My apologies for a long time between new threads. COVID’s fault, of course.
However, I hope you will all appreciate (in the broadest sense of the term) the following analysis by Michael Keating from John Menadue’s brilliant Pearls and Irritations (republished with permission):
Neo-Conservatives want to believe that Reagan and Thatcher achieved smaller government, lower taxes, and a booming economy. The reality, however, is very different.
Recently the Treasurer sort to appease his conservative base by citing the legacies of Reagan and Thatcher. Both are believed to epitomise small government, lower taxes, and improved economic performance. But as will be shown below, both Reagan and Thatcher’s actual record did not live up to the myths that their supporters want to believe.
Size of government and lower taxes
First, taxation did not fall under Reagan or Thatcher. While both leaders cut the amount of taxation paid by the rich, total revenue did not fall.
Instead under Reagan total current receipts represented 30.5 per cent of GDP, when he took office in 1980, and were still at that level when he left in 1988. While in the UK, under Thatcher, receipts increased by one percentage point from 37.7 per cent of GDP in 1979 to 38.7 per cent in 1990.
Furthermore, neither Reagan or Thatcher were able to seriously reduce government expenditure, although there was lots of stinginess and under-funding of government responsibilities. Thus, in the US, total government outlays as a percent of GDP rose from 33.7 per cent of GDP to 36.1 per cent under Reagan. While in the UK, over the lifetime of the Thatcher Government, total government outlays hardly changed; representing 42.6 per cent of GDP in 1979, and still as much as 42.1 per cent at the end in 1990, after peaking at 47.5 per cent in 1981 and 47.3 per cent in 1984.
Reagan also notched up large and continuing budget deficits to pay for his tax cuts to the rich. As a result, there was a massive increase in US gross public debt from 37.7 per cent in 1980 to 52.2 per cent in 1988. This debt was financed by bond sales, where the Chinese became the biggest holders of American bonds. Thus, somewhat ironically, the Chinese helped pay for the handouts to rich Americans. And it was only after the election of a Democrat, Bill Clinton, that the American budget was finally repaired, but the US budget was again plunged into deficit by future Republican Administrations.
Second, the evidence does not sustain the view that the economic strategies followed by either Reagan or Thatcher resulted in a strong economic performance.
In many ways the best way to assess a country’s economic performance is to compare it with that of other countries that have a similar level of development. On that basis, neither the US or the UK stand out as having a strong economic performance during the Reagan or Thatcher years respectively.
In the case of the US, under Reagan the US economy averaged the same annual rate of economic growth – 2.8 per cent – as the average for the other developed countries which were members of the OECD (Table 1). But this moderately good result reflected the fact that US population growth was substantially higher than average, and therefore employment growth also needed to be higher than average.
Table 1. US and UK comparative economic performance in the Reagan and Thatcher years respectively
|US or UK||Australia||OECD|
|US The Reagan years 1980 – 1988|
|GDP growth %||2.8||3.3||2.8|
|Employment growth %||1.8||2.0||1.1|
|Productivity growth %||1.0||1.2||1.7|
|UK The Thatcher years 1979 – 1990|
|GDP growth %||2.0||3.1||2.7|
|Employment growth %||0.5||2.3||1.1|
|Productivity growth %||1.5||0.8||1.6|
The counterpart, however, is that US productivity growth at an annual average of 1.0 per cent under Reagan was well below the OECD average of 1.7 per cent. Interestingly, when the US economic performance is compared with Australia, which also had a fast rate of population and employment growth, we find that the Australian economic growth rate over the Reagan years was about half a percentage point higher than the US on average, with Australian employment and productivity growth both being higher than in the US. And during most of this period, the relative success of Australia reflected the policies of the Hawke Labor Government.
Turning to the UK under Thatcher, we find that on average annual economic growth was significantly below the average in other similar developed economies (Table 1). The main reason for this was the relatively low rate of increase in employment, and the rate of productivity growth in the UK under Thatcher was about the same on average as in the rest of the OECD.
But even that average economic performance hardly rates as an endorsement of the Thatcher policies. These policies were very divisive and had other longer-term negative consequences which will be discussed below.
Increasing inequality and its longer-term economic consequences
The outstanding feature of both Reagan and Thatcher economic policies was their legacy of increasing inequality.
In fairness, income inequality rose in most developed nations during the 1980’s because of the impact of changing technology and to a lesser extent, globalisation. In many countries, however, governments intervened to assist their workers to adapt to these changes, and they also improved the social wage, so that the increase in inequality was very much mitigated.
By contrast, the fiscal policies adopted by Reagan and Thatcher, which deliberately sought to redistribute income in favour of the rich, made inequality worse both absolutely, and relative to almost all other countries. Furthermore, this rising inequality had very damaging economic consequences for both countries.
In the US, in particular, the negative growth in the typical family’s disposable income over the almost two decades preceding the global financial crisis, was partly offset by these families going deeper into debt. That way the risk of economic stagnation, due to low consumer demand, was postponed.
But postponement was all that could be achieved. Eventually the build-up of poor quality debt in the US became unsustainable. US bankruptcies increased and the property market collapsed to half its value, thus precipitating the global financial crisis.
In sum, the economic record of the Reagan and Thatcher Governments was not only poor during the lifetimes of those governments. The rising inequality that their policies aided and abetted directly led to the global financial crisis, and the continuing economic stagnation that has followed since.
Luckily now, in response to the Covid pandemic, governments are finally repudiating the Reagan and Thatcher heritages.