Anatole Kaletsky

Among all the obituaries and encomiums about Margaret Thatcher, very few have drawn the lesson from her legacy that is most relevant for the world today. Lady Thatcher is remembered as the quintessential conviction politician. But judged by her actions rather than her rhetoric, she was actually much more compromising and pragmatic than the politicians who now dominate Europe. And it was Thatcher’s tactical flexibility, as much as her deep convictions, that accounted for her successes in the economic field.

Governments in Europe and Britain today are obsessed with hitting preordained and unconditional targets: Inflation must be kept below 2 percent; deficits must be reduced to 3 percent of gross domestic product; government debt must be set on a declining path; banks must be recapitalized to arbitrary ratios laid down by some committee in Basel. In sacrificing their citizens’ well-being and their own political careers to these numerical totems, modern leaders often claim inspiration from Thatcher. And when voters turn against them, Europe’s leaders keep repeating Thatcher’s most famous slogans, “There is no alternative” and “No U-turn”.  But are these the right lessons to draw from Thatcher’s political life? A closer look at her economic achievements suggests otherwise.

In the 20 years she spent in parliament before becoming prime minister, Thatcher first saw Harold Wilson’s Labour government wrecked by currency crises and trade union militancy; then Ted Heath ousted by a miners’ strike; and finally James Callaghan humiliated by the 1976 sterling crisis and driven out of office by the wave of public-sector strikes that came to be called the “winter of discontent.” After these searing experiences, her immediate priority on becoming prime minister was to turn British monetary management and labor relations upside down. Yet her actions were much more cautious and pragmatic than her rhetoric.

In fact, the Thatcher revolution started with a huge tactical surrender: Within two months of taking office, she gave the public-sector unions that had brought the country to a standstill pay raises averaging 21 percent. This huge award resulted in the biggest increase in inflation in British history – from 10 percent when Thatcher took over to 22 percent a year later (as measured by the retail price index). Controlling this inflationary upsurge required stratospheric interest rates and an overvalued currency. These, in turn, led to a trebling of unemployment and the collapse of many British manufacturing businesses. In response to this economic disaster, Thatcher quickly abandoned the monetary targets she had initially claimed as the lodestar of her economic policies. While Thatcher’s recession seemed to go on forever to Britons who lived through it in the early 1980s, her U-turn against austerity came dizzyingly fast by the standards of today’s obstinate politicians, especially those in Europe.

After just 18 months in office, Thatcher effectively abandoned the monetarist policies that are still often regarded as the bedrock of her economic philosophy. In the two years from the autumn of 1980, she slashed interest rates from 16 percent to 9 percent and presided over the biggest currency devaluation in British history, with the pound falling from $2.40 to $1.45. Ironically, this U-turn on macroeconomic policy began within weeks of her most famous rhetorical commitment to unyielding monetarist austerity, when she challenged the October 1980 Conservative Party conference: “You turn if you want to; the Lady’s not for turning.”

The Age of Austerity is over. This is not a prediction, but a simple statement of fact. No serious policymaker anywhere in the world is trying to reduce deficits or debt any longer, and all major central banks are happy to finance more government borrowing with printed money. After Japan’s election of Prime Minister Shinzo Abe and the undeclared budgetary ceasefire in Washington that followed President Obama’s victory last year, there were just two significant hold-outs against this trend: Britain and the euro-zone. Now, the fiscal “Austerians” and “sado-monetarists” in both these economies have surrendered, albeit for very different reasons.

Much attention has been focused this week on the chaos in Cyprus. Coming after the Italian election and subsequent easing of Italy’s fiscal conditions, the overriding necessity to keep Cyprus within the euro — and its military bases and gas supplies outside Russian control — will almost surely mean another retreat by Germany and the European Central Bank from their excessive austerity demands. But an even more remarkable shift has occurred in Britain. The Cameron government, which embraced fiscal austerity as its main raison d’etre, was suddenly converted to the joys of debt and borrowing in this week’s budget.

Of course, the rhetoric of British Chancellor George Osborne’s budget speech gave no hint of his Damascene conversion. On the contrary, it ridiculed “people who seem to think that the way to borrow less is to borrow more.” But Osborne’s trademark sneers could not disguise the meaning of the policies and numbers he presented.

Ronald Reagan had a catchphrase when faced with a crisis, especially a synthetic “crisis” of the kind Washington loves to concoct. He would call in the officials and media advisers rushing manically around the West Wing and calmly tell them: “Don’t just do something – stand there.”  In this respect, as in several others, “No Drama Obama” seems to resemble the man he once admiringly described, despite their ideological animosity, as the last great “transformational” U.S. president.

With Wall Street hitting new records as Washington supposedly plunges into its latest fiscal crisis with the budget sequestration that began this week, Obama could do well to emulate Reagan’s laid-back style. In addition to doing nothing about the latest manufactured fiscal crisis, he could explain why nothing is the right thing to do.

To be more specific, Obama could negotiate a truce in the budget war. Instead of insisting that Republicans must “pay” for Democratic spending cuts by agreeing to higher taxes, the president could offer a much more attractive deal to both sides. If Republicans eased the sequester and demanded no new spending cuts, the Democrats could promise not to raise any taxes. Such a ceasefire would  be seen by both parties as an honorable draw. Republicans would have fulfilled their pledge to stop higher taxes; while Democrats would have thwarted efforts to gut government and the welfare state.

Whisper it softly, but the age of government austerity is ending. It may seem an odd week to say this, what with the U.S. government preparing for indiscriminate budget cuts, a new fiscal crisis apparently brewing in Europe after the Italian election and David Cameron promising to “go further and faster in reducing the deficit” after the downgrade of Britain’s credit. But politics is sometimes a looking-glass world, in which things are the opposite of what they seem.

Discussing the outcome of Friday’s “sequestration” of U.S. government spending is best left to the month ahead, when we see how the public reacts to government cutbacks. But in Italy, Britain and the rest of Europe, this week’s events should help convince politicians and voters that efforts to reduce government borrowing, whether through public spending cuts or through tax hikes, are both politically suicidal and economically counterproductive.

In Italy, and therefore the entire euro zone, this shift is now almost certain. After the clear majority voted for politicians explicitly campaigning against austerity and what they presented as German economic bullying, further budget cuts or labor reforms in Italy are now off the agenda, if only because they would be literally impossible to implement. If Angela Merkel demands further budget cuts, tax hikes or labor reforms as a condition for supporting Italy’s membership of the euro, a majority of voters have given an unequivocal clear answer: Basta, enough is enough. Most Italians would rather leave the euro than accept any further austerity – and if Italy left the euro, total breakup of the single currency would follow with an inevitability that might not apply if the country exiting were Greece, Portugal or even Spain.

The U.S. fiscal cliff was dodged in pretty much the way that seemed most likely after November’s election: a bipartisan deal in which pragmatic Republicans, no longer focused on ending the presidency of Barack Obama, joined moderate Democrats to prevent economic sabotage by extremists from both ends of the political spectrum. On Wall Street, the immediate reaction was euphoria. But among mainstream economists and political commentators in Washington, it was cynicism.

While stock markets around the world approached their highest levels since the 2008 financial crisis, media headlines emphasized grim forebodings: Fresh stand-off looms after US cliff deal (Financial Times); Budget deal passes, debt ceiling looms (Wall Street Journal); Deal done but threats remain (Washington Post); Bigger showdowns loom after fiscal cliff deal (Reuters); House backs tax deal as next fight looms (Bloomberg).

Investors’ initial reactions are often misguided, especially to complex political events, but this time the markets will probably be proved right, and the pundits wrong. This week’s deal marked a genuine, and most likely sustainable, breakthrough for reasons of both politics and economics.

Where will jobs and growth come from? As we enter the fifth year of the Great Recession, people all over the world are asking this question, but their political leaders are not providing any convincing answers, as has been made obvious in the U.S. presidential debate and the European Union summit this week.

The second presidential debate started with Jeremy Epstein, a 20-year old college student, pointing out that he had “little chance to get employment” and asking the two candidates for some reassurance and an explanation of how this would change. Mitt Romney offered lots of reassurance but not much explanation:

“I want you to be able to get a job. I know what it takes to get this economy going. I know what it takes to create good jobs again. I know what it takes to make sure that you have the kind of opportunity you deserve. When you graduate … in 2014, I presume I’m going to be president. I’m going to make sure you get a job. Thanks, Jeremy. Yeah, you bet.”

Who’s afraid of the fiscal cliff? Even as protests in Spain and Greece revive jitters in the euro zone, global businesses and investors have discovered a new political horror, this time in the U.S. The fear now in world markets is not so much about November’s election, but about the automatic tax hikes and public spending cuts that Ben Bernanke has dubbed the “fiscal cliff.” These fiscal changes, which come into force on Dec. 31 unless Congress passes new legislation, will tighten fiscal policy by some 4 percent of GDP, comparable to the austerity programs in Spain, Italy and Britain.

Given what fiscal austerity has done to Europe, the worries are understandable, but everyone should calm down. A drastic fiscal tightening is almost inconceivable after the election, because politics, economics and markets interact in Europe and America in opposite ways.

Let’s start with economic policy. The warnings from the Federal Reserve to U.S. politicians as the fiscal deadline approaches are all against allowing the legislated tax increases and spending cuts to take effect. Thus the Fed is giving politicians advice that is opposite that of the European Central Bank and the Bank of England.

As London prepares for another display of British pageantry and good humor to match the unlikely triumph of last month’s rain-sodden Royal Jubilee, a less impressive aspect of Britain’s stoical “stiff upper lip” may detract from the national pride associated with hosting the Olympics. In the global race out of recession, Britain has just been revealed as a prime contender for the wooden spoon.

Not only was the shocking drop of 0.7 percent in Britain’s second-quarter GDP reported on Wednesday much bigger than investors and independent economists had expected but it almost matched the 0.8 percent fall in Italy’s GDP the previous quarter. And that Italian drop holds the record for the biggest quarterly contraction suffered by any G7 country since the immediate aftermath of the Lehman crisis. Much more important than such statistical trivia is the fact that Britain’s economic output is still 4.5 percent below the peak level it reached in the first quarter of 2008, more than four years ago. The U.S. and German economies, by contrast, are now significantly bigger than they were before the crisis and, in this sense at least, have left the recession behind them. And even the euro zone as a whole, despite the severity of its financial crisis, has done much better than Britain, with GDP just 2 percent below its peak in 2008.

National economic performance is not, of course, a competitive Olympic sport, and there is more to economic success than GDP growth. Still, there is a good reason for connecting the Olympics with economics: International competitions and comparisons can teach useful lessons and create incentives to improve economic management.