Economist Brian Easton says the evidence from the past is that the neoliberal crash-through approach proposed by the new Truss-Kwarteng British government does not lift economic performance

This is a re-post of an article originally published on pundit.co.nz. It is here with permission.

The successful campaign of Liz Truss for British Prime Minister emphasised her neoliberal ambitions and her wish to further ‘free up’ the British economy Will the policies deliver the promised economic growth?

Such liberalisation has been a persistent feature of economic policies throughout the postwar world. At issue has been the rate of liberalisation and how far it extends. The extension arose following the rejection of the market mechanism because of the Great Depression of the 1930s and the centralisation of the control of resources to fight the Second World War. Some economies slowly unwound the controls, while others – New Zealand is a prime example – hung onto them and then dismantled them abruptly.

The impracticality of maintaining many of the controls was reinforced by the increasing complexity of the economy from growing consumer choice and from more advanced technologies. Moreover the specialisation which these changes needed was enhanced by the falling costs of distance – hence globalisation.

New Zealand largely resisted the liberalisation until the arrival of the Rogernomes in 1984. They chose to crash through – the approach the Truss Government seems to be embarking upon. It was not a success. The Australian Hawke-Keating Government at the same time tackled the transition more cautiously and with greater success. Per capita New Zealand GDP was 87 percent of Australia’s in 1985. In 1995 after a decade of neoliberal changes, it was 77 percent. The most recent figure is 81 percent.

The wealthy hardly noticed the poor performance because the tax changes favoured them to the extent that their incomes grew at much the same rate after 1984 as they had done before. The burden of adjustment was carried by those below, especially by the poor. Truss and Chancellor of the Exchequer (Minister of Finance) Kwasi Kwarteng seem to be embarked on a similar course.

The New Zealand-Australia comparison is not the only example. Economists contrast Russia’s liberalisation in the 1990s with China’s. Following the breakup of the Soviet Union, Russia chose to crash through, while the Chinese went for a more cautious liberalisation under Deng. Again caution won. Per capita incomes in Russia halved in the following decade recovering only with a rise in the price of oil. Incomes increased markedly in China, in part because it was able to latch onto the opportunities from globalisation to become the world’s biggest exporter of industrial goods; poverty levels fell spectacularly.

China was concerned with maintaining the authority of the Chinese Communist Party, still in power today, leaving open the question of whether it is possible to run a decentralised market in tandem with a centralised political regime. Russia’s Communist Party disappeared. The one central political institution which survived the upheaval was the security service; it is not accidental that the president of Russia, Vladimir Putin, is a KGB man.

Economists’ evaluation of the Russian failure has focused on the lack of the soft infrastructure which a liberal market economy requires, but which the neoliberals, concerned primarily with privatisation, ignored. It certainly created a class of rich security-service bureaucrats and business oligarchs all of whom today are beholden to their tsar Putin, but the promised economic growth did not turn up (except that stimulated by high oil prices).

One can see the importance of soft infrastructure in 1987 New Zealand’s financial crash. As much as they pretended, most of the businessmen and women the liberalisation empowered were not very good. When they went off overseas they were beaten by those who had evolved in a commercial culture and better understood how it worked. Legal and institutional arrangements were primitive, evidenced by accounting systems which created fake profits. Investors, their advisers and business journalists were naive as they discovered when the New Zealand share-market crashed further than any other in the rich world.

Soft infrastructure – a business culture, the necessary legal and other institutional arrangements and a popular understanding of how markets work – does not arise overnight. It evolves over long periods. (Ironically, the economist usually associated with the importance of such organic evolution is Friedrich Hayek, who was a pioneering neoliberal thinker; I doubt he would have supported crash-through.)

Truss presents herself as the new Margaret Thatcher. Will she fail, just as her predecessor Boris Johnson who presented himself as the new Winston Churchill so miserably failed? We need a more nuanced view of Thatcherism than the public rhetoric. Certainly she, like Ronald Reagan, accelerated market liberalisation. It is also true that the British economy experienced a moderate improvement in its growth rate, but correlation does not prove caution. The public revenues from the expansion of North Sea oil made tax cuts easier; some of the public wealth was transferred to the private sector via privatisations.

But it was not crash-through. The Thatcher privatisations took three to five years to prepare (the Rogernomic ones took three to five months) and usually involved regulatory agencies (the Rogernomics ones often did not). Even then, some of the British privatisations did not go well.

The first step to further market liberalisation of the British economy was Brexit, because the Brussels rules prevented the neoliberals ‘freeing’ up the economy. Britain is still working its way through the impact of cutting those ties. Thus far the outcomes have not been positive.

The second major step was the substantial income tax cuts of a couple of weeks ago, worth about 2 percent of British GDP and focused almost exclusively on the rich based on a belief that lower taxes would stimulate growth. Financial markets took fright. Neither Truss nor her Chancellor Kwarteng seems to have anticipated this, despite both having worked in financial institutions. (Neither have had much economic training, and the precipitate sacking of the Treasury Secretary suggests they are not listening to expert advice.)

Such was the public uproar that the top tax cuts were reversed – an extraordinarily rapid U-Turn. But the increase in the fiscal deficit remains – hence the financial markets' concerns. The implication seems to be that in order to sell all the government debt, interest rates are going to rise dramatically, say by four percentage points. It is most unfortunate that at a time the world financial system is suffering a lot of turbulence – reasons include the Chinese economy slowdown and the knock-on effects from the Ukrainian invasion – that the British Government has added another source of instability.

The third step is that for ideological reasons and to fund the deficit, Truss and Kwarteng are promising to cut public spending, as happened with the Richardson-Shipley cuts of 1990 (in fairness, they were responding to the Rogernomics tax cuts). The rhetoric is to cut waste; the reality is that programs which benefit people (voters) will have to be cut.

The final step is the liberalisation (deregulation) of the markets which were thought to be too regulated by Brussels. We are not sure the exact scope they have in mind, but the two were co-authors of Britannia Unchained in 2012 which targeted workers’ conditions. Other sectors may include agriculture, childcare, financial services, immigration and town planning.

Will they succeed? Current economic prognostications are not optimistic. Under the most favourable and well-managed conditions, market liberalisation takes time to generate the promised benefits. I cannot think of a crash-through example which was well managed – although those who benefited from the favourable income gains made from the tax cuts and privatisations may think otherwise. But most of the population was left struggling.

An earlier version was the basis of a “Nights with Bryan Crump” presentation.

*Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a re-post of an article originally published on pundit.co.nz. It is here with permission.