Liz Truss has announced her resignation after only a few weeks as Britain’s prime minister. Truss’ premiership has been on life support since the announcement of her mini-budget last month spooked the currency and bond markets. Truss sacrificed her finance minister, the former chancellor of the exchequer Kwasi Kwarteng, in order to delay her own departure, but it barely slowed down the inevitable. Once her successor is selected and in office before the end of the month, Truss will be left as the equivalent of a political trivia question: the shortest-serving British prime minister who left office alive.
It is perhaps ironic that a free-market prime minister and chancellor duo like Truss and Kwarteng, who entered government so sure of their own economic policy, would be so rapidly dethroned by the markets.
But in practice, this is not entirely surprising. People who supported Truss when she challenged Rishi Sunak, a more statist and orthodox candidate for the Conservative leadership, did so guardedly and with barely hidden despair.
They believed then—and still believe now – that Britain’s economy is so distorted, so broken, so dysfunctional in almost every way that radical change was the only possible route to a growing economy. Only a decisive break from orthodoxy could avoid a Britain in which a chaotic maelstrom of price increases and tax hikes occupies the next decade’s headlines. They simply bet on the wrong horse to do this.
Truss’ leadership campaign was haughty and, it now seems, unduly entitled. Once opinion polls of the Conservative party showed that Truss would win handily, her campaign team hunkered down in country houses to plot the future of the nation with a languid and almost regal air.
Their mistake was possibly in moving too fast—and in announcing the worst possible measures first. First, an enormous and open-ended commitment to pay the entire country’s energy bills (an inflationary measure if ever there was one), and then cuts to the income tax paid by the highest earners. Even to the most ardent devotees of the Laffer curve, the pace and arrogance of this latter move seemed cringe-inducing.
All of these were demand-side measures, more or less.
And yet it is the supply side of Britain’s great supply and demand graph that is almost irretrievably broken. Nothing can be built in the country because planning laws and zoning restrictions choke towns where there is eager demand for expansion. There can be no new towns near stifled cities like Glasgow and Cambridge because of ancient rules written for a country of 45 million people, rather than one of 70 million.
No new homes. No factories. No laboratory space. No solar and onshore wind farms. Politicians eagerly veto new developments in the hope that the few people who are watching them do so are rent-seeking property owners keen to safeguard the value of their vastly overinflated investments.
As in much of the world, Britain has suffered untold and largely hidden damage in the decade and a half since the 2008 financial crisis.
Britain has only had a base rate of interest over 6 percent for one month in this century. The era of normal interest rates came to an end in February 2000. From then on, the country has been suffused with cheap credit. It has hollowed out businesses, and it has indebted individuals to the tune of nine or ten times the average annual income to purchase one ordinary property.
Just as a recession shows up—and kills—those firms whose services are ultimately unnecessary, so too has a return to historically normal interest rates. As firms that have bobbed along on a tide of cheap money realize they lack the cash flow and day-to-day revenues to pay back interest on colossal loans, they begin to scream and wail. As individuals who have mortgaged themselves to death—because they were told for twenty years to borrow many times their annual income to buy a house—compute their new rates of repayment, more of them become mutinous and bitter.
And as sterling depreciates due to the release of the mini-budget in late September, a series of pension funds that had not hedged for this possibility cry out for amelioration. Shortly thereafter, the very Bank of England that has for two years refused to put up interest rates nearly fast and high enough decided it had no option but to put billions of pounds and decades of accumulated credibility on the line to stabilize the market in sterling and in gilts (government bonds).
Britain’s economy is more broken than Truss and Kwarteng realized. Any change to the low-interest rate, high-debt formula risks creating a mortgage crisis, according to the newspapers. And any decrease in Britain’s uncommonly generous state pension, which increases like clockwork—an ever-tightening ratchet whose payment takes up a higher proportion of government spending every year—will leave pensioners unacceptably poor.
Like a very elderly patient with a weak heart, Britain’s economy could withstand even less upheaval than the prime minister and chancellor had planned. After trying everything to cling on, the two of them had to go. Just as they could not buck the markets—no one in government ever can—they could not regain the markets’ trust.
But that does not make things easier. An increase in gilt yields makes borrowing more expensive. Thus, the new chancellor, Jeremy Hunt, has been brought in as a safe pair of hands to reassure the markets and impose ‘eye-watering’ cuts in public services to roll back Truss and Kwarteng’s expansionary fiscal policy.
Regardless, the state pension will continue increasing like a dangerous prototype airbag, squeezing the life out of the capacity of a state that must already make significant cuts.
Truss and Kwarteng never even laid out their plans to affect Britain’s supply side. That was the next stage, one they did not survive long enough to explain. Their radical supply-side experiment was over before they could do anything except stimulate demand—to little good effect.
This piece was originally published in The National Interest.