Basket Case

Enticing picture of coffee from the BBC’s story

In recent weeks we’ve covered inflation, and back at the start of the term discussed the importance of prices in determining all sorts of important economic variables, from national output (GDP) to most recently, the exchange rate.

Inflation is the rise in the general price level over some period of time. What is the general price level? This is determined via a “basket of goods”, supposedly what the average person buys and hence representative of prices the average person faces.

What is the “basket of goods”? The Office for National Statistics regularly updates the basket, which is reassuring, and the most recent updates were announced today: coffee pods are in, but nightclub fees are out. As a nation we are more in a hurry, making our real coffee via Nespresso machines and the like rather than the longer and more drawn out approach using a real coffee machine/pot, while we’re going to nightclubs less, apparently. What do you think?

Uber and Reading

Apparently the taxi company Uber has been denied a licence to operate in Reading. Uber is a mobile-phone based taxi company: potential users are matched to a taxi via an app on their phone. As a result, it operates differently to conventional taxi firms. Conventional taxi drivers have been opposed to Uber’s presence in London, supposedly on the grounds of consumer safety, and there are controversies about how much tax the company pays (although it should be said, not to anything like the same level as much larger, more developed multinational companies), and the contractual arrangement it has with drivers.

Alternatively, Uber provides a model that enables greater supply of taxi drivers, and even a surge price algorithm in peak times that encourages an increase in supply of taxis. It breaks into an industry that is heavily regulated and seemingly well protected (resulting in, in places, very high fares).

What’s probably most interesting is that some the objections Reading Borough Council put up reflect a lack of understanding about mobile phones and apps. The council suggests that evidence of 20,000 people in the Reading area having the Uber app on their phones does not constitute sufficient evidence of demand for the service, with one councillor saying Uber might be “trawled by phone app junkies who if they don’t have their phone in their hand they think they have had an amputation”.

In addition, given that Uber operates via the mobile phone app, it doesn’t need a traditional taxi rank like existing taxi companies, something else the Borough Council appear to have failed to grasp.

This highlights a problem with regulation when market innovations arrive – regulators are often the least well equipped to make judgements, and will often stifle innovation. Undoubtedly some concerns are legitimate about Uber, and the weaknesses in its business model will be refined in time. But it presents the kind of innovation to the taxi industry, for example, that Skype presented to telecommunications providers. The usual reaction of existing providers is to try and restrict the competition, and arguably that is what has happened here.

The Losers from Free Trade (and Donald Trump)

Thomas Frank writes in the Guardian that when Donald Trump “isn’t spewing insults, the Republican frontrunner is hammering home a powerful message about free trade and its victims”.

It’s a challenging point about a central aspect of what Frank calls “Econ 101”, but we understand as EC114, Introductory Macroeconomics: comparative advantage. The idea that all countries specialise in the things they are comparatively better at (rather than absolutely better at), and as a result we all do better. So Mexico produces air conditioning units, while America produces the designs for awesome Apple computers (made in China).

However, what does that mean for those who used to produce air conditioning units in America? Or those here in the UK who used to build ships?

As we pointed out in the lecture, free trade doesn’t mean all benefit. However, free trade does envisage that those displaced from industries that a country is not specialising in are able to move into those industries that a country is specialising in. So why hasn’t that happened in so many parts of the UK, and the US? Undoubtedly the article written by Frank could be applied here in the UK to the rhetoric of Nigel Farage and Ukip.

It’s tempting to say that we’ll find an answer at some point in the rest of the course, yet the reality is that depressed parts of the UK have been depressed for decades now, and things never seem to change – which suggests that the problem hasn’t really been solved as yet… or has it?

Frank concludes with a tirade against free trade but more: “Ill-considered trade deals and generous bank bailouts and guaranteed profits for insurance companies but no recovery for average people, ever – these policies have taken their toll.” To what extent have bank bailouts left us with a banking system unwilling to extend credit to firms willing to move into depressed areas of the country and create jobs?

Even if that’s true, however, most depressed areas of the UK have been depressed for longer than just the time since the Financial Crisis…

The Bank and Brexit

On a regular basis representatives of the Bank of England meets with the Treasury Select Committee, a body of MPs that examines the expenditure, administration and policy of HM Treasury, HM Revenue & Customs, and associated public bodies, including the Bank of England and the Financial Conduct Authority”. Today there has been a hearing at the Treasury Committee on “The economic and financial costs and benefits of UK’s EU membership”, in which governor Mark Carney gave evidence.

At the meeting, Carney was accused of being “pro-EU”, apparently because he wrote in a pre-hearing letter to the committee: “EU membership reinforces the dynamism of the UK economy”. As definitions and details are all important, particularly in the Brexit debate, thankfully the report then states: “A more dynamic economy is more resilient to shocks, can grow more rapidly without generating inflationary pressure or creating risks to financial stability and can also be associated with more effective competition. ”

It’s hard to imagine how an evaluation of the costs and benefits of the UK’s EU membership could avoid being pro-EU whilst making statements about the benefits of EU membership, and highlights the difficulty of providing any kind of appraisal in these politically-charged days. Nonetheless, it is important to do so, and also important to go to the source and read/listen to what’s happened. The link above is to the pre-hearing report put together by the Bank, and is well worth reading on the costs and benefits of EU membership.