Rishi Sunak and Liz Truss both claim to be the true heir of Margaret Thatcher’s economics. In one sense they are both right—but in another, more important, sense they are both emphatically wrong.
They’re both right because the self-styled Iron Lady was, in reality, inconsistent enough that each of them can fairly claim to represent a different stage of her evolution: tax-raising Rishi is the hairshirted Thatcher of the early eighties, whereas largesse Liz stands for the hubristic shoulder-pad economics of her later days. They’re both wrong because even now, 40 years on, so many of our national problems still date back to Thatcher: it is high time for the Tories to bury her, not praise her.
The lady was for winging it
The significant thing Thatcher brought to No 10 in 1979 was not a serious economic programme, but economic instincts. Now those instincts—that private property was to be revered, public expenditure disdained and inflation crushed whatever the human consequences—truly were significant. The imagery of the shopkeeper’s daughter earnestly balancing the books seared into memory the sense of a woman who knew what she was doing.
The truth, however, is that “Thatcherite” macroeconomic policy was made up as she went along. The starting point was Milton Friedman’s monetarist dogma, which claimed that the problem of inflation was purely and simply “too much money chasing too few goods.” That simple soundbite translated into an equally simple mathematical equation: MV = PQ, where M is the money supply, V the velocity of money (the regularity with which units of money get spent), Q is the quantity of goods and services and P the all-important price level. To the early Thatcherites, the upshot was clear: to get a grip on prices, all you had to do was grip the money supply.
Unfortunately, back in the real world, things were a lot more complicated. Mess around with money, and you can disrupt not only prices, but also the rate at which money changes hands (the V) and indeed the quantity of stuff produced, which is to say that the equation can be brought into balance not only by disinflation but also by a slump in the real economy. Moreover, public policy doesn’t directly set the “money supply”—the banks create a lot of it by issuing loans—and so it provides no more than a target, to be considered in setting things like interest rates.
Even this becomes a thicket, as you still need to settle the definition of the “money” you are going to watch. Thatcher started out by targeting so-called “broad money,” or M3, which included not only physical notes and coins but also the larger stock of deposits, which only exist as numbers in banks’ ledgers. But it turned out M3 did not exhibit a stable relationship with inflation, so in the mid-1980s her perplexed chancellor, Nigel Lawson, turned his attention to M0, the narrow monetary base of notes and coins alone. When that, too, failed to provide a reliable pointer towards inflation, he tried to lock in discipline by targeting instead sterling’s exchange rate against low-inflation Germany’s Deutsche Mark.
The trouble was he hadn’t achieved agreement for this with Thatcher herself, who had an economic prejudice against second-guessing currency market forces, and a political prejudice against tailoring Britain’s policy around Germany’s. Lawson was soon out of a job. But before interpreting this as a victory for Thatcher’s own principled economics, we need to register that a year later, shortly before her own downfall, the prime minister herself submitted to join the European exchange-rate mechanism—a commitment to maintain the value of sterling.
Our people
The point here is simply to say there is no solid box of Thatcherite tricks for running the economy from which Sunak, Truss or anyone else can hope to draw: her policies came and went. But that isn’t a failing of Thatcher as a politician. Indeed, it is precisely because she was ready to adjust tactics while remaining focused on her strategic aims that she not only survived but became the most consequential British prime minister of modern times.
To understand the real economics of Margaret Thatcher, don’t be distracted by the competing claims of latter-day Thatcherite ideologues. Start instead with the one principled stand she made against her party leadership on her way up the greasy pole, which was not on any financial matter, but in a 1961 rebellion in support of “caning, and in very serious cases, birching” as a judicial punishment. Thatcher was ruthless. And while the policies may have changed, the character never did.
When she got her hands on the economy, Thatcher was a ruthless battler on behalf of the haves against the have-nots. Memories have become blurred about this reality, because some of the policies she is now associated with, notably state share sell-offs and council house sales, are thought of as converting have-nots into haves. In truth, only a minority ever bought privatisation shares, and many sold them on quickly: indeed, a 2015 report by ResPublica, a thinktank associated with David Cameron, bemoaned how the proportion of the stock market directly owned by ordinary citizens had tanked since 1985, when she promised to make owning shares as common as owning a car. Council house sales had a more important social effect, but this was because they were boosted by large subsidies which—as her one-time aide Matthew Parris recalled on her death—she was initially very much opposed to, fearing they were unfair on “our people,” by which she meant those who had already bought their homes. Even a ruthless warrior can’t win every battle, however, and once she lost this one, as a shrewd politician made the best of it by making the giveaway her own.
Thatcher’s dedication to “our people” was unbending, and precisely because of that she was ready to reset her policy to keep up with their evolving needs and demands. Coming out of the 1970s, the number one priority for voters with money in the bank was to get inflation down. Underneath the successive waves of monetarist froth was the ruthless determination to do so, if necessary, by pushing the economy into a deep depression. That was the big call, it was done, and it worked—at a ferocious cost.
After a serious early bump in the form of the second oil shock (which briefly pushed inflation up to 18 per cent in 1980) the inflation inherited in May 1979, estimated on a CPI basis to have been nearly 9 per cent, had been pushed down to 4 per cent by 1984 and 3 per cent in 1986. But meanwhile, the main measure of unemployment, which had stood in spring 1979—when Thatcher’s Tories were charging that “Labour isn’t working”—at 1.4 million, rocketed to 3.3 million in Spring 1984, and remained stubbornly above three million for three full years. It was heavily concentrated, too, in the north of England, industrial Wales and Scotland. These are the places where “sound money” was restored—on the broken backs of the poor.
As the human toll of mounted, Thatcher was steadfast on the deflationary strategy, but the tactics were adjusted in line with the requirements of “our people.” When it became clear that treating inflation as the “purely monetary phenomenon” of Friedmanite theory implied raising interest rates to an insufferable point for the mortgagors of prosperous England, the focus was quietly switched to tighter fiscal policy. The government presented its eye-watering public deficit reductions plans as if they could in themselves arrest growth in its money targets, whereas in truth the theoretical connection between the two things was complex and tentative and, indeed, downplayed by Friedman himself. The immediate effect of whacking up taxes in the slump of 1981, as Thatcher and her first chancellor Geoffrey Howe did, was simply to drain demand from the economy. That implied higher unemployment, and workers with fewer options—who would think twice about asking for an inflationary pay rise.
Sunak doesn’t spout the same monetarist mumbo-jumbo, but in ploughing ahead with tax rises for anti-inflationary purposes even as we sink into a slump, he can certainly claim to be Thatcherite.
Truss’s claim is just as robust, but relates to the other end of the decade—not 1981, but 1988/89, when inflation was assumed to be defeated, and the priority for “our people” became tax cuts instead. By this time, the Iron Lady may have absorbed something from the cheerier “morning in America” ethos of Ronald Reagan, who had always been keen to cut taxes as soon as he could and leave others to worry about the consequences later.
Although Lawson today derides the shallow optimism of “Trussonomics,” in 1988 he was the one at the Treasury slashing taxes—most notably scrapping all the old top rates to 40 per cent—on the assumption that the good times, which he assumed were the product of Thatcherite reforms, could last. In truth, Thatcherite deregulation had now unleashed an unsustainable boom, which soon showed up in a rapidly deteriorating balance of payments as consumers splurged on imports. Before the inevitable bust, inflation began to climb to in a way that is not adequately remembered. When it eventually peaked in 1991, it was 8.5 percent, just a fraction of point lower than it had been under James Callaghan in May 1979—only this time unemployment was rapidly rising back towards a fresh peak of three million, for the second time in a decade.
Stuck record
If the aim were smooth economic management, then it’s fair to say that the Thatcher years are pretty well the opposite of what you’d want. But as the Tory Party well remembers, the many bumps did not stop her winning three elections. And to be fair, smoother economic performance is not always ultimately the best in the end: there may be times when creative destruction can work.
But on the raw measure of average output per head, there was no Thatcher miracle: GDP per head in 1979 was $2,300 lower in Britain than France. In 1991—the last year shaped by decisions she had made, before she was ousted in the final weeks of 1990—the UK fell short of France by $2,500. (Figures compiled by Our World In Data, using 2011 dollars for both years). Of course, such numbers can be sliced and diced in different ways, but the best that could seriously be claimed is that the Thatcher years saw Britain’s relative decline arrested. And even that might be a stretch. Look at UK GDP per head again alone over a slightly longer period (this time in 2013 pounds) and cumulative growth over the 11 years of Thatcher is 28.5 per cent, entirely indistinguishable from the 28.9 per cent of growth that accumulated in the 11 preceding years, between 1968 and 1979.
The real story was not about the size of the pie, but the way it was divided. Here there was change that was impossible to miss, as “our people” prospered, and others were left out in the cold. The Thatcher years saw the headline “Gini” measure of inequality rise from about 25 to about 35. A 10-point shift on a scale bounded between 0 (where every person has the same) and 100 (where one person has everything) is huge. It was enough to change Britain from being one of the more equal European societies to being a sort of mid-Atlantic society, well on the road to a yawning US-style income gap.
Interestingly, the Tory candidates might do well to note, this really was a distinctly Thatcherite phenomenon: the Institute for Fiscal Studies has documented that overall income inequality held steady under John Major, as it would also do under New Labour. Nonetheless, cross-national studies have found that the widening dispersal of incomes in 20th-century Britain was the most dramatic in the developed world. The great Thatcherite gulf on incomes was never closed, and so it continues to shape the economy—and society—that we live in today.
It was achieved in myriad ways, through small fights and big: the weakening of the trade unions; the replacement of moderately-paid public managers with costly privatised bosses; the deep cuts in top tax-rates twinned with a policy of letting benefits lag ever-further behind wages; the bonfire of financial regulations which enabled the bloating of the financial sector, together with the bonuses and pay of top staff. The effects on output will sometimes have been positive, sometimes negative: the assessment could fill long books. But the effect on inequality is uniform, and does not require the same debate, because I doubt anyone would seriously contest that all these changes worked in the same inegalitarian direction.
And if you like inequality, the current moment has a lot to recommend it, even before the spirit of Thatcher is resurrected. The pandemic saw poorer families forced to run down their savings to survive, while the better-off took the chance to top them up during their months of working from home. Six years of stagnation in actual business investment(that we might hope would raise productivity and thereby wages) was, until the present slump began to bite, going hand-in-hand with an orgy of private equity deals. Right now, bank bonuses are surging ahead as half of the country sinks into fuel poverty. IMF analysis suggests the rocketing cost of energy is set to hit poor Britons proportionally twice as hard as the rich, and indeed also twice as hard as their poor German counterparts and roughly four times as hard as poorer people in France.
We’ve now tried the unequal society that Thatcher bequeathed for a third of a century. That’s a long experiment, and the results are in. Among the self-appointed Conservative selectorate currently picking a new prime minister for the rest of us, they might be read as a case for doubling down on her agenda. For broader society, however, they might seem more like a powerful argument for trying something different.
