In this month's Inflation Report, the Bank of England argues 'that the
recovery in economic activity is likely to gather strength over the
next year or so. But the downside risks to growth in the near
term have increased somewhat, reflecting in particular
heightened market concerns about the prospects for fiscal
consolidation' - here and around the world. Specifically in the UK context, the Bank notes that the pace of the
'recovery will be dampened by several factors: the need for a
substantial fiscal tightening; further strengthening in the
balance sheet of the UK banking sector; and the private sector’s
desire for higher savings in an environment of increased
uncertainty'. Put simply: proceed with care.
Wednesday, May 12, 2010
It has taken some time for the various negotiations to come to a conclusion, but we now have a new government in the UK. The Liberal Democrats succeeded in gaining some concessions from the Conservatives, but these have overwhelmingly been in the area of political reform. On economic policy, there will now be an accelerated fiscal retrenchment, with £6bill spending reductions this year. This risks tipping the economy back into recession before the recovery gets fully under way.
For sure, the budget deficit needs to be addressed - and over the course of a parliament more needed to be done than Labour were offering. But the timing of this is potentially critical. Accelerating retrenchment by only a few months could have a major detrimental impact.
For sure, the budget deficit needs to be addressed - and over the course of a parliament more needed to be done than Labour were offering. But the timing of this is potentially critical. Accelerating retrenchment by only a few months could have a major detrimental impact.
Monday, May 10, 2010
The markets appear to like the deal that the EU and IMF have reached to prevent the debt crisis in Greece from spreading to other southern European states. The deal involves the Eurozone countries in guaranteeing 440b in loans, with a further 250b coming from the IMF. In addition, the European Commission is injecting 60b of emergency funding (some of which will, of course, come from non-Eurozone EU members such as the UK). The scale of this deal is impressive, and is a measure of the political ambition that underpins the Euro. It will involve a not insubstantial shift of political power from the weaker economies to the centre of Europe.
The numbers are big. They need to be in order to build a sufficiently secure tidal wall; this needs to resist the pressure of market forces that are speculating against the weaker economies by failing to buy their debt. The question remains: tidal wall or Cnut?
The numbers are big. They need to be in order to build a sufficiently secure tidal wall; this needs to resist the pressure of market forces that are speculating against the weaker economies by failing to buy their debt. The question remains: tidal wall or Cnut?
Friday, May 07, 2010
The economic scenario facing Greece is difficult. The country has accessed international support and its parliament has approved a tough set of austerity measures. These measures will not be easy to implement. The current government, or a different government, may be left with little option other than to withdraw from the euro. This would allow the new Greek currency to depreciate, improving competitiveness and disguising (through inflation due to higher import prices) the real impact of the austerity measures on the Greek population.
Portugal and Spain, and to a lesser extent Italy, have been identified as other Eurozone countries facing difficulties. It looks increasingly as though the Eurozone was never an optimal currency area. The northern countries might more reasonably have formed one such area while the southern countries formed another. Political aspiration ran ahead of economic reality.
In the UK, the decision to stay out of the euro was motivated by political considerations rather than economic analysis - a proper cost-benefit study was never conducted. That being so, the fact that we, unlike Greece, are not straitjacketed by the euro appears to be more a matter of good luck than good judgement.
Portugal and Spain, and to a lesser extent Italy, have been identified as other Eurozone countries facing difficulties. It looks increasingly as though the Eurozone was never an optimal currency area. The northern countries might more reasonably have formed one such area while the southern countries formed another. Political aspiration ran ahead of economic reality.
In the UK, the decision to stay out of the euro was motivated by political considerations rather than economic analysis - a proper cost-benefit study was never conducted. That being so, the fact that we, unlike Greece, are not straitjacketed by the euro appears to be more a matter of good luck than good judgement.
Tuesday, May 04, 2010
An interesting contribution to the election debate has been published by Tullett Prebon. It argues for substantial cuts in public expenditure, making the following claim:
'When anyone calls for cuts in public spending, there are howls of protest, and grim warnings that slashing spending would inflict unacceptable damage on the public services that are required by a civilised society. This is bunkum. In 2009-10, the government spent £674bn. If this were reduced by £50bn, it would remain higher than the inflation-adjusted total for 2007-08, when the public services were hardly under-funded. Even a £100bn reduction would only take real spending back to the 2004-05 level.'
This is a pretty dramatic claim. But it is spurious. To make a sensible comparison, it is necessary to adjust the figures to allow for the fact that the three years were at different points in the business cycle. Spending was high in 2009-10 precisely because the economy was in deep recession. This meant that spending on things like benefits (unemployment benefit, income support etc.) was high. And spending on projects was brought forward in order to mitigate the worst effects of the recession. Comparing this spending with that which obtained in 2004-05 is frankly ridiculous.
This does not mean that there is no scope for efficiency savings - there always is. But the Tullett Prebon report does show just how careful one has to be in reading claims made during an election period. In some measure, recovery will automatically bring about a cut in public expenditures. And in some measure a reduction of the UK's structural budget deficit is necessary. But without waiting for the recovery to take place, a £50b or £100b cut in public expenditure would cause untold damage.
'When anyone calls for cuts in public spending, there are howls of protest, and grim warnings that slashing spending would inflict unacceptable damage on the public services that are required by a civilised society. This is bunkum. In 2009-10, the government spent £674bn. If this were reduced by £50bn, it would remain higher than the inflation-adjusted total for 2007-08, when the public services were hardly under-funded. Even a £100bn reduction would only take real spending back to the 2004-05 level.'
This is a pretty dramatic claim. But it is spurious. To make a sensible comparison, it is necessary to adjust the figures to allow for the fact that the three years were at different points in the business cycle. Spending was high in 2009-10 precisely because the economy was in deep recession. This meant that spending on things like benefits (unemployment benefit, income support etc.) was high. And spending on projects was brought forward in order to mitigate the worst effects of the recession. Comparing this spending with that which obtained in 2004-05 is frankly ridiculous.
This does not mean that there is no scope for efficiency savings - there always is. But the Tullett Prebon report does show just how careful one has to be in reading claims made during an election period. In some measure, recovery will automatically bring about a cut in public expenditures. And in some measure a reduction of the UK's structural budget deficit is necessary. But without waiting for the recovery to take place, a £50b or £100b cut in public expenditure would cause untold damage.
Wednesday, March 31, 2010
The telecommunications regulator, Ofcom, has ruled that BSkyB must make two of its premier sports channels (Sky Sports 1 and Sky Sports 2) available to other distributors of television services at a reduced price. The regulator's concern is that BSkyB is abusing its monopoly position as a broadcaster of premier sports events.
In fact there is some competition. ESPN (another pay-TV operator) has the rights to certain premiership football matches, while other football competitions are broadcast by BBC, ITV and Channel 5. A reasonable amount of rugby is broadcast by BBC. Cricket's superb IPL competition is broadcast by ITV. The Hotbird satellite carries a huge amount of European sport free to air. But there is nonetheless widespread feeling that Sky does some cherry-picking. In this, Sky are supported by the sports bodies that themselves benefit from the broadcaster's financial clout.
Pricing in broadcasting is tricky. The general principle that welfare is maximised when price is set at marginal cost cannot be applied here - at least not without some modification. The marginal cost associated with a new subscriber is (virtually) nothing. If the subscription price were set at nothing, the broadcaster would receive no revenues and would not produce anything - unless, along the lines of a public service broadcaster, it were subsidised. So rules that are inevitably somewhat ad hoc have to take the place of general economic principles.
What, then, are the issues that need to be considered? The sports bodies gain from higher prices - up to a point. Much of the resultant surplus, ultimately, goes into athletes' pay. Likewise BSkyB benefits in terms of higher profits from the higher prices which, after all, it chooses to charge. Telecommunications firms that buy access to the premium sports channel in order to sell on to consumers would, however, benefit from lower charges, since this makes their package more attractive. Likewise, consumers would benefit from lower charges. Any consideration of the price that is best for society as a whole involves balancing these competing interests.
But the key is this: there are doubtless many consumers who would be willing to pay something for premium sport but who are not willing to pay current prices. If BSkyB could offer them discounted prices without alienating its current customer base, it would do so. The status quo is therefore inefficient because trades that ought to be made are not being made. This is what we call market failure, and such a situation is precisely what regulation is there to sort out.
In fact there is some competition. ESPN (another pay-TV operator) has the rights to certain premiership football matches, while other football competitions are broadcast by BBC, ITV and Channel 5. A reasonable amount of rugby is broadcast by BBC. Cricket's superb IPL competition is broadcast by ITV. The Hotbird satellite carries a huge amount of European sport free to air. But there is nonetheless widespread feeling that Sky does some cherry-picking. In this, Sky are supported by the sports bodies that themselves benefit from the broadcaster's financial clout.
Pricing in broadcasting is tricky. The general principle that welfare is maximised when price is set at marginal cost cannot be applied here - at least not without some modification. The marginal cost associated with a new subscriber is (virtually) nothing. If the subscription price were set at nothing, the broadcaster would receive no revenues and would not produce anything - unless, along the lines of a public service broadcaster, it were subsidised. So rules that are inevitably somewhat ad hoc have to take the place of general economic principles.
What, then, are the issues that need to be considered? The sports bodies gain from higher prices - up to a point. Much of the resultant surplus, ultimately, goes into athletes' pay. Likewise BSkyB benefits in terms of higher profits from the higher prices which, after all, it chooses to charge. Telecommunications firms that buy access to the premium sports channel in order to sell on to consumers would, however, benefit from lower charges, since this makes their package more attractive. Likewise, consumers would benefit from lower charges. Any consideration of the price that is best for society as a whole involves balancing these competing interests.
But the key is this: there are doubtless many consumers who would be willing to pay something for premium sport but who are not willing to pay current prices. If BSkyB could offer them discounted prices without alienating its current customer base, it would do so. The status quo is therefore inefficient because trades that ought to be made are not being made. This is what we call market failure, and such a situation is precisely what regulation is there to sort out.
Tuesday, March 23, 2010
An interesting article by Joseph Stiglitz argues against premature cutting of the budget deficit. Stiglitz suggests that 'prospects of a robust recovery are, at best, year or two away' and that at this stage 'reducing governemnt spending is a risk not worth taking'.
He notes that there is a difference between different types of expenditure, and that investment spending (on education, for instance) can lead to reductions in the budget deficit in future years. He also notes - and here is a crucial point - that the 'risks (associated with different policies on the budget deficit) are asymmetric: if these forecasts are wrong, and there is a more robust recovery, then, of course, expenditures can be cut back and/or taxes increased'.
Interestingly, Stiglitz makes specific comment on the UK: 'The UK's weaker performance is not the result of worse policies; indeed, compared to the US, its bank bailouts and labor market policies were, in many ways, far better.'
He notes that there is a difference between different types of expenditure, and that investment spending (on education, for instance) can lead to reductions in the budget deficit in future years. He also notes - and here is a crucial point - that the 'risks (associated with different policies on the budget deficit) are asymmetric: if these forecasts are wrong, and there is a more robust recovery, then, of course, expenditures can be cut back and/or taxes increased'.
Interestingly, Stiglitz makes specific comment on the UK: 'The UK's weaker performance is not the result of worse policies; indeed, compared to the US, its bank bailouts and labor market policies were, in many ways, far better.'
Wednesday, March 17, 2010
Barry Eichengreen and Kevin O'Rourke have been keeping tabs on the recession that started in 2008, comparing it with the Great Depression. Their early analyses suggested that the paths of the two events looked alarmingly similar. Their most recent update, available here, suggests that the global economy has pulled out of recession and that the pattern of economic activity now looks very different from that observed in the late 1920s and early 1930s.
Eichengreen and O'Rourke argue that 'policy deserves considerable credit' for the recovery. Moreover, they note that 'considerable excess capacity remains in a number of important economies. Exiting now from policies of stimulus in those countries would therefore be premature.'
Eichengreen and O'Rourke argue that 'policy deserves considerable credit' for the recovery. Moreover, they note that 'considerable excess capacity remains in a number of important economies. Exiting now from policies of stimulus in those countries would therefore be premature.'
Tuesday, March 09, 2010
The Association of Graduate Recruiters has published a new 'manifesto' for graduate recruitment. Its calls to action include the abolishment of the 50% target age participation rate for higher education, and a lifting of the cap on undergraduate tuition fees.
The manifesto has met with a mixed response, and has been criticised by both unions and government - not least because these groups see the economy as dependent on high skills, and so they support the 50% target.
A further recommendation in the manifesto is that tax breaks should be introduced for the employers of new graduates. The case is not well argued. Breaks given to employers conditional on the adoption of certain recruitment practices have often backfired, with employers shedding labour of other kinds in order to increase their hiring of the subsidised type of labour.
The manifesto has met with a mixed response, and has been criticised by both unions and government - not least because these groups see the economy as dependent on high skills, and so they support the 50% target.
A further recommendation in the manifesto is that tax breaks should be introduced for the employers of new graduates. The case is not well argued. Breaks given to employers conditional on the adoption of certain recruitment practices have often backfired, with employers shedding labour of other kinds in order to increase their hiring of the subsidised type of labour.
Friday, February 19, 2010
The headline in today's Times states that the 'shock deficit threatens UK recovery'.
On the same day, more than 60 economists have signed letters published in the Financial Times, arguing that moves to reduce the deficit should not be rushed since this would risk a return to recession.
The deficit (that is, borrowing over the year) is large, but the debt (the sum of deficits accumulated over the years) is not. For sure the deficit needs to be tackled sometime soon, otherwise the debt will grow, and ultimately servicing that debt would become a problem. But, in comparison with many other countries, the UK has started out from a good place.
Ponder for a moment why the deficit has grown. National income has declined by over 6% during this recession. During normal times, it grows by an average of about 2.5% per year, so national income is now around 10% lower than it would be had we experienced trend rates of growth over the last couple of years. As national income falls, tax revenues to government automatically fall. This fall has been of the order of £45-50 billion. At the same time, government spending on benefits automatically rise as the recession takes hold. Add to this a variety of special measures that have been taken, and which are time limited - the cut in VAT, the preponing of major construction projects and so on. This all suggests that a substantial proportion of the budget deficit is due to the recession (automatic stabilisation policy) and to deliberate attempts to minimise the impact of that recession (discretionary stabilisation policy). The deficit is there, in large measure, precisely to bring about UK recovery - not to threaten it.
This means that the Times headline is 'through the looking glass' economics.
For sure, books need to balance over the long term. The best thing to do to bring that balance about is to support the recovery. Once the recovery is properly under way, public sector cuts will be needed, and those cuts will hurt. The patient needs to be strong enough to take the medicine. Supporting the recovery calls for careful treatment, not knee-jerk reaction.
On the same day, more than 60 economists have signed letters published in the Financial Times, arguing that moves to reduce the deficit should not be rushed since this would risk a return to recession.
The deficit (that is, borrowing over the year) is large, but the debt (the sum of deficits accumulated over the years) is not. For sure the deficit needs to be tackled sometime soon, otherwise the debt will grow, and ultimately servicing that debt would become a problem. But, in comparison with many other countries, the UK has started out from a good place.
Ponder for a moment why the deficit has grown. National income has declined by over 6% during this recession. During normal times, it grows by an average of about 2.5% per year, so national income is now around 10% lower than it would be had we experienced trend rates of growth over the last couple of years. As national income falls, tax revenues to government automatically fall. This fall has been of the order of £45-50 billion. At the same time, government spending on benefits automatically rise as the recession takes hold. Add to this a variety of special measures that have been taken, and which are time limited - the cut in VAT, the preponing of major construction projects and so on. This all suggests that a substantial proportion of the budget deficit is due to the recession (automatic stabilisation policy) and to deliberate attempts to minimise the impact of that recession (discretionary stabilisation policy). The deficit is there, in large measure, precisely to bring about UK recovery - not to threaten it.
This means that the Times headline is 'through the looking glass' economics.
For sure, books need to balance over the long term. The best thing to do to bring that balance about is to support the recovery. Once the recovery is properly under way, public sector cuts will be needed, and those cuts will hurt. The patient needs to be strong enough to take the medicine. Supporting the recovery calls for careful treatment, not knee-jerk reaction.
Tuesday, February 16, 2010
The CPI inflation rate rose to 3.5% in January. Since this is above the 3% threshold, the Governor of the Bank of England must write a letter of explanation to the Chancellor of the Exchequer. He should not find this task too daunting. The rate of VAT rose back to 17.5% in January following its temporary reduction to 15%. As a result, for the next 12 months, the headline inflation figure will be artificially high.
Far from inflation and overheating, the threat that the UK economy continues to face comes from a recovery that is, as yet, still very weak. The danger of a return to recession is a real threat, and the temporary blip in inflation should not serve to disguise that fact.
Far from inflation and overheating, the threat that the UK economy continues to face comes from a recovery that is, as yet, still very weak. The danger of a return to recession is a real threat, and the temporary blip in inflation should not serve to disguise that fact.
Sunday, February 14, 2010
A letter in today's Sunday Times, written by a group of eminent economists, argues for early implementation of government spending cuts. I was a signatory to an earlier letter in the Financial Times that argued the opposite. What should we believe?
There is, for sure, a substantial government budget deficit - currently around £140 billion over a year. A significant part, somewhat more than a half, of this is due to the operation of so-called automatic stabilisers - the tendency for tax revenues to fall, and government spending to rise, during a recession. More is due to the deliberate rescheduling of government spending on projects - bringing them forward so that the economy can benefit from an early injection of spending. This being so, the public finances can be expected, in some measure, to 'rise with the tide' as the economy recovers.
Nonetheless, there will be a need for substantial cuts - nobody disputes that the structural budget deficit is indeed large. Timing is of the essence. While the economy remains fragile, cuts will be premature. Yet confidence in the public sector's ability to manage its debt depends critically on a credible plan being put in place. What is needed quickly is the promise of such a plan; the cuts themselves should wait a while until the recovery is more secure. If we can achieve growth of 1.5% this year, then there will be scope.
There is, for sure, a substantial government budget deficit - currently around £140 billion over a year. A significant part, somewhat more than a half, of this is due to the operation of so-called automatic stabilisers - the tendency for tax revenues to fall, and government spending to rise, during a recession. More is due to the deliberate rescheduling of government spending on projects - bringing them forward so that the economy can benefit from an early injection of spending. This being so, the public finances can be expected, in some measure, to 'rise with the tide' as the economy recovers.
Nonetheless, there will be a need for substantial cuts - nobody disputes that the structural budget deficit is indeed large. Timing is of the essence. While the economy remains fragile, cuts will be premature. Yet confidence in the public sector's ability to manage its debt depends critically on a credible plan being put in place. What is needed quickly is the promise of such a plan; the cuts themselves should wait a while until the recovery is more secure. If we can achieve growth of 1.5% this year, then there will be scope.
Thursday, February 11, 2010
Sir Michael Marmot's review on health inequalities in the UK has just been published. The inequalities that are highlighted are startling, and in themselves call for action.
One of the review's proposals refers to the minimum wage. The review cites work by which argues that a full-time worker on the minimum wage enjoys earnings that are insufficient to meet public expectations of an 'acceptable minimum standard of living'. It then argues for 'the coordination of social support, tax systems and minimum wage levels necessary to enable full implementation of minimum income for healthy living standards'.
This raises several issues. First, the link between the minimum wage and household incomes is tenuous. Workers who receive the minimum wage are not necessarily the chief income earners of a household. Even if they are, they may be in minimum wage employment for short spells in between longer spells of more remunerative work. Many workers who receive minimum wages work part-time. In many cases, young people work in jobs paying the minimum wage, either on a part-time basis or while they are searching for better jobs elsewhere. Put simply, the minimum wage is a blunt instrument in targeting poverty.
Where the chief income earner in a household is being paid minimum wages, for sure the income of the household is low. But the support of households in this position is not limited to the minimum wage - benefits, based on household income, kick in. These benefits are far better at targeting poverty.
Raising the minimum wage can of course help some people in poorly remunerated jobs; that's what they're there for. But it also raises the price of labour for employers. Under some circumstances this is no bad thing - it can prevent exploitation of workers in a situation where the employer has a lot of market power. But substantially to raise the minimum wage during tough economic times would most likely have deleterious effects on employment. It is a policy that would hurt the very people that Marmot is seeking to protect.
One of the review's proposals refers to the minimum wage. The review cites work by which argues that a full-time worker on the minimum wage enjoys earnings that are insufficient to meet public expectations of an 'acceptable minimum standard of living'. It then argues for 'the coordination of social support, tax systems and minimum wage levels necessary to enable full implementation of minimum income for healthy living standards'.
This raises several issues. First, the link between the minimum wage and household incomes is tenuous. Workers who receive the minimum wage are not necessarily the chief income earners of a household. Even if they are, they may be in minimum wage employment for short spells in between longer spells of more remunerative work. Many workers who receive minimum wages work part-time. In many cases, young people work in jobs paying the minimum wage, either on a part-time basis or while they are searching for better jobs elsewhere. Put simply, the minimum wage is a blunt instrument in targeting poverty.
Where the chief income earner in a household is being paid minimum wages, for sure the income of the household is low. But the support of households in this position is not limited to the minimum wage - benefits, based on household income, kick in. These benefits are far better at targeting poverty.
Raising the minimum wage can of course help some people in poorly remunerated jobs; that's what they're there for. But it also raises the price of labour for employers. Under some circumstances this is no bad thing - it can prevent exploitation of workers in a situation where the employer has a lot of market power. But substantially to raise the minimum wage during tough economic times would most likely have deleterious effects on employment. It is a policy that would hurt the very people that Marmot is seeking to protect.
Tuesday, January 26, 2010
So that's that then. The UK has emerged out of recession, with growth of 0.1% in the last quarter of last year. This is not a spectacular bounce back, and the receovery is set to be fragile for some time to come. The restoration of VAT to 17.5% at the start of this year may have led some people to prepone major purchases, so there could be a downward blip in demand during the current quarter. And while political considerations have delayed the announcement of savage public expenditure cuts (and - given that the patient is still in intensive care - that is probably just as well), such cuts will surely come.
While the unemployment rate fell last month, this was surprising. Over the longer term, expect the economy to have to grow by 2-2.5% per year before seeing a sustained decline in unemployment. In light of the pressure on public finances, it could well be another two years, at least, before this is achieved.
We're out of recession, but not out of the woods.
While the unemployment rate fell last month, this was surprising. Over the longer term, expect the economy to have to grow by 2-2.5% per year before seeing a sustained decline in unemployment. In light of the pressure on public finances, it could well be another two years, at least, before this is achieved.
We're out of recession, but not out of the woods.
Monday, December 07, 2009
A letter appears in today's Financial Times from 12 economists, urging the Chancellor of the Exchequer not to rush to cut government spending. I am one of the signatories.
To be sure, the government's budget deficit has risen alarmingly over the last couple of years. It has needed to do so in order to mitigate the effects of recession. And it has, beyond doubt, reached levels that, at around 15% of Gross Domestic Product, are not sustainable in the long term. But we should not forget that the deficit is a flow measure - it represents the gap between government spending and tax revenues in just one year. If we live beyond our means year after year, then that is not good; but if we save in some years in order to spend in difficult times, then that is not bad. At the moment, things are difficult, and thanks to some fairly prudent housekeeping in years gone by (not as prudent as it might have been perhaps - but still prudent enough) the national debt - the relevant stock measure - remains fairly modest. To be precise, the national debt in the UK (according to the latest OECD estimates) amounts to around 75% of Gross Domestic Product - less than that in the Euro area, less than that in the United States, and considerably less than that in Japan.
The government will need to tackle the budget deficit at some stage, and it should not wait too long before doing so. But to be aggressive in doing so now would be premature. The data for the last quarter showed the UK still in recession. Other countries will be tightening their budgets and this will likely result in, at best, slow recovery of global demand. So any recovery in the UK will be fragile over the coming year. If spending cuts were to throw the economy back into reverse, tax revenues would fall further, thus exacerbating - not curing - the problem of a high budget deficit.
Perhaps the foot should come off the accelerator a little. But it's too early to slam it on the brake. Like good comedy, it's just a matter of... timing.
To be sure, the government's budget deficit has risen alarmingly over the last couple of years. It has needed to do so in order to mitigate the effects of recession. And it has, beyond doubt, reached levels that, at around 15% of Gross Domestic Product, are not sustainable in the long term. But we should not forget that the deficit is a flow measure - it represents the gap between government spending and tax revenues in just one year. If we live beyond our means year after year, then that is not good; but if we save in some years in order to spend in difficult times, then that is not bad. At the moment, things are difficult, and thanks to some fairly prudent housekeeping in years gone by (not as prudent as it might have been perhaps - but still prudent enough) the national debt - the relevant stock measure - remains fairly modest. To be precise, the national debt in the UK (according to the latest OECD estimates) amounts to around 75% of Gross Domestic Product - less than that in the Euro area, less than that in the United States, and considerably less than that in Japan.
The government will need to tackle the budget deficit at some stage, and it should not wait too long before doing so. But to be aggressive in doing so now would be premature. The data for the last quarter showed the UK still in recession. Other countries will be tightening their budgets and this will likely result in, at best, slow recovery of global demand. So any recovery in the UK will be fragile over the coming year. If spending cuts were to throw the economy back into reverse, tax revenues would fall further, thus exacerbating - not curing - the problem of a high budget deficit.
Perhaps the foot should come off the accelerator a little. But it's too early to slam it on the brake. Like good comedy, it's just a matter of... timing.
Wednesday, October 28, 2009
A couple of news snippets from America have thrown the markets into reverse. House sales slowed by 3.6% over the year to September, and a measure of consumer confidence has also slipped. This news closely follows other disappointing news about US retail sales - though the latter figures are distorted somewhat by the ending of the car scrappage scheme in September.
The news from across the pond serves as a warning that - while the worst of the recession may be over - the route back to sustained growth is likely to be long and difficult. We knew that already. A look at the long term trend suggests that the markets are not currently overvalued, and that the current blip should not represent the start of a more prolonged decline.
The news from across the pond serves as a warning that - while the worst of the recession may be over - the route back to sustained growth is likely to be long and difficult. We knew that already. A look at the long term trend suggests that the markets are not currently overvalued, and that the current blip should not represent the start of a more prolonged decline.
Monday, October 12, 2009
In a Guardian article over the weekend, David Blanchflower has argued that 'a few years of inflation, around 5% or so, would be a really good idea'. It is certainly the case that inflation could help reduce the national debt and so improve the public finances - simply because it would reduce the real value of that debt. That being the case, it is almost certainly part of the hidden agenda for all political parties as we run up to the next election.
However, inflation hits some people harder than others. In particular it hits those on fixed incomes (which are often low incomes) - people like pensioners. To advocate a deliberate stimulus of inflation will be regarded by many observers as bizzare, at least without introducing special protection for disadvantaged groups. This means indexation of pensions. How effective a policy of inflation would then be is uncertain. The long and short of it is that the current situation demands that people feel pain in the adjustment.
Prof Blanchflower has done us all a service in bringing what are surely hidden agendas out into the open. Whether he is right in judging inflation to be a 'really good idea' is moot. But it is certainly right that we should have the opportunity to discuss these things in the open.
However, inflation hits some people harder than others. In particular it hits those on fixed incomes (which are often low incomes) - people like pensioners. To advocate a deliberate stimulus of inflation will be regarded by many observers as bizzare, at least without introducing special protection for disadvantaged groups. This means indexation of pensions. How effective a policy of inflation would then be is uncertain. The long and short of it is that the current situation demands that people feel pain in the adjustment.
Prof Blanchflower has done us all a service in bringing what are surely hidden agendas out into the open. Whether he is right in judging inflation to be a 'really good idea' is moot. But it is certainly right that we should have the opportunity to discuss these things in the open.
Monday, September 21, 2009
The Confederation of British Industry has generated some controversy with its report higher education. It advocates increased tuition fees, temporary abandonment of the target that 50% of the cohort should benefit from higher education, more financial support from business, and increased support for the STEM (schience, technology, engineering and mathematics) subject areas. These are not straightforward proposals.
Increasing tuition fees certainly sounds like an appealing way of maintaining funding for the universities at a time when the public finances are going to be squeezed. But the way in which students are funded in the UK make this option less simple to implement than might appear at first glance. Students receive a loan from the Student Loans Company, out of which they pay their tuition fees. These loans are funded by government. To be sure, the government can package these loans up and sell them to the private sector as parcels of debt - financial institutions are happy to pay upfront for an asset that will yield them returns in the future. But these parcels have to be sold at a discount. This discount reflects the fact that not all of what is loaned to students ends up being repaid - students on low incomes do not make repayments, and there is a write-off of the debt after 25 years. So, even though an increase in tuition fees might lead to a reduction in the amount of money that government needs to give directly to the universities, it would also lead to an increase in the amount of government expenditure needed to fund the student loan system. The extent to which tuition fees could be raised therefore entails a rather delicate balancing act. The Institute for Fiscal Studies has done interesting work on this. Some increase in tuition fees would certainly be possible. But the extent to which this could be done without entailing additional government expenditure is more limited than some commentators would appear to think.
The 50% target has always been contentious - not least because the figure itself appears to have been plucked out of thin air. It might reasonably be argued that, rather than have a target, young people should be allowed to make their own decisions about whether or not higher education represents, for them, a good investment. This year, many thousands of qualified school leavers have not succeeded in finding places in higher education. Abandonment of the target now would appear to be perverse.
It is not new for there to be calls for businesses to provide financial support to higher education. Many people agree that they should, but this does not, of course, mean that they will. Workers are not, in general, bound to their employers - we do not live in a slavery society. This means that workers are mobile across firms, which in turn means that firms are reluctant to pay for workers’ general education – they have no guarantee that the worker will stay with the firm long enough to give the company a return on its investment in that education.
The STEM subjects have been prioritised by government in recent years. There are, however, other subjects – notably business and law - that equally offer students a high rate of return.
While the CBI proposals are to be welcomed in that they will encourage debate, one would hope that the debate that is to follow will recognise some of the nuances that the proposals themselves fail to appreciate.
Increasing tuition fees certainly sounds like an appealing way of maintaining funding for the universities at a time when the public finances are going to be squeezed. But the way in which students are funded in the UK make this option less simple to implement than might appear at first glance. Students receive a loan from the Student Loans Company, out of which they pay their tuition fees. These loans are funded by government. To be sure, the government can package these loans up and sell them to the private sector as parcels of debt - financial institutions are happy to pay upfront for an asset that will yield them returns in the future. But these parcels have to be sold at a discount. This discount reflects the fact that not all of what is loaned to students ends up being repaid - students on low incomes do not make repayments, and there is a write-off of the debt after 25 years. So, even though an increase in tuition fees might lead to a reduction in the amount of money that government needs to give directly to the universities, it would also lead to an increase in the amount of government expenditure needed to fund the student loan system. The extent to which tuition fees could be raised therefore entails a rather delicate balancing act. The Institute for Fiscal Studies has done interesting work on this. Some increase in tuition fees would certainly be possible. But the extent to which this could be done without entailing additional government expenditure is more limited than some commentators would appear to think.
The 50% target has always been contentious - not least because the figure itself appears to have been plucked out of thin air. It might reasonably be argued that, rather than have a target, young people should be allowed to make their own decisions about whether or not higher education represents, for them, a good investment. This year, many thousands of qualified school leavers have not succeeded in finding places in higher education. Abandonment of the target now would appear to be perverse.
It is not new for there to be calls for businesses to provide financial support to higher education. Many people agree that they should, but this does not, of course, mean that they will. Workers are not, in general, bound to their employers - we do not live in a slavery society. This means that workers are mobile across firms, which in turn means that firms are reluctant to pay for workers’ general education – they have no guarantee that the worker will stay with the firm long enough to give the company a return on its investment in that education.
The STEM subjects have been prioritised by government in recent years. There are, however, other subjects – notably business and law - that equally offer students a high rate of return.
While the CBI proposals are to be welcomed in that they will encourage debate, one would hope that the debate that is to follow will recognise some of the nuances that the proposals themselves fail to appreciate.
Thursday, September 10, 2009
The National Institute for Economic Research estimates that the UK economy grew in the three months to the end of August this year. Official data will not be released until later in the year, and will cover the three months to September.
Meanwhile the FTSE index has risen above 5000 and appears - for now at least - to be staying there, giving further cause for optimism.
If these indicators are to be trusted, it would suggest that the recession has been quite short - five quarters - but also quite sharp. The rapid return to growth has surely been helped by the aggressive policy response of governments around the world. But that response in itself - desirable though it has been - has compromised the ability of economies to recover rapidly. The gulf that has emerged between public spending and tax revenues in this recession means that fiscal tightening over the next few years is inevitable. That tightening will constrain the growth of the economy in exactly the same way as the recent expansion of the budget deficit has stimulated it. The recession may be over, but the aftermath will be with us for several years to come.
Meanwhile the FTSE index has risen above 5000 and appears - for now at least - to be staying there, giving further cause for optimism.
If these indicators are to be trusted, it would suggest that the recession has been quite short - five quarters - but also quite sharp. The rapid return to growth has surely been helped by the aggressive policy response of governments around the world. But that response in itself - desirable though it has been - has compromised the ability of economies to recover rapidly. The gulf that has emerged between public spending and tax revenues in this recession means that fiscal tightening over the next few years is inevitable. That tightening will constrain the growth of the economy in exactly the same way as the recent expansion of the budget deficit has stimulated it. The recession may be over, but the aftermath will be with us for several years to come.
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