When illogical policy seems to work

June 13, 2013

It’s cynical, manipulative and hypocritical – and it looks like it is going to work. How often do you hear a sentence like this, to describe a government initiative or economic policy?  Not often enough.

The media and a surprisingly high proportion of business leaders, financiers and economic analysts seem to believe that policies which are dishonest, intellectually inconsistent or obviously self-interested in their motivation are ipso facto doomed to fail or to damage the public interest. But this is manifestly untrue. The effectiveness of public policies and their ultimate desirability is in practice judged not by their motivations, but by their results.

Which brings me to the real subject of this column: the improving outlook for the world economy and why many economists and financiers cannot bring themselves to acknowledge it. Let me begin with a striking example anticipated in this column back in March: the boom in house prices and debt-financed consumption that the British government is pumping up in preparation for the general election in May 2015.

In the British budget announced on March 20, George Osborne, the British finance minister, announced a spectacular pre-election giveaway: a program of highly leveraged mortgage lending guaranteed by the government with the stated intention of pumping up British household debt by up to £130 billion. The enormity of this number can be gauged by translating it into an equivalent stimulus relative to the size of the U.S. economy: $1.7 trillion.

Despite this audacious debt plan, the almost unanimous response among British pundits went something like this:

George Osborne based his entire economic program on deficit and debt reduction. He even started his budget speech with the Cameron government’s mantra since it came to power: “You cannot cure debt with more debt.” To tempt British consumers into taking on bigger debts would therefore be intellectually incoherent and blatantly hypocritical. And even if Osborne did want to tempt mortgage borrowers he would fail, because people would recognize his efforts as electoral manipulation and refuse to take the bait.

Three months later, this conventional moralizing has proved completely wrong. The British housing market has sprung to life, even though the full lending program does not begin until 2014. A monthly survey of realtors published this week revealed the strongest sales expectations since 2005, and the third best in the series’ 15-year record. Home builders’ shares are soaring. House prices in depressed regions such as Scotland are rising by double digits for the first time since 2007. And in the affluent areas of London never hit by the housing bust, dinner conversations are turning to how government-backed mortgages might be used to finance vacation homes, investment properties and children’s flats.

In short, Osborne’s transparently political plan to create a housing and mortgage boom in time for the 2015 election seems to be working already, even before the gusher of credit from the Treasury and the Bank of England has begun.

Assuming this trend continues – and there is every reason to believe that it will – a large part of the new mortgage debt will flow into consumer spending, growth will accelerate, unemployment will fall and Britain will enjoy decent economic conditions by the time the Cameron government faces the voters in May 2015.  If a pre-election boom helps to ensure Cameron’s re-election, it will obviously be bad news for anyone eager to see a change of government. A housing boom will also raise genuine misgivings in Britain about reverting to property speculation and consumption, instead of rebalancing the economy towards exports and investment as many economists had recommended.

But whether a housing boom proves politically expedient for the Cameron government and whether it is good or bad for the British economy’s long-run structure has no bearing on whether it will actually happen. This obvious distinction between what ought to happen and what is likely to happen is one that economists and financiers are surprisingly reluctant to draw.

Similar confusion between moral and analytical judgments can be observed all over the world these days in economics and finance. Many investors on Wall Street believe that stock prices cannot keep rising because they have been propelled by monetary manipulation which they consider irresponsible or immoral. Yet the bull market continues, despite this manipulation or maybe because of it. Many German political analysts argue that Angela Merkel cannot continue to back the euro because this means saying one thing to domestic voters and another to European leaders and financial markets. Yet the euro survives, despite this hypocrisy or maybe because of it. In Japan, the Abe administration is planning to increase inflation to 2 percent but trying to prevent bond yields from rising above 1 percent, which can only be done by getting cynically persuaded savers to disregard rational investment strategy.  Yet the Japanese economy is palpably improving, despite this cynicism or maybe because of it.

In sum, economic conditions are gradually improving around the world despite government and central bank policies that seem to be incoherent or self-serving in many different ways. But that is the normal course of human affairs. So as the world pulls out of its five-year slump and gradually returns to normal economic conditions in response to limitless printing of money and unprecedented government borrowing, the sentence at the beginning of this article may be worth repeating:

It is cynical, manipulative and hypocritical – and it looks like it is going to work.

PHOTO: Britain’s Prime Minister David Cameron delivers a speech to workers at the new London Gateway container port, which is under construction on the banks of the River Thames, near Tilbury in southern England June 10, 2013. REUTERS/Stefan Rousseau/Pool



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so Osborne’s policy s vey effectively creating a bubble which he hopes will blow up only after the 2015 elections. Vey smart indeed. It is a good indication of how desperate the (dis)United Kingdom is. Let’s hope it leaves the EU before the final implosion.

Posted by phoen2011 | Report as abusive

Every scam depends on things “…cynical, manipulative and hypocritical…” that “…looks like it is going to work.” Until it doesn’t!

Hope springs eternal…the hope of the bigger fool! It’s going to be wild ride, folks.

Posted by OneOfTheSheep | Report as abusive

So Help to Buy is “cynical, manipulative and hypocritical – and it looks like it is going to work”. Work in what way ? Provide a housing boom that works to get the Tories re-elected and a recovery underway ? Possibly yes. But work in the longer term ie 5+ years out ? I’d like to here Anatole’s thoughts on this – on the longer term repercussions. What does he think of the policy on balance. It’s not clear to me what is being said in terms of the bigger picture as opposed to what it might achieve short term. 5 years down the line there’s going to be real trouble again surely ?

It a reckless policy – hair of the dog. Do we really want to do this again ?

It amazes me how the Tories get away with it. They blame everything on the last government’s spending, Gordon Brown blah blah… whilst re-enacting the policies that actually really did get us into this mess … and the majority of the people in this country fall for it.

The Conservative propanganda machine works well that’s for sure.

Posted by heyrevolver | Report as abusive

Mr Kaletsky makes his own “intellectually incoherent” jump, tucked away at the bottom of the article: “as the world pulls out of its five-year slump and gradually returns to normal economic conditions,” while noting that current policies are certain to produce a bubble.

“Normal” has a nice reassuring ring, but the only way it makes any sense in this context is to define “normal” as “the experience of the last ten years,” that is, intense cycles of bubble and collapse overlying a secular trend towards higher unemployment, lower real productivity, depressed real wages, and industrial stagnation.

To say that this policy “works” is like saying you can fly by jumping off the Empire State Building — yes, but.

Posted by acebros | Report as abusive

This was half the story behind Conservative Party “economic policy” during most of the Thatcher years. This hypocrisy might have been how Gordon Brown got his inspiration to make the Bank of England into an “independent” technocratic institution (a positive step). (Gordon Brown was brilliant while ever he had Tony Blair to keep him on his toes.) George Osborne has only aped Gordon Brown’s political magnanimity and economic foresight by creating the “Office of Budget Responsibility” — one wonders why he didn’t create stronger technocratic anti-cyclical institutions?

So much for all the lip-service to “affordable housing”! With 65% of British families “owning” their own home (mostly with paper money backing that up); making them feel “wealthy” has become part of political strategy.

It’s not by coincidence that George Osborne is BOTH the UK Chancellor of the Exchequer (financial minister) and ALSO the Conservative Party’s Chief Strategist, AT THE SAME TIME. It’s an obvious conflict of interests! Yet for some reason, none of our politicians or journalists have been making an issue out of this. WHY NOT?

See posts of 20th April 2013…

Posted by matthewslyman | Report as abusive

This article’s message, the assessment of the nature of ‘the recovery’ is especially discouraging; but I suppose we’re better off if more of this kind of message were tossed out to general readership. (Maybe, just maybe, there’s some slim chance that humanity will notice how it’s behaving. It’s not just high level political manipulations that need correction, obviously. Multitudes of ordinary people are so keen to ‘get back to normal’ that they don’t seem terribly interested in how ‘normal’ became such a disaster.

I’m in the US and the same can be said for developments here. I track some news from a few Canadian communities and there – since they fared better all along – skirting disaster while maintaining ‘normal’, seems the happy mindset. Humanity’s behavior, given some 8-10,000 years to reach decent levels of literacy, (and the presumed capacity to use this for developing an ever better world), seems beyond bizarre.

Posted by MaggieMP | Report as abusive

As the great contemporary philosopher Nicholas Rescher put it:

“As beings of limited capacity, we cannot manage to wrap our minds adequately around the world’s vast manifold of complex and complexly interrelated realities…there is nothing incidental or fortuitous about our ignorance – it is something deeply rooted in the nature of things.”

With that in mind, and with all due respect to the unimpeachable track record of economists and financiers, enlightened policy-makers should be doing precisely what George Osborne is doing: Taking an empirical approach to our current economic woes.

Posted by jrpardinas | Report as abusive

Coming from Anatole “recession what recession?” Kaletsky, I think this could be a great sell signal!

Posted by sayonara | Report as abusive

The author, Anatole Kaletsky, has written good articles here at Reuters that I’ve enjoyed.

But with this one, I see that he is completely out of touch with the working class, the middle class.

Without a protective tariff, the real jobs are gone FOREVER. It’s called globalization.

A housing bubble doesn’t solve the problem.

Posted by AdamSmith | Report as abusive

Ultimately, politicians answer to voters. One person’s cynical pandering to voters may be another person’s giving voters what they believe to be in their best interests. Urban political “machines” of the late-19th and early 20th century were very skilled at this, and the positive side of those regimes is often overlooked.

Posted by Bob9999 | Report as abusive