John Rentoul: The paradox at the heart of Conservatism

Tory housing policy would lead to greater labour mobility – exactly what the condemned 'Northern Town' report advocates

The trouble with politicians is that they never give a straight answer. Last week David Cameron, for example, returned from his holiday in Cornwall to tell the BBC that a report from a think tank which is alleged to reflect his thinking was "rubbish from start to finish". He said its thesis was "nonsense". And then he told reporters that the report wasn't "barmy"; it was "insane". Don't you just wish that politicians would say what they mean?

"Insane" is a strong word. So what is a self-respecting politician-hater to do? Look for the hidden agenda, of course. Protesting too much and all that. What was Policy Exchange's "nonsensical" argument? That northern cities, which had expanded as ports, could not be regenerated by call centres. Ergo, the population of Liverpool, a city built around the docks that served a global maritime empire in the age of steam, should move to Oxford or Cambridge, the nodes of the knowledge economy.

What Cameron was really doing, we were told, was therefore trying to shore up the Tory vote in the North – as if this were a hopeless venture akin to halting a mudslide with wire netting. In fact, the idea that Cameron's appeal in northern England, Scotland and Wales is peculiarly weak is another of those theses that is commonly believed but which is actually "rubbish from start to finish".

Let us compare last month's ICM poll with the one taken in October 2005, just before Cameron became Conservative leader. First, there is the minor shock of being reminded that a Labour lead nationally of five percentage points has been turned into a Tory lead of 18 points. Never mind the people of Sunderland migrating to Guildford – this is the equivalent of 11.5 per cent of the electorate migrating from Labour to the Tories. But the swing from Labour to Tory is even greater in the North: 12.5 points.

Obviously, a smaller proportion of northerners intend to vote Tory compared with people in the South – but what matters is the change since Cameron took over. Contrary to myth, the Eton-educated southern toff has been slightly more effective in winning friends in the North than in making converts on his Home Counties turf.

No doubt Cameron was alarmed that the Policy Exchange report might offend the residents of northern cities, who might think, if he did not repudiate it, that he agreed with it. So he rejected it as vividly and colourfully as possible. Not because he feared his support in the North was more fragile than in the South, but because he thought it might be damaging to him. Oh, and also, possibly, because he disagreed with it.

Now this raises a more interesting question than recycled and untrue clichés about Tory support in the North. Which is: was he was right to do so? Because the striking thing about the Policy Exchange report is that its analysis is broadly correct. It specifically said that Liverpool, Rochdale, Bradford and Sunderland were not "doomed". (This was reported by The Independent under the headline "Cities in North doomed, says favourite Tory think tank".) The report went on, however: "We cannot guarantee to regenerate every town and every city in Britain that has fallen behind. Just as we can't buck the market, so we can't buck economic geography either."

It is curious that such a statement of orthodox economics should provoke such a reaction, and not just from politicians such as John Prescott – who, in his memoirs, protests his ideological openness while boasting that he never allowed the words "New Labour" to cross his lips – but from the leader of Margaret Thatcher's party, too.

The reality is that some attempts by national or local government to encourage regeneration have been more successful than others. Those that go with the grain of market forces have a greater chance of success – the most successful example being Canary Wharf in east London, fostered by radical deregulation in the 1980s.

Plainly, just because Liverpool grew as a port does not mean it can never thrive – much of it is indeed thriving. London has not resumed its growth in the past decade because it is the lowest crossing of the Thames. But the desolation of so many urban areas, from Speke to Glasgow East, arises from housing "schemes" built not so much as a conscious attempt to "buck economic geography", but with no idea that such concepts might even be relevant.

It was left to Edwina Currie, safely away from the front line of politics, to make the point: "If government efforts to help northern cities since the 1950s had succeeded, then there would be no gap in living standards, or employment, or educational achievement, or health."

Last week's kerfuffle may appear to be simply a silly-season diversion while we wait for the main drama of Gordon Brown's fall to resume, but there is rather more to it than that. There is a fundamental economic illiteracy about British politics that contradicts the idea that Lady Thatcher brought about a revolution in attitudes in this country. Profit is still too often a dirty word. Just as it is still almost universally expected of politicians that they should provide "affordable housing". Yet when the market suddenly provides lower house prices, the cry goes up for politicians to make housing less affordable again.

Hence another silly-season kerfuffle. Whether or not the Prime Minister, from his "I'm Not Tony" B&B in Suffolk, plotted the front page of The Sun 12 days ago ("Brown to scrap stamp duty"), he thinks that this is the kind of thing we want. David Cameron last week criticised Brown for "allowing the speculation to build" about a stamp duty holiday, which had "frozen" the housing market. Indeed, the possibility of changes to stamp duty may make people put off buying or selling. But the Daily Mail headlines that Cameron's comments generated will have been just as effective in "freezing" the market.

And what is Conservative policy? To abolish stamp duty on cheaper house purchases – for "nine out of 10 first-time buyers". Cameron ought to be asking George Osborne, his shadow Chancellor, some searching questions about their own policy – quite apart from how to pay for it.

What effect will cutting stamp duty have? Normally, most of the saving would end up as a windfall gain to the seller. However, when the market is abnormally slow, as it now is, the main effect might be psychological, in that it would lift the perceived deadweight cost of the transaction. That, in turn, would increase the volume of sales, leading to (slightly) higher prices. So, a policy designed at a time when prices were rising and intended to reduce prices, which would have been ineffective, might now have an effect, but in making prices higher than they would otherwise be.

The crowning paradox is that cutting stamp duty would do precisely what the Policy Exchange report advocates: make it easier for people to move house and therefore promote labour mobility in Britain. Which would make it easier for people to respond to market signals and move to where the jobs are, in the South-east, or to where the cheap houses are, in the North. As Tim Leunig, a co-author of the report, put it: "Internal migration has always been an important part of a dynamic economy."

David Cameron could not have been clearer in condemning the Policy Exchange report. But his party's policy could not be more muddled.