Margaret Thatcher’s passing led many around the world to reflect on her legacy. In the United Kingdom, reactions ranged from fond remembrances by supporters to street protests by detractors. In America, Republicans have lionized her, highlighting her strong ideological bond with Ronald Reagan. But today’s GOP seems to have strayed very far from the Reagan-Thatcher vision. This is especially true in the fields of financial and fiscal policy.
As an entrepreneur’s daughter, Thatcher understood the key role of finance in starting and growing small businesses and that an economy needs freedom to thrive. She lifted capital controls on the pound sterling, which allowed businesses to invest where they pleased and to access international credit markets.
Thatcher privatized public housing, putting homeownership within reach for those of modest means. The collateral from homeownership opened new financing options that gave ordinary working people the opportunity to become entrepreneurs — one of which many working Britons took advantage.
During Thatcher’s tenure, the United Kingdom had the highest growth in new businesses of any major European country. By the time she left Downing Street in 1990, the UK had gone from the bottom third to the top third of European countries in the ratio of self-employed to working population.
She democratized the City of London’s financial industry, which was previously an aristocratic club open only to the wealthy, catalyzing the city’s growth into one of the world’s leading financial centers.
Thatcher’s critics denounced her reforms as radical at the time. They were in the sense Britain’s economy, if it was to recover from decades of stagnation, needed strong medicine in the form of widespread liberalization.
In America, on the other hand, when the financial crisis hit in 2008, the last Republican administration and its allies in Congress reacted with interventionist policies that only made things worse. Bush administration officials spent much of their last days in office lobbying Congress to pass the Troubled Assets Relief Program (TARP), which initially directed $700 billion to troubled banks considered “too big to fail.”
Republicans also went along with the 2010 Dodd-Frank bill. Rushed through Congress in the wake of the financial crisis, Dodd-Frank put community banks, which often finance small businesses, at a significant competitive disadvantage. It also essentially codified the too-big-to-fail doctrine that worsened the crisis by deeming politically connected firms as “systemically important,” and thus likely recipients of taxpayer bailouts should the need arise.
Then there’s fiscal policy. By the time Thatcher entered 10 Downing Street, several rounds of Keynesian demand stimulus during the 1960s and 1970s had saddled Britain with runaway inflation. Workers, upset their wages were purchasing less and less each week, engaged in rampant strikes. Thatcher had the courage to stand up to the then-reigning Keynesian consensus by shutting off the stimulus spigot — with positive results.
Thatcher lowered tax rates, which allowed the economy to grow much larger, resulting in a broader tax base and more tax revenue. By 1990, government spending relative to the size of the economy had fallen by 10 percent from its 1979 level. She balanced the budget by cutting taxes and curbing the growth of spending.
By contrast, President George W. Bush engaged in two failed rounds of fiscal stimulus in 2001 and 2003. The first was a tax cut without any accompanying spending cuts; the second literally involved mailing out checks to private citizens. Republicans reliably oppose tax increases and often propose tax cuts, but their record on spending is nearly indistinguishable from that of Democrats. The recent sequestration debate involved fights over three percentage points in budget cuts. And all government spending, after all, must be paid for by tax revenues.
In pursuing what she described as an “enterprise society,” Thatcher revolutionized politics on both the right and the left. In fact, her policies were so popular with the working class its support for the Conservative Party was 51 percent higher than normal during her term, according to our calculations of polling data. Thatcher’s restoration of the Conservative Party as a credible alternative to Labour gave Tony Blair no choice but to re-brand Labour into the more market-oriented “New Labour” to win national elections again.
What can today’s Republicans learn from comparing Thatcher’s legacy with their own? The GOP’s failure to match tax cuts with spending cuts hasn’t worked — in the economy or at the ballot box. A better approach to encourage entrepreneurship would be to make real spending cuts, lighten regulation to free up access to credit, and restore government finances through a simpler tax code instead of higher rates.
The legacies of Margaret Thatcher and Ronald Reagan may not be perfect, but they provide a far better roadmap back to prosperity than the one Republicans are currently pursuing. Fortunately, they have a chance to rediscover them.
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