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

Lack of information goods - Pensions

A market can only work efficiently if both sides of the market (buyers and sellers) have all the information they need. Therefore a common market failure is where one side of the market has insufficient information or places too little value on that information.

Pensions are an excellent example. Many people do not save enough for retirement because they do not fully understand the benefits. This makes them look on pensions as too expensive and they decide not to 'consume' that service.

The problem with pensions is that the benefits are a long way into the future when you are in your 20's. When you realise that you need a pension it is too late to build up one you are satisfied with.

So the solution is to make pensions more attractive. Until now the government has given a tax incentive to those contributing to pension schemes. All contributions are 'tax free' saving 20% of the cost and up to 40% for higher rate tax payers.

Despite this generous incentive the number of people in private pension schemes has dropped below 3 million for the first time. (There are around 5 million in public sector schemes.) With 29 million people in work this means around 21 million workers in the UK have no private pension.

Of course the state will pay everyone an old age pension and there is a state earnings related pension, but this may not be enough to let people live comfortably. If that happens the government will end up paying out more benefits in other forms and with an ageing population they can't afford that.

So a new scheme is being introduced. All employers will have to offer a workplace pension and all workers will have to opt out of their workplace schemes. It is hoped that the effort of having to do so will mean many people will get a private pension by default.

This is an example of regulation and looks like being more successful than the market solution of tax rebates (although that remains too).

The Independent reports the scheme here

Inflation moderates, but head and tail winds continue

Inflation, as measured by the CPI, fell to 2.5% last month, that's down from 2.6%. This is still above the target rate of 2%, but it means inflation is going in the right direction.

There are always competing forces on the inflation rate. Some prices are rising and pushing the index up, others are falling and putting downward pressure on inflation. (Known as headwinds and tailwinds since a speech by the Governor of the Bank of England.)

Presently it is believed that inflation will fall towards target, despite factors such as higher food prices, because of weak demand in the economy generally. It is always difficult to be exact.

The BBC cover the figures here.

Look at the economy tracker for the data and maybe look at the personal inflation calculator

The Bristol Pound - isn't it just a gimmick?

Bristol is the first major city (their words) to launch their own currency. Some towns have already done this, such as Stroud, just half an hour north.

'The Bristol pound' can be exchanged in participating retailers and accounts can be set up with the Bristol Credit Union. So it works just like normal money.

The aim is to try to encourage 'local trade' and to prevent spending from 'leaking' out of the area when spent. According to their website:

What is the Bristol Pound

The Bristol Pound is a complementary local currency designed to support Bristol’s independent businesses, strengthen the local economy, keep our high streets diverse and distinct, and help build stronger communities.
The Bristol Pound is the UK’s first city wide local currency, the first to have electronic accounts managed by a regulated financial institution, and the first that can be used to pay some local taxes.

Well that's fair enough, but is it in any sense a real currency and can it achieve their goals?
The exchange rate if £1 to One Bristol pound (surely it should be called a 'Brizzol') means that it is in a currency union with the UK and so is subject to all the vagaries of the UK economy and UK monetary policy.

Maybe there will be a stronger local multiplier effect. But to achieve anything it must be widely accepted in settlement of debt and as a medium of exchange. For that to happen a large proportion of businesses will have to accept it, including national chains. These large businesses will then simply exchange their 'Brizzols' for real pounds and the money leaks away.

The advance of the Brizzol over other local currencies is that they can be exchanged electronically. But it seems little more than an interesting gimmick that falls into the category of regional marketing rather than economics.

See what you think at their website here

A supply-side reverse?

Today some details emerged about the scrapping of GCSE's and their replacement by a new exam.

The aim is to make the exam 'tougher' by which I presume they mean that the material examined will be more advanced. Some believe that it just means the exam will offer fewer pass grades and the format, a single three hour paper, is less user friendly.  (Languages and science subjects will have some interesting problems with that format.)

The question for economists is, will this raise educational standards and so make the workforce more capable? If the answer is yes then the capacity of the economy will increase and the prospect of a more competitive and faster growing economy is in prospect (in about twenty years time it should really kick in!)

But for most educators it is a huge step backwards which will exclude the less able and those not so good at three hour exams which would include many of the most able.

Further there is a huge missed opportunity. Everyone will  be compelled to stay in education until 18 when the new exams begin in 2015. So why is there a 16 year olds exam at all? Why not concentrate on education rather than hoop-jumping and have exams at 17 and 18.

Some will say that the Education Secretary has no grasp of modern education and is a throwback to an earlier age. Neanderthal.

The BBC cover the story here 

Does easier hiring and firing mean a better economy?

A major improvement in the UK economy since 1980 has been the improved supply side performance of the economy.

The main aim of the supply side reforms has been to make the market work better. That includes reducing regulations that makes it more costly for businesses to operate. By reducing costs not only do profits and so investments rise, but firms are more confident in their chances of success and so expand more quickly.

One area of concern has always been the ease with which firms can get rid of staff. If it is easy to fire staff then, so runs the argument, firms will be more willing to hire staff. If it is difficult to shed staff then firms will hold back on recruitment just in case they don't need the staff for long.

A classic example is the French who provide employment protection after just three months. As  a result many French workers find themselves on a series of short contracts making it impossible to borrow money long term.

Now the government is proposing making the cost of losing staff less by altering the rules on compensation for unfair dismissal. The Business Secretary, the very sensible and wise economist Vince Cable, (no political bias here) has rejected the idea of 'no fault dismissal' which would allow hiring and firing at will. But he has supported the idea of reduced compensation.

Will this accelerate the rate at which firms hire labour and help reduce unemployment? That is the acid test.

The BBC reports the proposals here

Difficult decisions and unintended consequences

One of the 'minor' objectives of government macroeconomic policy is the distribution of income. It's the objective that only really gets significant attention when everything else isn't a worry.  That is probably an indictment of the process.

A report by Saga today points out that some of the biggest losers from recent policy moves has been pensioners.

They have suffered from a cut in the real value of their tax free allowance, low yields on savings and lower pensions to name but three problems.

Saga are a 'vested interest group' of course and so you have to be careful. For example they claim Quantitative Easing (QE) has caused inflation and reduced the purchasing power of pensioner incomes. While inflation does reduce the purchasing power of all incomes I know of know evidence that QE has done anything except prevent a deeper recession.

The distribution of income is important however. The Guardian report shows how averages can deceive us into thinking things are not that bad and reminds us that the costs of economic problems is often concentrated on a few groups.

The Guardian article is here

The unemployment puzzle

The economy is supposed to be in recession. The relationship we expect between GDP and Unemployment is that as GDP falls unemployment rises. But it has fallen.

To make it even more strange the number in work rose by a staggering 236,000 in three months. There are now 29,600,000 people employed in the UK.

Of course there are other factors to consider. Only 100,000 of the new employees were working full time for example.

Also the long term unemployed, those unemployed for more than a year, rose again.  This is worrying because some people seem to becoming detached from the workforce.

The figures need to be treated carefully. What was the Olympics influence? Will it be reversed in the next figures> But the most important question - is there really a recession if unemployment is falling and employment is rising?

The BBC cover the figures here

Click through to the BBC economy page for more data

Business confidence continues to hold back economic recovery

Today there is depressing news on business confidence. It is, according to one survey, at a twenty year low.

Business confidence is by far the most important determinant of investment. It outweighs the influence of interest rates significantly.

If the outlook of firms improves and they start to expect better business prospects they will invest. If the invest then Aggregate Demand will rise and probably by a multiplied amount. And so the recovery will be formed.

But the survey says that business confidence is falling not improving. And so the dreaded double dip continues.

The Guardian reports the survey here

Competition and barriers to entry

Apple have established an awesome reputation for quality and innovation. While they have only about 18% of the personal computer market they dominate the MP3 and phone market and the iPad sets the standard in tablets.

It is very difficult to challenge Apple in these markets and as a result of this barrier to entry (brand loyalty) Apple can charge very high prices.

Amazon have a similar position in book and ebook retailing online.

The problem is that monopoly power (which any firm with a large market share gains) works against the consumer. Competition should bring down prices and raise quality and customer satisfaction, but entering the market is often difficult and does not always work as expected.

Amazon is now taking on Apple's iPad with the Kindle Fire. A combined Kindle and tablet, and it is less than half the price of an iPad.

Is is good for consumers? Only a company like Amazon could really mount a serious challenge in such a market. They are providing an alternative at a lower price. But Amazon are also trying to lock you in to their product - Kindle ebooks. Remember Apple have iBooks, and the two systems don't talk to each other.

So we could look at this as welcome competition, or we could see is as two Oligopolists fighting for bigger market shares at the expense of any other competitors. Both Amazon and Apple would settle for being the Coke and Pepsi of consumer electronics.

My Kindle Fire is ordered and expected delivery is October 25th!

The Telegraph article is here

A plan to save the Euro - Number 4113

 

The President of the European Central Bank has announced a new plan to save the Eurozone. It's well overdue and just the latest in a long running problem.

The Euro as a currency is in trouble because some of the members economies are very weak. This includes countries like Greece that have crippling debts and Spain who have 25% unemployment as a result of the economic downturn.

Confidence in the Euro is low which has led to the exchange value of the currency falling. There are also worries that some Euro area countries cannot pay their debts and so when they try to borrow more money they pay very high interest rates as the risk to lenders is high. This is making an economic recovery very difficult.

The new plan allows the European Central Bank (the ECB) to buy the bonds issued by countries that are used to raise the money they need. This will help fund their spending if they are new bonds. But more likely the ECB will buy old bonds. Whatever method is used in doing so the price of the bonds will rise.

The price of a bond and the rate of interest paid move in opposite directions (they are inversely related) and so the Euro area countries should find themselves paying lower interest rates on their debt. This will reduce pressure on their budgets, allow them to spend more and tax less and hopefully boost economic growth. It will also let households and firms borrow at lower rates, boosting Consumption and Investment.

This move has been bitterly opposed by the Germans, who think that basically it means German money buying other countries debt. But the move is long overdue, although possibly far too late.

The Independent report the plan here

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The difficult problem of choice

The fundamental issue in Economics is scarcity. And it comes up everywhere, everyday.

The issue is especially unfortunate when applied to the NHS. Despite what the Americans think the NHS is the finest idea in medical provision in the world - treatment is free at the point of use. But that means very high demand - wants are infinite and free is the price that gets that level of demand. But the budget of the NHS is limited by what the government can afford.

Therefore not all treatments can be afforded by the NHS and they have to make a choice about which to provide.

The article below tells of the provision of a cancer treatment for children. At £210,000 its just too much to be given to everyone. Of course this is a value judgement, but an excellent of scarcity, choice and opportunity cost.

The Telegraph article is here

Is it really going to work?

Despite a lot of talk about boosting growth the government has announced only a modest scheme to help and much of it is only an extension of previous measures.

The scheme will underwrite construction projects, allowing lower borrowing rates because the government will guarantee repayment. A third runway at Heathrow is to get another hearing.

The main measure is a promised relaxation in planning laws. At present it is very difficult to get approval in some areas for new building, partly because of objections from those protecting their own vested interest. This simply holds up projects and so delays growth.

These are supply-side measures that will not necessarily act very quickly, although they will help in time. Some people call for tax cuts.  For households, cuts in VAT or Income tax, to boost Consumption and so AD. For firms tax write-offs to cut the costs of new investment and so boost AD.

The argument about whether further boosts to AD or AS are most appropriate will continue. However both sides cannot escape the fact that confidence is so low and uncertainty over so many variables is so high, that governments are almost powerless to influence growth rates by more than a fraction of one percent.

The BBC report the 'new' initiatives here

Growth now the key issue

 For those who are just starting Economics this week it will be important to get a sense of perspective on recent economic events.

It would have been hard not to have noticed that times are tough due to a global recession that started in 2008. Despite a period of recovery the world economy is shrinking again with a particular crisis in the EU.

The causes of the crisis and why it has gone on so long are a matter of debate. It is far too complex a subject for this post. However consequences of the present situation are very serious and worth pointing out.

Households are worse off because:
1. Incomes are rising slowly or not at all.
Inflation - the rate at which prices are rising - is higher than the rate at which incomes are rising meaning everyone is worse off in real terms.
2. Unemployment is high.
Some people are therefore earning far less than before the recession, concentrating the costs of the recession on those who are unlucky enough to have lost their jobs and can't get another one.

Firms are worse off because:
1. Households and firms have less money to spend.
So firms have lower sales and they have little confidence that new investments will make a profit. So the new jobs we need are not being created.

The economy is worse off because:
1. There is less investment by firms and so low growth.
Firms must have confidence to invest and low demand and a shrinking economy mean this is missing.
2. The government have lower tax revenues and higher expenditure.
Governments get money from taxes on income and spending, both are lower in recession. But expenditure rises on things like unemployment benefits. So there is less money to spend on hospitals, schools and other services that makes life better for everyone.

This is a very brief overview of the problems. The article below highlights the problems of the current growth position and the pressure of government to act to improve the situation.

The Guardian article is here