Terry Pratchett: How High Interest Rates Hurt the Poor

Part of the resistance to monetary policy remedies to serious recessions comes from the idea that high interest rates are inherently good. Not so. High interest rates are good for those earning them, and bad for those who are paying them. It is not clear that those who earn high interest rates are always morally more deserving than those who pay them. Through one of his fictional characters, Terry Pratchett gives this example of the suffering sometimes caused by high interest rates that make it hard to make good investments.  

The reason that the rich were so rich, Vimes reasoned, was because they managed to spend less money.

Take boots, for example.  He earned thirty-eight dollars a month plus allowances.  A really good pair of leather boots cost fifty dollars.  But an affordable pair of boots, which were sort of OK for a season or two and then leaked like hell when the cardboard gave out, cost about ten dollars.  Those were the kind of boots Vimes always bought, and wore until the soles were so thin that he could tell where he was in Ankh-Morpork on a foggy night by the feel of the cobbles.

But the thing was that good boots lasted for years and years.  A man who could afford fifty dollars had a pair of boots that’d still be keeping his feet dry in ten year’s time, while a poor man who could only afford cheap boots would have spent a hundred dollars on boots in the same time and would still have wet feet.

This was the Captain Samuel Vimes “Boots” theory of socioeconomic unfairness.

The upshot is that the good boots cost less if you can borrow to buy them at a reasonably low interest rate, but if you either can’t borrow at all, or can only borrow at a very high interest rates, you face high expenses either way: either paying high interest rates on the money you borrowed to buy good boots, or paying to replace the bad quality boots frequently. The rich effectively face low interest rates, while the poor face high interest rates.  

Stepping away from the difference in interest rates the poor face as compared to the rich, whatever the level of interest rates, the poor are likely to suffer more from a given increase in all interest rates simply because they are more likely to have a negative wealth position that makes them pay interest on net, while the rich are more likely to have a positive wealth position that enables them to receive interest on net. So it takes more to justify high interest rates than to say that they are always better morally and ethically than low interest rates. If high interest rates make the economic system as a whole work better, that could be a good justification. But when low interest rates would help the economic system as a whole work better, any complaints by those earning low interest rates as a result need to be counterbalanced by the benefits to those paying low interest rates. 

Hat tip to my brother, Joseph Kimball, for pointing me to this passage