The Truss-Kwarteng policy is not Thatcherism, but Reaganomics. Thatcher and Reagan, early 1980s leaders of what came to smother the world under the name “neoliberalism”, had much in common; but also differences. Orthodox Thatcherites are shocked by Truss and Kwarteng.
The chief difference is this: Thatcher was a budget-balancer. She avoided government budget deficits. Such budget-balancing is a standard neoliberal line, though by now even Germany’s official economists, the most rigid on the issue, agree that governments should run temporary budget deficits in sharp slumps. (It’s a myth that the bourgeoisie ever “abandoned Keynesianism”; they modified it, and the dominant neoliberal trend in academic economics is now called “New Keynesianism”).
Reagan, by contrast, ran consistent large budget deficits unprecedented in the USA since World War 2. His motives were not “Keynesian”. He claimed that his tax cuts for the well-off, by encouraging wealth-seeking, would in time produce growth to mend the deficits. His advisers like Arthur Laffer had actual theories about that.
Truss is essaying a bigger exercise in “tax cuts for the rich now mean growth soon” than Reagan did. Reagan’s tax cuts did not bring growth. He had a slump in 1980-3; the revival after 1983 was driven by huge military spending, and by then Reagan had stopped his tax cuts.
The Truss-Kwarteng policy is not from their 2012 book Britannia Unchained, either. The three other authors of that book, Priti Patel, Dominic Raab, and Chris Skidmore, backed Sunak in the Tory leadership race (though Skidmore later shifted). They appear to be standard Thatcherites.
The book itself contains no economic theory. Despite whingeing about the propensity of young people in Britain to study “soft” subjects rather than maths, it cites what few statistics it gives with no care for accuracy. Insofar as it comments on the issue, it applauds Thatcherite “budget-balancing”.
Mostly, the book is a sloppy, preening, arrogant tirade about getting British workers to work harder. Tax cuts, welfare cuts, union-bashing, and job insecurity are suggested in a general way as encouraging “work ethic”, but there is none of the actual theory which Reagan’s advisers had.
Opportunist
Truss is an opportunist, a Remainer in 2016 who now goes with the “Singapore-on-Thames” ultra-Brexiter crowd. But then Reagan wasn’t an ideologue either. Kwarteng may have been reading Arthur Laffer. My best guess is that Truss and Kwarteng see the Tories as floundering (as they are), the unions as dangerously resurgent, Thatcherite budget-balancing as impossible, so the old Reagan line is the only option in their right-wing spectrum.
Kwarteng says he will balance the budget in the longer term. There is a theory in US academia, “Modern Monetary Theory”, with some right-wing origins but mostly-leftish support now, which says essentially that long-running budget deficits don’t matter: neither a promise of great future growth spurred by tax cuts, nor a promise of future social cuts, is needed to offset them. That’s another debate. Kwarteng doesn’t have that theory.
He promises cruel social cuts.
Truss and Kwarteng say they want to focus on “growth” rather than “distribution”. This is a bourgeois line from way before Thatcher and Reagan: to tell workers not to complain about our small “slice of the cake”, but to help the rich make “the whole cake” bigger.
It has a sinister twist at a time when unions are only beginning to push back. John Burn-Murdoch in the Financial Times (16 Sep) recently showed that the rich in Britain thrive relative to the rich almost everywhere else but the USA, but the worst-off 5% are 20% behind the worst-off in Slovenia (let alone the western-Europe average), and the middling (“median”) household is on course to be worse-off than its Slovenian counterpart by 2024. The divergence has set in since 2010. Thatcher and Kwarteng want to speed, not reverse, that trend to increased inequality.
Both Thatcher and Reagan wanted to move from building an integrated national industrial base with accommodations for the workers to restructuring their areas under the imperatives of world markets to attract mobile capital seeking the most profitable sites.
So they cut taxes for the rich (supposedly encouraging them to be more “entrepreneurial”); squashed unions; cut welfare (though not entirely: mobile capital needs fixed public infrastructure); and diminished regulation. They made those policies bourgeois orthodoxy, though much “deregulation” turned out to be re-regulation of a market-friendly or market-mimicking sort.
Thatcher balanced budgets by raising taxes for the worse-off while she cut them for the well-off (she raised the standard rate of VAT, for example, from 8% to 15%), and by using the proceeds from privatisation (Reagan had comparatively little to privatise) and from North Sea oil, which boomed in her term of office.
Reagan called his line “supply-side economics”. The theory was that previous governments had used public spending too much to boost or repair growth, working on the “demand side”, and government should instead stimulate growth by working on the “supply side”. By freeing profiteers from the trammels of unions, regulations, and taxes on their gains, the government would stimulate them to invest more.
The majority would notionally benefit from the “trickle-down”, i.e. the increased hiring and wage-paying that the newly dynamic entrepreneurs would do.
Not much of that happened. Profits rates recovered from the early 1980s, but investment in machinery and buildings, as a share of profits, declined, and continues low in the US, UK, and similar economies.
The Thatcherites subscribed to the general talk about unleashing “enterprise” (which was not new in 1980), but did not use the term “supply-side” much. Under Thatcher manufacturing employment in the UK declined 23% in a few years after 1979, and the Thatcherites reckoned that to be a necessary adjustment to the world. Under Reagan, there was a sharp slump in 1982-3, but after that manufacturing employment actually rose a bit by the end of his term of office in 1988.
Thatcher’s promise was a bit different from Reagan’s “trickle down”. It was that middling households could enrich themselves through buying shares in the enterprises the government sold off at low prices, and then quickly selling the shares again at higher prices; and by using the “right to buy” council houses cut-price. And that worked, after its own fashion, until the house price crash of 1989-92.
Expansion
Both Thatcher and Reagan benefited from the expansion of world financial markets as exchange controls were scrapped. London and New York established themselves as world centres of the expanded and faster-moving markets, and to flag up a statistical increase in national “output” that came with no increase in useful goods and services (though with an increase in well-paid jobs in and around the City and Wall Street).
Thatcher gained office mainly on a promise to cut inflation. Her advisers had a theory about that, “monetarism”. After a couple of years of ineffectuality it was quietly faded out in favour of the standard bourgeois recipe of balancing budgets and keeping interest rates high (which didn’t work well, either).
A more drastic effort to curb inflation through high interest rates, with some money-stock-targeting (“monetarist”) top-dressing, was already underway in the USA, initiated under Democrat president Carter by the Democrat Federal Reserve chief Paul Volcker, before Reagan came to office. He had only to continue it. The high interest rates caused a slump (businesses could not borrow to invest), which cut spending enough to dull inflation (eventually).
Interest rates now are much lower than then (17% in the UK in 1980, 22% in the USA). All other things being equal, increased consumer spending by the rich resulting from Truss-Kwarteng policy is likely to raise inflation. To offset that, and to induce overseas capitalists to buy British government IOUs (bonds), both to cover government spending and to offset the UK’s current huge trade deficit, Truss-Kwarteng will have to accept higher interest rates.
The USA also relies (and has relied since Reagan’s day, when it started running large trade deficits as well as budget deficits) on overseas capitalists buying its “Treasury bonds”.
The reliance is more precarious for Britain. The US dollar is the world’s chief reserve currency and medium of trade. Capitalists and governments worldwide want to hold dollar assets. They want to hold more of them, to give them a cushion of relative security, in times of economic turmoil, even economic turmoil originating in the USA.
They have no comparable “background” motive to hold British-pound assets. Slump is a more likely result from Truss-Kwarteng economics than boom.