It is something of a media sport in these recessionary times to find ‘economic scapegoats’. One minute the recession is the fault of the banks and their poor lending practices; the next minute it is the fault of the media themselves, who are constantly reporting doom and gloom; the next minute it is the fault of the politicians, who have failed to react quickly enough to the economic uncertainties; the list goes on! However, the one group that is rarely blamed is ‘us’ – the consumers. Given that the state of the economy is the outcome of our collective decisions, it could be said that we have no real right to complain, as our collective lack of confidence could be what has caused much of the current situation. As James Meek puts it in the article below:
What makes the situation peculiar is that the crisis that threatens us also seems to be us; we are simultaneously menaced by the wave, and exist as elements of the wave. After all, that is what an economic crisis is: the sum of all the actions of billions of people around the world, deciding whether to lend or hoard, borrow or save, sell or buy, move or stay, hire or fire, study or look for work, be pessimistic or optimistic.
To live in remarkable times Guardian (5/1/09)
Questions
- Explain how changes in consumer confidence can affect the level of aggregate demand.
- Examine the importance of consumer confidence in determining the length and depth of a recession.
- Discuss policies that the government can implement to try to boost consumer confidence.
- Analyse the impact on an economy of a prolonged period of poor consumer confidence.
The current financial crisis had led to Keynesian theory coming back into fashion. Governments all around the world have put in place a significant fiscal and monetary stimulus to try to mitigate the impact of the downturn. But is this really Keynesian policy at work? Keynes argued for permanent and tough controls on the financial sector to allow the government to pursue a policy of full employment. It would be difficult that current policies are therefore pure Keynesian policies, so is there an economic theory vacuum with market economics discredited, but Keynesian economics not really taking its place? The article below looks at how economic theory has changed in recent months and considers whether we need a ‘new’ Keynes.
Wanted: the Keynes for our times Guardian (22/12/08)
Questions
- Explain the difference between classical and Keynesian beliefs with respect to government intervention in the ecoomy.
- Analyse the extent to which the recent policy stimulus has been Keynesian in nature.
- Discuss the changes that have taken place in economic policy during 2008/9 in the context of economic theory.
The Chancellor, Alistair Darling, announced in January that the government wanted three-year pay deals with public-sector workers. He argued that this would help with planning for public-sector finances. But many commentators likened it to the pay freezes and incomes policies of 30 years ago. The articles linked to below from the Guardian look at the similarities between the economic situation now and 30 years ago.
| Questions |
| 1. |
Assess the likely success of a three-year pay deal in keeping the level of public-sector pay under control. |
| 2. |
“The story of the past 32 years is of how three big factors – privatisation, globalisation and curbs on the power of trade unions – have made it far harder for pay bargainers to use low levels of unemployment to win hefty pay awards.”Explain how these factors have changed the balance of power in the labour market. Discuss the extent to which this assertion is true. |
| 3. |
Discuss the extent to which the economic situation in 2008 is similar to that in the 1970s. |
In successive months the Monetary Policy Committee of the Bank of England (MPC) has cut Bank Rate from 4.5% down to 2% – the lowest level since November 1951. The dramatic changes show that the Bank is concerned that inflation and economic activity will fall sharply. Indeed the Governor has recognised that there is a possible danger of deflation (defined, in this context, as negative inflation: i.e. a fall in the price index, whether CPI or RPI). To the extent that these cuts in Bank Rate are passed on in interest rate cuts by banks and building socities, they will reduce the cost of borrowing. It is hoped that this, in turn, will result in a boost to aggregate demand – particularly in the run-up to Christmas.
Below is a selection of articles relating to the interest rate cuts, with many commentators wondering if the cuts will be enough and whether interest rates have much lower to go. For some background on interest rates, you may like to look at the History of Britain’s interest rate published by the Times Online. Martin Rowson’s cartoon in the Guardian clearly summarises the view that this may not be enough to revive an ailing British economy!
Bank enters uncharted territory BBC News Online (4/12/08)
Q&A: The Bank Rate cut and you BBC News Online (12/12/08)
Where will interest rates go now? BBC News Online (4/12/08)
Bank of England still has ammunition for the new year Guardian (4/12/08) Video
Farwell, convention Guardian (5/12/08)
No doubt that we’ve got further to go in this rate cutting Guardian (5/12/08) Podcast
Bank cuts rate by 1% to historic low Times Online (4/12/08)
Analysis: Shock and awe of rate cut Times Online (4/12/08)
Rates cut again as recession deepens Times Online (5/12/08)
Unconventional steps may slow the slide into global recession Times Online (7/12/08)
Bank cuts UK rates to 57-year low Times Online (4/12/08)
Questions
Peer Steinbrück, the German finance minister, has ridiculed the UK’s VAT cut and accused Gordon Brown of ‘crass Keynesianism’ in cutting VAT by 2.5 percentage points. He argued that the fiscal stimulus will raise the level of UK public debt to such an extent that it will take a generation to pay off. Gordon Brown has dismissed the attack as ‘internal German politics’, a stance that was given some credibility when Angela Merkel threw her weight behind a €200bn Europe-wide fiscal stimulus plan, seeming thereby to contradict the views of her own finance minister.
Brown’s VAT cut just crass Keynesianism, say Germans Guardian (11/12/08)
Germany attacks ‘depressing’ UK economic rescue Times Online (11/12/08)
Brown hits back at German criticism of his economic rescue plan ahead of summit Times Online (11/12/08)
Angela Merkel plays Scrooge. Thank goodness Times Online (11/12/08)
Angela Merkel throws weight behind Brown’s fiscal stimulus approach Guardian (11/12/08)
Questions
- Why may the boost to aggregate demand from the fiscal measures announced in the pre-Budget report be less than the Chancellor hoped?
- What would be the effect on the budget deficit if the Chancellor had given no fiscal boost to the economy and the recession, as a result, was deeper?
- Can Keynesianism ever be “crass”?
- How would you design a fiscal policy for maximum impact in combatting a recession?