Years of ultra-low UK interest rates probably hit productivity, but were a price worth paying to avoid higher unemployment, the Bank of England’s chief economist has said.
Andy Haldane said low rates kept some “zombie” firms alive, but the trade off was far more people stayed in work. A Bank modelling scenario found that years of 0.25% rates probably kept 1.5 million in jobs, he said in a speech. He would not have sacrificed those jobs for an extra 1% or 2% productivity. Mr Haldane was speaking at the London School of Economics about the “puzzles of productivity” and why it has been so low since the financial crisis. On one measure, Mr Haldane said, total factor productivity had shown its longest stagnation in more than 200 years.
Low interest rates had probably played a role by keeping some heavily indebted, unproductive “zombie” businesses alive, he said. If the Bank had held rates at 4.25% since the 2008 financial crisis rather than cut them to record lows, productivity was likely to have been 1% to 3% higher. However, holding rates would have imposed a “very significant macroeconomic cost” for unemployment, Mr Haldane said.
“Should monetary policymakers have sacrificed 1.5 million jobs for the sake of an extra 1% or 2% of productivity? Hand on heart, I can tell you this one would not knowingly have done so,” the economist said. Options other than higher rates offered a better way to boost productivity. A focus on exports and foreign ownership of companies tended to boost productivity, he said. Mr Haldane pointed to a very wide divergence between Britain’s most productive and least productive businesses, even within the same sectors and regions.
One solution could be a sort of mentoring scheme between what he called “frontier” firms and “non-frontier” ones so that they could share best practice, he suggested. “What would be in it for frontier companies? A more productive supply chain is clearly in their interests. The public sector could also play a useful nudging role in its procurement practices,” Mr Haldane said in his speech. “By shining a light on companies’ relative performance, the aim is that this would serve as a catalyst for remedial action by company management. Indeed, the aim is to provide firms not only with a means of bench-marking themselves, but with tools to improve performance along identified areas.”
There would be no quick fix, he concluded, but said business could learn from sport on the importance of marginal gains in the quest to improve and succeed. “As Olympic athletes have shown, marginal improvements accumulated over time can deliver world-beating performance. Applying those marginal gains to the population of UK companies could significantly improve UK living standards, even if those are harder to measure than gold medals,” Mr Haldane said.