Why Paul Krugman is Wrong About Margaret Thatcher

    Text size

As the top Keynesian gadfly, Paul Krugman's recent attack on Margaret Thatcher wasn't very surprising.

In a blog post on the very day she passed, he questioned whether or not Margaret Thatcher had actually made any difference to the performance of the British economy.

Since she had spent much of her career fighting the theories of like-minded economists you can easily understand why Krugman was so quick to take a swing.

But as someone who was actually there, I can tell you the evidence of Thatcher's success is incontrovertible-no matter what Paul Krugman wants you to believe.

What's more, the larger truth is that Thatcher's principles still hold lessons for us today.

The Real Thatcher Record

To illustrate the difficulty of Thatcher's battle: In the summer of 1981, no fewer than 364 top economists wrote a letter to the London Times denouncing her policies and saying they would inevitably lead to economic decline.

That letter marked just about the absolute low point of the 1979-81 recession.

After its publication the economy reverted into strong growth, and in the following year Thatcher's Falklands victory assured her re-election.

From 1981, Britain's economy continued to strengthen with only minor recessions until 2007. The trends marked a complete break from what had gone before, leading British living standards from 10% below those of France in 1980 to 10% above them in 2007.

You'd think the 364 economists who had written the foolish letter would have had difficulty keeping employment once the trend took hold. But far from it.

For the last 10 years, one of them, Mervyn King, has been Governor of the Bank of England -- which explains a lot about the failings of British monetary and regulatory policy, both before and since the 2008 financial crash.

Where Krugman's Argument Falls Apart

Of course, economic realities are hard to prove. Even 30 years after the event, a clever casuist like Krugman can manipulate figures to throw doubt on Thatcher's extraordinary turnaround in the British economy.

Krugman's argument looks at British living standards compared with the French, and produces a second very confusing graph of British unemployment (which was very high during Thatcher's early years because of all the dead capacity that had to be weeded out - the effect was much like the opening up of the Soviet Union after 1991) and then claims that the trend does not become clear until the mid-1990s, so Thatcher had nothing to do with it.

That ignores the political realities. There was no significant policy change in Britain after Thatcher's 1990 departure, other than the 1992 reversal of the foolish 1990 decision to link the pound to the deutschemark. John Major, Thatcher's successor, was a feeble individual with none of her convictions or courage, but he did not reverse her policies since his voting base would not have stood for it.

The 1990s strength after the 1990-92 hiccup (which only confirmed a trend already visible in 1981-89) was as much due to Thatcher as if she had still been wielding her handbag in Downing Street.

It was only after the massive Conservative party defeat in the 1997 election that policy changed, and then only gradually.

Tony Blair, the Labor leader, was quite willing to build on Thatcher's achievements, although over time the sloppy expansion of public spending by his Chancellor of the Exchequer and eventual (2007) successor Gordon Brown did change the policy trajectory.

Again, unlike Paul Krugman, I was there.

I returned to England from New York in late 1982, after Thatcher's Falklands victory had made her re-election inevitable, and lived there until 1995 (by which time a Labor government was itself inevitable).

The effects of Thatcher's policies were already apparent by the time of her 1983 re-election, and they were crystal-clear to everyone by the time of her second re-election in 1987. (Then the snarling opposition could only growl about "bourgeois triumphalism" - an insult I was happy to acknowledge!)

Yet even now in 2013 Krugman tries to explain them away. It is one of the annoyances of economics compared to the hard sciences, that there is always someone willing to doubt experimental results, however emphatic!

Of course, the current overspending, money madness and debt accumulation will eventually lead the United States to a position not unlike that of Britain in the late 1970s, with high inflation, high unemployment, and a mass of useless malinvestment that has to be liquidated for growth to resume.

However, I'm confident that we will then find leaders who know how to restore our economy and are capable of doing it.

But like Margaret Thatcher, they will have to engage in a titanic struggle against huge entrenched opposition, not least of which will come from economists like Krugman who have justified the current erroneous policies.

Related Story Links:

About the Author

Martin Hutchinson is the Global Investing Specialist for Money Map Press. A British-born investment banker with more than 30 years of experience, Martin has worked on both Wall Street and Fleet Street. He is now the editor of the Permanent Wealth Investor, where he focuses on "Alpha Bulldog" stocks that pay high dividends covered by earnings. In his Merchant Banker Alert, Martin uncovers the fastest-growing companies in the fastest-growing economies and brings those ideas back home to you. For more information about these services, call our VIP Services group at 855.509.6600 or 410.622.3004.

... Read full bio