Thatcher didn’t save the economy, she wrecked it – and we’re still paying the price

Alex Nunns argues that the right's celebrations of Margaret Thatcher’s economic record are an attempt to rewrite history
April 2013

British daily newspapers featuring front-page coverage of Margaret Thatcher's death

The press has praised Thatcher's economics - but it's not true

What’s more offensive than a £10 million state-funded victory celebration for Margaret Thatcher is the fact that, unlike the woman herself, her ideas are still alive and kicking. Amid the debris of a global economic cataclysm that should have shattered the confidence of Thatcherites, the eulogies are more triumphal and further from any sense of historical truth than ever. They are a dangerous rewriting of history, because mistakes cannot be learned from if they are denied.

In the early 1990s, when Britain was going through its second recession in ten years, the thought that Thatcher had achieved an economic miracle would have seemed about as plausible as Gordon Brown’s claim to have ended boom and bust now does. But in the years since, the idea has reasserted itself, not based on Thatcher’s actual economic record, which was a failure, but on the sheer staying-power of Thatcherism after Thatcher.

Thatcher failed on the economy, not just in terms of the huge social costs – the trashed lives, the forsaken communities, the needless destruction – but also on her own terms. Unusually for a politician Thatcher announced the standard by which she wanted to be judged: permanent low inflation. She couldn’t do it. When she came to office in May 1979 inflation was at 10.3 percent. In October 1990, the month before she left power, it was 10.9 percent.

This wasn’t just bad luck; it was the result of the spectacular failure of Thatcher’s guiding doctrine. ‘Monetarism’ is an economic theory that became a political force. It says that governments should not try to ensure that people have jobs by managing the economy; governments should only care about keeping inflation down.

American economist Milton Friedman, the high priest of monetarism, believed that inflation was caused by too much money being added to the economy. Restrict the money supply and inflation will come down, the economy will be stable and profits will increase. He said there would be a ‘natural level of unemployment’, but never mind about that.

It was a simple theory but unfortunately for Thatcher it didn’t work. At all. It crashed the economy in 1980-1, plunging the country into the sharpest, deepest recession since the war to that time. Most of the damage was done to the North, and many of the once great industrial cities and towns have not recovered to this day. Thatcher’s government toyed with people’s lives on the basis of an untested economic faith. It was an extraordinary, callous gambit, executed without compassion or contrition.

The cost of cutting inflation

Inflation did come down, but it wasn’t because of the money supply, which wildly overshot the targets set for it. This made no sense to monetarists – if the money supply was out of control, then so should inflation be. But there was no direct and reliable relationship between the two. However, it turned out that cutting inflation was easy if you were prepared, as Thatcher was, to engineer a severe recession, raise taxes and put millions of people out of work.

Still, by the mid-1980s Thatcher could bask in the glory of having achieved relatively low inflation, however it was done. But then it went up again, steadily at first, accelerating to double figures by 1990, partly because of massive tax cuts for the rich and (eventually) falling unemployment, but mostly because of a government-induced credit bubble.

Thatcher’s defenders say that despite this, overall inflation was much lower in the 1980s than in the previous decade. But that was true across the whole world – a general phenomenon brought about by falling commodity prices. Inflation dropped in France, Italy, Germany, the USA and Japan. It did come down more quickly in the UK, because of the severe 1980-1 recession, but in the other European countries it was achieved at a far lower cost.

Thatcher’s recession at the start of the decade set Britain’s economic growth back massively. It took until 1988 just to get back on trend with the growth of the 1970s. Despite the popular image of the 1980s as a decade of conspicuous consumption and growth, as against the recession-hit 1970s, in fact economic growth was exactly the same in both decades – an unremarkable 2.2 percent. Growth was stronger in the 1950s and the 1960s. 2.2 percent was average by international standards too. As miracles go, it wasn’t one of the best.

So how can today’s praise for Thatcher be so far removed from the facts? Thatcher’s real success doesn’t show up in the figures. It was in beating down the political and economic ‘consensus’ that had persisted since the Second World War. She made herself the figurehead of an insurgent ideology, and established it as orthodoxy.

In truth this ideology pre-dated her and was international. The old Keynesian thinking was undermined by the crisis of the global economy in the 1970s. The new thinking – which we now call neoliberalism – captured powerful institutions like the IMF remarkably quickly. Denis Healey, a Labour chancellor, first applied monetarist principles to the British economy in 1976, as a condition of an IMF loan. He called it ‘unbelieving monetarism’. It was Thatcher who proclaimed it as a virtue.

But the model was full of contradictions. Two main elements of Thatcherite ideology worked against each other. In the boom of 1987-8 Thatcher’s monetarist goal of low inflation was undermined by her other objective of free market reforms and deregulation, especially in the financial sector. Controls on the City of London and the banks were removed, most famously with the ‘Big Bang’ deregulation in 1986. The result was huge growth in the financial sector and a boom in private credit. Under Thatcher the share of financial services in the total business income of the country rose from 15 to 24 percent, while that of manufacturing fell from 21 to 17 percent. The factories were replaced by the banks.

Blowing bubbles

This brought a brand new phenomenon – irresponsible lending by banks. The credit bubble fuelled inflation, overheated the economy, then burst and sent the country into another recession in 1990. Ironically the Thatcherite experiment was scuppered by free markets. It was an allegory for the future fate of the global neoliberal economy.

Sustained by the dominance of neoliberal ideas around the world, Thatcherism was able to survive the 1990s recession and the election of a Labour government in 1997. It was not inevitable that the Labour Party would acquiesce so completely in all the fundamental tenets of Thatcherism, but in the form of New Labour it did. Later in life Thatcher correctly identified this as her legacy.

New Labour went further than Thatcher to institutionalise Thatcherism. It made the Bank of England independent, a Thatcherite proposal first made in the 1977 Tory pamphlet The Right Approach to the Economy. It embraced and extended the deregulation of the City. The economy appeared to be more stable and successful in this second phase of Thatcherism, but beneath the surface a similar process to that which caused the crash of the late 1980s was underway.

The long boom of 1993-2008 was again fuelled by a credit bubble made possible by financial deregulation, but on a far grander scale. This time it was global, yet Britain had a particular role because of the place of the City in the world economy. Built on newly available Chinese funds, the credit skyscraper appeared to have no upper limit, while cheap Chinese commodities kept inflation low. The resulting global crisis we are living through puts into the shade that of the 1970s, which first propelled neoliberalism onto the stage.

In an ironic epilogue, in Britain what was essentially a crisis of Thatcherism brought into power a far more Thatcherite Tory Party than that of the 1980s, and its prescription of spending cuts in a slump made a very bad recession that much worse.

We are left with the economic failure of Thatcherism on three levels – the abiding consequences of Thatcher’s own domestic policies from the 1980s; the fallout from the global neoliberal crisis; and the costs of the current government’s attempt to fix the problems of Thatcherism with more Thatcherism.

The shame is that we are only burying her body.



Alex Nunns is Red Pepper's political correspondent. He tweets at @alexnunns


 

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ArthurOConnor 17 April 2013, 19.17

Thatcher’s Big Bang was the precursor of to-day’s Credit Crunch. It lifted Exchange Conrol and allowed £94billion of Britain’s capital to disappear into Tax Havens whence it has never returned. The taxpayer would not have had to refund the banks had it been repatriated. For Thatcherism look at the exploitation of Britain’s corporate society, the robbing of its profits distributed in multi-million annual salaries to the selected few, the robbing of social welfare benefits from the poor, the enriching of the rich with tax-cuts and the spread of Fanny Mae economics which were imported from the US with Big Bang when Foreign Banks were allowed into the City’s Square mile turning the banking industry into the preserve of crooks who eventually began defrauding the sector with the fixing of LIBOR. The Big Bang was forced onto Thatcher by the company she kept – Corporation Heads who knew what they were doing – even if Thatcher didn’t. She was interested in the applause – the Queen Bee a willing tool – who wallowed in right winged extremism even unto the sending of 200 our our youths in the forces to their deaths in a wasted war over the Malvinas – so that she could be reelected on a wave of national xenophobia.


Ewan Valentine 17 April 2013, 21.27

“What’s more offensive than a £10 million state-funded victory celebration for Margaret Thatcher is the fact that, unlike the woman herself, her ideas are still alive and kicking.”

£10m is nothing compared with the £75bn her mandate against further EU contributions (which still protects us) to this date has saved

“In the early 1990s, when Britain was going through its second recession in ten years”

This was due to the U.S. market slump and the Dow Jones industrial average which slumped by 22.6%, markets most exposed to the U.S. markets were hardest hit, frankly it had little to do with our policies. Other than the fact that we had renewed trade relations with U.S. and indeed the rest of the world thanks to Mrs Thatcher. We enjoyed far more benefits of this freedom (even still today) than this slump negated our economic progress.

“based on Thatcher’s actual economic record, which was a failure”

Not according to the +23.3 growth in GDP

“Thatcher failed on the economy, not just in terms of the huge social costs – the trashed lives, the forsaken communities, the needless destruction”

Her ‘failure’ saw the rise of the middle class, she provided the economic framework for millions to own their own homes and break free of the state cycle that had previously, instead of liberating them; had entrapt them in a hopeless rut by which you were either poor and in state hands, or monstrously rich and in cabinet or a lobbyist (or of course a union fatcat).

Communities and lives were changed radically and yes, some did take the brunt for the changes in her economic revolution. However, is it fair to blame those who put them there in the first place? In the wholly false economy? Or is it the blame of the person who tried to shake away the illusory state economy in favor of the real economy. If you want to blame anyone, blame the self-serving, corporate, fascist, national Socialist, post-war Tory and the Labour cabinets who came before her, who ensnared them in a trap to keep people dependent on them to begin with. For which both sides were equally as guilty.

“Unusually for a politician Thatcher announced the standard by which she wanted to be judged: permanent low inflation. She couldn’t do it.”

According to official ONS figures, there was actually a slight decrease, still not as much as she would have liked.

“American economist Milton Friedman, the high priest of monetarism, believed that inflation was caused by too much money being added to the economy. Restrict the money supply and inflation will come down, the economy will be stable and profits will increase. He said there would be a ‘natural level of unemployment’, but never mind about that.”

Milton Friedman was a highly, highly regarded economist, he was not only the head of economics at Chicago school of economics, but he won Nobel awards for his economic literature and advisory. He was completely right, even those on the left wouldn’t deny that state printed money on false value was a bad idea, so why this is even disputes, I will never know.

“It was a simple theory but unfortunately for Thatcher it didn’t work.”

Economic liberalism is pretty simple, the economy is best in the hands of the people it affects, yes it’s simple.

“many of the once great industrial cities and towns have not recovered to this day.”

Mechanization drove a lot of the unskilled labour market into decline with the inevitable rise of technology, again it was reactionary to the real market. As well as that, she privatised nationalised markets because in many cases they were costing the average worker, the working class money that people simply couldn’t afford. Why should young workers be forced to pay for reclining industries for the sake of jobs? It’s coercion and it’s a direct attack on our liberty.

“Thatcher’s recession at the start of the decade set Britain’s economic growth back massively. It took until 1988 just to get back on trend with the growth of the 1970”

There is at least a 5 year latency between economic policy and its effects, at the start of 1980, the country was still very much feeling the effects of the 1970’s, the 1970’s era of national Socialist-esque 70’s left us in crippling decline, that was undeniable, we were described as the ‘sickman’ of Europe by the end of the 70’s because of our Soviet-like economic policies.

“So how can today’s praise for Thatcher be so far removed from the facts?”

I’m seeing very warped and fragile ‘facts’ in this article thus far.

“Thatcher’s real success doesn’t show up in the figures.”

Most of the official figures show a sharp increase in GDP, inflation overall did actually decrease substantially, among many, many other statistics.

See ONS figures

” In the boom of 1987-8 Thatcher’s monetarist goal of low inflation was undermined by her other objective of free market reforms and deregulation, especially in the financial sector.”

Low inflation and regulation aren’t crucially coupled, though de-regulation encourages lower inflation (see John Locke’s Essay’s, particularly on Hong Kong)

“Controls on the City of London and the banks were removed, most famously with the ‘Big Bang’ deregulation in 1986.”

This act was notoriously anti-toff, these de-regulations actually meant the city-boys of London were driven to be accountable to stake holders, as well as removing international trade-blocks on investors in the stock-markets, this lead to an incredible influx of working class British workers working in the city of London as traders and stock traders. Again, very much a positive, aspiration, meritocracy and hard work paid off, as it should.

U.S savings and loan crisis, knock on effect

There are so many holes in this articles arguments that just haven’t been addressed. The standards of living increased exponentially, the standards of work, the access to wealth, shares, the protection against aggressive EU economic bully boy tactics, she legacy is still to be seen today indeed. We have access to world markets as workers in a global economy that she helped to see us as a part of. Our largest sections of national infrastructure are accountable directly to the customer, our train lines have to compete for customers to stay afloat, the same for our phone companies, our bus’s, our industries. She collapsed state, monopolistic tendencies of decades before. She’s massively misunderstood and over looked, for the work she did, she has been grossly demonised for incredible work

And she invented the Mr Whippy



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