Cash is a rational birthday present but inappropriate

February 23, 2017 Leave a comment

Here is a clip from Seinfeld that I use when teaching Behavioural Economics. It seems rational that Jerry gives Elaine $182 for her birthday but it really is inappropriate. Cash replaces social norms by market norms and ruins the feelings usually evoked by a typical non-cash birthday gift. The deadweight loss of giving is the loss of efficiency that occurs when the value of the gift to the recipient is less than the cost of the gift to the giver. In this case, economists argue that cash would be a more efficient gift.

Full v Fulfilling Employment

February 21, 2017 Leave a comment

Free Exchange in The Economist had an article which looked at the change in terminology used by Janet Yellen chairman of the Federal Reserve. In a recent statement she alluded to the US economy near maximum employment and that rate rises could ensue. However only 69% of American adults have a job.

Full employment has normally been the concept that has been used to describe a situation where there is no cyclical or deficient-demand unemployment, but unemployment does exist as allowances must be made for frictional unemployment and seasonal factors – also referred to as the natural rate of unemployment or Non-Accelerating Inflation Rate of Unemployment (NAIRU). If a central bank wishes to stimulate demand below this level there is the concern that inflation will increase therefore they take a guess as to what is the natural rate of unemployment – the lowest rate of unemployment where prices don’t accelerate. Maximum unemployment is the same in that it refers to the labour market being as tight as it can be without increasing prices. Natural rates in the US have varied – around 5.3% in 1950 and then peaking at 6.3% in the stagflation period before falling 4.9% in 2008 and then rising to 5.1% after the GFC, see graph below.

NRU - 1950 - 2016.png

NRU and its causes

The NRU mainly depends on the level of frictional unemployment – defined as those who are in between jobs. This number can vary as at different times of the business cycle as there can be a delay in matching those looking for work with the vacancies themselves – a mismatch sometimes referred to as Structural Unemployment. The increase in frictional unemployment in the 1970’s and 80’s was largely due to the decline in manufacturing jobs with the advent of automation and more right wing policies (Reagan and Thatcher). Workers would stay unemployed in the hope that good high paid manufacturing jobs would reappear.

Unions can also influence the NRU with protecting workers jobs and pushing up wages so that employers find it too costly to employ more labour. However the fall in the 1990’s could be due to the advent of technology in the hiring process and the growth of part-time jobs which assisted those workers facing a career change.

Another influence on the NRU is wage growth as with the higher wages you attract more of the labour force to engage in actively looking for work.

A central bank will have to use trial and error to make a decision on how much spare capacity there is in an economy. Only when prices start to increase do they have an idea how capacity is running.

Quality not Quantity

As alluded to by The Economist the goal of full employment must consider the quality of jobs as well. With the acceleration of technology over labour, maximum employment should consider more than capacity constraints or inflationary pressure.

Rather, governments need to consider the options available to workers: not just how easily they can find jobs they want, but also how readily they can refuse jobs they do not. By lifting obstacles to job changes and giving workers a social safety net that enables them to refuse the crummiest jobs, societies can foster employment that is not just full, but fulfilling.

Sources: The Economist 28th January 2017, St Louis Federal Reserve – Natural Rate of Unemployment

Inflation on the way up

February 16, 2017 Leave a comment

Inflation is predicted to increase in the global economy in 2017 which is a welcoming thought when you consider the threat of deflation. The Economist identified 3 areas that are behind the increase.

1. Imported inflation – producer prices in China are increasing as prices at the factory gate rose by 5.5% and the spare capacity in the economy is getting smaller. Furthermore there has been an improvement in demand especially in Asia. Additionally oil prices have increased to over $50 per barrel up from $30. Therefore a lot the above imports have become more expensive which could lead to higher prices. However a lot will depend on the exchange rate – lower value exchange rate means that imports will be more expensive

2. Capacity pressures – with a reduction in spare capacity goods become more scarce so the price of them should increase. The USA economy is close to full capacity with 4.7% unemployment and US Fed chairman Janet Yellen recently indicated that a further increase in interest rates might be necessary to cool increasing pressure on inflation. In the Euro area there is more spare capacity with the unemployment rate of 9.8% – this is especially prevalent in Italy and Spain. Therefore if the inflation rate is to increase in the Euro area it will need countries like Germany, with a 4.1% unemployment rate, to generate it.

3. Inflationary expectations – expectations of further inflation in the future can lead workers to demand higher wages in anticipation of price increases or lead producers to set higher prices in anticipation of increased costs of production. Inflationary expectations have reached their highest level in 12 years according to a survey of fund managers. But it has also raised fears the world is heading for a period of low growth, higher unemployment and accompanied by high inflation leads to stagflation.

Inflation Expectations.png

Sources: The Economist, FT

AS Level – Economic systems: North Korea

February 14, 2017 Leave a comment

Following on the theme of economic systems and North Korea, below is a documentary from the BBC Panorama programme. John Sweeney goes undercover in North Korea and finds out what life is really like. The documentary shows: State ownership, State control, price controls and extreme government failure in poor quality goods and services, massive shortages, and crippling unemployment. He does venture over the border to South Korea  where the experience is in stark contrast. Good video to finish off the market systems topic.

USA and China Trade – will the USA create more jobs?

February 13, 2017 Leave a comment

USA China Trade Deficit.pngDonald Trump appointed Peter Navarro as the head of the newly created National Trade Council – it has been his anti-China stance outlined in his book ‘Death by China’ that has led to his surprise hiring by Trump. The book talks of the economic and military rise of China and the demise of the US manufacturing industry unable to compete with the Chinese sweatshops.

However a lot of the criticisms that Navarro has pointed at China have been quite valid.

1. Currency – the intervention on the foreign exchange market to keep their currency weak so improving the competitiveness of exports.
2. Intellectual property – forcing American firms to hand over intellectual property as a condition of access to the Chinese market.
3. Pollution – Chinese firms pollute the environment and have weak environmental controls on industry.
4. Working conditions – these are far worse than what is the law in most industrialized countries.
5. Export subsidies – government assistance help reduce the cost and ultimately the price of exports from China.

In 2006 he estimated that 41% of China’s competitive advantage over the USA in manufacturing came from unfair practices like those above and when China joined the WTO in 2001 the trade deficit with the USA ballooned at the same time millions of manufacturing jobs disappeared. The deficit though was funded by the Chinese and it was a consequence of the Chinese buying US Treasury bills – to put it simply the Chinese funded US consumers to buy Chinese products. Niall Ferguson refers to the relationship as Chimerica – the two are interdependent in that the USA borrows off the Chinese and then uses that money to buy Chinese products.

Navarro believes that with China adhering to global trade rules the deficit in manufacturing will decrease and manufacturing jobs will return to the US. However when jobs return they are not the same as they were in previous years as it is highly likely that productivity/technology has refined the production process. Research has also suggested that when the trade deficit with China increased (1998-2010) the loss of manufacturing jobs only rose slightly 2.5m to 2.7m. One wonders what Navarro will do in the coming months?

Sources: The Economist, The Ascent of Money by Niall Ferguson.

Categories: Trade Tags: ,

Satellite photo for teaching economic systems

February 11, 2017 Leave a comment

Teaching economic systems with my AS Level class and I use this great satellite photo to introduce the topic. I usually get students to write down what they understand by the photo. You should get a range of answers from – “they have no nightlife in North Korea” to “North Korea has a controlled economic system and it is blacked out from failure of the electrical grid except for Kim Jong Il’s palace”.

I got the image from the book Nothing to Envy: Ordinary Lives in North Korea. The book looks at the lives of six defectors from the repressive totalitarian regime of the Republic of North Korea and how it collapsed catastrophically into poverty, darkness, and starvation under the dictator’s son, Kim Jong Il.

The 3 heads of Donald Trump

February 10, 2017 Leave a comment

Below is a great cartoon clip from the FT with Gillian Tett talking about the 3 heads of Donald Trump. With some excellent cartoon graphics she goes through each of the following:

  1. The sensible serious Trump
  2. The love to shock Trump
  3. Sleezy, freewheeling, write my own rules, anti elitist Trump

One wonders which Trump will be more prevalent in his presidency? A lot of references to economics – animal spirits, NAFTA, tax cuts, corporate tax etc. As Gillian Tett points out ‘nobody really knows who he is’

Categories: Politics Tags: ,
%d bloggers like this: