Economic illiteracy – their economics teachers must be weeping in shame
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?)