How to avert a recession

Prem Sikka has an interesting piece at comment is free today.  He argues that instead of forcing pay cuts on the public sector to stave off the looming economic crisis, the government should be cutting taxes for the least well-off in order to increase the spending power of the poorest.

Sikka's call is echoed by The Item Club, Ernst & Young's economic forecasting unit, as reported in today's Observer.  This piece points out that a tightening of fiscal policy is required under Gordon Brown's golden rule but that it is likely only to exacerbate the current slowdown.  Let's hope Alistair Darling has the authority to overrule Brown on this one.

I have a great deal of sympathy with Sikka's trickle-up argument.  Giving a small amount of money to a large number of people will be much better for demand at all points in the economy than the alternative: giving large quantities of money to a small number of people; the upshot of the government's fiscal and deregulatory policies during the last decade.

Like most commentators and academics however, Sikka, who writes very well elsewhere on the problem of corporate accountability, appears to think determinedly within the confines of economic orthodoxy.  While his prescription is the right one as far as it goes, he does not acknowledge that the patient is fundamentally sick, and the wider economic framework in need of radical structural change.  His piece is worth a read though, not least because it contains a plethora of useful statistics which show how the economy is failing large numbers of ordinary people.

Comments

[Tim Worstall]

Oh come on Mark: Sikka's a loon.

Anyway, if you really want to have a stimulus that actually does some good you should copy Singapore: vary employer's contributions to national insurance. An immediate boost to the economy by lowering labour costs.

[Mark Braund]

Thanks Tim, an honour to have you as the first commenter on my new blog. I do have a habit of collecting loons, especially if they broadly echo my own concerns about the way the economy is setup/being run.

There was a time when governments would consider all manner of fiscal adjustments to keep the economy ticking along. Back in the day when full employment mattered.

I would support varying employer NI contributions, it may well do more for the economy, GDP wise, that tax cuts for the poorest paid. But both are better than the current prescription, and GDP growth isn't everything.