The expenses crisis had at least one thing going for it. It was a wonderful distraction for voters.
Ironically, the political paralysis in Westminster also diverted the attention of policy makers away from the economy. In May, there were no ostentatious innovations, sudden policy shifts or grand economic ideas. Naturally, for the first time since the crisis began, the economy showed some tentative signs of stabilizing. The service sector enjoyed a modest degree of growth, while sterling appreciated.
There is a lesson here, but it isn’t one that policy makers are inclined to study. It is that a market economy has powerful regenerative powers. Leave it alone, and the private sector will fix itself. Allow prices to adjust, and the market will ensure full employment and rising incomes. In contrast, government intervention always makes things worse.
The tragedy of the UK economy is that it is overwhelmed by the worst sort of government intervention. New Labour aren't interested the traditional objectives of government intervention, such as saving industry and creating jobs. New Labour’s purpose is to protect and control the most distorted market of all – housing. Its chosen instruments of intervention is a colossal bailout of the financial sector, coupled with a recklessly large fiscal deficit.
The property market is riddled with distortions. On the supply side, there is massive state intervention via local authority planning restrictions. A person may own a property, but they can not dispose of it as they please. They can not knock it down and rebuild it. They can not change its purpose. At every stage, the dead hand of the state restricts and prevents private individuals controlling their private property.
On the demand side, the cost of buying a house is also determined by the state via the interest rate. The cost of a house depends on the cost of servicing the debt used to purchase it - the mortgage interest rate. That price is governed by the Bank of England, who openly admit to trying to manage asset values, particularly housing, to regulate overall aggregate demand in the economy. Again, it is state intervention of the worst sort.
Over the last thirty years, the distortions in the housing market have grown like a cancer. Today, governments aren’t concerned about unemployment, inflation, the balance of payments, or the size of the government debt stock. The only objective of policy is the expansion of credit, designed to inflate house prices.
It is madness, of course, but UK policy makers, regardless of party, are not willing to acknowledge this insanity. That is why today the UK economy has near zero interest rates, a central bank printing around 10 percent of GDP in cash, and a government running a 12 percent of GDP fiscal deficit.
However, yesterday, the UK economy received the best piece of news in years. It was that Gordon Brown was going to continue as PM. If we are in luck, he will be a lame duck PM, unable to introduce any further interventionist policies. He might leave the economy alone to sort itself out.
Nevertheless, the economy will continue to struggle in the face of the legacy of irresponsible monetary and fiscal policies that Brown introduced when he still controlled his party. But if we are really lucky, his New Labour enemies will continue fighting for the leadership all the way to the next election. In fact, the continuing and outrageous venality of our politicians is the only hope for our economy.
If only the expenses scandal could continue forever.