From the TUC

Economic illiteracy – their economics teachers must be weeping in shame

07 Jan 2009, by in Economics, Politics

Although David Cameron launched it, I assume George Osborne must have at least agreed the latest Conservative plan – to incentivise saving with tax relief paid for by cutting (unspecified) public spending. And I’m very disappointed, because George and I went to the same school and the same university (albeit he’s a bit younger than  me) so we probably took the same economics courses, and maybe even had the same teachers. Apparently, I needn’t have bothered listening to them – clearly George didn’t, and he’s now the Shadow Chancellor!

I bet my colleagues from the TUC Economic and Social Affairs Department will blog more eruditely on this subject, but the economic illiteracy of the proposals had me harrumphing into my Financial Times yesterday morning. Encouraging people to save rather than spend in a recession, and doing it by cutting public spending isn’t even a schoolboy economic error.

Tom Freeman (hat tip) found a great quote from a Keynes radio broadcast, reproduced in La Stampa:

“For take the extreme case: suppose we were to stop spending incomes, and were to save the lot. Why, everyone would be out of work. And before long we should have no incomes to spend and the end would be that we should all starve to death.”

The only ray of ‘hope’ is that Chris Dillow says the proposal would have so little effect that it wouldn’t deepen the recession, but only transfer money from the public sector workers who lose their jobs to a few middle class retired people with savings. I can’t quite believe that’s the demographic on whom the next General Election result depends, but I haven’t looked at the figures recently.

This is not to say that I don’t understand the economic imperative (also echoed by the Prime Minister a few days ago) to help those pensioners (to take the most deserving group of savers) whose savings are no longer attracting the interest rates that they were. In a recession, where interest rates are plummeting, the smart thing for people with savings to do is either spend them (which helps boost demand – but probably not the best option for people on restricted incomes from other sources, eg pensioners) or invest them (by which I don’t mean buy existing stocks and shares, which is in a way just another example of spending, unless dividends are likely to be high, but actually invest them). That’s one of the ways recessions can be self-limiting (not always something you can rely on – see Keynes quote above).

(In parenthesis, I loved the bit of the proposal which would provide basic rate tax payers with £16,000 in savings with just under a pound a week extra tax relief – hands up how many basic tax rate payers have £16,000 in savings. Don’t spend your windfall all at once, will you?)

4 Responses to Economic illiteracy – their economics teachers must be weeping in shame

  1. Adam Lent

    Adam
    Jan 7th 2009, 10:06 am

    You said it all,Owen. But the Tory proposal got a very positive headline in The Daily Mail this morning. Job done from Cameron’s point of view!

  2. Owen Tudor

    Owen Tudor
    Jan 7th 2009, 2:58 pm

    I should of course have referenced the TUC’s official response, which is at http://www.tuc.org.uk/economy/tuc-15797-f0.cfm.

  3. Robert Day
    Jan 9th 2009, 1:37 pm

    At the risk of being thought to be banging on with one argument, once again we see that the Tories either don’t realise that the UK is a low wage economy or they don’t care. The argument that savers are penalised by low interest rates can be addressed by making sure that pensioners don’t have to rely on savings to have a healthy, safe and comfortable life.

    Monetarist policy always prioritises the needs of capital, and is happy to use any argument in support of that. They accuse us of having one-sided arguments whilst conveniently forgetting that their arguments are just as one-sided.

  4. Ralph Musgrave
    Jan 30th 2009, 9:37 pm

    I agree with Owen. Unfortunately the present government’s efforts, although somewhat better than Tory proposals, arent vastly better. The present government’s policy to date has consisted of borrowing vast sums (which crowds out private sector spending and investment) and pumping the money into banks, which in turn sit on it. Would I be right in thinking the net effect is a net increase in saving: exactly what Keynes said a country should NOT do in a recession?

    If only we’d had Laurel for Prime Minister, Hardy as leader of the opposition and Charlie Chaplain as Governor of the Bank of England, we’d have been better off.