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. |
Some economists believe that deflation is now a more serious threat than inflation. If this is the case then conventional monetary policy may not be enough to prevent deflation. In the article below, Gavyn Davies argues that the solution is to start thinking like South American dictators and print more money!
We must start thinking like South American dictators Guardian (13/11/08)
Questions
- Explain what is meant by “deflation”.
- Examine the link between deflation and depression.
- Explain why deflation requires a different policy response from inflation.
- Discuss the likely success of a policy of “printing money” in preventing deflation.
- Assess the impact of financing tax cuts through the sale of government bonds in a deflationary situation.
Inflation has reached a 16-year high of 5.2% in September 2008 with rising energy bills leading to much of the increase. This puts inflation well outside the target rate for the Consumer Prices Index (CPI), but analysts are convinced that it will fall sharply in the coming months with some predicting inflation to be just 1% by autumn 2009. Even the Bank of England has now agreed that inflationary risks have moved “decisively to the downside” allowing them to cut the interest rate from 5% to 4.5% as part of a globally coordinated interest rate cut.
Rising gas bills send inflation to 16-year high Times Online (14/10/08)
Inflation high but fear of recession grows Guardian (14/10/08)
Inflation soars to 5.2% Guardian (14/10/08)
Fresh storm gathering as inflation surge adds £3bn to welfare bill Times Online (15/10/08)
Rising cost of living prompts further pay strike threats Times Online (15/10/08)
Where now for UK inflation? BBC News Online (14/10/08)
Consumer inflation reaches 5.2% BBC News Online (14/10/08)
Questions
| 1. |
Explain how the CPI is calculated. |
| 2. |
What are the principal factors that have led to the rise in inflation to 5.2%? |
| 3. |
Discuss whether, in the current financial crisis, it is appropriate for the Bank of England’s Monetary Policy Committee (MPC) to be targeting just inflation. |
| 4. |
Explain the transmission mechanism whereby a cut in interest rates will affect inflation. Discuss whether this transmission mechanism will be as relevant in the current financial climate. |
Rising food prices (5.5% increase over the past year) and rising energy costs have led to a rise in overall inflation. The consumer price index rose from 2.5% in March to 3% in April, triggering concerns that the Governor of the Bank of England, Mervyn King, would have once again to write an explanatory letter to the Chancellor for inflation going over its target rate.
Biggest jump in cost of living for six years surprises the city Guardian (4/5/08)
The danger of inflation fixation Guardian (14/5/08)
Dear Alistair …. Guardian (13/5/08)
Rising food prices send inflation surging to 3% Guardian (13/5/08)
Playing the percentage game for high stakes Guardian (9/5/08)
High street prices in biggest surge since 1992 Times Online (29/5/08)
UK inflation jumps to 3% in April BBC News Online (13/5/08)
Questions
| 1. |
Explain the principal factors that led to the sharp rise in the cost of living for April. |
| 2. |
Assess the extent to which inflation may be higher for many groups in society than the consumer price index figures indicate. |
| 3. |
Discuss the extent to which an interest rate increase would help to reduce inflation in a climate of rising food and energy prices. |
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. |