Monday, 8 April 2013

Verdict on Thatcher

I was a 15 year old in Finchley, Mrs. Thatcher's constituency, when it became obvious that Denis Healey's mix of monetary policy and Income's policy was going to fail. Nixon had tried a Wage freeze but failed. Healey and Callaghan, both Monetarists, understood that Incomes Policy couldn't work but still thought it might impact on Expectations and give the Economy a soft landing. But, there wasn't a single Trade Union leader- let alone City analyst- who was in any doubt that this simply could not be the case. Labor would have been better off appointing a Witch Doctor to perform Voodoo rituals if they wanted their policy to be credible. As a matter of fact, there were a couple of Witch Doctors- sorry I mean Economists- who thought a tax based Income Policy could work even though there was already plenty of evidence of 'wage drift'- i.e. actual Income differing from taxable Income- and the upshot of a Tax based Incomes Policy would have been to create a parallel black economy with permanently debilitating effects on the tax base.

This fact should be borne in mind when discussing Thatcher's ascent. Essentially, Labour didn't have a policy (or had a saner version of Tory Monetarism which they could not admit to) so the Tories had it all their own way.

 The Tories saw their chance to capture the upper working class- Essex man who worked for Ford- leaving Labour with the low paid dregs which meant that a militant fringe got disproportionate play time. However, what did for the British working class was  the precipitate Tory abolishing of Exchange Controls, for which they exculpated themselves by saying they didn't know about 'overshooting' and like how North Sea Oil would inflate the real exchange rate and cause massive de-industrialization, coz urm Hayek never mentioned it and didn't Friedman once say something about this and...oh, anyway Markets are efficient don't you know. Thatcher's Govt. did a complete U turn on Monetary policy but what really helped was the ridiculously low real exchange rate which obtained by 1985- itself a result of Reaganite profligacy.

Friedman had spoken of the signal extraction problem re. Inflation but what destroyed British manufacturing was crazy Ecxhange rate based uncertainty. This is because manufacturing is more tradable  and price elastic than services. Thatcher herself was insulated from all this- indeed, probably quite ignorant. Whatever her convictions, they were irrelevant to the manner in which history happened by default.

I suppose Thatcher will be remembered for defeating Scargil and Gen. Galtieri. But, Lawson tells us, Thatcher was initially wet on Coal- but this meant that Scargill got uppity and went too far thus making a terrible conflict inevitable- whereas, w.r.t the Falklands, it is not clear that Thatcher's diplomats had been sending Galtieri unambiguous signals in the first place.

Other policies which were genuinely dear to her heart- the Poll tax, staying out of the E.R.M- led to her downfall. Still, it was she who promoted John Major who somehow endeared himself to the voter and gave the Tories another innings- albeit by way of follow on.

What then is Thatcher's great legacy? Surely, it must be Privatization. McMillan might moan that it was selling the family silver, but Thatcher showed it was sound house-wifely sense. The pity of it is that many working class people who bought their Council House, took windfall payments from their Mutual Societies, invested in specious Financial products, ended up mis-allocating resources and will face a poorer retirement. Educationally, as well, Thatcher's years disadvantaged Engineering and Science based Professions while enriching Lawyers and Accountants and Estate Agents. In the long run, this might represent the true 'opportunity cost' of her period at Downing 10.

No comments: