Curious Capitalist

Was Thatcherism Good (or Bad) for the Economy?

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Margaret Thatcher was known as the woman who, from 1979 to 1990, brought austerity and — at least for part of her tenure — economic growth to a stagflation-riddled Britain. She’s also known as a heedless free-market deregulator who set the stage for financial boom and bust, as well as for growing inequality. At a time when the debate over growth and austerity is front and center in the U.K., the U.S., Europe and much of the rest of the world, what is the legacy of Thatcher economics? Below, a look at some of the Iron Lady’s key economic ideas and what, if anything, they have to teach us today.

  1. A focus on inflation vs. unemployment. Perhaps it was justified back then, given that inflation in Britain in the late 1970s was heading toward 20%. But as Capital Economics managing director Roger Bootle points out in his smart look at Thatcher’s legacy in the Telegraph, the result of the government’s policy of fighting inflation by hiking interest rates fast and hard was “a cripplingly high pound, which devastated much of British industry, causing unemployment to soar.” Poverty and inequality went up radically under Thatcher, and the latter has stayed high since, a factor that many economists believe has impeded a more robust consumer recovery. While mass privatization (some of it successful, some not) did eventually create growth during the Thatcher years, GDP never rose by more than a couple of percentage points annually, even during the 1980s boom years. The verdict: in an era in which globalization and technology are keeping inflation down over the long term, and unemployment high, the Iron Lady’s policies are retro, and would be counterproductive.
  2. Public spending and tax cuts. Both Thatcher and her U.S. counterpart Ronald Reagan wanted to boost markets and shrink the state, but Reagan was a supply sider who focused almost solely on tax cuts (indeed the amount of public spending relative to GDP actually increased under Reagan). Not so the British conservatives. Thatcher was somewhat less enamored of “trickle-down economics” than Reagan and ultimately believed tax cuts had to be paid for by reductions in public expenditure as well as economic growth. Although public spending as a percentage of GDP rose in the first years of her tenure, by the time she left office in 1990, it had dropped by around 6 percentage points, from 44.6% to 38.9%. While she certainly never had to deal with the sort of austerity challenge faced by the U.K. today, she did manage to cut spending as well as taxes.
  3. Financial deregulation. The Big Bang shifted the focus of the U.K. economy from manufacturing to finance. While that set the stage for a deep recession following the financial crisis, it also made London the financial capital of Europe, if not the world. Interestingly, though, while the city itself is becoming ever more cosmopolitan, British banking is nearly dead — most of the major financial institutions operating in the City are American or European. (I wrote about that shift here, back in 2004.) What’s more, there’s now a growing debate, in Britain as in America, that more can and should be made in the U.K., since the economic knock-on effects of manufacturing across the broader economy are greater than in finance.
  4. Safe as houses. Thatcher was a bit of a hypocrite when it came to housing. While she preached a free-market doctrine, she fought advisers who attempted to outlaw things like the mortgage-interest deduction, which again led to cycles of housing boom and bust in the U.K. On the one hand, the housing industry has been a major vehicle for middle-class wealth creation in the U.K. (rates of homeownership are among the highest in the world). But it’s also sucked up a lot of useful capital and moved the U.K. further toward being a debtor society, rather than a Germanic-style producer society, which many economists believe is a more stable (if less glamorous) economic model.
  5. Bigger Europe? Thatcher, famously wary of British membership, believed that the E.U. should be either “deeper or broader.” And on that, she was right: the blending of a hugely diverse yet politically and fiscally unconnected group of countries, and the adoption of a mutual (and made-up) currency on which they must all depend, is ultimately at the root of the euro-zone crisis. Of course, Thatcher herself bet on broadening rather than deepening, believing the E.U. should take in much of Eastern Europe. Many experts have come to believe it will be impossible for the E.U. to exist at its current size, given the diversity of economic needs among all its nations. But that probably wouldn’t have changed Thatcher’s mind — after all, the lady wasn’t for turning.

MORE: Farewell to the Iron Lady: Margaret Thatcher (1925–2013)

MORE: Margaret Thatcher’s Foreign Policy: Was the Iron Lady on the Wrong Side of History?

38 comments
Ajibade Otolorin
Ajibade Otolorin

"Botha na friend to Thatcher and Reagan",thundered the late,iconic Afro-beat musician Fela in his hit song"Beasts of no Nation". Thatcher and Reagan were unconcerned about the evils of apartheid far as they had "constructive engagement"with the shameless regime.But Thatcher was more than just her romance with the evil regime in South Africa. No occupant of 10,Downing Street has brought British nationalism to the fore since Winston Churchill than the woman "with the eyes of Caligula and the mouth of Marilyn Monroe".She typified and fought for everything British;but she forgot that other peoples and nations also had a right to defend their sovereignty and uphold their nationalistic integrity. Thatcher instituted harsh economic policies that destroyed the spirit of society and over-exalted individualism-which 21st century Britain is still reeling the effects from.She fought an unnecessary war with the Argentinians and whittled down the significance of trade unions.She was not even ashamed to be dubbed "The Milk Snatcher". There have been female head of states,pre-Thatcher and post-Thatcher but none has been so detestable as the"devil in skirt"herself.Adieu,Maggie say hello to Reagan,Botha and the rest of your nefarious ilk;you can all now be permanently "constructively engaged."

James Mckechnie
James Mckechnie

Depends where you were at the time.I think the majority would say BAD

Ayman Freeman
Ayman Freeman

It was almost as bad as Reganomics, from which America has not yet recovered.

Geraldo Dias
Geraldo Dias

I'll leave this question to the Britons.

Md Mzaman
Md Mzaman

have a great trip to another world

Moudwe
Moudwe

@mamadou Aujourdhui je lisai 1 mec qui demandai kon privatise ses obseques! Suis aussi sur k yaura des prenneur si jamais on essayait. mdrrr

cwwardiii
cwwardiii

the better economics ... make everyone pay the same TAX RATE... choose ONE ... 5% or 10% or 15% with NO DEDUCTIONS.... I don't care which one just choose one and then Government put together a budget that does not grow every year... and stick to it!

cwwardiii
cwwardiii

social equality and trickle down theory are not even on the same planet... social equality... men = women .... economic equality... everyone gets the same chance.. not the same at all. Sure the well off have an advantage...but most of them started with nothing.. when you talk the 1% at the very top.. so what... I could care less about how much they make... realize if they don't spend it extravagantly then what use is it for them.. it helps the economy and we the <1% when they spend big $$$ so forget the envy ... pray for the rich to get richer and drag us upward...the only problem is where the politicians make it too one sided on the taxes .. those who make money pay ... those who don't pay nothing.. and who are the biggest numbers... the ones who pay NOTHING!!! So where is the social equality if    $$ = Social Equality  and some are paying NOTHING?

Sylwia Salapa
Sylwia Salapa

For those who understand and appreciate economy, individualism and hard work - it was good and rewarding. She was a remarkable woman of the 20th century.

My New Life in Asia
My New Life in Asia

Thatcherism was catastrophic. It inaugurated an era of free market fundamentalism that caused rising inequality, deindustrialization, pro-big-business policies, the erosion of the middle class and financial chaos. Pushing for more free market resulted in poor growth and social insecurity. It is not a coincidence that the most successful economies of the last thirty years (Scandinavian countries, Singapore, China, South Korea) did not follow neoliberal precepts. Just compare what were South Korea and East Germany in 1990 and what they are now. East Germany is perhaps the most staggering example of the failure of free market fundamentalism to understand the real mechanism of growth and economic upgrading. Mrs Thatcher was definitely one of the key figures that helped cement the belief in this wrong economic agenda, not only in Britain, but in many other countries.

davidcarser1
davidcarser1

Here are the five basic rules for economic prosperity, which no politician has ever seemed to understand:

1. You control inflation by controlling the money supply, not by raising interest rates. 

2. You reduce unemployment by reducing taxes and encouraging small and medium business.

3. You increase tax revenue by reducing taxes. 

4. You obtain economic recovery/growth by increasing government spending on creating productive infrastructure, not welfare. 

5. You create economic prosperity by encouraging free markets properly controlled by government. 


ViableOp
ViableOp

Margaret Thatcher's approach to many issues was mixed.  On one hand, she had very strong anti-communist leanings because the system in the USSR led to a lack of freedom.  On the other hand, she cozied up to despotic world leaders like Chile's Augusto Pinochet as shown here:

http://viableopposition.blogspot.ca/2013/04/margaret-thatcher-mixed-legacy-of-odd.html

She even congratulated a man who imprisoned hundreds of thousands of his citizens on his implementation of "democracy".

bluecedars
bluecedars

@davidcarser1"You increase tax revenue by reducing taxes. " Then taxes should be at zero; think of the increased tax revenues!