Policy can trump unpopularity
By Martin Hutchinson
As is well known to readers of this column, it is my considered opinion that
economic policy and management reached a global all-time apogee (so far - one
can always hope) under the British prime ministership of Robert Banks
Jenkinson, Lord Liverpool (prime minister, 1812-27). However Liverpool is
generally thought to have had one enormous advantage over modern policymakers
in not having to deal with a modern democracy. Unlike modern democratic
leaders, he was thus only moderately constrained by his policies' temporary
The Greek crisis has however graphically illustrated that popular resentment at
unpalatable economic change is very much as it was in 1812-20, and that
policymakers responding to that resentment are at least as insulated from
popular feeling as were
Liverpool and his government. Unfortunately, unlike Liverpool, they are not
using that insulation to good effect.
If the European Union's policy elite had possessed Liverpool's depth of
economic understanding, the crisis would have been easily solved, and indeed
would not have arisen in the first place. Liverpool would have put Europe onto
a gold standard; if he had been thwarted in that he might well have supported
the euro but would certainly not have admitted Greece into its membership.
He would immediately have spotted the disgraceful discrimination against the
private sector involved in the Basel Committee's zero rating of government
debt, a principal cause of the crisis because it has favored bank funding of
excessive government deficits over productive lending to the private sector. He
would have opposed root and branch governments increasing their deficits
through "stimulus" spending, pointing out the superior recession-fighting
record produced by his own 1816-19 austerity.
Once the crisis had arisen, Liverpool's solution would have been simple and
complete. He would have perceived by a simple analysis of relative productivity
that Greece had no hope of solving its problems while it remained a member of
the euro. He would thus have forced it to readopt the drachma when the crisis
first arose, in spring 2010. Following such re-adoption the drachma would have
immediately devalued by about two thirds, taking Greek per capita income down
to about $11,000 from the $32,000 at which it stood in 2008.
Naturally a further result would have been a Greek debt default, from which
Liverpool would have stood back entirely. If the Greek government wished to
bail out its banking system with drachma paper (thereby weakening the drachma
further) that would be its choice, but not one cent of German and Swedish
taxpayer money would be provided to facilitate this process.
Similarly, Liverpool would have allowed the Irish government to default, as a
result of its foolish 2008 attempt to bail out its banking system, and would
have given Spain, Italy and Portugal the alternative of leaving the euro or
adopting austerity programs rigorous enough to keep them members (those
austerity programs would have needed to be less rigorous than Latvia's, but in
any case their adoption would have been a matter for the national governments
themselves, with neither coercion nor extra resources provided by the EU.)
Should Liverpool's rigorous policies have caused problems in Europe's
overleveraged and badly managed banks, Liverpool would not have stopped the
European Central Bank from providing resources to eurozone banks, but only on
the terms eventually prescribed by Walter Bagehot - short-term loans against
first-class security at punitively high interest rates. There would have been
no bailouts, as Liverpool, with his knowledge of the 1720 Mississippi and South
Sea crashes, would have regarded "too big to fail" as being equivalent to "too
big to be allowed to live".
Liverpool's policies would thus have been dictated neither by sentimentality
about the inevitable short-term pain his policies would cause, nor by political
considerations of their probable unpopularity, but simply by their likelihood
of solving the problem in a market-friendly way and thereby allowing economic
growth to resume in the Eurozone as a whole. They would have been basically
free-market oriented, but not dictated by free trade or other dogma, as were
the policies of the free traders a generation later.
By their apparent harshness, they would have made him highly unpopular, yet
they would have stopped economic decay in its tracks and would have allowed
Europe to rise above the problems of its periphery, while that periphery led
productive existences at the lower living standards justified by their modest
The Liverpool government's attitude to popularity was best expressed not by
Liverpool himself but by his colleague Robert Stewart, Lord Castlereagh, who as
leader of the House of Commons bore much of the opprobrium for Liverpool's
policies. In 1821, after the 1816-19 "double-dip" recession had lifted, he
remarked "I am as popular now as I was unpopular formerly, and of the two,
unpopularity is the more convenient and gentlemanlike."
Some years ago I wrote a piece quoting Castlereagh and extolling the virtues of
unpopular economic policies. The piece was picked up by the Almaty Herald - it
was doubtless to the taste of Kazakhstan president (since 1991) Nursultan
Nazarbayev, who felt it proved that his economic policies, being unpopular,
must therefore be beneficial. I would like to correct any misapprehension: my
extolment of unpopularity was not intended to justify every action of Central
Asian dictators by suggesting their economic policies must be superior. The
unhappy fact that good economic policies are often unpopular does not imply
that unpopular economic policies are ipso facto good.
Liverpool would have understood the EU bureaucracy's desire to insulate itself
from populism, and would have been intrigued by the ingenuity of some of the
mechanisms by which it achieves this insulation. The idea of a permanent
appointed secretariat that was only distantly accountable to the electorate
would have seemed to him a plausible alternative to the pre-1832 franchise of
rotten boroughs, open vote purchase and limited voting rights.
However, he would have scoffed at claims by the EU leaders that their supposed
democratic antecedents gave them a moral superiority and would have correctly
pointed out that his pre-1832 franchise was far more accountable than the EU
bureaucracy, in that it gave considerable weight to public opinion when broadly
held over a prolonged period.
In any case, Liverpool would have had no time at all for the policies the
insulated EU bureaucracy pursues. He would have regarded its economics as
riddled with error, and the mantra that "economists never agree" as a mere
excuse to justify that error - he would have pointed out that the members of
the average high school algebra class don't agree on the solution to the week's
problems, either, but that's because half of them have bungled their
He would have regarded EU attempts to impose their lifestyle and ideology
choices on the people of Europe as appalling tyranny, which would have reminded
him most of the fanatical and cruel Jacobins of Maximilien Robespierre, a
movement with which he was very familiar. As I remarked above and Liverpool was
well aware, insulation from democratic accountability does not necessarily
produce good policies, and in the case of the EU apparatchiks it has bred
arrogance and corruption.
Whereas the policies and desires of the EU bureaucracy would have appeared
strange and repellent to Liverpool, those of the Greek rioters would have been
completely recognizable. His ascent to power, after all, coincided with the
Luddite anti-machinery riots. The fury of a populace finding unpalatable change
imposed on it by economic forces outside its control would have been entirely
explicable, as would the even greater fury of a people losing economically
unjustified comforts to which they had become accustomed.
Greek prime minister George Papandreou's claim on Thursday that "We are bearing
a cross and we are being stoned", with its extreme biblical overtones, would
have appeared very similar indeed to the rantings of "Orator" Hunt and his
Perceiving the Greek problem and anticipating the Greek reaction to policies
imposed by the EU bureaucracy, Liverpool would have rightly informed German
Chancellor Angela Merkel and French President Nicolas Sarkozy that the correct
response to such rhetoric and disturbances is firmness, not handouts.
In the Greek case, firmness, ie forcibly restoring the drachma, is perfectly
feasible, since the EU authorities are not in reality subject to significant
democratic control. Moreover, the economically superior outcome of a firm
policy, as with Liverpool's own firmness in 1816-19, would restore tranquility
even to the aggrieved Greek populace within a very few years and would preserve
economic stability and growth elsewhere.
In this crisis, there is thus no excuse for Europe's leaders not pursuing
policies that actually work.
Martin Hutchinson is the author of Great Conservatives (Academica
Press, 2005) - details can be found on the website www.greatconservatives.com -
and co-author with Professor Kevin Dowd of Alchemists of Loss (Wiley,
2010). Both are now available on Amazon.com, Great Conservatives only in
a Kindle edition, Alchemists of Loss in both Kindle and print editions.
(Republished with permission from PrudentBear.com.
Copyright 2005-11 David W Tice & Associates.)