There has been a lot of talk in the media about an Auckland housing bubble and its impact on the New Zealand economy. Below is a very informative graph I got from http://www.housepricecrash.co.uk which looks at the anatomy of a bubble.
When house prices are increasing rapidly we tend to feel better off but also have increased mortgage debt. House price inflation is a zero-sum game in that society as a whole does not benefit from a rise in house prices as those on the property ladder can only gain at the expense of prospective homeowners that cannot afford to enter the market. Over a short period of time house price inflation can provide a boost to economic growth if they deceive people into believing they are wealthier.
However, when a business invests it tends to have a positive-sum game in that if it employs 50 more workers that doesn’t mean that there are 50 other workers in the economy that are going to lose their jobs. This is real GDP growth rather than investing in property which tends not to generate growth as it is a finished asset – however some will argue that maintenance will always be needed.
The Economist produced an excellent graphic on the contribution to global growth over the last 5 years. Points to note:
- World economy grew by 2.7% in early 2016
- Brazil, Russia, India and China contribution to global growth rose from 1.4% t0 1.6% over the last year
- Although Britain has contributed the most to GDP growth in the EU, the decision to leave the EU has forecasters predict that GDP in the Union will be 1% lower in 2018
- Emerging economies continue to dominate world growth and are essential for jobs etc.
- From growth of around 4.5% in 2010 the global economy has stuttered along reaching just over 2.5% in the first half of 2016
In the 2016 Cambridge AS Economics syllabus there is a new topic which looks at the areas of privatisation and nationalisation in an economy. Below are some notes on the topic.
Nationalisation is when a government chooses to take an industry into state ownership in order to safeguard the supply of a good or service.
Privatisation is the transfer of ownership of property or businesses from a government to a privately owned entity.
Potential Benefits of Privatisation
- Improved Efficiency – private companies have a profit incentive to cut costs and be more efficient.
- Lack of Political Interference – Governments are motivated by political pressures rather than sound economic and business sense.
- Short Term view – A government many think only in terms of next election
- Shareholders – a private firm has pressure from shareholders to perform efficiently
- Increased Competition – more firms mean greater competition and efficiency
- Government will raise revenue from the sale – only a one off benefit and future dividends are lost.
Potential Benefits of Nationalisation
- Natural Monopoly – Many key industries nationalised were natural monopolies. This means the most efficient number of firms is one.
- Externalities – Some of the nationalised industries had significant positive externalities. A government can run public transport system could invest in public transport to help improve the economic infrastructure.
- Welfare Issues – Some industries play a key role in the welfare of consumers and citizens. Government provision means that needy groups can be looked after and provided with basic necessities.
- Industrial Relations – Labour unions often favour nationalisation because they feel they may be better treated by the government – rather than a profit maximising monopoly.
- Government Investment – Some industries require long-term investment to improve services over time. This long-term investment may not be profitable in the short-term, so without government intervention they may suffer from lack of long term investment.
The presence of technology in rural China is evidence that it is not just the booming cities that are the sources of growth. Furthermore, it suggests that inequality which has been symbolised by the ‘country versus city’ divide is now starting to decline.
Since the 1980’s China has gone through massive growth but it hasn’t been evenly shared. Income inequality is traditionally measured by using the Gini coefficient.
The Gini Coefficient is derived from the same information used to create a Lorenz Curve. The co-efficient indicates the gap between two percentages: the percentage of population, and the percentage of income received by each percentage of the population. In order to calculate this you divide the area between the Lorenz Curve and the 45° line by the total area below the 45° line eg.
Area between the Lorenz Curve and the 45° line ÷ Total area below the 45° line
The resulting number ranges between:
0 = perfect equality where say, 1% of the population = 1% of income, and
1 = maximum inequality where all the income of the economy is acquired by a single recipient.
* The straight line (45° line) shows absolute equality of income. That is, 10% of the households earn 10% of income, 50% of households earn 50% of income.
In 2010 China’s Gini coefficient was 0.61 which was one of the world’s most unequal countries however officially it has been falling for seven years from 0.49 in 2008 to 0.46 in 2015. Rural incomes have grown more quickly that their urban counterparts – in 2009 the average urban income was 3.3 times that of a rural worker but now it is 2.7 times. Many of those living in rural areas actually work in cities but are prevented from living there because of the strict residency system. Also companies have now been looking to the rural areas for cheap labour.
But at the top end you would get the impression that inequality of wealth is extremely high – wealth = what you own, as opposed to what you earn. China has more dollar billionaires (596) than the USA (537). Research has shown that 1% of the population control a 1/3 of China’s assets.
It is nothing new to consider how machines can perform the tasks done by the layout force. Experts believe that it is not blue collar or white collar jobs that are at risk but those jobs that are routine or non routine. Manual labour tasks have been constantly under pressure from technology but now more jobs that have cognitive tasks are now feeling the pinch.
Jobs said to be under threat from computerisation are:
- taxi and delivery drivers
- receptionists and security guards
- cashiers, counter and rental clerks, telemarketers and accountants
It is estimated that the development of machine learning will impact 35% of the workforce in Britain and 49% for Japan. See chart from The Economist – Computerisation of different occupations.
Job Polarisation – Middle Skills Jobs v Low-Skill and High-Skill Jobs
Economists are already worrying about “job polarisation”, where middle-skill jobs (such as those in manufacturing) are declining but both low-skill and high-skill jobs are expanding. In effect, the workforce bifurcates into two groups doing non-routine work: highly paid, skilled workers (such as architects and senior managers) on the one hand and low-paid, unskilled workers (such as cleaners and burger-flippers) on the other.
Source: The Economist June 25th 2016
Universal Basic Income
After two centuries in which capitalism has dominated the western world, this economic system has become desperately dysfunctional: inequality is growing, climate change is accelerating and nations are beset with bad demographics, debt burdens and angry voters.
Paul Mason – Channel 4 economics correspondent and author of ‘PostCapitalism: A Guide to Our Future’ states that:
“information technology has reduced the need for work” — or, more accurately, for all humans to be workers. For automation is now replacing jobs at a startling speed
“information goods are corroding the market’s ability to form prices correctly”. For the key point about cyber-information is that it can be replicated endlessly, for free; there is no constraint on how many times we can copy and paste a Wikipedia page. “Until we had shareable information goods, the basic law of economics was that everything is scarce. Supply and demand assumes scarcity. Now certain goods are not scarce, they are abundant.”
“goods, services and organisations are appearing that no longer respond to the dictates of the market and the managerial hierarchy”. More specifically, people are collaborating in a manner that does not always make sense to traditional economists, who are used to assuming that humans act in self-interest and price things according to supply and demand.
There is concerns in many countries as to what can be done with a growing labour force with limited job prospects. There have been call for more money given towards social welfare to protect those impacted by the changes to the labour market and assist them move to new jobs. Some have favored a universal basic income instead of the welfare system that involves paying a fixed amount each year to all citizens to actually exist – rather than tax to exist. Supporters of this idea argue that:
- People who are not working, or are working part-time, are not penalised if they decide to work more, because their welfare payments do not decline as their incomes rise.
- It gives people more freedom to decide how many hours they wish to work, and might also encourage them to retrain by providing them with a small guaranteed income while they do so.
- Those who predict significant job destruction see it as a way to keep the consumer economy going and support the non-working population.
- If most jobs are automated away, an alternative mechanism for redistributing wealth will be needed.
However those against this idea argue that:
- It is regressive as spending on existing welfare schemes would reduce income for the poorest, while giving the high incomes money they do not need.
- Furthermore funding such a venture would require a much higher tax rate that at present.
- The basic income would discourage some people from retraining, or indeed working at all—why not play video games all day?—though studies of previous experiments with a basic income suggest that it encourages people to reduce their working hours slightly, rather than giving up work altogether.
Whether technology will take over jobs and ultimately humanity is dependent on the rate of change and how we live through the long transition from capitalism (the state and the market) – to post capitalism (the state, the market and the shared collaborative economy).
Human nature is not a machine to be built after a model, and set to do exactly the work prescribed for it, but a tree, which requires to grow and develop itself on all sides, according to the tendency of the inward forces which make it a living thing. John Stuart Mill
Source: The Economist June 25th 2016
The aim in many developed countries is to stimulate economic growth and to raise inflation within the target bands as stipulated by many government’s central banks. For some countries the immediate objective has been to prevent their currency from rising making their exports more expensive and imports cheaper. Therefore the thought of negative interest rates discourages investors from buying your currency which would push up its value. The EU, Denmark, Sweden, Switzerland and Japan, central banks have decided to have a negative rate on commercial banks’ excess funds held on deposit at the central bank. In effect, private sector banks have to pay to park their money – see graph below.
New Zealand is currently in a bit of a predicament in that the OCR (central bank rate) is at 2.25% which is relatively high compared to other central banks and therefore does attract ‘hot money’ into the economy – money that ‘parks’ to earn interest. However if they drop interest rates to ease the pressure on the NZ$ they run the risk of further inflating the housing market by making borrowing cheaper.
For the consumer as soon as the rate banks offer fall below 0%, savers have an incentive to withdraw their money and put it under the mattress. By charging negative rates the central banks are hoping that the trading banks will keep more of their money and therefore lend it out to investors. However the desire to reduce a banks reserves is futile as if someone borrows money from a bank and buy a new car the money is paid to the car company who will then deposit the money in their account which increases the reserves of the bank.
Overall negative rate reflect the constant state of weak aggregate demand in many developed economies since the 2008 financial crisis. Central banks have kept their policy interest rates very low to stimulate economic growth and more recently to get higher inflation. However, how low can they go?
Below is a very good cartoon from the FT looking at negative interest rates.
Below is a very good documentary on the construction of the largest dam in the world – the Three Gorges Dam in China. However in its construction there are both costs and benefits including private and external. This is a topic in Unit 3 of the CIE A2 Economics syllabus and is found under – Externalities. Remember that we have both positive and negative externalities of production and consumption.
THE DIFFERENCE BETWEEN PRIVATE AND SOCIAL COSTS
Externalities create a divergence between the private and social costs of production.
|SOCIAL COST = PRIVATE COST + EXTERNAL COST (externality)|
- Private costs are the costs to a ‘firm of producing a good or service and to an individual of consuming a product.
- External costs are the spill over effects on third parties.
- Social costs are obtained by adding the private and external costs together. They reflect the total cost to society of an economic decision.
The same concept applies for Private and Social Benefits:
|SOCIAL BENEFIT = PRIVATE BENEFIT + EXTERNAL BENEFIT (externality)|
Benefits and Costs of building the Three Gorges Dam
The biggest benefit that is seen from the dam’s construction is that it produces renewable energy from hydro electricity. The Three Gorges Dam alone can provide China with 10% of its annual energy consumption. Increasing the proportion of hydroelectricity alternative to coal burning plants, will cut their emissions greatly which will help reduce the overall emissions all over the world – carbon emissions will be reduced 100 million tonnes compared to alternative coal generation