Why Kwasi Kwarteng IS WRONG

More than 40 years ago, the great economist and commentator J K Galbraith told “David Stockman has said that supply-side economics was merely a cover for the trickle-down approach to economic policy - what an older and less elegant generation called the horse-and-sparrow theory: If you feed the horse enough oats, some will pass through to the road for the sparrows”.

Kwasi Kwarteng

And that is the image which should be borne in mind when considering the singularly rash act committed yesterday by Kwasi Kwarteng, who for some reason is now Chancellor of the Exchequer. His so-called Mini Budget sent both share and currency markets into meltdown, in turn highlighting the stupidity of those out there on the right who claimed this must have been a good budget because the Rotten Lefties™ were opposed to it.

Why the reaction came as it did is not hard to understand: Kwarteng has - on our behalf - put another £45 billion on the national credit card, while abolishing the highest 45p income tax rate and cutting the basic rate of that tax. This will disproportionally benefit the well-off. And it gets worse.

Our new Chancellor has, with a straight face, described his actions as a “Growth Plan”. But with those at the bottom of the pile getting nothing from the budget, it will be interesting to see where the growth will come from, other than by a lot of sparrows sifting through a yet larger pile of horseshit. And then another thought enters: does Kwarteng actually know his economics?

I am not joking here. Let’s take this nice and slowly: what he seems to have missed is a very basic understanding of where growth comes from. This can be put directly: if you want to stimulate and thereby grow the economy, you don’t bung the rich a handout while giving the less well-off nothing.

This comes down to what is known as propensity to save versus propensity to spend: if you give someone at the bottom of the pile more money, they will, with the certainty of night following day, spend it. The least well-off always have more items on which they wish to spend than they have money. So they will spend it: what they spend it on may not be to the liking of the moneyed class, but that is not the point. They will generate economic activity.

However, if that money is given to someone who is already wallowing in cash, their propensity is not to spend, but to save it. They may invest it, but not necessarily in the UK. After all, the Tories have run down the country’s infrastructure for the past twelve and a half years, the labour force is restive after one effective pay cut too many, and mainland Europe looks more stable.

Hence the markets’ lack of confidence in the idea that this really was a “Growth Plan”. Unfunded tax cuts just so the rich could put a little more away in another of those offshore accounts? How economically illiterate is that? Small wonder right-leaning commentators were soon accusing those of insufficient faith in Kwarteng’s actions of “the politics of envy”.

But falling share prices and currency values showed that this, too, was no more than sloganeering in the vain hope that it might hold back reality. Kwarteng, meanwhile, had let slip who was behind the great experiment, as he deemed his measures to be “fair”. Ah, “fairness”: the cover word favoured by the so-called Taxpayers’ Alliance. Whose former head advise Liz Truss.

In recent years, the TPA has majored in falsehood and misinformation, and also, on occasion, in economic illiteracy. It has not been alone: the whole alphabet soup of Astroturf lobby groups, from IEA to CPS to ASI to PX, has been propagandising incessantly on the basis of occasionally highly questionable data. Also, they claimed to understand the markets.

They plainly didn’t: as Matt Holehouse of the Economist put it, “the gulf in reactions between free market think tanks and the actual market is genuinely fascinating”. The real world saw it, and the real world disapproved mightily. Meanwhile, freed from BBC restraint, Andrew Marr, now at LBC, passed highly adverse comment on Kwarteng’s actions in a post for the Staggers.

“The Government is going full throttle for an ideological argument about whether growth at all costs matters more than any residual sense of fairness. Quite why a tax cut for people earning more than £150,000 a year is not inflationary but pro-growth, while higher wages for workers doing essential jobs, who are obliged to spend every penny in their local economies, is inflationary and harms growth, will baffle ordinary people marooned with ordinary ideological intelligences”. Ordinary people who will suffer the most.

It has been rather like Brexit all over again: those who led many to believe that they knew better suddenly go from sitting on the sidelines cat-calling to finding themselves holding the levers of power, going on to show in short order that they don’t know how to operate them - partly because much of their case was built on omission, deception, and occasional flat-out lying.

The Astroturf lobby groups may plead economic purity, but those who can’t afford to turn the heating on - right now, before the next cost increase hits - will be forgiven for not giving a rat’s arse about how pure and rigorous the philosophical underpinning of this chaos happens to be.

Kwarteng doesn’t know what he’s doing. Nor do his advisors. That is all.

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