Thatcher changed a nation

Posted: May 13, 2004 12:00 AM

 Twenty-five years ago this month, in May 1979, Margaret Thatcher became prime minister of Great Britain. This proved to be an event of profound importance for that country. It is not an overstatement to say that she revolutionized Britain's society and economy in ways no other British leader has ever done.

 It is hard to explain to an American audience why Thatcher was so important, because much of what she did that was highly controversial in Britain would seem commonsensical to us. Indeed, one of the harshest criticisms leveled at her was that she was making Britain too much like the United States.

 Economist Irwin Stelzer did an excellent survey of the Thatcher legacy in the spring 1992 issue of The Public Interest. He goes to pains to explain what pre-Thatcher Britain was like. For only by knowing the historical, political and economic circumstances of the time can we really appreciate the changes Thatcher wrought.

 Because it was home to the Industrial Revolution, Britain became fabulously wealthy in the 1800s. Even after the devastation of the First World War, it remained the richest country in Europe. As late as the eve of World War II, per capita income in Britain was 25 percent above the rest of Europe.

 But the Second World War had a devastating impact on the British people. They came out of it with a deep longing for stability and security. This led to establishment of a far-reaching welfare state in Britain that included nationalization of much of its industry. Taxes were raised to confiscatory levels, and the British pound was devalued to pay for all the benefits. The British Empire came to an end.

 These socialist policies sapped the economy's strength. Although incomes continued to rise, they rose much more slowly in Britain than in the rest of Europe. By 1978, Britain was among the poorer countries there. Its productivity, which had once been the best in the world, was down to 69 percent of that in the United States. Moreover, the trend was downward. In 1960, British productivity had been 75 percent of that here.

 As Stelzer explains, during the 1950s and 1960s, the British people had settled in to the idea that the country was in decline and that nothing could be done about it. The principal job of Britain's leaders, both under the Conservative Party and the Labour Party, was to manage the decline so that it was not too disruptive. This often involved caving-in to labor union demands to preserve uneconomic jobs in obsolete industries at pay levels far above those justified by productivity.

 To keep the system operating required huge government subsidies, paid for with budget deficits that were monetized by the central bank, which led to high inflation. Inflation exacerbated problems with the tax system by pushing almost everyone up into tax brackets once reserved for the wealthy. In 1979, the basic tax rate was 33 percent, and the top rate went as high as 98 percent -- 83 percent on wages and an additional 15 percent surcharge on so-called unearned income such as interest and dividends.

 Press reports were filled with stories about famous Britons who were abandoning the country, about managers refusing promotions and a growing proliferation of tax avoidance schemes. Company cars became pervasive as one of the few ways one could enjoy tax-free income.

  Thatcher was elected to Parliament in 1953 and served in cabinet-level positions. In 1975, she was elected leader of the Conservative Party, which was then in opposition. She achieved this position by arguing that British decline was not inevitable, that the right policies could tame inflation and restore prosperity. These included tight control of the money supply, tax rate reductions, privatization of British industry, deregulation and a tougher position toward unions.

 On May 4, 1979, Conservatives won control of Parliament, making Thatcher prime minister. She quickly set about implementing her agenda. Just one month later, the basic rate of taxation was cut from 33 percent to 30 percent, and the top rate on wages went down from 83 percent to 60 percent. In subsequent years, the basic rate was reduced to 25 percent and the top rate lowered to 40 percent.

 Britain's nationalized industries were sold off to the general public, making many of them shareholders for the first time. Its extensive public housing was sold to tenants, making many of them homeowners for the first time. After a series of bitter encounters, the unions were finally tamed. The result was a rejuvenation of the economy, the restoration of an enterprise culture and the end of talk about British decline.

  Thatcher resigned as prime minister in 1990 and joined the House of Lords in 1992. Even her sternest critics admit that her reforms were necessary and beneficial to the country.