Nick and Vince's economic recovery plan

As I've recently signed up with the Liberal Democrats back in the UK, and my new membership card arrived yesterday, this would seem to be an apposite time to review what my party is considering to heft the British economy out of recession. So you know what I'm talking about, the plan can be found here. I may look at Labour and Tory plans as well, time permitting.

So the first thing to observe is that it is a spectacularly unfocused document. 4 out of 9 of the action points are geared towards helping people survive the recession (points 1, 5, 6 & 7). A further two (3 & 4) are more geared towards "How can we stop this happening again?" than "How do we fix it now?" These are all good intentions but are being missold as prescription for the economy.

To take them in order:

1. Action on the housing crisis – stop unnecessary repossessions and provide more social housing
The UK clearly needs more social housing. The lack of it has undoubtedly been a contributory factor to the property bubble. The present straitened times may offer an opportunity to acquire it cheaply. Unfortunately, the taxpayer is now on the hook to make good any losses the banks make on their exposure to an overvalued property market. I like the idea of building up social housing stock. I also like the idea of realising the losses in the property market rather than leaving them in an uncertain limbo, even though the taxpayer may end paying for it.

Now I'm not sure that this is actually what comes out of the details of this part of the plan. It seems far more geared towards forcing banks to let people keep homes that they couldn't afford in the first place. I think a lot of the loan restructuring will happen anyway. It makes financial sense for the banks to restructure (i.e partially write-off) the debt rather than foreclose and sell the collateral at the very bottom of the market. But applying government pressure to distort those decisions is going to prolong the process of correcting the inflation in the property market, painful though it is.

2. Action to put more money in people’s pockets - tax cuts for people on low and middle incomes
I have to be honest, I am automatically skeptical of any policy suggestion that claims to be revenue neutral by virtue of cutting unnecessary costs. I just don't think Britain's governments are ever that keen on wasting taxpayers money. So any policy that assumes that they are is suspect. Keynes would be suspicious of revenue neutral methods of counteracting a downturn anyway. You actually need to pump more money into the system by running a deficit.

So on the good side, this will reallocate money to people who are more likely to spend it. However, upping taxation on pollution, worthy though it is in the long run, is unlikely to encourage investment in the British economy. Similarly, rich people tend to have more mobile money. The taxation loopholes I don't doubt are unfair, but the Inland Revenue takes what it can without driving them to take their money overseas.

This one strikes me as a gamble. But I don't think it is primarily intended as an economic stimulus so much as a populist measure to support "ordinary British families".

3. Action to limit the excesses of the City & 4. Action to deliver future economic stability
I don't want to go too much into these. I will make a few general points. I think the question of how to reform and re-regulate the financial sector and monetary policy is a rich subject in it's own right.

As I said earlier, nothing here is particularly geared towards helping the economy recover from recession. The suggestions don't seem terrible, apart from an irrational antipathy to short-selling. Nor do I think City bonuses per se were a contributory factor (objectionable though they are to a sense of social justice) so much as the fact that they incentivised the wrong sorts of behaviour. But I think that the financial sector is in need of far more radical reform than suggested here.

Really though, these measures are simply too late. The horses have already bolted. To deliver economic stability you need to anticipate, or work out how to anticipate, the next crists, not explain how you could have prevented the last one.

5. Action to cut energy bills and fight fuel poverty
Undoubtedly, improving fuel efficiency in British homes is a good thing. This would be an ideal area to perform some Keynesian stimulus. Financing it through a de facto windfall tax on energy companies (the word "re-invest" fools nobody) is a categorically bad idea. Allowing this sort of instability into corporate taxation and regulation will do nothing to encourage investment in the UK economy. If there are market inefficiencies that allow these companies to make exploitative profits they should be identified and addressed directly.

6. Action to help people with debt problems
The reason, generally, people end up paying a high rate of interest on their debt is because are perceived as a credit risk. Extending cheap credit to such people at the taxpayers expense is not a solution. But education is.

Asking the financial sector to help finance that education is a windfall tax on a sector that hasn't had a windfall (and indeed in which the taxpayer now has a substantial stake). So, yes, help people understand how to manage their finances. Again, if nothing else, this would create jobs and act as economic stimulus. Some public funding, with appropriate strictures, might not then be inappropriate in helping people to restructure their debt.

But the overall effect here is pro-cyclical. It encourages people to spend less and pay off debt. This is the opposite of an economic stimulus. It is a necessary process, no doubt, but it is not part of an economic recovery package.

7. Action to help people who lose their jobs
Yes. Our infrastructure to support the unemployed is going to need some new investment in a recession. Most of this is sensible, if obvious stuff.

However, the idea that raising the minimum wage, in an economic downturn, is going to help create jobs is foolishly optimistic. I think in terms of incentivizing people to get back to work (which is not usually the problem in a recession) they have got it half right by continuing to provide benefits once someone has found employment. I would go further. My suggestion would be to scrap the minimum wage completely and instead continue to pay "unemployment" benefit, minus some fraction of salary (say two thirds). This would essentially be a government-sponsored "make-work" scheme but it would keep people in employment and it would mean that they were better off in cash terms by working. And it would maintain some sort of market mechanism to ensure that the work they were doing was as productive as possible.

8. Action to deliver ‘green-collar’ jobs and energy independence
The headline is great. It is only when you read the detail that you see what is actually being proposed is a tax hike. I don't have a problem with using taxation to steer the country but now is not the time to do so and it is wrong to present it as an economic stimulus.

By all means, invest in green mortgages and the railways. But borrow (or print money) to do so and start taxing lorries once the stimulus kicks in, when the economy is better positioned to weather an anti-commercial policy and when the infrastructure to replace them is already in place.

9. Action to reinvigorate global trade
Freeing up international trade can only be a good thing for the economy. Quite how you do that when the economy is in a slump and the clamour for protectionism across the world is growing louder, the paper neglects to mention.

However, I don't think that high commodity prices are a bad thing for the UK in the long run. They make it more and more economic sensible to start rebuilding the UK's manufacturing industry, the agricultural sector and those areas which have fallen out of favour with a highly skilled, services-biases economy of the sort which is particularly vulnerable to a downturn. Diversifying the UK economy is going to be key to a long-term recovery and diluting the cost of the higher wages demanded by Britons is beneficial to that end.