Get a bowl of popcorn and curl up in a comfy chair. A great show is just beginning, at least for political and econ nerds.
The United Kingdom’s new prime minister, Liz Truss, and Chancellor of the Exchequer (who prepares the country’s budget, which makes the position more powerful than the U. S. Treasury Secretary), Kwasi Kwarteng, have just presented a stunning new economic plan.
Their programs call for significant business and personal tax cuts aimed at stimulating growth.
For the most part, the plans are classic supply-side economics.
Reflexively, the usual suspects denounced the strategy.
I’m no expert on British economics and politics. However, I recognize a showdown between supply-side and Keynesian economics, to which I also admit to having an instinctual reaction. Witnessing it from across the pond without hearing the names Donald Trump or Joe Biden is a contest.
Times are tough for us but worse in Britain. CNN reports, “U.K. shoppers have pared back spending on groceries and ditched streaming subscriptions as the cost of living has soared in recent months.”
In July, Britain had the highest inflation among the Group of Seven advanced economies at 10.1 percent. Energy costs rose 54 percent in April and could increase another 80 percent in October. The Bank of England forecasts inflation of over 13 percent in October. Goldman Sachs predicts it could top 20 percent if the gas prices don’t drop.
Truss entered 10 Downing Street with the U.K. facing perhaps its most significant challenges since the 1970s. If you remember the 1970s, you recall how the U.K. and U.S. eventually got out of their respective stagflation messes.
Margaret Thatcher became Prime Minister of the U.K. a little more than a year before Ronald Reagan was elected President of the United States. Thatcher and Reagan had similar philosophies and economic policies. Both countries prospered under their leadership.
Comparisons between Truss’ tax plan and Thatcher’s are common in media reports. Truss’s tax cuts will be the largest since 1972, and she plans for more next year.
The predictable critics have lined up with the usual complaints. CNN’s Business, The New York Times (which even blamed Friday’s S&P500 drop on the U.K. tax plan. Although the market didn’t like it either, for what it’s worth, as the British Sterling fell to a 37-year low against the dollar), Bloomberg, The Guardian, and the rest of the liberal orthodoxy. Each found economists from think tanks, including former U.S. Treasury Secretary Larry Summers, who at least was right to warn about inflation before passing the final Covid stimulus bill.
The grousing included:
They don’t believe tax cuts will boost demand. Of course, that isn’t the goal of cutting taxes. Lowering taxes changes behavior. People have more incentive to work harder and be more productive – which is what happens. John Kennedy knew this, and that’s why he called for tax cuts (he was a supply-sider before it was cool). Lower taxes unlock productivity and creates economic growth.
Truss’ goal is to increase GDP by 2.5 percent, something the U.K. has not achieved since 2016, except for last year’s post-Covid bounce back, and isn’t currently in the forecast for the foreseeable future.
Tax cuts will cause inflation by creating demand. Keynesian economists are so conditioned to impact demand by spending taxpayer money that they argue tax cuts won’t create demand out of one side of their mouth but will create inflation out of the other. Funny how they don’t see inflation coming when the government spends money.
Tax cuts for the rich. It’s a favorite liberal slogan, and it’s false. To get a tax break, you have to pay taxes! Truss’ plan cuts taxes for most and relieves many of their tax burdens.
I’ve never understood why liberals think the money earned by working belongs to the government or why they believe allowing people to keep more of their money is immoral.
My favorite grumbler is Will Hutton, a columnist for The Observer, who rails against Truss and Kwarteng daily. He writes:
“Consider her six-point plan for growth. It starts, inevitably, with a commitment to cut taxes ‘now’. She will ‘unshackle business from burdensome regulation’ buttressed by ‘supply-side reform’. She will ‘scrap all EU-derived laws by 2023’ and ‘work with industry leaders to regulate for British businesses and consumers’. She will ‘create low-tax, low-regulation investment zones’. And she will revisit the Bank of England’s mandate so that it is better at managing inflation.”
I thought: Makes sense to me. Hutton concluded:
“It is ruinous nonsense.”
Would you like cheese with your whine?
Truss also offered a plan that she says will “end the energy crisis once and for all.” It includes:
- Freezing and capping household energy prices for two years in Great Britain
- Businesses will receive support for six months
- Making the U.K. an energy exporter by 2040
- Immediately lifting the moratorium on fracking in the U.K.
- New rounds of oil and gas drilling licensing
- New nuclear projects with a target of 24GW by 2050
Truss’ government estimates the energy plan will reduce inflation by five percent from current forecasts and increase tax receipts.
There are caveats.
The world is different from when Reagan and Thatcher launched their ambitious plans, at least on this side of the ocean. Everything is political now, and there is no appetite for compromise and conciliation. I’m not sure if it’s any different across the pond.
There are no planned spending cuts. Without reducing spending, deficits will increase in the beginning, as was the case in the U.S. during the Reagan years.
Not only aren’t spending cuts on the horizon, but the energy subsidy plan will increase expenditures. The energy price freeze will be popular, but price controls and subsidies aren’t consistent with supply-side economics.
Truss must call for an election in two years. Experience suggests that revenue may take a step backward in the first year. Critics will be quick to pounce if it does, but progress will happen by the end of the second year.
The dollar is the world’s reserve currency, which gave Reagan and the U.S. an advantage that Truss and the U.K. won’t enjoy.
After the stagflation and high “misery index” of the 1970s, the 1980s were a welcome relief. Supply-side economics did pull the U.S. and the U.K. out of troubled times. Reagan and Thatcher were great leaders.
The seeds planted in Silicon Valley in the “greed-is-good-80s” bloomed in the “world-wide-90s.” The peace dividend was a product of the 1980s that paid off in the 1990s.
The 1990s also show that tax cuts can stimulate the economy. In 1997, Congress passed, and Bill Clinton signed legislation that cut taxes, including cutting capital gains taxes from 28 to 20 percent. Real GDP growth was a point higher during Clinton’s second term.
I don’t fully understand the parallels and differences between the U.K. and U.S. economies. I do know that what worked for Reagan worked for Thatcher.
Truss has put forward a bold plan that, for the most part, stays true to supply-side ideals. The U.K. may give us the first chance in decades to see supply-side economics without the negatives that come with politicians we know better.
Pass the popcorn!
Andy Bloom is president of Andy Bloom Communications. He specializes in media training and political communications. He has programmed legendary stations including WIP, WPHT and WYSP/Philadelphia, KLSX, Los Angeles and WCCO Minneapolis. He was Vice President Programming for Emmis International, Greater Media Inc. and Coleman Research. Andy also served as communications director for Rep. Michael R. Turner (R-Ohio). He can be reached by email at firstname.lastname@example.org or you can follow him on Twitter @AndyBloomCom.