2. Consider Figure 2. Judge the UK's in ation history in an international context; can you think of reasons why the UK has performed as it has? Consider, and try to explain, the recent higher in ation levels in this historical context.

Figure 2: Plots of inflation calculated from Consumer Price Index data for all goods in the UK, US and
Japan. Source: OECD.

     Generally UK’s inflation levels follow patterns of other countries shown on the diagram (US and Japan). All three countries experienced high inflation during mid-70s (although it was less visible in the US and in 1980. However, the peaks were most extreme for the UK, while Japanese and American inflation levels fluctuated less.

     In 1975, due to futile Keynesian demand management attempts, inflation in the UK reached record highs (25%). This was caused by government policies aimed at pushing more demand. Ever since this time, defeating inflation has become a priority for governments, which had to abandon their previous goals of keeping unemployment low. In the aftermath of the 1981 budget, inflation fell for a couple of years.

     Recession in the early 1980s suggested that financial policy was too tight, yet inflation levels did not meet its targets. There were two main reasons for that, one being wage push inflation (trade unions refused to adjust wage behavior) and rising prices of oil (several OPEC countries lowered their production levels and artificially increased prices).

     The last peak was in year 1992. At this time UK has withdrawn from the Exchange Rate Mechanism (ERM), which allowed it to lower interest rates and target inflation more effectively. Since then inflation level in the UK remained quite low and under control until recently. The economic crisis pushed commodity prices up, resulting in inflation rate reaching almost 5% in summer 2011.

Looking at Figure 1, how would you describe the current UK unemployment level?1 Can you explain periods of higher unemployment, and also those of lower unemployment?

Figure 1: Plots of unemployment rates (standardised and claimant count) for a number of major economies

including the UK. Source: OECD Statistics.

     There are two plots for UK unemployment rate – one represents the standardised rate and the other the claimant count. The difference between these two is that the claimant count includes only people who are claiming unemployment benefits, while the standardised rate is the total number of people actively seeking employment. Throughout most of the period represented on the graph, the standardised rate is lower than the claimant count.

     The current unemployment level in the UK is approximately 8.5%, which is its highest level since the early 1990s. The claimant count is much lower and stands at around 5%. Even though these figures are high, UK unemployment is lower than the EU or US levels and UK’s claimant count is much lower than the value for Germany, which is considered as very stable during the current economic slowdown.

     In the past there were two large peaks in unemployment levels in the UK. The first one is a large, rapid increase in the 1980s. This was a result of restructuring of the British industry by the Thatcher government. Government policies were aimed at lowering inflation, even if it meant high unemployment rates. Interest rates and taxes were raised, spending cuts implemented and the economy fell into a recession. People who were hit most severely were those working in mining and manufacturing.

     The recession in the early 1990s was caused by the US savings and loan crisis. In 1993 unemployment level was 10.7%, but since then it began to decrease. Until 2008, when the current recession started, unemployment levels in the UK were quite low, due to a period of steady, stable growth and general prosperity.

If you could choose your own measure of national output, what would it be? How would you construct it and why would it improve on GDP?

     GDP is a flawed, but the most commonly used measure of national output. One of its disadvantages is double counting of goods, which makes GDP overvalued. Another problem is existence of the underground economy, which is not taken into account and therefore lowers GDP. Another flaw is not being able to account for productivity of some services (e.g. hospitals, schools or charities). At the same time, some ways of measuring GDP include sectors which do not actually produce anything (e.g. property letting). These flaws mean that the value obtained may simply be untrue and not show the actual wealth of a country.

     Any measure of national output intended to replace GDP would have to consider the aforementioned issues. In addition, it should account for “negative” products which could hinder future development (especially pollution). However, such a measure would be very complicated. GDP is fairly simple to calculate and GDP per capita gives a quite accurate picture of country’s development, allowing for comparisons between different states.

Can we separate economics from the political spectrum, and can we isolate it from morality? Should we?

     As a science, economics could exist without politics. Economists do not have to be politicians; their research might be purely theoretical and objective. Politics, however, cannot ever be completely separated from economics. Politicians, whose decisions affect millions of people, must consider economic issues when running their countries. They implement new laws and policies to support economic growth and development. Different political parties’ economic agendas are an important factor in the election campaigns. An unpopular view (or ignorance) on topics such as unemployment, inflation etc. can prevent a politician from being elected.

     Politics and economics become even more intertwined in the times of crises, such as nowadays. Decision-makers are expected to fix economic problems, but at the same time they have to take into account public opinion. An attempt to detach politics from economics is the creation of technocratic governments in two countries most affected by the current eurozone crisis (Italy and Greece). Both are led by economists and consist of specialists rather than politicians. So far the peoples of those countries support technocracy, but how long can an unelected, in fact anti-democratic government last? In addition, any technocratic government still needs backing from the parliament and this depends on political parties, which in turn depends on the voters’ support. To sum up, I think that it is possible for economics to be isolated from politics. However, politics cannot exist without economics, because it is a too important area to be ignored by those in power.

     The question of whether economics can be separated from morality is completely different. Economic knowledge should be used to make the world a better place for people to live. From that, another issue emerges. Is economic growth the way to make us happier? Will policies aimed at development always result in improving people’s lives? If the answer were ‘yes”, then no decision-maker would ever face a dilemma between what is best for the economy and what is best for the people. But what is good for some may be bad for others and politicians have to make a choice. If economics were detached from morality, the purpose of all policies would be to improve growth. Since it is argued that economic growth leads directly to happiness, morality should sometimes stand in the way and remind those in power about their goal – to change people’s lives for better.