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.
Since Labour has been in power the gap between rich and poor has remained more or less unchanged – a fact that might be surprising given a Labour government and fiscal policies that have become increasingly redistributive in nature. In fact income distribution in the UK has not changed since 1991 according to Office for National Statistics figures. Economists measure income distribution in various ways, but two of the key indicators are the Gini coefficient and the Lorenz curve. For more information on income distribution and some useful data, you may like to download an income data spreadsheet from the IFS (zip file). If you are interested in where you fit into the income scale, then you may also like to try the Institute for Fiscal Studies interactive income model. Why not try a range of different scenarios to see where different levels of income fit into the overall income scale.
UK income gap ‘same as in 1991’ BBC News Online (16/12/08)
Questions
- Define the terms (a) Gini coefficient and (b) Lorenz curve.
- Using diagrams as appropriate, show how the Lorenz curve will change when income distribution becomes (a) more equal and (b) less equal.
- Explain how the value of the Gini coefficient will change as income distribution gets more equal. With reference to the IFS spreadsheet (linked to above) descibe how the Gini coefficient has changed in recent years.
- Discuss reasons why income distibution in the UK has stayed the same since 1991 despite a series of redistributive measures adopted by the Labour government since 1997.
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?
The global financial crisis has led to a significant number of countries going into recession. Recession is defined by economists as two successive quarters of negative economic growth. Banking collapses and a collapse in consumer confidence, and therefore expenditure, have reduced aggregate demand. This situation has been exacerbated as each country’s exports fall due to the slowdown in other countries. The combination of these and other factors has led to negative economic growth resulting in recession. We have linked below to a range of news articles looking at different countries that have fallen into recession in recent months.
Germany
German economy now in recession BBC News Online (13/11/08)
Germany tumbles into recession as exports dive Times Online (13/11/08)
Germany slides into recession Guardian (13/11/08)
Eurozone
Threat of worst postwar slump grows as major economies enter recession Times Online (14/11/08)
Eurozone officially in recession BBC News Online (14/11/08)
Eurozone tumbles into first-ever recession Times Online (14/11/08)
Spain
Spain has that shrinking feeling as economy heads south Times Online (20/11/08)
Economic clouds gather as Spain faces recession Times Online (6/12/08)
Japan
Japanese economy now in recession BBC News Online (17/11/08)
Global slowdown and resurgent yen finally drag Japan into recession Times Online (18/11/08)
Japan in sharpest plunge to recession since war Times Online (28/11/08)
Japan slides into recession as global slowdown hits exports Guardian (17/11/08)
Singapore
Singapore officially in recession BBC News Online (21/11/08)
Hong Kong
Hong Kong slides into recession BBC News Online (14/11/08)
Questions
- Choose one of the countries above and analyse the principal reasons why it went into recession.
- Discuss whether a fiscal policy or a monetary policy stimulus will be more effective at boosting aggregate demand in a country that is in recession.
- Assess policies that the governments of the countries above could use to minimise the impact of recession on the level of employment in their country.
The Chancellor’s pre-Budget report was a massive political and economic gamble. The government has clearly recognised the potential seriousness of the economic situation and, in an attempt to avoid a prolonged recession, has injected £21bn into the UK economy in the form of tax cuts and spending increases. The headline grabbing changes were a cut in VAT and an increase in the top rate of income tax to 45% for those earning over £150,000 per year, but there was a raft of other changes including £3bn of public-sector infrastructure projects being brought forward.
Will this fiscal kick be enough to prevent a deep recession? The Chancellor clearly thinks so. He has amended his forecasts for economic growth to acknowledge that GDP will fall by 1% in 2009, but he believes growth will bounce back to 1.75% in 2010. The links below are to a selection of articles relating to the pre-Budget report, but there are plenty of other sites offering discussion and analysis of the issues relating to this unprecendented Keynesian fiscal boost.
Pre-Budget Report: Alistair Darling’s £1 trillion debt gamble Times Online (25/11/08)
Pre-budget report 2008 Guardian (25/11/08)
Pre-Budget report 2008 BBC News Online (25/11/08)
Average earners lose out in PBR BBC News Online (25/11/08)
Pre-Budget Report – the documents BBC News Online (25/11/08) Links to all pre-budget report documents as pdf files
Robinson and Peston analysis of PBR BBC News Online (25/11/08) Video from the Daily Politics show
Darling needs to cure a nation hooked on debt Guardian (24/11/08)
Darling unveils borrowing gamble BBC News Online (24/11/08)
Analysis: is this the death of New Labour? Times Online (24/11/08)
Alistair Darling announces £20bn economic boost Times Online (24/11/08)
Alistair Darling’s £20bn tax giveaway Times Online (24/11/08)
The mother of all gambles Guardian (24/11/08)
Obama and Darling: compare and contrast Guardian (24/11/08) Video comparing the packages announced by Alistair Darling and Barack Obama
The £21bn tax gamble Guardian (25/11/08)
Call this a cure? Guardian (25/11/08)
Questions
- Write a short paragraph outlining the main policies set out in the pre-Budget report.
- Evaluate the likely success of the policies announced in the pre-Budget report in preventing a prolonged recession for the UK economy.
- Discuss the short-term and long-term impact on the UK money markets of the high levels of borrowing required to fund the tax and spending changes set out in the 2008 pre-Budget report.
- Assess the likely impact of the increase in the top tax rate of income tax to 45% on (i) consumer expenditure growth, (ii) tax revenues, and (iii) the incentive for higher rate tax payers to work harder.
- Discuss whether a fiscal solution, such as that set out in the pre-budget report, or a monetary policy solution will be more effective at preventing a prolonged recession in the UK..