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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.
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.
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.