The Iron Lady and the Iron Curtain

David Petina

October 1, 1991

Eastern Europe has begun its long trek back from the disaster that it underwent during 40 years of communism. Experts from around the world have been called on to help emerging capitalists in that part of the world create a free market from scratch. For the most part these experts have said that while there are plenty of examples of economies which have moved from free market to socialist, no examples exist of a nation doing the reverse, and thus there is no existing plan for this transition. In fact, Great Britain under Margaret Thatcher proves a perfect example of just the type of economic revolution the free world hopes will occur in Eastern Europe.

For almost 35 years before Margaret Thatcher, British economic policy was, in some respects, Keynesian. What this means is that from the end of World War II until 1979, the British government attempted to fine tune the economy. According to Keynesian theory, the way to accomplish this is to increase discretionary government spending, decrease taxes during a recession, and to increase taxes during inflationary periods. Welfare, Social Security, and other such programs are perfect examples of discretionary spending by government. Realistically, elected representatives are likely to follow the politically popular Keynesian theory only during a recession, because the anti-inflationary measures are politically unpopular. Thus, policies which increase the size of the government during an economic downturn are enacted without a corresponding cutback during inflation. The government’s role in society, therefore, is all but continually increased. The cost of such actions by the government is inevitably higher taxes or bigger deficits. By 1979, the base income tax rate in England was 33% and the highest rate was 83%. Eventually, this type of economic policy leads to widespread public ownership of large companies, a huge government budget for social spending, and, according to this critic of this system, economic stagnation.

In 1979, Britain did face a large amount of economic stagnation. British industry was not competitive in the world market. Unemployment stood at nearly 1.3 million. The state owned such giant first as British Aerospace, British Airways, Jaguar and British Petroleum. Also, previous governments had erected a huge "safety net" of social services that were little different than the huge cradle to grave care offered in socialist systems. Government had even taken a hand in setting wages. In fact, her predecessor’s attempt to control wages helped Mrs. Thatcher ascend to the Prime Ministry. The Labour government under James Callaghan worked closely with the powerful trade unions in Britain to ensure that wages remained relatively stable. During 1977 and 1978 his government proposed wage freezes, not Keynesian spending cuts, in an attempt to control inflation. Because of union support, these proposals were enacted and were, for the most part, effective. When the government proposed only a small wage increase of 5% for 1979, the rank and file in the unions, unhappy after two years without a raise, rebelled. During the winter of 1978-79, Britain was nearly paralyzed by strikes in many diverse industries. This loss of support for the Labour government convinced Margaret Thatcher to move for a vote of no confidence against Prime Minister Callaghan, which she won by a single vote. In the subsequent Parliamentary election, the Tories won by a majority and Mrs. Thatcher because England’s first female Prime Minister.

When Mrs. Thatcher took office on May 3,1979, the situation was so bad that many commentators felt Britain, one of history’s greatest imperial powers and a major power s recently as 1945, had decayed into a second rate power and was doomed to this status for the rest of history. In short, these critics said that the sun, which formerly never set on the British flag, had now set on the heyday of British influence in the world. Margaret Thatcher felt that these critics were dead wrong. She believe that Britain could once again be great, if she could only rid herself of the wasteful and counterproductive interference of government in daily life. Thatcher felt that the British people would respond to the reintroduction of incentive into the economy. This, she proposed a supply side, monetarist policy which would bring back rewards for hard work. Fundamentally, this policy consisted of lower taxes and selling off government owned businesses, weakening union power, and less social spending by the government.

She acted immediately. Within her first 100 days, Prime Minister Thatcher slashed taxes; the top bracket feel from 83% to 60% and the base rate was dropped to 30%. She proposed roughly $9 billion in public spending cuts, most coming through layoffs of public employees. Her government also began looking into selling off state industries. The immediate result was plummeting popularity for Mrs. Thatcher. However, she realized that while her policies were disliked in the short run, they were the long term medicine that British economy needed. She knew that these policies would work to overcome the feeling of dependency that pervaded the British people. She also realized that the unions had become counterproductive special interests and therefore their power would have to be reduced. Many said that this stand, coupled with her low popularity, would result in Mrs. Thatcher’s rapid demise. Most believed that she could not last for one full five-year term.

But, much to her critics’ surprise, Mrs. Thatcher did survive. After defeating Argentina in a war over the Falkland Islands in 1983, Mrs. Thatcher called for an election which she won handily. Soon after this election, the mine workers union struck. The strike went on for almost one year, but the Prime Minister refused to yield. After one of the longest and bloodiest strikes in British history, the mine workers returned to work, have gained nothing. As government influence had been limited, so the power of the unions was checked by not caving in to the mine workers’ demands. Just as she had in her first term, the Iron Lady pushed through a tough, politically unpopular but economically beneficial, reform early in her administration. Once again, opinion polls showed the people resented Thatcher, and once again she survived. By 1987, when another election was called, Mrs. Thatcher had once again regained the people’s respect, so much so that her Tory party won a majority of roughly 120 seats in Parliament. Mrs. Thatcher retained the Prime Ministry, that few expected her to hold for five years, for nearly eleven and a half years – longer than anyone in over 160 years.

In these 11 years she permanently altered Britain. More than twice the number of Englishmen own stock now as in 1979. The number of homeowners has increased; taxes are down dramatically, even as compared to Mrs. Thatcher’s first budget. However, the effects of Thatcherism have not all been positive. Despite her best attempts, Mrs. Thatcher left office with inflation at nearly 11%, unemployment up, the infrastructure crumbling, and the nation facing a growing trade deficit. Her critics point to these problems and that the hardships suffered as a result of Thatcherism have failed to produce the better tomorrow it promised. They blame Thatcher for all of the problems of the nation, yet give her no credit for all of the successes of her regime. They especially point to the growing trade deficit as proof that Thatcherism failed to make England more competitive. Yet, the changes listed above were a direct result of her policies as was what many claim to be the greatest change wrought by Thatcher, a change in British attitude. The British people have stopped depending on the government and have seized the initiative once again. Even her most left-wing opponents have moved away from their strict socialism. Still, there is some opposition to the more open, and therefore, more uncertain market system. Overall, though, there were tremendous changes in Britain during the 1980’s. While there are still problems facing England, they are not a result of Thatcherism, but of its incompleteness.

Back then to the question of Eastern Europe. From an economic standpoint these countries are basically an extreme form of pre-Thatcher Britain. What can be done? Following the theories implemented by Margaret Thatcher would go a long way towards alleviating these nations’ economic woes. The question that these countries must face is not an economic one; instead, it is purely political. What many seem to ignore is that the question is not what policies the rulers of these nations should enact, it is whether they can overcome the short term political difficulties that these would entail in order to assure a brighter future for their people.

David Petina graduated from Ashland University in the Spring of 1991 with a B.S.B.A., and is currently at Indiana University on full scholarship to pursue a master’s degree in West European Studies.