23 September 2022
Cogito Ergo Non Serviam
Chancellor of the Exchequer Kwasi Kwarteng is an exceedingly well-educated gentleman. He has attended and soared at Eton (King\'s Scholar), Cambridge (Trinity, a first in classics and history, but not Greats, two-time Brown Medal winner ), Harvard (Kennedy Scholarship) and back to Cambridge for his PhD (economic history). So, he of all people should be able to guide the British economy through the current rough patch. Unfortunately, he has opted to cut taxes and put caps on energy bills during a time of heightened inflation. Based on his education, he has read Keynes, and yet, he is engaging in exactly the wrong policies.
Britain is not doing well, and when compared to other developed countries, it is still not doing well. The inflation rate is just under 10% year over year, GDP growth in the last quarter was down 0.1% and interest rates are rising. The debate over whether the UK is in a recession or not has begun. To anyone who remembers the 1970s (Dr. Kwarteng was born in 1975, so he does not), this smells like stagflation – rising prices without economic growth. Back then, the central banks of the world worked to drive inflation out of the equation, and the resulting positive economic conditions advanecd growth in the 1980s.
The Chancellor has decided not to do that. Instead, he is trying to put more cash into the pockets of Britons so they can pay the higher prices. The trouble with this approach is two-fold. First, he is cutting taxes in such a way that the richest benefit the most. This will exacerabate social inequities, and at the same time, it will do little to boost economic activity. As the world has seen time and again, giving the poor money causes economic activity. Giving it to the rich accomplishes little beyond enriching those who do not need more. Second, more money in the pockets of anyone boosts demand. Excess demand is exactly what causes inflation.
The correct policy right now is to provide some relief for those in the bottom half of incomes and wealth, increase interest rates and taxes (yes, higher taxes reduce inflation) and let the Bank of England set interest rates where it pleases.
Still, the Tory backbenches are finally happy with government policy. Christopher Hope of the Telegraph wrote in his daily briefing note:
Prime Minister Liz Truss is modeling herself after Margaret Thatcher. In this regard, she should reduce borrowing and cut government spending. But there is no fun in that, so she will let the national debt rise. She should also recall just how bad things got under Mrs. T before there was anything that looked liked better. GDP in 1980 and 1981 was lower than in 1979 when the Tories came to power. By 1983, there were 3 million out of work (and it would rise to 4 million before it was all over).
Dr. Kwarteng is betting he can do better. One doubts it.
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