George Osborne gave a revealing interview (1'52" in) to Radio 4 yesterday – revealing, not untypically for the BBC, for what it did not say.
Osborne said that sometime in the "next two or three years":
Markets, and indeed the country, will look to governments to set out plans for how they are going to eventually bring balance back to the public finances.
The first thing that was not said here – and certainly not by his fawning interviewer – is that the more educated parts of the country will be looking for no such thing. Intelligent economists (as well as me) agree that fiscal austerity will be counterproductive. With demand for gilts strong – even at negative yields – government borrowing is sustainable for now. And the best way to get it down is simply to ensure a strong economy. As Maynard Keynes said in 1933: "Look after the unemployment, and the Budget will look after itself."
Which poses the question. Why, then, would anybody prate about the need for austerity?
Which brings us to something else that was unsaid – that whilst austerity might not be technically necessary as a tool of macroeconomic management, it suits the interests of financial capital, a section of which pays Mr Osborne handsomely (another fact unsaid in the interview).
The reason for this is simple. For a given inflation target (the inflation target shouldn't be given but let that pass) monetary and fiscal policy are substitutes: tighter fiscal policy means looser monetary policy and vice versa. And this combination – what Osborne called fiscal conservatism and monetary activism – disproportionately benefits the finance sector for several reasons:
– Many trading strategies carry very low returns even when they pay off; various carry trades, arbitrage or near-arbitrage, or picking up pennies in front of steamrollers. To make them pay well requires leverage. Which needs cheap and easy money.
– Low interest rates and QE raise asset prices. And guess who benefits from these.
– As Costas Lapavitsas & Ivan Mendieta- Muñoz show, bank profits depend a lot on the net interest margin. And this is often higher when banks' financing costs are lower. As Thomas Philippon and Guillaume Bazot have shown, the finance sector is oligopolistic, so lower costs don't get passed onto customers.
– Low interest rates encourage people to take on more debt, to the benefit of banks. They also encourage savers to "reach for yield" and thus entrust their money to high-charging fund managers. If annuity and savings rates were high, savers would be less inclined to buy expensive funds.
Whilst fiscal austerity doesn't serve the interests of the country as a whole, therefore, it does suit the finance sector.
And it has disproportionate influence over policy. We don't need conspiracy theories to appreciate this. Nor is it because the sector pays Mr Osborne's wages: he served its interests long before he entered its employ. Nor is it even because of direct lobbying, important as that is.
It's also because of what James Kwak calls "cognitive capture". Finance professionals enjoy undue influence because they are perceived to have high status and expertise and network with politicians and journalists. They thus benefit from both the mere exposure effect and from the fact that, as Adam Smith said, the "respectful attentions of the world [are] more strongly directed towards the rich and the great, than towards the wise and the virtuous.
Yet another mechanism of influence has been described by Timo Walter and Leon Wansleben. Policy-makers, they say, have been drawn into "a kind of ‘ontological complicity’ with the dynamics of financialized capitalism" because large liquid markets give central banks more means of influencing the economy and hence greater power.
In these ways, financialization is self-reinforcing: a bigger financial sector gives finance greater pwoer.
Which is why I say that interview with Osborne was so inadvertently revealing. The (one-sided) discussion was framed in terms of what seems best for the country as a whole. But this of course is a fiction. Policy-making is not a technocratic exercise in what is best for the country but rather a matter of the extent to which policy is constrained by the influence of capital.
But how does that influence operate? How strong is it? Whose interests therefore does policy serve? These are questions which BBC usually overlooks. Which means that it is systematically and dangerously biased.