In this article, in the FT, Sarah O’Connor argues that the impact of high interest rates is less effective at demand suppression than has historically been the case. The exclusion of the young from the housing market and the impact of older people having finished paying off their mortgages has led to reduction in the number of households with mortgages, from 40% to 30%. It interests me, that the author argues the purpose of increasing interest rates is demand suppression and yet its effectiveness as a demand suppression tool is less than it once was.
The fact that older home owners have paid off their mortgages and that the recent housing prices have made it harder to get on the housing ladder, means that the interest rate increases are being born by workers in their 30’s and 40’s. A side effect of the squeeze on demand is increased unemployment and fewer vacancies; this policy as a narrower cohort of victims who are suffering a Tory double whammy of super inflated costs, and a squeeze on jobs and wages which means that people can’t get better ones to earn more.
This is unfair and will come to be seen as such. It prefers, once again, the older, wealthier, and retired cohorts in our society.
The fact is the intergenerational contract has been broken for decades but this is another nail in the coffin.
The flagship policy as the harbinger of the ending of that contract is economic tuition fees and student loans. Broadly based higher education has external economies of scale i.e. it should be subsidised; marketising university funding weakens the sectors ability to innovate and in some subjects survive. The current university/student finance regime militates against both and yet Labour, plan to compound this stupidity, by imposing a graduate tax meaning that graduates will be paying higher levels of tax at the times they can least afford it. This is unfair, and will act as a disincentive to disadvantaged groups in society to undertake higher education; it may also encourage such graduates to emigrate to a lower tax regime and while they have currently made it difficult to go to Europe, there are plenty of places where they can go.
Intergenerational equity needs a life-time view. Interest rate policy and university/student finance policies do not support such intergenerational equity.
On the effectiveness of interest rates as an anti-inflation tool, demand suppression is only an effective anti-inflation tool if the inflation is in fact caused by excess demand, that it is “demand pull” inflation. There are two other causes of inflation, the first is characterised as “cost push” and is caused by the increase in the price of input factors. Increasing interest rates adds to this type of inflation rather than diminishing it. The third cause is external shocks. I would argue that this is what has happened to the UK economy although the impact of increasing food prices and increasing energy prices is exacerbated by domestic policy choices, i.e. the increased barriers on imports especially food imports caused by Brexit, and the ludicrous so-called internal energy market which is part of the UK’s energy market regulation regime.
The Government had the option of squeezing profits, not incomes.
Phil BC reminds me that one of the reasons that the Tories pursue this vendetta against the young, or at least pursue policies that prefer older workers and pensioners is purely political. i.e. the young don’t vote Conservative. I believe he also argues in his book, that it’s too late to change course. Once it was said that if under 30 you didn’t vote left then you had no heart, but if over 30 you continued to do so, you had no brain. This piece of wisdom would seem to be outdated, although possibly over influential n Labour’s strategists.
Burton-Cartledge, Phil 2021. Falling Down: The Conservative Party and the Decline of Tory Britain. Verso.