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What we can learn from the U.K.'s economic fallout


The incredibly short tenure of outgoing British Prime Minister Liz Truss has raised eyebrows all around the world. And at the heart of this economic fallout in the U.K. is one thing - tax cuts. You see; the Truss plan to kick-start the economy and fight inflation had involved tax cuts for corporations and the wealthy, which probably sounds familiar if you've heard such calls made by some politicians here in the U.S. Let's talk about all of that now with Simon Johnson, professor at MIT Sloan School of Management and former chief economist with the International Monetary Fund. Welcome.


CHANG: Hi. OK. So first, real briefly, can you just help remind us about the basics of what the Truss tax plan would have done and why it caused so much upheaval?

JOHNSON: Well, Liz Truss and her then - or initial Chancellor of the Exchequer, Kwasi Kwarteng, campaigned on a promise that was straight out of the Ronald Reagan, George W. Bush playbook and Donald Trump playbook. They would cut personal taxes and corporate taxes. And they argued that that would boost the economy, that that would improve many things. Not sure it would have focused particularly on reducing inflation, but they did say it would lead to prosperity for all - so basically, a version of what we would sometimes call trickle-down economics.

CHANG: OK. But a lot of people did not like this plan.

JOHNSON: Well, one thing that was immediately evident was that this would increase the British budget deficit for the foreseeable future. So the bond market looked at that and said, wow, that's going to be a lot of borrowing. Of course, they're having an inflation problem like everyone else is. And interest rates, in reaction to the fiscal package, rose dramatically. And that also caused problems for financial markets - big problems, actually, for U.K. pension funds. Then came the economic and political pressure for Liz Truss to back down.

CHANG: Exactly. OK. Well, now I want to explore some parallels perhaps between the U.K. and U.S. here because I want to read a tweet from an editor for the legal blog Above the Law - quote, "Liz Truss implemented the GOP's whole economic plan and collapsed her economy within a month," end quote. We're talking about completely different governments, completely different economies here, I suppose. But what parallels between the U.S. and U.K. tax policy proposals are worth highlighting here?

JOHNSON: Certainly the tax-cutting rhetoric and the main thrust of what they were attempting to cut and how they were attempting to cut it - that is straight out of the Republican Party playbook. And Ronald Reagan, George W. Bush, Donald Trump have all run versions of that. And I think Truss and her chancellor, Kwarteng, thought that they would have a similar sort of positive reception among financial investors and maybe wouldn't be the most popular for ordinary voters, but they wouldn't be punished at the polls for it. So I think the parallel is actually pretty close. Different times, of course, different circumstances, different currency, but there's a lot of parallels.

CHANG: So what ultimately do you think is the takeaway for leaders and economists here in the U.S. from everything that has happened in the U.K., especially as they're all thinking about how inflation is impacting the economy here? What's the cautionary tale?

JOHNSON: The bond market vigilantes are back. It's a term - it's a strange term which we've not used in maybe 30 years in the United States. The bond market vigilantes have never, in any of these high-income countries in the modern period - they've never really turned against tax cuts in the way they turned against it in this moment in Britain over the past six weeks. But I think the warning to ministries of finance, to central banks and to politicians everywhere is the rhetoric of tax cuts and this idea - we'll cut the taxes, and we'll get more revenue, and it'll all trickle down to everybody - I mean, that hasn't been plausible for a long time. And now the bond markets have done the math. And I think there's going to be a lot less space for those sorts of proposals to succeed anyway. It might try, but the circumstances could be pretty brutal.

CHANG: That is Simon Johnson, MIT professor and former chief economist at the IMF. Thank you very much.

JOHNSON: Thank you. Transcript provided by NPR, Copyright NPR.

Alejandra Marquez Janse
Alejandra Marquez Janse is a producer for NPR's evening news program All Things Considered. She was part of a team that traveled to Uvalde, Texas, months after the mass shooting at Robb Elementary to cover its impact on the community. She also helped script and produce NPR's first bilingual special coverage of the State of the Union – broadcast in Spanish and English.
Ashley Brown is a senior editor for All Things Considered.
Ailsa Chang is an award-winning journalist who hosts All Things Considered along with Ari Shapiro, Audie Cornish, and Mary Louise Kelly. She landed in public radio after practicing law for a few years.