Macroeconomic Uncertainty

Today’s BBC headline is the Chancellor warning about a “‘dangerous cocktail’ of economic risks” facing the UK economy in 2016, suggesting this year will be the toughest since the financial crisis. It’s more politics than economics as one reads what the Chancellor actually said in a BBC Radio 4 interview this morning, representing expectations management: after all the positive talk about the economy by the Conservatives before the election and since, things have changed somewhat in recent months to challenge that outlook.

One of those things was that GDP growth for 2015Q3 was revised down – not by a huge amount, from 0.5% to 0.4% – but a downward revision nonetheless, and along with other downward revisions has meant that the UK grew significantly less in 2015 than was previously thought.

Another is the continued low oil price which, while great at the petrol pump for the paying customer, has mixed impacts on the UK economy which does export oil.

Perhaps most interest, however, is to also consider the Independent’s take on the Chancellor’s recent actions (as well as rhetoric): it talks about the role that economic forecasts played in the Chancellor’s budget giveaway in the Autumn Statement in November, noting that they might have been “potentially unreliable”. We noted here at the time that the budget giveaway did rely heavily on forecasts for GDP growth: governments need forecasts of economic growth in order to project the tax receipts they will get, and the amounts of benefits they’ll have to pay out, which heavily influences the level of the budget deficit/surplus. If growth now comes in lower than was forecast, this will almost certainly mean that the budget deficit will be worse than expected, casting doubt on the ability of the UK economy to meet the Chancellor’s new Fiscal Charter: to balance the budget in normal economic times.

As well as lecturing Introductory Macroeconomics this term and hence covering issues mentioned here in greater depth, I’ll also be lecturing a third year course on forecasting, where we will discuss the kinds of methods that are used to produce the kinds of forecasts that underly government budget decisions like these. Many of our undergraduate students take placements and graduate roles with the Government Economic Service, which could see them being placed in the Treasury, hence right in the centre of the process of generating those forecasts. What you are doing here as a student could play a crucial role in shaping the future of our country!

The Leisure Industry

Take a drive in the countryside anywhere in the country (but particularly, it seems, in the hills), and you’ll end up seeing many a cyclist. Bike stores are thriving, and Britain appears more active – a point that this BBC article makes.

The roots of this revival in cycling is traced back to the terrorist attacks in 2005 when the London Underground was closed, forcing many to commute on their bikes. This seems a rather London-centric interpretation, and others might focus on the Cycle To Work government scheme which began in 1999 allowing people to buy bikes tax free. Additionally, investment in cycling surrounding various sporting events (Olympics in London, but before that the Commonwealth Games in Manchester), and subsequent success appears to have inspired many.

Do we care, as economists? We have to; from a public policy perspective a more active population (probably) costs the state less – fewer weight-related problems being treated on the National Health Service. Governments are increasingly interested in what is called “nudge economics”, the application of behavioural economics to public policy in order to increase the effectiveness of policy. What policy lessons might be learnt from the cycling craze that could be applied more generally to encourage more folk into becoming more active?

Cycling, of course, isn’t the only boom area in physical activity – triathlons and their constituent parts – cycling, running and swimming, all appear to be enjoying a surge in popularity. As the linked article, a more business orientated approach, makes clear: people doing sport need to buy equipment. They also like to enter events, such as races.

An interesting associated phenomenon is the parkrun, which began back in 2004 as a few runners in a park in London, and now has events all of the country and in multiple countries around the world, with over 60,000 people running per week in 2014. It’s a free timed 5k run in a local park at 9am on a Saturday morning, and hence is supported by volunteers and sponsors, given the price is zero hence the organisation makes no revenue that way.

This is all micro more than macroeconomics, but hopefully in light of New Year Resolutions, which we’re all inclined to break, it’s a very interesting application of what you’re learning whilst you’re studying economics with us. Happy New Year!

Fracking: Economics and Externalities

From Huffington Post

The BBC headline this afternoon communicates the outcome of a vote in Parliament to allow fracking in National Parks. This would appear to be a doubly controversial outcome. Fracking is a means to extract gas from deep underground, and is controversial, as is any kind of economic development in National Parks.

Fracking is unpopular amongst many because of concerns regarding the amounts of water used in the process, which must be transported to fracking sites at great cost, and also concerns about fracking causing small earthquakes, or tremors. Nonetheless, it is a means for producing energy, hence increasing its supply, and bringing prices down. It’s generally acknowledged to have played a considerable role in energy prices falling in the US.

The government’s own website for National Parks says they are “areas of protected countryside that everyone can visit, and where people live, work and shape the landscape”. Anybody who has visited any of them knows how beautiful they are, and rightly protected. Nonetheless, at the same time they provide a valuable place where economic activity could take place; not least there is likely plenty of natural resources beneath them, but also, wouldn’t it be nice to be able to study at university and in the afternoon take a walk, or go for a jog in one of our glorious National Parks? Many companies would jump at the opportunity to provide such a working environment for their employees (of course, many wouldn’t also). However, these are areas that are protected for a reason – primarily their outstanding natural beauty. The tragedy of the commons teaches us that more than likely without this protection, we’d overuse such areas.

Now, of course, the fracking bill passed in Parliament restricts digging to areas of non-outstanding natural beauty, but once 1.2km underground, then frackers (so to speak) can drill horizontally to get underneath the areas of outstanding natural beauty. This, naturally, is concerning – will it have no effect whatsoever to be doing things underneath the ground?

What this fundamentally boils down to is the difference between private net benefits of actions, and social net benefits. When making decisions, we will usually consider the benefits and costs that accrue to us individually and pay less attention to benefits and costs that society at large may feel as a result of our actions. When there’s a difference between the two, like for example if I choose to play music very loudly in my neighbourhood, we say there’s an externality. In the case of economic activity in National Parks, there are clearly private benefits: mining companies, and energy providers will get private benefits, as we all will, if energy prices fall. But equally, if damage is done to our National Parks as a result, we will all suffer since we can no longer enjoy those National Parks as we previously did.