Liz Truss was in Washington last week. Speaking at the Heritage Foundation, she was unapologetic about her short-lived premiership. Indeed, she doubled down on her warnings that the US and the UK risk “becoming social democracies by the back door”.
Free-market capitalism in the West, Truss told her audience, “has gone off course”, with an anti-growth mindset pervading policymaking circles on both sides of the Atlantic.
While Truss was in America, Chancellor Jeremy Hunt announced the appointment of Megan Greene to the Bank of England’s Monetary Policy Committee. His decision to elevate yet another establishment economist marinaded in Treasury groupthink underscores how spectacularly unsuccessful Truss’s short-lived efforts to overturn economic orthodoxy in Britain proved to be. The orthodox thinking that got Britain into its current economic mess remains entrenched.
Truss was right to recognise that Britain is in a mess. Growth over the past two decades has been dire, so bad, in fact, that it is difficult to think of Britain as a high-income country any more. Even Mississippi, the poorest state in America, is projected to overtake the UK in per capita income terms. Rather than try to address Britain’s low growth, the country’s economic establishment seems resigned to it.
When George Osborne created the Office for Budget Responsibility, his intention was to ensure that government economic forecasts were honest. What he actually did was to hand control over fiscal forecasting to the OBR, meaning that today it is the OBR, not the Treasury, that drives fiscal policy. This helps to explain why, after 13 years of Tory government, taxes and spending are so high.
Back in the 1960s and 1970s, Britain’s economic establishment believed that fiscal stimulus was the way to engineer economic growth. That was seen to fail, but today officials believe in using monetary stimulus. According to the experts, interest rates need to be lowered to stimulate growth when things are looking down, but raised when the economy perks up. Yet it has proved to be easier to cut interest rates than to raise them. Easy money has allowed overconsumption and ghost growth. Bad investments have been made by those desperate for higher returns. Over time, growth and productivity have stalled.
Ironically, it was as Truss was attempting to move Britain away from this model that some seriously bad investments made by UK insurance firms – so-called “liability-driven investments” – threatened to trigger a full-scale financial crisis.
Truss’s big mistake was not her analysis of the problem, nor even her relatively modest tax-cutting proposals. It was her commitment to a universal energy-relief scheme, which it was feared at the time might mean an additional £130 billion in spending.
Watching Truss in Washington, I thought of that great American conservative Barry Goldwater. Like Truss, he came to prominence promoting a radical new economic agenda. He, too, was to prove spectacularly unsuccessful. Goldwater’s 1964 campaign for the White House saw him lose by what was then the largest margin in history.
For several years afterwards, Goldwater – like Truss today – seemed a byword for failure.
But like Goldwater, Truss’s analysis of what has gone wrong is accurate. Her solutions, like his, are sound. In time, she too will come to be seen as an essential precursor for the change her country needs. As for those creatures of the establishment who are today back in control, they will one day be utterly forgotten – perhaps sooner than they might imagine
Douglas Carswell is president and CEO of the Mississippi Center for Public Policy. He was previously MP for Clacton.
This article was originally featured in The Telegraph on April 15.