The policy prescriptions presented above inspired the political programmes of Reagan in the USA and of Thatcher in the United Kingdom. Through their speeches, these leaders were able to make citizens aware of the infeasible claims of social democracy and encourage them to defend their individual liberties. While neither Reagan nor Thatcher succeeded in reducing the size of the state, the resistance to their policies brought to light just how difficult it is to curtail the Leviathan state and the extent of efforts that will be needed to stop the forces that erode the foundations of contemporary democracies. Their achievements, along with a rise in popularity of the new classical ideas during the second half of the twentieth century, helped halt the path to “serfdom”.
As Keynesian policies began to lose traction in the USA and the United Kingdom in the early 1970s, under the influence of the problem of “stagflation”, the upgrading by researchers of the importance of competition and technological progress18and the blows from the superior arguments of the great thinkers of freedom, not only the tide of statism stopped but also economic policies turned increasingly towards
17The harmful administrative interventions can be easily identified by looking at the collection of papers in the edited volume by Boaz (2002).
18From the beginning of 1970, there appeared two structural changes in advanced economies.
These were the increasing number of small and medium size enterprises and the increased supply of services from single owner companies. According to Pontusson (1995), these changes contributed significantly to the weakening of social democracy.
privatisation and liberalisation. For example, in the USA, this trend started during the second half of the 1970s with a series of laws deregulating such industries as air transport, railways and telecommunications, and culminated in the break-up of the American Telephone & Telegraph (AT&T) in 1984.19In view of these bold policy initiatives, the election of Thatcher in the United Kingdom in 1979 and of Reagan in the USA in 1981, created expectations about the possible reduction in the size of the state that were not realized. Yet it is to the credit of these leaders that, even though their successors held different ideological beliefs, the trend they precipitated towards de-escalation of state interventions continued.
5.5.1 In the USA under Reagan
Reagan was the first president to attempt to reverse the effects of New Economic Policy (New Deal) that Roosevelt introduced in 1933.20 In his campaigns he proclaimed tenaciously that economic growth could accelerate only by reducing the size of government. When elected in 1981, Reagan introduced an economic recovery programme that called for (a) reducing the growth of public spending; (b) lowering marginal tax rates on income from labour and capital; (c) deregulating the economy21 and (d) slowing down inflation by controlling money supply. The expectation was that savings, investment and economic growth would increase, inflation and interest rates would decline, the public budget would balance and financial markets would recover. Moreover, with lower tax rates on capital and capital gains, the prices of shares traded in stock exchanges were expected to increase in excess of the rate warranted by GDP growth or investment, raising the return on investment and the volume of available resources for investment.22
Numerous assessments have concluded that the policies Reagan adopted to attain the above objectives were mostly successful. Growth rates accelerated, and unemployment and inflation remained low throughout the 1980s. Tax rates for individuals and businesses dropped significantly. Deregulation continued along the policies initiated in the 1970s, albeit at a slower pace. Price controls on oil, gas, cable television, telephone services, bus transportation between states and maritime transport, were eased or completely eliminated. The range and scope of antitrust
19The book by Temin (1987) traces the history from the first attempt to break the Bell System in 1970 to the final decision in 1984, which determined to a large extent the present structure of the telephone industry in the USA.
20For a summary and an insightful assessment of Reagan’s economic policies, see Niskanen (1988).
21Famous in this regard is the battle Reagan gave and won at the beginning of his presidency against the union of air traffic controllers. Since then the power of labour unions in the USA has been in decline.
22Relevant data to assess the extent to which these expectations were realised can be found in Sinn (1985), McGrattan and Prescott (2005).
policies narrowed, and banks were allowed to invest in a broader portfolio of assets.
In the fronts of health, safety in the workplace and the environment, even though the laws in force did not change, the new fields to which they applied were reduced. But the range of government activities did not shrink, which implies that privatisation and to a lesser extent deregulation were not given high priority during his first term in office.
Proponents of new classical democracy expected that Reagan would roll back the state in his second term with substantial cuts mainly in various entitlement programmes. But they waited in vain. Reagan did not reverse the upward trend that dominated public spending, because neither did he bring substantial changes in the major programmes of the welfare state, such as social security and health services, nor did he propose significant cuts in entitlements. To be sure, the annual increase in public spending in real terms fell from 4 % during President Carter to 3 % under President Reagan, and the slowdown would have been even greater if spending on defence hadn’t increased as significantly as it did. However, as these percentages imply, Reagan failed to stem public deficit and as a result the size of government continued to expand at a slightly lower rate than in the 1970s. This failure marked Reagan’s presidency and explains the disappointment his adherents express frequently.23
The same indecisiveness was observed in the field of privatisation, both at the federal and state levels. At least two major banks in the area of housing finance continued to operate as federal banks. The post office remained under federal ownership and management. Productive facilities such as ports, airports, urban railways and other infrastructures were left in the ownership of various states;
and, of course, since no such reforms took place during the years of Reagan, the opportunity was lost, and in the following years the size of the public sector crept slowly upwards.
5.5.2 In the UK under Thatcher
When Thatcher took over the presidency of the Conservative Party in 1975, the prevailing conditions in the United Kingdom were very different than those in the USA. The narrow public sector produced over 40 % of GDP, including defence spending (Middleton 1996). The wider public sector, aside of the “natural monopolies”, included also important “strategic enterprises” that traditionally operated under private ownership. The unions in these activities were extremely powerful and with their frequent strikes and demands influenced decisively the behaviour of employees in the private sector. The Labour government having a slight majority tried to manage an economy tumbling into bankruptcy under the custody of the International Monetary Fund (IMF). In short, the country was on the
23For further comments, see Friedman (1992).
brink of an economic disaster and there were serious risks of social unrest. When Thatcher was forced to resign in 1990, she left behind a thriving economy and a galvanised country with more individual freedoms and rights than ever before in the post-war period—a feat which is recognised even by the social democrats who had opposed her policies.24
The reforms introduced by Thatcher were guided by her belief in the social superiority of markets with monetary discipline, a conviction she never lost the opportunity to stress in public. The objectives of her policies were to (a) reduce the expanse of the government and increase the role of markets; (b) lower taxation to promote entrepreneurship and individual rights; (c) encourage businesses to increase investment and (d) strengthen healthy competition. To achieve them, Thatcher adopted a monetary policy that called for tight control of the supply of money to lower inflation and interest rates, especially during the period 1983–1987.
She restructured public services and reduced the number of civil servants. She reduced taxation and sought to expand property rights by limiting the ownership of houses by local authorities. Through an unprecedented wave of privatisations, she transferred many of the productive activities that had been in the control of the public sector in previous decades, to the private sector. To avoid creating monopolies in network industries (e.g. telecommunications, gas, water, etc.), she assigned the regulation of competition to specialised independent government authorities. To reduce the bargaining power of labour unions, she abolished negotiations among “social partners”. To prevent the difficulties that might arise in a fully privatised system of health and education services, she introduced “quasi- market” mechanisms, where the government retained control of the funding, but it did not provide such services directly to the beneficiaries. The government distributed vouchers or coupons with which the beneficiaries could buy the services they needed from independent producers of their choice who competed in quality and price. Finally, and most importantly, Thatcher succeeded in implementing effectively her policies as widely as possible.
From 1980 to 1989, productivity and GDP increased around 2.2 % per year, inflation decreased from 13 % to about 5 %, public deficits shrunk and the number of civil servants over the 1979–1987 period fell by 22.5 % (from 732,000 to 567,000). The most radical reforms were introduced between 1987 and 1990.
During this period the number of civil servants and advisors declined significantly, and those who were retained were placed in executive agencies with precise objectives and close monitoring of their performance. Great success met also the policy of privatisation, through which the attitudes of citizens changed favourably to capitalism. Indicative in this regard are two pieces of data: small shareholders, who in 1979 numbered three million, in 1990 increased to 11 million and when the gas industry was privatised in 1986, the demand for shares exceeded the number
24According to Collette and Laybourn (2003), from the period of Thatcher on individual rights, equality in front of the law, and prevention of racial and other discriminations, started to show signs of improvement in the United Kingdom.
offered by over 500 %. The shift in the sentiment of the public towards the free market economy was so fundamental that when the Labour Party gained power in the late 1990s they chose to retain the reforms and used them as springboard for their own policies. Yet, despite Thatcher’s success in restructuring public services, her efforts to reduce government spending in large areas of the welfare state, such as the national health system, social security and public education, failed, as did her efforts to reform local government.25 When she resigned in 1990, public expenditures as a percentage of GDP remained at the level it was in 1979, namely over 40 %, when Thatcher became premiere.
In light of the foregoing summary, the assessment by Friedman (2004) that the battle was only half won is right. The classical ideas that called for democracy with a free market economy and a small state, as a way to maintaining civil liberties along with increasing prosperity, won over the ideologies of socialism and statism.
Reagan and Thatcher contributed significantly to this outcome, because they pro- moted these ideas with conviction, effective communication and courageous policy initiatives. However, their efforts did not triumph, because neither the political systems nor the citizens were ready to accept their reforms.