L1102 Lecture 7:

Thatcherism

Nick Crafts
 The Post-War ‘Consensus’
• Can be interpreted as a concept of the set of
policies regarded as feasible by senior
politicians and civil servants in the context of
political constraints (Kavanagh & Morris, 1994)

• Implies a high degree of policy convergence but

did not connote ideological convergence (Hickson,
2004)

• Precluded some policies later embraced by

Thatcher governments (e.g., privatization,
industrial relations reform, reducing B/W)
 The Thatcher Experiment (1)
• At the end of the 1970s after a long period of
persistent relative economic decline and the
‘post-war consensus’ was challenged
• Supply-side policy was reformed quite
considerably along lines of making LME perform
better (not trying to become CME)
• The UK’s relative growth performance improved
thereafter as other countries slowed down more
 The Thatcher Experiment (2)
• Defied conventional wisdom on political
consequences of abandoning ‘post-war consensus’

• Was rescued by Falklands War and Labour Party splits

• Evolution and full impacts not realized ex-ante

• A big success was Tony Blair!

• Overall verdict depends on value judgments because

both efficiency and equity implications
1980s’ Supply-Side Policy
• From selective to horizontal industrial
policies
• Strengthening of competition
• Industrial relations reforms
• Privatization promoted
• Taxation restructured
• Benefit/wage ratios reduced
 Changes in Taxation
• Income tax: top rate down to 40%, standard
rate to 25% by 1988

• VAT: standard rate rose from 8% to 15% in

1979 and to 17.5% in 1991 but base stayed
narrow

• Corporate tax: headline rate fell from 52% in

1979 to 33% by 1991 but EMTR rose from
minus 31.4% to 28% (King & Robson, 1993)
 Privatization and Productivity
Performance
• Performance of nationalized industries in 1970s
generally agreed to be poor (Vickers & Yarrow, 1988)
• TFP growth raised by the privatization process
not by private ownership per se (Green & Haskel,
2004)

• Overall picture is dominated by levels effect of

eliminating inefficiency
• Regulation has proved more problematic than
the RPI – X enthusiasts supposed
 Trade Union Reform, 1980-93
• 8 major legislative measures changed legal
status of trade unions in stages; ended tradition
of ‘voluntarism’ and shifted TRW

• Changes included compulsory strike ballots,

banning secondary picketing, mandatory union
recognition and the closed shop and made trade
unions liable to legal action if did not comply

• Reduced trade union bargaining power but

lower rents to be shared
Structure of Industrial Relations
1906 1935 1955 1972 1998

TU Density 18 30 41 46 19
(% private sector)
Trade Unions 1282 1049 704 454 224

Collective Bargaining 15 36 55 70 42
(%)
Modal Form Multi Multi Multi Multi Single

Source: Gospel (2005)

 From Industrial to Competition
Policy
• Trade policy liberalized through EU
membership and GATT rounds
• Subsidies largely withdrawn
• De-regulation
• Competition policy belatedly strengthened
through 1998 and 2002 Acts
• NB: before, during and after Thatcher
 EU Entry: Impact on UK GDP
• Based on gravity model in Baier et al. (2008),
UK trade with EU members rose by 33.0% and
total UK trade increased by 17.1%

• Using lower-bound elasticity of impact of more

trade on real GDP in Feyrer (2009), increase in
Y/P = 8.6% (similar methodology to HMT, 2003)

NB: synthetic counterfactuals method gives similar

result (Campos et al., 2018)
 Context of UK Entry
• Joining EU in 1973 came after a long period of
protectionism and relative economic decline

• Entry was an important part of increasing

competition in UK and an important antidote to
bad management and debilitating industrial
relations (Crafts, 2012); it was part of the Thatcher
Experiment

• Explains where a lot of the 8.6% might have

come from as (partly) anticipated by Williamson
(1971)
 EU Membership
• UK joined EEC in 1973 and has subsequently
been subject to EU rules on state aid and
competition policy

• These have provided a ‘commitment

technology’ which reduces UK policymakers’
discretion and increasingly they have precluded
selective industrial policy and a ‘public-interest’
criterion in mergers policy

• However, horizontal industrial policy which

addresses market failures is allowed
 Increased Competition and Productivity
Performance
• Increases in competition correlated with
1980s productivity growth at sectoral level
(Haskel, 1991)

• Entry and exit accounted for 25% Y/L

growth in 1980-5 manufacturing rising to
40% in 1995-2000 (Criscuolo et al., 2004)
• Early 21st-century UK better at ‘creative
destruction’ than European average but
well below best countries
 Allocative Efficiency Scores
Manufacturing Services Business Sector

France 0.461 0.161 0.296

Germany 0.443 0.399 0.460
Greece -0.056 -0.235 -0.240
Italy 0.141 -0.190 -0.039
Sweden 0.672 0.253 0.379
UK 0.300 0.065 0.156

European Union 0.272 0.036 0.140

United States 0.473 0.358 0.394

Source: online appendix to Andrews and Cingano (2014)

 Increased Competition:
Effects via Industrial Relations
• During the 1980s and 1990s, increased competition
reduced union membership, union wage mark-ups and
union effects on productivity (Brown et al., 2008; Metcalf, 2002)
• Surge of productivity growth in unionized firms in 1980s
as organizational change took place under pressure of
competition (Machin & Wadhwani, 1989)
• De-recognition of unions in face of increased foreign
competition had strong effect on productivity growth in
late 1980s (Gregg et al., 1993)
• Multi-unionism in an industry reduced TFP growth by
0.75pp from the 1950s through the 1970s but had no
effect thereafter (Bean & Crafts, 1996)
 Thatcherite Supply-Side Policy:
Errors and Omissions
• Seriously incomplete tax reform

• Under-spent on infrastructure

• Slow to address quality of education

• Failed to reform land-use planning

• Did not address short-termism

 Short-Termism
• Investors weight near-term returns too heavily and
discount future returns too much: more likely in LME
than CME

• Implies projects with high NPV in the absence of myopia

may be rejected; can be expected to undermine R & D

• Private firms invest more than equivalent public firms

which prioritize dividends over long-term investments
(Dickerson et al., 1998)

• Innovation policy especially important if short-termism

prevails
 UK Short Termism Evidence
• Stock markets clearly reflect short-termism (Miles,
1993; Davies et al., 2014)

• Returns at t + 5 undervalued by about 40%

• Private firms invest about 4 times as much

• UK firms require relatively high returns and this

hurts R & D (Bond et al., 2003)
NB: Germany does not look like this (Black & Fraser,
2000)
 Management Buyouts in the
1980s and 1990s
• Rules change facilitated MBOs

• On average, MBOs delivered large gains in TFP

(Harris, et al., 2005)

• Private equity buyouts were especially good for

improvements in both profitability and productivity
(Toms et al., 2015)

• But issues related to management quality more

generally still there; suggests corporate
governance still a problem
 Management Practices (1)
Bloom & van Reenen (2007)

• Economic historians have often alleged poor

management

• This paper offers a way to demonstrate it by

matching survey evidence with accounting data

• It finds that better management practices are

positively associated with productivity,
profitability, and Tobin’s Q
 Management Practices (2)
• Better management practices are strongly
correlated with competition and inversely related
to CEO selected by primogeniture

• Average management scores were still lower in

the UK than Germany or USA

• Raw Score = -0.057G - 0.078F - 0.196*UK

- 0.627* Primo + 0.149*

Competitors
Raw Management Scores and %TFP Gap Explained

Raw Score % TFP Gap

France 3.015 52.5

Germany 3.210 28.7

UK 3.033 55.3

USA 3.308 0.0

Note: TFP gap is with USA.

Source: Bloom et al. (2016).

 Conclusions
• Thatcherite supply-side policy left much to be
desired but did improve productivity outcomes

• Notably, the trade-union veto ended

• Effectively addressed one of the two institutional

legacies

• Impact of increased competition consistent with

diagnosis of golden-age failure