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What’s The Problem? UK Economic Policy Mirrors Successful 1980s U.S. Effort

The snarks keep on coming for Britain’s new Prime Minister and finance chief.

Just a few days into their new jobs, Liz Russ (PM) and Kwasi Kwarteng have received a barrage of criticism for introducing some new economic policies including tax cuts.

But the critics seem to have gotten the wrong end of the stick.

The broad plan in the Truss-Kwarteng government is simple — follow the lead of Reagan in the early 1980s to control inflation and promote economic growth. To do that the center-piece parts of the so-called mini budget are tax cuts and reduced regulation. These include eliminating the top 45% personal income tax rate, and the reversal of a previous decision to increase corporate taxes from 19% to 23%.

These moves prompted The International Monetary Fund, which is often considered the global lender of last resort, to ask the government to reverse the tax cuts.

UK opposition leader, Sir Kier Starmer, demanded parliament b

e recalled and the proposed budget is killed.

There were many other similar calls from agitated individuals and organizations.

The problem is there seems to be little basis for the criticisms.

Kwarteng and Truss are following the leader of U.S. president Ronald Reagan and Fed chief Paul Volcker, who together crushed inflation and brought forth the economic boom of the 1980s. It lasted through the 1990s as well.

Reagannomics, as the policy mix became know, involved government getting out of the way of entrepreneur and businesses. To do that taxes got slashed and regulations were eliminated. The result of these so-called supply-side policies gave businesses and individuals both an incentive to work hard and reduced impediments to success.

At the same time, in n effort to crush inflation the Fed lifted the cost of borrowing money to nosebleed levels.

Those policies seem to be mimicked by the Truss-Kwarteng team. While last week’s mini-budget mostly rolled out the tax cut portion of the plan, the reality is that the Bank of England will be forced to raise interest rates to defend the value of the British pound.

In other words, the government will have tight monetary policy combined with loose fiscal policy. Unless the laws of economics have been undone, the result should echo that of 1980s America: a booming economy.

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