Thatcher's economic legacy: 40 years on
Thatcher embarked on a radical crusade of liberalising the economy, but how has it changed the economy and has it made the economy healthier?
Thatcher was not a consensus politician. Early on she embarked the then radical free market policies of Fredrich von Hayek and Milton Friedman. This promised to ‘roll back the frontiers of the state’ which was inefficient and had led to the problems of the 1970s. Before Thatcher it seemed that the economy was stuck in an insolvable mess. Inflation was rocketing and the government was pinned down by the power of the unions. There was a problem, but Thatcher’s purge of the economic system was an unnecessary and extremely painful solution which did not change the long term fortunes of the economy. It would take another decade before the economy properly recovered.
Thatcher’s main economic principle was monetarism. This was not an accepted economic ideology at the time and only the military dictatorship of Chile had previously used them. Perhaps there is a reason for that. This involved trying to tackle inflation by essentially crashing the economy. If spending is depressed, then there is no demand in an economy for goods and services so prices fall. Thatcher did this by raising interest rates to 17% and in the 1981 £4bn was taken out of the economy with the government’s budget. This was dubbed the greatest ‘fiscal squeeze in peacetime’.
Clearly, the main issue with this is that suddenly in 1980, the economy plunged into recession. By 1983, unemployment reached three million, the highest ever level after World War Two. It would not fall below this level until 1987. Although in economics we only usually consider economic factors such as real incomes, however this policy had profound social impacts. Most of those who lost their jobs were the poor who had fewer desirable skills. This had led to inequality continually increasing since the 1980s. Desolate areas of the UK today which have voted for Brexit today were largely created by Thatcher. There was also great unrest at the time with riots between April-June 1981, which seemed to signal a more divisive and lawless society.
Thatcher’s stubbornness meant that despite a petition from 364 economists she pursued even deeper into this trap of depression. This shows that her policies did not have the approval of professional economists never mind the man on the street. In many ways Thatcher was extremely lucky; North Sea oil suddenly came on stream which made up 15% of the government’s revenue and prevented a run on the pound. Without this, Thatcher would almost definitely be forced to relent and no doubt her legacy would be very different.
Another aspect of Thatcher’s economic legacy was her longer-term supply-side policies including privatisation and deregulation. Although this began slowly in her first term, after 1983 there was a full scale programme of selling of our ‘family silver’. BT was privatised in 1984 and in 1986 British Gas was privatised in the UK’s biggest share offer in history. Thatcher wanted to extend capitalism to all people by getting them involved in capital markets. The number of individuals owning shares increased from 3 million to 9 million between 1979-1990.
Although share ownership has never been universal in the UK, Thatcher had a much more significant impact in this area. New private industries were supposed to be more efficient due to competitive forces. In some cases this did indeed happen, for example, British Airways went from a struggling public firms to a hugely successful private firm.
However, in the utilities industries such as gas and water, in many cases prices were actually higher and firms less efficient. These industries are natural monopolies which means it is actually more efficient for only one firm to be in the market. More than one firm means that infrastructure has to be duplicated and there is less scope for economies of scale. The problem of expensive energy today is largely as a result of this privatisation and it is arguable that it is wrong to have privatised this companies.
Many of these sales were also usually quick and Britain did not receive the best price for its assets. The profits were also not used effectively. They could have been used to tackle social problems, but this never happened.
Within privatisation was the Housing Act 1980 which sold off council homes at a discount of 33-50%. At the time this was hugely popular, and the Labour opposition even supported it after they realised how popular it was. There were an additional 2 million homeowners created and it raised £18bn. Once again it did add to problems in the long-term. It created a shortage of council homes available to rent out and in some ways contributed to the housing crisis today by limiting the supply of affordable housing.
Deregulation was primarily focused on the financial sector in this period although to a lesser extent also the labour market. The financial sector liberalisation began in 1986, a period which became known as the ‘Big Bang’. Computer based trading was also introduced in this year which contributed to a massive growth in the financial sector which made London once again one of the largest financial capitals in the world. This sector now contributes a large proportion of the UK’s GDP, but it is also one of the most volatile; the 2008 crisis demonstrates the danger of an unregulated sector.
Clearly, Thatcher still has a profound effect on the economy today. She set a new economic consensus, but one which did not cure the malaise the UK economy was experiencing. There were dreadful recessions both in 1980 and 1990, far worse than anything in the 1970s and of course unemployment was much higher. Therefore, it is hard to argue Thatcher really solved anything. Today the impacts of her policies can still be seen everywhere. We have a much more precarious financial system, inequality is much higher, utilities are terribly expensive, and we are facing a housing crisis. Thatcher’s economic legacy should be known as making a more divided, insecure economy.
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