The danger for the new Republican majority is that the remedy prescribed by Liz Truss was virtually indistinguishable from the economic policy undertaken by Donald Trump. If the Republicans with their newfound power force that policy after January 22, will they suffer the same fate as Liz Truss or initiate a season of prosperity as remarkable is that achieved by Donald Trump?
Both Trump and Truss entered office well aware that the economy needed stimulation and proposed a diet of tax cuts, regulation cuts, but, note, neither politician advocated spending cuts. Rather, both politicians emphasized "growth, growth, growth".
When conservatives asked Donald Trump about a deficit grown too large his answer was not to cut spending, indeed he would massively increase military spending, but with a tax cut and regulation cuts he would grow the economy sufficiently to reduce the deficit, especially as calculated as a percentage of GNP.
Donald Trump was not derailed by massive, spiraling worldwide inflation that confronted Liz Truss so his policy effected wonderful growth at least until everything was derailed by the Covid pandemic. It is not clear before Covid whether he was going to close the deficit gap growth but it was clear that he achieved GNP growth. By cutting deadening regulations, Trump did increase productivity which is an inflation fighter. Wages soared along with GNP and it looked like Trump had succeeded brilliantly, then we came down with Covid 19.
In addition, Trump was aided by several factors that kept inflation in check: the American dollar was the reserve currency of the world; cheap goods were flooding in from China, Mexico and the Third World keeping prices in check while they pushed labor costs in America down; a flood of immigrants had swelled the labor force reducing pressure on wages; the Fed, free of pressure to fight inflation, kept interest rates low which favored growth and fixed assets, even as it distorted the economy to some degree. Under these circumstances, tax cuts and spending could hold hands and go forward unimpeded by threats from the bond market, the stock market, or any hint of a sovereign debt crisis.
Liz Truss enjoyed none of these factors which permitted tax cuts to be granted without generating deficits and inflation when spending was permitted to sail on. The bond market said, we won't accept your risk, we think there is a sovereign debt crisis, we are selling your bonds and we are selling your pound sterling. In the absence of spending cuts to match tax cuts, the economy was on the verge of collapse the pound along with it, and the political collapse of the Liz Truss administration was as sudden as it was inevitable.
I believe it is the Liz Truss scenario that will face the American government next year confronting the Republican majorities in both Houses with the dual challenge of saving the economy and, by extension, the Republic from economic and political disintegration. Will the Republicans escape the blame for the pain which must be inevitably endured?
Spending must be cut even as taxes are cut and taxes must be cut. Cutting spending is to tell the American voters to eat their spinach while the Democrats will be telling the electorate to have a second helping of dessert. As usual, the electorate is likely to behave as it has always behaved, to act in its own short-term self-interest. The electorate has never been known for postponing gratification.
Undertaking this dual challenge in a dystopian world in which those in power will likely be judged quickly and as harshly as Liz Truss, the Republicans have to get the policy right and the messaging right. That means the Republicans cannot succeed as a house divided, as conservatives vs. rinos, as House of Representatives vs. the Senate, as Patriots vs. McConnell, as spenders vs. cutters.
The fate of the party and perhaps the fate of the Republic turns on how the Republicans succeed.
