A strong welfare state helps far more people than you might think. That's my reaction to Shaun's description of how low interest rates are hurting savers and pension funds.

To see what I mean, let's start from Andy Haldane's justification for low rates - that he would rather err on the side of looseness than tightness:

I would rather run the risk of taking a sledgehammer to crack a nut than taking a miniature rock hammer to tunnel my way out of prison.

From one perspective, this preference seems odd. Robert Lucas famously argued that the welfare cost of economic fluctuations (pdf) were tiny. Why, then, is the Bank so keen to hurt savers by trying to reduce them?

The answer, of course, is that the costs of recession are not borne by some mythical representative agent. If a 1% fall in GDP (say) meant that everyone's income fell 1% it would indeed be no big deal. But this isn't what happens. Recessions impose massive costs upon the minority of people who suffer job loss - and we know that unemployment has massive human costs in terms of health (pdf) and mental well-being.

These costs fall especially heavily upon the young (pdf) and worse-off (pdf), who have no savings to cushion them through hard times. The coming downturn might be no different: as Brian Bell and Stephen Machin warn, it could hit low wages areas hard.

The justification for a rate cut is that it is an attempt to mitigate these high costs.

But why should it be monetary policy that does this? In principle, the job could be better done by a more generous welfare state (or macro markets!) - including a job guarantee.

If we had these better risk-pooling institutions, there'd be less need for counter-cyclical monetary policy. Older savers would therefore benefit from higher real interest rates, and younger ones would be better able to save for their old age. The risk of a financial crash - caused by investors piling into over-priced assets in an attempt to "reach for yield" - would also be less.

In this sense, those who are suffering from low interest rates - and I'm among them! - are the victims of an inadequate welfare state. However, because people are terrible at making connections between economic phenomena they fail to see this - and our imbecile media doesn't help them.

A good welfare state, therefore, shouldn't be a sectarian demand of Trotskyites. It's of far wider benefit than that.