Britain's Inflation 30 Years Ago

Britain had really bad inflation awhile back. The cabinet tried to stop it by imposing pay caps, which sounds really dumb. "Crisis? What Crisis?"

Let's assume that the goal of Britain is to bring inflation to an annual rate of 3% by the end of 1979, down to 2% by 1980, make the annual rate of inflation from 1982 to 1985 -0.333%, and do it with the least harm to long term economic growth? Some inflation fighting measures like gutting out the education budget to run a budget surplus (budget surplus can fight inflation) are bad for long term growth.

What is the best the cabinet(s) can do to achieve that? The Bank of England controls the interest rates and they are supposed to be independent of the cabinet. This leaves trying fiscal measures, administrative decisions, and passing laws. Pay caps have been proven in OTL to just cause a railroad strike.
 
I can't see any alternative other than wage and price freezes to dampen inflation, but this is a very temporary resolution. Only extreme monetarist measures would slash inflation to the rate you have suggested.
 
I can't see any alternative other than wage and price freezes to dampen inflation,

These are little more than speedbumps to inflation, and sometimes they don't even do that. Many, many countries have tried wage and price freezes and results have varied from "a temporary resolution and angry workers," "angry workers" and "disaster

Only extreme monetarist measures would slash inflation to the rate you have suggested.

Can a cabinet do this? Monetary policy I believe is under the BoE

If the cabinet can use extreme monetarist measures, what would be the "least collateral damage" way to do it. High interests rates WILL have other repercussions, but I'm sure there are different ways to implement a tight monetary policy
 
Can a cabinet do this? Monetary policy I believe is under the BoE.
Not in the 1970s. IIRC control of monetary policy wasn't transferred from HM Treasury to the Bank of England until 1997 when Cheshire Cat Features came to power.
If the cabinet can use extreme monetarist measures, what would be the "least collateral damage" way to do it. High interests rates WILL have other repercussions, but I'm sure there are different ways to implement a tight monetary policy
The OTL Labour Government would never take such action.

However, in March 1977 there was a vote of no confidence against the Callaghan Government which was foiled by the Lib-Lab Pact. However, his government was defeated in another vote of no confidence held in March 1979, which led to the General Election of May 1979 and Mrs Thatcher coming to power.

Therefore you can have a POD where Callaghan looses the March 1977 vote, which precipitates a General Election in May 1977, which Mrs Thatcher (who had been leader of the Conservative Party since February 1975) wins. I don't know what the chances of a Conservative victory in May 1977 were, but I suspect they must have been reasonably good or Callaghan wouldn't have made the Lib-Lab Pact with David Steel.
 
These are little more than speedbumps to inflation, and sometimes they don't even do that. Many, many countries have tried wage and price freezes and results have varied from "a temporary resolution and angry workers," "angry workers" and "disaster



Can a cabinet do this? Monetary policy I believe is under the BoE

If the cabinet can use extreme monetarist measures, what would be the "least collateral damage" way to do it. High interests rates WILL have other repercussions, but I'm sure there are different ways to implement a tight monetary policy

No, before 1997 the Bank of England was not independent from a ministerial perspective and could adjust monetary circulation at will. What I mean by "extreme" is cutting deeply to public spending, and compensatory high interest rates. Thatcher did the later, but didn't go very far in terms of public spending. Spending on core services for example, increased during her tenure.
 
The Bank of England didn't become independent until 1998 so it is very much in the power of politicians to reduce this in 1980. Indeed it was the very foundation of Thatcherism.

The big problem with inflation in the 1970s in the U.K. and elsewhere was the belief held by many governments and economists especially in the U.K. of the economic concept best known as the Philips Curve. This was the a simple modal that showed that in the short run their is a positive correlation between high employment and high inflation. This was beloved by politicians and civil servents as they could in theory use a graph and predict falls in unemployment if inflation was increased. Unfortunately the theory was never proved in the long run and is now used as a cautionary tale that sometimes correlations are just coincidences.

In the U.K. the new Thatcher Conservative Government rejected the Philips Curve as a guiding light in the economic governance of the country and instituted a series of reforms based on high taxes and slashing public spending. This brought inflation under control. However simply by not actively trying to influence employment levels by printing more money would have slowly reduced inflation. Indeed it can be argued that it was this realisation that slowly led to the independence of the Bank of England and other national banks as clearly politicians can't be trusted with monetary policy.

To get lower inflation quicker in the U.K. in the early 1980's is a tough ask. OTL the Tories really pushed things as far and as fast as was possible without a major economic event of similar global significance to the Wall Street Crash.
 
To get lower inflation quicker in the U.K. in the early 1980's is a tough ask.

Stop printing money is a start. It's a good idea for shutting down the problem in the long run, but I think it's inadequate for a rapid drop in inflation.

Do tariffs do squat to inflation? I'm assuming it's unilateral and the other side can't be bothered to retaliate.

Slash even more spending? That will defiantly hurt the economy, but budget surplus is a known inflation fighter (because you aren't issuing more script). What else can be put on the chopping block? Some RAF planes? Actually, I don't think there is anything that could be chopped without losing Falklands. Many Britons would be adversely hurt by a cut to housing. A cut to the NHS would make the population sicker even if the cuts were restored later (because that's 3+ years of less preventative care).

Maybe this is why economists recommend stop printing money and let inflation run out of steam slowly instead of taking it head on.
 

RousseauX

Donor
Let's assume that the goal of Britain is to bring inflation to an annual rate of 3% by the end of 1979, down to 2% by 1980, make the annual rate of inflation from 1982 to 1985 -0.333%, and do it with the least harm to long term economic growth?
Deflationary policy is inherently bad for economic growth, it's one thing to bring it down to reasonable rates of 2-4%, it's another to actively seek deflation

the best way to create deflation is a major recession or depression
 
Stop printing money is a start. It's a good idea for shutting down the problem in the long run, but I think it's inadequate for a rapid drop in inflation.

Do tariffs do squat to inflation? I'm assuming it's unilateral and the other side can't be bothered to retaliate.

Slash even more spending? That will defiantly hurt the economy, but budget surplus is a known inflation fighter (because you aren't issuing more script). What else can be put on the chopping block? Some RAF planes? Actually, I don't think there is anything that could be chopped without losing Falklands. Many Britons would be adversely hurt by a cut to housing. A cut to the NHS would make the population sicker even if the cuts were restored later (because that's 3+ years of less preventative care).

Maybe this is why economists recommend stop printing money and let inflation run out of steam slowly instead of taking it head on.

Inflation is caused solely by the supply of money outstripping demand. The problem is the economy becomes addicted to the excess and to suddenly massively reduce the supply can cause problems as bad as run high inflation. A good example is the deflation that resulted in the Wall Stret Crash which led the ensuing crisis becoming the Great Depression. Or more recently the addiction of the global economy to cheap debt that lead to the Banking Crisis in 2008.

Militarily it's unlikely the right wing Tories would cut back further than OTL while still at the height of the Cold War. Massive cuts where made OTL across the boad of public spending which was highly controversial OTL even within the Conservative party as for the left, Margaret Thatcher is still considered a hate figure for the cuts/reforms. simply looking at some of the sick merchandise brought out on the death of the Iron Lady indicates the enduring legacy of the early 1980's. I just don't see how it's possible for these to go deeper and/or faster. Although an independent Bank of England doing the dirty on the working man would insulate the government from the negative feelings of the populous which might help. One suspects that this was part of the reason Blair chose to make the BoE independent in the 1990's.

I feel I should point out that contrary to my statements above I am not a raving tory fan boy. I tend to vote for the Liberals.
 
Deflationary policy is inherently bad for economic growth,

By that standard the French really shouldn't have had any business growing their economy in the 1800s until they lost the Franco-Prussian War...

Also, Japan's lost decade was hardly a depression. It was more like a normal recession that took... a decade.

Also, long term growth is determined by capacity of the economy. Deflation itself does nothing to that. It discourages investment (see zero lower bound/ zero lower bound problem/ zero nominal lower bound) but only in a way that delays an economy from reaching full capacity (See AD–AS model, curve shifts and moves along curve) in the long run money is more or less neutral. Ways to grow economic capacity involve keeping more people healthy (they can't do much if sick, unless it's an at-home internet job), technological improvements (so the same number of people can do more stuff and have more stuff), increasing human capital (a person who can do algebra is more useful than someone who can't in a lot of occupations), correct talent allocation (training people who have a drive for programing how to farm cotton would result in a popular well dressed but probably poorer)... of course any deflationary measures than impair any of these would have an effect
 
I feel I should point out that contrary to my statements above I am not a raving tory fan boy. I tend to vote for the Liberals.

If I could vote for British MPs, I would too. My expat friends (who do vote) and I agree on a lot.

Granted it's probably a good thing non-British don't vote for British MPs. That's like asking your neighbor to determine what you spend money on.
 

RousseauX

Donor
By that standard the French really shouldn't have had any business growing their economy in the 1800s until they lost the Franco-Prussian War...

Also, Japan's lost decade was hardly a depression. It was more like a normal recession that took... a decade.

Also, long term growth is determined by capacity of the economy. Deflation itself does nothing to that. It discourages investment (see zero lower bound/ zero lower bound problem/ zero nominal lower bound) but only in a way that delays an economy from reaching full capacity (See AD–AS model, curve shifts and moves along curve) in the long run money is more or less neutral. Ways to grow economic capacity involve keeping more people healthy (they can't do much if sick, unless it's an at-home internet job), technological improvements (so the same number of people can do more stuff and have more stuff), increasing human capital (a person who can do algebra is more useful than someone who can't in a lot of occupations), correct talent allocation (training people who have a drive for programing how to farm cotton would result in a popular well dressed but probably poorer)... of course any deflationary measures than impair any of these would have an effect
As Keynes said, on the long run, we are all dead, in theory in the AD/AS model monetary policy (and fiscal policy btw) is neutral on the long run, the problem is that nobody knows what "the long run" is, if it takes a decade or two to recover from a deflationary crisis, that's a 10-20 years of lost growth. Even if growth goes back on the long run as prices/wages adjust downwards, that's still massive opportunity cost in terms of lost output while the adjustment happens.

E: Sorry, I didn't mean AD/AS model, I meant LS/LM model

https://www.investopedia.com/terms/i/islmmodel.asp
 
. . . The big problem with inflation in the 1970s in the U.K. and elsewhere was the belief held by many governments and economists especially in the U.K. of the economic concept best known as the Philips Curve. This was the a simple modal that showed that in the short run their is a positive correlation between high employment and high inflation. This was beloved by politicians and civil servents as they could in theory use a graph and predict falls in unemployment if inflation was increased. Unfortunately the theory was never proved in the long run and is now used as a cautionary tale that sometimes correlations are just coincidences. . .
I’ll be open to the possibility that the Philips Curve is more illusionary than real, or maybe it just explains certain economic times reasonably well but not others.

The stagflation of the early ‘70s is a wonky, hard-to-explain period.

The stagflation in 1973 following OPEC’s embargo leading to quadrupling of the price of oil (yes, 4-fold increase) is a piece of cake to explain. The supply curve shifts inward and you end up at a place of both lower GDP and higher prices.

Same for the doubling of the price of oil in 1979.

And to a lesser extent in 1990, and also “irregular but impressive upward climb from 2002 to 2008,” and in 2011.
https://books.google.com/books?id=q...ce of crude oil. American consumers"&f=false
 
P&B%2026.11%20Decrease%20Aggregate%20Supply.jpg

Stagflation

The very non-mysterious type of stagflation which results from an abrupt price increase in a major economic input, such as oil.
 
Britain had really bad inflation awhile back. The cabinet tried to stop it by imposing pay caps, which sounds really dumb. "Crisis? What Crisis?"

Let's assume that the goal of Britain is to bring inflation to an annual rate of 3% by the end of 1979, down to 2% by 1980, make the annual rate of inflation from 1982 to 1985 -0.333%, and do it with the least harm to long term economic growth? Some inflation fighting measures like gutting out the education budget to run a budget surplus (budget surplus can fight inflation) are bad for long term growth.

What is the best the cabinet(s) can do to achieve that? The Bank of England controls the interest rates and they are supposed to be independent of the cabinet. This leaves trying fiscal measures, administrative decisions, and passing laws. Pay caps have been proven in OTL to just cause a railroad strike.
POD Wednesday 23rd March 1977 the British Labour Government under James Callaghan looses a vote of no confidence because (unlike OTL) he is unable to make a deal with David Steel the leader of the Liberal Party. A general election is held on Thursday 28th April 1977, which is won by the Conservative Party under Margaret Thatcher who becomes Prime Minister a day later, i.e. Friday 29th April 1977.

IOTL Mr Callaghan won the 1977 vote of no confidence and survived until loosing another one on Wednesday 28th March 1979. That led to the General Election of Thursday 3rd May 1979 and Mrs Thatcher becoming prime minster on Friday 4th May 1979.

Mrs Thatcher coming to power 2 years earlier is the only way that would come remotely close to achieving your objective.
 
Slash even more spending? That will defiantly hurt the economy, but budget surplus is a known inflation fighter (because you aren't issuing more script). What else can be put on the chopping block? Some RAF planes? Actually, I don't think there is anything that could be chopped without losing Falklands. Many Britons would be adversely hurt by a cut to housing. A cut to the NHS would make the population sicker even if the cuts were restored later (because that's 3+ years of less preventative care).
If budget surpluses are known inflation fighters is increasing revenue a viable alternative to reducing expenditure? But not through raising taxes, instead it would be increased revenue through lower unemployment via a less severe recession in the early 1980s.

I write that because in my last post I suggested a POD of Mrs Thatcher becoming prime minister 2 years earlier. If she had would the early 1980s recession have been not as bad or even worse for the UK?
 
. . . Let's assume that the goal of Britain is to bring inflation to an annual rate of 3% by the end of 1979, down to 2% by 1980, make the annual rate of inflation from 1982 to 1985 -0.333%, and do it with the least harm to long term economic growth? . . .
I agree with RousseauX above that actively seeking deflation flirts with recession. But, half the fun of alternate history is that governments — and peoples — sometimes do irrational things!

If you can push your time period just a little bit later so that 1986 is solidly within it . . .

This is an ABC News broadcast from 1986. The price of oil had fallen from $30 a barrel to about half of that. And I think it would continue to fall to about $10 a barrel.

The supply curve moves outward, you get both lower prices and greater productivity. But, with the North Sea oil, we’d have to see how much of the UK economy benefits as a seller of oil vs. benefits from positive change in overall economy.

“ . . . From November of 1985 to July of 1986, oil fell from around $30 a barrel to $10. . . ”
https://www.morganstanley.com/ideas/oil-price-plunge-is-so-1986
 
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I can't see any alternative other than wage and price freezes to dampen inflation, but this is a very temporary resolution. Only extreme monetarist measures would slash inflation to the rate you have suggested.

That's why Stagflation took hold in the US, started by Nixon, continued by Ford.

Deregulation is what it took, started by Carter, to get things moving again in the US.

For the UK, have to do what Thatcher did. No other way.
Staying the course would lead to collaspe
 
The very non-mysterious type of stagflation which results from an abrupt price increase in a major economic input, such as oil

Done mostly by artificial price controls and regulations on Oil, not market forces.
The Oil Shock was bad, but adjusted for inflation, Oil went from $20 a barrel in 1970 to $54 after the 1st Embargo and $117 in 1980, but from 1985 to 2005, had averaged under $40

Reagan undid the last of the price controls on Oil&Gas in '81, that finally, along with other deregulation, broke Stagflation and doubledigit Inflation
 
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