Question

Describe how Reagan and Thatcher were philosophically and economically aligned. How would they fit into today’s economic world? Do you think that they would be in favor of ball-outs? What makes you think so? Express your opinion, with analysis in mind, not emotion.

Answer 1

Ronald Reagan and Margaret Thatcher share one quality more important than differences of style and temperament. They are both politicians who paint in primary colours. There has been nothing neutral about them or the reactions they provoke. They are memorable personalities, who arouse feelings of enthusiastic admiration or of biting disapproval. Such leaders usually leave a strong imprint on the countries that they govern.

Together, Baroness Thatcher and Ronald Reagan championed fewer government entitlements, less regulation, a more robust free market economy, British and American exceptionalism, and a foreign policy that had, as its unofficial motto, "might is right". They were a formidable pair, each reinforcing the other at every opportunity. President Reagan was so fond of her I sometimes thought he was tempted to give her a White House telephone extension.

Reagan and Thatcher represented and encouraged the international movement toward free markets. That both of them were such prominent champions of this policy, and were delivering rising prosperity to most of their peoples for most of the time, may have served as an example to others. They were certainly the most ardent advocates of free markets. They gave practical credibility to increasingly fashionable economic theories. Yet there were deeper forces at work than the example of Reagan and Thatcher. In international terms they symbolized an idea whose time had come.

Both leaders had common sense in abundance, and their common sense perhaps explained their optimism that two sagging countries could right themselves. Each knew that prosperity and optimism were as simple to achieve as reversing the very governmental policies that had the electorate so downcast. To put it bluntly, Reagan and Thatcher would laugh at what has some down simply because the fixes are so easy.

They saw to it that free market values once again became the progressive ideal worth striving for while government interventionism was marked as a backward concept to be shunned. Similarly, in the current battle of ideas touched off by the recent financial crisis, the accepted wisdom about what is "right" and what is "wrong" is once again being reversed.

Today, monetary policies are ultra-expansive with interest rates at zero amid quantitative easing measures. Fiscal policies, which have been very lax in the aftermath of the financial crisis, are now more and more challenged against a background of exploding public debt.

In the 1980s after an initially rather brutal recession, the economies of the U.S. and the U.K. enjoyed a decade of almost perfect conditions. At the beginning of the 1990s, inflation and unemployment were significantly lower. Moreover, the policy mix of loose fiscal and tight monetary conditions paved the way for a decade-long bull market in equities. If we take this experience as the mirror image of what is happening today.
If opposite causes are leading to opposite consequences, then the current policy-mixes of tight fiscal and loose monetary conditions could, after an initially spectacular recovery (like the one we are experiencing today), lead to much higher inflation and much lower growth than the conditions we have become accustomed to during the past three decades.
Moreover, the bear market in equities could last longer than we currently expect. This is a rather bleak outlook, and it should be taken cautiously, but the current prospects for the pound and the dollar tend to support a more pessimistic view.