Tag Archives: recession

Inflation and unemployment – the Margaret Thatcher experience


From 1979, inflation doubled in the first year of the Thatcher administration from 10% to 22%. The recession that followed brought the rate down to 5% in 1980. At the same time, unemployment soared to a breathtaking three million – and that was the official figure.

For Thatcher, inflation was always a bigger priority than unemployment. This was unusual at the time because memories of the starving jobless in the 1930s still loomed large in Britain.

Whereas in Germany, memories of hyper-inflation chimed more with the Thatcher viewpoint. That’s not to say British people weren’t fed up with price rises in the 70s – but the spectre that haunted families more was the prospect of the breadwinner being out of work.

To combat inflation, Thatcher embraced an economic theory called “monetarism” that necessitated high interest rates, higher taxes (VAT doubled almost straight away) and sharp cuts in public spending. The result of what one politician dubbed “voodoo economics” was disastrous for millions of people between 1979 and 1981.

It didn’t even work very well as a theory. Inflation was brought under control by 1980 but the money supply continued to grow. So there were further spending cuts that led to calamitous falls in economic output and whole regions de-industrialised. Unsurprisingly – monetarism was dumped by 1984.

To get a clearer idea of Thatcher’s thinking on inflation, I found a 1974 speech made in Preston by Thatcher’s economic guru Keith Joseph. He made it very clear that inflation was regarded by the Tories as the main enemy and not the traditional bogey of unemployment.

In fact, he argued, governments had been so spooked by the Great Depression of the 1930s that they thought mass joblessness was always around the corner. So governments spent money and then tried to hold down pay with incomes policies – always unsuccessfully.

Keith Joseph’s words in 1974 make interesting reading given what was to happen in Thatcher’s first two years in power with unemployment leaping:

It is perhaps easy to understand; our post-war boom began under the shadow of the 1930s. We were haunted by the fear of long-term mass unemployment, the grim, hopeless dole queues and towns which died. So we talked ourselves into believing that these gaunt, tight-lipped men in caps and mufflers were round the corner, and tailored our policy to match these imaginary conditions. For imaginary is what they were.

“Inflation is caused by governments” – speech by Keith Joseph in 1974

Already by the mid-1970s, people were shocked by an unemployment level of 500,000. Joseph swept that aside. Public money should not be used to create jobs. And anyway, he went on, a significant percentage of the unemployed were shirkers and scroungers.

There are the drifters and hippies who draw “welfare” but engage in activities to earn money, legal or illegal. From time to time the Ministry carries out local checks, and suddenly the number of registered unemployed melts away. How many fraudulent unemployed there are at any given time can only be estimated, but they probably account for at least a tenth of the registered unemployed at normal times. We ought to do more about such people, but expanding demand will not turn them into honest men.

“Inflation is caused by governments” – speech by Keith Joseph in 1974

The Great Depression of 1979 to 1981


Anybody over 50 years of age who lived in the Midlands or North of England and Scotland after 1979 will remember the economic depression that ravaged the industrial heartlands. I went to university in Liverpool in 1981 just after a summer of riots in that city and can recall well the sight of closed factories and decaying docks.

So – what on earth happened at that time? Up until Margaret Thatcher took over in 1979, unemployment had actually been falling for two years. Inflation had been brought to under 10%. Industrial output was finally ticking up as were living standards. The middle of the 70s had been disastrous. The Labour government of James Callaghan had to grovel to the International Monetary Fund for a bail out. But by the end of the decade, the economic indicators were improving. Plus oil from the North Sea was about to provide a bonanza.

However – Thatcher played to a sense that the post-war political consensus had run into the buffers. Even if the economics looked more favourable, the political and social environment in Britain was very volatile. Many people were fed up and looking for decisive leadership. And so Thatcher was elected. Unfortunately, she came into power wedded to what Labour Chancellor of the Exchequer Denis Healey described as “voodoo economics”.

Pursuing a monetarist economic policy turned a global recession into a British depression. Our unemployment sky-rocketed from 1979 to 1981 from about a million to three million – and that was the official statistics. Those stats were constantly revised in the 80s to massage them downwards.

Big rises in interest rates, indirect taxation (VAT), the exchange rate and cuts in public spending depressed demand and accelerated factory closures and bankruptcies. Every evening, the TV broadcast news would announce thousands of job cuts and names of firms now facing closure. These included household name brands and affected all sectors.

I got used to reciting the figures as a young political activist at that time. Manufacturing jobs slid by 22%. In vehicle production, jobs crashed by 28% – nearly a third of those in work. Young people were disproportionately affected with under-25s making up 40% of the jobless total. Two out of every three school leavers couldn’t find work. As the recession continued, it became clear that the number of long-term unemployed was increasing at an alarming rate. Many who had worked in blue-collar manufacturing, mining and dock work were stuck on the dole.

The incredible cost of this level of unemployment was around £17bn in benefits and lost tax revenues. I’d have to calculate the real cost in today’s money. That is a 1981 figure. It didn’t make economic sense. But it made political sense. For Thatcher, inflation was the real demon and fear of losing your job was a weapon against the power of the trades unions.

New evidence on the De Lorean scandal


The Troubles in Northern Ireland – years of terrorist attacks by Irish Republicans and Loyalists – left the province economically knackered. There was a huge reliance on state funded jobs, compared to the rest of the UK, and high levels of unemployment. So when American entrepreneur and General Motors executive John DeLorean showed up promising to build a new car industry in Ulster, politicians fell over themselves to make it happen.

The DeLorean Motor Company, that he set up in 1973, had developed a very distinctive looking car with gullwing doors and stainless steel finish. One of his cars featured in the movie Back To The Future. I remember these cars well and hilariously a mate of mine driving one opened the door to wave as he drove past and the door flew off – fortunately not injuring anybody!

As we all know now – after setting up a production facility in Northern Ireland in 1978 to great cheers and goodwill, things started to go wrong. The cars didn’t sell and the company finances revealed a black hole. A new book on the ensuing scandal claims that Thatcher was informed about the discrepancies in the DeLorean accounts and refused further funding resulting in the loss of 1,500 jobs. You can read more about that new book by clicking HERE.

Here’s a crash test for a DeLorean back in 1980.

Predictions for Maggie’s future – from 1979


The Economist

The Economist – December 1979

Maggie had been in power for eight months at the end of 1979. The Economist magazine (broadly sympathetic to her aims) was making its predictions for a new decade – the 1980s. So how did The Economist think Thatcher was going to fare in the years ahead?

Well, the next election was due in 1984 and they thought that was way too close for a government rapidly losing the level of popular support it had enjoyed in the May, 1979 General Election.

Like Cameron today, Thatcher was pleading for more than one term in office to achieve her aims but at the end of 1979, the polls were suggesting Labour would come back to power. The Economist thought the Labour faces just rejected by the electorate – Peter Shore, Dennis Healey, John Silkin – would be back in ministerial posts.

And there wouldn’t have been much surprise there. After all, through the 1960s and 1970s, Labour and the Tories took turns in power. Nobody would have thought in 1979 that Thatcher would last to 1990. The Economist believed it was “conceivable” that Thatcher would be dumped as Tory leader before 1984.

Europe was a big problem for Thatcher – senior Tories were horrified by her roughing up of the EEC (as the EU was called then). Foreign minister Lord Carrington was seen as a restraining influence on the Prime Minister (he would resign when the Falklands War broke out).

The Economist wrote that Carrington and Home Secretary William Whitelaw might move to “bell the cat” – put Thatcher under firm control and force her into a U-turn towards more traditional One Nation Toryism. She would be forced to adopt a more Ted Heath approach or resign.

The revival of the Liberal Party made a Lib-Con coalition – similar to what we have now – a real possibility. But The Economist thought that Labour – under Dennis Healey, who by 1984 would have defeated the left wing of the party – was more likely to return to power. The magazine correctly predicted that Roy Jenkins and Shirley Williams would form a new political party and for a while, that party would exercise a big influence.

So, how wrong was The Economist? The election was called early in 1983; an unexpected war in the Falklands boosted Thatcher; the Labour left put up a stronger fight and Dennis Healey did not become Labour leader; Thatcher purged her enemies within the Tory party and no bell was put on that cat!

The collapse of businesses during the 80s Thatcher recession


 

Over the first six months of 1980, a total of 3,160 firms called in the receivers. If you look at the list – as I’m doing now – there were loads of Midlands based medium sized manufacturers – especially in the automotive sector.

The toy industry was decimated in this period with Meccano closing down (makers of Dinky Toys); the failure of Dunbee-Combex-Marx (makers of Hornby trains, Scalextric cars and Sindy dolls) and huge redundancies at Lesney (maker of Matchbox toys).

Still, one area thrived – private receivers. Insolvency proceedings had been overseen by the government owned Official Receiver but Thatcher decided the City could do a far better job. And so through public policy, she helped build up the likes of Deloittes, Peat Marwick, Cork Gully and Coopers Lybrand. Many of these firms have since merged to create mega-accountancy operations.

Britain in decline

Britain in decline