At a lunchtime meeting on 28 October, Nicholas Crafts presented the results of recent research on the record of the Thatcher governments. Crafts is Professor of Economic History at the University of Warwick and a Research Fellow in CEPR's Human Resources programme. His talk drew on his CEPR Discussion Paper No. 710, `Was the Thatcher Experiment Worth It? British Economic Growth in a European Context', written as part of CEPR's research programme on `Comparative Experience of Economic Growth in Postwar Europe', supported by a grant from the Commission of the European Communities under its SPES programme. The views expressed by Professor Crafts were his own, however, not those of the Commission of the European Communities nor of CEPR, which takes no institutional policy positions.

Crafts began by noting that any assessment of the `Thatcher experiment' depends critically on the assumptions made concerning the counterfactual `world without Thatcher', weightings of the costs and benefits of the policies pursued in the 1980s entailing value judgements on which there is no established consensus, and a precise definition of when the `experiment' began and ended. Focusing on the supply-side reforms of the early 1980s, including privatization, deregulation and reform of the trade unions, which emphasized efficiency at the expense of equality, Crafts excluded the period of the `Lawson boom' which involved a significant departure from the first Thatcher government's monetarist policies and the ensuing recession. Judgements on these reforms must remain provisional, since they may have had longer-term effects on which research is only just beginning.

Crafts noted that the marked improvement in the UK's productivity performance in the early 1980s was not matched by the key macroeconomic indicators: inflation and unemployment. Calculations of `measurable economic welfare' using the methodology developed by Beckerman in the 1970s, which focuses on two corrections to GDP data to account for `leisure' and an explicit measure of how much society is prepared to pay to reduce inequality, indicated that both effects were quite large for the 1980s. They roughly cancelled out, under reasonable assumptions, but the details of distributional effects matter more than for the 1960s and 1970s. Growth raised income for most of the population but not for the bottom 20%, which most economists would find worth while on balance. Those attaching no weight to leisure (much of which was clearly involuntary in this period) and strongly averse to poverty would disagree.

Crafts noted that much econometric work has attributed the productivity gains of Thatcher's first term to increased competition and reduced union bargaining power, i.e. to policy changes that would not have taken place under an alternative social democrat government. The UK's economic growth had underperformed by some 0.7-0.8% per annum relative to its competitors from 1945 to the 1970s, however, so these gains may reflect a postponement of its post-war catch-up; `once-and-for-all' gains from such a productivity shake-out are unlikely to have any long-term impact. He estimated that the costs of increased inequality (from changes to taxes and benefits) and unemployment (arising from rationalization and the postponement of the much-needed boost to demand) to lie within the range of 5-8% of GDP. These compared with productivity gains of 5-10%, so the `Thatcher experiment' may have been `worth it'.

In an endogenous growth framework, the chances of an overall positive judgement might be enhanced as a result of a long-run positive boost to growth, which could secure a broader consensus willing to accept its short-run costs. But there is no evidence of any relative improvement in the UK's investment in technology or physical or human capital, through which most such `endogenous growth' effects operate. Deindustrialization took effect faster than was necessary, and there is some evidence that such slimming-down of the manufacturing base may also reduce long-term growth through two channels. First, the terms of trade must decline by some 1-2% per annum to maintain the trade balance. This entails a difficult adjustment process under fixed exchange rates, which would become even more difficult in a monetary union. Second, it passes up an opportunity to invest in high- technology industries and thus forgoes the strong learning effect in productivity growth. Crafts concluded that the short-run gains from the economic policy package introduced by the first Thatcher government probably outweighed its costs, but there is little evidence of any long-run boost to growth and at least tentative evidence of a long-run decline.