Moreover, even if one argues that the mini-budget is meant to be political theater, it has not been a very effective performance. Voters tend to become most attuned to the economy and government largesse in the year before an election, and there are well-documented “political budget cycles”: during election years, governments push highly visible spending projects and cut back on less-visible longer-term investments. But the next UK election might not be until January 2025. By that time, it should be clear that the tax cuts will not pay for themselves by boosting economic growth, and any initial positive reactions from voters will have dissipated. While Truss could call for an early election to get a broader mandate for her policies, that would be extraordinarily risky.
To be sure, radical policies, particularly from conservative politicians, are often berated by the press before proving to be far more successful than anticipated. British Prime Minister Margaret Thatcher and US President Ronald Reagan are two leading examples of this tendency, and Truss has made no secret of her admiration for the Iron Lady. But Thatcher and Reagan at least had a coherent policy framework that they clearly communicated; the same cannot be said for the Truss government so far.
Truss and her chancellor, Kwasi Kwarteng, are right to argue that the UK’s biggest economic problem over the past couple of decades has been anemic productivity growth, and that the solution must lie in supply-side reforms. Moreover, there is still time for them to come up with better plans, and to explain them better to the public. The Bank of England is key here also. Until then, the pound is going to be a punching bag, and things are likely to get much worse before they get better.
Kenneth Rogoff, professor of economics and public policy at Harvard University and recipient of the 2011 Deutsche Bank Prize in Financial Economics, was the chief economist of the International Monetary Fund from 2001 to 2003. The co-author of "This Time is Different: Eight Centuries of Financial Folly," his new book, "The Curse of Cash," was released in August 2016.