Paul Krugman.
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Paul Krugman, Mohamed El-Erian, and Nouriel Roubini blasted the new UK government’s spending plans.
Prime Minister Liz Truss’ planned tax cuts tanked the pound and spiked bond yields this week.
“Trussonomics is deeply stupid,” Krugman said, while Roubini slammed policymakers as “clueless.”
Paul Krugman, Nouriel Roubini, and Mohamed El-Erian have torn into the new British government’s proposed tax cuts, and weighed in on the Bank of England’s 65 billion pound ($70.5 billion) bond-buying plan.
Prime Minister Liz Truss and Chancellor Kwasi Karteng’s proposals tanked the pound and roiled the UK pensions sector this week. They also prompted a warning from the International Monetary Fund, and spurred the BoE to buy long-dated government bonds and delay the start of its bond sales, in order to stabilize volatile markets and forestall a financial disaster.
Here’s what the three leading economists have said about the fiasco:
Paul Krugman
“Trussonomics is deeply stupid,” Krugman tweeted on Wednesday. “But there seems to be a lot of hyperventilating going on. Not, it won’t cause a global crisis — for God’s sake, Britain is only 3.2% of world GDP. And while British markets are a mess, we’re a long way from 1976. Get a grip.”
The Nobel Prize-winning economist was referring to the UK’s last currency crisis — a product of painful inflation, trade and fiscal deficits, and surging oil prices. The nation received a nearly $4 billion loan from the IMF, which required it to make deep cuts in public spending.
Krugman also derided the UK government’s fiscal plan as “stupid and cruel,” and accused Truss and her cabinet of “buying into supply-side nonsense”, in a Twitter thread on Saturday.
Advocates of supply-side economics tout tax cuts, deregulation, and lower borrowing costs as the best tools to drive economic growth.
Mohamed El-Erian
In a Financial Times column, El-Erian underlined how unusual it is for a developed country like the UK to experience what’s happened this week: chaos in its currency and bond markets, a loss of confidence in its leaders, an urgent central-bank intervention, calls for an emergency interest-rate increase, and a warning from the IMF.
Allianz’s chief economic adviser warned the current tumult could result in higher borrowing costs and wealth losses for UK households. He said that would raise the risk of stagflation — when an economy faces stubborn inflation, stagnant growth, and rising unemployment.
El-Erian slammed the UK’s planned tax cuts as “unsettlingly large, relatively regressive and unfunded” in the column published Wednesday.
Moreover, he underscored the incoherence of the country’s policies in a tweet the same day. He noted that rate hikes and government-bond sales typically cool an economy, while tax cuts and bond purchases usually aim to stimulate it.
“There’s an inherent contradiction in what they’re trying to do,” he told CNN on Wednesday. “That’s why this is nothing more than a Band-Aid,” he said about the BoE’s bond-buying program.
Nouriel Roubini
“Truss and her cabinet are clueless,” Roubini tweeted on Saturday about the government’s fiscal plans. “Back to the 1970s. Stagflation and eventually the need to go and beg for an IMF bailout.”
The economist, nicknamed “Dr. Doom” for his dire predictions, argued in a Wednesday tweet that the BoE should be raising rates to shore up the pound’s value, instead of buying bonds and pumping money into the economy.
He also compared the UK to an emerging-market economy, given its incorrect mix of policies.
“BoE blinks and monetizes the reckless fiscal deficit at a time when monetary policy should become much tighter given the surge in inflation,” Roubini tweeted after the central bank announced its bond-purchasing program.
“1970s stagflation ahead! Full lunacy of MP and FP,” he added, referring to monetary and fiscal policy.