by
Gary North
Tea Party Economist

Recently
by Gary North: The
Case for Austerity

Three decades ago, political leadership was in a bull market. Today,
it is in a bear market.

Sarkozy lost
in France this month. Greece cannot form a government. Merkel’s
party lost a major election over the weekend. Great Britain is ruled
by a coalition government. Obama used his majority in both houses
of Congress to ram through a $787 billion stimulus, which fizzled.
Then his party lost the House in 2010. Support for him is tepid,
at best.

Think back
30 years. In politics, there were three crucial figures: Ronald
Reagan, Margaret Thatcher, and Deng Xiaoping. In religion, there
was one: John Paul II.

REAGAN

Ronald Reagan
rammed through his tax cuts in 1981. The Democrats in the House
grudgingly went along. The public was behind Reagan. They knew it.

He had trounced
Jimmy Carter. That was the first time an incumbent elected President
had lost since 1932. (Ford had not been elected.)

In 1982, Reagan
signed TEFRA into law. It raised taxes. Social Security’s bankruptcy
came in 1983. Reagan accepted the decision of the Greenspan Commission
on Social Security. He accepted a long-term tax hike.

In 1982, the
economy was in the worst recession since World War II. The Dow Jones
Industrial Average hit 777 on August 13, 1982. He signed TEFRA three
weeks later. He refused to veto any spending bills. He did not shut
down any federal department. The $200 billion annual deficits began
in 1983, but even then, he was hailed as a great leader. He became
the Teflon President. Nothing negative stuck. He defeated the hapless
Walter Mondale in 1984 by a staggering 525 to 13 electoral votes.

He let James
Baker III run the White House. Baker, then as now, was a Bush man.
But Reagan’s rhetoric never failed to inspire his followers. He
went out of office a popular President.

Reagan retained
only three non-negotiable policies: (1) income tax cuts in the top
brackets, (2) a build-up of the military, (3) anti-Communism. He
stuck to his guns.

Almost as
soon as he was sworn in, a minor union, PATCO, which ran air traffic
control, went on strike. This was illegal by federal law. Reagan
said he would fire anyone who did not go back to work on a specific
day. Most PATCO members did not go back to work. All of them were
fired. There were no plane crashes. The transition to new employees
went smoothly.

That sent
labor union leaders a message. It also sent the Soviet leaders a
message. They were as old as Reagan was, but he seemed tougher,
and the photos of Reagan as he rode his horse or put up fencing
on his ranch indicated that he was mentally and physically far younger.

I recall a
political cartoon at the time. It was a track race. Brezhnev was
in his running shorts, using a walker. Reagan was racing past him,
all teeth. That cartoon captured the actual condition of Soviet
leadership. Brezhnev died in November 1982. His replacement was
Andropov. He died in February 1984. His replacement was Chernenko.
He died in March 1985.

Clinton was
popular. Can you remember anything he did, other than Monica? He
was in office for 8 years, and mostly we remember Hillary. He, too,
was a Teflon President. Everything he did was Teflon. Nothing stuck
to any of it.

THATCHER

Across the
Atlantic in 1982 was Margaret Thatcher. She was the first female
Prime Minister of Great Britain. She was elected in May 1979. Wikipedia
summarizes how she won.

The
Conservatives campaigned on economic issues, pledging to control
inflation and to reduce the increasing power of the unions who supported
the mass strikes. They also employed the advertising agency Saatchi
Saatchi. The Conservative campaign was focused on gaining support
from traditional Labour voters who had never voted Conservative
before, first-time voters and people who had voted Liberal in 1974.
. . . She explicitly asked Labour voters for their support when
she launched her campaign in Cardiff, claiming that Labour was now
extreme.

This was exactly
the strategy that Reagan adopted a year later. In the midst of raging
price inflation and a recession, he got the votes of “blue collar
Democrats” who correctly perceived that Carter and the Democrats
were not deeply committed to their concerns.

She stuck
to her guns.

Thatcher’s
economic policy was influenced by monetarist thinking and economists
such as Milton Friedman. Together with Chancellor of the Exchequer
Geoffrey Howe, she lowered direct taxes on income and increased
indirect taxes. She increased interest rates to slow the growth
of the money supply and thereby lower inflation, introduced cash
limits on public spending, and reduced expenditure on social services
such as education and housing. Her cuts in higher education spending
resulted in her being the first Oxford-educated post-war Prime Minister
not to be awarded an honorary doctorate by the University of Oxford,
after a 738 to 319 vote of the governing assembly and a student
petition.

She did not
raise interest rates. The free market did that. The Bank of England
ceased inflating, following the lead of the Federal Reserve, under
Paul Volcker, who reversed policy in August 1979. That was why price
inflation slowed. That was also why the West went into a major recession.
As Austrian economic theory teaches, when central banks inflate,
there will be effects: rising prices and a bubble-filled boom. When
they cease inflating, there will be popped bubbles and a recession.

Then, also
like Reagan in 1982, she reversed on taxes.

Thatcher’s
job approval rating fell to 23% by December 1980, lower than recorded
for any previous Prime Minister. As the recession of the early 1980s
deepened she increased taxes, despite concerns expressed in a statement
signed by 364 leading economists issued towards the end of March
1981.

Why did she
increase taxes? Because
she refused to cut spending: also like Reagan. But the economy
began to recover under the new monetary policy.

By
1982 the UK began to experience signs of economic recovery; inflation
was down to 8.6% from a high of 18%, but unemployment was over 3
million for the first time since the 1930s. By 1983 overall economic
growth was stronger and inflation and mortgage rates were at their
lowest levels since 1970, although manufacturing output had dropped
by 30% since 1978 and unemployment remained high, peaking at 3.3
million in 1984.

This paralleled
the USA. By breaking price inflation, the two central banks caused
a worldwide recession. But it reversed, as a result of lowered top
marginal tax rates and more stable money.

The deficits
in the USA remained huge, but supply-side economics got the credit.
The policies were Keynesian to the core – huge deficits –
but Keynesians got no credit for this, because Reagan and Thatcher
were verbally anti-Keynesian. Reagan’s deficits ended the Republican
Party’s rhetorical legacy of balanced budgets. That was Reagan’s
supreme legacy to American political life. We now live under bipartisan
Keynesian deficits. So does all of the West.

Still, the
economy is sinking into recession. Keynesianism is not working.

In April 1982,
the military of Argentina attacked the British-owned Falkland Islands,
or Malvinas as the Argentinians called them. These islands were
off the east coast of Argentina. They had no economic or strategic
value. They were used for raising sheep. Thatcher went to war. In
June, Argentina surrendered. The British lost 255 men. Argentina
lost 649. The Argentinian government fell. Thatcher was overwhelmingly
re-elected in 1983.

This six-week
war had stretched the British Navy to its limits. This indicated
that Great Britain’s military capability was a shell of its 1945
self. But flags flew and crowds cheered.

In 1984, the
British coal miners struck in winter. Thatcher refused to capitulate.
She broke the union. Like Reagan, she gave great speeches. She was
a free market advocate, as was Reagan. She left a pro-market rhetorical
legacy, as did Reagan. This legacy was far stronger than her actual
policies were, also true of Reagan.

At the center
of both economies were the respective central banks. Volcker, not
Reagan, was the designer of the recovery. That was also true in
Great Britain. The Bank of England held the real power. Thatcher
and the British government did not.

DENG

In 1978, Deng
Xiaoping announced a new policy for agriculture. Henceforth, farmers
could grow what they wanted. They could sell their crops to other
Chinese without government intervention.

The confirmation
came to one village in a unique way. NPR
revealed it early in 2012. The story has been widely known in
China for years. The
German press told the story in 2008. But NPR’s version is lively.

In
1978, the farmers in a small Chinese village called Xiaogang gathered
in a mud hut to sign a secret contract. They thought it might get
them executed. Instead, it wound up transforming China’s economy
in ways that are still reverberating today. The contract was so
risky – and such a big deal – because it was created at
the height of communism in China. Everyone worked on the village’s
collective farm; there was no personal property.

The farmers
were fed up with communism. They agreed to assign plots to families.
Everyone would grow the food for the family. It turned them into
capitalists.

It was not
pure free enterprise. Some of the output would still go to the government.
Some went to the local collective. But families that exceeded their
quotas got to keep it.

They might
have been executed for this revolt. The contract said that if this
happened, or if anyone went to prison, other families would take
in the children until age 18.

They tried
to keep the contract secret. They failed.

Before
the contract, the farmers would drag themselves out into the field
only when the village whistle blew, marking the start of the work
day. After the contract, the families went out before dawn. “We
all secretly competed,” says Yen Jingchang. “Everyone wanted to
produce more than the next person.”

Ah, those
inscrutable Chinese! They were secret capitalist roaders. They were
governed by the cash nexus. Marx had warned against these people.
They think only of themselves, not of the greater good. Then they
work harder.

Nothing had
changed, except the system of rewards. There were no new tools.

It
was the same land, the same tools and the same people. Yet just
by changing the economic rules – by saying, you get to keep
some of what you grow – everything changed. At the end of the
season, they had an enormous harvest: more, Yen Hongchang says,
than in the previous five years combined. That huge harvest gave
them away. Local officials figured out that the farmers had divided
up the land, and word of what had happened in Xiaogang made its
way up the Communist Party chain of command.

Pretty smart
Communist bureaucrats! I mean, if all of a sudden output goes up
by five to one, there can be only one rational explanation: creeping
capitalism!

At
one point, Yen Hongchang was hauled in to the local Communist Party
office. The officials swore at him, treated him like he was on death
row. But fortunately for Mr. Yen and the other farmers, at this
moment in history, there were powerful people in the Communist Party
who wanted to change China’s economy. Deng Xiaoping, the Chinese
leader who would go on to create China’s modern economy, was just
coming to power. So instead of executing the Xiaogang farmers, the
Chinese leaders ultimately decided to hold them up as a model.

This was not
an isolated incident. The same story was repeated all over China,
which was why agricultural output rose in 1979. (For an academic
paper that discusses this enormous increase, but does not mention
Deng or the change in property rights, see
this.) Wiki
writes:

Economic
reforms taking advantage of market principles began in 1978 and
were carried out in two stages. The first stage, in the late 1970s
and early 1980s, involved the decollectivization of agriculture,
the opening up of the country to foreign investment, and permission
for entrepreneurs to start up businesses. However, most industry
remained state-owned. The second stage of reform, in the late 1980s
and 1990s, involved the privatization and contracting out of much
state-owned industry and the lifting of price controls, protectionist
policies, and regulations, although state monopolies in sectors
such as banking and petroleum remained.

JOHN
PAUL II

He became
Pope in 1979, after 30 days of John Paul I’s brief term. He spoke
several languages. He was a survivor. He had survived the Nazis.
He had survived the Communists. He had been mentored by Cardinal
Stefan Wyszynski, another master of pushing a hostile bureaucracy
to its limits.

He came into
office as an anti-Communist. His attempted assassination in 1981
by a man hired by Bulgarian Communists did not make him any more
cordial. But he forgave the man in 1983, and even met with him.
It changed the man’s entire attitude.

There have
been competing views of his legacy, obviously. But there is no doubt
that he was the most traveled Pope in history. The crowds that assembled
to see him were enormous. The crowd in Manila in 1995 was estimated
at 5 to 7 million.

In his waning
days as Premier of the USSR, Gorbachev
journeyed to the Vatican to meet with the Pope. In the midst
of economic breakdown, Gorbachev needed to build ties with the West.
He needed loans. He knew the importance of the Pope as a representative
of the West. The Pope did not visit him.

CONCLUSION

There is no
President, Prime Minister, or Premier to match the group of three
in 1982. There is no religious leader, either. There is no one who
commands much respect. There is no one who wields authority in terms
of a vision of social renewal.

Given the
state of public opinion today, it is best that there is no such
leader. The voters are committed to irreconcilable goals, all over
the world. They do not trust the state, yet they rely on the state
for welfare payments. They perceive the corruption, yet they do
not want to de-fund this corruption by spending cuts. They see that
their liberties are being taken away by the state, yet they call
for more action against undefined terrorists. They are, in a word,
schizophrenic.

Schizophrenia
does not produce healing. It produces confusion.

May
16, 2012

Gary
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible.

Copyright ©
2012 Gary North

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