Subject to certain caveats, the NI cut is the right thing to be doing

It’s possible to hold, as we often do, that macroeconomics is largely Woo. Far too much theorising balanced upon a paucity of evidence. The complicated nature of the mathematics used in it reminds us of the gyrations astronomers had to use before heliocentrism became established. The maths being complicated precisely because certain underlying assumptions were wrong, so great effort had to be made to fit observations into the theory. Then there’s that problem with being able to do any fine tuning given Hayek’s points about the knowledge problem. Oh, and the time lags associated with any action.

But that’s us and our biases.

Let us stick exactly within the strictures of the current set of macroeconomic models. Largely New Keynesian - all the Treasury, Fed, ECB and so on models are such. This makes the national insurance cut the right thing to be doing:

Liz Truss's National Insurance cut will take effect in workers' November payslips, Kwasi Kwarteng is expected to announce this week, as he ditches the Coalition-era focus on "sharing the proceeds of growth".

Again, we can put in all sorts of provisos here. Macroeconomics is Woo, we can’t fine tune because knowledge, perhaps the economy doesn’t in fact require stimulus - the inflation rate certainly isn’t suggesting such - and on and on. But accept that we’re working in a Keynesian policy structure, even if now New, that stimulus to households is required, government must do something. The NI cut is the right way to do it - as Keynes himself said:

I am converted to your proposal…for varying rates of contributions in good and bad times. (June 16, 1942). Keynes, Collected Writings, vol. 27, p. 208.

…[Y]ou are able to show fluctuations in income of an order of magnitude which is significant in the context… So far as employees are concerned, reductions in contributions are more likely to lead to increased expenditure as compared with saving than a reduction in income tax would, and are free from the objection to a reduction in income tax that the wealthier classes would benefit disproportionately. At the same time, the reduction to employers, operating as a mitigation of the costs of production, will come in particularly helpfully in bad times. (July 1, 1942). Keynes, Collected Writings, vol. 27, p. 218.

Well, there we go, got it from the fountainhead himself. It’s large enough in aggregate to make a difference, small enough individually not to be subject to Ricardian Equivalence and works fast.

The interesting thing about this being that damn near every Keynesian in the country now says reducing NI is the wrong thing to be doing because somethingsomethingmuttermutter.

We did say that we consider macroeconomics to be largely Woo, didn’t we?