Inequality
Our story starts in 1979. Margaret Thatcher is elected Prime Minister with the goal of controlling inflation in the lead up to her election.
Inflation had spiraled out of control. £100 in 1970 was worth over £300 by 1979. But what caused this? First, the 1970s were rocked by two massive oil shocks when OPEC doubled and then tripled oil prices. Everything from gas to groceries got more expensive overnight. At the same time, wages kept rising as powerful trade unions demanded more pay to keep up with the rising prices, creating a vicious cycle of rising prices, leading to rising wages, leading to rising prices, and so on. Add to this loose monetary and fiscal policies leading to tons of money floating in the economy, and you have a recipe for disaster.
Guided by Chancellor Geoffrey Howe and hardline monetarists like Keith Joseph and Alan Walters, Thatcher had made inflation enemy number one. To fight it, her strategy was simple. First, reduce the money supply. The Thatcher government set out to strangle money supply, cutting sterling M3 growth from 12% a year to just 6% by 1984. Second, interest rates. In June 1979, she increased rates from 12 to 14%. Then again to 17% in November, the highest in the history of Britain. The idea was simple enough. Make borrowing expensive, slow down credit and choke off inflation. Although this helped stamp down inflation, a stronger pound made British exports uncompetitive abroad, while sky high borrowing costs crippled businesses at home. Manufacturers couldn't invest, couldn't expand and in many cases couldn't even keep the lights on. And the third thing was government spending. The Thatcher government aimed to cut public sector borrowing requirement from 4.7% of GDP in 1979 to just 1.5% by 1983. Concurrently, while in the middle of a recession, they did the unthinkable. They raised taxes, but Britain was already in trouble. More than 2 million people were out of work, and every month another 100,000 were joining the unemployment lines. It was so shocking that 364 economists signed a letter to The Times, saying the policy had no basis in economic theory.
So the question was, did it work.
Well, yeah. Although extreme, inflation decreased from 13% in 1979 to 5% by 1983. But at what cost? High interest rates, a strong pound and spending cuts crushed manufacturing towns across the United Kingdom. Britain's industrial base was gutted and regional inequality began to take shape.
Meanwhile, London was living a very different story, predominantly a service based economy. London, unlike much of the UK, was able to hold on. By the mid 1980s, joblessness in northern England, Scotland and Wales all pushed past 15%. While the Southeast and London stayed under 10%. But why was this the case?
Enter the Big Bang Deregulation package. Thatcher had a vision of transforming London into a financial superpower. Through deregulation, fixed commissions and exchange controls were scrapped, the single capacity rule ended, foreign ownership welcomed and electronic trading unleashed.
The result? International banks poured in £450 million into the city. 1500 new millionaires were minted and London cemented itself as the world's dominant financial center. On paper, the UK looked like it had gone through a renaissance at the end of Thatcher's first year in office. GDP was around 1 trillion Great Britain Pounds. But when she left in 1990, it was 1.4 trillion GBP. GDP per capita also rose from £15,500 thousand to £19,900 thousand by 1990. Britain was richer. But this data doesn't show the whole picture.
During the same period of time, the Gini coefficient, a measure for inequality, increased from 25 to 35, meaning while GDP per capita rose by 30%, inequality rose by 40%. So although Britain was richer, it was becoming more unequal. This was partly due to the extreme cost of Thatcher's policies on Britain's industrial base.
For example, in 1979, manufacturing accounted for nearly 30% of the UK's GDP. And by 1990 it fell to 16%. Concurrently, manufacturing employment fell by nearly 40% from 1979 to 1993. So yes, GDP rose. GDP per capita increased. But if you didn't live in London, it wasn't so obvious. The services industry grew, but other industries declined as the UK wanted to rejig its economy.
Another way to examine the impact of shifting industries is the relationship between direct and indirect jobs created. Basically, if you open a factory selling widgets, you might hire 100 people directly. But to make your widgets, you need steel or electricity and distributors and more. Your factory, therefore, might support an additional 300 indirect jobs, giving a ratio of one direct job to every three indirect jobs. If we look at banking, the total is around 200 indirect jobs per 100 direct jobs. A ratio of 1 to 2. But if we look at iron manufacturing, the total is over 900 indirect jobs per 100 direct jobs. A ratio of 1 to 9. In fact, if we look at the financial services industry broadly, the ratio is around 1 to 3.6, which sounds great, but when you compare it to other industries like utilities, durable manufacturing and non-durable manufacturing, it isn't. And this is one of the reasons that service based industries lead to higher GDP, but increase inequality as earnings become more concentrated among a smaller group of individuals.
But this isn't simply about job creation. It's also about wages and benefits. Manufacturing jobs tended to be characterized by formal employment agreements with strong benefits, retirement plans, paid holidays, insurance, and sick leave. Alternatives for the majority low skilled manufacturing workforce did not have these characteristics. As such, studies show that the shift away from manufacturing led to an increase in inequality. And as a reminder, the UK's industrial base is deeply regionalized.
So although there might be jobs and wage growth in the South, pockets that historically relied on out-of-favor industries became hollowed out. And today not a single region in the UK north of London has a GDP per capita higher than the UK average.
Let that sink in. That means that every region in the UK, excluding London and the southeast, is poorer than the average of the UK.
are all Londoners living high on the hog? you don't think perhaps there are a multitude of Londoners barely getting by and swathes of deprivation experienced by other provincial cities. 