U Turns in Economic Policy

In 1980, Mrs Thatcher made a memorable speech.

“To those waiting with bated breath for that favourite media catchphrase, the U-turn, I have only one thing to say: You turn if you want to. The lady’s not for turning!”(BBC Link)

Background – The economy was struggling under deflationary fiscal and monetary policy. Mrs Thatcher was committed to reducing inflation and the budget deficit. But, this required spending cuts, tax rises and higher interest rates. Combined with a rise in the value of the sterling, it led to a sharp fall in aggregate demand and economic growth. Though these ‘monetarist policies’ were successful in reducing inflation, it led to a sharp rise in unemployment. Many economists criticised the economic policies because they felt they were too harsh and the recession deeper than it needed to be. See: Economy under Mrs Thatcher 1979-1984

There is an interesting parallel with today’s situation. The new coalition government have sought to tackle the budget deficit with great zeal. They have pledged to increase tax and cut spending. Unfortunately, signs suggest this has led to a fall in economic growth, and fall in consumer confidence. There is a danger the economy could enter a double dip recession (which will of course worsen the budget deficit). Some economists are saying, in the face of a double dip recession, it is better to delay spending cuts and try and maintain an economic recovery.(NIESR think tank suggest delaying spending cuts)

But, politicians don’t like doing U-Turns as it is often perceived (wrongly) in my view as a sign of weakness. A good economist should be willing to change policy if the economic situation changes.  If the economy enters a double dip recession, why should we persist with policies which only make it worse?

Related

By on February 3rd, 2011

One thought on “U Turns in Economic Policy

Leave a Reply

Your email address will not be published. Required fields are marked *