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