If Kwasi Kwarteng’s mini-budget survives the storm it caused A banker on a million-pound annual salary will get £50,000 in tax relief – on top of extra bonuses the bank can offer, now that Liz Truss’s government has remove the lid on them. Meanwhile, a Deliveroo rider gets a pep talk about the liberating value of aspiring to get rich, possibly as motivation to fly harder. This is the essence of the government’s growth strategy or, according to former Brexit secretary David Frost, its antidote to stagnation and defeatism.
While it’s tempting to draw the obvious analogy between zombie ideas like trickle-down growth and the classic Hollywood horror film Night of the Living Dead, a more appropriate response to the gravity of the situation is to follow his extra cash banker. The government claims the banker will invest it, thus promoting growth. If it hadn’t been a blatant lie, it might have passed as a touching example of misplaced faith. But unlike Adam Smith’s bakers, butchers and brewers, who would invest the excess cash in better and more bread, beer and meat, the banker will buy into a fund which in turn will buy stocks, derivatives and bonds.
These recipients of the banker’s extra money have a long history of not investing in real productive capacity. Why, when the masses out there can’t afford new high value products? Instead, large firms use the funds that come in either to buy back their stock (to boost their stock price and thus their bonuses) or to speculate in the derivatives market or real estate. The dirty secret behind the idea of the zombie economy is that only one thing can prevent the vicious financial cycle from spiraling out of control: the power of the government (and, sometimes, the central bank) to fuel it.
Margaret Thatcher, whom Liz Truss pretends to idolize, got this dirty little secret. He learned the hard way that tax cuts for the wealthy simply shifted income to the ruling class without yielding growth dividends. In order for its neoliberal policies to offer a semblance of development, it had to throw into the vicious economic cycle pre-existing public wealth: council houses and public utilities (gas, electricity, water) in particular. In short, Thatcher’s policies boosted growth not because austerity worked, but because parts of the common wealth of society was liquidated at reduced prices and thrown into the cauldron of the City.
Thatcher’s business model for the UK has remained more or less the same ever since. While the last Labor government used its city tax revenue to fund the NHS and social services, the UK’s productive capital base has continued to shrink. Tony Blair and Gordon Brown not only maintained the cycle of financialization that Thatcher had started, but reinforced it in two ways: by removing all remaining regulatory constraints on the City and by funneling income from deregulated public services into its circular flow.
Then in 2008, under the weight of his hubris, the vicious circle of financialization had its famous collapse. Immediately, the Bank of England joined forces with the government to bring it back. To this magnificent example of financier-only socialism, George Osborne added austerity, which, by further suppressing aggregate demand, eliminated any remaining impetus for real investment in Britain’s productive base.
Four decades after the neoliberal experiment began, the evidence is in: a stagnant economy is a dangerous fantasy. Growth is effectively impervious to top tax rates. Paul Krugman recently showed that neither Ronald Reagan’s tax cuts nor Bill Clinton’s tax increases significantly affected the US income trajectory. Similarly in the UK, the data belies the Tory belief that Thatcher set Britain on a brave new path to higher growth. We find that in 1979, output per hour worked in the UK was behind France and Germany by 17% and 18% respectively. Has the UK caught up after four decades of restrictive tax policies and various deregulation measures, which never happened in France? No, in 2019, France’s productivity remained 18% higher than the UK’s and Germany’s 17%.
From this historical perspective, the recent backlash against Liz Truss seems almost unfair. Certainly, the new prime minister and her chancellor made a monumental blunder. However, it is disingenuous of Truss raiders to try to pin the sins of a Thatcher-inspired business model on her, tweaked by Blair, propped up by Osborne, undermined by Brexit and neglected by Boris Johnson. The new Prime Minister’s unfortunate mistake was to try to defeat Rishi Sunak (while also rejecting Johnson’s ascendancy agenda) by doing … a Thatcher. Alas, lacking Thatcher’s access to abundant public assets to pump into the financial sector, and with the Bank of England too spooked by inflation to print more money to revive financialisation, the Trust ended up trying to the impossible: to do a Reagan, but without the almighty dollar in support.
The problem with zombie ideas that refuse to die is that, once they reappear, they encourage other deadly undead ideas to rise up. There are already indications that Kwarteng, instead of killing the zombie, will revive the austerity zombie. Impenetrable to the fact that tax cuts never create growth and austerity never halts the rate of growth of public debt, the UK is destined to be haunted by these two zombies for another two years.
The silver lining is that Trussonomics has almost guaranteed a Tory defeat at the next election. And after? Does Keir Starmer’s Labor have a plan to break the destructive loop of City-centric state appropriation of wealth? The future of the UK, and any hope of reversing four decades of needless damage, will depend on it.
Yanis Varoufakis is the leader of MeRA25 in the Greek Parliament, former Finance Minister of Greece and author of Another Now