Olen niin iloinen

For those of you who do not speak Finnish, a clue to the meaning of the words above might be found in the following questions.

What happens on 20th March 2018?

Answer – UN has declared it to be World Happiness Day

What do Norway and Burundi have in common?

Answer – they both dropped in the UN World Happiness Report. Burundi dropped to bottom place while Norway dropped out of the top slot to be replaced by Finland – hence the Finnish comment “I am so happy”.

The Report ranks 156 countries by their happiness levels, and, this year, it also looked at 117 countries by the happiness of their immigrants, with Finland coming top in both rankings.

The top and bottom 10 are recorded below. A sample in each country are asked to score their happiness on a scale of 10 (most happy) to 1 (least happy) with Finland scoring 7.6 and Burundi 2.9. In order to identify the reasoning behind the score, the report also looks at economic strength (measured in GDP per capita), social support, life expectancy, freedom of choice, generosity, and perceived corruption. The biggest loser was Venezuela, dropping 2.2 on the scale, which is little surprise considering the state of their economy. This year the study also looked at the happiness of migrants,

It is worth a warning note about the numbers – the difference between the top 6 countries is only 0.191 on the 1 – 10 scale.

The world’s happiest – and least happy – countries 2018 World Happiness Report
Happiest Least happy
1. Finland 147. Malawi
2. Norway 148. Haiti
3. Denmark 149. Liberia
4. Iceland 150. Syria
5. Switzerland 151. Rwanda
6. Netherlands 152. Yemen
7. Canada 153. Tanzania
8. New Zealand 154. South Sudan
9. Sweden 155. Central African Republic
10. Australia 156. Burundi


It is rare to see two successive blog posts on the same topic but it is also rare for an economic issue to receive the attention which President Trump’s proposed tariffs on steel and aluminium have attracted. Since the last post, Gary Cohn, his chief economic adviser, has resigned in protest at the decision, swaying the political balance in the White House from supporters of free trade towards protectionists, the EU has added to its list of potential targets for retaliation to include peanut butter, Bourbon, Florida orange juice and Harley Davidson motorcycles, and President Trump has continued to threaten retaliation against the retaliation, talking of tariffs against EU car exports. There have also been comments in the newspapers looking back to the 1930s and the protectionist measures imposed by the USA as a way of helping them escape the Great Depression, which served only to make the world situation worse.

The language of the debate (if that is what it can be called) continues to be confused. On the one hand President Trump argues that the tariffs are justified by WTO rules on the grounds of national security, a legitimate reason for imposing tariffs; the argument being that steel is an important product for the defence industries. However the main exporters of steel to the USA are the EU (the largest), Canada, Mexico and South Korea – hardly countries which are likely to go to war with the USA. China does not feature among the list of the major steel exporters to the USA. Furthermore some of the steel exported is highly specialised and not even manufactured in the USA.

While talking of national security as a justification, President Trump simultaneously continues to refer to the need to reduce the US balance of payments deficit, arguing that the deficit is “BAD” and the fault of foreign countries. Not only has the deficit occurred in part because foreign producers can produce more cheaply than US ones, it has also allowed the US to consume more than it produces and, subsequently, living standards have risen. Foreign trade is not a zero-sum game – both deficit and surplus countries benefit from greater trade.

So how has a country like the USA (and the UK) been able to run such a large and persistent deficit? This is because foreign governments, banks and individuals have been willing to hold dollars and US assets rather than change them back into their own currency. In the same way that a generous parent’s continual lending allows their children to spend more than they earn, the UK current account deficit might be partially financed by a financial account surplus caused by rich foreigners and businesses placing money earned from selling to the UK in UK banks or buying property in London, UK shares or government bonds. The same applies to the US, but is reinforced by the additional benefit the USA has which is that the dollar is so widely used for international trade and as a reserve currency.

Is the world heading for a trade war?

President Trump has announced that he is planning to impose long-term tariffs of 25% and 10% on steel and aluminium imports.  His argument is that these two industries have been facing decades of unfair overseas competition, resulting in the loss of American jobs and been one of the causes of the large US balance of payments deficit. He tweeted earlier this week that “We want free, fair and SMART TRADE.” Implicit in his argument is the idea that countries exporting to the USA are unfairly helping their domestic industries rather than being able to export cheaply because they are more efficient than US steel and aluminium producers. However it is not always easy to decide whether an industry is being artificially favoured through some sort of subsidy (cheap energy for Chinese steel makers has been mentioned) which allows it to compete unfairly or whether it is able to sell more cheaply because of lower costs through, for example, cheap labour, more efficient management or economies of scale achieved through its size. He also argues that steel and aluminium imports threaten national security, presumably if the US went to war with its trading partners!

The impact of the proposed tariffs is not. clear-cut. Although US steelworkers will benefit from reduced imports and increased domestic output, any user of steel in the US is likely to have to pay higher prices either because they will buy more expensive domestically-produced steel or because they will continue to buy from overseas and pay the tariff. Thus, US car workers might find that their cars are now more expensive, leading to an increase in foreign cars imported into the US and a fall in domestic production, thereby creating unemployment in the motor industry. Many industries using steel and aluminium, such as construction and the drinks industry (because of the cans they use) would also be adversely affected as would US consumers who will have to pay higher prices because of the tariffs. In economic terms, their consumer surplus (the extra utility they receive in excess of the price paid for the product) will be reduced. Some of this lost consumer surplus – a welfare benefit for the economy – will go to the government via the revenue from the tariff and some will go to US producers whose output has increased. However there will be a net welfare loss since higher prices will discourage consumption, with consumers turning to alternative products which provide less satisfaction. There is also likely to be a negative impact on labour since the number of steel and aluminium workers favourably affected, given that these industries are becoming more capital-intensive, is almost certainly smaller than those in other industries who will suffer from the falling demand caused by rising prices after the tariffs.

The tariffs are likely to provoke retaliation with the EU, Latin America and China talking of counter-measures on US goods such as Levi’s jeans, Harley-Davidson motorbikes and Bourbon whisky, and the WTO warning of the dangers of a trade war which President Trump has tweeted will be easy for the US to win. Following the EU’s talk of retaliation, President Trump has further escalated the issue by talking of imposing tariffs on EU cars exported to the USA.  Fears of a trade war, with countries retaliating and then the US imposing further protection, caused a fall in stock markets in Asia, London and Wall Street.  For the UK steel industry, the situation could be serious since almost 15% of our steel exports go to the USA.

Possibly most importantly to economists is that the tariffs mark a move away from the principle that free trade is beneficial to the world economy, enshrined in the principle of comparative advantage, where countries specialise in the production of goods and services in which they have the greatest comparative advantage (akin to the lowest opportunity cost of production) and import other products. With countries specialising according to the theory, resources are optimally allocated, and consumers benefit from lower prices. Try explaining that to a US steel worker.

Pesticide found to harm bees faces ban across EU

The European Food Safety Authority (Efsa) has concluded that neonicotinoids harm bees to the extent that an outright ban could be imposed. Clearly, we can conclude that the external costs of production, neonicotinoid is an insecticide used in farming, are so high that the socially optimal level of output is zero. Bees are important “as they pollinate three-quarters of all crops”. In recent years their numbers have plummeted and studies suggest that neonicotinoids are a significant cause. Expect any regulation or ban to increase costs to EU farmers. It will be interesting to see if the UK will adopt such measures, post-Brexit. If not, it could mean that British farmers see tariffs levied on any exports to the EU. I suspect, under current Environment Minister, Michael Gove, the UK will look to follow Efsa guidance.

Read the original Guardian article here.

Gender pay gap is falling – will new regulation continue the trend?


New regulation means that all UK firms with more than 250 employees need to report the difference in pay between men and women. The new regulation is intended to encourage large firms to focus on reducing gender pay inequality. The idea is that by publishing data, employees, customers, the general public might put pressure on firms to act. ONS data suggests the gap is falling; in 1997 it stood 17.4% (median pay), in 2017 it is now 9.1%. Equal pay has been a legal requirement for decades, but men still dominate top positions and, so, earn more. It is interesting to see the differences between individual firms and sectors. Banking appears to be an industry dominated by men, with a very large gender pay gap – Lloyds having the most marked gap (of the firms to have submitted thus far) with the median pay gap at 42.7% and the bonus gap at 60.7%.

New insights into GDP

A new book “The Growth Delusion” by David Pilling, a Financial Times journalist, provides interesting insights into our obsession with economic growth and how we measure it. This blog highlights only some of his key points which are relevant to A’level and IB economics. The book is definitely worth a read. Modern GDP statistics (“the value of goods and services produced in a given period”)  have their origin in the USA around the 1930s with the work of Kuznets, who produced the first national income data to see the impact of the Great Depression on the US economy. They became more important during the Second World War when the UK government, prompted by Keynes, and the US government needed to be able to manage the war effort to maximum effect while still providing enough resources for consumption.

Pilling points out the many failings of GDP as an economic indicator such as the way it takes no account of what is produced, merely its value. Thus he points out that  wars can be good for GDP if they involve countries producing more tanks, weapons and aircraft. Similarly, two forks are, in GDP terms, as useful as a knife and fork, but less useful in reality when trying to spread jam on toast or cut one’s steak.  He is also scathing about the use of averages and points out that while a rich country might have a high average GDP, and therefore, according to economists, a high standard of living, if this is held by a very small number of people, the standard of living of the majority might be below that of a country with a lower average of GDP.

Measurement of GDP is difficult since it is impossible to measure every transaction and therefore relies on surveys e.g. the Living Costs and Food Survey for about 5,000 households and monthly surveys of approximately 45,000 businesses. The development of technology has made the measurement of GDP more difficult. The UK Government set up an inquiry under Charlie Bean – OB and former Deputy Governor of the Bank of England – who made comments similar to those expressed by David Pilling in terms of activities which are now much harder to measure and value such as using Google Maps rather than buying a paper OS map or streaming films rather than buying or renting DVDs. Another problem is that many things have become cheaper and better – my new recorder is easier to use and records more than a previous DVD recorder  but, in GDP terms, it is less valuable because it is cheaper.

There have been many debates over what should be included in GDP and although these might seem largely irrelevant, they matter when trying to compare countries’ GDP. In the past certain things, such as the sale of cannabis in cafes in Holland were legal and therefore recorded while a similar purchase in Romford would not be counted. However Eurostat wanted consistency among its members and decided that all transactions for goods or services involving money were to be recorded, whether they legal, illegal, good or bad. Therefore, in a purely numerical way, those who argue in favour of increasing GDP as being a key government objective, could argue that encouraging the sale of drugs or prostitution is as valid as increased spending on education or health – something even an economist would find hard to justify! More relevantly sales of guns in the UK  are part of the shadow economy but in the US they are legal, widespread and contribute to their GDP.

Pilling also considers the problems of measuring GDP in developing countries where a significant percentage of production takes place in the shadow economy; for example in Zimbabwe only 6% of the is formally employed. Similarly, my purchase of bottled water from Waitrose  is counted in the UK’s GDP, but the effort of a African villager who spends hours walking to and from a stream or well to collect “free” water has no value according to GDP statistics. He describes the way lights at night are used to indicate economic activity in different areas with increases in intensity over time indicating growth. Such methods indicate that the proportion of economic activity occurring in villages, and not always measured, is more significant than thought and therefore the GDP of many developing countries is, similarly, larger than previously calculated.