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Thatcher’s legacy

Twenty seven years ago today one of Britain’s most successful – and divisive – prime ministers left 10 Downing Street for the last time.  In her wake lay the ruins of Britain’s industrial past.  Coal, steel, shipbuilding, factory and rail towns had been reduced to a shadow of their former glory.  And across the UK the swathe of neglected ex-industrial towns and regions that in 2016 pushed Britain out of the EU exit door were still reeling from the monetarist recession of the early 1980s.

Nevertheless, addressing the assembled media scrum outside 10 Downing Street, Thatcher included in her final speech the claim that:

“…we’re very happy that we leave the United Kingdom in a very, very much better state than when we came here eleven and a half years ago.”

For the relatively affluent metropolitan liberal class in big cities like Birmingham, Bristol, Cardiff, Manchester and – especially – London and its southeast hinterland, the words resonated.  Even as the last of the Poll Tax protests died down, Britain in the 1990s was about to boom.

The Tories were not to enjoy that decade.  Although John Major surprised everyone by winning the 1992 general election, the economic debacle of ‘Black Wednesday’ was waiting in the wings.  UK chancellor, Norman Lamont’s abject failure to manage the market ended the electorate’s belief in Tory economic competence for a generation.  Worse still, the episode concerned Britain’s membership of the European Exchange Rate Mechanism – a precursor to the common European currency that a large number of Tories didn’t think the UK should have had anything to do with.

What followed was the Tory internecine warfare over Britain’s membership of the European Union that continues to this day.  The situation was made worse because a large part of the parliamentary Tory Party returned in 1992 were getting on in years.  Several died, others retired due to ill health.  In by-election after by-election a reinvigorated Labour Party – first under John Smith and later Tony Blair – gained ground.  By 1996 the original Tory majority of 21 had been whittled down to just one.  By 1997, with the election looming, Britain had a minority government.

The Tories went into the 1997 election divided and dispirited.  Even cabinet ministers – including two future Tory leaders – preferred attacking their own leader to taking the fight to Tony Blair’s ‘New Labour.’  The result was that Labour wiped the floor with the Tories in May 1997.  Labour jumped from 273 to 418 seats – the most seats a Labour government has ever won.  The Tories, in contrast, were reduced to a rump of just 165 seats in their English shire counties.  The Tories had been all-but purged from Britain’s Celtic fringe.  There were no Tory MPs in Scotland or Wales and just one in Devon and Cornwall.

It was Tony Blair’s New Labour that became the true inheritor of the economic changes set in train by Margaret Thatcher.  Indeed, according to the late Conor Burns, MP for Bournemouth West:

“Late in 2002 Lady Thatcher came to Hampshire to speak at a dinner for me. Taking her round at the reception one of the guests asked her what was her greatest achievement. She replied, ‘Tony Blair and New Labour. We forced our opponents to change their minds.’”

Where previous Labour leaders might have been persuaded to reverse the neoliberal economic policies introduced between 1979 and 1990, Tony Blair and New Labour chose to build on them.  Gone were the promises of trade union rights, nationalisation and the redistribution of wealth.  By the late 1990s, New Labour was “intensely relaxed about people getting filthy rich as long as they pay their taxes.”  From then on, public services were to be funded through private borrowing.

What followed were the years of ‘Cool Britannia’ – the period when banking and finance (and money laundering and tax avoidance) became the UK’s primary contribution to the global economy.  Industry – the thing that had made Britain prosper in the first place – had become something that poor people in less developed economies on the other side of the planet could do on the cheap.  It was sufficient for the UK to trade raw currency in exchange for all the consumer goods that we might desire.  Meanwhile the proceeds from Britain’s financial wheeling and dealing helped pump up the biggest housing bubble we had ever seen.  Economists and bankers around the world proclaimed ‘The Great Moderation’ (a cousin of the 1929 ‘permanently high plateau’).  As it turned out, it was merely the calm before a very big storm.

Much of the feel-good sentiment during the New Labour years was due to our (at least for those who could get on the housing ladder) houses getting ‘paid’ more than we were.  With banks offering ever cheaper mortgages, British home owners were able to use their houses like ATMs – something they could withdraw cash from whenever they wanted a new car, an exotic holiday or just a new TV set.

This was Thatcher’s real legacy to the British people.  It is summed up in one graph from economist Steve Keen:

Thatcher Debt

The red line is the ratio of private debt to GDP from 1880 to 2017.  What it shows is that household and corporate borrowing throughout our history, irrespective of what colour government happened to be in power, remained remarkably stable.  As Keen explains:

“Private debt never exceeded 72% of GDP in the century from 1880 (when the Bank of England’s time series begins) till 1980, and its average value was 57% of GDP. By 2010, when it peaked, private debt had risen from under 60% of GDP to almost 200%. If any chart lets us date when Britain’s economy started to become seriously unbalanced, this is it. The decline in manufacturing had commenced much earlier, but the unconstrained ascendance of finance began in 1981. This was the date on which Britain started to become a fully owned subsidiary of the City of London.”

Starting in 1980, when Thatcher deregulated the mortgage market as part of the policy of selling off Britain’s public housing stock, and accelerating after the ‘big bang’ deregulation in 1986, the UK became a debt-economy.  Private banks were empowered to create and securitise new currency in the form of private sector debt:

“So, as banks created ‘money from nothing’, and the UK private sector spent that money that it got for doing nothing, prosperity seemed to abound. The rising credit-based demand substituted for the decline in demand from actually producing goods and services, and the additional financial claims against the UK’s physical resources grew from a relatively low level. The decline in manufacturing employment was offset by a rise in employment in finance, where the main output was not goods but credit-based money and its Siamese twin, debt. While the debt continued to grow, it boosted both economic activity and asset prices.”

New Labour presided over that boom despite having little idea what lay beneath it.  Although complex in its vastness, what Thatcher (along with Ronald Reagan and his successors in the USA) had created was a Ponzi scheme that depended upon a growing influx of new borrowers taking on an exponentially rising level of new debt to keep the economy going.

In order to increase borrowing, interest rates fell steadily in the early years of twenty-first century.  However, beginning around 2005 the real world started knocking on the door.  Conventional (i.e. cheap and abundant) oil production peaked (UK oil and gas production had already peaked in 1999).  Global oil prices began to rise alarmingly.  As oil is used to manufacture and/or transport almost every item we consume, prices soon began to rise across the economy.  Fearing generalised inflation, central bankers jacked up interest rates.

It is only at this point in the story that sub-prime mortgages became an issue.  So long as interest rates continued to trend downward – as they had been doing since 1980 – it was not unreasonable to extend mortgages to a widening part of the population.  If someone could afford the repayments at five percent and the expectation was that next year the rate would be four percent, then there was no reason to believe that the household would default (beyond the usual risks of death, sickness and redundancy that can befall even the most credit-worthy borrower).  Furthermore, since house prices continued to increase, even if a household got into trouble, they would still be able to sell the house, repay the loan and walk away with a cash return for themselves.

It was the rise in interest rates rather than the sub-prime mortgages that was the spark that set off the 2008 banking crash.  And it was the real world of limits to resource extraction (in the form of cheap oil) that paved the way for that decision.  It was Thatcher’s (and later Blair’s) deregulation of banking and finance that provided the (sub-prime derivative) fuel for the conflagration.

It is ironic that Thatcher once said that “the trouble with socialism is that eventually you run out of other people’s money.”  What 2008 revealed was that Thatcherism suffers from exactly the same problem.  Sooner or later it reaches peak debt.  It is all downhill from then on.

The outcome is the depression and the increasingly divided countries that we are living within today. The phenomenon of ‘Global Trumpism’ – the collapse of the political centre and the rise of the populist extremes is not some aberration; it is the logical conclusion of the fanancialisation of the western economies set in train by Thatcher and Reagan.  Thatcher had, indeed, transformed Tony Blair’s Labour Party.  But in doing so, she had disenfranchised half of the UK population.  In Scotland (and to a lesser extent Wales) traditional Labour voters could gravitate to centre-left nationalist parties.  In England, in the absence of a radical left alternative, the disenfranchised voice of the ex-industrial working class embraced the extreme right-wing nationalism of the UK Independence Party; paving the way for the Brexit debacle.

The same process had already unfolded in the USA under the Clintons.  Bill was even more enthusiastic about embracing Wall Street than Tony was about the City of London.  Across America’s rust belt the same simmering working class discontent that delivered Brexit was growing ever louder.  President Donald Trump with his hollow promise to ‘make America great again,’ is as much Thatcher’s legacy as Nigel Farage and the upsurge of British racism.

Not that Thatcher was around to see it.  In 2008, Thatcher’s daughter revealed that she was suffering from dementia and could barely remember the beginning of a sentence by the time she got to the end.  Increasingly frail and out of touch, the tragically lonely figure of Margaret Thatcher died in April 2013.  In death as in life, she divided the British people – half wanted to afford her a state funeral while the other half burned effigies of her in the streets and propelled the song “the witch is dead” to number two in the charts.

Had she left the UK in a better state than she found it in 1979?  It rather depends on when you believe the consequences of a political leader’s actions have drawn to a close.  By the late 1990s it  certainly appeared that Margaret Thatcher had bequeathed a thriving economy and a nation more at ease with itself than it had been in the early 1980s.  But looking back today it is clear that the thriving economy inherited by Tony Blair was built upon an unsustainable mountain of corporate and household debt.  It should also be clear by now that we were less a united country than a nation in which the minority of beneficiaries of Thatcherism deliberately chose to ignore the plight of the majority of its victims – those whose industries and jobs were decimated in the early 1980s; those who never got to go to university and find work in the City; those who never had a chance of getting on the housing ladder even as they were forced into ever more expensive buy-to-let renting.

The impoverished gig-economy worker queuing at the foodbank today is as much Margaret Thatcher’s legacy as the well-to-do City trader who commutes into town from his or her multi-million pound semi in the Home Counties.  And until and unless the growing divide between the two is addressed, the final legacy of Margaret Thatcher will be the disintegration of the United Kingdom that she claimed to have saved.

As you made it to the end…

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