A new U.K. leader could ease political chaos, but economic fixes will be harder
LEILA FADEL, HOST:
While a new prime minister in the U.K. could ease political instability, economic upheaval will be harder to calm. Outgoing Prime Minister Liz Truss' financial policy spooked the markets. And persistent inflation is hurting household budgets. For insight into what's next, we're joined now by Adam Posen, president of the Peterson Institute for International Economics. Good morning, Adam. Thanks for being on the program.
ADAM POSEN: Good morning, Leila. Thank you.
FADEL: OK. So what does the next prime minister have to do to try to protect Britain from a deep recession?
POSEN: There's not much they can do right now to protect them from a deep recession. But you can do things to protect households from the worst of it. And you can do things to protect the pound and the longer-term course of the British economy. What Truss and the previous chancellor, Kwarteng, got so wrong is that it matters what you spend money on. And it matters how you determine (laughter) the amount spent. And they violated norms on both of those. If the new prime minister and the current new chancellor, Mr. Hunt, come in and say, here's a path where we are going to spend on protecting low-income households but not spend willy-nilly, here's a path where we are going to raise some taxes, things should stabilize.
FADEL: So is Britain's former finance minister, Rishi Sunak, the right pick to help calm some of this economic turbulence in the U.K.?
POSEN: I think it's less about personalities...
POSEN: ...Than about behavior. He is clearly committed to the institutions, which is - they have something called the Office of Budget Responsibility, which is analogous to the U.S. Congressional Budget Office. Liz Truss tried to end run that. He's going to have them review the package. He's committed to the independence of the Bank of England, their Federal Reserve, and letting them raise rates if they see it necessary. He's committed to actually saying how they're going to supposedly pay for things. Finance ministers, just as in the U.S., never fully pay for things, but some notion of paying for it and having to cost it out. So it's about how he respects the institutions, as well as just showing some limitation.
FADEL: So more respect for the expertise around this. How much of this economic turmoil was about Truss' economic policies? And how much of it is really the legacy of Brexit? I mean, the U.K. had one of the strongest economies in Europe before leaving the European Union.
POSEN: Yeah. I am - I think Brexit was a major factor in two ways, Leila. First is that Brexit divided the society, divided the politics...
POSEN: ...And let extremists in the British Conservative Party essentially run the show. And that's part of when markets react badly. It's like with Italy or Argentina in the past. If you have unstable governments, people don't believe that you're going to stick to whatever fiscal policy you declare. And Brexit contributed to that. But also, economically, Brexit, by cutting off the U.K. from its largest trading partner - overwhelmingly largest trading partner, Europe, making things more expensive for people in the U.K., making shortages of certain kinds of workers and goods and services in the U.K., made inflation worse, made income worse. So it took what was a general, global problem and made it worse for the U.K.
FADEL: You know, so much about what you're describing sounds familiar - a divided public, concern about people ignoring expertise. And the U.S. is about to have midterms, which could shift power in Congress to Republicans. Is there something that conservatives in the U.S. could learn from the mistakes of conservatives in the U.K.?
POSEN: I think they should, Leila. I think it's a fair thing. It's less about expertise and more about institutions, that you don't just trivially throw aside basic, common-sense norms just for the sake of a quick political point. We hear House Minority Leader Kevin McCarthy talking about playing games with the debt ceiling, which, in a time where we've spent trillions of dollars in the last few years to deal with COVID and to deal with energy, that's irresponsible.
FADEL: Adam Posen of the Peterson Institute for International Economics. Thank you so much.
POSEN: Thank you for having me.
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