Archive for the ‘Margaret Thatcher’ Category

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All of a sudden the criticism is coming from everywhere. From George Soros to the Australian Treasurer; from the US Treasury Secretary to a former German Finance Minister, Germany’s leader Angel Merkel is being put under enormous policy to change tack. Is the great European experiment with austerity about to be ditched?

Perhaps one of the more surprising elements of the recent media coverage of the death of Lady Thatcher has been the focus on her views on the unification of Germany. Opinion seems divided on what, precisely, she believed, (whether unification should not happen at all, or should be merely delayed).

It is clear, however, that she had grave reservations. The unification of Germany probably led to acceleration in the European project; the idea being that a more closely integrated Europe, especially closer ties between France and Germany would act, as a counter weight to Germany’s new found might. Lady Thatcher, it appears, felt that not even that approach would work; that a united Germany would become virtually all powerful within such a union.

But the discussion on Lady’s Thatcher’s views on German unification is really about something else. Germany’s position within Europe is becoming increasingly unpopular and seemingly unrelated developments in the news have been sucked into the debate.

The criticisms of Germany have reached a new crescendo for two reasons. The first factor is the contrast with Japan. Its new programme of QE is not so much making the Eurozone look as if it is behind the curve, as making it look as if it is not on the curve at all. The second factor is the Cypriot debacle. The way this crisis was dealt with in Europe has left a nasty scar on the entire European project.

The US Treasury Secretary Jack Lew has been in Europe, and while he made some attempt to couch his words diplomatically, it is very hard not to interpret his comments as being hugely critical of Germany. He said at a press conference: “I was particularly interested in our European partners’ plans to strengthen sources of demand at a time of rising unemployment.” Err so what plans are those, exactly? Europe does not go for demand management. The ethos in Europe seems to be austerity and let demand take care of itself.

George Soros has been in Frankfurt, and while there he made a speech slating Germany for the way it dealt with the Cypriot crisis and said Europe’s biggest economy should do one of two things. Either it should support euro bonds, whereby bonds issued by one government are guaranteed by all members, or Germany should leave the euro.

He said: “Germany has no right to prevent the heavily indebted countries from escaping their misery by banding together and using Eurobonds.” He added: “The financial problem is that Germany is imposing the wrong policies on the Eurozone. Austerity does not work. You cannot shrink the debt burden by shrinking the deficit.”

Meanwhile former Australian Deputy Prime Minister and the country’s Treasurer Wayne Swan has praised the monetary policies of the US and Japan. “Thank God for the Fed,” he said. He could just as easily have said “Curse the Eurozone.” It would have meant much the same thing.

In Germany, the former Finance Minister and now political rival to Mrs Merkel Peer Steinbrück used an interview in ‘Spiegel’ to slam Mrs Merkel’s focus on austerity. Nobel Laureate Paul Krugman used his ‘New York Times’ column to congratulate Japan on its new bold approach to QE: “Seriously,” he said, “this is very good news.”

Austerity can work if applied in isolation, but when it is applied across a continent as important to the global economy as Europe it can become self-defeating.

©2013 Investment and Business News.

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210

Different times call for different remedies. Depending on your own interpretation of Mrs Thatcher, she either saved or destroyed Britain. She may have put the ‘great’ back in Britain, or put the ‘greed’ back in Britain. But whatever your conclusion, it does not mean the UK needs Thatcherism today and here is why.

The period 1868 to 1914, was a golden age for the UK economy. See: The Age of Symmetry. It was a golden age because it saw more innovation than any other period in history. It was not that golden for economic growth, however.

That’s the thing about innovation. It can sometimes have the effect of destroying jobs. An economy that has seen a burst of innovation has to learn how to ensure demand is there to meet all the potential supply. After World War I the global economy struggled to learn how to adjust. In the US a boom followed, but this was built on leverage to a large extent. World War II changed things. After the war, the UK became a more equal society partly because those who had fought for King and country demanded something in return. In part it was because of ideas of Keynes had become widely adopted.

In a more equal Britain, and an economy dominated by Keynesian demand creation, the UK finally learnt how to make use of that legacy of innovation, and the UK boomed as it caught up with potential. The UK was not alone; the post war period lasting around 25 years saw the highest levels of growth ever recorded. Germany learnt a different lesson from Britain, however. To a large extent it found a way to catch up with potential by selling its products overseas. Germany still relied on growing demand but the growth in demand came from outside its borders.

By the mid-1970s, all the potential growth coming from previous innovations had pretty much been used up. The UK went from high growth to playing with recession and stagnation. Something had to change, and change came in the shape of Mrs Thatcher. In many ways Thatcherism seemed to sound the death knell of Keynesian economics. Under her the UK learned to see the economy in much the same way that a savvy housewife managed the finances of her household.

The UK switched from being a country dominated by economic policies designed to increase demand, to one that emphasised supply-side. As part of this adjustment, taxes were cut, and especially for those on higher salaries. The UK became less equal. But this may have been what the UK needed for that era.

It is not like that today. Innovation is all around us. Jobs are being lost to automation. Corporate profits to GDP are at a new record. See: US corporate profits to GDP at all-time high 

Many of the larger companies do not know what to do with their mountains of cash. Money being generated by the corporate world is not being spent. The UK has become a far more unequal place, and that lack of equality has meant lack of demand to buy the products that business is capable of producing.

Keynesian economics may have lost its relevance in the 1980s, but that does not mean it is not relevant today.

And things are different in another way. The UK is now more reliant on the rest of the world than ever before. Globalisation has changed the shape of the global economy. The UK is virtually impotent. The UK government can implement measure to stimulate demand, but needs other countries to adopt similar policies or the result will be a rise in imports and the UK government may run up even bigger debts.

Mrs Thatcher became Prime Minister at a time when the global economy was changing in quite a profound way. She was more than the UK’s leader; she influenced world opinion. Thatcherism and Reaganomics were adopted internationally. Maybe Thatcherism and Reaganomics were responsible for ending the Cold War.

In one sense we need another Mrs Thatcher. We need a Prime Minister who can galvanise world leaders. It is just that we need our new Mrs Thatcher to hold quite different views from the first version. We need someone who supports measures to stimulate global demand, more equality, but as a global mantra, and indeed someone who supports minimum international taxes, such as a minimum corporation tax, so that governments can tax company profits without running the risk that companies will set-up shop elsewhere.

We need a system for addressing global imbalances as was proposed by Keynes in 1944 at Bretton Woods. And we need charismatic leaders who can light the way. Yes we need another Mrs T, but just not her ideas.

©2013 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here

213

The fans of free markets say businesses need to be allowed to fail; that when businesses fail – and indeed when an entire industry fails – a vacuum is created. New and dynamic businesses with bold ideas can then fill that vacuum. If instead, continues the argument, we protect businesses, or industries, newer companies are crowded out, and struggle to get a foothold.

Under Margaret Thatcher we saw lots of destruction. We saw destruction of industries, whole sectors of the economy and of ideas.

Before Mrs Thatcher they used to talk about the right to work. Post Thatcher attitudes changed to reflect the new belief that jobs were only available if they provided a benefit. The right to work was replaced by the dictates of the markets.

It was not just the profit motive that become more popular. During her era, an attitude developed, or perhaps returned, that a company existed to provide goods and services that people wanted. Profit was the reward for achieving that objective. Before Mrs Thatcher, many of the UK’s largest businesses seemed to be about creating jobs, rather than creating goods and services in the best possible way.

Mrs Thatcher slashed taxes. Not just the taxes paid by the richest, but across the board. And in so doing she created new incentives. Her privatisation campaign changed the face of the UK economy. Her policies towards home ownership created millions of new home owners.
But in many ways the policies of Mrs Thatcher sowed the seeds for the financial crisis of 2008. The short termism of the city surely had its roots in Thatcherism. Although the greed of the boom years may not have fitted in with Mrs Thatcher’s own views on morality, it was a consequence – or at least a partial consequence – of her policies.

There is, however one legacy of Thatcherism that is pretty unambiguously negative.

Some regions of the UK were transformed for the worse. Sure you may say that actually the blame rests with the unions, and argue that Mrs Thatcher was left with no choice. Be that as it may, the devastation happened nonetheless.

Creative destruction may have worked in many ways, and in many regions of the UK, but some regions never have recovered from that era.

If you live in one of the UK’s wealthier regions you may hold her up as the reason for much of the prosperity this country has now – even in the midst of a nasty downturn. But in the more depressed regions there was no legacy. Creative destruction has not worked.

You can blame the benefit culture for much of the UK’s problems if you like, but would such a culture have been created if we had not seen the decimation of so many jobs?

Maybe such changes had nothing to do with Mrs Thatcher; she was merely a child of her times. Unions caused much of the destruction of British industry, and the problems being suffered across much of Europe today – as traditional industries look increasing obsolete – were merely played out earlier in the UK.

Here is a thought. Maybe Thatcherism was right for the 1980s – or at least may it was right for certain regions – but does that necessarily mean that today we need even more supply-side reform? Is the key to regenerating the UK’s more depressed areas more free markets, less benefit, greater incentives to work, or are investment and ways of increasing demand the key to growth ? Read on Thatcherism is not the answer today 

©2013 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here