I had the good fortune to spend some time with Margaret Thatcher when i was
in the Reagan administration. I wrote to following piece for project
syndicate in early 2010 but thought you and others might like to read it
now.
Marty
Project Syndicate
Page 1 of 2
Is the Reagan-Thatcher Revolution Over? January 2010
By MARTIN FELDSTEIN
CAMBRIDGE Thirty years ago Ronald Reagan and Margaret Thatcher brought
about a revolution in thinking and policy in both economics and foreign
affairs. The economies of the United States and Britain are today
fundamentally different because of what they did. The collapse of communism
in Eastern Europe and the former Soviet Union is also the result of their
policies.
Of course, Reagan and Thatcher have always had their critics, some of whom
now believe that the world economy will revert to pre-Reagan and
pre-Thatcher policies. But anyone who recalls what the American and British
economies were like before Reagan and Thatcher, and who knows the changes
that they introduced, must also recognize that the world cannot go back.
I had the good fortune to work with President Reagan as his chief economic
adviser. Because of his close relationship with Prime Minister Thatcher, I
also had several opportunities to meet with her. They were revolutionaries
in their thinking and in their ability to inspire others to accept
fundamental change.
Reagan had four key economic goals when he assumed office in 1981: reduce
inflation, reduce high personal tax rates, reduce the size of government,
and reduce regulation of the private sector.
Inflation came down rapidly, from more than 10% in 1981 to less than 4% in
1983, because Reagan backed the tough monetary policies of US Federal
Reserve Chairman Paul Volcker. Today an inflation rate of close to zero is
the accepted goal of US policy.
Reagans tax policies reduced the top income-tax rate from 70% in 1980 to
28% in 1986. Although the top rate has climbed back to near 40%, no one
proposes a return to pre-Reagan levels.
Although Reagan could not bring down spending on entitlement programs for
retirees, Americas non-defense discretionary spending was reduced by
one-third, from 4.7% of GDP in the 1980 to 3.1% in 1988. It stood at 3.4%
in 2008.
Finally, regulations were reduced in a wide range of industries, including
air transport and the financial sector. While some restrictions on banks
will be imposed in the wake of the financial crisis, we will not see a
return to severe regulatory constraints on banks activities.
Reagan characterized the Soviet Union as an evil empire and increased
defense spending to challenge Soviet aggression and capabilities. The
collapse of the Soviet Union and of communism were, in part, dramatic
responses to US policies and to the inability of the Soviet economy to keep
up with the West. There will be no going back here as well.
When Margaret Thatcher became prime minister of Britain in 1979, she faced
an economy with much more fundamental problems than those in the US.
Britain was a much more socialized economy, with widespread government
ownership and dominant trade unions. She privatized the major
government-owned industries and sold government-owned housing to tenants.
No one is proposing to renationalize industries or to take back that
housing. Trade union power was permanently broken after long and painful
national strikes.
The top tax rate on wage income was cut in half during her tenure as prime
minister, falling from over 80% when she took office to 40%. Additional
taxes on investment income meant the top tax rate before Thatcher came to
power was initially above 95%. Although the top rate of income tax in
Britain was recently raised to 50%, there is no thought of going back to
pre-Thatcher taxes.
Faced with high inflation, Thatcher backed a monetarist approach that
supported high interest rates and succeeded in sharply reducing inflation.
Today Britain has an independent central bank with an inflation target of
2%.
Thatcher supported Britains entry into the European Union in order to
benefit from free trade, but she forcefully opposed joining the single
currency. The Labour government that followed her continued the policy of
remaining outside the euro zone, as will the Conservatives, who are likely
to return to power under David Cameron in the spring of 2010.
Financial deregulation made London a global financial center. Some of those
regulatory changes may be reversed, but Britain is unlikely to jeopardize
an important component of its economy by returning to pre-Thatcher
financial rules.
Indeed, there are no prospects of counter-revolution in Britain. Both Tony
Blair and Gordon Brown, who headed Labour governments after almost two
decades of Conservative rule, have been the face of market-friendly New
Labour, and it is now the only face that the Labour Party has.
Policies do evolve as conditions change and as we learn from experience.
But the dramatic policy changes in the US and Britain under Ronald Reagan
and Margaret Thatcher brought about such profound improvements that there
is no going back.
Martin Feldstein, a professor of economics at Harvard, was formerly
Chairman of President Ronald Reagans Council of Economic Advisors and
President of the National Bureau for Economic Research.
Copyright: Project Syndicate, 2010. www.project-syndicate.org
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file://I:\feldstein\projectsyndicatejan2010.html 1/19/2010
Received on Mon Apr 15 2013 - 04:55:31 EDT
