In the 1970s, psychologist Stanley Milgram instructed his students to board New York subway trains around the city, approach random members of the public and ask them for their seat without offering any justification. When the students returned, they reported that perhaps surprisingly, most people were willing to give up their seat. The students also said, somewhat less surprisingly, that they found the experiment almost impossibly difficult to conduct.
This was what’s known as a “breaching experiment”, an attempt to understand the rules of social life by briefly and deliberately breaking them. Over the past month, Britain has witnessed an extraordinary breaching experiment conducted at scale: what happens if a government acts without regard for financial markets? The results have been highly illuminating, not only for what they tell us about the likely trajectory of Liz Truss’s leadership, but for what they reveal about a host of other elites, experts and commentators who collectively get to define what counts as “sound” economic policy.
The main takeaway from the past few weeks is that no prime minister – or chancellor – can afford to ignore the views and sentiments of those who lend the state its money. This is scarcely surprising, given the lengths more orthodox politicians have gone to over the years to acknowledge the supremacy of the bond markets – but it has been graphically and quite grippingly performed before our eyes. Nobody could have predicted quite how things would play out between the September “mini-budget” and the humiliating policy U-turn and sacking of Kwasi Kwarteng three weeks later, but the fact that the markets eventually came out on top merely affirms core assumptions of the post-1970s era.
But study the Truss-Kwarteng breaching experiment more closely, and various other details about our political and economic reality come to light regarding whose economic interests count and whose don’t; what kinds of economic malfunction are permitted and which ones aren’t. Making these judgments over the past four weeks has required some remarkable hypocrisy on the part of technocrats, rival politicians and former politicians, but that has not deterred them.
Consider one elite perspective on the Truss-Kwarteng “breach”. The International Monetary Fund scolded Britain for letting its monetary policy and its fiscal policy pull in different directions. While the Bank of England has been trying to tackle inflation with interest rate rises, Kwarteng’s Treasury was guilty of contributing to inflation with tax cuts. Some “policy coherence” was sternly advised.
And yet, a conflict between monetary and fiscal policy was the central feature of the dismal decade that followed the 2008 financial crisis. While George Osborne starved local government, the welfare state and infrastructure projects of money, the Bank of England pumped unprecedented quantities of credit into the financial system to prevent a full-on depression. The combined effect was socially devastating (to an extent it affected life expectancy) and financially lucrative, as asset values soared. Was that really “coherent”? Or was it simply having the right priorities, from the IMF’s point of view?
Then consider the key mechanism through which Truss’s economic havoc fed directly into Tory party panic and another leadership crisis: the soaring cost of mortgages, soon to be followed by falling house prices. Evidence from the past 30 years suggests that Tory governments can weather various scandals and policy disasters, but not financial mismanagement that impacts on homeowners. It is likely to prove so again.
But why is this? For those whose fixed-rate mortgages are ending, and find themselves moving from a 1.5% interest rate to a 6% one, the economic hardship will be considerable. Some undoubtedly may have to move house. But the cost of living crisis was already biting several months before Truss took power, while David Cameron’s government had left widespread destitution in its wake that even drew criticism from Unicef and Oxfam. Osborne’s welfare “cap”, which prevented families with three or more children from receiving additional payments, added to already surging child poverty, but was motivated by political self-interest, a cynical ploy to divide the Labour party.
Clearly not everyone’s economic hardship carries the same weight in the corridors of Westminster. The image of the responsible homeowner, governed by financial rectitude and traditional family values, occupies a sacred place in the imagination of politicians and newspaper editors. Their suffering must be avoided at all political costs. If it was economic suffering itself that provoked such unease in parliament, the past 12 years would have played out very differently indeed. On some brute level, pundits and politicians can perhaps empathise more readily with the struggling mortgage holder because they themselves own property.
Last week, Osborne tweeted: “Given the pain being caused to the real economy by the financial turbulence, it’s not clear why it is in anyone’s interests to wait 18 more days before the inevitable u-turn on the mini budget.” In a touching moment of cross-party consensus, former Labour Treasury minister Ed Balls piped up: “I agree with George.” But was George Osborne really opining on avoidable economic pain? One regrettable consequence of the Truss-Kwarteng experiment is that Osborne is now treated as a voice of moderation and reason, rather than as the man whose policy choices tore the country apart, leaving it desperately vulnerable to the pandemic that later ravished it. Jeremy Hunt’s appointment as chancellor was greeted as a victory for realism and common sense over Brexiteer fantasies – but, as his immediate commitment to fiscal austerity demonstrated, this is the realism of the technocrat and the common sense of the bond trader.
There is, however, a glimmer of hope contained in the Truss-Kwarteng breach. The market response to the mini-budget, and the subsequent turnaround from the very first rumours of a U-turn, were not driven by any specific numbers. The problem was Kwarteng’s appalling Eton- and Brexit-fuelled arrogance; his belief that he didn’t have to account for himself at all. His fatal mistake was to behave towards the bond markets as Boris Johnson did towards parliament and the law: as if their rules applied to everybody except him.
By the same token, it’s plausible that a social democratic programme of government is financially viable, so long as it is accompanied by a modicum of deference to the markets and the conventional Treasury routines of costing and fiscal transparency. The point is not – as Osborne constantly told us – to reduce borrowing at all costs. The point is to be clear about what the borrowing requirement is, with as much clarity, foresight and humility as possible.
If anything good can come out of this mess, it is that lesson. Learning it may even help to free us from the hypocritical hectoring of technocrats and austerity merchants once and for all. In the meantime, we have yet to learn what fiscal medicine Hunt will prescribe for a national economy that has already suffered so much over the past 12 years.
William Davies is a sociologist and political economist. His latest book is Unprecedented? How Covid-19 Revealed the Politics of Our Economy
