the (latest) mess in the UK

background, as I see it

The concept behind the Reagan/Thatcher political revolution is the simple idea that just about everything works worse in government hands than in private. Therefore, the chief goal of a national leader who wants to maximize GDP growth is to deregulate as much as possible.

One way of forcing the transition from public to private ownership is to cut taxes, especially income taxes, thereby reducing the money available to entrenched bureaucrats to fund government-run activities. Academics like Arthur Laffer argued that it was most important in this effort that the taxes of the wealthiest be cut. Two reasons: the rich would then shift their efforts away from creating tax shelters for themselves to opening new businesses that would provide high-paying jobs for ordinary workers (trickle-down economics), and the government might even end up collecting more money than before once tax shelters were no longer a thing.

This hasn’t worked out. Three unintended consequences of the strategy:

–income tax cuts made the cash flows of mature businesses much more valuable than before, and therefore more attractive vs. taking the risk of starting a new enterprise

–their increased wealth made the owners of industries of the past more politically powerful, again tipping the scales away from progress toward preserving the status quo.

–ignoring the occasional toll highway, public goods like roads or schools haven’t transitioned smoothly to the private sector, as neo-liberal theory suggested, but have deteriorated instead. A weak education system, meaning a less-skilled workforce, and increasingly third-world infrastructure have translated into the near disappearance in the US of productivity gains as a source of GDP growth

The UK has gone down virtually the same path as the US. It’s schools may be better than ours, but the country has managed to dim its economic prospects more considerably than we have by voluntarily severing its privileged access to its largest export market, while potentially reopening the conflict between northern and southern Ireland.

what just happened in the UK

The recently installed UK government of Liz Truss decided a couple of weeks ago to give the domestic economy a shot in the arm, using the signature move in the neo-liberal playbook–a large, unfunded cut in income taxes.

No applause from financial markets, though. Instead, a spike in interest rates and a record low for sterling against the dollar.

Collateral damage as well: older, corporate defined benefit pension plans in the UK had been playing out the string by holding mostly all bonds and, apparently with government encouragement, using derivatives to hedge heavily against falling interest rates. The Truss tax cut proposal triggered large enough margin calls on these positions that the Bank of England had to step in to absorb the resulting selling.

The optimist in me thinks that maybe the world is starting to reconsider an academic theory that may have been great for the 1980s but that has had serious negative unforeseen consequences and is well past its use-by date.

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