Economics of the 1970s

Readers Question I’m currently looking at stagflation in the mid 1970s in the UK, and the policies the then-Government undertook to solve the economic crisis.

Was the Government right to widen the budget deficit 1974-5 in order to stimulate demand, or should it have run less expansionary policies to temper the effect of rising prices?

I’m afraid I don’t have access to many statistics from the 1970s, so it is hard to make much analysis. But basically, the government faced a twin problem of rising prices (mainly cost push) and falling demand. (Stagflation) By pursuing expansionary fiscal policy, they were attempting to maintain full employment ( a noble objective). However, it led to a rise in inflation and inflation expectations. Combined with powerful trades unions in the 1970s, this led to a sharp rise in inflation (25% by 1979). Arguably these rates of inflation were costly for the economy and led to an almost inevitable recession in 1980. see: recession 1980-81

Another factor to consider is how much expansionary fiscal policy actually helped boost economic growth and keep unemployment low. From a theoretical perspective, economists will certainly disagree about this. Monetarists, argue that such a fiscal expansion does very little to boost real GDP in the long run. They will argue that it mainly causes crowding out and rising inflation expectations. Keynesians however, argue that a fiscal expansion does help stimulate an economy, suffering from a downturn.

Was there any policies the Government could have enacted to try and reduce both the rate of inflation and unemployment simultaniously?

The main approach would have to have been through supply side policies. In particular,

• Reduce power of trades unions to help reduce wage push inflation and real wage unemployment.
• Privatisation to increase efficiency of state owned industries (although this would probably have cause  a temporary rise in unemployment)
• Ending state subsidies
• Education and training to help structurally unemployed workers move to new jobs.

Many of these supply side policies were introduced in the 1980s, with mixed results

• Supply side policies in the 1980s and 1990s
• Economic importance of supply side policies

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