Whatever, you might say about Thatcher, the period is certainly interesting for economic historians.
The late 70s left two major economic problems - high inflation and industrial unrest. With her chancellor, Geoffrey Howe, she took to tackling inflation with a gusto and intensity rarely matched. The government pursued a new set of Monetarist policies - jettisoning the post-war Keynesian consensus. Tax were raised, spending cut, interest rates increased, the pound appreciated, the money supply was controlled. All this reduced inflation.
Money Supply targets (an intrinsic part of Monetarism) proved to be more or less useless. But, the deflationary fiscal and deflationary monetary policy did succeed in achieving a reduction in inflation. Thatcher had achieved her first goal, but, unfortunately, that was only part of the story. The unprecedented reduction in aggregate demand led to one of the deepest recessions since the 1930s. Manufacturing output plummeted and unemployment shot up to 3 million. (see: 1981 Recession)
In inner cities, youth unemployment reached over 50% leading to a wave of inner city violence from Brixton to Toxteth. It seemed the great Thatcher revolution was ushering in a new social revolution. At the height of the recession, 365 economists wrote to the Times saying Mrs Thatcher must change her economic policies. Yet, if the country didn't know by now - this Lady was not for turning. She persisted with her policies and unemployment remained at 3 million until the mid 1980s. If Britain had been the first industrial nation, it was also becoming the first nation to 'de-industrialise'
There was certainly a need to tackle inflation in the late 70s. It would have been hard to do that without some fall in output. But, the extent of the recession was far greater than necessary. - I can only give the analogy of solving a painful toe, by cutting off a leg. The recession of 1981 really didn't need to be so severe. - Ideology did triumph over common sense.
Thatcher may have been an ideologue, but, she did have luck.
- The Falklands war was perfectly timed to give her an unexpected landslide in the 1983 election. The public finances also received a huge boost from:
- Oil revenues - 10% of Tax revenues were coming from oil in early 1980s. Something kept strangely quiet.
- Sale of Council houses
- Proceeds from privatisation.
The Miners Strike1984, was Thatcher's next war, and this time it was 'the enemy within'. - She wasn't talking about members of her cabinet - that would be later. This time the enemy was the high priest of the Union movement - Marxist and firebrand Arthur Scargill. If the miners had won in 1973, Thatcher was not going to share the same weakness as Heath. Thatcher prepared for war and after a bitter, bloody and damaging strike, the miners finally trudged back to work, outmanoeuvred and defeated after 12 months of strike action. It was perhaps a 'pyrrhic victory. A fight where the victor emerged with little credit. But, it did break the back of the militant union movement. Combined with strict anti-union legislation. The threat of a 3 day weak would never be repeated.
As the economy recovered, the government were keen to promote the idea of a 'supply side miracle'. After all the government had all but defeated the unions, it had implemented new supply side policies like privatisation. Britain no longer appeared the 'sick man of Europe' but, it appeared Britain was leading the world with its groundbreaking policies of privatisation and market deregulation.
In particular, the finance sector boomed as layers of regulation were removed at a stroke. The good times were back - especially for the young professionals in the south. It was the age of the Yuppie. A wave of consumerism and materialism gripped part of the nations. House prices and share prices rocketed. Even the likes of 'Sid' could benefit from this new share owning, property owning democracy. By the late 1980s, memories of the Winter of Discontent were like a bad dream as the UK economy raced away - outstripping the growth even of Germany and Japan.
It seemed there was nothing could stop the economies momentum - Mrs Thatcher may have made political enemies with the poll tax, but, the economy looked rosy. It seemed too good to be true - but, unfortunately - 'too good to be true' characterised the Lawson boom perfectly. There had been no supply-side miracle. Growth of 5% was simply unsustainable. Inflation reared its ugly head. By the time, it reached 10% it was too late. Belatedly the government sought to control inflation - through entry into ERM and higher interest rates. Thatcher may have disliked the political impact of ERM, but, it was the economic costs of ERM which was the biggest problem. Reminiscent of the 1968 devaluation crisis. The government was committed to maintaining a rate of the pound the markets though ridiculous. The government almost comically raised interest rates to 15% - in the middle of a recession - in the hope they could maintain the value of the Pound. The Markets ignored the desperate move and continued selling the Pound. After ignoring the inevitable for so long, the chancellor (now Norman Lamont) finally on Black Wednesday, left the ERM and devalued the pound. Finally, interest rates could fall and the UK could start to recover from another needlessly severe recession. See: (ERM Crisis)
- It was a classic boom and bust - but surely we would learn our mistake of the 1980s boom and bust - we wouldn't allow that to happen again.... (to be Continued...)