Shifting Sands and Policy Failures
As outlined in Chapters 3 to 7, there have been two striking developments in economics over the last thirty years. First, a major theoretical revolution has occurred in macroeconomics (from Keynesianism to monetarism and beyond) since the mid-1970s. Second, unemployment rates have persisted at the highest levels known in the post-Second World War period. In Chapter 3 we analysed how full employment as a genuine policy goal was abandoned with the introduction of the natural rate hypothesis and its assertion that there is only one unemployment rate consistent with stable inﬂation. In the natural rate hypothesis, there is no discretionary role for aggregate demand management and only microeconomic changes can reduce the natural rate of unemployment. Accordingly, the policy debate became increasingly concentrated on deregulation, privatisation and reductions in the provisions of the welfare state with tight monetary and ﬁscal regimes instituted, as we discussed in Chapters 4 to 6. The almost exclusive central bank focus on maintaining price stability on the back of an overwhelming faith in the NAIRU ideology has marked the ﬁnal stages in the evolution of an abandonment of earlier full employment policies. The modern policy framework is in contradistinction to the practice of governments in the post-Second World War period to 1975 which sought to maintain levels of demand using a range of ﬁscal and monetary measures that were suﬃcient to ensure that full employment was achieved. Unemployment rates were usually below 2 per cent throughout this period. Under inﬂation targeting (or...
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