Politicians' presumptions

Nick Clegg shows here just how the attitudes of politicians’ differ from those of economists. Speaking against the stamp duty holiday, he says (around 7 min in):

We certainly would not have tried to bribe people…into buying into a falling market. That’s terrifically dangerous because you might well be tempting people to go back into the market just at a time when they’ll be saddled with negative equity in the months ahead.

There’s a remarkable presumption here. It’s that people can be manipulated by government policy to act against their own interests even when taking huge decisions - that they’ll be so befuddled by the stamp duty holiday that they’ll buy depreciating assets.
By contrast, we economists think the problem with the stamp duty holiday is that it people won’t respond to it because they are rational, and won't buy into a falling market. Since when have 1% price cuts had big effects? If demand for house prices was so price-elastic, we wouldn’t have booms and slumps in the first place. And just look at the historical evidence.
Now, I’m not saying this to pick on Clegg. I fear he is representative of the political class generally, in exaggerating the manipulability of people and under-estimating their rationality. Maybe politicians are selected precisely for this mindset. 
 But just because the belief is widespread among politicians doesn’t mean it’s true.
Perhaps the big gap between the political class and the rest of us exists not because we are stupid or apathetic, but we can see that the presumptions of politicians are gravely questionable.

Comments

[Matthew]

Doesn't the stamp duty change have a slightly larger impact than that as most people's problem is the deposit, not the value of the house. If you are buying a £175,000 house and need a 10% deposit (probably more now) than you need £17,500. You also need £1,750 for stamp duty. This removal means your up front cost has fallen by nearly 10%.

[Alex]

The point is that both statements are true; yes, a stamp duty cut will be absurdly puny and won't do anything useful, but any effect it does have will be at the margin, so it will help people who probably can't pay get mortgages on rapidly depreciating property.

In fact the only effects it will have will be a) a giveaway to people who own their homes outright, the only ones with enough equity to still be in the market, and b) to help a small number of people get mortgages who probably shouldn't. You're missing the full crapness of the policy.

[Thomas]

It's not about solving the economic problem--it's about solving the political problem. The political problem is that pols cannot stand around during a crisis doing nothing. They must act. Whether their actions are good for the economic problem is irrelevant.

[reason]

Still removing stamp is not necessarily a bad thing in its own right. There should be a flat fee for registration services. One view is that there should make portfolio adjustment as cheap as possible (minimise transaction costs). Another view is the opposite, that we should make it expensive to discourage speculation. I'm inclined to think both views are correct, but I'm not sure how to support both simultaneously.

[reason]

Of course I agree the effect is puny, and what is worse it is a once off - you have to do the opposite at some stage if you want to do it again. It reminds me of the German employers organisation pushing to cancel public holidays (effectively a 0.5% cut in wages - how much do exchange rates fluctuate again)? What would make sense is to replace public holidays with movable holidays (remove the congestion and inconvenience cost - definite utility gain).