Directly following the London-based Independent’s special section Wednesday on Margaret Thatcher’s death came this headline: “Strip me of my knighthood and please accept my apology,” the plea of a former financial-industry honcho whose bank collapsed in 2008. The two events, believe it or not, are related. Prime Minister Thatcher’s 1980s economic reforms did not directly cause the 2008 financial and economic meltdown, of course. But Britain’s current conservative leaders can learn from Thatcher’s example. They should apply to Britain’s bloated, state-coddled financial sector the same free-market prescriptions that Mrs. Thatcher—as the Brits still call her, despite her later titles—applied to Britain’s bloated, state-coddled industrial sectors three decades ago.
Thatcher is famous for many things, including waging the 1982 Falklands War and breaking the coal miners’ strike of 1984 and 1985. Britain’s political Left and some of what remains of its postwar working class detest her for her reaction to the strike, and it’s clear why the miners fought so hard: parts of Britain’s north have never recovered their industrial-era might. By the late 1970s, though, Britain’s “mixed-economy” system, the legacy of World War II, was no longer working. The government’s ownership of major industries, from gas to telecom, was suffocating the private economy. One real-estate entrepreneur, David Young, “had to go out of his way to avoid letting people know he was an entrepreneur,” Daniel Yergin writes in The Commanding Heights: The Battle for the World Economy. As Young told Yergin, “It was not socially acceptable to work for oneself. People worked for big”—that is, state-owned—companies. By the late 1970s, Yergin continues, “the loss-making nationalized industries were demonstrating a voracious appetite for taxpayer funds. . . . Labor relations had turned into constant warfare,” with strikes “chronically disrupting society and the economy.” Just after her 1979 election, Thatcher wisely demurred on her first opportunity to take on the powerful National Union of Mineworkers, because their ability to cut off coal supplies to power plants could shut down the entire economy.
A half-decade later, Thatcher’s privatization program was selling off to private buyers everything from British Airways to British Gas to British Telecom. This wasn’t some evil idea she had thought up in a vacuum. Successful Western nations were already making such moves. America, though it had not owned its own domestic industries, had previously regulated them so closely that it might as well have; now, America had either deregulated or was deregulating everything from oil to airlines to AT&T. (You won’t find many on the British Left who want to go back to the days when it could take months to get a telephone line.) As Thatcher’s economic guru, Sir Keith Joseph, often put it: Britain could continue to live in fear of thirties-era unemployment levels, with a stagnant economy increasingly resembling that of an Eastern European nation, or it could make changes. But privatization wouldn’t succeed unless the government prevented powerful trade unions from strangling the economy.
The place to take such a stand was the coal mines. “The coal industry, nationalized in 1947, was losing money at a horrendous rate; the government subsidy had risen to $1.3 billion a year,” Yergin writes. But the way the miners saw it, “mine pits could not be closed . . . no matter how large the losses.” What could be more symbolic than weakening a union whose leaders thought they were entitled to shut off the entire country’s power supply by withholding its raw material? Anyone who has ever lived through an urban subway strike understands why Thatcher had to prevail, even if brutally.
Thatcher transformed another industry in 1986, when her government deregulated finance. Prior to the “Big Bang,” investment brokers worked on fixed commissions, and investment firms that bought and sold securities for their own profit-making couldn’t compete with firms that bought and sold securities for their customers. Nobody had to compete much for business. Thatcher changed that by abolishing fixed prices and letting investment firms pursue their competitors’ businesses. Here, too, she didn’t act in a vacuum: America had begun to take similar steps a decade earlier, and big American investment firms were gaining ground in global markets. After the Big Bang, London’s financial sector soared, not just domestically, but internationally. Ever more complex finance drove London’s growth until 2008.
Many British observers, and not just those on the left, have blamed Thatcher for the 2008 crisis. They suggest that her policies killed manufacturing and made Britain dependent on a crisis-prone financial industry. But British manufacturing still exists, though it is more productive and requires fewer workers. The nation’s smaller clump of operating coal mines employs a fraction of the people that the same level of production would have demanded back then. As for finance, if London had a choice, would it give up the extraordinary growth it saw from the eighties onward to avert the 2008 disaster? Without financial deregulation, London would have lost out to New York and other global competitors.
So was deregulating finance a good idea? In truth, it’s too early to tell, because the answer depends on future actions. Since 2008, the British government—first under Labor prime minister Gordon Brown and now under Conservative David Cameron and his chancellor of the exchequer, George Osborne—has taken a statist, pre-1980s approach to finance. Five years ago, Brown nationalized Britain’s two biggest banks, Royal Bank of Scotland and Lloyds, to prevent their bankruptcy and failure. The government has no immediate plans to reprivatize them. Sir James Crosby, the aforementioned banker who made headlines for trying to become the first Briton voluntarily to relinquish knighthood, worked at HBOS, a smaller financial institution that Lloyds, under government pressure, purchased in 2008. That acquisition eventually forced Lloyds to seek a government bailout.
Since taking over in 2010, Cameron and Osborne have treated the powerful financial industry the way pre-Thatcher governments treated the powerful trade unions. The government says nasty things about bankers like Crosby, but it doesn’t want to change anything to harm such a big source of employment. Nor does the government want to upset an economy still based on the banks’ unsustainable borrowing and lending. Osborne’s latest economic idea, “Help to Buy,” would use the British government’s credit to guarantee billions of pounds’ worth of mortgage lending to keep home prices from falling further and eroding middle-class wealth.
People who see Thatcher as championing banks over miners miss the point: Thatcher wanted free markets to determine which industries would do well and which wouldn’t. What worked in her time may not work now; only markets can give us the answer. For five years now, markets have been trying to say that finance remains too big, and that finance-created debt is keeping home prices and other asset values too high. Statist distortions retard economic recovery rather than speeding it up.
Just as throwing more money at miners 30 years ago would have made some powerful interests happy in the short term while hurting the nation in the long term, throwing more money at finance and household-debt creation buys some peace today at the cost of growth tomorrow. If Thatcher was brave enough to force coal miners to lose their good jobs, can’t Cameron and Osborne be brave enough to tell middle-class Britons that their home values are artificially inflated? Britain’s current generation of purportedly free-market politicians should ask themselves: would Margaret Thatcher have used state power to prop up a financial industry that needs its own dose of Iron Lady discipline?