This post isn't about politics. It's about economics. It has links to politics in the same way that education has links to politics and to Politics. But it's about economics, and ideas not personalities, let's be clear.
It turns out I have quite a lot to say about economics, so let's get my main point clear in case it gets lost in what follows:
Liz Truss spooked the markets because she showed a basic lack of economic understanding. She wanted to use tax cuts to create growth. Without realising that her measures would create inflation. Which would oblige the Bank of England to increase interest rates. Which would choke off any growth.
It wasn't the effect of her policies that caused alarm. It was her obvious lack of understanding of the basics of economics. She had no credibility and the market reacted, losing all confidence in government bonds.
To take a step back, economics is a lot like teaching. In that everyone thinks they know about schools because they went to one. And everyone thinks they know about economics, because they pay taxes. Ironically this argument would bar some of the current bigwigs, as they are the ones who seem not to pay taxes! Also, the fact that we hear politicians and journalists getting the wrong end of sticks about education, makes us think that maybe they aren't totally reliable when it comes to the economy or the racing tips. Economics also like teaching in that it is a bit of a mysterious art. We are always on the look out for a clear method, but when we are presented with one, it always turns out to be political rather than educational/economic. There are orthodoxies and heresies. And the power of belief. If an approach makes sense to a teacher, it may well work in their classroom. If the markets think a policy is necessary, then it may work.
The mother of a good friend of mine went to university to study economics. The first lecture was on the debate around controlling the money supply and whether it affected the economy. She thought, "If they don't even know that, what's the point of studying this?" She switched to Social Work and went on to have a long and distinguished career in doing good and affecting public policy.
So, as with statistics, we shouldn't feel intimidated and think that we have no right to comment on the economy. Our attitude to things that make no sense is often to think, "Someone cleverer than me understands it." For example throughout my life the attitude to public utilities has been to privatise them. The claim is that this brings investment. Does anyone understand how an approach which is about taking money out as profit or dividends is a model for putting money in to public services? It makes no sense but we have been cowed into thinking we aren't qualified to comment.
So back to Liz Truss. She is in the papers saying her tax cutting agenda wasn't given time. Let's look at it. She wanted to cut taxes to generate growth. She wasn't clear if this was simply because flooding people's pockets with cash would give a boost to the economy and through the discredited trickle down effect, lead to sustained increased economic activity. Or whether this was a long term structural change to encourage investment (= taking money in or taking money out?) in the UK. There's an easy answer to that question of whether it was meant to be an instant boost or a long term incentive. It was neither. It was simply following through on an empty mantra: We want tax cuts. It is the mantra of the tiny number of Tory party members. They justify it by saying, "It will create growth" but that's a slogan, not an economic argument. Liz Truss was elected by the Tory members after a campaign in which she pooh poohed the idea that tax cuts would cause inflation when it was put to her by her rival. She did not engage at all with economic debate. It was a simple gift in return for being elected. Even if I am wrong and there is more to her argument, you can see that this is how it appeared, and when it comes to the markets, appearance and belief is powerful.
Why would tax give aways cause inflation? Inflation is a result of free market bidding for resources. When things are in short supply, those with more money can pay more and get their hands on the goods. Because they are paying more, the prices go up. In happy times, the supply of goods and the amount of money to buy them are in balance, the economy is stable, and inflation is low. Liz Truss became PM at exactly a time where energy was in short supply. Paying more for it might mean you got your hands on more of it, out bidding those who are poorer. But it doesn't actually mean there is any more energy available. So putting more money in to the economy through tax cuts wouldn't make any more energy become available. Or solve the supply issues of an economy coming out of Covid or facing obstacles to trade after leaving a trading bloc. It would just mean more money to bid for the scarce resources, pushing up the prices.
This argument IS used by Liz Truss when it comes to putting money into public sector pay. At the moment, the things we want to buy are in short supply, so giving more money to teachers and nurses wouldn't actually solve that. It would just mean we had more money to bid for goods, pushing up prices. As the government can't solve the supply issues, they present it as a problem of too much money sloshing around, and restrict pay.
This blindness to the effect of putting money into the economy in different ways is also there in their growth policies. So the Truss economic mantra says that putting money into the economy through tax cuts causes growth. And forgets that it will cause inflation. Yet it also says that putting money into the economy through pay will cause inflation. And ignores the fact that it could also create growth. The argument is political, not economic. Just like education policies are political, not educational.
These economic arguments are not complicated. Their fallacious and facile nature is there for all to see. But for too long we have assumed that when something makes no sense, it must be because we don't understand it. Messing about with financial levers of tax and spending and easing generates flows of cash that some can feed off, but in macro economic terms, tend to cancel out. Creating growth without inflation is very hard, otherwise all governments of every stripe would do it.
If you were serious about creating growth, it wouldn't be through these economic levers at all. It would be through real world policies that remove obstacles to economic activity. Government spending on infrastructure that doesn't affect the mythical balance sheet, because you are getting an asset in return, not just giving the money away and hoping for the best. Restoring the free flow of trade would have a huge effect. Childcare, transport, flexible and inclusive working, infrastructure, training, local initiatives... all these would have a positive effect on economic activity, with a multiplier effect of the money generated being spent or reinvested back into the real economy.