Thatcher, Elizabeth, Volker

 I watched the TV series on the royal family where the Queen interviews Thatcher at three-year intervals.  We of course have no direct knowledge, this is what might be called reasonable fiction on what may have been said.  In the first the Queen congratulates Thatcher and finds she is most sexist, not trusting women for ministries, odd but the Queen takes it in stride.  Thatcher is very determined to "fix" Britain's economy with the standard right-wing spending cuts and high interest.  Of course this causes economic weakness and high unemployment, but at least a strong currency.  The Queen questions her strongly about this and Thatcher is unperturbed, the suffering is necessary.  Needless to say, the BBC is not famous for being pro-Thatcher.  ???

Yes — I think your description gets at one of the interesting distortions in The Crown: it is historical fiction with an enormous amount of plausible invention, rather than a reconstruction of conversations anyone could actually know.

The Thatcher material is particularly interesting because the series sets up a very deliberate contrast between the two women. Thatcher is portrayed as intensely ideological, combative and rather uncomfortable with other women in positions of power, while the Queen is presented as cautious, institutional and considerably more sympathetic to the social consequences of government policy. The imagined private conversations let the writers put arguments into the Queen's mouth that she could hardly have made publicly.

And your characterization of Thatcher's economics is broadly fair, although I'd qualify one part. The initial Thatcher program wasn't simply "cut spending and raise interest rates." It was a monetarist anti-inflation program involving tight monetary policy, very high interest rates, fiscal restraint, deregulation and major structural changes. The pound actually appreciated dramatically at first, which hurt British manufacturing and contributed to the recession. Unemployment subsequently became extraordinarily high.

The fascinating political question is whether that suffering was regarded by Thatcher as an unfortunate side effect or as a necessary price. The latter is certainly consistent with how she presented her philosophy. Her famous formulation was essentially that inflation had to be defeated and that Britain could not continue its previous economic habits merely because changing them was painful.

But The Crown gives the Queen a rather clever role here. She isn't portrayed as an economic theorist telling Thatcher that monetarism is wrong. Instead, she keeps coming back to the human and social consequences: unemployment, poverty, industrial communities being devastated. That's a very useful dramatic device because it makes the argument almost constitutional rather than partisan: You are entitled to pursue your economic philosophy, Prime Minister, but what about the people who are being crushed by it?

And yes, there is an unavoidable BBC/Netflix cultural lens to the portrayal. Thatcher has become one of those figures in British history who is almost impossible to portray neutrally because the consequences of her government were so dramatically different depending upon where you stood. To some, she rescued Britain from inflation, union power and economic stagnation; to others, she deliberately dismantled communities and accepted enormous unemployment in pursuit of an ideological project.

There is also a delicious irony in having the Queen challenge Thatcher about social consequences. The Queen herself was hardly a socialist. But she represented an older conception of Britain in which preserving social cohesion and continuity was itself a political value. Thatcher represented a much more radical break with that consensus.

So I wouldn't take the scene as evidence that the Queen actually said those things to Thatcher. I'd take it as the writers asking: "What would the Queen's private reaction to Thatcher's revolution have been?" And they've constructed a fairly plausible answer — the Queen doesn't try to defeat Thatcher; she simply keeps asking the question Thatcher's economic philosophy tends to push into the background: Yes, but what happens to the people?

Yes, exactly. That episode is almost certainly being used as political symbolism rather than as a literal explanation of the incident.

The real Michael Fagan broke into Buckingham Palace in 1982, and the circumstances were extraordinary enough without needing much embellishment. He was unemployed and going through a difficult period, so the writers have a perfectly legitimate historical fact to work with. But The Crown turns that into something much more pointed: the unemployed man literally penetrates the Queen's bedroom and tells her what is happening to ordinary people.

That's almost too perfect as drama. The palace becomes a physical representation of the insulated establishment, while Fagan becomes the voice of the people suffering outside it. The Queen gets a firsthand account of unemployment and despair that her advisers and politicians can only present as statistics.

And I think your "bit of a stretch" is exactly right. Unemployment may have been part of Fagan's circumstances; it doesn't follow that unemployment caused the break-in. The series converts correlation and background circumstance into a dramatic causal narrative.

It also neatly reinforces the Thatcher conversation you just described. The Queen has been asking Thatcher about the human cost of her economic policy, and then, in effect, the human cost walks into her bedroom. That's superb screenwriting, whether or not it is particularly good history.

There is another little irony in it: the real Fagan wasn't some carefully selected representative of the unemployed classes sent to deliver a political message to the sovereign. He was a particular man who did a spectacularly bizarre thing. The Crown turns an improbable event into a sort of political parable.

That is probably the best way to watch the series: not "did this happen?" but "why did the writers choose to have this happen this way?" Once you make that distinction, quite a lot of its historical liberties become much easier to appreciate.

How does one fix a situation of excessive inflation without pain, as the phenemenon feeds and reinforces itself?

Pretty much: you don't, at least not entirely. That is the unpleasant truth behind the Thatcher-era argument.

Inflation has a self-reinforcing component. If workers expect prices to rise 10%, they demand higher wages. Firms anticipating higher wages and input costs raise prices. Workers then discover that their wages have lost purchasing power and demand another increase. Borrowers, lenders, businesses and governments all begin making decisions on the assumption that money will be worth less tomorrow. At some point, merely announcing that inflation is undesirable isn't enough.

The question is therefore not really "How do we stop inflation without pain?" but "Who absorbs the pain, how much, and how quickly?"

There are several ways of doing it.

A sudden monetary squeeze, as Thatcher's government attempted, can break expectations fairly quickly. Interest rates rise, credit contracts, demand falls, businesses fail or cut employment, and wage growth eventually moderates. The advantage is that you can kill inflation decisively. The disadvantage is precisely what you describe: the medicine is recession and unemployment.

There is a less brutal alternative: gradual disinflation. Keep monetary policy restrictive enough to bring inflation down but not so restrictive that you deliberately produce a huge recession. That can work, but it takes longer and requires considerable credibility. You are essentially allowing people's wage and price expectations to adjust gradually rather than shocking them into adjustment.

And there is an important third possibility: reduce the inflationary pressure on the supply side. If the problem is an oil shock, energy shortage, food shortage, inadequate housing, excessive regulation, or some other constraint on production, increasing productive capacity can reduce inflation without suppressing demand nearly as much. Unfortunately, this is often slow. You cannot build a power station or a housing stock overnight.

There is also the seductive option of wage and price controls. Governments can simply prohibit prices and wages from rising. That can suppress the measured inflation rate temporarily, but unless the underlying excess demand or monetary problem is fixed, you tend to get shortages, rationing, deteriorating quality and black markets. Britain tried versions of this before Thatcher, with distinctly unimpressive results.

The really important point, though, is that inflation itself is already imposing pain. If prices rise 10% while your income rises 5%, you have suffered a 5% real pay cut. If the government suppresses inflation by creating unemployment, the unemployed suffer disproportionately. If it allows inflation to continue, people living on fixed incomes and people without bargaining power suffer disproportionately.

So there is no magic policy that makes the loss disappear. Someone ultimately has to bear the adjustment.

This is why I think The Crown's treatment of Thatcher is a little unfair if it implies that Thatcher simply chose "pain" when painless alternatives were sitting on the table. She certainly made a particular choice about how the adjustment should occur and who should bear it, and reasonable people can argue that she chose too much unemployment and too little concern for the industrial economy.

But the underlying dilemma she faced was real. Once inflationary expectations become entrenched, getting back to price stability is inherently redistributive and painful. The interesting economic argument is over the least damaging way to do it, not whether pain can somehow be eliminated.

I tend to think that some inflation is in fact better than none, one watches debt markets to see when it is too much.  The US Federal Reserve under Folker, (please forgive my poor name memory) engineered a serious recession in the States.  Later when the States appeared to be approaching surplus under Clinton, it was seen that that was not such a good idea either.

Yes — Volcker is the name you're looking for. And I think your instinct is quite defensible: the economically desirable state isn't necessarily zero inflation. It is low, predictable inflation that doesn't become embedded in expectations.

Volcker is actually a very good illustration of the distinction. The Fed deliberately accepted a brutal recession to break the inflation psychology of the 1970s. The federal funds rate approached 20%, unemployment reached about 10.8%, and the 1981–82 recession was the worst U.S. downturn since the Depression up to that point. Inflation nevertheless fell dramatically, from double-digit levels to roughly 4% by the end of 1982.

The interesting question is whether that was necessary at that particular intensity. The Fed's own historical account acknowledges that gradualists had argued for bringing inflation down more slowly, and that the Volcker approach involved a very large economic disruption. The successful part was that it restored credibility: people eventually believed that the Fed really would prevent another inflationary spiral.

And I think your debt-market observation is particularly important. The bond market is a remarkably useful inflation thermometer. If investors begin demanding substantially higher nominal yields because they expect inflation to persist, the problem is becoming self-reinforcing. Conversely, if inflation is 3% but long-term bonds remain quite comfortable with it, you haven't necessarily got an inflationary crisis.

Your Clinton example is interesting for a different reason. By 1998–2000 the federal government was actually running substantial surpluses — $70 billion in 1998, $124 billion in 1999 and $237 billion in 2000. And there was a genuine contemporary concern that continuing to run surpluses would reduce the supply of Treasury securities so far that the government would eventually run short of the very debt instruments that financial markets used as safe assets.

That's where I think "a surplus must always be good" becomes a rather silly piece of household accounting applied to a sovereign currency issuer. Paying down debt saves interest, certainly. But government debt is also an asset held by somebody else, and Treasury securities perform important functions in the financial system. The Clinton-era surplus was not necessarily an economic disaster — indeed, the economy was doing extraordinarily well — but the idea that zero government debt is automatically the optimal destination is quite wrong.

So I think there is a coherent position behind what you're saying:

Some inflation is the price of a growing economy and provides useful room for relative prices and wages to adjust. What you really want to prevent is inflation becoming an expectation.

Once people start saying, "Well, prices will be 8% higher next year, so obviously I need an 8% raise, and the business therefore needs to raise prices 8%," you've crossed the dangerous line.

And that makes the Thatcher/Queen discussion rather more interesting. Thatcher's great virtue, from the anti-inflation point of view, was recognizing that you cannot simply wish away an inflationary psychology. But that doesn't establish that the only acceptable cure was the amount of unemployment and industrial destruction that Britain experienced. There is a very large space between "let inflation run" and "burn down the economy until the inflation stops."

In other words, the trick is not eliminating inflation. It's keeping it boring. And boring is actually a rather wonderful economic achievement.