Wednesday 21 September 2022

Escaping from the laboratory


Attempting to make a virtue out of inevitability is not a wholly unreasonable starting point for a PM who seems to be going out of her way to take decisions which will be unpopular. However, deliberately setting out to make herself unpopular is what Sir Humphrey would call a “brave decision” and it may turn out to be rather too brave for those Tory MPs sitting on small majorities whose votes she seems to be taking for granted. There are major questions about whether the strategy of going for growth at all costs will work or not but, even supposing that it does, it is unlikely to produce much success in the two and a bit years which remain of her premiership. Growth is more like a giant tanker than a tap; it can’t just be turned on or off at a moment’s notice. Whether her backbenchers will be prepared to hold back until the ship is irreversibly sinking before acting, or whether they will follow the more traditional Tory approach of looking after their own interests is an open question, and not one on which she would be wise to stake her future.

It's far from clear that she’s really as committed to economic growth as she claims anyway. There is one single decision that she could take which would do more than anything else to reboot the UK’s economic prospects, which most economists and businesses would support, which would be largely painless to most people, and might even prove relatively popular (except among her own backbenchers), and that is to negotiate a closer trading arrangement with the EU’s Single Market. Given her own past commitment to membership of the EU, it surely can’t even be ideology which holds her back – it’s not clear that she has any ideology other than pleasing those she needs to please to keep her job. So, whatever she says, "growth at any cost" is clearly not on her agenda.

At the heart of her policy is the utterly discredited (see, for instance, IMF report from 2015) notion of ‘trickle-down economics’, under which allowing the richest to get even richer means that they spend and invest their extra wealth in ways from which we all benefit. It’s an ideological standpoint which requires its adherents to argue both that paying the poorest more makes them idle whilst paying the richest more makes them work harder, and to believe that people who already want for nothing will buy more goods and services, and invest in potentially risky startups, rather than simply locking the money away in some offshore tax haven. They also argue that companies which already have piles of money available for investment if the opportunity arises – and which, even if they don’t, can easily borrow money currently at what are still historically low interest rates – will use any tax cuts to invest in new capacity and innovation rather than distribute the money to shareholders through dividends and share buy-backs. And they regularly fall back on the infamous Laffer Curve, which purports to show that cutting taxes increases government revenue rather than reducing it. The problem is that there is no – zilch, zero, nada – empirical evidence to back up Laffer’s theory; it is just an interesting, abstract theory. That doesn’t prevent those who have a vested interest in reducing their own tax bills from quoting it as though it were gospel, but convincing people that a theory which benefits them is wrong is never going to be an easy proposition. Indeed, such evidence as is available on the operation of trickle-down economics shows that giving a bigger share to the rich ends up with the rich getting richer and increases inequality. Common sense trumps abstract economic theory. The argument that the size of the cake is more important than how it is shared out has a superficial ring of authenticity to it but if the extra cake all goes to those who already have the biggest pieces, then growing the cake is of no benefit to most people.

When in trouble, double down on the original proposition seems to be the order of the day for Truss, as it was for Johnson. But calling for all other major economies to follow her example and implement a similar approach is something of a classic. Not only does it betray (again) that special sense of exceptionalism which leads English nationalists to believe that they know best and the rest of the world should follow suit, it is also utterly self-defeating. The whole point of reducing taxation and regulation is, allegedly, to create competitive advantage (although there are serious doubts as to whether it would do so in practice; trade agreements which ban unfair advantages might make it difficult in practice to exploit such changes), but if everyone does the same those already dubious advantages are wiped out. All that’s left is growing inequality under which the rich get richer and the gap between rich and poor grows ever larger.

We – all of us who live in the UK – are about to be turned into a gigantic experiment in economics in the expectation that an experiment which has produced a consistent result when tried elsewhere will for some strange reason produce a different result here. The most rational response is to make a quick exit from the laboratory.

1 comment:

dafis said...

Regarding Truss as just daft is dangerous. I suspect that she is consciously driving the UK to a position where a far greater proportion of the population is either impoverished or close to it. The creation of a toxic blend of dependency and fear is a key part of her view of the class struggle so that the relatively small % of banksters and elitist cliques will live well with the rest of us reduced to serfdom. Ditch the bitch as soon as possible !