The New Global Economics

On Monday 14th November, one of a two part programme will be on at 8:00pm about the future of the global economy. The show will be broadcast by Martin Wolf, the chief economics commentator of the FT, where he'll discuss the short and long run effects and how things will be changing in the world.

Please do listen to it, if you can't then listen on iplayer when convenient for you, because this programme will give you valuable analysis that you can use in your exam and possible case studies...etc. To find out more about the programme, click here.

The Credit Crunch

For those of you who are unsure what the 'credit crunch' is, and how it started, watch this simplified, but concise video that explains it.

http://www.youtube.com/watch?v=wGxmgwUWNr0&feature=related

To summarise, occurring in 2008, the credit crunch was the result of over lending to people who are high risk and thus the inability of debtors to pay back their loans. In a simplified version, banks make money through a process called credit creation, lending more than is initially deposited. They know that people will deposit money back into the bank that they borrowed from and so can afford to lend more than they have (given a low liquidity ratio: the proportion of their assets - savers' money - that they keep).

Code for Fiscal Stability (1998)

·     Based on the 5 principles of tax

o      Equitable

o      Economical

o      Efficient

o      Convenient

o      Flexible

Includes:

·     The Golden Rule

o      The government should only borrow to fund new social capital (capital spending, i.e. schools, roads…etc) and not current spending (e.g. welfare benefits)

·     The Sustainable Investment Rule

o      Public sector net debt should not rise above 40% of national income at the end of each financial year of the economic cycle

·     If the government stuck to the two rules, the public sector budget should, in theory, balance out over the course of one economic cycle because the government is not increasing current spending. A deficit is run on capital spending instead, thus balancing it out.

·     Aims

o      To limit how much the government borrows and for what purpose

o      Allow automatic stabilisers (see here) to smooth over the economy

o      Support the role of the monetary policy

o      Avoid an unsustainable increase in public sector debt

o      Ensure that tax revenues that are collected finance public spending as far as possible

·     Australia and New Zealand had a similar code

·     The government complied with the rules from the full economic cycle between 1997-1998 to 2006-2007, just before the recessions/economic crisis.

·     In November 2008, it was written in the pre-budget report that the code had been suspended to allow for the government to act appropriately in response to the global recession.

·     It was replaced by a less restrictive ‘temporary operating rule’ where the target was to manage public finances over the medium term. 

Please note, the Fiscal Policy Framework and the Code for Fiscal Stability should be used in the exam for demonstrating your understanding of past and previous fiscal policy used by governments. As it is no longer in use, be careful when mentioning in the exam.

Stealth Tax

An indirect tax that government's try to implement as they think people will not notice them. They can be thought of as being 'secretly' implemented.

When the UK government introduced the Fiscal Policy Framework and the Code of Fiscal Stability (1998), one disadvantage was that it didn't stop the introduction of stealth taxes. For more on the Code of Fiscal Stability, look here

Tuition fees

Hi everyone, I would first like to apologise for the inactivity on my blog.

Second, I've just read something intriguing about universities and tuition fees. This article here, from The Independent, explains that universities have appealed to the Offa (Office for Fair Access), the universities watchdog, to try and amend the agreement they made earlier this year, to try to reduce their fees.

27 universities have appealed, possibly suggesting a price war in the higher education market. Is this a case against the market provision of higher education?

This is a good example of a possible price war that is currently occurring and a good example to use in the exam.

UK Growth Figures

Today it emerged that the UK economy has grown 0.5% in the third quarter of this year. Economists predicted a 0.4% growth rate, beating expectations. My verdict: at least it's not negative growth!

These two articles here and here, are good readings explaining the recent ONS figures.

Cost-Benefit Analysis (CBA)

·     A method of decision making which attempts to take into account social costs and benefits and private costs and benefits of a given project.

·     Tries to place a monetary value on all benefits arising from a project, then compares the total value with the project’s total costs.

·     An approval technique à used to decide whether the project will go ahead or not

·     Incorporates externalities

Uses

·     Public projects: airports, roads, motorways, bridges, tunnels, dam...

·     Public health programmes: mass immunisation (e.g. preparing for swine flu, even though vaccinations were not required in mass scale, CBA could have been used to decide if this was the best option)

·     Introduction of congestions charge in London

·     Investment in environmental projects (e.g. wind farms)

Stages of CBA

1a. Calculate social costs and benefits (externalities)

  b. How likely is the outcome of the cost/benefit calculated? Uncertainties?

2. Discounting the future: Calculate the monetary value now of costs and benefits expected in the future. Monetary value falls over time (because of inflation) therefore costs/benefits will be lower. Individuals also enjoy benefits now rather than later, leading to a fall in the value of costs/benefits for the future.

3. Compare costs to benefits to determine the net social rate of return.

4. Compare the net rate of return with different projects and decide which ones should go ahead.

Price shadowing: Prices being put on economic activities where there is no market price – artificial prices. They are used to reflect the time social costs and benefits, because charged prices do no always reflect the true marginal social cost of resources.

Criticisms of CBA

·     Putting a monetary value on externalities since they are delivered and received outside the market and have no market price. E.g. impact on environment.

·     Problems choosing the rate at which to discount the future and setting shadow prices accurately

·     Not all stakeholders are taken into account when calculating costs and benefits. E.g. non human stakeholders and future generations

·     Future costs and benefits are hard to forecast due to demand and supply changes, population, inflation rate, development of new technologies…

·     The costs and benefits are different to different income groups

·     A benefit to one party could be considered a cost to another, creating the need for value judgements and sometimes bias

·     The decision made to go ahead with a project is on the basis that benefits exceed costs, therefore the costs of the project are by passed

·     ‘Impartial experts’ making wrong decisions

·     Argued to be a ‘job creation scheme’ for economists and planners and a waste of time

·     Valuing human lives, for example for a proposed new road crossing. Is there a morality to calculating the value of someone’s life?

Case Study

The CBA was used with Heathrow Terminal 5

For:

Economic growth, jobs, increase competitiveness, boost economy, transport links improved, building on Brownfield sites.

Against:

More flights à more noise, traffic congestion, more air pollution, effects of wildlife

CBA was also used when deciding whether to have a national smoking ban in public places in 2004 in the UK