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!

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 ūüôā

Housing and Macro?

Is housing part of macroeconomics? You’ll get the opportunity whilst you’re studying here to think much more about housing policy, should you want to; we have experts in the department in Geoff Meen and Andi Nygaard, but we won’t spend any time on housing during Intro Macro next term. Nonetheless, as this Comment piece in the Guardian today makes clear, it matters in all sorts of ways across different sections of society and indeed the economy – and as such should be thought of as having a macroeconomic effect.

Buying a house is the most expensive thing most of us will ever buy, particularly here in the south of England where a four bedroom house can now cost easily above half a million pounds. Many times average income levels, and as such a huge loan must be taken out by home buyers, increasing our indebtedness at a time when debt levels are increasingly becoming a cause for concern. repayments are spread over many years – 25 or 30 years, commonly. The repayments made generally rely on the rate of interest charged, which is often a variable rate meaning it fluctuates with the rate of interest set by the Bank of England each month.

In addition, house prices across the country reflect economy-wide policies and actions both on the supply side, and the demand side. The Comment piece refers to a number of policies on the demand side primarily (right to buy, and various help-to-buy schemes that reduce the size of the deposit needed to get a mortgage), but there is also the supply side: since the late 1970s the number of houses being built to satisfy our demand as the population increases, as been very low by historical standards. Why is this? Why can’t governments simply build houses?

These are all sorts of questions you’ll be able to start putting together answers to as you study economics with us…

School Trip to the Bank of England

Yesterday a group of us from the economics department went to the Bank of England in London. We spent time in the Bank of England Museum before having a talk about the history of the museum, bank notes and gold.

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The museum is a number of things, but perhaps most obviously it’s a museum of economics; in the main hall there’s a number of displays talking about the monetary system; definitions of inflation, for example:

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It’s hugely important to have quick and easy definitions for terms like inflation, money, and quantitative easing. If nothing else, you can at least prove your friends wrong when they make grand¬†assertions about economic matters.

The opening hall is full of exhibits that make the point that monetary policymaking is hard work:

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Here, you can pull up and down the lever on the right to affect where the ball is, between deflation and inflation of 10%+. The problem is that on the left there’s an “economic shock” which makes it very hard to ever get the ball to 2%. Not too dissimilar to the outcomes of actual inflation over recent years…

What is an economic¬†shock? Another exhibit had genuine BBC news footage from throughout recent decades from events such as the oil crises in the 1970s, the stock market crash of 1987 and the UK’s exit from ERM in 1992 – all huge events that had considerable impacts on wider economic activity.

Perhaps the most exciting exhibit is a bar of gold Рvalue close on £300,000! As you can see, high security:

gold-selfie

 

The talk we had talked through the history of a state bank and central bank and how it developed, along with the development of bank notes from bits of paper to the soon-to-be plastic £5, £10, £20 and £50 notes we now use.

All in all, a fascinating museum, educational and good fun at the same time. If you are in London and within easy reach of the Bank, I’d highly recommend getting along – it’s free!

 

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.

Making Money on Macro?

Twitter is great for leaning more about macroeconomics, believe it or not. I happened across this tweet just now:

I’d highly recommend following the link; you’ll find a detailed account of a bet two macroeconomists agreed two years ago about inflation given GDP growth.

What is there to learn there?

1) Macroeconomics is very hard! Andrew Lilico readily admits he doesn’t understand how quantitative easing (QE) has affected inflation, and admits he’s unsure about how the labour market is currently working. The thing about QE is that is was “unconventional monetary policy”, which meant it wasn’t normal, hence there isn’t lots of examples of it previously being used elsewhere to get some sense of how it might work (you can count the uses on one hand, pretty much: Japan, UK, US, now Eurozone). This is problematic for us as macroeconomists: how then can we hope to understand how policy will work? The answer is we try and develop our theoretical understanding of how the economy works; but this has risks too…

2) Forecasting is not economics! Forecasting is predicting the future, and the future need not be the same as the present – things change all the time that have dramatic impacts on how events will turn out. Portes suggests that only an oil shock would have led to him losing the bet, and in fact one did occur, but a negative shock – something essentially nobody expected. More dramatic examples of forecast failure would be those in and around natural (and unnatural) disasters: e.g. forecasting output in Japan for the year ahead, just before the earthquake and tsunami struck in 2013. We can understand the economy perfectly well, but if things change tomorrow, our forecast will be wrong. Forecasting is different from economics. If you’re interested in forecasting, do think about taking my third year course on forecasting! ūüôā

3) Knowledge is money! If you do know the economy well, and study macroeconomics hard, there’s no reason why you can’t hope to make financial gains using that information. This need not be betting related, either; better knowledge about the economy can lead to better ideas about how to store your wealth, about what line of work to go into, about when (and where) to buy a house. Much of this is common sense of course, but there’s no doubt a bit of economic nous can help you augment that common sense. All the more reason to study economics :-)))

You’re doing Intro Macro: what comes after it?

You’re (probably) doing EC114, Intro Macro, at the University of Reading, if you’re reading this blog. This post is directed specifically at students of the course, so my apologies to those more casual readers the blog may attract.

What might you do after you’ve done Intro Macro, particularly if you enjoyed it, or think it’s important to learn macro?

As a department we’re in the process of constructing a topic/theme matrix enabling you to see the kinds of modules in your second and third years that you might wish to choose that build on Intro Macro.

At a very basic level, in your second year you may wish to choose Intermediate Macroeconomics¬†(EC202, assuming it’s not compulsory for you), but this is not the only macroeconomic option we offer. ¬†You might also think about Economic Theory (EC221), which thinks much more about what theories are (something we’ll spend time thinking about this year). Economic History (EC243) is another module you might think about: a surprisingly large amount of history was greatly influenced by economic, and more usually macroeconomic, events than you might have previously thought.

In reality though, it’s your third year (part 3) where your options for studying macroeconomics further really are; as such, I’d recommend having a look at each of the following module¬†details pages to check whether there are any pre-requisite modules you should be choosing in your second year. Here is our suite of modules at part 3:

  • Advanced Macroeconomics (EC302): Deeper consideration of the major themes of macroeconomics: long-term growth and short-term fluctuations.
  • Further Microeconomics and Macroeconomics (EC310): The macro part particularly considers the role of information in how monetary and fiscal policy operate in order to achieve macroeconomic stability.
  • International Economics (EC311): International economics refers mainly to topics we consider towards the end of term: exchange rates, trade and globalisation.
  • European Economic Integration (EC316): International economics applied specifically to the European project. With an EU referendum on the way, perhaps never a better time to be thinking about European economics!
  • Money and Banking (EC320): We spend a lecture thinking about money and banking – crucial functions of any economy, as the Global Financial Crisis made abundantly clear.
  • Macroeconomics for Developing Countries (EC342): The fundamental question of economics is (put from our perspective here in the UK) “why are we so rich and they so poor?”. A non-trivial part of this is macroeconomic policy on the part of governments – well worth studying in much more detail if you have an interest in development.
  • Banking in Emerging Economies (EC344): More on banking, and applied to emerging economies – particular issue of interest is¬†the impact of financial liberalisation, often a characteristic of banking in emerging economies.

Plenty of food for thought as you ponder what you want to study over your time with us. No need to make choices now, just consume¬†EC114 and you’ll be better informed when the time comes to make your module choices for parts 2 and 3…