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Published online by Cambridge University Press: 26 March 2020
The short-term outlook on ‘unchanged policies’ presented in chapter I of slow output growth, rising unemployment and little further reduction in inflation is not encouraging. But in order to form a critical view of policies formulated with medium-term objectives in view, it is necessary to look beyond the short term to see whether the economic ills of the recent past and immediate future could prove to be the foundations of lasting prosperity in, let us say, the mid-1980s. In this chapter we assess the economic strategy now being followed, and how the economy is likely to respond.
(note 1 in page 39) For a general discussion see David Savage, ‘Monetary targets and the control of the money supply’, National Institute Economic Review, no. 89, August 1979; on the relationship between the fiscal policy and the money supply, see ‘The money supply and the PSBR’, National Institute Economic Review, no 94, November 1980, pp. 19-22; on the control of the bank lending see the article by Keith Cuthbert son and Nigel Foster in this Review, pp. 63-77.
(note 1 in page 40) A. S. Courakis, ‘Monetary targets’, p. 309, in Courakis (ed.) Inflation, Depression and Economic Policy in the West, Maxwell, 1981.
(note 1 in page 41) This ex-post stability is in interesting contrast to the movements of currencies within the EMS—see the article by S. A. B. Page, pp. 52-62.
(note 2 in page 41) Consider, for example, the answers to the questions posed by the Treasury and Civil Service Committee Inquiry into Monetary Policy: ‘Do you agree that for the UK under floating exchange rates, the principal transmission mechanism of monetary actions is via changes in the exchange rate’? (Report of the Treasury and Civil Service Committee Inquiry into Monetary Policy, HMSO, 1980-1.)
(note 1 in page 42) ‘Inflation and unemployment’, Journal of Political Economy, no. 3, 1977.
(note 2 in page 42) A contrary view (but no new evidence) is contained in The Costs and Benefits of Cutting Inflation by Alan Budd and Geoffrey Dicks in the London Business School, Economic Outlook, October 1982.
(note 1 in page 43) G. C. Wenban-Smith, ‘Factors influencing recent pro ductivity growth—report on a survey of companies’, pp. 57-66.
(note 2 in page 43) Or ‘zilch’. See speech by Sir Terence Beckett reported in the Financial Times, 1 November 1982.
(note 1 in page 44) For example The Engineering Industry Training Board has recently estimated that the number of apprentices taken on by the engineering industry this year will be the lowest on record.
(note 2 in page 44) This suggestion is based mainly on hearsay evidence, but it may be confirmed by a small fall in the proportion of firms reporting to the CBI that they are working below capacity at a time when manufacturing output has not been rising at all.
(note 1 in page 44) See, for example, Patrick Minford and David Peel, ‘Is the Government's economic strategy on course’, Lloyds Bank Review, April 1981.
(note 2 in page 44) The possibility that ‘firing costs’ contribute to the level of unemployment is amongst the hypotheses explored in S. Nickell, ‘Determinants of equilibrium unemployment in Britain’, The Economic Journal, September 1982.
(note 1 in page 45) This view was expressed in Lord Kaldor's evidence to the Treasury and Civil Service Select Committee.
(note 2 in page 45) Employment in each sector is related to output (with lags to allow for the delayed reaction of employment to output) and a time trend to represent the underlying change over time in output per employee. The projected rate of productivity growth for the whole economy thus varies with the level and composition of output growth.
(note 1 in page 46) Department of Employment Gazette, April 1981, pp. 167-173.
(e) It could also in practice be taken as the signal for a greater or lesser degree of reflation, for tax cuts or additions to public spending, but that route to recovery is excluded by the assumptions on which the projections are based.
(note 1 in page 47) If the propensities to consume out of (net) interest income and the inflation loss in personal sector wealth were equal, and if all assets paid interest directly related to the rate of inflation, then a parallel reduction in inflation and interest rates would reduce the savings ratio but leave consumer spending unaffected.
(note 1 in page 50) Over so long a period only slightly different projections of trade volumes and prices yield very divergent results. A 1 per cent change in either direction in the projected annual rate of growth of exports or imports would alter the current balance by the order of the £3-3 1/2 billion by the end of the period.
(note 1 in page 51) Bank of England Quarterly Bulletin, July 1982.
(note 2 in page 51) The view that portfolio preferences are difficult to change is put forward in A. D. Bain, ‘Structural imbalance in the UK financial markets’, Bank of England Panel Paper, no. 19, July 1982.