The Problem With Gordon

This is from today's Guardian -

"Gordon Brown tonight called on the world's most powerful industrial nations to agree a programme of immediate and coordinated tax cuts to prevent the global economy sliding deeper into recession."

If the world economy is moving into a deflationary position, there is a problem with a co-ordinated programme of tax cuts. In a deflationary situation and with instability, there is an interest in people hording any newly found money from income tax or VAT-style cuts, which can be done by holding it in banks at even low interest rates as well as keeping it in their purses and wallets. For if money will be seen as increasing its value, people will wish to keep hold of it as some form of protection for the future. It will then only be via a growth in unemployment and the possibility of cuts in wages and benefits that the newly impovished will be obliged to spend the bits they have.

Tax cuts for the poor makes sense as the poor have little option but to spend the bit they have (and the world is full of poor people), but in other areas would it not be better for Governments to increase their own expenditure rather than to give across the board tax cuts? The building of Council Housing and its equivalent being an alternative.

The problems with a move to increased Government expenditure is that (a) it might get bogged down in long term capital programmes which would not do what is needed to stimulate demand in the short-run and (b) numbers of Governments throughout the world are corrupt and would misuse such a programme. So Governments would need to use their expenditure to provide people with consumer type goods. In a world that has wide areas of poverty this is by no means an incorrect approach - although international co-ordination would be essential to the tackle corruption problems.