Trade, No Deal Brexit and Coronavirus

Brexit’s been off the agenda for some time now given the spread of coronavirus, but its impact on trade may still yet be felt. Particularly if we start to live in a world where global pandemics become more common.

The discussion surrounding trade and coronavirus appears to be in terms of us producing the necessary medical equipment (ventilators), and also being able to buy them – import them.

It seems crazy to think that should ventilators be available for export by another country and hence import to the UK, that trade wouldn’t take place – and it’s silly to think that import duties would be placed on such imports.

Nonetheless, it’s all couched in an “us vs them” narrative – they need us more than we need them (to sell to us, or to buy from us, depending on which angle suits). But trade isn’t about us vs them, it’s about what we can all do together. By doing what we do best and sharing, more is produced and we are all better off. By producing what the UK is best at, and trading for other goods, GDP is growth is higher and we’re all better off.

So the bigger point, really, is about trade more fundamentally. We talk about turning car manufacturing plants, brewery and distilleries into production plants for ventilators and hand sanitiser. But the principle of trade is that it does this for us – we produce the things we’re best at, and we trade them for the things we’re relatively less good at.

Sure, we can turn those plants into ventilator plants, but they’ll be less efficient at that than they would be at producing cars, or vacuum cleaners.

Trade suggests let’s let the medical manufacturers around the world produce the medical equipment, and let’s trade with them, selling them our Rolls Royce’s, our Jaguar’s, our Brewdog and our Dyson vacuum cleaners.

That’s the longer term principle with coronavirus. Clearly right now very little trade and spending at all is taking place, due to the nature of the global lockdown. But the way to be better prepared for the next pandemic isn’t to make sure we all produce the same things – the UK produces, France produces, Japan produces, the US produces, China produces. It’s for us to all produce what we’re best at, and trade with the country best at making ventilators.

That way we’re all rich enough to be able to afford to buy in those ventilators in sufficient capacity.

A non-extreme view of Brexit

To those vociferously advocating we leave the EU, those of us who argue against them and suggest we’re better off staying are lefties. The central policies of the leave campaign are to erect barriers to economic activity – block free movement of labour, and without non-trivial trade negotiations, an increase in tariffs. These are protectionist, they are market interventionist, and might, thus, be thought of as lefty. Of course, it is a much better strategy to argue on the basis of whether a policy is good or bad in terms of delivering better outcomes (measured somehow) for some number of people (measured and determined somehow), rather than dismissing them for being lefty or right-leaning.

Someone who is unabashedly lefty is Chris Dillow who writes at the blog Stumbling and Mumbling. If you ever need something to do whilst you procrastinate so you can still feel productive, this is a blog you should bookmark. As his title states, he is “(Mildly) against Brexit”.

He is unconvinced about the EU in many areas, such as its ability to carry out macroeconomic policy, and implicitly to make trade deals (I think). However, the kinds of better economic world he is looking for is unlikely to be delivered by Brexit because those associated with it, as mentioned at the start, favour restricting free movement of factors of production, and of goods.

Related, John Kay at the FT has written in detail about the UK’s trading arrangements and Brexit. He does so in a way that he does not reveal his preference regarding Brexit, but points out that the UK is heavily engaged in trade in services – half of our trade relative to 20% of world trade. This means two things: (1) the common market is more important to us since its main thrust for a long time as been non-tariff barriers in areas like the service trade, than it is for our trade partners in Europe who export goods to us. (2) nonetheless, there are crucial differences in UK trade makeup not shared by other EU members that may make EU trade deals less suitable to the UK than the rest of the EU.

Today in Economics Conversations (1pm, HumSS 125), we’ll be debating Brexit and Trade – see you there!

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)

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

Tis the season?

overseas-aid

You may have seen this graphic, or some similar sentiment, doing the rounds at the moment.

As you may be aware, successive governments have committed to spending 0.7% of GDP on aid to some of the poorest and most needy people around the world. It’s also a tiny amount of money. The plot below makes this clear: it’s a small amount even of the interest the government pays on its national debt, and (not plotted) about a twentieth of what we spend on pensions each year.

Foreign Economic Aid and Interest on National Debt since 1993

So, practically, firstly, stopping this money would make little difference to the government’s overall budget. Bear in mind that the deficit is still much larger than 0.7% of GDP.

Secondly, there are many, many things that the government spends lots of money on that might be better reconsidered if there is a need to cut other things before we spend more money on flood defences (and helping those affected by the floods).

Third, as we’ll learn about this coming term, governments have budget constraints, and if they spend more than they get in tax receipts they run a deficit (as the UK government has done for a long time now), and need to borrow. As such, if something is important (hence has a good rate of return, however measured), and can be financed at a low interest rate (as is the case at the moment), then a better argument is that it should be funded by more borrowing.

Finally:

Conversations on Monday: Spending Review and Autumn Statement

On Monday we turn our attentions at our Economics Conversations sessions to the UK and its government’s fiscal plans. On November 25 the Spending Review and the Autumn Statement will happen.

The Spending Review happens at the start of each Parliament, hence the last one was back in 2010, and it sets out the budgets for each department, or part of the government.

The Autumn Statement is the Autumn counterpart to the Budget, which happens each March, and hence is an annual event where the Chancellor updates plans for government taxation and spending.

There’s little doubt that as we get nearer to these events, they’ll get more and more media attention, not least after the tax credits fiasco, so it’s always good to be prepared to think about them as economists by discussing them, as economists.

See you all on Monday!

Monday: Bob Kerslake

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On Monday we have Lord Kerslake coming to talk to us: 4pm in Palmer 104.

If he doesn’t sound all that familiar, it’s because he’s a Civil Servant, traditionally the kind of person involved in government decision making  that don’t get much attention – it’s the ministers and the government that get all the attention.

Nonetheless, he’s been at the centre of government decision making for many years, and should thus offer a hugely interesting insight into how government works.

It’ll be great to see you there!

Yet more changes in Higher Education

Autumnal University of Reading (pic from BBC)

You’re at university studying economics, and what you’ll hopefully find as you make your way through your time with us is that you can apply your economics to all sorts of things, including higher education. You won’t get that from Introductory Macroeconomics, but you will from other aspects of particularly microeconomics as you study with us. In fact, you already have many of the tools for an analysis…

Hopefully as economics students you don’t need to be persuaded about the importance of applying economics to higher education, but you may need to convince friends and family of that when you impart your wisdom upon them in conversation (as you surely will…). Higher education is like any part of the economy: it’s an area where scarce resources exist (lecturers, buildings, researchers), and competing demands for their uses exist (teaching, doing research). How best should those resources be allocated? Are we doing OK at the moment?

The Universities Minister appears to think we aren’t; a new “Office for Students” and “Teaching Excellence Framework” is required to ensure that universities devote more of their time to teaching related matters. We can think about universities as having both some kind of objective function (utility function), but also a budget constraint. The utility function is the value the university gains from its relative levels of research and teaching, while the budget constraint is that the university only has so many staff, who only have so many hours in the day to allocate between teaching and research.

There’s nothing wrong with suggesting universities do more on their teaching provision, and there’s little doubt there’s room for improvement. However, economics teaches us to be aware of the opportunity cost: without any increase in funding (unlikely given the climate of austerity), any increase in focus on teaching must lead to a reduction in resources allocated by universities to research.

Is that a bad thing? It could be if we think that teaching quality is a function of research. Lecturers that are also at the forefront of research, it can be argued, are better informed hence able to teach more relevant content. Equally, though, lecturers too focussed on research may not put in sufficient effort to their teaching.

Interest Rates on Hold

Bank of EnglandThe Bank of England’s Monetary Policy Committee (MPC), the nine good men that meet each month to decide what monetary policy in the UK should look like, voted to keep interest rates on hold at 0.5%. This is the 80th consecutive month the Bank has kept rates on hold at 0.5%.

The nine men on the committee voted 8-1 to keep them at 5%, a seemingly impressive level of decisiveness by a bunch of economists; as this commentary notes, economists are not known for agreeing with each other.

Today was dubbed “Super Thursday” because as well as releasing the interest rate decision, the Bank also released its Quarterly Inflation Report, a sizeable document where it reveals its stance on inflation – the economic variable it is commissioned by the government to focus on. As of recently, the Bank also publishes the minutes of the MPC meeting on the day of the announcement (i.e. today), something which used to be delayed a number of weeks. This gives some insight into exactly how such a remarkable level of consensus is arrived at month upon month.

So, lots of reading for you to do if you’re yearning for some macro ahead of next term…

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…