A look back at Margaret Thatcher’s economic record

April 8, 2013

Margaret Thatcher, who served as the United Kingdom's first — and, to date, only — female prime minister from 1979 to 1990, has died at age 87. Thatcher was Britain's longest-serving prime minister and, along with Herbert Asquith and Clement Attlee, perhaps the most influential on domestic policy of the last century.

Her record usually is summarized as heavy on union-busting, spending cuts, privatization and deregulation, undoing as much as she could of the social welfare state that Asquith and Attlee built. That's basically accurate, but it's worth delving deeper into what her specific policy program entailed.

Fighting inflation, letting unemployment rise

It makes sense to start with what the British economy looked like in 1979, when Thatcher took office. Like the U.S. at the time, Britain was experiencing quite high inflation. Under the second premiership of Harold Wilson, between 1974 and 1976, inflation peaked at above 26 percent, and while his successor James Callaghan never let it get much above 15 percent, it was hovering around 10 when Thatcher took office:


That said, the overall economy didn't look too bad. Unemployment and GDP growth were both about where you'd want them to be:


Thatcher set about trying to break the back of inflation by setting a target for the size of the money supply, trying to keep it under control and thereby prevent prices from growing at the rate they'd been. The logic for this position came largely from the work of Milton Friedman and other monetarists, of whom Thatcher was a big fan.

She clashed strongly with Bank of England governor Gordon Richardson and therefore monetary policy was largely consolidated in the Treasury, which she and her Chancellor of the Exchequer Geoffrey Howe controlled. Measures like an increase in the value-added tax, paired with income tax cuts, were adopted in hopes of controlling inflation.

This part of a purposeful strategy to reduce inflation through reducing the deficit and thereby reducing the possibility of needing to fund future deficits through inflation. "Experience shows that it is virtually impossible to finance an excessive public sector deficit without adding to the money supply," Howe reasoned. "Even were it possible, it could jeopardise success against inflation by adding to nominal incomes or precipitating a fall in the exchange rate." To get inflation under control, in other words, Howe and Thatcher thought they had to implement austerity.

It worked, sort of. Inflation fell a lot under Thatcher, settling around 4-5 percent annually by the mid-1980s:


The price of that, however, was much higher unemployment and a recession in the early 1980s, much like that experienced in the United States under Federal Reserve chairman Paul Volcker at about the same time as the Volcker Fed dramatically raised interest rates to combat U.S. inflation.


So Thatcher presided over unemployment levels of over 10 percent for the better part of a decade so that she could get 4-5 percent inflation every year. Your mileage may vary as to whether that was a good tradeoff.

Privatization


Thatcher also aggressively sold off key industries that had been owned by the British government. Early in her term, she sold off British Aerospace and Cable & Wireless, which was followed later on by British Telecom, Britoil, British Gas, and Jaguar. In her third term, British Airways, British Petroleum (or BP), British Steel, Rolls Royce, and electric and water companies were privatized as well.

Many of those companies have gone on to be successful private firms. Fans of the effort note that it freed up a great deal of money in the 1980s, preventing further spending cuts or tax increases, and created competitive sectors in telecommunications and fuel. Critics argue it enriched political allies of Thatcher and led to unnecessary layoffs as firms tried to become more efficient.

Union busting


One of Thatcher's most heated political battles came in 1984, when the miner's union struck. Earlier in Thatcher's term, in 1981, the miner's almost struck but the government immediately gave in and offered concessions. Thatcher spent the ensuing years plotting to make sure that never happened again, by changing trade union laws, stockpiling coals to blunt the impact of a strike on consumers and even having MI5 agents infiltrate the miner's unions.

So when the miners struck in 1984, she was ready. After nearly a year, the miner's returned to work without any concessions from the government. The National Union of Miners, which just 10  years earlier had toppled the Conservative government of Edward Heath, was permanently weakened.

Taxes and spending

As Bruce Bartlett notes, Thatcher actually increased taxes during the first part her tenure, though she cut the top rate of the income tax. She also cut spending, albeit mildly:


A large part of those spending reductions were related, of course, to privatizations which took public companies' losses off the public books.

Thatcher's demise came when she tried to change the tax funding local government from a property tax to a poll tax, where each household paid the exact same dollar amount rather than a share of their property value. That resulted in her ouster as Conservative leader and John Major's ascent to become Prime Minister.

Deregulation


Thatcher was also largely responsible for the City of London becoming the financial center of Europe. In 1986, she executed what became known as the "big bang," which deregulated large swathes of the financial industry. That resulted in tremendous growth,  especially among private equity firms and hedge funds which rely on heavily leveraged investments. Of course, the abolition of regulations limited how much firms could borrow, meaning that when lots of debt goes bad, that effect spreads easily from institution to institutions. So Thatcher's deregulations arguably contributed to the 2008 financial crisis, both in their own right and by influencing U.S. policymakers.

Europe



Thatcher was a strong Euroskeptic, and was heavily resistant to efforts to turn the European Community into a more federal European Union despite having support EC membership before becoming Prime Minister. She was particularly anti-Euro, correctly predicting that it would be a disaster for small countries whose economic needs didn't match those of France and Germany and thus wouldn't be reflected by the European Central Bank's policies.

She also resisted efforts to join the European Rate Mechanism, which pegged the pound to the German mark, before relenting just before being ousted (largely by pro-European members of her party) in 1990. Britain would be forced to leave the ERM in 1992 under pressure from a short position taken by George Soros. Soros made billions off his bet.

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Brad Plumer · April 8, 2013