Conversations on Refugees: NOW!!

Our latest Conversations in Economics session is about to begin, on perhaps the hottest topic of the (increasingly chilly) Autumn: Refugees.

It promises to be a challenging hour: who are refugees? Are they who we think they are? Are we who they think we are? Can we and should we apply economic reasoning to the situation?

Here’s the slides I’m using to introduce the discussion in a few minutes: https://docs.google.com/presentation/d/1NbBdk04FzH6OJHqEVMJyuM8MhtkaZ2HEHlHsm1_itYA/edit?usp=sharing

See you there 🙂

Further Reflections on the Autumn Statement

Here’s an blog post at a blog I regularly read: “So what has happened to the long-term plan, George?” It’s another set of reflections on last week’s Autumn Statement, adding in the current fiasco surrounding the Labour Party.
The Chancellor put off cutting the deficit based on a better than expected forecast of government revenues at last week’s Autumn Statement.
That decision probably won’t have great consequences – although it does raise questions of consistency, since as the blog article points out, the Prime Minister and Chancellor have long made the point that Labour didn’t “fix the roof while the sun was shining” back before the financial crisis.
The point it makes though is that weak oppositions, as Labour is currently providing to the Conservatives, allow potentially lazy, or complacent decisions to be made, which could have economic consequences.
I’d highly recommend the Political Betting blog that this article was motivated by; it’s a very interesting take on politics from the perspective of people who regularly place bets on political outcomes. The placing of bets is an economic decision, and many argue it’s an effective way of forcing rigorous thinking: if one’s money is at stake, one will be more conscious of potential biases that would result in betting losses.

Evidence? Who needs evidence…

Economics is an “observational science”. What does that mean? It means that, by and large, its something we observe rather than something we recreate in the laboratory under controlled conditions.

Why does this matter? Because it makes strong statements about what caused what more difficult. If we can’t be sure that something else didn’t cause what we’re looking at, then that casts doubt on our proposed explanation.

This is perhaps most acute in the area of public policy, particularly when it comes to the macroeconomy. Earlier in the week the Chancellor of the Exchequer (in charge of fiscal policy) was able to make a lot of concessions to a lot of people because of better than expected growth (that’s expected to happen). But is that better than expected growth due to great fiscal policy since 2010 (as some might argue), or due to more favourable other factors (less austerity than the government wanted to do since 2010)? Or something else entirely – better growth in our trading partners? The answer to this question matters a lot, since it tells us what fiscal policy would be more effective.

It’s always interesting to draw parallels with other fields, particularly when things are topical. As you’ll be aware, at the moment there are reforms being proposed for the NHS – namely to turn it into a seven-day service from its current (supposed) non-seven day service. A huge amount has been written and said and shouted about this, but the bottom line is if you’ve ever been into hospital on a weekend you’ll know that the NHS does indeed function on weekends.

As such, the argument has switched to whether it’s more risky to have been admitted on a weekend. Two studies have been relied upon, but the problem is that these studies are based on observational data. A comment published two days ago by the British Medical Journal (BMJ) says:

1. This is an observational study and cannot determine causation.

This is, alas, true. We cannot determine it. We can have a bloody good go at it, nonetheless, and you’ll learn a lot in econometrics about how we can go about this. But we cannot determine it, we can only be sure of it to some degree of confidence – usually 95%.

This doesn’t nullify the use of economics as a field of study, nonetheless – there’s a lot we can understand much more clearly via further study – but it is important to keep this in mind when studying economics…

Immigration up (a little bit)

As well as the aftermath of the Autumn Statement, there’s another bit of news today: net migration (immigration minus emigration, those coming minus those leaving) is at a record level of 336,000.

This number, actually identical to the number from the previous quarter, is higher than it was at the same point in 2014 – we usually try and compare the same point in the year since there are often seasonal effects (for example, higher sales near Christmas hence more demand for jobs).

A lot of people care a lot about this number. The government talked about getting this number down to “sustainable levels”, without ever defining what “sustainable” would actually be. It suggests that the current number is unsustainable – which undoubtedly it is since it cannot continue at that rate indefinitely. But by that logic, any positive number is unsustainable since there is only a finite amount of land in the UK. Of course, a more sensible approach to finding a sustainable level would consider the rate at which aggregate demand outstrips aggregate supply, since immigrants form part of the supply side of the economy (as well as the demand side).

Other parties, most notably, UKIP, have tried to make political capital out of this.

What is curious however is that this number isn’t being celebrated – it shows what a great place to be Britain is! People are desperate to come here to contribute towards the growing economy, and fewer folk are deciding to leave at the same time. It’s important to note, of course, that few if any of the immigrants considered here are refugees such as those coming from Syria.

The final thing worth noting is that less than half of this number is EU migration, which hardly makes a convincing case that renegotiating our EU membership on terms related to free movement of labour will make any meaningful difference.

Fiscal Plans and Fiscal Outcomes: The Importance of Forecasting

Next term we’ll learn about the difference between fiscal plans, and fiscal outturns, or outcomes. Fiscal plans are the ones set out today by the Chancellor in his Autumn Statement. Fiscal outturns are what we’ll see over the next four years.

Probably the most spectacular differences between plans and outcomes come when recessions come unexpectedly, like with the 2008 financial crisis which put paid to Gordon Brown’s Golden Rule (not borrowing for current consumption over the “cycle”). The outcomes, as we all know, were very large deficits, up to 10% of GDP.

What is perhaps most striking is that for all the anticipation of where the cuts would fall, instead the news is all about what cuts didn’t happen: tax credit cuts cancelled, police, international development, healthcare and defence budgets all protected, with a list of additional goodies thrown in.

How was all this possible? Without resorting to cynicism about politicians dressing up the good news and hiding the bad news (hint: local government and various tax rises hidden in the small print), this Guardian analysis makes it clear what changed: an upward adjustment in forecasts for growth and hence tax receipts.

The idea is this: as the independent Office for Budget Responsibility provided a very positive forecast for growth and hence tax receipts (we pay more tax when we earn more and spend more), this meant that in order to keep to his fiscal plans to eliminate the deficit, Osborne had to do much less – growth would do the hard work for him.

But the main point is this: all of this is based on economic forecasts, rather than actual events – it’s plans, not outcomes. We have to wait until 2020 to see what the outcomes are like. It shows just how hugely important economic forecasts are, however – and why you should think about taking my forecasting module when you get to your third year 🙂

Spending Review

As discussed in the Conversations session recently, today is the Spending Review. As this article suggests, the Chancellor is going to indicate spending on housing.

It’s a curious aspect of the political climate that at the same time that huge amounts of cuts need to happen (including to infrastructure investment since the Fiscal Charter doesn’t exempt that), still the headline is about a pledge to spend more on housing.

In addition, there’ll apparently be £3.8bn more for the NHS, and more on defence given the recent crises, while schools and international development can’t be touched. Which leaves a lot of cuts to fall in other areas. The BBC states that “These include local government, the Ministry of Justice and the Home Office, with police forces expected to face more cost-cutting.” Which will surely lead to protests by police officers – perhaps exemplifying why it is incredibly difficult to cut government spending…

We’ll come back to this in fiscal policy later in the Autumn Term…

Terrorism and Economics

What is your reaction when you see the continued news stories surrounding the Paris terrorist attacks? Brussels today, for the third day in a row, is on lock down – army everywhere, most things shut down, people being told not to congregate in groups.

Your response, hopefully, is not necessarily with the economic impact of all of this – there’s a human impact first of all, and hopefully the very strong measures being taken in Belgium will have had the impact of saving some innocent lives.

In light of the Paris attacks, much commentary has been written; not least: why do we care more about Paris than Beirut? Here’s a piece written last week on the potential economic impact: the stock market effect was muted, but it may be that in the longer term we notice effects more in terms of economic efficiency in Europe – much production relies on cross-border transport links, which are being disrupted this year firstly via the refugee crisis, and now from the increased level of terror alerts across the continent.

Places like Egypt and Tunisia have undoubtedly suffered differently in the longer term after terrorist atrocities, via lost tourism income. It’s clearly a secondary impact compared to the initial impact of any attack on human life, but an impact nonetheless. Are we generally sufficiently risk averse that terrorist attacks will influence our consumption patterns, even if the likelihood of being caught up in a terrorist attack is incredibly small?

Economic Modelling and Board Games

If you are in your first year, you may well have just become aware that we’re planning on a big board game experiment next term in macroeconomics. You might be thinking: why?!

One reason, we’ll admit, is that a number of us in the economics department quite enjoy playing board games. We’re not particularly weird and whacko in that respect: the board game industry is also thriving, with board game cafes are cropping up in the UK such as Draughts in London.

However, as economists we have another angle: board games are models. A model is a simplified version of reality, of something we wish to study or understand more. Of course, board games aren’t necessarily designed necessarily with that in mind – but nonetheless, games like Risk do provide some model of global warfare, games like Monopoly must provide some model of the property market, however warped and horrifying each might be.

Settlers of Catan is the particular game we’re using next term, and you might ask why? Well, Settlers is a game about settling: about groups of people settling in areas and developing. We can think about it as modelling the origins of growth – what does it take for groups to survive and prosper?

In the game, once initial settlements (and roads) have been placed, players must optimise given the constraints of the inputs available to them – land that produces, at random, materials necessary to further develop (build more settlements, build cities). Such development might be aided by trade: two players deciding that some swap of materials they have is mutually beneficial. The rate at which materials are traded reflects their value in the game – their relative scarcity, and hence we have inflation and deflation in a barter economy.

Quickly, you can see we can think about Settlers as an economic model. And that’s what we’ll do next term. You’ll be playing the game in Week 2, and for your essay at the end of term, you’ll be writing about Settlers as an economic model.

What do you need to do right now? You need to fill out this survey, as it will help us to set up game tables that enable us to best learn about the kinds of factors that lead to economic growth (and help you to write a better essay next term). And perhaps brush up on your knowledge of the game of Settlers of Catan 🙂

Borrowing… again

News today is that government borrowing for the month of October was the highest it has been for six years.

Borrowing like this contributes throughout the whole year to the deficit – the gap between government receipts (taxes, mainly) and government spending.

As you’ll be well aware given the recent passing of the Fiscal Charter, the government is set on austerity and on running a budget surplus – by 2019/20. So it’s not too much of a problem with regard the Charter that borrowing is up, but it nonetheless shows the difficulty of getting government spending under control.

Not least, various parts of the NHS are running large deficits, Network Rail projects (in and around Reading) are showing eye-watering overspends, and probably biggest of all, pensions continue to rise at 2.5% even while inflation is at -0.1%. The first two are symptomatic of the difference between fiscal plans, and fiscal outturns – things don’t always happen as expected and can impact government finances as a result.

Inflation is still Deflation

united-kingdom-inflation-cpiThis morning the latest inflation numbers have been released: -0.1%. That is, deflation. The Consumer Price Index, what the Bank of England uses to measure inflation, has barely changed since February – see above. To give some context, the Bank of England’s inflation forecasts since February have all suggested inflation would have risen back up to around 0.5% by now, yet persistently inflation is around zero.

Why does this matter? It matters on a number of levels; to mention a few:

  • Inflation is seen as a barometer of how well the economy is doing. Strong demand across the economy, given a fairly fixed supply, would yield inflation, and hence this suggests the economy is far from capacity (where supply would be fairly fixed).
  • Inflation is what the Bank of England must set its monetary policy to influence. The target is 2% with a 1% band either side, and hence inflation is below target. In this situation, the Bank might be expected to try and generate a bit of inflation to push back towards its target, yet interest rates, the tool the Bank uses, are already at their (effective) lower bound of 0.5%. It certainly doesn’t suggest the Bank is about to raise interest rates, another fear some have.
  • Inflation is the norm. Deflation has not been; I noted the one historical deflationary UK episode a few weeks ago. Japan has found itself fixed in zero/negative inflation territory for a long time now – it’s not the norm, and at least as far as Japan, and possibly increasingly the UK, are finding, it’s unexpectedly persistent too.

We’ll spend time looking at inflation next term…