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Posts Tagged ‘suppply-side policy’

Margaret Thatcher: seeking a calm assessment

Much has been written on Margaret Thatcher following her death at the age of 87 on April 8. But getting a calm assessment of both her time in office and her legacy is not easy. And it’s clear why: she created both stronger loyalty and stronger opposition than any other UK Prime Minister.

As economists, however, we should try to be as dispassionate as possible in assessing the effects of policies. There is always a normative question of the relative desirability of different economic outcomes – and you will have your own views on the relative importance of objectives such as economic growth, greater equality and greater social cohesion – but to determine cause and effect, or at least correlation, requires a careful examination of the evidence. Also, drawing lessons for future policy requires a careful modelling of the economy and the effects of changing economic variables.

The following articles have been selected from the hundreds that have appeared in the press in the past few days. Whilst they cannot be claimed to be totally ‘objective’, taken together they give a good overview of her economic policies and her economic legacy.

You may well have been surprised by the amount of coverage of her death and at the fervour of her supporters and critics. But this bears witness to the huge effect she had on both the political scene and on the UK economy – for good or bad.

Articles
Margaret Thatcher’s timeline: From Grantham to the House of Lords, via Arthur Scargill and the Falklands War Independent (8/4/13)
Overhauls Are Still Felt, Debated Decades Later Wall Street Journal, Charles Forelle (9/4/13)
Margaret Thatcher’s Four Ages of Monetary Policy EconoMonitor, David Smith (10/4/13)
How Mrs Thatcher smashed the Keynesian consensus The Economist (9/4/13)
Margaret Thatcher: The economy now and then BBC News, Stephanie Flanders (10/4/13)
Did Margaret Thatcher transform Britain’s economy for better or worse? The Guardian, Larry Elliott (8/4/13)
A look back at Margaret Thatcher’s economic record Washington Post, Dylan Matthews (8/4/13)
Margaret Thatcher’s legacy for business and economics—the world weighs in Quartz, Gwynn Guilford (8/4/13)

Data
Economic Data freely available online The Economics Network, see especially sites 1, 2, 3, 6 and 9

Questions

  1. Summarise the macroeconomic policies followed by the Thatcher government from 1979 to 1990.
  2. Chart economic growth, unemployment and inflation over Margaret Thatcher’s time in office. How does the performance of each of these indicators compare with the period from 1990 to 2007 and from 2008 to the present day?
  3. What is meant by ‘monetarism’? Did the Thatcher government follow pure monetarist policies?
  4. What is meant by the ‘Big Bang’ as applied to the financial sector in 1986? Assess the long-term consequences of the Big Bang.
  5. What elements of ‘Thatcherism’ were retained by the Labour government from 1997 to 2010?
  6. To what extent can the current Coalition government be described as ‘Thatcherite’?
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The paradox of thrift

If one person saves more, then it will increase that person’s consumption possibilities in the future. If, however, everyone saves more, and hence spends less, then businesses will earn less and are likely to respond by producing less if the decline in aggregate demand continues. Hence if a country saves more, people could be worse off. That’s the paradox of thrift.

There is considerable debate around the world at the moment about the desirability of austerity policies. The debate has become more intense with the worsening economic outlook in many European countries and with the election in France of François Hollande who rejects many of the austerity measures of his predecessor, Nicolas Sarkozy.

But can further stimulus be given to aggregate demand without causing a further worsening of countries’ public-sector debt positions and causing a fall in confidence in financial markets? And how would that impact on investment?

And in the meantime, as the economic outlook darkens, people are trying to save more, despite low interest rates. The paradox of thrift seems to be getting more acute. (Click here for a PowerPoint of the chart.)

Articles
How National Belt-Tightening Goes Awry New York Times, Robert J. Shiller (19/5/12)
Japan disease is spreading: High risk and low returns Firstpost (India), Vivek Kaul (17/5/12)
The Solution can not be More Debt Huffington Post, Jill Shaw Ruddock (29/5/12)
Crediting debt Breaking Views, Edward Hadas (30/5/12)
Green investments can overcome the paradox of thrift New Statesman, Dimitri Zenghelis (7/6/12)
Austerity has never worked Guardian, Ha-Joon Chang (4/6/12)
The False Choice Between Austerity And Growth Forbes (24/5/12)
It’s not a case of austerity v stimulus for Europe Guardian, Paul Haydon (1/6/12)

Data
UK households’ saving ratio: series NRJS ONS
Household saving rates for OECD countries StatExtracts: OECD

Questions

  1. Why may we be experiencing a paradox of thrift at the current time?
  2. What are the arguments for the use of fiscal and monetary policies to expand aggregate demand at the current time?
  3. What are the arguments against the use of fiscal and monetary policies to expand aggregate demand at the current time?
  4. Can economic growth be stimulated by a redistribution of aggregate demand and, if so, in what way?
  5. Can green investment overcome the paradox of thrift?
  6. To what extent are demand-side and supply-side policies (a) complementary; (b) contradictory? Or, to put the question another way, to what extent may policies to encourage growth in the long term damage growth in the short term and vice versa?
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