Stagflation and The Economic Crisis Of the 1970s Textbook: 216-218

Energy Crisis (1973) The Arabs, frustrated by the loss of the Yom Kippur War seek to punish Israeli’s allies. OPEC (The Organization of Petroleum Exporting Countries) declares an oil embargo on the nations of the West, specifically the US and the Netherlands OPEC also slowed the production of oil – causing prices to quadruple. Mr. B rulz

Energy Crisis and the West Oil shortages wreak havoc with industrialized economies and force gas rationing in the U.S. Goods became more expensive, causing rising inflation and the slowing of the economy. The embargo will only last for 5 months but the Arab states now become keenly aware of the power of oil. In 1971, the USA had withdrawn from the Bretton Woods Agreement – which used the gold standard to set the exchange rate between countries. As currencies floated freely on the world market, this too caused inflation. Thus, inflation and a recession occurred at the same time. This is called stagflation.

Changing Perspectives on Economics Stagflation adversely effected the British economy; in 1976, the British government was forced to borrow US$3.9 billion from the International Monetary Fund. Inflation caused the cost of running social programs to increase, yet the slowing of the economy meant governments could collect less tax revenue. The result was an increasing deficit and no means to repay the debt. See British Prime Minister James Callaghan’s speech and the chart on American inflation on page 217. Cairo, Frances, Roma, HK <3 our homie

a. Raise taxes and lower spending during times of prosperity Broken Rules: a. Raise taxes and lower spending during times of prosperity This ensures that there is money to “prime the pump” when the country falls into recession. a. However, govt’s officials wanted to stay popular and get re-elected b. Thus, they failed to raise taxes and lower spending during good times. c. Huge debts were accumulated

SS 30 Mixed Economies - Birth of Neo Conservatism Deficit Financing was the result. a. If a country’s debt is too high, then that country has high interest payments on that debt. b. If government has to support that debt, then they are unable to spend money in other areas that might help. c. Consequently, they must deficit finance to maintain social programs. More money is borrowed. September 19, 2018 SS 30 Mixed Economies - Birth of Neo Conservatism

Neo-Conservative Movement The Conservative Solution: STOP SPENDING The Neo-Conservative Movement or Supply Side Economics calls for the elimination of the public sector. They want private ownership of ALL industries in a given country. September 19, 2018 SS 30 Mixed Economies - Birth of Neo Conservatism

Introducing... Monetarism!! This theory holds that control of a country’s money supply is the best means to encourage economic growth and limit unemployment and inflation. Essentially, it reflected a return to the principles of liberalism through the application of classical liberal laissez-faire policies. Premiers Ralph Klein (Alberta), Mike Harris (Ontario), and Prime Minister Stephen Harper attempted to undo interventionist policies of previous governments.

Freidman and Monetarism Milton Friedman is a key economic thinker associated with neo-Conservatism which is also known as classical economics. His ideas are more closely linked with classical liberalism; thus his ideas are opposed to modern liberalism Belief Regarding Inflation: Inflation is the result of an excess of money produced by the central banks.

He is against the welfare state (social safety nets via government intervention) as it requires large government and excessive spending which leads to debt He is for fiscal responsibility and balanced budgets His economic theory/practice is called MONETARISM which is also known as SUPPLY-SIDE ECONOMICS

Hayek and Monetarism Fredrick Hayek was critical of collectivist thinking since before the Second World War, but the prevalence of Keynesian Economic thought made Hayek’s ideas unpopular. His ideas gained popularity in the 1960s and 1970s. He believed that in order for a collectivist society to function, the government must have a high level of control over society.

Eventually, this would threaten the liberty of the individual as the government gained control over all aspects of a citizen’s life. It is impossible for central planners to have sufficient information to make wise and ration decisions – cannot predict demand for products/service. Therefore, like Freidman, Hayek believed that the price system (free market) was the only way to balance supply and demand in the economy while maintaining individual liberty.

Principles of Monetarism Decrease government intervention and spending in the economy Downsize the public sector by privatizing and deregulating government owned business and services/programs Decrease taxes and lower interest rates to get businesses to increase supply Control the amount of money in supply Keep some unemployment to keep wages low – as this helps business to grow (can reinvest profits) Keep government small (costs less money then to run a government)