Monetary policy is one area which has already been used to try and fight the recession. This policy describes how the government, central bank, or monetary authority of a country controls; financial aspects of a country; the supply of money, the availability of money and the rate of interest, so as to attain a set of objectives oriented towards the growth and stability of the economy. [2]
Monetary Policy can be described as being expansionary or contractionary. With regards to the current situation, an expansionary policy has been adopted by the Labour government. This policy is traditionally used during a recession to tackle unemployment by lowering interest rates. With unemployment levels reaching 3 million, stronger enforcement of this monetary policy may be what is required to boost the job market.
Keynesian economics is a theory that relates to total spending within the economy, known as aggregate demand, and the effect that this has on output and inflation. The Keynesian theory was proposed when a group of economists sat down together, many years ago, and took all the parts from the monetary policy that they thought were right, and all the parts from the fiscal policy that they believed to be true. They then combined the two to form a Keynesian theory.
According to this theory, whenever there is a change in aggregate demand, whether it is anticipated or unanticipated, it will affect the output of goods and rate of employment rather than prices. This can be seen on the Phillips Curve that shows when unemployment increases, deflation decreases.
A Keynesian view of recession is that during this period, capital is not maximized. Unemployment rates are high and because there are less employees, capital is reduced. Fewer machines running in firms also means a loss of capital. If the loss of capital from idle machines is large enough, labour’s marginal product will fall regardless of there being fewer workers. [4]
Another main economic policy, seen as a contrast to the monetary policy, is the Fiscal Policy. The Fiscal Policy can be described as the use of government spending and revenue collection to influence the economy. [5]
Fiscal policy focuses on government spending and taxation. The fiscal, like the monetary policy, works on both an expansionary and a contractionary basis, but it also takes a neutral stance. This stance represents equilibrium in the economy in which government spending is equal to tax revenue.
By adjusting government spending and tax rates, the level of aggregate demand within the economy would rise. By tackling the crisis through a fiscal policy, objectives such as growth in the economy, full employment, and price stability can be achieved.
The chancellor, Alistair Darling, is already employing some fiscal-like mechanisms to help boost the economy.
In an attempt to pull the UK economy out of the gutter, Chancellor Darling is focussing on giving cash to the poorer families who need it rather than wealthier families who are less inclined to spend it. [6] The movement will focus on low-income parents, increasing their benefits and tax credits. By giving money to the poorer section of the population, it gives them money to spend on things that they would otherwise do without, meaning that money is plumbed back into the economy. If money is given to the middle-class families, it is less likely to be spent, and instead is saved.
By doing this, it really attacks the recession from both sides, by reducing the number of people falling into the debt-hole and increasing the money that is in the economy. This has become known as a ‘fiscal stimulus’.
Fiscal measures have already been used during this recession to help stabilise the economy. Barrack Obama and Gordon Brown wish to continue dealing with the situation in this way. Obama has plans to inject $800 billion into the economy, hoping that other big economies will back him with this. According to a German newspaper, Britain is looking to throw even more money into the fiscal stimulus, with $2 trillion being mentioned. The German chancellor, however, does not like the “global new deal.” She stated, “I will not let anyone tell me that I must spend more money.”[7] She also stated, “It is not time to look at more growth measures. I disagree with the idea completely. The existing measures must work” [8]
During the first week of April 2009, a meeting of the G20 countries takes place in London. It is likely that the leaders of the G20 will focus on other areas, likely to cause fewer disputes. One such area might be ‘Global Financial Reform.’ Prime Minister Brown and President Barrack Obama seem to be in agreement that financial reforms globally will help to establish a more secure environment for all of the world’s nations to trade in, culminating in a ‘new era of international economic partnership.’[9] In the eyes of many observers, it is likely that Global Financial Reform may offer a long term solution but will do little to bring an immediate end to the recession. At the time of writing, it would appear that the governments of France and Germany are uncomfortable with British and US led policy, insisting that they will not sign up to any global agreements which may not be in their own best interests.
As well as trying to regulate how countries trade with one another, Gordon Brown and his government must do all they can to encourage business enterprise at home. Unfortunately, despite all the billions that have been used to prop up our ailing banks such as The Royal bank of Scotland, (combined with the introduction of ‘loan guarantee schemes’ and reduced interest rates), our financial institutions are still reluctant to provide commercial loans. ‘Confidence’ at all levels of our economy is very low at present. Investors will undoubtedly try to wait until the market has ‘bottomed out’ before considering new ventures. For this reason, it is unlikely that any measures taken by the government are going to have any immediate effect. Instead, a long steady climb out of recession is more likely. In my view ‘boom and bust’ cannot be avoided in the open market, where longer periods of ‘boom’ will ultimately be followed by more acute and protracted periods of bust.
