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?

Terrorism and Economics

What is your reaction when you see the continued news stories surrounding the Paris terrorist attacks? Brussels today, for the third day in a row, is on lock down – army everywhere, most things shut down, people being told not to congregate in groups.

Your response, hopefully, is not necessarily with the economic impact of all of this – there’s a human impact first of all, and hopefully the very strong measures being taken in Belgium will have had the impact of saving some innocent lives.

In light of the Paris attacks, much commentary has been written; not least: why do we care more about Paris than Beirut? Here’s a piece written last week on the potential economic impact: the stock market effect was muted, but it may be that in the longer term we notice effects more in terms of economic efficiency in Europe – much production relies on cross-border transport links, which are being disrupted this year firstly via the refugee crisis, and now from the increased level of terror alerts across the continent.

Places like Egypt and Tunisia have undoubtedly suffered differently in the longer term after terrorist atrocities, via lost tourism income. It’s clearly a secondary impact compared to the initial impact of any attack on human life, but an impact nonetheless. Are we generally sufficiently risk averse that terrorist attacks will influence our consumption patterns, even if the likelihood of being caught up in a terrorist attack is incredibly small?

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 🙂

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…