Measuring social welfare

Social decline? Photograph: Jim Dyson/Getty Images

In a City.A.M. opinion piece, Tim Montgomerie writes about the need to better measure social welfare, primarily to counter the social decline we’re apparently seeing.

One thing that a good measure of social welfare would reveal is the extent to which we are in a decline. It is very common for commentators to lament about how things aren’t like they used to be, harking back to some golden age. It’s less clear what Montgomerie’s golden age is from reading his article which perhaps absolves him a little of this criticism. Nonetheless I’m sure there is an inbuilt tendency in us all to view the age of our youth as that golden age. I’ve come to realise, in my own personal experience, that the 1980s couldn’t have been a social golden age given all the upheavals taking place in that tumultuous decade.

Anyhow, the point remains a good one: we do need to measure social wellbeing in the same way we measure economic wellbeing (i.e., GDP). It’s not a novel point, it gets made year after year; back in 2010 David Cameron was talking about measuring “gross wellbeing” as well as “gross domestic product”, and before the general election Ed Miliband made a request to the Office for National Statistics that they start measuring wellbeing, or “living standards” in a single measure. None of this is to diminish the message, just to point out that it’s nothing new, and that like many public projects, project completion appears to be always somewhere on the distant horizon.

Early next term we’ll be talking about measuring GDP, and measuring economic wellbeing more generally, as well as social wellbeing.

Blow for Brexit?

The Guardian’s pic of British and EU flags

As you’re no doubt aware, there’s going to be a referendum on the UK’s membership of the European Union (EU) sometime between now and the end of 2017. Europe has always been an important and emotive topic, now as much as ever. We will, of course, spend time thinking about the issues surrounding any UK exit, or “Brexit” as it’s commonly dubbed, in the Spring – it’s a huge macroeconomic issue.

Those who suggest we ought to leave argue that the economy – the macroeconomy – would function much more effectively outside the EU. Our firms would be freed from red tape, our energy would be cheaper, we could sign our own trade deals and just more generally, do what we like. Of course, that “we” is very much the subset of us that thinks we should leave, but even then there is disagreement on what being outside the EU would look like. Would it mean we look like Switzerland (with its similarly bank-heavy economy, as Vince Cable pointed out last night), or Norway? Or even Turkey?

One of the planks of this argument though is being able to direct our own trade policy – who we have free trade agreements (FTAs) with, mainly. At the moment, trade deals are negotiated and signed at EU level, since the EU is a customs union where within the union no tariffs are levied on traded goods, but outside it a common external tariff (CET) is applied.

What would directing our own trade policy look like? Practically, the first step would be to negotiate all the FTAs we need with countries we currently have FTAs with, unless we want to increase the costs of trading for our firms. This is a non-trivial undertaking of a lot of diplomatic resources; FTAs aren’t agreed and signed overnight. Clearly a great expense of government resource, which would have to take place in the period after any Brexit vote and when we actually leave.

This first step, however, is made all the more fraught when we think that actually, those potential trade partners also have to stump up a load of their own diplomatic resources to negotiate these extra trade deals which while the UK was in the EU, weren’t necessary. Why would they be willing to do this? What if they are a big country whose share of trade with the UK is small, while at the same time the share of our trade with them was large? Like, say, the USA?

The news today is that a senior US trade official (it’s hard to imagine such an official being permitted to speak to the media without the consent of his/her superiors) has said that the US probably wouldn’t be particularly willing, if push came to shove, and that in reality, the UK would have to join at the back of the queue.

Those favouring Brexit like to point out that it seems likely a number of EU countries would wish to sign FTAs with the UK since they export more to us than we export to them (Germany being the prime example). Again, though, this does rely on that proportion of their trade being sufficiently large that it warrants the expense of resources necessary. From here we find that the UK accounts for about 6% of all German trade, below France, the Netherlands, China and the US, and 7% of all German exports. Not trivial, by any stretch – but essential? The Germans may be first in the line to negotiate a trade deal, but they may also not be: there’s a huge, vast amount of uncertainty surrounding the various building blocks required for the UK to succeed outside the EU.

Back to that fiscal charter…

2015-10-28 16.06.53-1

Last night Vince Cable gave a very interesting and insightful talk on his time in government, most notably many discussions with George Osborne where he disagreed with the Chancellor. One of those areas has manifested itself in the fiscal charter, passed recently, and already causing the government great trouble when it comes to meeting it.

Yesterday this appeared on the Guardian website; a commentary piece by David Graeber with an apocalyptic warning: we’re heading for another crash. Cable asked as much last night. The level of house prices reached a new high relative to income levels in the years before the crisis, rising from a historical 3 to nearer 6 (as a multiple of average income levels). This led to a lot of unpayable debt being taken on by home owners. That level never really dropped during the crisis, and is starting to rise again – house prices are rising faster than average incomes. Probably the only difference at the moment is it remains harder to get a mortgage than it was pre-crisis, but the government’s many FirstBuy/HomeBuy schemes, where it provides a sizeable chunk of the deposit for willing mortgage takers.

Graeber makes another important point about the fiscal charter and tax credits (and general austerity): national accounting identities (relationships that must hold true at the national economy level, like 1+1=2 must hold true) tell us that the sum of all debt must be zero. Hence if the government reduces its debt level, the private sector, or households, must increase their debt levels. This manifests itself practically in measures like the recent tax credit cuts. If tax credits are cut, many families will be worse off, and will find themselves more indebted. The mechanism the government optimistically claims will make them better off is that all firms will be able to pay them the “living wage” that they’re mandating. Even if that happens, it’s a shift from government indebtedness to private sector indebtedness: either firms incur losses to pay workers more, or they don’t pay those workers more and households incur more debt.

Of course, a follow on question is: should the government take on debt just so that we don’t have to? That’s a blog post for another time. Or the subject of a lecture or two next term…

Today: Vince Cable!

Vince Cable – pic from Telegraph

On campus this afternoon we have Vince Cable, former Lib Dem MP for Twickenham, and former Former Secretary of State for Business, Innovation and Skills.

He’ll be talking at 4pm in G11 in Henley Business School, talking about his recent book, “After the Storm”.

Vince Cable before getting into politics lectured in economics, and got a PhD from the University of Glasgow, so he’s quite a heavyweight when it comes to economic matters.

Even if (in fact, particularly if) you disagree with his politics, I challenge you to come along and listen to what he has to say, and try to reason with yourself why he is wrong in a manner that doesn’t rely on resorting to political differences. Next term we’ll start thinking much more seriously about macroeconomic policy and we’ll quickly see the differences between the major political parties in very different terms. It’s good to be analytical as much as possible when thinking about policies and economic ideas.

UK growth slows

The BBC’s “UK GDP growth” picture

Hidden beneath the ongoing furore over tax credits, the Office for National Statistics (ONS) this morning released the last UK growth figures: growth of 0.5%.

What does this mean? This is a number for how much more was produced in the UK economy in the months between July and September 2015 compared to the same months in 2014, in real terms (controlling for changes in price levels).

Overall, more was produced (and although 0.5% may seem small, UK GDP was US$2.7tr (trillion) in 2013 hence 0.5% of that is still a healthy US$135bn), but the number is slightly lower than was to be expected (apparently 0.6% was expected).

Additionally, growth wasn’t evenly spread over different parts of the economy: the manufacturing sector produced less, as did the construction sector (which had a large fall), although the service sector produced more.

Here’s plenty more “LIVE” commentary from the Guardian: http://www.theguardian.com/business/live/2015/oct/27/uk-gdp-growth-figures-george-osborne-live-updates

Here’s the actual data release from the ONS: http://www.ons.gov.uk/ons/rel/gva/gross-domestic-product–preliminary-estimate/q3-2015/index.html

We’ll spend time thinking about GDP growth and what it means early in the Spring Term, after Christmas.

Micro: Football and Sackings

Sherwood and Villa in happier times (from the Telegraph)

You’re studying microeconomics at the moment, which by and large looks at individual markets. While you eagerly anticipate macro for next term, here’s some more microeconomic stuff that shows how we can apply what we’re learning to all sorts of situations.

Those who follow football, in particular in the West Midlands, will be reflecting on the end of yet another managerial tenure at a local football club. Tim Sherwood on Sunday was sacked as manager of Aston Villa. A manager is an employee at a firm, most fundamentally; a firm that competes in a marketplace with other firms.

Football is an interesting economic case study, as it’s not immediately obvious where we should focus: should we focus on football teams, or football leagues? Indeed, Walter C. Neale pondered this in the Quarterly Journal of Economics in 1964. Sports teams compete with each other, but teams will always populate leagues; whether the leagues exist is what matters, and sports leagues have come and gone over the years.

Nonetheless, football teams must operate on a day-to-day basis without going bankrupt. Teams like Aston Villa face the very real threat of being relegated from the Premier League. The Premier League is a sports league which is hugely lucrative for the teams who compete within it; relegation to the Championship, the league below, has huge financial implications – massively lower income levels, not to mention reduced prestige. However, the hugely lower income levels (mainly television money, we all like watching the Premier League) are what matter: without income, expenses become unaffordable, and losses will be made.

With a defeat on Saturday, Aston Villa dropped to the bottom of the Premier League, and the three teams finishing lowest are relegated. As such, the decision to sack the manager was taken with the purpose of avoiding relegation. The club will have weighed up the potential cost of relegation, the likelihood of suffering it with Tim Sherwood as manager, the likelihood of suffering it with another manager in charge, all against the cost of sacking the manager (some pay-off will be necessary), and have decided, in their estimation, that sacking Sherwood is their best option.

It’s all economics…

Today’s Conversation: China and FDI

Image from the Guardian 🙂

Today’s Conversation in Economics is on Chinese infrastructure investment in the UK. Last week the main announcement during an official visit to the UK of Chinese president, Xi Jinping, was a one third stake in the development of a new nuclear plant at Hinkley Point. This follows on from other recent investments, or expressions of interest, in parts of the UK’s rail network (HS2), and other infrastructure projects.

There is so much to discuss about these investments; many question why it is necessary to secure funding from China for large investment projects, particularly as interest rates remain very low (c.f. Corbyn’s People’s QE which attempts by a different (and inflationary) method to do the same thing).

It is clearly a reflection of the emerging economic power of China, which became the world’s largest economy in 2014. In addition, its regular and massive trade surpluses have left it in a position with lots of “cash in the bank”, so to speak.

With regard China’s investments in the UK (we’re 8th on its list of favourite places to invest), another criticism is that it’s nationalisation – just by China, rather than the UK: “The government will indeed put some of our most vital infrastructure under state control – but the states in question will be France and China.” Of course, the reality that China takes a one-third stake in Hinkley Point is ignored. Also ignored are the huge costs and uncertainties involves in investing such an epic amount of money (£24bn!), without knowing what the outcomes will be in however many years it is until the plant is operational.

Hence, an alternative take here is that actually, the UK does well. We get other countries to stump up the finance for a cripplingly expensive infrastructure project. The Chinese see it as beneficial, as must the UK government, else one party of the two negotiating would not agree to it, and the trade would not occur.

Yesterday’s News: Carney and the EU

This week the Bank of England Governor, Mark Carney, gave a speech on the EU in Oxford. It’s well worth reading the whole thing, rather than the various responses to it. It’s not particularly long, and there’s even a bit of humour injected in places.

Firstly, why does it matter that the Bank of England Governor has given a speech? It matters because he is head of the institution tasked with carrying out monetary policy – what happens to interest rates, essentially, to keep inflation at around 2%, and also financial regulation – to try and ensure another financial crisis doesn’t occur.

What is the context? As you’ll be aware, the UK is holding a referendum by the end of 2017 on its membership of the EU. The UK, as a very open economy, is highly affected by international events – both good and bad. At times, high demand from Europe and elsewhere has helped drive UK growth, but at other times instability in neighbouring countries has inhibited our growth. Additionally, it means our policy decisions affect others in the same way that many decisions we make on a crowded train impact those who happen to be sat/stood near us.

What did Carney have to say? Essentially, he said that the founding principles of the EU: freedom of movement of goods and services, capital and labour, have been a good thing for the UK economy. These are arguments we’ll cover in much more detail next term, but here’s some food for thought in the meantime. However, he did add caution (something Eurosceptics have been quick to seize upon): financial regulation may threaten the UK economy in the future, as may the unwillingness of other European nations to reform and become more competitive.

All things we’ll be talking about in much more detail in the Spring: see you then!

Tax Credits?

Today’s headline news is not tax credits, but they’ve been dominating the news of late. The government plans to cut tax credits, which many see as unfair.

Tax credits are essentially in-work benefits, paid to people working but earning below a certain threshold (£14k). The motivation for them is to reduce the disincentive to take work that many on benefits face: by taking a job, many can find themselves worse off than they would be if they remained on benefits and out of work – the poverty trap.

One criticism of tax credits is that they amount to a subsidy to for firms unwilling to pay a sufficiently live-able wage to workers, and as a result sustain a low pay culture. This criticism assumes all firms do this out of choice rather than because it is all they can afford to pay. This analysis from the Institute of Economic Affairs makes the same point. It’s possibly a little simplistic in that it assumes all firms are price takers and have no bargaining power, which is probably unrealistic in at least some cases (and probably most likely in low pay cases).

The main reason the government is pushing through cuts to tax credits is that they need to satisfy the fiscal charter they introduced recently, and many other parts of the benefits bill are protected (such as pensions). The political criticism of the move derives from the fact that, pre-election, David Cameron said that he wouldn’t cut tax credits in one of the live TV debates.

On purely economic grounds, a government policy that reduces the poverty trap (or at least shifts it to in-work decisions about how many hours to take), ought to be a good thing – and should be on political grounds too, given that strivers (those in work) are to be encouraged, and shirkers (those out of work) are the ones to be penalised. This raises deeper questions about what function a welfare state serves (insurance mechanism?) if we are to analyse it properly, which we won’t.

But either way, given the fiscal charter the government has a lot of cutting to do, which is going to be very unpopular…

Two Thought Provoking Articles

In and amongst the madness of a given work day, interesting things to flash before you. Here’s two I came across today.

1) Selling Britain by the Yuan On the provocative side, but well worth thinking about. When borrowing costs are so low, why is the UK involving China in the financing of various parts of its public infrastructure? There must be an awkward question here for a Prime Minister who has described the Leader of the Opposition as a threat to the security of this nation…

2) Making the old even better off at the expense of the young is morally bankrupt Written by a Conservative (before I’m accused of bias), and makes a series of important points about the direction current government policy is moving, and the impacts it has on different generations.