The Iron Lady’s Real Economic Record

“Prosperity comes not from grand conferences of economists but by countless acts of personal self-confidence and self-reliance.”

~Margaret Thatcher

With the death of Ronald Reagan seven years ago, many heard for the first time about the successful economic policies advanced in the eighties, and the resulting expansion in the United States.  As media coverage broadened, Americans also became reacquainted with his contemporary Margaret Thatcher (who recently celebrated her 86^th birthday), and learned that under her leadership, a similar phenomenon had occurred in Britain.  Alas, this period of even-handed factual reporting was short-lived, and the media filter is once again in place.  But a new generation is catching on—conservative policies work wherever they are implemented.  And conservative economic success (and the resulting rancor from the left) is not just an American phenomenon.

The Labour Party in Britain has for the last decade spread falsehoods about the period during which Margaret Thatcher was Prime Minister, riding the 1990 recession into four terms of parliamentary leadership.  Labour tirelessly repeats myths about Thatcher’s impressive accomplishments.  And now Hollywood screenwriters, intellectually lazy and most likely ideologically-driven, have assigned themselves the task of institutionalizing these myths via the vehicle of cinema. Oscar-winner Meryl Streep has lent her reputation to this demagogic enterprise.  If leftists in Britain and the United States really believed what they say they believe, they would be willing to engage in open debate about the merits and pitfalls of the conservative economic paradigm, which in this case emphasizes standard supply-side policies such as low marginal tax rates and minimal government regulation.  Instead, leftists rewrite the record, taking advantage of Thatcher’s reduced mental capacity to challenge them.  Someone must “set the world to rights” and dispel the various popular myths about one of the greatest beacons of conservative competence in history.

Myth One: The Labour government preceding Lady Thatcher had a better employment record.

Prior to Thatcher’s premiership a false façade of higher employment existed.  But in actual fact, the Socialist philosophy of the then Labour Party required placing large sectors of the British economy under the national government’s control.  This policy of nationalization was initiated in the wake of World War II and was allowed to continue under the leadership of milquetoast conservatives who were afraid to lose the electorate’s mandate, and of Labour governments who promised “more of the same.”  As is typical with Socialism, even when actual productivity was falling, these industries were subsidized, and jobs that would naturally have become unprofitable were preserved.  There was no reason for people to look for better jobs, or work harder in hopes of making more money.  The trade unions, another instrument of Labour’s Socialist policies, constantly demanded and ensured wage increases for these nationalized industries, even though output never increased proportionately.  This led predictably to higher prices, which inevitably hurt the economy.

At first Thatcher’s “medicine” as she put it in her famous “The Lady’s Not for Turning” speech, seemed worse than the disease.  As Thatcher explained, “If I could press a button and genuinely solve the unemployment problem, do you think that I would not press that button this instant? Does anyone imagine that there is the smallest political gain in letting this unemployment continue, or that there is some obscure economic religion which demands this unemployment as part of its ritual? This Government are pursuing the only policy which gives any hope of bringing our people back to real and lasting employment.”

After de-nationalizing industry, e.g. British Gas and British Telecom, businesses were actually able to terminate expensive, inefficient, and unproductive segments of their workforce. This created a short-term spike in unemployment, but with Thatcher’s subsequent Trade-Union Reform (which kept trade unions from denying people jobs simply because they weren’t members), a vast surge in employment occurred.  Between 1980 and 1990, the number of British people unemployed dropped below two million.  This was a new record, and by the end of Maggie’s third term, 3 million more “real” jobs were created.[i]

Myth Two: Margaret Thatcher’s government increased inflation. In fact, the rate of inflation under Thatcher went as low as 4 percent compared to the previous Labour government’s paralyzing rate of over 20 percent.[ii] Her critics’ demagogic claim that inflation increased was based strictly on one fact, taken out of context.  The rate of inflation did go up a bit at the end of the Thatcher era due to an effective parliamentary coup d’état within her own government.   Even so, Thatcher brought inflation to less than half of what it been under her predecessor.

Myth Three: The poor got poorer under Margaret Thatcher. This is pure falsehood.  The Labour Party of the day talked of the economy as a fixed entity, which supposedly never expanded or contracted.  This is called static economic analysis.  It is upon this basis that Labour members of parliament spoke of a growing gap between the rich and poor, and a transfer of wealth from the poor to the rich.  Sounds like American liberals talking about Reaganomics.  Thatcher eloquently described Labour’s view as preferring that “the poor were poorer, provided the rich were less rich.”

Thatcher had hit on an important point.  What Socialists or liberals never talk about is income mobility, and specifically, upward income mobility.  People moved into higher income brackets under Thatcher.[iii] Women did particularly well.  By increasing taxes on higher brackets to punish those with greater affluence, Thatcher realized that the poor would actually be the victims, since median income growth would stagnate, which hurts the poor more than those with means.  Instead of erasing the gap, such punitive tax policies would merely move the gap down on the median scale, depressing wages.

The New Earnings Survey for the years 1977-1997 show that the three broadest wage groups all experienced significant increases, which, along with a lowering of inflation, meant that income growth during the Thatcher era was very real.  And yet, income quintiles are merely a relative group measure of affluence, not an accurate measure of individual wealth, because mobility in and out of quintiles has little or no impact on the average income of the quintile left.  Investment is a better indicator of disposable income growth. And the increase in non-corporate investment during the Thatcher years appears to contrast with the claim that Brits saw a reduction in their standard of living.  The number of shareholders went from 3 million to 11 million.[iv]

Myth Four: Margaret Thatcher spent less than the Labour Party on disabled persons during her tenure. In terms of purchasing power, Thatcher actually spent more on the disabled.  Since inflation had come down substantially, purchasing power was up.  As a percentage of GDP, government spending as a whole remained virtually unchanged.[v]

Myth Five: Margaret Thatcher forced poor unskilled coal miners into boxes. All Thatcher did was allow normal market forces to resume.  This is precisely what should have happened in any healthy Capitalist economy.  Had the hiring and firing, i.e. “creative destruction,” been allowed to happen sooner, the pain would have been lessened.  Downsizing is something that must often occur in business in order to keep all sectors of the economy productive and competitive.  The real fault lay with Labour policies which allowed trade unions, for political purposes, to block the unemployed from rebounding into new jobs.  If the economy had been truly laissez-faire, this tragedy could have been averted.

Myth Six: Margaret Thatcher caused the Exchange Rate Mechanism fiasco which cost one million British jobs at the end of her third term. The Exchange Rate Mechanism (ERM) was an economically questionable arrangement favored by a number of conservatives in Thatcher’s government which tied the value of the pound to German interest rates, predictably causing the slight increase in inflation discussed earlier, and massive layoffs due to the inevitable cost fluctuations that resulted.  Margaret Thatcher was completely innocent in this matter.

In Britain, various Cabinet ministers have a greater degree of policy-related independence than in the United States.  Nigel Lawson, Chancellor of the Exchequer, often mentioned as one of Margaret Thatcher’s favorite ministers, thought ERM was a good idea.  Without consulting Thatcher, Lawson began to implement ERM in Britain.  This entire fiasco caused a recession the size of which prompted Lawson to resign, leaving Thatcher to pick up the pieces.  The British press was only too eager to link “Thatcherism” with ERM.

Despite the attempts of Hollywood and leftists in Britain to redefine the Thatcher era, the facts are there for any who care to investigate.  Conservative economic policies work, even when put in place by liberals like JFK, who spurred U.S. economic growth by cutting taxes, or Tony Blair, who unabashedly continued (and took credit for) most of Thatcher’s policies.

For any serious student of policies that work, Margaret Thatcher’s record is an excellent place to start.