A new conservative administration takes power with a supply side agenda:
- Corporate tax cuts
- Deregulation in areas such as energy production
Six years later, another conservative administration takes office with an even more pro-growth agenda:
- Corporate tax cuts
- Deregulation in areas such as energy production
- YIMBY policies to encourage home building
- More high skilled immigration
- Seek out free trade agreements
Which is a better agenda? In the abstract, the second agenda is clearly better, more pro-growth. So why was the first agenda (adopted by Donald Trump) widely viewed as a success, while the second (Liz Truss) was widely viewed as a disaster? I see at least two factors:
- Timing: When Donald Trump was elected, the US fiscal situation was much less dire that the one faced by Truss in 2022. Britain’s national debt had risen to a relatively high level, and her proposed tax cuts and energy subsidies would have pushed the budget even more deeply into deficit. And this was occurring at a time when interest rates were rising throughout much of the world. As a result, Truss’s tax and spending proposals spooked the bond market, causing interest rates to rise even further and pushing the pound toward record lows.
- Politics: Congress was willing to pass many of Trump’s key economic proposals (apart from repealing Obamacare). Truss faced a great deal of resistance to her supply side reforms, with reports that even Conservative MPs would balk at ideas such as encouraging more homebuilding and allowing fracking to boost energy production.
The truth is that luck plays a big role in politics. Most leaders are only partly responsible for the state of the economy during their tenure. Truss’s policies might have been quite successful if adopted in a different time and place. The best way to look good is to inherit a depressed economy where stimulus is both politically popular and economically desirable (recall FDR). The worst situation for a new administration is to inherit an overheated economy where unpopular contractionary policies are necessary (Reagan).
PS. This tweet helps to illustrate my point:
Ouch!
