Time for tax cuts...

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...and not just because the stimulus they'll bring will help economic growth but because they are popular. Yes folks the age of people meekly telling pollsters they'll happily pay more tax "for the NHS" or some such weakness are over:

One in three British adults think taxes should be cut and the amount of funding for social housing reduced, according to a survey by a left-leaning think tank.

A survey of 2,000 people carried out by Yougov for the Labour-affiliated Fabian Society think tank shows 32 per cent of people agree that ‘tax rates should fall to pay for less provision’ of public housing.

A total of 35 per cent said the current balance is about right with just 16 per cent saying tax rates should rise to pay for more social housing services.

The survey showed that 72 per cent of people think social housing should be means-tested or partly paid for by the taxpayer. Nine per cent said there should be no state funding for social housing at all.

The findings also showed that two in three people think funding for programmes to help people out of work is too high or about right.

A total of 27 per cent think taxes should be cut to pay for less help for the unemployed, with 40 per cent saying the balance is about right.

Just 16 per cent said there should be higher taxes to fund more services to help people out of work.

The whining mithering left-wing commentariat are wrong - both about the economics and also the politics. And it's the welfare budget that ordinary folk have their eyes set on - the idea that we can give people just enough money that, despite a pretty depressing life, they have an active disincentive to risk that position.

So, rather than pouring endless cash into the bottomless pit of bank balance sheets, or squandering billions of 'grand projects', let's cut taxes for ordinary people. Raise the tax threshold to the minimum wage, cut the basic rate of tax to 15% and lower the top rate to 40%. We might have to lose a few civil servants (perhaps ministers would like to start with their own offices - all those 'special advisors' are an utter waste of cash) and close down some much loved programmes. But the population will have cash in its pockets, cash to spend on food, on home improvements, on clothes - on the things like holidays they can't afford at the moment.

And wouldn't that help just a little? And wouldn't it put a little deep blue water between the Conservatives and that subsidiary of public sector trade unionism, the Labour Party?

Go on George, you know you want to!

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What aid might teach us about quantitative easing

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In times past we used to think that one effect of international aid was to act as an economic stimulus. And, in orthodox economics, this rather makes sense – we get an increase in cash within the local economy thereby stimulating demand.

The main role of foreign aid in stimulating economic growth is to supplement domestic sources of finance such as savings, thus increasing the amount of investment and capital stock. As Morrissey (2001) points out, there are a number of mechanisms through which aid can contribute to economic growth, including (a) aid increases investment, in physical and human capital; (b) aid increases the capacity to import capital goods or technology; (c) aid does not have indirect effects that reduce investment or savings rates; and aid is associated with technology transfer that increases the productivity of capital and promotes endogenous technical change.

However, the research into the effects of aid on growth are mixed – there is no consistent evidence that international aid stimulates economic growth. For example:

(1) The effect of direct foreign investment and aid has been to increase economic inequality within countries. (2) Flows of direct foreign investment and aid have had a short-term effect of increasing the relative rate of economic growth of countries. (3) Stocks of direct foreign investment and aid have had the cumulative, long-term effect of decreasing the relative rate of economic growth of countries. (4) This relationship has been conditional on the level of development of countries. The stocks of foreign investment and aid have had negative effects in both richer and poorer developing countries, but the effect is much stronger within the richer than the poorer ones. (5) These relationships hold independently of geographical area.

There remains a debate about the effect of aid but it is very clear that the simple fact of stimulus – the mere presence of the aid money – is not sufficient to promote growth. Some argue that the policy environment is important (and here there is a debate as to whether macro considerations such as trade openness and fiscal policies are more or less important than micro considerations such as protection for property rights and labour market flexibility). But whatever the details, the fact remains that simply chucking in a load of new cash -  in return for absolutely nothing – won’t do the stimulus job.

Which begs a question – there’s ample evidence of ‘Dutch Disease’ resulting from aid transfers. In simple terms, aid creates inflation making it more expensive to export and therefore harder for the recipient country to grow.

It seems to me that any policy designed to promote inflation in an economy – for example quantitative easing – runs the risk of having the same effect as international aid. Namely a significant risk of inflation and its associated brake on real growth. If we pretend – by the use of legerdemain and jargon - that quantitative easing isn’t inflationary, then we are kidding ourselves that billions in new money can be created and poured into the economy without that money having any effect.

The latest bout of quantitative easing is akin to giving the economy – worn down by years of self-abuse – a large espresso and hoping that will do the job of waking it up. For a short while it will feel OK and then the underlying hangover will kick back in – maybe worse than before.

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