A theory of why the cleverest people make the dumbest decisions
This is a post about why people make terrible decisions, and so the obvious place to start is with British politics.
For those of you from overseas or waking from long and peaceful slumber, just over a week ago our new Prime Minister Liz Truss proposed a budget - well, she and her Chancellor Kwasi Kwarteng called it a ‘fiscal event’ because, oh never mind. Suffice to say, it did not go well. I mean it really didn’t. The fiscal event precipitated a global financial event which sent all of Britain’s vital signs haywire. The Bank of England was forced to step in and spend billions of pounds on government bonds, just to stop the house collapsing.
When I wrote about Truss last week (in a post for paid subscribers) things were already looking peaky, but I didn’t know how dire they were about to get. Over the weekend, the government went on a drunk-briefing spree, telling reporters that there were plenty more tax cuts where those came from, matey (although the whole problem is that they don’t know where they’re going to come from). On Monday the markets punished this idiocy, first by selling pounds and then by making our debt more expensive to service. The result is that mortgage rates have risen, the government is contemplating bigger cuts to already-failing public services, and we’re all worse off than we were.
I don’t know what will happen next, but Truss and Kwarteng will probably have to reverse elements of the budget, including the top rate tax cut which sparked the whole conflagration (at some point, Truss will probably be replaced by the person she defeated in the leadership contest, Rishi Sunak, but not yet). Such a reversal would only be partly about placating the markets, which were reacting less to specific policies and more to the general impression of an economy run by muppets; there were no forecasts, no proper costings, nothing about how the £60 billion energy package plus tax cuts are going to be paid for. They also need to placate Tory MPs, who are rightly terrified at the prospect of having to defend inevitable cuts to public spending while their government hands back money to bankers. (Having said all this, at the time of writing Truss and Kwarteng haven’t moved an inch).
Now, let me gently reiterate what I said last week, which is that in some ways Truss’s approach to economic policy is admirable.
It is a fine ambition to try and raise the baseline of British growth rather than accepting that it should be mediocre versus comparable nations. Britain has a big welfare state, the cost of which is growing faster than our economy; unless we increase our the rate at which we generate wealth we’re just sinking slowly into the sands. The only way out is to permanently boost our productive capacity.
Truss has also acknowledged that this kind of reset is hard, and that we must bite bullets, on housing and planning reform and childcare, if we’re going to achieve it (though some of the bullets she’s chosen, like fracking, are just poison pills).
So far so good. The trouble is that she and Kwarteng combined this apparently hard-nosed analysis with a fantasy which has made everything else they propose seem equally implausible. According to most economists there is virtually no evidence-based reason to believe that tax cuts for the very rich drive economic growth. It is just a story that Tories tell themselves, derived from a misty and muddled recollection of Thatcherism and Reaganism. The Laffer Curve is literally a back-of-a-napkin idea. People who work in finance and actually benefit from such cuts know all too well how implausible this story is. They also know that a government can cut taxes on the very rich, or it can make cuts in public spending, but it can’t do both. That’s to say, the traders grasp the basics of politics in a way that Truss and Kwarteng apparently do not.
In sum, it was not the size of the tax giveaway which generated panic in the markets. It was the stupidity of it. The stupidity, and the profound, unearned arrogance of making such moves with no regard for fiscal process and probity.
So here’s what I’m interested in. It touches on a theme I often return to, because I find it so fascinating: the peculiar stupidity of clever people.
How did these two intelligent individuals - Truss is at least clever enough to get where she is; Kwarteng is, famously, a Cambridge and Harvard-educated intellectual - come to stake their careers on such a fantastical story?
Below the fold I’ll discuss this question, with help from Charlie Munger and a bit of cognitive science.
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