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Lessons From Liz Truss’s Handling of U.K. Inflation
The sharp policy U-turn by Liz Truss, Britain’s prime minister, reveals the perils of taking the wrong path in the fight against scalding inflation.Government leaders in the West are struggling with rising inflation, slowing growth, and anxious electorates worried about winter and high energy bills. But Liz Truss, Britain’s prime minister, is the only one who devised an economic plan that unnerved financial markets, drew the ire of global leaders and the public and undermined her political standing.On Friday, battered by savage criticism, she retreated. Ms. Truss fired her top finance official, Kwasi Kwarteng, for creating precisely the package of unfunded tax cuts, billion-dollar spending programs and deregulation that she had asked for.She reinstated a scheduled increase in corporate taxes to 25 percent from 19 percent, a rise she had previously opposed. That announcement came on top of backtracking last week on her proposal to eliminate the top 45 percent income tax on the highest earners. The prime minister, in office a little over five weeks, also promised that spending would grow less rapidly than proposed, although no specifics were offered.The drama is still playing out, and it’s unclear if the Truss government will survive.In the United States, President Biden, while waging his own political battles over gas prices and inflation, has not proposed anything like the kind of policies that Ms. Truss’s government attempted, nor have any other leaders in Europe.Still, for European governments whose economies are suffering greatly from shocks and energy price surges caused by Russia’s war in Ukraine, there are timely lessons from the debacle playing out in London.One of the strongest was delivered early on by the International Monetary Fund: Don’t undermine your own central bankers. The I.M.F., which usually reserves such scoldings for developing nations, on Thursday doubled down on its message. “Don’t prolong the pain,” Kristalina Georgieva, the managing director, admonished.How to blunt the impact of inflation on the most vulnerable without further stoking inflation is the dilemma that every government is confronting.The Bank of England in London has aggressively tried to slow the sharp rise in prices by slowing the British economy.Alberto Pezzali/Associated Press“That is the question of the hour,” said Eswar Prasad, an economist at Cornell University who was attending the annual meetings of the World Bank and I.M.F. in Washington this week.Tension between the fiscal spending policies proposed by a government and the monetary policies controlled by central banks is not unusual. At the moment, though, central bankers are engaged in delicate policy maneuvers in the fight against a level of inflation not seen in decades. With the rate in Britain nearing 10 percent, the Bank of England has moved aggressively to slow down climbing prices through a series of interest rate increases aimed at crimping consumer and business spending.Any expansion of government spending is going to interfere with that aim to some degree, but Ms. Truss’s plan was far too big and too ill defined, Mr. Prasad said.“Measures to help households hit hard by energy increases, by themselves, would not have created that much of a stir,” he said. Many other countries have proposed exactly that. And the European Union has proposed a windfall tax on energy profits to help finance those subsidies.Ms. Truss, instead of coming up with a way to pay for energy assistance, pushed to eliminate a corporate tax increase and cut income taxes for the wealthiest segment of the population. The result was a reduction in government revenue and a ballooning of Britain’s debt.“Overall, the package did not have much clarity in terms of how it would support the economy in the short run without raising inflation,” Mr. Prasad said.By contrast, Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, cited the way governments and central banks worked in tandem when the pandemic struck in 2020 to keep economies from collapsing, issuing vast amounts of public debt.“Central banks printed every single dollar, euro and pound that governments spent” to support households and businesses because of the Covid crisis, Mr. Vistesen said. But now the circumstances have changed, and inflation is setting economies aflame.The actions of the Federal Reserve in the United States illustrate the switch central banks have made: In the harrowing early weeks of the global outbreak of the coronavirus, the Fed embarked on an extraordinary program to stimulate the economy and stabilize markets. This year, the Fed has been swiftly raising interest rates in a bid to slow growth.Both the United States and eurozone countries have somewhat more wiggle room than Britain, because the dollar and the euro are much more widely used around the world as currencies held in reserve than the British pound.Kwasi Kwarteng, Britain’s former chancellor of the Exchequer, left 11 Downing Street after Ms. Truss fired him on Friday.Kirsty Wigglesworth/Associated PressEven so, European governments can help households and businesses get through an energy crisis, Mr. Vistesen said, but they can’t embark on an open-ended spending spree.They also need to take account of what is happening in other economies. The richest countries that make up the Group of 7 are essentially part of the same “monetary and fiscal convoy,” said Will Hutton, president of the Academy of Social Sciences. By championing a Thatcher-era blend of steep tax cuts and deregulation, he said, the Truss government strayed too far from the rest of the flotilla and the economic mainstream.The adherence to 1980s-era trickle-down verities also revealed the risks of sticking with outdated policies in the face of changing circumstances, said Diane Coyle, a public policy professor at the University of Cambridge.“The situation in 1979 was very different,” Ms. Coyle said. “There were sclerotic high taxes and an overregulated economy, but not anymore.” Today, taxes in Britain are lower, and the economy is less regulated than the average member of the Organization for Economic Cooperation and Development, a club of 38 major economies.“The character of the economy has changed,” she said. “Public investment in research and skills are more important.”In that sense, what was missing from Ms. Truss’s economic plan was as important as what was included. And what Britain is lacking, said Mariana Mazzucato, an economist at University College London, is a visionary public investment program like the trillion-dollar climate and digitalization plans adopted by the European Union or the climate and infrastructure program in the United States.A rate of Inflation nearing 10 percent in Britain has affected the price of groceries and how people spend their money.Alex Ingram for The New York Times“If you don’t have a growth plan, an industrial strategy innovation policy,” Ms. Mazzucato said, “then your economy won’t expand.”Both Ms. Mazzucato and Ms. Coyle emphasized that Britain had some specific economic handicaps that predated the Truss administration, including the 2016 vote to exit the European Union, a stubborn lack of productivity, anemic business investment, and lagging research and development.Still, Ms. Coyle offered some advice that referred pointedly to Ms. Truss. “I think the main lesson is: Don’t shoot yourself in the foot.” More
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Why the British Pound Continues to Sink
Britain’s pound coin — rimmed in nickel and brass with an embossed image of Queen Elizabeth II at the center — could always be counted on to be significantly more valuable than the dollar.Such boasting rights effectively came to an end this week when the value of the pound sank to its lowest recorded level: £1 = $1.03 after falling more than 20 percent this year.The nearly one-to-one parity between the currencies sounded the close of a chapter in Britain’s history nearly as much as the metronomic footfalls of the procession that carried the queen’s funeral bier up the pavement to Windsor Castle.“The queen’s death for many people brought to an end a long era of which the soft power in the United Kingdom” was paramount, said Ian Goldin, professor of globalization and development at the University of Oxford. “The pound’s demise to its lowest level is sort of indicative of this broader decline in multiple dimensions.”The immediate cause of the pound’s alarming fall on Monday was the announcement of a spending and tax plan by Britain’s new Conservative government, which promised steep tax cuts that primarily benefited the wealthiest individuals along with expensive measures to help blunt the painful rise in energy prices on consumers and businesses.The sense of crisis ramped up Wednesday when the Bank of England intervened, in a rare move, and warned of “material risk to U.K. financial stability” from the government’s plan. The central bank said it would start buying British government bonds “on whatever scale is necessary” to stem a sell-off in British debt.The Bank of England’s emergency action seemed at odds with its efforts that began months ago to try to slow the nearly 10 percent annual inflation rate, which has lifted the price of essentials like petrol and food to painful levels.Rising Inflation in BritainInflation Slows Slightly: Consumer prices are still rising at about the fastest pace in 40 years, despite a small drop to 9.9 percent in August.Interest Rates: On Sept. 22, the Bank of England raised its key rate by another half a percentage point, to 2.25 percent, as it tries to keep high inflation from becoming embedded in the nation’s economy.Energy Bills to Soar: Gas and electric charges for most British households are set to rise 80 percent this fall, further squeezing consumers and stoking inflation.Investor Worries: The financial markets have been grumbling with unease about Britain’s economic outlook. The government plan to freeze energy bills and cut taxes is not easing concerns.The swooning pound this week has carried an unmistakable political message, amounting to a no-confidence vote by the world’s financial community in the economic strategy proposed by Prime Minister Liz Truss and her chancellor of the Exchequer, Kwasi Kwarteng.To Mr. Goldin, the pound’s journey indicates a decline in economic and political influence that accelerated when Britain voted to leave the European Union in 2016. In many respects, Britain already has the worst performing economy, aside from Russia, of the 38-member Organization for Economic Cooperation and Development.“It’s just a question of time before it falls out of the top 10 economies in the world,” Mr. Goldin said. Britain ranks sixth, having been surpassed by India.Eswar Prasad, an economist at Cornell University, said this latest plunge had delivered a bracing blow to Britain’s standing. A series of “self-inflicted wounds,” including Brexit and the government’s latest spending plan, have accelerated the pound’s slide and further endangered London’s status as a global financial center.Dozens of currencies, including the euro, the Japanese yen and the Chinese renminbi, have slumped in recent weeks. Rising interest rates and a relatively bright economic outlook in the United States combined with turmoil in the global economy have made investments in dollars particularly appealing.But the revival by the Truss government of an extreme version of Thatcher and Reagan-era “trickle-down” economic policies elicited a brutal response.“The problem isn’t that the U.K. budget was inflationary,” wrote Dario Perkins, a managing director at TS Lombard, a research firm, on Twitter. “It’s that it was moronic.”To some, the pound’s journey indicates a decline in Britain’s economic and political influence.Suzie Howell for The New York TimesDuring the more than 1,000 years in which the pound sterling has reigned as Britain’s national currency, it has suffered its share of ups and downs. Its value in the modern era could never match the value of an actual pound of silver, which in the 10th century could buy 15 cows.Over the centuries, British leaders have often gone to extraordinary lengths to protect the pound’s value, viewing its strength as a sign of the country’s economic power and influence. King Henry I issued a decree in 1125 ordering that those who produced substandard currency “lose their right hand and be castrated.”In the 1960s, the Labour government under Harold Wilson so resisted devaluing the pound — then set at a fixed rate of $2.80, high enough to be holding back the British economy — that he ordered cabinet papers discussing the idea to be burned. In 1967, the government finally cut its value by 14 percent to $2.40.Other economic crises thrashed the pound. In the 1970s, when oil prices skyrocketed and Britain’s inflation rate topped 25 percent, the government was compelled to ask the International Monetary Fund for a $3.9 billion loan. In the mid-1980s, when high U.S. interest rates and a Reagan administration spending spree jacked up the dollar’s value, the pound fell to a then record low.The pound’s dominance has been waning since the end of World War II. Today, the global economy is experiencing a particularly tumultuous time as it recovers from the aftermath of the coronavirus pandemic, supply chain breakdowns, Russia’s invasion of Ukraine, an energy shortage and soaring inflation.As Richard Portes, an economics professor at London Business School, said, currency exchanges have enormous swings over time. The euro was worth 82 cents in its early days, he recalled, and people referred to it as a “toilet paper” currency. But by 2008, its value had doubled to $1.60.What might cause the pound to revive is not clear.The Truss government’s economic program has forcefully accelerated the pound’s slide — the latest in a series of what many economists consider egregious economic missteps that peaked with Brexit.Much depends on the Truss government.“The plunge in the pound is the result of policy choices, not some historical inevitability” said Ian Shepherdson, chief U.S. economist at Pantheon Macroeconomics. “Whether this is a new, grim era or just an unfortunate interlude depends on whether they reverse course or are kicked out at the next election.”As it happens, the Bank of England is preparing to issue new pound bank notes and coins featuring King Charles III, at the very moment that the pound has dropped to record lows.“The death of the queen and the fall of the pound do seem jointly to signify decisively the end of an era,” Mr. Prasad of Cornell said. “These two events could be considered markers in a long historical procession in the British economy and the pound sterling becoming far less important than they once were.” More
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Your Friday Briefing: Men Flee Russian Conscription
Plus Japan props up the yen and Cambodia concludes its Khmer Rouge trials.A billboard in St. Petersburg promoting military service.Olga Maltseva/Agence France-Presse — Getty ImagesMen flee Russia, fearing draftOne day after President Vladimir Putin announced a plan to bring 300,000 civilians into military service, thousands of Russians received draft papers and boarded buses to training sites. Many others left the country in a rush, paying rising prices to catch flights to Armenia, Georgia, Montenegro and Turkey, some of the countries that allow Russians to enter without visas.Russian officials said the call-up would be limited to people with combat experience. But one journalist said her husband, a father of five with no military experience, had been summoned.Our reporter spoke to a 23-year-old who bought a plane ticket to Istanbul, wrapped up his business and kissed his crying mother goodbye — all within about 12 hours of Putin’s announcement. He said he has no idea when he will return. “I was sitting and thinking about what I could die for, and I didn’t see any reason to die for the country,” he said. Here are live updates.Reaction: The E.U. is scrambling to decide how to respond. Countries are weighing security concerns against their desire to help those fleeing an unjust war.Surveillance: The Times obtained nearly 160,000 files from Russia’s powerful internet regulator, which the government uses to find opponents and squash dissent. Compared with China, much of the work of Russian censors is done manually, but what Moscow lacks in sophistication, it has made up for in determination.The Japanese yen has been sliding against the U.S. dollar.Kim Kyung-Hoon/ReutersJapan props up the declining yenJapan announced yesterday that it had intervened to prop up the value of the yen for the first time in 24 years, in an effort to stop the currency’s continuing slide against the dollar.Yesterday, the yen passed 145 to the dollar after the U.S. Federal Reserve’s announcement on Wednesday that it would raise its policy rate by an additional three-quarters of a percentage point. The yen has lost over 20 percent of its value against the dollar over the past year, and it has been the worst performing currency among major developed economies this year.Context: The yen’s plunge has largely been caused by Japan’s determination to keep interest rates low. The government’s intervention followed an announcement by the Bank of Japan that it would stick fast to its longstanding ultralow interest rate policy — even as most other countries have begun to follow the U.S. Federal Reserve’s increases.Explore the World of the ‘Lord of the Rings’The literary universe built by J.R.R. Tolkien, now adapted into a new series for Amazon Prime Video, has inspired generations of readers and viewers.Artist and Scholar: Tolkien did more than write books. He invented an alternate reality, complete with its own geography, languages and history.Being Frodo: The actor Elijah Wood explains why he’ll never be upset at being associated with the “Lord of the Rings” movie series. A Soviet Take: A 1991 production based on Tolkien’s novels, recently digitized by a Russian broadcaster, is a time capsule of a bygone era. From the Archives: Read what W.H. Auden wrote about “The Fellowship of the Ring,” the first volume of Tolkien’s trilogy, in 1954.History: For years, a weak yen was widely seen as a boon for its export-driven economy, making Japanese products cheaper and more attractive for consumers abroad.Elsewhere: The Bank of England raised its key interest rate by half a point to 2.25 percent yesterday, the highest level since 2008. It is the latest effort to tame high inflation.Khieu Samphan, 91, is the last surviving Khmer Rouge leader. Nhet Sok Heng/Extraordinary Chambers in the Courts of Cambodia, via Associated PressProsecuting the Khmer RougeFor more than 15 years, a court in a military camp in Cambodia has been working to prosecute the crimes of the Khmer Rouge regime, which caused the deaths of an estimated 1.7 million Cambodians in the late 1970s.In its final hearing yesterday, it rejected an appeal by Khieu Samphan, 91, the fanatical communist movement’s last surviving leader, upholding his conviction and life sentence for genocide and other crimes.Many victims think the United Nations-backed tribunal, which spent over $330 million, was a hollow exercise conducted far too long after the atrocities were committed. Only three people were convicted, and many of the Khmer Rouge’s senior figures — including its notorious top leader, Pol Pot — were long dead by the time the court was created.Background: From 1975 to 1979, the Khmer Rouge caused the deaths of nearly a quarter of the population from execution, torture, starvation and untreated disease as it sought to abolish modernity and create an agrarian utopia.THE LATEST NEWSAsia PacificKim Jong-un, North Korea’s leader, with Vladimir Putin, Russia’s president, in 2019.Pool photo by Alexander ZemlianichenkoNorth Korea denied a U.S. intelligence report that it was selling millions of artillery shells and rockets to Russia, accusing the U.S. of spreading a “reckless” rumor.The Malaysian businessman known as Fat Leonard, who was at the center of a U.S. Navy bribery scandal, was recaptured after he escaped house arrest two weeks ago.Tonga’s enormous underwater volcano that erupted in January may have caused a short-term spike in global warming, scientists said.Yoon Suk Yeol, the South Korean president, was caught on a hot mic calling U.S. lawmakers “idiots,” The Washington Post reports.Around the WorldDavid Malpass, the president of the World Bank, refused to acknowledge human-caused global warming earlier this week. Yesterday, he said he accepted the overwhelming scientific conclusion.A U.S. federal appeals court allowed the Justice Department to resume using sensitive documents seized from Donald Trump in its investigation.U.S. veterans are pushing Congress to grant Afghan evacuees a pass to residency, but some Republicans argue they pose security risks.A deadly cholera outbreak is spreading in Syria, where millions of people, displaced by civil war, lack clean water and health care.What Else Is HappeningCameron Smith/Getty Images for Laver CupRoger Federer will play the last competitive match of his career today in London.For the first time, Catholics outnumber Protestants in Northern Island, a striking demographic shift that could eventually fuel calls to reunite Ireland.The U.S. Senate ratified an international treaty to phase out hydrofluorocarbons, the planet-warming chemicals found in refrigerators and air-conditioners.The U.S. is on track to break its record for guns intercepted at airport checkpoints in one year. So far 4,600 have been discovered, and nearly 90 percent are loaded.A Morning ReadMohammed Zubair, second from the right, is a founder of Alt News. He was jailed this summer over a complaint from an anonymous Twitter user.Atul Loke for The New York TimesFake news is rising in India, with a surge of disinformation after the rise of Narendra Modi, the Hindu nationalist prime minister. Alt News, an independent website, has emerged as a leading debunker of misinformation, such as stories about child-kidnapping gangs and Muslims spreading Covid.But highlighting hate speech against minority groups has put it on a collision course with Modi’s government: A founder was recently arrested and is accused of spreading communal unrest.ARTS AND IDEASTolkien, for Italy’s right wing?Italy’s national election is on Sunday. Giorgia Meloni, the hard-right politician who is the front-runner to become the country’s next prime minister, has a surprising personal manifesto.Meloni loves “The Lord of the Rings” and sees the fantasy adventure series, written by J.R.R. Tolkien, as something of a sacred text. As a youth activist in the post-Fascist Italian Social Movement, she used to dress up as a hobbit.That might seem like a youthful infatuation. But in Italy, “The Lord of the Rings” has informed generations of post-Fascist youth. They have looked to Tolkien’s traditionalist mythic age for symbols, heroes and creation myths free of Fascist taboos, from which they could reconstruct a hard-right identity.Meloni, 45, said that she had learned from dwarves, elves and hobbits the “value of specificity” with “each indispensable for the fact of being particular.” She extrapolated that as a lesson about protecting Europe’s sovereign nations and unique identities.“I think that Tolkien could say better than us what conservatives believe in,” Meloni said. “I don’t consider ‘The Lord of the Rings’ fantasy.”PLAY, WATCH, EATWhat to CookKelly Marshall for The New York TimesThis roasted mushroom and halloumi grain bowl is warm and adaptable.What to Read“Getting Lost,” a series of diary entries by the French writer Annie Ernaux, recounts an all-consuming romance with a younger man.DrinkThe appletini is back, and it’s ushering in a new martini era.Now Time to PlayPlay today’s Mini Crossword, and a clue: Even the slightest bit (five letters).Here are today’s Wordle and today’s Spelling Bee.You can find all our puzzles here.That’s it for today’s briefing. See you next time. — AmeliaP.S. Phil Pan is our next International editor. He was the first Asia editor of The Times based in Hong Kong and previously served as our Beijing bureau chief. The latest episode of “The Daily” is on Vladimir Putin’s escalation of the war.You can reach Amelia and the team at briefing@nytimes.com. More
