War. ‘I admire her greatly,’ Hayek confirmed. ‘Her policies are the right ones, but whether she’ll be able to get done what she knows must be done is another question.’ Quoting John Stuart Mill’s description of the Tories as ‘the stupid party’, he expressed his suspicion that Thatcher, like himself, was more of a nineteenth-century liberal than a conservative – an opponent, in other words, of any interference with the marketplace, whether from social democrats bent on social engineering or captains of industry who wished to keep out cheap imports.
Milton Friedman returned to Britain in February 1980 to launch an ideological Blitzkrieg – meeting Thatcher at Downing Street, promoting his new book Free to Choose and presenting a series of televised lectures in which he advocated ‘the elimination of all government interference in free enterprise, from minimum wage to social welfare programmes’. He cited the economies of Japan, South Korea and Malaysia to prove that prosperity depended on allowing the ‘invisible guiding hand’ of the free market to hold the tiller. ‘What happens here in Britain will have a very important influence in the US,’ he told the Washington Post’s London correspondent. ‘If Thatcher succeeds, it will be very encouraging. It is a fascinating experiment, and a good deal depends on it … Britain, and much of the world, is at a turning point after a fifty to sixty-year run of Fabian socialism.’ Thatcher’s election, he believed, ‘could mark the turning away from the welfare state back to the free-market economies of the nineteenth century’.
By then, Thatcher’s application of Friedmanite principles – restricting the money supply, cutting public spending – was indeed producing results. During her first year inflation surged from 9 per cent to more than 20 per cent; interest rates and unemployment both rose sharply; and Britain’s manufacturing industry, the legacy of that energetic nineteenth-century entrepreneurialism which Friedman and Thatcher so admired, was battered by recession.
This news escaped the attention of her transatlantic disciples, perhaps because they were distracted by the emergence of a hero on their own side of the pond – the old Hollywood actor Ronald Reagan, who entered the presidential primaries of 1980 reciting the incredible but irresistible promise that he would cut taxes, increase defence spending and still balance the budget by 1983. The wondrous alchemical formula had been devised by Arthur Laffer, a colleague of Milton Friedman at the University of Chicago, whose ‘Laffer Curve’ seemed to demonstrate that a government could actually increase its revenue by reducing tax rates. The rich would no longer feel impelled to seek out ingenious tax-dodging ruses, and the lower rate would stimulate economic growth, thus expanding the national revenue anyway.
Although the ‘supply-side economics’ espoused by the Reaganites had a veneer of scientific method, not least in the elegant parabola of Laffer’s curve, it was indistinguishable from the old, discredited superstition known as ‘trickle-down theory’: the notion that if the rich were encouraged and enabled to make themselves as wealthy as possible – through low taxes, huge salaries, stock options, bonuses and perks – the benefits of this bonanza would somehow, magically, reach the pockets of the humblest hop-picker or crossing-sweeper. In his Political Dictionary, William Safire attributes the theory (though not the title) to the presidential candidate William Jennings Bryan, who in 1896 referred to the belief ‘that if you will only legislate to make the well-to-do prosperous, their prosperity will leak through to those below’. The actual phrase ‘trickle-down theory’ first appeared in the 1932 presidential campaign, when Democrats mocked Herbert Hoover’s plan to engineer an economic recovery by making the rich richer. ‘It’s kind of hard to sell “trickle down”,’ Reagan’s budget director, David Stockman, admitted in an incautious interview with the Atlantic Monthly soon after the 1980 election. ‘So the supply-side formula was the only way to get a tax policy that was really “trickle down”. Supply-side is “trickle-down theory”.’
Even on the right, Reaganomics was not universally popular. One of Britain’s most fervent monetarists, Professor Patrick Minford, advised Margaret Thatcher that the Laffer Curve was nonsense; Reagan’s Republican rival George Bush mocked supply-side theories as ‘voodoo economics’. Only a few months later, however, Bush accepted the role of candidate Reagan’s running mate, and by 1981 the new president and vice-president were working their voodoo magic. Reagan’s first budget included a modest reduction in the basic tax rate, but his indiscreet colleague David Stockman revealed that this was merely a ‘Trojan horse’ for the far more drastic slashing of the top rate from 70 to 50 per cent – and, later, to 28 per cent. Tax-cuts for the rich were central to the supply-side superstition.
According to the Laffer Curve, the public coffers should then have swelled with extra revenue, so much so that the budget could be balanced within a year or two. The reality could hardly be further from the theory: during Reagan’s eight years in the White House the total federal deficit swelled from about $900 billion to more than $3 trillion. While his tax policies certainly precipitated an orgy of speculation in stocks and real estate, they did nothing to induce genuine economic progress: as Americans stopped saving and started spending, throughout the 1980s there was a continuous decline in the long-term capital investment on which growth and jobs depended. At the start of 1981 the new administration was assuring the nation that there would be no recession, but by the autumn it had already arrived, as the Federal Reserve raised interest rates to dampen the inflationary effects of the tax cuts. A year later unemployment in the US rose above 10 per cent for the first time since the 1930s.
Ronald Reagan was an incorrigible fantasist. (He once told the Israeli prime minister that he had been present at the liberation of Nazi death camps in Europe; in fact, his wartime duties in the army film unit never took him further afield than California.) Like many sentimental old hams, he could not always distinguish between his own life and the roles he acted. More surprisingly, others believed his fantasies: even today, tough conservative journalists come over all lyrical and moist-eyed when writing about the years of Reaganomics, recalled as a Gilded Age of prosperity and contentment.
It was indeed reminiscent of that previous Gilded Age a century earlier, notably in the widening gulf between a wealthy elite and the rest. As the political analyst Kevin Phillips recorded in his influential book The Politics of Rich and Poor (1990), ‘no parallel upsurge of riches had been seen since the late nineteenth century, the era of the Vanderbilts, Morgans and Rockefellers’. Income tax was abolished in the United States in 1872, not to be reimposed again until the First World War, and it was during this period that the great dynasties built their fortunes – and flaunted them. An ostentatious 1980s mogul such as Donald Trump, who erected the Trump Tower as a vainglorious monument, was merely following the example of those earlier nouveaux riches who built outrageously gaudy palazzos and châteaux on Fifth Avenue. The conspicuous extravagance of late-Victorian millionaires – exemplified by Mrs Stuyvesant Fish’s famous dinner in honour of her dog, which arrived wearing a $15,000 diamond-studded collar – was more than matched by the glitzy parties chronicled and celebrated every month in Vanity Fair, relaunched under the editorship of Tina Brown in 1983 as a parish magazine for the new plutocracy.
As in the first Gilded Age, scarcely any of the new abundance trickled down to the middle or working classes. Under Ronald Reagan, it was not until 1987 that the average family’s real income returned to the levels enjoyed in the 1970s, and even this was a misleading comparison since they were now working far harder for it: whereas in 1973 average Americans had 26.2 hours of ‘leisure time’ every week, by 1987 the figure had fallen to 16.6 hours. They were less secure, too, as short-term or temporary contracts demolished the tradition of full-time, well-paid and often unionised employment. The earnings of male blue-collar workers in manufacturing industry fell throughout the 1980s as their employers threatened to close the factory or move production overseas if American labour ‘priced itself out of a job’. There was also a revival of Herbert Spencer’s social Darwinism, which had last been in vogue at the turn of the previous century, as right-wing triumphalists argued that government should not interfere with the ‘natural selection’ of commercial markets.
Curiously, however, they seemed quite willing to let the government clear up any ensuing mess. In 1982 members of Congress were bribed to ‘liberalise’ the Savings & Loan industry, effectively promising that the public purse would cover any losses from bad investments made