Thatcher truly changed the climate

Economics
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The Independent Online
A COUPLE of years ago a friend at the top of the Treasury confessed to me that he felt they blew it in 1986 and 1987. Up to then, he argued, they had really got economic policy right. They had established fiscal and monetary stability, the recovery was secure, and they had made many of the necessary structural changes to the economy that would, in time, lead to faster growth rates in the future.

But then they made a series of mistakes. They misread the dangers to the economy of the stock market crash; they underestimated the interaction between financial deregulation and the boom - they deregulated at the wrong time in the economic cycle; and they ignored the warning signals from the very rapid growth of the money supply and the growing current account deficit because, since they were moving into a large fiscal surplus, they thought that economic policy was still quite tight.

This snapshot of economic policy during the Thatcher years sprang to mind last week when Lady T was puffing her new book in a series of radio interviews. The memoirs actually cover her rise to power - the pre-Downing Street years - but most of her interviews were devoted to a justification of her policies in office.

One particular point sprang out: tackled on public spending and taxation, she argued that she had cut the rate of income tax and public spending, despite having inherited a large budget deficit, which she had turned into a surplus. In her own mind, her period in office was an economic triumph.

Many people, particularly those who were seduced by the late 1980s euphoria into borrowing heavily, would simply not recognise this view. So her claims do deserve some kind of answer: is it possible to make a sensible economic assessment of the Thatcher years, divorced from political point-scoring? And if so, how might the balance sheet stack up?

There are three fundamental difficulties in adding up the score. First, you have to try to adjust for the economic cycle. This is not just a question of looking at measures of growth or unemployment from peak to peak, or from trough to trough, but also adjusting for the cycle when comparing performance with that of other countries. So claims by politicians that "Britain has the fastest growth in the EU" or whatever always have to be taken with a pinch of salt.

Second, you have to make some allowance for influences common to all countries at the time. For example, all developed countries experienced some sort of boom during the 1980s; and so any criticism of, say, our property boom, would have to acknowledge that the US and Japan experienced similar conditions. Trends in social attitudes, too, are remarkably consistent in ostensibly different countries.

Third and most difficult of all, the lags in economics can be very long. We do realise now the scale of the disaster that has resulted from poor investment decisions in the 1950s and 1960s such as the building of tower blocks or the nuclear power programme. But we can only begin to guess at the opportunity cost of that investment: what we might have achieved had that money been more sensibly spent.

But with those health warnings in mind, it is possible to start making a tally of sorts. In a nutshell, it is a story of micro-economic success and macro-economic failure.

The failure first. The graphs show three possible performance indicators. The first two are the standard measures of external balance, the current account, and internal balance, the Government's fiscal position. The other is a measure of personal behaviour, the savings ratio.

The obvious point, of course, is that they all do the much same thing. The current account wiggles about in modest surplus (thanks largely to oil) in the early 1980s before whizzing into serious deficit in 1987. Government borrowing is slowly brought under control but remains a constraint on policy until it quite suddenly swings into surplus. And just as the Government stops borrowing and starts saving, we punters do exactly the reverse, and by 1988 are spending 4 per cent more than we are earning. The Government's surplus was real enough, but it was achieved under circumstances that were unsustainable: a runaway boom.

Looking at those three graphs, it is very hard to draw any other conclusion than the one admitted by the Treasury mandarin at the start of this column: that they failed to react quickly enough to the late 1980s boom. One can then have a secondary argument as to whether it was Mrs Thatcher's fault, or whether the blame should be laid at the door of her Chancellor, Nigel Lawson. But it was her Government.

Few people would quarrel with that. More might find it odd to claim that in micro-economic policy the decade was a success. The problem here is the question of lags. Take the three main micro-economic reforms of the Thatcher years: labour market reform, privatisation and deregulation.

Most people would look at unemployment at the beginning of the decade, 1.1 million, and compare it with the level at the end, 1.7 million (but that after hitting 3 million and almost rising to that again). They would also point to the main changes made to the measurement of unemployment, all of which had the effect of cutting the total. But this really is not fair. It ignores the fact that unemployment was unsustainably low in 1979, that it rose in every European country through the 1980s, and reforms are liable to take at least a decade to work though, maybe more. The test of the labour market policies of the early 1980s should be the change in the "natural" or non-inflationary rate of unemployment. Here, the Organisation for Economic Co-operation and Development calculates that the reforms dropped this natural rate by about 3 percentage points, to about 7 per cent. That is an enormous advance, and it is not some figure reached by manipulation. As for actual levels, the OECD calculates standardised rates of unemployment, and our published rate is pretty close to the standardised one.

Take privatisation. It happens to be unpopular at the moment, thanks in part to the excesses of privatised utility bosses, but viewed objectively it is a policy which has been imitated in just about every country in the world. The Thatcher legacy is that this was done relatively early by world standards. Had there been a different government, we would now be in the middle of the privatisation process, instead of near the end of it. Whatever view one takes of the rights and wrongs, this is a world movement of astonishing power.

Finally deregulation. The problem here is that the costs are visible and specific while the benefits are concealed and general. Thus in, for example, the home loans market, people see the costs of deregulation in the growth of mortgage arrears and individuals losing their homes. They cannot see the costs had the loans market remained as it was in the 1970s, when the building societies had a virtual monopoly, and people had to wait maybe years in a queue before they could get a loan and move into a home of their own. The problem of arrears was the result of the macro- failure that created the housing boom, not a failure of deregulation.

Deregulation also led to an explosion of entrepreneurial activity. Again, many people feel uncomfortable about that and point to the surge in business failures that occurred at the end of the decade. What is less often acknowledged is the opportunities that climate created. You are reading one now - this newspaper would not have existed had it not been for financial deregulation: when founded, this group was the largest start-up in Britain.

And this change of climate really was a function of political leadership. In his new and important book* to be published later this week, the economist Lord Skidelsky points out that: "Ronald Reagan and Margaret Thatcher provided the ideological drive and personal leadership which made anti-collectivism a cause." What we do not yet know is the extent to which continental Europe and Japan will be forced to imitate the economic policies of the US and Britain in the next 10 years.

* The World After Communism, Robert Skidelsky, Macmillan, pounds 16.99.

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