Sunday 5 February 2023

The Delusion is Strong with This One

In a short that has done the Twitter rounds, a hypothetical beggar asks someone if they have a spare tenner. "Yes", replies our good Samaritan. They take the money out of the wallet ... and runs to the nearest mansion to post it through the front door, because the best way to help the poor and destitute is by giving the rich more money. In her 4,000 word essay, Liz Truss argues that trickle down is one of the "key arguments" forgotten by the press and her party as economics have marched ever leftwards since 2010.

What to make of this extraordinary reinsertion into public debate when she should still be enjoying a well-deserved period of silence? To demonstrate the absurdity of Truss's "return", imagine if Thatcher had penned a long piece 100 days after leaving office with a low key attack on John Major's abolition of the Poll Tax. She would not be given the political time of day by anyone, thanks to the mess she bequeathed her successor, and her going into print would have been regarded as ill-advised, if not outright deranged. But as David Gauke wryly observes, fears Truss's bruising contact with political realities destroyed her sense of self-confidence are unfounded. The delusion is strong with this one.

For Truss, there are two sets of actors to blame - the economic blob ensconced in the Treasury, civil service (the "left wing" rendering of the now famous headline is the Telegraph's doing, not hers), and in the international institutions; and the Tory party itself. Or, to be more accurate, those who removed Boris Johnson then did the same to her. As far as she's concerned, her diagnosis of the situation was sound and the prescription would have worked, if it wasn't for these pesky kids. Let's remind ourselves of the analysis Truss put forward during the Tory leadership contest: that Britain needs to grow the economy (outstanding insight!) and this requires cancelling the scheduled rise in corporation tax and cutting the increase in National Insurance introduced by her then opponent and now Prime Minister. After refusing to be drawn on what to do about energy price inflation, once in office she "borrowed" the freeze from the opposition parties, but Tories are going to Tory and made sure no energy giants were harmed as they received a hefty bung from the state. After the period of official mourning for the Queen, Kwasi Kwarteng presented their joint budgetary statement and announced a bunch of unfunded tax cuts, including the abolition of the 45p rate.

Truss usefully reminds us that there was substantial elite support for her plan. She singles out Kitty Ussher, Gordon Brown's former treasury bod who, shilling these days for the Institute of Directors, declared the mini-budget "a good news day for British business". The director general of the CBI, Tony Danker, was effusive with praise, saying it was a "turning point for the economy". Truss neglected to mention her approach had firm fans among the press too. The Telegraph, in its role as a semi-independent internal Tory bulletin, wrote that the "fiscal event" was "unashamedly putting wealth-creating enterprise back at centre stage". The Times, with a foot in political realities, nevertheless dubbed it a "gamble" on "boosting growth at all costs". Even as the wheels were coming off, The Sun argued that she was "jump-starting our stagnant economy" and called on readers to ignore the panic.

Given the effusive praise, how could it all go wrong? Truss almost treads into tin foil hat territory. She discusses the defeatist attitude in the Treasury. As someone who was there for two years, she complains about their "pessimism and scepticism", how monetary policy was sacrosanct, and everything was subordinated to an imagined post-Brexit trade deal with the EU. They also committed the most grievous sin of viewing Brexit as a damage limitation exercise. With this enemy within, Truss sets out her conspiracy theory. Having looked into the causes of the spectacular collapse, she discovered the importance of Liability-Driven Investments and how dependent many pension funds were on them. With market volatility being as it was, her announcement of unfunded tax cuts (i.e. cancelling corporation tax, National Insurance, and the 45p top rate) saw Sterling crash in value and therefore the value of government bonds, which pensions held and used as loan guarantees. With the bottom falling out of the floor of their assets, funds would be forced to sell to meet their obligations as loans were called in, leading to a spiral of collapse. The Bank of England stepped in to stop the crisis. Truss, who reportedly spent her time at the Treasury challenging civil servants to do sums on an abacus was obviously too busy to learn about how state finances and the fiscal wellbeing of the core Tory support were closely intertwined. Naturally, she was blameless: "At no point during any of the preparations for the mini-Budget had any concerns about liability-driven investments and the risk they posed to bond markets been mentioned at all to me ...". Perhaps Truss would have been warned had she not sacked Tom Scholar, the Treasury's most senior official. The subsequent carnage on the markets was volatility already baked into the system, she claims. Where she failed was not explaining things properly because of her lack of communications finesse.

Truss goes on to rant about the "lefty" Office for Budget Responsibility, forgetting it was set up by George Osborne to discipline government as a short-term gimmick to reinforce the shrink-the-deficit message. Apparently it provided a straitjacket that constricted Treasury and policy maker thinking ... along broadly Keynesian lines. The critique of her position by well known enforcers of social democratic orthodoxy, the IMF, were "politically motivated" - a point Truss sadly does not expand on. And Joe Biden's comments were all in service of an international attempt to harmonise tax regimes between G7 countries. Which just goes to show Truss's plan amounted to being a tax haven for capital fleeing from other advanced states. Therefore, she complains, her plan never had the chance to succeed. On what would be the perfect circumstances for her success, she does not say.

Truss paid the political price. When interest rates jumped up, the Tories very definitely lost the mortgage holder constituency. But also, it knocked on and affected the key Tory landlord base, businesses were hobbled by rising rates on bank loans, and added inflation put up the costs of commercial activity independently of energy prices. As usual, working age people were hit the hardest but for once the cost of Truss's efforts at "unashamedly putting wealth-creating enterprise" at the centre of politics found businesses big and small out of pocket. Some people did very well, but the number of Truss-supporting hedge fund managers are but a tiny sliver of the capitalist class.

The essay shows a depth of delusion to a degree seldom seen among someone who, briefly, was in the front rank of politics. With a proper comeback forever off the cards, Truss believes she can still steer things. Her prospectus of hard class politics makes for economic drivel, but where we see distended drool the Tory faithful identify nectar which they can't but lap up. Sunak's briefcase Toryism isn't bothering the polls, nor does its steady-as-she-goes excite much interest. As unreasonable as Truss is, she has identified that for her party to turn things around it does need to do something eye-catching. Confining oneself to boring, technocratic-sounding pledges won't cut it. Truss is hoping she can use her leverage on the backbenches to pressure Sunak onto the victorious path. And there's space for it now Johnson appears more interested in making money than doing his job.

To that extent, this is welcome. Truss's "return" creates new axes for the Tory party to splinter around, with more room for bad tempered tantrums, toy throwing, and playground-style bust ups. Having the former Prime Minister who crashed the economy treated as a serious figure Tories should be listening to is manna from heaven for Keir Starmer. Labour could not have asked for a more favourable scenario. The Tory leadership debates amply demonstrated Truss was not suitable - the signs were plain to see. But now, through her, the Tories are demonstrating their tenuous grip on political realities. Just as Truss made our present crisis worse than it should have been, there's every chance her continuing influence could ensure the Tory defeat, when it comes, is heavier than it might otherwise be.

Image Credit


Blissex said...

«Or, to be more accurate, those who removed Boris Johnson then did the same to her.»

Totally realistic: the tory press does not do a vicious campaign of personal attacks against two Conservatives PMs by "mistake".

«As far as she's concerned, her diagnosis of the situation was sound and the prescription would have worked»

And here I can understand one additional reason why she was thrown under the bus by the "whig" faction of The Establishment: "trickle down" and "free markets" are for them just silly propaganda to fool the gullible masses, but they know very well how silly they are, and it scared "The Establishment" that Truss seemed to be earnest in believing in them. She might not have bailed out the LDI speculators because of an earnest belief in the "free markets" and "minimal state intervention", for example.

«The subsequent carnage on the markets was volatility already baked into the system, she claims.»

That's indeed quite realistic. The system is utterly dependent on continuing support by the BoE providing massive amounts of very cheap debt to "friends of friends", for as long as that can last. So the "deep state" main principle is "don't make waves", and she did make a very small wave. Here is official confirmation:>
«UK financial crisis
Andrew Bailey: I ‘would never’ stage a coup»

«The critique of her position by well known enforcers of social democratic orthodoxy, the IMF, were "politically motivated" - a point Truss sadly does not expand on [...] Sunak's briefcase Toryism»

It is Sunak's briefcase Conservativism of the "whig" (with tory vote pandering) variety, aligned with the "whig" IMF consensus. It is unfortunate that "Tory" (upper case "T") is used as a synonym for "Conservative", because the Conservatives are mostly "whigs" (most of the leading figures, while most the base is "tory").

However Truss is right in one respect: Sunak is too left wing for the Conservatives, and he should be exchanged for Starmer. Smarmy Sunak is a much better fit for New New Labour, and ultra-brexiter, hard-authoritarian, plastic-patriotic Starmer is a much better fit for UKIP, oops I mean the Conservatives :-).

Blissex said...

«The subsequent carnage on the markets was volatility already baked into the system, she claims.»

A realistic piece by the FT makes clear how right she is:
«First, there is a world of difference between Liability Driven Investment and “Leveraged LDI” — and it is the latter, not plain LDI, which caused the problems.
LDI is just jargon for matching pension assets and liabilities, exactly what Boots pioneered 20 years ago. … But with “Leveraged LDI”, a pension scheme is effectively borrowing to buy assets which don’t match liabilities — equities, PE, hedge funds, property — betting their value will increase more than the value of liabilities. The Bank of England Deputy Governor, Sam Woods, recently told the Treasury select committee:

Q311: “[T]here is a bit of having your cake and eating it: you keep the returns from the higher returning assets you have and you leverage for the gilts part that you need for matching purposes.”

With Andrew Bailey, the Bank Governor, adding:

Q314: “[W]hat started as a means of managing asset liability positions became a means of actually increasing the return to the fund … that is the leverage point.”

First things first: unlike LDI — hedging — “Leveraged LDI” is speculation, increasing risk for members, the sponsor, the PPF, and the whole financial system (see my earlier Alphaville on BT’s Leveraged LDI). Second, leverage was hidden from members, shareholders, and bondholders, because accounting requirements are poor — pension schemes and companies don’t have to disclose details of their Leveraged LDI.»

The aim seems to me to have been that placing huge bets on the markets would result in big bonuses for the bettors if that worked (plus big fee income for the mates of the bettors in the City), and a bailout if it did not work. There was a small risk that "true believers" Truss and Kwarteng might not have bothered with the bailout, so they had to go, plus they were kippers like Johnson. Briefcase politicians are pragmatists, not ideological:>
«“I don’t think in ideological terms. I never have,” Obama said, continuing on the healthcare theme.»
«Starmer on the Andrew Marr show. He was asked what had happened to the Ten Pledges. The answer, “Look, I’m a pragmatist, not an ideologue.”»