NRPLUS MEMBER ARTICLE A pril 3 saw the death of one of the last Thatcherite greats, Nigel Lawson. He was ninety-one. Serving as Margaret Thatcher’s chancellor of the exchequer (finance minister) between 1983 and 1989, Lawson played a vital part in creating a British economic revival so strong that it took the combined efforts of both the Conservative and the Labour parties decades to destroy it.
Appreciating Lawson’s achievements does not necessitate getting stuck in a 1980’s time warp (pleasant though that would be), nor does it require us to ignore the fact that today’s economic and political challenges are distinct from those of four decades ago. Indeed, still today his writings, speeches, and actions in government continue to offer useful lessons on everything from tactics and strategy to matters of basic economic principle.
Highly intelligent, his own man, and a natural skeptic, Lawson was deeply distrustful of consensus. In a speech in 2012 he observed that in his “rather long” political experience:
When all three political parties are agreed on a policy, it is nearly always mistaken. There is a very clear reason why that should be. The existence of all-party consensus ensures that the policy in question is never properly debated or scrutinised.
Doubtless those within the Beltway who fetishize bipartisanship would have been horrified to hear talk like that.
When it came to economic policy, Lawson had seen as a young man where postwar economic “consensus” was taking the U.K. In the course of a journalistic career that, with brief interruptions, lasted from the late 1950s until the early 1970s, he didn’t hesitate to say so. There were certainly differences — sometimes sharp differences — between the Labour and Conservative parties, but overall when it came to the economy, a (more or less) social-democratic consensus came to prevail after the defeat of Clement Attlee’s radical Labour government in 1951. It worked for a while, but the 1960s saw the beginning of relative economic decline, which then metastasized into a systemic crisis in the 1970s.
In a 1988 speech, Lawson explained why this state of affairs had prevailed for so long. His comments are worth repeating:
In the heyday of the post-War consensus, even the practical case for capitalism was rarely argued with fervour, with a few signal exceptions. And the moral case for capitalism was lost by default.
That description comes depressingly close to the state of debate in the U.S. today. Many of those who once would have generally defended free market principles — which is by no means the same as “free market fundamentalism” — have now thrown their support behind notions such as stakeholder capitalism, “common good” capitalism, and ESG. This doesn’t bode well for the health of the American economy or the liberty of the American citizen.
But back to Britain in the 1970s: The manifest failure of the old economic model opened the door to more radical alternatives. Doubling down on a disaster that they saw as opportunity, the Labour party’s increasingly powerful left wing pushed for so much state intervention that, had it been successful, the U.K. would have become too close for comfort to a command economy, if without the customary mass executions.
Meanwhile, on the right, the Conservatives had chosen a new leader. Margaret Thatcher had long indicated that she was receptive to the arguments for a new approach to the economy then bubbling up in think tanks, sections of the press, and even parts of the Tory party. And in the 1979 general election, enough voters were sufficiently fed up with the crumbling status quo that — with varied levels of enthusiasm — they voted the Conservatives into power, and Mrs. Thatcher into 10 Downing Street.
In a typically erudite 1980 speech, Lawson — who had no intention of letting the economic and moral case for free markets be lost by default — explained the new government’s break with the Conservative party’s recent past. For too long, he argued, the Tories had embraced “the philosophy of social democracy, with its profound faith in the efficacy of government action, particularly in the economic sphere,” a “delusion” that Lawson believed was “based (in the economic sphere at least) in equal parts on a misreading of the economic lessons of the inter-war years and a misunderstanding of Keynes.”
While Thatcherism (which he referred to as “new Conservatism”) may have been a radical break with postwar Toryism, it was, Lawson maintained, a return to an older tradition:
To the extent that new Conservatives turn to new sages – such as Hayek and Friedman – that is partly because what those writers are doing is avowedly reinterpreting the traditional political wisdom of Hume, Burke and Adam Smith in terms of the conditions today; and partly because, as specialists in economics (although Hayek in particular is a great deal more than that) they are of particular interest in an age in which, for better or worse, economic policy has achieved a centrality in the political debate which it never enjoyed in, say, [the late 19th century] . . .
As Financial Secretary to the Treasury, Lawson was already playing an important role in shaping economic policy. He used the speech as an opportunity to list some of the early achievements of the Thatcher government, including the abolition of controls on pay, prices, and dividends as well as something for which he had been the principal advocate, the ending of restrictions on the convertibility of the currency and flows of capital out of the country. Privatizations, something Lawson backed strongly throughout his time in Thatcher’s governments, were also underway.
On the question of tax, spending, and government borrowing, Lawson had this to say:
Despite the cuts in government spending, the overriding need to reduce government borrowing, to which I have already referred, has so far prevented us from reducing the overall burden of taxation – although that remains our long-term objective. But we have at least been able to introduce a major switch from taxes on earning to taxes on spending, with the result that income tax has been cut all round, with the top marginal rate on earned income coming down from 83% to 60%. This is absolutely essential to restore personal incentives.
Lawson was (and remained throughout his life) doubtful about the degree to which extra revenue generated by cutting taxes could resolve a country’s fiscal problems. Which is to say that he was not a supply-sider in the sense often used in the U.S. Indeed, it’s interesting to see that in a 1984 lecture he pointed out that the position of the dollar as a reserve currency gave the U.S. significantly more flexibility with regard to deficit financing than other countries.
That said, Lawson was determined to reduce the role of the state in the economy, and his push for supply-side reforms (in the broader sense of that term) that Britain desperately needed included limiting, as much as possible, the disincentive effect of high direct taxation. With public finances in poor shape, he reworked tax in a way that shifted some of the burden away from income towards consumption, which is not (ahem) the worst of ideas.
Fiscal order was restored by spending and monetary discipline. Of course, the boost to public finances from surging North Sea oil production also helped, as did a strong economic recovery (annual GDP growth exceeded 5 percent in 1987 and 1988). The latter was not so much a routine bounce-back from a tough time as a sign that the “enterprise culture” that Lawson was playing such a part in creating was beginning to bear fruit. With the public finances in better shape, in 1988, he cut income tax further still, reducing it to two bands: a base rate of 25 percent and a top rate of 40 percent. (U.S. readers should note that the U.K. has no local income tax).
Writing in CapX, Madsen Pirie notes that:
The top 10% of earners had been paying 35% of the total income tax take. Under Lawson’s lower rate that went up to 48%. In rough terms this meant that the top 10% went from paying just over a third to just under a half of total income taxes.
Corporation tax had also already been reduced from 52 percent to 35 percent.
In 1980, annual inflation — which had first peaked in 1975 at around 24 percent — jumped again to 18 percent, before going into a steep decline. In 1988 it stood at a little over 4 percent, but was moving up again: something that was about to cause trouble. Unemployment — which reached nearly 12 percent in 1984 (up from around 5.5 percent at the time of Thatcher’s first election victory in 1979) — was still running very high (between 8–9 percent but falling). These numbers reflected just how difficult the restructuring of the economy had been, and, for that matter, would continue to be. It is, however, worth remembering Lawson’s observation that 1970s overmanning, particularly in manufacturing, had been a form of “disguised unemployment” that so dragged down productivity that it would not have been sustainable in the longer term.
Cato’s Ryan Bourne writes:
As Chancellor, Lawson oversaw a growing UK economy that caught up with its European counterparts. The combination of strong growth and restrained public expenditure saw the state shrink from 42.8 percent of GDP in 1983/84 to 34.7 percent in 1989/90. Tax cuts saw revenues relative to GDP fall too, from 39.5 to 34.7 percent of GDP. When Lawson resigned, the country was running a balanced budget.
For all his radicalism, Lawson understood the virtues of careful preparation. In 1974 a National Union of Miners (NUM) strike had effectively destroyed the previous Conservative government (the coal mines had been nationalized in the 1940s, meaning that, in the event of a dispute, the responsibility for setting miners’ pay ultimately rested with the government). So, as Secretary of State for Energy, Lawson arranged for the stockpiling of coal for power stations (most of the U.K’s power stations were coal-burning) ahead of what he saw as another, inevitable strike by the NUM. In 1984, when the strike (which was to last a year) finally did come, Lawson’s precautions played a vital part in the Thatcher government’s eventual victory, thus putting an end to the era when the highly politicized trades union movement — which had become dangerously powerful in the 1970s — could mount a serious challenge to an elected government.
Despite his successes, Lawson’s early (1985) and prescient warnings that proposed new system of local taxation — the “poll tax” — “would be completely unworkable and politically catastrophic” were ignored. He was right, and when the tax was introduced in 1989–90 it, more than anything else, brought an end to Thatcher’s premiership.
By that time, Lawson had been out of office for more than a year, resigning in October 1989 after a falling out with Thatcher. The underlying cause was a messy dispute — the full backstory is too complex to go into here — over how to control inflation once Lawson had abandoned monetary targeting (which financial innovation had shown to be of diminishing utility). Instead, he introduced a policy of shadowing the deutsche mark, a currency he viewed as an anti-inflationary anchor. The idea was a bad one, made worse by Lawson not telling the prime minister what he was doing (he knew she would not approve) for a surprisingly long time. Worse still, inflation was increasing rapidly (it reached nearly 8 percent in 1989, with yet further to climb) and had been helped on its way by the previous year’s budget, which had been too fiscally loose, despite all its virtues.
In the end, this transformational chancellor was effectively felled by the first half of a ‘traditional’ boom–bust cycle of a type somewhat unfairly compared to those seen under two Tory chancellors in the preceding quarter-century. The bust followed shortly thereafter, but it was a mark of changed times that, this time, the Conservatives prevailed in the next election.
Though he was never to hold senior office again, Lawson’s rebellion against consensus politics would continue. Indeed, despite the fact that his dispute with Thatcher saw him take a superficially more pro-EU stance (as I said, it was complex), Lawson was an instinctive euroskeptic and took a prominent role in the Leave campaign ahead of the Brexit vote, even as he was living, naturally, in France. Before that he was the founder and first chairman of the Global Warming Policy Foundation, which has become a prominent climate-skeptic thinktank. “Human folly,” he wrote in his last article for the Spectator (November 2021), “is all too common. But in a long life I have never come across anything remotely as bad as the current climate scare.” He wasn’t a fan of the pandemic lockdowns either . . .
National Review Institute: Discussion on the Economy Palm Beach, May 4
Raising Interest Rates and Banking Turmoil — What it all Means
The Federal Reserve raised interest rates yet again in the shadow of troubles in the banking industry. This has only led to fears that the move could add to financial turmoil. In order to quell inflation many argue that the Fed did the right thing and would be right to continue to raise interest rates. What does this mean for the economy and the individual? Please join Tomas J. Philipson, Acting Chairman of the Council of Economic Advisers in the Trump administration, and Andrew Stuttaford, National Review Capital Matters editor, for a discussion on these issues and more at the Sailfish Club of Florida on May 4.
The event is complimentary.
More details here.
The Capital Record
We released the latest of our series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, which appears weekly, is designed to make use of another medium to deliver Capital Matters’ defense of free markets. Financier and NRI trustee David L. Bahnsen hosts discussions on economics and finance in this National Review Capital Matters podcast, sponsored by the National Review Institute. Episodes feature interviews with the nation’s top business leaders, entrepreneurs, investment professionals, and financial commentators.
In the 113th episode, David is joined by House Financial Services Committee member, Representative Andy Ogles. The two chew the fat on the government being here to help and how scary that really is — especially if you’re a small bank.
No Free Lunch
Earlier this year, David launched a new six-part digital video series, No Free Lunch, here on National Review Online. In it, we bring the debate over free markets back to “first things” — emphatically arguing that only by beginning our study of economics with the human person can we obtain a properly ordered vision for a market economy . . .
The series began with a discussion with Fr. Robert Sirico of the Acton Institute. Later guests include Larry Kudlow, Dennis Prager, Dr. Hunter Baker, Ryan Anderson, Pastor Doug Wilson and Senator Ted Cruz.
Yes, the six-part series now has seven parts.
Enjoy.
The Capital Matters week that was . . .
Regulatory Policy
With Tax Day now upon us, the IRS is on the public mind. But with respect to security breaches, the IRS is not alone. America’s federal records are being turned inside out regularly by hackers and leakers. Odds are, anything you have shared with the government is possessed by some bad actor somewhere, or will be soon.
Try finding a federal agency that hasn’t faced an embarrassing or damaging leak in recent years. In 2023, we have already learned of compromises at the United Special Operations Command in the Department of Defense, the Federal Bureau of Investigation, and the U.S. Marshals Service, three of the most secure corners of the government. If they stumble and trip, who can stay afoot?
Banking
The problems with federal deposit insurance have been known for years, even by the president who signed the bill that created the FDIC.
In a recent blog post, monetary historian George Selgin considers the history of the FDIC. First, Selgin writes that the deposit-insurance scheme that the FDIC uses was not new when it was first adopted. In fact, state governments had experimented with similar schemes in the 1800s. New York, Michigan, and Vermont all created FDIC-style deposit insurance; all three states’ schemes failed before the Civil War started.
Second, the FDIC’s creation was not necessary to help end the Great Depression, nor was it designed to do so . . .
The Democrats and the Fed have been circling the wagons to blame everyone but themselves for the collapse of SVB and the calamity that followed. In a speech before the National Association for Business Economics, Secretary Yellen added that “when the president and I took office in January 2021, we inherited a financial-stability apparatus at Treasury that had been decimated.” . . .
Fiscal Policy
Last week the Social Security and Medicare trustees revealed that the trust funds will cover full benefits until 2031 for Medicare, and 2033 for Social Security’s Old Age and Survivors Insurance (OASI) program. These insolvency dates, which had been estimated at 2028 and 2034 a year ago, feed the faulty assumption that Social Security and Medicare benefits are fully funded for the near future, and thus reform is less urgent.
In reality, Social Security and Medicare continue to run large and growing deficits, and the trustees’ dates have limited economic relevance. The first problem is that these insolvency dates apply only to Social Security and Medicare’s hospital insurance program (Part A). Excluded from the solvency calculations are Medicare’s physician (Part B) and drug (Part D) programs, even as they run a $447 billion cash shortfall this year that will surge past $1 trillion in a decade. The second problem is that the Social Security and Medicare “trust funds” — while representing a legal promise to pay benefits — contain no economic assets and therefore save current taxpayers no money . . .
Climate Policy
I wrote the other day about the way that Britain’s command-and-control Tories are attempting to force consumers to buy electric vehicles even before the prohibition on the sale of new internal combustion engine vehicles (ICEVs) from 2030. That’s five years before the EU’s somewhat shaky 2035 deadline, for reasons basically attributable to the unlamented Boris Johnson’s vainglory. He thought it was going to set an example to the world and give the British EV market a flying start . . . or something. The chaos this accelerated version of an ill-planned and reckless transition will cause is just another part of the wreckage that Johnson has left behind him . . .
Eminent domain — a fancy term for expropriation by the state — can be justified under certain circumstances, but there ought to be a high bar to be overcome before such powers are exercised. Seizing private property to facilitate the installation of energy systems that lack the reliability required by a modern economy ought to fail any basic moral or commonsense test. The law, as we know, can be less demanding, but a banker of Dimon’s stature should not be. . . .
Tax
While our leaders in Washington continue to double down on the bad ideas that got us here, the state of Montana is showing how a renewed commitment to fiscal responsibility can help ignite an economic comeback.
Instead of spending more on stimulus, bailouts, and handouts, Montana’s leaders have prioritized reducing the government’s burden on taxpayers. Now, while President Biden proposes tax hikes, Montanans of all incomes are enjoying historic tax breaks . . .
Transportation
Dockworkers on the West Coast represented by the International Longshore and Warehouse Union (ILWU) didn’t come to work this morning. ILWU Local 13, which represents workers at the Ports of Los Angeles and Long Beach, has “withheld labor” and “effectively shut down” the ports for today, according to the Pacific Maritime Association, the group that represents port employers.
The labor contract for West Coast dockworkers expired last July, and operations have continued without a contract while the new contract is being negotiated. That means the contract’s no-strike clause and some dispute-resolution processes are no longer operative.
Economics
Today, we live in a world where educated people — in the search of cheap forms of persuasion — readily ascribe to an author words he never wrote and thoughts he never had. Is it fair to call this educated behavior barbaric and unskillful? If so, then there really was an “oracular Burke.” And, to make things perfectly clear, Burke believed that “the moment that Government appears at market, all the principles of market will be subverted.” . . .
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Please note that, owing to travel plans, there will be no Capital Letter next week.