By Anatole Kaletsky
June 13 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:
Despite this audacious debt plan, the almost unanimous
response among British pundits went something like the folowing.
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
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 2.0 percent but trying to
prevent bond yields from rising above 1.0 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
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.