Britain led the world in its transformation from an agricultural to a manufacturing economy. It then led the world in the next phase of development. Thatcher never publicly proposed to reduce Britain’s manufacturing sector and replace it with a service-based economy. But by forcing uncompetitive industries out of business, her policies dramatically accelerated this transition, and because of this, Britain is now far ahead of its rivals.
Recall Sir Nicholas Henderson, the British ambassador to Paris, who sent a telegram to the foreign office in 1979 remarking that “today we are not only no longer a world power, but we are not in the first rank even as a European one.” He included in this missive a table: It showed that Britain’s per capita income was 46 percent below West Germany’s and 41 percent below France’s.
As of today, British per capita income is 6 percent higher than united Germany’s and 8 percent higher than France’s.110 Britain is Europe’s fastest-growing economy now, and the world’s fifth largest. (It was not long ago the fourth, but China is now ahead.) If these trends continue, it will soon overtake Germany, becoming Europe’s largest economy for the first time since 1959. This would have been unimaginable in the 1970s.
Britain’s economic performance since the Thatcher era has been unusual—strikingly unusual. Given that unemployment has fallen, what you would expect to see, at least if you still relied upon the Phillips Curve to make your predictions, is higher inflation. For the past decade, Britain has experienced declining unemployment with stable or falling inflation. The NAIRU has fallen, in other words. It has fallen—there is no other reasonable explanation—because Thatcher’s supply-side policies have worked their way through.111
How do we know that Thatcher’s policies are responsible for this, rather than the policies of her successors? The answer is simple: Her successors continued her policies. The changes Thatcher put in place were not reversed. They have now been embraced by every major political party in Britain. The Labour Party has reinvented itself as champions of free enterprise. “Government,” Tony Blair told the World Economic Forum at Davos, in 2000, “should have a role that is enabling . . . above all, promoting competition and removing the barriers to business growth . . . I call it a Third Way . . . Supporting wealth creation. Tackling vested interests. Using market mechanisms.”
You can call it a Third Way all you like, but the fact of the matter is, it is Thatcher’s way.
The remaining controversy about Thatcher’s economic policy, then, is not whether she strengthened Britain’s global economic position. She did. It is whether she did it at an unacceptable cost, and whether those costs were the inevitable price of transformation. Those costs—two painful recessions, a massive growth in inequality, and the creation of what seems to be a permanent British underclass—do indeed seem to have been high.
The top income tax rate dropped from 83 percent when Thatcher came to power (and 98 percent for those with “unearned income”) to 40 percent when she left. Indirect taxation, however, in the form of Value Added Tax, rose from 7 percent to 17.5 percent. This predictably led to a growth in income inequality. This was a design feature, not a bug. Thatcher aimed to reward those who created wealth and to punish those who did not. Inequality, in her view, was natural and inevitable. “The pursuit of equality itself is a mirage,” she said in 1975, in a speech delivered to American conservatives in New York:What’s more desirable and more practicable than the pursuit of equality is the pursuit of equality of opportunity. And opportunity means nothing unless it includes the right to be unequal and the freedom to be different. One of the reasons that we value individuals is not because they’re all the same, but because they’re all different. I believe you have a saying in the Middle West: “Don’t cut down the tall poppies. Let them rather grow tall.” I would say, let our children grow tall and some taller than others if they have the ability in them to do so. Because we must build a society in which each citizen can develop his full potential, both for his own benefit and for the community as a whole, a society in which originality, skill, energy and thrift are rewarded, in which we encourage rather than restrict the variety and richness of human nature.112
Thatcher’s tax policies, coupled with the radical shift in the economy from manufacturing to services under her tenure, caused some poppies to grow to gigantesque heights. Other fields were simply mown down. Educated professionals in the financial sector flourished; factory employees went under. Some of those who had lost their jobs in the manufacturing sector found new jobs in the service sector, but often at lower salaries. Many did not find new jobs at all.
The average real income of British families rose 37 percent from 1979 to 1992. The income of the richest tenth rose 61 percent; the income of the poorest tenth decreased by 18 percent. Rates of welfare dependency and child poverty, in particular, soared—as did the crime rate. Although Britain as a whole obviously became more affluent, the poorest fifth profited not one bit from Thatcherism.
This is quite striking. An increase in income inequality is not a priori a bad thing, if the rich become much, much richer and the poor become only somewhat richer. But no economic policy can be reckoned a wholesale success if the poor become poorer during a time of massive economic expansion. Certainly, by all means let some children grow taller than others. But under Thatcher, a substantial number grew shorter. That was not the plan.
Margaret Thatcher went beyond the economic claim that free markets are an efficient vehicle for allocating scarce goods and resources. She argued that free markets were morally ennobling. Although Britain is on average a far more prosperous society now, it is not clear to me that it is a more moral one—in fact, the ubiquitous British underclass is a degraded, disgusting spectacle. Anyone who reads the British tabloid press, or walks through the streets of a British city on a Saturday night, knows this full well.
In this sense, Thatcher’s critics are right.
In 1986, Thatcher’s government opened the stock market to foreign and domestic traders, an event known as the Big Bang. British investors were now free to seek the best rates of return abroad, just as foreign investors were now free to invest in Britain. Thus did London become, again, the world’s center of finance. In 2002, the United States passed the Sarbanes-Oxley Act, regulating corporate accounting practices. Bankers in the City of London smirk that they would like to erect a solid gold statue in honor of the legislators who sponsored the act, for their efforts may well have diminished the likelihood of another Enron scandal in America—it is hard to say—but also, certainly, resulted in shifting a massive proportion of the mergers and acquisition boom to Britain.
While I was in London recently, I stayed with one of these bankers, an old friend of mine. He asked me to withhold his name—his company allows him to say nothing about these things on the record—so I’ll call him Harry. I’ll call his flat mate, a London restaurateur, William. They are typical children of the Thatcher Revolution, both prospering in sectors that are thriving now because of her policies.
Harry and William share a spacious flat in a newly gentrified neighborhood of London. It is conspicuously expensive and in the manner of all bachelor pads conspicuously uncivilized: Inelim-inable red wine stains subtly impregnate the luxuriant meringue of the wall-to-wall carpet; the cupboards are fully stocked with drink-mixers involving Rwandan fever-tree quinine, but the kitchen is empty of anything edible. That weekend, Harry was nursing not a broken heart, precisely, but a mildly indignant one. The woman he had been dating had just dumped him, telling him that she wanted someone who made still more money: “That’s what all women want, deep down,” she had apparently said to him.
We opened a bottle of champagne before going out to dinner, and when the subject of Thatcher came up, I switched on my recorder.
Harry: Why has London become the world financial center? . . . through a combination of multiculturalism, the ability to suck up the most talented from all over the world, and I think it’s worked also because of light-touch regulation. I me
an, you just have to look at Sarbanes-Oxley in the States, and all the business that’s put London’s way. . . . The miners’ strike’s interesting because of its wider significance in the battle against trade unionism, and actually, the freeing up of the economy, and I think that’s been thrown sharply into relief by things like France, and Germany, and thirty-five-hour weeks—
William: Yeah, that’s madness—
Harry: And you have Sarkozy. And what, you know, he does speak to—it’s funny, because they interview people and they say, “Well, what do you think we need, Sarkozy or Royal,” and most people say, “We need Thatcher!”
William:—the journalists in France have been saying that for years!
Harry: Yeah, and so they need someone with the balls to do it. . . . But actually I think what is more interesting is the Falklands, you know . . . America, America sat on the fence for long periods . . . it had, you know, it was very much the kind of classic State Department, Defense Department, had a very . . . you know, was it . . . Fritz . . . Patrick, was it Fitzpatrick who was the—
CB: Kirkpatrick. Jeanne Kirkpatrick.
Harry: Kirkpatrick, yeah—
CB:—who was described by Alan Clark as “that Anglophobe harridan”—
Harry: Yeah! Exactly! Utter, utter Irish bitch, basically, who was causing us all kinds of issues. Anyway, focusing too much on the economic and the analytic arguments, I think, is a bore.
William: [bored] Yeah.
CB: Well, we’ll have plenty of time to talk about it, but first we should open that bottle of—
The transcript indicates that we did not, in fact, return to the subject, or if we did, I never turned the recorder back on.
It is not hard to see why unemployed former coal miners who are still living in poverty would fail to see the lifestyle of these two men as evidence that Thatcher created a better world. Now, you know where I stand on Thatcher—I am not saying that I agree with them. I am just saying that if you want to know why they still hate her, look no further.
Was there an alternative? Many people still think there was. Neil Kinnock thinks so, of course.
Neil Kinnock: I mean, the thing is, people say, “Ah, she got the trade unions reformed; she got the restoration of industrial order.” What she got was massive unemployment, so everybody is scared shitless! I mean—
CB: Yeah, but that forced restructuring, the moving of manufacturing into—
NK: No, no! That was a bloody disaster! I mean, there had to be a restructuring, there had to be a shift in the direction of high-tech, and services, and so on, of course there did. And it didn’t come from nowhere, either—that expertise was there in substantial part already. But there could have been a different pace, and simultaneously with a reduction—which was necessary—of traditional manufacturing, an intensive development of high-tech industry. I mean, if Sweden could, in twenty-five years, turn from a smokestack country into a high-tech country, do it without unemployment ever going above 6.4 percent, and be the most prosperous country in the world—we coulda done that in maybe the same amount, maybe a shorter time, without the devastation of communities and peoples’ lives, and the destruction of industries, in the way that it happened! But of course they didn’t plan it. They made the omelet by breaking the eggs on the wall. That’s not the most sensible way to break the eggs.
CB: Analogies to Sweden are always unconvincing, because Sweden has—
NK: Hold on, hold on! If you look at Sweden in, say, the mid-’70s, this was an economy with a more outdated industrial employment structure than we had then, even. I mean, this was a rustbucket economy. And it got turned around, they spent the same proportion of their GNP on unemployment as we did in the Thatcher years, except that three-quarters of that expenditure went on training and retraining, and the rest went on unemployment benefits, and the proportions were exactly the reverse in the United Kingdom. That was the difference—
CB: Why was there such a reluctance to spend on training and retraining among the Conservatives? Was it just an objection to spending the money, or was it a sense that—
NK: No, they didn’t feel that transition in the economy could or should be organized. So they didn’t do it.
CB: Right. It was a philosophical problem with planning an economy—
NK: Sure. Whereas, when we used to go around saying that we could get unemployment down, and it would require generating X amount of expenditure in the economy, etc., etc., etc., we’d get absolutely bloody hammered by the classicals—
CB: You’d get hammered by who?
NK: By, you know, the classical supporters of the Conservative philosophy . . . Anyway, you know, it depends on what you think a country should be run for, and how you think it should be run. The great thing about the kind of boiled-down Friedmanism that they had is that they didn’t think the country should be run. Or certainly, the economy. They felt that it should be left to the magic of the market. She said to me, in Prime Minister’s Questions, you may have heard the phrase, “You can’t buck the market.” And this is an incantation, this is—a religious conviction, almost, which is bloody ridiculous! I mean, there’s no serious economist in the world who would offer that as a kind of a chant in an economic church—
CB: No, there are plenty of serious economists who would say that the best economic strategy is to have as little state planning as is consistent with providing basic public necessities—
NK: Mmmm. Are they the same ones that defend maintaining the biggest defense budget in the world?
CB: Yeah, they are. And for good reason!
NK: [Laughter] There you are! They all believe in [unintelligible] capitalism, luv. They all believe the bloody system couldn’t run by itself!
CB: They all believe in what?
NK: They all believe the system couldn’t run by itself—
CB: No, you said something before “capitalism”—
NK: Tension o’ capitalism.
CB: The basic tension of capitalism?
NK: No, no, [unintelligible]. The kind o’ capitalism that, you know, is freebooting, and minimum interference and all the rest of it, but when it gets into difficulty, there’s a stretcher—
CB: But that sort of conservative does always say, “Yes, there are certain things the state has to provide, and must provide well.” Defense, security. But that’s where they draw the line. And they say, “The state should not provide job retraining, or health care; that’s best dealt with by markets.” And it’s not ideologically inconsistent; it’s spelled out—there are certain things that the market can’t do—
NK: Well, the trouble with economic models is that the people who make them never live in them. It’s a little bit like those office boxes built by architects who are never gonna work in ’em.
Kinnock, as you can see, wouldn’t let me interrupt him. But in the end I have the final word. In his view, and he is perfectly clear about this, the alternative to Thatcher was a planned economy. And the evidence he offers that such an economy can create anything other than a human hell is Sweden. Let me finish the sentence he wouldn’t let me finish. Socialists love analogies to Sweden. But they are always unconvincing because they are based on some fantasy Sweden, rather than on an actual Nordic country bordered by Norway and Finland. In this Sweden of lore, every single woman is also eighteen years old, blonde, busty, lonely, naked, and waiting for you in the sauna. Kinnock is simply mistaken about Swedish unemployment statistics. In the early 1990s, Swedish unemployment rose to 13 percent, higher than ever experienced in Britain after Thatcher came to power. In the period Kinnock is discussing, Sweden in fact experienced a precipitous slide in the prosperity league—from fourth place in 1970 to sixteenth place in 1998.113 In fact, the policies Kinnock admires nearly ran Sweden into the ground. Only when they were abandoned did the Swedish economy begin to recover. You may as well argue that the command economy has been a splendid success in Narnia.
Over and over again, Thatcher’s critics told me that yes, Britain’s
economic transition was inevitable, but “she didn’t plan for it.” No, she didn’t. That is precisely the point. If the government plans the economy, it is no longer free. And if it is not free, the transitions that do occur tend to lengthen the lines for bread.
So the question remains: Were the costs of the Thatcher Revolution inevitable? Was this the price Britain had to pay as a kind of entrance fee to a true market economy? I’m afraid most of them probably were. The blow of the first years would have been softened had her first governments been more deft in their monetary targeting, but the bulk of the permanent dislocation can’t be attributed to this. For the most part, those whose standard of living declined as a result of Thatcher’s reforms became poorer because they had previously been the beneficiaries of state support, either in the direct form of welfare payments or the indirect form of state intervention to prop up fossilized and uncompetitive industries.
Had this system of economic redistribution been sustainable, the argument could be made that it was more humane than the one that replaced it and, therefore, that it should have been sustained. But it was not sustainable: Britain was experiencing slow but steady relative decline. Relative decline, over time, tends to become absolute decline, followed by collapse—a pattern commonly observed in command economies.
Britain is now the world’s second-largest producer and exporter of services. What remains of its manufacturing sector is highly competitive. In the period since Thatcher came to power, countries such as China have liberalized their economies and transformed themselves into manufacturing superpowers. It is simply not credible to imagine that Britain could have survived as a major manufacturing power in the face of that kind of competition. Attempts indefinitely to prop up Britain’s uncompetitive manufacturing sector were doomed to progressively greater failure.
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