Stop Go Economics

Stop-Go economic cycles are all about the government reacting to events in the business cycle, such as booms or recessions, by exerting control to keep employment high and inflation low.

Conservative Stop-Go economics

The economic approach Harold Macmillan’s 1957–1963 government introduced has been given this name due to the brisk nature of the cycles into which the government threw the economy. Stop-Go policies were primarily employed during the period in British Economic History known as the British Economic Golden Age, which lasted from 1951 to 1973. The bulk of Stop-Go policies adopted in this period was under the Macmillan ministry. However, the Swinging Sixties government of Harold Wilson (1964–1970) also turned to Stop-Go practices to keep the economy in check.

Background: Keynesian economics

According to the Keynesian theory of economics, the government’s job is to keep the economy in check, particularly in times of boom. Letting the business cycle run its course freely does not ensure full employment or stable prices. Therefore, the government needs to intervene to ensure this.

According to Keynes, aggregate demand is the most important driving force in the economy, and its volatility, particularly during a time of boom, is why the government must control it. It is possible for an economic boom to cause the aggregate demand to increase too much, which can push the economy beyond its potential productive capacity, leading to inflation. This, in turn, can lead to the economy overheating. In other words, the country’s resources and labour force will not be able to keep up with the demand of customers.

Stop-Go economics is a Keynesian economic strategy because it controls aggregate demand through government intervention. If aggregate demand is too high, the government can deflate or ‘cool down’ the overheating economy so that demand decreases and industry can catch up. On the other hand, if aggregate demand is too low, the government can inflate the economy to drive it up.

What this tells us about Stop-Go economics is that adopting this approach was about reacting to economic events (such as rising wages or rising inflation) rather than putting in place a strong economic foundation for the British economy.

The post-war boom and Stop-Go economics

World productivity soared during the post-war period as countries and economies recovered from the impacts of World War II, which led to an explosion in international trade.

This is known as the post-war boom, which was a period of rapid expansion and economic growth.

The post-war economic boom in Britain

The increase in trade increased Britain’s exports, and there was also high productivity in the immediate post-war moment, as the task of rebuilding derelict Britain meant that there were jobs for everyone. This was a time of full employment, which meant that practically everyone who wanted to and was able to work was employed. The population was employed and well-paid, as the 50s saw substantial increases in wages due in part to trade unions successfully pushing for wage increases.

As people earned more, they were able to buy more. This led to an increase in consumer demand. This was great news for the people of Britain, as they could participate in the economy in ways previously inaccessible to most. This period of economic expansion and affluence became known as Britain’s Economic Golden Age.

The problem with the post-war economic boom

Let’s go back to the Keynesian economic theory. According to Keynes, growth is the result of an increase in aggregate demand matched by an increase in aggregate supply. That is, consumer demand is an indication of a well-performing economy only if a country has the productive capacity to produce enough stuff to sell to consumers. Therein lies the problem with the post-war economic boom: manufacturing was not always able to keep up with consumer demand.

Rises in wages were not matched by productivity rates, which meant that British firms could not keep up with growing consumer demand. This leads to two key economic issues:

• High inflation: in order for businesses to keep up with demand, they have to raise their prices, leading to inflation. Inflation is a problem because it decreases the value of the pound, and if wages don’t keep up with inflation, this will lead to poverty.

• Balance of trade problems: since domestic businesses cannot keep up with the aggregate demand of the newly-affluent British public, imports of goods from other countries increase. The problem was that import rates began to exceed export rates, which is known as a trade deficit. This is problematic because it means that Britain is spending more money buying from other countries than it is earning from other countries buying from Britain.

  • Balance of payments problems: a trade deficit contributes to the broader balance of payments problems.

Therefore, the inability of firms to keep up with aggregate demand leads the economy to overheat. Periods of the boom, such as the post-war boom, are vulnerable to overheating if a country’s productive capacity cannot keep up with demands. Overheating is the consequence of an economy that has expanded at an unsustainable rate.

Thus arises the problem that Stop-Go tactics seek to address: how can the government keep employment and wages high while also preventing inflation and balance of payment deficits?

Stop-Go economic cycle

‘Stop-Go’ is the term that was given to the government’s employment of deflationary and expansionary measures in order to control the business cycle. Stop-Go tactics are a short-term alternative solution to medium-term management of the economy.

The response of Harold Macmillan’s government (1957-63) was to employ Stop-Go tactics to combat high inflation with deflationary measures in the ‘Stop’ phase and to expand or increase the economy with expansionary or inflationary measures in the ‘Go’ phase. These two phases are interdependent, as one phase necessitates the other, which gives Stop-Go economics their cyclical nature.

The Stop phase

The Stop phase is a reaction to high inflation and balance of trade and balance of payments problems. The Stop phase aims to deflate the inflated economy through deflationary restraints such as:

• Increasing interest rates.

• Introducing wage freezes (a cap on how much wages can increase).

• Increasing taxes.

These measures all serve the purpose of decreasing the number of cash people have to spend so that they want to buy less, and supply can catch up with demand.

However, keeping the economy restricted with deflationary measures for too long can also cause its own problems.

The Go phase

The ‘Go’ phase is a necessary follow-up because deflating the economy has the danger of putting too much strain on firms and workers. Therefore, a ‘Go’ phase has to give the economy another boost.

In the ‘Go’ phase, the restrictions on the economy are lifted, and expansionary measures are employed:

• Ending wage freezes.

• Lowering interest rates.

• Introducing tax cuts.

This will lead to a period of prosperity; people will have more disposable income, which will increase consumer demand, thus benefiting both consumers and firms in the short term.

Stop-Go economic policies

We will now look at three key examples of expansionary and deflationary tactics employed by the Conservative Macmillan government, which ran from 1957 to 1963.

Derick Heathcoat-Armory’s 1959 budget plans

Derick Heathcoat-Armory was Macmillan’s Chancellor of the Exchequer from 1958 to 1960. In the run-up to the 1959 general election, Heathcoat-Armory put forward appealing expansionary budget plans in the form of tax cuts. This was a strategy to win votes in the election which appealed particularly to middle-class voters who would most benefit from tax cuts.

However, employing this expansionary measure was unwise, as inflation was high, making it more prudent for the government to cut spending at this time.

As a result of this ‘Go’ measure, consumers spent more money, which exacerbated inflation and trade deficit problems.

As a result of this Go phase, Heathcoat-Armory then had to employ deflationary Stop measures, increasing tax and interest rates, cutting public spending and limiting wage increases.

Fig. 1 - Derick Heathcoat-Amory.

Selwyn Lloyd’s 1961 wage freeze

Selwyn Lloyd succeeded Heathcoat-Armory as Chancellor of the Exchequer, and he was forced to introduce a seven-month wage freeze in 1961 to cope with inflation. This was an unpopular measure, and it particularly angered trade unions, who pushed for fairer, higher wages.

Britain also applied for a loan from the IMF in 1961 as the balance of payments deficit worsened.

Reginald Maudling’s 1962 tax cuts

Reginald Maudling replaced Selwyn Lloyd as Chancellor of the Exchequer after he was fired by Macmillan on the ‘Night of the Long Knives’. During this period, he implemented the last Go phase of the Macmillan government, introducing further tax cuts to cope with the deflation brought on by the 1961 wage freeze.

Maudling’s cuts:

• Government sales tax cut on automobiles from 45 per cent to 25 per cent sales tax.

• Reducing the bank rate: reducing the bank rate lowered interest rates, encouraging people to take out more loans.

• Reducing purchase tax: purchase tax is an old form of VAT; this was a tax put on luxury goods.

As a result of Maudling’s tax concessions, from 1963 to 1964, there was a rise in economic growth. The balance of trade gap was tightened, as the export rate grew during this time by 10%; however, import rates remained nearly 20% higher. This led Britain to apply for a further loan renewal from the IMF in 1963.

Maudling’s expansionary measures failed to address the underlying balance of trade and balance of payments problems.

Issues with Stop-Go economics

During Macmillan’s government, there was dissent over the efficiency of these Stop-Go policies and other strategies were employed to address economic problems that Stop-Go policies could not tackle.

Peter Thorneycroft’s monetarism

Disputes over economic policies led to internal divisions in Macmillan’s government. Peter Thorneycroft was Chancellor of the Exchequer from 1957 to 1958 and he opposed Macmillan’s reliance on Stop-Go policies. He believed in implementing cuts to the government’s public spending and borrowing, for example, from the IMF. This economic approach is called monetarism, as it is focused on cutting the money supply to address the underlying problems of the British economy.

However, as a One-Nation Conservative, Macmillan believed it was the duty of the government to ensure the welfare of its people. He knew that cutting government spending would lead to unemployment and cutbacks in housing, which made him reluctant to pull out of the Stop-Go cycle. This led Thorneycroft to resign.

National Economic Development Council (NEDC)

In 1961, Chancellor of the Exchequer Selwyn Lloyd set up the National Economic Development Council, nicknamed ‘Neddy’, to coordinate long-term economic planning. The NEDC was made up of members of the government, academics, trade unionists, and employers. The NEDC sought to achieve cooperation between these groups.

National Incomes Commission (NIC)

After Lloyd was fired in 1962, the National Incomes Commission, nicknamed ‘Nicky’, was set up later in the year to address the ineffectiveness of Stop-Go policies. The purpose of NIC was to monitor the wage increases and price inflation brought on by Stop-Go policies. The purpose of Nicky was to keep inflation and the balance of payments in check.

However, both the NEDC and NIC were short-lived projects with limited success.

The creation of the EFTA and the first application to join the EEC

The formation of the EFTA in 1960 was part of Britain’s efforts to modernise the British economy. It was formed to modernise Britain’s economy and to improve its trade links. Better trade links meant the balance of trade problems should improve. However, the EFTA was not able to compete with the EEC.

Macmillan’s decision to put forward Britain’s application to join the European Economic Community was his attempt at a long-term economic alternative to Stop-Go cycles. Joining the European Economic Community (EEC) would have the benefit of stronger trade links between Britain and the rest of Europe, which would address Britain’s balance of trade problems. However, the application was vetoed by French President Charles De Gaulle.

Beeching report of 1963

By 1963, it was clear that Stop-Go policies were not going to sufficiently alleviate Britain’s balance of payments problem, so Macmillan cut public spending on the railway service. The Beeching report led to a closure of over 30% of the rail network, which hit people in rural areas the most.

The Wilson Labour government and Stop-Go economic policies

When Harold Wilson took office in 1964, the balance of payments deficit was estimated to be £800m. The Harold Wilson government of the Swinging Sixties (1964-1970) attempted to break out of Stop-Go economic cycles, setting up the Department of Economic Affairs to devise plans for long-term sustainable economic growth.

However, Wilson was forced to turn to devaluation and deflationary methods to offset the trade deficit. By employing deflationary measures, Wilson’s government was essentially continuing the cycle of Stop-Go, as deflationary policies are merely the ‘Stop’ phase of the Stop-Go cycle. However, the deflationary measures, in conjunction with devaluation, proved successful, as there was a balance of payments surplus by 1969.

This surplus was a relative success. However, an economic recession in the 1970s followed it, triggered by the 1973 oil crisis.

Stop-Go economics and the British economic Golden Age

Stop-Go economics was the main economic approach the Macmillan government employed during the period of the British Economic Golden Age. The weaknesses of this approach were acknowledged by Macmillan’s government and the succeeding Labour government of Harold Wilson.

However, governments were unable to find an alternative economic strategy to Stop-Go economic cycles, remaining stuck in them during the period. It wasn’t until Margaret Thatcher’s election in 1979 that Britain finally broke out of the Stop-Go cycle with the advent of Thatcherism.