IF ANYONE doubts Margaret Thatcher’s contribution to reversing decline, they should read Sir Douglas Wass’s remarkable book Decline to Fall. Sir Douglas, formerly permanent secretary to the Treasury, wrote extensively on the 1976 IMF crisis, when Britain was forced to beg for a £2.3bn bailout. It presents a frightening picture of policymakers living in a fantasy world for years – in which the priority was to raise public spending, and where there were no solutions to rising inflation and falling growth.
Thatcher had no illusions about the failure of the old model, but not all of us were so prescient. Along with Sir Mervyn King and Sir Alec Cairncross (surprisingly in both cases), I was one of 364 economists to write to The Times in 1981, complaining about her policies. I am now very willing to my admit error.
It was not just about macro failure. The micro British economy was dominated by oligopolies, producing either unwanted (coal) or low quality products (cars) at ever-increasing levels of subsidy. The supposed success of full employment was the result of massive over-manning and low productivity, which produced low living standards. In 1979, Thatcher inherited the Maxi economy, so-called after the notorious final product of the Austin-Morris car empire.
Her key economic contribution at the micro level was in opening up markets and promoting competition. Until 2008, this delivered remarkable improvements in living standards and growth. Real wages doubled and supply side changes brought better living standards to working class people. This delivered phones, air travel and central heating. Working people became home owners, with a new range of opportunities for themselves and their children. People no longer had to wait six months for a phone from the nationalised monopoly. Even the protests against Thatcherism became easier because networks could carry mobiles.
It is also wrong to blame Thatcher for the decline of British manufacturing, not least because manufacturing production rose 7.5 per cent during her term of office. In any case, old industry was doomed by its failure to innovate. Powerful unionisation must take some share of the blame, given the extraordinary strike record in British factories after 1960. The average number of working days lost each year to strikes in the 1970s was 12.9m, compared to 660,000 in the 1990s. It was impossible to invest in manufacturing, unless you were a government agency, for 30 years.
Yet there was one area where Thatcher did not change Britain — the middle class’s addiction to public spending. In fact, change increased the interest of the middle class in this area. Privatisation and outsourcing reduced the number of manual workers working in the public sector. The unions were a shadow of their former selves. The working class was in the market.
But the middle class was divided between a minority in enterprise, and many who were still in the public sector as teachers, university staff and doctors. She changed the workers, but not the middle class and the intellectuals. Most still regard government action as the only guarantee of civilisation and condemn Thatcher with the ultimate damning term of “neo-liberalism”.
The recession has only confirmed these attitudes. Health is a particularly striking example. There is now less support for pluralism, competition and new entrants for health services than 20 years ago. The most taboo word in Whitehall is no longer sex or communism, but competition. The new NCB (National Commissioning Board or NHS England) recently produced a 326 page manual on specialist services without mentioning the possibility of new entry through tendering.
The new class divide has already produced political change. In the last election, the biggest swing to the Conservatives (14 per cent) was in working class Cannock, and the biggest swing to Labour (3 per cent) in prosperous South Islington. Working class voters have a much clearer view of the pernicious effects of the welfare system in causing longer-term drop out from the workforce, with dire consequences for health. Many of the most severe long-term medical conditions afflict those who are out of the workforce.
The Islington middle class wants a new age of resurgent public spending and government activity. Much of the media supports this. Collectivism by direct ownership is being replaced by collectivism through regulation and indirect control of resources. This new corporatism is the biggest long-term threat to economic recovery.
Nick is an associate of Volterra alongside being an emeritus professor at Imperial College, and a member of the advisory board at Reform.
This article was featured in City Am on Monday 15th April 2013