It's Thatcher’s 80th birthday. I'll not be celebrating. I’ll grant that she did do some good things – such as the abolition of much of the machinery of the corporate state and the deregulation of financial markets. But her influence upon the economy was, in many ways, disastrous. For example:
1. She did not shrink the state in the sense of cutting the tax burden. In 1978-79, taxes were 40.2% of GDP. In 1989-90 they were 39.9% (table C24 of this pdf).
2. She was not, naturally, committed to privatization. The word wasn’t mentioned in the 1979 manifesto. And the sale of BT was motivated more by a desire to raise money than to promote competition; that’s why the company was sold as a monopoly, rather than broken into competitive units. And in this case at least, privatization did not much increase efficiency. Massimo Florio (pdf) says of BT:
Operating profits…were remarkably stable before and after divestiture, and ownership change per se had little discernable impact on productivity trends.
And the sale of council houses, with huge discounts to people who had lived in them longest, was designed to bribe people into voting Tory. In rewarding people who had been immobile, these signaled that labour mobility – “get on your bike” - was not to be encouraged.
3. Thatcher did not introduce major market reforms into the NHS or education. The basic structure of these services – state monopolies – was much the same in 1979 as in 1990.
4. Labour market performance did not improve under Thatcher. This paper (pdf) estimates that the Nairu was actually higher in 1990 than 1979, although it did fall in the later 1980s. And this paper (pdf) concludes that the Thatcher reforms:
did not improve the response of real wages to unemployment nor the transition for men out of unemployment, and were accompanied by rising wage inequalities that do not seem to reflect the working of an ideal market system…There is no strong evidence that the British labour market experienced a deep microeconomic change.
5. The original Thatcherite macroeconomic policy – the use of monetary targets to cut inflation – was a terrible failure. The idea (at least in public) was that the announcement of credible limits to monetary growth in 1979 would reduce inflation expectations, and hence actual inflation, without reducing output.
But this didn’t happen. Money growth consistently overshot its target and the economy slumped in 1980-81. Patrick Minford, a Thatcher sympathizer, has blamed this on the “poor credibility” of policy.
Sure, inflation did collapse, especially after 1982. But this was for completely different reasons to those publicly envisaged. Inflation fell because of the recession and a fall in world-wide inflation – certainly not because of lower monetary growth.
6. Two of the three worst recessions in the last 100 years - 1980-81 and 1990-91 – began under Thatcher. This (at least) betokens a little recklessness in macroeconomic policy.
Now, it’s quite possible that the aggregate welfare costs of recessions are small, as Robert Lucas has demonstrated. But this is only true if there are adequate mechanisms for polling macroeconomic risks. But Thatcher, far from promoting these, actually cut unemployment benefits, stigmatized the unemployed, and did nothing to encourage the growth of private markets for insuring against macroceconomic risks. The Thatcher project owed nothing at all to the Arrow-Hahn-Debreu model of what a properly functioning market economy should be.
There is a common theme uniting all these points. It’s that Thatcher was a class warrior, not an economic libertarian. Where market reforms benefited the rich (exchange controls) or bribed floating voters (council house sales), she supported them. Where market reforms could have helped the poor (school vouchers, macro markets), she did nothing. And there remains the suspicion that the 1980-81 recession was welcomed as a means of destroying the traditional working class.
And this is where her influence was wholly pernicious. She has given a generation of non-economists the impression that support for free markets is equivalent to support for the vested interests of the rich. Nothing could be further from the truth.