Tuesday, December 16, 2003

The debate on differential tuition fees for higher education has hit the headlines once again, with over 150 Labour MPs signing an early day motion suggesting that they are likely to vote against the government. This would be unfortunate indeed.

Since the early 1990s, funding per undergraduate student in the UK has declined from £8000 to £5000. Multiply this by the number of students in the system, and it is clear that, in comparison with the recent past, total income from this source is at least £6 billion less than it might have been. This funding gap is adversely affecting the fabric of our higher education institutions; it is adversely affecting the conditions under which our students study; and it is severely challenging the ability of our best universities to compete with the best universities worldwide. Nobody seriously doubts that the universities need more cash. The problem is: from where?

Taxing in order to improve the finance of higher education is not an option. Closing the funding gap would put 3 percentage points onto the basic rate of income tax. That is politically infeasible. In any event, it would be inequitable to impose taxes on those who do not benefit from higher education in order to fund the univerisites; it would be wrong to expect road sweepers to pay for the investment made in people who later in life get high earnings on the back of their education. The debate about this ended with the introduction of flat rate tuition fees.

At stake now is the matter of differential tuition fees. Different students study different courses, have different abilities, and have different needs. It is absurd to pretend that all benefit, and that all should therefore pay, equally for the higher education they receive. Some benefit more than others. So some should pay more than others. That is only fair.

Some people object to differential fees on the grounds that their introduction will create a two-tier system of universities. This is hogwash. Higher education institutions already charge differential fees to all postgraduates. They also already charge differential fees to all undergraduates domiciled outside the EU. Universities already receive incomes from their students that vary according to how much the market will let them charge. Courses with a strong reputation charge more than those without. What is new?

The proposals before parliament could certainly benefit from some refinement and clarification. In particular, the bursaries system that has been mooted should be administered (and in my view largely financed) by the government - only the government has a mandate to redistribute income in this way. And we need to be sure that, unlike the existing fees, the new fees should not be a stealth tax - when the government introduced tuition fees at a level of £1000 in 1999, it reduced its own funding for each undergraduate student by an almost identical amount.

Notwithstanding this, the principle of differential tuition fees is a good one. It is not right that students on courses that will benefit them relatively little should pay as much for those courses as other students on courses that will benefit them a lot. The proposals currently before parliament will remove that horrible inequity. Those MPs who are considering rebellion should consider that.
The recent decline of the US dollar has been dramatic. The stimulus for this has been the huge current account deficits faced by the US. That these deficits should emerge at a time when the American economy has not been growing strongly is a concern - as the US economy expands, more imports are likely to be sucked in, and the current account deficit will increase further. To mitigate this, the weakening dollar should at least make American goods cheaper for consumers in other countries to buy.

The flip side of the weakening dollar is the strengthening of other currencies (such as the pound or the euro) against the US currency. This makes it harder for these countries to sell goods in the US, and so will make it more difficult for the European economies to pull their way out of the recent period of sluggish growth. A strong recovery in the US is, more than ever, what Europe needs in order to stimulate growth on this side of the pond.
My work on A level curricula and subsequent labour market earnings has been generating some media interest in the last couple of days. Essentially this work takes issue with earlier studies that suggest that maths is the only A level subject that positively influences subsequent earnings.

I disagree with this earlier work because, in my view, it does not make sense to examine the labour market impact of each subject separately. Students take a curriculum - a whole set of subjects - at A level, and they do so because they expect the interaction of these subjects to pack more of a punch than can a single subject. So taking chemistry alongside, say, physics can be more effective than taking either subject in isolation - because there are beneficial spillovers from one subject to the other.

The work that I have done uses a sophisticated statistical estimation method based on neural networks to analyse the impact of all possible combinations of subjects. The results suggest strongly that:

(i) maths is not the only subject that contributes to future earnings
(ii) it is not possible to say that a narrow curriculum is more productive than a broad curriculum or vice versa - subsequent earnings depend on the precise mix of subjects studied
(iii) again, it is not possible to claim that a curriculum dominated by sciences is more productive than one dominated by arts - for exactly the same reason; subsequent earnings depend on the precise mix of subjects studied.

The results are therefore quite complicated. But, of course, that is what we should expect. The interactions between different subjects are complex indeed.

Friday, August 22, 2003

The Euro is falling against the dollar. While there has been renewed optimism in America about consumer spending, France in particular has slumped, this putting downward pressure on the Euro. The adjustment in the currency's value should help stimulate the French (and more generally the Eurozone) economy, but what effect will this have on the UK?

The strength of the Euro in the recent past has rendered British exports reasonably competitive and has buffered the UK economy from the worst effects of the downturn. With the Euro now adjusting downwards, Britain's strength is less apparent. A soft landing still appears to be the most likely outcome, but we are not out of the woods yet.

Tuesday, June 10, 2003

The government's publication of the results of the five economic tests for entry to the Euro has exposed the political nature of the exercise. Four (or is it two?) of the economic tests have failed, but the government's response is to put measures in place to help ensure that the tests can be passed in future. It is striking that these measures were not put in place several years ago. The reason they were not is, of course, that the five tests have served merely as a screen to cover the politicians' prevarication.

What we have needed all along - as I have mentioned before - is a cost-benefit analysis. The five tests did not produce that; they were narrowly focused tests, some of which were bound to fail (if it suited the government for them to do so) because they asked questions along the lines of how long is a piece of string. We don't need five tests to tell us that the Euro will reduce our own government's flexibility to manage the economy - we know that it will do that. What we need to know is whether the costs of that are more than offset by the benefits of a more certain economic environment. For all the huff and puff of the Chancellor's announcement, we are no nearer knowing the answer to the question that really needs to be addressed.

Monday, June 02, 2003

After a brief lull in the housing market at the start of this year, house prices have once again started to rise quickly. At present, average house prices seem to be running at about 10-15 per cent above trend, indicating that a downward adjustment is likely. The market has been buoyed in recent months by low interest rates, but it seems that the turning point will come sooner rather than later.

The overall increase in prices masks some regional disparities. In some parts of the South East prices have started to fall, while in other regions prices are still rising quite steeply. This is characteristic of a ripple effect that is quite often seen in UK house prices - changes seem to emanate from the area around London, and then spread out over a period of about 18 months to the more peripheral regions. House prices generally are, of course, higher in the South East than elsewhere - but householders everywhere should be aware of the dangers of negative equity that adversely affected almost 2 million people in the late 1980s.

Some commentators have been alarmist - with Andrew Oswald notably predicting a 30% fall in house prices over the next two years. This is, I think, a little too pessimistic. I would expect the adjustment to be about half that. But even my more modest forecast implies that large numbers of people will be hit hard by the housing market downturn. And, with rates already very low, scope for further help in the form of interest rate cuts is limited.

Tuesday, May 13, 2003

The Conservative Party has just released details of its new policy on higher education in the UK. In a nutshell, the policy is to scrap tuition fees and to fund this by scrapping the current government's target that 50% of the relevant age cohort should enter higher education by 2010.

At least the second part of the policy is good. However, the Conservatives have refused to say what the age participation index should be if their policy is going to balance the books - as they promise. The likelihood is that their policy would entail a substantial reduction in the numbers of young people proceeding to higher education. While there is some evidence to suggest that 50% is too high a target, it is likely that the outcome of the Conservatives' policy would be that too few youngsters are given the opportunity of higher education. Either that, or the sums won't add up.

The scrapping of fees is surely a tilt at the middle class vote, and is likely to prove quite popular amongst this group - until they start to think about it. Fees have been introduced, partly, because it is right that the main beneficiaries of higher education (that is, graduates) should pay for their education (at a time in their lives when they can afford to do so). It is not right that taxpayers who have not benefitted from higher education should pay for job tickets (good job tickets at that) for other people - my dustman should not have to pay through the tax system for my children's education.

But most fundamentally, what the Conservatives are proposing is strongly anti-libertarian. Their proposals would deny people the right to spend their own money in order to 'better themselves' by acquiring a university level education. Given the love of freedom that has traditionally characterised that party, this is quite astonishing.

Tuesday, May 06, 2003

The first modern toll road will open in Britain in a few months time, and today the level of tolls will be announced. Paying tolls has long been a political hot potato in the UK, though it is not clear why. We routinely pay tolls for bridges and tunnels, we pay for parking, we pay hefty taxes on petrol. We routinely choose to drive on toll roads in neighbouring countries.

When Ken Livingstone introduced road taxes in central London earlier this year, many thought that this would be a controversial and unpopular move. It wasn't. Road pricing has long been deemed a sensible policy by economists. Now that we have the experience of London to draw on, drivers understand that the benefits of road pricing - uncongested roads - are real and tangible. The Birmingham toll road is sure to be the first of many. The real task facing the authorities is how to re-engineer existing motorways at key congestion points so that tolls can be introduced there too, without simply moving the congestion onto other roads.
The results of the UK Treasury's five economic tests for whether or not Britain should join the Euro are shortly to be announced. The second of these tests concerns the issue of whether or not there is sufficient flexibility in the economic system to cope with economic change. This is, of course, a loaded test. While Britain has a separate currency from the Eurozone, it can either allow the pound to shadow the Euro or it can let the pound vary in value relative to the Euro. We have a choice. If we join the Euro, we can only pursue the first of these options. So it is obvious that joining the Euro implies less flexibility. Once that simple fact is appreciated, it becomes clear that the whole import of the second test depends on one's interpretation of the word 'sufficient'. One man's sufficient is another man's poison. The tests serve political fudge more than economic reality - while they have served both pretty well up to now, it is time for the government to realise that this is no way to make policy.

The answer to the question of whether, on economic grounds, joining the Euro would be beneficial is one that can be answered by cost-benefit analysis. The five tests do not set costs against benefits. They are an inappropriate tool for the analytical question that has been posed. Rather than postpone a decision on whether the tests are passed, the government ought now to initiate a full cost-benefit exercise.

Wednesday, April 09, 2003

In today's Budget, Chancellor of the Exchequer Gordon Brown has revised his forecasts for this year's growth downwards to 2-2.5%. This forecast remains optimistic in relation to the forecasts of most independent observers. At the same time, he has raised his expected level of borrowing this year from £20billion to £27billion - a substantial increase.

The government is perfectly right to borrow when the economy is in the doldrums - when rapid growth does not exist to deliver tax revenue windfalls and when unemployment is rising (it isn't yet) to increase government outgoings on benefit payments. The story we are hearing from Mr Brown is a mixed one, though - he remains optimistic about growth, yet for some reason still finds the need to borrow more.

At the risk of sounding pessimistic, my view is that Mr Brown's forecast for growth is high. This would be so even if he were not increasing his borrowing. But the increased borrowing stores up some problems for the future. At some stage what he borrows must be paid back. If that can be done out of tax revenues delivered as a windfall from economic growth, then all well and good. But if he finds that he will need to raise taxes in future budgets in order to get his books to balance over the business cycle (his stated aim) then those increased taxes will stunt future growth still further.

Wednesday, March 19, 2003

The hike in the UK's minimum wage to £4.50 per hour has just been announced. The announcement has coincided with the news that, while the jobless total has fallen once again in February, the claimant count (the number of workers claiming unemployment benefit) has risen. We know that the recovery of the economy from its soft landing has been sluggish so far, and it is unusual to have such slow growth for such a long period without unemployment rising. To raise the minimum wage under these circumstances is cavalier - though clearly less so than would have been an even larger hike.

Minimum wages are not always bad for employment - Alan Manning and other economists have shown convincingly that there are circumstances where imposing a minimum wage can indeed raise employment. But a large increase in the minimum wage at a time when the economic growth is slow - and when the tax implications of war finance threaten future growth - is risky.

Tuesday, March 18, 2003

UK inflation has hit 3%, the upper limit of the target range which the government provides to the Bank of England. This is likely to reduce the scope for the central bank to reduce interest rates further - something it might ordinarily have wished to do in light of the sustained sluggishness of the economy.

The news about inflation is unlikely to lead to a relaxation of the government's 2-3% target band for inflation, however. The increase in prices has been fuelled largely by increases in oil (and petrol) prices. That increase is likely to be reversed as winter turns to spring. The hike in oil prices is largely attributed to the hard winter suffered in many parts of North America, and the consequent increase in demand for oil. Once the weather gets warmer, demand will fall back.

On the supply side, many producers have been operating close to capacity, and there is little evidence to suggest that the oil price hike has been generated by supply restrictions. Of course, that could all change in response to events in Iraq. But to the extent that any conflict will be short, there is unlikely to be a severe supply shock, and so oil prices should fall back by the middle of the year. Consequently inflation should fall back to a central position within the target band.

Tuesday, March 11, 2003

The Euro has been scaling new heights of late, against both the dollar and sterling. At first blush, this might seem odd. Growth in the eurozone is still more sluggish than in the USA or UK, and this is forecast to remain the case over the next 18 months.

But in other respects, the strong showing of the euro makes a lot of sense. The US and UK are both running current account deficits on their balance of payments - unlike the eurozone which is in surplus. So demand for euros is relatively high, since the net exports of the eurozone need to be paid for. For exactly the same reason, the demands for dollars and for sterling are relatively weak. The trade surplus of the eurozone is, in large measure, a consequence of its sluggish growth - people in those countries just aren't consuming enough to be importing as much as they're exporting.

Moreover, the threat of US and UK involvement in war - and the financial implications of that - means that higher taxes or squeezed government spending are on the cards for the medium term in these countries. Medium term, it is inevitable that the economies of the US and UK will take a hit if what seems likely to happen in the Gulf comes to pass. At the same time, the US seems to be edging away from a policy preference for a strong dollar.

Germany, in particular, is vulnerable to the current strength of the euro - its exports are beginning to look expensive, and so demand for its output is likely to fall. But the strength of the euro may yet turn out to be a blip exacerbated by the current international political situation. If the threat of war passes, or if war is short, the markets may well revert to a cautious optimism about the prospects for the American and British economies, the dollar and pound may well recover by the summer, and the overvaluation of the euro may quickly be corrected.

Wednesday, March 05, 2003

Council tax has hit the headlines. There are two reasons why. First, council tax bills are set to rise considerably this year. Secondly, the rise looks like being unevenly distributed across the regions, with the heaviest increases being in the southern part of England.

The two issues arise from different, but equally interesting, sources. Locally raised taxes contribute to the coffers of the local authorities only about a quarter of the budget. The rest is grant from central government. This means that for every £100 worth of revenue and expenditure in a local authority, only £25 is raised from local taxes. If the authority wants to raise its expenditure by a small amount - say 5% - then that £25 must rise to £30. That's a hike of 20% in council tax bills. In other words, even small differences between local councils in their preferences about expenditure can have a massive impact on the coucil tax bill received by residents. There is a cure to this problem - and that is to make a higher proportion of local authorities' revenues locally controlled. The proportion of local authorities' revenue that is accounted for by central government grant needs to be eroded over time. This is an essential prerequisite for enhanced local democracy.

The second issue is all about why councils in the south are complaining. It is certainly true that the largest increases in council tax are concentrated in the southern part of the country. The reason for this is that there have been recent changes in the way the governement compensates councils for differences in their ability to generate local tax revenues, given the rate of council tax. In areas where house prices are typically high, a given structure of council tax rates generates more revenue than in other areas - simply because a higher proportion of houses are valued in the higher tax bands. The new funding mechanism used to determine the central government grant to local authorities includes a system that corrects for this bias. That means that areas where house prices are high are now being treated less favourably than in the past. But it's important to recognise that the change in funding mechanism has been introduced purely to get rid of the bias in the system that has worked in favour of these regions up to now. It would certainly be consistent with the facts to argue that - far from being disadvantaged now - the southern counties have benefitted from substantial, albeit accidental, central government munificence in the past.

Tuesday, March 04, 2003

The pensions crisis in the UK is likely to have major impacts on the way we work. Essentially, we are faced by a double whammy. People are living longer and so pensions funds need to be buoyant in order to support the increased number of retirees. But the current poor performance of equities markets has deprived pension funds of this buoyancy.

The markets are likely to recover, so things may not really be quite as gloomy as they appear at the moment. But the fact remains that pension funds made investments at a time when optimism about the long term strength of the markets was excessive. There will be a shortfall, and that will require many people to work for longer than they had planned.

Retirement typically occurs at a convenient point in the life cycle - the children have left home, demands on the family budget have gone down. Just before retirement, for many people, the demands on the family budget are high. As expected expenditures of households fall, so retirement brings about a means whereby income can come into line with these expenditures.

But if pensions prove to be inadequate, or if their payment is delayed, many more people than now might want to enjoy several years of semi-retirement - withdrawal from pressurised full-time jobs into a more casual form of employment. This might mean consultancies, it might mean part-time work, or it might mean starting altogether new careers. It could result in a substantial change in employment structures in many industries (especially in the service sector), with employers choosing to contract work to self-employed older workers in preference to in-house staff.

With pay scales often depending on experience, older workers have often found it difficult to gain employment. With a freer market, older workers able to set their remuneration competitively might become cheaper to employ. Age discrimination might become less common. And the increased supply of labour to the market is likely to dampen wage growth for all types of worker. A longer working life and lower pay does not make for cheerful reading. Perhaps on this issue economics really is the dismal science.

But, on the bright side, the markets do seem to have passed their nadir. And the other source of the problem is our increased longevity. What's that they say about every cloud?

Monday, February 17, 2003

London's new congestion charge comes into force today. Vehicles entering central London will face a £5 daily charge. Payment is to be made by a variety of means (SMS, phone, web, ticket booths etc.) and monitoring is by CCTV reading number plates.

Road pricing has been on the agenda for 40 years. Alan Walters (who later became Margaret Thatcher's economic guru) proposed the introduction of road pricing in the UK in the early 1960s. The roots of the idea go back further.

The rationale is simple. A driver who takes his or her car into a congested area contributes to that congestion, but up till now has not paid a price for the inconvenience caused to other people. This is what economists call an externality. The tax introduces a price for this, and therefore compensates for the externality.

No doubt the charge will infuriate many people who have grown used to having something that they value given to them for free. (In that respect, it is a bit like the proposed hikes in tuition for universities.) But the congestion charge is undoubtedly good economics. The niggling doubt concerns the capability of the technology to cope with the task in hand. If it can, the benefits of the scheme will be substantial indeed.

Sunday, February 09, 2003

Reports today suggest that Chancellor of the Exchequer, Gordon Brown, has privately decided that Britain should not join the European single currency. While at the present time I think this is the right decision, I do not think the Chancellor's reasoning is sound.

The reason reportedly given by Mr Brown is that he regrets the decision of the European Central Bank not to cut interest rates, and that he values Britain's own flexibility to do so. Nothing would benefit Britain more at present than a cut in interest rates in the Euro zone. Yet by staying out of the Euro, we have ensured that we have no influence in this decision. By Mr Brown's own reasoning, we should join, so that we can have influence (though of course not control) over such a key determinant of our own economy's success.

But in my view the time is not yet right to join the Euro - albeit for different reasons. Our economy is not fully in synch with that of the rest of Europe. And so the time for us to make the (politically desirable) decision to join remains some way down the road.

Thursday, February 06, 2003

Interest rates have been cut today, to 3.75%, by the Bank of England's Monetary Policy Committee. There has been some debate in recent days about whether or not such a cut is desirable. The argument is that the downturn in manufacturing in Britain, in particular, is due to a fall in international demand rather than low demand within Britain, and that therefore a cut in domestic interest rates will not fix the problem. Those favouring this line of argument suggest that a cut in interest rates will boost an overheating housing market, and would therefore be damaging. In constrast, I would have to say that I agree with the Bank of England's position. Retail sales in the Christmas period disappointed many, and there are signs that the housing market boom is slowing. The fillip provided to the domestic economy by the interest rate cut is therefore very welcome.

Tuesday, January 28, 2003

The stock markets in major economies are in a terrible slump. The British FTSE100 index has fallen for a record 11 straight days, and has now lost half its value over the last 3 years. By any standard for normal times, shares in the FTSE should be considered as undervalued. Comparing their current value with a 20 year trend, the undervaluation seems to be quite severe; remarkably, the trend value is about 1500 points above the current index of 3480. An adjustment was certainly needed after the excessive optimism of the late 1990s - it's only in the last 6 months that the series has fallen below trend. If these are normal times, the market should bounce back, and bounce back well.

The troubles of Australian insurer AMP suggest, however, that these might not be normal times. They have been exposed to the fluctuations of the FTSE, and there is doubt as to whether they can continue to meet claims. Once financial institutions like this crumble under the weight of an underperforming stock market, confidence can crumble too. If that were to happen, we might never regain the old trend. There could be a catastrophic break with the past. What we are seeing might be the start of a new trend in the financial series, and the start could be from a lower base. In a nutshell, we might be in for a hard time.

That said, AMP is not a firm where problems have emerged suddenly. Their former CEO, Paul Batchelor, resigned in September 2002 after poor financial performance. Marc de Cure, their former financial officer, had resigned a few weeks before that, after several months of financial setbacks. Their problems appear to owe rather a lot to investment decisions that, with hindsight, appear ill-judged and atypical of the behaviour of other firms.

It is certainly possible that the current drop in share prices represents a catastrophic break from the past. By my money still remains with the view that a not insubstantial rebound is likely.

Thursday, January 23, 2003

The government is considering giving itself the power to take over the running of British Energy, the troubled electricity generating firm. A takeover of this sort, which mimics the recent conversion of Railtrack into the non-profit Network Rail, might be innocuous in itself. But it does not confront the real issues facing the company.

Some of the privatisations of the Thatcher era have been extremely successful. The success of others, usually the more complex ones such as rail, has been more modest. When a monopolistic state firm is broken up into numerous providers, each of which must have contractual links with others, it is essential that the contracts are carefully designed and that the prices at which resources are transferred between the new firms are appropriately set. It is not clear that this has been the case with British Energy, and it certainly wasn't the case with Railtrack. Taking over the firm will not, of itself, fix these problems.

Nuclear energy has a lot of advantages - it is clean, and it does not burn up rapidly exhaustible supplies of fuel. But it is not cheap; safety considerations and the costs of decommissioning add to the bill. There's a powerful case to suggest that British Energy has not been allowed to compete on a level playing field with other energy providers. Maybe that's the case. Maybe the advantages of nuclear electricity even justify some sort of subsidy, or some adjustment to the prices that the firm currently faces. But if so, the subsidy should be out in the open. If the government takes control of British Energy, can we be sure that there will be transparency?

Wednesday, January 22, 2003

Today's the day the White Paper on higher education was published, announcing that differential tuition fees of up to £3000 per year, to be paid by students via an income contingent loan, could be levied by universities from 2006 onwards. This replaces the current fixed tuition of £1000. The greater flexibility, whereby different degrees in different universities will be able to charge tuition at different levels, has to be a good thing, moving us nearer to a market situation. Many people are, of course, concerned about rising levels of student debt; the repayment scheme that is proposed should spread out repayments over a longer period than at present, so that the repayment per month will for a typical student be lower than now.

The proposals have come amongst a raft of further initiatives aimed at widening access to higher education. This is, of course, desirable. But it needs to be borne in mind that many of the barriers that young people from less affluent backgrounds face in accessing higher education are barriers that exist in the secondary (and even primary) schools. Social engineering at entry to university is no substitute for fixing problems in the schools - and it makes no accommodation for young people who leave education altogther at ages 16 or 18. I'm all for widening access, but you can only positively discriminate in favour of some people if you discriminate against others. I can foresee all sorts of interesting cases coming up to the European court of human rights! To enforce aspects of the widening participation agenda, the government is proposing the creation of an access regulator. I dare say that after a couple of years, this will mean regulation of higher education in all sorts of ways not currently envisaged. But to flourish, universities need freedom from the state, not more regulation.

The most disappointing thing, though, is that the government has stubbornly held to its target that 50% of young people should pass through higher education by the end of the decade. This is when there is already much evidence to suggest that 30% of recent graduates are in jobs for which they are overeducated. 50% is a nice round figure, but if the government really wants to set a target of this kind (and why should it?) it really does have a responsibility to come out and justify it. That, it still has not done.