Category: Essential Economics for Business: Ch 11

In the face of a Labour backbench rebellion over the abolition of the 10p tax rate in the most recent Budget, the Chancellor, Alistair Darling, introduced what has been described as a mini-budget this month. In this mini-budget he significantly increased tax allowances to try to alleviate the impact of the removal of the 10p tax rate on some of the poorest families.

Darling’s solution could prove costly, say economists Guardian (14/5/08)
FAQ: Formula that bought off the Labour rebels Guardian (14/5/08)
Brown risks £2.7bn tax cut to end revolt Guardian (14/5/08)
Mini-budget will put money in pockets of 22 million voters Guardian (13/5/08)
Darling’s statement in full Guardian (13/5/08)
Institute for Fiscal Studies highlights Chancellor’s dilemma after emergency tax cut Times Online (21/5/08)
Q&A on the Government’s ‘Golden Rule’ Times Online (15/5/08)
Basic rate taxpayers to get £120 BBC News Online (13/5/08)
Q&A: Tax changes BBC News Online (13/5/08)
Full statement: Tax changes BBC News Online (13/5/08)

Questions

1. What was the effect of the abolition of the10p tax rate on income distribution (before the min-budget measures)?
2. Assess the extent to which these changes will alleviate the impact of removing the 10p tax rate on the poorest families.
3. Discuss the likely impact of this change in the government’s fiscal stance on the main UK macroeconomic targets.

The Governor of the Bank of England, Mervyn King, recently talked about the end of the ‘nice’ decade. He was not using this in its normal sense, but was taking about a ‘non-inflationary, consistently expansionary’ decade of economic growth. Economists and journalists have been busy suggesting other acronyms for the situation that we face now including VILE (‘volatile inflation, less expansionary’) and the less generous CRAP (close to recession, absent a policy’). So are we facing a new more inflationary and less stable period of economic development? Is the ‘nice’ period really over?

Recession alert as Brown fights back Guardian (15/5/08)
‘It’s things outside the Bank’s control that are going up’ Guardian (14/5/08) (Podcast)
Nasty truth behind those nice headlines Times Online (19/5/08)
Inflation prospects will make a master letter writer out of Mervyn King Times Online (13/5/08)
Which way from the edge of the abyss? Guardian (25/4/08)

Questions

1. Explain the main factors that have led to the past decade being a ‘NICE’ one.
2. Assess the extent to which we are moving into a ‘VILE’ period .
3. Evaluate two policies that the government could adopt to try to avoid the UK economy moving into a VILE period.

In recent years Labour has taken what might be described as a light-touch on regulation of City firms and financial institutions. In the article below the economics editor of the Guardian, Larry Elliott, argues that this ‘pact with the devil’ might have come back to haunt Gordon Brown as the impact of the global credit crunch continues to dominate economic news.

Brown damned by his Faustian pact Guardian (12/5/08)

Questions

1. What form has regulation of the financial sector taken under the Labour government?
2. Assess the extent to which this regulatory approach could be considered a ‘Faustian bargain’.
3. Discuss the extent to which tighter regulation of financial markets might have helped the UK economy avoid the impact of the global credit crunch.

The prospect of a severe recession in America has inevitably drawn parallels in the media with the Great Depression of 1929. The parallel may not be entirely appropriate in terms of scale and severity, but what lessons are there that can be learnt from the Great Depression?

Credit crunch: risk-taking
Times Online (23/3/08)
America gets depressed by thoughts of 1929 revisited Times Online (23/3/08)
Lessons learnt from Great Depression Times Online (25/3/08)

Questions

1. Explain the principal causes of the Great Depression of the 1930s.
2. Assess the parallels between the current economic situation in America and the situation preceding the Great Depression in 1929.
3. Discuss the extent to which the recent loosening of monetary and fiscal policy in America will help reduce the likelihood of recession.

The recent credit crunch has resulted in a lot of criticism of the banks and other financial institutions. Many commentators have argued for reforms to the financial system with greater controls on lending and restrictions on banks’ ability to create credit. The articles below have a common theme – assessing the actions that politicians and policy makers need to consider as a result of the recent credit crunch.

After excess comes fear – and then socialism, at least for the bankers Guardian (23/3/08)
Capitalism’s too important to be left to capitalists Observer (23/3/08)
If the City won’t put its house in order, politicians must Observer (23/3/08)

Podcast

How to stop the market mayhem Guardian (19/3/08)

Questions

1. Explain what is meant by the ‘liberalisation of financial markets’.
2. “If the City won’t put its house in order, the politicians must”. Examine the validity of Will Hutton’s argument.
3. Discuss the extent to which the freedom of banks to lend has been the cause of the recent credit crunch.