Thursday, 21 July 2022

Honesty, consistency, and the Tory leadership race


Given what Liz Truss has had to say about the economic policy which has been pursued by successive governments for twenty years, she’s probably going to be furious when she finds out which party was in government for the last twelve of those years. And even more so if she ever realises that she was a minister in that government for ten of those years, including two years at the Treasury. Apparently, it’s all been a huge mistake and she knew that all along, even as she trudged through the division lobby voting in favour of budget after budget. And given her insistence that she is a Thatcherite and will govern as a Thatcherite, let’s hope no-one explains to her that it was her heroine who did so much to normalise the idea that governments, like households, can only spend what they receive in income.

When she was busy supporting governments which argued that there had to be a balance between government income and expenditure, and when she and others attacked politicians of other parties for arguing the opposite, she already knew deep down that they were right, but was just biding her time waiting for her opportunity to lead a government which would reverse the policy. What a refreshing change it will be to have such an honest politician to replace the congenital liar currently occupying Number 10. We can confidently believe every word she says, at least until she changes her mind again.

We should not be too critical, though – as Luke’s gospel tells us “… there will be more rejoicing in heaven over one sinner who repents than over ninety-nine righteous persons who do not”. Repent is about the least that she can do, although whether her understanding of the word repentance is any deeper than that of her predecessor is another question. And it’s only a half repentance anyway.

In arguing that the government can both cut taxes and spend more, she is accepting the basic truth that government income and expenditure do not need to be in balance, and its corollary that lack of money does not prevent governments from spending it. Whether that gap is met by 'borrowing' or new money creation is an interesting question for debate, but since the government insist on treating both as ‘borrowing’ in the official accounts, it’s an academic distinction. The problem with her position is not about whether the government can spend money it doesn’t have but about how it spends that money. And on that point, she’s propounding the generally discredited theory that cutting taxes magically generates economic growth by putting money into the hands of consumers who then go out and spend it rather than, say, repay debt, and businesses which invest it in new capacity rather than shareholder pay-outs, and that it causes no inflation in the process. Of course there are some economists who argue, based on economic theory, that that will be the result, and she even referred to one of them, Patrick Minford of Cardiff University, who seems to be something of an outlier’s outlier on the matter. I’m not sure which is going to be worse for us all – Sunak’s insistence that there is no spare money or Truss’s insistence that there is plenty of money but that it should be given out to the most well-off in the form of tax cuts.

The issue with what Truss is saying isn’t with the theory but with the complete lack of any empirical evidence showing that it works in practice. And the reason for that isn’t necessarily that the theory is wrong per se, but that the assumptions that need to be made to make it work simply don’t hold true in the real world. Any economic model only predicts what will happen in the real world to the extent that the assumptions underpinning it are valid and accurate. Hers are neither.

I doubt she will be particularly concerned about that at this stage; her appeal is aimed only at that tiny minority of the population represented by the Tory membership register: predominantly older, male, white, and richer than the population at large. Curiously enough, that just happens to be a demographic which would benefit personally from her proposals – what a lucky coincidence that is. Whether her views will survive contact with reality if she reaches Number 10 is also something about which I doubt she will be overly concerned. We’ll simply discover that her deeply-held long-term conviction that fiscal rectitude is essential was just temporarily hiding after all. What a refreshing change it will be to have a PM who is so consistent in her views.

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