Making sense of the meltdown

Sahil Dutta, Kojo Koram, Quinn Slobodian, Florence Sutcliffe-Braithwaite, James Stafford

The 44-day premiership of Liz Truss produced a series of radical turnarounds in British politics. It has destroyed, at least for now, the prized ‘economic credibility’ of the Conservative Party, and may yet ensure that Labour wins the next general election outright. It has also created the conditions, however, for a return to austerity policies under the new Conservative leadership of Rishi Sunak and Jeremy Hunt: justified by the panicked response of bond and currency markets to former Chancellor Kwasi Kwarteng’s tax-cutting ‘mini-budget’. 

To make sense of this extraordinary moment, Renewal convened a roundtable of experts on the Conservative party, neoliberalism and fiscal policy. They discussed the historical origins of Truss’s political project, the many continuities between her ways of thinking and Rishi Sunak’s, and the dangers of Labour learning the wrong policy lessons from the market response to the ‘mini-budget’. 

This conversation took place via Zoom on the 24th October–the day Rishi Sunak was named leader of the Conservative Party. It has been lightly edited for clarity.  

Short-lived PM and Chancellor Liz Truss and Kwasi Kwarteng. © Creative Commons

The intellectual origins of ‘Trussonomics’

James Stafford: Truss & Kwarteng’s mini-budget suggested a particular kind of neoliberalism that was confrontational, embattled, radicalized; and at odds with elite and technocratic opinion in Britain and around the world. Where did it come from?

Florence Sutcliffe-Braithwaite: Thatcher’s first years in power must have been in the back of Truss’s mind when she was drawing up the ‘mini-budget’ with Kwarteng. Famously, in 1981 she had 364 economists writing to The Times to say, ‘this has got to stop!’ And the narrative, at least, is that Thatcher held firm, the Thatcherite medicine worked, and delivered an economic miracle. 

Now, obviously a lot of evidence suggests it didn’t really cause an economic miracle, but I think that was nonetheless in the back of Truss’s mind, that she too would be not subject to restrictions that were ultimately just in the minds of her critics. She thought that if she took the difficult decisions and stood firm, her ideology would triumph.

Quinn Slobodian: There is a kind of non-economic reasoning at work here, a kind of voluntarism, or the belief that what is required at certain times is an act of political boldness that isn’t reducible to an economic argument. That has its own series of reference points by now: Brexit, Reagan’s tax cuts, Thatcher’s moves at the beginning of her administration as Florence says. 

Another case in point is Lee Kuan Yew and Singapore. The story of the transformation of this tiny dot in Southeast Asia into a global city is often explained (poorly) in a shorthand way in terms of the ‘boldness’ of its leadership at the moment of decolonization. You can cast a figure like Lee as someone who defied modest expectations and seized all of the opportunities available to him: novel South-South alliances, the use of new technologies, the exploitation of new market niches for outsourcing and offshore banking, and so on.

In a sense, that’s what the ‘mini budget’ was–a leap of faith with its own presumed history of successes. Unfortunately, those successes were always premised on a set of conditions beyond the act of will itself, and those conditions obviously didn’t exist for Britain in 2022. 

James Stafford: Truss and Kwarteng were obsessed with ‘unleashing’ things that have been repressed: entrepreneurial ability, creativity, innovation. And they had a model of political leadership that was in this entrepreneurial mould—they themselves wanted to be decisive and creative and ‘disruptive’ in the way that the entrepreneur-figure they admire is. So consequently they wouldn’t let themselves be held back by this kind of technocratic reasoning that says: ‘Well. Maybe you should run the numbers by the Office for Budget Responsibility first?’ 

Quinn Slobodian: There is definitely a social Darwinist undertone to their beloved idea of ‘unleashing’. It will be unpleasant for some but liberating for others. There might be some repressed ‘Victorian virtues’ left within the British population that need to be revived through this shock to the system. Once they’ve been unleashed, though—think about unleashing a Rottweiler —the weaker will be taken down.

This magical thinking–rather than actual economic thinking–is tagged onto buzzwords or phrases from economic doctrine like ‘creative destruction’. But it doesn’t really go beyond the buzzword. It’s actually a belief that the natural hierarchy needs to be restored through the forces of competition being less restricted by the intervention of managers and bureaucrats. 

James Stafford: This brings us seamlessly to your piece for the New York Times, Kojo, about how Enoch Powell’s views on economics, race and culture set a precedent for Truss and Kwarteng’s policies.

Kojo Koram: I think we need to emphasise that lineage in order to understand why the Truss administration took the economic gamble that it made in what were pretty unpromising circumstances, and ended up really overstretching themselves. What they were doing was rooted in a long tradition of seeing a lot of the compromises that were made in the aftermath of the Second World War by the British state as being fundamentally illegitimate. Powell’s writings on the British state and its role in the economy describe a European model of social engineering and economic statecraft as almost unnatural in this ‘nation unafraid’, in this thousand year unbroken chain of English freedom. This is something that I think has sat underneath a lot of this politics that has been bubbled up in terms of the Brexit movement and the European Research Group. Truss and Kwarteng had a real belief that this was the moment to really correct that distortion of the way in which the British and particularly the English economy should naturally function. 

Quinn Slobodian: I think Kojo is really right to home in on Powell because Powell had an interesting turn in his biography from a natural creature of empire, a civil servant, to quite a strong critic of the continuation of empire. The latter Powell is perfect for our moment because he squares the dyad that’s often seen as contradictory between a kind of localism and a globalism that is explicitly not an imperialism. Powell wanted Britain to come home to itself, but he wanted it to remain a global economic power, just one that was not institutionally entangled globally. So how do you do that? Well, you engage through allegedly depoliticized economic institutions like the gold standard, which Powell continued to believe one could return to. You mediate your global economic activity through forms of private ordering.

What often confounds people about this right-wing globalist populism is that it seems to jumble together too many contradictory things. For example, how can you be against immigration and yet be so economically liberal in other parts of your policy? If you think about this as a version of Powellism, then it does become possible to ‘come home’ and remain global at the same time, and to be a free trader and an advocate of free finance, while still being so tight on immigration. 

On that point, though, I think if it is true that Suella Braverman resigned from Truss’ government [She has since been reappointed by SunakJS] because of pressure being put on her to raise immigration quotas in response to Truss’ call for growth, then we could see this as an interesting tension. On the one hand, you have an economic policy that is premised on ongoing growth and yet it also wants to strangle off the input of one of the most important factors of production for exactly that growth, which is a talented and growing labor force. I think it’s worth watching how the labor question will be handled in the new dispensation under Sunak. Will it be loosened up? Will the Powellism soften a bit? Or will that remain the rock against which a lot of this growth ideology ends up smashing? 

Continuities between Truss & Sunak

James Stafford: The aspiration post Brexit has been that you can have more guestworker schemes. You can have a more explicitly hierarchical and exploitative labor market that uses migration instrumentally without conceding migrant workers the kind of rights that EU free movement gave them. There’s always been a split within the Brexit right between those who want these guest worker schemes and those who just want fewer people. Maybe Braverman fell foul of that.

Quinn Slobodian: The Dubai, or Singapore, model is the only one that actually works to do this sort of localist globalism. You bring people in large numbers—but as a second tier, non-citizen workforce. 

Florence Sutcliffe-Braithwaite: I think Sunak will probably be quite pragmatic on this. They will increase ‘points-based’ elements of the system and really drive down what they would call ‘illegal immigration’ and ‘unskilled immigration’. That is possible because of Brexit and it will sort of square that circle of localism, growth and globalism (except for the real dyed-in-the-wool zero immigration people). This can also be spun as a non-racist policy because it will probably mean more migrants of colour and fewer mainly white migrants from Europe. This will in turn only exacerbate the role migration regimes play in entrenching global inequality—we have a great piece on this by James Hampshire coming out in our final issue of the year. 

Kojo Koram: That would also work in terms of Sunak’s personal biography. The idea of the upwardly mobile possibilities of immigration is also going to be weaponized, I think, in order to mask the harder edges of whatever policy Sunak’s chosen home secretary [Braverman] really advocates for. 

This is all related to another real passion project of Sunak’s from his very early days as an MP—the growth and expansion of special investment zones, free trade zones, places where you can have differentiated labor rights and conditions for people working in those areas. We’re not going to see the complete disappearance of Liz Truss’ vision of a nation of ‘Über-riding, Airbnb-ing, Deliveroo-eating freedom fighters’. The continued expansion of the platform economy requires that kind of precarious labor. I think that it could find a quite comfortable home in Sunak’s partitioning of the British economy into these investment zones.

Sahil Dutta: Sunak has said that he wants to combat the problem of withdrawal from the workforce with attacks on the already threadbare welfare system, to try and fix that under-supply of labour. 

Neoliberals have long hoped that there is some kind of market mechanism that can deliver that discipline on state and society, but plans to implement tend to fall apart quite quickly. A lot of right wing politics is about trying to establish an external disciplinary force, whether it be the gold standard or anything else.

Quinn Slobodian: I’m curious about how Sunak is going to deal with the institutions of neoliberal global governance. Is he going to be less belligerent and more willing to try to do some kind of WTO reboot? Is there going to be a big push for this UK-US bilateral trade relationship? What’s your sense there, Kojo? 

Kojo Koram: I think that there will be a much more comfortable relationship with international legal encasement of capitalist relations. I think that there won’t be the kind of belligerent rhetoric around smashing up and redrawing the Brexit exit agreement that we saw with Johnson and Truss. There will be a renewed emphasis on trade agreements with not just the US, but with Commonwealth countries like India or rising economic powers like Nigeria.

In general, I think we’re likely to see a much more general attempt to try and reintegrate the UK as a reliable member of the kind of governing architecture that was seen as so important for giving globalization its legal foundations. I think that a lot of Sunak’s premiership might be driven by the impetus to try and reestablish the UK’s credibility within that community of global governance, which first Johnson and then Truss did so much to challenge and upturn.

The return of austerity?

Quinn Slobodian: There are basically two very different ways of looking at the last month or so. One is as it appears: as a kind of shambolic display of incompetence and bad governance. The other way involves putting on dialectical goggles and looking for the cunning of history. If you take that latter position, it is clearly true that the Kwarteng-Truss model was the epitome of ‘cakeism’, in the Boris Johnson mould. It was not paying for its tax cuts, it was doing tax cuts plus boosting energy subsidies in such a way that of course shocked the money markets. That was never going to work. 

But could we then take the second step and say what they were “actually” doing was producing the conditions within which austerity could be rolled out, meaning you now match the tax cuts with proper spending cuts in a way that maybe would have been harder to do before the pension freak-out, before the Bank of England U-turn and so on? 

How do we think about that? It may not be technically true in terms of the intentions of the actors, but is it possible to see that as a kind of outcome regardless of how this ends up: rather than showcasing Tory incompetence and their inability to govern, it actually gets them closer to a more hardcore goal than they might have been able to achieve by other means?

Florence Sutcliffe-Braithwaite: I don’t think that that was a deliberate move—it was both sheer incompetence and also an illustration of the lack of room for manoeuvre that politicians have in the world that Thatcherism helped to create. 

Not that governments were not restricted before. In the period that we often describe as Keynesian or even social democratic before the 1970s, British governments were obsessed with maintaining the value of the pound within the Bretton Woods system and did all sorts of quite extreme things in order to achieve that. So it’s not like governments had agency before the 1970s and now they don’t. 

But the post-70s global economic settlement has really restricted what they can do: this was an illustration of that. And it has, I think, absolutely baked in austerity for many years to come. It’s really difficult to see how anyone is going to be able to really undo austerity for quite some time. But then the New Labour governments, when they first came in, held to Tory spending plans for the first couple of years and only after that started to spend more money on public services and turn a lot of things around. We could potentially see the same kind of thing coming down the line from a future Labour government. Perhaps that’s the best case scenario. 

The role of the Bank of England in the market meltdown

James Stafford: This brings us to the question of whether these constraints driving us back towards austerity are real—or whether they are at least in part invented disciplinary mechanisms of the kind Sahil was talking about. 

Sahil, what do you think was driving the way gilt and currency markets reacted to the mini budget? Was it that the money wasn’t being spent on things that markets thought would provide a good return in terms of growth or productivity? Or was it just that it was too much money spent too quickly without checking the sums and without a sense of where it was all going?

Sahil Dutta: It’s more of a puzzle than it first appears. One of the frustrations I have is that the budget is being presented as a radical, exceptional break from what had been happening before. The underlying theory is not so dissimilar to how policy has been for a long time—concentrating resources at the top, trying to remove all risk from investing while maximizing the rewards. This is somehow meant to resolve a growth dilemma that’s been at the center of British politics, basically since 1945, but then especially so since 2008. It’s not self-evident that it would blow up in this way now.

Not to repeat the Tory line, but there is a global context that is significant. The currency markets and bond markets should be separated slightly. What’s driving the decline in sterling in comparison to the dollar is the US Federal Reserve tightening—raising interest rates, ending the asset purchase programs that they’ve been running since 2008. And then you’ve got the Bank of England committing to quantitative tightening this year—selling back some of the UK government debt they’d previously bought, as part of its deflationary agenda. So this means that even before the budget, liquidity in the long-dated government bond markets, both in the US and the UK, is less than it was. 

And then you get this moment of crisis—and it is clearly sparked by the fact that there is no investor confidence in the promise that you can deliver economic stability with a further concentration of resources at the top. But the sequence of events, with the Bank of England announcing its plans for quantitative tightening a day before the fiscally expansive but regressive budget, clearly shows a lack of coordination in governance between the Bank and the Treasury. It also demonstrates that the Bank did have and does take a dim view of this type of Conservative policy.

I think the wrong lesson almost to draw from it is that this was the inevitable flexing of the 

‘bond market vigilante’ muscles and there was no way that could be avoided. The Bank of England taking a decision to basically not support the government’s fiscal plans helped produce the market reaction. 

Then there are longer term issues related to the way that the market for UK public debt sits in the money markets and with pensions. Again, the bank should have had better awareness of the impact of its quantitative tightening policy alongside the budget in relation to pensions, and there wasn’t that. The Bank of England absolutely shares responsibility with Truss and Kwarteng for what happened. But there’s a reticence about holding the Bank accountable, which I find frustrating.

James Stafford: Can you explain how pension funds were sucked into this as the interest rates on government bonds rose? What was it that put pension funds in danger? 

Sahil Dutta: Partly it’s that many defined benefit pension schemes have been closed to new members, so they’ve not got new liquidity coming in. At the same time you had a two-decade fall in interest rates generally, which makes it harder for pension funds to get yield over the long term, and balance their liabilities and assets.

One of the ways in which they tried to deal with this twin problem is to hedge against the possibility of further falls in interest rates—because this is the world before the current moment of rising interest rates—by taking out strategies to buy interest rate swaps, which are derivatives that would pay off in the event of further falls in interest rates. In order to undertake those investment strategies they partner with—or are predated by, depending on how you want to see these things—big asset managers who access interest rate swaps by pledging gilts as collateral. 

When central banks started raising interest rates this year, those swaps started to turn against those investments: rising interest rates meant they faced possible losses. So the asset managers demanded they pledge more capital, the result of which is there’s a demand for cash out of these pension funds. They don’t have cash. In order to meet the margin calls on their gilt-based collateral swap agreements, they sell gilts, which further reduces the price of gilts, so you get the ‘death spiral’. 

Globally, there’s a lack of buyers of long-dated government debt. Now for UK government debt, pension funds would normally be a buyer—but they’re all selling simultaneously in the UK, and so you need somebody to come in and provide a support for the price. The institution that did that in this crisis—reversing what it just said it was going to do about a week before—was the Bank of England, which said ‘if no one else will buy it, we will’. They acted to put a floor under the price of long-dated  gilts and thereby stabilize, at least for a period of time, the chaos that was itself sparked by the ‘mini-budget’ and the Bank’s tightening plan.

If the Bank were to make an ongoing commitment to do that, and doesn’t make it so time limited, then there’s probably more fiscal flexibility. It’s not particularly orderly, but there is flexibility there. That’s something that the Bank wasn’t keen to carry on doing. They wanted to keep a harder constraint in terms of how much the government could borrow without the gilt markets seizing up.

James Stafford: This infamous three day deadline—the Bank of England saying on 11th October that they would stop propping up the gilt market—was spun as putting pressure on the pension funds to get their houses in order. From what you were saying about the Bank’s disapproval of the Truss tax cuts, was the real audience for that ultimatum the government? 

Sahil Dutta: I do think that it was both. The Bank was trying to hurry up the pension funds in changing their strategies, although they were also whispering that they could extend support for longer if necessary. The commitment to support the orderly unrolling of those pension fund strategies was there throughout. 

More broadly, though, the Bank’s enabling of the ‘bond market vigilantes’ should shape how we see what the constraints are for alternative programs and alternative fiscal strategies. It does raise questions about institutional reform and what the Bank is there to do, what the Treasury is there to do. The danger for social democrats is to think that if you just do more orderly forms of fiscal planning, if you have long term strategies, if you use the OBR, if you avoid Truss’s rhetorical attacks on the Treasury orthodoxy or the Bank mandate, then somehow you’d be able to do big investments and increase public spending in the era of rising rates. 

That might not be possible. But you could take on the extra element, which is institutional reform: really using the Bank in the service of fiscal policy. That’s not something that certainly this Labour leadership is comfortable talking about. It’s a mistake of progressives to uphold the orthodoxy as being the only orderly way to run fiscal policy, because it’s not been working for an awfully long time. 

Quinn Slobodian: One danger is, if you see Truss & Kwarteng as sort of fundamentalists, driven by a kind of non-economic political urge or ideology—by religion, in short!—then the tendency is to see the central bank as science. You turn the Bank into the kind of rational pole against which one can judge flights of fancy and ideology. This is obviously just tactically wrong, and from what you’re telling us it’s empirically wrong as well. 

Labour’s fiscal plans and the limitations of ‘borrowing to invest’

James Stafford: It seems to me that the gamble Labour are likely to take is that they can borrow to invest while continuing to squeeze current spending. They would try and invest in things which are in line with this emergent post-neoliberal paradigm that we’re starting to see talked about in the financial press, the EU, other organs of global technocracy: resilience, industrial policy and investment in green energy. This might represent a landing zone for a centre-left politics with a lot of buy-in from business elites and international institutions like the IMF. They would probably have to be tough on public sector pay and welfare spending, but that’s fine with their kind of political orientation and the credibility they think they need to win with the electorate as well as the markets.

Sahil Dutta: If you can make a credible display of austerity and you want to rhetorically hold to ‘sound money’ principles, and then you find different fudges around capital investment, maybe you can do that. But in order to actually deal with the stagnant state of the UK, you need something that is more radically redistributive. 

It might be that in a context of rising rates globally it becomes very difficult to undertake those kinds of investments. If fiscal expansion on capital spending is your only form of economic change to the current orthodoxy, alongside tiny bits of fiddling around with tax, I don’t know how credible that would be in terms of how bond markets would react to that. 

So ultimately then the external constraint would be bond markets disciplining what Labour’s plans would be. There is a narrow landing point, but it’s one that will fail the test of what is necessary to rescue the social state in Britain. We have to start talking about broader institutional reform and elite taxation. You can solve fiscal credibility if you just tax right at the top and do that properly. But it’s going to be tricky to just go for investment alone, without anything else, no matter how many forms of technocratic prose you put around it.

Popular mobilisation and the politics of austerity

James Stafford: I was wondering about what kind of popular forces or popular mobilizations might kind of alter the trajectory of UK politics towards a new era of austerity at this point. Obviously, there’s been the Enough is Enough campaign. There’s an ongoing strike wave. Is there any prospect of something coalescing within the UK that would, for instance, push Labour towards more ambitious wealth taxation or a more radical fiscal policy?

Florence Sutcliffe-Braithwaite: One of the strange things at the moment is the fact that there is such a strong consensus around supporting people through the cost of living crisis, in a way that there wasn’t in the 80s or in the 70s when inflation was high, when mortgage interest rates were really high. There is this huge acceptance of the idea that it’s the government’s job to preserve living standards; that’s accepted by even a lot of people in the Conservative party, and may well undermine mass mobilization against austerity and against cuts that are coming down the line. This could be the case even while the Conservative government continues to disregard the living standards of the poorest people in society, who’ve been dealing with spiralling rents, and shrinking incomes for well over a decade now.

Kojo Koram: In terms of the strike action, it’s curious just how broad it is in comparison to the 1970s and 1980s. We are seeing many different sectors of society that are now seeing industrial action gaining that language and framing of themselves as subjects within the labor market. One of the few things that Truss was able to do in her brief tenure was to at least dampen the criminal barrister strike that had been brewing for a number of years now and becoming increasingly militant. We’re looking at the potential nurses strikes, increasing industrial action that we’re seeing in former, not just in what we might call white collar professionals, but in those standard kind of prestige professions—medicine, law, aeroplane pilots. All these kinds of industries are now gaining the language of industrial action, which used to be seen in the 1980s as the preserve of miners and dockers. I think that really shows the way in which shifts in global capitalism over the last 30, 40 years have allowed for a hollowing out of labor standards right across the board. And I think that’s going to make the groups who are the constituency of any potential labor government potentially more familiar with more radical, confrontational language about labour relations than was the case when Tony Blair became prime minister with a huge majority.

Sahil Dutta: The level of labour organization is still very limited. But I agree there is at least a rhetorical confidence in the labour movement that underpins some of the things that Florence is saying. There is more widespread acceptance of the idea that people do need to be supported in some sense. 

The sort of discussions of macroeconomics compared to 2008—where you could so successfully spin the banking crisis as Labour spending—that kind of attempt to actively just produce ignorance seems a lot less effective now. There’s a much broader range of people that speak about political economy, there’s more media sources. That makes it least slightly harder to just insist austerity has to be the only response to whatever fiscal ‘black hole’ we have. 

And there’s also the fact that in contrast to the 80s, when there was still a significant safety net in place, that has now been eaten away and the period of austerity has really left nothing left to cut. Just keeping nominal rates of spending the same and letting inflation reduce the real value of government spending is not really an option.

James Stafford: That points, again, to the danger of Labour simply acquiescing to austerity politics while making Truss & Kwarteng take the blame for them; just as Cameron, Clegg and Osborne blamed Brown. That kind of ‘manufactured ignorance’ about the previous government imposing tragic constraints on what you can do can be very useful in an immediate party-political sense. But I think this conversation has shown us that Labour has to be careful to not lose the war over economic policy in the act of winning an electoral battle with the Conservatives.

Sahil Dutta is a Lecturer in International Political Economy at City, University of London. He is the author, with Will Davies, Nick Taylor and Martina Tazziloa, of Unprecedented? How Covid-19 Revealed the Politics of Our Economy (2022).

Kojo Koram is a Senior Lecturer in Law at Birkbeck, University of London, and the author of Uncommonwealth: Britain and the Aftermath of Empire (2022).

Quinn Slobodian is Marion Butler McLean Professor in the History of Ideas at Wellesley College, and the author of Globalists (2018) and Crack-up Capitalism (forthcoming 2023).

James Stafford is an Assistant Professor in History at Columbia University and a Contributing Editor at Renewal. 

Florence Sutcliffe-Braithwaite is Associate Professor of British History at University College, London, and Co-Editor of Renewal.