Great Leap Forward

The End of an Era: The Reagan-Thatcher Years, Goodbye and Good Riddance

With the recent death of Margaret Thatcher, the Iron Lady, it is time for a quick retrospective.

Here’s the conventional narrative. The Keynesians took over policy-making in the UK and the US in the 1960s. They coddled Big Labor, allowing unions to ramp up wages. They coddled the poor with generous welfare. They coddled Big Business with lucrative defense contracts. They ran up Big Government budget deficits. And they told their Central Banks to run the monetary spigots. They partied like Hippies at a Love-In until those inflation chickens came home to roost in the 1970s.

Unable to reign-in their excesses, inflation accelerated; as prices and wages climbed ever-higher, the US and UK became uncompetitive. Jobs disappeared and unemployment rose. The “misery index” (inflation rate + unemployment rate) soared. Americans and Brits demanded new leadership.

In 1979 Iron Lady Hilda Thatcher ousted the Labour government of James Callaghan, while “Bedtime for Bonzo” star Ronald Reagan bested Peanut Farmer Jimmy Carter in the 1980 American election. The new leaders implemented a combination of attacks on labor, attacks on regulation, and attacks on tiny islands (Thatcher pummeled the Falklands while Reagan bombed Grenada into submission).  They (supposedly) brought spending under control as they downsized Big Government. And they got their Central Banks to ground the money helicopters.

The rest, as they say, is history. Thatcher saved the UK by increasing efficiency. Reagan brought “Morning in America”. Together, they destroyed the “Evil Empire” and brought lasting peace around the globe. Keynesianism’s spiraling deficits and inflation were forever banished from the English-speaking world. The populations enjoyed rising living standards, full employment, and falling poverty rates.


Warren Mosler has a different take on the whole episode:

Here’s how I remember it all, by Warren Mosler.

I didn’t look anything up, with the idea that memories matter.

The ‘golden age’ from WWII was said to have ended around 1973.

Inflation and employment was remembered as relatively low, productivity high, the American middle class thriving.

Why?  Keynes was sort of followed.  The Kennedy tax cuts come to mind. 

But also of consequence and ignored was the fact that the US had excess crude production capacity, with the Texas Railroad Commission setting quotas, etc. to support prices at maybe the $2.50-$3.00 price range. And stable crude prices, though maybe a bit higher than they ‘needed’ to be, meant reasonable price stability, as much was priced on a cost plus basis, and the price of oil was a cost of most everything, directly or indirectly.

But in the early 1970’s demand for crude exceeded the US’s capacity to produce it, and Saudi Arabia became the swing producer, replacing the Texas Railroad commission as price setter.  And, of course, price stability wasn’t their prime objective, as they hiked price first to about $10 by maybe 1975, which caused a near panic globally, then after a too brief pause they hiked to $20, and finally $40 by maybe 1980. 

With oil part of the cost structure, the consumer price index, aka ‘inflation’, soared to double digits by the late 70’s.  Headline Keynesian proposals were largely the likes of price and wage controls, which Nixon actually tried for a while.  But it turned out the voters preferred inflation to their government telling them what they could earn (wage controls on organized labor and others) and what they could charge.  Arthur Burns had the fed funds rate up to maybe 6%.  Miller took over and quickly fell out of favor, followed by tall Paul in maybe 1979 who put on what might be the largest display of gross ignorance of monetary operations with his borrowed reserve targeting policy.  However, a year or so after the price of oil broke as did inflation giving tall Paul the spin of being the man who courageously broke inflation.  Overlooked was that Jimmy Carter had allowed the deregulation of natural gas in 1978, triggering a massive increase in supply, with our electric utilities shifting from oil to nat gas, and opec desperately cutting production by maybe 15 million barrels/day in what turned out to be an unsuccessful effort to hold price above $30, as the supply shock was too large for them and they drowned in the flood of no longer needed oil, with prices falling to maybe the $10 range where they stayed for almost 20 years, until climbing demand again put the Saudis in the catbird seat.  Meanwhile, Greenspan got credit for that Goldilocks period that again was the product of stable oil prices, not the fed (at least in my story.)

So back to the 70’s, and continuous oil price hikes by a foreign monopolist.  All nations experienced pretty much the same inflation.  And it all ended at about the same time as well when the price of crude fell.  The ‘heroes’ were coincidental.  In fact, my take is they actually made it worse than it needed to be, but it did ‘get better’ and they of course were in the right place at the right time to get credit for that. 

With the price of oil being hiked by a foreign monopolist, I see two choices. 

The first is to try to let there be a relative value shift (as the fed tries to do today) and not let those price hikes spill into the rest of the price level, which means wages, for the most part.  This is another name for a decline in real terms of trade.  It would have meant the saudis would get more real goods and services for the oil.  The other choice is to let all other price adjust upward to keep relative value the same, and try to keep real terms of trade from deteriorating. 

Interestingly, I never heard this argument then and I still don’t hear it now.  But that’s how it is none the less.

And, ultimately, the answer fell somewhere in between.  Some price adjustment and some real terms of trade deterioration. 

But it all got very ugly along the way.

It was decided the inflation was caused by unions trying to keep up or stay ahead of things for their members, for example. It was forgotten that the power of unions was a derivative of price power of their companies, and as companies lost pricing power to foreign competition, unions lost bargaining power just as fast.

And somehow a recession and high unemployment/lost output was the medicine needed for a foreign monopolist to stop hiking prices???

And there was Ford’s ‘whip inflation now’ (WIP) buttons for his inflation fighting proposal, and Carter with his hostage thing adding to the feeling of vulnerability.  And the natural gas dereg of 1978, the thing that actually did break the inflation two years later, hardly got a notice, before or after, and to this day still ignored.

As today, the problem back then was no one of political consequence understood the monetary system, including the mainstream Keynesians who had been the intellectual leadership for a long time.  The monetarists came into vogue for real only after the failure of the Keynesians, who never did recover, and to this day I’ve heard those still alive push for price and wage controls, fixed exchange rates, etc. etc. in the name of price stability. 

So in this context the rise of Thatcher types, including Reagan, makes perfect sense.  And even today, those critical of Thatcher type policies have yet to propose any kind of comprehensive proposals that make any sense to me.  They now all agree we have a long term deficit problem, and so put forth proposals accordingly, etc. as they are all destroying our civilization with their abject ignorance of the monetary system.  Or, for some unknown reason, they are just plain subversive. 


It was the blind leading the blind then and it’s the same now.

And that’s how I remember it/her.

And I care a whole lot more about what happens next than about what happened then.

And that’s pretty much the way I remember it, too. Cost-push inflation (driven by oil and also by food prices–which Warren left out, but food had become a globally-traded commodity and contributed to both of our high inflation periods in the 1970s) was misinterpreted as a lagged-effect of “Keynesian” demand policies. So even as demand stagnated when government spending stopped growing in the 1970s, Nixon-Carter-Reagan all reacted with austerity that unnecessarily raised unemployment.

Welfare “Queens” and Greedy Labor Unions became the scapegoats. With wages and social spending stagnant, the economies would never recover to “Golden Age” levels. Eventually Clinton came along with a plan to unleash Wall Street (and the UK had its own version, freeing London’s financial center) in order to create serial bubbles.

And that worked until the whole sham collapsed in late 2007.

But there is no “Plan B”, as I’ve said before.

Thank you, Ronnie and Maggie. RIP.

19 Responses to “The End of an Era: The Reagan-Thatcher Years, Goodbye and Good Riddance”

b_bApril 11th, 2013 at 6:21 am

My take (for UK and Australia) was there was too much pricing power for both Industry (via public sector monopolies) and labour (via unions). No flexibility in the system to cope with supply shocks.

So the oil / food price spikes in the 1970's were simply passed on by monopolists – and unions received the corresponing pay rise for members to maintain a real standard of living. And the cycle continued even with rising unemployment – and the Phillips Curve died.

The only way to break the inflation cycle was to dismantle the pricing power of both sides. This was doesn via privatising and deregulating public monopolies and breaking up the unions.

It was painful for the worker and lucrative for the capital owner. But it did break the inflation cycle and in the process allowed Keynsian policies to become more effective during a crisis – as seen since 2007.

jonf34April 11th, 2013 at 12:48 pm

I certainly don't remember all the detail you and Warren do. But I do remember oil prices and the Saudis. I remember the inflation and the evil unions who caused it all, since I was one of them back then. But I also remember crazy interest rates and CDs at insane levels. Sadly I was too poor to participate but I have always wondered how that came to be and why anyone would pay those rates. I still wonder about it in face of the near zero interest rates today.

L. Randall Wray L. Randall WrayApril 11th, 2013 at 9:30 pm

Tall Paul jacked up overnight rate above 20%; he knew it would kill the thrifts and trigger a financial crisis. And you are right that anyone who wanted to buy a home had to pay very high mortgage rates. And that was also the beginning of the move to “originate to distribute” rather than hold mortgages. The rest, as they say, is history.

L. Randall Wray L. Randall WrayApril 11th, 2013 at 9:35 pm

Oh, and by the way, I was also one of those evil union members–a Teamster–in the mid 1970s but by the time of Tall Paul I was unemployed; fortunately I got into CETA, a New Deal-type jobs program (another one of those evil progressive ideas that provide a safety net for average folk). And from CETA, into economics, and I guess you know the rest of that story. Jobs programs are “hand-ups” not “hand-outs”.

jerryApril 12th, 2013 at 4:11 am

Alas, I'm a bit young to revel in all these memories.. but I do wonder if things appear to be progressing at all from where you sit? Certainly from my perspective MMT seems to be "it" right now and I'm still a bit amazed every time I hear the mainstream media raving about deficits, bankruptcy, etc. I feel like it's only a matter of time before people start using logic and empirical evidence in economics.. but then I'm pretty new to it all and maybe that's how its always been? We do have Stephanie Kelton on MSNBC and things like #MintTheCoin that got some publicity recently.. how's it look from the top of the mountain good sir?

oblomovIIIApril 12th, 2013 at 9:19 am

Just a quickie – the Falklands was hardly of Thatcher's design. It was actually invaded, then defended. (Argentina only briefly used it as a penal colony in 1830s). Useful history here

L. Randall Wray L. Randall WrayApril 12th, 2013 at 11:03 pm

Not sure, I’m still near the bottom of that mountain. Need to ask Jamie Dimon and Larry Summers how things look from the top!

L. Randall Wray L. Randall WrayApril 12th, 2013 at 11:09 pm

Ah, yes, the British ought to retain their empire stretching from sun-up to sun-down, including an island a stone’s throw off Argentina’s coast. And remember that Reagan’s invasion was not an invasion but rather a rescue operation to save medical students who had no idea they were in danger. Give us a break. Both invasions were designed to whip up war fever at home by attacking tiny little islands and prosecuting a swift victory.

HepionApril 13th, 2013 at 9:11 pm

You guys have far too leniant attitude towards unions. Maybe it is because you are americans and live in a country where unions are on the ropes. But let me tell you what happens where labour unions are strong: they are in a constant competition against each other over national income.

Reasons to demand wage raises are plentiful, but most common is that some other group earns more. Nurses will demand raises because engineers earn more even though education level is the same, bus drivers demand more because factory workers earn more, teachers demand more because nurses got their pay raises, doctors demand more because they wanna keep their pay premiums relative to everyone else, ad infinitum. Ive seen it happen in real life and all these productivity busting raises keep oc inflation going.

Inflation causes FX rate to depreciate and fixed exchange rates are periodically devalued as increases nominal spending puts strain on FX reserves. So foreign competition can't really keep inflation process in check.

Labour unions turn even high unempoyment to reason to demand pay raises because they say purchasing power of the workers must be raised to combat economic slump. Contrary what economist often say, high unemployment does not lead to wage moderation but wage escalation. Open your eyes to real world for god's sake. All you have to do is read news. Just look at what PCS union in Britain is doing for example.

Labour unions have evolved from guild system of middle ages, but I don't think guild system never bargained over wages. Maybe we don't have any sort of good system for national income distribution resolution, altough centralized nation-wide bargaining can keep inflation in check, while assuring fair distribution between wages and profits. But labour unions are not the panacea of good you claim them to be. Maybe they should have power to negotiate over everyhing else BUT wages. Wages should come from outside, from national wage comittee or something like that.

Everyone who is willing to see is able to see that letting every employee group deside their own nominal income level at the expense of everyone else in the economy is recipie for disaster.

L. Randall Wray L. Randall WrayApril 13th, 2013 at 10:56 pm

Hep: whoops, if they are in competition they push wages down!

You forget that capitalism is a rigged game, as Warren Mosler always says. Capitalists do not NEED to employ any particular worker. They’re rich and can always make workers compete against each other to drive wages down. Workers NEED to work in order to eat. Capitalists can always win that game against individual workers. Workers only have strength in unions; unions make it a somewhat more fair game.

mike wrightApril 14th, 2013 at 9:22 am

A stone's throw ? Actually 400 miles. Hope your understanding of economics is better than your grasp of geography. Or history. (not to mention democracy – apparently the wishes of the people who live there – the only human population ever to have lived there – and who lived there peacably and contentedly under their own laws, harming and threatening no-one – until the day they were suddenly invaded by a brutal fascist dictatorship – carry no weight in your eyes) The Argentine claim is so preposterous it would make a US claim to Cuba or to Greenland seem the very height of justice and good sense I assume you would recognise either such claim as too obviously stupid to be worth discussing. Yet on the basis of proximity – to which you appear to attach importance – why? – either would have far more merit than the Argentine claim to the Falklands.

david j michel jr.April 14th, 2013 at 4:39 pm

randall wray,my grandfather was a teamster truck driver,that was the last time unions did any good.I did not like reagan he started the first amnesty for illegal aliens.yes you see I don't use the lib term undocumented immigrant .that has done more damage to the american worker than the unions are pushing for amnesty,that makes no sense .as if we need more competition for less jobs .maybe this president could stop the flow of illegals ,but he won't because he is educated beyond his intelligence.he is the same as george bush and reagan just another elitist rich white dude !I know you wont let these comments on your page,their is no free speech unless you say what liberals want to hear.

jonf34April 14th, 2013 at 9:33 pm

The NYT reported in 2011 that unions had 11.9% of the labor force. That is down from 35% in the fifties and 20.1% in 1983. What does that tell you about how well off they are? The Times did say the median weekly income for unions was $917 vs $717 for non unions.

L. Randall Wray L. Randall WrayApril 16th, 2013 at 12:50 pm

No, this is my blog and no one has a free speech right to post to my blog. However, we do allow comments so long as they are not too vulgar or racist or otherwise offensive.

L. Randall Wray L. Randall WrayApril 16th, 2013 at 12:52 pm

Yep, stone’s throw in comparison to the UK’s claim. Take a look at a globe and you will see that the UK is on the other side of the world. And note that the UK has been violating an international mandate to hand the Falklands back to Argentina, who’s claim is recognized internationally.

bailoutsMay 9th, 2013 at 8:02 am

Labor unions have progressed, but I don't think guild program never bargained over income. Maybe we don't have any kind of good program for nationwide income submission quality, altough central nation-wide negotiating can keep rising prices in check, while guaranteeing reasonable submission between income and earnings.

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