‘Did Thatcher Turn Britain Around?’

by Patrick Brennan

Paul Krugman asked that question last night on his blog. He admits that, against a relevant comparison, France, Britain under Thatcher and in the years following saw lower unemployment and much stronger income growth. However, he takes two issues with attributing this to Thatcher. One:

Thatcher came to power in 1979, and imposed a radical change in policy almost immediately. But the big improvement in British performance doesn’t really show in the data until the mid-1990s. Does she get credit for a reward so long delayed?

Well, the effects weren’t really that delayed: As Krugman’s own France vs. Britain income chart indicates, income began recovering in Britain faster than the competition immediately under Thatcher’s tenure, after the 1980 recession was beaten. That reversed during the recession around 1990, but then resumed at roughly the same pace — which happened to be much quicker than France’s. This only led to Britain’s having caught up with its Channel competitor, then beating it soundly, in the 2000s, but the effects were clearly visible from the beginning.

You don’t need a lag to see the effects of Thatcher’s reforms, though it certainly helps. And questioning the benefits of systematic reform because they don’t most strongly appear until after a delay is . . . begging the question.

In case this isn’t clear, Krugman inadvertently demonstrates exactly why Thatcher’s reforms can be thanked for much of Britain’s later economic success. He explains: There’s another possibility” besides Thatcher for Britain’s success. “For what happened in the 90s that arguably redounded very much to Britain’s benefit? Why, the rise of fancy finance — which was a huge boon to the country that contains the City.”

But Thatcher’s thorough deregulation of British finance led to the restoration of London as the world’s premiere financial center, and her liberalization played a significant role in the rise of “fancy finance,” with its spectacular benefits and well-known costs. In fact, financial deregulation was a central part of Baroness Thatcher’s passionate commitment to liberalizing markets and confronting entrenched economic interests.

The most dramatic example was the City’s shift from in-person trading to electronic trading and other reforms that all occurred on one day in October of 1986, leading to a huge increase in trading volumes and representing a major step toward today’s financial markets. 

Look, I’m not going to accuse Paul Krugman of being anti-science, but does he not even believe in the Big Bang?

It’s quite reasonable to ask whether the increasing importance of the City to Britain’s economy, and the deregulation of finance more generally, was such a great thing, especially after the 2008 financial crisis (I’m inclined to think it’s best that Britain got a lion’s share of the action, regardless). What you can’t do is say it helped turn Britain around, and then ask, “Did Thatcher Turn Britain Around?”