Space and Economic Value

From wired.com, http://www.wired.co.uk/news/archive/2009-08/11/why-didnt-britain-win-the-race-to-the-moon

This morning at 11:03am, GMT, a British astronaut will be launched into space for the first time.

The Treasury, the part of the UK government that is all about spending and revenues, has taken the opportunity to laud the UK space industry and its support for it on Twitter. Indeed there’s a new National Space Policy, the first such thing to exist here in the UK.

The Tweet, and the policy blurb emphasise that the space industry is “worth £11.8 billion” to the UK economy. Where has this number come from?

One of the first things we’ll be doing next term is thinking about is numbers like these – where do they come from? With an industry like the car industry it’s much easier to work these things out, since people buy cars at a particular price, and we then assume that that price reflects the value we as a society place on that good (a debatable assumption, but an assumption nonetheless).

But with space? Who buys the produce of the space industry? Hence, if there is no end consumer in the same way as most industry, what do we do? The answer is we value by the value of the inputs that went into the process. What was the value of the labour, capital and land inputs that went into production in the industry?

If you’re starting to raise objections about this, that’s fair enough; it’s far from a satisfactory approach.  For example, given this the government could simply give all employees a pay rise to get a GDP increase. However, it’s hard to know what else could be done instead, if we wish to measure things like national economic activity. Some defence can be mounted; the amount paid to the factors of production employed in the space industry must be market rates – if the UK space industry paid too low, then their experts would seek employment elsewhere – space agencies overseas, or other areas of manufacturing, say, in the private sector. As such there is some basis in what we value as a society in these calculations, even if it’s not as direct as in, say, private sector manufacturing.

In addition, the methods employed by the UK when calculating national income are the same as other countries around the world use. Hence at least if our measure is bad, it’s only as bad as what everyone else is doing, and still affords us a basis for comparing between countries.

Government Investment

One common criticism by those sceptical of the role of government is that attempts by governments to influence economic activity suffer from excessive delays. Hence the term “shovel ready” has quickly become part of the political vernacular since the financial crisis and economic downturn in 2008.

Today gives a great example of a project that is anything but “shovel ready”: the expansion of London (and by extension the UK’s) airport capacity. This is basically a decision on whether to build a third runway at Heathrow Airport, and as the BBC article points out, this has been being discussed now for 25 years, and commission after commission have reported on the issue. Nonetheless, the government is about to announce that yet another review is necessary, and a decision that might have been made around about now will instead happen in six months’ time.

Conveniently enough, after the forthcoming London Mayor elections.

Understandably, the Confederation of British Industry (CBI), a group that represents the interests of UK businesses, is highly frustrated by this. Yet further uncertainty on the back of 25 years of uncertainty is something that is unwelcome for business. We’ll cover investment next term, but one thing that is generally cited as a reason for firms choosing to invest is the absence (or otherwise) of uncertainty. Will firms, British or otherwise, choose to invest less in the UK at the moment given there’s still no clarity on whether or not a third runway will be built at Heathrow?

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…

Events Today: Conversations and Kerslake

 

Reminders: Lunchtime, 1-2pm in HumSS 125 is the latest Economics Conversation, where today we’ll be discussing the upcoming Financial Settlement and Autumn Statement by the UK Government. These are both statements likely to be all the more interesting in light of recent events surrounding tax credits and the government’s fiscal charter.

Also, at 4pm today in Palmer 104 we have Lord Kerslake, former Head of the Civil Service, speaking at our Policy in Practice seminar. This is an event open to all, and a really great opportunity to hear more about how government works, particularly when it comes to the role economics plays (or doesn’t) in the policy-making process.

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Back to that fiscal charter…

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Last night Vince Cable gave a very interesting and insightful talk on his time in government, most notably many discussions with George Osborne where he disagreed with the Chancellor. One of those areas has manifested itself in the fiscal charter, passed recently, and already causing the government great trouble when it comes to meeting it.

Yesterday this appeared on the Guardian website; a commentary piece by David Graeber with an apocalyptic warning: we’re heading for another crash. Cable asked as much last night. The level of house prices reached a new high relative to income levels in the years before the crisis, rising from a historical 3 to nearer 6 (as a multiple of average income levels). This led to a lot of unpayable debt being taken on by home owners. That level never really dropped during the crisis, and is starting to rise again – house prices are rising faster than average incomes. Probably the only difference at the moment is it remains harder to get a mortgage than it was pre-crisis, but the government’s many FirstBuy/HomeBuy schemes, where it provides a sizeable chunk of the deposit for willing mortgage takers.

Graeber makes another important point about the fiscal charter and tax credits (and general austerity): national accounting identities (relationships that must hold true at the national economy level, like 1+1=2 must hold true) tell us that the sum of all debt must be zero. Hence if the government reduces its debt level, the private sector, or households, must increase their debt levels. This manifests itself practically in measures like the recent tax credit cuts. If tax credits are cut, many families will be worse off, and will find themselves more indebted. The mechanism the government optimistically claims will make them better off is that all firms will be able to pay them the “living wage” that they’re mandating. Even if that happens, it’s a shift from government indebtedness to private sector indebtedness: either firms incur losses to pay workers more, or they don’t pay those workers more and households incur more debt.

Of course, a follow on question is: should the government take on debt just so that we don’t have to? That’s a blog post for another time. Or the subject of a lecture or two 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…