Margaret Thatcher and Ronald Reagan were Good for the World but Bad for Special Interests

Posted by PITHOCRATES - April 14th, 2013

Week in Review

People either loved Margaret Thatcher.  Or they hated her.  And it all came down to their political ideology.  If you were pro-capitalism you loved her.  If you preferred socialism you hated her.  And the biggest socialist to hate her (and her friend Ronald Reagan) was the Union of Socialist Soviet Republics (USSR).  Not only did the success of her economic policies make the failure of the Soviet economic policies stark by comparison she was outspoken about her hatred of communism.  Even allowed her good friend, Ronald Reagan, base American nuclear cruise missiles on British soil.

Capitalism’s victory over Soviet socialism was so apparent that Mikhail Gorbachev opened dialogue with the Great Margaret Thatcher.  Ultimately bringing about the Soviet’s defeat in the Cold War.  Because socialism as an economic system doesn’t work.  Which is why Britain soared to new heights under the capitalist policies of Margaret Thatcher.  While the Soviet Union collapsed under their socialist policies.  And she entered office when Britain was at its worst (see To blame Margaret Thatcher for today’s problems is to misunderstand history by Allister Heath posted 4/9/2013 on The Telegraph).

[Margaret Thatcher] inherited a basket case of an economy, crippled by obsolete state-owned firms, a legacy of decades of poor policies. Management was insular and demoralised, the workforce used as pawns by militant union leaders who would call strikes at every opportunity, customers treated like dirt and production techniques stuck in the past.

Productivity was appalling, overmanning the norm and the quality of UK-made goods notoriously poor. Britain was sclerotic, anti-entrepreneurial and anti-innovation, often specialising in industries with no long-term future.

Yet it is a little-known fact that manufacturing output actually went up during her time in office, despite the necessary liquidation of so many unviable plants.

This was basically the problem they were having in the Soviet Union.  Everything was state-owned.  Production techniques were stuck in the past.  No one clamored to get their hands on good Soviet products.  Because there were no good Soviet products.  And they had far too many workers in their plants building stuff no one wanted.  While store shelves sat empty and people went without the basic necessities.  Britain was far along the path to outright socialism.  While Soviet Union was nearing the end of that path.  Margaret Thatcher turned the country around before they could end up where the Soviet Union was.  And the sun began to shine once more on the British Empire.  Albeit a smaller one.

Output had grown another 4.9pc by the start of 1997, when the Tories were booted out. Given the bitterness of the 1980s’ recession, caused by the desperate need to wring out extreme levels of inflation from the system by using high interest rates, it shows just how effective her supply-side reforms turned out to be…

…She was right to slash income tax, to repeal capital controls and to shake up the City of London with Big Bang. Most of her reforms to retail banking, including allowing banks and building societies to compete with one another, were spot-on.

There were some bad changes, however, though not the ones usually cited: still-high inflation made the ultra-safe saving banks unviable, especially after the EU forced the UK to introduce retail deposit insurance in 1979; there was a counter-productive move away from individual responsibility in retail financial services; and the UK signed up to the Basel Accords in 1990, a flawed international system to regulate banks that triggered all sorts of dangerous unintended behaviour and ensured financial institutions retained far too little reserves. In all cases, however, these were changes that didn’t really follow her basic philosophy…

Thatcherism was about choice, individual responsibility and independence from the state, not the politicised, artificially pump-primed markets we ended up with by the mid-2000s. She hated bail-outs, government subsidies and nationalisations; and would have looked on in horror at the gradual socialisation of losses and privatisation of profit in the financial services industry in the 15 years running up to the crisis.

Starting with the rescue of the LTCM fund in 1998 in New York, regulators decided that no large financial institution could ever fail. Alan Greenspan saw himself as an economist-king, manipulating interest rates to bolster financial markets and ensure perpetual growth, and triggering a giant bubble that burst twice. This was corporatism, not genuine capitalism.

Under the new order, including Gordon Brown’s late, unlamented Financial Services Authority, banks were disciplined neither by the free market – the authorities were there as a backstop, so there was no chance of going bust – nor by regulators, who allowed risk to build up unchecked. Greed was no longer balanced out by fear; moral hazard had replaced prudence. Thatcher, the grocer’s daughter and keen student of F.A Hayek, would have despaired.

A genuinely Thatcherite government in the 2000s is unlikely to have tolerated the explosion in the money supply – and house price madness – that Brown allowed, not least because Lord Lawson made a similar mistake in the late 1980s when he was Chancellor, triggering an earlier, disastrous house price bubble and bust. The parallels between the two episodes are striking but bizarrely uncommented upon.

So it is silly to blame Thatcher for today’s problems. If only one of her disciples had been in power in the 2000s, we wouldn’t be in anything like the mess we are in today.

Supply-side reforms?  Those were the same kind of reforms that her good friend, Ronald Reagan, favored.  And by using them he undid the Keynesian damage of his predecessors (LBJ, Nixon, Ford and Carter).  Pulling the United States off the path towards socialism.  Long before they got where Britain was before Thatcher.  But like in Britain it didn’t take long to return to the failed policies of the past.  The Keynesians returned in full force.  Playing with interest rates.  Keeping them artificially low to interfere with market forces.  Causing great irrational exuberance.  Those famous words uttered by Alan Greenspan.  An irrational exuberance his Federal Reserve policies enabled. Allowing people to borrow cheap money to invest with abandon.  With no fear of the economic fallout.  Pure Keynesian economics.  This wasn’t capitalism.  For capitalism would have raised those interest rates before they created such great bubbles.  And capitalism would have disciplined those free markets.  By checking greed with fear and having serious consequences for irrational exuberance.  Not government bailouts.

If Thatcher and Reagan were in office in the past decade things would be a lot better now.  And the simple proof of that is that when we moved away from their policies we created the mess we have today.

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