Growth Sometimes Wins

In the Conservative Party’s unexpected landslide victory in the UK, Columbia Business School professor Charles Calomiris sees a mix of smart, populist politics, and a citizenry ready to trade short-term comfort for austerity’s promise of long-term growth.

Print this page

How could an austerity-promoting Conservative government that is asking voters to make continuing economic sacrifices win so resoundingly in England and Wales, with enough support to form a government without the erstwhile assistance of the Liberal Democrats?

Two centuries ago the British political philosopher Alexander Fraser Tytler opined “the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to its loose fiscal policy.” Someone needs to explain this iron law of democracy to Prime Minister David Cameron, who has ridden his austerity platform to an unanticipated landslide. And he isn’t the only successful Conservative in Britain’s history to contradict this dire prediction.

In the 1980s, Margaret Thatcher offered Britain a reform program that imposed severe short-term economic costs in exchange for long-term economic gains, in the form of reduced inflation and higher economic growth. Thatcher delivered on those promises and won three terms in office. Cameron may be on his way to similar electoral success, if he can deliver the growth gains that he claims his austerity program will produce.

The key insight that both leaders had about voters is that they are not as short sighted as they are commonly believed to be. In their famous 1981 essay, “A Rational Theory of the Size of Government,” professors Allan Meltzer and Scott Richard developed a model of voter behavior in which growth-oriented policies are sometimes rewarded by the deciding median voter — a voter who cares both about short-term redistribution and long-term growth. Recently, in a follow-up article, the authors have shown that their model does an excellent job explaining the ups and downs of tax and transfer policies in several countries, including the UK. The essential insight of this article is that there are critical moments in countries’ histories when the opportunities for long-term growth are large enough that voters will accept austerity as a necessary, if bitter, pill to swallow. This is one of those times in the UK.

Of course, there is more to the story than that. The UK government not only projects growth; it has already delivered growth, contrary to the prognostications of its critics. Many skeptics, including leftist economists such as Paul Krugman, vilified the austerity policies of the Cameron Administration. The Financial Times was highly critical, too, several years ago, but the record of success led even the left-leaning Financial Times to eat some crow over its dire warnings and to endorse the Conservatives for reelection last week.

Finally, the success of the Conservatives today is not only about the promise of growth; it also reflects some populist politics. Three decades ago, Margaret Thatcher’s victories were made possible by the privatization of council flats through the “Right to Buy” program, which allowed residents of the UK’s social housing to purchase their homes from the local government — a well-conceived boon to the middle class, which made the benefits of privatization tangible and personal. Likewise, today, the Cameron Administration has used the “Help to Buy” program, which provides housing subsidies in the form of interest-free loans and public loan guarantees, to win greater popularity. Mr. Cameron promised to expand those policies during his recent election campaign. Unlike Mrs. Thatcher’s housing privatization, however, it is likely that an expansion of existing housing finance subsidies will expose the government to fiscal consequences and housing price bubbles that could threaten long-term growth. Going forward, the most interesting question will be how Mr. Cameron will weigh the need to deliver on growth against the need to deliver housing subsidies.


A version of this article also appears in Charles Calomiris' column at Forbes.

About the researcher

Charles Calomiris

Charles W. Calomiris is Henry Kaufman Professor of Financial Institutions at Columbia Business School, Director of the Business School’s Program for Financial...

Read more.
articles by Topic