Four years ago the British economy appeared to be on the verge of "making it". What went wrong, David Smith asks, and whose fault was it anyway?
"What have you guys done to this economy?" he said, and he meant it. The visitor, as readers will have guessed, was an American, an Anglophile, last over here four years ago. At that time the Thatcher economic miracle was near its peak. Britain, it appeared, had made it, or was on the verge of doing so. But in 1991, as we peered through the mist of a recession-hit economy, things were very different.
The question was one of those that, if one is at all susceptible to insomnia, can indeed keep you awake at night. What did go wrong, and whose fault was it? And, most importantly, can we ever get back to the low-inflation, high-growth, high-productivity economy that we had?
The first lesson of the past four years is: ignore the business cycle at your peril. In 1987-88 the economy was on the crest of the wave. The previous cyclical trough was as long ago as the spring of 1981 and, apart from a brief pause in activity in 1985, it had been upward progress all the way.
This had several effects. Governments, individuals and companies all ceased to believe, to a greater or lesser extent, that there was any downside to economic activity. Inevitably the focus has been on the mistakes made by the Government, and Nigel Lawson as Chancellor of the Exchequer, which arose out of this belief. And certainly, on any measure, it was quite wrong to boost the economy through unrealistically low interest rates and tax cuts at the height of the boom in 1988.
Governments, and Chancellors in particular, are there to carry the can, if not suffer the consequences. But how many of us can put our hands on our hearts and say that we did not believe, just a little bit, that the good times were here to stay? And the consequence of that, of course, was that as both individuals and companies we borrowed ourselves into the very position which made us vulnerable to high interest rates and the downturn.
What is now clear is that in attempting to eliminate the business cycle in the late 1980s, the Government, with the connivance of the rest of us, only served to exaggerate it. That was why the inflationary boom was so strong, and this without the external factor of, for example, sharply rising world oil prices. And that is why the subsequent recession has been so harsh.
The second lesson is that certain policy actions, while perfectly desirable in themselves, can have unpredictable and damaging consequences. Most businessmen welcome deregulation, and rightly so. For individuals its effects can be mixed, at least in the short term. But how many people objected when, from the mid-1980s onwards, financial deregulation enabled us to borrow what we wanted, without having to grovel.
It is now possible to see that, from both sides, the initial experiments with a deregulated financial system went too far. Lenders, obsessed with market share, were only too keen to push out loans. And they found customers who were only too willing to take them. I suspect that, for both lenders and borrowers, enough fingers have been burned for there to be a greater degree of self-restraint will operate in the next upturn.