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After reading Anatole Kaletsky‘s piece in the Times newspaper today I felt I needed to pick up some of my old economics books and do some revision. I have to admit, even after a second reading I am not sure I fully grasp the mechanics of implementing what he was suggesting.

I will try to summarise his article. He believes there is every chance that the current package of government aid will not be enough to stimulate the economy. He therefore suggests that the government borrow more, but do so at zero cost from the Bank of England. Apparently, Britain’s proportion of cash circulating in the economy as a percentage of all deposits is the lowest in Europe, leaving the economy and banks dangerously exposed to a liquidity crisis. He therefore suggests that the banks are made to deposit 10% of their monetary liabilities with the Bank of England. The catch is that they will be paid zero interest on these deposits (an effective windfall tax) which would enable the Bank of England to lend the money to the government at zero cost increasing the government’s war chest to kick start the economy.

Sounds like a good idea. I think.

Anyway, it got me thinking about economics and our/the electorates understanding of government policy. Implementing economic policy and managing the economy is such a large part of how we evaluate the performance of political parties, yet our understanding of the subject matter is, on average, very limited. When it comes to election time will we be able to judge for ourselves how Gordon has steered us through the crunch? Is he the saviour of the Western world or has he squandered billions of tax payers money?

How can our democracy operate effectively when we can not evaluate the performance of our politicians? Should economics become a compulsory subject along with English and Maths?

I just can’t see that it will. Robert Peston has been out and about getting feedback from retailers who have been very negative about it. See his post here.

I am no great economist, however, if I had to make the call I would treat the challenge like a marketing campaign.

When you launch a new product, the key is to get momentum. If your budget is limited, which they always are, you usually focus all of your marketing around a tightly defined target audience which will get the most benefit from the product and talk about it the most. The aim is then to get that group to tell their friends/colleagues/family and, possibly, pass on the benefit to them.

A 2.5% reduction in VAT looks like the opposite strategy. Targeting everyone, nobody benefits much, little passed on and no momentum. I am sure there could have been a more effective approach. Very frustrating.

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