2016 was to have been the year of exit from quantitative easing.  Instead it is to be the year of negative interest rates.

For more than a decade we have been told that the world suffers from a glut of savings, resulting from the surpluses of Asian countries and Germany.  The excess supply of capital exerts downward pressure on interest rates, in line with those supply and demand diagrams from economics 101. 

        But there is a subtle difference between the supply and demand diagram for apples and pears and the equivalent diagram for savings and investment:  At a price of zero, the commercial supply of apples and pears dries up.  But people will go on saving even at negative interest rates, because they need to make provision for retirement and their children. Since consumption and investment demand is so weak, and the demand to save so strong, we have now reached the point where the equilibrium interest rate is negative. So the central banks of the world are testing the notion of a zero lower bound to interest rates. Can they actually make us pay to save?

     But the thesis that ultra low interest rates are the product of a savings glut does not stand up to examination. In Britain and the United States, households are not saving too much for retirement but too little.  The low prospective returns are aggravating the looming problem that unfavourable demography poses for most western economies.

          And equilibrium interest rates could be negative only if there were no investment projects left that would yield a positive rate of return. But this claim is obviously absurd.  A moment’s thought identifies endless projects that would yield a positive rate of return. At the most banal level, I have just paid a cab driver who apologised for the bumpy ride occasioned by numerous potholes.  The potholes will have to be mended one day, and the longer we wait the greater the likely damage to the road surface.  There is undoubtedly a positive return to fixing them right away.

More seriously, the queue of planes every time you take off or land at Heathrow is a regular reminder that London needs more airport capacity.  Britain has created very little electricity generation capacity for years and both coal and nuclear stations are approaching the end of their life.   Housing starts in the UK in the fourth quarter of 2015 were 31,000.  There are about 28 million houses in the UK, so that at this rate even if there were no growth in the number of households it would take over 200 years to replace the existing stock.

And this is Britain, among the most advanced countries in the world in terms of the quality of its infrastructure.  Most people live in countries with a crying need for better sanitation, better education and better transport.  

The problem is not that there is a shortage of productive investment opportunities which will yield rates of return well above zero. The problem is that we have put a string of barriers – institutional, political and economic – in the way of actually making these investments. Nimbyism that blocks housing development and airport expansion. Political procrastination over our energy needs. Obsession with taking borrowing off the public sector balance sheet. Blockage of the channels of intermediation that supply funds to small and medium size enterprises. The belief that the ‘zero lower bound’ to interest rates is a major obstacle to stimulating demand supposes that there is a raft of projects which promise a prospective return less than zero but more than – say – minus one half per cent. This completely misunderstands the nature of the barriers to long term productive investment.  We need less financial ingenuity and more common sense.