A contribution to the supply-side debate from an academic

I have dealt before with the question of immigration and the impact on the supply side of the economy.

Here is a contribution from an academic, Sir Andre Geim, a Nobel prize winning physicist. He makes the point that the present UK immigration policy is likely to harm the economy. The points are well made and I won't repeat them here.

The supply side of the economy can be damaged in the long term by inappropriate short term policy. The problem is that the long term nature of supply side policy means it is difficult to see the benefits and this allows the Daily Mail/Express/Sun to play to the base instincts of popular culture.

The Independent reports Sir Andre's comments here

Governments role in development

It is easy to miss the major issues of developing economies from the comfort of the UK. One of them is the argument about the role government should play.

On one side of the argument are those who believe markets should drive development. There should be free trade, stable inflation and minimal government intervention.

On the other side of the argument are those who say that LDC's have not got the capital needed to provide the infrastructure that markets need (roads, power, education and health services for example). Therefore governments must take the lead by providing this.

But a third position takes this argument further. LDC's don't have the experienced entrepreneurs and necessary business skills to allow markets to allow development at the desired rate. Further they argue that the distribution of income that markets would cause will be far too unequal and this also requires intervention. In short the view is that the government must be responsible for the development process and most parts of the economy.

India is a country that has largely taken the third view. Indian industries are heavily subsidised, measures to even out the distribution of income are significant and prices are controlled. This has worked quite well for India, although their advantage as English speakers cannot be understated.

However now the policy is reaching its limits. The widespread involvement of government has stifled private enterprise, prevented the development of some industries and led to a corruption that diverts well intended funds from worthwhile projects.

So the time has come to reform and 'get the prices right' to allow India to unlock its potential. It's not going to be easy.

The Age reports on the next stage which includes the introduction of VAT (GST).

Inflation targets and QE - lessons from Japan

The Japanese economy has been struggling for a while, since before the Global Financial Crisis. The problem has been a period of prolonged recession and deflation and virtually all policy attempts have failed to correct the situation.

Exports are now falling, previously one of the few bright areas for Japan, and now a serious situation faces the country.

One problem is that the Japanese people just don't want to spend and domestic demand is weak. This is encouraged by the falling price level (deflation), why should you buy goods today when in a few months they will be cheaper? The mentality of the population needs to be changed to help boost Aggregate Demand.

What does not work is lowering interest rates, they have tried that and actually had years of negative real interest rates. There have also been fiscal stimulus packages that have seen tax cuts and more government spending,  things would have been even worse had they not done this but the problems continue. So what can they do?

One suggestion is that the Bank of Japan raise its inflation target from 1% to 2%. One reason why the Bank of England has a target of 2% is to prevent any chance of a slide into deflation. This seems sensible, but all a bit late now.

The next alternative is massive Quantitative Easing (QE). Print Yen and pump them into the economy. Here they will rely on households and firms having very high money balances as a result and so they will want to spend the cash to re-balance their portfolios. (The resulting fall in yields - already very low - has already failed to work).

Of course Japan also requires Europe to sort itself out so they can start buying Japanese exports again. But when you here people telling you that QE has gone too far and will be inflationary you must point of that this is exactly what is needed - higher demand and stable inflation - not deflation.

The BBC report Japan's woes here

Accelerator effects about to kick in?

The semi-technical sector of the Economics industry (the press and interest groups in the main) are very fond of quoting statistics on ratio's to predict a change in the economy.

For example in the 1990's the ratio of average earnings to house prices was often quoted as being at a historic high. This was used, usually by the Daily Mail/Express to predict an imminent collapse of house prices. The fact this didn't happen explains the dangers of such statistics. (In this case the change in the workings of the financial markets and low interest rates allowed a much higher ratio of house prices to earnings so the comparison was not valid.)

Now there is a great deal of interest in the age of consumer durables in the USA (refrigerators, cars etc). The average age of these items has risen during the recession as households put of replacing them as money was tight and confidence low. A similar change must have happened in Europe as the failure of Comet would support.

So many of these household items must be wearing out,  reason many, and that means they must be replaced soon. This will give a much needed boost to the economy.

This may be true. But there are several reasons to be wary. Firstly modern appliances and cars last a lot longer. There are cars sold with seven year warranties, something that would be inconceivable in the 1980's (It was said British Leyland cars were guaranteed for a year - that is guaranteed to break down in a year).

Secondly if there was a rise in demand for these products they most will be made overseas. While retailers may see better business the rise in employment may not be that great and we will have to wait for the recovery of those trading partners.

This cycle of obsolescence is part of the explanation of the business cycle provided by the multiplier-accelerator theory. While intended to be applied to capital goods the same cyclical pattern may be relevant today. I guess we shall see.

Some data is presented in this industry blog here

Toll roads, but it's not road pricing

The Government are reluctant to do anything that is seen as unpopular when it comes to roads. There is an old saying in politics; 'Never get involved with parking or dogs' as it divides the nation pretty equally.

When governments say that they want to reduce congestion everyone agrees,  but disagree violently on how to do it.

Some want more and wider roads. This upsets the environmental lobby as it encourages more cars to use the now clearer roads (and usually just causes worse problems somewhere else on the system).

Some want greater restrictions on driving, such as road pricing, which makes drivers pay for the roads they use according to the time of day and level of congestion. This was simply hinted at in 2007 and caused nearly two million to sign a petition opposing a policy that was yet to be proposed by any party.

A compromise that might be more acceptable is to charge tolls on new roads. Most people seem to back the idea of not raising taxes further and so this is the only way to build new roads.

But is this an integrated transport policy? A series of tolled and non-tolled roads might not work at all. Drivers may cram on to the non-tolled roads to avoid the charge causing even worse congestion in areas not designed for heavy traffic.

The M6 toll road (the Birmingham Northern Relief Road) is a case in point. Opened in 2004 the latest figures show it carrying just 39,000 vehicles a day, almost half the predicted 74,000 a day when it was planned. The rest continue to battle each other for space on the congested M6 to the south.

Toll roads may be a convenient way of avoiding the problems of fiscal policy faced by the UK at present, but it lacks the broader and deeper thinking required to meet the challenge of the 21st Century.

The BBC report the toll road policy here

When regulation is necessary

Governments have tried everything to reduce smoking. 

They have used the best method available to such a market failure - tax and forced the price up to many times the actual cost of production. The problem is that this addictive good has very inelastic demand and so the effect on existing smokers is small.

Two primary methods of moving the demand curve to the left have been tried:

Education has failed. Everyone knows that smoking is bad for them, but they have failed to understand the full extent of the damage they do to themselves yet young smokers continue to take up the habit.

Banning advertising has not worked either.

However all these measures have reduced smoking and it is much less of a problem than it was in the 1960's when almost everyone smoked.

So what can governments do when they are faced with the failure of policy to correct this market failure? Unusually the best answer is more regulation. Normally the best solution to market failure is some sort of tradeable permit, then tax, but not with smoking.

The latest attempt is the banning of distinctive packaging. This has been introduced by Australia where all cigarette packets are now olive green with nasty pictures on them. The idea is to deny brand loyalty and make them unattractive.

Of course the tobacco companies claim its not going to work and even claim it is unfair. But these were the same companies who claimed smoking didn't cause cancer when they had evidence that it did, so lets not take too much notice of them.

The Telegraph report the new scheme here

A record number of hits

The blog got a record number of hits in November, 4370 at 9.10pm. 

As you can see this far exceeds any previous month.

Who carries the cost of a flexible labour market?

Today it was reported that over 3 million people in Britain are underemployed. The exact meaning of this is covered by an ONS video which is embedded in the Daily Telegraph article below, but essentially it means workers who do not work full time.

Inevitably those who are underemployed want to work more hours, usually because they need the higher income.

The rise in underemployment is bad news for those who would like more work and can't get it. They are clearly worse off. For many the data confirms their fears that the true cost of the recession is far higher than the unemployment figures suggest and solves, partly, the puzzle of why unemployment has risen so little in the recession.

For those who advocated the relaxation of labour market rules in the 1980's and 90's the figures will come as a vindication of that supply side policy. Because of the greater flexibility of the market some workers have accepted lower wages and shorter hours rather than becoming unemployed. The pain of the recession is spread more evenly and the economy has not suffered as much disruption as it would have with mass redundancies (which are the alternative to shorter hours).

Some would argue that the unemployment figures are a misrepresentation of the current economic situation, but for most economists it is a welcome sign that the supply side reforms of the Blessed Margaret continue to help the economy.

The Daily Telegraph cover the story here

Supply side policy failure

Supply side policy is known for its long lag time and the uncertainty of its outcomes. Today we have evidence of this in the measures implemented to reduce long term unemployment.

The 'Welfare-to-work' programme aims to help those who are long term unemployed return to work. Those who have been out of work for more than six months find it especially difficult to find work. They have become disenchanted and detached from the workforce, as they loose the skills and habit of work and become more distant to current work practises. Perhaps it is needless to say that as the period of unemployment becomes longer these problems worsen.

So the government have been paying for additional help, through private sector organisations, to get the long term unemployed back to work. They do this by a variety of methods that often includes training.

A report has shown that the number of people helped find a job is just 3.53% of those on the welfare-to-work programmes have found jobs.

Is this policy a waste of money? In a period when the government spending much more than it anticipated would a policy of doing nothing and simply paying the benefits be a better idea?

The BBC cover the story here

Christmas animal spirits?

Photo courtesy of welshkaren

It’s Christmas! Well, nearly, at least. And as the madness of the Christmas season takes hold, consumer willingness to spend increases significantly compared to the rest of the year. With so many friends and family members to buy gifts for, the overall level of demand in the economy increases.

It’s a great time for retailers. As consumers spend more, their revenues increase. In fact, consumers are willing to pay far higher prices in order to fulfil the social expectations of giving high-value gifts, at the same time as being rushed off their feet and less willing to spend time looking for a good deal.

In comparison, the post-Christmas period is a sales bonanza, seeing equally mad behaviours emerge as people hunt for a cheap deal. Shoppers camp out and queue for the sales that start at an unearthly hour in the morning. The USA’s similar post-Thanksgiving ‘Black Friday’ sales have prompted violent and sometimes fatal behaviour. It was thought that a fatal stabbing during last year’s Oxford Street Boxing Day Sales was due to the retail frenzy.

Firms have begun to take advantage of these very different markets. By charging high prices before Christmas, when demand is price inelastic; and offering discount deals after Christmas, when demand is price elastic; they are able to increase their revenue in both periods. This is an example of price discrimination: where firms charge different prices in different markets to maximise their revenue.

Economic theory would hold that this can only be a good outcome. Is this true?

Comment if you know which famous (and peerless) economist's works the title refers to.

The article below explores the phenomenon in more detail:

Clement Wong’s article

A false hope? Microfinance

One of the most intractable problems for the world is how to reduce poverty in less developed countries (LDC's). Make no mistake poverty is a massive problem that will persist long after the current financial crisis affecting Europe has passed.

One of the great hopes was the provision of 'microfinance' to small businesses in third world countries.

The problem of many LDC's is a lack of saving and capital. This is a problem for larger firms who cannot borrow the funds they need to grow. However most people in LDC's are hampered because they cannot establish their own small businesses, they too lack the necessary capital.

Of course small businesses, usually just employing one person, need far less capital to establish themselves. In the UK and other developed countries small businesses would go to the bank to obtain funds, but LDC's simply don't have the financial infrastructure for this.

Most people in LDC's don't have bank accounts and bank branches cannot be found in each village or even each high street.

Microfinance was an innovation that allowed ordinary people to obtain small loans to set up their own business. It partly relied on the goodwill of western donors but great things were claimed for it. It gave the chance for many to earn their own living and begin the overall raising of the standard of living in many areas of LDC's never helped by large development projects and multinational firms investments.

Now it seems that much of the optimism for this was a fallacy. This is devastating news for many. The Guardian article below gives details

The Guardian article is here

Growing deficit just part of policy conflict issue

Click on picture to enlarge

In 2010 the government set out its deficit reduction plan. The aim was to reduce the amount the government borrowed each year through tax rises and expenditure cuts and they dared to hope they might start repaying debt by 2015.

This plan lies in ruins and yesterday it was revealed that so far this year the government have borrowed five billion pounds more than they planned.

There are good reasons for this situation. In 2010 everyone expected growth to be much higher than it proved to be. The government were, as they must be, more optimistic than others, but the slowness of the recovery worldwide has taken its toll.

When the economy shrinks the automatic stabilisers kick in. Government tax revenue falls and expenditure rises. While this moderates the depth of any downturn it has the exact opposite effect to the planned the public finances

The linked Guardian editorial highlights the difficulties of achieving all macroeconomic aims at the same time. The government needs economic growth but the measures it could take to promote this in the short term will cause the deficit to become larger. There are painful choices to be made.

The Guardian editorial is here

Poor consumption decisions lead to poor health

Today there is news that in the UK deaths from liver disease has risen by 20%. Is this a surprise? Yes, because in the rest of Europe deaths from the same cause have fallen by 20%!

The cause of liver failure is usuall either drinking too much, being overweight or having a poor diet. Of course hepatitis, which is an infection, can also cause liver failure.

From our point of view this is another example of market failure. It is caused by consumers failing to take into account the full information available about the goods they consume.

There are three different failures identified here, but all have a similar cause. Lack of information, or demerit goods, are over-consumed compared to optimal levels.

In the case of alcohol there is already a high tax, but a minimum price per unit of alcohol will soon be considered by the government in an attempt to reduce binge drinking. As for poor diet and over-eating the question about how to tackle this remains unresolved.

What is certain is that more education will help in all three cases and stories like the one in The Guardian below needs to be taken seriously.

The Guardian story is here

So much for competition

The way markets are structured is critical to delivering an efficient allocation of resources. During the 1980's the movement to increase competition in markets in order to drive prices down and consumer service up was the basis of the privatisation and deregulation programme.

The idea is essentially that monopolies can exploit their customers and the more firms in the market the better it is for keeping costs and prices down.

In some markets economies of scale means you can't efficiently have hundreds of firms. One such market is energy supply, but you could certainly have up to 15 or 20. But when you have oligopoly market structures there is a tendency to collude and so some regulation to ensure fairness and maintain competition is needed.

So the energy market, dominated by six big suppliers, is one that might fall into a situation where they each decide not to compete too hard for business and all keep prices quite high.

Many people have been disappointed by recent high energy prices, some believe that the firms are keeping prices high when they need not. Others think that pricing is unfair with some people getting good deals while others (without Internet or able to pay by direct debit) pay too much.

So the government are introducing a new regime where there will be fewer price plans and customers will have to be put on the lowest available tariff.

This seems to be abandoning the idea of competition as a way of making sure resources are allocated efficiently.

The fear is that this will eliminate competition. The big firms will set similar but higher prices and while some people will be better off the good deals will disappear. The danger is that the government has just done the firms collusion for them and will prevent prices being forced down in the market.

The BBC survey the change here and make some excellent points

Economic nationalism is still there

Virtually any economist will tell you that free trade is the best thing for the welfare of all. Some will tell you that it has to be be free and 'fair' trade.

What is certainly true is that consumers benefit from the lower prices due to competition caused by free trade. European consumers have certainly benefited massively from cheaper goods made in China in recent years.

Of course there are losers as well as winners in this process. Many of those who made goods now supplied by the Chinese have lost their jobs and some firms have closed down. The knowledge that these resources are now released to be used in more profitable areas of the EU economy is of little consolation to the unemployed.

Governments are not good at practising what they preach. While a government claims to support free trade they are nervous about the votes of those adversely affected in the declining industries. They act to protect them and slow the transition, or even stop it.

One way of defying free trade is to claim a competitor is 'dumping' goods on the market. That technically means they are selling the goods at a price below the cost of production. The motives for a country doing this would be to raise domestic employment or to destroy the industry of another country in order to then monopolise that market.

The EU has just announced a tax (called a tariff or duty) on Chinese ceramics. Around half the cups, plates etc sold in the UK are made in China. The duty can be as much as 58.8%!

The EU is allowed to do this as an interim measure while the matter is investigated. The World Trade Organisation (WTO) can intervene but that takes a couple of years. Sadly the EU is quick to suspect dumping, usually due to complaints from EU firms and it is rarely true. The Chinese, in this case, are simply cheaper.

The attached article reveals a surprising number of cases where the EU has acted to restrict trade. In this case there seems to be more opposition that support for the move within the EU itself.

The Yahoo article is here

Anonymous comments

We do not publish anonymous comments. If you can't register your name include it at the end of the post.

Amazingly two anonymous comments were left while this post was at the top of the blog! Identify yourself or take the three!

Regulating demerit goods

Merit goods are technically 'lack of information goods', where consumers do not have all the information necessary to make a decision on consumption, or ignore information that is relevant.

Demerit goods, such as tobacco, are similarly lack of information goods. Where they are present in the market an inefficient allocation of resources will occur as consumers maximise perceived private benefits weighted against private costs.

They consume to the point where Marginal Private Benefit equals Marginal Private Cost. With demerit goods Marginal Private Cost understates the true costs of consumption and so the market fails.

One way to correct this is through price. A tax will raise private costs and reduce consumption. But what if the harm done by the good is so great that the optimal level of consumption is zero? Then regulation must be used to ban the good or service.

In Australia it has long been recognised that ultraviolet radiation causes skin cancer. It appears that sunbeds cause a much greater amount of harm than natural sunlight, but consumers do not consider the full information on harmful effects and continue to use sunbeds.  Therefore Australian governments are starting the process of banning sunbeds.

As with all policy choices there are costs of acting. There is no guarantee that it will work for a while as second hand sun beds are traded and who knows if there will be a trade in illegal sunbeds from states that do not act? Of course zero may not be the optimal level of consumption of sunbeds, for example some people suffer from a lack of vitamin D and need them to correct this. All regulation is a guess and can be a sledgehammer to crack a walnut.

The Age report on progress in Victoria to ban sunbeds here

Unemployment down - at least in some ways

The debate on whether the recovery is going to be sustained will go on for a long time. Yesterday there was some good news on unemployment, although not consistently, and a warning from the Bank of England that the recovery will be slower than they previously expected.

The unemployment figures on the ILO measure fell by 49,000, largely due to a fall in youth unemployment. This really is good news as it means that the jobs market at the bottom end may be recruiting again. If school and university leavers had to endure another year of poor recruitment then then problems of long term, but young unemployed would present a massive policy problem for a decade at least.

Unusually the claimant count measure of unemployment rose. This difference is unusual because it is harder to get Job Seekers Allowance than it is to say you are unemployed according to the ILO definition. However we should wait for more data before reading too much into this.

Meanwhile the Bank of England said that the growth of the economy will be much slower than they thought in their last report, just three months ago. They now think the economy will return to 2008 levels of output in 2015 and not 2013. That is really quite a big difference.

The bank expects recovery to be uneven and does not rule out future declines in output in some quarters. The Euro area recovery is key. If Europe does not recover, and today it was announced that the Euro area slipped back into recession, then Britain will suffer too.

The BBC review the unemployment figures and comment of future prospects here

Inflation makes a surprise upward move

Lots of people are expressing their surprise at the rise in inflation to 2.7% (from 2.2% last month).  I'm not sure we really should be that surprised or that worried.

Inflation is the CONTINUOUS RISE in the general price level, reducing the purchasing power of real incomes. This rise is due to three main factors:

1. A rise in university tuition fees.
2. A rise in food prices due to the poor weather
3. A rise in energy bills

The Bank of England is supposed to keep inflation at 2%, but are allowed a 1% margin before they have to apologise. Should they really be concerned with this rise?

Well 2.2% was a 34 month low for inflation and so things seemed to be coming back under control, so this will be a blow to the men from Threadneedle Street. But the first two factors that caused inflation must be seen as 'one-off' influences. Tuition fees will not rise as much next year (from £3k to £9k this year) and it is unlikely that the awful weather of this year will be repeated next year.

So both the first two influences will drop out of the index next year. As for energy bills this market is known to be volatile and so there is little that can really be read into the price rise in terms of future inflation.

Also inflation is really concerning when it affects everybody. Tuition fees affect only a small proportion of the population, but the current massive rise makes the index jump significantly despite the small weight it is given in the basket.

So the Bank of England will almost certainly carry on looking at underlying inflation when setting interest rates and not the headline figure. Overall demand remains weak and while there are encouraging signs of recovery it is unlikely that interest rates will rise until well into next year even so.

The Daily Telegraph has a good explanation of inflation trends here

Transfer pricing - legal but is it right?

Today a Parliamentary Select Committee questioned senior executives of Amazon.co.uk, Starbucks and Google as to why their companies pay virtually no corporation (profit)tax.

The firms concerned are able to minimise the profit tax they pay by declaring profits in countries with lower tax rates. It works like this:

Suppose Amazon sells a book in the UK for £20. The book cost £10 from the publisher giving a gross profit of £10. Amazon incurs other costs of £5 running their business in the UK meaning they have made £5 net profit.

So Amazon pay corporation tax on £5 profit? Well that could happen but not if they do it like this:

Amazon UK sells a book in the UK for £20. The book cost £15 from Amazon Luxembourg giving a gross profit of £5. Amazon UK incurs other costs of £5 running their business in the UK meaning they have made no net profit.

Amazon Luxembourg bought the book from the publisher and made £5 profit in Luxembourg which has a lower rate of corporation tax.

Amazon do pay tax where they declare the profit. But by selling goods between subsidiaries they can make the profit appear where they want it to; in the countries that tax least.

This is all totally legal. Amazon, Starbucks and Google are multinational companies and are able to do this, but a firm operating only in the UK can't. Some feel that this is unfair as in my example Amazon UK really made the money by its UK operations and they should pay tax on their real profits here.

As the companies made clear to the committee, they do pay tax. Millions of pounds in payroll taxes such as employers National Insurance Contributions, local Business Rates and VAT. However in these days of poor public finances many will have little sympathy with them.

A Guardian article explaining Amazons actual operation here

Who won the banana war?

The EU is well known for its protection of agriculture. Farmers in the EU have benefited from taxes on agricultural imports that have made more efficient farmers from outside the EU uncompetitive within the EU.

So perhaps it is surprising to learn that the EU has also protected farmers in the Caribbean. They did this by putting a tax on bananas grown in countries that were not former colonies of EU countries benefiting mainly former UK and French dependencies in the West Indies.

Other countries, such as Costa Rica and Venezuela complained to the World Trade Organisation that this was unfair. Their plantation grown bananas were, according to them, bigger and better quality than the small Caribbean bananas and were being unfairly disadvantaged in the EU market.

For more than twenty years this dispute raged on and now the EU has agreed to lower the tariffs on bananas. (Details are in the linked Daily Telegraph article.)

So who has 'won'. Well the non-EU colonies have greater access to the EU market, so they have a victory. The other big winner is the EU consumer who will now be able to buy bananas more cheaply as tariffs fall and competition in the market will increase.

However the tariff is not abolished, just reduced. So EU consumers will still be paying more than they could do for  bananas and so there is a continued welfare loss due to the tariff that remains.

The clear losers are Caribbean banana growers. They are high cost, small producers who operate in conditions that produced lower quality and smaller bananas than other countries. They will probably find their incomes will fall. Fortunately sugar cane is the best crop to use for making bio-fuel and the Caribbean is ideally suited to produce that leading to a rapid expansion of that industry.

A victory for partial free trade anyway.

The Daily Telegraph covers the story here

The Living Wage

Earlier this week there was a concerted effort to persuade employers to pay the 'Living Wage' as opposed to the legal minimum wage. It had support from both Boris Johnson (Conservative) and Ed Millipead (Labour) showing that this is more than a partisan measure.

In the late 1990's a minimum wage was introduced to protect the lowest paid. It set the floor price in the labour market.

The arguments for the minimum wage was that the relative bargaining power of some workers was too weak to obtain a fair wage. Therefore government would ensure they received one and so reduce in-work poverty.

The argument against the minimum wage was that it would cause wage costs to rise too far and firms would simply reduce employed numbers as workers became too expensive.

In the event there is little (if any) evidence that workers lost their jobs due to the minimum wage. It certainly meant that some workers got pay rises that allowed them a better standard of living.

However the minimum wage was introduced at a much lower level than some wanted. They argued that the minimum wage level set was still too low to allow families a reasonable standard of living. The result was the calculation of a 'Living wage'. This could be defined as:

A living wage is the minimum income necessary for a worker to meet basic needs (for an extended period of time or for a lifetime). These needs include shelter (housing) and other incidentals such as clothing and nutrition.

There are two articles linked below. One is the Daily Mirror's coverage of this weeks story. The other is the Living Wage Foundations explanation of what it means and its advantages.

Of course there is an argument against it. If wage costs rise then workers become more expensive and some may lose their jobs. So higher wages for some are paid for by no wages for others.

The economics of the Living Wage is partly about setting price floors in markets. It is also about what should be done.

The Daily Mirror article is here

The Living Wage Foundation page is here

The EU Budget - should it rise?

The Government suffered a defeat in the House of Commons because some members wished to see a cut in the spending of the EU. 

It would be tempting to say this was because they disagreed with cutting public spending and preferred instead to see higher spending to boost economic activity. Interestingly the Labour Party supported an amendment to cut the EU budget despite opposing cuts at home. The Conservatives who rebelled may have done so to give the UK a stonger bargaining position to oppose the rise in the EU budget.

The European Commission (the group of appointed officials who run the EU) wanted a 6.8% rise in the EU budget and were backed by the EU Parliament. The committee of governments - the EU Council - only agreed a 2.79% rise.

The BBC show how the budget is spent here

There are a number of issues, among them:

The EU spends 32% of its budget supporting farmers. 

The EU spends 36% of its budget supporting poorer areas of the EU

The EU budget has risen every year since 2000 

A few countries are large net contributors to the budget - this includes the UK

All EU countries have had to cut expenditure since the recession to balance budgets

The debate about UK membership of the EU may depend on how fair our contribution to the EU budget is seen to be. Iain Duncan-Smith (Works and Pensions Secretary) said he could see the UK 'thriving' outside of the EU over the weekend - it's not clear if he or Michael Gove had the brain they share at the time. But there is a lot at stake.

A strong EU with a large budget could help to stabilise Europe and provide economic management of the continent. However many oppose this view and prefer nation states to run their own affairs.

Both visions may be unrealistic. No nation can stand alone, but the political integration needed for the EU to be the economic manager of Europe is unacceptable to most at present.

For a view on why the EU budget should be raised read The Guardian article here

So what happens next?

There have been several posts on demand and supply and changes to the market. Below is a link to an article in The Guardian about the effects of the recent weather on honey production.

What side of the market is affected?
What will happen in the market for honey?
How will the market for jam and marmalade be affected by changes in the honey market?
Upon what will the extent of the changes in these markets depend?

Good one for IB micro internal assessment!

The Guardian article is here

Energy prices - a reason to reconsider?

Five of the six big energy companies has announced very high price rises, up to 11%. This is going to have a very large impact on household budgets.

There are two areas I'd like to think about, one fairly obvious and the other more reflective.

1. Fuel Poverty

Fuel Poverty is a relatively new term that refers to a situation where households spend more than 10% of their income on keeping warm. (The definition is vague on gross or disposable income, but only the latter makes sense.)

Clearly an 11% price rise will cause more households to fall into this category. If we taxed energy then people would explain that this was a 'regressive tax'. It would fall more heavily on the poorest households as it takes up a greater proportion of their income.

Therefore we should be worried about these energy price rises on the grounds of equity and income distribution. The Sunday Mirror article below looks at the effect on Fuel Poverty which may now affect one in four households.

2. The privatised energy market

In the 1980's the energy market was privatised. The aim was to introduce competition and force prices down and so making everyone better off.

The effectiveness of this policy should now be reassessed. Has it led to lower prices? Is there actually competition? Was it, in retrospect, a good idea?

Supply side policies take a long time to yield their results. It took two attempts to get the gas market right as well.

Is there really competition in this market? All the big companies are going to raise their prices by about the same amount. This is to be expected as their raw material costs are changing in exactly the same way.

If government still controlled this market then they could moderate the price rises, allow special tariffs to vulnerable groups etc. But the energy companies are private, profit making, firms and they work in the interests of their shareholders.

The Government has proposed forcing all energy companies to make sure customers are on the lowest possible tariff. This implies one tariff per company, probably all pretty identical. A major blow to competition and without any price controls. Politically popular but hardly market economics.

The Daily Mirror article is here

End of recesion or just heading for VW?

People often talk about the shape of a recession. The 'best' is V shaped - a short and sharp drop in GDP with a rapid recovery. U shaped is second best, still a strong recovery. The dreaded L shaped is the one to avoid and the reason why the policy response was so robust in 2008/9.

The UK has now officially reached the end of the W shaped - double dip - recession. Feared for so long and lengthened by the one-off impact of the Jubilee. Officially the UK grew by 1% in the quarter July to September, the fastest growth for five years.

Actually there were special considerations for this growth spurt, mainly the Olympics and the 'catch-up' from the previous quarter, so don't get too excited yet.

The headline figure is, as always, hiding a lot of detail. Look at the BBC economy page for that. It should be noted that the construction sector really is the problem area at present.

Construction continues to shrink and is making a really big impact on the figures. We should be worried about this. Not only does construction employ a lot of people and use lots of locally produced resources, but it is also a 'leading sector' in recoveries. We would expect construction to turn up before we saw a sustained rise in Real GDP.

The other point that might be worth noting is that the economy shrank by 6.4% in the first 'dip' and so far only half of that has been recovered even counting the last quarters growth.

Below is an article by The Guardian's Larry Elliott. You could not find a more miserable and biased economic commentator and he puts the latest recovery in the worst light he can. I'm surprised he wasn't the first to name the next stage as the triple dip or VW shaped recession. Glad I got in first!

Elliott's article is here

The sharp end of international trade and specialisation

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Ford have announced the closure of the Transit van factory in Southampton. The last 500 jobs will be lost from a plant that has produced over two million vans since 1972.

This was not a surprise. A Belgian Ford factory is also to close as the vehicle maker can produce far more cheaply elsewhere.

The closure reflects the continuing decline of Britain’s comparative advantage in basic manufacturing. Turkey will benefit as all production is transferred there.

The move illustrates one of the important effects of specialisation and exchange. We know that specialising allows more goods and services to be produced overall and through trade everyone can consume more and so be better off.

While overall welfare rises somebody bears a cost during the 'adjustment period'. This must occur as an industry grows in one trading partner through specialisation another, somewhere else, must decline. Where an industry declines workers lose their jobs and must seek new ones.

Those who lose their jobs are structurally unemployed. They are in need of retraining and because so many are losing their jobs at the same time it may be difficult to clear the local labour market for some time. The costs will fall particularly heavily on the over 40’s who will find it most difficult to find work.

A point to consider is why BMW (the Mini) and Honda are growing in the UK. Is it because of their product?

The local paper reports this move here

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When adjusting prices does not work

Markets do not always allocate resources efficiently. One such market failure is in the area of demerit goods such as tobacco.

Demerit goods are more accurately described as 'lack of information goods'. Consumers do not fully appreciate the costs and benefits of consumption and so the demand curve for the product is further to the right than it would be to achieve an efficient allocation of resources.

The usual response to this type of market failure is to tax the good. This raises the price and so reduces consumption. However sometimes this does not work to the extent desired. For example with tobacco consumers are addicted and the PED is very inelastic. Educating the population on the dangers is therefore another option and that can include graphic pictures of the harm that tobacco does.

One area of great concern is the diet of the nation. We eat too much overall and or diets include too much fat and salt. This is very concerning because of the health impacts which will shorten life expectancy and impose heavy costs on the NHS.

Taxing fat and salt is difficult, mainly because of the very many products involved. In addition any tax on food would be highly regressive as food takes up a higher proportion of the income of poor households. So far education has not been that effective. Therefore resorting to warning people at the point of sale and trying to get them to more fully consider the information about the product may help.

People know that fat is bad for them in too great a quantity (as are too may calories, salt etc). What they don't know is how much of each is in modern processed food. For some time there has been a call for a uniform method of labelling food to show the content. Each retailer and manufacturer disagreed on the format (some prefer traffic lights others % of daily maximums etc).

Now there is agreement on a uniform system that combines all of the approaches. The move has to be accompanied with education which allows people to understand the dangers of exceeding the recommended daily amounts. But if successful then the demand for high fat and salt goods will shift to the left.

Unfortunately this is only going to be a voluntary scheme so it falls short of 'Regulation'. It is, however, a good example of where adjusting prices is not enough and an example of an alternative policy to reduce market failure. But will it work?

The BBC covers the story here

Fixed exchange rates - pros and cons

Before Hong Kong returned to China it was a small but vibrant trading economy. It dealt primarily with the West and a huge proportion of its activity was traded. 'Made in Hong Kong' was as common a sight as 'Made in China' is today.

Fixed exchange rates were the norm from 1945 to 1971. Hong Kong was too small an economy to maintain its own stable currency and so after the collapse of the world fixed exchange rate system they pegged the HK$ it to the US$.

The Hong Kong economy needed a stable exchange rate so that its firms could trade with certainty, knowing what prices to set and what money would be received. But the maintenance of a fixed exchange rate in turbulent times is difficult and imposes costs as well as benefits on the economy concerned.

Hong Kong's problem is that it chose the US$ to fix to. A perfectly sensible choice at the time, but now the US is pumping money into their economy (Quantitative Easing) this is destabilising the US$.

The BBC article below talks about the recent experience and discusses some of the issues.

The BBC article is here

The complex issue of trade

Japan has seen a fall of over 10% in exports in September compared to a year ago. This is pretty exceptional under any circumstances and threatens the Japanese economy.

The causes are varied and add up to an overall drop. They are:
A boycott of Japanese goods in China
The weakening of European markets
The strong Yen

The unfortunate combination of factors means that japan will see Aggregate Demand falling as net exports (X - M) is a significant influence on the Japanese economy. Japan has run a trade surplus for many years and this has helped raise the rate of growth in Japan. Now a return to recession is a real possibility.

Interdependence of modern economies is a fact of life.

The BBC report the story here

Nobel prize - solutions to market failure

This year the Nobel Prize in Economics has been awarded to two people who have worked on solutions to allocations of resources when prices don't work.

Market failure is common. Scarce resources are then not allocated efficiently and this reduces overall welfare.

Sometimes prices can be adjusted to compensate, perhaps by taxing or subsidising the good or service. When that can't be done other solutions may not be obvious except for some sort of rationing system.

Lloyd Shapely, a mathematician, helped develop early game theory and also produced a paper on matching demand and supply when there are ethical or legal complications. Alvin Roth developed a method to allocate resources from this work, such as organs for transplant.

These two men are unusual winners of the prize, but perhaps appropriately they are applying economics to the real world and it is helping save lives. Given the bad press Economics got thanks to the banks this is good exposure for the discipline.

The prize in Economics is still worth  $1.2 million, and is shared by the two men. Shapely is 89 and could probably have done with the prize a little earlier!

The Guardian reports the prize here

The effectiveness of taxing externalities

Australia introduced a carbon tax of $23 a tonne on July 1st. The aim was to help Australia reduce carbon emissions and meet its 5% reduction target by 2020 (UK target is 50% by 2020 and  80% by 2050 - just saying).

The point of a tax is to raise the price and reduce consumption. By getting people to change the pattern of their expenditure toward the relatively cheaper, lower carbon, goods and services Australian carbon emissions will fall.

By far the biggest contributor to Australian carbon emissions is electricity generation. Australia uses a lot of very dirty coal (especially in Victoria) which has been likened to environmental terrorism. The first data available shows us that there has been a significant change in the use of electricity.

One reason is that there has been quite a take up in solar showers. This reduces an important fraction of daily electricity use, as long as the weather is reasonable of course. So less electricity needs to be generated.

The other effect in the market is the move away from coal by the generators. This is exactly why the carbon tax was introduced.

The Age gives details of the change in power generation.

Employment at a record high

If there is something to celebrate it is that there are more people in work in the UK than ever before. In addition unemployment has fallen from 8.1% to 7.9%, a significantly larger drop than was expected.

This is good news for the economy because more people in work implies higher Real GDP and so an improvement in the standard of living. The Government will be pleased because tax revenues should rise leading to a smaller deficit.

The question of why employment is so high in a recession is one we must visit again. It is almost certainly due in part to a demographic anomaly. The size of the workforce must have risen. Fewer people leaving the workforce (for example not retiring at the previous normal age) and more people gaining jobs would explain this. While a substantial number of people remain unemployed there are more jobs.In other periods unemployment would have fallen substantially already.

There are particular concerns. The young are finding it increasingly difficult to get work and the difference between geographical areas is also widening. Scotland saw a rise in unemployment as did Northern Ireland. Cambridge has the lowest jobless rate overall in the country. Horsham has 1.6% unemployment, Birmingham Ladywood 12.2%. These are big differences showing the costs of unemployment are not evenly distributed.

Good news has to be welcomed. It will help boost confidence in both households and firms, but we really have to start asking about how youth and long term unemployment will be solved over the next few years.

The Telegraph report the figures here with numerous links to related stories.

Inflation falls, but not for long?

The CPI and RPI fell by 0.3% last month. That is good news for the MPC and keeping to the inflation target and is the lowest rate on CPI since November 2009.

The cause of the fall in inflation illustrates that the figure is a moving average. A year ago gas and electricity prices rose significantly, but this year they did not. Of course there were other price rises but not as much as a year ago.

The importance of the September inflation figure is that it many benefits are increased in line with it. So its important for next years Government spending and the fall in inflation is good news for George Osborne.

The BBC covers the story and shows both the influences on the current inflation rate and reviews the benefits that are affected. There is also a section on why lower inflation is good for some people and firms.

The BBC story is here

The debate of EU membership is really coming back

In 1975 the UK held its first ever referendum on whether it should stay in the EU (then the EEC) which it had only joined in 1973. 67.5% of people voted to stay and the Home Secretary of the day, Roy Jenkins, said that it had 'put the uncertainty behind us'.

While there have been people who have called for withdraw, such as UKIP, no mainstream politician has given it serious consideration. Today it appears that the inept and intellectually challenged Education Secretary Michael Gove believes the UK should leave (with support from, among others,  the giant brain of Iain Duncan-Smith).

I have a balanced and tolerant view of Mr Gove, but there is an economic argument for leaving the EU and that debate must now be had. The result will determine nothing less than the economic future of the UK.

The argument for joining the EEC in 1973 was that of trade creation. Barriers to trade would be eliminated between the UK and the other members and the amount of trade and specialisation would increase making everyone better off. This is classic stuff and exactly the sort of thing economists advise countries to do if they want to grow up to be big and strong.

Along with the lowering of trade barriers came political co-operation. This has included a European Parliament and a European Court. EU law supersedes UK law. This is what people like Michael Gove and UKIP object to, it restricts the ability of the UK government to act.

So is there a case for leaving the EU? Well actually yes. The result will depend on the terms of leaving. The ideal solution for the UK would be to get the same deal as Greenland when it left. That put Greenland in the same position as Norway - a part of the single EU market, but not a member.

Norway gets all the benefits of specialisation and trade, but pays nothing towards the running of the EU, has no say in the rules and gets none of the political benefits of a single European voice.

The Greenland option is going to be very hard to stop politically. The question to be decided is 'Do you want Britain to be a simple economic partner of Europe, or a political partner in Europe?'

Under starters orders.  This is going to run longer than the debt crisis!

The Mail (who else?) report Gove's views here

Incomplete analysis can lead to errors

In a time when the Department for Transport have admitted their analysis of Rail Franchise bids is flawed we are reminded that a faulty method can lead to poor decisions.

One of the most difficult decisions to be made is what transport infrastructure to invest in. There are very many factors to consider, such as forecasts of future demand and external costs and benefits. All of these are difficult to value.

The solution is a full Cost-Benefit Analysis that considers all the private and external costs and values them properly. Only then can a judgement be made and even so substantial margins of error must be considered.

So should we give much credibility to a study by MIT that a third runway at Heathrow is a bad idea?

The MIT study says that, compared to a new Thames Estuary airport (Boris Island), a third runway at Heathrow would cause more early deaths due to pollution. So that's it then, decision made.

However when questioned the authors admitted they had not included any of the following issues in their study:

* The cost of construction at either site
* The impact on local transport at either site
* The impact of extra road traffic too and from any new airport
* The external costs and benefits of either airport

Of course their defence was that they were only looking at health impacts of the two options and that is actually quite reasonable. It represents a contribution to the full cost-benefit analysis and a valuable one at that.

The Guardian reports the study here

From market prices to inflation

Markets set the prices for individual goods. Inflation is the continuous rise in the general price level. Of course we are taught that we must not confuse the two. When the price of a particular good rises this is due to either a rise in demand or a supply constraint, not inflation. But surely there is a connection?

The issue of food prices is a good example of where we can link market prices and inflation. Food prices generally are about to rise due to several factors:

1. The wet summer in the UK has led to a lower harvest and it is proving difficult to plant next years crop.
2. There have been droughts in the USA, Russia and southern Europe during the growing season.

This means that cereal prices overall are rising. It's due to a supply shock, relative scarcity has increased.

But this is going to feed through into inflation as it will cause a wider impact on prices.

Clearly the goods which use soya, wheat etc will have to pass on the extra costs. The price of bread for example. But cereal crops are also used to make biofuel and to feed animals. So we can, at the very least, expect the price of meat to rise too.

While these are changes in relative prices of individual goods this will feed through into inflation. Food is a significant item in average household budgets and so has a significant weight in the CPI. The rise in food prices, and goods which use inputs from the agricultural sector, will feed into CPI and cause a rise in the index.

This is, of course, quite reasonable. Average households will find the cost of living is rising

The Guardian covers the story here

The case for Plan A

Yesterday the Conservatives put the argument for continuing their plan to reduce the government budget deficit in the strongest terms for over a year.

Fundamentally there is on two types of news on the economy, bad and absolutely awful. Given that the government might as well take it on the chin and express their beliefs.

George Osbourne, The Chancellor, said he would find more money through benefit cuts. This plays surprisingly well outside of the Conservative Party with the general public. It remains to be seen if it can be done and whether people will accept the reality.

The Prime Minister asserted the cuts will continue, despite the growth forecast for the UK by the IMF being cut. (Well we all knew that!). He pointed out that one million new private sector jobs have been created and this is compensating for public sector cuts.

The government argues that the deficit needs to be reduced to avoid problems in the future. The Opposition says a boost is needed to get the economy growing again.

The IMF says that a short term stimulus might be appropriate, but that the markets will take fright on any large scale and longer term rise in spending that will raise the deficit. So some support for both sides there.

One issue that is clear is that the government has not reduced the deficit as far as they wanted to. This shows just how difficult it is to cut spending. Good luck with the plan George.

The Independent cover the current issues here

"Most people don't understand inflation"

The Office for National Statistics (ONS) are considering changing the way the Retail Price Index (RPI) is calculated.

The RPI and CPI don't provided the same figures for inflation as they have different baskets of good and are calculated in a different way.

This may not seem that important but government benefits, pensions and some investments are linked to one index or the other. When one is constantly higher than the other this means the gap between the various benefits and pensions widen.

Also some may say that the government wants the RPI to be lower so they can save money on those payments based on RPI.

So if the RPI is adjusted it may do some groups harm. Pensioners and pension funds among them.

The ONS are consulting on the need for change, but not many people are likely to respond. According to research very few people understand inflation let alone the complexities of how it is calculated. It may be that people with a lot to lose stay silent.

Rest assured I will be adding my voice to the consultation, but I'd like the use of geometric means in RPI which will cause the reported figure to fall a little.

The article on this raises important points and helps you to better understand how inflation is measured.

The BBC report the issue here

Consumer confidence returning?

Consumption is by far the largest component of Aggregate Demand. Around two-thirds of the total. Therefore rising consumer confidence will be good news for the economy as it struggles out of the double dip of this recession.

Consumers have been shell shocked since 2009. Real income is down due to low wage rises and inflation which is higher than the wage rises (in the public sector and some industries wages have been frozen or even fallen in money terms). Also the uncertainty associated with the recession, the Eurozone crisis and government cuts has led to a higher savings rate.

Currently the economy needs short-run growth desperately. Just using up more of the idle resources of the economy will help a lot. Output and employment will rise and there is then a good chance that a sustainable rate of growth will emerge. Households spending more will allow this to happen.

So the news from Visa that shoppers have spent more in September (around 3%) is great news. One swallow does not make a summer, but it really is a good sign.

The BBC report the figures and speculate on whether the economy has really turned the corner here.

Fuel sales decline 15%

The AA is reporting fuel sales are down 15% in the UK, that's 1.7bn billion litres less compared with three years ago.

The AA blame rising fuel prices. The price of petrol was around £1.05 a litre three years ago and is now £1.37.

Can we infer the Price Elasticity of Demand from this data? Well actually no, ceteris paribus does not apply.

You could calculate the PED but it won't be very accurate. Incomes have changed markedly in the recession, moves to reduce carbon emissions have been ongoing and of course households have had time to adjust to higher prices since the 2008 peak.

Interestingly the same phenomenon has been reported all over the world. All over Europe, in India and North America fuel consumption is down.

The BBC report the drop here

Just because it has not changed does not mean its not significant

Today both the European Central Bank (ECB) and Bank of England decided to leave interest rates unchanged. For the UK it means interest rates have been at an all time low of 0.5% since March 2009.

This lack of change is deceptive. The low interest rates reflect concerns over the very low levels of demand in the economy and the expansionary monetary policy which is trying to stimulate Aggregate Demand. So what is happening is an ongoing active monetary policy.

But rates are pretty much as low as they can go (although there are rumours of a fall to 0.25% next month) and additional help through more Quantitative Easing (printing money) may still be required to help the economy recover.

The decisions to be made about monetary policy are not straightforward. The Bank of England must predict what inflation will be in two years time. As the linked article below shows it is not even clear what the July to September GDP figures will be, so predicting influences on inflation up to two years ahead is far from straightforward.

Monetary policy is a key policy weapon. Balancing the needs of growth (which needs low interest rates) and inflation, which is still above target, is a continuing headache.

The BBC explain some of the difficulties here

Another rail fiasco

The decision to award the West Coast Main Line franchise to First Group in August has already caused a commotion. Virgin had launched a legal challenge claiming 'somebody does not like us at the DfT' (Department for Transport).

Well its not only people in the DfT who find Richard Branson a pain in the arse, but that was not the reason Virgin lost. Officials miscalculated the time value of money and passenger numbers in the 13 year franchise bid. It does make a difference when money flows are received as inflation and interest rates are key elements.

The whole process is now up in the air and will have to be examined again.

For us the process is the issue. How do we assess long term transport projects? Stephen Glaister a former LSE and Imperial professor is a specialist Transport Economist. He looks at the issues in this excellent Guardian article here. (Essential for A2!)

Glaister's article is here

Can government spending really help the recovery

It is the turn of the Labour Party to have their conference this week and opposition parties generally have a free hit at the government.

The Shadow Chancellor, Ed Balls, used his speech to suggest that the government should spend more money (£4 billion) on building new houses and giving a tax break to first time house buyers to try and boost economic activity.

This is standard Keynesian stuff. The government spends more money to boost Aggregate Demand. The multiplier effect then raises national income and employment by even more than that. Balls claims it will 'kick start' the economy.

It's good politics, but not really believable as economic policy. The government is already spending far more than it raises (around £170 billion) to boost Aggregate Demand. Although using government spending on construction keeps a lot of the spending local at first the multiplier is very low (maybe 1.25?) and so it might raise GDP by £5billion if its new money.

The biggest hole in the Balls argument is how it would be funded. According to him Labour would use the money raised from the auction of 4G licences by the mobile phone companies. That money has already been earmarked for use so actually it would be financed by more borrowing.

The argument about how much to stimulate the economy will go on for ever. See what you think of the Balls plan.

The Independent report the policy proposal here

France pays the price for not reforming

There is one consolation for the UK in the recession. It is worse in France.

The French government have just issued their latest budget proposals. This is against a background of three quarters of recession and unemployment of 10.2%. Also the French government budget deficit is significantly higher than it needs to be to meet Euro area rules.

So the French are proposing a 75% tax rate for the really high earners. There is also a new 45% tax rate for those earning more than £120k.

This has an obvious effect on income distribution and that suits the new socialist administration (the LibDem's have similar ideas in the UK). But many say that the French have again missed the point.

The French have resisted making the supply-side reforms which have helped other economies, like the UK, adjust working conditions in the face of the crisis. French employment law continues to discourage firms from employing staff on a permanent basis and raises the cost of employment further beyond the wage rate making employing staff expensive.

The rise in profit taxes makes the prospects for employment worse not better.

The French are caught in a difficult situation. They want to help ease the recession and help the poor and unemployed, but they are finding it hard to make the tough decisions.

The Independent covers the new French budget here

The problem of measuring

Deps have already encountered the issue of measuring GDP. There are plenty of reasons to suppose it is not an exact science.

Today the GDP figures for the April - June period (the second Quarter) were revised for a second time. It was good news as the fall in GDP was less than previously reported meaning the recession is not as bad as was thought.

The article explains some reasons why the figures reported originally were wrong

The BBC explain the change here

Supply shock pushes market price up

In an unfortunate turn of events Olive Oil prices are set to rise by 25% or more.

The cause is a fall in the olive crop in Spain. The problem is two supply shocks which have reduced the quantity and quality of the crop.

First there was a frost when the olive trees were flowering, which meant less crop. Then there was a drought over the summer (the rain fell on the UK) and this means lower quality fruit with less 'juice' to turn into olive oil.

The effect is that the supply of olive oil is lower, shifting the supply curve to the left. The market price will rise and everyone will have to pay more for their olive oil. The full extent of the change will depend on the elasticity of demand.

If there is an upside it is that Greece will get more for their olive oil and they produced a normal crop.

The Guardian covers the story here

A new initiative on an admission of failure

The political conference season always brings some populist policy announcements. So Vince Cable has provided the embattled LibDem's with one to try and cheer them up (they currently lag UKIP in the polls).

The idea is unusual in the sense that it is the fourth of its type and two of previous ones were also announced this year. Essentially it is another attempt to help businesses borrow funds and so grow.

Leaving aside the previous, presumably inadequate, measures this one involves a new government owned bank. It will have £1bn of public money and some private sector money. It hopes to help small and medium sized businesses to borrow long term (around 10 years).

The problem, as before, is that the high street banks (such as Lloyd's and HSBC) are short of cash and risk averse. They are reluctant to lend to small and medium size businesses long term and so these firms cannot undertake new projects that take years to repay their investment.

The aim is to provide greater certainty.

Certainty for the high street banks - they can pass loans on to this new 'CableBank' and remove the risk from their balance sheets. In this case they will be much happier to agree long term loans as they remove the risk of default.

Certainty for small and medium sized businesses as they can borrow at an agreed rate for a period that makes investing safer. No firm wants to have the risk of losing their funding or seeing a hike in interest rates part way through an expansion.

So overall this will help? Like all supply-side policies it will take time to work. It will be 18 months before this bank can start operating and then more time before enough loans can be made to really make a difference. If the economy isn't growing by then nothing may help!

The BBC report the scheme here and there is a link to Robert Peston's blog where he doubts its effectiveness

Road pricing 'inevitable'

Ever since I started teaching Transport Economics in 1995 road pricing has seen to be 'about 10 years away'. It is a sensible move that will allow better management of the road space we have, allow the economy to function more efficiently and help reduce greenhouse gas emissions. So its still '10 years away'.

Now Transport Minister Normal Baker says it is inevitable. Not for environmental reasons, but because the move away from carbon based fuels will reduce government revenue from excise duties on fuel! The government can't afford that.

As a consequence the road fund licence (the tax disc) will also be scrapped and people will find themselves charged according to the distance travelled, via GPS technology. Hopefully there will be a scheme that charges 'by the time of day and level of congestion' rather than simple tolls.  

The details of Minister Baker's ideas and some commentary is in the Sunday Express. Who would have thought we would ever look there?

The Express article is here

Public debt rising

The government wanted to reduce the level of annual government borrowing (the public sector borrowing requirement - PSBR) and reduce the proportion of government debt to GDP.

Last month the government borrowed £14.4 billion, well above the projections of the recent budget let alone the 2010 budget plan.

It now seems certain that the government will not meet its debt reduction or deficit reduction targets. But is this really important.

The arguments for deficit reduction are based on reducing the tax burden on the economy and keeping borrowing costs low (for example in Greece all borrowers pay very high interest rates because of the Greek governments excessive debts). That will aid long term growth.

The reason why the Governor of the Bank of England says it is okay to miss the debt targets is because of low growth world wide. If the world does not grow then the UK is unlikely to grow very quickly either. Therefore tax revenues are lower than expected and government spending is higher (on benefits for example).

Some people say that the government should spend even more to boost short-run growth. The same people ridicule the overshooting of the debt target. Am I the only one who finds that odd?

The Guardian explains the debt situation here