Fareed Zakaria Fails to Appreciate the Fruits of Thatcherism

Thursday, 11 April 2013 04:03

Fareed Zakaria failed to recognize the true fruits of Thatcherism in his column today. After telling readers that Thatcherism was the right remedy for the problems of the 1970s such as oil shocks, slow productivity growth and rising wages, he says that it is not the answer for economy now:

"Today, American and European workers struggle to keep up their wages as technology and globalization push them down. Western economies face global competition, with other countries building impressive infrastructure and expanding education and worker training. They face a two-track economy where capital does well but labor does not, where college graduates thrive but those without strong skills fall behind and where inequality is rising not just in outcomes but also in opportunities."

Actually, the problems that Zakaria identifies are largely the result of Thatcherism. A main reason that workers have to struggle to keep their wages up is that central banks have deliberately raised unemployment in order to keep inflation low. This weakens the bargaining power of workers, especially those in the bottom half of the wage distribution.

The high unemployment of recent years can be attributed to a policy of financial regulation that allowed for banks to grow large with the implicit subsidy of a government granted too big to fail guarantee. It also required central banks to conduct monetary and regulatory policy without regard to asset bubbles.

Thatcher and her kindred spirits in the United States and elsewhere worked to weaken labor unions. This has also reduced the ability of workers to secure their share of gains from productivity growth.

The split between winners and losers in the current economy does not fit Zakaria's description. The median wage for college graduates has been virtually flat since the 1990s. This group includes many people who have very high skills.

The comment about globalization is bizarre. The fact that other countries have become wealthier should help the rich countries, not hurt them. It only poses a problem in a context of bad macroeconomic policy, like having an over-valued currency. It also can be a problem with selective protectionism of the sort used in the United States. Trade policy has deliberately put less-educated workers in direct competition with low-paid workers in the developing world. By contrast, highly educated professionals like doctors and lawyers, are largely protected from such competition.

It is remarkable that Zakaria somehow fails to recognize the extent to which the factors that he identifies as problems were the direct result of Thatcherism. In many cases, such as the weakening of workers bargaining power, this was an explicitly stated goal of many of her supporters.