Tuesday, October 25, 2022

Truss Tragedy

(at Project Syndicate)

The Liz Truss Tragedy

The former British prime minister’s downfall holds important lessons for growth-minded policymakers in the United States, Europe, and elsewhere. While her diagnosis of the country’s economic problem was spot on, she fatally mismanaged both the politics and the messaging of her policy response.

STANFORD – Liz Truss’s stint as British prime minister is over, but she was right that the United Kingdom needs growth. Her downfall is tragic, because growth is the only path out of the country’s economic dilemma. 

The UK is surprisingly poor. Its GDP per capita is just $43,000, compared to $60,000 in the United States. The average British home is one-third the size of the average US home. Worse, the country’s economy is not growing. Its GDP per capita is lower than it was in 2007. Productivity – the underlying source of economic growth – has been flat for over a decade. 

The UK desperately needs supply-side reforms. Surging inflation tells us that demand-side stimulus is a spent force. 

If anything, Truss’s proposed reforms were too mild. A 40% top marginal income tax rate (down from 45%) would not make the UK a low-tax free-market Shangri-La, especially considering that it would also still have a 20% value-added tax (VAT), national insurance taxes, property taxes, corporate taxes, and more. Recall that US President Ronald Reagan and Speaker of the House Tip O’Neill (a Democrat) cut the top federal marginal rate from 70% to 28%

Truss also proposed free-market “investment zones.” But if one accepts that pro-investment tax and planning conditions are good in blighted areas, why not the whole country? 

The UK is at a post-Brexit crossroads. Will it become a free-trade, entrepreneurial, financial hub – a “Singapore on Thames”? Or does Brexit mean protecting and subsidizing inefficient businesses and places even more than the European Union allows? 

Unfortunately, we now know the answer. Truss’s critics have no counterproposal that has any chance of reigniting growth. The stage is set for further high-tax, high-subsidy, over-regulated decline. 

As sound as Truss’s plans were in economic-policy terms, her government’s handling of the messaging and the politics was spectacularly inept. That is an important lesson for those of us who want to see more growth-oriented policies in the US, Canada, and Europe. 

One obvious mistake was Truss’s announcement of a £60 billion ($68 billion) blowout to hold down gas prices. That is not a good way to launch a pro-growth revolution. 

She then moved on to “tax cuts,” predictably raising the ire of the high-tax intelligentsia. In announcing the policy, neither Truss nor her chancellor of the Exchequer, Kwasi Kwarteng, explained the point of lowering tax rates. For example, Kwarteng sold tax cuts as “putting money back into people’s pockets.” But such Keynesian stimulus is the last thing the country needs amid historic inflation. Kwarteng should have explained that lower tax rates improve the incentives to work, save, invest, start a business, or, in the case of corporate taxes, move a business to the UK or keep it there. (Ideally, one cuts tax rates but broadens the base, maintaining revenues until spending falls.) 

If you can’t explain that clearly and consistently, you either don’t understand or believe your own message, or you think voters are too dumb to comprehend it. Either way, your revolution will fail. In the face of predictable, implacable hostility from the entrenched left-wing media and economic commentariat, a free-market revolution needs great communicators. 

By starting with taxes and subsidies, Truss and Kwarteng guaranteed that nobody would pay attention to the most important parts of the plan: the essential pro-growth regulatory reforms that they had described in the 2012 book Britannia Unchained. Britain’s housing restrictions, as in the US, lead to absurdly high prices, which stymies many businesses and the workers they might hire. The situation is especially harmful to less-advantaged people who cannot afford to live near high-productivity jobs. Truss had also planned to bring back North Sea oil production and lift the UK’s ban on fracking. These are sensible responses to a global energy crisis. 

The lesson is that growth-minded policymakers should start with microeconomic reforms. Everyone can see that over-regulation and restrictions on housing and energy production are hobbling supply. Even climate-change activists are noticing that it is too difficult to get permits for windmills and transmission lines. Everyone can see that schools are awful and getting worse. Workers as well as business owners and managers can see that labor regulations are straitjacketing their workplaces. People can see in everyday experience how social-program disincentives lead some people not to work at all. 

Patiently explaining these problems to voters can also make for good politics. We all long for simple mind-the-store competence in our governments. Fixing dysfunction is a visible achievement that works right away, with no short-run cost. 

Truss’s handling of the politics was even worse than her marketing. Margaret Thatcher and Reagan faced the same withering scorn from the chattering classes, and they had to endure years of hardship before their reforms took root. But they held firm. 

Truss’s critics seized on UK bond-market hiccups, though these were tiny compared to those of the 1980s. They also were largely attributable to the Bank of England raising rates, and to a pension risk regulation fiasco. [Previous posts ending here.] Nonetheless, Truss quickly gave in. By starting with an energy blowout to placate the left, she already encouraged her opponents to go in for the kill. When a shark is on your trail, you don’t offer it a foot and then assume that you’ll both get along. When an iron lady was needed, Truss proved to be made of straw. 

The US, too, is a high-tax, over-regulated, over-subsidized, high-debt, slow-growth economy. For us, too, supply-side reforms are the only way out. Yet many of our conservative voices now pander to voters by advocating big-government big-tax nationalism, protectionism, subsidies, and crony capitalism, albeit directed in different directions than the left. 

For those of us who still understand that the only real solution lies in economic freedom and small, competent government, Truss’s downfall offers important lessons. We must heed them so that we don’t blow our chance if we get one. 

John H. Cochrane is a senior fellow of the Hoover Institution and an adjunct scholar at the CATO Institute.

Jon Hartley is a PhD student in economics at Stanford University and a research fellow at the Foundation for Research on Equal Opportunity.


PS, every bone in my body wanted to join the chorus yelling  "Hooray for fiscal theory of the price level, here come the bond market vigilantes I've been warning about for 20 years" in response to the interest rate hiccups surrounding Truss' plan. But in honesty I cannot. The tax cuts were small, UK debt to GDP less than the US, similar tax cuts and raises have come and gone with nary a peep from the bond market -- Trump for example -- and the UK still borrows at negative rates. Look at interest rates in 1980. It doesn't add up. FTPL references debt to long-term ability to repay. You can't just pick and choose data points that coincide with your story and ignore the others. The point of asset markets is that nobody really knows why they move. Maybe it's true, but I need some indication that these small tax cuts really are the fiscal cliff. 

Update: "Rishi Sunk won't allow fracking" WSJ. Here we go. 


  1. The solution was simple: supply side reforms but without headline-grabbing tax cuts to stoke political and bond-market angst.

    Unfortunately "supply-side" has become synonymous with "tax cuts," which are unlikely to be popular at a time of high inflation. Why not simple separate the two?

    1. Debt financed tax cuts. That is what sent the UK bond market into a tizzy. When economists and policy makers figure out how to cut taxes while reducing debt, a world of possibilities becomes available.



    2. Agreed...but they never do.

  2. Wolf's column in the FT shows that the UK is already fairly deregulated when compared to the US and major EU economies. Most GDP comparisons show that it is around France, Germany levels. Not sure I follow the line of reasoning here. I don't think anyone would disagree that they (or the US, EU, etc.) need growth. Whether the standard supply side reforms listed in this post will deliver it is a separate (empirical) question. They should have outpaced the EU based on previous deregulation efforts (they remain close to France in terms of GDP pc), again calling into question whether these efforts are really such growth boosters (and I am not saying they aren't). Cheers.

    1. View the U.K. consumer confidence index which is negative, and compare that with the U.S. consumer confidence index which is positive. Diametrically opposite consumer sentiment levels.

      U.S. income tax rates on incomes less than $100,000/yr for a married couple filing jointly are astonishingly low compared to almost every other OECD member. For a senior citizen, married filing jointly, the average tax rate on $80,000 is roughly 11%.

      As John points out, the U.K. V.A.T. rate of 20% is a regressive tax on low income families. How does one get ahead under that level of taxation coupled with an inflation rate (price index yr/yr change) of 10%?

    2. Here is GDP per capita adjusted for PPP. [It's all World Bank collections, so I can't vouch for the sources, but they're the most up-to-date numbers


      Note that UK [and France] are noticeably below Germany and the Netherlands. Everybody had trouble recovering from the 2008 financial crisis [why?], but the UK is lagging [France is worse], even if it's not just sitting there.

    3. Sorry: Click on log, upper left.

  3. Would love to hear your top ten supply side reforms you would propose for the US if you were president including what impact you think they would have and how you would try to sell them to the electorate.

    1. He listed them in a blog post called 4 percent growth.

      I'm not sure how you could sell them politically because in concert they do two things that are pretty hardcore anathemas to the left's worldview.

      1) a broader and more efficient tax code will make measured inequality in terms of how it's defined today worse. Even if the poorest person is made better off by x, If the rich are made 10x better off, it's a problem for them.

      2) The deregulation and limiting of government will always be seen as second best solutions to the world view that if we only had responsible and more skilled leaders, it would do even better than the free market. In other words, those areas where the market doesn't meet some social equilibrium, the clarion call for government will only sound louder when the spending is lower.

  4. Whenever I read these articles now, John Cogan enters my head. I think the biggest obstacles to "supply side" reforms are the entrenched entitlements that people are loathe to cut back. High Costs of Good Intentions is actually even more expensive than the headline numbers once you factor in the lost growth.

    The experience in Spain was an eye opening test into human psychology. When notified that a cut in pensions would be funneled to the schools; thus effectively a transfer from the old to the young; the elderly still preferred their retirement checks at the expense of their grandchildren's education. Maybe if it was literally their own grandchildren, they'd have voted differently but when the beneficiaries are diffuse; individual self interest tends to win.

    1. Every entitlement creates a constituency. That's the very reason why entitlements are created. Once a constituency exists (and votes) entitlements cannot be eliminated without losing that constituency votes. And some more, since other voters would be sympathetic with their cause and little aware that trade-offs do exist. Entitlements that allow other voters "virtue signaling" will became particularly entrenched.

      So, entitlements can only grow thru well-established mechanisms (see Cogan's "The Cost of Good Intentions").

      Hayek tried to warn us about this. We choose not to hear him. He also illuminated us on what is coming next.

    2. Entrenched profit pools are just as big a barrier as entitlements, perhaps bigger. Behind most reform ideas there is some large company who stands to see profits fall.

    3. Getting rid of fiat money fixes these incentives- if the government has to be honest with its budgeting then it is harder to keep giving out new entitlements without obvious negative consequences. Not advocating bitcoin or gold or other crypto, but just pointing out a fact

  5. > We all long for simple mind-the-store competence in our governments.
    > ...
    > Everyone can see that over-regulation and restrictions on housing
    > and energy production are hobbling supply

    If "We All" and "Everyone" means me and John Cochrane, then I think the statements above are true.

    If "everyone" must include the wokes and fascists --- they are way too busy with their culture wars to worry about things like competence and productivity. You do realize Herschel Walker could actually win a Senate seat, right?

  6. "Even climate-change activists are noticing that it is too difficult to get permits for windmills and transmission lines."

    Praise the Lord!

  7. The huge energy subsidies at the same time as the tax cuts was the problem. If she should have waited to do tax cuts when the situation was better.

  8. Perhaps it would be better if balance were emphasised rather than growth. Growth in itself does not address inequities in society. Growth in itself may concentrate the rewards of a productive society in the hands of a few. Growth in itself may exploit non-renewable resources. An impoverished society needs growth, but growth in itself may worsen inequities and depletion of resources.

    1. "An impoverished society needs growth, but growth in itself may worsen inequities"

      Can you give us examples where growth made the poor in a society worse off?

      "and depletion of resources."

      Poor societies can ill afford (and generally don't) concern themselves overly about pollution, deforestation, environmental degradation, etc. Societies do more and more about these things as they become wealthier and more able to absorb the costs.

    2. "Growth in itself does not address inequities in society". Maybe, but why is that even relevant?

      "Growth in itself may concentrate the rewards of a productive society in the hands of a few.", and who cares? What growth has done, to an amazing incredible level, is to improve everybody's lives (well maybe not that much for Cuban, North Koreans or even Russians).

      Growth will do the same trick again ... if defenders of "proven nonsenses" let it do it.

  9. With respect to the proposed energy-cost cap (which is being retained by Hunt, chancellor of the U.K. exchequer, but for a curtailed period--through April '23 only), one should properly look on this as compensation for a governmental negative externality imposed on the population in service of "climate change" abatement policies that have not delivered the required replacement energy.

  10. People who live in the UK are so much poorer than those of us here in the US. I spent a few weeks in the UK last month and was reminded of the difference in living standards.

    I spent some time in a middle class neighborhood in Deal, just outside of Dover. I noticed that the houses are way smaller than houses in the US, and the houses are missing a lot of amenities we would consider fairly standard. Few houses had dryers - most people had to hang their clothes on drying lines. I didn't see any houses with dishwashers, though maybe some had them. The washing machines were very small - probably about 1/2 the size of the ones I see in the US.

  11. You said, "For those of us who still understand that the only real solution lies in economic freedom and small, competent government"

    I am afraid that does not work in a world of large corporations and oligarchy

  12. As a long-retired UK then Australian economic policy adviser, I fully support your article. Perhaps you should be UK Prime Minister. Australia is also going in the wrong direction at an increasing pace.

  13. The reality is that the most expensive thing in plan by far were the also unpaid for energy subsidies. It was always a misnomer to characterize the agenda as pro-growth, but the irony the media going for the kill over the tax cuts is that the end result is a victory for fiscal hawks. That's not the same thing as a pro-growth supply side agenda, but the other thing that Reagan had going for him was low national debt that allowed larger deficits from the initial cut in taxes. In essence you say that we should all be willing to get on broad with deregulation, but that seems as far away as the elephant in the room: cutting the size of government.

  14. You said, "For those of us who still understand that the only real solution lies in economic freedom and small, competent government"

    I am afraid that is no defense against the oligarchy. Keep dreaming!

  15. "The average British home is one-third the size of the average US home." (2nd para.)

    What exactly is this intended to prove?

    Here are some questions;

    In terms of land area, are the UK and US of equivalent size?

    In terms of settlements, how does the average age of those in the UK and the US compare?

    When those settlements initially began to form, or to increase in size, what was the dominant mode of transport?


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