Tuesday, April 09, 2013

Mrs Thatcher and inflation: a letter to the Spectator

Republished from the Broad Oak Blog - original post dated 16 January 2010 (N.B. BoE M4 data from 1963 - 1981 has recently been redacted, without explanation):


Sir Peregrine Worsthorne (Letters, 16 January) may have been right to support Mrs Thatcher for confronting the unions, but I believe he is wholly mistaken when he says she tackled inflation. Thanks to the opening up of global markets, consumer prices have been lowered by cheap foreign labour, indirectly by the importation of goods, and directly by the deliberately uncontrolled immigration of low-paid workers. However, behind the scenes there has been massive long-term monetary inflation, the woeful consequences of which we are now merely beginning to suffer. Economics may seem rather dry, but its implications are correspondingly fiery and so I hope your magazine will allow room for explanation.

Comparing GDP with (M4) bank lending figures from the Bank of England’s website, which gives data from 1963 on, we see that annual increases in lending almost always outstrip increases in GDP, but sometimes far more so than others. The worst was in 1972, when M4 increased by 35% (GDP grew by only 12%); the fear of monetary inflation and its potential effect on exchange rates may have been a major factor in OPEC’s decision to hike oil prices in 1973, which triggered years of high price inflation in the UK and the humiliating IMF rescue in 1976. Lending increases dropped below GDP between 1974 and 1977, then resumed ascendancy, though not in time to rescue James Callaghan’s premiership.

But inflation did wonders for Mrs Thatcher. The average annual excess of M4 growth over GDP in 1964-79 was 2%; from 1979-1990, the “Thatcher years”, it averaged 8% (and about 4% p.a. thereafter). The results have included overspending on luxuries; the loss of jobs and industrial skills; the export of machinery and tools; and a huge exaggeration of property and stock valuations. Worse, we now have a large class of economic dependants, both home-grown and recently imported, whose support costs cannot be externalised as easily as our manufacturing capacity.

Sir Peregrine may not divine in Mr Cameron the architect of our rescue, but I fear the situation may now have developed well beyond any man’s power to amend without reform on a scale that may not be entirely possible in a democratic society.


James Higham said...

on a scale that may not be entirely possible in a democratic society

Ah, the sting in the tail. And in which society will it be possible, Sackers?

Sackerson said...

Perhaps one like Cyprus, or Greece, or Italy.

Mark Wadsworth said...

Seems like a good letter to me.

Sackerson said...

Thanks, but they didn't publish it.

James Higham said...

Just some stats:

Under Thatcher, GDP rose by 29.4 per cent — an average of 0.6 per cent growth per quarter. (That’s the same as the average growth rate from 1955 to 2013.)

Manufacturing jobs lost, but more service jobs created. A net of 1.6 million jobs were created under Thatcher. The manufacturing industry lost 1.9 million, while the services sector grew by 3.6 million.

Unemployment up, then down, then up again. The unemployment rate rose from 5.3 per cent to a high of 12 per cent in 1984, before falling to 7.5 per cent when Thatcher left office. It began to rise again in 1990, and continued to do so after she left, reaching a high of 10.8 per cent in January 1993.

Inequality rose dramatically… The Gini coefficient went from 0.25 in 1979 to 0.34 in 1990.

…but were the poor better off? Thatcher said she didn’t care about the gap between rich and poor, but rather that everyone became better off in absolute terms. So did the poor get richer over the Thatcher years? As the below graph shows, they did (slightly) before you take into account rising housing costs. The income of the 10th percentile rose by 4.6 per cent in real terms before housing costs (the income of the 90th percentile rose by 47 per cent). But after housing costs, the real income of the 10th percentile fell by 2.4 per cent — so the poor were in fact worse off in 1990 than in 1979 (the 90th percentile were 48 per cent better off after housing costs).

Shrinking the state? Government spending actually rose by 17.6 per cent in real terms under Thatcher, but because that was slower than overall growth it came to represent a smaller share of the economy. Spending was 45.1 per cent of GDP when Thatcher took office and 39.4 per cent when she left.

inflation under Thatcher. On the Retail Prices Index, it peaked at 21.9 per cent after her first year in office, and fell to a low of 2.4 per cent in the summer of ’86. But then it began to rise again, to a peak of 10.9 per cent in Autumn 1990. So inflation was 10.3 per cent when Thatcher took office and 9.7 per cent when she left it. But the difference was that 10 per cent and rising in 1979, but 10 per cent and falling in 1990.

Sackerson said...

Wow, that's a lot of interesting stats, James.

Essay title: "Mrs Thatcher made the right enemies, but the wrong friends. Discuss."