Monday, 6 May 2013

1980s Economic Miracle?

If you read my previous post, the 1980s look like a rough time. But, as with most periods - look at them in a different light and the complete opposite can be argued. Thatcher had other aims whilst in power: reducing state intervention, allow market forces to do their thing and curb Trade Unions. The year she came to power was seen as a year of 'cutting spending' when in actual fact spending grew every year Thatcher was in power. Poor start.

But why does her spending stay high? Is it Thatcher's fault? In a way, no. She was stuck with an aging population and rife unemployment - this meant high social security spending. It was impossible to make big cuts in the core government services, the only cuts that could effectively be made were in minor spending programmes. She does, however, lower public sector borrowing. But with spending staying high and borrowing falling, the tax burden had to rise. Tax payments as a percentage of GDP in the 80s rise as a structural change is made in taxation. Indirect taxes become the main focus as income tax falls and indirect taxes rise. A popular move with voters.

Thatcher is obviously know for her process of privatisation as well. The industries under public control were being heavily criticised for their loss making and the benefits they provided to producers, not consumers. The investment in state programmes were adding to borrowing, so selling these industries could fund tax cuts and promote efficiency. The process started with the competitive industries being sold first: shipbuilding, for example. Utilities went after, but were still overseen by the government because they were natural monopolies.

Curbing the Trade Unions was another of Thatcher's aims in power. She didn't like the influence they had. She went about a process of tearing them down with policies such as banning closed shop, outlawing secondary picketing and strengthening internal balloting procedures.

These three policies were a political success. Trade union membership falls, income tax cuts are popular, privatisation is popular and striking falls. The manufacturing sector came out particularly strong - Britain's productivity here was growing at a faster rate than the other G7 countries. It was known as the 'manufacturing miracle'. What caused it? Hmm. The downside was, though, that absolute levels of manufacturing were below competitors and the jobless count rose sharply.  

De-industrialisation had seemingly occurred. The industrial workforce falls from 43% to 30% of total employment in a 16 year period from 1973-1989. Growth was now mainly coming from the service sector. The pessimists thought this switch to services was slowing overall productivity growth. The counter argument was that these employment trends were in line with what was happening in the other G7 countries - it seemed like a natural trend. There was no tangible output from the service sector so it was hard to measure improvements in the quality of the goods, but technological changes were definitely increasing growth in the sector.

Overall productivity in services was growing slower than in manufacturing. Across the whole economy, productivity growth wasn't that impressive - but this was a global trend at the time. Claims of an 'economic miracle' in the 1980s were overstating the reality. There were improvements, yes, but we were still behind the rest of Western Europe and these gains came at the price of higher unemployment and higher income inequality. 

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