There was a tendency, noticeable during the last few days, to dub the economic measures adopted by PM Liz Truss and her Finance Minister Kwasi Kwarteng, prior to their forced exit, as the job of a pair of crackpots and deviants who acted on their own.
Their first contention, after her inglorious resignation within 45 days, is that the setback has nothing to do with the philosophy of neoliberalism per se but the isolated act of two individuals who had gone bonkers. The stock markets said no, the IMF said no, and even the US Treasury Secretary advised caution. And the above-mentioned institutions, even in one’s wildest imagination, cannot be stated to hold a brief for the Keynesian doctrine. Their second contention is that neoliberalism calls for tax cuts only if alternative modes of revenue generation are guaranteed.
On the contrary, adherents of neoliberalism have consistently held the view that the budget deficit resulting from tax cuts on the rich can only be balanced by an increase in indirect taxes, which affects all citizens more or less equally or cuts in welfare expenditure that support the unemployed and senior citizens, the weakening – if not disbanding – of the NHS and various other measures that benefit the “undeserving” poor. There was ample evidence of support for Truss and Kwarteng among rabid Tory supporters and of course the usual culprits in the media – both in the UK and the USA.
Allister Heath, in his editorial for the Telegraph, was euphoric. This was before the crisis erupted. “This is the best Budget I have ever heard a British Chancellor deliver, by a massive margin. The tax cuts were so huge and bold, the language so extraordinary, that at times, listening to Kwasi Kwarteng, I had to pinch myself to make sure I wasn’t dreaming, that I hadn’t been transported to a distant land that actually believed in the economics of Milton Friedman and FA Hayek. …The neo-Brownite consensus of the past 20 years, the egalitarian, redistributionist obsession, the technocratic centrism, the genuflections at the altar of a bogus class war, the spreadsheet-wielding socialists: all were blown to smithereens by Kwarteng’s stunning neo-Reaganite peroration. …All the taboos have been defiled: the fracking ban, the performative 45pc tax rate, the malfunctioning bonus cap, the previous gang’s nihilistic corporation tax and national insurance raids.
The basic rate of income tax is being cut, as is stamp duty, that dumbest of levies. …Reforms of this order of magnitude should really have happened after the referendum in 2016, or after Boris Johnson became Prime Minister in 2019… Truss has a fighting chance to save Britain, and her party, from oblivion…” The Wall Street Journal‘s editorial was equally hopeful and celebratory. “…This is a pro-growth agenda that is very different from the tax-and-spend Keynesianism that has dominated the West’s economic policies for nearly two decades. …Mr. Kwarteng axed the 2.5-percentage point increase in the payroll tax imposed by former Prime Minister Boris Johnson and has cancelled a planned increase in the corporate income tax rate to 26% from 19%. …Kwarteng was also surprised by eliminating the 45% tax rate on incomes above £150,000.
The top marginal rate now will be 40%… A frequent complaint is that there’s no evidence that tax cuts for corporations or higher earners will boost demand. Maybe not, but that’s also not the point. Britain doesn’t need a Keynesian demand-side stimulus. It needs the supply-side jolt Ms. Truss is trying to deliver by changing incentives to work and invest. … Ms. Truss’s plan is different. She’s not throwing around money to fund consumption. She’s using the tax code to spur production….Britain has become the most important economic experiment in the developed world because Ms. Truss is the only leader willing to abandon a stale Keynesian policy consensus that has produced stagflation everywhere.”
Keynes is evidently the main target, with three references. He accepts that the tax cuts may not boost demand. So what? Keynesian theories have to be dumped lock, stock and barrel. For the heck of it obviously, because there is no evidence as yet to suggest that supply-side economics triggers demand in the economy. Supply-side economics fails because no industrialist is willing to invest when there is slack demand in the economy.
In the meantime, spending by the rich on luxury properties and in the secondary markets (the stock markets), gold and diamond ingots, esoteric vacations, private yachts and jets increase but does little to spur demand because by its very nature the labour component of such types of consumption is minimal. The reaction of the IMF refusing to go along with Truss puzzled Yanis Varoufakis, Finance Minister of Greece during their economic crisis a few years back, and an economist in his own right. Writing for the Atlantic, he says “For the IMF to criticize the government of a major Western economy was a little like the janitor scolding the landlord for putting the building’s assessed value at risk. That sense of a reversal of the usual order of things was all the sharper because, lest we forget, it was Britain’s Tories, under Margaret Thatcher’s steely leadership, who wrote the book on fiscal probity as the bedrock of neoliberalism.
The IMF spent more than four decades inflicting that orthodoxy upon hapless governments the world over.” His succinct analysis of the root cause for this sudden about-turn sounds highly probable, although the real truth will perhaps never be known. “In the face of this mounting transatlantic storm, the IMF’s decision to step in was unsurprising. The only remaining puzzle is why the IMF pointed to the inequality-causing effects of the Truss government’s tax cuts for the ultra-rich. Although the force of circumstance has changed something significant, I doubt this spells the demise of the IMF’s neoliberal instincts. Much more likely is this: The IMF realized that the post-2008 inequality-generating policies it helped enforce have plunged North Atlantic capitalism into a state of gilded stagnation that is now unstable, and it feared that the volatility vortex would worsen on news of measures that would create even greater inequality.
If the IMF has begun to dislike inequality, it is only because the IMF sees inequality as a proxy for systemic instability.” Why did Truss have to resign? She cares two hoots about what the IMF says and she knew that the stock markets behaved the way they did because they did not wish to disturb the state of equilibrium but would recoil within a reasonable span, as they always do. What is as clear as daylight is that she was compelled to do so because of her Party whose prospects of re-election now hang by a slender thread, expected to snap in a year’s time (acceptance levels of the Labour Party have soared to 54 per cent by latest reports) and they were not willing to accelerate the downfall.
The British people are a lot wiser today than in the days of Thatcherism. Of course, Tories with grass root contacts realized this, not the ones who live in ivory towers. Perhaps Rishi Sunak belongs to the former category. Memories of the Thatcher days are still vivid among those who lived through a dark chapter of British history. What does Thatcherism epitomize? A small State, gradual disbanding of welfare, tight control over fiscal deficits as well as money supply, privatisation of public utilities, constraints on the labour movement, and rise in inequalities.
What were the effects of her policies on the economy and the social fabric? 3.3 million unemployed in 1984, compared to 1.5 million when she acquired power, the highest childhood-poverty rate in Europe, (when she resigned in 1990 it had reached a peak of 28 per cent) and a spurt in inequalities as reflected in the Gini coefficient climbing to 0.34 in 1990 from 0.25 in 1979. Her exit from power (once again ousted by the Conservative Party) was equally ignominious. In her biopic, we find her as an isolated figure – buying bread and eggs at a supermarket, barely acknowledged by the bystanders and shoppers. Although Thatcher was discredited as an individual, traces of her economic theory remain even now.
Labour moved to the Centre under Blair as did the Conservatives, leading to what is commonly referred to as the “Post-Thatcherite consensus”. It did little to ameliorate the conditions of the poor but worked. In 2013, it was reported that 1 million individuals were forced to avail of the Food Bank at some point or the other during the course of the year. A huge regional gap emerged between the formerly industrialized north and the trading south. Welfare provisions were regulated under the guise of “Welfare Reform”. In 2014, the number of unemployed was reported as high as 1 million.
Wage levels remained stagnant, partly due to high unemployment and partly due to the weakening of the trade union movement. Despite the obvious inequities and inadequacies of the system, there exists today a state of equilibrium, although it is not the happiest situation. The masses are unwilling to upset the apple cart as they fear the alternatives could be scarier.
This is why Jeremy Corbin was defeated. Nonetheless, the Iron Lady held on to power for 11 years and won three elections. Her legacy still lasts in a diluted form as one of the poles of what dialecticians would describe as a “unity of opposites”. The truss lasted just for 45 days – it only shows that the winds of change are palpable. As Marx famously stated: “History repeats itself, first as tragedy, second as farce.”