Chocolate tax - they wouldn’t, would they?
I don’t want to underestimate the dangers of obesity – there are clearly significant social costs associated with it such as extra cost to the NHS of treating conditions caused by it, as well as private costs for the individual – but I know I am not the only person feeling some horror at the idea of a new ‘sin’ tax on chocolate! I do not consider myself a chocaholic, but I admit that I do indulge in chocolate from time to time. Judging from the responses on TV and radio programmes yesterday I’m not alone in thinking this might be a step too far, and I think there could be a need to persuade the government that they should not consider such a move, by making the economic case against tax on chocolate. This is what I have come up with so far – I am sure there are other points that you could add…..
read more...»Trade-offs in the off trade
Proposals to tackle alcohol-fuelled violence and health related problems in Scotland were announced yesterday. This is government intervention to tackle the market failures that result from alcohol, which has been a regular issue discussed in England and Wales as well. Some of the statistics given in this video report spell out the reasons for the concern north of the border; there has been a 20% increase in the number of people being discharged from hospital following alcohol-related treatment, Scots drink the equivalent of two litres more pure alcohol each per year than the English, and alcohol-related liver disease has overtaken heart disease as one of the top three killers there.
read more...»New Revision Presentation on European Carbon Emissions Trading
This new tutor2u revision presentation looks at:
- Can carbon markets be part of the answer in controlling climate change?
- What is the basic economics of carbon trading?
- Is the EU system working?
- What are the alternatives / complements?
- Should carbon trading be replaced with a carbon tax?
Download PowerPoint presentation
Is this how EU grants should be allocated?
The European Commission for Agriculture and Rural Development has made grants of up to £5,000 available to farmers in Northern Ireland to help modernise their farms, improving animal welfare and farm efficiency. But with just £6m available, many farmers are set to lose out. The farmers whose grant applications are successful will be able to buy from a government-approved list of items such as cow mattresses, creep feeders and computerised livestock identification systems, and must add to the amount of money they are allocated from their own funds. Michelle Gildernew, the Minister for Agriculture and Rural Development, says that this is an “important boost to the economy”, because many of the items on the approved list have been made in Northern Ireland.
read more...»Superb presentation on the credit crunch
Here is a superb presentation on the economics of the credit crunch given by Nick Fawcett, Fellow of Lady Margaret Hall. There are some perceptive comments on the role that monetary and fiscal policy can play in stabilising output together with the constraints facing policy-makers. And there a fascinating section on the economics of asymmetric information (a topic in AS micro) and the problems in unfreezing the supply of credit given the amount of stinky debt in the banking system. Many of the supporting charts could be used profitably with an able set of students.
The presentation is available to download from Nick’s website.
Alternative views of the economic crisis to evaluate
While politicians, business leaders and policymakers searched for solutions at this year’s World Economic Forum in Davos, different debates were taking place at the “alternative” World Social Forum in Belem, Brazil.
There, a mix of some 100,000 campaigners, thinkers, and working people came to starkly different conclusions about the causes of the downturn, and how best to address it. This BBC article takes the views of 4 of the participants:
David Evan Harris, Director, Global Lives Project
“The current economic model which privileges unbridled competition is not sustainable”
Walden Bello, Focus on Global South
“This crisis has roots in global overproduction”
Myriam Vander Stichele, Researcher on multinationals
“Calls for re-regulation require a dismantling of the architecture of international trade treaties”
Marcos Arruda, Economist
“At this point the capitalist emperor has no clothes”
Their views make interesting reading; while they all broadly agree that the existing model of the global economy has to change in the light of the economic crisis, they offer very different perspectives of the root causes and the solutions – worth reading and evaluating to assess which you think would work best, and why.
Let businesses fail - its good for the UK economy
This short 40 second clip from the excellent BBC Working Lunch last week would make a superb starter piece for a classroom debate about business failure…
read more...»Steel Industry may face meltdown
The excellent Big Question feature in the Independent today turns its attention to the problems of what remains of the UK steel industry
“Demand is collapsing as the global recession takes the wind out of both the motor and construction industries. The credit crunch and ensuing recession are wreaking havoc in the motor and building industries in both the UK and Europe, which are Corus’s main markets.”
Corus has announced a huge number of redundancies and the steelworkers unions are complaining that competitiveness of the UK steel sector is being undermined by subsidies to manufacturers in other countries such as France. Further background is available here from the Times:
Steelworkers demand same government subsidies as European rivals
“Facing a precipitous fall in demand for steel from the motor and building industries, Corus said that it needed help to subsidise short-time working at mills that are operating below capacity. Demand in Europe had fallen by 40 per cent while the Corus order book was down 30 per cent.”
Jim has blogged about the rise in labour productivity at UK steel plants - but will increasing efficiency be enough to prevent widespread plant shut downs and job losses? Corus will have a tough time riding out this storm.
AS students might consider these questions:
What are the main demand-side problems facing UK steel producers?
What are the main supply-side problems facing the UK steel industry?
Explain how an economic recession affects the market price of steel
Is there a case for the UK government to offer financial support to the industry at this time?
Black Wednesday Videos
Most years when I come to teach the economics of fixed versus floating exchange rates I end up spending some time looking around on the BBC web site for an archive video of the night in September 1992 when the UK suspended membership of the exchange rate mechanism.
read more...»Apprenticeships, skills gaps, information failure and training opportunities
Earlier this month the Prime Minister announced a £140m plan to create 35,000 additional apprenticeship places, of which 20,000 would be in the public sector (and 6,000 with McDonalds, making it the biggest apprenticeship provider in the UK). Lord Young, the minister responsible for apprenticeships in England, promised that those who won apprenticeships in the public sector would be able to complete their training, come what may. This article highlights the plight of a young man who has just lost his engineering workplace experience while studying with one of the largest private apprenticeship training firms in the South West of England.
read more...»Equality of unemployment
Getting more women into the labour force and into employment has been a deliberate aim of government intervention over the last 30 years or so. Benefits, training, flexible working and childcare schemes have all focused clearly on encouraging women to work rather than to choose not to do so. Your study of employment figures in the UK will show that the increases in employment over the last 10 years or so have favoured women; more of them are in work, women now earn more than men in a fifth of couples, and more households depend upon a woman’s wage. A quarter of households with children are headed by lone parents, 90 per cent of whom are women.
read more...»Negative mulitplier effects of a brutal outlook for carmakers
There seems to have been grim news from the car industry every day for the last week or so. Nissan and Jaguar are shedding jobs. In November Honda said they would shut down production for February and March, and today said they will extend that to cover April and May as well.
read more...»Read the small print!
Falling base rate should help to reduce mortgage interest rates and bring some relief to borrowers who are feeling vulnerable with negative equity and rising unemployment threatening them. But those who took out ‘tracker’ mortgages in 2007, when mortgage lenders were still caught up in the race to lend to as many people as possible, may find themselves in the bizarre position that their banks are paying them, if base rate falls any further.
read more...»Long term unemployment
Who would be an employment minister during a recession? It is easy to gloat about the latest batch of record numbers in work when an economy is on the upslopes but less palatible when each day brings a fresh round of job losses, factory closures and business administrations. I look for a politician who is brutally honest and clear about where the economy is.
read more...»Pay cuts in a recession
Pay cuts and pay freezes are being flagged up as an increasingly common option by businesses struggling to survive in the early stages of the recession. Formula 1 drivers are being asked to consider cuts in their earnings as teams look to control costs ahead of the 2009 season; staff working for the publisher Penguin who earn over £30,000 have had their salaries frozen. Premier Rugby in Britain will agree, next month, on a reduction in the salary cap from £4m to £3.5m. And a new survey from the British Chambers of Commerce covering 300 member firms has found that 43% plan to freeze wages and salaries in the coming year. Nearly one business in ten will go a step further and attempt to cut basic pay and salaries – a measure described in this article from the Sunday Times as “almost unprecedented in the experience of today’s workers.”
read more...»Paying tax at 90% - the poverty trap
The Independent carries an article today which flags up the disincentives facing thousands of households on low incomes. According to the piece, “A total of 60,000 households receiving income-related benefits or tax credits will face handing 90p of every extra pound they earn to the Treasury next year, twice this year’s total…. and the number of low-income households with a marginal tax rate of more than 60 per cent will grow by 85,000 to more than 1.9 million next year.”
The reason is the complex working of the tax credit and benefit system where working a few extra hours a week causes benefit recipients to lose means-tested (income related) benefits as well as having to pay more in income tax and national insurance contributions. Single mothers returning to work are thought to be especially at risk of the povert ytrap effect - currently, anyone working more than 16 hours a week loses their right to benefits.
This is an important issue - the effective tax rate paid by many thousands of people towards the lower end of the pay ladder can be twice that paid by the richest in society - raising questions not just about economic efficiency and incentives to work (key supply side issues) but basic fairness / equity.
Costs of Supply - Organic Farmers Divided
As the recession bites, so sales of organic food have started to slump and with it the premium prices that truly organic farmers can command in the market-place. The tough economic climate seems to be causing a deep divide within the organic farming community about whether the rules on the use of organic feed should be relaxed as a cost saving measure for producers facing an uncertain future.
The article in the Times today entitled “Let us bend the rules, say organic farmers” is a great example of how organic farmers face differences in the conditions of supply compared to producers who rely on conventional mass production methods. According to the article, average organic feed prices are £320 a tonne compared with £160 a tonne for conventional feed.
With hundreds of farmers converting some or all of their production to organic methods in response to the rise in organic products sales over recent years, the Soil Association and the Organic Farmers and Growers are trying to persuade the government to relax the regulations imposed on organic suppliers that allow them to trade under the organic quality mark. But hard core organic producers argue that to do so would dilute the brand reputation and cause confusion (information failure) among consumers.
It is interesting how in a recession there are increased pressures on so many different stakeholders. The depth of the downturn in 2009 will create much suffering among producers - but the very best, the most flexible and the most robust should be able to survive without sacrificing their principles or their standards. Organic produce will always be more expensive than conventional farm output - are we about to see yet another industry lobbying for government support to tide them through difficult times?
A Collapse in UK Vehicle Production
Car manufacturing and commercial vehicle production in the UK slumped to its lowest level for over 21 years last month as the sector suffers from the squeeze on credit and the broader economic recession.
read more...»Devaluation and salvation?
The exchange rate is big news at the moment and it is worth following closely since changes in the external value of a currency can have significant effects on prices, export and domestic demand, jobs and the rate of economic growth.
As with most topics in AS macro, think about causation, consequences and whether changes to macroeconomic policies through intervention can and should seek to make a difference.
Larry Elliott in the Guardian considers whether the devaluation of sterling against the Euro could be a saving grace for the economy. And there is a neat interactive graphic showing what has been happening to the pound’s value against the Euro Area currency.
The Times reports on sterling’s weakness and suggests that falling overseas demand for UK denominated shares is one factor driving the currency lower. Britain is expected to suffer a deeper recession than most of the leading advanced economies and this will impact on profits and dividends from UK businesses largely dependent on the health of the UK economy.
The Financial Times reports on the rise of the Euro as a reserve currency
“There are now more euros in circulation than dollars, and the euro’s role as an international reserve currency is growing. By the first half of this year, the euro accounted for 27 per cent of official foreign reserves, up from 18 per cent soon after its launch. The dollar’s share fell from 71.2 per cent to 62.5 per cent during the same period.”
Reserve currency status is an important factor driving demand for a currency – sterling seems to have lost its much vaunted safe-haven status among international investors and this is another reason behind the steep depreciation of recent weeks and months.
Will the government (through the Bank of England) intervene in the currency markets to help stabilise the value of the pound against the Euro?
Not if you believe the public statements of Treasury Minister Yvette Cooper who is reported in the Independent as saying that the value of the pound was not a top priority for the government implying that the pound would be left to find its own market level. In an interview on the BBC radio 4 Today programme she is quoted as saying:
“We’ve never had a policy of targeting the pound. Our policy is to target inflation. And that I think has been the right one.”
Regular articles on the economics of exchange rates appear on my blog here:
Hand outs and help ups
With unemployment already rising at an alarming rate and job prospects looking awful for the New Year and beyond, the thorny question of welfare assistance for those out of work becomes more salient by the week.
The government has announced plans for what they believe are radical welfare reforms - designed to provide a carrot and a stick to nudge the economically inactive back into the labour market. It is one thing having the motivation and the skills needed to find fresh employment in a weakening labour market, it is another to find the work that suits you best in a part of the world where you want to live. Keep in mind that - despite the recession - there are still over 600,000 unfilled job vacancies in the UK economy and many of these have been vacant for a lengthy period of time.
Tim Harford produced a timely piece on the costs and benefits of unemployment benefits in his piece for the Financial Times last week. It is a good one to read because it brings into play concepts such as moral hazard and the social consequences of people having sufficient financial resources to spend time looking for the job that makes the most of their experience and abilities.
Diseconomies of scale are human
One of John Kay’s phrases in his piece in the Financial Times yesterday will stay with me for the remainder of my teaching career. In a piece which focuses on the malign influences of political lobbying by huge economies of scale businesses that have been in relative decline for many a long year, John writes:
“That is true of the carmakers, whose problems are of much longer standing than the current downturn. In automobiles as in many industries, economies of scale are technological, the diseconomies of scale human. Human factors in business are generally more influential than technological ones in determining the long run fate of a company.”
This is a terrific article to use when discussing the root causes of government failures that can result from subsidies and bail-outs given to companies deemed “too large to fail.”
The remainder of John’s article can be found at his excellent web site
Some companies are too powerful to fail
The cost of streetlighting
Ask any student to give an example of a public good and the default answer seems to be “streelighting” - I will pass on whether streetlighting for urban roads and motorways meets precisely all of the defining characteristics of a public good (it surely comes close!) - but this BBC online magazine article provides an interesting follow up question for students - how much does it cost to provide such services on a daily basis. Perhaps a good example to use when discussing the costs and benefits of providing public goods?
Economics of fishing
The BBC today has two stories on the economics of fishing. Firstly the government has announced a £5m plan to fund the de-commissioning of some of the UK’s in-shore fishing fleet in a bid t oreduce what the government regards as fundamental excess capacity in the industry.
£5m fund to scrap fishing boats
This BBC video looks at the background
Secondly the rising stocks of cod in the north sea has led in part oa rise in the size of the annual cod quota given to scottish fishermen by the European Union as part of their common fisheries policy. But the thorny issue of discarding excess fish remains unsettled. The quotas refer to landed cod which encourages fishing vessels to dump much of the fish they have caught before they reach home in order to avoid fines for over-fishing. The result is a deadweight loss of scarce resources in an industry already suffering from the long term decline in fish stocks.
Fishermen land cod deal at talks
See also “Scots anger over discarded fish”
Louis Theroux - Crime and Economics in Action
The Louis Theroux documentary on law and disorder in Johannesberg is a fantastic documentary to demonstrate just a few economic concepts to students as a christmas treat.
Before the lesson lead a discussion - ‘to what extent is policing a public good?’
Then another discussion leading from,‘to what extent do you think policing should be a public good, i.e. provided by governments?’
Then introduce or perhaps revise the concept of government failure and how governments may fail to provide policing to a desired quantity.
The programme demonstrates how there may be a demand for private police agencies run by the free market in South Africa, because the government fails to provide adequate policing to a desired quantity.
Other points for discussion included in the programme may include; income inequality, the costs of unemployment, external costs associated with slum housing. Also note other government failures the S.A. government are guilty of e.g. failure of information provision for AIDS HIV Virus.
A discussion on the paternal role of governments may also be considered.
The show also raises all sorts of other ethical debates which Louis questions. Try to avoid getting bogged down in these those, keep it to economics!
Marcus
Collapsing Crude and Prices at the Pumps
The price of crude oil has collapsed by more than a quarter this week – Brent crude is trading close to $40 a barrel less than a third of the level earlier on this autumn. Petrol and diesel prices have come down (there is an asymmetry of media coverage – we hear less of price declines and more of price rises) but, although the price of crude is now at a four year low, the price of diesel has decline only to a level seen at the start of 2008. In the United States where diesel and gasoline is taxed less heavily, the retail price of fuel responds much more quickly to world prices.
The Costs of Cutting Carbon
Susan Watts from Newsnight has this excellent short video on some of the findings of the Committee for Climate Change and some of the costs and benefits of meeting stringent carbon reduction targets.
Last week the Financial Times ran a special feature on Climate Change and Business. Their climate change series is available here.
Bags and Bottles - Toronto Makes a Move
Fed up with the limited effects of attempts to persuade retailers and consumers to cut their consumption of plastic bags at the supermarket checkouts, the authorities in Toronto have followed the example set a few years back in the Irish Republic by introducing a new 5 cents charge for each bag used. But they have gone a step further and introduced a ban on sales of bottled water in council premises and also put in a ban on the use of biodegradable and compostable plastic bags. What is not clear is whether this new charge is a tax or a fee! A tax generates revenue that can be ear-marked for investment in other environmental projects such as recycling schemes. But a fee on plastic bags can be collected by the retailer and presumably add direct to their own profits. My local Sainsbury store charges 50p for one of those rather large (and useful) carrier bags and I have a steadily mounting collection of them in my cupboard because of my persistent failure to take one with me when I go shopping.
Cheap drinks and government intervention
This BBC clip covers an announcement in the Queen’s Speech about policy proposals contained within a new Crime and Policing Bill to curb the flood of cheap drinks promotions offered by pubs and clubs which the government believes contributes to binge drinking. The Telegraph reports that
“Retailers will not be able to sell any alcohol cheaper than the price of buying one item of it, no matter how many more a customer buys. It means there will be a ban on offers such as two for ones, three bottles of wine for £10, or discounted multipacks of beer where the overall cost is cheaper than the sum of the individual bottles or cans contained.”
A seasonal hat tip to Ben White for spotting the article and for suggesting a number of economic concepts and policy issues that the article might be used to illustrate in a group discussion:
Pricing Incentives and price discrimination
Importance of price elasticity of demand e.g. if minimum drinks prices are imposed
Market Failure - externalities from consumption, alcohol disorders and de-merit goods
Regulation and Legislation - effectiveness and costs of regulatory policies
Risks of government failure including the law of unintended consequences
Social Issues
The fool’s gold of carbon trading
Jonathan Leake has a substantial article here on the future of carbon trading in Europe. I will be writing in more depth about carbon trading for the next edition of EconoMax ... but on a quick reading this article is deeply critical of some of the unintended consequences of the scheme and the flawed arrangements surrounding the inception of the 1st phase of EU-ETS. Worth a read if you are preparing for questions on government intervention in markets.
Menu Costs of Cutting VAT
The small cut in VAT is a staggeringly inept piece of policy-making from a government that has completely lost control of public finances and which is groping in the dark for ways to stabilise demand and confidence as the lagged effects of asset price deflation take hold.
Even the UK Treasury does not expect retailers to pass on all of the decrease in VAT from 17.5% to 15%. And why should they? Many have already started offering sizeable price discounts in a bid to shift excess stock - 10% off, 25% one-day sales, 4 for 3 offers. All of these are more significant that the marginal reduction in VAT. Many consumers who do not understand percentages may be perplexed when they find out that a £100 television which used to sell for £117.50 with VAT at 17.5% and which might now retail for £115 - involves a reduction of £.50 which is a fall of 2.13%.
And for thousands of smaller businesses across the UK the menu costs of changing price lists, menus and catalogues will be an additional burden at a time of commercial distress. This article from Management Today considers some of the difficulties.
Jason Gordon from Ernst and Young sums this up well in an article in today’s Telegraph:
“This is a non-trivial thing to implement. It’s not just the cost of printing the tickets, it’s the time and cost of employing a member of staff to change all the prices, when they could be putting stock on shelves. This is right in the middle of peak trading and most retailers have more important things to juggle.”
Don’‘t forget that the VAT cut will be reversed in 13 months time bringing a fresh set of price adjustment costs. For small traders who do not have access to fully-computerised business systems this is not a trivial issue.
We read today that the government considered raising VAT to 18.5% from 2011. The same menu cost arguments apply to small increases in VAT.
