Are we all Thatcherites?
How should we view the recent economic history of Britain? There is now a broad but unspoken consensus, encompassing many on the right and left, which runs as follows: whatever the excesses of Thatcherism, something had to be done about the unions; the reforms of the 1980s and 1990s have at least laid the ground for steady growth and declining unemployment. A new Labour administration should therefore pursue a “steady as it goes” course.
These views are variously wrong, missing the point and complacent. First, some facts. Despite the benefits of North Sea oil and the unsustainable Lawson boom, GDP grew at a rate of only 2.4 per cent between the peak years of 1979 and 1989. The effects of Thatcherite economic policy were particularly damaging on the manufacturing sector. Over 1979-89, Britain’s manufacturing output grew by a total of only 15 per cent-an average growth rate of barely 1 per cent a year.
Certainly, manufacturing productivity grew in the 1980s, but our productivity levels still lag the other leading industrial countries and any improvement was largely due to job cuts rather than increased output. Part of the increased output per person was actually due to a one-off increase in labour inputs per person through increased production-line speeds, reduced break times and so on, which is not acknowledged in the official productivity calculations.
And what productivity growth there was went mainly into increased profits rather than the reduced prices which could have increased market share, employment and exports. The increased profits themselves went disproportionately into dividend payments rather than investment.
True, the investment record of manufacturing in Britain had been relatively poor for decades; but it became even worse after 1979. It is a major cause of Britain’s indifferent growth performance, constraining technological progress and the expansion of demand. The cumulative effect of this record is that British workers lack the plant and machinery used in other leading industrial countries. If Britain is to compete effectively with them this investment shortfall will have to be reversed. Some have suggested Singapore-style compulsory saving as a potential “big idea” for Tony Blair. But what is really needed is compulsory investment.
Turning to macroeconomic policy since 1979, this has encouraged an overvalued exchange rate and high interest rates. Erratic monetary policy discouraged investment and business confidence. This was particularly apparent during the early 1980s when high…