Monday, August 8, 2022

Trussonomics is like Boris Johnson’s Cakeism and will end in tears

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I have to admit that part of me, the journalistic part, can’t wait for Liz Truss to become Prime Minister. As we hackers always say, it makes a good copy. As we also say today, it is good for traffic. It’s quite a childish, shameful thing because millions of lives are being deteriorated by her disastrous policies, so the better, more honorable part of me is hoping she doesn’t come close to coming to power. But I might as well be honest and declare self-interest.

Put simply, Liz Truss’ ideas will crash the economy. Trussonomics, as we may soon learn to call it, will impoverish the country. It will ruthlessly cut taxes while inflation rises. It will have dire consequences, the exact extent and nature of which are difficult to predict. In the worst case scenario, with rising borrowing, debt and a sterling crisis, we may have to go to the IMF because that can mean excessive public debt in a high-interest world.

And if she really is as Eurosceptic as she pretends, and she’s serious about the Northern Ireland Protocol bill and the unilateral breach of the EU-UK Free Trade Agreement, we’re also going to have a trade war with our biggest export market and our biggest Trade and industry have sources of supply. “Catastrophe” doesn’t come close.

Everyone seems to want to cite Margaret Thatcher these days – Liz Truss even dresses up as her. But Thatcher would have thought Ms Truss’ policies bizarre, if not immoral. Mrs Truss’ close friend, campaign manager and likely future Chancellor, Kwasi Kwarteng wrote a good book on the early days of Mrs Thatcher’s presidency, dubbed Thatcher’s trial. In it he tells how Mrs Thatcher put fighting inflation before cutting taxes.

Mr Kwarteng quoted Mrs Thatcher at the time: “One of the most immoral things you can do is to pose as a moral politician who demands more for health, education, industry, more housing, more for everything and then says, ‘No, I didn’t mean you pay taxes on it; I meant you need to borrow more…’”

It is true, for example, that Mrs Thatcher immediately reduced income tax rates when she came to power in 1979, but she also nearly doubled the standard sales tax rate from 8 percent to 15 percent. Soon after, she severed the link between pensions and income, and her chancellor, Geoffrey Howe, raised interest rates and put unemployment on a rising trend until it reached three million. It wasn’t popular, but it lowered inflation.

Thatcher was a balanced-budget, healthy-money right winger, as Rishi Sunak is now; Ms. Truss is more like a Ronald Reagan who places great faith in the “Laffer curve” and prays that lower tax rates will bring higher revenues to self-fund tax cuts. That wasn’t all that convincing even then, and Mr. Reagan was running huge federal and trade deficits – but with the status of the dollar to underpin them.

But let’s give her the benefit of the doubt for a moment.

Trussonomics then goes like this: Britain’s immediate inflation problem is a lack of supply (that’s true). That’s why we need to make the economy more productive and efficient (that’s true). One way to do this is through supply-side reform, including tax cuts to improve incentives and encourage entrepreneurship, and corporate tax cuts to boost investment (this may be right, at least in principle).

But here are the multiple problems with this argument. Any increase in investment, entrepreneurship and productivity would take months if not years to catch on, but in the meantime the accelerating rate of inflation in the UK economy will also push up the cost base, make businesses uncompetitive and, once in are embedded in the labor market, tougher measures to squeeze them out cost a lot. Tax cuts would be offset for many by even faster increases in prices and the cost of living, compounded by the depreciating pound. If Mrs Truss allows the Bank of England to remain operationally independent, she will have to raise interest rates to absorb the excess spending power released by Truss’ tax cuts.

The boost in demand from tax cuts will need to be offset by a corresponding increase in mortgage and credit card bills, as well as the cost of borrowing for businesses, and will most likely result in a mini housing crash. Consumer and business confidence is being destroyed. It would take money out of the pockets of workers with larger mortgages and modest incomes, and into the hands of older, wealthier people with small mortgages and bigger savings.

Ms Truss argues that while Britain’s national debt is high, it is not as high in relation to national income as some other countries – the US, Japan, Canada. But there are important reasons for this. America enjoys the “exorbitant privilege” of having the world’s reserve currency – the US dollar – and can spend a lot more money without ever being collected. High national debt is a sign of failure. Canada enjoys a resource-rich economy and accounts for public sector pension liabilities in a different way.

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In any case, the extent to which a nation can live beyond its means depends on foreigners lending it the money to cover its trade and/or budget deficits. In the UK, both grow. Their willingness to borrow depends on the interest they receive to cover the risk of not getting their money back. If an economy is dynamic and growing fast – for example an emerging market in East Asia – it will develop. In a steadily growing and mature economy with modest spending and low inflation like Switzerland, occasional financing needs can be met. Post-Brexit Britain and on the brink of an EU trade war and uncontrollable sovereign debt? Not as much.

Right now it’s just wrong to tell people they can take big tax cuts with no repercussions because we can just borrow them and spend as much or even more on public services because Truss-Kwarteng’s growth spurt will soon pay off for themselves. I doubt they believe that themselves – they just want to dress up Tory prejudice in respectable-sounding business jargon.

The truth about the long span of the Thatcher Major years, which actually extends into the New Labor era, is that Britain’s economic revival rested on certain factors, all of which are now absent. The first was the establishment of an economy with low inflation expectations, which could only be achieved after two severe recessions (1980-81 and 1990-91). Now let’s go backwards. The second was deregulation, market liberalization, union reform and privatization. There was huge scope for this in 1979, and private funding initiatives greatly expanded in the 1990s and 2000s.

Now, however, there is much less wiggle room, and some of these ideas (like rail privatization) have gone out of fashion. In third place was the EU internal market project. No further comment on this. And the fourth was labor migration from the EU, which boosted growth. That, too, is over now and has given us a labor shortage.

In other words, it’s hard to see what actually constitutes trussonomics or where it fits into Tory tradition. It really is Cakeism, the extension of Boris Johnson’s economic fantasy island by others. It’s deception. It’s immoral. It will end in tears.

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