The Thatcher revolution: all for nothing?

Margaret_Thatcher_(1983)

Margaret Thatcher in 1983. Photo by Rob Bogaerts / Anefo – Nationaal Archief

Did the Thatcherite reforms of the 1980s and 90s improve UK economic performance? A special report by Ken Coutts and Graham Gudgin of Cambridge University suggests not. This is a controversial claim, but one examined in some detail by the two authors.

It has become the conventional wisdom among commentators in the UK, including many on the centre left, that the liberalisation of the economy beginning in 1979 led to an economic renaissance. But the report shows that the growth in productivity in the 1950s and 60s, when the economy was more regulated and managed along corporatist lines, was better than the decades since Thatcher came to power, which includes the years of the ‘New’ Labour governments under Tony Blair and Gordon Brown.

Growth was more unstable and average unemployment significantly higher than in the earlier period. Although there were clearly problems that came to a head in the 1970s, it is not so clear that their removal sparked some kind of dramatic improvement.

Compared to the US economy, the UK failed to close the gap in levels of productivity. Compared to the founding members of the European Union, which includes France and Germany, UK performance has been better since the 1990s, but this is down to a deterioration in the performance of these countries, rather than an improvement in the UK.

It can only be argued that the Thatcherite reforms led to an improvement in macroeconomic terms if the case is made that it would have been worse in their absence. This is not unreasonable. However there are a number of European countries that have, to varying degrees, maintained a more corporatist framework for policy, with a stronger role for cooperation between government, firms and unions. The Nordic countries are a case in point: they have fairly consistently outperformed the UK, while maintaining lower levels of inequality and a stronger welfare state. This suggests that, contrary to Thatcher’s TINA (There Is No Alternative) acronym, there were different paths that could have been taken by UK governments in their reforms over recent decades.

The report makes a strong case that the only clear ‘improvement’ made by the liberalisation of the economy was due to reforms to the financial sector. However, over the long-term, this change simply allowed household debt to grow more rapidly than GDP, which led to faster growth in consumption, demand and output over the period, a trend that has ultimately proved unsustainable. This can be seen in the years since the financial crisis of 2008. Some deleveraging has taken place, but household debt has now stabilized as a share of GDP and growth is slowing after a tepid recovery. Growth in productivity and GDP per capita, which are the key indicators for improvements in the standard of living, are way below previous trends and there is little indication that the necessary recovery is underway.

The authors of the report contend that the neglect of manufacturing by successive governments, which includes several periods of overvaluation of the pound, have in part caused it to shrink to around 10% of GDP. This is one of the steepest falls and lowest levels among advanced economies. Since productivity growth in the manufacturing sector as a whole has been faster than that in services, including the financial sector, this neglect has led to slower productivity for the UK economy overall.

Liberalisation in the UK also appears to have contributed to a steep rise in inequality, although this more or less stabilized since the late 1990s, when the Labour government engaged in some income redistribution.

In the absence of a further unsustainable rise in household debt, where is an improved performance for the UK to come from?

At least part of the answer may come from a useful little book by John Mills and Bryan Gould. They offer an apparently simple solution to many of the UK economy’s problems: a substantial devaluation of the pound. If this can be achieved, the results would be an improvement in the current account as net exports start to grow much more rapidly. This would produce faster growth in manufacturing, which still dominates foreign trade. As the current account improves, this would allow faster overall growth in GDP, a proportional fall in private debt, and also a fall in the budget deficit towards balance. More jobs in manufacturing would reduce unemployment and inequality too, as employment in the middle of the income distribution recovers.

This all sounds good, but would such a devaluation be possible? The authors suggest that the UK government could discourage capital imports such as portfolio investment, and encourage capital exports. A change in the stated policy could also have an effect on the level of the currency, by changing market expectations.

In the current climate, with slowing global demand, devaluation may be less effective at boosting exports, but it would still have an impact if it could be achieved. The current government does not seem to be concerned about the effect of a strong currency on the fortunes of the manufacturing sector. To paraphrase a recent article on the BBC news website: ‘whatever happened to (chancellor George Osborne’s) march of the makers? Governments since 2010 have failed on this count and are largely continuing the policies followed since the 1980s which according to the above report have, in macroeconomic terms, been distinctly unsuccessful.

A significant change in strategy is needed. I will discuss this in future posts.

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