Ec 111 week 2bb-1

1

EC-111: British Economy

Recent Macro Economic Policy and Trends

Dr Catherine RobinsonF35, Richard Price

Office hours: Monday 10.30-11.30 and Thursday 9.30-10.30Appointments: [email protected]

Week 2:1

2

Macroeconomic performance

Week 2:1

GDP per person (2005$) 1950-2009

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000

1950

1952

1954

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

AUS

DNK

GBR

USA

FRA

Source: Penn World Tables, 2011

Week 2:1

Week 1:2

Labour productivity growth (%pa Growth) GVA per hour worked

Source: OECD Stats extract 2013

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

Australia France Germany Greece Ireland Spain United Kingdom

United States

OECD

GDP per hour worked 2001-07

GDP per hour worked 2007-09

GDP per hour worked 2009-11

GDP per hour worked Growth %pa (PPP converted $, 2005 prices)

Source: Penn World Tables, 2011

-6

-4

-2

0

2

4

6

8

10

12

14

1951

1954

1957

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

GDP growth

Week 2:1

Week 1:2

Labour productivity GVA per hour worked

0

10

20

30

40

50

60

70

19

70

19

72

19

74

19

76

19

78

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

France

Ireland

Italy

United Kingdom

United States

Source: OECD Stats extract 2011

So what can be said about UK performance?

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 on disaggregated national performance Is it down to the manufacturing/service balance in the

economy?The public/private sector balance?

Week 2:1

Spending the next few weeks looking at why

Week 2:1

Week 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 the

devastating 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 approachThe market is stable, if left to itself

Shocks will occur but prices will adjust and the market will return to equilibrium in the long run

Government interference runs the risk of making things worse

The role of Government is to set rules that create a stable environment with conducive infrastructure to allow firms to operate unhindered

Week 2:1

Keynesianism in a nutshellThere is no automatic tendency towards full

employment

Markets cannot be left to the own devices

The market is inherently unstable

Demand needs to be stimulatedDEMAND MANAGEMENT POLICIESTo control flows of expenditure to stimulate output

and employment

Fiscal policies dominated and a constant ‘tinkering’

Week 1:1 12

Hayek versus Keynes

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’s

collapse

Western Europe faced the negative consequences of war

Resource consequences Manpower

losses (obviously) Also distribution issues – heavy industry and the public sector was

growing, but other parts of the economy were suffering Shortage of miners and an ageing population

Week 2:1

Changes to Manpower Use 1938-48 ('000s) Sector 1938 1944 1948 %of 1938 total %growthArmed forces 385 4,967 846 220 78.7Total civil employment 17,378 16,967 19,064 110 9.3Agriculture and fishing 949 1,048 1,123 118 16.8Mining and quarrying 849 813 839 99 -1.2Metals, engineering, vehicles and ship building 2,590 4,496 3,546 137 31.4Chemicals 276 515 367 133 28.5Textiles 861 635 835 97 -3.1Clothing 717 455 613 85 -15.7Food, drink and tobacco 640 508 628 98 -1.9Cement 271 159 263 97 -3.0Leather goods 844 536 775 92 -8.5Other manufacturing 164 129 223 136 30.7Construction 1,264 623 1,375 109 8.4Gas, water, electricity 240 193 275 115 13.6Transport 1,225 1,237 1,472 120 18.4Distributive trades 2,882 1,927 2,354 82 -20.2Banking and finance 414 268 344 83 -18.5Government 1,386 2,091 2,229 161 47.5Misc. services 1,806 1,334 1,813 100 0.4

UNEMPLOYED 1,710 54 272 16 -183.8

TOTAL WORKING POPULATION 19,473 22,008 20,367 105 4.5

Source: Alford, 1988, p.21

Week 2:1

Resource consequencesCapital

War losses Natural physical depreciation Affected by the reduced capacity for savings and

investmentBritain had lost 1/3rd of its shipping tonnageOverseas assets had suffered during the war, either as a result

of being put out of commission or simply being disposed ofWAR DEBTS were massive - £3.5bn which was 45% of GNP in

1945Removal of the Lend-Lease arrangement Britain had with the

US

Productive capacity damaged and distorted

Week 2:1

Post-War Economic PolicyBecause of the dire situation regarding capital and

labour there was a fear of inflationThe 1930s was still in people’s memories

Price and incomes policies continued into the 1970s

A desire to recover economically but also to restore its international reputation and position

Earlier studies (Feinstein, 1972) suggest that the post war recovery was pretty good, butNo net increase in total real wealth 1913-1951 (Alford,

1988)

Week 2:1

Impact of WWIIOverall the impact of WWII was relatively positive

But was it an opportunity wasted? In 1948 the UK accounted for 42% of exports in Western

Europe – 9.5 times larger than W. Germany – only 2 times larger by 1951

Widespread change in ideas between 1939-45 (Addison, 1977)People were fighting for something they believed inThey were determined to make things different afterwards

BEVERIDGE REPORT 1942 Increased commitment to social welfare; employment;

distribution of wealth WHITE PAPER ON EMPLOYMENT 1944

Week 2:1

Political landscapeTargets were ideological, but vague objectives

Peacetime economies are more complicated than wartime ones

Economists probably not as influential as they thought they 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

observed in the 1930s

Nationalisation Coal; rail; transport; electricity and gas; civil aviation; the bank of

England Aim to establish workable administrative structures (not economic

requirements)

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 planning

Week 2:1

Incomes policies…To replace the market for wage determination

with administrative targetsPolicy on and policy-off periods which were

relatively short ~6months or so...Culminating in the Social Contract of 1974-1978

Which ultimately led to the Winter of Discontent and the collapse of the labour government

Week 2:1

Balance of PaymentsDuring the 1950s and 1960s there were continual

problems with BofP deficits...

Governments thereforeManipulated aggregate demand (stop-go policies)Adopted exchange control measures to keep the

external account in balance (devaluation a last resort in 1967 -14%)

Other policies such as investment incentives to promote capital formation and long run economic growth

REPRESENTS A NARROW INTERPRETATION OF KEYNESIAN THINKING (MAYNARD, 1989)

Week 2:1

Tomorrow…Where did it all go wrong?

No supply side thinking at all

The 1970s onwards...

ReferencesFor last week:

Griffiths and Wall (2011) 12th Edition – handy for the Tinbergen theory

Mosley (1976) Towards a Satisficing theory of Economic Policy’, The Economic Journal, 86(341), 59-72 (available on JSTOR)

O’Mahony, M. and C. Robinson (2007) UK Growth and Productivity in an International Perspective: Evidence from EUKLEMS, National Institute Economic Review, 200, April, 2007, 79-86

For this week:

Alford, BWE (1988) ‘British Economic Performance 1945-1975’, Chapters1 and 2

Maynard, G. (1989) The Economy Under Thatcher, chapter 1, Blackwell, LondonWeek 2:1