Do something!

You don't need to be a brain surgeon to know that the world economy is in a pickle.

We can sit around discussing the causes until the cows come home. But that won't help. We have to do something to get out of the mess.

Nearly everyone agrees that there is a serious demand problem. Consumers don't want to spend for three main reasons:

• Their houses and/or shares are worth less than before.
  
• They are losing their jobs.
• They are worried about losing their jobs in the future.

If low demand is the problem, what's the answer? Again, you don't need to be a brain surgeon to work that one out. Even Maynard, my pet parrot, knows what needs doing. "Increase demand!" he squawks from the moment he wakes up (around 6.30) to the moment he goes to sleep (around 22.30, after the evening news).

Maynard, you may remember, is named after John Maynard Keynes, Britain's most famous economist. Keynes argued that there are circumstances in which only government action to boost demand can pull a free-market economy out of a slump. (Keynes, by the way, was a believer in capitalism and wanted to save it through his recommendations.)

Barack Obama has said he will take drastic action to get the US economy moving again. Britain, meanwhile, has announced higher public spending and a temporary cut in the higher rate of VAT from 17.5 to 15 per cent.

The Oxford University Centre for Business Taxation says, however, that the cut in VAT is a poor way of boosting demand for a number of reasons:

• Not all of the tax cut will be passed on to consumers.
• Many consumers will save the tax cut, rather than spend more.
  
• The cut is not targeted to those most likely to spend.
• Part of any increased spending will go on imports.

A better way, says the centre, would be to target tax cuts specifically to low-income families.

But at least Britain is doing something. Germany — and Angela Merkel, in particular — is dithering. The chancellor has given the impression she wants to save any tax cuts until 2010 so that she can promise them in her election campaign next autumn.

This would be not only cynical but also a big mistake.