The Lady is Not For Turning

Margaret_Thatcher Margaret Thatcher was a conviction politician, driven by ideas and grounded in her principles. Her unshakeable belief  in economic liberalism and political freedom spread across the world. She oversaw the fall of communism in the USSR while China, India and Latin America opened up their economies and freed up their markets, leading to an era of unprecedented prosperity. Her legacy at home though is quite mixed.   To some Mrs. Thatcher was ruthless and out of touch with the common people, evidenced by the mass unemployment her policies in the early eighties led to. Others say she led an economic revolution in Britain that shook the country out of its steady post-war decline and stagnation of the 1970’s.  Not many leaders have incited such strong opinions and been as divisive a figure as Margaret Thatcher.  However, the indisputable fact remains that Mrs. Thatcher left an ideological imprint on Britain and the world that few 20th century politicians can boast of.

Thatcher’s imprint was the strongest in macroeconomic policy. She decided to tackle the stagflation she inherited by focusing solely on inflation, believing that low inflation will lead to lower unemployment in the long run. She disavowed Keynesian demand management, which was the norm at the time, and instead embraced the monetarism of Milton Freidman. The move proved to be an utter disaster. In order to control the money supply, Thatcher increased interest rates to stratospheric levels, as high as 17% which strengthened the pound, hurting manufacturing exports. To hasten the fall in inflation, she embarked on spending cuts to reduce the budget deficit. This combination of high interest rates and government austerity led to record levels of unemployment. The manufacturing industry was decimated, leading to structural unemployment in the North that still exists today. However, even as unemployment soared past three million, Thatcher remained defiant. She marched on with further spending cuts in the budget of 1981 despite widespread opposition. Facing criticism from even her own party, she infamously announced at the Conservative Party Conference that ‘the lady is not for turning.’ Many viewed her failed experiment with monetarism as well as her obstinacy with  spending cuts as proof of her tendency to be blinded by dogma. She seemed to cross the fine line between conviction and stubbornness.

It was this stubbornness that eventually led to Thatcher’s downfall.  In 1989, she decided to introduce a flat tax that required people of all income distributions to pay the same level of tax for local government services. It was the beginning of the end for Mrs. Thatcher and was perhaps her moment of hubris. The tax was opposed my many of her Cabinet members but she still went ahead with it. It proved to be so unpopular that Thatcher was forced abandon it. Her Cabinet colleagues found it increasingly difficult to work with her and she was eventually forced out by her own party which she saw as an act of betrayal.

Mrs. Thatcher might have got carried away by her ideological zeal but the main principles of ‘Thatcherism’ have been accepted by both sides of the political spectrum. Nobody wants to return to the period of bank nationalization, protectionism, fiscal pump priming and militant trade unions that characterized the 1970’s. The Labor Party under Tony Blair remodeled itself as a proponent of the free market and reformed Britain’s public services, preaching individual ambition not collective action as a means to spread prosperity to all. However, post the Great Recession of 2008, government budget deficits have swelled, regulations have increased while the role of financial sector in the economy has come under attack like never before. Even though policymakers need to evaluate the relationship between the state and the market in the light of the crisis, they must use the key principles that Thatcher espoused as a guiding light, just tempered by a sense of realism and pragmatism.