Liz Truss’ trickle-down economics

22 Sep, 2022 at 22:45 | Posted in Economics | 6 Comments

U.K. Prime Minister Liz Truss has said she’s ready to make “unpopular decisions” such as tax cuts and boosting bonuses for wealthy bankers to grow the economy, even though they obviously benefit the wealthiest more than the poor …

ECONOMICS

Truss and her conservative government are to give U.K. corporations and shareholders a gift. The only trickle-down to workers to be going on is probably best described in the picture below …

6 Comments

  1. It’s actually part of an expansionary fiscal policy to “go for growth”. There is actually another level of debate going on here. The Treasury Secretary has been fired by Truss and Kwarteng for what they believe is an excessive attention on the budget deficit. Market Monetarists and Neo-‘Keynesians’ economists should be happy. These economists were major critics of austerity and used things like zero lower interest rate bound arguments (fiscal expansions in the context of very loose monetary policy).

    But we are now starting to see the problems with their American centric theory: Britain is a fairly small open economy dependent on foreign capital to finance its structural external deficit. It does not have a reserve currency and it is not a hegemonic power backed up by a huge domestic market. Basically, to some degree it is hostage to international capital markets.

    There is a link between government deficits and balance of payments in the UK, but it is a subtle and nuanced one. But we can see there is a link by the way the markets and the pound reacted to Kwarteng’s mini budget.

    I tend to agree with the Treasury (not the Chancellor of the Exchequer): at some point macro-contraction in the UK, possibly even austerity will be necessary. The important thing though is that this does not fall on the poor and vulnerable.

    Eventually we will have to see European social democratic policy in the UK, such as prices and incomes policies and direct credit allocations – both anathemas to neo-classical economists, but I suspect things will get much worse before that happens

    Comment by Nanikore— 24 Sep, 2022 #

    • When I said neo-Keynesians I meant New Keynesians (New-classical economics with “Keynesian” frictions).

      Comment by Nanikore— 24 Sep, 2022 #

      • I would add that now we are in a world where the US is not flooding the global markets with liquidity we are all in a different place. The weaker and more exposed economies, especially smaller open ones, are going to be hit first by a strengthening dollar.

        People are also going to learn the real reasons why Brexit was a big mistake. Although the EU has created a big problem for itself with overly hasty eastern expansion, and a big cause of concern is Romainai’s and Bulgarian imminent and premature entry into the Eurozone. The unresolved problems in the Eurozone are to some extent softening the impact on sterling against the Euro.

        At some point we can certainly expect tightening by the ECB. This could bring back the old austerity problems. I don’t know how accommodating Germany can be with some of the weaker Eurozone members. The German model works well by containing monetary expansion and using collective bargaining to adjust prices. But some of the weaker members in the EU are going to put this under pressure unless there is some real progress made on institutional integration – which Eastern Europe opposes for sovereignty reasons. Macron’s solution – a two speed Europe, is probably the only answer.

        Comment by Nanikore— 26 Sep, 2022 #

        • I should have also mentioned, interest rates are going to go through the roof. It is amazing how much this looks like the Thatcher/Reagan years: large public deficits due to tax cuts, high interest rates, deregulation/privatisation. This is more than Thatcher Cosplay by Truss.

          Comment by Nanikore— 26 Sep, 2022 #

          • https://www.cityam.com/analysis-pound-slump-is-bad-but-uk-bond-market-is-carnage/

            Yields on 5 year UK bonds are now higher than Greece and Italy.

            One thing that went around a lot was that “government debts don’t matter if they are denominated in that country’s own currency”. I hope we get some well-informed Model-free analysis on this now. But I will not hold my breath.

            Comment by Nanikore— 27 Sep, 2022 #

            • Although Sterling is one of the IMF’s 6 reserve currencies (although it is not the “world’s reserve currency” – that is unquestionably in practice the USD). Interesting graph here on world FX reserve stockpiles. I would imagine there is some talk going on among central banks in order to stabilise the pound and UK bond market (I would suggest that Truss does not annoy the US, EU or IMF too much.)

              https://www.reuters.com/markets/europe/sterling-needs-kindness-reserve-managers-mike-dolan-2022-09-28/

              Also, the BOE is buying UK long term bonds frantically to stabilise that market, but wouldn’t that be inflationary and weaken sterling by injecting liquidity into the system?

              Comment by Nanikore— 29 Sep, 2022 #


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