Why politicians can never get our finances in order

Sep 19, 2012, 11:19

Merryn Somerset Webb

Posted byMerryn Somerset Webb

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I’m reading The Mess We’re In: Why Politicians Can’t Fix Financial Crises by Guy Fraser Sampson. The answer, in a nutshell is: “because they caused them”.

One of the premises of this excellent book is that “within a Western democratic system, we place our politicians in an impossible situation. We ask them to make decisions with long-term effects,” but because “they must seek election every few years, we more or less force them to consider only the short-term consequences”.

The fact is that most economic policies that are likely to confer a long term benefit are “also likely to cause short term pain, while those that confer a short-term advantage (often no more than a brief alleviation of a long-term or naturally occurring condition) almost always cause long-term damage.”

He notes this having an unpleasant effect after WWII when “it would become a leitmotif of governments of both parties as the post-war period progressed, that important policy decisions would be made not according to the long-term interests of the country, but to maximise the chance of re-election”, and traces most of our current ills to the bad decisions made then. He is also pretty clear that the same thing is happening now.
 
It is a point picked up by Daniel Finkelstein in the Times today. If we don’t cut the deficit now, he asks, when will we? Cutting spending and long term government borrowing is “almost impossibly hard”. Summoning up the will and the political support is difficult, and any agreement on it is bound to be fragile – given the non-stop demands of electorates. 

But, as should be perfectly obvious to all, “governments cannot go on borrowing larger and larger amounts, because at some point – and it is hard to be certain in advance when it will be – those doing the lending will conclude that the country, even if it has the wherewithal, does not have the political will to control its spending and tax.”

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That’s why we have finally started trying to cut our deficit. But “once we return to a policy of borrow and spend, how will we ever summon up the will to stop again?” How will we all decide that another moment is somehow the “right moment” when this is not? The answer is that we probably won’t – and that way disaster lies.

Fraser Sampson thinks one of the only ways to ever get our finances in order is the introduction of a written constitution that creates the “obligation for the government to produce a balanced budget” (which was, by the way, something that Keynes assumed was normally going to happen). I suspect he is right.

Support for the idea that politicians can’t make long term decisions unless they operate within a structure that forces them to comes from an article by Lord Lamont in the Sunday Telegraph. I have a soft spot for Lamont thanks to the fact that we share a Shetland connection (he is Lord Lamont of Lerwick) and to the fact that he is a firm believer in “balanced budgets, sound money and free markets”, but read the interview and you will see the point.

In his defence of Britain’s entry and exit into the European exchange rate mechanism (ERM) he notes that we would never have been able to bring inflation down from double figures to 2% without the ERM. Why? Because “the government simply would not have had the determination to maintain the high rates of interest necessary” to do it. Short term considerations would have taken priority over long term considerations.

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  • 1. Lupulco

    (19 September 2012, 12:23PM)  Complain about this comment

    Yes we can blame the Politicos, but the Electorate and the big corporations like their sweetners.
    Yes a written constitution to have a balanced budget, the Maastrict treaty went someway to that, yearly deficit of no more than 2%. Failed
    We could also have some sort of benign dictator?
    Then again that is what the voters in their collective wisdom wanted. Not a Lib/Con Coalitition, but a National Coalition of all the Lib/Con/Lab based on % of votes cast. But it was ignored.

  • 2. JREwing

    (19 September 2012, 12:44PM)  Complain about this comment

    "Democracy is based on the idea that the common people know what is good for them and deserve to get it good and hard" - H. L. Mencken

    "The best argument against democracy is a five minute conversation with the average voter" - Winston Churchill.

  • 3. Tim W

    (19 September 2012, 01:13PM)  Complain about this comment

    It's worth noting that the majority of government debt is tied up in the ellectorate's collective pension, providing a low risk store of wealth for retirement while being put to use in the name of your king and country.

    I guess the problem lies in the 'low risk store of wealth bit'. If borrowing continues to the point that it can't be paid back then it's no longer low risk and if governments keep printing money then the store of wealth bit is gone too.

    My conclusion is that government debt isn't bad, it just needs to be kept at a level in line with the demand from investors.

  • 4. Dream Jeanie

    (20 September 2012, 08:35AM)  Complain about this comment

    If even economists can't agree what's good for the economy, what are the chances that the average voter is going to be persuaded that something painful in the short-term and with no clearly provable outcome will help them in the long term? Even well educated people I know seem to think that government has a magic wand and could make everything perfect without any ordinary person suffering even the most minor inconvenience if only it had the political will. I repeatedly hear how normal rules don't apply to government and that if only the government were more left/right* wing in its actions, we wouldn't have got into this mess in the first place and could be out of it by the end of the year. We probably do have the political system we deserve, but on the plus side, at least we don't have death camps, war within the country or mass starvation or mass homelessness. *Delete according to the political persuasion of the person you are talking to.

  • 5. Chester

    (20 September 2012, 11:31AM)  Complain about this comment

    There can be no pretence of policy "for the national good". Govt is parasitic by nature and reactive in behaviour - there can be no worse combination of absolute power to conspire against the principle of sound money

    Lamont is right. Govt needs a force bigger than itself to keep it in check. Bond markets eventually "contain" political screw-ups, but normally post event (as is happening now that 30 yr bond yields are rising)

    "Sound money" should indeed be supported by a constitutional conditions, which limit both size and influence of the state to allow UK plc to remain competitive with growth economies. That means anything over 15% of GDP is uncompetitive, so the state needs to shrink by 70%. If we don't do it, the market will

  • 6. Dr Ray

    (20 September 2012, 06:55PM)  Complain about this comment

    I think agonising over deficits and how the National Debt will be paid off is really worrying over the wrong thing. There is not a major or even a minor economy on earth which now follows sound money principles and debts will be monetized simultaneously in all countries so that no one country is at a disadvantage. We see this already. In an odd way I agree with Boris here that debt doesn't matter and as long as governments rack up and monetize debts at more or less the same rate, life goes on, with only the foolish who don't see what is happening losing their savings and pensions.

  • 7. Alastair

    (21 September 2012, 06:45AM)  Complain about this comment

    If even economists can't agree what's good for the economy, what are the chances that the average voter is going to be persuaded that something painful in the short-term and with no clearly provable outcome will help them in the long term?

    Answer is like a child at school offered six of the belt now or a dammed thrashing at the end of term.

    Children will tend to make better choices on the economy than politicians or electorates

  • 8. Alastair

    (21 September 2012, 06:48AM)  Complain about this comment

    Dr Ray

    "There is not a major or even a minor economy on earth which now follows sound money principles and debts will be monetized simultaneously in all countries so that no one country is at a disadvantage. We see this already. "

    When all the fools in Christendom are all in agreement..... a wise man heads the other way!

    Alastair
    Alastair

  • 9. Andrew H

    (21 September 2012, 11:37AM)  Complain about this comment

    @6 Dr. Ray,

    Deficits, debts and money printing do not matter as long as everybody is doing it?

    I suppose misery does love company, however, I think you'll increasingly begin to see in time that this piece of Chartalist dogma is a very grand fallacy indeed.

  • 10. Andrew H

    (21 September 2012, 12:01PM)  Complain about this comment

    @6 Dr. Ray,

    I would also amend my previous statement:

    "Deficits, debts, and money printing do not matter as long as you are the person, or one of the people, in control of the supply of money (until lynched by the general populace)"

    The debts and monetisation are a form of fraud and there largely to ensure that those holding bubble priced assets do not take a hit, at the expense of everybody else.

    Unfortunately as this continues, capital will be increasingly directed away from productive economic activity into further bubbles and speculation (we can see this already with stock markets and the like being almost completely driven by the actions of central banks), and we will all become poorer as a result.

  • 11. Andrew H.

    (21 September 2012, 12:04PM)  Complain about this comment

    ...continued...

    And how much poorer we get will be determined by how much the powers that be are willing to continue the madness.

  • 12. Luke

    (21 September 2012, 02:05PM)  Complain about this comment

    Finkelstein's point, as I understand it, is that because we/our politicians won't do the right thing in the future, we should do the wrong thing now.

    But the notion that voters will always vote for, and politicians will always carry out, measures that lead to unsustainable debt is not borne out by history. By historical standards, govt debt as a proportion of GDP is relatively low http://econ.economicshelp.org/2009/03/historical-national-debt.html

    SO whether by luck or judgment, helped by a bit of inflation, voters and politicians have been reducing the ratio of debt to GDP since the war. Doesn't mean we don't have problems, but look at history before you pretend to be worldly wise.

  • 13. Dr Ray

    (21 September 2012, 03:53PM)  Complain about this comment

    Andrew,

    Obviously monetizing of debt matters to the people who expect to be paid back. I should have said it doesn't matter to the government or those close to them. I agree it is a fraud as people are encouraged to work and save all their lives for the modern equivalent of beads and trinkets which Europeans used to buy Manhatten. But life goes on. For example credit card companies don't worry unduly about fraud providing it affects other CC companies too. They just adjust the rate to cover the losses and the foolish end up paying.

  • 14. Muenstermann

    (22 September 2012, 10:49AM)  Complain about this comment

    Dear 'Dream-Jeannie' and Ms. Webb:
    If we do not finally have a sound financial policy, a balanced budget and firm control and reduction of social handout and 'redistribution' projects we will have death camps, war within and outside of the country, and mass starvation. In the end, Socialist stateists will do what they have always done. Between 1917 and 1990 they managed to murder at least 130 million 'inconvenient' people. Anyone who thinks Britain will somehow be immune to their will to power simply does not know history and is indeed dreaming.

  • 15. Peter Kellow

    (22 September 2012, 01:09PM)  Complain about this comment

    The way to eliminate the deficit is to eliminate the dumbest idea anyone ever had for financing government excess expenditure - government bonds.

    I write an IOU with a promise to pay interest. You are a bank so you create the money and buy my IOU.

    Duhh! But I am the government so I could have created the money myself and had no debt and no interest to pay

    The reason why we don't adopt this obvious solution is because the politicians (Lamont has umpteen bank directorships) are in the pocket of the banks

    The origin of the bonds system lies when currencies were backed by gold

    It is a nonsense with a fiat currency.

  • 16. clive chafer

    (22 September 2012, 02:29PM)  Complain about this comment

    I have no doubt that the weakness in democracy is the need to take short-term decisions in order to try to get re-elected and thereby damage the economy. The temptation to over-borrow and please the electorate with various giveaways has led us into the current debt trap.

    Gordon Brown must have known that continuing to borrow like crazy in the final year of his time as Prime Minister was very bad for the country but he did so because he felt it would give him the best/only chance of being returned to power.

    Merryn's solution is a good one; make it constitutional to always write a balanced budget, so defined as to limit borrowing to a LOW proportion of GDP or preferably phase it out altogether. This mess was avoidable.

  • 17. Tony Hart

    (23 September 2012, 07:23AM)  Complain about this comment

    Let us have a balanced budget for annual, revenue spending, like NHS, education and so on. Then set up loans for capital expenditure, which then need repaying out of revenue spending, like mortgages. Then set up pension funds for state and public pensions.

    Then we might get money matters under control.

  • 18. TEL

    (23 September 2012, 09:57AM)  Complain about this comment

    I am reminded by your article of an event in the early 70s property collapse, when Denis Healy "silly billy" made the pronouncement " I will squeeze the property developers till their pips squeak" or similar. The industry was already in decline and trying to correct, but as usual the Government were miles behind and the result was they forced a calamitous crash rather than what would have been a hard landing

  • 19. Tony Hart

    (23 September 2012, 10:33AM)  Complain about this comment

    Whilst you are writing about lending and deficis, etc., why did banks lend to private equity firms?? I read the front-page of the Daily Telegraph Business, where it reported that Acromas borrowed £4.8bn to buy AA and Saga. What was the justification for that loan?

    Could we have an article on why private equity firms find it so easy o borrow money, please.

  • 20. Inthe sun

    (23 September 2012, 10:36AM)  Complain about this comment

    It has been said that everything written is really a footnote to Plato.Well, in regard to politica and the economy one only has to read Karl Popper and there you will find the answers. We are living through the greatest change economically in our history where corruption by the political, banking and ruling elites is going unpunished. Why? Because the mass of people are totally uneducated in understanding the simplest and basic concepts of money and worse still make no attempt to correct their general ignorance even though the answers are available all over the internet.These are the same conditions that led to millions of young men being slaughtered in WW1 and subsequent stupid politically driven wars like Afganistan, Irak, Vietnam etc.

  • 21. HL

    (25 September 2012, 02:34PM)  Complain about this comment

    Inthe sun is spot on. All wars are politically driven.

    For many politicians in history, war has been convenient. After all, bombs and speeches are an easy way to divert the public's attention away from policy follies or economic woes. People who are caught up in a battle for survival are more likely to loathe their enemies than their own leaders. And in the course f it all, millions die.

    Even when peace breaks out again, the effects of war continue for generations because of the massive debts that have been incurred.

    The biggest question of all has to be "How can we lessen the power of politicians ?"

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