The poor judgements of Nigel Lawson

 

For someone who has been described as the “economic brain of Thatcherism”, it was inevitable that evaluations of his career would be ideologically polarised. He was after all the person who started privatisation, created the City’s ‘Big Bang’ and who cut top tax rates. Yet in the eyes of history, successful politicians need competence as well as ideology in order to make good decisions and judgements. The view I want to put forward here is that Lawson had an uncanny knack of making bad decisions.

It is perhaps telling that a number of articles following his death contrast his period in office favourably compared to our more recent Chancellors. It has to be said that this is an incredibly low bar. Equally some have focused on his undoubted intellect while in office, and prefer not to dwell on his more recent championing of Brexit and climate change denial. I want to suggest that the Nigel Lawson who was in charge at the Treasury had the same quality of judgement as the later Nigel Lawson who promoted Brexit and climate change denial.

To be fair, let me start with some of the things he got right. Abolishing corporation tax stock relief made sense, and as far as I know no one has thought to bring it back since. Abolishing corporation tax investment allowances survived for a considerable period of time, but they have returned in recent years. He was right to try and align income and capital gains taxes, something today's politicians should note. He was right to want to abolish mortgage tax relief, but Thatcher prevented him doing so. He also fought a long running battle to prevent Thatcher introducing the poll tax.

The first major thing he got wrong was monetarism. He was part of the Treasury team when Thatcher got elected, and although Howe was Chancellor it was Lawson who was the intellectual heavyweight in those initial years. (He moved from the Treasury to become energy secretary in September 1981). Although some people talk about monetarism in ideological terms, here I want to use the term in a more technical way, as a means of stabilising the economy through hitting targets for the quantity of money.

Monetarism didn’t make sense either in theory or practice. In terms of theory it made little sense to set interest rates to hit an intermediate target (some measure of money) rather than the final objective (inflation and output). It was a bad policy in practice because it caused a recession that decimated UK manufacturing, resulting in a prolonged period of very high unemployment. This was never the intention of the policy, because those putting it forward thought it would cause little disruption.

Ironically the 80/81 recession was predicted by initial internal Treasury forecasts. Macro forecasts are notoriously bad at predicting recessions, but for once a key forecast got it right. However the team of politicians and advisors that came with the new government, of which Lawson was a key member, regarded both the model and the civil servants that produced that forecast to be hopelessly Keynesian, so they ignored the warnings. A final desperate attempt to hit monetary targets led to the notorious 1981 Budget, where taxes were raised in the middle of a recession, delaying the subsequent recovery.

With the demise of monetarism, Lawson looked to an alternative intermediate target - the exchange rate. He decided to peg sterling at 3 Deutschmarks from March 1987, at a time when interest rates were too low. In addition, in the 1988 budget he reduced the top rate of tax from 60 per cent to 40 per cent, and to avoid appearing to favour the rich he also continued to reduce the basic rate. This combination of monetary and fiscal largesse, together with a credit boom (see below), meant that inflation doubled from around 5% to around 10% just after Lawson resigned in October 1989. Once again it seems he ignored Treasury advice on this.

In 1986 he presided over the biggest deregulation of the UK’s financial sector: the “Big Bang”. As well as preparing the ground for the failure of UK banks during the Global Financial Crisis thirty years later, it also led to the demutualisation of many Building Societies, with banks increasing their involvement in the UK mortgage market. Both led to much easier credit conditions for UK borrowers, leading to a housing boom. House prices rose 16% in 1987 and a further 25% in 1988. This also increased goods and services consumption, adding to what today is known as the Lawson boom.

In his time in the Treasury Lawson therefore helped create one recession, and laid the groundwork for a second. While his successor’s decision to enter the ERM at an overvalued exchange rate undoubtedly made the 1991 recession sharper than it had to be, some sort of downturn was likely in order to reduce the high level of inflation caused by the Lawson boom.

Of course these major mistakes may have had an ideological motivation, but it is possible to combine political motivations with good judgement. Lawson failed to do that. While Liz Truss as Prime Minister is rightly derided for blowing up the bond market, Lawson played a major role in blowing up the UK economy, twice. Indeed I suspect it is ideology that sustains Lawson’s reputation in many quarters. In reality, although their knowledge and intellects may have been very different, there is a similarity between the arrogance of Truss and Lawson in terms of pursuing ideological convenient but predictably disastrous economic ideas.

Lawson was Chancellor for 6 years, which is a relatively long period, and we can justifiably add an extra 2 for the period from 79 to 81 when he was Financial Secretary. The obvious recent comparison, therefore, is with Gordon Brown (10 years). Brown may have had a degree of luck in presiding over 10 years without any significant fluctuations in inflation or output (there was no boom or bust), but the contrast with a recession and a boom for Lawson does tell us something about both [1]. Of course Brown (as PM) was eventually brought down by the Global Financial Crisis, but arguably the groundwork for the impact of that global shock on UK banks was laid down by Lawson’s Big Bang rather than Brown. [2] In contrast the decimation of UK manufacturing in the early 80s owed a lot to the arrogance of the monetarist revolutionaries who took over the Treasury in 1979, and the Lawson boom of the late eighties rightly bears his name.

It should also never be forgotten that Lawson was Chancellor when North Sea Oil started bringing large amounts of money into the exchequer. Standard macroeconomic theory suggests that a temporary resource bonanza like that should mainly be saved, so that future generations can benefit from it. That is what happened in Norway. This saving does not have to be done by the government, but by using it to cut taxes (the basic rate was reduced from 30 per cent in 1983 to 25 per cent by 1988) Lawson gave no indication to taxpayers that this was a temporary bonus that should be saved. This policy failure can be contrasted with Brown’s decision in 2003 not to join the Euro, which most people would now regard as the right decision.

In 2013 Lawson advocated Britain leaving the European Union, arguing that “economic gains would substantially outweigh the costs”. In 2009 Lawson became chairman of The Global Warming Policy Foundation, a registered charity involved in promoting climate change denial. I hope the account above suggests that both were not some kind of later life aberration, but just more examples of making very poor choices.

So when people argue that we’d be a lot better off if there were more people like Lawson in public life today, I have to disagree. There is no doubt that Lawson was far better qualified than many other Chancellors, and also that he was clever, so why did he get these major judgements wrong? I think a large part of the answer is arrogance. As Julia Langdon writes: “His fierce intellectual approach to all aspects of policy meant that he always gave a higher priority to achieving his aims than to what others thought.” Those ‘others’ it seems included Treasury civil servants, many of whom were his intellectual equal, and who warned him about the mistakes he was about to make. If you take off the ideological blinkers, Lawson’s legacy is getting most major judgements wrong.

[1] By creating the independent Monetary Policy Committee of the Bank of England in 1997 Brown handed over stabilisation policy to others, and until 2007 they did a pretty good job.

[2] To his credit Brown played a major role in bringing that global crisis under control.