Wednesday, October 20, 2010

1979 and 2009...Thatcher to Cameron


There are some parallels to be drawn between the period 1978 to 1980, and 2008 to 2010 when looking at both the US and the UK political and economic environments. Both have seen changes in political direction, although possibly divergent as they stand today, but also and both are periods of serious economic crisis.

Comparisons between the two economies per se are some what meaningless. The UK could be geographically absorbed into most US states and the size of the economy has been compared to Florida and California. However it is more in parallell ideologies and international leadership in fiscal policy and public investment which are of noteworthy discussion.

Many economists ( ref.2,3,4) agree that in fact the Reagonomics and Thatcherite years did not, within their terms, achieve the fiscal and full ideological goals of balancing the budget and reducing both the PSBR and the state budget / GDP gearing.

However what both regimes were able to very firmly achieve was a change in attitudes, without which the "neo neoliberal liberals" namely Messrs Clinton and Blair, could not have enjoyed both sustained economic growth, balanced annual budgets and taxation effective policies. The main difference being that this lead to sustainable increases in public spending for the Democratic and Labour governments of the 1990s..

.......As the Actor Said to The Grocer's Daughter...

Thatcher and Reagan were both from relatively naive political backgrounds, which was in fact a help rather than a hindrance. Thatcher was brought up above a Grocers store in Lincolnshire, becoming a university educated Chemist and went on to view fiscal policy very much in terms of the whole country being run like a small business and policies being treated like hypothesis based on current scientific fact.

Ronald Reagan had been a would-be-star in Hollywood and even when rising to office as governor of California, showed often naive political judgement. (ref..)

This naivity was however, not at all at odds to a ground swell of economists who came to be known as the "liberal economists" and their immediate afterfolllowers, arguably, the neoliberals. They too agreed fundamentally that the books had to be balanced.

Furthermore the economists were very much of the view that the rate of inflation in public services had to be halted. There was in the 1970s an expectation in the populous and those working in public service, that public service provision would continue to grow, in order to enjoy incremental investment and operational budgets. Over allever better services would both contribute to, and match the better-expected-living standards based upon perceived need and not sustainabe budget.

The New Right's Legacy for the New Left

The Clinton and Blair governments inherited a political and fiscal environment where economic growth could be stimulated while public spending could both grow, and be paid for by near-time tax revenues, and not long term borrowing.

Gone also was the left wing's punative view on the rich. Instead the nouveau rich of the entrepreneurial classes and the entertainment and sports "industries" were welcomed by both Clinton and Blair in the new vision of meritocracy and righteous social democracy. No longer would the super rich and general self employed be taxed punitively, but rather tax revenues would be optimised by making it attractive to live, invest and run businesses in the UK and US.

First Terms With Backward Effects

The first terms for both Thatcher and Reagan were on the balance sheet, not good. The cuts in public spending in the general services area actually contributed to low growth as government employment was reduced and wage claims curtailed. Also liberlisation of corporate law made it easier for companies in the UK to disinvest or realise liquidation of their assets as the only growth in share holder investment. Privatisation also lead to job cuts in the short term.

The first term of Margaret Thatcher lead in fact to higher public spending and GDP gearing because of the large rise in unemployment ( benefits being payed by the state, and resulting loss in taxation) and the Falklands War. Reagan achieved little of the hoped for tax cuts and cuts in real terms to public spending, due to the same reasons perhaps:unemployment and defence.

What these two first terms did achieve was to releive the inertia of the slow, crisis filled and recessionary 1970s with respect to public spending as well as business investment, growth and birth-rate of new enterprises. Both governments foundered yet managed in political momentum to hold the electorate who continued to want a move away from the stagflation of the late 70s.

One alarming parallel to draw today to the conservative-libdem government in the UK and the potentially righ wing senate and congress swing in the US, is that cuts in public spending lead to slower growth.

Cuts in taxes were popular, but in the UK the "Tories" put in place a large rise in VAT in 1979-80, which in fact is a proportionately far higher tax on the poorest in society as it taxed all VATable items of food, clothing etc at 15% up from the base of 8%. If this had been enacted in a growing economy, it would have inevitably lead to inflationary pressures in both margin-fulcrum effects on traded items and wage demands due to the increased cost of living.

The Cold War Defrosts

In retrospect one area of puzzeling ideology both Reagan and Thatcher held to was a large defence budget, as a far higher proportion of GDP than most western economies ( this is however, weighted by the post WWII withstraints on the key German and Japanese economies).

Ideologically, they had the "Great Bear", the USSR and despite a fairly stable period of cold war post Vietnam, ageing nuclear weaponry and delivery systems meant the Russians had a possible advantage in having the SS20 mobile missile systems, making it virtually impossible to either react to strategic targets ( launch sites) or pre-emptively strike them.

One response was the multiwarhead, longer distance Trident Missile system. The other, which was not nearly as far fetched as the name it gained suggests, was an close-orbit defence satellite system which could identify launched ICBMs and destroy them in the upper atmosphere: Reagan's "star wars".

It took more than a decade for both these systems, Trident as a detterent in the UK and an effective "star wars" technology, to actually come to fruition: and of course by 1992 these systems were really obsolete or of little strategic importance due to the collapse of the USSR . However, star wars did precipitate the initial fall of the soviet ICBM dominance and the credibility of their economic investment in the military, possibly tipping the of the politbureaux into the folly of their brand of totalitarianism.

Boom and Bust

It was really the mid eighties liberisation of capital markets at "big bang" in the UK and following connectivity of capital markets by the use of IT which stimulated the huge investments in western economies, and possibly over investment and later crash of Asian capital markets. Further to this, consumer credit was liberilsed beyond inflationary sensible parameters in the UK ( ref need to support any such claim for the usa 1984-89)

I dare say that you could track the number of people reaching their credit limits and not being able to make payments with the decline in captial markets in the late 80s: this tipping effect from consumer spending and irresponsible debt has reared its' head again with the subprime market ( "white trash bring down all the great empires" )

Inflation headed back up into double figures, with interest rates matching suit and the finance markets crashed and did not fully recover after Black Monday, the first major "correction" to the newly liberalised capital markets.

House reposessions and personal bankruptcies ran high in the UK, although the tories were maybe quite right in their view point on the "nanny state" when it regarded personal investment, debt and home ownership. This would be the first "attitude correction" perhaps in the new right's view, in other words individuals should take and make responsible decisions over their budgets.

Certainly the boom and bust was remembered by voters after the lack lustre Bush I and Major governments failed to cure the ills, with multiple terms and larger influence for the left on both sides of the atlantic being the result at the ballot box.

The Neo-Neo Liberals Take the Helm: Enter Clinton and Blair

As with the implementation of strategic defence strategies, once again it took the Clinton administration of 1993-97 to actually put into place the balancing of government budgets which 12 years of Reagan and "George H" could not. Similarily in the UK, the PSBR and GDP/Spend gearing was only finally achieved under Blair. Both state leaders resided over the longest period of sustained economic growth since world war II. ( 4)

This however in many commentators view was not just the result of a fortuitous inheritence. The two governments were able to present cohesive internal party politics and secure broad support across a spectrum of govermental ( sivil service), public service ( like the NHS and many Quangos), trade unions and economic actors in both international government, capital finance and captains of industry.

Further to this, when both leaders took over in the 1990s they were able to plan for optimised tax efficiency, meaning that both the private economy could enjoy growth driven by tax, legislative and fiscal environments. Public spending could once again grow with the aim of delivering enhanced and more efficient services, which also fuelled economic growth.

Low inflation, and in post war terms, super low inflation of below 3% became the fiscal goal of governments and this was driven by increased competition in the ever more enterprising economies. How two left wing governments, despite having moved to right of centre on monetary policy, managed to achieve such low inflation and interest rates is a mystery to the writer here.

The balancing act of low interest rates from central banks to encourage investment in the real economy could, and later into the 00s indeed did, lead to increased inflation. Lower bank interest rates released working capital through cost effective loans for both small and larger businesses while also making investing in governmental bonds and just savings accounts, far less attractive for private investors. Capital markets would need to also secure higher ROI from the real economy and deriviatives markets, where in both cases, value multiplicaiton could be acheived at a far better ROI than those investments linked to base interest rate.

A Bleak Future for the Neo-neo Liberal Right

The new right face a bleak future once they come to power with their proposed raft of tax cuts.


Western economies were already failing to deliver ROI when the internet bubble burst in 2000/ 2001. There after higher ROI was sought in what I call the "funny money" markets: deriviatives and investment mechanisms geared around at the base, consumer debt. It is somewhat Ironic that the speculators chose to focus their efforts in maximising ROI on what in the USA was in fact a US governmental subsidised initiative for poorer families to buy their homes: The sub prime market was invented, and the whole house-of-cards built around this con trick has lead to the near total collapse of the capitalist investment system.

Fundamentally, an economy must multiply value at several levels: private business must add value from raw materials and peopl'es manhours in rendering these higher value or providing services at a profit. SInce the internet bubble burst, and the far east finance crisis became a long lasting syndrome, westernised economies havve failed to add fundamental value and have instead imported from China.; but bluntly, the chinese are the ones taking the fundamental value multiplication.

Intellectual property is the mantra of the west: we do the clever stuff, and the Chinese will make it. However add the costs of intellectualism to the costs of the supply chain and then divide by increased competition and a low cost base for actual production of something which does not need you patented widget to work as well, and you start to disappoint "the street" on your ROI and profit warnings.

The service economy is of little help in saving this situation of low growth and reduced margins in the product economy. The service economy is in my opinion, fully dependent on two factors: value multiplication in the product economy and consumer spending power from the employees in the public sector. Take the pre 2010 medicare situation in the USA: it is completely dependent on the US police, sivil service and other employees to be able to survive financially. Why choose healthcare, that is just for sick people right? Health care is a large proportion of GDP in western countries with the new sicknesses which take longer to kill us than the old. Smoking, bad diet, lack of exercise and stress mainly from trying to get ROI for your stake holders.


What Blair and Clinton enjoyed economically and politically will be looked back upon as a golden time for both businesses and the public sector. In these years prudent fiscal management and revenue effectvie structuring of personal and corporate taxation meant that the public sector could further boost growth in the economy while intending to support a higher standard of living delivered to the electorate.

What the legacy of this vision of continual improvement of public services, and the freedom allowed the capital markets has lead to is the largest crisis since the 1930s. The gamblers on Wall Street were not the only boys in the casino in the mid 2000s: that governments continued to service wars in areas of little political gain, and had expanding public services now needing PSBR, has well and truly dumped the next rack of right wingers who will promise to do what Reagan and Thatcher did in 1979, and probably end up doing as badly as their well known predecessors.


(1) - (3) TBC

(4) Fiscal policy convergence from Reagan to Blair: the left veers right

Av Ravi K. Roy,Arthur Denzau

No comments:

Post a Comment