LVRs and the Very Serious People

By Eric Crampton 23/07/2015


The Very Serious People understand the political constraints under which policy operates. They often overestimate the bindingness of those constraints, but the rest of us underestimate them. Here’s Tyler:

I think of it this way: the People are Very Serious if they realize that common sense morality must, to a considerable extent, rule politics. At least if voters are watching.

So what is common sense morality in this context? It embodies a number of propositions, including, for instance (with cultural variants across nations):

  1. Political decisions should be based on what people and institutions deserve, based on their prior conduct and also on their contributions to the general good.
  2. Economic nationalism.
  3. Traditional morality, based on respect for authority, repayment of debts, savings, and hard work.
  4. Inflation is bad, in part because it violates #1 and #3, and in the case of the eurozone it often violates #2 as well.
  5. “I don’t care what you all say, the government should be able to find some way of arranging things so that I don’t have to suffer too badly from this.”

Now here’s the thing: common sense morality very often is wrong, or when it is right that is often with qualifications.

Therefore at the margin there is almost always a way to improve on what the Very Serious People are pushing for. The Very Serious People realize this themselves, though not usually to the full extent, because they have been cognitively captured by their situations. They see themselves as “a wee bit off due to political constraints,” instead of “a fair amount off due to political constraints.” So there is usually some quite justified criticism of the Very Serious People. Common sense morality is needed at some level, but still at the margin we wish to deviate from it.

Indeed. Now let’s think about LVR policy. The first round could only ever take the edge off of the housing price run-up; the second round was targeted at investors when the main risk to financial stability came from owner-occupiers and when there was no evidence of risk to financial stability. As Mike Reddell continues to point out, and as we’ve argued here before, it is really really hard to come up with a coherent justification for the LVR policy as it was implemented or sold. Seriously – go read the stuff from Harrison that Reddell is citing. See also the NBR here.

The people inside RBNZ are not idiots. A lot of them know that the public justifications for this stuff are nonsensical.

What worse thing might they have been trying to forestall with the LVR policy? Being seen to be doing something slightly useless and minorly harmful can be a lot better than being forced to do something very costly.