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The Trussonomics Warning

The UK government's disastrous rollout of its "mini-budget" is a cautionary tale for policymakers around the world as they pursue measures to help households deal with rising energy prices and inflation. When an economy is already operating near capacity, one group's benefit is another group's cost.

CAMBRIDGE – Following an immediate and brutal reaction from financial markets, UK Prime Minister Liz Truss has, fortunately, abandoned her government’s proposal to lower the tax rate paid by the country’s highest earners. Nonetheless, the experience following her ill-advised “mini-budget” should be a warning to policymakers around the world as they pursue measures intended to help households hurt by rising energy prices and inflation more broadly.

While the United Kingdom’s financial-market drama garnered the most attention, it was not even the primary problem with Truss’s strategy. The more fundamental issue nowadays is that all policies intended to help one group – whether tax cuts for the wealthy, reduced sales taxes (in Florida), lump-sum tax cuts (in California), student loan debt relief, or energy subsidies – must ultimately come at the expense of other groups.

This economic logic is simple and unforgiving. Whenever a country cuts taxes or raises benefits for one group, it is enabling members of that group to increase their consumption. If total output can rise to meet this additional consumption, everything will work out fine: the economy will produce more, the favored group will consume more, and everyone else will be unharmed. The problem today is that output will not rise simply by dint of some groups receiving transfers. In most advanced economies, the unemployment rate is about as low as it has been in decades, capacity is being fully utilized, and central banks are doing everything they can to reduce demand. If one group is empowered to spend more, others will have to spend less.

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