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.

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Falling Share Prices – Causes and Effects

This week has seen major falls in share prices across the world with $6 trillion being wiped off world share values.  America’s Dow Jones index dropped 5.2%, Japan’s Nikkei index fell 8.1% and the UK’s FTSE index fell 4.7%, the lowest it has been for 15 months, while in Japan and America the falls broke records for the size of their drop since October 2008.

The initial reason for the fall was, paradoxically, good US economic data as their service sector boomed and wage levels grew at the fastest rate since the start of the decade. This good news meant that it is now more likely that US interest rates will rise sooner and by more than had previously been anticipated. Mark Carney reinforced this view when he expressed similar sentiments about the future of UK interest rates.

Although a rise in interest rates has been expected for some time as the world economy’s growth accelerated, the reminder that it might occur soon has come as an unpleasant shock. The scaling back of QE by central banks is expected to reduce the ability to borrow cheaply, some of which has financed recent purchases in shares. Financial investors expect that the forthcoming rise in interest rates will reduce company profits, therefore reducing the demand for shares. Simultaneously existing shareholders might be encouraged to sell quickly before prices fall further, thereby increasing the excess demand. In addition, the economic uncertainty was increased by the fall in the value of bitcoin by approximately 50% since the state of the year.

Economists are trying to decide whether we are currently experiencing a “correction” or  are entering a bear market, where prices fall by more than 20%. The “correction” proponents believe that shares are over-priced in terms of their price compared to their earnings – the price:earnings ratio – and therefore the fall was due. However there is concern that the behaviour of investors, whether in shares, currencies or commodities, sometimes leads to markets over-shooting since falls (increases) in price encourage selling (buying) which further reduces (increases) the price.

According to economic theory, the fall in share prices might lead to a negative wealth effect (the idea that consumption is determined by one’s wealth as well as one’s income). However, given that many shareholders are in the upper income brackets, their marginal propensity to consume will be low and therefore the effect will small. More significant might be the general impact on consumer and business confidence from the media reports about the falling share prices. As Keynes wrote in his General Theory,  “animal spirits” outweigh the  “weighted average of quantitative benefits multiplied by quantitative probabilities.”.

Big pharma, the NHS, and ‘price gouging’.

Over the past couple of years, the news has reported several incidents of sudden and rapid price hikes in medicines bought by the NHS. Drugs are often patent protected, which, put simply, means that firms are legally protected from another firm reproducing their product. Patents are a barrier to entry that helps to increase monopoly power. They do, however, provide benefits, insofar that without legal protection firms are unlikely to conduct the highly expensive research and development process to develop new drugs if another firm can simply come along and copy their idea. Without the high R&D costs, the rival would be able to charge a lower price and so the ‘creator’ stands to make large losses. Consequently, firms would not invest in R&D and we, the consumers, would not benefit from the advances in medicines we have seen.

On the other hand, firms can exploit this legal protection and monopoly power by charging very high prices to earn abnormal profits. These profits can be reinvested to develop new drugs, as Big Pharma will point out, or returned to shareholders in the form of dividends. However, the consequence of high prices, is, of course, lower consumption, and given the nature of the product, this can have a significant impact on consumer’s health.

The NHS is a very large organisation, Britain’s largest employer, with an annual budget of approximately £122bn. This should give it monopsony power when it comes to buying drugs, approximately £15bn of the budget, countering the monopoly power of the large pharmaceutical firms, such as Pfizer. However, reports suggest that the NHS is not getting value for money and is a victim of ‘price gouging’ – the process of suddenly increasing prices to exploit market power and increase profits. Probably the most famous example of price gouging is when Martin Shrkeli bought a patented drug used to treat AIDS and then increased the price by 5500% overnight. The process of extracting a larger ‘slice’ of wealth without creating new wealth is called rent-seeking. He is not a very popular man.

The UK government can take action to deter firms from this practice, which often takes place when a patent expires and the firm can change the name and distribution chain, a process known as ‘debranding’. Recently, Flynn and Pfizer have been fined for their decision to increase the price of an epilepsy drug by 2000%, although this is being contested in the courts. Further regulation is being discussed by the government and may be processed in the near future.

Given the funding issues the NHS currently faces, an increasing medicines bill creates an unwanted opportunity cost and means that cuts in other areas have to be made. Big pharma does need to make a profit to recoup high R&D costs and fund new medicine development, but how much is enough?

Read the original article here.

Oil and the UK Economy.

The price of crude oil fell from $114 a barrel in June 2014 to $27 in January 2016. This fall  had significant impacts on both the North Sea oil industry and the UK economy more generally. In the early 1980s, when North Sea oil production was at its peak, the energy industry contributed over 10% to UK GDP but by 2014 this had fallen to 2.8%. It is worth noting that, unlike Middle East producers, those extracting oil in the North Sea face high costs because of the weather and also because many of the easy-to-reach (and therefore low-cost fields) have been exhausted. Employment in the industry was 440,000 at the start of 2014, fell to 375,000 in September 2015 and is now around 300,000. If this continues, the skills of workers will be lost and many of the firms which make the infrastructure necessary to extract oil will close down. Government revenue from corporation tax and the other taxes levied on oil production has dropped sharply from a peak of over £30bn in the mid-1980s to an estimated £0.9bn this year.

The decline in the oil price and in the North Sea oil industry has had a significant impact on parts of Scotland and particularly on Aberdeen, the “oil capital”. When oil was first extracted, it became a boom town with low unemployment, rapidly rising wages and house prices as workers moved in to the area and new businesses set up. However, in recent years, the picture has been different with oil companies laying off workers, incomes and house prices falling and unemployment rising, an example of a local multiplier effect with local businesses supplying the oil industry, hotels, restaurants, taxi companies, etc suffering from the decline in the oil industry, the loss of income of its workers and the decline in foreign businesses and workers in the area.

However things might be changing. The price of crude oil has been rising steadily and is currently (Jan 2018) around $70 and there has been an increase in investment in the industry with firms starting new projects, supported by an inflow of private finance. This optimism is based on the  feeling that the recent low crude oil prices marked the bottom of the cycle and we are now back into a period of increasing oil prices, hence making many postponed projects  profitable.

The reasons for the rising oil prices are an interesting exercise in the economics of supply and demand. We have seen cuts in production orchestrated by OPEC combined with increased demand across the world economy because of higher world growth. There is also speculation which is further increasing the price. However this might be optimistic since US shale production is likely to increase, prompted by the higher prices and a positive economic environment under President Trump.

So what will this do to UK consumers who are already seeing higher prices for petrol and diesel? Will the higher prices feed through into firms’ costs, thereby increasing inflation or will the price rises tail off as US supply depresses prices and the OPEC production restrictions are broken by some of its members, eager to cash in on the higher prices?

Technology and unemployment

For many years people have worried about the rise of the robots and artificial intelligence. Science fiction writers have envisaged situations where robots gradually gain more intelligence and power until they are able to take over the world and whichever other planets feature in the story. Less exciting, but more immediately relevant, economists and politicians have also concerned themselves with the impact of the robots on society and particularly on the demand for labour. During eras of major technological change, it was predicted that the rise, firstly of steam, then electricity and more recently the computer, would lead to massive unemployment. Keynes, writing before the Second World War, predicted that new technology would drastically reduce the working week and we would have to tackle the problem of how to occupy our time with a 25-hour working week. In 1979 Fiat produced a now-famous advert for their new Strada (https://www.youtube.com/watch?v=-fXV6KzhBbM ) under the slogan “handbuilt by robots” which showed the construction of the car in a spotless factory without humans, with everything done by robots.

A recent report, “The Future of Skills: Employment in 2030” by NESTA, an innovation charity, paints a relatively attractive future. They suggest that while 20% of the labour force is currently working in occupations which are likely to shrink, about 10% are in occupations that are likely to grow as a percentage of the workforce. Re-training will be necessary for the former, either to cope with the way their existing job has changed or to allow them to join the latter group. These industries include those working in teaching and education, hospitality, leisure, health care, and other jobs which require workers to deal with people, such as care for the elderly. Another group which will do well are those working in occupations which require higher-order cognitive skills such as psychologists. Those possessing creativity and communication and problem-solving skills will do well while those in jobs which can be more easily adapted to robots and artificial intelligence, such as those involving routine calculations and basic manufacturing skills will be lost. If you are seeking advice as to how to invest your portfolio, it is already possible to put all the necessary information such as your attitude to risk, how much you have available to invest and for how long and a computer algorithm will devise your optimal portfolio.

Pub smoking ban: 10 charts that show the impact – BBC News

It’s 10 years since smoking in enclosed public spaces was banned in England. What has the impact been?

Source: Pub smoking ban: 10 charts that show the impact – BBC News

This is an excellent article, written by an old uni friend of mine, exploring the impact of restrictions on where people can smoke. Cigarettes are considered by economists as a demerit good, one that generates negative externalities through consumption. These externalities, costs to a third party, can occur in many ways, for example, the adverse effects on the health of bar workers. The ban has helped to reduce the number of people smoking in the UK, although it still remains predominantly a habit of the poor. However, it is important to note that changes to packaging legislation and increased duties may have helped to reduce the number too. A reduction in the number of smokers helps to reduce the pressure on the NHS of treating tobacco-related illness, although, of course, if people live longer then other, perhaps more expensive treamtents, need to be paid for. An unintended consequence has been the impact on pubs, a number are closing creating unemployment in the process. Again, however, other factors, such as a general reduction in alcohol consumption and cheaper substitutes, i.e. buying beer from a supermarket, will have had an effect.

This is a nice example of how a number of government interventions can be used to correct the market failure associated with a demerit good.

Uber rival’s drivers are ‘workers’, employment tribunal rules

Addison Lee is a well-established brand in the London taxi market. It appears that they too have been making use of the ‘gig economy’ in order to reduce labour costs and maximise profits. Businesses, such as Addison Lee, Uber, and Deliveroo, do not employ their workers, but, rather offer a service that connects a customer, someone who wants a taxi or take out, with someone willing to provide the service. This helps to keep costs down as Addison Lee do not have to pay the additional benefits that an employee would cost, such as holiday pay, pension contributions, etc. The worker does have increased flexibility, and the potential to earn more, but has less security and does run the risk of earning less than the national living wage of £7.50 an hour (25+, April 2017). The growth in the ‘gig economy’ is seen as one of the reasons why wage growth has been so slow when UK unemployment is so low (4.3%, July 2017). Economists would expect wages to rise as the labour market ‘tightens’ and firms struggle to fill vacancies. It appears the growth of the ‘gig economy’ has resulted in more flexible labour markets, which, in turn, has reduced the natural rate of unemployment, the rate at which we would expect to see workers ‘bid up’ their wage demands. Clearly the ‘gig economy’ is good at creating jobs, but courts, unions, and those politically left of centre appear to be concerned by the potential exploitation of workers whose incomes can be rather volatile and lack much in the way of job security and employment rights.

FT article