In an interview now lost to the archives, one of Thatcher’s PR men Tim Bell explained that the focus on Mrs T’s looks was inevitable. No one remembered what any particular prime minister had worn previously because they were men. There was nothing to remember. Inevitably for a woman, things were different for Thatcher, so of course there was always more discussion of it. To be sure, she used her clothes as part of her appeal, as Churchill had done before her with his bow-ties. But she was going to be judged on her clothes anyway, so she had to turn the situation to her advantage.
Truss has the whiff of market monetarism about her
So it is with Liz Truss. No-one knows or cares what suit Sunak is wearing from one day to the next, tieless or otherwise. But Truss will always be scrutinised, and not just for her clothes. With her proposals for tax cuts, her free enterprise rhetoric and her view that inflation is a monetary problem, she will inevitably be compared to Thatcher. For every Guardian reader who finds her Thatcherite credentials abhorrent, there’s an association of Tory members who find it admirable. The best thing she can do is lean into it, as she did with the pussy-bow outfit in the second debate.
But how much of a Thatcherite is Truss? Can we expect a rerun of the 1980s or something different? Well, both. The most interesting point of comparison is her approach to monetary policy. It is difficult to compare modern politicians with their predecessors on this score because Gordon Brown made the Bank of England independent. It is now up to a team of economists to set interest rates, whereas in the 1980s that was the job of the Treasury. So Truss won’t be setting interest rates directly like Thatcher’s government was.
What she can do, though, is to change the Bank’s mandate. Currently, the bank has an inflation target. The average price level in the economy is not supposed to rise by more than two per cent a year. This system worked for a long time, the so-called Great Moderation, but it’s under pressure now as inflation rises. Inflation rises are associated with higher interest rates — which are used to get inflation under control. So strong is this association that when Truss said she thought inflation was caused by loose monetary policy in the Channel 4 debate, the moderator reflexively said this would mean higher interest rates and a mortgages nightmare.
But Truss has the whiff of market monetarism about her. She has proposed a review of the Bank of England’s mandate. If the Bank didn’t have an inflation target, what would it have? Rather than targeting inflation, market monetarism involves targeting income. This is called a “nominal GDP target” — the Bank would be looking not just at inflation, but inflation and growth. It is the overall size of the economy that matters, not just the inflation rate. That is likely what Truss is looking for from her review of the Bank. In the Channel 4 debate, she pointed to Japan’s central bank as a model, which switched to nominal GDP targeting in 2015. (Economists like Scott Sumner recommend using market indicators to set interest rates; it’s not clear whether Truss supports that.)
According to Sumner, targeting nominal GDP is a more stable method of running monetary policy. When the economy runs hot, like in the tech boom, a nominal GDP target seeks to return to a more normal growth path. The same is true of dips. Following this policy would mean the government would have less scope to “rig” economic performance with tax and spend policy: it would all be smoothed out by the growth target.
What’s missing from all of these critiques is growth
Importantly, this changes our perspective on interest rates. Low rates are usually thought to mean we are in a period of easy money, and vice versa. Sumner reminds us that low rates tend to go with tight money; high rates tend to come at times of high inflation. Interest rates don’t tell us whether money is tight or loose — markets do. It’s complicated, as they say. The easy association of Truss’ policy on inflation with a “mortgages nightmare” is not necessarily a given. Truss is proposing a new paradigm but she’s often critiqued by the standards of the old model.
A similar association is made with Truss’ proposed tax cuts and the public finances. Cutting taxes means lower revenue, which means less funding for public services. Jonathan Freedland in the Guardian gave this idea a very clear expression recently. “She wants simultaneously to cut the money coming into the public coffers and increase the money going out: less tax and more spending at the same time. She’ll cancel the national insurance rise and jack up the defence budget. This is pure cakeism.” As with almost all other anti-Truss commentators, Freedland relies on the fact that only one Brexiteer economist can be found to support her tax cuts.
What’s missing from all of these critiques is growth. Truss’ number one priority is, as it has always been, growth. She understands that with growth, many of these arguments become less important. If you can grow the economy more, you will need to bicker less about taxes and revenue. Taken individually each of her policies — Bank of England mandate, tax cuts, Net Zero suspension, control of public spending — can be critiqued on its own terms. What Truss is trying to do instead is put together a package of policies that together will promote economic growth.
Tax cuts alone might not encourage growth. (Although recent research shows that cutting corporation tax improves R&D spending and investment.) But tax cuts as part of a programme of monetary discipline, fiscal control, higher interest rates, targeted regulatory cuts and perhaps nominal GDP targeting is a different proposition. Especially when inflation has given more headroom for cuts in the government’s budget. To be fair to her opponents, Truss isn’t presenting the usual soundbite arguments, and we live in a media ecosystem that thrives on the trading of un-nuanced arguments.
Truss’ critics from the FT to the Tory party are assuming, consciously or not, that the current situation needs to be managed rather than changed. This is the mindset Truss is fighting, more so than any particular policy. She’s been fighting it for years. Her monetary, fiscal and regulatory ideas are all about changing the rate of growth, not accepting it. She seems now to be our best hope of a political leader who really wants to try something new, to take modern ideas and apply them to the problems of the state. That mindset, more than her monetarist beliefs or garish outfits, is how she really resembles Margaret Thatcher. Let us hope she succeeds.
Enjoying The Critic online? It's even better in print
Try five issues of Britain’s newest magazine for £10Subscribe