Tuesday, January 06, 2009

All a Case of Timing

In my view, Yvette Cooper is spot on in describing the Tories current plans as economic madness, cuts in public spending combined and incentives to save are very bad ideas at this point. Tom Freeman has similar thoughts here.

The main reason for this is that as a recession takes hold, there is a natural tendancy towards higher savings because people are insecure about their future and save in order to protect themselves from the loss of income that might come with losing their job. This does appear to be exactly what's happening (albeit slowly) at the moment, the household savings ratio rose from -1.1% in Q1 of 2008 to 1.8% in Q3 of 2008.

The problem with an increase in savings is that it is matched by a decrease in spending and unfortunately our jobs depend on people continuing to spend, an economy needs consumers as well as producers and there is no magic force that will keep buying our goods if we stop our spending. Public spending cuts will reduce the level of spending our jobs depend on, saving incentives will reduce it further (as I write I notice Chris Dillow disagrees on the saving point reckoning the diference will be near zero), and all this will make the current economic downturn more severe.

The Tories seem to be opting for this puritanical DEBT = BAD approach and while there is a moral to that story, the time it was appropriate was a few years ago when everyone was loading up on debt like there was no tomorrow. Right now, we need to bear in mind the lessons from previous recessions and try to do what we can for demand, saving the lessons about debt for when the economy's back on an even keel.

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