By Anatole Kaletsky
April 16 Among all the obituaries and encomiums about Margaret Thatcher, very few have drawn the lesson from her legacy that is most relevant for the world today.
Lady Thatcher is remembered as the quintessential conviction politician. But judged by her actions rather than her rhetoric, she was actually much more compromising and pragmatic than the politicians who now dominate Europe. And it was Thatcher's tactical flexibility, as much as her deep convictions, that accounted for her successes in the economic field.
Governments in Europe and Britain today are obsessed with hitting preordained and unconditional targets. Inflation must be kept below 2.0 percent; deficits must be reduced to 3.0 percent of gross domestic product; government debt must be set on a declining path; banks must be recapitalized to arbitrary ratios laid down by some committee in Basel.
In sacrificing their citizens' well-being and their own political careers to these numerical totems, modern leaders often claim inspiration from Thatcher. And when voters turn against them, Europe's leaders keep repeating Thatcher's most famous slogans, "There is no alternative" and "No U-turn". But are these the right lessons to draw from Thatcher's political life? A closer look at her economic achievements suggests otherwise.
In the 20 years she spent in parliament before becoming prime minister, Thatcher first saw Harold Wilson's Labour government wrecked by currency crises and trade union militancy. Then Ted Heath ousted by a miners' strike and finally James Callaghan humiliated by the 1976 sterling crisis and driven out of office by the wave of public-sector strikes that came to be called the "winter of discontent." After these searing experiences, her immediate priority on becoming prime minister was to turn British monetary management and labor relations upside down. Yet her actions were much more cautious and pragmatic than her rhetoric.
In fact, the Thatcher revolution started with a huge tactical surrender. Within two months of taking office, she gave the public-sector unions that had brought the country to a standstill pay raises averaging 21 percent. This huge award resulted in the biggest increase in inflation in British history - from 10 percent when Thatcher took over to 22 percent a year later (as measured by the retail price index). Controlling this inflationary upsurge required stratospheric interest rates and an overvalued currency. These, in turn, led to a trebling of unemployment and the collapse of many British manufacturing businesses. In response to this economic disaster, Thatcher quickly abandoned the monetary targets she had initially claimed as the lodestar of her economic policies. While Thatcher's recession seemed to go on forever to Britons who lived through it in the early 1980s, her U-turn against austerity came dizzyingly fast by the standards of today's obstinate politicians, especially those in Europe.
After just 18 months in office, Thatcher effectively abandoned the monetarist policies that are still often regarded as the bedrock of her economic philosophy. In the two years from the autumn of 1980, she slashed interest rates from 16 percent to 9 percent and presided over the biggest currency devaluation in British history, with the pound falling from $2.40 to $1.45. Ironically, this U-turn on macroeconomic policy began within weeks of her most famous rhetorical commitment to unyielding monetarist austerity, when she challenged the October 1980 Conservative Party conference: "You turn if you want to; the Lady's not for turning."
After the monetary U-turn of 1981-82, the British economy started reviving, and by late 1982, Thatcher's popularity had rebounded, with help from the Falklands war. But Thatcher remained cautious. She waited almost a further two years before starting seriously to implement the labor market, privatization and competition reforms for which she is now remembered and justifiably revered. By 1984, when these structural reforms were launched in earnest, the British economy was enjoying a full-scale boom.
The pivotal event was the 1984-85 miners' strike - and even this famous victory exemplified Thatcher's pragmatism and tactical caution. Two years earlier she had faced a similar demand for higher pay from the miners but judged the economy too weak and public support too fragile for a long strike. Thatcher quickly surrendered and even sacked the tough-minded boss who had refused to bargain with the union. It was only after the economic recovery that followed the 1981 U-turn on monetary policy that Thatcher felt ready for the all-out battle with the miners by which her place in history has been defined.
Similar patience and tactical calculation marked the other great structural reform that defined Thatcherism: privatization. "Privatization" was a word that Thatcher's government brought to many people's attention for the first time, as I can attest, having written the first detailed article on this subject in the Financial Times, whose editors insisted on quotation marks around every appearance of this new word.
The first such "privatization," of British Telecom, happened only in late 1984, five years after Thatcher's election. Like all of Thatcher's big privatizations, this was carefully structured to guarantee political popularity by offering virtually guaranteed profits to voters. The sale of public housing at knockdown prices did even more to enrich working-class voters when combined with the house-price boom that began in 1982 after the monetary policy U-turn.
Thus, Thatcher's invention of "popular capitalism," just like her taming of the unions, became possible only after Britain's economic and financial cycle moved from bust to boom. The key lesson of Thatcherism, therefore, was that market-oriented structural reforms such as labor flexibility, privatization and supply-side tax cuts were symbiotically linked to the abandonment of monetarism and macroeconomic austerity. Expansionary macroeconomic policies and competitive structural reforms were both needed to reverse Britain's decline.
Without Thatcher's anti-union legislation, privatization and deregulation, expansionary demand management would have produced inflation. But without expansionary demand management, labor reforms and restructuring of inefficient state-owned industries would have deepened recession and aggravated unemployment, as in Europe today.
In short, austerity is the enemy of competitiveness, and without economic growth structural reform is doomed to failure. If only today's European leaders could understand this as clearly as Margaret Thatcher.