“Friedman Friday” CLASSIC ARTICLE FROM DECADES AGO FROM MILTON FRIEDMAN “Mitterrand Elects Thatcher” by Milton Friedman Newsweek, 4 July 1983

Milton Friedman article

Mitterrand Elects Thatcher”
by Milton Friedman

Newsweek, 4 July 1983, p. 51
©The Newsweek/Daily Beast Company LLC


In 1981, as Britain slid into a deepening recession and unemployment mounted above the 2 million mark, the conventional political wisdom was that Margaret Thatcher’s days as prime minister were numbered unless she could manage to foster a prompt recovery in the economy that sharply reduced unemployment. Talk about a U-turn was the order of the day.
Margaret Thatcher stuck to her guns—proclaiming that U-turn was not in her vocabulary. The recession continued and unemployment kept going up. Yet three weeks ago, with more than 3 million unemployed, she was re-elected in a landslide, achieving the largest majority in Parliament since the postwar Labor landslide in 1945.
One source of her victory was a sharp decline in inflation, from 22 percent in early 1980 to 4 percent currently—fully realizing a major campaign promise. Yet, by itself, that could hardly have produced a landslide. The postmortems have stressed two other factors: the Falklands war and the disintegration of the Labor Party. The Falklands war enabled Mrs. Thatcher to demonstrate in a dramatic way a quality of leadership and a firmness of purpose that had been conspicuously lacking in her predecessors. The “Iron Lady” became an accolade, not an epithet.


The sharp left turn by the official Labor Party, the resulting formation of the Social Democratic Party and the alliance between the new party and the Liberals certainly played a major part in fragmenting the opposition to Mrs. Thatcher. As matters developed, there was simply no responsible alternative to Mrs. Thatcher, no credible alternative government.


However, this explanation lacks one essential ingredient: it omits the role of President Mitterrand.
France 
was suffering from the same ills when Mitterrand was elected president as Britain when Mrs. Thatcher became prime minister and the United States when Ronald Reagan became president—high and rising inflation, high unemployment and slow economic growth. Mitterrand’s attack on those ills was precisely the reverse of Mrs. Thatcher’s. On coming into office, Thatcher reduced taxes; Mitterrand increased them. Thatcher reduced controls over prices and wages; Mitterrand expanded them. Thatcher eliminated foreign-exchange controls; Mitterrand made them tighter. Thatcher moved to denationalize enterprises and reduce regulation, Mitterrand nationalized private banks and other enterprises and increased government intervention into the remaining private enterprise. Thatcher tried to hold down government spending, albeit with little success; Mitterrand went on a spending binge.


Had the Mitterrand policies succeeded, even if for only a year or so, Thatcher’s opposition in Britain would have been enormously strengthened. The Labor Party would have had a real alternative to offer—one that was consistent with its ideological propensities and that had worked on the other side of the Channel. The cry that Thatcher’s “monetarism” was a tragic failure could not have been dismissed as mere campaign rhetoric.

Instead, the Mitterrand policy was a clear failure. Inflation remained high. Unemployment went up. The government’s budget deficit soared. So did the deficit in the balance of payments. The franc had to be devalued three times in the past two years, despite massive government borrowing in a vain attempt to prop the franc up. Worst of all for Thatcher’s opposition, Mitterrand was forced to reverse courseThe U-turn occurred across the Channel as the French government was driven to adopt the much-derided Thatcher policies.


Thatcher’s opposition was left intellectually bankrupt. It had no credible alternative policy to offer. The claim that she was an irresponsible demagogue imposing unnecessary costs on the British people rang hollow. Her persistence in the main lines of her policy was perceived by the voters as a realistic recognition that there was no easy cure for ills that had accumulated during decades.


The British experience is being repeated in the United States. The Democratic leaders attack Reaganomics as a failure, yet they, too, are intellectually bankrupt. They, too, have no credible alternative to offer, and many of them continue to attack the label while adopting the substance. Mitterrand has made no sharper U-turn than longtime New Dealers who have always praised deficits as a way to prime the pump and stimulate the economy but are now preaching the virtues of balancing the budget.

Thatcher and Reagan: The radical economics at the heart of their relationship

Centre for Policy Studies intern Tom Waters writes on the economic foundations of the Thatcher-Reagan relationship.

Aside from their excellent personal relationship, Thatcher and Reagan are commonly renowned for their revolutionary economic policies. They faced similar difficulties upon their first electoral victories, in 1979 and 1980; inflation was 18% in Britain, and 10% in America, economic growth had been faltering for a decade, and taxes were at a record high. Both Thatcher and Reagan were ultimately successful in reversing these trends. When they left office, in 1990 and 1989, inflation had been brought under control, they had overseen consistent growth for almost all their time in power, and taxation rates had been substantially reduced. The steps the two leaders took in achieving these feats were broadly similar, and were based in a belief in free markets and a responsible monetary policy.

Reagan and Thatcher adopted a similar strategy to reduce income tax rates. Inspired by the economic theory of Arthur Laffer, Reagan reduced the top rate of income tax from 70% to 50% in his first year; whilst excluding up to $3,000 of income from tax for married couples. Thatcher, likewise, had also seen the damaging effects that high marginal rates had on incentives in the UK. In her first budget, she dropped the top rate of income tax and increased the threshold for the basic tax rate, as well as lowering that rate by 3%. Later tax cuts went even further, cutting the basic rate of income tax to 25%, and the top rate to 40%.

But reform to the income tax system was not just about the changing the rates – Thatcher and Reagan recognised Adam Smith’s view that a good tax system was a simple one. Prior to Thatcher, there had been 11 bands of income tax. She reduced this to 7 in her first year, and by 1989 had got it down to just 2. The year before Reagan entered office there had incredibly been no less than 17 income tax brackets for single people. By 1988 there were also 2. Whereas before middle and high earners had faced damaging marginal taxes, the Reagan-Thatcher tax cut and simplification measures helped spur on an increase in productivity and innovation.

And these tax cuts didn’t mean that government spending had to fall either. On the contrary, Reagan upped federal spending in real terms from $1299bn in 1981 to $1645bn in 1989 (2005 $s) – an increase of almost 27%. But he did this without making government spending burdensome on the economy – across his Presidency, federal spending as a percentage of GDP stayed almost the same, falling just slightly from 21.7% to 20.9%. Likewise, although Thatcher has developed a reputation for savagely cutting, she in fact, like Reagan, increased spending – by 7% in real terms. But she too managed to do this without the state becoming an excessively large part of the economy, by decreasing public spending as a share of GDP from 42.8% to 36.5%.

Inflation had been a major issue in the late 1970s in both countries, and in the fiscal year in which Thatcher entered office inflation soared to almost 18%. In Reagan’s first year, inflation stood at over 10%. Both of them used high interest rates to curb the inflation which was damaging savings and capital investment. They recognised that the short-term pain of high rates was to produce a more certain environment for investment, wages and growth – to get the economy out of its stuttering trend of the 70s and move towards a steady, sustainable growth path.

And, indeed, growth was enjoyed in both countries. After inflation had been bought under control, America saw its longest ever period of sustained growth in peacetime – a full 92 months without recession. Similarly with Thatcher, after two years of recession caused by having to reign in the profligate monetary policy of previous governments, the British economy enjoyed continued growth for almost her entire premiership – from 1981 until 1990. And this wasn’t an artificial, debt fuelled growth like the one of the noughties – public debt as a percentage of GDP fell from 42% to 25% under Thatcher.

The starkest difference in their economics surrounds Thatcher’s privatisation agenda. For all his rhetoric, Reagan’s only major privatisation was of Conrail, a freight railroad system. Thatcher’s included huge state assets: British Airways, British Telecom and BP were sold off. She encouraged the public to buy shares in the industries being privatised, resulting in the number of individual shareholders across the country tripling. Other privatised companies included British Aerospace, the National Freight Company, and Jaguar. In 1979, 35% of people lived in state owned houses which were costly to the taxpayer; but under Thatcher, millions of people were able to buy their houses.

The similarities, both in approach and results, far outweigh the differences. The tough decisions taken by the President and Prime Minister gave economic hope to two nations in deep-rooted economic problems. By reducing and simplifying income taxes, privatising wasteful publicly owned industries, and reducing inflationary pressure, Reagan and Thatcher were both able to engender a long period of prosperous growth. It was that growth that enabled them to – despite the fall in tax rates – increase public spending, without making the state a burden on the economy.

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