When illogical policy seems to work
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