Thursday, December 06, 2007

How to avoid a recession

Robert Reich, Clinton's Secretary of Labor, has a blog. It's extremely knowledgable (of course), and also very well written. Today's post is on how to avoid the coming recession:

"All we need do is recognize one simple fact: Lower-income people spend a larger portion of whatever extra income they get than those with higher incomes (in economic jargon, lower-income people have a higher marginal propensity to consume). So every dollar of a tax cut aimed at lower-income Americans packs a bigger stimulative punch than a dollar of tax cut aimed at those with higher incomes. By the same logic, every dollar of a tax increase on higher-income people has a smaller detrimental effect on their purchases than would a dollar tax hike on lower-income people. Get it? The best way to stimulate the economy without adding to the national debt is to cut the taxes of lower-income Americans and pay for that tax cut by raising taxes on those with higher incomes. Presto – a simple formula for being both fiscally responsible and also fiscally stimulative."

Nothing much to add to that except - if it's right for the USA, chances are it would be a good idea for us here in Britain too. Can we send away the rubbish American advisers to the Prime Minister like the man who has helped lose eight Presidential elections, and instead get this one to come and help us?

4 Comments:

At 11:06 am , Anonymous jdc said...

Hang on a minute. I'm all for a more progressive tax system, but I don't see how, when our core problem is that people have borrowed too much and saved too little, the solution to falling economic growth is to encourage people to spend more and save less.

 
At 12:26 pm , Anonymous tim f said...

If people on lower incomes had more money, wouldn't they be able to both spend and save more?

 
At 4:59 pm , Anonymous jdc said...

Yes, they would be able to, but the point is that they don't - that's what Dan said in the original post!

"Lower-income people spend a larger portion of whatever extra income they get than those with higher incomes"

So any zero-sum redistribution from rich to poor would be a redistribution from saving to spending. Now, I don't think that's a problem if you accompany it with incentives to save rather than spend (lower taxes on savings accounts, higher interest rates).

I think it's fair to say that poorer people spend a greater proportion of their extra money locally than rich people, up to a certian point, and that would help too.

 
At 4:03 pm , Anonymous angus said...

"I don't see how, when our core problem is that people have borrowed too much and saved too little, the solution to falling economic growth is to encourage people to spend more and save less."

Yes, but is it our core problem?

The biggest immediate problem is surely the risk that because of too high debt, people stop spending and cause a recession.

I wouldn't have started from here but we are where we are...

 

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