Margaret Thatcher: Right about nearly everything

She was respected more abroad than at home 

It is still terribly hard for those who opposed her to admit it, but Margaret Thatcher was right about most things.

She was right that Britain’s trade unions had become much too powerful. She was right that nationalised industries had to be privatised. She was right that inflation has monetary causes.

She was also mostly right about foreign policy. She was right to drive the forces of Argentina’s junta out of the Falklands and she was right to exhort a “wobbly” George H.W. Bush to mete out the same treatment to Saddam Hussein’s forces in Kuwait.

Though labelled the “Iron Lady” by a Soviet magazine, her hawkishness in the cold war did not blind her to the possibilities of doing business with Mikhail Gorbachev. Like Ronald Reagan, she was quick to see the opportunity offered by his policies of glasnost and perestroika.

The outcome of the cold war seems inevitable with the benefit of hindsight. But for most of the 1980s, Thatcher had to endure a relentless stream of criticism from fellow travellers and useful idiots: believers in unilateral disarmament who would gladly have allowed the Soviets to establish dominance in intermediate range nuclear forces in Europe, as well as exponents of “convergence theory”, who insisted that the countries of Nato and the Warsaw Pact were gradually and peacefully growing alike (give or take the odd gulag). Above all, however, Thatcher was right about Europe. She was right to push Europe in the direction of real free trade by backing and signing the Single European Act of 1986. Yet she was equally right to oppose the idea of a single European currency.

On this issue, the Financial Times, as well as a great many other respected publications, owes Thatcher not only the respect due to a great leader, but also an apology. Throughout the 1980s, many critics consistently heaped opprobrium on her for resisting the efforts of her own cabinet to get sterling into the European exchange rate mechanism.
Consistently, Thatcher’s sceptics took the side of those, such as Nigel Lawson, Geoffrey Howe and John Major, who favoured “shadowing” the Deutschmark and then pegging the sterling-mark exchange rate.

Having been dragged kicking and screaming into the ERM in October 1990, Thatcher denounced the Delors plan for a federal Europe with a defiant “No! No! No!” – one “no” apiece for the European parliament, government and senate he envisaged. Just weeks later, deserted by her cabinet colleagues, she was forced to resign. Yet subsequent events have largely vindicated Thatcher’s view. Sterling’s entry into the ERM was an unmitigated economic policy disaster. Tying Britain’s fortunes to the decisions of the Bundesbank in Frankfurt, ERM membership led to an unnecessarily severe recession in 1990-1992, which ended only when – with some help from George Soros – the pound left the mechanism.

There were those who argued that the ERM fiasco illustrated the even greater advantages of a full monetary union over a system of fixed exchange rates. But once again subsequent events have confirmed the Thatcherite view that an independent monetary policy is an essential part of a nation’s sovereignty. Just ask yourself how Britain would have fared if we had been inside the eurozone when the financial crisis struck. I shudder even to think of it.

It has long been conventional wisdom that Thatcher was wrong about one thing above all. She was wrong, so the argument goes, to oppose German reunification.

Indeed, most recent accounts of the events of 1989-1990 portray her as a kind of female Basil Fawlty, stuck in some kind of second world war time-warp.

Yet future historians may look back on negative reaction to German reunification with more sympathy than most commentators felt at the time. In an internal memorandum, written on February 2 1990, Thatcher offered a shrewd commentary on West Germany’s position that reunification would pose no strategic threat if it was accompanied by increased European integration. “The problems will not be overcome by strengthening the E[uropean] C[ommunity],” she wrote. “Germany’s ambitions would then become the dominant and active factor.”
There are rather a large number of people in southern Europe today – and perhaps also in Paris – who would acknowledge that here, too, Thatcher was right. Only last year the Italian prime minister complained of being treated as if Italy was in a “semicolonial” relationship with Germany.

Like many great leaders, Margaret Thatcher has come to be more respected abroad than she ever was at home. Left-leaning Brits who opposed her during the 1980s find it especially hard to admit that she was mostly right and they were wrong.

On the teaching of history, Michael Gove is right

Why do critics feel obliged to defend a status quo that so many teachers, parents and pupils agree is indefensible? 

Michael Gove's new national curriculum is out, and already the big guns of Oxbridge are blasting the changes it proposes to the way English kids are taught history.

From Cambridge no less a personage than Richard Evans, the Regius Professor of History, condemned Gove's attempt to restore "rote learning of the patriotic stocking-fillers so beloved of traditionalists". According to Evans, the new curriculum was "a Little England version of our national past, linked to an isolationist view of our national future". It constituted "a mindless regression to the patriotic myths of the Edwardian era".

From Oxford came the echo. David Priestland said it was a "depressingly narrow … resolutely insular … politicised and philistine" document. "We are … firmly back in the land of the Edwardian bestseller Our Island Story."

The pomposity of these attacks is in inverse proportion to their accuracy. Indeed, if you want a perfect illustration of how depressingly narrow, resolutely insular and politicised Oxbridge historians can be, read these two. You have to wonder when, if ever, these learned professors last set foot inside a school classroom, or last had a conversation with a history teacher or a pupil about the current key stages 2 and 3.

Evans's enthusiastic allusion to "the existing breadth and ambition of coverage, critical method and historical debate" suggests an almost wilful ignorance of – or indifference to – the parlous state of historical knowledge among young Britons.

If you want to understand what's really wrong with history in English schools, read schoolteacher Matthew Hunter's excellent essay in the latest issue of Standpoint. As Hunter rightly says, it's not just the defective content of the old national curriculum that is the problem. It's the way history has been taught in British schools ever since the advent of the schools history project in the 1970s and the rejection of historical knowledge in favour of "source analysis" and "child-centered" learning ("Imagine you are a Roman centurion …").

Only someone living in a dreaming Oxonian spire could be unaware of how badly this has turned out, despite the best efforts of thousands of hard-working teachers. I know because I have watched three of my children go through the English system, because I have regularly visited schools and talked to history teachers, and because (unlike Evans and Priestland, authors of rather dry works on, respectively, Nazi Germany and Soviet Russia) I have written and presented popular history.

The new national curriculum is not flawless, to be sure. It runs counter to the advice I gave Gove by being much too prescriptive. The 34 topics to be covered by pupils between the ages of seven and 14 already read a bit like chapter titles and, if there is one thing I hope we avoid, it is an official history textbook (even if it's written by Simon Schama).

But to caricature it as an unfunny version of 1066 and All That is the kind of disingenuous misrepresentation of a document that Richard Evans would denounce as professional misconduct if he were not the historian doing it.

Among other things, the national curriculum explicitly aims to ensure that all pupils "know and understand the broad outlines of European and world history: the growth and decline of ancient civilisations; the expansion and dissolution of empires"; that they "understand historical concepts such as continuity and change, cause and consequence, similarity, difference and significance"; and that they "understand how evidence is used rigorously to make historical claims".

At key stage 1, children will be introduced to "basic concepts" such as nation, civilisation, monarchy, parliament, democracy, war and peace. At key stage 2, they will study the ancient civilisations of Greece and Rome. As for "the essential chronology of Britain's history", to which Evans and Priestland object so strongly, it is a model of political correctness: not only Mary Seacole makes the cut, but also Olaudah Equiano – hardly escapees from Our Island Story.

Quite why the professors feel obliged to defend a status quo that so many teachers, parents and pupils agree is indefensible I cannot work out. Is it sheer ignorance? Or partisan prejudice?

Surely they can't sincerely think it's acceptable for children to leave school (as mine have all done) knowing nothing whatever about the Norman conquest, the English civil war or the Glorious Revolution, but plenty (well, a bit) about the Third Reich, the New Deal and the civil rights movement?

This national curriculum isn't perfect, but it's a major improvement. It's supposed to be a "framework document for consultation". At least we now know two people Gove need not consult.

Currency wars are best fought quietly

The identity of the true warriors might come as a surprise 

Few issues in economics are more susceptible to political misrepresentation than exchange rates. The past few days have provided another perfect illustration of this point.

On Tuesday, in response to pressure from Shinzo Abe, the country’s new prime minister, the Bank of Japan voted to increase its inflation target from 1 to 2 per cent and to hit that target “at the earliest possible date”. To that end, starting a year from now, the BoJ will buy Y13tn ($140bn) of mostly short-term government debt each month.

The Japanese move triggered a flurry of warnings of an imminent “currency war”. Alexei Ulyukayev, first deputy chairman of Russia’s central bank, led the charge, closely followed by Jens Weidmann, Bundesbank president, and Bahk Jae-wan, South Korea’s finance minister.

Mr Weidmann referred darkly to “alarming infringements” and an “end to central bank autonomy”. The Japanese were not slow to respond. “Germany is the country whose exports have benefited most from the euro area’s fixed exchange rate system,” shot back Akira Amari, the country’s economy minister. “He’s not in a position to criticise.”
Before the beer glasses start flying in Davos (fat chance), let’s put this in historical perspective. Consider four things.

Back in the 1930s, it was obvious who was waging a currency war. Before the Depression, most countries had been on the gold standard, which had fixed exchange rates in terms of the yellow metal. When Britain abandoned gold in September 1931, it unleashed a wave of competitive devaluations. As economist Barry Eichengreen argues, going off gold was the essential first step towards recovery in the Depression. Floating the pound not only cheapened British exports; more importantly, it allowed the Bank of England to pursue a monetary policy focused on domestic needs. Lower interest rates helped generate recovery via the housing market.

Today, however, we live in a world of fiat money and mostly floating rates. The last vestige of the gold standard was swept away in August 1971, when Richard Nixon suspended the convertibility of the dollar into gold. For one country to accuse another of waging a currency war in 2013 is therefore absurd. The war has been going on for more than 40 years and it is a war of all against all.

Secondly, we should reflect on just how dire things are in Japan. The country has been in a near stationary state since the end of the 1980s. Nominal gross domestic product in yen terms is about where it was 20 years ago. Its public debt is unsustainably large. Japan’s demographics are the world’s worst. So give them a break.

Thirdly, the BoJ’s move is hardly revolutionary. Governor Masaaki Shirakawa offered no new asset purchases in 2013 and the net impact of the purchases promised for 2014 will be limited since most of the money will be used to buy short-term debt close to maturity. The net increase in asset purchases for 2014 will be only Y10tn, equivalent to about 2 per cent of GDP.
Compare that with the policy of the US Federal Reserve, which has consistently been more aggressive than its Japanese counterpart since the beginning of the financial crisis. Last week the Fed’s balance sheet exceeded $3tn for the first time ever. If the Fed keeps buying assets at the current pace of $85bn a month for the rest of 2013, it will accumulate another trillion in long-term assets: between 6 and 7 per cent of GDP. And that’s this year, not next.

Fourthly, and most importantly, the tendency of politicians and the public to focus on short-term movements in nominal exchange rates generates much more heat than light. True, Japan’s nominal rate in terms of the dollar has weakened markedly since September. Back then, a dollar was worth just Y77. Today it’s above Y90. But that 17 per cent depreciation looks less impressive when you remember that the dollar was worth Y158 back in early 1990 and apart from a brief period in 1995 it has traded below Y90 only since the summer of 2010.
In any case, it’s not a single nominal exchange rate that really matters. The Bank for International Settlements calculates far more meaningful real effective exchange rates, which take into account all the different economies with which a country trades and, crucially, changes in relative prices.

Put in these terms, Japan’s story looks very different. Since the early 1990s, the effects of deflation have weakened the real effective exchange rate. Between 1994 and the summer of 2007, this rate declined by more than a third. But with the onset of the global financial crisis, Japan had to give back some of its gains in competitiveness. Between August 2007 and October 2011 the real effective exchange rate strengthened by 27 per cent. Recent Japanese policy has only partly reversed that.
On the basis of the Bis data, the most aggressive currency warriors of the past 5½ years have been South Korea (a 19 per cent real effective depreciation since August 2007) and the UK (minus 17 per cent). So the Koreans win this week’s prize for hypocrisy. As for the Brits, small wonder Prime Minister David Cameron regards the crisis of the European Monetary Union as a huge political opportunity. He was one of those wise Conservatives who opposed British membership of the euro. And it has been the BoE’s easy monetary policy that has eased the pain of his government’s austerity.

Mr Cameron has been called many things in the past week but not “currency warrior”. Yet part of the plan since he entered Number 10 has been to discreetly weaken the pound. Sir Mervyn King, BoE governor, has been obliging. Mark Carney, his successor, will be even more so.

Naive commentators have portrayed Mr Cameron’s promise of an “in-out” referendum on EU membership after the next general election as reckless. But it not only makes political sense. It also makes economic sense as part of a covert devaluation strategy.

Turning Points

2012 in review 

WE yearn for turning points. Just as economists have predicted nine out of the last five recessions, so journalists have surely reported nine out of the last five revolutions. Every election is hailed as epoch-making. Every president is expected to have a new foreign policy “doctrine.” A minor redesign of a cellular phone is hailed by the devotees of the Apple cult as a “paradigm shift.”

The point about paradigm shifts, as Thomas Kuhn pointed out in “The Structure of Scientific Revolutions,” is that they don’t happen every other year. They are slow, because even when a new insight is right — dazzlingly right in hindsight — vested interests and other forms of inertia resist its adoption. The same is true for big political discontinuities. They just don’t happen that often.

In 2012 there were a whole bunch of elections, not only in the United States but also in France, Mexico, the Netherlands, Russia, South Korea, Taiwan and Venezuela. In China a new standing committee of the Politburo was named, after a selection process so opaque as to be papal.

In countries like Egypt, Libya and Yemen, there was no mistaking the revolutionary character of the change as the misnamed Arab Spring continued its evolution into an Islamist Winter. But in other places the political changes hardly qualified as turning points. In France a jaded Left mounted one last feeble rally against economic reality. In Mexico the old regime, in the form of the Institutional Revolutionary Party, returned to power. Contrary to expectations, anti-European populists lost in Holland and the genial Mark Rutte was re-elected. In Russia, Vladimir Putin abandoned his pretense of being prime minister and returned to his real job as president. Turning points? Turn over and go back to sleep.

The great English historian A.J.P. Taylor said of the year 1848 that “German history reached its turning point and failed to turn.” This verdict could in fact be applied to most countries in most years.

History is like an oil tanker. It does not turn on a dime. Mankind sails forward through time in seas that are sometimes calm, sometimes stormy. At times it seems almost becalmed, at other times it can do 12 knots. Depending on who captains the ship, it veers sometimes to port, sometimes to starboard. When it changes direction, the turn is generally slow.

The things that change suddenly on an oil tanker are the emotions of the crew. Nine hundred and ninety-nine days out of a thousand, they obey their orders and do their work. But very occasionally there is a drama. The men mutiny and the captain is clapped in irons. Or pirates board the ship. Such events are what historians love to study and call “revolutions.” Still, the ship plows onward.

In other words, do not expect 1989 to happen every year — and don’t exaggerate how big a turning point even 1989 was. Nearly a quarter of a century ago, Francis Fukuyama hailed “an unabashed victory of economic and political liberalism… the Triumph of the West.”

It seemed so true. Who could forget the thrill of that night — Nov. 9, 1989 — when the Cold War ended not with Armageddon but with a street party? Yet, as I write, the People’s Republic of China is poised to overtake the United States in terms of gross domestic product (adjusted for differences in purchasing power) in 2017. If you invested in the West in 1989 you fared much worse than if you had invested in the Rest. Emerging stock markets have risen by a factor of five since 1989; the U.S. market, fourfold; Europe, less than threefold.

One attractively simple way of thinking about the world is to say that wealth, and with it power, are shifting from the West to the Rest. In that sense, the real turning point was not 1989 but 1979, the year Deng Xiaoping visited the United States and China’s economic reforms began in earnest. From that point, the “great divergence” of the West from the Rest came to an end, and the world embarked on a “great reconvergence.”

The Six Drivers of Historical Change 

But the reality is more complicated than suggested by phrases like “the post-American world.”

There are six slow-acting drivers of historical change in our time, as in most of recorded history. A common error is to focus on only one. They are:

1. Technological innovation;

2. The spread of ideas and institutions;

3. The tendency of even good political systems to degenerate;

4. Demographics;

5. Supplies of essential commodities;

6. Climate change.

The first three essentially explain why the West has lost some of its predominance. But the others remind us that, in that wonderful line often attributed to Bismarck, “a special Providence watches over children, drunkards and the United States of America.”

Measured (crudely) in terms of international patents granted by country of origin of applicant, the West no longer leads. Japan has been out in front of the United States for nearly 20 years and, in the past decade, first South Korea and then China have overtaken Germany to take the third and fourth places.

Measured (less crudely) with standardized tests of mathematical attainment at age 15, the West has also slipped. In the most recent report, published by the Organization for Economic Cooperation and Development, the gap between teenagers from the Shanghai District of China and those from the United States was as big as the gap between the Americans and their Albanian contemporaries. The silver medal went to young mathematicians from Singapore, the bronze to their counterparts in Hong Kong, then came South Korea, followed by Taiwan. Proficiency at math isn’t everything, of course, but societies that teach the average student so much better than the West does are probabilistically more likely to turn raw genius (which is pretty randomly distributed through humanity) into Nobel prizes.

The third driver of change — nearly always overlooked by political scientists — is the tendency of even the best systems to degenerate as rent-seeking special interests grow on the body politic like barnacles on a ship’s hull, and civic virtue yields to human frailty. Westerners are justly proud of their various democratic systems, and Americans in particular regard their Constitution as the world’s best. Yet every comparative study of institutional quality — from the World Economic Forum’s Global Competitiveness Index to the World Bank’s Worldwide Governance Indicators — tells the same depressing story. In many Western countries there has been a perceptible decline in the rule of law. Among the worst cases are South European “cradles of democracy,” Greece and Italy, which receive shockingly bad scores from the World Economic Forum. In the United States, meanwhile, the World Bank reports marked declines since 2000 in the control of corruption, regulatory quality, accountability and government effectiveness.

This “great degeneration” helps explain the slowdown in growth and productivity we have witnessed in the West in the past decade. We cannot blame it solely on the financial crisis, nor on the fact that (as the economist Robert Gordon recently argued) the information technology revolution has delivered much less than its own hype led us to expect. The world is changing not just because the Rest have got better, but also because — quite independently — the West has got worse. Indeed, much of the developed world today reminds me of what Adam Smith said about China in “The Wealth of Nations”: It has reached a “stationary” state in which growth is near zero and prosperity is enjoyed only by a corrupt bureaucratic elite.

Nevertheless, there are three important reasons why the United States is more likely to escape from this condition of stasis than Southern Europe or Japan.

First, partly because of immigration, partly because of fertility and partly because of inefficient health care, the United States is aging much less quickly than countries like Japan and Germany. By 2050, according to the United Nations, more than a third of Japanese will be 65 or over. For Germany the figure will be 31 percent. Even in China, more than a quarter of the population will be older than 64. But for the United States, the figure will be just 21 percent. China’s labor force will start to shrink in the 2020s. That will not happen in the United States.

Beyond 2012 

Secondly, unlike Europe and Japan, the United States is one of the global Big Five in terms of mineral wealth, with known reserves of fossil fuels and minerals worth at least $30 trillion — more than Australia, Saudi Arabia and China, though less than Russia. In particular, the United States is poised to profit from an energy revolution that has seen shale gas leap from 1 percent of U.S. natural gas production in 2000 to 35 percent today. American natural gas is a quarter the price of East Asian and a third the price of German. The combination of an increasingly competitive labor market and cheap energy is going to spark a remarkable recovery of U.S. manufacturing in the near future.

Finally, as the world warms and climate becomes more volatile, North America will fare better than East Asia. Natural disasters will happen, of course, as Hurricane Sandy reminded us. But there will be more on the other side of the Pacific. Good luck to Asia’s coastal megacities. They will need it.

Already things look better for the United States than for the rest of the West. The I.M.F. projects 2.3 percent growth next year, compared with 1.2 percent for Japan and 0.7 percent for the euro zone. That divergence will persist.

In America, the economic trends toward self-sufficiency and manufacturing recovery may encourage a new phenomenon: liberal isolationism, as the country reverts to its default aversion to “foreign entanglements.” By contrast, Europe and Japan will continue to languish, denying themselves the relief of higher immigration or nuclear power, stagnating under piles of debt that will become harder and harder to finance. In these stationary states, populism will take uglier forms. After more than half a century, European integration may turn into disintegration.

Meanwhile, in the mobile states of the developing (and still growing) world, there will be more bourgeois revolutions, in the classical sense of revolutions against autocracy led by aspirant middle classes. Already, according to Credit Suisse, more than 300 million Chinese adults have wealth of between $10,000 and $100,000, while close to 20 million have wealth above $100,000. These people are discovering that their hard-won private property needs to be protected by the rule of law, and that the biggest threat to that is a corrupt Communist Party, which they are increasingly able and willing to criticize in online microblogs.

In the big emerging democracies — India, Brazil, Nigeria — there is less need for a bourgeois revolution. Indeed, Dilma Rousseff, the Brazilian president, recently declared that she wants “a middle-class Brazil.” In North Africa and the Middle East, by contrast, the bourgeois revolutions have begun. It was in Libya last year that the following graffiti was seen: “We want a constitutional role and for the president to have less authority and the four year presidential term should not be extended.” That is the authentic voice of 1848, though it remains to be seen whether Arabia will truly turn at this turning point.

The American empire-in-all-but-name is leaving the Middle Eastern stage, having dominated the region since the 1970s and — I would argue — having sparked the revolution by toppling the most vicious of the Arab dictators. Now the real contest is between those who would impose a medieval legal order on Arabia, as the ayatollahs imposed it on Persia after 1979, and those who dream of the long-awaited Islamic Reformation, which would allow Muslims to coexist in peace with modernity — not to mention with the state of Israel, modernity’s representative in the region. The choice between the Iranian and the Turkish (or Indonesian or Malaysian) models should not be hard to make. Yet the Arabs may have to endure a period of sectarian warfare before that Reformation can occur.

The hardest question to answer, as the great tanker of history slowly turns, is whether the two dominant powers of the age, America and China, will be able to maintain what Henry Kissinger has called “co-evolution,” or whether they are doomed to re-enact the rise of the Anglo-German antagonism that culminated in world war nearly a century ago. Will it be Chimerica — or what Noah Feldman has christened “Cool War”?

Or blazing hot war? The approaching centenary of 1914 is a sobering reminder that, while elections may come and elections may go, it is wars that change history’s direction most decisively. World War I did not sink the human ship, but it certainly sank the first age of globalization. Should a similar conflict occur in our time, we shall know that world history has reached a turning point. We must hope it will only turn — and not keel right over.