Lessons from Nigel Lawson
April 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 . . .
Extracted from The Capital Letter for the week beginning April 3, 2023