Hahn was better known to the wider public, however, as the co-instigator of a famous letter to The Times, signed by 364 of Britain’s most eminent economists in 1981, warning Margaret Thatcher’s government that its economic policies would deepen the depression, erode the industrial base and undermine Britain’s social and political stability.
In drafting their letter, Hahn and his Cambridge colleague Robert Neild hoped to persuade the government to execute a swift U-turn after Sir Geoffrey Howe’s austerity budget of March 1981. “There is no basis in economic theory or supporting evidence for the government’s belief that by deflating demand they will bring inflation under control and thereby introduce an automatic recovery in output and employment; present policies will deepen the depression,” they wrote.
The Lady was not for turning....
In fact, the economic recovery that Hahn predicted would not happen began more or less as soon as the letter appeared. Unemployment continued to rise in the short term, but this was in the face of a highly regulated and unionised labour market and wholesale industrial restructuring. More significantly, with government borrowing back on course Howe could reduce interest rates at a time when they had been rising and when a high exchange rate had been crippling British industry. Moreover, the government’s strategy persuaded investors that necessary policies would be followed through and that they would work, laying the groundwork for sustained recovery.