Could Margaret Thatcher’s reforms work in 2013?
I grew up admiring Margaret Thatcher. It was obvious to many of us in India in the 1970s that socialist economics didn’t work and that Thatcher’s radical reforms were the right course, one we wished someone would advocate in India. (It took 12 years and a massive crisis for that to happen.) Her plans to cut taxes, privatize industry and deregulate have been vindicated by history, but that doesn’t tell us much about what to do today.
Consider the world in 1979, when Thatcher came to power. The average Briton’s life was a series of interactions with government: Telephone, gas, electricity and water service, ports, trains and airlines were all owned and run by the state, as were steel companies and even Jaguar and Rolls-Royce. In almost all cases, this led to inefficiency and sclerosis. It took months to get a home telephone line installed. Marginal tax rates were ferociously high, reaching up to 83 percent.
Britain was not unusual. In most European countries, the state had as large a role atop the “commanding heights” of the economy. And while the United States was always far more free-market-oriented, even U.S. tax rates in the 1970s were in the range of 70 percent, and government tightly regulated telecommunications, transportation and finance. Throughout the Western world, the consensus was that large-scale state intervention was needed to achieve growth and prosperity. That’s why a conservative Republican president, Richard Nixon, said in 1971, “I am now a Keynesian in economics.” (The phrase often misattributed to him, “We are all Keynesians now,” was actually written by the libertarian economist Milton Friedman, in Time magazine in 1965.)
Today’s world is completely different. Thirty years of privatization and deregulation have swept through industries as varied as telecommunications, airlines and finance. In most sectors, it is hard to find a major state-owned company in the Western world. Thatcher privatized 50 companies, and governments in Europe, Asia, Latin America and Africa followed the same course. Taxes have been slashed everywhere. The top marginal tax rate in India in 1974 was 97.5 percent. (Really.) Today, the top rate is 40 percent. In the United States in 1977, taxes on capital gains and dividends were 39.9 percent; in 2012, the rate was 15 percent. In 1977, corporate U.S. tax rates were close to 50 percent; now they are 35 percent, and most companies pay a much lower rate. These changes have taken place under conservative, liberal and even socialist governments. As Peter Mandelson, architect of the Labor Party’s rise in the 1990s, declared, “We are all Thatcherites now.”
Note that Thatcher rolled back the regulatory state but not the welfare state. During her 11-year reign of radical free markets, the state’s role in the overall economy grew. She never spoke out against Britain’s nationalized health care. While cutting some taxes she substantially raised others (on consumption), ensuring that deficits didn’t grow too large.
Thatcher’s ideas resonated because they were an effective antidote to the problems of the times. In the 1970s, the Western world staggered under the weight of oil shocks, rising wages, rocketing inflation, slowing productivity and growth, labor unrest, high taxes and sclerotic state-owned companies. These are not the problems we face now.
Today, American and European workers struggle to keep up their wages as technology and globalization push them down. Western economies face global competition, with other countries building impressive infrastructure and expanding education and worker training. They face a two-track economy where capital does well but labor does not, where college graduates thrive but those without strong skills fall behind and where inequality is rising not just in outcomes but also in opportunities.
Against this backdrop, would a further round of deregulation do much? Would cutting taxes from around 40 percent unleash growth, especially when it would mean even larger deficits? The Simpson-Bowles plan, often seen as a practical solution to U.S. fiscal problems, raises tax revenue by $2.6 trillion and hikes the rates on both capital gains and dividends.
Margaret Thatcher was, in her own words, a “conviction politician,” but she was successful because her convictions addressed the central problems of her time. The ideas that work now will be those that solve our problems, not those of the 1970s.