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.
- 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.
- 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.
- 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.
- 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.
- 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.