June 4, 2023

OneMuch has been done about Liz Truss’ economic policy.

Obviously she’s not sharing all the details with us (at least not yet), but one of the underpinnings is the belief that tax cuts for everyone – reversing the increase in state insurance – will be self-funding because it will spark a wave of corporates Tax revenue will therefore increase. She opposes “handouts,” more targeted help on the energy bills of the poor, and a windfall tax on big energy producers.

Essentially, this amounts to a massive fiscal stimulus to the economy amid labor shortages and rapidly rising inflation. The aim is to avoid a recession — “not inevitable,” she said. There are some other interesting parts like cutting the VAT on fuel and suspending the green levy (a paltry sum), but that’s about the size of it – driven by unfunded tax cuts and some concrete public spending increases Growth, for example on defense.

All of this “Trussonomics” has good support among her Conservative Party members who need to vote, but she seems genuinely convinced of her rather dogmatic belief in the power of the Laffer curve (the relationship between tax rates and the resulting tax levels) beliefs, the wisdom of Patrick Minford (who helplessly adds that this could mean 7% interest rates) and the continuing doctrine of Johnson’s Cake Doctrine. But she was ridiculed for it. Her defeated rival, former chancellor and finance minister Rishi Sunak, derided it as “fairytale” economics. Michael Gove called it a “vacation away from reality”. The highly respected former deputy governor of the Bank of England, Charles Bean, noted that growth-boosting “supply-side” reforms will take a long time to implement.

Agencies such as the Institute for Fiscal Studies (IFS) warned at the time that such a truss scheme would create a huge hole in public finances. When news broke that Truss might cut VAT by 5% or 10%, the IFS experts must have passed out. City banks have raised their inflation forecasts and the pound has weakened as the world turns to the so-called safe haven of the dollar. Also, there is talk of a trade war with Europe and “friend or foe” Emmanuel Macron. You will feel that Truss is not only impetuous and single-minded, but also unaffected by reason.

So, despite having degrees in Philosophy, Politics and Economics from Oxford, and a highly developed mathematical talent, Truss didn’t understand economics (at least according to the above). does it matter? Are we doomed to rise at 25% or more per year, the highest inflation rate since 1975? Or since the end of the First World War? Or the pinnacle of the Napoleonic Wars? Or ever? With wages falling, far behind?

Usually what happens when the Prime Minister has some crazy plan, such as the truss plan (admittedly, this is an overly solemn description of speculation and a series of blind hopes), the Treasury, the Bank of England, the International Monetary Fund (IMF), think tanks Cliques, city banks, and economic “groups” will criticize, moderate, guard against, and generally form. So will backbench committees and cabinet colleagues – especially if political damage is threatened. But in Trusland, that’s far less likely for three reasons.

First, Truss is headstrong and won’t listen. Whether she’s “Dim Lizzie” – as some tweets say – or her academic performance suggests she’s supposed to be that smart (her much-maligned school in Leeds may not be as good as she appears to be) her disappointment), which is if she can’t digest the arguments and moderate her policies — traits that Margaret Thatcher did have, at least during her earlier, more successful and less imperial rise to power stage, she is useless.

Second, Truss wants to dismantle institutions that might try to resist. No 10 – don’t laugh – will be transformed into an “economic nerve center”, with the likes of Minford and John Redwood no doubt feeding their brains with Thatcherian nourishment. An ally assured: “Liz is a serious economic policy thinker. She sees a clear economic direction and philosophy for the government to follow.

“It’s not that Leeds wants to neutralize any prime minister’s powers – far from it – but she does want No. 10 to be the economic nerve center, working closely with the prime minister and his Treasury.”

As a result, Truss reportedly abandoned Dominic Cummings’ idea of ​​turning the Treasury into Department 10. She has temporarily shelved the idea of ​​splitting it into a growth sector she controls and another narrowly focused sector, the stingy public finance sector. That’s presumably what they did in Germany, and the idea has been circulating around Whitehall since the 1960s, when the Wilson government tried to tame the Treasury but failed to prioritize growth through the short-lived Department of Economic Affairs. Michael Heseltine tried the same thing in the 1990s, but lost the battle as well.

Unlike postwar Germany, however, Truss wanted to take control of the Bank of England and “review” its mandate. Governor Andrew Bailey has been a useful scapegoat for the recent spike in inflation, which is actually more about Brexit and the Kremlin than Needle Thread. He said he would love to revisit the Bank’s role, but of course he has no real choice in the matter. The operational independence that Tony Blair and Gordon Brown gave the bank in 1998, with low and stable inflation throughout its mandate, will be severely eroded. Political control will be restored and rates will be set to accommodate the sprints of growth and election cycles. (Of course, this was also facilitated by the repeal of the Term Parliament Act, which restored absolute discretion over the timing of the next Prime Minister election. Truss, as cynical as anyone, is also likely to devise a tax cut and lower mortgage rates The pre-election boom that came with it. It was probably on her mind.)

Finally, we have her new prime minister, Quasi Kwaten. He’s a very smart guy and a good historian, and he wrote a pretty good book a few years ago called The Thatcher Trial. In it, he documents the key economic and political struggles of Thatcher’s first years in power in 1979. It was a testing period, as he said, and a period of high inflation and high interest rates. There was industrial unrest, unemployment rose, and Thatcher’s policies – direct tax cuts and supply-side reforms – faced enormous resistance from the “economic bloc”. The establishment, from the then governor of the Bank of England to the TUC to the CBI, fought back fiercely.It is known that 364 prominent economists wrote to era Pointing out what she’s doing is stupid. The “Wet Child” in the closet tries to band together against her. But despite her actions from time to time, she maintained her courage with the constant support of her prime minister and her close colleague at the time, Jeffrey Howe.

You have to wonder if Kwarteng’s apparent admiration for Thatcher and Howe led him to assume Truss and him were their contemporaries. If so, then he learned the wrong lessons from the trauma of 1979-1981. Income tax was slashed, it was true, but VAT was almost doubled, and interest rates were pushed up to 17% to squeeze inflation out of the system; the ensuing downturn was welcomed by calm. “No choice” is the mantra.

So what we’re going to get is the exact opposite of Thatcherism: an inflationary boom that we try to make ends meet, but delivered with Thatcherian determination.

The Truss Revolution would also be adorned with the kind of lighthearted optimism that Truss now proposes, which Thatcher also used in her day. You can imagine Truss taunting Keir Starmer with Thatcher’s line at the 1983 election rally – “Labour is pessimistic, we are hopeful. Where they suffer, we are determined to succeed. Where they fear the future. where we meet challenges, excitement and adventure.” She also likes to quote Kipling’s uplifting passages, which are not about economics but about emotions. I wouldn’t be surprised if Truss soon began to trumpet imperialist poetry.

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