Trickle down economics

If you have no interest in British politics you can count yourselves lucky. They’ve just had a change of Prime Minister, the big blonde PM has just been replaced by a smaller blonde one, Liz Truss. They didn’t have a general election or anything sensible like that. I’ll spare you the background details, but it’s just how British politics works, or more often doesn’t.

She’s had a turbulent first month, as has her new finance minister Kwasi Kwarteng.

Between them they have kick-started a massive shift in the economic policy of the UK, many have argued that as this policy shift has no mandate from the people as it was never put to the electorate to vote on, but they are going to do it anyway… but it’s just how British politics works, or more often doesn’t.

The two of them, and a few others now in high office, penned a book 10 years ago called Britannia Unchained, an economic vision of a libertarian smaller state with lower taxes, lower spending all aimed at prosperity by boosting growth and improving the ‘idle’ productivity of UK workers and funding it all with trickle down economics. Now they have maneuvered themselves into power they got to work, announcing tax cuts for business and the wealthy, increasing bankers bonuses, at the same time as denying increases in salaries to the lowest paid, and benefits to the poorest, and paying for it by borrowing huge sums of money. To borrow an often used phrase in the UK, this went down like a bucket of cold sick with the financial markets. The value of the pound tanked, the yields on government bonds soared, putting the interest the UK government has to pay to borrow up, pension funds that hold these assets immediately went into existential danger, and mortgages went up. The electorate that didn’t actually get to have an election were equally livid as the news making them poorer at a time of high inflation in order to enrich those already doing pretty well was received about as well as you might imagine. All-in-all a memorable first day in the office for the new administration.

The theory of trickle down economics is fairly, possibly too, simple. Cut taxes to business, and the wealthy, and they will invest more, and spend more and you end up with greater growth and with that comes a greater tax take, at a lower percentage, and everyone benefits. It’s not new, it was popular with US presidents starting with Ronald Reagan, and many republican presidents that followed him, right up to the last big blonde one.

The problem is that in that period it hasn’t actually worked. Studies of the 40 years of data have demonstrated that the rich have got richer, while average wages remained virtually unchanged, while the very poorest got poorer. Over the period growth slowed, and where there was growth, it was fueled by historically low interest rates, rather than tax cuts.

In isolation however it can have a positive effect. Look at the industry we are all involved in as the readership of The Islander. Unless you are lucky enough to be the owner of a super yacht, there is a pretty good chance that you owe your living to trickle down economics as we work on the playthings paid for by the discretionary incomes of the super wealthy, I know I do, and I’m grateful for it. It makes our own micro economy function, but the bigger picture is a story of a debunked economic mistake.

Prime Minister Truss said she was not afraid of being unpopular as she pursued her vision. That was until she suddenly found herself to be very unpopular and began to unwind some of the policies set out only days earlier.

The problem with democracy, at least from her point of view, is that every vote counts the same. There are many more people who, in the short term at least, will be hurt by these policies than those who benefit from them. If this risky and expensive gamble doesn’t pay off very soon, she’s likely to get a humiliating lesson in democracy, but not before catastrophic damage is inflicted that will hurt many people and take decades to unwind.

By Phil McCoffers – The Islander Economics Correspondent


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