Why politicians can never get our finances in order
The only way politicians can fix the mess they've made of the financial system is if they are forced to. And with politicians being politicians, that's not going to happen.
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."
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.