It was bold, it was brutal, but who was proved right in 1981?
By Gabriel Rozenberg
Lord Howe, the Chancellor handed the task of saving the British economy, thinks it was him. Hundreds of economists begged to differ
LORD HOWE of Aberavon, Baroness Thatcher’s first Chancellor, sits amid the Gothic grandeur of the House of Lords and casts his mind back to his critics. “An economist,” he says, with undisguised triumph, “is a man who knows 364 ways of making love, but doesn’t know any women.”
His choice of number is no accident. Twenty-five ago today economists at Cambridge began to circulate a letter to their colleagues condemning the policies of the then Margaret Thatcher and Sir Geoffrey Howe as being likely to “deepen the depression, erode the industrial base of our economy and threaten its social and political stability”. By the time that the letter was published in The Times, 364 economists from across Britain’s universities had signed it.
The letter was an unprecedented response to a Budget that remains the harshest of modern times. Lord Howe remains unrepentant. So, too, to some extent, do some of his critics.
In the first two years of her Government, Mrs Thatcher had little to show for her attempts to constrain the money supply and public borrowing in order to conquer inflation and reinvigorate growth. Inflation had peaked at 22 per cent, unemployment had doubled to two million, interest rates were in double-digits and manufacturing output had slumped. Britain was mired in recession.
Faced with such dire conditions, past Governments had followed an orthodox Keynesian approach and had borrowed more money to boost demand and had tried to “spend their way out of a recession” — even if the consequence was more inflation.
When the Chancellor delivered his Budget in March 1981, he stunned MPs by freezing income tax thresholds, which with inflation at 13 per cent amounted to a tax increase of £1.9 billion, and by raising alcohol and tobacco duties by 30 per cent. Petrol duty was raised by 20p per gallon, equivalent to an 11p-per-litre rise in today’s money.
Mrs Thatcher was to write later: “I doubt that there has ever been a clearer test of two fundamentally different approaches to economic management.”
Lord Howe said: “In those days . . . the public sector borrowing requirement was rising from £6 to £9 to £14 billion. It was catastrophe writ large, and we simply had to operate by constraining that. The measures I took, if you look back at them, were astonishing.”
He said that now he felt vindicated: a sustained recovery began almost immediately afterwards and growth was maintained throughout the rest of the decade. “Within two years the manifestations of wisdom, if you like, were very plain to see.”
Nevertheless, one of the men who organised the letter in The Times in 1981, Frank Hahn, said that it had stood the test of time. “What we said was perfectly reasonable — that in times of high unemployment and rising unemployment, it’s not a time to cut the budget,” Professor Hahn said. “And we predicted the very bad social consequences.” He added that the “tolerance of the British working class” had prevented the strife that he had feared.
The academics that he assembled included not only most former chief economic advisers to the government but also some of those who would become the most powerful and influential economists of later decades. One, Amartya Sen, went on to win the Nobel Prize for Economics. Mervyn King, now Governor of the Bank of England, signed the letter, as did Stephen Nickell, today a fellow member of the Bank’s Monetary Policy Committee.
In a new collection of essays by the Institute of Economic Affairs entitled Were 364 Economists All Wrong?, Professor Nickell argues that the letter, while not entirely accurate, was broadly correct to say that the Budget was unnecessarily harsh. “Unemployment was easily going to be high enough to bring down inflation to normal levels in a reasonable time,” he writes.
Lord Howe was nonplussed by the letter — “it was, in its scale, so overwhelming that it became ludicrous” — and is certain that history has vindicated him. “I had no doubt that our strategic concept was right and the Budget was part of that process,” he says. “And you know, si monumentum requiris, circumspice [if you seek my monument, look around me], as it says on Christopher Wren’s tombstone.”
Statement drafted on March 13, 1981:“We, who are all present or retired members of the economics staffs of British universities, are convinced that:
(b) present politics will deepen the depression, erode the industrial base of our economy and threaten its social and political stability;
(c) there are alternative policies; and
(d) the time has come to reject monetarist policies and consider urgently which alternative offers the best hope of sustained recovery.”
Signed by 364 university economists