There is No Alternative (22 page)

Rates of both inflation and unemployment in Britain are now
very
low. In fact, since 1997, Britain has ranked top in both output and inflation stabilization in the Organisation for Economic Cooperation and Development. The prestige of highly trained economists has never quite recovered. Thatcher's first chancellor, Geoffrey Howe, subsequently declared that he had “actually produced a definition of economists as a result: that an economist is a man who knows 364 ways of making love, but doesn't know any women.”

One may argue—and many do—that unemployment declined despite rather than because of Thatcher's intransigent adherence to monetarist doctrines, but the fact remains that it did come down—a lot—which at least leaves the matter open to debate.

So was it insanity, or was it uncanny intuition coupled with astonishing force of will?

To be honest, I'm not sure. I think the jury is still out.

Nigel Lawson, predictably, feels the monetarist perspective has been vindicated. Although economists certainly have not converged around the principle that you must control inflation
above all,
there is no longer much doubt that
if
you are attempting to control inflation, monetary policy is the tool of choice. “The Andrew Grahams of this world,” Lawson wrote to me,

About this, he is right. Before Thatcher, there was a debate about the primacy of monetary policy in controlling inflation. There is no debate now. In this respect, the Labour Party did indeed go beyond anything Thatcher ever attempted to do: As Lawson points out, in 1997 it removed the authority to set interest rates from the Treasury and transferred it to an independent monetary policy committee. This is a measure often recommended by monetarists on the grounds that the key to controlling inflationary expectations is credibility: People must be given a good reason to believe that inflation will stay under control. If you take responsibility for controlling inflation away from elected governments—which are apt to manipulate the economy for short-term electoral gain—you are sending a signal:
We're not just yanking your chain. No matter what happens, your money will be good.
I am not sure that I would
describe this development as “game, set and match” for the monetarists, but I agree that it's certainly not an outright loss.

The Master of Balliol is not a great fan of Thatcher's, but he is fair-minded enough to concede that the relationship between Thatcher's experiments with monetarism and Britain's now-vibrant economy is at least an open question. “It's one of the very big unanswered questions in my mind about economics. She said there was no alternative.”

He hesitates for a moment, then adds, “She might have been right.”

“No alternative to—?”

“No alternative to massive unemployment to stop inflation. I wrote an article in 1975 which more or less said I thought this would happen. I didn't believe for a minute this rubbish that it would be peaceful and easy. I thought it would be difficult, and I'd much rather we hadn't had to do it. We've had one huge recession under her and another one under John Major, and it's killed off inflation in the British economy and it needed to be killed off somewhere along the way. I'd much rather we'd found an alternative. But if we didn't have an alternative—”

He pauses again, then sighs. “She had the guts to push it through.”

If we see the heart of Thatcherism as an attempt to control inflation
above all
by using monetary policy
alone,
our judgment of Thatcherism will be ambivalent at best. The high costs associated with this policy—and her inability to bring inflation down immediately and keep it down—have tended to obscure the success of her other policies. But they shouldn't. That would be to miss the point of Thatcherism.

Recall the second part of Friedman's prescription: To treat unemployment, you must fix the underlying problem—the distortions
in the economy that are increasing the NAIRU. You must, in other words, target the supply side of the economy. As successive Thatcher governments struggled to bring down the inflation rate, they simultaneously sought to increase economic productivity through a series of dramatic supply-side reforms. The reason Thatcher matters
now,
not the reason she mattered then, is the story of these reforms.
¹⁰⁸

What did Thatcher do, specifically, to affect the supply side? For that matter, what
is
the supply side? When we speak of strengthening the supply side, we are talking about creating incentives for people to produce—in other words, supply—goods and services. When taxes are lower, for example (this is the classic supply-side remedy), people have more incentive to be productive.

Foremost among the things Thatcher did to strengthen the supply side was smash the trade unions. (Economists would describe this as “augmenting labor market flexibility.”) When Thatcher came to power, some 70 percent of the British labor force was paid according to the terms of a trade union agreement. By 1998, this figure had fallen to 35 percent. Next in importance were changes made to the welfare benefit system: Prior to Thatcher, welfare payments had been indexed to average wages. Under Thatcher, payouts were linked to the Retail Price Index. Because wages rose faster than prices, over time this reduced payouts. These policies—together with reductions in income tax, the privatization of public industries and utilities, trade liberalization, and deregulation—were designed to heighten the ability of prices to convey information, create incentives to work, and ultimately lower the NAIRU.

They did precisely what they were intended to do.

These terms—supply side, incentives, NAIRU—may sound sterile. The everyday economic realities they describe, however, are
nothing of the sort. John and Miranda Hoskyns, for example, recall what they meant in practical terms.

That
is what we're talking about when we talk about the supply side.

Thatcher's policies resulted, as would be predicted, in what economists would call “a complete reassignment of resources,” leading to “an inevitable period of readjustment.” Now remember, many of those “resources” were human beings. Some of them never adjusted. What we mean, in simpler terms, is this: Thatcher took a sledgehammer to a dysfunctional semi-command economy, stepped back, and waited for the rubble to reassemble itself—
sans
government direction—in a more efficient configuration. It took many years for the dust to settle, and the collateral damage was considerable. But in the end, the restructured economy was, as she had predicted it would be, leaner and meaner. The fact that these effects were chiefly seen after, and not during, the Thatcher era should not obscure the fact that they were the consequence of her policies.

Privatization generally saved the taxpayer a fortune and made privatized industries more competitive and innovative. The privatization of British Telecom resulted in a dramatic lowering of prices
and improvement in service. The sale of council houses was and remains one of Thatcher's most popular policies. But it would be wrong to describe privatization as an unalloyed success in every instance. Having taken British trains both before and after privatization, I can report that they were lousy and expensive before, and they are lousy and expensive now.

Generally—and predictably—privatization was most successful in industries with natural competitors. As the Master of Balliol correctly pointed out, “Don't mix up competition and privatization. They're not the same thing.”