Tuesday, October 26, 2010

GDP Growth Announcement

Every three months or so, the Office for National Statistics releases the numbers for Gross Domestic Product (GDP) for the previous quarter (three month period). Today it released its first estimate of what GDP was for the UK in 2010Q3 (the third quarter of 2010) which is based on about a quarter of all the information available to them.

Next term we'll talk quite a bit about GDP but the BBC's economics section has quite a nice description of it if you're not familiar.

In 2010Q2 the UK economy grew by 1.2% which was surprisingly high, but it is often the case that as an economy starts to emerge from a recession that it grows strongly. Growth in 2010Q3 was expected to be much slower with many pundits expecting about 0.4%. Today though that number came in at 0.8%. It means that for 2010 as a whole, growth is likely to be just shy of 2%.

Does this mean the economy is up and running and all is well? As the BBC article makes clear however, there are other reasons to be a little bit pessimistic about future growth: Retail sales fell in September, and house prices are falling (these are seen as a barometer of economic activity). Furthermore, the impact of the Coalition government's steep spending cuts will start to take effect soon, something else that is likely to depress future growth.

Monday, October 25, 2010

US Economists on the UK Austerity

As you may have noticed, last Wednesday George Osborne announced the Comprehensive Spending Review, to much fanfare.

There are a few things to say in addition to linking up a couple of comments from US economists (against is Paul Krugman, for is Stephen Williamson).

The most important is this: When you're doing economics, try as best you can to separate what politics from economics. All politicians have a rather distorted view of economics: Tory ministers blame anything and everything on Labour, Labour ministers blame anything and everything on the Conservatives. Of course, they both have their economists, but the point is: Soon you'll be able to understand which bits each set of economists is ignoring to come to its conclusions.

For example, according to the Tories Labour is entirely responsible for the recession we suffered, and the budget deficit that has resulted. They support this with some assertions (apparently lax regulation from the FSA, not "fixing the roof when the sun was shining" whatever that actually means!). But what you will learn this year is that recessions happen: They are part of the natural cycle of the economy, and no amount of government action will solve that (Tories are right to laugh at Gordon Brown's comment years ago about ending boom and bust it's fair to say).

Additionally, government finances are a product of the economic cycle: In recessions, people are out of work and hence they don't pay taxes and instead claim benefits. So the budget deficit will worsen in a recession, especially the worst one in 70 years.

You'll learn next term about why economists worry about these cuts in spending (regardless of their views about how large the state should be). It's something called Aggregate Demand, and the Multiplier principle. The practical upshot is found in warnings by KPMG that the public sector cuts have a direct impact elsewhere because many small businesses rely on the public sector (councils, etc) for contracts, and hence many may go out of business as a result.

Friday, October 22, 2010

Don't be like French Students!

As you may be aware, France is being brought to a standstill by industrial action at the moment. The beef is that the retirement age is being increased from 60 to 62. In case you thought you might have misread that, you didn't. Even after the increase, the French will be retiring at least three years before Brits. And of course, they limit working weeks to 35 hours also, so while they are working for that shorter timespan, they put in less hours.

Of course, that's a very general argument and doesn't take into account how hard the French work in that more limited time - it may be they are more productive because they get more rest.

Nonetheless, students are rioting too about this! What is their rationale? Apparently they fear that because old people will be retiring later, there will be less jobs for them when they (eventually) finish their studies.

This highlights a mistake that as keen economics students Martin and I would like you to never make: The economy isn't a zero-sum game. I.e. there isn't a fixed number (say 40m) jobs to go around meaning that if one job is taken by one person, that's one job less left in the economy. The economy is a dynamic place where opportunities are constantly arising to set-up business and provide a product/service. Hence the potential number of jobs is always changing and so the economy is not a zero-sum game in economist speak.

So these students are perhaps even more deluded than the students that speak out on behalf of the NUS in the UK.

Good news!

If you're a girl, that is. Your degree will get 31% more pay with your degree than without it! For us guys, the picture is a little less dramatic - with economics your pay will be 19.6% higher than it would otherwise have been. If you do an arts degree and you are male, your pay will be a rather more trifling 5% higher. The research underlying this is commented on here.

Why is this all important? Well, if fees double as is likely to be the case, it makes a non-economics social science degree (or some other humanities degree) seem like a very poor investment - a very low rate of return for a high outlay. As the article says, a humanities degree becomes something of a consumption good, as opposed to an investment.

An investment good, as you'll be learning about this year, is something that yields future returns. A consumption good only yields current returns (when you consume that Mars Bar). If your pay is unlikely to go up much and your fees are very high, then it can't be that you're buying the good (a humanities degree) for investment purposes. It must be for consumption - the joy of learning for example.

Your economics degree on the other hand, regardless of whether you're a boy or a girl, will pay off in the future via higher earnings and hence is worth the investment.

Thursday, October 14, 2010

Make Use of the Internet!

You've just started your economics degree (or at least a degree vaguely related to economics), which means you must be at least a little keen to understand more about the economy around us - if not least to impress your friends.

An attitude that seems to pervade many economics students at Birmingham though is "how much do I have to do?", or perhaps better paraphrased "how little can I get away with doing?". Can I get away with just buying this particular textbook and then reading the specific bits the lecturer refers to? Can I then spend all of the rest of my time doing other more interesting stuff (Wii, drinking, whatever)?

The answer, of course, is "yes, of course you can - provided you're happy with a 2:2". In the increasingly difficult workplace out there post-degree, a 2:2 might not cut the mustard.

The point is this: Make the most of your time as a student, and make the most of the resources available to you - academically! It sounds cringeworthy, but most previous students of economics would have given their right arm for the kinds of resources freely available to you via the internet. Prominent economists whom previous to hear their thoughts you needed to be a student at their university (not always easy when they're at Harvard and such places), but now you can just read their blogs.

You can read the most prominent thinkers in the field daily and start to understand how they think, how economists think, and most of all you can get their take on why the economy is where it is right now.

Use these resources available to you - you don't need to be an expert to read them because these guys are trying to write in a more easily accessible language than you'd find in one of their papers. To this end and to encourage you to do this, an extra panel has been added on the right hand side of this blog as you read it, with the title ECON101AB BLOGS. Go visit them, browse, see what you learn!

Wednesday, October 13, 2010

Unemployment Numbers

Another in the long list of things we'll look into next term in econ101b is Unemployment - joblessness. Unemployment almost always refers to workers out of work, although others have talked about unemployed houses recently, amongst other things.

But we usually think about workers being unemployed - not employed, not put to work. Every month the UK statistical agency reports unemployment figures for the UK and they are usually pored over with great interest, particularly in times like the current (will we have a double dip? Can we blame the Tories yet?) ones. Apparently the number of people being employed (hence leaving the state of unemployment) increased by nearly 200,000 this last month.

This would seem to be great news, but as Stumbling and Mumbling points out, things ain't always as they seem. Most of all, the numbers of people becoming employed are not necessarily coming from the pool of unemployed workers. Many other things are possible: People who were not previously actively seeking work (hence not counted as unemployed, e.g. mothers returning to the workforce after raising kids or the retired) may have taken jobs, or immigrants may have taken jobs in the UK (not likely at the moment thanks to the incoming government's arbitrary caps).

The bottom line is: Much of these numbers are people becoming self-employed or taking part-time work. In fact, full time employment has fallen in these latest released numbers.

It most certainly isn't a particularly encouraging story about UK Plc...

What do Central Banks do?

I'm lecturer for second term (econ101b), which is macroeconomics. Currently Martin Jensen is lecturing you on microeconomics, and so when I post I'll be pointing you towards macroeconomic events and news and how that links in to what we'll look at next term.

One thing we'll ask next term is: What do Central Banks do? They are always in the news, particularly around Monetary Policy Committee (MPC) meeting times in the UK. The Bank of England is the Central Bank for the UK. In the US, a system called the Federal Reserve System operates in place of a single Central Bank, and there are Federal Reserves of a number of regions in the US - Minneapolis, New York, Philadelphia, San Francisco, etc. But they all hang together under the Federal Reserve, naturally headquartered in Washington. Their equivalent of the MPC called the FOMC, or the Federal Open Market Committee.*

But what do these Central Banks actually do? Generally they are given responsibility for monetary policy in most economies: The MPC sets interest rates to achieve an inflation target, the idea being that if inflation is kept low and stable, the macroeconomy will stay roughly in order. In the US, the objective of the Federal Reserve is a little wider than just inflation and includes the wider macroeconomy.

There have been many criticisms over the years about whether targetting is the right thing: What's the right target? Why just inflation? Why not asset prices? What is the effect of different targets? An alternative school of thought, pushed more than most by an economist called Scott Sumner, is that Central Banks should target nominal GDP (that's GDP in the actual prices we pay before any correction is carried out for inflation).

It turns out that in its most recent meeting the FOMC hinted it may well begin such a targetting exercise. Next term we'll consider much more what this actually means, other that at the basic level it means that the Federal Reserve would target a particular level of nominal GDP (NGDP) and hence choose interest rates and other monetary tools in order to achieve this aim, just like currently the Bank of England chooses interest rates to achieve 2% inflation.

*: Despite the prevalence of Wikipedia links in this post, the advice is: Don't rely on Wikipedia. Anyone can edit it and hence put false information in there. Rely instead, if you need to for referencing, on something like the New Palgrave Dictionary of Economics. If you refer to Wikipedia in any assignments you hand in, you'll likely incur the wrath of your tutor!

Tuesday, October 12, 2010

Economics of Everything

If you're a new student here at Birmingham, keen to learn your economics, can I point you in the direction of Marginal Revolution? It's a blog written by two economists, Tyler Cowen and Alex Tabarrok and contains many posts each day, often relating every day or topical events into the thinking of economists.

For example today they comment on the contract the Chilean miners have apparently signed in order that none of them attempts to individually profit from the group's experiences underground for over two months. Will it hold up? How will they enforce it if one of the group deviates?

All these kinds of things are intriguing economic issues relating to such actions of individuals and groups. Marginal Revolution's Markets in Everything series of posts are highly illuminatings and I'd highly recommend them as you begin your economics degree and start attempting to think like economists...

Price Indices

In econ101b next term, you'll learn about inflation. Inflation is the phenomenon of rising prices and the term is applied to individual prices and prices more generally. Inflation matters: One of the main goals of macroeconomic policy is to keep prices low and stable, one way or another. This is important because if prices are low and stable, they are predictable, and consumers know how much they need to spend, as do firms, making rates of return on investments a safer proposition.

The question, of course, is exactly how do you measure it? Official statistics are usually what are called Consumer Price Indices (CPIs). But they are based on a basket of goods (literally, the types of goods the "average" family buys), and hence measure the changes in prices of these goods.

But who is this average family, and is this really the most important thing for government policy to be targetting? Already people are asking whether it makes sense when the kinds of goods poor folk buy are very different to the kinds of goods rich people buy (see here), but the latest development is perhaps not entirely surprising: The Google Price Index.

The idea is that Google will use the ridiculous volumes of information it has at its disposal to measure inflation - just how much are prices changing of the goods that people are actually buying (based on what they do on Google?). There are many possible advantages of such an index - it could be released daily (whereas official statistics are monthly), and it would likely be easily updated to reflect new trends in consumption (it is commonly reported (but I can't find a link!) that until very recently candles were still a main item in the CPI calculation).

If you're unaware of the many things Google has done since it has had Hal Varian as its Chief Economist, there is at the bare minimum Google Trends and its use for things like prediction Bird Flu from internet searches.

Monday, October 11, 2010

Nobel Prize in Economics

The final Nobel Prize announcement each year is economics - that happened just now. The winners of the 2010 economics Nobel Prize are Peter A. Diamond, Dale T. Mortensen, Christopher A. Pissarides. Tyler Cowen at Marginal Revolution is posting about each of these guys: Their common link is search models in labour markets, and search theory more generally.

If you're seeking a British angle on this, Pissarides is at the LSE and is British-Cypriot. The other two are American. All of them promote ideas relating to something we'll learn about next term in macroeconomics: Frictional unemployment. People often change jobs, and this doesn't happen instantaneously, hence some of the unemployment at any given time will be frictional as people search for jobs. Once they find a job they are matched.

Thinking Ahead...Already!

There's a new module choice for your second year now, relative to what you could have studied had you started your degree two years ago (i.e., it's starting this year) - econ217ab. It's called the Contemporary UK Economy, and aims to cover contemorary issues relating to the UK economy - it does what it says on the tin.

Toby Kendall this term will talk about amongst other things immigration and student fees, two big issues on the political agenda currently, and ones you no doubt have opinions on. I'll also talk about the economics of sport this term before moving on to the global economic crisis and the UK's part in it, before talking about monetary and fiscal policy.

Today the first mootings of what will be said when a big review of education (by Lord Browne) funding is released tomorrow were released and discussed. Prof. Michael Arthur of Leeds University was on the radio this morning talking about how fees might be arranged if universities, as is expected by some, are given the freedom to set fees themselves. Classroom only courses, such as economics, would require something in the region of six to seven thousand pounds per student, with the sciences (medical, physical and otherwise) requiring a lot more.

That would just be a cost-based approach - to try and ensure that the system is fully funded based on demand. That wouldn't even be an outcomes approach, which you might expect - if you can get a bit of paper that shows the world how great you are, and allows you to earn more, in a purely free market you'd expect to pay some money for that. So on that basis, then of the classroom courses you might expect to pay more for an economics degree since it leads you towards higher earning careers in banking and finance, potentially.

If this discussion starts to offend your principles, I'd invite you to think about it over the coming year, and sign up for econ217ab in your second year where we'll discuss all of these kinds of issues and invite you to apply economic theory and reasoning to them. It's fascinating stuff...

Thursday, October 7, 2010

What you will learn this year...

So you chose economics, and you've arrived at university.  If your A-level economics was anything like mine, you may have been given a stylised history of the UK with some brief treatment of the 1970s before moving on to the 1980s and Margaret Thatcher.  You probably got the impression from how the material was presented to you that Labour had a reputation for being unable to manage the economy - something that bedeviled them in 1992, but something New Labour managed to overcome in 1997.

One thing though has become remarkably clear since the May General Election this year - the Conservatives are remarkably good at rewriting economic history, and unfathomly good at getting people (who don't necessarily even vote Tory) to believe what they say about the economy.

You will learn this year and in your three years studying economics that politicians generally are not folk to be trusted when they open their mouths about the economy.  You'll learn about incentives, and how incentive structures influence perverse outcomes (e.g. see page 19 of this newsletter about this).  You probably already knew this, but the incentives in play for politicians influence the things they utter on the economy - they are party political first, and truthful a distant second.

An example of this was William Hague on Radio 4 yesterday morning.  Cuts will harm defence, yet as with any Tory comment on anything related to cuts, they try and paint a picture of how shambolic Labour was, the mess they left, etc., in order to (1) score some political points (who would ever vote that lot in again after this?!) and (2) excuse themselves from the blame for the adverse effects of the cuts they intend to make.

The fundamental underlying matter here though is that people do actually seem to believe cuts are unavoidable.  You would almost think, given this, that the economics profession was in consensus about this: Cuts are necessary and unavoidable.  It may, then, come as some surprise to find that a lot of prominent economists actually don't believe this.  Paul Krugman, Joseph Stiglitz (both Nobel prizewinners), Brad DeLong, Martin Wolf (writer at the FT), Robert Skidelsky to name but a few, dissent.

Stay tuned then: Don't skip lectures, listen in them, attempt the assignments you get for each class and attend each class, and you'll learn a lot more about why these economists think the way they do, and why you should treat with scepticism every economic utterance from a politician...

Tuesday, October 5, 2010

Fiscal Austerity Won't Be Painless

In second term (econ101b), you'll start to learn a lot about macroeconomics, and so the current debate over the macroeconomy and fiscal austerity will start to make a lot more sense after that.  You'll learn about a concept called Aggregate Demand and you'll learn about contributions to it and to economic growth via something called the Circular Flow of Income.  Later in term you'll learn about the money markets, interest rates, and something called the LM curve.

These are basic economic theory concepts, and they allow us to start thinking about the impact of government spending, and help frame the discussions that have been had amongst politicians over the last year relating to austerity.  The Labour party emphasised the impact of spending on Aggregate Demand, saying that big cuts in spending will reduce aggregate demand and plunge us back into recession - less money going around the Circular Flow of Income.  The Tories on the other hand, argued that the government is too big: It "crowds out" the private sector.  We need to cut back government so that the private sector can flourish.

Of course, the problem is putting numbers into these concepts.  They are all well and good as concepts but how big are they?  Labour would argue crowding out isn't that important, particularly at a time of recession and low aggregate demand; Labour would also argue that the multiplier (the factor by which GDP grows given an increase in government spending) is large.  On the other hand, the Tories would argue that crowding out is important, and the multiplier is small.  So who is right?

The Economist reports on two studies which give conflicting viewpoints on this: Welcome to economics!  One research paper, by Alesina and Ardegna, suggests that fiscal austerity can help stimulate growth; the other, from the IMF, says it won't, and picks holes in the Alesina-Ardegna strategy.  The devil is in the details, but what this speaks of most is that, unfortunately, putting numbers on things in economics is very hard work indeed, and often you'll find that people put the numbers on things that they want to see via clever techniques and border on the deceptive, in order to further their case.

Monday, October 4, 2010

Learning Economics Will Challenge You...

...if the views held by the NUS are anything to go by.  I've blogged on this before, but the National Union of Students, whom you may come to enjoy the provisions of during your time at Birmingham, tend to appoint economic illiterates to their Presidency.  This morning the current incumbent, a chap called Aaron Porter, displayed another great dose of either economic illiteracy, or just naivety on Radio 4.

The basic gist was: Fees may go up in the future, and Radio 4 had Dr Wendy Platt of the Russell Group of universities (which includes Birmingham) interviewed along with Porter.  Porter, however, disputed the idea that universities are making a loss on teaching undergraduate students in the UK due to the constraints on fees and other funding from central government.

The fact is, the Economics Department makes a huge loss on teaching undergraduates here in Birmingham, and we don't have anything like the amount of equipment involved in the physical sciences when teaching you.  £3000 from each of you per year simply doesn't cut the mustard of hours of lecturing, hours of preparing, hours of TAs giving classes, room bookings, energy costs of lighting rooms and powering up huge projectors, etc.  And that doesn't even begin to get going on opportunity costs - what else could the University have done with these resources?  Couldn't I have been researching?

Furthermore, a more important question even than this is: Why should the taxpayer completely fund your university education?  What does Joe Bloggs taxpayer down in the less wealthy suburbs of Birmingham gain from your being educated here that his taxpayers money should subsidise it?  (in reality: To subsidise your beer consumption)  Why shouldn't fees be much, much higher than they are to reflect this?

You'll learn this coming term about externalities of education: The social benefit is actually greater than the private benefit: It does actually help Joe Bloggs in the suburbs if you help to shape better government policy, if you run a company that provides them with better products, and it certainly helps Joe Bloggs if we have a much better educated elite in this country dictating what will happen in the future.

But how much is he helped?  How much greater is the social benefit of having an educated you vs a non-educated you?  The chances are, you will earn hundreds of thousands of pounds more than you would have without your degree for various reasons (not even related to the intrinsic quality of it - just having the degree signals a lot about you to future employers) - so you're getting a fantastic pay-off for your trifling three grand a year - why shouldn't you pay a bit more for that?

Final point: What about those that can't afford it?  Scholarships.