I started to write this blog when the Government was announcing the financial support package, but developments with Trump over took me. I’m glad I waited until after the mini-budget because the speed of events has meant that anything I had written previously would be out of date by now.
Lets go back one week and remember what people said:
Even after it started to unravel on Monday morning there were still plenty defending it:
Clearly some of these takes haven’t aged so well. The biggest debate now seems to be whether we call it the Catrusstrophe or Kamikwasi? The pound has crashed so far we need to look for the black box.
Truss had become Prime Minister promising Tory members some real red blooded Conservatism after Cameron’s social liberalism and Johnson’s flirtation with high spending and the red wall.
I started to try and describe what the economic theories were which defined her approach to Government. Some might call this retro-Thatherism, or neo-liberalism, or libertarianism.
The ideas that define Truss really date back to the 1980s when I was studying economics with varying degrees of success. There are 3 key ideas behind her approach to economics: trickle down theory, the Laffer curve, and the efficient market hypothesis
The Efficient Market Hypothesis
In it’s simplest form it states that that share prices reflect all information, and stocks trade at their fair market value on exchanges. What it is popularly taken to mean is that you can’t beat the market, the best and most efficient way to allocate resources and price risk is through markets. If markets aren’t working efficiently then they need to be stripped of regulations and controls to make them work better. EMH is the founding principle of deregulation, in particular de-regulation of financial markets
Trickle Down Theory
TDT is the belief that tax cuts for the rich and big corporations ultimately benefit everyone, because they will increase their spending which will trickle down to people lower down the income scale. Cutting regulation on big companies and cutting taxes for people in high income brackets benefits everyone
Entrepreneurs are more likely to start and expand businesses, companies are more inclined to invest and banks will tend to increase lending if they are paying less in tax.
Initially, the beneficiaries are the rich, but gradually everyone gains because as the economy gets bigger well-paid jobs are created for working people.
The Laffer Curve
The Laffer curve represents the theoretical relationship between rates of taxation and the resulting levels of the government’s tax revenue. It postulates that there is an optimum rate of tax which maximises revenue – if taxes rise above this level Government revenue will drop
The legend is that Laffer drew his curve on a napkin when he was trying to explain the idea to the Reagan administration. Nobel Laureate Paul Krugman claims he still has the napkin. Laffer was clear his theory worked best when personal tax rates were prohibitively high, by which he meant between 50% and 100%. At rates below 50%, Laffer found cutting taxes led to bigger rather than smaller budget deficits.
Incredibly even after decades of tax cuts right wingers still believe that we are on the right hand side of the curve.
This may come as a shock to people but these are not bad ideas.
At least, not so long as you treat them as exactly that. Ideas. All 3 of these ideas are strictly theoretical. They were intended as concepts that could be used to help policy makers think about choices of tax rate or spending. They were never designed to be used as actual polices. Trying to calculate the exact laffer curve for a complex modern economy is nonsense.
There are lots of ideas in economics which have a similar pedigree – great ideas in their own right but only as concepts not as policies.
Truss had already abandoned the EMT when she organised the intervention in the energy market – this has been forgotten in all of the chaos of the mini-budget, but this was a massive moment – a hard core Thatcherite admitting that markets were failing and intervening on a massive scale. Although watching the market reaction to the mini-budget it is easy to see at least some superficial efficiency.
Which makes it all the more crazy that she is apparently prepared to stand and fight for trickle down theory and the laffer curve.
Some people have claimed that crashing the pound was a plan, something the Government intended. Certainly some hedge funds with close links to Truss’s team have made lots of money, but this was a catastrophic accident caused by dogmatic economics colliding with sceptical markets.
These ideas have been promoted by lobbying groups and think tanks since the 80s with lavish if mysterious funding. Over the decades these theories became accepted as hard fact, and ultimately as dogma, just as groups on the left believe that nationalising things automatically makes them better. An alphabet soup of lobbying groups – taxpayers alliance, migration watch, brexit central have taken these theories and made them into dogma, promoting them heavily on TV and in the media. Brexit took these organisations to the fringes to the heart of Government, where they have been promoting this ideology for years.
This is what happens when those ideas smack up against reality.
I parrticularly recommend this on BBC sounds about 55 Tufton Street, and their role in lobbying for the exact policies that just crashed the UK economy
5 thoughts on “The cost of Lizzing | The end of an era in Economics”
It’s amusing to see the wailing that the otherwise infallible markets have got it wrong.
The Laffer Curve has always struck me as exactly the same concept as a profit maximisation curve – along with the point that you never know where you are on it, until raising by one unit makes profit fall.
If we actually had a decent press, they would be challenging Kwazi to show where he thinks we were, where he thinks we are now, and what he predicts will happen so he can be held to it, rather than the absolute bloody nonsense of Just Believe.
The secondary point is that we have a government that – unlike Clinton or New Labour – does not actually want to maximise tax revenue. They have an ideological commitment to shrink public services – lowering tax revenue is a prerequisite to justify the real-term cuts to come.
And Minford – he’s the Piers Corbyn of economics. And what he fails to realise is it’s never just economics – if we have to renew at a base rate of 6%, we will be paying an additional £8000 a year, which is an enormous chunk of net pay, an even bigger chunk out of discretionary income – even if you can ‘afford it’. Certainly far in excess of any benefit from tax cuts or likely pay increase.
The self-employed – very much a group the Conservatives have always spoken to more than Labour – won’t even see the tax cut benefits, given how many reduce their liabilities.
You can spout whatever guff you want about economic theory in papers, but the real world of politics is you cannot preside over a continued decline in living standards for your electorate.
And bankers don’t make up much of the electorate – many of them aren’t even British.
Minford is an odd character. He had a Chair in Economics at Liverpool when I was there, but ended up having to leave. He has become the Economist of last resort – if you can’t get anyone else to support your crazy ideas you ask him
Every Saturday just becomes an education reading your blog. Keep ‘em coming. The Tufton Street mob have had an extremely unhealthy influence on UK politics for far too long and their dark funding sources have skewered the political debates that oiled the wheels of Brexit, Culture Wars and now Truss/Kwarteng economics. It was pleasing to see they lost their court case against James O’Brien who has been a lonely voice exposing their dark arts for many years.
Chers Nigel. And yes this has exposed the agenda that lots of weird right wing lobbying groups have been pushing for years
[…] 30 years on from Black Wednesday | Could it happen again? The cost of Lizzing | The end of an era in Economics […]