By John H. Cochrane and Jon Hartley/Stanford
The fall of the former British prime minister holds important lessons for growth-conscious policymakers in the United States, Europe and elsewhere. While her diagnosis of the country’s economic problem was spot on, she fatally mishandled both the politics and the message of her policy response.
Liz Truss’ term as UK Prime Minister is over, but she was right to say the UK needs growth. Its fall is tragic, because growth is the only way out of the country’s economic dilemma.
The UK is surprisingly poor. Its GDP per capita is only $43,000, compared to $60,000 in the United States. The average British house is one third the size of the average American house. Worse, the country’s economy is not growing. Its GDP per capita is lower than it was in 2007. Productivity – the underlying source of economic growth – has been stable for more than a decade.
The UK desperately needs supply-side reforms. Galloping inflation reveals
us that demand-side stimulus is a depleted force.
On the contrary, the reforms proposed by Truss were too soft. A top marginal income tax rate of 40% (instead of 45%) would not make the UK a low tax free market Shangri-La, especially as it would also a value added tax (VAT) of 20%, national. insurance taxes, property taxes, corporation taxes, etc. Recall that US President Ronald Reagan and Speaker of the House Tip O’Neill (a Democrat) cut the top federal marginal rate from 70% to 28%.
Truss also proposed free market “investment zones”. But if we accept that the fiscal and planning conditions favorable to investment are good in the disaster zones, why not in the whole country?
The UK is at a post-Brexit crossroads. Will it become a hub for free trade, entrepreneurship and finance – a “Singapore on the Thames”? Or does Brexit mean protecting and subsidizing inefficient businesses and places even more than the European Union allows?
Unfortunately, we now know the answer. Truss’s detractors have no counter-proposals that could jump-start growth. The stage is set for further decline with high taxes, high subsidies and excessive regulation.
As sound as Truss’s plans were in terms of economic policy, his government’s handling of messaging and policy was spectacularly inept. This is an important lesson for those of us who want to see more growth-oriented policies in the United States, Canada and Europe.
One obvious mistake was Truss’ announcement of a £60bn ($68bn) blowout to keep gas prices down. This is not a good way to start a pro-growth revolution.
She then moved on to “tax cuts,” predictably angering the high-tax intelligentsia. In announcing the policy, neither Truss nor his Chancellor of the Exchequer, Kwasi Kwarteng, explained the value of cutting tax rates. For example, Kwarteng sold tax cuts as “putting money back in people’s pockets”. But such a Keynesian stimulus is the last thing the country needs in a context of historic inflation. Kwarteng should have explained that lower tax rates improve incentives to work, save, invest, start a business or, in the case of corporation tax, move a business to the UK or to keep it. (Ideally, you’re cutting tax rates but broadening the base, maintaining revenue until spending declines.)
If you can’t explain this clearly and coherently, you either don’t understand or believe your own message, or you think voters are too stupid to understand it. Either way, your revolution will fail. In the face of predictable and relentless hostility from the media and entrenched leftist economic commentators, a liberal revolution needs great communicators.
Starting with taxes and subsidies, Truss and Kwarteng guaranteed that no one would pay attention to the most important parts of the plan: the essential growth-friendly regulatory reforms they outlined in the 2012 book Britannia Unchained. Housing restrictions in Britain, as in the United States, are leading to absurdly high prices, which are hampering many businesses and the workers they might hire. The situation is particularly detrimental to the less advantaged people who cannot afford to live near high-productivity jobs. Truss had also planned to bring oil production back to the North Sea and lift Britain’s ban on fracking. These are sensible responses to a global energy crisis.
The lesson is that growth-minded policymakers should start with microeconomic reforms. Everyone can see that overregulation and restrictions on housing and energy production are hampering supply. Even climate change activists note that it is too difficult to obtain permits for wind turbines and transmission lines. Everyone can see that the schools are awful and getting worse. Workers as well as business owners and managers may find that labor regulations restrict their workplaces. People can see in their daily experience how the disincentives of social programs lead some people not to work at all.
Patiently explaining these issues to voters can also make good politics. We all yearn for a mere competence of the spirit of the store in our governments. Resolving malfunctions is a visible achievement that works immediately, without any short-term cost.
Truss’ handling of politics was even worse than his marketing. Margaret Thatcher and Reagan faced the same scorn from the chattering classes, and they had to endure years of hardship before their reforms took hold. But they held on.
Critics of Truss seized on UK bond market misfires, albeit small by comparison to those of the 1980s. They were also largely blamed on the Bank of England’s rate hike and regulatory fiasco pension risks. Nonetheless, Truss quickly relented. Starting with a burst of energy to appease the left, she has already encouraged her opponents to go kill. When a shark is on your trail, you don’t offer it a foothold and then assume the two of you will get along. When an iron lady was needed, Truss turned out to be straw.
The United States, too, is a high-tax, over-regulated, over-subsidized, heavily indebted and slow-growing economy. For us too, supply-side reforms are the only way out. Yet many of our conservative voices are now flattering voters by advocating nationalism, protectionism, subsidies and crony capitalism, albeit headed in different directions than the left.
For those of us who still understand that the only real solution lies in economic freedom and a competent small government, the fall of Truss offers some important lessons. We have to take this into account so as not to waste our chance if we get one. – Project union
• John H. Cochrane is Principal Investigator at the Hoover Institution and Adjunct Investigator at the CATO Institute. Jon Hartley is a PhD candidate in economics at Stanford University and a researcher at the Equal Opportunity Research Foundation.