In his excellent piece in the LRB, Simon points to the "ludicrous situation" in which the Labour party "now wants to portray itself as being just as tough on the deficit as the coalition*." Why this is?

Let's start from a different place, by considering another profession which has consistently disappointed its customers - the financial services sector. There's evidence from around the world that financial advice is worse (pdf) than useless and that fund managers (pdf) under-perform index trackers. Why is this? A new paper (pdf) by Robert Vishy, Adrei Schleifer and Nicola Gennaioli provides one reason. Advisors and managers, they say, try to win and sustain the trust of their clients. But it's difficult to win people's trust by telling them they are twats. Better to nod sagely, praise their judgment and give them what they want; people tend to trust people like themselves. "in many circumstances, managers have a strong incentive to pander to their investors’ beliefs" they say: this is one reason why funds invested in tech stocks in 2000, and why advisors directed clients into such funds.

Now, here's the thing. Politics is very much like fund management in this sense: the fund manager says "trust me with money"; the politician says: "trust me with power." Just as fund managers pander to stupid ideas to win trust, so too must politicians. An election campaign is no place for an economics tutorial. As Ronald Reagan said, "If you're explaining, you're losing."

But where do stupid ideas about the deficit come from? It might be because political reporting is inherently biased.

In focusing upon politicians' acts and words, such reporting - perhaps unintentionally - encourages the belief that government borrowing is under their control. A deficit therefore looks like a failure.

This is exacerbated by the fact that the very word "deficit" has negative connotations. The Oxford Compact Thesaurus offers as synonyms for it "deficiency", "shortage", "arrears" and "negative amount". In German "debt" and "guilt" are the same words, but the English language isn't wholly

different.

By contrast, from the economists' perspective the salient facts and ideas are the mix of the investment dearth, shortage of safe assets, corporate financial surplus and secular stagnation which have produced a worldwide long-term decline in real interest rates, and an under-utilization of resources in the west which has given us high unemployment and stagnantish real wages.

From this perspective, government borrowing is a good thing; it would be better to be renamed the private sector surplus. In focusing upon politicians rather than impersonal processes, however, political reporting downgrades this perspective. As I've said before, the news is not the truth.

My point here, perhaps, generalizes. Bad policy does not always arise from simple stupidity. It can also result from a combination of perverse incentives and the unconscious biases generated by the nature of journalism.

* Luckily, there is a difference between rhetoric and reality: Labour's actual policy is looser than the Tories. My fear, though, is that people who pretend to be mad eventually actually go mad.