During my studies at college, I found that Economics textbooks spouted never-ending theories about the powers of economic manipulation that the government had at their disposal. From stimulating supply to taming demand, the titans of the political mechanisms possess the hypothetical ability to bend the economy to their will. However, it’s important to note that all of this is “hypothetical” at the end of the day. While I passively absorbed these theories to regurgitate under exam conditions, one question did prod at me for a while:
In reality, to what extent does the government have an influence over the UK economy?
When I took on the EPQ in my second year of college, I chose this to be the topic that I wrote my oh-so lengthy dissertation on. A year later, I think it’s high time that I share my findings with you. But before we can strike at the heart of the issue, we need to brush up on our economic theory.
The Theory of Government Intervention
In essence, government intervention refers to the process of when the government deploy appropriate economic policies in order to rectify what they consider to be failures in the market and achieve preferable social and economic objectives that would otherwise not be met if left solely to the metaphorical hands of the free market mechanism. Examples of these objectives would be a low, stable rate of inflation, economic growth that is sustainable in the long-run, and rising living-standards for the wealthy – I mean, for all *cough*.
The government are thought to have an arsenal filled with policies designed to meet these objectives. Firstly, fiscal policy, which refers collectively to the combined management of government taxation and spending. It can be ‘expansionary’ through increases in government spending and reductions in taxation which aim to boost demand in the economy, as well as consumer spending power. This would normally be during a ‘bust’ phase in the economic cycle. On the other hand, a ‘boom’ phase would merit ‘contractionary fiscal policy’ which aims to achieve the complete opposite through reductions in spending and increases in taxation in order to prevent inflation from spiralling out of control and taking over the world, or something along those lines.
There is also monetary policy, which is defined as the process via which the central bank, government, or monetary authority of a country manipulates the supply, availability and the cost of money (interest rates). Although monetary policy is not exactly a form of government policy, the Bank of England does work in conjunction with the government when deciding their plan of action. As is the case with fiscal policy, monetary policy can be ‘expansionary’ or ‘contractionary’ depending on which stage of the economic cycle the economy is in. A rise or reduction in the base interest rate set by the Bank of England would either decrease or increase the money supply and the amount of disposable income that consumers have available to them, therefore indirectly affecting inflation and demand in the economy.
Finally, there is the broad category that is supply-side policies – these being macroeconomic policies which the government implement in order to boost the supply-side performance and potential of the economy. They tend to focus on improving firms, markets and industries so that they operate more efficiently and therefore contribute to the growth of the level of real national output. I won’t explore these types of policies too deeply as that would probably take up a page (and you can do it in your own time, you lazy pleb) but an excellent example is implementing tough anti-monopoly and anti-cartel laws to increase competition in markets, as competition is considered to be the key to the increased efficiency of goods, services and production, which benefits the consumer as well as producers.
Government Intervention in Practise: 2012
Now that you are well-versed in government interventionist policies, we can progress to the highlight of the show: an actual attempt at answering my initial question. There are a range of ways that I could have gone about this but I thought the most appropriate path to take would be to rewind the clock to times of national economic struggle and take a closer look at what part the government of the time had to play.
First stop – just under two years ago, around when I was writing up the actual dissertation for my EPQ. With one of our highest national debts of over a trillion pounds (at the end of September 2012), £81 million worth of budget cuts being made across the country from education to welfare benefits, a high rate of unemployment at 7.8%, and a sluggish economy that required a lot of fiscal attention, the government had really been placed on the spot. So, what death-defying, heart-stopping, bone-crushing, adrenaline-pumping action plan did they take on?
Well, that’s the thing; they didn’t. Prioritising the national debt over all else, they proposed billions more in cuts to government spending. With an already all-time low interest rate of 0.5%, monetary policy wasn’t an option they could rely on and their weak focus on the supply-side of the economy received many raised eyebrows from economists. Andrew Sentance, a senior economic adviser to PwC and former member of the Bank of England’s Monetary Policy Committee, said:
“Supply-side policies supported growth in the UK in the 1980s and the 1990s, and we need a stronger focus on them now.”
The funny thing is that, not long afterwards, the UK’s credit rating dropped from AAA. They starved their nation to prevent something that happened anyway and, to be frank, it was far from being the end of the world.
Government Intervention in Practise: 1970s
This was an eventful decade for the UK, as it was in the October of 1973 that the oil crisis occurred, where the quadrupling of oil prices by OPEC helped send the inflation rate soaring to 24% in 1975. The crisis started when OPEC decided to boycott America and punish the west for their support to Israel in the Yom Kippur war. The conservative government, led by Ted Heath, were already struggling to cope with high food prices which had come about due to global shortages and the rise in oil prices did not make the situation any better. It had gotten so bad that the government had even considered rationing using coupons that had been left behind from the Second World War.
This was not made any better by the wage rises that were enforced by the strength of trade unions, and the “growth of credit” and consumer spending. Some considered this time frame to be one of ill-ease with the three-day week being imposed, after the miners’ strike was announced in December 1973, in order to conserve the country’s energy supplies. There was also the “Winter of Discontent” of 1978-79 during which various strikes took place due to wage regulations that were imposed. Now, according to this Economics textbook in front of me, all the government had to do was pull a few levers and fiddle with a few dials, and the economy would be as right as rain, right?
The government thought they could use expansionary fiscal policy to fine-tune the economy and increase aggregate demand to ensure full employment. All that happened is they fell on their arses and had to be bailed out by the IMF for £2.3 billion. In 1972, the Heath government were said to have taken a U-turn in macroeconomic policy, suggesting that they could use non-monetary methods to manage inflation, rather than manipulating interest rates. However, the attempts that the government did make to control inflation through increases in the interest rate and the capping of wage rates throughout the country only fuelled industrial unrest, and led to a frequent number of strikes and flying pickets throughout the country.
With the government struggling to use fiscal and monetary policy to control the economy during the 1970s, many economists suggested that supply-side policies were the best option for reducing both unemployment and inflation simultaneously (as many always do).
“The economic policies of Mrs Thatcher from 1979-1983 were successful in combating inflation, but it was at a cost of a deep recession of 1981.”
We can conclude from all this that although supply-side options were available to the government in the 1970’s crisis, they chose to ignore them and focused on manipulating monetary and fiscal policy to achieve their ends. Some people believe that this is the reason why the Wilson and Callaghan governments failed to achieve their economic goals.
I think I’ve made it pretty clear to you fine people that the powers of the government with regards to economic control are somewhat exaggerated. There is no cheat code that makes the budget deficit go away, nor is there a red button under the Prime Minister’s desk that activates “super awesome economy” mode.
What many people fail to understand is that Economics is more about human behaviour than anything else. Even our favourite Spaniard, Señor Oxford Dictionario, defines “economy” as:
“The state of a country or region in terms of the production and consumption of goods and services and the supply of money.”
Now, who is responsible for the production and consumption of goods and services? It’s us – the people. The politicians can fiddle with as many policies as they please but, regardless of what they do, our economy depends mostly on our decisions to buy, sell, and trade. The economy is nothing, if not merely a measure of the thousands of transactions that occur on a daily basis.
As our loveable Game of Thrones character, Lord Varys, so wisely said: