Thatcher and Reagan -- two on the economic seesaw
Britain and the United States -- Margaret Thatcher and Ronald Reagan -- are experimenting with bold new programs in turbulent economic times. Inflation and recession are the enemies.Skip to next paragraph
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British Prime Minister Thatcher, the so-called "Iron Lady," arrived in Washington Feb. 25 to meet with President Reagan just as inflation in the US fell below double-digit rates for the first time since last summer.
The US Labor Department reported that for January the monthly increase in the consumer price index (CPI) was 0.7 percent, for an annual rate of 9.1 percent. In December the annual inflation rate was 13.4 percent.
Despite the apparent drop in the inflation rate, Murray Weidenbaum, chairman of the Council of Economic Advisers, cautioned: "January's moderate increase in the CPI, although welcome, provides little basis for optimism with regard to the underlying rate of inflation. The slight decline in food prices was counterbalanced by a sharp rise in energy. With January's reading 11.7 percent above a year ago, we are still in a double-digit inflationary environment."
Mrs. Thatcher's struggle to turn her nation's economic situation around is older than Mr. Reagan's -- and in trouble. After nearly two years in office, she sees Britain in a severe economic downturn, with signs of recovery very uncertain.
President Reagan and Prime Minister Thatcher are trying to do three similar things on the economic front: cut taxes and government spending, reduce the role of government in the economy, and slow the money supply growth and the inflation rate.
Both leaders are aided by the momentary weakness of their political opposition. Reagan knocked Democrats off balance by his election victory, followed by a spectacularly detailed and sweeping package of spending and tax cuts. Mrs. Thatcher sees the opposition Labour Party almost neutralized over social, ideological, and international disputes.
Mrs. Thatcher has one big advantage over Mr. Reagan in presenting her recovery program: a parliamentary system that assures her a majority in government until the next election in 1984. (By contrast the fragmented US Congress may tear the Reagan program apart.)
Mr. Reagan has one big advantage over Mrs. Thatcher: There are no nationalized industries in the US whose working force can create strikes and force humiliating defeats on the government, as has just happened in the United Kingdom in the coal strikes.
The two leaders are respectively trying precedent-setting experimental economic remedies: Mrs. Thatcher, belonging to the so- called "monetarist" school, hopes to control inflation by controlling the supply of money in circulation, among other things. Mr. Reagan is following the "supply side" economics school, which puts emphasis on increasing the mass of goods available to buyers (supplies) rather than in stimulating demand.
To some degree, these theories break from the old Keynesian school of economics, which postulated that the economy could be controlled by increased government spending during slumps, and by government austerity in inflation. However, "stagflation" (simultaneous inflation and stagnation) has arrived and has put economists in a dither all over the world.
The two conservative leaders have a great deal in common in their Washington meeting. "It helps to know we share the same views," Mrs. Thatcher declared before coming here.
Her economic program has been disappointing so far, but she vows more of the same. Mr. Reagan might profit by the British lesson; for one thing, the British government has not been able to control its own spending. This is also one of the biggest problems Reagan faces: whether Congress will accept the gigantic spending cuts he proposes.
The American system of controlling money in circulation, a key factor in both economic recovery programs, is simpler than in Britain because it is centered more completely in the Federal Reserve Board (Fed).
Testifying before the Senate Banking Committee on the day of Mrs. Thatcher's arrival, Fed chairman Paul A. Volcker announced more restrictive money supply targets to "squeeze out" inflation: If inflation continued, caused by too many dollars chasing too few goods, the Fed would intervene quicker to restrict money supply.
The money supply normally is reduced by raising interest rates. The trouble is that high interest rates cut inflation but also put a brake on business expansion.
"If inflation continues unabated or rises," Mr. Volcker told senators, "real activity is likely to be squeezed. As inflation begins notably to abate, the stage will be set for stronger real growth."
Volcker announced a 0.5 percent reduction in this year's growth targets for the most common measures of the US money supply.