When Ronald Reagan ran for president with an economic plan heavily accented by tax cuts, he was ridiculed. By both sides. It was accepted wisdom among Democrats and Republicans that reducing the penalty placed on work would increase inflationary pressures that were already high.
Thankfully Reagan combined learnedness with common sense in ways rare for a politician. As such, he expertly put to bed the absurdity of tax cuts as an inflation instigator during a debate with his Democratic opponent for president, Jimmy Carter. Lightly paraphrasing Reagan, he asked Carter why it was inflationary to let people keep more of the money they earned, but not inflationary for government to take it and spend it. Reagan’s quip proved devastating to Carter. He went on to win the 1980 election in landslide fashion.
Reagan’s takedown of Carter took place over 40 years ago. During that time, it seems basic economic understanding has reverted to the debased thinking that defined the slow-growth 1970s. Then as now, inflation’s causes aren’t understood. This sad reality has pundits on the Left and Right critiquing Liz Truss’s tax cut proposals in the way that Reagan’s were in 1980. History repeats itself, or rhymes, or something like that.
Washington Post columnist Catherine Rampell is unsurprisingly less than fond of Truss’s proposal to reduce the top British income tax rate to 40% from 45% in concert with erasing a planned increase in the corporate tax rate. See above to understand why. In Rampell’s words, “when an economy is overheating and demand exceeds constrained supply, giving the public even more cash to spend will almost certainly make inflation worse.” To say Rampell’s stance is disappointing is to say it’s surprising. It’s not. Rampell has a flock to feed, and one eager to be told what it wants to hear about the alleged horrors of tax cuts.
Notable here is that it’s not just Rampell who is critical of the Truss tax proposal. At the Post, disdain is bipartisan. Rampell’s fellow columnist Megan McArdle caucuses with the libertarian or Republican side, but her criticism of tax cuts mirrors Rampell’s. In McArdle’s words, the “greater risk” of the Truss tax cuts “is that by pumping money into the economy, the government will fuel further inflation.” Somewhere up there Gerald Ford is smiling, “W.I.N.” pin in hand.
Really, what do Rampell and McArdle think will happen to the money if Her Majesty’s Revenue and Customs takes more of it? Will politicians sit on it? The question is rhetorical. Glossed over by each columnist is not just that demand vs. supply have nothing to do with inflation, but that arrogating the fruits of production to government doesn’t decrease spending as much as it increases the role of politicians on the matter of who will get to direct the fruits of production. Put rather simply, Truss’s economic plan would laudably aim to shrink the amount of resources allocated by politicians in politicized fashion so that the actual producers of those resources have more control over them, and direct them in market-driven ways. That Rampell favors politicians and her beloved “experts” isn’t surprising. As for McArdle, her fellow libertarians owe her an intervention….
What about the market’s reaction to the Truss plan? Pundit analysis suggested negative, but then it’s possible the sell-off had to do with it not being bold enough. Figure that Truss has to get her proposal passed, which means that she’ll get less than what she’s asking for. Logic dictates asking for more with compromise on a bigger ask the goal.
Pundits added that yields on British government debt rose to reflect revenue loss from the tax cuts, but the view isn’t serious. Figure that in 1815, Great Britain had debt that was 260% of GDP, and without an inflationary breakout, so to pretend that any revenue loss from these cuts will result in a long-term weaker pound is hard to take seriously.
Crucial here is that a stable, non-inflationary currency is a choice, and one that the Chancellor of the Exchequer could achieve between breakfast and lunch through signaling to the markets. If Kwasi Kwarteng wants to see how, he could consult Nigel Lawson’s (Exchequer under Thatcher) The View From No. 11 for knowledge of how Lawson stabilized the pound in the late ‘80s. Rampell and McArdle both struggle with an understanding of inflation. Horrid as government spending is, it’s not an instigator of the latter. Neither do supply/demand imbalances that are logically matched with commensurate demand/supply imbalances. Inflation is a currency phenomenon, period.
Which brings us to other news that dropped in concert with Truss’s growth plan. Rampell and McArdle’s Post was chock full of articles speculating on whether or not Vladimir Putin will go nuclear, along with threats from the Biden administration about the “catastrophic consequences” of same. One would guess this news relevant to a country like Great Britain that shares a continent with Russia. Surprise moves markets, as do probabilities. Please think about this in terms of Truss’s plan. To pretend it surprised investors is hard to countenance. It’s quite simply hard to imagine that what was expected moved markets. Lest readers forget, markets around the world fell hard last Friday. The guess here is ongoing uncertainty about Putin’s intentions loomed large.
In other words, there’s nothing much to the criticism of Liz Truss and her economic proposal. How could reductions in the tax burden be harmful? That Rampell is aghast is as predictable as the plan Truss brought forth. As for McArdle, she might re-acquaint herself with Henry Hazlitt. He was rightly clear that in a world full of the poor, sick, and underemployed, there’s never too much capital. Never.