Corruption and Growth?

Last week we considered economic growth, and noted the role that institutions play in fostering, or at least being correlated with, economic growth. We considered corruption when thinking about rent seeking: whether economic agents create value themselves, or seek to apportion the value created by others – for example, via piracy or theft.

We saw a version of the Corruption Perceptions Index, a measure of corruption amongst countries, noting which countries were deemed less corrupt, and which others were more corrupt. Today Bloomberg reports on the 2015 Corruption Perceptions Index, in which apparently Brazil and Turkey show the biggest falls. Related or otherwise, Reuters reports that recently the IMF downgraded its GDP growth forecast for Brazil to -2.5% from 1.1% in 2016, and the World Bank cut its growth forecasts for Turkey recently.

Gains from Trade

Here’s a common refrain from those arguing for Brexit (British exit from the EU): the EU needs us more than we need the EU!

The argument is based on the fact that we have a trade deficit with the rest of the EU, as we do with the rest of the world. That trade deficit means we import more than we export when it comes to trade with the EU.

Hence, firstly, if you think that the UK running a large trade deficit is a bad thing, particularly running one indefinitely, it’s worth noting then that this argument relies on the UK’s trade deficit remaining in perpetuity.

It also doesn’t take into account how large each EU country’s trade with us is relative to, say, other parts of the EU (how much for example France trades with Germany relative to the UK), or with the US, or emerging markets. The answer, actually, is: we’re not that big.

It also fails to take into account issues surrounding the location of firms. Many firms locate in the UK as a stepping stone to the EU, basing their European HQs here. If exiting the EU led to the relocation of these firms to places within the EU, then our reliance on being in the EU is based on wider considerations that purely trade volumes.

We’ll be covering trade in the next couple of weeks, as well as globalisation. We’ll be sure to touch upon these kinds of issues. Our job will be to try and analyse the claims made by both sides of the argument in order to work out who is closer to being right, helping you decide which way you’ll vote in the referendum (which will apparently be on June 23)

Economics Conversations: Does Manufacturing Matter?

manufacturing

In today’s second conversations session of term we’re looking at UK manufacturing. Since 1970 it’s fallen from 27% of the UK economy to 10% in 2013. The snapshot of a table from a government report into manufacturing, shown above, shows that this decline in relative importance is not confined to the UK.

Nonetheless, many worry about this de-industrialisation trend, both here and in America. Why do folk worry? Arguments range from there being something intrinsically healthy in making things, through to the impact on the trade balance, and the provision of jobs in particular for those who would struggle to earn as well in non-manufacturing industries. In the case of the UK, it is argued the ever increasing levels of inequality and regional imbalances all draw from the decline in the importance of manufacturing.

Evidence of the latter appears quite clear from the decline in many former industrial areas of the UK, but need it be the case? Why haven’t firms moved into these areas given that there are large amounts of unemployed labour that could be employed relatively cheaply? Where generally there’s land to be used which again is relatively cheap compared to the South East? Why haven’t such workers been re-trained to be equipped to work in other lines of work?

An Economist article makes a number of points against the arguments emphasising the importance of manufacturing; while the balance in goods might look bad, the US and UK are more than ample enough exporters of services to make up for that imbalance, and if manufacturing was providing high paid work disproportionately given the relative levels of productivity and hence value added (as suggested by the idea that it provided high wage jobs for those that wouldn’t get them elsewhere), then this might be symptomatic of why the industry has been in decline.

What are your thoughts? Come along at 1pm to the next Economics Conversations event!

Unemployment Down but a Rate Rise Unlikely

Two macroeconomic stories have adorned the main headlines on the BBC website in the last 24 hours.

First, Mark Carney, current Governor of the Bank of England, ruled out interest rate rises in the near future – highly unlikely in 2016, it seems. Then this morning the news is that unemployment, the number of people not in work but seeking work (hence counted as part of the labour force) is at its lowest level since 2005.

As with many economic variables, a change in any direction is not unambiguously a good thing; for interest rates, which have been low for many years now, this is good for borrowers (for example, people with mortgages to buy houses), but bad for savers. This is because the rate the Bank of England sets heavily influences the rates set by banks around the country, so borrowers will continue to have to pay back their loans on lower interest rates, but savers will continue to earn very little interest on their savings.

The reality that the Bank doesn’t think a rate rise is likely implies the Bank thinks the prospects for economic growth are not so great; this comes on the back of the Chancellor’s warning about a dangerous cocktail of factors affecting UK growth in the coming year. Prospects for growth have reduced.

This comes, though, in stark contrast to the good news from the labour market. That unemployment is falling is generally a good thing – it’s hard to think of particularly convincing reasons why it wouldn’t be. Sometimes people point out that the fall might be based only on workers going into short-term or zero-hours contracts, or part-time or self-employment, all of which are seen as less secure jobs for workers, and signs not of high confidence amongst employers.

It may also be that some are back to work, but the 5% that remain have been out of work for a long time and are starting to become discouraged. If people have stopped looking for work, they stop being classed as unemployed and hence the unemployment rate can fall due to this. It is quite standard that after recessions the number of long-term unemployed increases, and while this does not excuse the reality or make light of it, it does present a problem for the government in attempting to find policies to get such people back into the workforce.

Europe’s troubles?

In today’s first Conversations in Economics session, the topic for discussion is the issues facing Europe, and specifically the European Union.

We’ve become accustomed to negative news about Europe here in the UK. If it’s not poor or sluggish growth, it’s negative stories about the EU and how it supposedly affects us here in the UK.

Interestingly, though, it may be that the Eurozone has put some of its troubles behind it, just as the US economy seems set to struggle, according to a Tweet I retweeted this morning:

tweet-eu-us

Remaining in the EU “disastrous”

It seems increasingly likely that the EU referendum we’ve been promised is going to happen sooner rather than later – potentially this year, not 2017 as originally expected.

Given that, the messages being put out by ministers are becoming louder and louder. A prominent Eurosceptic in the Conservative Cabinet, Chris Grayling, yesterday wrote in the Telegraph that staying in the EU would be “disastrous” for the UK.

It’s not clear exactly what it is about “more Europe” (vaguely defined) that would be particularly disastrous as far as Grayling is concerned – this isn’t made clear. Reference is made to immigration, although again immigration is simply implied to be a bad thing, since apparently the current levels should not be sustained moving forward (only half of our net inward migration flows are actually from the EU, it’s worth bearing in mind).

Grayling talks about some aspects of the economic idea behind the EU: the single market, or common market: common standards across countries so that exporters aren’t having to match a whole range of different standards for different countries. There then appears to be a misunderstanding about exactly how that would be achieved, because Grayling complains about “giving the EU more and more scope to involve itself in matters that were once the preserve of national governments.”

If a group of countries all have different product standards and regulations, and they agree a common market where these must be harmonised, then clearly each of those countries must give up powers that were once their preserve. It cannot be that a common market can exist where each country can still decide to set its own regulations a bit different for a bit for some reason or another – that would then cease to be a common market.

Optimism, anxiety and the state of the economy

Yesterday US President Obama gave an annual speech that US Presidents give, called the State of the Union address. Conservative thinkers here think that David Cameron should initiate a similar thing, but that’s by the by. The BBC reports that Obama’s final SOTU (everything it seems gets an acronym in the US) conveyed a message regarding optimism and anxiety.

You may think trivial emotions like optimism and anxiety are utterly irrelevant when it comes to how economic outcomes are determined, but you’d probably be wrong. Indeed, one of the early Keynesian business cycle theories that we’ll cover later in term suggests that co-ordination failures occur because some people are less optimistic and hence don’t do particular things (e.g. produce less thinking they won’t sell all that much), leading others to do the same – the pessimism of some is contagious.

The antidote to such failures of co-ordination might be more co-ordinated positive speak – such as Obama encouraging everyone to be optimistic. It sounds almost silly, but what is the empirical evidence? Here’s some bedtime reading on the matter, work by an economist called Sylvain Leduc who considers business confidence and economic fluctuations. Work I’ve been doing myself suggests that the Bank of England’s Monetary Policy Committee, which determines monetary policy (the setting of interest rates to achieve an inflation target), pays a lot of attention to business confidence when considering the state of the economy.

Measuring ourselves

We take measuring ourselves incredibly importantly. This is true at the individual level (we want to know whether we fit in), but also at the national level – how well are we doing relative to, say, the Eurozone countries?

In order to be able to say anything at all about the latter, we have to have some measurements. The standard measurement we use when it comes to entire economies like the UK, or like France or Germany or the USA, is Gross Domestic Product, or GDP. It’s the value at market prices of all the goods and services produced in an economy over some period of time. It’s everything we make as a country, at the value we place upon it – very broadly speaking.

That it’s not a good measure of welfare is almost universally well known. This article from a very interesting blog (well worth a read if you’re feeling like procrastinating but want to feel like you’ve been at least a little bit productive) notes that by and large innovation doesn’t appear in the statistics either. Relative to even our parents, but certainly our grandparents’ eras, ours is one of mass variety, it’s argued, and this is the result of innovation – loads more great products for us to buy and enjoy.

The very basic economics says this should be good – we can find the products that most suit us in all areas of our lives, and be happier than if we were more restricted in the choices we could make. However, choices have opportunity costs, and opportunity costs may lead to regrets – if one makes one choice, one cannot have done the other similarly enticing thing. If innovations are sufficiently small (the difference between, say, the latest Android phone made by Samsung and the latest one may by LG), we as consumers cannot realistically be expected to be well informed about these kinds of differences and what they mean.

Anyhow, the bottom line is that we use GDP, and we use it in all sorts of ways (not least to determine how much the government should spend). It’s a vitally important statistic, and a huge amount of effort goes into producing it (effort that shows up in GDP) – and we should be aware of its shortcomings, without necessarily advocating its replacement. It’s not clear how any other measure of well-being could appropriately factor in the amount of choice we have, and how differently it affects each of us.

Thinking ahead: placements?

As a university student you have vast expanses of summer breaks ahead of you, and you may have already mapped them out – Inter-railing around Europe, backpacking in South East Asia, the opportunities (should you have a bit of cash) are limitless, to borrow our university’s marketing tagline.

But there’s no reason why, even if you haven’t got the cash, you can’t still do something awesome like that and earn a bit of cash along the way. Hopefully you’re getting emails from our excellent Vicki Wiles about opportunities that are coming up – there are events today and tomorrow:

1.       HumSS 126, 2-3pm, 12th January 2016, Insight Placement Application Session

This session will focus on applications for summer work experience after your first year, both to formal internship schemes and also speculative applications.

2.       HumSS G25, 3-4pm, 13th January 2016, Personality Tests to help inform Career Direction

Lucy Hawkins and Claire Mack from the Careers team will be running this session using personality tests to help you to identify your strengths to help to inform your career direction decisions.

If you’re giving a placement this summer some thought, get along to one or both of these events. We have a great team in place now both within the department and across the university geared to helping you find a summer placement, and supporting you through the application and through the placement too.

Great experiences, great CV points, a bit of cash, and still some time to do some travelling – what more could you want?

 

Back to School on Monday…

Monday marks the start of term – welcome back!

Hopefully you’re coming back refreshed and raring to go. Spring term is an encouraging term in so many senses, not least that the evenings get lighter and lighter as we go through term. I was going to say that we start to see daffodils around the campus, and buds on the trees, but this year’s bizarrely mild winter means that we’ve already seen that (even saw some blossom earlier on today).

Nonetheless, welcome back. Thursday will be our first Introductory Macroeconomics lecture, 2-3pm in Henley Business School G11. There’ll be blog posts between now and then I hope, but I’m looking forward to seeing you all there and getting cracking with Introductory Macroeconomics.