mein the 1970s, psychologist stanley milgram instructed his students to board the New York subways around the city, approach random members of the public, and ask for your seat without offering any justification. When the students returned, they reported that, surprisingly, most people were willing to give up their seats. The students also said, somewhat less surprisingly, that they found the experiment almost impossibly difficult to perform.
This was what is known as a “breaking experiment”, an attempt to understand the rules of social life by briefly and deliberately breaking them. Over the past month, Britain has witnessed an extraordinary experiment in breaking made to scale: What happens if a government acts without considering the financial markets? The results have been very illuminating, not only for what they tell us about the likely trajectory of Liz Truss’s leadership, but also for what they reveal about a host of other elites, pundits, and commentators who collectively define what counts as “sound” economics. “. politics.
The main takeaway from recent weeks is that no prime minister or chancellor can afford to ignore the views and sentiments of those who lend their money to the state. This is hardly surprising, given the lengths to which more orthodox politicians have gone over the years to acknowledge the supremacy of the bond markets, but it has been done graphically and quite grippingly before our eyes. No one could have predicted exactly how things would play out between September’s “mini-budget” and Kwasi Kwarteng’s humiliating policy U-turn and sacking three weeks later, but the fact that the markets ultimately won simply affirms the core assumptions. of the post-1970s era.
But take a closer look at the Truss-Kwarteng breakdown experiment, and several other details about our political and economic reality come to light regarding whose economic interests count and whose economic interests don’t; what types economic malfunctions are allowed and which are not. Making these judgments over the last four weeks has required some notable hypocrisy on the part of technocrats, rival politicians and former politicians, but that has not deterred them.
Consider an elite perspective on the Truss-Kwarteng “gap.” The International Monetary Fund scolded Britain for allowing its monetary policy and fiscal policy to drift in different directions. While the Bank of England has been trying to tackle inflation with interest rate hikes, the Kwarteng Treasury was guilty of contributing to inflation with tax cuts. Some “policy coherence” was strongly advised.
And yet, a conflict between monetary and fiscal policy was the core feature dismal decade following the 2008 financial crisis. While George Osborne starved local government, welfare and infrastructure projects of money, the Bank of England pumped unprecedented amounts of credit into the financial system to prevent a full depression. The combined effect was socially devastating (to some extent it affected Life expectancy) and financially lucrative, as asset values skyrocketed. Was that really “coherent”? Or did he just have the right priorities, from the IMF’s point of view?
Then consider the key mechanism through which Truss’s economic ravages directly fueled Tory party panic and another leadership crisis: skyrocketing mortgage costs, soon followed by falling house prices. Evidence from the last 30 years suggests that Conservative governments can weather various scandals and political disasters, but not the financial mismanagement that plagues homeowners. It is likely that he will prove it again.
But why is this? For those whose fixed-rate mortgages are ending and are going from an interest rate of 1.5% to 6%, the economic difficulties will be considerable. Some, no doubt, may have to move house. But the cost of living crisis was already biting Several months before Truss took power, while David Cameron’s government had left widespread misery in its wake that even drew criticism of Unicef and Oxfam. Osborne’s well-beingCap”, which prevented families with three or more children from receiving additional payments, added to the already growing child poverty, but was motivated by political interests, a cynical ploy to divide the Labor Party.
Clearly, everyone’s economic difficulties do not carry the same weight in the corridors of Westminster. The image of the responsible homeowner, governed by financial rectitude and traditional family values, occupies a sacred place in the imagination of politicians and newspaper editors. His suffering must be avoided at all political costs. If it was economic suffering itself that caused such unease in parliament, the last 12 years would have played out very differently. On some gross level, pundits and politicians can perhaps more easily empathize with the struggling mortgage holder because they own the property themselves.
Last week Osborne tweeted: “Given the pain that the financial turbulence is causing the real economy, it is not clear why anyone is interested in waiting another 18 days before the inevitable U-turn in the mini-budget.” In a moving moment of cross-party consensus, former Labor Treasury Secretary Ed Balls piped up: “I agree with George.” but it was George Osborne really weighing in on avoidable economic pain? An unfortunate consequence of the Truss-Kwarteng experiment is that Osborne is now treated as a voice of moderation and reason, rather than the man whose political decisions tore the country apart, leaving it desperately vulnerable to the pandemic that later devastated it. The appointment of Jeremy Hunt as chancellor was greeted as a victory for realism and common sense over the fantasies of the Brexiteer, but, as his immediate commitment to fiscal austerity demonstrated, this is the realism of the technocrat and the common sense of the bond trader. .
There is, however, a ray of hope contained in the Truss-Kwarteng gap. The market response to the mini-budget, and the subsequent reversal of early rumors of a U-turn, weren’t driven by any specific number. The problem was Kwarteng’s terrible Eton- and Brexit-fueled arrogance; his belief that he did not have to account for himself at all. His fatal mistake was behaving with the bond markets as Boris Johnson did with parliament and the law: as if his rules applied to everyone but him.
By the same token, it is plausible that a social democratic government program is financially viable, provided it is accompanied by a modicum of deference to markets and the conventional Treasury routines of costing and fiscal transparency. The point is not, as Osborne constantly told us, to reduce debt at all costs. The point is to be clear about the borrowing requirement it iswith as much clarity, foresight and humility as possible.
If anything good can come out of this mess, it’s that lesson. Learning it may even help us free ourselves from the hypocritical intimidation of technocrats and austerity merchants once and for all. In the meantime, we have yet to know what fiscal medicine Hunt will prescribe for a national economy that has already suffered greatly over the past 12 years.