The Cure? Cut Taxes and Spending

I feel bad for Ms. Truss, but only because whoever was in that seat, like the passenger in James Bond’s Aston Martin DB5, was going to be ejected. Unknown to many, U.K. pension funds had been hedging against interest rate increases, using derivatives with six or seven times leverage. As inflation hit 10.1%, interest rates were going up no matter what, which caused funds to dump gilts, or bonds, to pay their margin calls, crushing the currency.

The press jumped on Ms. Truss’s tax cuts (lowered from 45% to 40% for £150,000 earners) but ignored her subsidies for high energy bills. It wasn’t tax cuts that did her in; it was deadly pension leverage. Both Reagan and Thatcher knew to slay the inflation dragon first. To stabilize the situation, the Bank of England printed tons of pounds to buy bonds—more quantitative easing in an inflationary world. Not smart.

The new prime minister

Rishi Sunak,

a Stanford M.B.A., is foolishly exploring tax increases. Sadly, tax cuts are probably dead in the U.K., maybe for a decade. Well, stick a fork in jolly old England. Mr. Sunak should listen to his predecessor

Winston Churchill,

who said: “We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.”

The U.S. should heed that advice as well. Mr. Biden says “in our bones, we know democracy is at risk” but nevertheless he turbocharges spending—bucket handle lifting. The Biden administration is pro-union, a tax on consumers. It killed pipelines and energy exploration, raising energy costs. It has forgiven student loans, which means tuition is going up. Its Inflation Reduction Act is filled with green pork and healthcare tax credits. It set minimum corporate taxes of 15% for big corporations that will be passed along to consumers. And a 1% excise tax on stock buybacks. And 87,000 new IRS agents to shake down the American middle class. Democracy is fine; I’d say the economy is at risk.

Interest rates of 5% or higher should slay the inflation dragon, but then what? Are tax cuts here as toxic as in the U.K.? I suppose it depends on who wins on Tuesday. We know a Republican House and Senate will fire up committee investigations and made-for-TV hearings. That’s their prerogative and payback for recent show trials/hearings. But are there any pro-growth legislators in the building?

We need tax cuts to nurture the production side of the economy. And deregulation of energy, healthcare and other industries to reverse the Biden administration’s heavy hand.

The stock market may already be reflecting this outcome. As polls have shown a bigger red wave coming, the Dow Jones Industrial Average has gained more than 3,000 points since a Sept. 30 low. Markets love divided government, and the presumption is that Republicans will be better shepherds of pro-growth economic policies. Of course, any hints of tax cuts in 2023 will rekindle references to Ms. Truss. So what? Have a backbone. And while it’s hard to make spending cuts during an inflationary crisis, markets will respect this. Even cheer.

As forces push decoupling from China, economic growth is going to come from efficient supply chains and productivity in manufacturing in the U.S. Tax and spending cuts are the cure. Mr. Biden has called conservatives semi-fascists, which is rich given his policies. But it’s no time to be semi-supply-siders—see the recent Truss fall. Republicans must resist the urge to subsidize higher energy costs and instead help slay inflation and bring back a strong, productive economy.

Sadly, California, where I live, remains a lost cause. We have high taxes and high energy costs, yet we vote about whether Indian reservations or smartphone apps should control gambling. Let’s leave that in Nevada. More intriguing is Proposition 30, backed by environmentalists and ride-share firm Lyft and co-founder

John Zimmer,

to subsidize electric vehicles, especially since the August decree banning sales of gasoline-powered cars by 2035. Proposition 30 would slap a 1.75% tax on incomes over $2 million, of which 80% would go to subsidize electric vehicles and charging stations and 20% to prevent forest fires.

Strangely, lockdown lord Gov. Gavin Newsom opposes Proposition 30. Well of course he does. You can almost hear the gears in Mr. Newsom’s head spinning, “Hold on. I get to decide how we spend rich Californians’ money, not you.” Please stop yanking up those bucket handles.