It should be patently obvious that putting the country into cold-storage for two years, and lavishing unfunded benefits to all and sundry to protect them from hardship, must carry dire consequences for Britain’s economy – and this reality now confronts us. The Johnson regime inculcated the mindset “the state will provide”, and poured forth generous state-backed loans, unsupported by any meaningful tests of eligibility or ability to repay them.
The furlough scheme supported labour costs, landlords were prohibited from enforcing rent arrears and even HMRC were unusually flexible regarding outstanding taxes. When he was Chancellor, Rishi Sunak added verve to the mix with his “eat-out-to-help-out” gimmickry and taxpayer-funded “bounce-back” loans that held little prospect of repayment. Looking back on this fraud-prone hotchpotch of financial make-believe we are left with the inescapable conclusion that our “fiscal conservative” PM is merely a pawn in the spendthrift Keynesian mould of macroeconomic futility, and doesn’t actually have much of a clue – despite his Treasury and Goldman Sachs credentials.
Whatever the Whitehall monkeys thought, said or believed, their manic largesse was another state-funded injection of liquidity into an economy already stuffed with funny-money after a dozen years of unbacked credit creation and interest rates at their lowest in 300 years. Predictably, this served to entrench widespread apathy and dependence on the state’s “magic money-tree”.
State handouts are an interventionist placebo: they make things worse
The result is a scarcely imaginable scale of misallocated resources, supply-chain disruption, capital destruction and untold damage to the psyche of a comatose generation. These shenanigans masquerading as economic policy enabled thousands of “zombie” companies to survive on a combination of cheap borrowing and state handouts, with little prospect of real growth in a competitive free market. Small businesses are now feeling the bite of reality more keenly than most, and this will worsen when the government scales back its energy support for businesses in April. They face a bottom-up recession in which they are the ones most likely to face insolvency.
While vast support schemes helped to protect livelihoods, they impeded the process of “creative destruction” whereby defunct businesses are circumstantially forced to give way to more innovative, cost-effective and profitable uses of capital. The drug of state-intervention always sounds the death-knell of production, and there is no more egregious form of intervention than a tax burden at its 80-year peak.
The Truss saga
Liz Truss has now broken her silence on what she learned from last autumn’s brief prime-ministerial spell that brought her face-to-face with the Treasury’s inflexible economic orthodoxy. Upholders of that orthodoxy attacked her proposed reforms on tax cuts and deregulatory measures, aided and abetted by gratuitous interjections from Bank of England governor Andrew Bailey, the Office of Budgetary Responsibility, the IMF and that geriatric fruitcake, President Biden of the USA – after which the bond markets went crazy. Without exception these carefully timed broadsides were made by individuals and institutions whose own forecasting records are abysmal – you may recall Governor Bailey’s dismissal of 2021 price increases as a merely “transient” phenomenon?
Truss fully acknowledges that she and Chancellor Kwasi Kwarteng didn’t communicate their message effectively or within a reasonable timescale – and nor was she primed by Treasury civil servants on the “liability-driven” investments that maintain the solvency of many UK defined-benefit pension schemes. The forces ranged against her played a dirty game. Her proposals for tax cuts were deliberately distorted. They weren’t “cuts” anyway. Apart from her intention to reduce the top income tax rate from 45p to 40p in the pound, they were proposals for not increasing tax rates! In any case, cutting taxes is not about “making the wealthy wealthier”, as the Labour front bench bellowed; it’s about leaving tax-paying citizens (including those already paying top rates) free to spend more of their own earnings as they see fit.
Where we are now
Crispin Odey, the hedge fund tycoon, spelled out his own assessment of all that’s wrong with government today: “The establishment elite that controls Britain has been captured by Leftist progressive ideologies riddled with political correctness”.
I do not dissent from his assessment. The irony is that the “progressive ideologies” he refers to are shared by so many millennial freshers who, having suffered most from the lockdown despite being least at risk, will pick up the bill. They will struggle to get on the housing ladder, yet will face decades of higher taxes to pay for what the political classes have done to the economy since 2020.
If Liz Truss has any aspirations for salving something useful she will draw on her earlier experience as foreign secretary. Our departure from the EU nearly seven years ago should have heralded a revival of Britain’s historic presence as a hub of international trade and finance. Though Britain is a small island off the European mainland, we benefit from a level of democracy that is the envy of disenfranchised populations throughout the world. We also have a constitution that, though unwritten, enshrines the common law principles of consistency and flexibility, backed by courts that carry a global guarantee of independence, impartiality and enforceability, as enunciated in Magna Carta 1,000 years ago. Magna Carta, the source and repository of our foundations of civil freedom, expresses four key principles:
(i) no one is above the law – not even the monarch;
(ii) no one can be detained without cause or evidence;
(iii) everyone has a right to trial by jury; and
(iv) a widow cannot be forced to marry and give up her property ― a major first step in women’s rights.
I cannot contemplate these principled heights without a sense of despair at the depths of our subsequent descent: I’m reminded of Antony’s speech to the crowd after Caesar’s murder:
O, what a fall was there, my countrymen!
Then I, and you, and all of us fell down,
Whilst bloody treason flourish’d over us.
Well, not quite yet – but you get the drift.
In defiance of everything that our release from EU shackles intended, we continue to pay blood-money to honour historic obligations. Only today we read that our government has paid the EU £2.3 billion after losing a long-running trade dispute, including £1 billion in interest. And what for? A disagreement over the importation of Chinese textiles and footwear between 2011 and 2017 – when the UK was still part of the European Union. It was claimed that more than half of all textiles and footwear imported into the UK from China were below “the lowest acceptable prices” permitted by EU rules designed to protect the EU’s domestic producers. And where, do you suppose, this decision was reached? In the EU’s own Court of Justice, of course!
Magna Carta, where art thou now? As my friend Godfrey Bloom puts it, when our final Court of Appeal is based in a foreign country we can no longer claim to be a sovereign nation.
In my fantasy world I wish we had leaders with the guts to tell Brussels to get stuffed – but no, they waste time, energy and huge amounts of taxpayers’ money by indulging in futile and unwarranted wrangling over this protectionist rubbish. They are lost in a face-saving pool of ignorance and a death-wish to reverse Brexit. When it comes to international trade all that’s needed is a unilateral declaration of free trade. Let’s, yet once more, spell it out for them.
(i) Q: What is a “unilateral declaration of free trade”?
A: Unilateral means “one-sided”: we can do it alone and require no reciprocation. It means we are ready to trade without recourse to tariffs, subsidies or any other form of state intervention. Remember that only people and businesses can “trade” anyway. Governments can’t. Having a “Trade Department” is another waste of resources – we don’t need it. All we want government to do is remove restrictions, interventions, regulations and obstacles – and then stand aside!
(ii) Q: But what if the other country imposes tariffs on goods that we export to them? Surely we should follow suit and charge tariffs on imports from that country?
A: If a foreign government wishes to punish its own citizens by raising the cost of goods we send them, let them. It’s up to their own population to vote them out of power for raising the cost of goods they want to buy from us. Likewise, if our government charges tariffs or import duty on goods from abroad they are effectively punishing us with higher prices. Yet another tax – no thanks!
(iii) Q: But if the goods they export to the UK are cheaper than our domestically produced goods, those cheap imports will undermine domestic businesses. Surely our government has a duty to protect our businesses with subsidies, especially if the foreign goods are cheaper only because of subsidies where they are manufactured?
A: If we protect our home industries by imposing tariffs on imported goods, we are forcing our own citizens to pay prices that exceed what the exporting businesses expect to receive. If we have to protect domestic businesses by using taxpayers’ money to grant subsidies, perhaps those businesses should (a)aim to cut their costs of production; or (b) lobby government to cut the numerous regulatory costs that render our pricing uncompetitive; or (c) face the law of comparative advantage. They may be in the wrong business and should allow forces of creative destruction to allocate capital resources more productively.
(iv) Q: Surely it is natural to retaliate in a “tit-for-tat” protective war?
A: Maybe you should read (i) to (iii) above more carefully. If you have understood the argument, you will recognise the golden rule: “The only certainty is that tariffs will always harm the citizens of any country that imposes them”.
Persisting masochists should remember: in the protectionist game there are only losers!
Forgive this lesson in elementary trade economics – but it bears repetition at a time when protective mercantilism is reasserting itself with a vengeance and warlike noises are heard yet again.
A final word
“Protection or Free Trade” by American economist Henry George was published in 1886 and explains in detail the frightening reality of the forces of protectionism. Milton Friedman said it was the most rhetorically brilliant work ever written on trade.
He also paraphrased one of George’s arguments in favour of free trade: “It’s a very interesting thing that in times of war, we blockade our enemies in order to prevent them from getting goods from us. In time of peace we do to ourselves by tariffs what we do to our enemy in time of war.”