Has “real” Trussonomics never been tried? A postmortem of the Truss/Kwarteng project
Over the past couple of years, I have written a lot about how socialists always disown every socialist project as soon as its failures become apparent, and then go on to claim that the project was never “really” socialist to begin with. The idea of socialism is pure, noble and flawless. It cannot fail. It cannot be refuted by real-world evidence. It can only be “badly implemented”, “distorted” or “misappropriated”.
In recent weeks, however, the rhetoric of “Yes, but… not like that!” has not come from socialists talking about Venezuela or Nicaragua, but from disgruntled free-marketeers talking about the ill-fated Truss/Kwarteng government.
Whenever this happens, inevitably, within a few minutes, my Twitter notifications fill up with comments like “Oooh, so what you guys are saying is, Trussism-Kwartengism wasn’t real free-market economics? Real free-market economics has never been tried? Hmmm, what does this remind me of? An idea for your next book there, eh, Herr Niemietz?”
Fair enough, I suppose! It would be a bit rich of me to complain about that. My work on socialism was, after all, was not just about socialism per se, but also, more broadly, about the lack of accountability in the world of ideas. If you argue that people should be held to account for the track record of the ideas they advocate, you cannot credibly complain when you find yourself at the receiving end of that.
And, yes, admittedly, in recent weeks, disgruntled free-marketeers really have sounded very much like Continuity-Corbynites. “Truss and Kwarteng had the right ideas, their plan was just terribly executed”; “Truss and Kwarteng were never given a chance, the entire media establishment immediately ganged up on them”; “Truss and Kwarteng were undermined by their own party at every step of the way” – we have heard this all before, just substitute “Corbyn” for “Truss”, and “McDonnell” for “Kwarteng”.
So I cannot blame people for making this comparison. But that does not mean that I have to accept it: I believe that this is a fundamental false equivalence, and I would like to explain why.
(I should, at this stage, make clear that the IEA has no corporate view, so I cannot speak for any of my colleagues or ex-colleagues, or people from other pro-market think tanks. Where I refer to what other people have said, I will specifically say so.)
Real-world examples vs “Just trust me, bro!”
Let’s start at a more general level.
Free-market economics is heavily empirical. This means that free-market economists would not make a claim like “real free-market economics has never been tried”, because such a claim would be completely at odds with everything they do. “Real” free-market economics has been tried many times. Free-market think tank publications almost always discuss real-world examples for the claims they are making. Browse these pages, and you will find literally hundreds of examples for this. This tendency is sometimes mocked by our opponents (see e.g. “Graph goes up means world more gooder”), because inevitably, all of the examples we point to are still imperfect – but that is the fundamental difference between us and them. Since we deal in real-world examples, we have to own those imperfections too. And since socialists don’t accept any real-world examples (apart from a few obscure, short-lived experiments, such as the Paris Commune or Revolutionary Catalonia), they can deal in beautiful illusions.
So the question was never whether “real” free-market economics has been tried. Of course it has. The question is merely whether what happened in Britain in September/October 2022 is a particularly good example of it.
Good idea, badly done?
It is easy to the blame the failure of a policy agenda on “bad implementation”. It is easy to claim that a failed policy agenda was merely a bad version of a fundamentally good idea.
However, it would be absurd to conclude from this that “bad implementation” or “bad versions” do not exist. It would be absurd to claim that policy agendas cannot be badly implemented, or that any version of an agenda is as good as any other.
There are plenty of policy agendas which have worked well in some versions and contexts, but not others. For example, in Russia and other parts of the former USSR, the transition from a socialist to a market economy was a disaster. It led to a drop in economic output, and an explosion of all sorts of social problems. However, that same transition worked far more smoothly in the Czech Republic, Slovakia, Poland, Hungary, Slovenia and the Baltic states, which are now prosperous democracies. The reform programmes were, on the face of it, similar, but the results were drastically different. So if you are a Russian market reformer, who argues that Russia mere adopted a bad version of a fundamentally good idea – you would be entirely correct. That would not be excuse-making.
When I wrote my Master’s thesis on pension systems ages ago, I found good versions and bad versions of both pay-as-you-go systems and prefunded systems. It was not immediately clear to me what explained the difference.
Years later when I wrote about “workfare” (i.e. conditional welfare) schemes, I found, again, good versions and bad versions. Finding out what made the good ones good, and the bad ones bad, took some digging.
Closer to home, John Major’s “internal market” reforms of the NHS were largely a failure. When Tony Blair tried a similar reform package just over a decade later, the results were a lot better. Major had the right idea, but he chose a bad version of it. Blair chose a better version of the same general idea, and succeeded. I could go on all day, but the point is that policy programmes really do come in good versions and bad versions. It is not always and everywhere a mere excuse to say that something was “just badly done”.
So how can we tell the difference between a bad policy, and a bad version of a good policy? More to the point, how can we tell the difference between the valid argument, and the cheap excuse?
There may not be a litmus test, but it helps if the person making such a claim can say exactly what was bad about this version, and what a “good version” would look like. My criticism of socialists is that they cannot do that:
“Despite the vehemence with which contemporary socialists reject comparisons with any variant of socialism that has so far been tried, they usually struggle to explain what exactly they would do differently. What is the difference between ‘real socialism’ and ‘unreal socialism’? […] This is where contemporary socialists usually become evasive and talk about lofty ambitions rather than tangible institutional characteristics.” (pp. 25-26)
Free-market critics of the Truss/Kwarteng project, on the other hand, can do that very easily:
Do the growth-boosting supply-side reforms in housing, energy and infrastructure first, and the tax cuts later. Even then, do not fund permanent tax cuts through additional borrowing. Cut spending by the same amount as you cut taxes, even if you believe that your tax cuts will eventually be self-funding. Request external, independent auditing and evaluations of every spending pledge and every fiscal change. Don’t make open-ended, untargeted spending commitments. Target support on those who need it most, and present an exit plan from the policy in advance.
You can agree with such a plan, or you can think that it is impractical, tone-deaf, and unrealistic. But you cannot deny that it is meaningfully different from what happened under the Truss/Kwarteng government.
Wise after the event?
One of my criticisms of socialists is that they typically enthusiastically endorse socialist projects as long as they are popular, and then disown them as soon as they fall out of favour, now pretending they never supported them in the first place:
“[T]here is a major flaw in the not-real-socialism narrative: the fact that it is usually only deployed after the event, that is, after a socialist experiment has already been widely discredited. […] [A]s long as a socialist experiment is in its prime, its socialist credentials are rarely in doubt. As long as socialism seems to work, it is always ‘real’ socialism. It is only when it fails, and when it becomes an embarrassment for the socialist cause, that it is retroactively recategorised as unreal.” (pp. 55-56)
Timing matters. Even if you have plausible reasons to distance yourself from a political project, it looks opportunistic and dishonest if you only discover those reasons after that project’s failure.
Are there not some obvious parallels here? Now that the Truss/Kwarteng project has failed, everyone claims to have been a sceptic all along. How is this different from John McDonnell suddenly discovering in 2018 that Venezuela was not a socialist country, despite having described it as “socialism in action” just a few years earlier?
But for this comparison to work, there would need to be a “before the event” and an “after the event”. Which there wasn’t, in this case. Because there was no event. The distinction does not work for a project which barely lasted for ten minutes.
The reason why I think it is fair to hold the collapse of Venezuela against the socialist Left is that they lionised the Chavez/Maduro project for at least eight years (pp. 232-240). At that stage, it was crystal clear to both critics and supporters what that project stood for. If you endorse a political project at such an advanced stage, that project becomes yours, and you own its failures.
But if a political project has barely gotten off the ground yet, and everything is still in flux, you cannot have more than a tentative initial impression of it. At this stage, you are still allowed to revise those impressions – provided you don’t delete your initial statements, and pretend that what you believe now is what you have believed right from the start.
Trussonomics vs free-market economics
But let’s talk about the specific policies, or rather, policy announcements, of the Truss/Kwarteng government, and about what exactly went wrong.
In a nutshell, the problem with the mini-budget was that it entailed huge and permanent increases in government borrowing at a time when markets were hyper-nervous. The IFS explained:
“The Government’s costing of the Energy Price Guarantee for households and non-domestic consumers – £60 billion over the next six months – means that borrowing this year is now on course to climb to £190 billion. At 7.5% of national income this would make it the third-highest peak in borrowing since the Second World War […]
By 2026-27 we now forecast that borrowing will be over £110 billion – 3.9% of GDP […]
[A]lmost £45 billion a year [in borrowing is due to] tax cuts”.
This combination of a higher debt-to-GDP ratio with a higher structural budget deficit triggered adverse market reactions. A different kind of government might have been able to get away with this politically; but if you style yourself as a market-friendly government, losing market confidence is the one thing you cannot get away with.
Where the government got the inspiration for those plans from, I don’t know, but they certainly did not get it from us, and this is neither hindsight bias nor retroactive disowning. On the day after the mini-budget, my colleague Chris Snowdon wrote:
“The energy price cap certainly wasn’t an IEA policy […] and in all my years hanging around the Westminster think tank scene, I don’t recall unfunded tax cuts being a central plank of free market thinking.”
On energy: a rough outline of the government’s plans was known before the mini-budget, and on that basis, we had already condemned those plans on 7 September and 8 September.
On deficit-funded tax cuts: for as long as I have been at the IEA, we have been accused by our opponents of being obsessively fiscally hawkish and alarmist about government borrowing, certainly not of being too relaxed about it. We have been accused of succumbing to “the household fallacy”, i.e. of naively believing that the government should balance its books, and live within its means, just like a private household (without understanding Keynesian fiscal multipliers).
While we have often advocated tax cuts, we have typically coupled this with calls for equivalent spending cuts.
The last decade’s most comprehensive IEA publication on fiscal policy was the book Sharper Axes, Lower Taxes, published in 2011. As it says on the tin, that book did make the case for major tax cuts. But the great bulk of the book is really about spending cuts. The tax cuts are almost an afterthought, or rather, they are the reward you get if and when the heavy lifting of spending cuts has been done.
In 2016, we published the book Taxation, Government Spending and Economic Growth, which also makes crystal-clear:
“One of the major objectives of this book is to examine the impact of taxation on growth. However, the focus in much of the data and analysis is on government spending rather than taxation. The reason is that, ultimately, it is government spending that determines the total tax burden. […] [I]t is assumed in much of this book that it is the financing of government spending that ultimately imposes a burden on the private sector rather than taxation as such. The focus is therefore very much on government spending as the main long-run determinant of the tax burden.”
In 2021, in a head-to-head discussion with economist Tom Bergin, I defended the idea of a low-tax economy, but I also said:
“[T]here is such a thing as “naïve Lafferism”. […] [S]ome people have overegged this point that Laffer was making, believing that tax cuts are some magical stimulus. I think most economists would say that what matters more is that you have a tax system that’s coherent and non-distortionary and simple. […] That is more important than just having low taxes.”
In addition, there have been several IEA publications which argued that the true scale of government debt was vastly greater than official figures suggest. Nick Silver warned of unfunded and unaccounted-for implicit pension liabilities, which were a form of government debt in all but name. Neil Record made a similar argument about public sector pensions, and I made a similar argument about future healthcare spending commitments. None of this is compatible with a blasé attitude to government borrowing, be it for tax cuts or anything else.
Even the Guardian recognises that the mini-budget was very different from traditional Thatcherism:
“[I]n stark contrast to the way Truss and Kwarteng were planning tens of billions of unfunded tax cuts, [chancellor Geoffrey] Howe balanced the books with a dramatic rise in the principal VAT rate from 8% to 15%. […]
Thatcher was very cautious, and it was not until after 1986, and in particular the 1988 Nigel Lawson budget, that the big reductions in personal tax rates were made”.
What I got wrong
A fair question, at this stage, would be: if the risky elements of the Truss-Kwarteng mini-budget, which triggered those adverse market responses, went so clearly against free-market principles – why did free-marketeers not say so straight away? Why did we not immediately disown the plans?
While some of us did raise concerns about the levels of borrowing, in truth, most of us were not particularly vocal about them, and we did not draw strong conclusions from them.
So why this hesitancy? Again, I can only speak for myself here, but maybe my own experience will sound familiar to some readers.
A bit of background first. There was a time when free-market liberals were able to find common ground with people from both the political Left and the political Right. We were not really part of either camp, but we could get along with market-friendly social democrats as well as “Thatcherite” conservatives.
That era came to an end around 2015, when British politics entered what my colleague Dr Steve Davies calls a period of realignment. In very different ways, both the political Left and the Right took a sharp anti-liberal turn. On the Left, we saw the return of orthodox Marxist socialism, combined with the rise of an aggressive “woke” progressivism, and a militant eco-millenarianism. On the Right, we saw the rise of a populist collectivism, variously described as “post-liberalism” or “communitarianism”, which sees liberalism as its main enemy. In the Theresa May years, the Conservative Party defined itself in equidistance to both “the socialist Left”, and “the libertarian Right” (p. 7), but the guru of this variant of conservatism, Nick Timothy, clearly has a much bigger problem with libertarians than with socialists. (He writes about little else.)
That realignment left free-market liberals stranded in an intellectual wilderness. We were now in an odd situation. There is normally a positive correlation between how hated you are, and how influential you are. If you have little influence, your opponents won’t bother hating you: they will just see you as a harmless crank. Free-marketeers, however, ended up in that worst of all worlds, where everything we said seemed to fall on deaf ears, but we still managed to attract a huge amount of hatred from all sides.
Against this backdrop, the fact that we suddenly had two self-identified supporters of free enterprise in 10 and 11 Downing Street seemed like a breath of fresh air. What this would mean in practice, and whether it would translate into the kind of policy changes I would like to see, I had no idea. But at least, free-market liberalism finally seemed to be back in from the cold.
Under those conditions, you want to give a government the benefit of the doubt, and focus more on the positive aspects. You don’t immediately want to go back to sounding all gloomy, grumpy, and negative again.
Thus, while I criticised individual policies, such as their housing policy and energy policy, I nonetheless considered Truss and Kwarteng kindred spirits in the broadest sense (I still do), and when everyone seemed to turn against them, I did not want to join in.
It is not that I said anything in particular in those weeks which I now regret. What I got wrong is more a matter of emphasis, and omission.
Let’s take the above-mentioned IFS comment on the mini-budget. This was an uncharacteristically damning statement. The IFS said that the budget lacked “even a semblance of an effort to make the public finance numbers add up.” They described it as a plan “to borrow large sums at increasingly expensive rates [and] put government debt on an unsustainable rising path”. Kwarteng, they said, had “shown himself willing to gamble with fiscal sustainability […] He is willing to shrug off the risks of inflation, and […] he has avoided scrutiny by presenting a Budget […] without accompanying forecasts from the Office for Budget Responsibility.”
I tweeted a link to that IFS comment on 3 October – but I did not highlight any of those damning passages. Instead, I chose to highlight the one passage where they said that the abolition of the additional 45% rate of income tax was not, in itself, a big fiscal problem, because that rate did not raise a huge amount of revenue anyway.
This was not an endorsement of the mini-budget, but the emphasis was nonetheless completely wrong. What mattered, in this context, was not this one individual measure, but the overall profligacy of the budget, and that is the part that I should have been shouting about.
There is no way I would have been this reticent if a progressive or a post-liberal conservative government had announced an increase in government borrowing of such a magnitude, if it had been led by increases in public spending rather than tax cuts. More, there is not even a way I would have been this reticent if such a government had announced borrowing-funded tax cuts of such a magnitude. I would have said very clearly, and from the very first moment, that while I support tax cuts, I don’t want them done in this way, and under those conditions.
I should have been just as explicit and vocal about the risky elements of the Truss/Kwarteng budget.
Roger Douglas, the former Finance Minister of New Zealand (and successful free-market reformer of “Rogernomics” fame), once said that “Speed is essential: it is impossible to go too fast. […] Opponents’ fire is much less accurate if they have to shoot at a rapidly moving target.”
Truss and Kwarteng must have believed this, too, and hit the ground running. But they stumbled over their risky fiscal plan, fell badly and hit their heads, and as they finally got up again, stumbling around dizzy and disoriented, they had made themselves the perfect targets for their opponents’ fire.
To the extent that people of a pro-market persuasion supported their plan, we should own up to it, and be honest with ourselves about what we got wrong. We are not socialists, after all. We are better than that.
But the claim that one bad budget somehow refutes two and a half centuries of liberal economic thought is disingenuous. It was a specific, identifiable mistake that did in Truss and Kwarteng. This does not mean that industry nationalisations have suddenly become a good idea; it does not mean that protectionism has suddenly become a viable policy; it does not mean that price ceilings no longer create shortages; it does not mean that labour market rigidities no longer create unemployment; it does not mean that people suddenly no longer react to incentives; it does not mean that subsidies no longer create distortions; it does not mean that prohibitions no longer create black markets; it does not mean that zero-pricing no longer leads to rationing; and it does not mean that the NHS no longer lags behind many other healthcare systems. It certainly does not mean that Britain no longer has a shortage of housing, energy, or affordable childcare services.
Liz Truss and Kwasi Kwarteng correctly identified the barriers that hold back the British economy. They correctly pointed out that we do not have to resign ourselves to stagnant productivity and managed relative decline. Britain’s problems are homemade, and self-inflicted.
Free-market economics offers tried-and-tested, effective answers to most of these problems. We know this, because real free-market economics has been extensively tried. Just not in Britain in 2022.