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      Elections Approaching, Erdogan Raises the Heat Again With Greece

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      Turkey’s president suggested that troops “may suddenly arrive one night” in Greece. With inflation rampant and the lira sinking, a manufactured crisis might be just the thing he needs.ISTANBUL — Last week at a closed dinner in Prague, Prime Minister Kyriakos Mitsotakis of Greece was addressing 44 European leaders when President Recep Tayyip Erdogan of Turkey interrupted him and started a shouting match.Before stalking from the room, Mr. Erdogan accused Mr. Mitsotakis of insincerity about settling disputes in the eastern Aegean and blasted the European Union for siding with its members, Greece and Cyprus, according to a European diplomat and two senior European officials who were there.While the others, flabbergasted and annoyed, finished their dinners, Mr. Erdogan fulminated at a news conference against Greece and threatened invasion. “We may suddenly arrive one night,” he said. When a reporter asked if that meant he would attack Greece, the Turkish president said, “Actually you have understood.”The outburst was only the latest from Mr. Erdogan. As he faces mounting political and economic difficulties before elections in the spring, he has been ramping up the threats against his NATO ally since the summer, using language normally left to military hawks and ultranationalists.While few diplomats or analysts are predicting war, there is a growing sense among European diplomats that a politically threatened Mr. Erdogan is an increasingly dangerous one for his neighbors — and that accidents can happen.Mr. Erdogan needs crisis to buoy his shaky standing at home after nearly 20 years in power, a diplomat specializing in Turkey said, requesting anonymity. And if he is not provided one, the diplomat said, he may create one.The rising tensions between Greece and Turkey, both NATO members, now threaten to add a difficult new dimension to Europe’s efforts to maintain its unity in the face of Russia’s war in Ukraine and its accumulating economic fallout.Mr. Erdogan met President Vladimir V. Putin of Russia in Kazakhstan on Thursday.Pool photo by Vyacheslav ProkofyevAlready, Mr. Erdogan has made himself a troublesome and unpredictable ally for his NATO partners. His economic challenges and desire to carve out a stable security sphere for Turkey in a tough neighborhood have pushed him ever closer to President Vladimir V. Putin of Russia.Mr. Erdogan has earned some shelter from open criticism by allies because of his efforts to mediate between Russia and Ukraine, especially in the deal to allow Ukrainian grain exports.But he has refused to impose sanctions on Russia and continues to get Russian gas through the TurkStream pipeline, while asking Moscow to delay payment for energy.On Thursday, Mr. Erdogan met Mr. Putin in Kazakhstan, where they discussed using Turkey as an energy hub to export more Russian gas after the pipelines to Germany under the Baltic Sea have been damaged.But it is the escalating rhetoric against Greece that is now drawing special attention.Sinan Ulgen, the director of EDAM, an Istanbul-based research institution, said that of course there was an electoral aspect to Mr. Erdogan’s actions. But there were also deep-seated problems that foster chronic instability and dangerous tensions.“Turkey and Greece have a set of unresolved bilateral disputes,” he said, “and this creates a favorable environment whenever a politician in Ankara or Athens wants to raise tensions.”The two countries nearly went to war in the 1970s over energy exploration in the Aegean, in 1995-96 over disputed claims over an uninhabited rock formation in the eastern Mediterranean, and in 2020, again over energy exploration in disputed waters. “And now we’re at it again,” Mr. Ulgen said. “And why? Because of elections in Turkey and Greece.”Mr. Mitsotakis is also in campaign mode, with elections expected next summer, damaged by a continuing scandal over spyware planted in the phones of opposition politicians and journalists. As in Turkey, nothing appeals to Greek patriotism more than a good spat with an old foe.A Turkish drill in August off Mersin, Turkey. Turkey and Greece nearly went to war in 2020 over Turkish energy exploration in disputed waters.Adem Altan/Agence France-Presse — Getty ImagesHe has sought to appear firm without escalating. Confronted at the dinner in Prague, Mr. Mitsotakis retorted that leaders should solve problems and not create new ones, that he was prepared to discuss all issues but could not stay silent while Turkey threatened the sovereignty of Greek islands.“No, Mr. Erdogan — no to bullying,” he said in a recent policy speech. He told reporters that he was open to talks with Mr. Erdogan despite the vitriol, saying he thought military conflict unlikely. “I don’t believe this will ever happen,” he said. “And if, God forbid, it happened, Turkey would receive an absolutely devastating response.”He was referring to Greek military abilities that have been significantly bolstered recently as part of expanded defense agreements with France and the United States.Mr. Mitsotakis has also taken advantage of American annoyance with Mr. Erdogan’s relations with Russia and his delay in approving NATO enlargement to Finland and Sweden to boost ties with Washington. In May, he was the first Greek prime minister to address Congress and urged it to reconsider arms sales to Turkey.He has said Greece will buy F-35s, while Turkey, denied F-35s because of its purchase of a Russian air-defense system, is still pressing to get more F-16s and modernization kits, using NATO enlargement as leverage.But Mr. Erdogan is facing considerable problems at home, making tensions with Greece an easy and traditional way to divert attention and rally support.Mr. Erdogan is presiding over a disastrous economy, with inflation running officially at 83 percent a year — but most likely higher — and the currency depreciating. Turkish gross domestic product per capita, a measure of wealth, has dropped to about $7,500 from more than $12,600 in 2013, based on Turkey’s real population, which now includes some four million Syrian refugees, according to Bilge Yilmaz, a professor at the Wharton School of the University of Pennsylvania.Mr. Erdogan is presiding over a disastrous economy, with inflation running officially at 83 percent a year.Yasin Akgul/Agence France-Presse — Getty ImagesMr. Erdogan has kept cutting interest rates against conventional economic advice. “We need to reverse monetary policy,” said Mr. Yilmaz, who is touted as a likely finance minister should Mr. Erdogan lose the election. “A strong adjustment of the economy will not be easy.”There is also growing popular resentment of the continuing cost of the refugees, who were taken in by Mr. Erdogan as a generous gesture to fellow Muslims in difficulty.Still, Mr. Erdogan is thought to have a solid 30 percent of the vote as his base, and government-controlled media dominate, with numerous opposition journalists and politicians jailed or silenced.In a report on Wednesday, the European Union criticized “democratic backsliding” and said that “in the area of democracy, the rule of law and fundamental rights, Turkey needs to reverse the negative trend as a matter of priority with addressing the weakening of effective checks and balances in the political system.”Still, at this point, analysts think Mr. Erdogan could lose his majority in Parliament and might just lose the presidential election itself.That is an analysis firmly rejected by Mr. Erdogan’s Justice and Development Party, the AKP, said Volkan Bozkir, a former diplomat and member of Parliament, who says flatly that Mr. Erdogan and his party will be re-elected.Constantinos Filis, the director of the Institute of Global Affairs at the American College of Greece, believes that Mr. Erdogan is trying to keep all options open, “casting Greece as a convenient external threat and creating a dangerous framework within which he could justify a potential move against Greece in advance.”As for Washington, he said, they are telling Mr. Erdogan: “Thank you for what you did in Ukraine, of course you haven’t imposed sanctions on Russia, but OK, you’re in a difficult position, strategically, diplomatically, economically — but don’t dare to do something in the Aegean or the Eastern Mediterranean that will bring trouble to NATO.”Migrants at the border between Turkey and Greece in March 2020. There is growing popular resentment of the continuing cost of the refugees in Turkey, who include four million Syrians.The New York TimesMore likely, Mr. Filis said, Mr. Erdogan would again send migrants toward Europe, or launch another energy exploration in disputed areas off Cyprus or Crete, which produced near clashes in 2020, or intercept a Greek ship transporting military equipment to one of the Aegean Islands.Mr. Ulgen also does not expect armed conflict but would not be surprised. “It could happen; it’s not something we can rule out anymore,” he said. “But if it happens, it will be small-scale.”Niki Kitsantonis More

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      Lessons From Liz Truss’s Handling of U.K. Inflation

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      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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      Democrats’ Troubles in Nevada Are a Microcosm of Nationwide Headwinds

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      Inflation and a rocky economy are bolstering Republicans in their races against incumbent Democrats, motivating “an electorate that simply wants change,” as one G.O.P. consultant says.LAS VEGAS — The Culinary Workers Union members who are knocking on doors to get out the vote are on the cursed-at front lines of the Democratic Party’s midterm battle.Most voters do not open their doors. And when some do answer, the canvassers might wish they hadn’t.“You think I am going to vote for those Democrats after all they’ve done to ruin the economy?” a voter shouted one evening last week from her entryway in a working-class neighborhood of East Las Vegas.Miguel Gonzalez, a 55-year-old chef who described himself as a conservative Christian who has voted for Republicans for most of his life, was more polite but no more convinced. “I don’t agree with anything Democrats are doing at all,” he said after taking a fistful of fliers from the union canvassers.Those who know Nevada best have always viewed its blue-state status as something befitting a desert: a kind of mirage. Democrats are actually a minority among registered voters, and most of the party’s victories in the last decade were narrowly decided. But the state has long been a symbolic linchpin for the party — vital to its national coalition and its hold on the blue West.Now, Democrats in Nevada are facing potential losses up and down the ballot in November and bracing for a seismic shift that could help Republicans win control of both houses of Congress. Senator Catherine Cortez Masto remains one of the most vulnerable Democratic incumbents in the country. Gov. Steve Sisolak is fighting his most formidable challenger yet. And the state’s three House Democrats could all lose their seats.The Democratic juggernaut built by former Senator Harry M. Reid is on its heels, staring down the most significant spate of losses in more than a decade. More

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      Why the British Pound Continues to Sink

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      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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      Truss Takes a Bold Economic Gamble. Will It Sink Her Government?

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      Three weeks into her term, Prime Minister Liz Truss’s financial plans have thrown the markets and Britain’s currency into chaos and put her future in peril.LONDON — Prime Minister Liz Truss of Britain campaigned as a tax cutter and champion of supply-side economics, and she won the race to replace her scandal-scarred predecessor, Boris Johnson. Now she has delivered that free-market agenda, and it may sink her government.Four days after Ms. Truss’s tax cuts and deregulatory plans stunned financial markets and threw the British pound into a tailspin, the prime minister’s political future looks increasingly precarious as well.Her Conservative Party is gripped by anxiety, with a new poll showing that the opposition Labour Party has taken a 17 percentage point lead over the Tories. It’s a treacherous place for a prime minister in only her third week on the job.Labour is seizing the moment to present itself as the party of fiscal responsibility. With some experts predicting the pound could tumble to parity with the dollar, economists and political analysts said the uncertainty over Britain’s economic path would continue to hang over the markets and Ms. Truss’s government.“It’s entirely possible she could be replaced before the next election,” said Tim Bale, a professor of politics at Queen Mary University of London, who is an expert on the Conservative Party. “It would be very, very difficult to conduct a full-blown leadership contest again, but I wouldn’t rule anything out.”That Ms. Truss should find herself in this predicament so soon after taking office attests to both the radical nature and awkward timing of her proposals. Cutting taxes at a time of near-double-digit inflation, when central banks in London and elsewhere are raising interest rates, was always going to mark Britain as an economic outlier.But the government compounded the shock last Friday when the chancellor of the Exchequer, Kwasi Kwarteng, unexpectedly announced that the government would also abolish the top income tax rate of 45 percent applied to those earning more than 150,000 pounds, or about $164,000, a year.And Mr. Kwarteng did not submit the package to the scrutiny a government budget normally receives, deepening fears that the tax cuts, without corresponding spending cuts, will blow a hole in Britain’s public finances.Cutting taxes at a time of near-double-digit inflation, when central banks in London and worldwide are raising interest rates, has made Britain an economic outlier.Carl Court/Getty ImagesOn Tuesday, the pound stabilized briefly against the dollar, as did 10-year rates on British government bonds, though both began to gyrate later in the day after a senior official at the Bank of England signaled an aggressive rise in interest rates.The International Monetary Fund, which bailed out Britain in 1976, added to the deepening sense of anxiety when it urged the British government to reconsider the tax cuts. In a statement, it said the cuts would exacerbate inequality and lead to fiscal policy and monetary policy working at “cross purposes.”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.Already, the specter of higher interest rates was causing the housing market to seize up. Two major British mortgage lenders announced that they would stop offering new loans because of the market volatility. Higher rates will hurt hundreds of thousands of homeowners who need to refinance fixed-term mortgages — property owners, analysts noted, who are the bedrock of the Conservative Party.“It’s not like the U.S., where people are on 30-year mortgages,” said Jonathan Portes, a professor of economics and public policy at King’s College London.An estimated 63 percent of mortgage holders have either floating rate mortgages or loans that will expire in the next two years. And the steep decline of the pound means that interest rates will have to rise even further than they would have merely to curb inflation.Ms. Truss, he said, could have taken a more cautious approach: rolling out the supply-side measures first, like plans to untangle Britain’s cumbersome residential planning rules and build more housing, which are hurdles to economic growth. Then, when inflationary pressures had eased, the government could have cut taxes.But that was never in the cards, Professor Portes said, because Ms. Truss and Mr. Kwarteng are free-market evangelists who ardently believe that cutting taxes will reignite growth, and because they have little more than two years to turn around the economy before they face voters in a general election.“This is ‘shock and awe,’” he said. “Truss, Kwarteng, and the people around them think they had to act quickly. The longer they wait, the more the resistance will build up.”Kwasi Kwarteng, Britain’s chancellor of the Exchequer, announced tax cuts that some fear will blow a hole in Britain’s public finances.Clodagh Kilcoyne/ReutersDuring the campaign, Ms. Truss modeled herself on Margaret Thatcher, who also announced a series of free-market measures after taking office as prime minister and endured a turbulent couple of years. Unlike Ms. Truss, though, Thatcher worried about curbing inflation and shoring up public finances; she even raised some taxes during a recession in 1981 before reducing them in later years.But Thatcher came in after an election victory over an exhausted Labour government, which gave her more time to weather the downturn and for her deregulatory measures to take effect. She also got a lift after Britain vanquished Argentina in the Falklands War in 1982, which uncorked a surge of patriotism.“Thatcher was thinking in 1979 that I only need to give voters something they like by 1982,” said Charles Moore, a former editor of The Daily Telegraph who wrote a three-volume biography of the former prime minister. “Liz Truss hasn’t got this amount of time.”The better analogy to Ms. Truss, he said, is Ronald Reagan, with his emphasis on tax cuts and other supply-side policies, as well as his relative lack of concern for their effect on public deficits. Like Thatcher, Reagan weathered a recession before the United States began growing again in 1983. And like her, he had a cushion before he had to face voters.Ms. Truss, by contrast, has taken office after 12 years of Conservative-led governments, and three years into Mr. Johnson’s tenure. She will have to call an election by the beginning of 2025, at the latest. The Labour Party, which had been divided by Brexit and internal disputes, has been galvanized by the new government’s chaotic start, in particular Mr. Kwarteng’s plan to cut the top tax rate, which has allowed Labour to stake out a clear contrast on issues of economic equity.Speaking at the party’s annual conference in Liverpool on Tuesday, the Labour leader, Keir Starmer, declared that the Conservatives “say they do not believe in redistribution. But they do — from the poor to the rich.”Keir Starmer’s Labour Party is seizing the moment to present itself as the party of fiscal responsibility.Henry Nicholls/ReutersLabour’s lead of 17 percentage points in a new poll by the market research firm, YouGov, is the largest advantage it has had over the Conservatives in two decades. The Tories won the support of just 28 percent of those surveyed, raising questions about its ability to hold on to its existing seats, according to Professor Bale.That forbidding political landscape only adds to the challenge facing Ms. Truss. For the tax cuts to have one of their desired effects — which is to encourage businesses to invest more — economists said companies would need some reassurance that the policy is not going to be reversed by a new government in two years.“This is a very inexperienced government swinging for the fences in a situation where Labour is the strong favorite in the next election, if they don’t swing too far left,” said Kenneth S. Rogoff, a professor of economics at Harvard. “If one believes that the tax cuts are going to be reversed under Labour, and that there is a high chance of a Labour government, why would they influence long-term investment?”Britain, Professor Rogoff said, was also rowing against much greater forces in the global economy. After years of low inflation and extremely low interest rates, the flood of public spending because of the coronavirus pandemic has brought back the scourge of inflation and a shift toward higher rates.“The verdict will almost certainly be that governments borrowed too much and should have raised taxes on the wealthy more,” he said.In the short term, Ms. Truss is likely to find herself increasingly at odds with the Bank of England. The bank was already expected to raise rates at its next meeting in November. On Tuesday, its chief economist, Huw Pill, said the government’s new fiscal policies would require a “significant monetary policy response.”Adam S. Posen, an American economist who once served on the Bank of England’s monetary policy committee, said, “The government’s policies are not only outrageously irresponsible, but they don’t seem to understand that the bank has to respond to these policies by raising interest rates a lot.”The Bank of England, like many other banks worldwide, is expected to raise rates at its meeting next month.Andy Rain/EPA, via ShutterstockMr. Posen, who is the president of the Peterson Institute of International Economics, likened Britain’s loss of credibility in the markets to that of Britain and other European countries in the 1970s and Latin American countries in the 1980s. The best course, he said, would be for the government to reverse its fiscal policy, though he said Ms. Truss and Mr. Kwarteng seemed “willfully committed to it.”Certainly, they have given no indication that they plan to back down. On Tuesday, Mr. Kwarteng told bankers and asset managers that he was confident the government’s plan would work.After the turmoil that led to Mr. Johnson’s ouster in July, and the protracted contest to replace him, few in the Conservative Party have the stomach to move against Ms. Truss now. But analysts note that the new prime minister has a shallow reservoir of support among lawmakers. Barely a third of them voted for her in the final ballot against her primary opponent, Rishi Sunak, and she won the subsequent vote among party members by a closer margin than expected.Taking note of the new YouGov poll, Huw Merriman, a Conservative lawmaker, may have spoken for many of his colleagues when he said on Twitter, “Those of us who backed Rishi Sunak lost the contest, but this poll suggests that the victor is losing our voters with policies we warned against.”“For the good of our country, and the livelihoods of everyone in our country,” he added, “I still hope to be proven wrong.” More

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      Inflation Remains Voters’ Top Concern. Can Republicans Keep Their Focus?

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      Democrats and Republicans are running parallel campaigns, with one party emphasizing abortion and democracy, the other inflation and the economy — and both talking past each other.Zach Nunn, an Iowa Republican challenging one of the House’s most vulnerable Democrats, had been talking for months about rising prices when a Texas congressman two weeks ago invited him to visit the Mexican border — to see the fentanyl confiscated, hear tales of dying migrants and witness overwhelmed border agents.Mr. Nunn took it all in, he said. Then, he went back to a district that stretches from Des Moines to the Missouri line to talk about inflation some more.“You know, from knocking on 10,000 doors, what people are interested in,” Mr. Nunn said. It would not matter, he said, if he were speaking in Clarinda, Iowa — a city of 5,300 — or West Des Moines, a city of 70,000. “People are all talking about what is going on with the economy,” he said.In the six-month primary season that came to a close on Tuesday, issues like abortion, crime, immigration, the Jan. 6 attack on the Capitol, and Donald J. Trump have risen and fallen, but nothing has dislodged inflation and the economy from the top of voters’ minds. On Wednesday, polls out of Wisconsin and Georgia again found inflation to be the issue of greatest concern.A New York Times/Siena poll released on Friday had bright spots for Democrats, but 49 percent of respondents said that “economic issues such as jobs, taxes or the cost of living” were likely to determine their votes in November, compared with 31 percent who saw “societal issues such as abortion, guns or democracy” as decisive. And 52 percent of registered voters said they agreed with Republicans on the economy, versus 38 percent who said they agreed with Democrats.“People are all talking about what is going on with the economy,” said Zach Nunn, a Republican candidate for a House seat in Iowa.Bryon Houlgrave/The Des Moines Register, via Associated PressAnd Republican candidates aren’t letting go.“Inflation is now high enough to rob every working American of a month’s pay over the course of a year,” said Tom Barrett, a Michigan state senator challenging Representative Elissa Slotkin, a Democrat, in a Republican-leaning district around Lansing.Representative Nancy Mace, Republican of South Carolina, released her first advertisement of the general election on Thursday — and it focused solely on inflation.“I’m Nancy Mace, and I have had it with crazy inflation,” she says to the camera as she counts up the cost of cooking an eggs-and-bacon breakfast. (Milk, $4 a gallon, a dozen eggs, nearly $4, and bacon, $8 a pack.)For all the losers in an inflationary economy, there are also winners: people with large mortgages or student loan burdens that shrink away in real terms; workers whose wages suddenly rise, sometimes enough to keep pace with prices; frugal seniors who enjoy Social Security cost-of-living increases tied to the inflation rate and higher interest rates on their savings accounts.The State of the 2022 Midterm ElectionsWith the primaries over, both parties are shifting their focus to the general election on Nov. 8.Echoing Trump: Six G.O.P. nominees for governor and the Senate in critical midterm states, all backed by former President Donald J. Trump, would not commit to accepting this year’s election results.Times/Siena Poll: Our second survey of the 2022 election cycle found Democrats remain unexpectedly competitive in the battle for Congress, while G.O.P. dreams of a major realignment among Latino voters have failed to materialize.Ohio Senate Race: The contest between Representative Tim Ryan, a Democrat, and his Republican opponent, J.D. Vance, appears tighter than many once expected.Pennsylvania Senate Race: In one of his most extensive interviews since having a stroke, Lt. Gov. John Fetterman, the Democratic nominee, said he was fully capable of handling a campaign that could decide control of the Senate.Even so, inflation has had outsize potency as a political issue for at least a century — and since hyperinflation after World War I helped usher in authoritarianism across Europe, few issues have been quite so politically destabilizing.In the mid-1990s, Robert J. Shiller, a Nobel Prize-winning economist at Yale who was puzzled by the power of inflation as a disruptive force, surveyed people in the United States, Germany and Brazil to determine why inflation had always produced so much anger, wounded national pride and a feeling that an unwritten social contract between citizens and their government had been broken.Facing deep feelings of insecurity, anxiety and unfairness, “not a single respondent volunteered anywhere on the questionnaire that he or she benefited from inflation,” he marveled.Representative Nancy Mace released her first ad of the general election last week, focusing on the economy. “I’m Nancy Mace, and I have had it with crazy inflation,” she says in the ad.Allison Joyce/Getty ImagesFor Republicans seeking control of Congress, that history still could prove determinative, even as Democrats try to center their campaigns on abortion rights and democratic pluralism and Republican strategists test other themes, like crime, the border and Democratic “radicalism.”Representative Kim Schrier, a Democrat in the suburbs of Seattle who is locked in a tossup contest for re-election, has gone after her Republican opponent, Matt Larkin, on abortion, using her background as a physician to press a persona of earnest trustworthiness. Democratic campaign officials in Washington, D.C., have accused Mr. Larkin of questioning the election results of 2020 and refusing to acknowledge President Biden as legitimately elected.Mr. Larkin’s response? The price of eggs, “up 52 percent in Washington State,” he said Thursday, and milk, “way, way up in the Eighth District.”.css-1v2n82w{max-width:600px;width:calc(100% – 40px);margin-top:20px;margin-bottom:25px;height:auto;margin-left:auto;margin-right:auto;font-family:nyt-franklin;color:var(–color-content-secondary,#363636);}@media only screen and (max-width:480px){.css-1v2n82w{margin-left:20px;margin-right:20px;}}@media only screen and (min-width:1024px){.css-1v2n82w{width:600px;}}.css-161d8zr{width:40px;margin-bottom:18px;text-align:left;margin-left:0;color:var(–color-content-primary,#121212);border:1px solid var(–color-content-primary,#121212);}@media only screen and (max-width:480px){.css-161d8zr{width:30px;margin-bottom:15px;}}.css-tjtq43{line-height:25px;}@media only screen and (max-width:480px){.css-tjtq43{line-height:24px;}}.css-x1k33h{font-family:nyt-cheltenham;font-size:19px;font-weight:700;line-height:25px;}.css-ok2gjs{font-size:17px;font-weight:300;line-height:25px;}.css-ok2gjs a{font-weight:500;color:var(–color-content-secondary,#363636);}.css-1c013uz{margin-top:18px;margin-bottom:22px;}@media only screen and (max-width:480px){.css-1c013uz{font-size:14px;margin-top:15px;margin-bottom:20px;}}.css-1c013uz a{color:var(–color-signal-editorial,#326891);-webkit-text-decoration:underline;text-decoration:underline;font-weight:500;font-size:16px;}@media only screen and (max-width:480px){.css-1c013uz a{font-size:13px;}}.css-1c013uz a:hover{-webkit-text-decoration:none;text-decoration:none;}How Times reporters cover politics. We rely on our journalists to be independent observers. So while Times staff members may vote, they are not allowed to endorse or campaign for candidates or political causes. This includes participating in marches or rallies in support of a movement or giving money to, or raising money for, any political candidate or election cause.Learn more about our process.Voters, he said in an interview, “are very, very concerned.”And, in a country where one party controls the House, the Senate and the White House — and in a state where Democrats control pretty much everything — “there’s also a sense that the Democrats in general are doing this,” Mr. Larkin added.That, too, is consistent with economic history: Citizens of countries suffering from inflation have routinely sought to assign blame — to the government, to greedy companies or to politicians. Inflationary periods often yield labor strife, as workers and unions press for wage increases to keep up with rising prices, point fingers at “price-gouging” companies and, more than anything, rage at those in power.Labor leaders marching against inflation at a demonstration in Buenos Aires in August.Juan Mabromata/Agence France-Presse — Getty ImagesRichard M. Nixon’s 1968 victory over Hubert Humphrey is popularly attributed to the Vietnam War and domestic unrest, but inflation was a “top three” issue, even though price increases were a relatively mild 4.27 percent, said Jason Furman, a Harvard economist with deep connections to the national Democratic Party.Gerald R. Ford’s defeat in 1976 is often ascribed to the hangover from Watergate, but his WIN (Whip Inflation Now) buttons became an object of ridicule in a year in which inflation was still pushing 6 percent. Four years later, Jimmy Carter’s dreams of a second term were vaporized by 13.5 percent inflation.And in 1982, as the Federal Reserve was engineering a recession to finally get control of price gains and Ronald Reagan was absorbing the blame, Democrats beat Republicans by nearly 12 percentage points in the midterm elections — and padded their House majority by 27 seats.“From bitter historical experience, we know how quickly inflation destroys confidence in the reliability of political institutions and ends up endangering democracy,” Helmut Kohl, the chancellor of Germany, said in 1995, harking back to the hyperinflation of the Weimar Republic.In 2022, Republicans like State Senator Jen Kiggans, who is challenging Representative Elaine Luria in southeast Virginia, are using inflation not only to go after the party in power, but also to deflect Democratic charges of “radicalism” by portraying themselves as ordinary family folks, in touch with consumer reality.For voters, however, the signals from the actual economy are mixed. The official inflation report last Tuesday showed that prices in August rose 8.3 percent from a year earlier, only slightly better than July’s 8.5 percent. But because of rapidly falling gasoline prices, overall consumer costs from the month before rose a barely noticeable 0.1 percent. Prices at the pump, the most visible inflationary signal to consumers, are expected to continue their fall in the weeks leading up to the election. That could offer at least psychological relief to consumers — and Democrats — as other cost-of-living indicators like food and rent send stock traders and the Federal Reserve running for shelter.Gasoline prices are expected to continue falling in the weeks leading up to the November elections.Carlos Bernate for The New York Times“If you’re going to have 8 percent inflation over the year before up to the election, you’d like to have the last three months at zero, so the sequencing is about as good as it could be” for Democrats, Mr. Furman said.Mr. Barrett conceded that these fresh signals could blunt the political impact. “To some degree, they boiled the frog, then turned the temperature down a notch on the stove,” he said, “but it’s still raging hot.”And his Democratic opponent, Ms, Slotkin, has taken pains to address the issue, too, ticking off legislation and administrative actions that she said she supported to address inflation. They include suspending the federal gas tax, releasing oil from the strategic petroleum reserve, pressing companies on “price gouging” and granting Medicare the authority to negotiate drug prices.“Certainly if there was a silver bullet to fix it, it would have been fired,” she said, adding, “leaders need to do all they can — not just use it as a political issue.”Republicans say that, as children go back to school, higher prices on clothes, food and school supplies will come more into focus, and cold weather will bring the sticker shock of soaring heating bills. The disorienting power of price increases is all the more potent, experts say, because Americans have not weathered them in four decades.Democrats hope to turn voters’ minds elsewhere. On the lengthy “issues” web page of Mr. Nunn’s opponent, Representative Cindy Axne, the word inflation does not appear, though she does mention inflation in one campaign ad as being among a litany of travails hitting Iowans recently. In another ad, Ms. Axne acknowledges that “rising costs are hurting Iowa families everywhere.”Representative Cindy Axne mentioned inflation in one campaign ad, among a list of problems facing Iowans.Cheriss May for The New York TimesOn Friday, Emilia Sykes, the Democratic candidate for an open House seat in northeast Ohio, released a new ad saying she has “a plan to lower costs,” though she avoided the word inflation.Elsewhere, Democrats are focusing almost exclusively on abortion, democracy and the overall theme that Republicans who have undermined the integrity of elections and democratic institutions cannot be trusted with power.In that sense, the parties are entering the final sprint to Nov. 8 largely talking past each other.But the unique ability of inflation to anger voters and undermine authorities in power should not be underestimated, economists say. Wage increases, though stronger than they have been in years, have not kept pace with inflation this year, but in 2021, when voters’ anger showed up most clearly in polling, average family incomes “far exceeded” price gains, thanks in large part to temporary tax cuts and income supplements approved in successive pandemic-relief measures, said Austan Goolsbee, a University of Chicago economist.“Average actual real incomes went up, not down,” he said, “so it’s still a puzzle.”For Republicans, there is no mystery, only the challenge of staying on the issue as Democrats try to direct voters’ attention anywhere else.“This stuff is real,” Mr. Barrett said on Thursday. “The Democrats are whistling past the graveyard.” More

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      Ahead of Midterms, Yellen Embarks on Economic Victory Tour

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      DEARBORN, Mich. — Emerging from months of inflation and recession fears, the Biden administration is pivoting to recast its stewardship of the U.S. economy as a singular achievement. In their pitch to voters, two months before midterm elections determine whether Democrats will maintain full control of Washington, Biden officials are pointing to a postpandemic resurgence of factories and “forgotten” cities.The case was reinforced on Thursday by Treasury Secretary Janet L. Yellen, who laid out the trajectory of President Biden’s economic agenda on the floor of Ford Motor’s electric vehicle factory in Dearborn, Mich. Surrounded by F-150 Lightning trucks, Ms. Yellen described an economy where new infrastructure investments would soon make it easier to produce and move goods around the country, bringing prosperity to places that have been left behind.“We know that a disproportionate share of economic opportunity has been concentrated in major coastal cities,” Ms. Yellen said in a speech. “Investments from the Biden economic plan have already begun shifting this dynamic.”Her comments addressed a U.S. economy that is at a crossroads. Some metrics suggest that a run of the highest inflation in four decades has peaked, but recession fears still loom as the Federal Reserve continues to raise interest rates to contain rising prices. The price of gasoline has been easing in recent weeks, but a European Union embargo on Russian oil that is expected to take effect in December could send prices soaring again, rattling the global economy. Lockdowns in China in response to virus outbreaks continue to weigh on the world’s second-largest economy.In her speech on Thursday, Ms. Yellen said the legislation that Mr. Biden signed this year to promote infrastructure investment, expand the domestic semiconductor industry and support the transition to electric vehicles represented what she called “modern supply-side economics.” Rather than relying on tax cuts and deregulation to spur economic growth, as Republicans espouse, Ms. Yellen contends that investments that make it easier to produce products in the United States will lead to a more broad-based and stable economic expansion. She argued that an expansion of clean energy initiatives was also a matter of national security.“It will put us well on our way toward a future where we depend on the wind, sun and other clean sources for our energy,” Ms. Yellen said as Ford’s electric pickup trucks were assembled around her. “We will rid ourselves from our current dependence on fossil fuels and the whims of autocrats like Putin,” she said, referring to President Vladimir V. Putin of Russia.The remarks were the first of several that top Biden administration officials and the president himself are planning to make this month as midterm election campaigns around the country enter their final stretch. After months of being on the defensive in the face of criticism from Republicans who say Democrats fueled inflation by overstimulating the economy, the Biden administration is fully embracing the fruits of initiatives such as the $1.9 trillion American Rescue Plan of 2021, which disbursed $350 billion to states and cities.At the factory, Ms. Yellen met with some of Ford’s top engineers and executives. During her trip to Michigan, she also made stops in Detroit at an East African restaurant, an apparel manufacturer and a coffee shop that received federal stimulus funds. She dined with Detroit’s mayor, Mike Duggan, and Michigan’s lieutenant governor, Garlin Gilchrist.Detroit was awarded $827 million through the relief package and has been spending the money on projects to clean up blighted neighborhoods, expand broadband access and upgrade parks and recreation venues.Although Ms. Yellen is helping to lead what Treasury officials described as a victory lap, some of her top priorities have yet to be addressed..css-1v2n82w{max-width:600px;width:calc(100% – 40px);margin-top:20px;margin-bottom:25px;height:auto;margin-left:auto;margin-right:auto;font-family:nyt-franklin;color:var(–color-content-secondary,#363636);}@media only screen and (max-width:480px){.css-1v2n82w{margin-left:20px;margin-right:20px;}}@media only screen and (min-width:1024px){.css-1v2n82w{width:600px;}}.css-161d8zr{width:40px;margin-bottom:18px;text-align:left;margin-left:0;color:var(–color-content-primary,#121212);border:1px solid var(–color-content-primary,#121212);}@media only screen and (max-width:480px){.css-161d8zr{width:30px;margin-bottom:15px;}}.css-tjtq43{line-height:25px;}@media only screen and (max-width:480px){.css-tjtq43{line-height:24px;}}.css-x1k33h{font-family:nyt-cheltenham;font-size:19px;font-weight:700;line-height:25px;}.css-ok2gjs{font-size:17px;font-weight:300;line-height:25px;}.css-ok2gjs a{font-weight:500;color:var(–color-content-secondary,#363636);}.css-1c013uz{margin-top:18px;margin-bottom:22px;}@media only screen and (max-width:480px){.css-1c013uz{font-size:14px;margin-top:15px;margin-bottom:20px;}}.css-1c013uz a{color:var(–color-signal-editorial,#326891);-webkit-text-decoration:underline;text-decoration:underline;font-weight:500;font-size:16px;}@media only screen and (max-width:480px){.css-1c013uz a{font-size:13px;}}.css-1c013uz a:hover{-webkit-text-decoration:none;text-decoration:none;}How Times reporters cover politics. We rely on our journalists to be independent observers. So while Times staff members may vote, they are not allowed to endorse or campaign for candidates or political causes. This includes participating in marches or rallies in support of a movement or giving money to, or raising money for, any political candidate or election cause.Learn more about our process.The so-called Inflation Reduction Act, which Congress passed last month, did not contain provisions to put the United States in compliance with the global tax agreement that Ms. Yellen brokered last year, which aimed to eliminate corporate tax havens, leaving the deal in limbo. On Thursday, she said she would continue to “advocate for additional reforms of our tax code and the global tax system.”Despite Ms. Yellen’s belief that some of the tariffs that the Trump administration imposed on Chinese imports were not strategic and should be removed, Mr. Biden has yet to roll them back. In her speech, Ms. Yellen accused China of unfairly using its market advantages as leverage against other countries but said maintaining “mutually beneficial trade” was important.Ms. Yellen also made no mention in her speech of Mr. Biden’s recent decision to cancel student loan debt for millions of Americans. She believed the policy, which budget analysts estimate could cost the federal government $300 billion, could fuel inflation.Treasury Department officials said Detroit, the center of the American automobile industry, exemplified how many elements of the Biden administration’s economic agenda are coming together to benefit a place that epitomized the economic carnage of the 2008 financial crisis. Legislation that Democrats passed this year is meant to create new incentives for the purchase of electric vehicles, improve access to microchips that are critical for car manufacturing and smooth out supply chains that have been disrupted during the pandemic.“There will be greater certainty in our increasingly technology-dependent economy,” Ms. Yellen said.But the transition to a postpandemic economy has had its share of turbulence.Ford said last month that it was cutting 3,000 jobs as part of an effort to reduce costs and become more competitive amid the industry’s evolution to electric vehicles. The company also cut nearly 300 workers in April.“People in Michigan can be pretty nervous about the transition to electric vehicles because they actually require by some estimation a lot less labor to assemble because there are fewer parts,” said Gabriel Ehrlich, an economist at the University of Michigan. “There are questions about what does that mean for these jobs.”Republicans in Congress continue to assail the Biden administration’s management of the economy.“Inflation continues to sit at a 40-year high, eating away at paychecks and sending costs through the roof,” Representative Tim Walberg, a Michigan Republican, said on Twitter on Thursday. “While in Michigan today, Secretary Yellen should apologize for being so wrong about the inflation-fueling impact of the Biden administration’s runaway spending.”Ms. Yellen will be followed to Michigan next week by Mr. Biden, who will attend Detroit’s annual auto show.The business community in Detroit, noting the magnetism of Michigan’s swing-state status, welcomed the attention.“We’re about as purple as it gets right now,” Sandy K. Baruah, the chief executive of the Detroit Regional Chamber, a business group.Noting the importance of the automobile industry to America’s economy, Mr. Baruah added: “When you think about blue-collar jobs and the transitioning nature of blue-collar jobs, especially in the manufacturing space, Michigan has the perfect optics.” More

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      Rising Energy Prices and High Inflation: The Economic Issues Facing Liz Truss

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      For the past eight weeks through the Conservative Party’s leadership contest, the severity of Britain’s economic troubles only worsened. The new prime minister, Liz Truss, will be greeted with a long list of demands for rapid and aggressive support to alleviate the pain caused by the rising cost of living.Looming over the new government is the specter of stagflation — an unpleasant mix of stagnant economic growth and high inflation. Consumer prices are rising at their fastest pace in four decades as the rate of inflation exceeds 10 percent and is expected to keep climbing. Meanwhile, the economy contracted in the second quarter, and the Bank of England is forecasting a long recession to begin later this year as wages lag and household budgets are squeezed by rising food and energy costs. Household incomes, adjusted for inflation and taxes, are predicted to fall sharply this year and next, in the worst decline in records dating back to the 1960s, the central bank said.Britain caps household energy bills, but that limit will increase by 80 percent beginning next month. And there are calls for urgent action to help low-income households as it becomes increasingly accepted that a relief package laid out in May is inadequate. Liz Truss said on Sunday that should introduce a package to help people with energy bills within a week of taking office. Small businesses — especially energy-intensive ones, such as pubs and restaurants — are warning of widespread closures over the winter as companies won’t be able to afford their energy bills. The pub industry said there needs to be “swift and substantial” government intervention to avoid large-scale job losses.There is also a growing number of labor strikes, as workers across industries demand pay raises in line with the cost of living. Among those walking out or threatening to are port workers, nurses, teachers, train drivers and mail service personnel.Beyond these immediate problems, Britain also has many long-running economic challenges to overcome. How will the new government try to make a success of Brexit, which so far has made trading with Britain’s closest neighbors more cumbersome and costly? Can the government close the inequality gap between London and the rest of the country? Amid an energy crisis, will the government get on track to meet its legally binding targets to reach net zero carbon emissions?The gloomy economic prospects for Britain are clear in financial markets. The pound dropped 4.5 percent against the U.S. dollar in August, its worst month in nearly six years, and is now trading at $1.15. It’s at its lowest level since March 2020, and approaching the lowest since 1985. The price of British government bonds has dropped as investors turn away from British assets and expect the central bank to need to raise interest rates sharply to rein in inflation. More