The Pathologisation of Prosperity

What the Masters of the Universe really think about wealth

The law can give nothing that has not first been taken from its owner.

-Frederic Bastiat

Our age has become characterised by a growing, if inchoate, sense that there is something undesirable and even illegitimate per se about ordinary people wanting to be more prosperous. Of course this is not stated openly and is generally an unconscious reflex. But it is there all the same: a kind of intellectual ambience, if I can put it in those terms, which holds that the nation’s wealth is not its own, and is rather a State-owned resource which government apportions and manipulates as it sees fit in order to achieve policy objectives of whatever kind. Since this is the case, the accumulation of assets by individuals, households, families and so on - particularly the educated working- and lower-middle classes - is increasingly portrayed as being intrinsically antagonistic to what government is trying to achieve. The result is that the aspirational desire to amass wealth and pass it on to one’s children (the root by which my family, for example, found a way from poverty to financial stability across three generations) is becoming itself pathologised.

This mood has gradually permeated our institutions. And you notice it whenever you are able to get a glimpse at what the people in power really think. Policymakers say all kinds of interesting and revealing things when they believe themselves to be talking to the like-minded. This is why it is very important for the informed citizen to in particular pay attention to the ‘grey literature’, which is often published on the basis that almost nobody will read it except those for whom it is directly relevant. It generally paints a much truer picture that what you can read about in the newspapers or hear people spout in interviews.

A good example of this is a speech given in 2021 by Gertjan Vlieghe, then-External Member of the Bank of England’s Monetary Policy Committee (MPC, the body which decides the Bank’s base interest rate), and now economic advisor to Jeremy Hunt (the man who purports to be the UK’s Chancellor of the Exchequer). Vlieghe’s credentials speak for themselves. He is a clever man - obviously much cleverer than I am. But he is also a consummate economic establishment insider. And paying attention to the kinds of things he says to fellow economic establishment insiders therefore gives us a window onto what one might call the intellectual ambience of modern economic governance. The results, to say the least, are intriguing. And they demonstrate in a quite nuts-and-bolts sort of a way the extent to which the ‘intellectual ambience’ that I earlier mentioned has filtered into what ought to be the least political and most pragmatic of our institutions - the Bank of England.

The speech, titled ‘Running Out of Room: Revisiting the 3D Perspective on Low Interest Rates’, has an otherworldly quality to it when read from the perspective of 2024. Statements like ‘I have not changed by view that this inflation peak is likely to be temporary’ and ‘[W]hen tightening does become appropriate, I suspect not much of it will be needed’ must have sounded very sensible in July 2021, but raise a sense of alarm when read now: not only is Jeremy Hunt at the helm, but he is being advised by people too hubristic to admit that they have the same predictive powers as a coin toss. But this is not the place to dispute its substance, which I am in any case ill-equipped to do; what we are chiefly interested in here is its approach to economic affairs, and what that tells us.

The speech concerns the reasons why in Vlieghe’s view the natural or ‘neutral’ interest rate (which you can think of as the interest rate that would be at the sweet spot where the economy is neither being artificially stimulated nor contracted) is likely to remain ‘persistently low’ (as it is inferred to have been in most developed economies for a long time), and what to do about it. This matters for the Bank of England because the lower the natural interest rate, the less ‘policy space’ there is. In layperson’s terms (and I should say straight away that I am very much a layperson, being merely a humble lawyer who just likes to ask awkward questions and read obscure books), if the neutral rate is low, this means that the Bank will not see much bang for its buck in terms of wheezes to stimulate the economy if it ‘needs’ to, whether through lowering and then raising the base or ‘policy’ rate or through quantitative easing. And this in turn means it will not be able to do very much to help if there is a downturn. Its main policy levers in such circumstances will in short be largely ineffective if pulled.

Since the Bank of England, like any central bank, largely justifies its existence on the basis that it keeps the economy stable - particularly in a downturn - then this is of course in its view going to be a bad thing. So a low neutral interest rate is identified by Vlieghe as a problem in search of a remedy.

There are two main reasons, in Vlieghe’s opinion, why the neutral interest rate has been so low for so long and will remain so (others are put forward by other people, for example here and here; it seems to me that, as in almost any macroeconomic question, the jury is very much still out). The first is to do with people living longer and having fewer children; as people age they naturally accumulate more savings, particularly in the run-up to retirement, so you then get a bigger stock of savings - weighted towards low-risk asset classes - which pushes down the natural interest rate. And since we have a bigger and bigger share of old people in the population, we have proportionally fewer workers, so there is less demand for investment, which also pushes interest rates down. The second is due to ‘wealth inequality’: as people get richer, they have a lower marginal propensity to consume (they spend a lower proportion of their income on food, clothes, etc.) and therefore use their income to accumulate assets. This then produces an oversupply of credit which results in cheaper loans. There are just more assets floating around in search of demand for credit. And so the result is a lower natural interest rate. We appear to be seeing more ‘income inequality’, which leads to ‘wealth inequality’, and this precisely this oversupply of credit.

This all sounds plausible enough, at least insofar as my dull brain understands things. It may be wrong, and indeed Vlieghe’s argument may not be as I have described it; economically literate readers may be sniggering up their sleeves at my inept account as they go. But as I said earlier, what is really important for our purposes is the approach which the speech adopts to the subject of the accumulation of wealth. And we see this most clearly in Vlieghe’s suggested remedies, some of which are in the remit of the MPC, and some of which are in the remit of government. It is perhaps important to make clear that Vlieghe does not advocate any in particular; he just moots them as possibilities.

The first thing he suggests are negative interest rates. If your problem is a low natural interest rate, the theory goes, then why not just go much lower with the policy/base rate - i.e. into negative territory? Readers who like to play News from Uncibal bingo will be glad to know this turns into a paean to the wonders of CBDCs. The ‘problem’ with negative interest rates from the perspective of implementation, you see (I leave to one side the obvious fact that anything that presents a ‘problem’ for the implementation of negative interest rates is to be welcomed) has always been that people would abandon other assets in favour of cash. If your money in the bank is going to go down in value by -0.5% or -0.75%, or whatever, a year, then it becomes more rational to hold physical cash stuffed under the mattress; its value won’t depreciate. This will end up harming bank profits and worsen any downturn, and therefore negate any ‘stimulative’ effect associated with the policy. Ah, yes, but not if the digital pound has replaced cash!:

[A]s central banks…are considering a move to [CBDCs], this constraint can potentially be moved more easily in the future. If digitisation becomes sufficiently widespread so that cash is used much less, this opens up the possibility of having more deeply negative interest rates in the distant future, without causing any negative effect on bank profits since interest rates on all safe assets would become negative, so banks can maintain their net interest margin, as bank deposits are no less attractive than other negative rate assets.

I hope you didn’t miss the import of that amidst the awkward phrasing: what’s important, to be clear, is bank profitability, not the fact that you, I, and every other poor schmuck in the land would be slapped with a de facto tax on having some money tucked away for our children or a rainy day. Which is more important: the net interest margin of banks, or governing on behalf of savers who have just been trying to be prudent? It’s a no-brainer, really, isn’t it?

The second remedy Vlieghe suggests is even more reassuring: having a higher inflation target so as to ‘create more monetary policy space’. The idea here is that if inflation is higher, nominal interest rates (i.e. interest rates not taking into account inflation) have to also go higher, so if the central bank then cuts the base rate, it has a bigger effect. There is something almost endearing about central bankers’ enduring belief that monetary policy is just a matter of pushing a button in order to achieve an outcome (as though they have it in their power to actually meet their inflation target); much less endearing is the idea that higher inflation should be endured as a matter of course simply in the interests of giving the Bank of England greater power to ‘stimulate’ the economy as it wills it.

The third remedy Vlieghe suggests - really a package of remedies - would be designed to try to tackle the problem of the low natural rate of interest itself. Here, he covers a range of options, and this is where we get to the real heart of the matter:

a ) Since the problem is partly a product of a low birth rate and longevity, you could try to raise the birth rate. But this is a member of Britain’s ‘new elite’ we are talking about here, so having brought up the idea of boosting the birth rate Vlieghe immediately dismisses it as crazy talk. It would be bad for climate change, first of all (yes, he actually says this), and in any case, we don't like children anyhow, do we? So whatever the solution is, it cannot be promoting the idea that having children is inherently wonderful, that it’s better to do it when you are young than when you are old, that marriage is the bedrock of society, and that large families are really nice. Definitely not any of those things.

b) Reducing time spent in retirement, on the other hand, is a very good idea. Since older people have this annoying habit of leaving the labour force, if we can keep them in it for longer, then we get more economic output and therefore more demand for investment and higher interest rates. Vlieghe is chary about detail, but speculates in a footnote whether ‘more can be done to raise the average effective retirement age’. People, it should be clear, are first and foremost economic units.

c) We could tackle ‘income inequality’, which leads to higher wealth inequality, which is apparently intrinsically undesirable in addition to its effect on the natural interest rate that we have already sketched out. And this is where the mask really begins to slip, as Vlieghe takes the opportunity to ventilate some embarrassing Student Union opinions about economic policy: ‘over the past several decades’, he tells us, we have seen ‘widespread deregulation’ to the effect that there have been ‘rising profits’ (boo! hiss!), ‘weaker investment’, and a ‘reduction in wages’. The solution to this - remember, this is member of the Bank of England’s MPC who was also at one time a director at Deutsche Bank and a senior economist at a hedge fund - is ‘strong regulatory anti-trust legislation and the promotion or facilitation of collective bargaining in labour markets’ so as to ‘restore the balance of power and therefore the balance of incomes’. We need stronger unions and more government intervention, folks. You read it here first.

d) And while we’re on the subject of why capitalism is bad, we could also tax people more. ‘There is a pendulum that has swung’, you see, ‘from a high tax, high regulation environment to a low tax, low regulation environment since the early 1980s’, and this needs to swing back. It is astonishing that anybody could have looked at the UK economy in 2021 and identified its main problem as being low taxation (in fairness, Vlieghe was speaking before the various changes Jeremy Hunt brought in when appointed Chancellor in 2022), but for the avoidance of doubt, here are his verbatim comments:

‘Falling corporate tax rates and falling marginal income tax rates on the richest, as well as a range of other tax policies, have contributed to rising income inequality since the early 1980s. Flexibility in tax regimes for high income individuals to reclassify income as corporate profits have also played a role. Low inheritance taxes allow income inequality in one generation to become entrenched in future generations.’

I said I would not dissect the substance of Vlieghe’s speech, so I will refrain from drawing attention to the very low likelihood of him having arranged to voluntarily overpay his own tax bill to reflect his earnest desire to remedy the problem of income inequality in the UK. What is significant here is the mindset. Vlieghe, who, as I earlier described him, is a consummate economic establishment insider, has no interest in the question of how poor people might become richer. His interest is in how to make things more equal - with the emphasis entirely on what can be done to diminish the wealth of the wealthy. As no other than Margaret Thatcher put it in one of her last Parliamentary appearances as Prime Minister, there are simply some people in left-learning Britain who would rather see the poor poorer as long as the rich were less rich. High inflation? Negative interest rates? Vlieghe would, as we have seen, merrily sacrifice the interests of the aspirational poor before the altar of ‘monetary policy space’. But income inequality? Rising profits? Flexible tax regimes? Those are the sorts of things up with which he will not put. This tells you everything you need to know about priorities, and everything you need to know about the mindset of Britain’s economic establishment (and, by the way, the ideas and opinions of those in a position to advise the Chancellor about economic policy).

According to Vlieghe, in sum, then, the banquet of policy options before us basically involves negative interest rates (punishing savers), higher inflation (punishing everyone, but especially savers), shorter time spent in retirement, and higher taxes. And all of this done to, er, increase the Bank of England’s capacity to make recessions less harmful. Did he really think this through?

More broadly, taken together, all of this builds an ugly picture of the attitudes which prevail among society’s purported ‘elite’ towards the whole idea of economic growth. For all of Tony Blair’s many undesirable features, one thing that you can say about the early New Labour governments was that at least in those days people on the centre-left seemed to have it in their heads that it would be nice if everybody could be wealthier. And this, of course, was built on Thatcher’s own revolutionary notion that even working class people might aspire to one day own property, have disposable income, and enjoy some comfort in retirement. Neither of these figures was uncontroversial when they were in power, of course, and neither can be said to have been even close to perfect. But in this regard at least they were both on the right subject.

Our conversation has now moved to a different topic entirely, as Vlieghe’s 2021 speech unwittingly demonstrates. Not how we can increase national wealth; not how we can help individual people - even poor people! - become more prosperous; and certainly not how we can tackle some of the really deep and intractable problems that our society faces (the low birth rate being chief among them). Rather, how the State can best rearrange the stock of assets in the economy to achieve purposes of one kind or another (to make people more equal; to give more monetary policy firepower to the Bank of England; etc.). The result is a vision of the nation’s wealth as itself simply being assets on the State’s balance sheet rather than the property of the people who own it, with phenomena such as tax, interest rates, inflation targets and so on being conceptualised as mere tools by which those assets are bestowed upon the grateful population in greater or lesser measure.

This should not really surprise those of us who have read our Michael Oakeshott, our Leo Strauss, our Friedrich Hayek; the modern State wants to make the population reliant upon it to retain their loyalty, plain and simple, and taking total responsibility for the divvying-up of assets to make things more ‘equal’ and to stave off recession is a very good means of achieving that goal. It of course produces bizarre genuflections (the population must sacrifice their wealth in order to help the State fight off recessions), but that must be understood as a feature, rather than a bug, of the underlying rationale. In the State’s view, what could be more appropriate indeed than the gradual diminution of the holding of assets by individuals (since that would increase reliance of the individual upon the State itself), and an ever greater emphasis placed on the importance of the central bank in saving us all from economic harm?

In closing, it is fitting to return to the words of our friend Dr Vlieghe, whose (I am sure unintentional) implications are genuinely chilling:

‘Absent policy changes, there is no prospective reversal in this particular driver of interest rates: downward pressure from demographics either continues further or remains where it is. The key mechanism is not that older people have lower savings rates, but rather that, as people age, they hold higher levels of assets, in particular safe assets, and those assets are only run down slowly and partially late in life. The higher saving of the middle-aged outweighs the modest dissaving of the retirees.’

A political environment in which the mere saving of money, the most fundamental feature of a sound economy and the main way in which poor people become wealthier over the course of generations, is conceptualised as a problem is one that is ready to go to some quite dark and dangerous places. I doubt very much that Vlieghe means anything in particular by problematising the fact that older people’s assets are only ‘slowly and partially [emphasis added]’ run down late in life. But taken together with his comments about low inheritance taxes allowing income inequality to become ‘entrenched’, one begins to see an image of future ‘policy changes’ being sketched out which will I think have very disturbing consequences for that most basic human practice, wherein grandparents and parents pass on what little they can to their descendants in the hope those descendants might have a better life than their own. What, after all, could be more logical than an inheritance tax of 100%, given that it is really the State that owns the nation’s wealth in the first place, and which therefore ultimately ought to determine what proportion of the pot each individual is entitled to?