Thursday, December 2, 2010

More on Central Banking

I've mentioned from time to time central banking, and that next term we'll look into what Central Banks are and what they do. There's much more fuss currently in the US about their central banking system, the Federal Reserve, than there is here. This article is a reasonably good description of both the system, and the problems it is facing.

There are a lot of issues covered in the article, but something I mentioned yesterday is of note: Since the 1970s the Fed has had a "dual mandate" - maintain not just low and stable prices but also maximum employment (whatever that means). This would seem to be at the bottom of many criticisms over there, since it gives an unelected body a large say in macroeconomic policy.

We'll find out next term that monetary policy and fiscal policy can often act against each other and frequently do. They act against each other in general macroeconomic terms: If the central bank is targetting output. In the UK we appear to try to limit this potential conflict by having the Bank of England only target keeping inflation at a particular level. This may lead to it considering output when it sets interest rates (since output affects inflation) but fundamentally the Bank is judged on whether it achieves 2%.

So it may be this extra macroeconomic goal the Fed is set in the US which attracts particular criticism. It could also just be that the Tea Partiers have stirred things up there, but certainly we don't appear to be criticising the Bank of England half as much here.

The other point of interest is whether unelected bodies should have power over economic policy. The first instinct is probably to shout "no!", but on the other hand populist policies are not necessarily the best policies. The populist policy of hounding banks out of town is self-defeating since then jobs are lost, and who is going to set-up business in an environment. Populist policies also often conflict with what you'll learn during econ101ab to be the best policy - so perhaps unelected bodies may do a better job?

Wednesday, December 1, 2010

Classic Economists and Mistakes

In the UK, the Bank of England has a mono mandate, so to speak: It is charged with keeping inflation low and stable - around 2%. In the US however, the Federal Reserve (the central bank system) has a dual mandate: To also achieve maximum employment via its monetary policy decisions.

It's fair to say some people disagree with this while others agree. John B Taylor is a prominent figure in monetary policy theory in economics, as you'll learn next term. He devised what is called the Taylor Rule: That the interest rate should be set taking into account both inflation and the output gap (the difference between actual and potential GDP).

However, despite this, Taylor is now a fierce critic of the Federal Reserve and commonly makes statements like: "The Fed's decision to hold interest rates too low for too long from 2002 to 2004 exacerbated the formation of the housing bubble." He states this based on a very simple equation called the Taylor Rule: It's not even estimated. It's a very theory-orientated construction and from his he asserts monetary policy was too loose in 2002-4 and this caused the housing bubble and subsequent crash.

Now Taylor, along with a Republican politician, is suggesting that this dual mandate should be removed and replaced with a single-mandate, just price stability.

Greg Mankiw isn't convinced about this, suggesting that even if the mandate was simply price stability some of the same policies (notably quantitative easing) would have still taken place.

Furthermore, Taylor is making a really fundamentally basic error of judgement that a lot of economics (and people more generally) often make: Comparing apples and oranges.

Taylor says: QE1 (quantitative easing last year) didn't work: The economy is still in a mess. Yet how on earth does he know this? He's comparing the pre-QE1 economy with the post-QE1 economy yet these are two fundamentally different things.

He wants to compare the post-QE1 (or today's) economy with another US economy run up to today without QE1, so a without-QE1 post-QE1 economy. But he can't and the next best thing is to compare where we are now with where we were back then.

But how does John B Taylor know that the without-QE1 economy today wouldn't be in a much worse situation? The answer is: He doesn't. He asserts it would be, based on no evidence.

Next term, we'll try and cover why this kind of analysis is very dangerous indeed because it often leads to policymakers changing policy - changing policy based on little or no evidence, but simple assertions, however strongly put.

Monday, November 22, 2010

Ireland's Bail Out and the Euro

Don't just be aware of politicians and their inability to grasp the simple economics you'll be learning this year and throughout your degree, be aware also of journalists who peddle bad economics and bad science in the pursuit of convincing you of their prior prejudice.

Today, Ireland will be bailed out by a number of international institutions: The Eurozone, the EU and the IMF. It's the upshot of Ireland's banks taking on a vast amount of liabilities, way in excess of the entire GDP of Ireland. In other words, it's the upshot of hugely bad decisions on the part of bankers in Ireland.

Of course, this is grotesque for so many Irish people, who have had to endure massive austerity measures as a result of these terrible decisions. However, if you read the Telegraph, the Daily Mail and the Sun today about the situation, you'll probably come away believing the Euro is the sole reason for all of Ireland's problems.

You may even hear Tory politicians like Douglas Carswell who may try to tell you that Ireland's difficulties are entirely Euro based and that in fact we're not bailing out Ireland today, but the Eurozone.

Let's stand back for a moment. A single currency between Ireland and most of its major trading partners has existed now for 10 years, against the pleasure of people like Douglas Carswell and the right-wing, Europhobic media. So you have to take things with a pinch of salt. You have to ask things like, as an economist: What is an Optimal Currency Area? Is it the Eurozone? Is it bigger? Is it smaller? The North East of the UK often struggles with being in the same Poundzone as the South East - although of course Carswell and co don't call for the break-up of the Poundzone which bears all the characteristics of the Eurozone.

The answer, of course, is that there are some benefits to a common currency. It's nice to not have to change currency, to be subject to the whims of the foreign exchange markets. But as economic experience and theory has shown over the years, this is only true to the extent that changes in the level of competitiveness (reflected in productivity) can be recognised within this arrangement: Either by the moving of prices or exchange rates to ensure the Law of One Price, or PPP, roughly holds.

More on all of this next term. In the meantime - look beyond what journalists and politicians write and ask why they write it in the first place...

Friday, November 19, 2010

What is a Central Bank and Why Do We Have One?

It's become very fashionable in the US (I guess it's always been fashionable in reality but it seems to have been amplified since 2007) to criticise the Fed - that's the US central bank system.

There's been a recent discussion between Tyler Cowen and Alex Tabarrok, with a bit extra from Brian Caplan, about this.

Tabarrok, along with some of the research he cites, goes a little further than perhaps many of us in the UK might even begin to think: He talks about what would have happened had the Fed never existed. In 1903 the Federal Reserve system was established, whereas the Bank of England has been existence much longer (although not necessarily in its current form).

This is a much stronger position than just assessing the performance of an institution, but it does beg the question: What would happen instead? What exactly does a central bank do? Reportedly the Fed was given the mandate to stabilise the economy and hence conduct monetary policy.

So the research Tabarrok considers looks at pre- and post-Fed and looks at how the economy fared. It finds that post-Fed, things went a bit messy: Great Depression and all that.

But the big problem here is: Can we really rewind the clock and carry out this comparison? We don't know what the US, post-1913, would have looked like without the Fed in place so the comparison is a little false. We can try and control for all of the other factors which might explain economic outcomes, but this is an imperfect science.

So we're basically left with economic theory; what does economic theory tell us about the functions of a central bank? Come back next term for lectures, and we'll find out!

Monday, November 15, 2010


The QE2, you may believe, is a cruise liner, but you'd be wrong. It's what hip and happening economists are calling the second bout of Quantitative Easing by central banks around the world. Well, by the US Central Bank, the Federal Reserve, at any rate. Relatively strong UK economic growth last quarter meant the Bank of England decided against QE2 at its last MPC meeting.

Quantitative easing is, in very simple and not overly accurate terms, the printing of money by central banks. Its official name in the US is the "large-scale asset purchase plan": It is the central bank buying huge amounts of financial assets (bonds and bills) on financial markets, the result being that they push money into the economy (since they have to use money to buy these assets).

The hopeful idea is that this enables the economy to grow because there is more money going around for people to use; one of the common themes of commentators on the state of the global economy has been that no money is available for investing as banks repair their balance sheets.

One way which we'll learn about next term that Central Banks influence economic activity is through interest rates. Lower interest rates make current use of money cheaper (credit is cheaper, less opportunity cost related to saving) and hence this is a common policy used for helping economies escape recessions. However, once interest rates reach zero then Central Banks cannot reduce them any lower to stimulate economic activity, and hence why some central banks have resorted to QE: It is an alternative way to make more money available more cheaply.

As may not be totally unsurprising given the current political climate in America, opinions are strongly divided about QE2. Some argue it's essential to stimulate economic growth in the circumstances, but others are worried about it, not least Sarah Palin.

Wednesday, November 10, 2010

Gold is very valuable and immensely powerful

More on gold. And inflation. This article by David Leonhardt ridicules the media and others who continually talk about new record high prices in commodities such as oil or gold: They aren't adjusting for inflation! Inflation means that it costs more pounds or dollars to get the same thing at a later point in time, as you probably are well aware of. So that means that prices generally rise, and hence new record highs can be quite common.

It's a nice little explanation of this. The article then talks about the wider agenda of people touting the price of gold and is quite complicated. The first bit about adjusting for inflation though is somewhat amusing...

Good as Gold?

You'll learn next term about the history of monetary arrangements that the industrialised world has dabbled with over the years.

Most tend to be abandoned in perceived failure - funnily enough usually around the time of some recession or time of economic difficulty.

The current time of economic difficulty is no different, and people are once again making suggestions that perhaps the current monetary arrangement, inflation targetting, has run its course.

The argument is: Inflation targetting was all well and good; it gave us low and stable inflation and a long period of growth - but it also gave us asset price bubbles (share prices, house prices, commodity prices), most of which have at different points led to small recessions, and arguably to the huge recession we just suffered.

So, instead, some people have suggested a return to something called the Gold Standard. The World Bank's chief Robert Zoellick made the suggestion in the FT last week.

A gold standard is where the value of the currency is backed (at least partially) in gold, some recognisable tangible object. This is in contrast to the current system where currency is backed only in our faith that it is worth what it is worth.

If you're interested in reading more about this suggestion, and how it has been greeted, then there's a New York Times discussion on it here, with contributions from various top economists from the US.

Tuesday, October 26, 2010

GDP Growth Announcement

Every three months or so, the Office for National Statistics releases the numbers for Gross Domestic Product (GDP) for the previous quarter (three month period). Today it released its first estimate of what GDP was for the UK in 2010Q3 (the third quarter of 2010) which is based on about a quarter of all the information available to them.

Next term we'll talk quite a bit about GDP but the BBC's economics section has quite a nice description of it if you're not familiar.

In 2010Q2 the UK economy grew by 1.2% which was surprisingly high, but it is often the case that as an economy starts to emerge from a recession that it grows strongly. Growth in 2010Q3 was expected to be much slower with many pundits expecting about 0.4%. Today though that number came in at 0.8%. It means that for 2010 as a whole, growth is likely to be just shy of 2%.

Does this mean the economy is up and running and all is well? As the BBC article makes clear however, there are other reasons to be a little bit pessimistic about future growth: Retail sales fell in September, and house prices are falling (these are seen as a barometer of economic activity). Furthermore, the impact of the Coalition government's steep spending cuts will start to take effect soon, something else that is likely to depress future growth.

Monday, October 25, 2010

US Economists on the UK Austerity

As you may have noticed, last Wednesday George Osborne announced the Comprehensive Spending Review, to much fanfare.

There are a few things to say in addition to linking up a couple of comments from US economists (against is Paul Krugman, for is Stephen Williamson).

The most important is this: When you're doing economics, try as best you can to separate what politics from economics. All politicians have a rather distorted view of economics: Tory ministers blame anything and everything on Labour, Labour ministers blame anything and everything on the Conservatives. Of course, they both have their economists, but the point is: Soon you'll be able to understand which bits each set of economists is ignoring to come to its conclusions.

For example, according to the Tories Labour is entirely responsible for the recession we suffered, and the budget deficit that has resulted. They support this with some assertions (apparently lax regulation from the FSA, not "fixing the roof when the sun was shining" whatever that actually means!). But what you will learn this year is that recessions happen: They are part of the natural cycle of the economy, and no amount of government action will solve that (Tories are right to laugh at Gordon Brown's comment years ago about ending boom and bust it's fair to say).

Additionally, government finances are a product of the economic cycle: In recessions, people are out of work and hence they don't pay taxes and instead claim benefits. So the budget deficit will worsen in a recession, especially the worst one in 70 years.

You'll learn next term about why economists worry about these cuts in spending (regardless of their views about how large the state should be). It's something called Aggregate Demand, and the Multiplier principle. The practical upshot is found in warnings by KPMG that the public sector cuts have a direct impact elsewhere because many small businesses rely on the public sector (councils, etc) for contracts, and hence many may go out of business as a result.

Friday, October 22, 2010

Don't be like French Students!

As you may be aware, France is being brought to a standstill by industrial action at the moment. The beef is that the retirement age is being increased from 60 to 62. In case you thought you might have misread that, you didn't. Even after the increase, the French will be retiring at least three years before Brits. And of course, they limit working weeks to 35 hours also, so while they are working for that shorter timespan, they put in less hours.

Of course, that's a very general argument and doesn't take into account how hard the French work in that more limited time - it may be they are more productive because they get more rest.

Nonetheless, students are rioting too about this! What is their rationale? Apparently they fear that because old people will be retiring later, there will be less jobs for them when they (eventually) finish their studies.

This highlights a mistake that as keen economics students Martin and I would like you to never make: The economy isn't a zero-sum game. I.e. there isn't a fixed number (say 40m) jobs to go around meaning that if one job is taken by one person, that's one job less left in the economy. The economy is a dynamic place where opportunities are constantly arising to set-up business and provide a product/service. Hence the potential number of jobs is always changing and so the economy is not a zero-sum game in economist speak.

So these students are perhaps even more deluded than the students that speak out on behalf of the NUS in the UK.

Good news!

If you're a girl, that is. Your degree will get 31% more pay with your degree than without it! For us guys, the picture is a little less dramatic - with economics your pay will be 19.6% higher than it would otherwise have been. If you do an arts degree and you are male, your pay will be a rather more trifling 5% higher. The research underlying this is commented on here.

Why is this all important? Well, if fees double as is likely to be the case, it makes a non-economics social science degree (or some other humanities degree) seem like a very poor investment - a very low rate of return for a high outlay. As the article says, a humanities degree becomes something of a consumption good, as opposed to an investment.

An investment good, as you'll be learning about this year, is something that yields future returns. A consumption good only yields current returns (when you consume that Mars Bar). If your pay is unlikely to go up much and your fees are very high, then it can't be that you're buying the good (a humanities degree) for investment purposes. It must be for consumption - the joy of learning for example.

Your economics degree on the other hand, regardless of whether you're a boy or a girl, will pay off in the future via higher earnings and hence is worth the investment.

Thursday, October 14, 2010

Make Use of the Internet!

You've just started your economics degree (or at least a degree vaguely related to economics), which means you must be at least a little keen to understand more about the economy around us - if not least to impress your friends.

An attitude that seems to pervade many economics students at Birmingham though is "how much do I have to do?", or perhaps better paraphrased "how little can I get away with doing?". Can I get away with just buying this particular textbook and then reading the specific bits the lecturer refers to? Can I then spend all of the rest of my time doing other more interesting stuff (Wii, drinking, whatever)?

The answer, of course, is "yes, of course you can - provided you're happy with a 2:2". In the increasingly difficult workplace out there post-degree, a 2:2 might not cut the mustard.

The point is this: Make the most of your time as a student, and make the most of the resources available to you - academically! It sounds cringeworthy, but most previous students of economics would have given their right arm for the kinds of resources freely available to you via the internet. Prominent economists whom previous to hear their thoughts you needed to be a student at their university (not always easy when they're at Harvard and such places), but now you can just read their blogs.

You can read the most prominent thinkers in the field daily and start to understand how they think, how economists think, and most of all you can get their take on why the economy is where it is right now.

Use these resources available to you - you don't need to be an expert to read them because these guys are trying to write in a more easily accessible language than you'd find in one of their papers. To this end and to encourage you to do this, an extra panel has been added on the right hand side of this blog as you read it, with the title ECON101AB BLOGS. Go visit them, browse, see what you learn!

Wednesday, October 13, 2010

Unemployment Numbers

Another in the long list of things we'll look into next term in econ101b is Unemployment - joblessness. Unemployment almost always refers to workers out of work, although others have talked about unemployed houses recently, amongst other things.

But we usually think about workers being unemployed - not employed, not put to work. Every month the UK statistical agency reports unemployment figures for the UK and they are usually pored over with great interest, particularly in times like the current (will we have a double dip? Can we blame the Tories yet?) ones. Apparently the number of people being employed (hence leaving the state of unemployment) increased by nearly 200,000 this last month.

This would seem to be great news, but as Stumbling and Mumbling points out, things ain't always as they seem. Most of all, the numbers of people becoming employed are not necessarily coming from the pool of unemployed workers. Many other things are possible: People who were not previously actively seeking work (hence not counted as unemployed, e.g. mothers returning to the workforce after raising kids or the retired) may have taken jobs, or immigrants may have taken jobs in the UK (not likely at the moment thanks to the incoming government's arbitrary caps).

The bottom line is: Much of these numbers are people becoming self-employed or taking part-time work. In fact, full time employment has fallen in these latest released numbers.

It most certainly isn't a particularly encouraging story about UK Plc...

What do Central Banks do?

I'm lecturer for second term (econ101b), which is macroeconomics. Currently Martin Jensen is lecturing you on microeconomics, and so when I post I'll be pointing you towards macroeconomic events and news and how that links in to what we'll look at next term.

One thing we'll ask next term is: What do Central Banks do? They are always in the news, particularly around Monetary Policy Committee (MPC) meeting times in the UK. The Bank of England is the Central Bank for the UK. In the US, a system called the Federal Reserve System operates in place of a single Central Bank, and there are Federal Reserves of a number of regions in the US - Minneapolis, New York, Philadelphia, San Francisco, etc. But they all hang together under the Federal Reserve, naturally headquartered in Washington. Their equivalent of the MPC called the FOMC, or the Federal Open Market Committee.*

But what do these Central Banks actually do? Generally they are given responsibility for monetary policy in most economies: The MPC sets interest rates to achieve an inflation target, the idea being that if inflation is kept low and stable, the macroeconomy will stay roughly in order. In the US, the objective of the Federal Reserve is a little wider than just inflation and includes the wider macroeconomy.

There have been many criticisms over the years about whether targetting is the right thing: What's the right target? Why just inflation? Why not asset prices? What is the effect of different targets? An alternative school of thought, pushed more than most by an economist called Scott Sumner, is that Central Banks should target nominal GDP (that's GDP in the actual prices we pay before any correction is carried out for inflation).

It turns out that in its most recent meeting the FOMC hinted it may well begin such a targetting exercise. Next term we'll consider much more what this actually means, other that at the basic level it means that the Federal Reserve would target a particular level of nominal GDP (NGDP) and hence choose interest rates and other monetary tools in order to achieve this aim, just like currently the Bank of England chooses interest rates to achieve 2% inflation.

*: Despite the prevalence of Wikipedia links in this post, the advice is: Don't rely on Wikipedia. Anyone can edit it and hence put false information in there. Rely instead, if you need to for referencing, on something like the New Palgrave Dictionary of Economics. If you refer to Wikipedia in any assignments you hand in, you'll likely incur the wrath of your tutor!

Tuesday, October 12, 2010

Economics of Everything

If you're a new student here at Birmingham, keen to learn your economics, can I point you in the direction of Marginal Revolution? It's a blog written by two economists, Tyler Cowen and Alex Tabarrok and contains many posts each day, often relating every day or topical events into the thinking of economists.

For example today they comment on the contract the Chilean miners have apparently signed in order that none of them attempts to individually profit from the group's experiences underground for over two months. Will it hold up? How will they enforce it if one of the group deviates?

All these kinds of things are intriguing economic issues relating to such actions of individuals and groups. Marginal Revolution's Markets in Everything series of posts are highly illuminatings and I'd highly recommend them as you begin your economics degree and start attempting to think like economists...

Price Indices

In econ101b next term, you'll learn about inflation. Inflation is the phenomenon of rising prices and the term is applied to individual prices and prices more generally. Inflation matters: One of the main goals of macroeconomic policy is to keep prices low and stable, one way or another. This is important because if prices are low and stable, they are predictable, and consumers know how much they need to spend, as do firms, making rates of return on investments a safer proposition.

The question, of course, is exactly how do you measure it? Official statistics are usually what are called Consumer Price Indices (CPIs). But they are based on a basket of goods (literally, the types of goods the "average" family buys), and hence measure the changes in prices of these goods.

But who is this average family, and is this really the most important thing for government policy to be targetting? Already people are asking whether it makes sense when the kinds of goods poor folk buy are very different to the kinds of goods rich people buy (see here), but the latest development is perhaps not entirely surprising: The Google Price Index.

The idea is that Google will use the ridiculous volumes of information it has at its disposal to measure inflation - just how much are prices changing of the goods that people are actually buying (based on what they do on Google?). There are many possible advantages of such an index - it could be released daily (whereas official statistics are monthly), and it would likely be easily updated to reflect new trends in consumption (it is commonly reported (but I can't find a link!) that until very recently candles were still a main item in the CPI calculation).

If you're unaware of the many things Google has done since it has had Hal Varian as its Chief Economist, there is at the bare minimum Google Trends and its use for things like prediction Bird Flu from internet searches.

Monday, October 11, 2010

Nobel Prize in Economics

The final Nobel Prize announcement each year is economics - that happened just now. The winners of the 2010 economics Nobel Prize are Peter A. Diamond, Dale T. Mortensen, Christopher A. Pissarides. Tyler Cowen at Marginal Revolution is posting about each of these guys: Their common link is search models in labour markets, and search theory more generally.

If you're seeking a British angle on this, Pissarides is at the LSE and is British-Cypriot. The other two are American. All of them promote ideas relating to something we'll learn about next term in macroeconomics: Frictional unemployment. People often change jobs, and this doesn't happen instantaneously, hence some of the unemployment at any given time will be frictional as people search for jobs. Once they find a job they are matched.

Thinking Ahead...Already!

There's a new module choice for your second year now, relative to what you could have studied had you started your degree two years ago (i.e., it's starting this year) - econ217ab. It's called the Contemporary UK Economy, and aims to cover contemorary issues relating to the UK economy - it does what it says on the tin.

Toby Kendall this term will talk about amongst other things immigration and student fees, two big issues on the political agenda currently, and ones you no doubt have opinions on. I'll also talk about the economics of sport this term before moving on to the global economic crisis and the UK's part in it, before talking about monetary and fiscal policy.

Today the first mootings of what will be said when a big review of education (by Lord Browne) funding is released tomorrow were released and discussed. Prof. Michael Arthur of Leeds University was on the radio this morning talking about how fees might be arranged if universities, as is expected by some, are given the freedom to set fees themselves. Classroom only courses, such as economics, would require something in the region of six to seven thousand pounds per student, with the sciences (medical, physical and otherwise) requiring a lot more.

That would just be a cost-based approach - to try and ensure that the system is fully funded based on demand. That wouldn't even be an outcomes approach, which you might expect - if you can get a bit of paper that shows the world how great you are, and allows you to earn more, in a purely free market you'd expect to pay some money for that. So on that basis, then of the classroom courses you might expect to pay more for an economics degree since it leads you towards higher earning careers in banking and finance, potentially.

If this discussion starts to offend your principles, I'd invite you to think about it over the coming year, and sign up for econ217ab in your second year where we'll discuss all of these kinds of issues and invite you to apply economic theory and reasoning to them. It's fascinating stuff...

Thursday, October 7, 2010

What you will learn this year...

So you chose economics, and you've arrived at university.  If your A-level economics was anything like mine, you may have been given a stylised history of the UK with some brief treatment of the 1970s before moving on to the 1980s and Margaret Thatcher.  You probably got the impression from how the material was presented to you that Labour had a reputation for being unable to manage the economy - something that bedeviled them in 1992, but something New Labour managed to overcome in 1997.

One thing though has become remarkably clear since the May General Election this year - the Conservatives are remarkably good at rewriting economic history, and unfathomly good at getting people (who don't necessarily even vote Tory) to believe what they say about the economy.

You will learn this year and in your three years studying economics that politicians generally are not folk to be trusted when they open their mouths about the economy.  You'll learn about incentives, and how incentive structures influence perverse outcomes (e.g. see page 19 of this newsletter about this).  You probably already knew this, but the incentives in play for politicians influence the things they utter on the economy - they are party political first, and truthful a distant second.

An example of this was William Hague on Radio 4 yesterday morning.  Cuts will harm defence, yet as with any Tory comment on anything related to cuts, they try and paint a picture of how shambolic Labour was, the mess they left, etc., in order to (1) score some political points (who would ever vote that lot in again after this?!) and (2) excuse themselves from the blame for the adverse effects of the cuts they intend to make.

The fundamental underlying matter here though is that people do actually seem to believe cuts are unavoidable.  You would almost think, given this, that the economics profession was in consensus about this: Cuts are necessary and unavoidable.  It may, then, come as some surprise to find that a lot of prominent economists actually don't believe this.  Paul Krugman, Joseph Stiglitz (both Nobel prizewinners), Brad DeLong, Martin Wolf (writer at the FT), Robert Skidelsky to name but a few, dissent.

Stay tuned then: Don't skip lectures, listen in them, attempt the assignments you get for each class and attend each class, and you'll learn a lot more about why these economists think the way they do, and why you should treat with scepticism every economic utterance from a politician...

Tuesday, October 5, 2010

Fiscal Austerity Won't Be Painless

In second term (econ101b), you'll start to learn a lot about macroeconomics, and so the current debate over the macroeconomy and fiscal austerity will start to make a lot more sense after that.  You'll learn about a concept called Aggregate Demand and you'll learn about contributions to it and to economic growth via something called the Circular Flow of Income.  Later in term you'll learn about the money markets, interest rates, and something called the LM curve.

These are basic economic theory concepts, and they allow us to start thinking about the impact of government spending, and help frame the discussions that have been had amongst politicians over the last year relating to austerity.  The Labour party emphasised the impact of spending on Aggregate Demand, saying that big cuts in spending will reduce aggregate demand and plunge us back into recession - less money going around the Circular Flow of Income.  The Tories on the other hand, argued that the government is too big: It "crowds out" the private sector.  We need to cut back government so that the private sector can flourish.

Of course, the problem is putting numbers into these concepts.  They are all well and good as concepts but how big are they?  Labour would argue crowding out isn't that important, particularly at a time of recession and low aggregate demand; Labour would also argue that the multiplier (the factor by which GDP grows given an increase in government spending) is large.  On the other hand, the Tories would argue that crowding out is important, and the multiplier is small.  So who is right?

The Economist reports on two studies which give conflicting viewpoints on this: Welcome to economics!  One research paper, by Alesina and Ardegna, suggests that fiscal austerity can help stimulate growth; the other, from the IMF, says it won't, and picks holes in the Alesina-Ardegna strategy.  The devil is in the details, but what this speaks of most is that, unfortunately, putting numbers on things in economics is very hard work indeed, and often you'll find that people put the numbers on things that they want to see via clever techniques and border on the deceptive, in order to further their case.

Monday, October 4, 2010

Learning Economics Will Challenge You...

...if the views held by the NUS are anything to go by.  I've blogged on this before, but the National Union of Students, whom you may come to enjoy the provisions of during your time at Birmingham, tend to appoint economic illiterates to their Presidency.  This morning the current incumbent, a chap called Aaron Porter, displayed another great dose of either economic illiteracy, or just naivety on Radio 4.

The basic gist was: Fees may go up in the future, and Radio 4 had Dr Wendy Platt of the Russell Group of universities (which includes Birmingham) interviewed along with Porter.  Porter, however, disputed the idea that universities are making a loss on teaching undergraduate students in the UK due to the constraints on fees and other funding from central government.

The fact is, the Economics Department makes a huge loss on teaching undergraduates here in Birmingham, and we don't have anything like the amount of equipment involved in the physical sciences when teaching you.  £3000 from each of you per year simply doesn't cut the mustard of hours of lecturing, hours of preparing, hours of TAs giving classes, room bookings, energy costs of lighting rooms and powering up huge projectors, etc.  And that doesn't even begin to get going on opportunity costs - what else could the University have done with these resources?  Couldn't I have been researching?

Furthermore, a more important question even than this is: Why should the taxpayer completely fund your university education?  What does Joe Bloggs taxpayer down in the less wealthy suburbs of Birmingham gain from your being educated here that his taxpayers money should subsidise it?  (in reality: To subsidise your beer consumption)  Why shouldn't fees be much, much higher than they are to reflect this?

You'll learn this coming term about externalities of education: The social benefit is actually greater than the private benefit: It does actually help Joe Bloggs in the suburbs if you help to shape better government policy, if you run a company that provides them with better products, and it certainly helps Joe Bloggs if we have a much better educated elite in this country dictating what will happen in the future.

But how much is he helped?  How much greater is the social benefit of having an educated you vs a non-educated you?  The chances are, you will earn hundreds of thousands of pounds more than you would have without your degree for various reasons (not even related to the intrinsic quality of it - just having the degree signals a lot about you to future employers) - so you're getting a fantastic pay-off for your trifling three grand a year - why shouldn't you pay a bit more for that?

Final point: What about those that can't afford it?  Scholarships.

Thursday, September 30, 2010

Welcome to Birmingham!

The new term and academic year is upon us.  If you are just arriving at Birmingham for the first time, welcome!  If you're returning, welcome back!

This blog is something I've set up for the part of econ101ab (Principles of Economics), an introductory economics course at the University of Birmingham.  I teach the second part ("b"), which is macroeconomics.  In the coming term before Christmas you'll have lectures from Martin Jensen on microeconomics.

If you're unsure of the difference between the two, PJ O'Rourke has helpfully obliged with a definition:

One thing that economists do know is that the study of economics is divided into two fields, "microeconomics" and "macroeconomics". Micro is the study of individual behaviour, and macro is the study of how economics behave as a whole. That is, microeconomics concerns things that economists are specifically wrong about, while macroeconomics concerns things economists are wrong about generally.

Enjoy microeconomics this term!

Monday, September 13, 2010

Strikes Ahead

The TUC (Trade Unions Council) are backing joint strikes if planned Tory Coalition cuts go ahead, it has been announced today.

I generally don't back old Labour, lefty stuff like this: I find unions too militant, and usually too ignorant of economics.  Those of you studying econ101 this coming year will find out exactly why unions often cause more harm than good.

However, they don't necessarily always cause more harm than good, for many reasons.  The first, of course, is when employers are simply wielding disproportionate and unfair power as a single employer of many people.  Collective action on the part of workers can hope to match the employer for bargaining power and strike a better agreement for workers.  Classical economists might complain that this distorts the market value for labour, but does it really?  Is the market value really what employers set for wages, particularly when they wield some kind of market power?  You'll learn about the monopolisation of markets in econ101.

Furthermore, should the cuts go ahead?  There's little doubt that the deficit is very large currently, but is that an excuse to wield the axe left, right and centre, as the Coalition is planning?  Some very interesting analysis can be found by Chris Dillow at a blog called Stumbling and Mumbling that I'm a big fan of: The fact is that no government has the kind of knowledge that the Coalition is talking about using to make these cuts fair because nobody can have that kind of knowledge except God (if he exists*).

So given this, I'm actually sympathetic to the Unions and I hope that collective actions on the part of the masses can force this Coalition to rethink.  Governments can be incredibly arrogant creatures at the best of time; lets see just how arrogant this one will be...

(* - I believe he does. See here if you're interested.)

Wednesday, September 8, 2010

Don't Know

I liked this blog article on the BBC this morning:

It basically says: Polls don't include the "don't know" respondents when reporting results.  So when we're told x% support tighter immigration controls, it's even more bogus a number than we might have already thought.

Yet the "don't knows" are probably the wisest respondents of all, since they realise how complicated the underlying issue is that the questioner is being asked.

Having said that, the case regarding immigration is clear.  If you want more expensive meals, transport, etc., then by all means throw out all the immigrants.  Be careful what you wish for...

Friday, August 27, 2010

A Classic Economics Debate

The more I explore of the blogs various leading economists write, the more I wonder whether they have private lives - I don't understand how they can blog, and comment on other peoples' blogs, as much as they do and remain productive, without their non-work lives being squeezed into basically sleeping 5-6 hours a night tops.

But that's by the by.  I've been intrigued by the debate the last few days about a speech by Narayana Kocherlakota, who is the President of the Minneapolis Fed (part of the US central banking system).  The point that has generated the debate is this:
To sum up, over the long run, a low fed funds rate must lead to consistent—but low—levels of deflation.
So someone very high up in the US Central Banking system is making the point that low interest rates must (not might, or could) lead to deflation (that's negative inflation).  This is, of course, counter to most folks' intuition - at least folk who have studied monetary economics at a basic level.  There, we teach that lower interest rates encourage investment and discourage savings, hence raising aggregate demand.  With higher aggregate demand, one expects inflation to be the result of low interest rates.

Hence, perhaps unsurprisingly, a number of people are frothing at the mouth: Paul Krugman, Scott Sumner, Nick Rowe, Mark Thoma and Andy Harless, to name but a few prominent US economists and bloggers.  I'd say it's interesting to have a read of most of these links - particularly the one for Nick Rowe as the comments there are particularly extensive.  Andy Harless has perhaps the most humorous take: Kocherlakota it seems has mistaken "must lead to" with "are a result of", and hence Harless suggests that perhaps umbrellas cause rain.

Now of course the blogosphere is full of such strongly put opinions, and I suspect the most widely read blogs are those that are particularly forthright and strong in how they put forward ideas - rather than the mild-mannered blogs that don't say anything particularly strongly.

The other side of this can be found in the comments on Nick Rowe's blog from two people: Steven Williamson and David Andolfatto.  Williamson is a particularly forthright economist, and spends most of his time bashing Paul Krugman.  I used to teach a module for which the textbook I inherited was his textbook.  If I was still teaching that module, I would have dropped the textbook by now, simply because of the outright hostility he holds to all schools of thought other than his own, and the associated intellectual arrogance he exudes in all posts.

The essence of Williamson's response is that of course you can put together a model which explains the statement Kocherlakota wrote.  That's the standard economist's response.  And because he can think of a model, then he decides he has to mock and deride all those who don't subscribe to the simple model he wrote down.

Of course, what isn't answered by Williamson is the empirical relevance of the model.  Does his mini-theory have any relevance whatsoever in the real world?  (in economist-speak is it empirically relevant?).  The model he puts forward makes one particular assumption that stands out: Prices move freely.  So prices aren't sticky at all.  This is a standard debate amongst macroeconomists, would you believe - whether prices are sticky or not.  Forget shoe-leather costs, wage contracts, etc., all the obvious empirical evidence for sticky prices.  Some people, like Williamson reject that prices are sticky - on intellectual grounds, not empirical ones.  Williamson finds the theoretical underpinning arguments for sticky prices unpersuasive, and so therefore these sticky prices can't possibly exist.

So basically we're left with a debate between people who look at the world, see the frictions and issues with the economic mechanism and design models that represent these problems and hence draw conclusions likely relevant for policymakers, who draw the conclusion that low interest rates in general should not be synonymous with deflation, and others who take a theoretical view of the world starting from the premise it functions just perfectly (I don't see a good reason why sticky prices exist therefore they don't).  In the latter world, which bears no relation to the real world, it is possible to defend the initial umbrellas-cause-rain position of Kocherlakota.  In the former world, it really isn't possible.  I'm firmly in the former world.

Thursday, August 26, 2010

A German Speaking Too Soon

Hans-Werner Sinn has always been a fairly outspoken German economist.  Not too long ago he was telling Paul Krugman that he was wrong to be telling Germans to be spending more in no uncertain terms.  Now he's giving us a rather bold statement about where the world is currently, on Project Syndicate.

He starts by asserting that the Financial Crisis is over.  I'm not totally sure about that.

He ends by talking about Germany, and how it's now booming.  We should point out that Germany grew by an impressive 2.2% last quarter, but as has been said elsewhere, this is just one data point.  Sinn, however, is convinced that Germany is now booming.  We'll have to wait and see.

He ends with a somewhat perplexing statement:
The explanation for this divided world is that countries like Greece, Spain, and the US, which experienced a long boom financed by huge capital imports, now face growing difficulties in finding foreign finance.
Now Greece and Spain I can understand having growing difficulties in finding foreign finance, but the US?!  Perhaps Sinn is taking his opposition to anything Krugman writes to new levels, but Krugman has been fairly clear, using interest rates on long-term bonds and the like (so data, not just opinions), that actually, international investors still see the US and the US dollar as a safe haven for their assets.

For your interest, Krugman himself debunks the theory that Germany is some economic miracle here.

Wednesday, August 25, 2010

Central Planning and the Market Economy

John B Taylor (of Taylor Rule fame) has a nice blog that accompanies his first year macro course at Stanford University in the US.  He has just written about a long term example of the efficacy of markets over central planning: Russia now exports grain.

Before the central planning of the Soviet Union Russia and the Ukraine exported grain.  Under the Soviet system of giant collective farms, the Soviet Union was forced to import grain due to the economic disaster that was collectivisation.  Now, 20 years after the fall of the Soviet Union, Russia is exporting again.  How about that?

Friday, August 20, 2010

Economists and Immigration

There's little doubt that one of the major news topics of recent years has been immigration.  It was an election issue, and will no doubt be a recurring issue.  Ed Balls is chipping in as he bids for the Labour leadership.  Politicians are falling over themselves to sound more and more like Joe Bloggs on the street, who is very concerned about immigration.

The Coalition government has taken steps to introduce its promised cap on non-EU immigration, and would, given the opportunity, do more.

But is this good for us?  What does economics tell us here?  It can tell us many things.  First, it begs the question: Why restrict?  By restricting the free movement of factors of production to their most productive uses, we must therefore end up with a less optimal solution.  The same or inferior output at higher cost, as we throw out the non-EU worker who was selected as the best person for that particular job.

Hard headed and brutal as it is, there simply is no economic argument for restricting immigration.  Let's think a little more about the consequences of restricting.  Poor quality British workers get jobs, they're protected, and have little incentive to be anything other than mediocre - they won't be replaced by that more highly skilled Aussie or Canadian because they are now ineligible for the job.

You will probably notice during your time even as an undergraduate in Birmingham that the overseas students you see amongst you are by some distance the most hard working and keen to learn.  They emerge with the better qualifications and knowledge, and are likely the more employable people.  But they won't be employable legally in the UK.  We'll be poorer as a result.

We'll be poorer because meals in restaurants will cost more and will be delivered by unmotivated, overpaid British waitresses instead of motivated and hard working immigrants.

I could go on.  The simple fact is, there are no good reasons for restricting immigration.  What about overcrowding, you might ask?  Well, there will become a point where migrating to the UK is no longer beneficial to people elsewhere, if we left things unrestricted.  The marginal benefit of doing so would be outweighed by the marginal cost.

We'd have more things produced because the world is not a zero-sum game.  If immigrants take some jobs, there are still plenty of others out there, and those displaced should be motivated to upskill themselves and find a new job.  If they aren't prepared, I don't want to know about them and I certainly don't want to hear their moaning - the kind of moaning that has secured the current anti-immigrant sentiment in this country.

Thursday, August 19, 2010

Robert Skidelsky on Deficit Cutting

Robert Skidelsky is a very prominent economist, not least for his biographies of Keynes.  As you can imagine, he is more Keynesian in his leaning as an economist than some.  Right now, with the austerity of the Coalition and others the flavour of the moment, people are much less inclined towards Keynesian arguments.

The feel now is that we need to cut the deficit - this is the big problem, not the fact we're stuck in an anemic recovery from the recession of 2008-9.  Skidelsky has written this article in Project Syndicate on the issue, and I think the punchline has to be:
Events and common sense drove them to deficit finance in 2009-2010, but they have not abandoned the theory that depressions cannot happen, and that deficits are therefore always harmful (except in war!). So now they vie with each other in their haste to cut off the lifeline that they themselves extended.

Wednesday, August 18, 2010

100 Days of the Coalition

Today marks 100 days since the Tories and the Lib-Dems agreed to join forces in a coalition government in the aftermath of the inconclusive election back in May.

Naturally, the Coalition is trying to put a positive spin on what it has achieved in 100 days.  Most of this is journalists trying to fill space - August is a nororiously dry time for news stories.

Econ101b teaches about monetary and fiscal policy having time lags for implementation, and we learn that the UK government actually has little power over monetary policy these days, having granted the Bank of England independence in 1997.  Given these long time lags, it is probably quite unrealistic to expect that the Coalition can have had any impact thus far on economic outcomes - at least at the macroeconomic level.

It's trying hard though - and another argument we come across in econ101b can give them some credence for trying to argue they've had an impact thus far: Expectations.

Expectations are powerful things.  Investors decide whether to invest or not based on their expectations.  Expect a downturn, and they won't invest - at least not in physical projects.  Why build a new office block if you expect a prolonged downturn?  Can you know you'll fill it?

A central emphasis when the Coalition began was that bond markets were soon likely to turn on the UK - our debt is too high, and our deficit is too high - as high as Greece!  Such talk is based on expectations: Expectations that the expectations of investors are that the UK will default like Greece.

Much has passed under the water since.  Not least, interest rates on long-term government debt have been falling - i.e. it's been getting cheaper for the UK government to borrow.  Kind of runs against what the Coalition had asserted.  The voices of austerity such as the Coalition have been mocked by various sources, not least Nobel Prizewinner Paul Krugman.  Another Nobel Prizewinner, Joseph Stiglitz, has attacked this panic in the face of financial markets: Who is governing, Robert Skidelsky has asked, is it the government, or is it the financial markets?

Of course it's far too soon to judge the coalition; even if I say bond market rates have fallen, there's no reason why they won't rise in the future.  Other unexpected events may mean that despite the austerity, the UK escapes a recession, and unemployment doesn't rise above 3m - something that looks odds on currently.  And even if we have a recession, it still will be too early to judge the coalition - it may be that the cuts are necessary to secure a longer term prosperity for the UK.  I have my doubts, but this may well be the case...

Sunday, August 15, 2010

Policy Uncertainty

One thing we'll talk about second term is the impact uncertainty can have on economic outcomes.  In other words, if people are uncertain, they do less: They don't take big decisions.  In particular, they don't make investment decisions.

A big thing in the US currently is the impact of uncertainty over government policy, and its impact on the economy.  Tyler Cowen at Marginal Revolution (a blog well worth subscribing to for both terms of your econ101 experience) has this post about it.  Some people suggest that uncertainty over policy is the reason why the US economy is not recovering strongly.  These people are generally Republicans responding to the fact they are out of power and trying to lay all the blame at the foot of the in-power Democrats.

As Cowen points out though, there's much more at stake - not least the restructuring that's going on in the US economy.

The main point I think is: Don't trust anyone who tries to tell you there's a single cause for why the economy is in the mess it's in, either this side of the Atlantic or the other.  There's many, many causes, and a huge number of alternative solutions out there that may or may not work.  The economy is a complicated beast, and far too complicated for single-cause explanations...

The Austrians

A fairly non-mainstream school of thought in economics is the Austrian School of Thought.  Austrians emphasise the price mechanism and its supremacy: Left unconstrained it leads to the best possible allocation of resources.  It may be that the market doesn't lead to be the optimal allocation, distortions are possible; but government intervention won't be helpful - the "dead hand" of government will always lead to a worse outcome.

As a result, an Austrian economist probably doesn't like very much the actual Austrian, or continental European, economic systems - social democracies with high taxes and heavy government intervention in markets.

Funny then that this Austrian economist, Don Boudreaux, seems to be gloating about strong growth in Germany vs the US.  Germany has just reported 2.2% GDP growth last quarter (which is impressive), while the US appears to be toiling towards a double dip recession.

Germany also has been embracing austerity recently, with significant spending cuts to address its large budget deficit, while the US, via Obama and the Democrats, is about the only major economy still attempting to pursue fiscal stimulus policies to encourage economic growth.

So the fact that the US, maintaining strong government intervention, is muddling towards a double dip recession, while Germany, cutting it back, has reported strong growth, is music to this Austrian's ears.

Of course, the story is so much more complicated than that.  Not least: You can't prove anything with one data point.  Then: How quickly do fiscal policies have any effect?  Finally, what is the impact of government intervention in the macroeconomy?  (the answer is it's quite slow with time lags, so the current numbers have nothing to do with recent decisions on austerity vs stimulus spending).

All these things you'll learn more about second term next year when we get to macroeconomics in the econ101 course.

Saturday, August 14, 2010

The New Year

It's mid August, but fairly soon the academic year will be starting.

A huge amount has been happening in the macroeconomy over the spring and summer of this year, and so I'll start to make posts on here for keen econ101ab students at Birmingham, and students elsewhere who might be interested.

As a taster, the big debate over the summer has been over austerity vs spending. The Tories have started drastically cutting government spending, waxing on repeatedly, with ad nauseum, about Labour's supposed recklessness. Here's an example I saw today.

Were Labour reckless? Or are the Tories the reckless ones, potentially plunging the UK back into recession? It's the kind of question that gets right to the heart of what economics is. Keep tuned for more...

Wednesday, June 16, 2010

Nouriel Roubini on Double Dip Changes

Nouriel Roubini is a very well known and respected economist, and he has written recently on the possibility of a double dip recession. Very important reading.

Monday, June 7, 2010

Consider this a warning!

Nope, not related to exam results, but a research paper recently published (for the paper see here, for a blog on the article see here).

From survey data (not perfect but gives a good indication), the time a student (like your good selves) spends studying has fallen between 1961 and 2003 from 40 hours to 27 hours.

Now bare in mind the standard working week is 37.5 hours, and when you were in school you generally had probably over 25 contact hours a week plus homework, something's up here.

Let's just say: If you're spending 27 or less hours a week studying towards your degree, you're a part-timer. You're all due to get your marks soon, and if you did spend nearer 27 than 40 hours a week over your first year, don't be surprised if your marks are a little lower than you were expecting...

Thursday, May 27, 2010

More on the Cuts

The internet is a rich source of blogs written by economists when they should probably be doing some work.

I'm keen on blogs by intelligent economists that argue against the current general public's sympathy for the need for efficiency savings, massive deficit reduction and a reduction in the size of the state on the grounds that the Tories made the arguments. So I enjoyed this morning reading a blog called Stumbling and Mumbling.

From three days ago, a post on Nick Clegg's abandonment of his previous position in favour of the Tory line, and his clear confusion on the subject. It does seem a shame that Clegg can't just say: Yep, we had to give in on this one in the interests of the coalition holding together, but instead has to put on this really rather sad show that he really now thinks this is necessary. As the blog post makes clear, his position is pretty weak at best.

From two days ago, a comment on the actual cuts, making use of some of the microeconomics learnt in econ101a as well as thinking about the macro scale of things learnt in econ101b.

How exactly is the big boss (Osborne) going to know where the inefficiencies are? It's in the interests of those that profit from the inefficiencies to hide them in any large institution (and the public sector at millions of workers is pretty huge!). As a result, Osborne couldn't really identify many efficiency savings and so has just done what was long expected, and cut anyway.

Wednesday, May 26, 2010

The OECD on the UK via the WSJ

The OECD publishes fairly frequent forecasts on the state of the global economy, and its constituent parts - so recently it has revised its opinion on the UK: See here.

It thinks UK interest rates should rise to about 3.5% by the end of 2011 to cope with rising inflationary pressures likely to come about due to a recovering economy and a lot of money moving around (after Quantitative Easing). 3.5% seems high, but then this is 18 months down the line, and a lot of water could pass under the bridge between now and then...

The Cuts!

So the Tories (helped by the Lib Dems) got into power in the end, and late last week were able to announce the first installment in their cuts, £6.25bn announced by George Osborne last week. As noted in the Times article flagged up in the last post on GDP growth, this fiscal tightening is likely to act as a "brake on growth".

That comes from the simple analysis from the circular flow of income and the multiplier effect. From there, government spending (G) was an injection of funds into the circular flow, and taxation (T) a withdrawal. If G rises, the money then goes round the cycle a few times, with withdrawals along the way. So if £6.25bn was injected into the economy, the overall effect would be greater than £6.25bn.

How much greater? This depends on how much is withdrawn each time, and of course everybody is different. But let's look into some rough and ready figures. The top band of income tax is currently 40%, but of course we're taxed in many ways less directly. So lets say half our income goes in taxes. Then there's savings. The data suggest that essentially we don't bother saving much these days - although that's changing at the moment with all the talk of austerity. So lets say we save 10% of our income. Then we import a lot too, so lets say perhaps we import goods amounting to about 20% of our income. That leaves just 20% of that £6.25bn still in the cycle next time round.

The overall multiplier then will be 1/0.8=1.25 and hence £6.25bn becomes only £7.8bn. So assuming the same works in reverse, then perhaps George's cuts won't be too bad.

But, of course, what if we don't import as much as 20%? What if we save a bit less? Say we save just 2% of our income, and import 10%, then the marginal propensity to withdraw (what we divided by a moment ago for the multipler) becomes 1/(1-0.5-0.02-0.1)=1/0.38 and £6.25bn becomes £16.4bn.

How much is the economy currently growing by? GDP in 2010Q1 was £360bn up from £349bn in 2009Q1 (see So that appears to be a jump of just £11bn between 2009Q1 and 2010Q1.

We shall have to wait and see what the effect of Osborne's cuts are. At least one commentator acknowledges the effect of the multipler (see this FT article), but doesn't think it'll be big enough to tip us back into recession. It'll be interesting though (and painful for many I imagine).

Growth Revised Up

In the last week, the Office for National Statistics (ONS) has announced that GDP growth for 2010Q1 has been revised up from 0.2% to 0.3%. May not sound like a big deal but when GDP is in the order of billions, 0.3% of a billion is a substantial number.

What are these updates? Are they the outcomes of different measures of GDP? The answer is no: They are simply the ONS getting closer to the right number.

There's great clamour in our 24-hour news, instant gratification culture to get our hands on the numbers as soon as possible, and the ONS responds to that by announcing GDP as early as possible after the quarter has ended (at the end of March in this case). That comes (I think!) 40 days after the end of the quarter, and the first revision 60 days.

The initial number comes after only a supposedly representative portion of the economy has been added up, and of course over time more of the economy's (recorded) activity is added up. For 2009Q4, the first announcement was 0.2% growth, the first revision up to 0.3%, the last revision to 0.4%. Perhaps the first segment the ONS counts isn't so representative after all.

It should also be noted that it's a quarterly figure, not an annual one. The growth is based on the same quarterly figure for the previous year however (to avoid the fact that production post-Christmas for example will always fall).

Friday, May 21, 2010

MPC Member Talks About UK Inflation

Reported in the Wall Street Journal, Adam Posen talks about the UK's current situation.

Inflation in the UK is rising while it's falling elsewhere, and we're above target yet the Bank of England isn't about to start raising interest rates.

Yet inflation expectations are a big thing: Will people infer from the Bank's lack of action that in reality inflation won't be low any more? Apparently not, Posen says. He says that from surveys and yields on particular length financial assets (ones that you could put your money into if you were concerned about inflation eroding the value of your money), expectations are still "anchored".

But why is inflation rising in the UK and not elsewhere? It's keeping the MPC up at night. We covered in our lectures cost-push and demand-pull inflation. In the last 2 years the pound has lost 25% of its value against our trading partners. That could well explain why inflation is up: Cost-push inflation, as the cost of inputs rises because we import many of our inputs.

Maybe a student of econ101b should write to Adam and help him get some sleep tonight...

Tuesday, May 18, 2010

Inflation is high

Today it's been announced that inflation has hit 3.7%, way above the Bank of England's 2% +/- 1% target. Hence the governor of the Bank of England, Mervyn King, has had to send another letter to the Chancellor. Of course, for better or worse (I'd argue the latter), the Chancellor is now George Osborne, as a coalition government formed last week between the Tories and the Lib Dems: We are living in a ConDemNation - best pun I've come across yet.

King has many valid points about inflation and why it's high - the weak exchange rate, which if you recall, makes imports more expensive. And we Brits tend to consume many imports (not least fuel). But also, this time last year VAT was at 15%, and now it's back up to 17.5%, distorting the figures.

Interestingly enough, King expects inflation in 2011 to be below target, so to fall from its current level. This is despite the record government deficit (remember how the PSNCR feeds into the money supply and hence likely feeds into inflation), and also a likely further hike in VAT to about 20%.

Exam is Over. What now?

You've done the econ101ab exam, and hopefully it wasn't too painful (despite the chaos in both rooms where the exam took place - sorry about that). In time you'll get your results.

In the meantime, I'll carry on making econ101b-related posts on here. My apologies for the long break in postings - I got somewhat carried away in Facebook debates about the economy pre-election.

Thursday, May 6, 2010

Election Day!

I guess Monday's looming exam weighs more heavily on your minds, but if you want a light hearted distraction related to the course, the Guardian is reporting that 18 of the last 20 UK elections have been correctly predicted by the US stock market, the Dow Jones.

Recall that stock markets reflect confidence in the economy, and hence can often be seen as a barometer of economic sentiment. Left-wing parties have often been seen as bad for the economy and hence the stock market may fall on expectation of a left-wing party gaining power.

So this Guardian reporter suggests that the US stock market predicts a hung parliament, but the FTSE predicts a Tory majority. We'll have to see. I could wax lyrical on what the FTSE movements mean, but I won't.

I'll vote Labour later on today, and hope for the sake of the economy that the Tories don't get that majority...

Friday, April 30, 2010

Economics and the Tories

I'm immersed in multiple Facebook debates with friends of mine on the election and how the economy matters in my thoughts about the election.

I wrote the following note today which I'll post here. If it's already obvious, I'm a Christian and so some comments on the note relate to that; but I think these kinds of things should form one's views on other aspects of life such as the economy. Anyway, here goes:

Quite a few people perhaps are interested in my thoughts on the election as an economist. I'm far from the only economist in the world, and my background is as a Labour voter. So hopefully my economist friends will comment on this also and correct me where they think I'm wrong - in case it is (which I hope not) that political matters are clouding the economic judgement.

If you're linked in, I've debated with you on Facebook already so thought you might be interested.

Where to start. Hopefully as I go through these things it'll become clear that my take on how the economy work means naturally I'm more inclined towards Labour than the Tories. More inclined towards Lib Dems too, for that matter.

Deficit. Basic economic theory says that the total demand for goods (stuff produced in the economy and imported) is called Aggregate Demand, and made up of what we as consumers consume (called C), what firms invest in for future production (given the letter I), what the government spends (G), and net exports (NX, so if more people buy our goods abroad than we buy of their goods then this term is positive). So: AD=C+I+G+NX.

Furthermore, money in the economy goes round and round - between firms and workers who consume and so it goes back to firms, who pay workers, and so on...

So: There's something called a multiplier effect. If the government ploughs in some more money (G goes up), then that extra money goes round a few times as firms pay workers who buy stuff in Tescos etc). So that means a £1bn injection of government money will lead to total output (GDP) going up by more than £1bn because we spend it quite a few times between us.

The same has to work in reverse. Pull out money, demand falls, goods aren't sold, the economy has to shrink.

But should we put loads of G in the mixture? No - other economic theory talks about the crowding out effect: Lots of government spending raises interest rates meaning firms invest less and their share of the economy falls. So we can't just go on raising G all the time, that won't lead to strong growth because firms are crowded out of the picture.

So when should G fall? G should fall when its negative impact won't be enough to tip the economy into a recession. Governments should not be compared to households for reasons I may touch on later, but they can be compared to firms in some contexts - one I'm thinking of is this. As a firm, if you borrow to start up, you pay the money back once the firm is profitable - you don't do it immediately because then you'd never get off the ground. So we need to cut later.

And we need to cut: The government's share of the economy can't be the 50% it is now. It is too high. But it's 50% because it owns Northern Rock and most of RBS and Lloyds TSB, and because many jobs have been lost in the private sector in the recession. These are rather special (as in different, peculiar) times.

So as you can see, nothing controversial in there, it's all very basic economics. And it so happens it corresponds to the Labour policy on getting the deficit back under control.

More generally, where do I stand on the economy? Economics teaches that markets are very effective tools for helping the economy function. Via the price mechanism, where the price moves in a market to equate supply and demand, information is immediately conveyed to all people about the state of the market.

But markets are far, far from perfect. Some people in the market are uninformed, and those well informed exploit them. Other times, if left to the market some things (benefits for those unemployed) just would not happen.

So the power of markets needs to be harnessed. That's regulation mostly. Not nationalisation most of the time (tho the army and some thing of course need to remain nationalised). Financial markets are everyone's favourite target, and rightly so.

Perversely, a right-wing view on regulation has held sway since the 1970s (not just under Labour!), and politics has reflected this, and regulation has got lighter. Alan Greenspan in the US (former governer of their central bank) has come under a lot of fire for honestly believing financial markets could regulate themselves. Of course they can't when some people have a lot of knowledge, and others have little, yet a lot of money is going around.

So I'm left of centre on how the economy should be run. But not much left of centre. The benefits system has got to be, as much as possible, not open to abuse (but we live in a fallen, imperfect world, people will always abuse the system). But it's got to be there. As people we just aren't charitable enough.

A tax system should also be progressive. Many right-wing economists (that the Tories love) would say that highly progressive taxes discourage effort - and in the extreme I think this is true. But to use that kind of idea to justify their cuts on inheritance tax just stink and reveal much about their priorities (given their track record).

On purely economic grounds: It's poorer folk that spend a higher proportion of their income, hence if you're aiming tax cuts, you'd aim them at the poorer people not the richer. But of course, I don't form my beliefs on taxation by economics alone, but also as a Christian. A realistic Christian. Of course, it's not nice that the government forces us to pay tax to redistribute income (Toby - you moan about how inequal income is now in the UK - but if the Tories came in nothing they do would reduce inequality!). But left to ourselves, we're sinful and greedy. There's just no way we'd pay enough in charity to ensure abject poverty was avoided. Why did the welfare state come about in the first place?!

Few more election related things. IMF. All parties are as bad as each other at spinning and distorting, but the Tory IMF thing is just wrong on so many levels. Not least this: The IMF was called in in 1976 to bail out the UK. In 1977 there was a hung parliament. Hence the Tories are wrong historically on the link between the two.

Will the UK become like Greece? Dave's linking of our currently deficit to Greece's is almost entirely irrelevant. Bit like saying I'm spending too much today, and so is that guy over there who is about to file for bankruptcy. Our debt is massively smaller than Greece's, and has historically been so. Furthermore, our debt is long-term (10-15 year bonds), Greece's is very short term - hence they keep having to appease creditors that they'll pay eventually. Finally, the UK's debt is given the top rating by credit agencies: Greece's is junk. Maybe the UK will suffer a downgrading (but I doubt it - the last S&P statement basically said there was no risk of this), but the UK has an infinitely better track record than Greece, and hence it's fairly unlikely.

Are business leaders backing the Tories btw? The Tories would like to tell you that, but businesses are after a credible deficit reduction plan, and the IFS has made it clear none of the parties do enough. I'd personally like better, more clearer plans - but I want more clearer plans to reduce the debt once the economy is growing. It simply isn't sensible to cut it and send the economy back into recession.

That's enough for now. Hopefully it's clear why I vote Labour based on my principles formed from being a Christian and an economist.

Incidentally, I just finished chatting with John Fender (on BBC and Sky News in the last day), and despite being a Lib Dem voter, he is most convinced by Labour on the economy.

Monday, April 26, 2010


We've talked at various points about the effect of expectations: On exchange rates, on investment, and hence on national output, GDP.

Today the BBC reports that business leaders fear a hung parliament because of the potential paralysis that it could produce.

This is an expectations effect: If firms are more pessimistic they may invest less, meaning that the economic growth reported in the last two quarters may be unsustainable.

Much political hay will be made of this. The Tories have most to fear about a hung parliament for many reasons: One is that not so long ago they expected to win outright - that looks unlikely now. The second is that a Labour-LibDem pact is much more likely than a LibDem-Tory pact, regardless of the recent pronouncements by the major parties.

If the political maneuvering fascinates you, you should think about taking a microeconomic theory module next year, one that will introduce you to game theory. See you at 9...

Friday, April 23, 2010

Growth at 0.2%

The ONS has announced the UK economy grew by 0.2% in 2010Q1 (first three months of the year).

This is lower than many expected, and of course people are making big game of it. Apparently it's a sign that momentum in the economy is waning according to Ernst and Young. But industrial growth surged 0.7% in the same period, and this is just the first release of GDP. I suspect we'll see the figure revised higher as the ONS counts up more of the economy (this figure is based on just 40% of the numbers).

All Those Lovely Numbers

Today is the big one, but this week has seen a steady release of important numbers relating to the economy.

We've learnt that unemployment finally tipped above 2.5m in 2010Q1, that inflation is up to 3.4% due in part to petrol prices (again due in main part to exchange rate changes and tax), that government borrowing is very large indeed (what didn't we know?).

Today is the big one: GDP growth, from 9:30am.

Also, the debates: Final one on campus next Thursday - get along if you can!

Wednesday, April 21, 2010

If you need another reason not to vote BNP...

...then your economics lectures will have given you some idea about that.

Today the BNP has called for restrictions on imports from China, on the basis that somehow this will protect UK jobs.

What will it actually do? Simply make goods more expensive, making us poorer.

It'll make us reliant on governments to always protect us from those terrible foreigners who have developed better ways to do things. Surely the better thing is to try and compete and develop better ways too instead of protecting?

But, really, it's just too easy to pick holes in BNP attempts at policy...

Monday, April 19, 2010

Big Week!

My apologies for a 10-day delay in new posts - but of course, you were all fervently revising anyway weren't you?

Now you've revised 101b, you have all the key economic concepts under your grasp ahead of a big week for the politicians in the run up to the election on May 6.

After the positive news from the National Institute of Economic and Social Research (very influential think tank) suggesting growth would be 0.4% in the first three months of 2010 (2010Q1), Ernst & Young's Item Club has suggested that growth will be sluggish - under 1% for the whole year. This is likely a different spin on the same news. 0.4% each quarter of 2010 would mean, roughly speaking, growth of around 1% a year (because the 0.4% each quarter is calculated on the previous year so it's hard to calculate exactly based on the quarterly figures).

But this BBC news article reporting the bad news from Ernst and Young points out that most days this week there will be some new economic data released: Thursday is public finances (expect Cameron to harp on again about debt then), and Friday is GDP in 2010Q1. Should be fun...

Friday, April 9, 2010

Petrol Prices at Record Levels: It's the Exchange Rate, Stupid

I'm sure you'll come across many vitriolic outbursts by people this week as petrol prices hit their highest levels ever. That vitriol will be directed at two entities: The government, and the oil companies.

But this FT article gives a good account of why that anger and abuse would be poorly directed.

The exchange rate is causing much of our difficulties. Remember, if the exchange rate depreciates then imports cost more since we need more currency to buy them now. Hence oil costs more, and so petrol costs more.

Added to that, the recession meant people have started driving less (400 miles on average a year, according to the RAC), and so oil companies have had to cut refinery capacity as a result. Hence supply has fallen off too, contributing to the problems.

So it's not all as clear as you might thing, and not all the government's, or BP's, or Shell's fault.

The Exam

I'm getting a lot of emails about the exam, so I'm going to write all that I'm going to reply to any future emails that I get in this post.

The econ101b (i.e. the macro part) exam will follow the same structure as in previous years, so all past papers from the last 5 years will be helpful for you to get some idea of what to expect.

In terms of the economic content of the questions, they are based on what was covered in the lectures. So to prepare best, you must re-cover what was looked at in lectures. This means in the first instance reading back over the lecture slides and notes you made. That's the bare minimum, and I think you'd struggle to get through on just that alone.

You need to consider also reading the textbook chapters corresponding to the lectures (which were clearly advertised). You should read all of the chapters, and not be of the mindset: How little do I need to read. The less you read, the worse you do, the more you read, the better you do. It's a simple production function.

You'll be well advised to take the time in the run up to the exam to do some practice essays and practice exams as part of your revision.

China To Loosen Exchange Rate

We've looked fairly extensively at exchanges rates over econ101b, and considered fixed and floating exchange rates.

China is the most obvious example of a fixed exchange rate system, and that system has long attracted criticism especially from the US because it means Chinese exports remain cheaper as the Chinese economy grows, and imports into China stay expensive. Hence Chinese exporters are helped, while US (and to some extent UK) exporters into China are disadvantaged.

It seems that China will start to allow some marginal changes in its currency - i.e. it will allow more movement. Given the vast amounts of currency coming into China to buy its exports, there is only one direction the currency will go - up!

The linked NY Times article is very nicely written to explain all the various aspects of this possible movement. Well worth a read.

More Good News for the Economy

The National Institute of Economic and Social Research predicts that growth will be 0.4% this quarter (so January-March of this year), the same as it was in the last quarter of 2009.

This is great news if the state of the economy concerns you - regardless of the upcoming election, because of course it'll get a spinning or two in that arena.

You may be of the cynical viewpoint that what does it matter if these GDP figures show growth - what matters is unemployment right? People getting jobs.

GDP is one part of a much bigger picture, but it's important: If the economy is seen to be growing (and 0.4% a quarter is a reasonable rate of growth - not stellar by any means but given the sharp falls in 2008 and 2009 it's growth) then confidence will grow amongst businessmen to invest, creating jobs.

Furthermore, the conditions are good for expansion for many UK firms because of the weak exchange rate: Remember this makes our exports cheaper. Reflecting this, the Grauniad also reports than manufacturing output is up.

It's worth pointing out that in the manufacturing article, the BCC (British Chamber of Commerce, representing UK companies) makes the point that government help will still be needed post election to keep the recovery going.

Now, the Tories propose to cut the deficit drastically post-election if they're in power. They've ring fenced those important things like health and education. So support for businesses has to be one of the areas that would see less funding - and rightly so from a Tory point of view.

Remember: A more right-wing, classical take on economics would say the state should be small, and let business do what it does best without interference from the government. I wonder whether some business leaders will lift their heads above the parapets and voice support for Labour in the coming days?

Finally: The Grauniad. That's what Private Eye calls the Guardian because of the volume of typos in the Guardian. Check out the grammatical error in the manufacturing article (if it hasn't been corrected yet).

Thursday, April 8, 2010

If you're already bored...

...of the election coverage, the Guardian has an amusing take on each day's events. Here's yesterday.

Wednesday, April 7, 2010

The Real World isn't Like Football

Often newspapers and regular folk like you or I will talk about the economic growth of the UK relative to Europe, the US, Asia, etc., as if it's some big World Cup of economic growth - the UK has to do well (make the quarter finals say).

But of course, it doesn't work quite like that. If other economies are not growing, then they will not be buying our goods so much, and so our demand will rise less, and hence our economy will grow less. This is the premise for the rather gloomy article in the Guardian, noting that European growth levels are lower than the UK, and will hold the UK's recovery back.

This is the flip side to the article I referred to earlier from the BBC, reporting that the OECD thinks the UK's growth will be faster than most G7 countries in the latter part of 2010. If others aren't growing, they aren't confident and aren't buying our goods. Much better if they're growing about the same kind of rate that we are. Faster if they like buying our goods!

Plenty to talk about

There's more on the National Insurance hike planned by Labour, and opposed by the Tories. Another 38 or so businessmen have come out supporting the Tories.

There are plenty of reflections possible on this. First, it's an increase in taxation, which is a withdrawal from the circular flow of income. In that respect, it is potentially harmful to the economic recovery since the multiplier will work in reverse. On the other hand, it's hardly a massive increase. Although it appears to go against the general Labour mantra of postpone cutting the deficit, there are plenty of signs now that the economy is picking up - see recent blogs on business confidence.

Businessmen, it seems, are a little put out that Labour have described them as being deceived by the Tories. This is hardly surprising! Luke Johnson has responded by calling the government "economically illiterate", and also remarks in the linked FT article: “I think that’s insulting. Businesses know very well what will encourage them to employ more people.”

Businessmen also know exactly what to say, and what not to say. Of course, NI needn't be a tax on jobs: Firms have the choice of objective. If they are profit maximisers then yes, labour becomes more expensive as an input. Of course, if their objective is to maximise some profit function that includes social welfare as an argument, then the firms may take a hit to profits instead of cutting workers and remain at their previous output levels.

Optimistic of course, but the point is this: Businessmen don't like the NI rise because it will cut their profits, and businessman, as a rule, are greedy. So that's why they are squealing at the moment. And that's what I mean by they know exactly what to say.

Of course, the Tories are promising drastic cuts in government spending if in power. Given the things being protected (education, health), it means that other incentive programs (tax credit, etc) will have to be shelved. I suspect businesses aren't quite thinking through the implications of this.

The fact is, we will all have to feel the effects of the measures to cut the deficit, and there is little reason to protect businessmen at the expense of others, if this is possible...