If you had asked 50 random people in any High Street of any sizable town in Britain what the effect of a reduction of 2.5% off the rate of VAT would actually do to their spending habits, I think the answer would have been little or nothing.
Why then, several weeks after the rate cut was introduced, are Opposition Politicians like David Cameron and Nick Clegg only now questioning what effect it would have? Suddenly, with the benefit of Retail Spending data, which revealed exactly what any person in the street would have predicted that the rate drop had no effect, why now have these Politicians suddenly become wise and are haranguing the daft Ministers that introduced it?
Probability Theory
I watched an absorbing part of the Christmas Royal Institution Lectures yesterday where an able Professor showed that if you drop a small ball into a box which had a triangular set of wooden pegs to interrupt its path, the ball would randomly drop into one of eight slots. Do it again to an individual ball and again the next ball randomly chooses a slot. If, however, you suddenly drop a whole jar full of identical balls into the box, the balls would fall into the slots so that the height of each stack of balls in each slot exactly followed the pattern of the mean distribution of probability. In other words, individually the balls are random and hard to predict but when taken over a whole sample, they behave according to plan.
So applying the same theory to a minor 2.5% cut in VAT rate to an individual's spending pattern it seems you can't predict it but when an overall saving of £12.5bn is at stake, surely the great mass of people would spend according to plan - i.e. a lot more?
When Theory Does Not Mirror Reality
Probability Theory isn't actually applicable in this instance. Common sense would tell you that 2.5% off VAT would not do a jot to spending patterns, because the individual gain in savings is pathetic. After rising tax bills, fuel and energy prices, food bills, plus a fall in the available credit supply, people are looking to far greater savings to stimulate spending. Although John Lewis reported a good start o the Sales Season, anecdotal evidence on the number of people in town centres and the High Street generally show that people are simply not spending as much.
And that's because it is not about minor savings, it's about the lack of money generally and the uncertainty surrounding the future as the recession bites and hits jobs.
Reality has a habit of proving theories to be just what they are - theories.
The Progress of The Bail Out
Mervyn King has been pretty succinct. It is his belief that the £800bn so far pumped into banks is not enough to stop more toppling. In fact, he has alluded to potential wholesale public ownership of banks - a far cry from the theories of free market forces. The money pumped in has merely kept fat cat executives in a job and worrying about how they get the gravy train going again and to generate the vast bonuses of before. Meanwhile, those loiterers at the cash tills and backrooms get made redundant on mass as they are nothing more than hangers on.
What the bail out did was shore up a status quo, a way of life. These besuited people, while feeling some remorse allegedly for the mess we are in, still do not slash their own salary bills and get back to the core business of capital raising and lending, instead they want to continue along the lines of before. We spent £800bn to keep a slim population of elite executives in their jobs while a further 600,000 to 1 million people will pay with their job for their lack of talent.
I may be being a bit harsh and slightly left of the truth, but I don't see the economic benefit filtering through from this huge bail out - in fact I have seen pretty much the opposite. So when Darling and Brown gave out all the money we will have to fund, where were the tight stipulations on how it would be used and spent? The answer is they just followed what the Theory said in their old books. Spend and it will all come right.........probably?
Accountability vs Responsibility
For those who follow my Blog, I have consistently picked on themes of management in business and one theme is Accountability vs Responsibility. In the worst economic crisis since The Great Depression, I would like to see more than just theory used but some hard nosed common sense and the bearing of accountability for the mistakes - the ones so far and future ones. I cannot help thinking, after 10 years of flowering up our economic position thanks to a false boom based on unrealistic asset growth, that we are allowing a Government that so horribly got it wrong to try and rekindle the same bonanza.
Common sense says it cannot work again - so why are we letting them get away with it a second time?
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