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Why Paul Krugman is Wrong About Margaret Thatcher

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.

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  1. Arthur Robey | April 12, 2013

    Oil, You forgot to mention Oil.

    England finds oil. England gets rich.
    The oil runs out. England gets poor.

    Why am I not paid for these deep insights?

  2. joao pedroso | April 12, 2013

    Everybody's too lazy to take such challenges.
    when found America is ruling the world economy maybe then Europe reacts to its fall.

  3. Richard | April 12, 2013

    If I sold my farm I would have no mortgage.
    Where would I live adn how would I work?
    I could pay rent for an equivalent property by using my capital but what happens when I no longer make any money?
    Similarly, why would I accept somebody else taking out a loan to do so, or to build a path for me to walk on or a pump for my water, to then own these things and charge me for the use of them for the rest of my life and then more? If I could do that myself and make some money by charging a small fee to my friends and neighbours to use the facilities, until paid for, It would be lunacy of the highest order to do otherwise, wouldn't it?
    This is exactly what Thatcherism was about.
    An appalling episode in human history which has brought our demise closer.

    • PalmerBill | April 12, 2013

      You confuse personal responsibilities and economics with governments necessary role and and funding.
      It makes for a far better society to have as much self-determination in the hands of individuals and private enterprise as possible and only as much central government as is necessary.

  4. Eugene William Howe | April 12, 2013

    Why do people even pay any attention to Krugman in the first place, he just thinks he knows something and all the left wing nuts kow tow to him. Why is a good question and I think I know the answer, they are to dumb to know right from wrong and think he is some kind of god. He is just a stupid F##ker at best…..

  5. Tim Kyle | April 12, 2013

    Excellent article. What is it about these "economists?" that think continually piling on debt is good? Someone (usually the poor taxpayer) has to pay up eventually. I hate having other people taking my money and spending it on their favourite hobby horses and invariably wasting it. The UK today is a shambles. Government debt is continuing to rise and all the old wasteful habits are back.

  6. Trev Adams | April 12, 2013

    I am deeply concerned at the hatred and class divisions of the left. I write often to online news forums about this and receive a hail of abuse in return. I think they should consider their posts.

  7. Bill Cravens | April 12, 2013

    >>I'm confident that we will then find leaders who know how to restore our economy<< I am not as confident of this as is Mr. Hutchinson. He is assuming that the Left will "play fair" such that, just as American politics swung from Right to Left between Reagan and Obama, so also will it swing from Left back to Right. (If this were true, our next President would be Ann Coulter.) But Hutchinson forgets one basic fact about liberals like Obama… The Left cheats. Having attained more power than any previous Democrat / Leftist in history, there is no way Barack Obama and his team are going to yield power when the time comes.

    I've never been a citizen of Chicago, but I've lived within an hour's drive of the city for nearly all of my life. The Democrats have ruled Chicago with an iron fist for a century or more, because the city's politics are dominated by a vast network of interdependent self-interest groups in both the public and private sector, all of which labor to keep the ruling party in power, in return for the favors and patronage they receive in return. It's known as "The Chicago Machine", and it's as much a part of the Windy City as is Lake Michigan.

    It should be clear to anyone familiar with the ways of the Machine, what Obama is aiming to do. By pandering sufficiently to the right self-interest groups (espec. union), and fueling the scheme with borrowed money whilst running up the debt, he is effectively creating a Federal version of the Machine. If he is successful, then the Left will control so much of the access to what so many to believe to be their self-interest that we will never be rid of them. Chicago Democrats may have their squabbles and internal conflicts on occasion but, in the Windy city, there is no resisting the Power of the Machine. If Obama can pull this off, then the pendulum will no longer swing. The Leftists will have an unbreakable hammerlock on national politics, and conservatives will be reduced to gathering scraps from their table via local politics.

    • Aprov | April 12, 2013

      Bill, much of what you've written is quite true. Thank you! However, organizations like the "Chicago Machine" only continue until the money used to finance patronage, taxes plus debt, runs out. The Achilles' heel of the "Left" is its inability to accumulate ever increasing, and ultimately unpayable, debt — in the long term.

      Martin, thank you for today's article.


    • Mark H | April 13, 2013

      You forgot to mention another hallmark of the Chicago Machine–widespread voter fraud. The Dems have been becoming increasingly adept at this on a national level–witness the last election, wherein some precincts reported OVER 100% of votes voted for Obama.

  8. redmapleleaf | April 12, 2013

    Roar! Krugman is such a fool. And all these economists are now still employed and in such high places?
    Last night, Peter Schiff had a guest on his show that is fully convinced that to increase youth employment that the minimum wage should be RAISED!! Even after Peter made clear to her that raising the cost of something means demand for it will go down, she still would not admit that her idea is ridiculous. And this woman is now getting her DOCTORATE in economics and she doesn't even understand the law of supply and demand!! We get this from the "educated"?? lol

    • Robert Brink | April 12, 2013

      Perhaps the guest on Peter Schiff's show didn't feel her idea of raising the minimum wage was ridiculous because every time it's been done, the predictions that unemployment would increase and the economy would be harmed turned out to be wrong. Who is the "educated" one in this argument, and which person is exposed as "Pitiful"?

    • Rodzilla | April 13, 2013

      once again we find our society has confused education with intelligence, education is little more than being able to regurgitate what was written by another educated individual without the sensibility to actually absorb what was contained in the material to use it effectively, (I always use the Micheal Keaton movie Multiplicity as an example of how dullness spreads) any one try putting together a piece of furniture with instructions made by some one with a 3rd world engineering degree? very complicated looking, using the "lets baffle them with Bovine Excrement technique", an intelligent person takes more time trying to read between the lines to figure out what the educated one was actually trying to say, than actually completing the task at hand, thus we have our inefficiencies being bled into our economy from the "educated and all knowing" as the intelligent one is used to getting to the point and getting the job done.
      We are at the point where the educated ones think they are so much better than the ordinary person that they have destroyed / are in the process of destroying every thing we have built as a society, as history teaches us, the farther you look back, the further ahead you can see, you have to be an educated blind fool to not see the direction the 1st world is headed, straight to becoming the 3rd world.
      Loved the Iron Lady, and the world does not have enough people like her, we are now trying to breed conformity, not free thought, we must remember what we did to make our society great, it came from parents taking the time to teach their children how to do things, and the difference between right and wrong, and standing up for those beliefs, not expecting the education system or the ever knowing government bureaucracies to do it for us.


  9. Wizzoo | April 12, 2013

    Martin is absolutely correct in this piece.The bottom line is get the government off people's backs and by this I include industry.Small government, low taxation, strong defences and honesty from politicians.If Mrs T said she was going to do something you knew that she would do that and why.I know because I worked in the City of London spanning pre and post the Thatcher era.Modern society and commerce is too complex for some dreary bureaucrat to decide what is needed.Only markets can do that.They can be clumsy and cruel but ultimately they get it right and we're all better off for it.Once we start moving away from these principles then things start going wrong big time.Since Mrs T left power the UK, after a while, began slipping back in to its old dirigiste ways,not balancing the books and most notably propping up bust banks among much else.The worst fault is welfarism and for those of us this side of the pond it does look as if Mr Obama is embarking down this road.Take it from a Brit, DON'T go there.It will suck the life and dynamism out of your economy.As Milton Friedman said,"If you pay people to be unemployed they will." A safety net yes, but not a life style.
    I hesitate to offer an opinion here but the man closest to the ideal is Ron Paul.Listen to him and the dear old US will blow everyone else away again.It will probably be unpleasant and painful but it will work.Freedom always works.God bless.

  10. G.T. | April 12, 2013

    Mr. Hutchinson:

    You must be the greatest economist on earth. You are full of it to
    really think that Magaret Thatcher was great. I will not trust your
    financial advise.

  11. james donegan | April 12, 2013

    The only asset in the social security "trust fund" is "special issue notes" of the government which are redeemed by ???????????. the government making a bookkeeping entry. If cash is needed it comes from our general fund. All the tax money put into the fund has been 'BORROWED' and spent.

    I am quite surprised that people still think there are "assets" in the fund that can be used to make up any shortfall of disbursements over tax receipts

  12. Dad | April 12, 2013

    Prior to Margaret Thatcher, Britain had become a socialist quagmire. Thatcher saw (perhaps even understood) the advantage of introducing "capitalist" tools to spur the economy. In a nutshell, she reduced taxes on the rich, created greater flexibility for the wealthy to invest and prosper, the result had an immediate positive impact on the British economy. Just like Reagonomics – which also (kind of) worked. Unfortunately while the initial impact was positive for the economy as a whole, over time the rich got richer, invested less, privatization reduced internal job/opportunity growth, jobs moved to China, the Germans bought Rolls Royce, Bentley, the poor got poorer, the middle class shrank, massive unemployment and the economy diminished. So this economic miracle was temporary. But this time it is much harder to fix. Good thing that America didn't take this route. Oh wait …

    • Robert Brink | April 12, 2013

      You are 100 percent correct, Dad. And what of it that Hutchinson was there while this was happening? He was a member of the well-off upper class enjoying the benefits his ilk derived from Thatcher's policies. He's like almost all of these investment newsletter advisers; they're all libertarians who champion the rich. Krugman has been proven right over and over. Inflation would go through the roof with the Fed's low interest rates, the conservative economic "experts" railed. Wrong. Europe needs to undergo austerity, persons such as Keith Fitz-Gerald of Money Map Report shouted. It stifled growth and made matters worse, as Krugman said it would. When are these guys going to own up to their wrong-headedness? Only Stephen Leeb called it correctly, saying these people were suffering for nothing. As for the British woman who likes Rand Paul, that folksy-sounding, snake-in-the-grass racist appeals to the basest instincts in the American population and is a poison influence on our society.

  13. Ian Shearer | April 12, 2013

    I too was there during the Thatcher years and still am in the UK. The oil mentioned by one respondent has not stopped flowing but the boost to the public spending junkie of the hits from the original exploration licences has gone. Unfortunately the effect of this money for nothing joining the treasury coffers was to perpetuate the employment of excess government workers, and these people are far more difficult to sack than private firm's employees who find themselves on the street as soon as their firm goes bust.

    The blessed Margaret held to her conviction that socialism is doomed when socialists run out of other peoples' money and she lived to see the Iron Curtain economies collapse for exactly that reason. The service rendered by the privatised industries now is vastly superior to their UK state owned ancestors – with one exception. The odd failure is the railways, which have been semi-nationalised again and in which a few private companies run trains on state-owned track for which they bag a hefty state subsidy. At least this experiment was worthwhile, demonastrating that Railways in UK are inherently uneconomic and need to be run as a subsidised public service.

    Just because you cannot find a British made article in Wallmart do not fall for the notion we make nothing. Without British components your airliners, ships, automatic cars and watches would not function. However the first industrialists soon began to invest their profits outside UK, both for sound economic reasons and to keep the money from the UK taxman. The Black economy in the UK, defined as profitable activity controlled by British residents but operating overseas beyond the reach of the UK state is 2.5 times the size of the visible economy. Without it, a country which has run a visible trade deficit for all but 6 years since 1860, would have gone bust years ago.

    Finally: Trevor Adams console yourself – the abuse is built in to the left-wing psyche. Read "Envy – a theory of Social Behaviour" by Helmut Schoeck.

  14. Tom Lains | April 12, 2013

    Having worked in oil and gas all my life, I tracked the North Sea developments (and its economics) very closely at the start of my career. It was the massive influx of petro dollars, that pulled the English out of their former malaise and nothing else. Policies coming from the left or right are meaningless unless you are producing something the rest of the world wants in quantity. Unless, like the US. you can create and careen from one Ponzi scheme to the next.

  15. evelyn | April 12, 2013

    You were there!! I was there in mid 70s, I was appalled, it was doom and doomed. Check the stats of migration to Canada & Australia, the managerial class fleeing. I was very young then, and even coming from a third world country, I could tell. Now we have slipped to a fifth world and Great Britain what a difference.. Piers Morgen CNN was also there and he had to acknowlege what it was in the 70s. Great leader, gutsy, if only a few would care to follow here example.

  16. luutzen | April 12, 2013

    Hutchinson, old chap, House of the Lords?

    Stealing from the working class, and making the Rich richer? History has always been like this.

    I admire Robin Hood, and the 3 french musquetteers: new french revolution…

    Down with Kings, Queens, Colonels, generals, private central banks and the Goldman Sachs kartel.

  17. RonW | April 12, 2013

    The main reason Paul Krugman is wrong about Margaret Thatcher is that he is wrong about everything, unless you think like a socialist.

  18. Dimitrios Philippelis | April 12, 2013

    What a pity…
    He is a Nobel Laureate and has a great lack of respect to a dead woman.
    His humanistic specifications and cultural characteristics of a runner, namely, the shoot which grows along the ground and can take root at points along and give direction to our society have remained behind. He has not been taught that the shift from the practice of personal vendetta to a system of litigation cannot be offset and cleared. The character Orestes, who sets out to avenge his father after his mother's affair with Aegisthus has to do with lack of respect to the deads.
    The God has forgiven the dead and what the others say is gossip and gadfly.

  19. David | April 13, 2013

    I read Hutchinson's editorial and the comments that followed. I didn't read anything specific that Thatcher did. With all of the news coverage after her death, I never heard anything specific.

    I know many people were out of work and I know that oil was discovered in the North Sea. I have heard people complain about her policies that "put people out of work", but, again, nothing specific.

    Hugo Chavez was in power for a decade and a half and, fortunately for him, he died before the catastrophe he caused will come to full fruition.

    Also, a major cause of the financial crisis in the US and in the world was from Clinton and the Republican congress repealing Glass-Steagall in 1997. It took years of bad decisions by the major financial institutions for the downfall of those same institutions.

    Were all of those people Britain out of work because of previous administrations causes that Thatcher fixed?

  20. Keith | April 14, 2013

    I simply do not undestand how a prson can be elected a politician and then becomes an expert on everything to be revered on their death. The mistakes and hardships caused nver seem to matter

  21. Will | April 15, 2013

    Nice work. It is funny that anyone still listens to that idiot.



  22. Mrs C | April 15, 2013

    To whom can you point in the history of British Prime Ministers who got everything right?
    Others now forgotten had got us into a big mess. In tackling that she got some things right and some things wrong. It was wrong to let our mining industry go hang; It was wrong to think that service industry could replace heavy industry. It was wrong to privatize everything that moved, including vital services like water and the railways. Might have been better to put structures in place that make good management possible in the public sector – accountability for a start.
    Insisting on the balloting of members before calling a strike was good; the total destruction of the unions was not good. Then again maybe Arthur Scargill is as much or more to blame for the destruction of the unions than Mrs Thatcher.
    She was right to resist the ERM as time would tell.
    But the biggest mistake of that era was the deregulation of financial services. It led directly to a crazy bubble in credit. In the eighties a salesman came to my office and said "I will give you 5 mortgages without any income details" (for buy to let of course). And when I went to the bank for a DTI-backed loan to start a business, they said "Hey have some more, you don't want to have to come back later." Predictably the financial sector is now horribly corrupt – as in HSBC involved in money laundering – but the government dare not do anything because 15% of our GDP is from financial services, and probably a lot more indirectly. I would like to think that Mrs Thatcher did not anticipate this development or she would have resisted it.
    Mrs Thatcher is most negatively remembered because she appeared ruthless; she knew she had a fight on her hands, and as a lone woman in a man's world she didn't dare show a chink in her armour. Her policies and the ruthless way they were implemented hurt people, and they haven't forgotten, or let their children forget. But there are plenty of others who hurt people; will people dance on Tony Blair's grave or Gordon Brown's? Probably not. They had a clever spin machine, and bought the people off with benefits and tax credits, so nobody felt personally affected, but in truth they left us all broke. David Cameron isn't fixing it. It is out of control and he can't fix it.
    If Mrs Thatcher could hear from the grave she would be flattered that she is getting so much attention on her passing. What a compliment to say to one woman, "You single-handedly changed the country, even the world" whether for better or worse.

  23. Kevin Beck | April 16, 2013

    Martin, you could have simplified the title to "Why Paul Krugman is wrong about…" and it would have correctly applied to any object.

    Has anyone of the notoriety of Krugman ever had such an unblemished record of failure?

  24. Mark. McN | May 3, 2013

    As a young man, Maggie gave this working class boy the encouragement and the confidence to establish and run a family buisiness that grew over thirty years. The punitive tax that existed before 1979, the utter ignorance of economics shown by the political 'elite' prior to '79, was tragic in the extreme. When you consider the country who gave the world the industrial revolution, to experience the absolute disaster of the seventies was truly humbling. If the 'one nation conservatism' or the socialist labour philosophies had prevaled, whether in opposition or faustian agreement, we would not have a United Kingdom. Indeed, we may still not, for we will soon have a referendum on Scotlands membership soon. This too has its roots in the Thatcher years, but now that the hysteria of those battles between right and left has ebbed, I really believe the Scots will not choose economic isolation in the eurozone. I cannot see Germany will welcome another impoverished socialist begger looking for handouts. The battles were not of Mrs Thatchers choosing, but the fragmented labour movement which stood in a queue waiting to do battle with the Prime Minister of the day, and obligingly took turns to fight for their various union fiefdoms, one at a time. You cannot have an argument on your own, although you couldn't get that reality to permiate the minds of her protagonists. The re-organiseation that occured in those years could not have occured with either the old conservative party, or the old labour party. She was middle class, and was therefore familiar with both ends of society. The tragedy is that for all the high-minded posturing of labour political theorists wishing to follow correct democratic rules, or the faux conservative gratitude in the UK we have returned to the same landscape prior to the Thatcher years, after the betrayal of the conservatives. We now have rule from old etonians. The fact that Paul Krugman owes his legitimacy to Alfred Nobel, a truly successful capitalist, is irony in the extreme. And to survey the current British political landscape is also deeply ironic. It would be funny if it wasn't my country.

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