Economics Essays

Why Deflation is Bad

2021-06-09T07:43:00.001+01:00

Deflation is a situation where prices fall (negative inflation rate)

Deflation in the UK in the 1920s.

There are several reasons why deflation is considered to be harmful to the economy.

Discourage buying. When general prices are falling, consumers tend to delay purchasing. For example, rather than buy a flatscreen today, they wait a year when they will be cheaper. The effect of falling prices is to depress consumer spending leading to lower economic growth.
Increasing real value of debt. When people take on debt like mortgages, they expect the value of the debt to be steadily eroded by inflation. (A mortgage becomes easier to repay as your wage increases). When there is deflation, the real value of debts increases. You owe the same, but, your wage is falling. Therefore, you have to spend a higher % of your income on servicing the deb.

The increasing real value of debt can cause a deflationary spiral. As prices fall and debt increases, it leads to lower confidence, lower spending (lower AD) and this leads to a further fall in prices and wages.
Increasing Government Debt to GDP ratio. Deflation also increases the real value of government debt. It makes it much more difficult to reduce the debt to GDP ratio. Thus countries can start spending a higher % of income on debt repayment. Furthermore, as deflation tend to reduce economic growth, the cyclical deficit increases. The lack of growth of nominal GDP was a key factor behind the increase in debt to GDP in Greece, during the debt crisis of 2010s. In the UK in the 1920, deflation kept debt to GDP above 100% of GDP for two decades.
Real Wage Unemployment. In deflation, wages may need to fall so firms can afford to keep employing workers. However, wages are often sticky downwards. (Unions resist nominal wage cuts). Therefore, falling prices are often not met by falling wages this leads to a rise in real wages. This creates real wage unemployment. It also makes a countries exports less competitive (particularly a problem in the Eurozone where countries can't devalue the exchange rate)

Demand for labour falls to D2 causing equilibrium wage to fall to W2. But, if wages are sticky downwards they remain at W1 causing unemployment of Q3-Q1.
Monetary Policy Becomes ineffective. With deflation, zero interest rates may be too high. Even quantitative easing may be insufficient to get people spending. (deflation and monetary policy) The problem is that it is difficult to cut interest rates below zero and so the monetary authorities cannot adequately deal with the slow growth and deflation.

Link

2020-03-20T10:12:00.001+00:00

This post has moved please visit updated post

How much can a government borrow?

Paradox of Thrift

2020-03-11T14:28:00.000+00:00

The paradox of thrift is a concept that if many individuals decide to increase their private saving rates, it can lead to a fall in general consumption and lower output.
Therefore, although it might make sense for an individual to save more, a rapid rise in national private savings can harm economic activity and be damaging to the overall economy.
In a recession, we often see this 'paradox of thrift'. Faced with the prospect of recession and unemployment, people take the reasonable step to increase their personal saving and cut back on spending. However, this fall in consumer spending leads to a decrease in aggregate demand and therefore lower economic growth.

Paradox of thrift during 2020 corona recession

In 2020, the economic shutdown will lead to an unprecedented rise in savings. Partly because people are very nervous about the future economy but also because opportunities to spend are severely limited.
On the other hand, people who see a large fall in income will have to dip into their savings and borrow to stay afloat.

Paradox of thrift during 2009 Recession

In the recession of 2008, we see a sharp rise in the UK saving ratio as consumers respond to bad economic news by increasing saving and cutting back on spending.

This fall in spending and a rise in saving contributed to the recession.

A deep recession in 2008/09 partly magnified by a rise in private sector saving.

Paradox of Thrift in 1930s

In the great depression of the 1930s, GDP fell, unemployment rose and the UK experienced a long period of deflation. In response to this disastrous economic situation, mainstream economists were at a loss as how to respond. Such a lengthy period of disequilibrium didn’t sit well with Classical theory which expected markets to operate smoothly and efficiently.

One policy the National government did approve was the cutting of unemployment benefits. The rationale was that in times of depression the govt should set an example by reducing its debt. This example actually inspired members of the public to send in their savings in the hope that it would help the economy.

By reducing benefits they further reduced consumer spending and AD. This made areas of high unemployment even more impoverished. When people saved rather than spent their money it just made the recession worse.

Keynes and paradox of thrift

In the 1930s, J.M. Keynes argued that this 'paradox of thrift' was pushing the economy into a prolonged recession. He argued that in response to higher private saving, the government should borrow from the private sector and inject money into the economy.

This government borrowing wouldn't cause crowding out because the private sector were not investing, but just saving.

In the UK and US Keynes was largely ignored until after the war and as a consequence the UK economy experienced high levels of unemployment for the remainder of the decade.

Who coined the term paradox of thrift?

Keynes first popularised the term as it fitted in neatly with his concept that recessions were caused by falls in aggregate demand. It also justified higher government borrowing to offset the private sector savings. He mentioned it in his General Theory.

"For although the amount of his own saving is unlikely to have any significant influence on his own income, the reactions of the amount of his consumption on the incomes of others makes it impossible for all individuals simultaneously to save any given sums. Every such attempt to save more by reducing consumption will so affect incomes that the attempt necessarily defeats itself. It is, of course, just as impossible for the community as a whole to save less than the amount of current investment, since the attempt to do so will necessarily raise incomes to a level at which the sums which individuals choose to save add up to a figure exactly equal to the amount of investment.

— John Maynard Keynes, The General Theory of Employment, Interest and Money, Chapter 7, p. 84

This rather long-winded statement was shortened by Paul Samuelson, who used the term 'paradox of thrift' in his influential post-war macroeconomics text book.

The idea was also in use before Keynes. In 1893, in the The Fallacy of Saving, John M. Robertson writes on the potential problem of many individuals saving at once.

"Had the whole population been alike bent on saving, the total saved would positively have been much less, inasmuch as (other tendencies remaining the same) industrial paralysis would have been reached sooner or oftener, profits would be less, interest much lower, and earnings smaller and more precarious. This ... is no idle paradox, but the strictest economic truth."

— John M. Robertson, The Fallacy of Saving, pp. 131–132

Paradox of thrift and government borrowing

The paradox of thrift suggests that if there is a recession, there will be a rise in private sector saving and hence greater demand to buy government bonds. Therefore, even if the government borrow more, bond yields may fall.

Criticisms of paradox of thrift

Higher saving increases bank balances and can lead to an increase in bank lending - and hence investment.
A fall in demand from higher saving, will cause lower prices, which encourage demand to increase. This is related to Say's Law which states supply creates its own demand.
Higher domestic savings can lead to lower domestic inflation and therefore increase exports. Higher exports can boost demand.

Responding to criticisms

In a recession, banks may not want to lend, and even if banks do want to lend, firms do not want to borrow and invest. In fact, in a recession, firms may do the same as consumers and try to save more and pay back dent.
Prices may be sticky downwards and not fall, even if there is lower demand. Also, if prices fall, deflation can discourage spending because real value of debt rises.
Not every country can 'export' its way out of a recession.

Impact of expansionary fiscal policy

Understanding UK Housing Market

2019-06-14T10:33:00.000+01:00

The housing market is said to be one of the most popular topics of conversation at dinner parties. In the UK, this is for good reason. Houses are by far the biggest form of household wealth and have a big impact on consumers and the economy.

This graph shows two main features of the UK housing market.

House prices are volatile with frequent booms and busts.
Despite volatility, and even adjusted for inflation - UK house prices have been on a strong upward trend since the 1930s.

Main factors affecting house prices

Supply. UK house prices have stayed relatively high (despite recession and credit crunch) because of a shortage of supply. Ireland and Spain have seen much bigger house price falls because they have large excess supply.
Interest rates. The UK housing market is sensitive to changes in interest rates. Higher interest rates in the early 1990s made mortgages unaffordable and caused a big drop in house prices.
Economy / unemployment. A recession and rising unemployment usually causes lower demand for buying houses and a fall in price. (falling house prices also tend to deepen the recession)
Mortgage availability. In the boom years of 2000-07, banks were keen to lend and they relaxed their lending criteria, enabling more people to get a mortgage. But, the credit crunch meant banks had to tighten their lending criteria making mortgages difficult to get (even though interest rates were low)
see more at: factors affecting housing market

Why are UK house prices so volatile?

UK house prices have been highly volatile in the past few decades. On the one hand this is unexpected. People don't buy and sell houses like a commodity. But, in practise, house prices are volatile for a number of reasons.

Inelastic supply. It takes time to build houses - with rising demand, supply often can't keep up. This pushes prices up.
Change in credit conditions. Mortgage availability can vary depending on the state of the banks and financial markets.
Changing interest rates. Interest rates are used to control inflation, but a rise in interest rates has a big effect on demand and affordability.
Changes in confidence. In the boom years, we see landlords buying to let and demand rises. When prices fall, people don't want to buy for fear of negative equity.

Why are UK house prices so expensive?

(graph showing nominal house prices)

UK house prices are very expensive. Despite the credit crunch, UK houses are still less affordable in 2013 than at the end of the Lawson boom in the 1980s.

If we look at the affordability of mortgage payments, buying a house looks more affordable because interest rates are much lower in the 2010s, than in the 1990s. But, with house prices nearly 7 times average earnings in London, buying a house is out of the question for many first time buyers. Generally, mortgage companies only lend 3-4 incomes. It is too difficult to raise a deposit. Why are house prices so expensive?

1. Demand rising faster than supply. The UK fails to build enough houses to meet growing demand. This is related to strict planning legislation and the frequent local opposition to building new houses. Home building was also hard hit by the credit crunch. See more at Supply of houses

2. Squeezing onto the property market. As well as a shortage of supply, people try very hard to buy a house despite its expense. For example, some young people may benefit from generous loan or help from their parents to help get them on the property ladder. London has seen strong demand from overseas buyers; parts of the countryside has seen the purchase of second homes, pushing house prices higher.

Housing market crashes

If the UK had a boom in housing builds, we may have had a similar experience to Ireland. In the boom years, Irish house prices rose 300%, but between 2006 and 2012, house prices collapsed, falling more than 50%. The main difference is that Ireland were building record numbers of houses, leaving a glut in the property market. Irish boom and bust. See also boom and bust in US housing market

How does the Housing market affect the rest of the economy?

Housing is the biggest form of personal wealth in the UK. Changes in house prices have a significant effect on UK household wealth and confidence. If house prices are rising, homeowners can gain extra cash through re-mortgaging their house and spending the extra equity (this was a feature of the 1980s and 2000s boom). Therefore, rising house prices tend to increase consumer spending. However, if people see falling house prices, they lose capacity to re-mortgage and also consumer confidence tends to fall, leading to lower spending. Falling house prices in 2009 and 1990 were key factors in contributing to the recessions of those periods.

see more at: Housing market and economy

Government intervention in the housing market

Ideally, the government would overcome market failure in the housing market. This would involve:

Increasing supply to overcome fundamental shortage.
Protecting green belt land
Ensuring minimum standards of house building and ensuring tenants get a fair deal
Seeking to avoid house price volatility.

However, 1 and 2 conflict. The government often say they want to build new houses, but this is often politically unpopular with local protests against the building of new houses. Governments often focus on helping first time buyers, through government backed mortgages - but this has been criticised for not solving the fundamental problem house prices are too expensive, and just encourages greater debt levels.

Related posts on the housing market

Trades Unions Link

2019-05-13T13:03:00.001+01:00

This is a look at the main pros and cons of trade unions in the modern economy.

The post has been updated and moved to https://www.economicshelp.org/blog/219825/labour-markets/trades-unions/

Fallacies (moved)

2019-03-08T08:45:00.001+00:00

Some common economic fallacies, such as 'immigrants take our jobs' the broken window fallacy and the Luddite fallacy on the role of new technology.

This post has moved. See here - Common Economic Fallacies

Problems with the Euro

2018-05-07T10:05:00.000+01:00

The Euro is a bold experiment to create the largest currency area in the World. However, the current Euro crisis have revealed deep flaws in the structure of the single currency

The Euro involves:

A single currency within the Eurozone area.
A common monetary policy. Interest Rates are set by the ECB for the whole Eurozone area.
Growth and Stability Pact. In theory there are limits on government borrowing, national debt and fiscal policy. However, in practice member countries have often violated the strict limits on government borrowing.

Problems and costs of the Euro

Interest rates not suitable for whole Eurozone. A common monetary policy involves a common interest rate for the whole eurozone area. However, the interest rate set by the ECB may be inappropriate for regions which are growing much faster or much slower than the Eurozone average. For example, in 2011, the ECB increased interest rates because of fears of inflation in Germany. However, in 2011, southern Eurozone members were heading for recession due to austerity packages. The higher interest rates set by the ECB were unsuitable for countries such as Portugal, Greece and Italy.
The Euro is not an optimal currency area. If a state in the US, such as New York ,was in recession, workers in New York could move to New England and get a job. However, in the Eurozone this is much more difficult; it involves moving country and possibly learning a new language. There are more barriers to the movement of labour and capital within a diverse region like Europe. Therefore, an unemployed Greek can't easily relocate to Germany. see: Two Speed Europe
Limits Fiscal Policy. With a common monetary policy it is important to have similar levels of national debt, otherwise countries may struggle to attract enough buyers of national debt. This is a growing problem for many Mediterranean countries like Italy, Greece and Spain who have large national debts and rising bond yields.
Lack of Incentives. It is argued that being a member of the Euro protects a country from a currency crisis. Therefore, there is less incentive for countries to implement structural reform and fiscal responsibility. For example, in good years Greece was able to benefit from very low bond yields on its debt because people felt Greek debt would be secured by rest of Europe. But, this wasn't the case, and Greece were lulled into a fall sense of security.
No scope for devaluation. Since the start of the Euro, several countries have experienced rising labour costs. This has made their exports uncompetitive. Usually, their currency would devalue to restore competitiveness. However, in the Euro, you can't devalue and you are stuck with uncompetitive exports. This has led to record current account deficits, a fall in exports and low growth. This has particularly been a problem for countries like Portugal, Italy and Greece.

This shows the effects of Eurozone members becoming uncompetitive. Very high current account deficits.

No Lender of Last Resort. The ECB is unwilling to buy government bonds if there is a temporary liquidity shortage. This makes markets more nervous about holding debt from eurozone economies and precipitates fiscal crisis. See: Problems of Italy - why Italian bonds increased despite having a much lower budget deficit than UK.
However it is worth noting that since Mario Draghi took over and promised to 'do whatever it takes, the ECB has effectively acted as lender of last resort.

Italy bond yields rose despite a primary budget surplus

Deflationary Bias I would argue there is a deflationary bias in the Eurozone which increases the risk of recession and higher unemployment

Eurozone members have seen a rise in unemployment - higher than US and UK

Divergence in bank rates. In theory, the Eurzone creates a common interest rate. However, in the credit crisis of 2010-13, we see rising bank rates for peripheral Eurozone countries, like Italy and Spain. Small and medium sized firms faced higher borrowing costs than in 2005, even though the ECB cut the main base rate. This suggests that the ECB was unable to loosen monetary policy when needed. See more on credit policy
Asymmetric Shocks. If one country experienced an external shock it might need a different response. But this is not possible with a common currency. E.g. German reunification required higher interest rates in order to help reduce inflation but this was not good for many other countries.
An oil shock would affect net importers like France more than Norway and the UK who export a lot. Monetary Policy will have different effects in different countries. For example, the UK is sensitive to changes in the interest rate because many people have mortgages.

Experience of EU Fiscal Crisis

The great recession of 2008-11 showed the vulnerability of Euro member countries to a common monetary policy. Because they can't devalue and also ask the Central Bank to buy government securities they are at much greater risk of a liquidity crisis.

Because of fears over liquidity crisis, bond yields rose from Ireland, Spain, Portugal and Greece. As a result these eurozone countries were forced into pursuing spending cuts, and accepting higher interest rates. But, this led to a vicious cycle of lower growth and lower tax revenues.

See: Why UK bond yields stayed low compared to Euro members

Problems for UK Economy

UK economy has additional problems which make joining the Euro a bad idea.

Housing market. Many in the UK have a mortgage which is a big % of their disposable income. This is related to the high cost of buying houses in the UK.
Variable Mortgages In the UK more homeowners have variable mortgages. These two factors means UK consumers are very sensitive to changes in the base rate. If the ECB kept interest rates higher than the UK needed it would create serious problems in the UK. Arguably to join the UK would need to reform its housing market and reliance on variable mortgages.

Predictions for the Dollar as the Reserve Currency

2018-04-03T11:12:00.000+01:00

Governments hold foreign currency reserves to help deal with issues such as depreciation in their currency. At the moment, the world’s biggest foreign currency reserve is the US dollar; about 64% of the World’s foreign currency reserves are currently denominated in dollars. This is because, historically, the US economy has been the most secure and powerful economy. However, with the continual decline in the dollar, many countries are fearing that the dollar is no longer the best currency to use and increasingly countries are switching to other currencies such as the Euro.

Pricing of Commodities in Dollars

A separate, but related issue, is that most commodities, e.g. oil prices, are also priced in dollars. Oil prices are denominated in dollars because currently, the dollar is the most common currency. If the dollar was to be replaced by the Euro as the world’s currency reserve; it is more than likely that we would see commodities priced in Euro’s. In fact, some countries are already starting to use the Euro rather than the dollar

Will the Euro Replace the Dollar as the World’s Reserve Currency?

Since 1999, the Dollar’s share of the world’s currency reserves have fallen from 70.9% to 64%
In the same period, the Euro has increased from 17.9% to 25.8%
(the 3rd biggest reserve currency is the Pound sterling 4%
(the 4th biggest reserve currency is the Japanese Yen 2.8%)

Why the Euro May soon Replace the Dollar

The Dollar has been very weak in the past 8 years. Against the Euro, the Dollar has fallen by over 30% since 2001. The Dollar has also fallen against the Yen and other currencies. This means that countries holding reserves in dollars are seeing a decline in their value. For example, China has over $1,400 billion of dollar reserves. A 20% devaluation represents a significant loss for them. Therefore, the rational step is to diversify out of the dollar.
Countries dropping the Dollar Peg. Many middle eastern Countries such as Saudi Arabia, Kuwait and Syria used to maintain a dollar peg. However, there are signs that they no longer want to keep a peg against a devaluing dollar. Kuwait and Syria have dropped their peg and Saudi Arabia recently decided not to follow the US in cutting interest rates.
Dollar’s weakness may continue. The US economy is continuing to slow down as it remains hard hit by the housing slump. US interest rates have fallen and may continue to fall by more than the Eurozone. As interest rates in the US are low it becomes less attractive to buy US dollars so the devaluation will continue.
US Trade Deficit (current account deficit of 5%). In recent years, the US has built up a large current account deficit. This has caused an outflow of currency and is a factor in maintaining the weakness of the dollar. (although the recent devaluation though has helped reduce the deficit from over 6% to 4.7%)
The Euro is a real alternative. The Euro economy is now as large as the US. The Euro may also be seen as more politically desirable. European countries were less willing to get involved in Iraq and many accuse the US of an ‘imperial overreach’ with too many foreign bases and interference around the world. The European Union, by contrast, provides greater diversity and is politically more attractive, especially to middle eastern countries.
Better inflation performance of the Eurozone to the US. There was a marked contrast in response to the recent credit crisis. The US slashed rates to 2.25%, the ECB barely cut rates at all. The lower rates and devaluation of the dollar makes future inflation in the US more likely, this will only make the US less attractive.

Changing the world’s reserve currency is something that doesn’t happen very often. The US has enjoyed a hegemony really since the end of the First World War. However, that is no reason to suggest that the dollar’s influence will continue. Sooner or later, economic fundamentals are likely to cause people to shift out of the dollar and into alternatives. I will look at the consequences of this potential change in future essays.

Related

Effects of a falling dollar
Why do foreigners hold US dollars?
Will the Euro Replace the Dollar at Economist's view
Why the Euro will soon replace the dollar as the world's reserve currency

Importance of Growth - Quick summary -

2017-11-01T10:07:00.001+00:00

Economic growth raises real incomes and living standards, enabling households to consume more goods and services.
It increases tax revenues without raising tax rates, giving governments more scope to fund healthcare, education, pensions and infrastructure.
Growth reduces unemployment by creating new jobs and encouraging firms to invest.
It helps lower relative debt burdens because GDP rises faster than liabilities.
Higher growth supports business confidence and innovation, improving productivity over time.
It can reduce poverty by expanding opportunities and wages. Internationally, fast-growing economies attract inward investment and strengthen competitiveness.

Full post - Importance of economic growth

Link

2017-10-21T02:19:00.000+01:00

Updated ink to post on liquidity trap

Interest Rates explained

2017-10-11T11:55:00.000+01:00

Interest rates reflect the cost of borrowing. They also indicate the return on savings/bonds.

Commerical banks charge a higher interest rate on loans and pay a lower rate on savings. This difference between the cost of borrowing and rate of return on savings is part of the reason banks are profitable. Lending customers deposits at a higher rate than they pay customers interest on their savings.

Types of interest rates

Interest rates are controlled by the Central Bank (sometimes governments set interest rates directly). The Central Bank change a base rate. This base rate is the rate they charge to commercial banks. If the base rate rises, commercial banks will tend to put up their standard variable rates.

Effect of an Increase in Interest Rates

If interest rates go up, we will see:

Cost of borrowing is more expensive. If borrowing is more expensive consumers will take out fewer loans. Firms will borrow less. Therefore consumer spending and investment will fall (or increase at slower rates)
Mortgage and loan repayments increase. This reduces consumer disposable income and consumer spending further.
Return on savings increase. More attractive to save and this will reduce consumer spending
Higher interest rates cause an appreciation in the exchange rate due to hot money flows. (It is more attractive to save in the UK, if UK interest rates are higher than other countries)
An appreciation in the exchange rate makes more expensive, leading to less export demand
Fall in asset prices. Higher interest rates can make it less attractive to buy a house with a mortgage leading to lower house prices.

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Macro effects

If consumer spending and investment falls, this will lead to lower AD. Therefore this causes a fall in Real GDP or at least a fall in the rate of economic growth.
Lower growth will tend to increase unemployment. With less output, firms demand less workers.
Lower growth will also help to reduce inflation.

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Evaluation of Interest rate increases

1. Depends on the situation of the economy

If the economy is at full capacity a rise in interest rates may reduce inflation, but not growth. However, if there is already spare capacity then rising interest rates could cause a recession.

2. Depends on other components of AD

For example, if exports are rising, or if consumers confidence is high; rising interest rates may not reduce AD. For example, in the late 1980s, there were modest rises in interest rates, but the other aspects of the economy were growing so quickly, it failed to halt the above trend rate of growth (until 1991/92 when interest rates reached a record 15%)

3. Income effect of higher interest rates

Higher return on saving may give some consumers a high income. This will be consumers like pensioners. However, in the UK, the savings ratio is quite high, therefore the income effect of a rise in interest rates is likely to be quite low. The substitution effect will be higher.

4. It depends whether commercial banks pass interest rate cut onto consumers. In the credit crunch, banks didn't reduce their Standard Variable Rate as much as the Bank of England cut its base rate.

In Credit Crunch of 2008, lower interest rates failed to boost economic growth.

How does Bank of England decide whether to increase interest rates?

The Bank will look at a wide variety of statistics to consider the state of the economy. The most important factors are

Inflation target of 2%. But Bank has to consider other objectives such as
economic growth and inflation.
It also has to consider the type of inflation. Is it temporary cost-push inflation or underlying inflationary pressures.
Is the economy reaching full capacity?

Example of interest rate dilemma Nov 2017

Should interest rates go up?

Real interest rates

Real interest rate = nominal interest rate - inflation rate.

If interest rates are 5%, and inflation is 3%, the real interest rate is 2% - savers will see a positive return on savings.

However, if interest rates stay at 5% and inflation rises to 6%, then real interest rates become negative. Real interest rates will be -1.0%

See also:

The Economy of the 1970s

2017-10-05T10:19:00.003+01:00

The 1970s was not just an era of dayglow trousers, lava lamps and the emergence of punk rock. It was a traumatic economic decade of stagflation, a three day week and the return of unemployment. Yet, despite some headline-grabbing crisis - it was also a decade of rising living standards, the growth of credit and rising property prices.

Graph showing combination of high inflation and volatile output.

Barber Boom 1970-73

The early years of the 1970s were a period of rapid economic growth.

The Bank of England deregulated the mortgage market - meaning High Street Banks could now lend mortgages (not just local building societies). This helped fuel a rise in house prices and consumer wealth.
Barber Boom of 1972. In the 1972 budget, the chancellor Anthony Barber made a dash for growth - with large tax cuts against a backdrop of high economic growth.
Growth of Credit. It was in the 1970s, we saw the first mass use of credit cards (Access). This helped create a consumer bubble.

Inflation Crisis

By 1973, inflation in the UK was accelerating to over 20%. This was due to:

Rising wages, partly due to strength of unions.
The inflationary budget of 1972.
Growth in credit and consumer spending.
Oil price shock of 1973, leading to 70% increase in oil prices.

Trying to deal with inflation

Belatedly, the government tried to deal with unemployment, through higher interest rates. Also, the Heath government tried capping wages. This was fuel for industrial unrest, leading to frequent and widespread strikes. In 1973, the miners went on strike and were also joined by sympathetic trades unionists - led by, amongst others, the young and infectiously strident Arthur Scargill. Growing up in Thatcher's Britain, it is hard to remember how powerful trades unions actually were at the time. During Heath's government 9 million working days were lost to strike action - plus more to practises such as 'working to rule'. Flying pickets successfully blocked coal and coke factories, which at the time produced the majority of the nation's power. Suddenly the life source of Britain's energy was being blocked. At the height of the strike, Britain was on a 3 day week, with the Prime Minister, Edward Heath making public appeals to conserve energy.

1974, also saw an unwelcome return of a real recession. This recession was caused by the end of the Barber boom and falling living standards from rising prices. In the post-war period, we had booms and busts, but, the bust were relatively mild, with only very minor declines in output. But, in 1974, output fell 3.4% causing a return of high unemployment not seen since the 1930s.

Oil Prices in the 1970s

blue line - nominal oil prices
Yellow line - Real oil prices, adjusted for inflation

Since oil had become an intrinsic part of the economy, we had taken it for granted that oil could be bought cheaply. The 1960s and early 1970s, saw a rapid rise in ownership of cars and motoring. Britain enthusiastically embraced the motor car - helped by rising incomes and cheap petrol.

But, the 1973 oil crisis, changed all that. Suddenly the price of petrol more than doubled and the UK faced an energy crisis to go along with a spike in inflation. The government seemed powerless as Britain was put on a three day week and TV was turned off at 10.30pm. Emergency speed limits were introduced to conserve petrol.

If in 1957, we had never had it so good, by 1973, it seemed we had never had it so bad. It was a return to the 1940s austerity; but with no obvious enemy, the public were less forgiving of this inconvenience.

UK current account

In the mid 1970s, the UK saw a deterioration in the current account. High UK inflation was making UK goods less competitive. Also domestic consumer spending remained relatively strong - sucking in more imports. Although the current account reached a peak of only 4% of GDP in late 1974, (low compared to current account in 2000s) there were greater concerns about financing the current account deficit in the 1970s due to less investment income

1976 IMF Bailout

In 1976, the UK needed to apply to the IMF for a bailout. This was due to high budget deficit and also concerns over the value of Sterling. Markets believed Sterling was overvalued and so kept selling. This caused the Pound to depreciate.

Britain asked the IMF for a £2.3bn bail out in 1976 saying unemployment and inflation were at exceptional levels.

In return the IMF insisted on deep spending cuts to tackle the budget deficit. The government implemented spending cuts. By 1977, the economy showed signs of recovery, and helped by oil revenues the balance of payments improved. The pound also strengthened after the loan. The UK did not need to draw-out the full loan. More detail at: IMF crisis

UK borrowing in the 1970s

From UK Budget deficit

UK budget deficit rose rapidly from 1971/72 to 1975/76
Due to rise in GDP, total public sector debt fell from approx 60% of GDP (1970) to 50% in 1980 (see: National debt

The Winter of Discontent

In the late 1970s, inflation had continued to be a problem; with a combination of rising oil prices and rising nominal wages. Again the government sought to control the wage inflation by imposing wage caps. But, again the unions were in no mood for stiff wage settlements. Strike action broke out across the country, extending from the industrial heartlands to the public sector. Public servants from dustbin men to gravediggers in Liverpool went on strike. Unburied coffins in Liverpool piled up, and in cities across the UK, garbage went uncollected. Not for nothing, was that period of strike action called the 'Winter of Discontent'. It seemed the government was unable to control either inflation or the strike action. A feeling of powerlessness pervaded the country.

In some regards, the economic situation of the 1970s was not quite as bad as the dramatic Winter of Discontent suggested. Certainly, the three day week was a radical event. But, it was relatively short lived. The 1970s was a period of rising living standards. Nor is the 1970s a vindication of monetarism and proof of the failure of Keynesianism. See: How Really bad was the 1970s?

Yet, the UK economy had fundamental problems, and it needed a radical shake up. But, no-one could have predicted quite how radical the Thatcher revolution would be... (to be continued - see: economy of 1980s)

Housing Market in 1970s

The 1970s was a period of rapid house price growth, especially in the early 1970s.
During the 1970s, home ownership rates increased from 51%, 1970 to 57% in 1981

In 1970 Q1, average house prices were £4,377
By 1973 Q1, average house prices had more than doubled to £8,395

Real house prices rose in the early 1970s because:

Rise in incomes
MIRAS - tax relief on mortgages, encouraged people to get a mortgage.
Deregulation of mortgage sector
Greater aspiration to own a home

unadjusted for inflation. Nominal house prices

Real House


Real house prices adjusted for inflation, stayed constant in second half of 1970s.

Annual % growth in house prices.

In the second half of the 1970s, real house prices fell between 1975 to 77 because they struggled to keep up with record inflation.

Price and incomes policies

In the 1970s, governments still gave great weight to policies of intervening to limit price and wage increases in the economy. See more at Price and incomes policies

Economics

2017-06-17T09:38:00.001+01:00

Readers Question: What is the Importance of Economics?

See: The Importance of Economics

Run on the Pound

2017-06-01T11:05:00.000+01:00

A run on the pound refers to a situation where international investors become nervous over holding sterling and sterling assets, and so sell as quickly as possible.

A run on the pound may occur when markets feel the Pound is overvalued and likely to fall quickly. If markets expect the pound to fall, they will sell quickly before making a loss.

What may cause a run on the Pound?

A run on the pound is more likely in a semi fixed exchange rate. e.g. when the Government is committed to trying to keep the Pound at a certain level. If markets feel this level is unsustainable they may keep selling Pounds until the government is forced to devalue.

For example, in 1992, the UK tried to maintain value of Sterling in ERM, but, ultimately markets forced the UK out and we had to devalue. The graph above shows the near 20% devaluation in 1992.
We also had a run on the pound in the late 60s, causing the Wilson government to devalue pound. (In 1967, Wilson devalued pound by 15% after selling many foreign currency reserves trying to maintain value of Pound)
In 1976, there was another on the Pound as markets feared the UK's fiscal position.
Financial crisis depreciation. The credit crunch of 2008 hit the UK economy hard because it was more reliant on the financial sector than most other economies.

Other potential causes of a run on the Pound

High inflation - high inflation reduces the value of Pound Sterling. Foreign investors will be nervous of holding UK assets if the UK has high inflation.
Threat of sovereign debt default. If markets feel government borrowing is too high and unsustainable then there is a risk of foreigners losing their government bonds. Therefore, the market will sell bonds causing an outflow of foreign currency and fall in value of sterling. This can build up a momentum effect. As the fall in the currency can alarm other investors.
Large current account deficit. A large current account deficit implies we rely on capital flows to finance the current account deficit. Therefore, the UK would be more vulnerable to capital flight. In this circumstance a run on the Pound would be stronger. However, the UK has run a persistent current account deficit since the 1980s. (See: Current account deficit)

Is the UK at risk from a Run on the Pound?

No. Firstly the Pound is floating i.e. governments are not trying to keep its value high. The Pound has already depreciated by about 15% since the Brexit vote in June 2016. - This wouldn't count as a run on the pound but large depreciation. With a floating exchange rate, there is less chance of markets feeling an exchange rate is fundamentally overvalued.

UK's debt is a concern (national debt at over 80% of GDP), but, we still retain good credit rating and despite rising debt, bond yields fell - reflecting the fact markets see UK debt as a safe investment.

Would membership of Euro protect against a run on the Pound?

If we joined the Euro, by definition we couldn't have a run on the Pound, but, it doesn't solve underlying problems like lack of competitiveness, excessive government borrowing, negative growth. Being outside the Euro, would give Greece more flexibility for dealing with their crisis.

Related

Sample Question and Answers in Economics

2017-05-22T13:08:00.000+01:00

A good revision technique is reviewing sample questions and model essays:

Micro A Level Questions and Answers:

Why Women are Paid Less than Men (30) Edexcel Unit 5a
Does a Minimum Wage Reduce Poverty? - (30) AQA unit 5 Business Economics
Discuss 3 different Policies to Reduce Inequality(30) AQA
When if Ever should the Government prevent a Merger or Takeover? OCR (20)
Advantages of Electronic Road Pricing (30) AQA

Sample Macro Economics Questions and Answers

Economic Growth Essays

Inflation Essays

Unemployment Essays

Market failure

Trade and globalisation

Link between inflation and interest rates

2017-01-10T09:28:00.000+00:00

Interest rates can influence the rate of inflation and the rate of economic growth.
The Bank of England change the 'base' interest rate to try and target the government's inflation rate of 2% +/-1

Generally, an increase in inflation leads to higher interest rates.
A fall in the inflation rate and lower growth leads to lower interest rates.

Graph Showing Inflation and Interest Rates in the UK

Real Interest Rates

Typically, nominal interest rates are 1 - 2 % higher than inflation. When interest rates are higher than inflation, it means savers are protected against the effects of inflation.
However, in 2008 and 2011, we had a period of negative real interest rates. This meant the inflation rate was higher than the base rate.
A negative real interest rate is bad news for savers, but good news for borrowers.

Response to Rising Inflation

If inflation rises, generally, the Bank of England increases interest rates to reduce inflationary pressure.
Higher interest rates tend to reduce consumer spending. This is because homeowners see an increase in the cost of their mortgage payments and have less disposable income. Therefore, they spend less. Also, higher interest rates increase the incentive to save and reduce the incentive to borrow.
Therefore, an increase in interest rates tends to reduce the rate of economic growth and prevent inflationary pressures.
See more on: Effects of Higher interest rates on economy

Response to Fall in Inflation Rate

If inflation falls below the target, there is likely to be a fall in the rate of economic growth, and the Central Bank may fear a recession. Therefore, in response, they may cut interest rates to try and boost economic growth.

Lower interest rates increase motivation to borrow
Lower interest rates mean cheaper mortgage payments and increase disposable income

Why A Cut in Interest Rates May Not Work

In some situations, cutting interest rates may be ineffective in boosting economic growth. For example, in 2008-11:

The recession was so sharp that investment and consumption have fallen dramatically and so the cuts in interest rates have only mitigated the extent of the downturn
House Price falls provide a powerful negative impact on spending. Lower interest rates should boost spending. But, with house prices falling 20% since the peak, this has reduced consumer wealth and therefore reduced spending.
Global downturn. Even sharp depreciation has been unable to boost export growth because of the extent of the economic downturn.
Time Lags. A cut in interest rates can take a long time to have an effect. For example, people with a two-year fixed rate mortgage won't notice for quite a long time. (until they re-mortgage. Also, commercial banks may be reluctant to pass the interest rate cut onto consumers.

Why higher inflation may not cause higher interest rates

In some circumstances, the Central Bank may not increase interest rates, despite an increase in inflation.
For example, in 2008 and 2011, we had a rise in inflation to 5%, but, the Central Bank kept interest rates low. Why?

They kept interest rates low because:

They felt inflation was just due to temporary cost-push factors like higher taxes and volatile food prices increasing
They felt economy was at risk of inflation. Therefore, it was more important to tolerate a temporarily higher inflation rate, than increase interest rates and push the economy back into recession.

UK Exchange Rate Mechanism Crisis 1992

2016-07-06T09:30:00.001+01:00

In October 1990, the UK made the decision to join the Exchange Rate Mechanism (ERM)
The ERM was a semi-fixed exchange rate mechanism. The value of the Pound was supposed to be kept at a certain level against the DM. £1 = DM2.95. The lower limit for the exchange rate was DM 2.773. If the Pound approached this level, the government would be obliged to intervene - through buying Pounds and raising interest rates.

The exchange rate mechanism was designed as a precursor to joining the Euro. The aim was to keep exchange rates stable; it was hoped this would:

Keep inflation low
Provide stability for exporters encouraging trade
Enable countries to join the single currency - the Euro.

In the late 1980s, the chancellor, Nigel Lawson was keen to join the ERM. But, Mrs Thatcher with her more euro-sceptic views wanted to stay out. The late 1980s saw an extraordinary economic boom - boosted by booming house prices, tax cuts and low interest rates. Growth reached record levels of 4-5% a year. Enthusiastic government ministers talked of an economic miracle - hoping Government policies had enabled, at long last, to catch up with other countries like Germany.

Economic growth

However, this miracle was an illusion. High growth was unsustainable and led to inflation.(see: Lawson Boom) With inflation of 10%, Nigel Lawson was able to convince Mrs Thatcher that the UK would benefit from joining the ERM to help reduce inflation.

Therefore, the UK joined in October 1990. at a rate of DM 2.95 to the Pound.

However, the problem was that the economic situation was declining quickly. The UK was sliding into recession due to falling house prices and an end to the past economic boom.

High inflation and deteriorating economic activity was making the Pound less attractive. Therefore, the Pound kept falling to its lower limit in the ERM. Therefore, the government was bound to protect this value of the Pound by:

Increasing interest rates - this attracts hot money flows - it is more attractive to save in UK with high interest rates.
Buying pounds with foreign exchange reserves.

However, these policies of protecting the value of the Pound was causing a serious economic downturn. High interest rates particularly hit the housing market. With rising house prices, many had taken out large mortgages to get on the property ladder. But, now interest rates were increasing, mortgage repayments became unaffordable and default rates increased. Combined with rising unemployment from the recession, the housing market saw a dramatic fall in prices that was to last 4 years.

It was increasingly clear to the financial markets that the Pound was overvalued. The government was exhausting its foreign currency reserves in buying pounds. But, more problematically, the high interest rates was causing a serious recession and misery for homeowners.

Financial speculators like George Soros predicted the Pound was doomed, so they were keen to sell their pounds to the British government. (It is said George Soros made £1 billion out of the UK government during ERM crisis)

It became a question of pride for Ministers, with Norman Lamont and John Major pledging to keep the UK in the ERM, seemingly at all costs.

For a long time, the British government fought a losing battle. But, the foreign currency reserves of the British government were no match for the trillions of Pound Sterling traded on the foreign currency and the pound kept sliding. It is estimated that the Treasury used £27 billion of foreign currency reserves trying to prop up the Pound. The Treasury estimated the final cost to the taxpayer was estimated at £3.4 billion.

On one desperate day - Wednesday 16th September, the UK government increased interest rates to 15%. In theory, these high interest rates should attract hot money flows. But, the market saw it for what it was - a measure of desperation. The market knew these interest rates were unsustainable and couldn't be maintained; the sell off continued and eventually, the government caved into the inevitable and left the ERM. The Pound fell 15%, interest rates were cut, and the economy was able to recover.

It is a classic example, of failed government policy. If the UK had joined the ERM at the start of the economic boom in the mid 1980s, the anti inflationary impact would have helped moderate the boom, kept inflation low and prevented a painful readjustment. But, they joined at the wrong rate at the wrong time. Trying to keep the Pound artificially high caused a recession, deeper than any of our competitors. The ERM was dubbed 'The eternal recession mechanism'. The artificially high exchange rate just attracted financial speculators who saw the British government as a source of easy profit.

On leaving the ERM, the UK economy soon recovered. This was partly due to devaluation, but also perhaps more importantly - interest rates were able to fall significantly.

However, the episode left painful scars and played a key role in keeping the UK out of the Euro. It also shows the mistake of targeting inflation through an intermediary such as the exchange rate. As a consequence of this episode, the government gave the Bank a direct inflation target of 2.5%. The ERM crisis also paved the way to given the Bank of England independence in 1997. The hope was that an independent bank would avoid the excesses of the Lawson boom and bust of the 1980s.

Lessons from ERM

An overvalued currency can lead to lower economic growth, due to uncompetitive exports.
Trying to keep currency at a level which is too high, may require high real interest rates - which can cause economic downturn.
It is hard to buck the market. Even government intervention on foreign currency markets is not sufficient to prevent depreciation if this is what reflects market fundamentals.
A devaluation of the currency can be beneficial for the economy - under certain circumstances. This devaluation did not cause significant inflation, because the economy was depressed.

UK Recession of 1991-92
UK devaluation of 1967 - many similarities
UK Economic history
Factors influencing exchange rate
UK Crashes out of ERM in 1992 at BBC
"Unemployment is a price well worth paying for lower inflation" - Norman Lamont commenting on his own policies

Benefits of the European Union

2016-07-03T07:45:00.000+01:00

The European Union is a political and economic union of 28 countries. Originally formed in 1958 by six countries (then the EEC), the EU has expanded in terms of size and integration. The aim of the EU is to promote European harmony through creating a single market, enabling the free movement of goods, services and people.

Some of the benefits of the European Union include

Broad political and legal benefits

European harmony - European Union countries are no longer at loggerheads like they were in the past. With the exception of civil war in Yugoslavia (which wasn't in the EU at the time), Europe has managed to heal the divisions which were so painfully exposed in the two World Wars in the Twentieth Century. The EU was awarded the Nobel Peace Prize in 2012 for helping to promote peace and international co-operation. Many Eastern European countries are keen to join the EU because they feel it will help promote economic and political stability.
Legal and human rights. The EU has a strong commitment to human rights, preventing discrimination and the due process of law. This makes the EU attractive to countries, such as the Ukraine who wish to share in similar legal and human rights.
Prospect of membership has helped modernise countries, such as Turkey. The Copenhagen Criteria for EU membership enshrine a commitment to human rights, the rule of law and a market economy. The prospect of gaining membership of the EU, encourage countries to implement human rights legislation.

Economic benefits

EU is one of strongest economic areas in the world. With 500 million people, it has 7.3% of the world's population but accounts for 23% of nominal global GDP.
Free trade and removal of non-tariff barriers have helped reduce costs and prices for consumers. Increased trade with the EU creates jobs and higher income. Over 52% of UK exports are to the EU. Trade within the EU has increased 30% since 1992.
According to one study - over ten years (1993-2003), the Single Market has boosted the EU’s GDP by €877 billion [£588 billion]. This represents €5,700 [£3,819] of extra income per household.
A paper, Campos, Coricelli, and Moretti (2014) used the synthetic counterfactuals method (SCM) pioneered by Abadie and Gardeazabal (2003). The red dotted line shows estimated GDP if the country had not been a member of the EU. This shows that even more prosperous EU countries, such as the UK have benefited from higher GDP as a result of being in the EU.
Removal of customs barriers mean 60 million customs clearance documents per year no longer need to be completed, cutting bureaucracy and reducing costs and delivery times
Countries in the EU, are amongst the highest positions in the Human Development Index (HDI)
Poorer countries, such as Ireland, Portugal and Spain have made significant degrees of economic development since they joined the European Union. A report suggests that over the period of the 1980s and 2004 enlargement, there are substantial positive payoffs of EU membership, with a gain in per capita GDP of approximately 12% for poorer countries. (Vox - how poorer countries benefit from EU)
Social cohesion fund. This has invested in poorer areas of the EU to help reduce regional disparities. For example, Ireland benefited from the EU social cohesion fund (over €6 billion of investment in education and infrastructure spending)
EU structural funds to help Eastern European economies develop will benefit the UK in the long term because as they become more affluent, they will be able to buy more UK exports.
The European Union has attracted greater inward investment from outside the EU. Inward investment grew from €23 billion [£15.4 billion] in 1992 to €159 billion [ £106.5 billion] in 2005. The UK is the 5th largest source of inward investment in the world, and being a member of the single market is an important factor in encouraging Japanese firms.
he European Social Fund (ESF)

Labour and free movement of people

Free movement of labour and capital have helped create a more flexible economy. For example, UK and Ireland have benefited from the immigration of Eastern European workers to fill labour market shortages in certain areas, such as plumbing, nursing and cleaning.
Far from 'taking jobs', migration has helped increase productive capacity and makes a net contribution to tax revenues. (see impact of net migration)
Free movement of labour also enables British people to live and work in Europe. Roughly 1.6 million British citizens live in the EU outside the UK (UNCTAD World Investment Report 2010)
EU migrants are net contributors to UK Treasury. EU migrants tend to be young. Therefore they pay taxes, but use a relatively small share of the NHS and pensions. See: Fiscal effects of immigration. Net migration has helped deal with the UK's demographic timebomb.
EU has enabled people to travel freely across national boundaries making trade and tourism easier and cheaper. According to the European Commission, more than 15 million EU citizens have moved to other EU countries to work or to enjoy their retirement.
1.5 million young people have completed part of their studies in another member state with the help of the Erasmus programme. The possibility to study abroad is considered positive by 84% of EU citizens. (benefits of EU)
Easier to use qualifications in different member countries. This makes it easier to work abroad without having to retrain in different national qualifications.
Mutual recognition of safety standards and rules have helped reduce costs for firms. This has encouraged the development of small and medium business who rely on the low cost of exports.
Social charter enshrines protection for workers such as a maximum working week, right to collective bargaining and fair pay for employment.
European Arrest Warrant (EAW) scheme has made it easier to track criminals across the European continent.

Environmental benefits of the EU

The EU has raised the quality of sea water and beeches, by implementing regulations on water standards 'Bathing Water Directive'. 92% of tourist locations now meet minimum water quality standards. (Clean water at Europa.eu)
Tackling global warming. In 2006, the (EU) committed to reducing its global warming emissions by at least 20 percent of 1990 levels by 2020. The EU has also committed to spending $375 billion a year to cut greenhouse gas emissions by at least 80 percent by 2050 compared to 1990 levels. (global warming pdf)
Tackling acid rain. Environmental treaties which have sought to deal with European wide environmental problems such as acid rain. The EU has set strict restrictions on emissions of pollutants, such as sulphur, and other causes of acid rain. (BBC Link)

Consumer benefits of the EU

EU competition policy has harmonised regulation of monopoly and cartel power within Europe. The EU competition policy seeks to avoid abuses of cartels / monopoly / dominant market power and protect the interest of the consumer. There has been successful deregulation of airlines, electricity and gas markets.
The EU has reduced the price of making mobile phone calls abroad. In 2007 EU legislation set maximum charges for making and receiving calls. The EU also agreed with 14 mobile phone manufacturers to create a standard design for chargers from 2011 in order to make life easier for consumers and reduce wastage. In 2014, it is has voted to scrap roaming charges which will drastically reduce the cost of using a mobile phone abroad. (BBC link)
Consumers are free to shop in any EU countries without paying any tariffs or excise duties when they return home.

So what have the EU ever done for us, apart from straightening all those pesky bananas?

Benefits of EU for eastern European economies

Political stability and greater integration amongst European states. Pressure to keep democratic norms.
Increased Trade - This will lead to advantages such as lower prices for consumers and more exports for industries with a comparative advantage.
Increased competition
Increased Inward Investment This will be because of greater stability in the economy, lower trade costs and greater harmonization. The benefits of this include a positive regional multiplier and greater technical assistance
Social Policy's and subsidies. New countries will benefit from Regional, Social and CAP because they tend to be poorer.
Reduce income disparities. Membership of EU will help eastern economies to 'catch up with' western counterparts.
Free-movement of labour enables workers in east to travel to west and gain higher incomes that can then be re-invested in business in the east.

WTO Link

2016-06-17T16:50:00.002+01:00

Readers Question: What are the advantages and disadvantages of the WTO formally the GATT?

Advantages of promoting free trade

Lower prices for consumers. Removing tariffs enables us to buy cheaper imports
Free trade encourages greater competitiveness. Through free trade, firms face a higher incentive to cut costs. For example, a domestic monopoly may now face competition from foreign firms.
The law of comparative advantage states that free trade will enable an increase in economic welfare. This is because countries can specialise in producing goods where they have a lower opportunity cost.
Economies of scale. By encouraging free trade, firms can specialise and produce a higher quantity. This enables more economies of scale, this is important for industries with high fixed costs, such as car and aeroplane manufacture. In new trade theory, it is this specialisation and exploitation of economies of scale that is most important factor in improving economic welfare.

This Post has been updated and moved to

Advantages and Disadvantages of WTO

Unemployment - A price worth paying for lower inflation?

2016-04-26T10:59:00.000+01:00

"Rising unemployment and the recession have been the price that we have had to pay to get inflation down. That price is well worth paying.""

- Norman Lamont, Chancellor of the Exchequer. 16th May, 1991 (Hansard)

Unemployment started increasing in 1990 and rose to over 3 million in 1993.

John Major also said "If it's not hurting, it's not working"

Unemployment vs Inflation is a trade off that policy makers often face. But, this particular statement was widely seen as a political gaffe or just a callous disregard for the costs of unemployment. To make such a bold statement is to suggest the government cares little for the personal cost of those who are made unemployed, but is it justified? and is there any economic rationale behind this?

What is the justification for making this statement?

1. The unemployment will only be temporary and a necessary step to overcome the inflationary pressures in the economy.

If inflation is high, it is invariably necessary to slowdown the economy to reduce inflation. There are no easy ways to reduce inflation. To reduce inflation will require either tight Monetary policy (higher interest rates) or tight fiscal policy (higher taxes and lower government spending.) These policies will reduce aggregate demand and reduce inflationary pressures. However, these will cause a slowdown in growth and rise in unemployment. However, this slowdown is only temporary and after inflation has been reduced and people expect lower inflation, the economy will be able to expand creating low unemployment and low inflation.

To some extent N.Lamont will claim to be vindicated by events. Although unemployment rose to 3 million in the early 1990s, inflation was reduced and since then the economy has experienced a long period of uninterrupted growth without inflation and unemployment has fallen.

2. Costs of inflation

It is argued that inflation leads to lower living standards in the long run. High inflation creates uncertainty and confusion about future prices and costs. This tends to reduce business investment and leads to slower growth. High inflation also creates menu costs for the economy and more importantly will contribute to deteriorating competitiveness in the economy. Unless inflation is reduced the economy will always grow at a slower rate than it could with low and stable inflation.

3. Inflation and hysteresis

It is widely accepted that previous inflation rates have a strong bearing on future inflation. If an economy experiences high inflation, people expect high inflation in the future. This becomes self fulfilling as workers demand higher wages and firms push up costs. If inflation is reduced then it becomes much easier to keep it low in the future.

Problems of the statement

1. Unemployment can last for a long time

When the Conservative party came to power in 1979, inflation was over 20% the government implemented high interest rates and tight fiscal policy in an attempt to control the money supply and inflation. They were successful in reducing inflation but at the cost of a deep recession. Unemployment rose to 3 million and high rates of unemployment persisted until the late 1980s. Arguably the social costs of unemployment are far greater than inflation. If there are lower levels of investment it is not as damaging and dispiriting as having no work. The fact that the early 1980s saw many riots in the inner cities show the social problems which unemployment can create.

2. Targeting inflation lacks balance

If your only target is low inflation then the danger is that the monetary authorities will become blind to other economic issues. It is my belief that the 1981 recession was deeper than necessary. The enthusiasm to reduce inflation was overdone; if they had given greater importance to unemployment they would not have persisted with anti inflationary policies for so long. Similarly the 1991 recession was deeper than necessary because of the insistence of remaining in Exchange Rate Mechanism for so long. True, low inflation is important but to target at the exclusion of all else misses the whole point.

Conclusion

One irony of the statement was that the inflation was largely avoidable. The economy was allowed to expand far too quickly in the late 1980s leading to the boom and inflation. If the economic cycle had been better stabilised the government wouldn't have been left with the difficult dilemma.

Stagflation

The danger of targeting only inflation becomes more apparent in a period of stagflation. This means both inflation and unemployment rise due to the Aggregate Supply shifting to the left. In this case, keeping to a low inflation target risks causing a widespread downturn in the economy. In periods of stagflation flexibility may be required in inflation targets, even if this risks reducing confidence in inflation policy.

Related

Boom and Bust in US Housing Market.

2016-04-11T22:29:00.000+01:00

Between 2006 and 2012, the US housing market saw significant falls in house prices, combined with record levels of mortgage defaults. Many economists and housing experts have suggested it is a bust that was inevitable to occur. This short article looks at why the US Housing Market went from boom to bust.

Why US Housing Market Declined 2006-12

1. House Prices Rose at Unprecedented Levels.

Historically US House prices have increased at a similar rate to rents, however, in the last period of the housing boom the ratio of House prices to rents had grew at a rate of 78%. (1)
The ratio of House Prices to Income has also increased significantly from the long term average. In 1952 house prices relative to income was 100% in 2002 the ratio was 190%. (2) This increased to over 200% by the end of the housing boom.

The effect of rising house prices was that it was increasingly difficult for first time buyers and those on low incomes to buy a house. It also means that those with mortgages pay a higher % of their income in mortgage payments. This means they are more vulnerable to any changes in the housing market.

Ratio of House prices to Incomes in US
source of graphs: Calculated Risk

Ratio of House Prices to Rent

2. Aggressive sale of Sub Prime Mortgages

Usually when house prices rise, demand moderates. However, in the case of the US housing market, mortgage lenders were desperate to maintain sales. Therefore they just found new ways to sell the more expensive houses.
In particular mortgage lenders did several things to maintain sales amongst those with poor credit, low income and higher risk see example of inappropriate selling of mortgages (3)

3. Increased Promotion of Discounted mortgages.

Basically, this means for the first year or two the homeowner gets an introductory interest rate, making mortgage payments cheaper and more affordable. However, after 2 years the interest rates jumped to the standard variable rate. Unfortunately because of the way mortgages were sold, these facts were not always made clear; meaning many households on low incomes took out mortgages they would later struggle to pay. This will become an increasing problem throughout 2007 as more mortgages end their introductory period.

4. Increased use of Variable Adjustable Mortgages.

In 2002 interest rates were very low (1%) This made adjustable mortgages very attractive. Therefore more people could afford to get a mortgage. However, interest rates have since risen considerably since their historical low, significantly increasing the cost of mortgage payments. The rise in Adjustable mortgages is most prominent amongst low-income families. Fixed rate mortgages would have been safer, but mortgage companies have not been pushing these since they tend to look for best short-term chance of selling a mortgage. (The growth in ARMs between 200 0and 2004 accounted for about two-thirds of the relative increase in variable interest debt.) (4)

5. Rising Interest Rates

In 2002 because of weakness in other areas of the economy monetary policy was loosened. This was perhaps a good strategy regarding economic growth and inflation, however, it ignored the micro implications for the housing market. Low-interest rates were a real stimulus for those on low income and bad credit records to buy a house for the first time. However, between 2003 and 2006, interest rates were increased - significantly raising the cost of mortgage payments for homeowners. Just a 2% rise in interest rates can increase the cost of mortgage interest payments by 40% (5)

A combination of factors - rising interest rates, higher unemployment and subprime mortgage deals caused record levels of mortgage delinquency.

6. Speculation

Rising house prices did encourage an element of speculation in the US Housing Market. Estimates suggest 25% of house purchases in 2005 were influenced by speculation (5) The Housing market was providing greater returns than the stock market, therefore this encourages buy to let investors. As house prices start to fall this section of the market changes completely.

7. Excess Supply

The boom years encouraged an excess of new houses being built. The supply of housing now exceeds the demand, therefore the price of housing is likely to continue to fall (6)

Footnotes

(1) (2) End of US Housing Boom

(3) House Prices tied to sham mortgages

(4) US Housing Market

(5) House Crash Continues

(6) Excess Supply in US Housing Market

Related links on US Housing Market

Housing Market Crash

Next blog post: Effect of Falling House Prices on the Economy. Will it cause Recession?

The UK economy in the 1960s

2016-04-06T03:00:00.000+01:00

The end of the 1950s was a period of rising living standards, summed up by Harold MacMillan's 'you've never had it so good'

Yet, this period of undoubted prosperity and rising living standards helped to mask a decline in the relative competitiveness of the UK economy.

Rising living standards of the 1960s

UK economic growth in the 1960s. There were brief dips in output, but these were not sustained.

In the 1960s, economic growth translated into rising living standards, with households able to purchase a greater range of 'white goods' and cars. There were new markets emerging, for example, teenagers had greater disposable income to spend on pop music, like the Beatles.

There was also a revolution in transport. At the start of the 1960s a majority of households did not have a private car, but relied on public transport. By the end of the 1960s, car ownership rates had risen from approx. 40% to 60% (RAC - car ownership rates) The first motorway was built in 1958, and throughout the 1960s there was a major road building programme - just as the railway network was severely cut back.

Compared to current prices, housing was also still cheap. Helped by a boom in post-war house building, owning a home was an affordable aspiration for both the middle class and working class. (Average house prices in 1969, £4,328). During the 1960s, home ownership rates increased.

Declining competitiveness

However, despite higher economic growth, the UK performed relatively poorly compared to our major competitors, such as Germany, Japan and US roared ahead UK productivity growth was relatively lower due to several factors. such as:

Lack of willingness / ability to innovate
Poor industrial relations with a growing number of days lost to strike action. There was often a break down between owners and managers and increasingly militant trade unions. Some argue this was exacerbated by Britain's class system. Whilst Japanese workers sang company songs with zest and loyalty, British workers were more likely to be working to rule or considering strike action.
Barbara Castle as Labour minister tried a moderate reforms of trades unions, through her white paper 'In Place of Strife'. However, the unions effectively lobbied Labour ministers and the reform bill was blocked.
Complacency. Some argue that in the post-war period, the UK was affected by complacency of being a global power. This complacency was in stark contrast to the defeated countries of Germany and Japan, who put greater energy into business. The UK was also hampered by coming to terms with letting go its Empire and trying to join Europe. In the 1960s, two applications to join the EEC were vetoed by the French.
Lack of public sector infrastructure. Burdened by high post-war debt, the UK struggled to invest in new transport and technologies. For example, the UK was still relying on steam trains until the mid 1960s - later than many other countries who made switch to cheaper and more efficient electricity and diesel.

Balance of Payments

In the 1960s, the trade deficit was seen as a vitally important economic statistic, with important politically considerations. Unfortunately, for the Harold Wilson government of the 1960s, the UK trade deficit was embarrassingly large - a result of the decline in competitiveness and a wish to retain a strong pound. Campaigns like 'Buy British' were surprisingly prominent, but, ultimately failed to make any real dent in the trade deficit. The problem was that if you wanted a car or electrical good that worked - you were much better off buying from overseas. If we made jokes about Skodas and Ladas in the 1980s, British Leyland was the butt of many jokes during 60s and 70s.

Full employment

See: Historical unemployment UK

Despite the economic weaknesses of the 1960s, it was still an era of full employment and rising real wages. Compared to the rest of the Twentieth Century, the 1950s and 60s were a rare period of full employment. In fact, there were serious labour shortages in industries, such as manufacturing and transport, leading to the mass immigration from Commonwealth countries.

Inflation

Inflation in the UK in the 1960s

UK inflation in the 1960s was relatively benign. This was helped by low global inflation. However, towards the end of the 1960s, we start to see a rise in inflation. This rise in inflation was partly caused by devaluation, which tends to push up prices because imports are more expensive.

Devaluation of 1967

Throughout the 1960s, the government were committed to keeping the value of the Pound high. This led to relative high interest rates and intervention in foreign currency reserves. However, efforts to keep the Pound strong, ultimately failed, and in 19 Nov, 1967, the government were forced to devalue the Pound. The Pound was reduced from $2.80, to $2.40, a cut of 14%. It was considered a political embarrassment, though it was necessary given the declining competitiveness. Harold Wilson made a major announcement telling people:

"It does not mean that the pound here in Britain, in your pocket or purse or in your bank, has been devalued." (BBC)

But, it did cause the price of imports to rise and contribute to rising inflation. It was also hoped the devaluation would tackle

"Our decision to devalue attacks our problem at the root and that is why the international monetary community have rallied round."

However, although it proved a temporary boost in competitiveness. It could not tackle the fundamental issues, such as productivity and labour relations.

The experience did seem to sum up the 1960s. - not bad - but, could have done better - and we certainly weren't as good as everyone else.

See more on Devaluation of 1967

National Debt in post war period

National debt in 1960 106.7% of GDP - By 1970 this had fallen to 64.2% of GDP

After the Second World War, the UK was left with huge debts. National debt as a % of GDP exceeded 200% of GDP in the early 1950s. Britain was reliant on loans from the United States. Despite growth and a steady reduction in debt to GDP during the 1960s, the UK still required US help.

Undoubtedly, had it not been for the necessity of borrowing from the US, Harold Wilson would have been freer to be more critical of the Vietnam War - as he told his cabinet on why he would not criticise the war - 'You can't afford to kick your main creditor in the balls' - or words to that effect.

The 1970s

But, if the late 1960s were difficult, the 1970s proved to be one of the most difficult economic decades since the 1930s. It was an era of industrial confrontation, rampant inflation, an unexpected oil shock and an unwelcome return of mass unemployment. The economic power of the UK was exposed for what it had become.... ( - UK economy in 1970s )

Related

The Lawson Boom of the late 1980s

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Between 1985 - 1988, UK economic growth was well above the long run trend rate of 2.5%. By 1990, inflation had increased to 9.5%.

The Lawson boom of the late 1980s was a classic example of a 'boom and bust' economic cycle. The late 1980s were a period of rapid economic expansion. This was caused by rising house prices, tax cuts, lower interest rates and high confidence.
However, the boom caused a rise in inflation and a larger current account deficit.
Policies to tackle this inflation caused the recession of 1991-92.

The Lawson boom followed from the recession of 1981. This recession particularly affected the manufacturing sector and caused unemployment to rise to 3 million. By 1985, unemployment was still over 2.5 million people. However, from 1986 the government made various decisions which helped to inflate the economy causing an inflationary boom.
Economic growth in the 1980s

Causes of the Lawson Boom

Tax Cuts

In 1988, the chancellor Nigel Lawson reduced the basic rate of income tax from 29% to 25%. The higher rate of income tax was cut to 40%. The 1988 budget is often referred to as the 'giveaway budget'. The chancellor was helped by good revenues from North Sea oil.

The effect of these tax cuts was a fiscal stimulus which helped to increase disposable income and consumer confidence. This led to a rise in consumer spending and economic growth.

Over optimism

During the 1980s, the government felt that they had presided over an 'economic miracle'. They felt that the last recession had removed a lot of inefficient firms. They also felt that supply-side policies, such as privatisation, had been effective in increasing the productivity of the economy and therefore had increased the long run trend rate of growth. This belief encouraged the chancellor to believe the economy could grow at a much faster rate than previously. Therefore, when growth increased above 4%, they did little to slow down an overheating economy. They believed (or hoped) that the long run trend rate of economic growth had increased from 2.5% to 4%. As Nigel Lawson said in his budget speech 1988.

"In 1987 as a whole, output grew by getting on for 4½ per cent., rather more than the rate of inflation which averaged 4.2 per cent. At the same time, unemployment fell faster than in any other year since the war, in every region of the country, and more than in any other major nation.
The plain fact is that the British economy has been transformed. Prudent financial policies have given business and industry the confidence to expand, while supply side reforms have progressively removed the barriers to enterprise." (source)

However, this was not the case and economic growth of 4%, led to a growing current account deficit and rising inflation rate.

2. A reluctance to increase interest rates

In the 1980s, interest rates were set by the Chancellor (not the independent Bank of England, like now) In October 1987, there was a stock market crash. In one week 25% of the stock market value was wiped out. There was no obvious economic cause of this, but the government was worried about its macroeconomic implications. As a result interest rates were reduced, to avoid any downturn. As it happened the stock market crash had only a marginal macro-economic effect and the economy continued to grow at a rapid rate. But, the impact of that cut in interest rates in 1987 was to encourage the boom - and in particular the housing boom.

3. Exchange Rate Mechanism ERM

The ERM was another factor keeping interest rates lower than they should. Mrs Thatcher didn't want to join the ERM. However, the Chancellor Nigel Lawson wanted to follow an unofficial exchange rate of 3 DM to £1. This often proved to be a factor in preventing interest rates from rising. The Chancellor didn't want to increase interest rates because it would break the 'unofficial exchange rate.low interest'
4. The housing boom

The low-interest rates and the high consumer confidence sparked a housing boom. During the boom years, house prices rose by 300% (and more in places like London). Q4 1988 was the peak of the boom period with house prices rising over 30% at an annual rate. This boom in house prices caused a rise in household wealth and increased confidence. Equity withdrawal rose to record levels, which helped increase consumer spending.

Rising interest rates meant mortgage payments in the late 1980s took over 50% of disposable income.

By 1988 and 1989, the economy was growing at 5% a year (almost double the long run trend rate) Despite signs of overheating, the government were reluctant to react. Interest rates were increased, but not as quickly as they could have. Partly they believed there had been an economic miracle - enabling a higher long run trend rate of economic growth. But, also Nigel Lawson, didn't want higher interest rates to boost the value of the Pound above the 'unofficial exchange rate' he was following. This was a policy known as shadowing the D-Mark. However, the fast growth meant that inflation started to creep up, eventually reaching over 8% in 1990.

With inflation at 8%, interest rates were increased further, but this caused mortgage payments to increase and the confidence evaporated as many people found they couldn't afford the mortgage repayments.

Current account deficit

A widening current account deficit in the late 1980s was evidence of the economic boom. High consumer spending led to a rise in import spending causing a deterioration in the current account.

Higher growth led to a bigger current account deficit. In 1989, the current account was 4.9% of GDP - reflecting the fact the economy was overheating and consumers were buying from abroad; domestic suppliers could not meet the rising demand.

Unemployment in the 1980s

UK unemployment fell during the Lawson Boom(1985-89) But rose as interest rates were increased in 1990.

Conclusion

The 1980s was a missed opportunity and the recession of 1991 unnecessary. By the mid 1980s, the government had reduced inflation - through a deep recession. There had also been some supply side reforms which helped aspects of the economy. Privatisation and reform of trades unions did help increase productivity and efficiency. However, these improvements were nothing like enough to enable a 'supply side miracle'. The main lesson of the Lawson boom was that the government made a big mistake in allowing the economy grow too fast, leading to inflation and an unsustainable boom. The consequence of this boom, was a painful recession as belatedly the government tried to bring inflation down again.

Other notes on this period.

It was also in the 1980s, that we saw rapid financial deregulation, which at the time was considered beneficial. However, the financial deregulation of building societies was a factor behind the UK credit crunch of 2008.
The Lawson Boom also saw a period of widening inequality - helped by cuts to tax rates for high earners.
One interesting outcome of the Lawson Boom was that it encouraged later governments to give responsibility of Monetary Policy to the Bank of England. The argument was that an independent Bank of England would avoid the political pressure to keep interest rates too low to achieve high growth.

Economic impact of Mrs Thatcher

How does austerity affect the economy?

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Several countries have recently implemented 'austerity packages' - attempts to reduce government spending and increase taxes, in an effort to reduce their budget deficit. It was hoped these austerity packages would 'restore confidence', improve countries fiscal position and enable long-term recovery.
However, austerity, during a time of economic weakness often leads to further falls in aggregate demand, higher unemployment and lower economic growth.

In some cases, austerity to reduce a budget deficit can be self-defeating, with sharp falls in real GDP, causing debt to GDP ratios to continue to rise.
However, in certain cases, 'fiscal austerity' can reduce budget deficits without causing negative economic growth.

Austerity in the 1930s

Main impact of austerity

Lower demand. A cut in government spending and higher taxes will lead to lower aggregate demand and lower economic growth. If there is a fall in output, firms will employ less workers leading to higher unemployment. Also, government spending cuts may involve making public sector workers redundant. In addition, media coverage of 'austerity measures' tend to reduce consumer and business confidence. Fears over job losses and expectations of lower growth will encourage consumers to save rather than spend . This will be a further drag on consumer spending and economic growth (See also: paradox of thrift). As a result of austerity measures in 2011, the OECD now forecast negative growth of -0.8% for the Eurozone in 2012.

Eurozone growth - hit by austerity post 2008.

Lower inflation. Spending cuts will tend to lead to lower inflation. Firstly, the fall in aggregate demand (AD) will lead to lower inflationary pressures in the economy. Also, if the government limits public sector wages, this will put downward pressure on wages. Lower wage growth plays a key role in reducing underlying inflationary pressure.

Competitiveness. It is hoped that austerity measures will help create greater pressure to reduce costs. These lower costs can help improve competitiveness. This is important for countries in the Euro, such as Ireland, Greece and Spain. In the boom years, they became uncompetitive leading to lower export demand and a current account deficit. Measures to deflate the economy should make exports more competitive. Ireland has been relatively successful in improving competitiveness, this is reflected in their move from a trade deficit to trade surplus. However, this attempt to improve competitiveness through lower inflation may take several years, and involve a high cost of lower growth and unemployment.

Irish GNP

source: Ireland Triumphs, NY Times, Krugman, P.

Ireland has been one of more 'successful' countries which has embarked on austerity, but this shows GNP is still significantly below pre-crisis levels (when real GNP was growing at an average rate of close to 5% a year)

Budget deficit. Higher taxes and lower spending will lead to an improvement in the government's budget deficit. This will help improve public finances in the long term.

However, if austerity measures cause lower economic growth, the government will also see a fall in cyclical tax revenues. e.g. increasing tax rates, should increase revenue. But, if higher taxes cause a recession, there will be less people working and so income tax revenue may actually fall. Also, if austerity measures cause unemployment, it will require higher government spending on benefits.

UK National debt as % of GDP, continued to rise despite austerity measures of 2010-12/

The UK's budget deficit fell slower than expected. This was partly because growth forecasts proved overly-optimistic. The austerity measures led to a slowdown in growth.

Distributional impacts

Austerity may not affect everyone in society equally. The biggest losers will be those who are made unemployed. Fiscal austerity will tend to hit the lowest paid the most because they will be most affected by stagnant wage growth. People in jobs with good long-term contracts may be insulated from downward wage pressures and growth in zero hour contracts.

What determines the impact of austerity?

Labour market flexibility. If labour markets are flexible, it may be easier to cut wages, and labour costs. This may make it easier to restore competitiveness and restore economic growth. However, if there is great resistance to lower labour costs, it will be much harder to restore competitiveness. But, labour market flexibility may lead to lower wages and worse working conditions.

What spending is cut? If a government cuts spending by raising the retirement age to 70, then this will not lead to lower growth. In fact it could help increase labour supply and increase productivity. However, if the government cut spending on current infrastructure investment, this will have a much greater impact on reducing domestic demand and lead to lower economic growth.

Monetary policy. Austerity involves lower domestic demand. However, if monetary policy can be loosened (e.g. lower interest rates or increased money supply) then the deflationary effects of spending cuts can be offset. For example, in the Euro, countries like Greece have fiscal austerity, but there is no corresponding loosening of monetary policy (e.g. the ECB increased interest rates in early 2011 and didn't pursue any quantitative easing). By contrast, the UK has more flexibility because the Bank of England pursued quantitative easing.

There have been successful cases of fiscal austerity - where it has been accompanied by a corresponding fall in interest rates and/or devaluation in the exchange rate.

Exchange rate. Austerity is not as damaging if a country can devalue the exchange rate. This devaluation helps to restore competitiveness much quicker than relying on internal devaluation. The depreciation helps boost export demand. Countries in the Euro, can't devalue and so have to rely solely on internal devaluation to restore competitiveness.

Global growth. Austerity is not as damaging if the rest of the world economy is doing well. If global growth is strong, export demand will be strong. However, if all countries are experiencing a recession, then deflationary fiscal policy will have a greater impact in reducing domestic demand.

Central Bank intervention. Countries in the Euro, without a lender of last resort, are having to cut spending much quicker than countries outside the Euro. This is because bond yields on Euro debt has risen very quickly because markets fear liquidity shortages.

Rising Eurozone bond yields forced faster austerity. Though since 2012 the ECB has intervened more in bond markets giving countries a little more room for maneouvre

Economics Essays

Why Deflation is Bad

Link

Paradox of Thrift

Paradox of thrift during 2020 corona recession

Paradox of thrift during 2009 Recession

Paradox of Thrift in 1930s

Keynes and paradox of thrift

Who coined the term paradox of thrift?

Paradox of thrift and government borrowing

Criticisms of paradox of thrift

Responding to criticisms

Understanding UK Housing Market

Main factors affecting house prices

Why are UK house prices so volatile?

Why are UK house prices so expensive?

Housing market crashes

How does the Housing market affect the rest of the economy?

Government intervention in the housing market

Trades Unions Link

Fallacies (moved)

Problems with the Euro

Problems and costs of the Euro

Problems for UK Economy

Predictions for the Dollar as the Reserve Currency

Will the Euro Replace the Dollar as the World’s Reserve Currency?

Why the Euro May soon Replace the Dollar

Importance of Growth - Quick summary -

Link

Interest Rates explained

Effect of an Increase in Interest Rates

Macro effects

How does Bank of England decide whether to increase interest rates?

Example of interest rate dilemma Nov 2017

Real interest rates

The Economy of the 1970s

Barber Boom 1970-73

Inflation Crisis

Trying to deal with inflation

1976 IMF Bailout

The Winter of Discontent

Housing Market in 1970s

Real House

Price and incomes policies

Economics

Run on the Pound

What may cause a run on the Pound?

Other potential causes of a run on the Pound

Is the UK at risk from a Run on the Pound?

Would membership of Euro protect against a run on the Pound?

Sample Question and Answers in Economics

Economic Growth Essays

Inflation Essays

Unemployment Essays

Link between inflation and interest rates

UK Exchange Rate Mechanism Crisis 1992

Lessons from ERM

Benefits of the European Union

Some of the benefits of the European Union include

Broad political and legal benefits

Economic benefits

Labour and free movement of people

Environmental benefits of the EU

Consumer benefits of the EU

Benefits of EU for eastern European economies

Recent posts on Brexit and Europe

WTO Link

Advantages of promoting free trade

Advantages and Disadvantages of WTO

Unemployment - A price worth paying for lower inflation?

Problems of the statement

Boom and Bust in US Housing Market.

Why US Housing Market Declined 2006-12

Ratio of House Prices to Rent

The UK economy in the 1960s

The Lawson Boom of the late 1980s

Causes of the Lawson Boom

How does austerity affect the economy?

Main impact of austerity

What determines the impact of austerity?