Political Economics: The West's 'Anti-Growth Coalition' Prevails

 

"We might as well start calling them the Truss Wars. The central question facing conservatives for the foreseeable future will be: What on earth went wrong in the U.K. during Liz Truss's 49-day tenure as prime minister? The debate is germane on both sides of the Atlantic.

Thank Ms. Truss herself for opening a new front this week. She is, alas, preternaturally inept at selling her own ideas. Her newspaper column and magazine interview in recent days are no exception. But listen carefully and you'll find she's raising exactly the sort of issues conservatives should be discussing. It's embarrassing that a lot of politicians and pundits seem to be afraid to engage seriously with her. Or perhaps it's telling.

Start with her assessment of the broader political and economic battlefield. The fundamental challenge facing developed economies, in her sometimes garbled telling, is the transition from low interest rates and low inflation to higher interest rates and higher inflation. The old world was marked by low investment, which caused living standards to stagnate. Politicians therefore tried to goose growth with inflated asset prices and escalating government spending paid for with cheap debt.

This approach is no longer tenable as inflation returns and interest rates rise. So governments must focus like a laser on steering their economies toward productive private investment. Ms. Truss and her chancellor, Kwasi Kwarteng, attempted to do this in the "mini-budget" they unveiled on Sept. 23, by reducing taxes on labor and capital.

Note, as Ms. Truss does, that this productivity transformation will be made all the harder in many places by the legacy of decades of awful green policies, the bill for which is coming due in ruinous household and business energy costs across developed economies. Criticism of the U.K. mini-budget focused on the "unfunded" tax cuts, but the far bigger expenditure -- 60% of the mini-budget, per Ms. Truss -- was on energy subsidies.

This already constitutes fightin' words on the right. After more than a decade of underperforming economic growth, conservatives everywhere are starting to view this condition as an input into the political process rather than an output of it. This mindset drags them into fights about the distribution of limited economic spoils via taxation, entitlements, industrial policy and green boondoggles. The right can't win because, try as it might, voters always trust the left more to redistribute.

Ms. Truss's central political error was to imagine the Tories were still capable of optimism about economic growth as an alternative to stale redistributionism. Her selection as prime minister by a majority of the party's grassroots members suggests the faith still is alive among Tory voters -- barely.

But it has atrophied among elected Tory politicians, who ousted her as soon as they could. The rectification budget that Prime Minister Rishi Sunak and Chancellor Jeremy Hunt produced in November tries to breathe new life into the old economic model, with big spending increases and tax hikes, while elsewhere Mr. Sunak continues his pursuit of a costly and illusory green future.

Ms. Truss's critics instead want to claim her big mistake was spooking bond investors with all those unfunded tax cuts, which is supposed to prove the free market now rejects supply-side economics. Here again, her recent comments achieve moments of lucidity opponents are anxious to ignore.

In her telling, she and Mr. Kwarteng didn't realize how badly 15 years of post-global-financial-panic policies denatured financial markets. A clue here is that what broke wasn't "the market." It was a specific form of hedging instrument used heavily by U.K. defined-benefit pension plans to cope with long-term slow growth and suppression of interest rates by the central bank -- i.e., the old economy.

The strategy exploded when interest rates started rising. This was an inevitable hangover from the policies Ms. Truss inherited. Bank of England Governor Andrew Bailey owes her a bottle of champagne as thanks for accidentally making herself the scapegoat for a crisis he otherwise would have caused himself with his inflation-fighting rate increases. President Biden and the International Monetary Fund should chip in for the gift, since this episode offered them an excuse to pile in against the supply-side policies they dislike (even as the IMF now tacitly admits maybe the Sunak alternative ain't so grand after all).

This hints at the fundamental truth of Ms. Truss's most-derided assertion, which also is her claim of greatest moment in America: that there exists an "anti-growth coalition" opposed to the supply-side reforms necessary to adapt to the new economic realities she discerns. Critics accuse her of diversionary conspiracy-mongering.

But her broad economic diagnosis and specific explanation for why her policies failed politically and in the markets point to how several decades of lower growth have entrenched interests -- from intellectually lazy Treasury bureaucrats to overextended pension managers to homeowners sitting on inflated equity -- that will resist the policy changes the economy requires to grow again.

Conservatives, as Ms. Truss warns, must decide whether they want to stagnate in this old-economy coalition or rebuild a pro-growth movement." [1]

1. Political Economics: The West's 'Anti-Growth Coalition' Prevails
Sternberg, Joseph C.  Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 10 Feb 2023: A.17.