Michael Pascoe: RIP trickle-down economics – even the financial markets have given up
UK Prime Minister Liz Truss has just delivered the biggest tax cuts in 50 years. Photo: TND
One of the more enlightening performances of our immediate-past treasurer was his declaration of admiration for Thatcherism and Reaganomics.
Now employed by investment bank Goldman Sachs (aka the “vampire squid”), I trust he’s coming to terms with even the global financial markets pointedly rejecting his preferred philosophy.
If an event was required to finally rule off the world’s four-decade dance with trickle down economics, it was delivered on Friday night in the form of the British government’s mini-budget – new Prime Minister Liz Truss’s attempt to add Trussonomics to the neoliberal lexicon with the biggest tax cuts in half a century.
The verdict was immediate. The pound plunged as markets gave the tax cuts the thumbs down, expectations of higher interest rates rose and the outlook for the faltering British economy deteriorated further.
As if post-Brexit Britain did not have enough problems.
Nobody – except perhaps Liz Truss, her chancellor Kwasi Kwarteng and a few supporters – is buying the trickle-down fantasy any more.
The Guardian reported Ms Truss and Mr Kwarteng had been working on plans for government for more than a decade, “ever since they wrote their book Britannia Unchained, the first draft of Trussonomics, a rip-roaring ride through free markets, deregulation and the small state. She is determined to make seismic changes.
“The Commons benches behind Kwarteng were muted. Grim-faced MPs barely raised a cheer. Some of those with ‘red wall’ seats are aghast that tax cuts so disproportionately benefit the rich. ‘It’s electoral suicide,’ one despaired. Even some of her supporters admit her plans are ‘brilliant, or they are bonkers’.”
The markets’ seismic changes might not be what the PM and her chancellor had in mind.
The neoliberal cry of “you can’t tax your way to prosperity” has been joined by “you can’t tax cut your way to prosperity either”.
The Economist’s verdict was blunt: “Liz Truss’s selective Reaganomics won’t work.”
But neither did Ronald Reagan’s Reaganomics. The claim that it did is the stuff of neoliberal propaganda, not reality. It’s the dogma of think tanks and politicians funded by rich people who dislike paying tax, the delusions of deficient treasurers past.
Having shot itself in both feet with Brexit, sorry old England is moving on to knee-capping.
At the macro level, a quick $75 billion worth of tax cuts thrown on top of an economy the Bank of England is trying to cool with interest rate rises pits fiscal policy against monetary policy – meaning more interest rate rises.
The extra borrowing and lack of confidence in the British government contributes to the plunging pound, making imports more expensive, thus more inflationary pressure, thus more pressure on the Bank of England to screw down the economy that Ms Truss is trying to stimulate.
Scrapping the top tax rate – 45 per cent on incomes above £150,000 ($250,000) – and making 40 per cent the top rate provides the worst of the optics for little in the way of economics.
Less tax for the well-off does not mean they stimulate economic growth more. Tom Red’s explanation in Crikey was only a little simplistic.
The writing was on the wall for PM Truss before the mini-budget. When big business wants to be good friends with the opposition Labour Party, the money had already spoken.
“It helps Labour that businesses despair of the Conservative Party,” reported the Economist.
“Many people (including politicians) assume that firms want treats such as tax cuts and deregulation. They do, but they are more interested in a stable, predictable environment in which to invest.
“After 12 years in office and four radically different prime ministers, the Conservatives can hardly promise that. Boris Johnson’s tenure was especially shambolic. ‘For the last few years, we’re just not sure what we’re facing into with the government,’ laments one executive.”
English commentator Anthony Peters provided perspective in his email newsletter: “Kwarteng’s argument was that 25 years of governments’ attempts to redistribute wealth from the bottom up has failed and that the time might have come to take an entirely different and innovative approach to the fiscal structure.
“At the age of 47, Kwarteng is clearly far too young to have any memory of the Barber Boom, named after Anthony Barber, who was Chancellor to Ted Heath in the early 1970s. Kwarteng’s ‘innovative’ fiscal structure is all but a carbon copy of Barber’s ‘Dash for Growth’ and markets are pricing in its same calamitous failure.
“As far as his ‘special advisors’ are concerned, in most cases they are so young and so green that not even their parents will remember Barber.”
Mr Peters is a conservative veteran of markets and commentary, certainly no “Leftie”. When he despairs so strongly of the Conservative Party, Trussonomics won’t be around for long.
And he has a knack for an observation that makes a broader point about Britain’s demise.
“I suspect Kwarteng has kicked the bucket out from under the country,” he wrote.
“There is no doubt that he is correct that the policies of redistribution by way of high taxation and high benefits have not brought the fruits they were supposed to even though in the UK neither of them is particularly high compared to European peers. ‘Trickle down’ doesn’t work and nor does the ‘benefit state’. The only thing that works is work.
“Perchance, in the past seven days I have been both to Zurich and to Manchester. In the former there is barely a corner of town from which one could not eat one’s lunch off the pavement, in the latter even the centre of the city and business districts were sinking in litter and garbage.
“Civic pride and cleanliness are not a function of benefits and taxation of the rich. It’s not about how often the streets are cleaned; it’s about how often they need to be cleaned and why.”
RIP – trickle-down economics
Born – circa 1980
Buried – 2022.