Liz Truss' Tax Fiasco Shows How UK Guardrails Have Fallen Away

inflation is not yet really coming down. Households and countries that import most of their energy are facing a tough winter, and financial markets they're all over the place, though mainly down. Isn't this all, as Larry Summers suggested? There possibly a warm up exercise for another global financial crisis, or merely turbulence on the way to that much hope for soft landing.

Who the hell knows, but whatever is going on, we do know the UK has been right in the crosshairs, with a new Conservative Prime Minister, Liz Trust, facing wild swings in the value of the pound in the past two weeks, and I'm watering increases in borrowing costs that will ripple through the UK economy and society for months

to come. Just to give you a sense of it, if you remortgage your home this summer in the UK, you might have got alone with an interest rate of around two point three percent that would be fixed for five years. The rate on the average five year fixed today is closer to six and quite a lot of that rise has come just since the government unveiled its plan to borrow more to pay for tax cuts for businesses and high earners under the banner of spurring growth.

So we're going to take a closer look at the UK in this first episode of the series and ask a question whether the dramas that have afflicted Liz Truss are a cautionary tale or more a sneak preview of what might lie in store for others. JP Morgan's chief European economist, Malcolm Barr thinks investors were reacting not so much to one bad plan, but a long term systematic weakening in Britain's key institutions. I'll talk to him about

that in a few minutes later on. We'll also have a report from Liverpool, where cost of living woes for doc workers are getting in the way of any hopes that post Brexit that city could once again play a major role in global trade. But first, a quick taste of what it's been like to be in Birmingham this week for the Conservative Party's annual conference. Was supposed to be a coming out party for the new prime minister, where she about her radical vision for growth and generally

reveled in getting the top job. But at least one part of that radical plan had already been junked in the face of overwhelming opposition before the delegates even arrived in Birmingham, and many of her own MPs, amid the market turmoil, opted not to come at all. Alas Bloomberg, UK Government reporter Kitty Donaldson was not so fortunate. She was there for every minute. You could call this Conservative conference a Roana coaster for Liz Truss, but that implies

had been high points. Most of the time. It felt like she was plunging into free full I spent this week talking to Tory MP's cabinet ministers and activists and it's not been pretty. They were a cross anyway because the Prime Minister hadn't united the party after a leadership win. One MP said she's been behaving like she won a

landslide at a general election. Other MP's were also hopping mad about last week's market turmoil and the damage abolishing the top rate of income tax did to the party's reputation. That's because Labor can now present the Tories is out of touch and favoring the wealthy. In the end, the U turn was the worst of both worlds. Trust. According to some MPs, it's now weak and the damage is done at the parties and the fringes around the conference.

Even the Cabinet were angry and spelled out the implications of Liz Truss's policy reverse ferret. They said to me, she's now so damaged she'll only be able to get very little of her agenda through Parliament. That includes stuff such as planning reform. Meanwhile, two very big beasts, former Cabinet ministers, Michael Gove and Grant Shaps, we're going around

having secret squirrel conversations and separately drumming rebellion. Liz Trust was also in submarine mode, disappearing from public view while her aids limited the damage. I actually had a drink with Liz Trust on Monday night and she was quite chipper, making jokes but also being clear she had a vision of economic success that needs to be judged in the

longer term. The trouble for Trust, she's now isolated. Some of her MP's even talked about a cult at the center of the party, and it's largely a cult of two. That's Liz Trust herself and her chancellor Quasi quoteng h. In her speech on Wednesday, which actually went much better than many suspected it would, Liz Trust talked about an antique growth coalition and we need an economically sound and secure United Kingdom and that will mean challenging those who

tried to stop growth. I will not allow the anti growth coalition to hold us back. Now that may sound like a band that should be in one of the second stages at Glastonbury, but what it actually means is anyone who disagrees with Trust and Quarteng's very specific brand of tourism, almost like Trust hasn't learned a single lesson from this week. In order to get voters on side, never mind conservative MPs, political parties need to offer a positive vision and not set themselves up with even more

enemies becoming. Weeks for his Trust are going to be fractious at the very best. So Malcolm bart is head of European Economics for JP Morgan here in London, and as I said at the start of the program, he wrote a rather eye catching piece just as all hell was breaking loose in the financial markets for the UK the other day entitled the Fiscal Event, Brexit and silly Walks. Malcolm,

thanks very much for joining us. Not in that piece, you basically say that the financial markets were not only doubtful about this government's promises, but they were sort of structurally doubtful about the state of in UK institutions now and you know that was that's rooted in policy shifts going back many years. So just talk us through it, because of course usually a lot of the sort of research that comes out of places like JP Morgan is quite short term, and you were making a very very

long term and a rather damning argument. Well, thanks, Stephanie. I mean that the basic idea which I've been trying to investigating that piece is really that there have been a set of changes going on for a while which have been tending to create more space ease for policymakers to steer off the straight and narrow. Some of the guardrails have been being removed over time, and I don't think this is a new process. I think it goes

back beyond Brexit. But Brexit certainly made the process more intense, and there's a result. I think that you have to have that little bit of history in mind when you ask yourself the question, well, hang on, the trust administration has said we are going to deal with medium term sustainability, but why why were markets not prepared to take them on trust? And I think that that is really because, as I say, over time, I think a lot of things have been changing which really have made an accident

like this a lot more likely to happen. I mean, it's funny because it's the kind of analysis that one would usually hear of an emerging market economy when people talk about weaknesses and institutions or even the basic rule of law. I mean, you list it's quite deaf data. You listed the things that were considered to be, as you say, the sort of guard rails that helped us sort of push policy choices towards the orthodoxy even when

you had unorthodox politicians. Independent central bank, independent monitoring of the fiscal choices are technically proficient, and independent civil service functioning parliamentary oversight, a respected judiciary. When you think of Brexit, the sort of mayhem in politics of post Brexit years under Boris Johnson and others, more or less all of those things have been undermined to some extent. I think

that's right. And it can sound like you're making a very sort of party political point sometimes when you're discussing this, and I really actually think this is a point which isn't about whether you're from the left or from the right, or whether you're firmly in the middle. I think it's

really just about understanding how policy is it. So, I mean I was I was asking myself that the question, what is it that's different about what's what's been happening in the last week or two weeks compared to some of the sort of iconic UK debarkles that we all think about in the past. You know, the I m F loan, the exit from the e r M, the financial crisis. You know, what, is this just another one of those or is it different? And I would argue

it is a bit different. And the reason it's a bit different is I think if you go back to the seventy six I m F, if you look at the e r M exit and even that was Sorry, just for those who don't remember the finer points of exchange rate policy in Europe, that was when we joined the exchange rate system in Europe that came before the euro and then had to spectaclic spectacular exit it because the markets decided we just couldn't sustain the rate we

were at. That's right if you've been covering the UK, these these events are rather tattooed on the back of your eyeballs as the kind of big events where we really messed up. But I think there is a difference between them and now, and I think that the difference is that those failings were worth the failings of institutions that were actually trying to do what was quite orthodox

or of their time. You know, if you look at what the Labor government was doing in seventy six, it might look a little bit odd now, but by the standards of the time, they were doing things that were

very much seen in other administrations around Europe. You look at the e r M, you know, there was a sense in which the UK was like a lot of other countries, just trying to figure out what policy regime you needed to have in place when you moved away from monetarism, you know, so, I think again kind of orthodox the financial crisis very much the UK was doing

what other countries were doing. I think what's different this time around is that, really what we're seeing is that the changes that have been going on for a while all have given politicians room for an experimentalism that really we wouldn't we we didn't see through any of those episodes.

It's difficult in my mind to imagine a similar set of errors having been made by any incoming administration over really the last fifteen to twenty years, in the sense of being able to present policy in a way that was so roundly condemned in both the political space and

by the market reaction. More fundamentally, I think the UK is in a state where, looking over the coming years, I think that we are at more risk of events like this occurring unless we begin to repair some of the institutional changes that you mentioned before, improving parliamentary oversight to some extent, making it have a little bit more teeth, making sure that politicians are actually respecting and listening to independent voices like the Civil Service and the Office for

Budget Responsibility. Everything you say, Malcolm, could be quite reassuring to people listening in the rest of the world, because it sounds like the market ructions and the really startling spike in borrowing costs and they're feeling for a while anyway that things were sort of out of control. Is a UK problem, it's it's it's something that's that's result

of UK policy mistakes. The government would make the argument, and some others would make the argument that no, the UK has perhaps got a few things wrong, or it has been the first country to face a more challenging world, but it won't be the last because the financial markets not wanting to borrow at such cheap rates to governments anymore, and inflation being a difficult problem to fix without hurting

your economy. Well, those two challenges are going to face every government in the next few months and maybe years. I think there are some lessons to be taken from this. We have a very very big energy shock which the global economy is trying to digest, and an energy shock basically means that those who are energy consumers are going to be worse off and the benefits again to the energy producers. And that is as central bankers are very fond of telling us that is a unavoidable real adjustment,

and that is out there. I think what the UK experience does tell you is that when you try to address that, you must make sure that whatever you're doing has some clear political consensus that can be sustained behind it. In an environment where you have an inner energy shock, reducing taxation for those at the top end of the income distribution is not just questionable economics, but it's extremely bad politics in the sense of maintaining some kind of

coherent support for the policies you're putting in place. So I think I think it's absolutely fair to say that there is a common component. But if you look at markets around Western Europe, there has been nothing of the same sort of sequence of events as we've seen from in the UK over the last couple of weeks, and so I do think that there is a component of this, which is some some chickens which the UK you know,

has been incubating, coming home to roost. There is one fundamental feature of that of that crazy week for the UK, which is likely to have some residents in other parts of the world, and that's the big rise in long term interest rates. The borrowing cast attached to these io use that governments have, the bombs have, but also interest

rates attached to mortgages. Larry Summers has talked about feeling a little bit like two thousand and seven that you're starting to get many sort of explosions and problems in certain areas can Aias in the coal mine of this much broader issue of the world having to adjust to much higher interest rates potentially for several years if central banks can't get inflation under control. Well, I think lingering in the background of all of this is a very

fundamental question, which is is the inflation process stable. If we were having this conversation probably three years ago, we would have been reflecting on how difficult advanced economies had found it to make sure inflation was not too low. Wind forward a few years and here we are not just looking the issue of an increase in inflation, but really are quite profound said of questions around whether central banks really are still in control of the inflation process.

And so I think I think we need to recognize that that was all part of the backdrop against which the you know, the markets responded in the way that they did, um you know, to to the mini budget in the UK, and these are uniquely challenging times, and you're absolutely right to say some of the adjustments in markets that we've been seeing have been brutal as that

has been been occurring. Now, I'll admit here that there is a bit of me that says, as much as one has to be careful what you wish for, if you had said prior to the pandemic, you can have a choice of an unemployment problem or an inflation problem on the other side of this, which one you think we'd be We'd rather have a which are we better

placed to be able to deal with. I think most economists, this one included, would have said I'd rather have the inflation problem, thank you, because I think that that we may have both in Well, yes, you're absolutely right to some extent. You might not get to choose you You're just getting to choose the balance of both, right, But I think if you if at the moment, I think it's fair to say, yes, policy may have been too

easy for too long. Yes, it may be the case that what was originally thought of as an energy shock was actually something more fundamental than that. But I personally think that over time we have a policy making framework that can response to that we can do without the sorts of messiness that we got in the UK mini

budget along the way. I would be less confident about making that statement if we were coming out of the pandemic and economies were extremely weak and we were worrying about getting growth back up again and trying to get unemployment down, because there I would be wondering exactly what we could do to make that happen. So, yes, it's

a problem. Yes it's not just the UK issue, but there is a bit of a sense in my mind at least, that this is probably the problem we'd have chosen to have faced given the sequence of events that we've seen over the last few years. Well, you've taken us to a to a welcome, rather positive endpoint, So I definitely I don't think we should we should go

too far further down the road. But those who are listening carefully at the beginning may have a nagging question in their mind as to what the reference to silly walks referred to in the title of your Peace, So

maybe you should explain it. So for those who those of your listeners who've heard of Monty Python, there is many people, but well, Monty Python a sort of very archetypal seventh c. Slash eighties British common the and one of their most iconic creations was the Ministry for Silly Walks, wherein the individuals would make their way from A to

b in all sorts of entertaining ways. That John Clees was the archetypal demonstrator of that, and I've always thought that there was something uniquely British about that, in the sense that you would still get from A to B, but there would be some amount of entertainment to be had in the quirkiness of the of the roots and the manner of the motion, and so you know, I think that there was there was always a sense of looking at the UK that there was all sorts of

quirkiness and idiosyncrasy to our politics, to our legal system. But international investors always thought, look, this is all very interesting and colorful, but the destiny that the route from A to B is ultimately a route from where you are to a centerport destination. And I think that, you know, what I was trying to get get at in in the Silly Walks reference was a little bit that international investors are just beginning to wonder whether we're silly as

opposed to whether this is just an entertaining walk. And of course the idea of going from A to B feels particularly challenging today because it happens to be the day of a rail strike in the UK. But let's say we do eventually get their Malcolm bar thank you very much, my pleasure. With inflation at nearly ten percent and many key workers being offered pay increases that are a fraction of that, the cost of living is a

massive issue for households and for businesses across Britain. It's also getting in the way of the government's grand vision of the country's economic future. Freed from the European Union, our supply chains are Brendan Murray found all of those tensions and more on a recent trip across the Mercy. I've been there knocking round thee of her pity For yes,

I'm on the London stage. It's hide a boat song, Get two people on alf on Lowden, dischargeon you know on the just waited the next bolt, and then usually each hour. When Liverpool residents claim that their seaside town in northern England is where the modern world began, they're not exaggerating global trade crossed its wharfs in the late

nineteenth century. This was the launchpad for the British Empire, the home of the shipping line that operated the Titanic, and the birthplace of the most popular UK export, the Beatles. One constant here has been the docks, seven miles of

them along the Mersey River towards the Irish Sea. But Liverpool's port is in the midst of the worst labor unrest in a quarter century, a fight over the future of good jobs for generations of families like Ferry Dock hand Brian Thompson's So in these thirty five years, what have you seen changed for the better for worse here the border Liverpool. Well, when the starts of the it was like a big bus station. Every bus comes to the pier head, every bush at the pier head on

the front of it. Now there's no bus station here, you know, that's all gone. What do put on the bus stations about? What you really do you build the city in thest fifteen years you know this buildings down the next to them as you've found each building that's a new building. You've got the Museum of Liverpool just strolling on the ice hands side, so it's it's a

nice welcome the city sucome to, you know. At the moment though, the dispute on the city's northern docks involved some six d dock workers who have been on strike for the past few weeks. The doctors here have had a long history of ups and downs with their bosses. Here's Katie fox Hotus, a lecturer and employment relations at

Sheffield University Management School. Liverpool historically was always one of the sort of most militant groups of doctor trade union this in the UK are really sort of well known story,

very politically inclined and strongly organized. All of that began to change with the ending of the National Dock Labor Scheme in the late nineteen eighties and that laid the groundwork for this twenty eight month long strike in the mid nineteen nineties known as the Doctors Strike from as fox Hotas explains, basically, the entire workforce was fired twenty five years ago and new workers were hired through non union agencies and it was quite a bad employment situations,

he said. But something happened over the past decade that turned the tide back in favor of the unions in Liverpool. We've really seen over the past decade really this sort of renaissance of union organizing on the docks in Liverpool, and it's been a slow, arduous process of really building the union up from nothing to the fighting force it

is today that has a most a percent union density. Yeah, you can see all that history today hanging on the walls of a Liverpool pub called the Casa, which was founded by one of the workmen who was fired back in. Jackie Richardson manages the place. It's a community center where union members gathered for meetings and to get financial help in these tough economic times. It's a nonprofit organization. It's a social justice center and like a community hop. It's

known as like a trades union bar. So the majodity of the trades unions meet here. It's a strike day goes from here and and a lot of the you know, the unions of the Philly Phillies to he is about the regular meetings each from everyone and then people are struggling so much. You know, if someone goes in, it's you know, through these doors sort of face all for help. If we can't help them, will try and point them inside. Erection of someone, or they'll try and find someone that

can't help them. What Richards hears from the Dockers is that they're trying to prevent their livelihoods from going in reverse. Their employer, peel Ports, says it's offering a fair pay rise of more than eight percent and that the strikers are threatening the local economy. That's the challenge across Britain for the new UK Prime Minister, Liz Trusts, whose government is charged with reviving the UK economy in a way that doesn't unsettle financial markets, hurt the middle class or

alienate her political base. Around Liverpool, public sympathy has tilted toward the Dockers. Here's Brian Thompson again. I think you know that the incestrates and the inflation, people's money delusion the gold backwards. So do you want to just stay level the I don't think they They want to be geedy and they don't want any excellent money. It's just like to keep level of inflation, which he'll I think

they've got advice for that. You know. With its connections to trade routes west to the Americas, Liverpool is well positioned to capitalize on Brexit, which was supposed to untether Britain from the European Union so we can thrive under new trade deals in the global econom to me, but Brexit's promise so far has mainly meant more paperwork for

local businesses rather than newfound prosperity. Here's Elena and Theso of the Liverpool Chamber of Commerce explaining how the city leverages its rich maritime history with the need to modernize after Brexit. I think it is a little bit of a mix of both because obviously you have to move on with technology tally say sum paperless trade frictions trade and I think we have a really good cluster of

logistic capabilities in the region. Quite a few phone members are well prepared to cope with the changes post Brexit, postco with everybody is prepared to accept the mole atility for the trade supply chains for example, and I think Liverpool has to continue to play this vital role in the north of the UK to be seen as as a really good platform for trade links with all the

overseas global networks that you have. For the doctors, they just want a fair piece of Liverpool's future and the signs of progress are rising among the scrap yards and vacant lots along the waterfront. What are you doing here? So you tell me? As we walked through the museum here why On a recent weekday morning, tourists and school kids waited outside the Maritime Museum and bustled in and out of the shops in the redeveloped Albert Docks, a crown jewel of the Industrial Age when it opened in

the mid nineteenth century. A five million pounds stadium is being built near the banks of the River Mercy to be the new home of Everton, Liverpool's second most famous team in English Premier League. You got a hell of a lot of statist COMMENTI in Liverpool. You know they want to take a ferry across the Mercy. Did Yes, it's it's one of the book list things you'd you'd be surprised, you know already people have just been actual

before goes on in Liverpool. I'm Brendan Murray for Bloomberg News, Torn in every Soul, fairy Cross, the Mersey has this land. Well that's it for this rather British episode of Stephanomics. I'm escaping to Washington next week. In the meantime, do please rate the show if you like it, and check out the Bloomberg News website for more economic news and views on the global economy. You should also follow at

economics on Twitter. This episode is produced by Summer Saddi and Magnus Hendrickson, with special thanks to Kitty Donaldson, James Woolcock, Malcolm Barr, and Brendan Murray. Mike Sasso is the executive producer of Stephanomics, the