Economics help blog – Page 188

Should We Tax Swearing?

22 January 202023 January 2013 by Tejvan Pettinger

An important principle in economics is the idea of taxing goods with negative externalities (goods which impose external costs on the rest of society) Usually, in a free market, we ignore the external costs of our consumption. We only face the private costs. But, this leads to overconsumption of these goods and a deadweight welfare …

Reducing government borrowing during economic growth

18 November 201717 January 2013 by Tejvan Pettinger

Readers Question: In a non-recession situation, if a government reduces it’s borrowing and thus it’s spending, how can that have a depressing effect on the economy? Wouldn’t that money be either be loaned to someone else or spent to on goods and services by the people who have it?

Yes. If an economy is growing rapidly, a reduction in government borrowing (thought government spending cuts) shouldn’t have a depressing effect on the economy. This is because if the economy is strong, a fall in government spending, is usually absorbed by the growing private sector. This is related to the principle of crowding out. – The idea that during economic growth, government spending is crowding out private sector spending. Therefore, as government spending falls, this ‘crowded out’ private sector can increase.

Example

If the economy is growing strongly, then investors will be keen to invest in private enterprise – loans to firms, buying shares on the stock market, buying commercial bonds e.t.c. This is because during an economic boom with rising incomes, investors feel that the private sector is going to give a relatively good rate of return.

Therefore, if the government wishes to borrow money in a period of economic growth, it will have to work harder to attract private investors to buy government bonds. If the private sector is giving a rate of return of say 5%, then, ceteris paribus, the bond yield on government debt will have to be at least 5% to attract borrowing.

If the government wishes to borrow more during times of economic growth, it is competing with private sector investment, and this competition to attract buyers will most likely push up bond yields.

EU Report on Unemployment and Social Developments

18 November 201716 January 2013 by Tejvan Pettinger

For the past few years, it has felt a bit repetitive always asking the same question – why can’t the EU policy makers see unemployment, social exclusion and rising poverty as the real challenge facing Europe? In the current climate it is not bond yields, inflation targets or levels of debt that are the real threat to European stability. The real threat is from rising unemployment, declining living standards and increased inequality. But, whilst EU policy tinkers at the edge, it has seemed to ignore the more pressing problems of the real economy.

After being rather dismissive of the EU policy for economic growth for 2013, a recent report on Employment and Social Developments in Europe 2013 is much more encouraging.

neets

Firstly, there is a clear recognition of some of the real problems facing Europe. Rising unemployment, social exclusion and inequality. The above graph shows levels of NEETs

NEETs – stands for Not in Employment, Education or Training. It is a guide to the number of people without work, but also lacking any positive action to get back into work. It is a situation that can easily lead to demotivation, and when concentrated amongst young people, cause social unrest.

What would happen if we developed the all-powerful robot?

22 January 202016 January 2013 by Tejvan Pettinger

In a follow up to the previous post on the Luddite Fallacy. What would happen if we developed the ‘perfect – all-powerful robot’? Rather than looking at what happens if we start with no technology and increase, what if we start at the other end of the spectrum? Suppose technological advances lead to a robot …

EU Policies for Economic Growth in 2013

17 May 20199 January 2013 by Tejvan Pettinger

The EU has recently entered a double dip recession, with southern Eurozone countries particularly badly affected. As a consequence of the recession, EU unemployment continues to rise. Over the last twelve months, the number of unemployed people has increased by 2 million,
to reach more than 25 million. The unemployment rate is up to 10.6% in the EU and 11.6% in the euro area.

eu unemployment

To restore economic growth, the EU has produced an Annual Growth Survey 2013 to try and deal with these issues. They have suggested concentrating on:

Pursuing differentiated, growth-friendly fiscal consolidation
Restoring normal lending to the economy
Promoting growth and competitiveness for today and tomorrow
Tackling unemployment and the social consequences of the crisis
Modernising public administration

Differentiated, growth-friendly fiscal consolidation

The EU report states that, in recent years, sovereign debt in the EU has increased from 60% to 90% of GDP, and therefore debt levels need to be reduced quickly. However, they admit that fiscal consolidation (tax increases and spending cuts) might lead to lower growth. However, they argue that some types of fiscal consolidation may have a smaller negative impact on economic growth. For example.

Reducing taxes on labour could help create employment. Lower labour costs could help improve competitiveness. This is important for countries like Portugal who are relatively uncompetitive. (see also: Fiscal devaluation)
They state reducing government spending has a lower negative multiplier effect than increasing taxes.
Consider raising retirement ages and prevent early retirement being taken – this can reduce government spending with less impact on economic growth..

Evaluation of ‘Growth-friendly fiscal consolidation’

‘Growth friendly fiscal consolidation’ seems a contradiction in terms. The basic problem is that fiscal consolidation has significantly reduced economic growth. There has been a large negative multiplier effect within the EU
Spending cuts do have a large negative multiplier effect. Cuts to welfare benefits have led to lower spending and greater poverty amongst the unemployed.
The EU claim the stability and growth pact has flexibility. ‘For example, during 2012, the deadlines set for Spain and Portugal to bring their government deficits back below 3% of GDP were extended by one year, giving them until 2014 to achieve this goal.’ But, this really isn’t flexibility. A country with the depth of recession of Spain and Portugal shouldn’t be trying to achieve a budget deficit of 3% of GDP in 2014, when private spending is falling.
There is no mention of monetary policy (e.g. some form of increasing the money supply). If correctly implemented, monetary policy could provide a boost to aggregate demand as fiscal consolidation reduces AD.

Top 10 Economies by GDP

29 December 20208 January 2013 by Tejvan Pettinger

When measuring the largest / best economies, there are different ways of ranking countries.

Nominal GDP in $US. This is the simplest measure and shows the actual final market value of GDP produced in the economy. It is useful for comparing levels of international trade. It uses the official exchange rate.
GDP in Purchasing Power Parity (PPP). This takes into account the different costs of living in countries. For example, a country like India will have a higher PPP GDP because although GDP is low, official exchange rates don’t reflect the lower living costs. You can see a comparison here GDP at PPP v GDP in nominal terms
Real GDP per capita. This gives an impression of average incomes in a country. Clearly, the countries with the most people will have high GDP (e.g. India, China). But, GDP per capita will be relatively lower. It can involve Nominal GDP per capita or GDP per capita PPP.
Human Development Index (HDI). The Human Development Index is different to GDP; it tries to take into account living standards by looking at levels of life expectancy, literacy, education, standards of living, and quality of life for countries worldwide.

Top 10 Economies by Nominal GDP

top10-economies-nominal-gdp

Economics and Positive Thinking

18 November 20177 January 2013 by Tejvan Pettinger

If you read any number of self-improvement books, you will come across ideas such as ‘what you think, you will become’. Over, 2,500 years ago, the Buddha said: “All that we are is the result of what we have thought. The mind is everything. What we think we become.”

When overused these positive thinking mantras can become a bit tiresome. But, maybe there is still some relevance to modern macroeconomics. Not least, we have the phrase of ‘talking ourselves into a recession’. The idea that if key people in the economy keep talking about a recession, this can become a self-fulfilling prophecy. With a threat of recession, people spend less, firms invest less and this creates falling aggregate demand. Cynics may say, people wouldn’t talk about a recession unless there was some economic justification so it will be hard to attribute it all to merely negative talk. Nevertheless, it does show the potential of strong opinions having a significant bearing on the outcome.

If you wish for Austerity, you tend to Get it

The next thing that springs to mind is the recent attitude to the economy and debt. We could characterise the EU and UK’s attitude as ‘austerian’. Generally austerians take a very pessimistic view towards the economy. They are deeply worried about levels of debt and government borrowing. They fear bond markets will very soon penalise these high levels of debt. Austerians spend a lot of time telling the electorate how the economy is in a bad shape and we need to respond with strict spending cuts and tax increases. There is also a sense of morality attached to this austerity approach. ‘Debt got us into this mess, we can’t use debt to get out of it.’

The consequence of austerity measures has generally been higher unemployment and lower economic growth. In the Eurozone, austerity policies have generally failed to reduce debt to GDP ratios because of the recession. Therefore, with budget deficits failing to fall, austerians take this as evidence to cut spending more deeply. Again it is accompanied by a sense of morality. “We almost deserve a period of austerity in response to the previous lending boom of the mid 2000s.” ‘We can’t spend money, we don’t have’. Those of an Austerian nature have an instinctive dislike to the idea of printing money – even though all evidence of the past five years is that increasing the monetary base has not caused any significant inflation. Perhaps it’s related to the idea ‘we don’t deserve to create money from nothing, but we do deserve a recession.’

UK Economy in 2013

22 January 202031 December 2012 by Tejvan Pettinger

Summary of UK Economy at the Start of 2013

The UK economy starts 2013 after one of the longest periods of economic stagnation on record. GDP has been flat for the past two years, and real GDP is still way below the 2008 peak.

Despite the depressing picture of economic growth, unemployment (7.9%) is much lower than might be expected given the sluggish nature of economic growth. However, if we count under-employment (e.g. working fewer hours than would like) and disguised unemployment, then the picture is much less promising.

Consumer confidence remains low as most people have been affected by the unwelcome combination of high inflation and low wage growth. Inflation fell in 2012, but in 2013, we again may see some unwelcome return of cost-push inflation – prices rising despite the output gap.