Slagging off the Thatcher Economic Miracle...

1980: The Early Days of the Thatcher Economic Miracle, as Industry Secretary Sir Keith Joseph spells it out..

Growing up in the West Midlands in the early 1980s, when the original Workshop Of The World seemed to be in permanent Closing Down Sale mode, I was always sceptical about the “Thatcher Economic Miracle” Britain was supposed to have lived through during the 1980s (and which was reaching its apotheosis twenty years ago this summer in the pages of The Sun, Express, Mail, Telegraph, Times etc). After all, if the two worst economic recessions since the 1930s, punctuated by an unsustainable credit boom, the wiping out of a good chunk of the country’s economic base and the wasting of North Sea oil revenues constitute an “Economic Miracle”, what the bloody hell was an “Economic Disaster” supposed to look like??

I could never understand how the Labour Party in the 1980s let the Tories get away with the claim that they alone were "economically competent" (ditto for patriotism- on the EU, Thatcher, as Martin Walker once pointed out, talked like Enoch Powell, but acted like Ted Heath). Now Gordon Brown goes on about building on the 'achievements' of the 1980s...no wonder the Labour Party has been deserted by so many of its traditional supporters, as yesterday's Glasgow East bye-election debacle shows.

The following piece I wrote during the winter of 1989-90, when the second recession of Thatcher’s reign was taking off serious big-time, although I notice in this essay her Government were merely “prepared to gamble with recession"...


“The successes of Thatcher’s economic policy were costly and, in retrospect, have come to seem rather short-lived.” Discuss.

Tony Thirwall, in an article about ten years of Thatcher’s economic policy, comments that “if two million unemployed, 7 per cent inflation, 13 per cent interest rats, and a £15 billion balance of payments deficit constitutes an economic miracle, what, may one ask constitutes and economic disaster?) [1] In a similar critical vein, this essay will examine those areas of economic policy in which the present government claims great success, such as controlling inflation and the trade unions, before examining its biggest failure- the failure to stop the “deindustrialisation” of the British economy. The policies of the Thatcher government will be examined as well in the context of the world economic situation over the past decade and the economic windfall for the British state in the form of North Sea oil.

One of the government’s declared objectives was to reduce public expenditure. The first words of its November 1979 Public Expenditure White Paper were “Public Expenditure is at the heart of our current economic difficulties”, [2] and it went on to declare that the government wanted public expenditure reduced by 4% by 1983-84. [3] The 1980 Mid-Term Financial Statement (MTFS) planned a 5% reduction by 1984. [4] There are several reasons for Conservative hostility to public expenditure. PM a party political level, government spending was seen as the main reason for high levels of taxation, and since the Conservatives had promised to reduce income tax, reducing public expenditure seemed the easiest way to keep their promises, High levels of public expenditure, which apparently approached 60% of national income in the mid-1970s, [6] were seen as threatening to “squeeze out” private enterprise, a traditionally important Tory concern, one expressed most articulately by Bacon and Eltis in their book “Britain’s Economic Problem: Too Few Producers”. [6] High government spending was also seen as a reason for a high Public Sector Borrowing Requirement, which many, including monetarists, saw as a cause for high levels of inflation. [7] On an ideological level, the economic “libertarians” around Thatcher saw public expenditure as an expression of state-sponsored collectivism, which was spent on collectivist-inspired welfare programmes which were in direct conflict with individual responsibility and freedom. [8]

Despite the government’s plans, and the pressure from its supporters to keep to its plans, between 1980 and 1984 public expenditure in real terms grew by 8%. Reasons for this included higher levels of social security payments as a result of higher unemployment, increased expenditure on the internal and external security of the British state, and government reluctance to reduce spending on electorally popular parts of the public sector, such as the NHS. This was in spite of reductions in funds for sectors such as housing and education. Since 1984 public spending as a percentage of national income has fallen slightly, but this is entirely due to the economy growing faster than increases in public expenditure. [10] Income tax has been reduced, the standard rate falling from 33% in 1979 to 25% in 1988, [11] but without government revenue being obtained from privatisation sales and North Sea oil revenue, these tax cuts would have been almost impossible.

Inflation was another great worry of the Conservative government in 1979, and “monetarism” was the method by which it said prices would be controlled. In practice, this meant that the government planned to control inflation through issuing monetary targets under the MTFS. It was only in 1983, though, that Sterling M3 growth targets were met. [12] Previously, actual growth in Sterling M3 had easily exceeded projected growth. [13] Contrary to the “monetarist” arguments of Milton Friedman, which the government had used as intellectual ballast for their policies, the House of Commons Committee on Monetary Policy said in March 1981 “that there was no relation between changes in money supply and the rate of inflation.” [14] In early 1985 Mrs. Thatcher publicly repudiated one of central tenets of “monetarism”- the natural rate of unemployment thesis- and this, says David Smith “was also a rejection of the monetarist ideas she had nurtured during four years as leader of the Opposition, and which she had vigorously attempted to put into practice on her election as Prime Minister…” [15] Inflation, however, was kept at a low level throughout most of the 1980s. If “monetarism” did not cause this, what did? The price of commodities, especially oil, affected inflation a lot. Around 1980 the Retail Price Index went up to around 22% [16], in the midst of the “monetarist” experiment. The main reason was the increase in the oil price following the 1979 Iranian Revolution. [17] During the 1980s the price of oil and other commodities fell as a consequence of a worldwide downturn in demand for such products, The high exchange rate, helped by the price of North Sea oil and high interest rates, kept inflationary pressures down as well. Wage militancy amongst workers was severely affected by the rise in unemployment, although wage increases throughout the 1980s on average, at about 7%, exceeded the inflation rate. [18]

Inflation started to rise in the late 1980s again as the result of several factors, government policy perhaps the most important. After abandoning monetarism, the government embraced another “New Right” economic doctrine- “supply-side” economics. [19] “Supply-siders” believed that cutting taxes can stimulate the economy. Some believed that tax cuts should have priority over controlling the money supply. In the early 1980s the government rejected this course, believing that tax should be cut only when conditions were favourable. The budges between 1986 and 1988, however, saw income tax cuts, but Britain’s economy did not have the capacity to produce all the goods desired by consumers with more ready cash. In an effort to answer demand, firms were prepared to push up wages in an attempt to recruit workers with the right skills. Where there were skill shortages, workers were able to demand higher wages. In its efforts to control inflation, the government are prepared to gamble with recession through using the same high interest and exchange rate policies as in the early 1980s- what John Hillard describes as “the application of age- old deflationary policies.” [20]

Sir Keith Joseph in 1979 wrote a pamphlet with the title “Solving the Union Problem is the Key to Britain’s Recovery.” [21] Several bills have been passed by the government aimed at controlling union activity, and the spectacular defeats the unions suffered in the 1984-5 miners’ strike and 1986-7 Wapping dispute suggested to many that the Conservatives had “tamed” the unions. As Thirwall says, though, the fall in the number of strikes was “largely a function of the high levels of unemployment”, [22] and Gamble notes that “trade union organisation remained strong. Examples of union-free industries and no-strike agreements remained rare, and earnings of unionised workers in permanent employment continued to rise faster than output and inflation.”[23] Moran even claims that the government’s trade union reforms could mean more strikes, since the law now gives more power to rank-and-file unionists, who are fragmented, unpredictable, a fertile breeding ground for all kinds of novel ideas”, as opposed to “full time officials, who…have been patriotic, cautious and well integrated into the dominant political culture.” [24] The action taken in 1989 by tube drivers and ambulance crews against the advice of their leaders suggest that Moran may be correct in believing “Conservatives may yet rue the day they undermined the trade-union officials.” [25]

Thatcher’s economic policies have failed dismally to reverse, or even stop, the fundamental problem of the British economy- the long-term decline of domestic manufacturing industry. The acceleration of Britain’s “deindustrialisation” in the 1980s is the result mostly of the government remaining staunch supporters of two long standing principles of British economic policy- that the interests of the financial sector take precedent over the interests of domestic manufacturing industry, [26], and that free trade should be encouraged as far as possible. [27]

The application of these two principles by the government, after taking office, to the British economy, led to a major recession in industry. Increases in interest rates and the rise in oil prices led to an increase in the effective exchange rate of more than 20%. [28] Unable to compete effectively with foreign goods, and unable to pay for much extra investment, manufacturing output fell by 19% [29] between 1979 and 1982. Unemployment almost doubled between 1978 and 1981 to well over two million. [30] Import penetration of domestic markets in sectors such as engineering and textiles rose by 25%. [31] In 1982 there was a record 12,000 company liquidations, [32] and for the first time in history more manufactured goods were imported than exported. [33]

At the same time s this domestic manufacturing slump was occurring, the City of London and “Those sectors able to trade and produce internationally…consolidated as the leading sectors of the economy.” [34] The government’s abolition of exchange controls in 1979 led to a major export of capital from Britain throughout the 1980s. By 1986 the volume of exported capital had almost increased threefold from its 1978 figure [35]. And “Foreign investments, both direct and portfolio, increased from £38 billion at the end of 1978 to £177 billion by the end of 1985.” [36] The forty largest UK manufactures had also between 1979 and 1986 increased employment abroad by 125,000 while reducing it in Britain by 415,000. [37] Throughout the 1980s exported capital had exceeded manufacturing investment in Britain. [38]

This export of capital helped to keep the balance of payments in surplus, as did exports of North Sea oil. Under Thatcher, North Sea oil was not used to fund the regeneration of manufacturing, as the Labour Left and Scottish Nationalists in their different ways advocated, [39] but instead took the burden of paying for “deindustrialisation.” Between 1979 and 1985, the government’s North Sea oil revenues amounted to £52 billion [40], while, says McInnes, £33 billion of that could be said to have been spent on unemployment benefit. [41] Arguably, North Sea oil also helped, along with privatisation revenue, [42] to finance income tax cuts.

Since 1982 the economy has been growing on average at 4% per annum. [43] Productivity has risen since 1980 at almost 6% per annum, [44] but this can be explained, says Leys, as “largely a statistical effect of the closure of so many inefficient plants, and of reduced manning levels” [45], and by 1988, says Victor Keegan “wage increases per unit of output- the measure used by the government.- arte actually worse in Britain than in nearly all of our major competitors….” [46] The unemployment figures have been falling since 1986, but this has been a lot to do with the 29 changes affecting unemployment statistics [47], as a Bank of England report stated recently “The sharper fall in unemployment…has been due to the introduction of the Restart interviews and stricter availability-for-work tests. Thus the Restart variable has since 1986, contributed about 750,000 to the fall in unemployment.” [48]

The economic recovery since 1982, says Gamble, depended on “the recovery in the world economy” brought about “by the supply side policies pursued in the United States which reflated the American economy and increased world demand.” [50] The recovery in Britain also depended on foreign governments, firms and financiers having faith that it could be sustained. As a result, interest rates have stayed above 10% in Britain throughout the 1980s to keep “hot money” invested in the pound and the City of London. [51] It has also meant that foreign manufacturers have been encouraged to either buy up existing British firms or set up completely new plants in Britain. This trend has been encouraged by the fact that “London has one of the most open stock markets in the world and is…the easiest place in Europe to buy companies either as a foothold for outsiders o for expansion by existing [European Economic [C]ommunity companies in the run up to 1992 [the Single European Market, which actually began on January 1st 1993].” [52] Around 10% of UK employees work for foreign firms [53], and many sectors vital to nay modern economy, such as microchips, have past under near total overseas control. [54]

In short, the government’s whole strategy for Britain’s economic future is dependent in the “internationalisation” of the British economy. This is heavily dependent on keeping foreign confidence in Britain’s economic performance, and on the health of the entire world economy. Neither of these two suppositions can be assumed to go on indefinitely. A global stock exchange crash, a trade war [55], a debt default or an economic downturn could lead to major problems for the British economy; not only could global demand decline dramatically with “knock-on” effects for the British economy, but foreign firms might pull out of Britain altogether to concentrate on home markets.

More probably, an economic slowdown in the early 1990s, to reduce the balance of payments and the rate of inflation sop that foreign confidence in the economy as a whole, and the currency in particular, could be maintained, might lead to a Conservative electoral defeat in 1991-2. [56] The problems for the Conservatives is that they are economically at the mercy of forces they cannot control, and forces, moreover, that have more influence over the British economy that when Mrs. Thatcher took office in 1979; in many cases that increased influence is a direct result of the government’s own policies. [57] Yet without the support of those international forces- whether nominally British or foreign- and the underlying world economic situation that those forces, in turn, depend upon for their influence, the Conservatives would have been unable to claim the few economic successes they point to now. Gamble, writing in the mid-1980s, may turn out to be correct in saying that “The Thatcher Government may turn out in the end to be just another administration that proclaimed economic regeneration in its rhetoric but was still forced to preside over further relative decline.” [58]



1989: The Thatcher Economic Miracle Start To Go Arse Over Tit, Despite Chancellor Nigel Lawson's best efforts...

Footnotes

[1] T. Thirwall “Myth of Thatcher’s miracle”, The Guardian, 26/4/89, p.15
[2] A. Gamble (1988) The Free Economy and the Strong State, p.101
[3] Ibid, p.101
[4] D. Kavanagh (1987) Thatcherism and British Politics, p.229
[5] A. Gamble (1985) Britain in Decline, p.229
[6] R. Bacon and W. Eltis “Too few producers” in D. Coates and J. Hillard, eds, (1985) The Economic Decline of Modern Britain, pp.77-91.
[7] J. Hillard “Thatcherism and Decline” in ibid, p.354
[8] J. Hoskyns “Mentioning the Unmentionable” in ibid, pp.127-133.
[9] Kavanagh, op cit, p.299
[10] Gamble, (1988), op cit, p.122
[11] Ibid, p.122
[12] Kavanagh, op cit, p.228
[13] Ibid, p.228
[14] Ibid, p.228
[15] D. Smith (1988) The Rise and Fall of Monetarism, p.123
[16] Ibid, p.191
[17] Ibid, pp.89-90
[18] V. Keegan “One last chance to cure the British disease”, The Guardian, 20/11/88, p.8
[19] Smith, op cit, p.176
[20] Hillard in Coates and Hillard, eds, op cit, p.355
[21] K. Joseph “Solving the Union Problem is the Key to Britain’s Recovery” in ibid, pp.98-105.
[22] Thirwall, op cit, p.15
[23] Gamble, (1988), op cit, p.127
[24] M. Moran “Industrial Relations” in H. Drucker et al, eds, (1988) Developments in British Politics 2, p.294
[25] ibid, p.294
[26] Gamble, (1988), op cit, p.194
[27] Gamble, (1985), op cit, pp.59-60
[28] Thirwall, op cit, p.15
[29] Gamble, (1985), op cit, p.194
[30] J. McInnes (1987) Thatcherism At Work, p.66
[31] Gamble 91985), op cit, p.194
[32] Ibid, p.194
[33] Ibid, p.194
[34]Gamble, (1988), p.195
[35] McInnes, op cit, p.66
[36] Gamble, (1988), op cit, p.177
[37] McInnes, op cit, p.80
[38] Ibid, p.66
[39] C. Leys (1989) Politics In Britain, pp.134 & 261
[40] McInnes op cit, p.67
[41] Ibid, p.67
[42] Asset sales had realised £12 billion up to 1985; Gamble, (1988), op cit, p.257
[43] Thirwall, op cit, p.15
[44] Leys, op cit, p.332
[45] Ibid, p.332
[46] V. Keegan “A cure which can only make things worse” ,The Guardian, 5/12/88, p.14
[47] R. Waterhouse “Anxiety grows over integrity of statistics, The Independent, 9/10/87, p.3
[48] Ibid, p.3
[49] Gamble, (1988), op cit, p.111
[50] Ibid, p.111
[51] Keegan, (1989), op cit, p.14
[52] P. Rodgers et al, “Who owns Britain as the ‘for sale’ sign goes up?” The Guardian, 2/8/88, p.11
[53] Ibid, p.11
[54] Ibid, p.11
[55] M. Walker “Iron Lady fights old dragons”, The Guardian, 16/11/88, p.23
[56] L. Elliott “Forecasts warn of long, hard slog” The Guardian, 26/6/89, p.12
[57] “Mrs. Thatcher has done more to lock Britain’s fate into Europe than any British politician since Ted Heath”; M. Walker, op cit, p.23
[58] Gamble, (1985), op cit, p.203.

As an afterword, I wish I could have cut down the footnotes. When in Freshers' Week back in October 88 I was given no advice on writing essays, but I was given a sheet of A4 that warned me about plagiarism. After that I went overboard on citing my sources. However, I think that if you want to say anything that goes against received opinion i.e. “Mrs Thatcher saved the British economy” (‘for whom’? is the question) you need to cite support of your arguments in chapter and verse ad infinitum if need be. Otherwise it is just you versus the Memory Hole...

I think my piece over-estimated the potential for the unions to regain their power (outside of the public sectors/utilities). However, I think I got spot on the potential for any "British Economic Miracle" to be brought down by external factors. Look at NuLab now getting serious grief from the rising price of imported raw materials (better not ask what happened to revenues from North Sea oil...). The "internationalisation" of the British economy has vastly increased since the late 1980s, helped by NuLab policies. If there was to be a major world economic crisis, one wonders how we would cope, particularly if foreign investors do the patriotic thing and re-invest in their own economies....