In the FT, Gerry Holtham - one of Wales’ most celebrated economists - is arguing for a National Investment Bank. I’m inclined to side with him and Duncan on this, and against the idea that it is a clinching argument against such a bank that it will lead to politically-directed lending. I say so for six reasons:
1. It’s quite possible to organize such a bank to be at least a little autonomous of government. The Bank of England and BBC aren’t politicians’ playthings, so why must a National Investment Bank be?
2. In our current pickle, any lending at all would be a help in macroeconomic terms.
3. Yes, many of the lending decisions of state bureaucrats are likely to be poor ones. But this is an inevitable consequence of the fact that the future is inherently unknowable. The relevant benchmark against which to judge a state bank is not some mythical counterfactual of perfect decisions but rather the real world of banking in which lending is also systematically misdirected. Would over-lending to “green” companies really be worse than booms in property lending, which is what the private sector gives us, when it gives generous loans at all?
4. Many of the costs of misdirected lending are second-order (the diversion of resources towards bad companies) whereas the costs of insufficient lending are first-order (lower GDP). It takes a lot of Harberger triangles to fill an Okun gap.
5. Yes, many western countries have gotten rich through free market institutions. But these are get rich slow schemes. We are rich because we’ve had 200 years of 1-2% growth. Societies that have enjoyed a few decades of 6-7% growth, such as the more successful Asian tigers, have done so with state involvement. See the work of Ha-Joon Chang, such as this paper.
6. Yes, it is easier for nations to grow fast if they are behind the technological frontier than if they are near it. But it‘s not clear that being near the frontier argues against state banking. We don’t know how the technological frontier will move - technical progress is by definition unpredictable. So, surely one reasonable strategy is to throw money at lots of different ventures and see what works. In a climate in which the private sector is unwilling or unable to lend to new firms, this provides a potential role for the state.