Economics at the University of Birmingham

My first year at the University of Birmingham came to an end last Friday. I finished my last exam at half past 11 and now I have an overwhelming feeling of freedom. Too much so, perhaps. I have nothing to do, hence why I'm here. I wanted to give my opinion on the University of Birmingham, and the economics course they offer. I'm going to try to be honest, but of course I have the potential to be bias so feel free to ignore every word I say. There will be a few words of advice towards the end.

I'll start by saying that I've loved my first year at University. It's been great. I've enjoyed pretty much all of it - but it did fly by, unfortunately. It seems only yesterday I was moving my stuff in and saying goodbye to friends from home. If I had to quantify my first year studying economics at the University of Birmingham it would be a solid 8 out of 10 (I believe that nothing is perfect, so an 8 is pretty damn good coming from me).

'Old Joe'

As far as the University as a whole goes, there are plenty of positives. The campus is talked about a lot - it's a beautiful campus, centring around the main attraction 'Old Joe', and it doesn't get that reputation for no reason. It even looks good in the rain. It almost makes you want to walk on to campus for your 9 o'clock lecture! Understandably, having a nice environment around you for your 3 years+ of studying is important - it really does help. The transport links are also a massive benefit. Having an on-campus train station that can take you to Birmingham New Street in 10 minutes is invaluable. It makes the trip home/back to university for holidays so much easier and less stressful, as well as giving you easy access to a great city in your free time. I'd recommend getting a 16-25 railcard if you plan on using the station a lot, the railcard makes a return journey into New Street only £1.40 and you can also use it to get a third off trains home. Perfect. Amenities on campus are also pretty awesome. I love my coffee, so being able to pick up a Starbucks or a Costa in the middle of campus is great. The queues aren't even that big as you might expect, and it's normal pricing. There's also the farmers market for all of your fresh fruit and vegetables which is a neat touch.

The walk to campus during the snow

Everything of course isn't perfect, there are some downsides which I'll even admit to. Firstly, although this depends on what sort of person you are, the accommodation leaves a fair bit to be desired. Although I can only speak for the halls I live in, I assume it's a similar story for the others. For what you're paying you may expect a lot more. I've paid over £4,000 a year for my room and with that I get a flat with one shower, two toilets and a kitchen that I'm sharing with 4 others. The rooms are averagely sized. The biggest problem is from above. The management seem very unwilling to put any effort into helping out students. I met with my halls manager twice about issues in my flat that were affecting me and my flatmate and she virtually laughed us out the door - not ideal, but if you have thick skin you probably won't meet many problems. The maintenance service is also pretty slow - expect at least a 2 day delay when it comes to fixing broken things in your flat. We had to cook for a week using torchlight because our kitchen light broke and essentially bath in the shower because of a blocked drain. Another slight issue is location for decent food shopping. If you're a food delivery sort of person then ignore this, but if you're like me and you actually like going to the shop and picking out your own things then there's a slight problem. You get an Aldi, a Sainsbury's, a Tesco and a Morrisons nearby, but all are about a twenty minute walk. This of course limits the amount of stuff you can actually buy to the amount you can carry in bags, meaning you may have to go a few times a week - which can be a bit of a pain.

The course itself was very good. I went with straight economics, but there was plenty of scope to vary that a bit - maybe put in a language, or go down a more mathematical route. I liked the fact I could cater my degree to my own preferences, despite still sticking with pure economics. There's a good balance of modules in first year: a few maths-y ones, some pure economics and then more applied and specific modules which give you a good introduction to the whole subject and assist you when it comes to picking modules in the second year. On that note, for the second year you get to choose 6 out of the 12 modules you will study - so there is a lot of freedom for you to make your degree as appropriate to you and your aspirations as possible. The teaching quality is as good as I expected - I do feel I've learnt a lot in this first year, despite it of course not really counting for anything. The office hours of lecturers are always available if you're having any issues with the work and they're more than happy to help you over e-mail in the hours when their office isn't open. One of the big debates nowadays is how the university are spending our £9000 tuition fees - but I think the economics department is doing it well. We get all lecture slides printed out for us, which is good when it comes to note-taking and the revision period. We also get a personal tutor that we can see with any issues and an economics office staffed with friendly people who are always willing to help. I'd say that money was well spent relative to other departments in the university.  

One little fault I had with the course was that one of the modules was made up of 50% business studies. I mean, no disrespect to business studies students, but that wasn't really the sort of stuff I wanted to be learning on my economics degree. It's not very relevant to me and thus I found it frustrating. Especially when it came to revising for the exam, I couldn't focus or concentrate on learning the material because it just didn't interest me. Although the boundaries between economics and business studies can be blurred at times, this module definitely took a step over which I wasn't best pleased with. My second problem is the library. This is probably an issue in all other universities at exam time, but I noticed it was particularly difficult to even get a space during April and May, let alone get a computer. The solution would be to get up at 8 am and get in there before the crowd, but that isn't always ideal. I toyed with taking my laptop down there to use, but found the Wi-Fi to be infuriatingly unreliable and I had to just stay at my flat to revise. There could be an improvement in this area. However, the next big investment from the university is a re-housing of the library so that could solve the issues.

My 'average' sized bedroom

I'd like to conclude by saying that Birmingham is a great place to study. It's an awesome city, everything you need is right on your doorstep and the University is fantastic. It's highly rated and will take you places in life. I do have some tips for you, though. First, try hard in your first year. Many people will tell you that the first year is a doss and 40% is all you need to continue to second year. Yes, that's true, but 40% doesn't look great on the CV, and if you have real aspiration you're going to want to be doing internships during the Summer of second year. A 2:1 minimum in first year is needed to do these internships, and that will take some commitment and some work. My second piece of advice is to dive in to everything. So many opportunities will present themselves in such a short space of time. Try as much as you can and get involved in everything that takes your fancy. If it means little sleep, so be it - you won't look back and remember the nights where you got plenty of sleep. "C.V, C.V, C.V" will be hammered into you for the first few weeks, and the only way to make yours look good is to do stuff, get involved and experience things. Good luck in your ventures, and I'll potentially see you at Birmingham next year. Laters.

Sam.

A Background to Financial Assets

Financial markets essentially revolve around the buying and selling of assets, intangible assets to be precise. An intangible asset is an asset that's physical properties are irrelevant to its value - it tends to just be a piece of paper.  The relevant part is the future claim to some income or benefit that the asset legally entitles the owner to. The owner of the asset would be referred to as the investor, whereas the person/institution that is agreeing to pay out in the future is known as the issuer. Examples of these intangible, also known as financial, assets would be common stock, bonds, loans or mortgages to name but a few. These differ from tangible assets. The value of a tangible asset is derived directly from its physical properties. Examples of these would be a house or a car.

The return the investor receives on these financial assets depends on what sort of asset they've purchased. It could be an equity instrument or a debt instrument. If the investor has purchased an equity instrument then the issuer will be paying an amount out depending on the earnings of the asset. So, for example, an equity instrument could be a partnership share in a business. The issuer would then pay the investor an amount depending on the profits earned by the business. In contrast to this, a debt instrument involves fixed payments to the investor. These would be loans or bonds, when a fixed interest rate is paid out. One exception to the rule would be a convertible bond - these allow the investor to switch between debt and equity if certain conditions are met.

Financial assets play two key roles in the economy. They are a method of transferring funds to those who need them to purchase tangible assets from those who have excess funds. They also act as a method of redistributing the risk that comes with the cash flow generated by tangible assets among those seeking and those providing the funds.  

The price of an asset is the most important factor - this is essentially what determines whether people will buy and/or sell. The basic principle to follow is that the price of the asset is equal to the current value of its expected cash flow. The certainty of that cash flow is what causes variations in the price of the asset. The assets are all subject to risk, and it's this risk that can cause price fluctuations, allowing investors to potentially profit. The three main risks that financial assets are subject to are the following:

• Purchasing Power Risk - This is to do with the rate of inflation. The rate of inflation will affect the real value of the financial asset and thus cause the price to fluctuate.
• Credit/Default risk - This is the risk that the issuer will default on their obligation. Or, in Lehman's terms, the risk that the person agreeing to pay up cannot pay up, causing the investor to lose money.
• Foreign Exchange Risk - The risk associated with the value of the currency changing and potentially being worth less.

There is a relationship between tangible and financial assets. Financial assets tend to be used to finance tangible assets. So a debt instrument may be issued to generate funds to buy some delivery vehicles, for example.

There's a simple introduction to financial assets.  An intangible asset that legally obliges the issuer to pay the investor an agreed amount in the future. The play a pivotal role in the economy - moving funds around from those with an excess to those that need them. The price is determined by how much the asset is expected to bring in at a future date, this value is subject to fluctuations caused by different types of risk. Hope that all makes sense 

The European Union - A Process of Economic Integration

The European Union is a very contentious issue in current affairs. To stay? To leave? The benefits? The drawbacks? These are dilemmas that will never really be resolved, regardless of what action is taken. What we can discuss, though, is how the European Union came to be what it is today - and what exactly that is.

Source: www.cia.gov

Today's EU is has derived from more than 50 years of European economic, political and social integration. The process started on the 25th March 1957 when the Treaty of Rome was signed by the six founding members of the European Economic Community: West Germany, Italy, France, Luxembourg, the Netherlands and Belgium. The treaty was laid out into a series of articles, with Articles 1, 2 and 3 being the most important. Article 1 established the European Economic Community. Articles 2 and 3 set out all of the economic goals and initiatives to achieve them for the six nations.

Article 3 would be the main focus for us economists, here the methods of creating economic integration between the nations are discussed. The main points are outlined below:

• Article 3a - Removal of trade barriers, tariffs and quotas between member states.
• Article 3b - Adoption of a 'Common Commercial Policy'. This in essence is a tariff on imports from all non-members. This common policy with respect to tariffs made the EEC a 'customs union'.
• Article 3c - Integration of capital and labour markets, which meant there should be a freedom of movement of services.
• Article 3g - Ensures undistorted competition in member states. This meant subsidies from governments to national firms that distorted trade were banned, there had to be a common competition policy, a harmonizing of national laws that affected market operation and harmonization of some national taxes.
• As well as these, there was a call for mechanisms to coordinate member state macroeconomic policy in case of Balance of Payments crises and they all agreed on goals and principles for agriculture (The Common Agricultural Policy came into effect in 1962).

One thing that wasn't included in the treaty was integration on social policy and taxes (bar the ones that affected competition). The argument was that both of these would greatly affect the lives of citizens in the EU and therefore a harmonization would cause difficulties and conflict. There was also an economic argument put forward as to why both of these weren't necessary for success.

Since the Treaty of Rome was signed in 1957 there has been very little modifications to the actual content of the articles - until the signing of the Treaty of Lisbon in 2007, changes only came in the form of additions to the original policies. For example, Article 2 stated that the EU should be promoting the 'economic good life'. The definition of this has changed and been expanded over time and now includes all of the following criterion: high employment, gender equality, high degree of competition, environmental quality improvements and rising living standards, to name but a few. Article 3 set out a list of activities to achieve the 'economic good life', this list has also been added to as the years have progressed and the dynamic of the community has changed. It now includes the following non-exhaustive list: immigration policy for non EU members, coordination of employment policy, environmental policies, improvements in industrial competitiveness, promotion of research and development and promotion of health and consumer protection. The Treaty of Lisbon is set to overhaul the original treaty in terms of its form, not its content. The main change would come in its promotion of the 'good life' as opposed to the 'economic good life', suggesting less emphasis is being placed on economic integration in more recent times. The result of this treaty will not be seen for many years yet as most of the policies aren't set to take effect until 2014 and beyond.

So European economic integration took place in a variety of stages. An index was created so economic historians could quantify the extent of integration (Mongelli et al. 2007). The suggestion from this index was that from 1958-1968 integration happened quickly and over these 10 years a Customs Union was formed. From 1973 to roughly 1986 there was a period of Euro-pessimism where little integration occurred because people were unsure of the effects. From 1986 to 1992 things picked up again as the Single Market was formed through the Single Market Programme. Finally, from 1992 onwards integration continued as the Economic and Monetary Union was adopted and of course the common currency came into effect.  

The structure of the EU changed drastically in 1992 and is set to change again when the effects of the Lisbon Treaty fully take effect. Prior to the signing of the Maastricht Treaty in 1992, all new integration had to be subject to majority voting before it was passed. This system was problematic - it created a divide. On one side we had "the Vanguards", Germany for instance, who were all for the spread of integration and would agree to any policy that improved things. On the other side was "the Doubters", the UK for example, who feared that further integration was forcing EU citizens to accept more integration that they didn't even want - therefore this side rejected most attempts at further integration. The solution was the Maastricht Treaty and its three pillar system. This organisational structure drew a line between supranational and intergovernmental policy areas. The first pillar contained all integration under the Treaty of Rome, and was still subject to supranational-ity (majority voting between members). This was the European Community. The second pillar was for all foreign and defence matters and the third pillar for police, justice and 'other home affairs'. This treaty put member states in full control of the second and third pillars, giving some independence. Integration is these two pillars was subject to direct negotiation between member states and required a full "yes" consensus before anything was passed. The development of the Treaty of Lisbon is set to remove the three pillar system.

What we can conclude is that economic integration in Europe has come about through a progressive series of treaties. The three most important ones to remember are the Treaty Establishing the European Community (Treaty of Rome), the Treaty on the European Union (Maastricht Treaty) and finally the Treaty of Lisbon. These three are the only ones that created real structural change to integration in Europe. The results of the Treaty of Lisbon are still in the pipeline, so it'll be a while before we can analyse the success of such a policy. Cheers for reading.

Regions and Cities

Regional disparities have always been an issue in Britain, going as far back as before World War 2. For instance, before the war each industry was very much based in one part of the country. Finance was in London, textiles in Lancashire/Yorkshire and metalwork in the midlands. No government really thought in terms of regional policy, it only starts to creep into politicians minds during the interwar period because of the depressed states of some old industrial areas.

Measuring regional inequality was and had always been a tough task. Firstly, which places fall into what region? Birmingham, for example, seems to have shifted from being part of the prosperous South in the 30s-60s to now being part of the depressed North. There are many ways that the inequality could be measured: unemployment rates, labour force participation or income per head, for example. As far as unemployment goes, the further we go back the more unequal they are. In the 50s, unemployment was higher in the peripheral regions (N.England, Scotland, Wales) but the regional average was low and acceptable so nothing was done. Through the 60s, 70s and 80s unemployment everywhere rises, especially in the old industrial regions. The South and East are the only regions to avoid double figure unemployment rates in the 80s. From 1990 onwards, unemployment rates have diverged nationwide.

Labour force participation rates show a different story to the one above. They still show large regional variations with the biggest increase in working population taking place in the South. Income per head puts more attention the income in each region. It states that London and the South East have always had the highest levels, but that the South West and East Anglia have improved a lot recently. The North West fell behind after the First World War whilst the West Midlands followed suit in the 1960s.

So what is the cause of these imbalances? Part of the blame is the amount of people employed in declining sectors. As these sectors were all based in the same regions it left them lagging behind. Through the 70s and 80s the blame was increasingly placed on having the wrong mix of industry and services. Too many people were in industry when services was the growing sector. But, if we look at the statistics in a slightly different way we can get a different outlook on things. For example, if you look at female unemployment alone then the patterns diminish. Also, London looks like the best region - but it also lost a lot of manufacturing jobs from 1960-1990 leaving people unemployed. There are periods where East Anglia actually increases its employment in manufacturing.

Imbalances do exist, this is true. But why do they persist? Theory states that market forces should even things out. The first reason the imbalances continue is agglomeration effects. Firms expanding in a sector all seem to cluster together in the same area. This means, despite them perhaps clustering in high wage and rent cost, prosperous areas they benefit in the sense that they are close to skilled/specialist labour, suppliers, customers and the local infrastructure is attracting the correct type of employee. This is why more firms set up in the South - these benefits are more prevalent there. For larger firms, this effect meant that they tended to set up their corporate HQs, legal services and research and development centres in the South whilst their basic distribution and assembly tasks were focused in 'Outer Britain'. Proof of this is that over half of research and development spending in the 1980s came out of the South East of England.

The government make an attempt to rid the country of these regional imbalances from 1945 onwards. Some argue it would distort the market, others argue it was a necessity for faster national growth. The main tools they had was building and land controls and financial aid.

Financial aid could come in varying forms: loans, tax rebates to firms or grants, subsidies or infrastructure developments. Some of this aid came from the central government, some from local government and some from the EU.

1963 is when regional policy starts getting used widespread. It is used to raise growth and combat local unemployment. Before this there just wasn't the available resources to do much regionally. After 1976 this regional funding fell back because there were large constraints on public spending and the money that was available was directed towards inner city problems. More recently, from the 90s onwards perhaps, regional issues are of more importance for political reasons. Financial aid is given but much more selectively, with the focus being on new firms, regional competitiveness and aid to larger firms to attract external investment.

How effective was the policy of regional aid then? In the most assisted areas net job creation stood at around 600,000 from 1960-81. The majority of firms receiving aid said they wouldn't have been able to go ahead in their original form without the aid. But, it had its negatives. Manufacturing employment fell rapidly in assisted areas if you took the aid away - makes the suggestion that job creation was marginal. Firms receiving aid exaggerated the effects to try and get themselves more. Since the 90s, studies have suggested that aid would be useful if it was better targeted, but there haven't been available funds to do this. The problem of different tasks in the North and South persists.

Finally, we can conclude by saying that government policy affects regions differently even if they are not specifically regional policies. Plus, we cannot be sure of that actual effects of job creation because all the estimates vary massively. Make your own mind up.

Football Isn't Just A Sport...

A lot of criticism gets thrown about these days regarding the sheer sum of money involved in football. In all honesty, it's true. There's a heck of a lot of money in football. I feel these critics are looking at the game all wrong - football isn't just a sport anymore, it is a business and it should be viewed as one. When football is viewed as a business nothing seems out of place - we have a bunch of firms aiming to maximise profit by producing the best quality goods.

Everything you'd expect to see in a market for a 'normal' good can be witnessed in the 'football market'. We have a bunch of firms competing against each other to maximise their profits - these firms are the football teams. At the top of these firms are owners, CEOs, etc all with the intention of making a lot of money. They'll say the aim of the football club is to win football matches and to win tournaments, and this is true. But, they only want to win because that is what earns the dollar. Greed is very much apparent in football as it is in other businesses - the greed to make as much money as possible. A firm cannot operate without its employees, just like a football team cannot operate without its players. The players are the football teams employees. The football team wants the best employees, to win the most matches and therefore earn the most money - therefore a lot of money is flashed around to encourage the most talented players to join the club. I could go on, I think we are getting the idea - a football team is also a business.

If you're bored and lonely on a night then get yourself stuck into the reports and financial statements that each football club releases on a yearly basis. I'm afraid to admit that I'm a Liverpool fan in fear of losing a large proportion of my audience - but hey ho! The report for Liverpool can be found here. It gives a very detailed breakdown of where the money has come from and where it is going - a very interesting read.

The first thing that can be noticed is that Liverpool F.C made a loss in the 2011-2012 financial year, although not quite as large as the loss from the 2010-2011 financial year. An explanation for this is that Liverpool F.C's accounts for 2011-2012 only cater for 10 months because of a change in financial year dates to align with the football season. July 2011-May 2012 is accounted for. But, it still stands that the last two years a loss has been made - totaling over £85 million (£89,960 million for the exact-ists). So, a business making massive losses for a prolonged period of time.. one question springs to mind - why are they still operating? It's a tough question - it could be through expectation, the want for stability, profits being made elsewhere. One thing we can confirm is making losses isn't such a bad thing in football.

A reason for this could be the constant investment flows in the modern game. Not only are the players employees of the firm, but for the duration of their contract they are also an asset. Clubs are constantly investing in new assets and selling on owned assets it's very hard to get a static look at the profitability of the club. Owners will expect losses if they are constantly pumping money into the club in the form of investment. Another reason the loss is essentially overlooked by those that matter is because they may be picking up the gains elsewhere. The owning of the football club gains a unique entry into English markets with access to a large pool of potential custom. Companies could see profits rise in other sectors due to the owning of the club.

This was just a quick ramble in an attempt to be as productive as possible during my procrastination. I'll be writing a full length, in depth post on the economics of football during the Summer - so stay tuned for that. Feel free to throw your thoughts at me.. do you think there is too much money in the game? Is the game suffering as a consequence? Cheers for reading guys.

Sam.

Britain and Europe

This post will give you a walk through the years of the relationship between Britain and the rest of Europe. We start with the 1800s. In this period, Europe is generally a protectionist place, but Britain is closer to it economically than any other point since the 1600s. Due to the protectionism, though, Britain sees most of its trade growth occurring outside of Europe. It is cheaper to import and export from elsewhere.

By the time World War One starts most of Britain's trade is not with Europe. The only real interest Britain has in Europe at this point is a political one - they didn't want one nation (Germany) from dominating the continent. Two wars are fought to stop this happening, they succeed. During the 1930s, the gold standard collapses which pushes Britain closer to its empire. This relationship continues through World War 2 and the Commonwealth and the USA become Britain's main trading partners.

The years immediately following World War 2 leave Britain relying on European recovery to stop the spread of communism. Despite this, the empire and USA are still the main trading links. The expectation is that Western Europe will remain protectionist and broken for a whole generation following the war, so Britain still considers itself a key power.

An important event occurs in 1957 when the European Economic Community is formed with the signing of the Treaty of Rome. France, Germany, Italy, Belgium, Netherland and Luxembourg were the original 6 members. They all agree to strive for three keys goals: Abolishment of internal trade barriers on manufactured goods, introduction of a common external tariff and aim for further economic and political integration between the six of them. How does Britain react? It immediately feels like it cannot join. The common external tariff would not be compatible with Britain's empire and trading patterns. Britain goes and creates its own community - the European Free Trade Association with Scandinavia and parts of Central and Southern Europe. It was a much looser agreement than the EEC; there was an internal free market on manufactured goods but no external common tariff so Britain could still effectively operate with their empire.

By the time the 1960s come around it is obvious that the Sterling is no longer a major currency. The Commonwealth begins to erode away as countries gain their independence and trading with the EFTA is growing too slowly.  Conversely, trade with the EEC is growing faster despite not being a member. It would be access to these markets that would be necessary for prosperity. The decision to join comes in 1961 when Britain makes a formal application. France initially blocks the join, they think that Britain is far too committed to the Commonwealth and therefore would not be a beneficial member. It took 12 years for Britain to finally be accepted, but there are problems almost instantly. The loss of sovereignty, relations with the Commonwealth and the EEC budget are all issues.

The Common Agricultural Policy was the main spending focus of the EEC budget. The problem was that Britain's agricultural sector was so structurally different from other EEC members that the CAP was not beneficial. Britain imported cheap food and subsidised its own small agricultural sector. Deficiency payments were made to try and increase productivity, but overall the cost of aiding the British farms was very small. The 6 EEC members all had very large and inefficient farming sectors. Imports were kept out with high tariffs and any surplus product was bought by the EEC to maintain the price. It was costly for the consumer and highly inefficient, but it gave the farmers a lot of political power. The rest of the budget was also an issue for Britain. Roughly 1.2% of each members GDP was donated to the EEC budget. Income was also derived from external tariffs, and as Britain imported a lot of food and raw materials they found themselves contributing a lot to the budget. 75% of the budget was spent on the CAP, and with Britain's small farming sector they did not receive much. Britain was essentially contributing more than it was getting from the EEC.

So why did Britain join? Well, mainly through fear. They thought economic and political marginalisation would take place, they'd lose influence and not be considered an important player in Europe if they didn't become a member. Britain also hoped to ride the short term costs in the hope that the longer term would reap benefits. They hoped the longer term benefits would come in the form of access to fast growing markets and exposure to greater competition. I guess in the long run some of this does occur, Britain benefits in the early 1980s when they receive a rebate on the EEC budget, but an economic crisis in the 70s puts plans for further integration well and truly on hold.

Since 1985, the Single Market has been created in Europe by the Single European Act. The EEC became the EU and political governance changed partly to police the market. The single currency, of course, was introduced, but Britain vetoed. They opted out in the hope that the whole plan of a single currency would fall through, but this did not happen. By 2000, though, Britain had become closer to Europe economically despite being less integrated than the other Euro members. Most foreign direct investment goes outside of Europe, but the amount staying within is increasing.

Essentially, Britain goes along with change in Europe because it has no other choice. It is no longer the biggest player in the continent and other countries are setting the agenda. 

1980s Economic Miracle?

If you read my previous post, the 1980s look like a rough time. But, as with most periods - look at them in a different light and the complete opposite can be argued. Thatcher had other aims whilst in power: reducing state intervention, allow market forces to do their thing and curb Trade Unions. The year she came to power was seen as a year of 'cutting spending' when in actual fact spending grew every year Thatcher was in power. Poor start.

But why does her spending stay high? Is it Thatcher's fault? In a way, no. She was stuck with an aging population and rife unemployment - this meant high social security spending. It was impossible to make big cuts in the core government services, the only cuts that could effectively be made were in minor spending programmes. She does, however, lower public sector borrowing. But with spending staying high and borrowing falling, the tax burden had to rise. Tax payments as a percentage of GDP in the 80s rise as a structural change is made in taxation. Indirect taxes become the main focus as income tax falls and indirect taxes rise. A popular move with voters.

Thatcher is obviously know for her process of privatisation as well. The industries under public control were being heavily criticised for their loss making and the benefits they provided to producers, not consumers. The investment in state programmes were adding to borrowing, so selling these industries could fund tax cuts and promote efficiency. The process started with the competitive industries being sold first: shipbuilding, for example. Utilities went after, but were still overseen by the government because they were natural monopolies.

Curbing the Trade Unions was another of Thatcher's aims in power. She didn't like the influence they had. She went about a process of tearing them down with policies such as banning closed shop, outlawing secondary picketing and strengthening internal balloting procedures.

These three policies were a political success. Trade union membership falls, income tax cuts are popular, privatisation is popular and striking falls. The manufacturing sector came out particularly strong - Britain's productivity here was growing at a faster rate than the other G7 countries. It was known as the 'manufacturing miracle'. What caused it? Hmm. The downside was, though, that absolute levels of manufacturing were below competitors and the jobless count rose sharply.  

De-industrialisation had seemingly occurred. The industrial workforce falls from 43% to 30% of total employment in a 16 year period from 1973-1989. Growth was now mainly coming from the service sector. The pessimists thought this switch to services was slowing overall productivity growth. The counter argument was that these employment trends were in line with what was happening in the other G7 countries - it seemed like a natural trend. There was no tangible output from the service sector so it was hard to measure improvements in the quality of the goods, but technological changes were definitely increasing growth in the sector.

Overall productivity in services was growing slower than in manufacturing. Across the whole economy, productivity growth wasn't that impressive - but this was a global trend at the time. Claims of an 'economic miracle' in the 1980s were overstating the reality. There were improvements, yes, but we were still behind the rest of Western Europe and these gains came at the price of higher unemployment and higher income inequality. 

The Thatcher and Major Years

In 1979 Margaret Thatcher came to power in Britain - the first female Prime Minister. It was seen as a turning point for Britain, not just for this reason, but because of the effect it could have on economic policy. She was a radical woman, and her policies echoed her personality. Brutal. Defeating inflation was the key to her policies. In the run up to the election the Conservatives rethink their philosophy and come up with their "New Approach". They'd place greater emphasis on market forces, preferring small government intervention in the economy. This wouldn't be possible with the inflation problem, however. This needed to be defeated because it was distorting price signals and angering voters.

This period saw the rise of the Monetarists. They were born out of the "Chicago School" with Milton Friedman a figurehead of sorts. Their argument was fairly simple. They felt using demand management would be shooting ourselves in the foot - more demand meant more inflation and not higher output. Inflation was a monetary phenomenon, the money supply had to be cut to control it - tight financial policy was needed. In 1980, the Conservatives follow this line of thought. They raise interest rates and VAT while lowering their public borrowing. What's the result?

Well, in 1981 the economy is in recession - yet the Budget of this year sees policy tightened even further. It was a bold move, it showed that the Conservatives were really trying to tackle inflation. And it works. Inflation falls rapidly from 18% to a more acceptable 4.3% from 1980-1983. Interest rates are increased further after this and growth starts to pick up. It was a step in the right direction, but unemployment was remaining high and inflation was still higher and more volatile than other major economies.

The policy still struggled, however. They know that responding to the headline inflation rate was pointless because of the time lags in policy taking effect. They somehow needed to find an effective framework that could predict inflation in the future and respond to that level now. This indicator for when to change policy came in the form of the Medium Term Financial Strategy (1980). It was a framework that targeted the money supply - targets would be made and the broad money supply would not be allowed to rise above them. Interest rates and lower public borrowing would be used to control the money supply and keep it within the desired range. It had risks, tightening policy always carried the risk of bringing a recession.

It could have worked, but it had its problems. The targets weren't met - the money supply consistently grew faster than it was meant to and public borrowing wasn't cut enough. The policy wasn't tight enough, yet the real economy suggested the policy was too tight - domestic demand was being curbed by the interest rates and the pound soared. Britain entered a bad recession not long after. Why does this happen? A recession shouldn't really mean the money supply rises. Yet it did. This is the same period that the banks are being deregulated and firms were struggling and needing to borrow more to stay afloat. Lending controls were abolished, which means more loans were now showing on the official statistics. Overall, the money supply figures weren't an accurate guide to the economic conditions.

The Medium Term Financial Strategy is gradually abandoned because of its weaknesses - the government starts to slowly target the exchange rate by keeping the pound steady with the German mark. The pound starts at too low a level against the mark and the economy overheats in 1988. The government try and raise interest rates but it's too late as we enter recession again and end the 1980s with rising inflation. Britain needed help - and this came in the form of the European Exchange Rate Mechanism. This mechanism pinned the pound to the strong Mark allowing it to fluctuate 6% either side - Britain joined at a rate of 2.95 DM. The advantages were that it would supposedly improve fiscal discipline and therefore curb the inflation problem. It didn't. In 1992, on a day known as 'Black Wednesday' we see that it didn't. Britain finds it needing to lower its interest rates because the initial rate it joined the ERM with was over-valued. Other countries in the ERM had high interest rates which meant Britain couldn't realistically lower theirs. Speculators begin to see the pound falling and start to sell, a run on the pound starts. The aftermath of this was that the pound had to be devalued in 1992 and the credibility of the John Major government was ruined. Improvements do follow, but they can't restore the governments political position. An inflation target rate is set and interest rate decisions are given to the Bank of England who based their changes on a range of economic variables and not just the one. 

Nationalisation

A nationalised industry is an industry owned by the state that produces a marketable, priced output. Over the course of 40 years from the 1940s to the 80s there was a lot of action in the field of nationalisation. Post World War 2 saw a lot of industries brought under state control: coal, gas, buses and the Bank of England to name but a few. Between the 50s and the 70s there was some backtracking and indecision from the government. Road haulage and steel were denationalised, but then steel was nationalised again in 1967. Further nationalisation took place after 1970 when shipbuilding, aerospace, Rolls Royce, British Leyland and water were all brought by the government. By 1980, 8% of the workforce were in public industries and they produced 11% of Britain's GDP.

The aim behind this process was to achieve a fairer society. This was what Labour wanted. They were also attempting to improve economic performance - for example coal was performing poorly under private sector control and the energy and transport industries had plenty of scope for coordination. The problem was that a lot of other countries in Europe had high levels of public ownership in this era also but there is no evidence to suggest that nationalisation had any positive effect on economic performance. Of course the vast range of sectors made overall performance very hard to measure, may I add.

The policy had its supporters... and its critics. Milward shows that public sector productivity growth, as a whole, is better from 1951-1985. Hannah, another historian, shows that on a global scale Britain's utilities and airline sectors had poor productivity. The consensus seemed to be that nationalisation didn't have any transformative effect on economic performance.

So, what were the problems with nationalisation? In summary, you could say the problem was that the task was too big. The initial organisational challenges were huge - some firms needed to be combined to improve efficiency which was no easy feat. To oversee the whole operation expert managers were needed, but managers that were good enough were in very short supply.

As stated earlier, the process of nationalisation had an aim of improving economic performance. Efficiency needed to be promoted - but how did public firms differ from private firms in order to create this change? A series of nationalisation White Papers were released (1961, 1967, 1978) detailing the responsibilities of public corporations. It outlined the following:

·         Investment projects had to be subjected to a series of accountancy tests that would be used in the private sector to ensure a worthwhile rate of return.

·         The firms marginal cost would be used to determine output.

·         Cross subsidisation was discouraged.

·         Firms should be aiming to break even over a planned period of time.

But, as with most things - this didn't quite work out as intended. Each point mentioned above seemed to encounter a difficulty. Forecasting the rates of return was difficult because the markets were constantly changing. With such complex outputs, measuring the corporations marginal cost was a challenge. It was virtually impossible to define conditions for loss making activities and any loss makers weren't penalised, nor firms that exceeded targets rewarded. The government was using the nationalised industries to achieve short term goals and this was undermining the White Papers.

The three main short-term goals the government was trying to achieve with these industries was technological nationalism, macroeconomic stability and social rescue. By technological nationalism we mean nationalised firms being forced to buy British products as opposed to those from abroad to try and push the firms and make them more attractive to exports. The problem with this is British products, such as planes, tended to be more costly than those from abroad, and pretty frankly they were rubbish. The macroeconomic stability was controlled by using nationalised firms investment programmes in line with the 'Stop-Go' cycle. Finally, they attempted to achieve social rescue by    keeping jobs in declining industries in unemployment black spots to stop the unemployment levels from rising and creating depressed regions, despite these declining industries essentially holding the economy back.

To conclude, nationalisation wasn't really a massive failure or a success. The thought was that bringing these firms under state control would be beneficial, but in reality they still shared the same problems they faced under the private sector. The use of these industries to meet short term goals potentially hindered the success of the program.  

Battling Against Inflation, 1970-79

The 70s were a bad decade for the British economy. 'Failure' is probably the most fitting word for the period. From 1974 to 1979 unemployment had crept up to pushing on 5%, growth had fallen to 2% but the real issue was inflation at 16%. Part of the rise in prices can be attributed to the collapse of the Bretton Woods system, this led to a global commodity price rise which saw oil rise four fold in a 2 year period. Domestically, though, the supply side issues discussed in a previous post weren't helping and a lot of errors were made in macroeconomic policy cause partly by confusion over the actual cause of inflation.

The confusion was theorists thinking they understood the tradeoffs between economic objectives, such as inflation and unemployment. Stagflation occurred in the early 70s which shocked theorists - inflation and unemployment was rife at the same time, the government were struggling to achieve any of their objectives.

The government needed to re-think. They put the priority on targeting unemployment in the early 70s. During this period the Barber Boom took place. The chancellor at the time (Barber) injected a large monetary and fiscal stimulus to raise output but not inflation because of the spare capacity in the economy. Sterling was also allowed to float freely to stop a balance of payments crisis choking the growth. Did it work? In the short term - yes. Growth peaks at 7% in 1973. But, over the longer term, the balance of payments deficit soars, inflation starts to runaway and smaller financial institutions collapsed - the three things that really weren't wanted.

Because of the soaring inflation the government makes controlling this the main priority as the 1970s progress. Unemployment falls down the pecking order. Revised Keynesian theory defined the inflation as cost-push. Wages were rising faster than productivity forcing up the prices. Pay rises needed to be checked - were income policies the solution to this? Income policies worked like so: pay rises would be limited by setting a norm that everyone should follow. Some would be voluntary, some would be forced, others would be more complex. It worked for small periods of time, but it always failed eventually as people became dissatisfied and it defied the point of trade unions.

The monetarists attacked the income policies claiming they didn't curb inflation at all they just distorted the labour market. Tighter financial policy was required. This was true, public spending was high and still increasing. It rose faster than national income from 1970-75 and reached 9% of GDP during 1975. This high spending was crowding out private sector investment by pushing up interest rates. In 1976, Labour realise the problem and agree to a deflationary package. Their new budget regime centred around cash limits. 60% of their spending would now be subject to 'cash limits'  and different programmes received a fixed cash sum year on year regardless of inflation. In real terms, this change meant public spending fell and brought inflation down to some extent.

What can we conclude from this then? Was this the end of the Keynesian era? The government were still trying their hardest to adapt Keynesian demand management policies rather than find a new, improved framework. This just resulted in what seemed like aimless policies that didn't solve any problems. Real living standards on the whole were hit, especially the middle income people, which led to a lot of resentment.