Friday, 12 April 2013

Margaret Thatcher’s economic legacy

From comes a couple of articles looking at Margaret Thatcher’s economic legacy. John Van Reenen argues:
Margaret Thatcher’s economic legacy lives on. This column provides a markedly balanced assessment of her mistakes and achievements. Most pressingly, Thatcherism left the UK failing to properly think about long-run investment, especially in infrastructure, in the skills of those at the lower end of the ability distribution and in innovation. The UK is addressing some of these problems, but this failure to invest in prosperity is the main challenge we face as a nation over the next 50 years.
while Nicholas Crafts explains that
The policies of the Conservative governments led by Margaret Thatcher between 1979 and 1990 remain highly controversial more than 20 years later. In many respects, they represented a sharp break with the earlier postwar period and this was certainly true of supply-side policies relevant to growth performance. Reforms of fiscal policy were made including the restructuring of taxation by increasing VAT while reducing income-tax rates and, notably, by indexing transfer payments to prices rather than wages while aiming to restore a balanced budget. Industrial policy was downsized as subsidies were cut and privatisation of state-owned businesses was embraced while deregulation, including most notably of financial markets with the ‘Big Bang’ in 1986, was promoted. Legal reforms of industrial relations further reduced trade union bargaining power which had initially been undermined by rising unemployment. In general, these changes were accepted rather than reversed by Labour after 1997.

In fact, before, during and after Thatcher, government policy moved in the direction of increasing competition in product markets. In particular, protectionism was discarded with liberalisation through GATT negotiations, entry into the European Community in 1973, the retreat from industrial subsidies and foreign-exchange controls in the Thatcher years, and the implementation of the European Single Market legislation in the 1990s. Trade liberalisation reduced price-cost margins. The average effective rate of protection fell from 9.3% in 1968 to 4.7% in 1979, and 1.2% in 1986 (Ennew et al. 1990), subsidies were reduced from £9bn (at 1980 prices) in 1969 to £5bn in 1979 and £0.3bn in 1990 (Wren 1996), and import penetration in manufacturing rose from 20.8% in 1970 to 40.8% by 2000.
Van Reenan sees Thatcher's polices as a failure.
Nevertheless, there are many important economic and social failures that are part of the Thatcher legacy. First, there was a tremendous growth of inequality both in pre-tax incomes and through changes to tax and benefit policies that favoured the rich. [...]. Some of this inequality was addressed by the Labour governments through tax credits and the minimum wage, but the share of income going to the top 1% continued to rise inexorably, driven by the financial sector. This was the second failure – excessive deregulation of financial services starting with the Big Bang in 1986, but continuing until the eve of the 2007 crisis. Even free markets need to be properly regulated. Third, her early years were marked by a failure to understand that the public employment service needs to be active in helping people find jobs. A major mistake was splitting benefit offices from job centres and pushing many unemployed onto disability benefits (which are much harder to escape from) in an effort to massage down the unemployed claimant count statistics. Unemployment claims peaked at over three million in 1986 when Restart was launched – a policy that finally put more effort into getting the unemployed searching for work and was deepened under the New Deal policies after 1997.

Finally, and perhaps most importantly, there was been a failure of long-run investment: in infrastructure, in the skills of those at the lower end of the ability distribution, and in innovation. The UK addressed some of its problems, but this failure to invest in prosperity is the main challenge we face as a nation over the next 50 years. The LSE Growth Commission has put forward some proposals to deal with this – let’s hope the current generation of political leaders takes heed.
Crafts concludes by saying,
In sum, Thatcherism was a partial solution to the problems which had led to earlier underperformance, in particular, those that had arisen from weak competition (Crafts 2012). The reforms encouraged the effective diffusion of new technology rather than greater invention and worked more through reducing inefficiency than promoting investment-led growth. They addressed relative economic decline through improving TFP and reducing the NAIRU. At the same time, the short-term implications were seriously adverse for many workers as unemployment rose and manufacturing rapidly shed two million jobs while income inequality surged, to no small extent as a result of benefit reforms.

Indeed, any judgement on Thatcherism turns heavily on value judgements concerning the relative importance of income distribution and economic growth as policy objectives. The 1980s saw a very rapid increase in the Gini coefficient by about nine percentage points, which has turned out to be largely permanent. Ultimately, the Thatcher experiment was about making a liberal market economy work better. There will be those who think a German-style coordinated market economy is preferable. That was not really an option available to Mrs Thatcher but in any event it was hardly a vision of which she approved.

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