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A New Left-Wing Scam

Guardian’s Distorted Image of Thatcherism

Thatcher leaving office on 28 November 1990. Photo: Richard Baker.

Thatcherism was about individual freedom, protected by a strong state...

In the Guardian on 5 August 2021, columnist Aditya Chakrabortty asserts that ‘Thatcherism is the big Tory scam that distorts our politics’. His main evidence is a piece in the left-wing Cambridge Journal of Economics last year where the message was that Thatcher did not accomplish what she set out to do. Chakrabortty quotes two figures from the piece: ‘The total value of central government receipts was 30.4% of GDP in 1979; by 1990, this proportion had risen to 30.9%.’ On the face of it, however, these figures show that Thatcher did indeed accomplish what she set out to do which was to halt the advance of socialism: there is no practical difference between 30.4 per cent and 30.9 per cent. Under Thatcher, even according to those hostile critics, government did not grow, as it had previously done for decades in the United Kingdom. This was a major accomplishment.

Enlargement of the Tax Base Not a Tax Increase

There is more to the story. Chakrabortty ignores the fact that figures on tax revenue have to be put into the right context. Paradoxically, tax receipts as a proportion of GDP may increase although the tax rate stays the same and sometimes also even if it is lowered. This happens when income increases and a larger proportion of it is consequently subject to taxation. This can clearly be seen from two thought experiments. Consider a company which operates at zero profit and which therefore pays no corporate income tax. Now the economy suddenly enters a boom period and the company starts to make a profit and therefore has to pay corporate income tax. Other things being equal, this means that the total value of central government receipts as a proportion of GDP will increase. Consider again a low-income person who only pays tax on half of his income, the other half being the standard deduction allowed. Now, because the economy has entered a boom period, demand for his services increases with the result that his income increases by a third. Other things being equal, this individual will consequently pay tax on two thirds of his income. Again, this means that the total value of central government receipts as a proportion of GDP will increase.

Note that this increase in the total value of central government receipts as a proportion of GDP will happen without any increase of the tax rate. Under most tax regimes, there is thus an in-built tendency for the total value of government receipts as a proportion of GDP to increase during an upswing, and a corresponding tendency for it to decrease during a downturn. Note also that something similar may happen when the tax rate is lowered. This may stimulate the economy and produce a boom, with the result that the total value of government receipts as a proportion of GDP will actually increase, despite the fact that the tax rate had been lowered. A small portion of a big cake may be larger than a large portion of a small cake. In the long run, it is the size of the tax base which matters. This is no idle speculation. In 1997, for example, the Swiss and Swedish governments received roughly the same tax revenue per capita, around $1,000. But the tax rate was more than 60 per cent in Sweden, and only 30 per cent in Switzerland. I chose this example because Switzerland and Sweden are quite comparable in many ways and because the numbers are so striking and memorable. But generally speaking, the tax base is everywhere sensitive not only to the short-term state of the economy, but also to the long-term tax rate.

Thatcher Reversed the Decline of Great Britain

The latter half of Thatcher’s period in office saw quite a decent rate of economic growth which means, given the considerations above, that not only was the growth of government halted under Thatcher—no mean accomplishment in itself—but that actually government shrank relative to the economy. A part of the increase in the total value of central government receipts, quoted by Chakrabortty, was just a statistical phenomenon, brought about by the in-built tendency of the tax base to expand during upswings and to contract during downturns. After all, Thatcher had in 1979 lowered the marginal income tax from 83 to 60 per cent, and in 1987 she lowered it to 40 per cent, whereas she raised the VAT from 8 to 15 per cent. The idea was to tax spending rather than production. She obtained the desired result, to stimulate wealth creation, not by throwing money at the economy, but by imposing the discipline of profit and loss on it. It is true, as the authors of the piece in the Cambridge Journal of Economics emphasise, that Great Britain had seen higher rates of economic growth in some other post-war periods. But of course the economy grew quickly after the war when it was simply recovering. Some of the total output measured before 1979 was also illusory, such as that produced by loss-making coal mines and steel plants. Such entities enter into statistical aggregates, but they do not contribute anything to consumer satisfaction.  

What is crucial is that Thatcher reversed Great Britain’s economic decline relative to the other major industrial powers in the West. Her country saw sustained economic growth from 1982 to 2008 (with the exception of two years). In this period the economy grew faster and performed better than comparable economies, those of the United States, Germany, and France. Thatcher confronted a dire situation when she formed her first government in 1979. The trade unions had become states within the state, bringing down Conservative governments, exerting almost total control over the Labour Party and fighting fiercely against all efforts to increase productivity, such as closing down inefficient enterprises and introducing labour-saving technologies. For a while, a three-day working week had even been implemented to save energy, and the United Kingdom had in 1976 been forced to seek a huge emergency loan from the International Monetary Fund. Everybody knew that this could not go on, but nobody, except for Thatcher and her tiny group of followers, had the courage, proficiency and determination to change course.

Thatcher Practised Frugality

Chakrabortty admits that government spending went down somewhat under Thatcher. ‘Over her first four years in No 10, only a few programmes got cut, most notably foreign aid, even while she shovelled cash into domestic policing and an overseas war.’ Chakrabortty could not have chosen a better target for frugality than development aid. It is a complete misnomer. The choice is between development without aid as in Hong Kong and the other Asian Tigers and aid without development as in Tanzania, Cape Verde and many other African countries, as William Easterly, Arvind Panagariya and others have amply demonstrated. The only effective help the affluent West can give to developing nations is to maintain free trade with them in which they can use their comparative advantage. Note also that Chakrabortty speaks about ‘an overseas war’ when he is obviously referring to the Falklands War. While there is a grain of truth in the remark by Jorge Luis Borges that the Falklands War was about two bald men fighting over a comb, it should be recalled that it was not Thatcher who started the war. The Falkland Islands were attacked by a cruel and corrupt military junta in Argentina who wanted glory on the cheap. Did Chakrabortty not want to resist them?

Perhaps Thatcherism could be defined as the support for a free economy alongside a strong state. But it would be more accurate, I think, to characterise it by four main principles: free trade, private property, the rule of law, and respect for traditions. Indeed, the rule of law requires a strong state, national defence and the maintenance of law and order. But it also requires limited government, political constraints, checks and balances.

Competitive Economy Not a Zero-Sum Game

For Chakrabortty, Thatcherism is not about these four principles. It is about the deliberate transfer of money and power from the poor to the rich, and from the trade unions—which Thatcher ‘broke’ according to him—to large corporations. He seems to regard the economy as a zero-sum game where more for some will invariable mean less for others. One man’s gain is another man’s loss. But this is not what a free and competitive economy is about. It is true that during the Thatcher years the rich became richer, but the poor also became richer. Probably the gap between the richest group and the poorest group (however arbitrarily defined) widened, but this was because the income ladder was extended upwards. Moreover, now a much higher proportion of the rich in Great Britain than before Thatcher have made their wealth instead of inheriting it. Each year, the Sunday Times compiles a list of the 1,000 richest people in the United Kingdom. Recent results are noteworthy. ‘Britain has been transformed into a country  where the self-made can succeed,’ journalist Robert Watts wrote about the 2018 list, ‘with almost all the 1,000 richest people now entrepreneurs who built their own fortunes. Inherited wealth and old money have been all but banished from the 30th annual Sunday Times Rich List. When the Rich List was first published in 1989 just 43% of the entries had made their money themselves and the surest way to a fortune was to be a landowner — preferably with a title. Today 94% of those in the Rich List are self-made entrepreneurs behind some of Britain’s game-changing businesses.’

In a sense however Thatcherism implied a transfer of power. It was the transfer of power from large, obscure, non-transparent monopolies like trade unions and large public corporations to consumers and taxpayers. Nevertheless, a lot of power remains in the hands of the teachers, social workers and mid-level bureaucrats who form the core of Guardian readers. They are zealously trying to preserve this power against what they perceive as the threat of increased consumer choice. To further their aims and interests, they try to present a distorted image of Thatcherism. Theirs is a left-wing scam. Chakrabortty and his colleagues at the Guardian surely know what they are doing.

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