by UnHerd Staff
Monday, 5
September 2022
Seen Elsewhere
13:38

Anatole Kaletsky: Trussonomics might just work

Perhaps the conventional economists are wrong?
by UnHerd Staff
The Tories’ newly anointed leader. Credit: Getty

Liz Truss may have only been Tory party leader for under an hour, but her economic programme has been declared as good as dead. On the Left, she has been criticised of ‘fantasy economics’ that fail to help the poorest cope by focusing relief on the richest, while on the Right, sound-money fiscal conservatives have lined up to criticise the new PM of being irresponsibly profligate, with her plans to borrow for tax cuts during an inflation spike. Even her supporters admit that her plans could ‘create havoc’ for the UK.

So where does this leave our soon-to-be PM? Without so much as a cabinet appointed, it would appear that her agenda, which includes cancelling the national insurance rise, removing a planned increase in corporation tax and scrapping green levies, is only popular with the Right-wing of the Tory grassroots. 

Step forward, Anatole Kaletsky. The veteran economist and commentator, ex Times, Financial Times and Economist, writes for his research company Gavekal that Trussonomics just might work. Although at pains to emphasise that he personally thinks it is more likely to fail, he concedes that we are in unconventional times and that the Truss’ Keynesian experiment with fiscal expansion and monetary contraction could plausibly succeed. It all depends on what the root cause of the current inflation really is:

The old monetarist doctrine that inflation is “always and everywhere a monetary phenomenon,” caused simply by central banks printing too much money, has been convincingly refuted by experience, first in Japan from 1990 onwards, and then in the world as a whole since 2009.

Alternative theories that inflation is caused by low unemployment or excessive government borrowing or spending are even more dubious. Inflation has many possible causes, which differ widely depending on social, economic and technological conditions in different countries at different times.

It is therefore possible, although not likely, that inflation may be successfully reduced by the combination of policies promised by Truss: imposing price controls on energy and some other essentials, cutting real wages by breaking strikes and tightening anti-union legislation, pressing the Bank of England to tighten monetary policy, and then using tax cuts or targeted public spending to support politically-favored business sectors and social groups.

It is also possible, and rather more likely, that an advanced economy such as the UK can operate quite well with substantially higher inflation than the conventional 2% target. And it is entirely probable that running large public deficits, instead of sticking to austere fiscal targets, will have no discernible effect on either inflation or interest rates over any politically relevant timescale, especially if declining real wages keep consumption subdued.

If some or all of these statements turn out to be true, then Truss’s unorthodox economics may manage to avert the deep recession that almost everyone in the UK now sees as inevitable—and do it without creating a disastrous inflationary spiral. 

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John Riordan
John Riordan
1 month ago

The question of whether it might work seems, to me, to be of less importance than why a person would want it to work – at least as stated above. The one thing that never seems admitted about plans to control inflation is that if you are reduced to achieving inflation control by suppressing consumer demand through wage compression, you’ve already lost the argument.

In much the same way, you can cut off your own head to cure a headache, but it would be a pretty stupid and pointless way to go about it.

However that’s not how I’m reading Liz Truss’s plans – not based upon her own version of them. She is focussed upon growth through productivity improvements, and while that has always been a difficult trick to pull off, it is decidedly different to forcibly reducing people’s incomes so that inflation stays under control.

Peter B
Peter B
1 month ago
Reply to  John Riordan

I just cannot follow your argument here.
How would lowering taxes on people cause “wage compression” ?
How would lower inflation cause “wage compression” ? Inflation is a direct tax on the value of earnings.
If I understood Liz Truss’ plan correctly, it is about lowering direct taxes now and loading up the national credit card for our descendants to deal with later. Please do not assume I am a fan of this … . But once again, I do not see how this reduces disposable income today.
Certainly, reverting to a more sensible level of interest rates (a good, but painful thing in my view) would reduce disposable incomes. But that is not “suppressing wages”.
Furthermore, what is wrong about lowering consumer demand at times ? It’s perfectly arguable that the situation we are in is the result of almost three decades of excessive consumer spending and debt and that reverting to the historical mean would be a sensible thing to do now.
We have been living beyond our means (as has most of the rest of the world) for 20 or 30 years. It is time to start paying our own way again and not stealing from our children. If that means a recession (and it probably does), so be it.
There is absolutely no reason why improving productivity in the UK should be difficult. The fact that we’ve done poorly here for around two decades just shows that we have a lot of catching up to do. First off, there’s a mass of unproductive overhead that’s been added during this period – we could immediately bin all the unproductive “equalities” stuff which is not only a tax on productive activities, but also ties up people who might be doing something productive. Then chop the university sector down to a sensible size (lose at least 30% in the next few years as a start). And get more emphasis on useful degrees. Remove the need for “degrees” where they really are not needed. There is just so much low hanging fruit here. The only problem is finding someone with the guts to get on and do the job. In many sectors Britain is world leading. We know what needs to be done.

Nicky Samengo-Turner
Nicky Samengo-Turner
1 month ago
Reply to  Peter B

Do you understand how bond markets work? I suspect not…

Peter B
Peter B
27 days ago

Please do explain how and why that is relevant here.

John Riordan
John Riordan
29 days ago
Reply to  Peter B

You are unable to follow my argument I’m guessing because you haven’t spotted that I’m taking issue with what I believe to be a misrepresentation of Liz Truss’s position, or at least a red-herring relating to it.

The point is that one of the standard approaches to inflation control has in the past been to introduce policies that confiscate spending power. One such policy is raising taxes, another example is raising interest rates. It is a brute force approach that always involves reducing people’s living standards. However, that is not what Liz Truss is planning to do, and why I thought it worth remarking upon.

Last edited 29 days ago by John Riordan
Peter B
Peter B
27 days ago
Reply to  John Riordan

Thanks, I see a bit better.
But still disagree with your apparent point that it is “wrong” to reduce real disposable income for a period (rather than wages).
There is no easy way to fight inflation and we should not try to con ourselves that there is. The free lunch era is over. Personally, I think that’s a good thing as it’ds the only ruote back to economic sanity.

Alan Tonkyn
Alan Tonkyn
29 days ago
Reply to  Peter B

YES! I agree with all your key points here, especially ‘We have been living beyond our means….for 20 or 30 years.’ So, ‘yes’ to more sensible interest rates, to encourage saving and reduce irresponsible consumer spending. ‘Yes’ to improving our lamentable productivity rates to make UK-produced goods and services more competitive. ‘Yes’ to getting rid of productivity-sapping red tape and nonsense. ‘Yes’ to chopping down the size of the university sector, and replacing much of it with high-level and respected technical and vocational education. And, in addition, we need to look at how to make health service provision and old age care more sustainable by a sensitive transition to different funding models that will not leave the poorest unprotected, but which engender a proper sense of our responsibilities for our own health and welfare.

Katharine Eyre
Katharine Eyre
1 month ago

If some or all of these statements turn out to be true…”
Pardon me – I am not an economist, but that seems like a very big “if”. Also carrying the caveat of “may”, which should have a flashing red light on the top of it.
IF some or all of those statements turn out to be wrong – which seems to be the likely scenario – what does it mean? Fighting inflation the Erdogan way?

Last edited 1 month ago by Katharine Eyre
Aaron James
Aaron James
1 month ago

What a crazy article. May as well say any vu-du weirdness may bring down inflation, so let’s try that.

If the writer is saying just lower wages will cure inflation – well cart and horse really. Lowing wages will raise the ‘Real Price’ of goods. Wage Deflation to cure Good’s price Inflation? WoW, genius.

The old monetarist doctrine that inflation is “always and everywhere a monetary phenomenon,” caused simply by central banks printing too much money, has been convincingly refuted by experience,”

No it hasn’t. Inflation IS the increase of money supply. You people have to watch your Peter Schiff, and not this guy pulling wild theories out of the air. What next? MMT?

Inflation is a stealth TAX. The government prints vast amounts of real money – cash, BUT does not make any more stuff—– (QE is creating Bank Reserves, not the same) so instead of 1$ chasing one bag of rice, you doubled the cash, and now 2$ chases one bag of rice. This means your savings, real wages, pensions, all decrease in real value – AND so does National Debt in real terms. The government erased the value of its debt – BY DECREASING the value of your assets. It is a Tax, it is paid by plundering your savings and wage.

OK you crazy MMTers – why not print everyone $100,000,000? Then everyone would be rich – right? Everyone can have a Ferrari? Right? or does the Ferrari price Inflate because you forgot to print 60 million Ferraries at the same time?

Sonny Ramadhin
Sonny Ramadhin
1 month ago

The old monetarist doctrine that inflation is “always and everywhere a monetary phenomenon,” caused simply by central banks printing too much money, has been convincingly refuted by experience, first in Japan from 1990 onwards, and then in the world as a whole since 2009.”
Thousands of years of history refuted convincingly by modern banking and QE, where the invented money never filtered through to the general populace. Certainly.
I would not say that printing money always causes inflation but it can be observed that inflation has always followed an increase in the amount of circulating currency.
Such when the UK government piped money into workers bank accounts in the summer of 2020, I chose to invest most of my savings in goods. The economists came out to deny inflation was coming and say we had moved past monetarism. Then inflation came and it was a black swan, who could have predicted a war in Europe.
Inflation began rising in the US in early 2021, a year before Russia’s invasion but amidst a 40% increase in the M2 money supply.
It may be feasible to control inflation by preventing a wage spiral but what would it mean to operate an economy “quite well” with inflation significantly above 2%? An egregious hidden tax, no more, no less.
Over any politically relevant timescale”
It never is, the cost of debt is payable by your children once the politicians of the day have been long forgotten.

Mary Thomas
Mary Thomas
1 month ago
Reply to  Sonny Ramadhin

Throughout my lifetime I have been paying off debt for this country. Firstly the debt incurred by buying and freeing all slaves owned on British territory overseas cost 40% of the entire GDP of the time, and secondly the debt borrowed for the country to survive and fight WWII.

It’s hard to believe but it was only in 2015 that, according to the Treasury, British taxpayers finished ‘paying off’ the debt which the British government incurred in order to compensate British slave owners in 1835 because of the abolition of slavery.
Jun 9, 2020
https://taxjustice.net › 2020/06/09
Britain’s Slave Owner Compensation Loan,

– and the second off in 2006.
It hasn’t been the end of the world for me, born in 1947. It won’t be the end of the world for my descendants. Things change.

Last edited 1 month ago by Mary Thomas
Nicky Samengo-Turner
Nicky Samengo-Turner
1 month ago
Reply to  Mary Thomas

so you have your own bond fund? You will have made a lot of money out of it, assuming you got your hedging right?

Adam Bartlett
Adam Bartlett
1 month ago

Most welcome to see this optimistic take. I’ve long considered Kaletsky one of the most honest & reliable econ commmentors. E.g. I recall looking back on his 2010 “Capitalism 4” book in 2012 & thinking ‘Yup, much did turn out like he said, & wasn’t obvious at the time’ – and I dont think that about many.

michael harris
michael harris
1 month ago

Confusion about whether monetary expansion does or does not cause inflation is caused by the wildly variable time lags in the onset of nemesis.

Nicky Samengo-Turner
Nicky Samengo-Turner
1 month ago

Yet again on this medium, blinding ignorance about economics, and capital markets! Do these people think that governments borrow on some imaginary credit card or via some imaginary bank loan?…. More extraordinary is how people will express opinions about a subject that they clearly have not a scintilla of knowledge about, and have not or cannot research? The great thing about free speech is as to how it puts ignorance out in the open?!

Diane Tasker
Diane Tasker
23 days ago

Free Speech: ‘the right to express any opinions without censorship or restraint.’
Oxford Dictionary

Such petty sniping at those who YOU deem to be ignorant isn’t necessary or useful in a free speech forum – which doesn’t require a degree in economics to participate.