October 30, 2013

The social value of interest

Paul Krugman has an interesting take on the interest-rate debate

His basic point is about the social function of interest -- as a 'reward for waiting' to spend. That is, savings usually have a social value, in that one person's savings become available to do something else of social value. Imagine, for example, that your bank takes your savings & lends them out to your county to repair roads and sewers. The interest you get paid (in normal times) is your payback for letting others use your money to the benefit of all.

Right now, however, we have too much savings, and for whatever reason (some of it is lack of political will or consensus) those savings cannot be usefully employed. Lack of demand in the economy is part of that, but I would argue that we have a screaming need for infrastructure improvement, investment in education, etc. There is plenty of 'demand' for your capital, but the right wing does not want capital deployed in that way. As a result -- according to Krugman -- real interest rates are very low.

Now here's the paradox: The rich want interest rates to go up, because they would like to have a better risk-free return on their capital. They don't actually need this additional money, mind you, and they wouldn't spend it if they had it, they'd just whine for a better return on it by keeping interest rates high.  High interest rates would discourage business investment, and keep employment down. In others words, the economy would get even worse, with still more depression of demand. But if those same rich would support some spending on infrastructure, education, etc., that would increase the demand for their capital to invest, and their returns would rise. A rising tide lifts even the rich.

But no, that would be too simple. After all, there is no more certain guide to the right-wing mentality than the belief that 'government' is the enemy.