The University of Salford/CC by 2.0
Former British Prime Minister Margaret Thatcher died today at the age of 87. Normally the death of a former European head of state would not be of interest in a local magazine, but Thatcher’s influence on domestic governance was profound—she may be a more popular and beloved figure here than in Britain, which BuzzFeed UK tweaked us on today—and the U.S. is grappling with her domestic policies, as much or more so in Chicago than elsewhere, the nation’s privatization lab.
The Thatcher government did not invent privatization; her predecessors had begun the process of “denationalization” prior to her taking power. But it got the name “privatization” during her reign, and no Western democracy had ever privatized public assets on that scale, affecting 42 national businesses with 900,000 employees, more than McDonald’s and Target combined.
It’s a bit of an apples-to-oranges comparison; Britain had many more public businesses to privatize, beginning with the phone company and extending to mines, the Jaguar car company, British Petroleum, and more. On a federal level the U.S. had many fewer options to privatize, though the replacement of federal bureaucrats by contractors is a form of privatization.
What Thatcher first did was bring to democratic governance what’s now known as neoliberalism, which David Harvey describes as “a theory of political economic practices that proposes that human well-being can best be advanced by liberating individual entrepreneurial freedoms and skills within an institutional framework characterized by strong private property rights, free markets, and free trade.” Here’s how the New Yorker’s John Cassidy describes it:
In subsequent years, her name would come to be associated with laissez-faire economists like Adam Smith, Friedrich Hayek, and Milton Friedman. But Mrs. Thatcher’s guiding philosophy was really more homespun. It emanated from the shop she lived above with her mother and father, Alderman Albert Roberts, who believed in hard work, thrift, and balancing the books. “Some say I preach merely the homilies of housekeeping or the parables of the parlour,” Mrs. Thatcher said, in a 1982 speech to a banquet of grandees in the City of London. “But I do not repent. Those parables would have saved many a financier from failure and many a country from crisis.”
Friedman, the University of Chicago Nobel winner, was of particular influence on Thatcher and her aides. The economic crisies of the late 1970s—particularly in Britain, the “sick man of Europe"— gave Thatcher’s government to implement this approach to the economy. The initial reason will sound familiar to anyone who observed the sale of Chicago’s parking meters: “In 1979 an initial reason for the sale of state-owned assets was the Exchequer’s need to raise funds to sustain high levels of public expenditure without further tax rises.” The country was also just a couple years after having to take on an IMF loan to stave off bankruptcy. The loan came with policy strings, so maintaining public expenditure would have been appealing.
(Thatcher did manage to cut taxes, with the highest cuts coming at the top of the spectrum, though she also minded the gap by almost doubling the value-added tax, which is basically a sales tax.)
Privatization was not initially a significant part of the Conservative platform, but after its initial success as a budget band-aid it moved forward quickly in Thatcher’s second term, when it became an ideological goal (“liberating individual entrepreneurial freedom") as a fiscal one (“not going broke or raising taxes").
Did it work? The consensus seems to be yes, but not really in the way anyone thought:
“Private ownership radically changed the incentives, but it was not the panacea its architect imagined,” said Dieter Helm, professor of energy policy at Oxford university. “What was gradually recognised was that privatised industries needed regulating, and serious regulatory failings, as well as badly designed reforms of the market after privatisation, are at the root of many of the problems that persist.”
In 2000, two British economists, Richard Green and Jonathan Haskel, looked at the economic effects of privatization in the cheekily titled paper “Seeing a Premier-League Economy.” Their conclusion was that privatization itself didn’t increase productivity; it was the process of making the public businesses appealing to private buyers that did:
Preprivatization restructuring, more competition, and tighter regulation all raised efficiency. Real change in the gas industry, for example, started in the early 1990s, once the competition authorities started to force open the industry. An open question is whether the commitment to privatization was essential to obtaining these gains.
It’s sort of like when your house gets to be a mess and you invite people over so you’re forced to clean it up. Britain had a productivity problem; privatization fixed it, but before the privatization actually occurred. In 1993, David Blanchflower of Dartmouth and Richard Freeman of Harvard found structural concerns:
We conclude that the Thatcher reforms succeeded in reducing union power and increasing the incentive to work – and may have increased the responsiveness of wages and employment at the micro-level. But they did not improve the response of real wages to unemployment nor the transition for men out of unemployment, and were accompanied by rising wage inequalities that do not seem to reflect the working of an ideal market system.
Blanchflower and Freeman allowed that the problems they saw could change; Thatcher was barely out of office at that point. But 20 years after their paper, an analysis in The Guardian found that the massive gains in wage inequality under Thatcher did not turn around, and poverty levels, while improved from their 1990 high, were still higher than when Thatcher took office.
The full-on privatization that marked the Thatcher era didn’t really take hold in the United States—in part because there simply weren’t the same kind of assets to sell, and in part because some of the privatizations well and truly failed, like the privatization of rail. Thatcher’s real legacy in the U.S. is that of her legacy in Britain: the embrace by the left of neoliberal privatization:
Most spectacular among these converts has been the Labour Party itself.
Clause IV of the party’s constitution, a commitment to “the common ownership of the means of production", required a Labour government to reverse privatisations.
In 1995, under Tony Blair’s leadership, the party voted to amend the clause and the face of British politics for a century was changed.
Two years later New Labour was in power, successfully establishing a reputation for sound finance and an ability to manage a predominantly market-based economy that had eluded other Labour governments for most of their periods of office.
The Labour Party, in Thatcher’s wake, embraced a different form of privatization, the Private Finance Initiative:
Under PFI, the government no longer finances and builds new public investments like roads and hospitals. Instead it gets the private sector to raise the cash, build the thing and maintain it afterwards. Instead of paying for the investment up front, the public sector repays private firms over a long period, typically 25 years.
If that sounds a bit like the Chicago Infrastructure Trust, it should. Rather than just selling assets (as with Thatcher or Daley), the trust gets private money to build now and pays that back over time. In the context of U.S. cities, Chicago has been something of a privatization lab, but in some ways we’ve followed the same arc as Britain, a few years later. It’s useful as a model and cautionary tale—as with the country’s recent experience with PFI, which is now being redone with greater transparency.
5 days ago