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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 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