Author: Labour Party Supporter | Written in the 1980s
During the period of economic prosperity, a broad consensus emerged. Major parties on both the left and the right generally accepted the concept of a "mixed economy"—a capitalist system that included some state-owned enterprises. They also acknowledged certain rights due to workers—specifically, the right to free trade unions—and recognized the government's responsibilities, particularly regarding the provision of welfare services and the maintenance of roughly full employment. While the precise parameters of this consensus varied by country and shifted slightly over the course of the boom—with ongoing debates about where to draw the lines—there remained a broad alignment of views among the major parties. In Britain, this consensus was dubbed "Butskellism"—a portmanteau combining the first half of Conservative leader Butler's surname with the latter half of Labour leader Gaitskell's—to signify the agreement between the two parties.
By the late 1970s, this consensus came under increasing strain as economic conditions no longer supported the continued provision of full employment, rising living standards, and welfare services. In some countries, the consensus collapsed entirely. Two opposing viewpoints emerged—or were in the process of emerging. The perspective adopted by the Left (albeit with some lingering ambivalence) is the subject of the next chapter; here, we examine the vigorous economic policies implemented by "New Right" governments in the early 1980s.
The first major government to adopt such policies was the British Conservative administration elected in 1979. A year later, a U.S. president advocating a similar platform was elected. Consequently, these policies became inextricably linked with the names of Thatcher and Reagan. To understand Thatcherism and Reaganomics, one must look beyond the simplistic slogans often used to characterize these two figures; thus, we begin by discussing the rhetoric and the political and economic theories used to justify these policies, before examining their substance and logic.
Rhetoric
The striking rhetoric politicians used to promote these policies centered primarily on two concepts. The first was the view that inflation is both immoral and the number-one public menace. Consequently, Thatcher spoke of the need to restore "sound money," and Robin Leigh-Pemberton—the Governor of the Bank of England she appointed—declared that inflation posed a greater threat to the free world than communism did. The main purpose of these slogans was to argue for the necessity of a tight monetary policy.
The second core concept held that previous governments—and indeed the nation as a whole—had been recklessly wasteful. Thus, the old refrain that "we must live within our means" was repeatedly trotted out as if it were a profound insight. It was not only schoolchildren denied free lunches who suffered the impact of education budget cuts; we all had to "tighten our belts" to ensure "good housekeeping." These moralizing sermons were primarily intended to provide a rationale for attacking employment, living standards, and welfare provision. Such high-minded rhetoric helped to cast anyone unwilling to make the necessary sacrifices as somehow in the wrong.
Political Economy
The theoretical arguments underpinning these views originated from a body of political-economic thought, most notably associated with the writer Friedrich Hayek.
The central emphasis of this perspective was the need to "stop the state from interfering with the people." The ever-increasing government intervention sanctioned by the prevailing consensus represents—to borrow the title of a book by Hayek—an inevitable "Road to Serfdom." Once the government becomes involved, economic outcomes cease to reflect market forces independent of human agency and instead become politicized. Coalitions of interest groups impose their will on others in a manner that is essentially arbitrary and authoritarian. Such a situation is fundamentally incompatible with economic efficiency and individual liberty.
One might arrive at some very radical policy conclusions: "Libertarians who cleverly retain a role for state power limit it to the activities of a 'night-watchman,' focusing primarily on law, order, and national defense... There would, of course, be no conscription, no anti-drug legislation, and no interference in private sexual conduct; but neither would there be social security—not even a minimal safety net—nor basic healthcare services, let alone planning regulations for urban and rural development" (Brittan, p. 55). Hayek himself advocated abolishing the state's monopoly on currency issuance in favor of private currency issuance and the competitive circulation of money.
Neither Thatcher nor Reagan adopted this specific approach. However, they did embrace the core tenets of the theory, albeit without adopting the full ideological trappings of true libertarianism.
Within these broad perspectives on political economy, two more narrowly defined economic theories can be distinguished. One is monetarism, which posits that inflation is caused by an excessively rapid growth rate in the money supply. Consequently, the crucial economic task for the government is to control the growth rates of money and credit. The most effective way to slow the growth of the money supply is to reduce the government deficit (i.e., to lower the public sector's borrowing requirement). The problem with a deficit is that it must be financed either by printing more money or by borrowing. In the former case, the money supply grows too rapidly; in the latter, interest rates rise because the government absorbs funds that would otherwise have gone into industry, thereby "crowding out" private investment and leading to prolonged underemployment and low incomes.
Monetarists argue that fiscal policy is largely ineffective, and that using deficit spending to boost employment is particularly disastrous. Ultimately, employment tends toward a "natural" rate determined by free-market supply and demand; consequently, any new jobs created are soon fully offset by job losses elsewhere in the economy. The only ultimate result of increased government spending is either reduced private investment or higher inflation. Governments neither can nor should attempt to provide a level of employment higher than that spontaneously generated by the economy.
The Thatcher government initially embraced pure monetarist arguments, though its stance later became more pragmatic. The Reagan administration consistently employed a mix of monetarist and supply-side approaches. Supply-side economics represents the second major theory underpinning the economic views of the New Right.
Europeans often misunderstand the term "supply-side economics," associating it with government intervention in industry—a view almost diametrically opposed to the American understanding of the concept.
At the heart of supply-side economics lies the belief that substantial tax cuts are the key to economic recovery. Lowering income taxes increases the potential returns on saving, working, and investing. Consequently, tax cuts encourage people to work harder and longer hours, while also stimulating investment. Output rises and unemployment falls. Supply-siders believe that, despite lower tax rates, the resulting increase in income expands the tax base so significantly that total tax revenue actually rises. However, supply-siders argue that government spending should be cut—partly to allow for deeper tax cuts, but more importantly because massive government expenditure (especially on welfare) undermines work incentives by reducing the necessity to work. In stark contrast to the explanation that unemployment stems from insufficient demand—the foundation of Keynesian economics—supply-siders assert that unemployment arises from a lack of work incentives, while economic depression results from insufficient incentives for investment. Although most monetarists agree with the supply-side emphasis on tax cuts and increased incentives, they remain highly skeptical regarding the extent to which—and the speed at which—such measures can lower the natural rate of unemployment. Consequently, monetarists do not believe tax rates should be cut prior to corresponding reductions in government spending, as government deficits would trigger inflation, rising interest rates, or both. Conversely, supply-siders argue that overly tight monetary policy would drive up interest rates and undermine the beneficial effects of tax cuts on investment, thereby hindering economic recovery.
**Practical Approaches**
While the views outlined above certainly influenced the thinking of Thatcher and Reagan, the very theories they used to articulate their governments' shared goals also served to obscure them. This is because these theories deliberately and completely sidestep the issue of class.
The primary fear of the New Right is not the politicization of decision-making itself, but rather the prospect of political decisions in which the working class holds significant sway. Their concern is not merely a coalition of traditional interest groups, but the political power of the labor movement. Hayek stated clearly: "For more than a century, government policy regarding labor unions has swung from one extreme to the other. In the past, union activities were—if not outright prohibited—rarely legal. Today, however, unions have become uniquely privileged organizations to which ordinary laws do not apply. They stand as the sole major exception where the government’s fundamental function—preventing coercion and violence—fails to operate. The very foundation of our free society is gravely threatened by the powers usurped by unions" (Hayek, pp. 66–68).
Similarly, the aim of the New Right is not to reduce the burdens on everyone indiscriminately, but specifically to alleviate the burdens placed on employers by the labor movement and by the progressive legislation enacted during the boom years in response to workers' demands. We view this perspective as a clear and highly radical attempt to resolve the economic difficulties of the past fifteen years on capitalist terms. It seeks to address the key issue that emerged during the final years of the boom—namely, the workers' growing capacity to secure better wages, state welfare benefits, and working conditions—by fundamentally altering the parameters previously accepted by all political parties. In other words, it aims to revert the relationship between capital and labor to the state it was in thirty years ago. Moreover, Hayek is fully aware of the implications of this.
"Yet, this path remains blocked by the most foolish of all fashionable arguments: that 'we cannot turn back the clock.' One cannot help but wonder whether those who habitually use this cliché realize that it merely expresses a fatalistic belief that we are incapable of learning from our mistakes. ... Only by reapplying abandoned principles to current policy can we avert the threat to our free institutions" (Hayek, pp. 87–88). For Hayek, a "free system" could only be "capitalism." The New Right held the view that if restoring the conditions for profitable production and sustained accumulation required reverting to a political order that predated the emergence of a shared public consciousness, then such a course should be pursued.
Outlined below are some of the key policies devised to achieve these outcomes, contrasted with the orthodox practices of the 1960s.
Tight monetary policy. The government’s responsibility was by no means to guarantee full employment, but rather to prevent the consequences that "excessive" employment (in New Right parlance) would have on prices and profits. In Hayek’s words, traditional demand management was merely "an irresponsible way of passing the buck to one's successors. In this respect, we are naturally suffering the retribution visited upon us by the man who pioneered this approach [Keynes], for we are already in the midst of that very outcome—the 'long run'—in which Keynes knew we would all be dead" (Hayek, p. 109).
Cutting welfare provision. Rather than guaranteeing improvements in welfare, the government should reduce welfare services to a level the economy could afford, ensuring that the "wealth-creating" private sector was not undermined.
Tax cuts. Instead of levying taxes to fund welfare in a way that placed a heavier burden on the wealthy, taxes—particularly those on the highest income brackets—should be cut to reduce government "interference" in income distribution. Such distribution was generated by the market and was essential for the market's own efficient operation.
Privatization and deregulation. The government should not restrict businesses from pursuing profit at the expense of workers and consumers; instead, the scope for private profit-seeking should be expanded rather than curtailed.
Weakening trade unions. Rather than recognizing legislation that safeguards trade union rights for organized workers, the government should weaken labor laws to grant employers greater freedom to undermine union organization. At the same time, the government should set an example in its dealings with the increasingly significant public-sector unions.
In examining the implementation of these policies in the UK and the US, we focus on their logic and consistency. Since both governments remained in power at the time this book was written, it is too early to reach a definitive conclusion.
Contractionary Monetary Policy
During the early days of the Thatcher administration, the view that tightening the money supply could curb inflation without affecting other areas was widely held. This perspective suggested that simply announcing strict targets for money supply growth would suffice to restrain the rise of wages and prices. Milton Friedman, a leading figure in monetarist theory, remarked on the UK situation in 1980: "By the time inflation falls to single digits in 1982, the side effects will be merely a slight decline in output and employment" (Stewart, p. 172). Undoubtedly, this proved to be absurdly optimistic. Policies of monetary contraction operate by inducing economic recession—or even depression. When it comes to treating economic ills, the fear factor is often more potent than any "magic" cure.
If a government restricts credit growth to a rate below the prevailing inflation rate, interest rates will rise. This reduces the returns on business investment, makes installment plans and mortgages more expensive, and—because raising capital becomes costlier—compels businesses to sell off inventories. Opinions have varied over the years regarding the magnitude of these effects; however, a sharp contraction in credit undoubtedly dampens spending. This contractionary dynamic is reinforced by floating exchange rates. High interest rates attract foreign capital, driving up the currency's value; this renders exports less competitive while making imports more attractive, leading to a further decline in sales of domestically produced goods. Such a shock hits a country like the UK—where foreign trade accounts for a significant share of output—much harder than it does a less open economy like that of the United States.
The aim of triggering a recession is to restore profitability to production and investment. Success in this objective depends less on the extent to which a recession (intended to lower inflation) reduces the growth of wages and prices, and more on the extent to which wage growth is curtailed relative to price growth—thereby compressing real wages and boosting profits. The potential impact of a recession on productivity is equally significant.
During an economic downturn, the weakest firms—those with the lowest productivity—are the first to go bankrupt; their exit drives up average productivity. Sustained disinflationary pressure also compels management to alter work practices—downsizing operations, forcing workers to accelerate production without wage increases, and so forth. The mechanisms involved are brutal. Managers genuinely perceive the situation as a fight for corporate survival. Crucially, deflation erodes workers' resistance to these changes in work practices. Fear is the decisive factor here: workers realize that opposition could lead to layoffs or business failure due to overstaffing, leaving them with no prospect of finding alternative employment. Under such pressure, wage growth is suppressed, often falling below the rate of price inflation.
The choice of monetary policy over fiscal policy to induce deflation and trigger a recession is, in economic terms, a secondary issue. After all, while radical supply-siders favor tax cuts, reductions in government spending would achieve the same result. However, monetary policy—precisely because of its purported direct impact on inflation—can become the decisive element in macroeconomic policymaking. For the New Right, the primary challenge lies in securing voter support for a contractionary economic program. It is here that pedantic doctrines like monetarism come into play; they serve as a foundational rationale for abandoning a core tenet of the post-war political consensus: the government's responsibility to maintain full employment. Ford, an adviser to the Governor of the Bank of England, outlined this strategy in an article for the Bank’s prestigious *Quarterly Bulletin*: "...it would be possible to base such a strategy on the well-known Keynesian explanation of the tendency for managed demand to decline, and on focusing greater effort on ultimate objectives rather than intermediate targets. However, this would entail explicitly announcing targets for output and employment. That would be a highly risky course of action; such targets might fail to gain public acceptance, or prove insufficient to guarantee a substantial drop in inflation—or both. Utilizing powerful intermediate targets like the money supply and government borrowing allows the authorities to distance themselves from issues of output and employment, while simply emphasizing the crucial role played by industrial cost trends in those areas. In short, whatever difficulties might arise from using intermediate targets, they were vital from the outset—both to signal a determination to break with the past and to enable the authorities to navigate uncharted waters with confidence" (July 1983, p. 207). Thus, monetarism played a role in promoting the Conservative Party's strategy that was as significant as that of a political party's advertising agency.
In its early years, the Thatcher government did indeed implement drastic monetary tightening. Interest rates rose from below the inflation rate (5%) to over 10%, undermining sales prospects and thereby damaging output and employment across the board. High borrowing costs stifled fixed capital investment; between the second quarter of 1979 and the second quarter of 1981, the decline in fixed capital investment amounted to 1.5% of output. Constraints imposed on corporate cash positions led to a massive reduction in inventories—a drop equivalent to 3.5% of output over the same period. High interest rates, combined with confidence stemming from the pound's new status as a petro-currency, sharply reversed the currency's earlier depreciation. The competitiveness of British manufacturing suffered a staggering 50% decline. This dealt a severe blow to exports; over two years, the drop in exports amounted to 2% of total output. Meanwhile, rising imports—equivalent to 2.5% of output—crowded out domestic products. These developments reinforced one another, and their combined impact became the driving force behind the economic downturn of 1980–1981.
The consequences were severe. The decline in output was greater than that of any recession in the preceding sixty years, including the Great Depression of 1929–1932. By the spring of 1981, the official unemployment rate had doubled, with the jobless accounting for 12% of the total workforce. In 1982, 12,000 company liquidations were announced—two and a half times the rate seen in 1979. The industrial sector was hit hardest. In the twelve months following December 1979, manufacturing output fell by 15%—far exceeding the decline in any single year during the 1930s, when the steepest annual drop was just 5.5%. By early 1983, imports of manufactured goods were 24% higher than in 1979, whereas domestic manufacturing output remained 16% below 1979 levels.
It is crucial to note that the economic decline was concentrated in industry, particularly manufacturing. These sectors were the most exposed to international competition; consequently, if the strategy were to succeed, they would inevitably face the greatest pressure—but also stand to reap the most significant rewards.
The severity of the recession in the United States in 1982 was comparable to that of the UK recession of 1980–1981. However, because the duration was shorter than in the UK, output fell by only about 2%, whereas it dropped by 4% in the UK. Meanwhile, interest rates rose rapidly, with real interest rates reaching around 10%—a level unprecedented in the United States. As in the UK, a reduction in inventories was a primary factor contributing to the 1% decline in output. Private investment also fell significantly. The appreciation of the US dollar eroded American industrial competitiveness by 20%, precipitating a rapid decline in exports. Similar to the UK, government spending on goods and services saw a slight increase, while transfer payments rose substantially, helping to cushion the impact of falling incomes on consumption. Industry was hit the hardest; in 1982, industrial production fell by 8%, and the unemployment rate climbed above 10%.
Dismantling the Welfare System
Both the Thatcher and Reagan administrations significantly cut state welfare allocations. During the first Thatcher administration, numerous cash benefits were abolished. Unemployment benefits linked to previous earnings were also eliminated; for an average wage earner, this benefit would have amounted to £18.60 per week in 1983. Industrial injury benefits were likewise abolished.
Many other cash benefits saw their real value reduced, and mechanisms linking benefits to prices or incomes were weakened or scrapped. Pensions were no longer indexed to changes in average earnings—a shift that cost a pensioner couple £2.25 per week in 1983. Benefits for the incapacitated were cut by 5% and decoupled from income levels, resulting in a weekly loss of £4.25 for a married disability benefit recipient in 1983.
Cuts to local government subsidies and restrictions on funding caused the real value of local government budgets to drop by 3.5% that year. Local government capital expenditure fell by 40 percent. This severely impacted funding for housing, schools, and homes for the elderly.
In the realm of education, the Thatcher government cut 18,000 teaching positions between 1980 and 1982. Between the 1978/79 and 1981/82 academic years, spending on textbooks per secondary school student dropped from £22.70 to £19.90—a significant decline when adjusted for inflation. The cost of school meals spiraled out of control, doubling on average. Tuition fees for the Open University rose by 79 percent between 1981 and 1983.
Regarding healthcare, standards declined despite an increase in real spending. This was primarily due to shifts in the population's age structure; healthcare costs for those over 75 were nearly eight times higher than for the working-age population, and the over-75 demographic was growing by approximately 45,000 people annually. Prescription charges rose by 600 percent, while routine dental charges increased by 170 percent.
In the United States, when Reagan attempted to cut social security spending in 1981, he suffered his first major defeat in Congress and was forced to concede on the issue. However, welfare funding in many other areas was slashed.
Trade Adjustment Assistance provided one year of unemployment benefits to workers who had lost their jobs due to a surge in imports. When Reagan took office, 500,000 workers were receiving these benefits—most of whom had been laid off from the automotive and auto-parts industries. The 1982 budget cut funding for this program by more than half. In 1981, 140,000 newly discharged veterans joined the ranks of those receiving unemployment benefits. Relief payments are no longer issued to individuals eligible for re-enlistment in the military or to those discharged for misconduct.
Washington has also adopted "workfare" programs already implemented by many states. These programs compel recipients either to spend significant time each week job-hunting—such as in "job clubs," where participants must spend 40 hours a week reading help-wanted ads and filling out applications—or to work for the state at minimum wage for enough hours to "earn" their relief payments.
Workfare programs save money primarily by making life miserable for welfare recipients rather than by actually finding them jobs. After New Jersey implemented such a program, 2,879 people found employment, while 9,016 lost their benefits. In Michigan, anyone who dropped out of the program was removed from the rolls for "non-cooperation."
The maximum annual income for a family of four to qualify for food stamps was lowered from $14,000 to $11,000. Cost-of-living adjustments to welfare benefits were repeatedly delayed. Eligibility criteria for school lunch subsidies became stricter, and funding for these subsidies was cut. Consequently, during the Reagan administration's first year, the average price of school meals in Massachusetts rose by 50–85 percent, and participation dropped by one-third.
A 1983 U.S. Census Bureau report on poverty in America revealed that 34.4 million people were living below the official poverty line (defined as an annual income of $9,862—approximately £6,500—for a family of four). This indicated that roughly one in seven Americans was living in poverty, the highest level since 1965. Welfare cuts take various forms, impacting individual lives in different ways. They may involve slashing the rights—whether in cash or in kind—to which individuals are entitled as citizens or as members of specific groups; the reduction of the real value of pensions is one such example. Cuts may also be implemented by making it difficult to exercise a right to a benefit, rather than by formally abolishing it—as seen in the ever-lengthening hospital waiting lists. Another approach involves attaching high costs to the exercise of a right, effectively making it difficult or impossible for low-income groups to access it; prescription charges are a clear example of this. Ultimately, however, all welfare cuts signal a government retreating from its responsibility to guarantee citizens an adequate level of welfare. This amounts to an attempt to fundamentally undermine a key element of the collective consciousness established in the post-war era. This erosion has two primary effects.
First, cutting welfare reduces government expenditure. This tightens the money supply and lowers the deficit, potentially paving the way for tax cuts if the reductions are sufficiently deep.
Second, unlike cuts to other areas of government spending, welfare cuts heighten the urgency with which people cling to their jobs. The less tolerable unemployment becomes, the more willing people are to accept lower wages and poor working conditions. Restricting access to benefits strengthens the link between employment and the ability to secure the goods and services necessary for survival. This reinforces the primary form of discipline imposed on workers by capitalism: the requirement to work according to an employer's wishes in order to make a living.
Tax Cuts
During his campaign, Reagan promised an across-the-board 30% cut in personal income taxes. He stated he would implement "equal percentage cuts for everyone" rather than a "redistribution of wealth between tax brackets." In reality, however, the cuts were not only smaller (totaling 23% over three years) but also highly skewed in favor of the wealthy. First, the top marginal tax rate was lowered by 29%, exceeding the average rate of reduction. Second, the higher the tax bracket, the greater the benefit derived from the legislation (for instance, halving all rates would double the disposable income of someone who previously paid two-thirds of their income in taxes, whereas those with no tax liability received no benefit at all). Third, neither personal exemption levels nor the income thresholds for progressive tax brackets were indexed to inflation. This meant that the poorest taxpayers would rapidly rise into higher tax brackets—a process accelerated by the specific rate reductions applied to each bracket. Calculations showed that in 1980, a family earning $10,000 annually would actually pay more in taxes, while a family earning $250,000 would see their after-tax income increase by approximately one-fifth.
Reagan’s budget director, David Stockman, spoke quite candidly on the matter: "The crux of the supply-side tax cut plan was to lower the top marginal rate from 70% to 50%; everything else was secondary. The initial argument was that the top rate was excessively high and caused the greatest damage to the U.S. economy. Later, to make the tax cut politically palatable to the public, rates across all brackets had to be lowered. But I believe the Kemp-Roth proposal [the original tax-cut plan] was always a Trojan horse designed to lower the top rate" (Ackerman, pp. 43–44). Do not forget: this Trojan horse was not merely a spoonful of sugar to help the bitter medicine go down; it was a vehicle for a scam.
These new tax-avoidance loopholes were created specifically for special interest groups. For instance, the exemption from the windfall profit tax on oil allowed oil companies to save $3 billion annually starting in 1986. Summarizing the lobbying efforts by special interest groups to pass the tax cut legislation, David Stockman remarked: "Do you realize the greed that surfaced at the forefront of the economy? Selfish, sordid people were truly fattened up; the level of greed and opportunism was spiraling out of control" (Ackerman, p. 50).
The most significant tax break for corporations was accelerated depreciation; this was projected to cost the U.S. Treasury $53 billion annually by 1986, with the cost rising further in subsequent years.
The President's Economic Report effectively acknowledged that the cumulative effect of these tax breaks was not merely to prevent corporate profit margins from being eroded by a third due to corporate taxes, but actually to push after-tax profit margins above pre-tax rates of return. As one commentator put it: "We could all use that kind of encouragement" (Bowles et al., p. 185).
Margaret Thatcher, however, did not formulate a massive plan based on Reagan’s step-by-step approach to comprehensive tax cuts. Although her government repeatedly stated that its long-term goal was to drastically cut the basic rate of income tax, it sought to avoid announcing specific targets or a firm timetable.
Thatcher’s first administration did cut income taxes. In 1979, the basic rate of income tax was reduced from 33% to 30%, and personal allowances were raised by a margin that exceeded the cumulative inflation rate of the preceding four years by 5%. However, the capital gains tax rate rose from 8% to 15% in 1979, and the National Insurance levy was increased from 6.5% to 9% in three stages. The income tax rate on taxable income starting at £750 rose from 25% to 30%, and the average tax rate also increased.
The actual outcome of all these changes—much like the plan implemented by Reagan—was that most people ended up paying more in taxes. The total tax burden on an average wage earner rose from 44% in 1979 to 48% in 1983. Conversely, high-income earners ended up paying less; the top marginal income tax rate was cut from 84% to 60%. A company director earning £45,000 a year saw their weekly take-home pay increase by £120—a rise of one-quarter.
To date, the tax system changes on both sides of the Atlantic have effectively redistributed income from the less affluent to those sharing the same background as members of the two governments.
Thus, all the talk about tax cuts was merely a ruse to mask a massive redistribution of income from the poor to the rich. As J.K. Galbraith noted, advocating for "improved incentives"—which served to make the rich richer and the poor poorer—was the theory *du jour*. Broad-based tax cuts might have had a certain economic logic: trading tax reductions for wage restraint from workers. Workers' take-home pay would rise, while any gains from slower growth in labor costs would boost corporate competitiveness and profits. However, the politically plausible scenario of a major assault on the welfare state did not materialize in either the UK or the US. Massive tax cuts implied huge deficits, thereby undermining a tight fiscal policy stance; consequently, they were either not implemented or were offset—and more than compensated for—by increases in other forms of taxation. The contraction of the tax base caused by economic recession meant that the ratio of tax revenue to GDP actually rose. For instance, in the UK, the figure rose from 39% in 1979 to 43% in 1981.
Privatization and Deregulation
Both governments adopted a "hands-off" policy regarding business management. They believed that production decisions were best left to capitalists operating in an environment as free as possible from government interference. In the United States, this trend primarily took the form of "deregulation" of existing private sector activities. In the UK, the breakthrough came through shifting previously state-owned and state-controlled enterprises to private operation. The difference in emphasis between the two countries largely reflects the US preference for controlling private enterprises through regulations rather than nationalization (the electric power industry being a prime example).
"Don't just stand there—do something to loosen things up," said Murray Weidenbaum, a leading proponent of deregulation and the first chairman of President Reagan's Council of Economic Advisers. In 1981, the government dropped the legal requirement for automakers to install crash-protection airbags or other passive safety restraints in all vehicles. General Motors stated that this change would save the company $500,000 a day. If this figure holds true, US automakers would save approximately $1.5 billion over four years; however, the estimated costs associated with accidental deaths, medical expenses, and insurance premiums for consumers would reach $4.5 billion.
Supply-siders claimed that businesses were being hamstrung by a web of burdensome regulations—practices that were stifling innovation and investment while curtailing individual freedom. These regulations primarily targeted workplace safety, energy consumption, environmental pollution, and consumer health and safety. Weidenbaum described this area as a "new frontier of social regulation."
Naturally, these controls imposed costs on businesses—estimated at around $12 billion. Yet, they also yielded tangible benefits for the quality of life. Throughout the 1970s, the volume of harmful particulates released into the atmosphere was cut in half, while sulfur dioxide emissions dropped by one-sixth. Pollution per vehicle-mile fell by between one-third and one-half, allowing aquatic life to return to certain key bodies of water. Standard analyses of social welfare benefits indicate annual gains of $21 billion from the Clean Air Act and $12 billion from water pollution control; reduced fatalities due to improved automotive safety saved $6 billion, while fewer factory accidents resulted in savings of $10 billion. All these areas have been targeted for deregulation.
The energy industry is a particularly powerful lobbying group pushing for deregulation. The American Petroleum Institute, representing oil companies, has urgently called for the development of the nation's third-largest oil field, located on federal land. They assure the public that national parks, forests, and prairies would only benefit. Animals, it seems, are fond of oil companies: "Caribou and moose—along with their calves—can be seen grazing in fields within a few hundred yards of drilling rigs, or resting and grazing beneath sections of the elevated Trans-Alaska Pipeline, where the climate is warmer and the grass is lusher" (Ackerman, p. 131).
The government's zeal for deregulation appears boundless. In a 1980 report, James Miller III argued that avoiding downsides comes at a cost: those unwilling to take financial risks are likely to end up with cheap, unreliable products. "The imposition of quality standards by government agencies conflicts with the effective expression of consumer preferences" (Ackerman, p. 119). He was later appointed Chairman of the U.S. Federal Trade Commission.
During the first Thatcher administration, privatization primarily took two forms. One involved selling government assets—or the government's minority stakes in such assets—to the private sector. British Aerospace, Cable & Wireless, Amersham International, and Associated British Ports were fully privatized, with shares sold publicly on the stock exchange. The National Freight Corporation was sold to its "employees" (primarily management). The British Technology Group (formerly the National Research Development Corporation) sold off several high-tech companies—including Ferranti and International Computers Limited (ICL)—as well as shares in twenty-four other small enterprises. The largest cash transaction was the sale of shares in the British National Oil Corporation.
Subsidiaries of state-owned industries were also sold off. British Rail sold its hovercraft services, laundries, and hotels, as well as its stake in the "Wonderworld" theme park in Corby. British Gas floated 50 percent of its shares in the Wytch Farm oilfield on the market. The government... Government departments also put assets up for sale. These included the National Maritime Institute, eleven Royal Ordnance Factories, twenty-four highway service stations, a small hotel in North London, and a livestock breeding center.
State-owned buildings and land were also sold off. More than 400,000 local authority-built homes were sold at prices up to 50 percent below market value. Entire housing estates were sold to private developers, including a complex of 3,312 homes in Merseyside. Buildings and land belonging to the National Health Service (NHS) were likewise put up for sale.
Another major form of privatization involved hiring private contractors to perform tasks previously handled by state employees—essentially outsourcing work through contracts. Government departments, the NHS, and Conservative-controlled local authorities contracted out a wide range of services, from cleaning, refuse collection, laundry, sewer maintenance, and catering to security, typing, photocopying, vehicle maintenance, computer services, photography, design, and auditing. The Reagan administration took this practice a step further; it planned to hand over the management of a prison—slated for construction in Texas at a cost of $4 million—to the Corrections Corporation of America, with payment set at $23.50 per prisoner per day. The function of deregulation is quite simple: it allows capital to generate greater profits by legally dismantling monopolies. Massive social costs are deemed acceptable largely because the burden of these expenses does not fall on the corporations themselves. Such deregulation of the private sector signals that the government has effectively abandoned a key responsibility established in the post-war consensus: protecting workers from the hazards of excessive pollution, dangerous working conditions, and substandard products.
Privatization has more complex implications. While it opens up profitable avenues for private capital, its impact on the total financial resources available for private accumulation is negligible. During the years the government sold off state-owned assets—and in the period immediately following—privatization would certainly have reduced the government's debt burden if the enterprises had originally borrowed funds to finance investments exceeding their current profits. However, if private capital had lent to state-owned enterprises—or to private firms engaged in similar activities—privatization would have had little effect in this regard. Clearly, if the government sold assets at bargain prices, investors or speculators purchasing the shares would profit at the expense of taxpayers. Yet, if the government... If assets are sold at their actual market value, private investors merely shift from holding government bonds to holding equities of equivalent value.
If privatization boosts the profitability of these enterprises, it simply increases the total surplus available for private accumulation. The fear of dismissal by new owners may compel workers to accept lower wages or work under greater intensity—particularly when workers in the private sector, where unions are often weaker, replace those in the state sector, where unions are strong. While capital as a whole benefits from the increased profits, workers in the privatized industries pay the price. If privatization subjects enterprises to market pressures and prompts owners to cut unprofitable service divisions, total profits rise further—but this time, it is the consumers who bear the cost. In a scenario where capital is organized so efficiently that productivity gains require no extra effort from the workforce, the resulting increase in profits comes at the expense of workers losing their jobs. Given that state-sector workers had already secured favorable conditions—or that the enterprises' operations reflected broader social considerations—privatization serves, in this respect, as an assault on the rights workers had previously won.
Cracking Down on Unions
In October 1980, Ronald Reagan—a former star of the film *Bedtime for Bonzo* who would soon become the first U.S. president to have previously served as a union leader—wrote to the president of one of the few unions supporting his presidential campaign. He stated, "You can rest assured that if I am elected president, I will take whatever steps are necessary to provide your members with the most advanced equipment possible and to adjust staffing levels and work schedules so as to ensure the highest possible level of public safety.... I pledge to you that my administration will work hand in hand with you to achieve a spirit of cooperation between the President of the United States and your members" (Ackerman, p. 110). The union in question was the Professional Air Traffic Controllers Organization (PATCO). Ten months later, on August 3, 1981, Reagan ordered the firing of all 11,000 members of the organization, and the union's leaders were roughly hauled off to jail in handcuffs. A hardline stance against unions was a hallmark of Reagan’s approach. Robert Poli, the president of PATCO, should have paid closer attention to the candidate's speeches rather than the contents of his letters. On April 23, 1980, Reagan had remarked, "We should take a close look at whether unions ought to be subject to the same kind of restrictions that antitrust laws impose on businesses. Labor power has become so immense that they bargain with management on an industry-wide basis. I have been considering for some time whether they should be subject to the same limitations imposed on business and industry" (Ackerman, p. 101). Although Reagan never actually attempted to use antitrust laws against unions, nor did he propose repealing the minimum wage or other labor protection laws (despite constantly criticizing them publicly), he found other ways to penalize workers. The situation involving the air traffic controllers' union serves as a classic example. It dates back to the early 1970s, when the Federal Aviation Administration (FAA) had already identified poor morale in control towers. A 1978 expert report criticized harsh management practices (controllers rated their supervisors' restrictions on their freedom even more negatively than soldiers rated their officers). The report proposed a plan for "union-management cooperation to boost workplace vitality." The FAA adopted this plan, thereby averting a threatened strike.
Between 1978 and 1981, air traffic volume grew by 20 percent, yet there was no corresponding increase in controllers or equipment. Moving aircraft required bending regulations and risking lives. Such high-stress work exacted a heavy toll; controllers suffered from higher rates of ulcers than the general population, and many became alcoholics. Although retirement was possible after 25 years of service (or after 20 years for those over 50), only 11 percent served that long, with half leaving the profession due to health issues.
Reagan introduced two new measures into the FAA's strategy for handling the strike. One was immediate dismissal (Carter had also contemplated using the threat of firing), and the other was a crucial plan to curtail flights, thereby easing the pressure on air traffic control operations. This plan also helped major airlines reduce losses, as they were struggling with roughly 50 percent excess capacity and fierce price-cutting competition from other carriers following recent deregulation. After the strike failed, new air traffic controllers were required to sign agreements pledging not to participate in union actions.
The government's handling of the air traffic controllers' union posed a threat to workers in other public sectors. In the private sector, workers were forced to make significant concessions to management in the form of wage cuts, wage freezes, premature contract renegotiations, and relaxed labor regulations. The most substantial wage concessions occurred in the trucking industry in 1982: across-the-board wage increases were eliminated, and cost-of-living adjustments were made less frequent and smaller than in the past (covering only 70 percent of inflation). Auto workers accepted contracts that eliminated general wage increases and delayed cost-of-living adjustments (providing only 90 percent inflation protection). Significant changes to labor regulations were also accepted—developments that were perhaps even more far-reaching, as they accelerated a process of change already underway (see Chapter 17). *Business Week* reported numerous examples across the steel, auto, rail, meatpacking, rubber, airline, construction, and other industries where the scope of work was "expanded" through increased responsibilities and the consolidation of tasks, and where management gained greater flexibility regarding work schedules and staffing levels following the adoption of new technologies. One observer commented: "You could go back to any recession and find examples of unionized firms aggressively seeking control over labor, but you would have to go back to the Great Depression of the 1930s to find as many instances of such efforts as we are seeing now" (*Business Week*, May 16, 1983).
Thatcher’s approach to public-sector unions during her first two years in office differed sharply from Reagan’s handling of the air traffic controllers' union. In 1979–1980, she approved a series of substantial wage settlements—a continuation of practices established by the previous Labour government. As late as 1981, some of the more powerful public sector unions achieved significant successes: miners and water workers secured a 9% pay rise, firefighters 10%, and local government employees 7.5%. It was not until 1982–1983 that the government was sufficiently prepared to weather a water workers' strike and two railway workers' strikes without major disruption. Despite setting a target to cut the civil service workforce by 15% between 1976 and 1984, Thatcher managed to shed hardly any redundant administrative staff during the first 18 months. Early privatization efforts focused primarily on companies where union opposition was likely to be minimal—most notably the British National Oil Corporation, British Aerospace, and British Telecom. Enterprises slated for privatization that were expected to trigger fierce resistance—such as British Airways and British Telecom—were initially shelved. It is immediately apparent that this approach was inconsistent with the government's overall radical strategy.
The explanation for this situation lies in the desire to avoid a united front of public and private sector unions against the government. Between 1970 and 1974, such joint union action had opposed the policies of the Conservative government led by Edward Heath, ultimately contributing to its downfall. Since then, public sector unions had grown in strength and spearheaded the wave of strikes during the "Winter of Discontent" (1978–1979). Consequently, a cautious approach toward public sector unions was deemed necessary until unemployment had weakened private sector unions enough to prevent them from providing effective support to their counterparts in the public sector—a point that had not yet been reached prior to 1982.
The lessons learned from the Heath administration also shaped the strategy adopted toward private sector unions. Their strategy focused on using legislation to curb trade union power, shifting authority from the factory floor to the state, and allowing employers to sue unions in court for violating the new restrictions. Employers were generally reluctant to utilize these legislative measures; indeed, even towards the end of the Heath administration, the head of the Confederation of British Industry—the employers' federation—explicitly condemned this approach. On the rare occasions when such legal avenues were pursued, unions often refused to comply with court rulings, forcing the government to back down.
Margaret Thatcher drew two key conclusions from Heath’s disastrous failure. First, she recognized that legislation had only a limited role to play as a weapon for regulating industrial relations. Consequently, she decided against major legal reforms until other methods had been used to weaken the unions; in other words, she viewed anti-union legislation primarily as a supporting measure—to be deployed alongside other tactics to shift the balance of power between labor and management—rather than as the initial instrument for achieving that shift.
The Employment Acts of 1980 and 1982 were more moderate than Heath’s Industrial Relations Act. The first of these acts provided funding for secret ballots regarding strikes and union elections, though the decision to utilize this mechanism remained with the unions. It limited the number of pickets allowed during a strike to six and removed immunity from civil litigation for several categories of minor industrial actions. Finally, the first act made it illegal to dismiss a worker for union membership—or for refusing to join a union—in factories where a specific union held exclusive bargaining rights; furthermore, for new factories to establish such exclusive union arrangements, that union was required to represent more than 80 percent of the workforce. The second Employment Act defined the scope of industrial disputes—excluding inter-union and political conflicts—and held unions liable for the unlawful actions of their representatives unless those actions were clearly unrelated to union business. The Act also outlawed "closed-shop" agreements (contracts requiring employment of only union members) and mandated compensation for workers dismissed for failing to join a specific union; however, it made little headway on major issues such as declaring closed-shop workplaces illegal, outlawing unofficial strikes, or making collective bargaining agreements legally binding.
Summarizing the lessons learned from the Heath administration, Employment Secretary James Prior stated: "The Conservative Party has no intention of getting itself into a position where it enacts laws at the behest of employers only to fail to enforce them... It would be a grave error to take action now that merely unites the unions against a Conservative government" (*Business Week*, April 16, 1979).
The subsequent "softly, softly" strategy proved highly effective in fracturing the trade union movement. Shortly after the 1983 general election, a small employer sued the print union—the National Graphical Association (NGA)—after its members took action to prevent the company from operating a closed-shop arrangement. Following an exceptionally tough police response to the large number of pickets deployed by the union, the courts imposed fines totaling over £500,000 on the NGA and ordered the freezing of all its assets. The Trades Union Congress (TUC) was then faced with the question of whether to fully back the union in its struggle against the government... The union leadership hastily decided to support the struggle, but the courts disregarded the move, prompting the leadership to agree to back only lawful actions. This effectively stripped the National Society of Operative Printers and Assistants (NATSOPA) of any means it might have used to secure a strike victory. It was a major victory for the government. However, legal measures played only a supporting role in the government's primary strategy. To transform labor-management relations in the private sector, the government adopted a "double-edged sword" strategy. Its main targets were large-scale industrial plants—specifically those where plant-level union organization was strongest and where employers had previously made the most significant concessions regarding work procedures and operational standards.
One edge of this sword was compulsory discipline. Leveraging its position as the majority shareholder in British Leyland, the government sought to demonstrate that a tough, new style of management could succeed even in a stronghold of powerful plant-level unionism, such as the automotive industry. An observer summarized the situation as follows: The government declared that continued financial subsidies were contingent upon achieving satisfactory results in reducing losses. British Leyland management aimed to unilaterally control the shop floor in order to reduce overstaffing—affecting both skilled and unskilled workers—and to introduce labor-saving machinery, particularly for welding and painting processes. Their approach involved communicating work requirements directly to shop-floor workers, threatening dismissal for those who struck, and warning that the plant would close if government subsidies were withdrawn. They also threatened to recruit replacement workers from the general labor pool if the unions called a strike. In February and April 1980, the Transport and General Workers' Union (TGWU) and the Amalgamated Union of Engineering Workers (AUEW)—the latter with little enthusiasm—called for strikes, but the majority of workers rejected the calls. "Since then, management has consistently implemented a system of unilateral control (albeit with some variations across factories). The result has been a blurring of occupational boundaries for skilled workers and an intensification of labor on the assembly lines—most notably through the massive reduction of redundant semi-skilled and unskilled workers" (Soskice, 1984, p. 26).
The other side of this sword was severe deflation, which forced managers—who might otherwise have been willing to negotiate "gentlemen's agreements" with factory unions—to follow the Leyland model and engage in direct confrontation with the workforce.
All attempts to clash with unions, bypass them, undermine their legitimacy, or weaken their organizations through mass layoffs converged on a single objective: implementing a strategy that fundamentally altered the parameters of the prevailing collective consciousness. The right of free trade unions to effectively exercise representation was itself a key component of that original collective consciousness. However, because powerful unions had always served as the guardians of other aspects of that consciousness—namely job security and welfare benefits—the significance of weakening them became more widely recognized.
Are the Policies Working?
It is too early to make a definitive assessment of Thatcherism and Reaganomics. However, several points can be noted:
First, the benefits to profit margins derived from drastic deflationary measures appear to have been merely short-term. In 1981, productivity in British manufacturing did indeed rise by a remarkable 10 percent; yet this merely offset the decline experienced during the recession just months earlier, when output had fallen so rapidly that firms could not lay off workers fast enough. Viewed as a whole, the first Thatcher administration saw manufacturing productivity grow at an annual rate of 3.1 percent—higher than the 1.4 percent annual rate under the preceding Labour government—but this was not the result of massive investment or the rapid introduction of new technology. In 1982, for the first time in the postwar era, new investment in British manufacturing fell below the level of routine equipment scrapping. Consequently, the fixed capital stock declined; if one accounts for the additional scrapping caused by forced rationalization during the recession, the magnitude of this decline was substantial.
Thus, productivity gains were achieved primarily through the rationalization of inefficient sectors and the implementation of schemes to intensify work and reorganize production. A few companies—most notably British Steel and British Leyland—claimed significant results; they leveraged state ownership to great effect by threatening to close plants unless workers accepted management's plans. After four years of the "Thatcher experiment," it remains unclear whether these cases heralded a more widespread trend. Some productivity gains stemmed simply from improvements that allowed for more intensive utilization of existing production capacity. A 1981 survey indicated that firms could increase output by 10 percent by hiring only 20 percent more workers. Between 1979 and 1982, a period marked by declining output, real industrial profits fell by 19 percent. The trend reversed in 1983; as output grew slightly, profits rose at three times the rate of wage growth. Nevertheless, profit margins remained below the levels seen in the 1960s.
In 1983, U.S. production staged a significant recovery, driven by increases in inventories and consumer spending. During the first three quarters, the pace of profit recovery was roughly double the historical average; this reflected sluggish wage growth and the cost-cutting efforts many firms had undertaken during the preceding four difficult years (Morgan Guaranty Trust Company report, November 1983, p. 6). Productivity grew by approximately 3 percent in 1983—reflecting "cost reductions" following the stagnation of the 1970s—in response to rising imports, deregulation, and the economic recession (ibid., p. 11). However, the rise in profit margins in 1983 merely reversed the previous year's decline, and productivity levels remained far from high; this raised doubts about whether corporate investment would surge sufficiently to sustain the momentum of the recovery in output and productivity.
A key aspect of the implementation of "Reaganomics" stood in stark contrast to the austerity policies fervently championed by Margaret Thatcher. While governments in other advanced capitalist nations were busy cutting aggregate public spending and raising taxes, Reagan pursued supply-side policies that slashed taxes for high-income earners and increased military spending; consequently, government expenditure aimed at stimulating the U.S. economy between 1982 and 1984 amounted to 2.1 percent of GDP. The US government deficit has risen from negligible levels in the late 1970s to the average for advanced capitalist nations—namely, 4 percent of GDP—with further increases anticipated. The Federal Reserve, fiscally controlled by conservative bankers, was compelled to step in and curb expansion; it aggressively restricted credit and maintained real interest rates at unprecedentedly high levels. Given the inability to strictly prevent capital flight, other nations had no choice but to raise their own interest rates in tandem. Consequently, while exports from other advanced capitalist nations benefited from the strong dollar, high interest rates served as a convenient explanation for the sluggish economic recovery in other regions.
Finally, it is crucial to understand what constitutes "success." It is not defined by the criteria typically cited by politicians and financial commentators. Inflation is not the fundamental issue, nor is the marginal recovery driven largely by inventory accumulation, housing loans, and consumer credit particularly relevant. True success lies in the re-establishment of conditions conducive to profitable production and sustained capital accumulation—conditions that include dealing a severe blow to the labor movement, sufficient to prevent it from mounting an effective counterattack during periods of rising accumulation and substantial economic improvement.
