2 - Domestic policy issues

Summary

Introduction

There has been a marked decline in the macroeconomic performance of the industrial countries since the early 1970s. This has taken the form of lower growth rates of GNP and of productivity, and of higher levels of inflation and unemployment. During this decade the industrial countries experienced the worst recession since the 1930s, and at the time of writing not all of them have recovered fully from this experience. In many Western European countries unemployment figures are in double digits, and inflation rates are high by historical standards.

There has been an extensive debate about the causes of this poor performance and about the policy measures necessary to remedy it. As yet there is little general agreement on these issues. An explanation that initially was widely canvassed attributed the recession of the 1970s to the increases in oil prices in 1973 and 1978–9. However, there is now general agreement that, although these price increases had some negative consequences for the industrial economies, these consequences were certainly not of the order of magnitude required to explain the recession of the 1970s. The principal causes must be sought elsewhere. We discuss the macroeconomic impact of higher oil prices in Chapter 7.

In this chapter we develop an alternative analysis of the macroeconomic characteristics and performance of advanced industrial economies. A central aspect of this analysis is the emergence of new technologies, which have fundamentally altered the macroeconomic characteristics of certain sectors of industrial economies.