Tories against Thatcher

Stephen Bush expresses a widely-held opinion when he writes:

Boris Johnson sees more Thatcherites when he looks at his cabinet than Margaret Thatcher did with any of hers.

In a sense, however, this is very odd – because in one respect this government is fundamentally anti-Thatcherite.

What I mean is that a cornerstone of Thatcherism was the belief that a major role of government was to provide stability so that businesses could plan without having to worry about policy changes. This was the idea behind the medium-term financial strategy – to reduce inflation (hence creating stability) without using price or wage controls, what Nigel Lawson decried as “ever more ad hoc interference with free markets.” As she said:  

An economy will work best when it is built on a framework of clear and predictable rules on which individuals and companies can depend when making their own plans.  Government's primary economic task is to frame and enforce such rules. Its own discretionary interventions should be kept to a minimum.

In risking a no-deal Brexit this government, of course, is doing 180 degrees the opposite of this*: a course of action which requires a contingency fund to bail out the businesses it damages might be many things - some perhaps describable without expletives – but Thatcherite it ain't.

Johnson’s government is, of course, not alone in rejecting this fundamental Thatcherite idea. In ramping up the trade war, his ideological stablemate in the US is making “ever more ad hoc interference with free markets” and creating uncertainty.

And here’s the thing. Thatcher was right in this regard. We now know that policy uncertainty does indeed reduce capital spending. This is because some potential investment projects are like call options – firms have a choice to exercise them now or later – and uncertainty increases the incentive to hold onto options. Yesterday’s figures showed that business investment has flatlined for four years. One reason for this – of many – is that Brexit uncertainty has caused companies to put some projects onto the back burner. This is contributing to the stagnation in productivity and real incomes.

This is hurting the class that Tories are traditionally supposed to protect. My chart plots the global policy uncertainty index complied by Nick Bloom and colleagues against the All-share dividend yield. It’s clear that there’s a correlation between the two – of 0.55 if we’re being precise. Now, correlation isn’t causality yada yada but it’s plausible that it is to a degree. Policy uncertainty might raise the risk premium on equities, and might also reduce future growth. Both would warrant a higher dividend yield and hence lower share prices. In this sense, the Tories’ (and Trump’s) rejection of Thatcherism is hurting equity investors - who are their own class.

So, what’s going on?

One thing is that the financial crisis and decade of stagnation has shown that whilst policy stability might be necessary for economic success it is certainty not sufficient. Everybody has responded to this by doubling down on their priors. The left think it shows we need a more activist state; centrists pretend it never happened; and the right think – wrongly, I believe – that we need to escape the protectionist yoke of the EU and pursue freer trade.

But there’s something else. For one thing, this shows that the political climate does not change simply because of explicit debate about ideas. No Tory has AFAIK explicitly argued against Thatcher’s belief in the importance of stability: they just forgot it and fell into other ideas.

And for another, this tells us something about political labels. Names such as “Thatcherite”, “Blairite” or “Corbynista” don’t merely describe a coherent explicit set of ideas.  They also refer to distinct dispositions, loyalties and hostilities. Like it or not, tribalism matters.

* Some might add that Johnson's promises to jack up public spending are a rejection of Thatcherite ideas of "sound finance". Personally, I suspect that this is more defensible now that real bond yields are sharply negative. 

Comments

[Peter]

It seems very "brave" in the Yes, Minister sense to write as if the Thatcher government didn't introduce fundamental economic reforms. It sounds like you are conflating laissez faire economics with leaving the economy in exactly the state you found it in when coming to power - even if it's anything but laissez faire.

And also: higher dividend yields hurt equity investors?? You'll have to explain that one to me.

[e]

Very clear. Perhaps the cabinet recognise, or hope Thatcherite rhetoric still has more clout than reality. Seems mean to single out Stephen Bush.

[Blissex]

As often our wykehamist blogger takes political propaganda at face value... As if Thatcher's politics did not have the goal of providing the opposite of stability, but vast and growing redistribution, by any means necessary, in favour of "her own". My personal opinion is that she was only in most part a giant hypocrite, and in a minor part she half believed her own propaganda homilies.

As to "The left think it shows we need a more activist state" I find it hard to believe, as an essential part of left policies is for the state to stop being so expensively activist on the side of property and share owners, big business, the finance "industry", and to spend less of public money on supporting and enriching them; and the tories have been very keen to spend large sums on activist policies to protect the english voters from unapproved opinions, and also very activitst to get the yugoslav, iraqi, lybian and syrian governments off the backs of citizens :-).

The very mild centre left policies proposed by the Labour wing of Labour are for the state to refocus from redistributing from poorer to richer, to improve the chances of lower income people for better jobs, wages, pensions, public services, rather than to increase state activism.

[Blissex]

«don’t merely describe a coherent explicit set of ideas. dispositions, loyalties and hostilities. Like it or not, tribalism matters.»

I guess that "interests" then don't matter, it is either tribalism or ideas that drive politics... :-)

[cjcjc]

Is 0.55 a terribly strong correlation?
And how statistically significant is that 0.55?
Higher dividend yields today = higher total returns tomorrow.
I'm struggling to see the problem unless you are a forced seller today?

[Alex]

I think to some extent they have come to see stability as a bad thing, in a bastardization of [NNT/Austrian econ/John Boyd/something or other].