Another way of looking at Truss and Kwarteng's mini-budget that I have encountered is this:
1. 'Trussonomics' is a variant of 'Trickle-Down' economics, an economic theory that has never, ever (since the time of Reagan) produced the much anticipated 'growth'.
2. Presumably, it doesn't achieve the desired effect because many companies these days are entirely in thrall to their shareholders. So any extra profits that arise from cuts in taxation and deregulation will be paid to them rather than reinvested in the business to secure its long term future. Since the 1980’s, companies have been put under increasing pressure to deliver higher short-term profits, otherwise they may place themselves at risk of a hostile takeover from a Gordon Gekko-type – character.
3. In addition to the payment of higher dividends, the easiest way for the CEO of a company to enable these short-term profits to be made is simply to cut costs, something that can be achieved by reducing the workforce through redundancies, freezing salaries, lowering overheads (like paying for employee pensions, cutting investment in research & development, and selling off less profitable arms of the business). This ‘slash and burn’ approach was faithfully depicted in Oliver Stone’s movie. And by the time the company gets into trouble, the CEOs who enacted this policy will often have moved on.
4.To convey an impression of how serious this problem is, in the UK, the average period of shareholding, which had already fallen from 5 years in the mid-1960’s to two years in the 1980’s, plummeted to about 7.5 months by the end of 2007. Additionally, between the 1950’s and 1970’s (when Keynesian economic policies held sway), about 35-45% of corporate profits were given to shareholders in the form of dividends. But between 2001 and 2010, the largest US companies handed over 94% of their profits, while the top UK companies gave away 89% of theirs.
5. Tax cuts for the poorest do make sense, as they will tend to spend any additional income they have. The notion of tax cuts also has intuitive appeal because of this, causing this notion to be perceived as 'common sense'. Reform's proposal to raise the tax threshold in their manifesto may have resonated with potential voters for this reason. But any growth achieved by such cuts are more than offset by factors 2-4.
6. The financial markets these days are aware that 'Trickle-down' does not work (as encapsulated by the cover of the book depicted below), and so this is why Truss & Kwarteng's budget went down like a lead balloon.
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7. So why did Truss support such a discredited theory? The only reason I can think of is psychological: she is an ideologue. Often, converts to faiths tend to be far more zealous than those who grow up in one, as if they have a point to prove. Truss was not always a Tory, so maybe she falls into this category.
One caveat: I am a complete dilettante when it comes to economics and it could very well be that much of the above explanation is flawed. So it is only offered tentatively.
But I thought it was worth putting out there.
