So last week, we discussed the policy objectives and indsutrments. WE looked at the theories of economic policy and then we went on to discuss trends in the UK performance relative it interesting comparison countries – France, Germany, Italy, US, Australia Ireland To pick a few..
Today I want to begin to look at the overall objective of macro policy and the main measure of how successful an economy is. We have looked at individual policy target variables such as unemployment, debt, inflation etc. but ultimately, the driver of policy as we are currently seeing is economic growth – defined in terms of national income per head.
So here we have a more up to date picture than what we had in the blackboard slides. This gives you an idea of what has been happening in the recent period – we see that since the beginning of the millennium we have experienced moderate growth per hour – around 2%. In the period 1007-2009 we saw a distinct decline in earnings per hour and then again some sign of recovery. Ireland and Spain have unemployment problems (remember last week)14 and 20%, respectively in 2010
Constant growth of around 5% per annum until 2008, when it all went a bit crazy.
If we look from the 1970s, we see that the UK trajectory of productivity has been somewhat flatter than say, the US and there has been a widening of the productivity gap, despite some signs of this gap closing until the 1990s
These are the sorts of arguments that will crop up over the next few weeks at different points in time.
What I want to do now is go back in time to the end of the war..
We see the transitions from a belief in the Hayekian world of the neoclassical approach which appeared to fail us in the 1930s, a move into Keynesian economic thought in the 19302-1960’s before the landscape changed again and a move to a more monetarist view of the macro economy was influential. Today we will look at Post War Britain…. And we will hopefully get as far as the mid 1970s when keynesianism appeared to breakdown.
Firstly, what were we leaving behind. The fundamentals from your Principals course – a neoclassical belief that if left to its own devices, the market would be inherently stable and would tend towards equilibrium. There would of course be shocks to the system, but these would be short term impacts and the market would adjust via the pricing mechanism and restore the long run equilibrium. Government intervention was most likely to make matters worse. The role of government was minimal; to keep institutions stable and predictable so that the market could operate within the existing infrastructure with as little interference as possible and firms could operate unhindered.
BUT, after what happened in the 1930s - stock market crash, bank collapse, retrenchment of lending, higher unemployment, tariffs, crop failure in the US etc…all had a contractionary effect on global economy. Keynesianism arrived on the scene as a potential answer. Markets had no automatic tendency towards full employment. Keynes argued that markets cannot be left unregulated – to their own devices; markets are unstable – subject to shocks and very rarely in a state of equilibrium. What we need to do therefore is to actively stimulate demand in the economy when its on a downturn particularly. Thus we entered a period of demand management policies, whereby governments actively tried to control the flow of expenditure to stimulate output and thus generate employment. FULL EMPLOYMENT WAS THE OVERRIDING OBJECTIVE. Demand management was largely orchestrated using fiscal policies, that is, policies of taxation and government spending…and generally constant tinkering with the system through incomes and pricing policies also.
So we can have a look at the industrial structure. You may have looked at more up to date pictures of this before -
Areas like coventry,swansea and portsmouth particularly as well as londonThere was a general consequence of underinvestment
EC-111: British EconomyRecent Macro EconomicPolicy and TrendsDr Catherine RobinsonF35, Richard PriceOffice hours: Monday 10.30-11.30 and Thursday 9.30-10.30Appointments: firstname.lastname@example.orgWeek 2:1
GDP per person (2005$) 1950-200905000100001500020000250003000035000400004500050000195019521954195619581960196219641966196819701972197419761978198019821984198619881990199219941996199820002002200420062008AUSDNKGBRUSAFRASource: Penn WorldTables, 2011Week 2:1
Labour productivity growth(%pa Growth) GVA per hour workedWeek 1:2Source: OECD Stats extract 2013-3.0-2.0-1.00.01.02.03.04.0Australia France Germany Greece Ireland Spain UnitedKingdomUnitedStatesOECDGDP per hour worked 2001-07GDP per hour worked 2007-09GDP per hour worked 2009-11
GDP per hour worked Growth %pa(PPP converted $, 2005 prices)Source: Penn WorldTables, 2011-6-4-20246810121419511954195719601963196619691972197519781981198419871990199319961999200220052008GDP growthWeek 2:1
Labour productivityGVA per hour workedWeek 1:2010203040506070197019721974197619781980198219841986198819901992199419961998200020022004200620082010FranceIrelandItalyUnited KingdomUnited StatesSource: OECD Stats extract 2011
So what can be said about UKperformance? Labour productivity has traditionally lagged behind Is it a measurement thing? ‘Bacon and Eltis’ theory – too few producers? Are Britons less skilled than other nations? Do they invest less in capital, or the wrong sort of capital? Sources of Growth literature also focuses ondisaggregated national performance Is it down to the manufacturing/service balance in theeconomy? The public/private sector balance?Week 2:1
Spending the next few weekslooking at whyWeek 2:1
The post-war landscape Summarise the basic macro economic schools of thought Neoclassical Keynesian Monetarist Post war Britain (1945-1973) What did it look like as it emerged from the 1930s and thedevastating impact of WWII? What were the main economic objectives? What policies were implemented to achieve these? Dominated by Keynesian approach to the macro economy Did they work? The breakdown…(1974-1979)Week 2:1
The neoclassical approach The market is stable, if left to itself Shocks will occur but prices will adjust and the marketwill return to equilibrium in the long run Government interference runs the risk of making thingsworse The role of Government is to set rules that create astable environment with conducive infrastructure toallow firms to operate unhinderedWeek 2:1
Keynesianism in a nutshell There is no automatic tendency towards fullemployment Markets cannot be left to the own devices The market is inherently unstable Demand needs to be stimulated DEMAND MANAGEMENT POLICIES To control flows of expenditure to stimulate output andemployment Fiscal policies dominated and a constant ‘tinkering’Week 2:1
1945: Keynesianism dominated following the 1930s Aggregate demand needed stimulating Full employment was THE policy objective Achieved by resorting to incomes policies to control inflation US Position The war had in effect stimulated its economy out of the 1930’scollapse Western Europe faced the negative consequences of war Resource consequences Manpower losses (obviously) Also distribution issues – heavy industry and the public sector wasgrowing, but other parts of the economy were suffering Shortage of miners and an ageing populationWeek 2:1
Resource consequences Capital War losses Natural physical depreciation Affected by the reduced capacity for savings and investment Britain had lost 1/3rd of its shipping tonnage Overseas assets had suffered during the war, either as a resultof being put out of commission or simply being disposed of WAR DEBTS were massive - £3.5bn which was 45% of GNP in1945 Removal of the Lend-Lease arrangement Britain had with theUS Productive capacity damaged and distortedWeek 2:1
Post-War Economic Policy Because of the dire situation regarding capital andlabour there was a fear of inflation The 1930s was still in people’s memories Price and incomes policies continued into the 1970s A desire to recover economically but also to restore itsinternational reputation and position Earlier studies (Feinstein, 1972) suggest that the postwar recovery was pretty good, but No net increase in total real wealth 1913-1951(Alford, 1988)Week 2:1
Impact of WWII Overall the impact of WWII was relatively positive But was it an opportunity wasted? In 1948 the UK accounted for 42% of exports in WesternEurope – 9.5 times larger than W. Germany – only 2 timeslarger by 1951 Widespread change in ideas between 1939-45 (Addison, 1977) People were fighting for something they believed in They were determined to make things different afterwards BEVERIDGE REPORT 1942 Increased commitment to social welfare; employment;distribution of wealth WHITE PAPER ON EMPLOYMENT 1944Week 2:1
Political landscape Targets were ideological, but vague objectives Peacetime economies are more complicated thanwartime ones Economists probably not as influential as they thoughtthey were What was the basic role of Government?Week 2:1
Key policies – PLANNING! Largely driven by the fear of inflation leading to deflation, as observedin the 1930s Nationalisation Coal; rail; transport; electricity and gas; civil aviation; the bank of England Aim to establish workable administrative structures (not economicrequirements) Controls or production and consumption Cheap money Rationing was no longer desirable The introduction of national income accounting; of regional policy too External pressures On exchange rates through international currency arrangements Marshall Aid The Export Drive to improve Balance of Payments position Shift in focus for the Treasury No longer resource but financial planningWeek 2:1
Incomes policies… To replace the market for wage determination withadministrative targets Policy on and policy-off periods which were relativelyshort ~6months or so... Culminating in the Social Contract of 1974-1978 Which ultimately led to the Winter of Discontent and thecollapse of the labour governmentWeek 2:1
Balance of Payments During the 1950s and 1960s there were continualproblems with BofP deficits... Governments therefore Manipulated aggregate demand (stop-go policies) Adopted exchange control measures to keep the externalaccount in balance (devaluation a last resort in 1967 -14%) Other policies such as investment incentives to promotecapital formation and long run economic growth REPRESENTS A NARROW INTERPRETATION OFKEYNESIAN THINKING (MAYNARD, 1989)Week 2:1
Tomorrow… Where did it all go wrong? No supply side thinking at all The 1970s onwards...Week 2:1
ReferencesFor last week:Griffiths and Wall (2011) 12th Edition – handy for the Tinbergen theoryMosley (1976) Towards a Satisficing theory of Economic Policy’, TheEconomic Journal, 86(341), 59-72 (available on JSTOR)O’Mahony, M. and C. Robinson (2007) UK Growth and Productivity in anInternational Perspective: Evidence from EUKLEMS, National InstituteEconomic Review, 200, April, 2007, 79-86For this week:Alford, BWE (1988) ‘British Economic Performance 1945-1975’, Chapters1and 2Maynard, G. (1989) The Economy Under Thatcher, chapter1, Blackwell, LondonWeek 2:1