The Economist | Deep trouble

The Economist | Deep trouble

The deep sea is a frequently used example of common access resources that is over-exploited  – a case of ‘The Tragedy of the Commons’ originally coined by ecologist, Garrett Hardin. It stems from a simple idea that the benefits of over-fishing (increased revenues) are private while the costs are shared. Unfortunately, such an approach is unsustainable as a result of over-consumption and subsequent market failure. Technology is both a cause of the problem and a solution too. Larger trawlers increase catch size reducing the number left to breed. However, new technology can help to monitor, collect information and enforce regulation. One extreme proposal is to ban fishing in set zones, this has been effective in some trials allowing fish to ‘restock’ and improve sustainability. Clearly, an international agreement is required, but this is hard, especially given the current rise in nationalism and self-interest. The WTO are working on something, but have been doing so for several years.

Productivity and the election

Many of my recent posts have focused on productivity and the UK’s poor record when compared to other countries. As mentioned before, in general terms, UK workers produce in five days what workers in the USA, France, Germany and Italy produce in four. Although GDP growth has been good until recently (only 03% in the last quarter) and employment data in the UK is extremely positive with the employment rate standing at 74.6%, the highest since data was first collected in 1971, it has been accompanied by poor productivity growth with the increase in UK productivity since 2008 (the period immediately before the recession) being only 1.1%. This means that pay, and therefore living standards, will be lower in the UK than in more productive countries. The Bank of England’s latest Inflation Report suggests that incomes will rise 2% this year and inflation will rise to 2.8%, therefore implying a fall in real incomes.
There are many explanations for this. One explanation, which neatly sidesteps the problem, is that the main issue is not that the UK has low productivity, but is that we are simply poor at measuring it in the service sector, a key area in the UK economy. In manufacturing, it is relatively simple. One can count the number of goods produced; however, in services it is trickier particularly as the digital economy grows. 10 years ago, if I wanted directions, I would buy a map and eight years ago I bought a satnav and put it in the car (both are easy to measure). Today I  use my smartphone and these additional services are not easy to measure.
Nevertheless, most economists accept that there is a  productivity issue in the UK. Andy Haldane, chief economist at the Bank of England, suggests that poor management is a key factor, particularly in sectors where competition is low, allowing x-inefficiency to flourish. Lord Browne, former Chief Executive of BP, suggests three key factors. Firstly our service economy is not sufficiently professional compared with the USA; secondly there is a shortage of finance available in the UK for entrepreneurs wishing to start new businesses and, finally, he cites the anti-science culture in the UK where it is acceptable to profess an ignorance of mathematics and science. However almost all economists would agree that the UK’s low level of investment is a contributory factor and the uncertainty around Brexit and the election itself could cause businesses to delay their investment plans until the future is more certain. There is already anecdotal evidence of many financial institutions looking to open offices overseas.
There has been little focus specifically on the issue in the election. Labour plans to increase Corporation Tax to 26%. (It is currently 19% but due to fall to 17% over the next two years) which might impact on investment in the future but some of their spending plans might, in the long term, improve productivity. They also intend to renationalise the railways, water, the national grid and Royal Mail and borrow £250 billion to create a fund for infrastructure projects. The Conservative’s statement that “no (Brexit) deal is better than a bad deal” and a reluctance to remain in the Single Market has also caused anxiety among businesses, while a focus on grammar schools is not the best way to tackle Lord Brown’s concern over the UK educational system. However they do present themselves as a more pro-business, low tax government and hope that such sentiments will encourage investment. They are also committed to spend 2.4% of GDP on R & D by 2027 and to create a national productivity investment fund of £23 billion.
The IFS, an independent think tank focus on Labour’s additional infrastructure spending which would boost GDP in the near-term and would increase the productive capacity of the UK economy in the long term, although their increased labour market regulations such as a higher minimum wage would have the opposite effect as would four additional bank holidays and their higher rate of corporation tax. The Conservatives’ commitment to reduce net immigration would also weaken growth, although no specific timescale has been announced. Most disappointingly, the IFS suggest that there will be NO overall impact on productivity from either party. It is difficult to take into account the impact of Labour’s plans to take significant parts of the economy back into public ownership, not least because of the time which such measures would need to come into effect.

Roll on Thursday!

UK Economy Update – Is the party over?

Depending on which economic commentator you read, the UK economy is either heading for problems or is set to continue on a reasonably steady path for some time to come. What is particularly interesting (to an economist!) is that the different predictions do not result from different data but from different interpretations of the same data.

On the downside, inflation has jumped from 2.3% to 2.7% and is predicted to rise further because of the fall in sterling since the Brexit vote last June. Consumers are also suffering as real earnings are £1,700 lower than they were before the Crash and are likely to fall over the next two years as inflation exceeds wage increases.

Economic growth has slowed because of a cut-back in consumer spending which is   partially the result of higher import prices following the fall in the value of the pound since June and might also be a reflection of falling confidence in the UK economy among consumers. It grew by only 0.3% January to March, compared with 0.7% in the last three months of 2016 while the figures for GDP per head are 0.1% and 0.5% respectively.

On a more positive note, the UK is still the 5th largest economy in the world (but is predicted to be overtaken by India before the end of the year) and unemployment is down from 4.7% to 4.6%, the lowest since 1975. It was not long ago that we thought 5% was the lowest we could hope for without causing a major increase in inflation. Wages, which we would normally expect to be rising fast given the slow level of unemployment, are rising at about half their rate of  increase before the financial crisis. However this is is not totally beneficial since a reason they are rising so slowly is the low level of UK productivity which fell in the first quarter of 2017 compared to the last quarter of 2016.

The balance of payments deficit dropped significantly in the last quarter of 2016 as export orders for manufacturing have increased following the fall in the value of sterling. Unfortunately, this might have been a temporary improvement since the first quarter of 2017 saw the deficit in goods increase as imports rose and exports fell. The deficit in goods AND services also rose for the first quarter to £10.5bn, almost double the previous quarter’s figure of £5.7bn. Concern over the increase in house prices has eased since they are currently rising at their slowest rate for four years; however they are still currently averaging 6.1 x average earnings compared with a long-term average of 4.3 x average earnings. The peak was in 2007 (just before the Crash) when they reached 6.4 times earnings. If the housing market slumps over the next few years then this will have a significant impact on the economy from its impact on associated spending (furniture, white goods, carpets, etc), the wealth effect and the impact on consumer and business confidence.

The latest Bank of England forecasts show the economy growing well, averaging 1.8% over the next three years, but these are based on the Government managing to negotiate a “smooth” Brexit, with the implication that a problem with the negotiations will result in lower growth, inflation rising no higher than 2.8% and slower consumer growth being compensated by higher business investment and exports, two areas where the UK has failed in over recent years.

It is difficult to take into account are the economic shocks which we might face over the next few months. For example what will happen to confidence in America if there are serious revelations about another member of President Trump’s team being involved with Russia. Then,  if the American economy slows, what will that do to UK exports?What will happen to business confidence, and hence investment,  over the next two years as leaks about Brexit negotiations hit the news headlines? What will China do over the next few years in terms of global expansion?

Not to worry. As Keynes wrote in 1923 – “In the long run we are all dead”.


Book review of ‘Economist Naturalist’

‘The Economist Naturalist: Why Economics explains almost everything’, by Robert H Frank (Professor of Management and Economics at Cornell University.) is a book which can be comprehended by people who does not study economics as an academic subject because it contains lots of interesting practical problems. Moreover, the narrative style of interpretation enables the reader to connect them with real life situation rather than unnecessary diagrams or professional terminologies.

The most engaging part of the book is that some of the phenomenons really raised my curiosity to find out the economic theories behind it. As demonstrated by the front cover of this book – Why is milk sold in rectangular containers, while are soft drinks are sold in cylindrical ones? In the beginning I did not regard it as something links with economics as it appears rather friendly than those we read in the textbooks. However, the reason behind it not only linked with economics but also psychology, history and practical experiences – the answer is for you to find out from reading the fascinating book.

Alternatively, Frank can be vague about his explanations of economic phenomenon. As demonstrated in his example of drive-up cashpoint machines that have Braille dots, some readers argue that the reason behind it is the regulation rather than opportunity cost. Despite a brief explanation, Frank does not attempt to add these alternative reasons into account. I think an economic phenomenon requires a variety of reasons to be fully established.

Overall I rate this book as 4 / 5 because after reading this book, economics is not something that is on the moon for me anymore, it illustrates a rational dimension approaching to human behaviour.

“The Undercover Economist” Book Review

“The Undercover Economist”, published by Little, Brown, is the bestselling book by author Tim Harford. Harford is an English economist, journalist and broadcaster living in London. Having gained his Masters of Philosophy of Economics at Oxford University, he has become a distinguished economist who is now a senior columnist for The Financial Times.

The main focus of the book is taking ordinary, everyday situations, such as buying a coffee or health insurance, and revealing the truth behind them from an economists perspective. Harford delivers his views in a light-hearted tone without the heavy use of complicated terminology, making his book easy-to-read and engaging while still being highly informative. By breaking down each problem into a simplified example, no matter was ever too complicated to understand. I personally enjoyed exploring economics from a social level and seeing the huge influence economics has on everyday life; particularly Harford’s theories about solving the issues of having private health insurance in comparison to free healthcare (Chapter 5 – The Inside Story) and seeing the extraordinary results of the extremely cleverly-designed UK 3G auctions (Chapter 7 – The Man Who Knew The Value of Nothing).

In my opinion, I think this book could be improved by making fewer assumptions and fictional scenarios in order to explain theories. By making too many assumptions about certain scenarios in order to simplify them creates questions about how realistic the theories really are.

Overall, I would rate this book a 4/5; I enjoyed the wide variety of economic topics explored and I’m sure that every reader will find something in the book that is of particular interest to them. From reading this book I have learned that economics is all around us and the best way to solve a problem is by finding the cause of the problem instead of just finding a solution to it.

‘Think like a freak’ Book review

“Think like a freak” written by Steven D. Levitt and Stephen J. Dubner and published by Penguin Books is the third book written by Levitt and Dubner. It’s predecessors being the extremely popular, “Freakonomics,” and, “Superfreakonomics.” The main focus of the book is to encourage people to look at problems from different perspectives, and in doing so attack the root cause of the problem to eliminate it altogether rather than find short term solutions, which can be applied to both everyday life and specific economic issues too. I thoroughly enjoyed the lighthearted nature of the book and the humorous tone throughout. Further to this I particularly enjoyed the second and seventh chapters named, “The three hardest words in the English language,” and, “What do King Solomon and David Lee Roth have in common?” respectively. The second chapter encourages the reader to ask more questions about fundamental issues which many people often wrongly assume the answer to, as well as presenting the idea that saying “I don’t know” (the three hardest words in the English language according to Levitt and Dubner) is actually more beneficial in the long run than, again, incorrectly presuming the solution. The seventh chapter (supported by the sixth chapter) goes on to explain that in order to correctly assess a situation, one must understand the incentives of all parties involved. The authors understood that many may attempt to disguise their true incentives, therefore, people may act differently than if they were being truthful. As a result of this, the book discussed many ways in which we should try to uncover the true objectives of people, which in turn will be a useful tool when deciphering the incentives and intentions of both consumers and firms. Although there were some references to economic events and theory throughout the book, I believe that the piece should have been more focused on economic policies. The book was very interesting and I learnt a lot from it, however the economic content was actually a lot less than I had imagined it would be.

The mystery of the missing young US workers and the supply curve for labour

In the USA over the last 15 years, there has been a steady fall in the number of young people in the labour force in America. Before 2000 and 2015, the employment rate for male workers without a degree dropped from 82% to 72% and a fifth of this group had not worked for a year. This took place at a time when the unemployment rate nationally dropped to 5% and almost 3 million jobs were created in the economy.

As the time spent in work decreased, time spent on leisure activities increased, with the main leisure activity being on-line gaming. Economists have struggled to explain this fall in employment among this group. One view relates to the trade-off between work and leisure whereby the more one works, the less time one has to enjoy the benefits of one’s increased income. Therefore, by implication, this cohort is satisfied with a low income and more leisure because the additional leisure time allows them to engage in their favoured pastime. Linked to this is the idea of “leisure luxuries” which are the leisure activities one spends more time on as one has more leisure time. They correspond to the idea of luxury goods which are income elastic.  For example, as one’s income rises, one might spend proportionately more on restaurant meals since they are a luxury item. Similarly, according to this view, put forward by Hurst, Aguair, Bils and Charles last year, as one has more leisure time one does not spend more time washing dishes or eating breakfast, one spends significantly more on one’s preferred hobbies. For these people, the marginal utility of an extra hour of leisure which they can spend on their preferred activity exceeds that from the income provided by an extra hour working. The authors are clear that not everyone behaves like this since some will prefer to work longer in order to be able to afford better goods and services, e.g. the two-week holiday remains at two weeks but is spent in more exotic destinations, paid for by the higher income from work.

Given that the longer one is unemployed, the more difficult it is to get a job, the implication of this trend is that this group of missing workers, mainly but not entirely male, will find it difficult in the future to get a job and pay for the non-leisure activities people need such as housing, furniture, food and a car.