Wednesday, 21 January 2009

A Stupid and Naive Question

We have a credit crunch and the banking system is in huge difficulty, with bank reserve ratios at inadequate levels and the prospect of huge losses in the future as a result of their bad bets. Right?

So, in simple English, people and businesses are short of credit and the banks are short of cash. Right?

The solution is a highly complex policy in which the country borrows huge sums (from where?) and uses these to make loans to and equity purchases of banks. Banks buy insurance from HMG against their own stupid mistakes, enabling us all to pick up the tab collectively instead of the person who cocked up in the first place. Lots of lawyers write interminable prose. Lots of civil servants oversee the banks. Interest for the lenders is deducted. What is left appears in the banks' accounts and (magically) the banks decide to lend again. This apparently solves the problem of excessive reliance on credit.

What I want to know is why can't the government just, errm, stop spending so much and give us all a huge tax cut? I mean really stop spending. Defer the ID card scheme, the NHS computer, Trident and so on. Stop recruiting for any post that is not frontline (and I really do mean frontline; nurses, yes, diversity consultants, no). Cope with the equipment HMG has at present. Get spending back under control, then give us a real tax cut - not a mealy-mouthed 2% off prices, something really significant like a few pennies off the basic rate.

That way, money would go directly to the pay packets of the "Hard Working Families" that Labour claims to love so dearly. They could bank it - thereby increasing capital ratios - or they could spend it - thereby giving the economy a boost and increasing capital ratios when the shopkeeper banks it. They would feel more confident when they saw their take-home pay increase. They could be less reliant on credit in the future because they would have the cash.

Yes, the goverment would have to suffer a loss of spending power. Oh dear. That would make them, err, just like every person and every business in the country that they are supposed to represent.

Now I know the political arguments against this. I can understand perfectly well why Gordon would rather pull his fingernails out with a pair of rusty pliers than suffer the indignity of letting us mere voters decide how to spend our own money. But what economic reasons are there for not doing this?


  1. As far as I know, the left justify the use of government spending instead of tax cuts by pointing out that if you gave people the money during a recession, they'd probably put it in savings and it would leave the economy - whereas the government would use it to employ people and so on. This sounds kind of sensible on the surface, but...

    Surely if there were more people depositing more money in more savings accounts, the banks would have greater assests with which to give loans to businesses which would then employ more people and get the economy back on track?

    I'm not so sure there's any such thing as taking money out of the economy...

  2. banks would have greater assests

    Yes - that's exactly what I was thinking!

    The only way to take money out of the economy is to waste it on unproductive uses. Whilst the people employed to do something pointless do still return their salaries to the economy, the amount returned is surely less than what could have been returned by the total of the amount spent on imported goods (new NHS computers, for example) and the lost opportunity cost - i.e. the growth that could have been achieved if the money had been put to a productive use.

  3. You mean you want any government to pretty much start behaving as we have to in our daily lives to make ends meet and not behave like some out of control politician on a power binge justifying their position.

    Good grief l would say that is very inconsiderate of you, they would not be politicians then they may start to be called member of the human race.