Ken Coutts

The macroeconomic impact of liberal economic policies in the UK

A sea-change occurred in the early 1980s in the way the UK economy was organised. From then on, until the present day, openness to trade, light-touch regulation of commerce and free competition have been the watchwords, alongside low income tax rates and constraints on trade union action. Most importantly, the removal of a raft of restrictions on banks and building societies, combined with the abolition of controls on the international movement of capital, allowed a huge expansion in household borrowing. These liberalisation measures extended an earlier trend including the bonfire of wartime restrictions, international trade agreements to reduce tariffs, the move to floating exchange rates between 1971 and 1973 and the switch from direct to indirect controls on bank lending in 1971. However, even by the late 1970s, the UK economy was still strongly managed by government. Controls were still in place on capital movements, investment, prices and incomes. Trade unions remained powerful and the basic rate of income tax was at 30% with the top rate at 83%. Most lending to households was still undertaken by heavily controlled building societies. Government economic policies prior to the late 1970s still aimed to maintain full employment although the practice had become more difficult to achieve. After 1979, policy switched decisively towards controlling inflation, first through monetarism and later by using interest rates to meet inflation targets. It is often taken for granted in media and policy-making circles that more structural economic reforms, involving greater labour market flexibility, will increase the efficiency of the economy. This assumption may arise because liberal markets are linked to a political philosophy of individual freedom and responsibility. It may also be because many economists in business and academia have a presumption that private sector organisation of economic activity is superior to any state intervention. We make no such

Global Influences on UK Manufacturing Prices

This paper presents substantial new evidence on the competitive process that links together industrial economic and international economics. Our time-series data base concerns manufactured product prices and their domestic and international determinants. We identity cointegrating relationships, using single equation and multivariate methods. We find that both market imperfections, largely ignored in international economics, and international factors, mostly neglected in industrial economics, should be jointly incorporated into pricing analysis. The significance of global factors varies markedly: differentiated-product sectors respond little to foreign price signals. Our findings are relevant to many fields within economics, including the transmission of inflation.

Should the UK Continue to Follow Liberal Economic Policies

The current economic crisis in the UK, which began in 2008, has been the deepest and most prolonged for over a century. The level of output, or gross domestic product (GDP), is now 20 per cent below the pre-2008 trend,1 and the cumulative loss of income since 2007 is equivalent to a whole year’s GDP. Even with the recent upturn in growth, no economic forecaster currently expects full convergence back towards the pre-2008 trend.2 That trend had been well established, at least since 1948 when modern records began. Since there was also continuous growth from the early 1930s to 1948, this means that the UK economy is in new territory not previously experienced in most people’s lifetime.

Price Inflation in the UK: Has Anything Changed?

Since leaving the ERM, the UK has had low inflation while unemployment has fallen substantially. This suggests that wage and price behaviour may have changed over the recent past. In this article, Ken Coutts and Brian Henry review the evidence for such change, particularly in pricing behaviour, but find little convincing evidence of a major structural shift. Rather, low inflation can be attributed to the effect of weak demand and low capacity utilisation on prices (and wages) which are larger and longer lasting than is generally believed, together with beneficial effects from low world inflation. On leaving the ERM, the government also instituted a classic combination of expenditure-switching and expenditure-reducing policies which played an essential part in promoting recovery without increasing inflation.