The Chancellor's announcement of the extension of pensioner bonds should remind us that the UK's Monetary Policy Committee is now a triumvirate of George Osborne, David Cameron and Lynton Crosby. The meetings chaired by Mark Carney at Threadneedle Street are a masquerade.
One of the key neoliberal reforms of New Labour was granting the Bank of England operational independence in 1997, which meant the ability to set interest rates. But this hasn't removed the pressure on politicians to ensure adequate returns for savers. Instead, it has led to a displacement whereby government seeks to pull other policy levers to produce the same effect. Given that many of these levers target specific electoral blocs, rather than the economy as a whole, there is an obvious risk of bad policy due to preferential treatment. In this sense, Osborne's commitment on pensioner bonds is consistent with his reform of pension and annuity rules and the continuing constraint on housebuilding.
Unconventional monetary policies - such as QE and negative deposit rates - give the impression that central bankers have been actively managing the economy, but the macroeconomic impact has been slight because these measures don't address the shortfall in aggregate demand. Dramatic monetary interventions announced by central bankers serve as a distraction from the continuation of fiscal policies that favour the rich and penalise public investment. Though most people recognise that what the global economy needs is higher wages in the West, lower profits (to stimulate productivity growth), and increased infrastructure investment (outside China), governments remain committed to austerity and the preservation of existing wealth. QE is better than sitting on your hands, but not much.
Ageing populations mean that more and more people expect to live off the income of savings, in the form of pensions, equities or property assets. But long-term interest rates have been trending down from 6% in the early 80s to near-zero now. This, together with the growing surplus of capital over the same period, has inflated bubbles in property and commodities as savers have sought alternatives to declining deposit rates. The problem is that the property and commodity markets are now either flat or out of the reach of modest savers, while deposit rates look likely to remain near zero for the foreseeable future. The extension of pensioner bonds is not merely a pre-election giveaway, it's an admission that adequate returns for savers can only be achieved by selective government intervention. It is this intervention, rather than concerns over increased public debt or vote-buying, that really bothers the free-market right.
The central fallacy of public debate in the UK is that the national economy is equivalent to a self-reliant household. This is obviously absurd on many levels - if we all followed the maxim "neither a borrower nor a lender be", the economy would collapse - but the persistence of the metaphor in government speeches is not due to a lack of imagination but rather its ideological value in emphasising the ideal of wealth preservation. The salience of inheritance and the "mansion tax" serve the same purpose. But the paradox is that the majority of people to whom this moral fable appeals do not own any real wealth, let alone a mansion. What most of them are concerned about are low returns on modest savings and pensions, hence the attraction of pensioner bonds. Logically, modest savers should be in favour of high public debt - i.e. a low-risk buyer of their loanable funds, such as a government that can print its own money - which again does much to explain the testiness of the right on this issue.
The fact that public debt is high but interest rates are low suggests that the former is not having a negative impact on the economy, so we should not make debt reduction a priority, regardless of the "fix the roof when the sun is shining" nonsense. If low interest rates are fundamentally due to the combined effects of a worldwide savings glut and a lack of demand for capital, then it isn't going to rain any time soon. The wealthy are not bothered by low rates for savers or low aggregate investment as they are focused on arbitrage between different asset classes - i.e. getting an above-average return due to market privilege, which can be further amplified through tax avoidance. What they don't want is confiscatory taxation, hence the antipathy to public spending and the insistence on austerity. Though it may upset the purists at the IEA, the pensioner bond is a small price to pay if it buys enough votes to maintain the stranglehold of the wealthy on the monetary policy committee.