Freidman and Thatcher

These two items from 1979 and 1983 speak volumes about where we are in this country today with the Obama administration.  For some reason liberals (leftists, progressives or whatever they are now calling themselves) cannot understand how human nature affects economics.  They continually try to put square pegs into round holes no matter how many times this action proves futile.  Obviously some people are simply hard wired to believe that socialism is the only way to organize society.

“Hooray for Margaret Thatcher” (Newsweek, 9 July 1979)

We have become so accustomed to politicians making extravagant campaign promises and then forgetting about them once elected that the first major act of Margaret Thatcher’s government— the budget unveiled on June 12—was a surprise. It did precisely what she had promised to do.

Margaret Thatcher campaigned on a platform of reversing the trend toward an ever more intrusive government—a trend that had carried government spending in Great Britain to somewhere between 50 per cent and 60 per cent of the nation’s income. Ever since the end of World War II, both Labor and Tory governments have added to government-provided social services as well as to government-owned and -operated industry. Foreign-exchange transactions have been rigidly controlled. Taxes have been punitive, yet have not yielded enough to meet costs. Excessive money created to finance deficits sparked an inflation that hit a rate of over 30 per cent a year in mid-1975. Only recently was inflation brought down to the neighborhood of 10 per cent, and it is once again on the rise.

  
  Photo credit: Robert Huffstutter

Most important of all, the persistent move to a centralized and collectivist economy produced economic stagnation. Before World War II, the British citizen enjoyed a real income that averaged close to twice that of the Frenchman or German. Today, the ratio is nearly reversed. The Frenchman or German enjoys a real income close to twice that of the ordinary Briton.

Margaret Thatcher declared in no uncertain terms that the long British experiment was a failure. She urged greater reliance on private enterprise and on market incentives. She promised to reduce the fraction of the people’s income that government spends on their behalf, and to cut sharply government control over the lives of British citizens. Her government’s budget is a major first step. It reduces the top marginal tax rate on so-called “earned” income from 83 per cent to 60 per cent, on “unearned” income from a confiscatory 98 per cent to 75 per cent. At the same time, it raises the level of income exempt from income tax and cuts the bottom rate from 33 per cent to 30 per cent. It proposes to cut government spending significantly, to sell some of the government’s industrial holdings and to promote the sale of government-owned housing units to their occupants. It loosens foreign-exchange controls substantially as a first step toward their elimination.

One retrograde step, in my opinion, is an increase in indirect taxes—the British general sales taxes, or VAT. This increase, which partly offsets the decrease in direct taxes, combined with lower spending will reduce government borrowing, facilitating a restrained monetary policy and releasing funds for private investment. The purpose is admirable. However, once taxes are imposed, it is hard to cut them. From the long-run point of view, it seems to me preferable to resort to a temporarily higher level of borrowing rather than to a possibly permanently higher level of indirect taxes.

I would also have preferred to see exchange controls eliminated completely rather than by degrees. The controls serve no constructive purpose. Eliminating them gradually only prolongs the harm and preserves a mischievous bureaucracy.

But these are quibbles. I salute Margaret Thatcher and her government for their courage and wisdom in moving firmly and promptly to cut Britain’s bureaucratic straitjacket. Britain has enormous latent strength—in human capacities, industrial traditions, financial institutions, social stability. If these can be released from bondage, if incentive can be restored, Britain could once again become a vibrant, dynamic, increasingly productive economy.

In the United States, when the President proposes a budget, that is only the beginning. Congress disposes, and it may take many months before the final result is determined. In Britain, the situation is different. What the Prime Minister and Cabinet propose in effect becomes law as of that day—subject only to a vote of no-confidence in the government and a new national election. However, when the party in power has a majority in the House of Commons as large as the Tories now have, that is a purely hypothetical possibility.

What happens in Britain is of great importance to us. Ever since the founding of the colonies in the New World, Britain has been a major source of our economic and political thought. In the past few decades, we have been moving in the same direction as Britain and many other countries, though at a slower pace. If Britain’s change of direction succeeds, it will surely reinforce the pressures in the United States to cut our own government down to size.

"Mitterrand Elects Thatcher" (Newsweek, 4 July 1983)

In 1981, as Britain slid into a deepening recession and unemployment mounted above the 2 million mark, the conventional political wisdom was that Margaret Thatcher’s days as prime minister were numbered unless she could manage to foster a prompt recovery in the economy that sharply reduced unemployment. Talk about a U-turn was the order of the day.

Margaret Thatcher stuck to her guns—proclaiming that U-turn was not in her vocabulary. The recession continued and unemployment kept going up. Yet three weeks ago, with more than 3 million unemployed, she was re-elected in a landslide, achieving the largest majority in Parliament since the postwar Labor landslide in 1945.

One source of her victory was a sharp decline in inflation, from 22 percent in early 1980 to 4 percent currently—fully realizing a major campaign promise. Yet, by itself, that could hardly have produced a landslide. The postmortems have stressed two other factors: the Falklands war and the disintegration of the Labor Party. The Falklands war enabled Mrs. Thatcher to demonstrate in a dramatic way a quality of leadership and a firmness of purpose that had been conspicuously lacking in her predecessors. The “Iron Lady” became an accolade, not an epithet.

The sharp left turn by the official Labor Party, the resulting formation of the Social Democratic Party and the alliance between the new party and the Liberals certainly played a major part in fragmenting the opposition to Mrs. Thatcher. As matters developed, there was simply no responsible alternative to Mrs. Thatcher, no credible alternative government.

However, this explanation lacks one essential ingredient: it omits the role of President Mitterrand.

France was suffering from the same ills when Mitterrand was elected president as Britain when Mrs. Thatcher became prime minister and the United States when Ronald Reagan became president—high and rising inflation, high unemployment and slow economic growth. Mitterrand’s attack on those ills was precisely the reverse of Mrs. Thatcher’s. On coming into office, Thatcher reduced taxes; Mitterrand increased them. Thatcher reduced controls over prices and wages; Mitterrand expanded them. Thatcher eliminated foreign-exchange controls; Mitterrand made them tighter. Thatcher moved to denationalize enterprises and reduce regulation, Mitterrand nationalized private banks and other enterprises and increased government intervention into the remaining private enterprise. Thatcher tried to hold down government spending, albeit with little success; Mitterrand went on a spending binge.

Had the Mitterrand policies succeeded, even if for only a year or so, Thatcher’s opposition in Britain would have been enormously strengthened. The Labor Party would have had a real alternative to offer—one that was consistent with its ideological propensities and that had worked on the other side of the Channel. The cry that Thatcher’s “monetarism” was a tragic failure could not have been dismissed as mere campaign rhetoric.

Instead, the Mitterrand policy was a clear failure. Inflation remained high. Unemployment went up. The government’s budget deficit soared. So did the deficit in the balance of payments. The franc had to be devalued three times in the past two years, despite massive government borrowing in a vain attempt to prop the franc up. Worst of all for Thatcher’s opposition, Mitterrand was forced to reverse course. The U-turn occurred across the Channel as the French government was driven to adopt the much-derided Thatcher policies.

Thatcher’s opposition was left intellectually bankrupt. It had no credible alternative policy to offer. The claim that she was an irresponsible demagogue imposing unnecessary costs on the British people rang hollow. Her persistence in the main lines of her policy was perceived by the voters as a realistic recognition that there was no easy cure for ills that had accumulated during decades.

The British experience is being repeated in the United States. The Democratic leaders attack Reaganomics as a failure, yet they, too, are intellectually bankrupt. They, too, have no credible alternative to offer, and many of them continue to attack the label while adopting the substance. Mitterrand has made no sharper U-turn than longtime New Dealers who have always praised deficits as a way to prime the pump and stimulate the economy but are now preaching the virtues of balancing the budget.

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