Hiltzik: The Folly of Republican Economics

Fox Business Talking Head Larry Kudlow was overjoyed in September. 23

“The new British Prime Minister Liz Truss has presented a great plan for supply-side economic growth that looks very much like the basic thrust of Kevin McCarthy’s ‘Commitment to America’ plan,” he told viewers that day on his daily programme.

What got Kudlow vibrating was the release of a budget plan by Truss that would cut corporate taxes and cut the top rate of tax on the wealthiest Britons from 45% to 40%.

It’s just very exciting that we finally have Thatcher back in the UK under the Liz Truss name.

– Economist Arthur Laffer, shortly before Truss was ousted as Prime Minister

Kudlow, a former economic adviser to former President Trump, was right that the Truss plan closely resembled Republican economic orthodoxy, which begins and ends with tax cuts for the wealthy.

What prompted him to mention House minority leader Kevin McCarthy (R-Bakersfield) was a bit mysterious, however, as the published version of McCarthy’s program lacks the details needed for the comparison.

It does not matter. The point is that the Truss economic plan was far from “outstanding” and was a disaster from the start. The UK bond market plummeted, prompting Bank of England officials to try to repair the damage.

The entire British political establishment, from right to left, was appalled by Truss’ proposal to cut the country’s tax revenue by some $3.4 billion a year, with no indication of how it would make up the deficit. The notion that the biggest tax cut since 1972 would unleash a wave of corporate growth was widely scoffed at.

Truss and her then chancellor (or chief financial officer) Kwasi Kwarteng reversed course on the tax cut plan on October 11. 3, nine days after they proposed it. Truss fired Kwarteng 11 days later. And on February 10th, just 44 days after taking office, Truss herself was forced to resign in what was the shortest tenure by a female prime minister in British history.

If there’s a lesson in all of this, Kudlow hasn’t voiced it. It’s not clear if he even commented on Liz Truss’ fall – a search of the Fox Business Channel website turns up no clip of him. (Fox Business did not immediately respond to a request for comment.)

But the Fox Business archives are replete with praise for Truss from other right-wing business experts, all aired in the early days of her tenure as prime minister.

Here’s economist Art Laffer on Kudlow’s show on 14/28: “Now you’re going to see Britain outperforming the rest of the world year after year,” enthused Laffer. “It’s just very exciting to finally have Thatcher back in the UK under the Liz Truss name.”

On Kudlow’s Sept. 26 show, Stephen Moore, senior economist at right-wing think tank FreedomWorks and another former member of the Trump Economic Brain Trust, hailed Truss as a “hero” and a “superstar.” Moore said, “It’s hard to find anything she doesn’t like about what she’s done.”

All of these snooty comments were accompanied by smirking digs at what Kudlow called “business leftists,” who sounded the alarm about Truss from the start.

We have already reported on Laffer and Moore’s infallible talent for making mistakes in economic policy. However, the praise for Truss and the speed with which their program collapsed is something new.

To paraphrase the late Joan Didion, they offered an analysis in which “measurable cerebral activity is virtually absent.” Major press critic AJ Liebling might have described it as “the futility of flapdoodle”.

Didion glanced at Bob Woodward’s blank books, darling of the long-running uninformed speculation about Joseph Stalin’s health, as he lay on his deathbed in 1953.

The false calls for the Truss program reflected a knee-jerk impulse by supply-siders to respond with eager adoration to anything remotely resembling the policies of Margaret Thatcher and Ronald Reagan.

It’s a habit that only the most staunch Conservatives in Britain itself continued to exhibit until “a new generation” of Conservative MPs, including Truss and Kwarteng, “demanded a return to Thatcher principles of free market and low taxes and supply-side reforms,” noted the Financial Times, which no one would mistake for a liberal newspaper.

Their thesis, as under Thatcher and Reagan, was that “tax cuts would pay off if they allowed the economy to grow”.

The truth is that the Thatcher and Reagan revolutions did not allow the UK and US economies to grow in a way that benefited everyone. Their policies only benefited the rich. Also, today is not the 1980s and Truss is not Thatcher, whose nearly 12-year tenure made her the longest-serving prime minister since 1885.

There was widespread doubt among UK economic watchers that Truss’ tax cuts would have a measurable effect on growth, particularly given the self-imposed headwinds the UK economy is facing. Comparing the effects of Thatcher’s tax cuts with those of Truss was sheer folly.

“Under Thatcher, the top tax rate was reduced from 80 to 40 percent,” recalls Martin Wolf, chief commentator at the Financial Times. “It’s debatable whether even that significantly improved performance. This mouse of change certainly cannot…. For economic performance, these changes are totemic, not real. However, for income distribution, they will be perfectly real and not totemic.”

Paul Johnson, head of the London-based Institute for Fiscal Studies, added: “It’s a lack of productivity growth that has meant that income and living standards have faltered as a result of choice. We have decided not to invest in education, to liberalize the planning system or to remain in the European single market. The overall costs for this are enormous.”

Truss and Kwarteng certainly knew their policies would be ineffective and ruinously expensive. Days before they announced their plan, they fired Tom Scholar, the Treasury Department’s chief official, presumably because they knew he would oppose the tax cuts. They refused to allow the Office for Budget Responsibility, an independent state budgetary agency similar to our Congressional Budget Office, to review the plan.

As a result of these maneuvers and their basic structure, the Truss Plan almost generated immediate political opposition. The cut in the top tax rate would only directly affect around 600,000 Britons with annual incomes above around $170,000 – pretty much the top 1%.

As Johnson calculated, the very wealthiest households, the 0.1% with incomes above about $680,000, would each receive a tax cut of about $22,500. Everyone else would see their property tax rates drop from 20% to just 19%.

Meanwhile, most Britons would face cuts in government services as the government struggled to meet its increased deficit.

There are lessons to be learned from all of this for the US, especially Republican politicians. One is that sticking to Reagan-style economic policies will not help create growth. It has not done so in the past and will not do so now. Another reason is that there’s limited appeal in feeding fat cats tax cuts while the rest of America impoverishes, and eventually the public will get smart.

A third reason is that serious political leaders admit their mistakes. Truss did so, telling the BBC, “We went too far and too fast.” (Not that her confession was enough to save her job.)

Kudlow, Laffer and Moore were spectacularly wrong about Truss and their policies. If they were honest analysts, they would admit it. The supply economy has been a failure for most Americans. She and her GOP supporters should stop clinging to the rubble.

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