Book review: End the Depression Now! by Paul Krugman

Book review ‘End This Depression Now.’

Gloria Ma

‘End This Depression Now’ by Paul Krugman focuses on analysing the causes and consequences of 2008 Economic Crisis, in order to outline numbers of methods to avoid future depressions.

Throughout the book, Krugman is very much like an existentialist who urges the responsible agents to act spontaneously towards changes in policies making and economic forecast. As he quotes from Keynes: “The long run is a misleading guide to current affairs. In the long we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the sea is flat again.” Hence, Krugman argues that all the economic crisis are avoidable as the economists can proactively make adaptations over time periods. Taking the example of Brexit, “the boom, not the slump, is the time for austerity”, a cut in interest rate and cooperation tax are authentic policies to impose in the U.K. economy – they not only boost the consumer and business confidence but also directly increase consumption and investment to maintain a sound economics growth rate.

The most captivating, or precisely the most admirable part of this book is that Krugman has a visionary prediction of the world politics now: a global lean towards nationalism (extremism) – such as Brexit, Trump’s presidency and the coming up French general election Round 2 – this phenomenon can be simply interpreted by economic factors. It is obvious that Krugman stands aside with the Keynesians, however, this might inevitably set the width of the book rather narrow.
Although Krugman has listed lots of adequate arguments, it is always interesting to hear other monetarists’ solutions upon economic crises.

Overall, I have learnt a great deal from this book, not merely the economists’ theories, and also the responsibilities that rule-setters have to act on. No depressions can indicate the end of the world, there are always solutions and ways to limit the harms.

“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 UK Economy – how are we doing?

Since the Brexit vote ten months ago, there have been many reports about the state of the UK economy and its prospects for the future. In an ideal world, we could look at the recently-published data and decide how we are doing. Unfortunately, the picture is unclear with different data sets indicating different things.

On the positive side, unemployment has fallen to 4.7% and employment has risen to almost 75%, both numbers reaching impressive lows and highs respectively. What we would also expect to see simultaneously is an acceleration in wage increases as workers take advantage of a tighter labour market indicated by  low unemployment, high activity rates and employers reporting recruitment difficulties, with the effect magnified by an increasing number of migrant workers returning home because of the fall in their incomes when exchanged into their own currency due to the fall in sterling since June. However, money wages are rising at only 2.3%pa and, as inflation increases, real wages will fall. Possible explanations for the low average increase in wages are the 1% cap on public sector pay increases thereby reducing the average, a possible increase in retired workers returning to the labour force depressing wages and the increase in self-employment since the self-employed are not counted in the data.

Other positives for the economy are our growth rate, the reduction in government borrowing and improvement in the  balance of payments. Our annual GDP growth of 1.8% has been the second highest in the G7 behind only Germany at 1.9%. However there is concern that consumer spending, which has been an important contributor to the UK’s growth, is now slowing.  Further factors which might impact on consumer spending are the expected fall in real income, mentioned above,  and the slowdown in the housing market which, according to the Halifax, grew at its slowest rate for four years.  The housing market is important for an economy in terms of the wealth effect, its impact on consumer confidence and the effect it has on related markets, such as carpets, furniture and household appliances, which people buy when they move.

The slowdown in consumption growth, and therefore probably GDP growth, is such that the Bank of England is now thinking that the increase in interest rates which has been talked about for some time, is likely to be postponed from late 2018 until the middle of 2019. It will then be almost twelve years since the last increase in UK interest rates which took place in July 2007 when they were increased from 5.5% to 5.75%.

The Public Sector Borrowing Requirement (PSBR) has come in below expectations and is now back to levels experienced before the financial crisis. This is largely due to  income and corporation tax revenues being greater than predicted. However, if the economy slows down in the run-up to Brexit, tax revenues will fall and benefit payments increase, increasing the PSBR.

The current account deficit dropped from 5.3% to 2.3% of GDP in the last three months of 2016. Unfortunately this proved to be a temporary improvement and the deficit has widened again this year. This makes it clear that devaluation alone will not be sufficient to improve our balance of payments and significant structural changes will also be necessary to improve the attractiveness of UK products. (Consider Germany which has a current account surplus equivalent to 8.7% of GDP not because of cheap goods but because of high quality, well-designed products). FDI increased in the last quarter of 2016 but a worrying development are recent surveys which have found that the UK has fallen in attractiveness as an overseas country in which to set up compared to other countries.

On the positive side, we could be in Greece where unemployment is 23%, and average wages have fallen approximately 10%, income tax has been increased from 40% to 47%,  the retirement age has been increased from 60 to 67 and  pensions have been cut 14 times compared to 2009.

 

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.

The dangers of saying goodbye to globalisation

On the other side of the Atlantic, President Trump is keen to “put America first” and move manufacturing back to the United States and he has already had dealings with US companies thinking of moving production overseas. He has also talked of moving away from free trade has about re-writing NAFTA (the trade agreement with Canada and Mexico).

However it is worth reflecting  about the Argentinian experience. Cristina Kirchner was elected President of Argentina in 2007 and announced that Argentina needed to manufacture far more of the goods it consumed, rather than importing. In order to achieve this, she imposed  import tariffs of between 30% – 40% and banned the import of certain goods, in the hope that foreign companies would move production to Argentina. In 2011 one such banned good was the cell phone. Apple refused to produce in Argentina but Blackberry agreed. (It is worth noting that at this time Blackberry was the most popular and fashionable mobile phone in the country with sales of over $100m). The Blackberrys previously imported into Argentina had components from Asia and were assembled in either Mexico or Uruguay.

The Argentinian Government specified the place where the factory was to be built and selected Tierra del Fuego, a remote small island with poor roads and few flights at the southern tip of Argentina. In fact the main streets of Tierra del Fuego look more like  the set of a spaghetti western, with sheep grazing in the fields and tumbleweed (almost) blowing down the street, than a major manufacturing area. The establishment of the factory and recruitment of workers, who had to be paid three times the normal wage to persuade them to move down, took two years and there was much celebration in 2013 when the first Blackberry rolled off the production line.

Unfortunately, as a warning to anti-free-traders, because it took so long to bring the factory into production that the phones produced were two year old models and, because of high labour costs, the phones sold for almost twice as much as later models on sale elsewhere in the world. A new industry – the smuggling of Blackberries into Argentina from the USA – quickly grew and demand for the Argentinian-made phones fell, leading to redundancies in Tierra del Fuego. Those in favour of free trade cite the principle of comparative advantage and suggest that Argentina should have put more resources into the sector sit is best at, such as wine and beef.

 

What’s in my basket?

What have  bicycle helmets, flavoured water, soya milk and men’s base layer tops got in common? Alternatively, if that is too hard a question for you, try finding the connection between a child’s swing, alcopops and the fee levied by banks for stopping a cheque which has been written. The answer is not that you wish to cancel the cheque for a child’s swing which you bought after drinking too many alcopops. The products listed refer to the changes in the basket of  goods and services which are used to calculate the Consumer Price Index, the UK Government’s preferred measure of inflation.

The bicycle helmets, flavoured water, soya milk and base layer tops are now sufficiently popular to enter the new basket of goods which was unveiled this week by the Office for National Statistics with these items representing a trend towards healthier living and particularly more cycling following GB success in the Olympics. However, before we can congratulate ourselves on our new fitness regime, it is worth noting that gin and fruit ciders are also now included in the basket. The second list of goods, along with menthol cigarettes, non-smart-phone mobile phones and the ever-popular (or now slightly less popular) single -drainer sink have all left the basket of goods and services.

About 700 goods and services are included in the basket and their prices are measured monthly both online and at 140 locations across the country in order to take into account different prices in different types of shops and gain an accurate picture of inflation in the UK.