The Population Crisis

According to popular legend, the science of economics was christened “the dismal science” by Thomas Carlyle following the publication by Thomas Malthus in 1798 of “An Essay on the Principle of Population”. In this he suggested that poverty and hunger would be a country’s natural state since increases in population would tend to outstrip increases in food supply. Fortunately he was proved wrong as birth rates fell and new techniques increased the supply of food and the science of economics moved on.

We are currently focused on short-term issues such as Brexit but it is worth taking a longer perspective following the publication of a report in ‘The Lancet’ which has highlighted falling fertility rates across the world between 1950 and 2017. The reasons behind the fall include better education and employment prospects for women, improved access to contraception, better maternal education for mothers and prospective mothers and improvements in infant mortality. As a result, 91 out of 195 countries have been identified as having a fertility rate below 2.05 – the minimum necessary for stable population growth. For example, in Britain over the period, the fertility rate fell from 2.2 to 1.7.

The implications of falling fertility rates in richer countries, partially masked by inward immigration, focus on the conflict between increased life expectancy, creating an increased number of elderly pensioners receiving benefits and increasingly needing expensive medical care, and a falling supply of workers who are paying taxes to support the elderly. These workers will therefore face a greater burden in terms of the taxes they will need to pay to support the elderly.

This is already significant in Japan where 28% of the population are over 65, the highest proportion in the world, compared with 18% in the UK and 22% in Germany. One offsetting feature in Japan is that people often work on beyond their retirement age – 3% of their labour force is over 80! Although it is not suggested that working until 80 becomes the norm, the retirement age in many countries is being increased as a result of increased life expectancy and, in the UK, it will reach 66 by October 2020 and 67 by 2028 for both men and women. This will reduce pension payments and increase tax revenue but, alone, is unlikely to be enough to prevent developed countries facing increasing budget deficits to finance care and benefits for the elderly.

As this crisis unfolds, the people who will suffer most are not the elderly but younger generations who will not only be working longer and paying higher taxes but will face student debt and higher house prices than experienced by their grandparents

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The impact of technology – The Fourth Industrial Revolution?

Amazon has opened a shop in Seattle with no checkouts and customers who do not pay on leaving. Instead, with the appropriate app to link the shopping to an Amazon account, all that is needed is to go round the store, put items in a bag and scanners and sensors do the rest. After leaving the store, payment is debited from your account. There are no queues and no cashiers.  So successful has it proved that more have been opened. It already has three in Seattle and one in Chicago and plans ten by the end of 2018, 50 by the end of 2019 and, according to some press reports, 3,000 such shops within three years.

Electric cars have also been in the news over the summer, with a focus on how they will reduce the environmental damage from driving. What has been less well-publicised is their possible impact on the demand for workers in the factories of the future. Electric cars are easier to manufacture than current ones because their mechanism has fewer moving parts than the internal combustion engine. This means both that fewer workers will be needed and those on the manufacturing process will be less skilled, making it easier to outsource manufacture to other countries. However new technology in the motor industry could, potentially, have an even greater impact with the arrival of driverless vehicles. Uber is already looking into driverless taxis and black cab and white van drivers could become a distant memory in the same way that stokers on railways are no longer with us and blacksmiths are a rarity.

A robot is being developed, based on technology used in the NASA Rover to explore Mars, which will drive itself round battery chicken sheds, measuring the chickens by sight and checking their temperatures. This machine is likely to be popular if farmers face a shortage of labour after Brexit since they will replace human workers.

There is considerable dispute over the numbers and what the future will look like. Some suggest traditional, full-time jobs will decline and there will be an increase in remote working but overall, there will  be little impact on the number of jobs. Others argue that the impact will be positive, with new technology creating more jobs than are lost. They suggest there will be a much greater need for workers to develop, build and maintain the new technology and there will be some areas such as the care industry (growing because of an ageing population) where more human workers are likely to be needed to care for patients. McKinsey, a worldwide consultancy form,  recently predicted that robots will have the same impact on the global economy as the development of the steam engine, adding 1.2%pa to global growth by 2030.

A report by the World Economic Forum (The Future of Jobs, 2018), one of the more optimistic forecasters, has suggested that 42% of the world’s jobs will be done by machines by 2022, up from 29% today. It also estimates that although 75 million jobs will be lost by 2022, 133 million new jobs will be generated, resulting in an additional 58 million jobs. They see losses in administration, clerical, manufacturing, construction, legal, and maintenance sectors but increased demand for those in data analysis, management, computing, architecture, engineering, sales, education and training. Different numbers come from PWC, a worldwide firm of accountants, who predicted in July that about 7 million jobs will be lost by 2020 because of technology but 7.2 million will be created. They see losses in manufacturing, transport and public administration while the increases will occur in healthcare, science and technology and education.

Others are less optimistic. During the summer, Andy Haldane, the Bank of England’s chief economist, made the news by predicting that the impact of artificial intelligence could be more disruptive than previous industrial revolutions and would lead to widespread job losses. He argued that previously machines had replaced labour doing manual tasks whereas increasingly machines, because of developments in AI, are undertaking tasks previously thought to be beyond them. Mr Carney, the Governor of the Bank of England, suggested that the latest industrial revolution would threaten 10% of jobs in the UK and, while some workers would benefit from being more productive and earning higher wages, others, losing their jobs,  would not easily be able to find employment providing a reasonable standard of living and would need to be able to access education and re-training throughout their lives.

However the big issue will be that the people filling the new jobs are unlikely to be those losing the old ones. How society copes with this will be a major issue for the future.

A confusing week for economists

This week has seen a considerable amount of contradictory economic information. On the positive side, employment in Britain reached a record high in the three months to April, 2018, with an employment rate of 75.6%. Unemployment has remained at its current low of 4.2% and the inactivity rate, those people, such as students, of working age, but not in the labour force, is also at a record low. Retail sales grew by a record 4.1% in May

However the rate of increase in earnings, which we would expect to be high given the low unemployment figures (as suggested by the Phillips Curve), has dropped from 2.6% to 2.5%. In real terms, the rate of growth in real earnings was only 0.1%, implying that future consumption growth will be low.

Other disappointing news was an announcement from Land Rover that they are moving production of the Discovery from the UK to Slovakia and news that Poundland and House of Fraser have collapsed, putting thousands of jobs at risk. However even these news items are not clearcut. One of the reasons behind Land Rover’s actions is that, once production has moved out of the UK, the site will be used to produce new, more high-tech, more expensive hybrid and electric models and the decline in traditional retailing is happening as on-line purchases increase, creating delivery and warehouse jobs.

However possibly the most disappointing pieces of news were firstly the latest data on manufacturing output for April, showing the fastest fall for 6 years and secondly, the deterioration in the UK’s trade deficit which grew by £1.6bn to a deficit of £9.7bn, the worst monthly figure since October 2016.

Possibly the best way to evaluate the data is to look at what the markets thought and they were pessimistic, thinking that the weakness of the economy will make an interest rate rise less likely and therefore sterling fell in the foreign exchange markets.

What does the future hold?

“Accurate predictions” and “economists” are not words which always go together and the longer the time period, the less accurate are predictions likely to be. Last year, it was predicted that driverless cars would soon be with us and we would be summoning our driver-free Uber with as little worry as ordering a take-away via Deliveroo. However, following the death of a 49-year-old woman in Arizona, as a result of a collision with an Uber vehicle being driven in autonomous mode, (with a human behind the wheel), both Uber and Toyota have suspended trials and a number of American states are reviewing their attitude to trials of driverless vehicles.

A worry which has been with us for longer is the impact of technological progress and more recently AI, on employment prospects. Keynes, in 1930, during the Great Depression, wrote an article predicting a 15 hour working week by 2030. For him, this was not a worry since he suggested that the average person would be significantly richer in 2030 than in 1930, since businesses would still be producing goods and services and workers enjoying their increased leisure. However, he did raise the possibility of technological unemployment where the fall in demand for labour from technological progress was greater than the increased demand for labour needed to produce new goods and services. Trying to estimate the costs and benefits of new technology in terms of employment has been a problem since the Luddites in the 19th century – English textile workers and weavers who destroyed machinery which they thought would take their jobs away. On the other hand, technological optimists see the arrival of robots as an advantage since they will allow tedious, repetitive jobs to be undertaken by machines while the humans focus on rewarding, creative areas.

Examples support both views. The rise of online shopping is a cause of the decline in high street retailers. However internet shopping has created jobs in warehouses for workers to fulfil orders and among van drivers. But, in the future, will the goods ordered be collected from the shelves by robots and delivered by drones? What will happen to the number of workers in supermarkets if the technology used in Amazon’s cashless store becomes more widespread? There is a consensus that the types of jobs most at risk are those which are routine and repetitive while the safest are those which involve creativity, judgement and manual dexterity. An area which should be secure, and in which the UK is currently strong, is the creative sector, which covers such things as advertising, film and television programme making, architecture, and fashion, employing two million people and contributing over 5% to GDP. One might also think that teaching is a safe occupation since, so they tell me, it involves judgement, empathy and creativity. But if the school of the future is based round individualised learning with students working in large open-plan spaces, supported by “facilitators”, will so many people be needed? How long before we get the department blog generated with no human involvement? How do we take account of the jobs which have not yet been created?

What is clear is that there will need to be resources put into re-training existing workers to allow those who have lost their jobs to move into new areas and, more importantly, those entering school in September, will need to be taught to be adaptable and creative so they can learn new skills, rather than being trained in the skills in use today.

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

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.

Sterling and the UK Economy

The pound has undergone something of a roller-coaster ride over the past three and a half years.  It was $1.71 in July 2014, fell from $1.49 to $1.32 after the Brexit vote and then again to $1.21 in January, 2017 and has recently risen to $1.38 (20th January 2018). However, it is worth noting that while, historically we usually measure sterling against the dollar, the fall against the euro has been greater.  In July 2015, £1 would buy 1.49 euros but by August 2017 the rate had fallen to £1 = 1.08 euros  and it is currently at £1 = 1.33 euros.

This post will consider the factors which might cause the value of a currency to fluctuate. (and the next will discuss the impact fluctuations might have on an economy). Over the last 100 years, the world has moved from a system where currencies were fixed to gold (the Gold Standard), to a time when the dollar was fixed to gold while currencies such as sterling were pegged, with limited flexibility, against the dollar (the Bretton Woods Agreement) to a system of flexible exchange rates where, today, in theory, the demand for and supply of the pound in the foreign exchange market determines its value.

In old economics textbooks, the adjustment process was simple.  The demand for a currency is determined by foreigners wanting to buy UK exports and needing to pay for them in sterling while the supply of sterling came from UK firms and consumers wanting to buy foreign goods and services, such as overseas holidays, and needing to swap pounds for foreign currency to pay for them. If the UK had a balance of payments deficit, the demand for sterling in the foreign exchange market would be less than the supply and so the value would depreciate against other countries, making UK exports cheaper and imports more expensive, restoring international equilibrium.

Today the situation is far more complex; not only do we have to consider the impact of a currency such as the euro which has replaced the individual currencies of the members of the eurozone, making it impossible for them to use depreciation to improve their balance of payments, it is now no longer the sale and purchase of exports and imports of goods and services which determines  the exchange rate, it is the trade in financial assets which is far more important as banks, businesses, governments and individuals buy and sell foreign shares and government securities and move money between countries to gain higher interest rates or profit from speculative movements in currencies. To put this into perspective, the World Trade Organisation estimated that in 2015, total international trade in goods and services amounted to $20 trillion while $5 trillion was traded on the foreign exchange market EACH Day.

Therefore factors which influence speculators’ views of the economy will have a major short-term impact on the value of the currency. Hence, immediately after Brexit, the general view was that leaving the EU would have detrimental effects on the economy (or at least on those dealing in financial assets and currencies) and this reduced the demand for sterling from overseas and increased its supply from UK holders seeking to purchase foreign financial assets. Similarly if the political situation changes and that affects views of the economy, then the value of the currency will change. Other things which will affect the value of the currency will be changes (or expected changes) in our rate of interest or the rate of interest in other major currencies, the economic performance of our economy or other major countries since if, for example, the US economy weakens, then relatively, the UK economy will be stronger and this will encourage a movement of money from the dollar to the pound.