Thursday, September 6, 2012

Marginal Revolution University!

If not yet, I hope to encourage you whilst you study economics to become avid readers of blogs written by economists. After all, this is one of them. They are a great resource - they make available to you high profile economists in real time, as you get their reflections on every day events. This is a really important aspect of learning to think like an economist.

One really intriguing development has recently been announced by Marginal Revolution, a very popular blog - Marginal Revolution University, or MRUniversity as they seem to be dubbing it.  The blog post introducing it is here, and the website to get more information about it is

They plan to offer courses freely online it appears, and in formats that are not prohibitively costly to access (e.g. data plans on mobile phone contracts).

Well worth keeping an eye on - it's always good to get as much good tuition as possible, and one thing is quite sure about this initiative is that it will provide high quality tuition.

Friday, August 17, 2012

Be Inspired!

Even if you're not a football fan or even a Man City fan, City have potentially given you a boon today - see

City are making available incredibly detailed data on all football matches from last season - could make for an ideal extended essay when you reach your third year!

Sign up here:

Thursday, August 16, 2012

Results Day!

Today is the big day for many prospective econ101b students for 2012-13, so wishing you all the very best as you get your results today and digest them!  Hope to see many of you in the lecture halls of the University of Birmingham next academic year!

Monday, August 13, 2012

The Olympics

Well, I must admit I got caught up in the euphoria - I spent many moments when I ought to have been being more productive checking the latest medals for Team GB, and refreshing on the tickets website, and as an economist that leads me to think a little about the economic impact of the 30th Olympiad that have just finished here in the UK, in London to be most precise.

Can we ever measure it? Can we say that the net economic benefit was x million pounds? The BBC have tried today to enter into the debate, pointing out not just the basics (e.g. we built stadia which created jobs), but also the subtleties - how many tourists were put off coming to the UK because of the Olympics? How many Brits holidayed abroad to avoid the games? How much productivity was lost as Brits checked up on the BBC website how many golds we'd won? Did we do it more than the French, the Americans, the Irish, etc?

Then, how do we measure the "feel-good factor" which undeniably was created by the games? It was wonderful to walk through London and Hyde Park last week and experience the vibrant atmosphere, but what, if any, was the actual benefit of that? As happier people will we become more productive, have better ideas and be creative in the workplace?

Of course, a response can be that this doesn't really matter - why should we always be so bothered about the economic benefit of something like this? Of course, the bottom line is that we have all had to pay for it, one way or another, through either the tax system or in other ways, such as funds that might otherwise have been spent on local services in the regions rather than London and the games. So given we all had to pay for it, we ought to be thinking about whether it was good value or not.

Most likely, on paper, the games won't turn a profit - but that's mainly because things like the feel-good factor can't be measured. There's little doubt that while economists remain, in general, negative on the impact of such large events, the general Joe Bloggs remains unabashedly positive, and many would dearly love the next Olympics to be in London too...

Wednesday, July 25, 2012

GDP figures

Today saw the announcement of the first round of GDP figures, the Office for National Statistics' first attempt at working out what happened in 2012Q2, or April, May and June of this year. They base these numbers on something like a quarter of the total amount of data available for that period, and hence sometimes these numbers can be a little inaccurate.

The announcement today was that GDP fell by 0.7% in April, May and June of 2012, contributing further to the recession that began in the last three months of 2011. Overall, according to these figures, GDP is now lower than it was when the Coalition came to power. There's plenty to be sceptical about in the figures though, as David Smith points out. There's more reflection at the FT also, and following the link about hysteresis takes you to the IMF's recent prognosis on the UK - the prospects are not particularly promising.

The IMF, contrary to its previous pronouncements on the UK economy, is now recommending continued loose monetary policy and fiscal policy - calling on the Coalition to abandon its austerity drive.  Of course, the government is never going to admit it's changing to Plan B, but recent announcements regarding public spending, as Jonathan Portes points out, are a tacit acknowledgement of this.  The deficit remains eye-wateringly large, while interest rates are only low because of a lack of growth prospects rather than any confidence in the government's economic policy (despite the government's insistence to the contrary), hence little has changed since 2010 when there was no alternative to austerity...

Monday, July 23, 2012

What would Keynes do?

The philosopher John Gray has written an article on the BBC News website entitled A Point of View: What would Keynes do? It's well worth a read to get some feel for who Keynes was, and how he thought.

Gray makes an important distinction in his article, notably that what Keynes might propose if faced with today's economic environment is different to what is generally described in the press as "Keynesian economics", i.e. tax and spend policies.

The other important thing about this article is the following - it's written not by an economist but a philosopher. What is always important is not to be parochial when studying economics - others can, of course contribute and we shouldn't be so arrogant as to think we can't learn from those in other fields. However, unlike any other science, almost everyone thinks they know something about economics, and often what they think they know is fused with their political beliefs, meaning that it will be very hard, if not impossible, to reason in such a situation. It's a good practice ground to try though - helps you to think about what you know about the economy if you're forced to think quickly on your feet in a discussion with a friend who shares different political beliefs to you...

And, of course, it's great if you can challenge your own political beliefs using what you've learnt in economics. Try not to simply take the bits of economics that suit your political beliefs but instead let your beliefs be shaped as much as possible by what you learn as an economics student...

Friday, July 6, 2012

LIBOR and Fixing Rates

I doubt this story has passed anyone by; Barclays bank decided to attempt to manipulate a market through lying about the price it was paying. According to this article summarising the whole thing by Sloman, they may have succeeded. If it did, it would then have ended up giving a better impression about how "safe" the bank was at the height of the crisis, thus most likely avoiding as much of a share price fall, and as high rates to pay to borrow money from other banks (that's what the interbank market is for).

There's a lot that will come out in time about this, but the whole episode neatly fits within a module I teach each year in Birmingham called Contemporary Issues in the UK Economy.  We have a section on the financial crisis, and naturally by the time I get round to teaching it next (February 2013), I will certainly be talking about this crisis, and the likely proposed response to it.

What should be noted most importantly though is that is shows the limited information available to regulators. Surely the regulation that was already heading through parliament should have been sufficient to "prevent a repeat of the crisis ever happening again"? It won't take you an economics degree to be sceptical about that commonly expressed sentiment, but hopefully it will help you to be constructive about it.

Of course, what's being talked about is the regulation heading through parliament being amended - amended already, before it's even got through? Then we'll amend it again next time something emerges - the point is that government doesn't have all the necessary information to prevent everything happening, and hence will like this always be fighting the next war. They may legislate against some manner in which the rate was "fixed" - banks will continue to have an incentive to do this, and will just find other ways to do that.

Probably the most important point though is the general direction of response - our response has been "let's regulate more!", because the problem was "there wasn't enough regulation!". Yet nobody ever explains why the regulation pre-crisis wasn't enough, and why adding more to the mix will somehow solve the problem.

What would be a much simpler response, and probably more effective, would be to empower us as customers in a more fundamental way - offer us more choice. Allow more competition in the banking sector. Change competition policy such that we don't encourage market consolidation until there are dominant players like Barclays and RBS who can abuse their position and get away with it because there isn't any realistic alternative. Why is it that the only way a new bank could emerge from the crisis was by Virgin buying the carcass of an old one?

If we could vote with our feet (and it may require some regulation to enforce that to be allowed since we share a lot of information with our bank that other banks haven't got to make us better more suitable offers), then we'd walk away from banks like Barclays who do things like they've been found to be doing. Then the incentive for Barclays not to do illegal, immoral things is that they will suffer on the bottom line - the most important thing for them.

Wednesday, July 4, 2012

Ideology or economics?

I blogged yesterday about a post on Liberal Conspiracy (LC) which I decried for being too ideologically motivated rather than motivated by scientific investigation. As I said, I file LC under politics in my Google Reader. However, I do file Marginal Revolution (MR) under economics - along with a number of other blogs written by economists of a libertarian persuasion - however, I'm wondering whether I should reconsider.

There's a constant, ongoing debate between libertarian economists, and non-libertarians of various stripes; the latest instalment is summarised in the post that has motivated this post by Tyler Cowen at MR. It appears a few non-libertarians have challenged libertarians on a point I consistently think about libertarians - they are a little loose in how strictly they apply the need for liberty amongst all members of society, ignoring the cases where the price mechanism will not operate to yield liberty to all but will in fact restrict liberties to many.

While I don't agree with everything the critics (at Crooked Timber, another interesting if politically slanted blog) have to say, I find Cowen's response striking. He basically says two things:

1) Show me some data.
2) Employees behave just as badly as employers so let's shine the light on them.

I find response (1) a little weak - it's the kind of response one says when one can't think of a good solid, analytical response. I mean, for sure, it would be great if we had empirical studies on all these things, yet it hasn't stopped economists debating for years and years and years. The appeal to empirical work is all the more ironic because many of the more staunch libertarians tend to ignore all economic data and attempts to use it as useless since the world is so complicated and it's hard to control for all possible causal factors involved.

There is probably a 1(b) here too - Tyler says essentially "are you sure workers want this, or is it just the bloggers that want it?". For me this has to count as the most stupid question ever. If you approach workers and say "would you like some more rights and representation?", I don't think that many will say "no thanks!".

But on to (2), this is the biggest point of contention for me. Apparently, two wrongs make a right, to use common parlance. But more importantly from the perspective of being an economist, the question is the following: Which way is the causality? For sure, workers will steal in the workplace if they can get away with it, and for sure, firms will try and shirk their responsibilities to their workers also, if they can get away with it.

But why doesn't Tyler consider the idea it might be that workers steal from work because they feel they get ripped off daily, paid way beneath what they are worth to the company, etc?  Could it not be the case that a firm that makes all its workers feel like they are part of the company, valued, paid their worth, included in decision making etc., sees less workplace theft?

The causality could, of course, be entirely the other way - it could be that workers are just thieves, and hence firms respond by being nasty to their workers. I'd love to see an empirical study on this!

But why doesn't Tyler explore this? My sense is it's because of the libertarian leanings in him, rather than anything else. The economist should be asking this question, and an economist of Tyler's calibre could analyse these things infinitely better than I ever could, and hence should be asking this question instead of mouthing off in the way he does - invoking personal experience, another common trait of the libertarian.

So I'd file this post from Marginal Revolution, often a great economics blog, more under the "politics/ideology" section of my Google Reader, if I could.

Tuesday, July 3, 2012

Read with Scepticism

If you're studying economics, one important aspect of your education will be to enable you to be discerning. It's particularly important I think in economics because the subject, especially at the macroeconomics level, is so infused with politics.

In my Google Reader, I have a blog called Liberal Conspiracy listed under politics and not economics, and this post about Tony Blair, not to mention this one about the supposed banking commission to be set up in the light of the Barclays fiasco, reveal precisely why.

On the Blair post, the writer criticises Blair for saying we should not “deny the financial sector a say in putting it [the financial system] right”.

The writer suffers from something many suffer from when they aren't students of economics, notably that of an over-confidence in their own ability and information.

How, exactly, does the reader know sufficient amounts about the financial sector such that he is able to tell what the right level of regulation is without even consulting those in the financial sector?

For example, why would it be so horrendous if we said to the financial sector "we plan on these regulations; what are the easy ways in which you would get around them?", in order to get some idea how good/bad any planned regulations might be?

Too many in government, and advising government, believe government has the kinds of information required to step in an regulate a market appropriately. This, generally, is not the case. Many economic studies, including some of my own, have established that information is disaggregated amongst market participants, those actually trading, buying and selling. To simply disregard all of this information is patently absurd and self-defeating - it just means the regulations that are set up will be totally ineffective at best, and harmful to the economy at worst.

And of course, this links us on to the second post, a supposed scoop on Andrew Tyrie, the Tory MP heading up the planned banking inquiry.  Shock, horror, he isn't a big fan of regulation, apparently. It's a bit of a "is the Pope really Catholic?" moment, really.

But moreover, the kinds of quotes in the article from Tyrie are actually simply questions that ought to be asked. We should not be willing to simply accept, as it seems the author of the post (Sunny Hundal) is, that regulation is always and everywhere a good thing. We should be inquisitive, asking why it is necessary and when. This is what economists do, and if as you read this, you're inclined to side with Sunny, and if you also so happen to be entering your second year next year at Birmingham, let me encourage you to take econ217.

In that module, we spend a lot of time looking at things like banking, the financial crisis, and more generally government intervention in markets. I hope to see some of you there!

Thursday, June 21, 2012

When is competition a bad thing?

Over the years, various aspects of the UK economy have been privatised - taken out of the hands of the government, and their operations have been handed to private operators. The widespread perception of this is negative - it leads to higher prices and poorer service. Yet economists are unremittingly positive about competition - which kind of requires privatisation since if a government is the only provider of a service, by definition there's no competition. Why the contradiction?

One area in which it's generally perceived competition has been bad is in education - to be specific, in examining bodies, the companies that set exam papers at GCSE (and A-) level. Today apparently the government will announce an overhaul of this system. Apparently there's been a "race to the bottom" with having exam bodies competing with each other, and this should thus be changed, and the resulting system will have just one body providing exams - removing competition.

But why has competition between examining bodies led to this supposed race to the bottom, and reduction in standards that everyone believes has happened? What is distinct about the market for exams (particularly at GCSE - it seems A-levels are less susceptible to this criticism) that means competition is not helpful? Why do exam providers feel they have to make exams easier and easier, and provide greater proportions of A-Cs in order to look good?

What is acting in the market to prevent firms competing on how well their exams assess the ability levels of students (essentially the purpose of examinations)? Are there restrictions on new entrants to the market? Given the current climate, it strikes me if new bodies could set up to provide exams, a body that set up proposing to provide not the highest possible proportion of A-Cs but the most accurate assessments of students, that would be popular, at least amongst the popular press? I suspect there are many regulatory hurdles a new entrant would have to jump through - get certified by many bodies, checked over by other regulatory entities and so on. I doubt it's particularly easy to set up.

My sense is the race to the bottom is not caused by competition amongst exam bodies, but more the clamour of schools to be able to show an ever increasing percentage of A-C GCSEs, meaning that they want the exam bodies that provides them with that. And is that clamour just because of competition - competition to attract the best students?

Fundamentally, is there something wrong with competition in education? Again, I wonder whether this need actually be the case. Can new schools open up to provide a better service than the current lot? The answer is starting to change here - free schools are an example of this. Fundamentally, markets work because they provide incentives to others to provide a better service, and clearly if a school sets up and provides a high standard of education that employers (and society at large - schools needn't just be worker producers) values, then in a marketplace it would attract custom.

Now as I finish, of course there are difficulties with markets in education - information is a tricky thing and the consumer (the student) isn't necessarily fully informed about the value of what they are consuming. Nonetheless, that doesn't mean that competition won't work. Nor does examples of failed "competition" measures that have existed over the years. As a student of economics, it's important you realise that such examples are merely observations, and rather distorted ones for the reasons outlined in this post.

Wednesday, June 20, 2012

Summer activity

It's summer and although not formally term time, I tend to keep posting on here regardless with hopefully interesting stuff in case former students are still tuning in, so to speak.

Of interest yesterday, alongside the injustice handed out to Ukraine by human error (and some economics - why did UEFA really think adding more scope for human error was better than goal line technology?), was inflation falling to 2.8%, its lowest level for quite a while. Importantly, firmly back within the target range.

How is that possible, given all this quantitative easing and continued budget deficits? You'll recall the former adds liquid assets to the economy in place of illiquid ones hence should see more spending. The latter also adds more money into the economy by putting unearned money in the hands of unemployed people and such, and via spending projects for example related to the Olympics.

The answer is that this extra money, for now, isn't being spent. You'll also recall the aggregate demand (AD) aggregate supply explanation for price level determination and hence inflation. If AD stays in the same place since we don't spend then we won't get inflation despite supposedly inflationary policies.

Friday, June 15, 2012

End of term - congratulations or otherwise...

Today is the last day of the academic year here in Birmingham - results day.  Well done to all of those that got the results they were hoping for, commiserations to those who didn't.

Hope to see those of you continuing students next year, and to those leaving us, all the best in the future - do keep in touch!

Friday, June 1, 2012

Eurozone Madness

The news seems ever ongoing and ever worsening from the eurozone, and perhaps more than any other subject area at the moment, attracts comments that are disingenuous - folk that are anti-EU make suggestions that they know will lead to only one thing - the break up of the eurozone and maybe even the EU.

One common suggestion is that Greece should leave the euro, and many suggest Greece would even be better off if it did.

Such statements are very simplistic readings of the situation, and I wonder if they are deliberately so because the people making them are ideologically predisposed against the euro.

Allowing countries to leave the euro would signal the end of the euro because of the precedent it would set - that countries can be forced out. When would it stop? Would even France be safe? The eurozone functioned pre-crisis very well because it was seen to be irrevocable, and credibly so. That meant an absence of speculation, something that has returned en masse now that the crisis has arrived.

Second, would Greece be better off outside? Its debt would be transferred into its new currency which would immediately depreciate, increasing the size of its debts significantly. That isn't going to help solve its problems any time soon...

Monday, May 21, 2012


It's hard for me to know exactly what the readership of this blog is, but at least notionally it's students of econ101ab, which recently had its final examination for 2011-12. Hopefully those who sat the exam and read the blog will carry on, and those who are more casual readers of this blog will also carry on - I'll keep posting sporadically over the summer, and of course pick up again in the Autumn and Winter when econ101ab comes around again.

In the meantime I thought I'd point out a blog post which suggests that "economists tell the EU" that "austerity isn't working".

This blog post is a great example of where you, as first year undergraduates, have already surpassed the understanding of many people in the blogosphere who claim to be qualified enough to talk about the economy. Generally also of the left or right, what they exemplify is an inability to make a coherent, logical argument, and also an inability to distinguish causality from correlation.

The main reason I highlight this is that these are two common failings of many arguments put forward by well meaning folk, undergraduate students included - I'd like to encourage you in your essays as you move through your degree to try and ensure you do none of these things!

The headline says "austerity isn't working", yet no attempt is made to actually establish that fact. It's assumed - like we're having a chat over a pint in the pub. Unemployment is cited as an important factor we need to be concerned about. For sure it is, but how does the blog article, or the pamphlet it is based on, establish that unemployment is caused by austerity? It points out that unemployment is up "since 2008", as if that is the clincher. That is a correlation. We cannot run the UK economy (or the EU one for that matter) since 2008 without the two large policy measures that took place - the stimulus packages of 2008 and the austerity that followed. So it's impossible to know; how do we know the stimulus package didn't set in motion the causal events that led to the increased unemployment?

Now the intent here is not to be deconstructive. What have we learnt in econ101b about the macroeconomy, and hence unemployment? A number of things; early in the course we talked about labour demand and labour supply; we can have cyclical bouts of unemployment, caused generally because real wages don't fall far enough to clear the market, as we would have in a normal demand-supply diagram for a market.

We also learnt about aggregate demand (AD) - the total level of demand in the economy is the sum of a number of things: private consumption (C), investment (I), government spending (G) and net exports (NX). We usually jump from there and say "look, increase G and we increase AD and everything is plain sailing!".

However, we do also discuss factors that help determine, for example, investment - it's a function of business confidence (b), interest rates (r) and potentially also of government spending (either as firms invest to meet demands of government or as they are crowded out - call it g).  So I is a function of confidence, interest rates and government spending in potentially unknown ways: I=f(b,r,g).

The large logical jump the blog article makes is that increasing (or not decreasing) G will solve all the problems in our macroeconomy. Now regardless of what you feel about austerity, and I am personally not particularly keen on it, a case has to be made for why it is bad, and unfortunately the blog article cited above doesn't do that (and neither does this, for space reasons!).

You have to make a number of assumptions about investment behaviour, about consumption behaviour and about the behaviour of the rest of the world in order to arrive at the conclusion that austerity is harmful and that instead we should be stimulating the economy. I'll try and set them out in separate blog posts over the coming days. All assumptions ought to be testable, meaning that it is not inconceivable that real world data could be brought to bear on this issue - which would be a refreshing change from much of the loud voices out there at the moment.

Wednesday, April 25, 2012

Back in Recession

I'll excuse all my econ101b students for perhaps not being up at this hour, but 14 minutes ago the Office for National Statistics announced that the UK shrank by 0.2% in 2012Q1, following on from the fall in 2011Q4, which means that officially, the UK is in recession - again.

The Twittersphere is, of course, awash with response.  I had searched for UK GDP and was getting more than 20 new tweets appearing per second:

Does it really matter though? What exactly is this? Recall GDP is the value of final goods produced in the UK over a particular time period - here the first three months of 2012.

The ONS has released information based on 40% of its full data for the UK for the first three months of the year - so it's possible that later the number will be revised as the remaining 60% of the data is used to calculate more precisely how much was produced in the UK over the last three months.

The important thing however is not to jump on these figures, as many will in the Twittersphere, and draw premature conclusions. Yes, the Coalition did embark on austerity, and many did warn a recession may be the consequence (I warned of it but didn't actually think it would happen because so many unexpected events happen). However, many other things are happening - austerity elsewhere, the eurozone crisis, and we as consumers may well have changed unrecognisably over the last few years in response to the crisis.

It is possible that this number will eventually be revised so substantially that it's positive - either way however, what it reveals however is a generally rather bleak picture of economic activity in the UK; as Chris Dillow (@CJFDillow) tweets:

Obsession with small drop in GDP is statistical fetishism. Even if GDP had grown 0.2% in Q1, it would still have been a poor performance.
 There will be plenty of comment on this over the coming days; if you are preparing for the econ101 exam, be careful how you make use of it! Stick to reputable journalistic sources rather than bloggers - FT, Economist, perhaps the Guardian and the Telegraph at a stretch.

Sunday, April 15, 2012


Also now fading from memory is the panic buying of fuel of a couple of weeks back - but as a refresher, it was announced a week before Easter that drivers of fuel trucks may strike, prompting government ministers to suggest panic buying (hard to believe, but true - Francis Maude even suggested filling up some jerry cans and putting them in the garage!).

The result was predictable - panic buying, queues everywhere, shortages and chaos.

So if this was so predictable, why on earth did the government do it?

There's at least two reasons which are quite plausible to my mind. The first is bumping up GDP figures, and the second is managing public opinion.

The first was noted by the Liberal Conspiracy blog (although strangely I can't find the link to it anymore...) - the panic buying happened in the last few days of March, and March being the third month of the year, is the last month in the quarter, and we calculate GDP by the quarter. 2011Q4, the previous quarter, saw negative growth, and hence if this quarter also saw negative growth (and the OECD had said they expected it), then this would mean the UK was back in recession.

Hence if people were to buy lots of petrol, this would count as lots of output sold, expenditure made, incomes earned (the three ways to calculate GDP). Is it possible the government decided it could influence GDP figures to ensure that the UK didn't enter a recession?

A perhaps slightly less far fetched suggestion is that the government was instead trying to manage opinions.

The simple fact is that two sides are trying to bargain some pay agreements, and hence the media management of both sides is to try and get the public onside.  You may have seen blurbs to the following effect on Facebook:

So let me get this right, 2000 tanker drivers are complaining that 45k a year and a final salary pension, is too little for a dangerous job? Yet our boys and girls out in Afghan get 24k or there about to get shot at? Round the 2000 tanker drivers up, send em out to Afghan, then ask 2000 soldiers if they want to earn 45k a year driving a fuel tanker about. Problem solved.... repost if u agree.
On the other hand, the truckers do have a story to tell too, again found via Liberal Conspiracy (a leftie blog which I'd treat with some caution - they don't have the kind of economics tuition you've already got in your first year alone at university).

The government in its announcements led to panic buying and general public resentment against the fuel tanker drivers, hence succeeding in its objective, to get public opinion on their side against any actual fuel strike that might happen. If the representatives of truck drivers realise how unpopular any decision to strike would be, their bargaining position is significantly weakened.

So, both possibilities are very much in the realm of conspiracy theory, but both are interesting and contain a good chunk of economics...


Things have been a little quiet on here of late, although many interesting things have been happening for the keen economist in recent weeks and months, not least the recent panic buying of stamps (alongside petrol), prompted by an announcement that Royal Mail will increase the price of stamps by 30%. Sloman's economics blog comments on this here, and notes the public outrage at the price moves, with the word "profiteering" appearing at least once.

It's quite odd how a loss-making business can be accused of profiteering, but that's another matter.

The bottom line is that there exist other ways of sending information, and perhaps there have never been as many as there are now, and not surprisingly Royal Mail has felt the pinch. The optician concerned about the cost of sending out thousands of mail shots ought to perhaps consider alternative means of getting that information out - emails, phone calls, or even just other mail companies other than Royal Mail.

The reason the stamp price hike seems to great is that before now Royal Mail haven't been able to, because of the regulator restricting how much they can increase prices by. While it might be argued that by keeping the price low, Royal Mail gets more customers, it is clearly the case that folk are not influenced by price alone when decided how to send information - if they were, then Royal Mail wouldn't have been making losses with such apparently attractive prices.

Royal Mail needs the flexibility of not having so many of the things it can do so heavily regulated if it is to adapt and survive in an age of rapidly advancing technology.

Tuesday, February 21, 2012

Bristol Pounds and Bitcoin...

Quite late on the scene, please accept my apologies, we're looking at money these coming two weeks in classes, and different money systems - not necessarily in different countries either. Usually we think about different money in different countries - dollars in the US, pounds in the UK, euros in the eurozone and yen in Japan, for example. However, currencies (monies) needn't be attached to some geographical area, and Bitcoin is one example of this - it's an online currency primarily, used for online trades. The Bristol pounds that we've seen before, these are geographically limited though - just to the Bristol area.

Essentially, what we try to do as economists is analyse economic objects such as this (and the objects we look at needn't be economic either, it's worth pointing out). We boil any kind of money down to what it is, at the end of the day - some good that for whatever reason is used as money. Why do people use some goods as money? We have the three properties discussed in the lectures - medium of exchange, unit of account and store of value. If some good satisfies all three it may be used as money. Hence the example of cigarette money in WWII. It satisfied the properties required of money and hence was used in that way. It remained a good that could be consumed, but of course smoking those cigarettes meant you could no longer use them as money.

So, to what extent do our two candidate currencies satisfy these characteristics? With the Bristol pounds, it's not clear yet whether people will start using them - if they do, they will have to have begun to view them as a medium of exchange. Will Bristol folk, and Bristol enterprises, start taking up these things? There's no compulsion upon them since their alternative is to use standard, universally accepted Pounds Sterling (which, by the way, bears no reference to the Scottish town, it seems). This fact of course doesn't rule them out as becoming of great use, but provides one sceptical note on their potential uptake. There's little doubt that since the Bristol Credit Union will be backing these Bristol pounds at 1:1 with Pounds Sterling, that provided the Bristol Credit Union remains solvent both the unit of account and store of value will remain - provided also that the pound doesn't dramatically lose value in the comings weeks, months and years.

So, can you perform the same thought process for Bitcoin in your assignments?

Thursday, February 9, 2012

Trade Gap and QE

Two bits of news today relating to the macroeconomy; first the Bank of England is extending Quantitative Easing (QE), its programme of pumping more money into the economy, by £50bn. Second, the UK's trade deficit has fallen to its lowest level since 2003.

On the first, QE is an attempt by the Bank of England to stimulate the economy. This works in the way we discussed in lectures last week, as the Bank prints new money and uses it to buy government bonds and other types of assets from banks. This turns assets the banks have into liquid form, ready to be used to provide cheaper credit to the wider economy via loans. In doing this now for a number of years, the Bank has amassed a balance sheet on a monumental scale - the assets its procured are equivalent to over 20% of UK GDP (national output).

We're going to discuss much more about monetary policy later in term, but QE is not part of conventional monetary policy; the Bank of England in normal times would make use of the interest rate to influence the economy, yet currently interest rates are as low as they can practically go (we can't have negative nominal interest rates as that would imply banks deducting money from savings accounts and paying borrowers to borrow). So in an attempt to still influence the economy, it has embarked on QE.

Turning to the trade deficit, this is the balance of goods and services, or our exports of goods and services minus our imports of them. For many years now the UK has run a substantial trade deficit, importing more than it exports. Theoretically, this ought to lead to a depreciation in the pound since there's less demand for pounds, and we supply them to buy imports in foreign currency. However, that analysis doesn't include demands and supplies of pounds from the financial sector and so despite this trade deficit, the pound hasn't depreciated. In fact, it only had one, substantial depreciation in the entire period, which was at the time of the financial crisis, in 2007-08, when the pound lost 25% of its value against its major trading partners.

Such a dramatic devaluation would be expected to have impacted trade since it makes imports for us more expensive, and exports less expensive, yet for a long time there was no pick up in UK trade - the deficit remained large. This could have been because of a lack of overseas (eurozone) demand for our goods, it could have been because our exports are produced with many imported inputs, or that the price elasticity of our imports is low, or for a whole host of other reasons.

Either way, it appears that at long last, the effect of that devaluation may be filtering through. That or we're just spending less as well as those elsewhere spending less.

Sloman is from Bristol!

I've already mentioned this new initiative, launching a new currency in Bristol. You'd almost think they timed the announcement to coincide with econ101b! It turns out that the main author of our textbook, John Sloman, is a Bristolian, and on the Sloman blog he's just written a bit about the Bristol Pounds being minted as I type...

What I mentioned in the lecture was that while the Bank of England only accepts the real thing, i.e. Pounds Sterling, that doesn't mean we can't deal in our own currencies - provided when we deal with the Bank (via our own bank usually), it's in Pounds Sterling. So this little initiative can exist because the Bristol Credit Union stands behind it, willing to issue Pounds Sterling on a one-to-one basis with Bristol pounds.

Sloman refers to a few people who are justifying the new initiative because Bristol doesn't want to become like a clone town - all the other British high streets that have chain stores everywhere and look alike.

However, and please do (yet again) excuse my cynicism on this, but this is a very static argument. The Local Data Company has just released a report on the health of the retail industry in the UK and it makes quite chilling reading; in some areas as many as one in three stores in a shopping centre is empty. The high street is currently changing beyond all recognition, suggesting more than anything that the "clone" model of saturating the high street with well known brands, may not have been overly successful.

Of course, it may simply mean that stronger branded stores take over more of the empty space (e.g. Tescos and Sainsburys), but the sheer volume of excess supply means prices must come down, encouraging small local retailers to set up shop.

So an initiative such as a local currency, which restricts what its users can do with it (spend within Bristol or else!), may not be particularly useful in achieving what the market may achieve on its own!

Monday, February 6, 2012

Topical Initiative in Bristol

Just as we start lecturing on money, the BBC reports that Bristol is issuing its own currency: The Bristol Pound. The Bristol pounds, which Bristol is calling on locals to design the notes for, will be exchanged 1:1 with actual pounds (Pounds Sterling), hence operating on a fixed exchange rate system, yet will have one important, and designed, limitation - they can only be traded in Bristol.

This may sound, on the face of it, like a great local initiative, but one has to really question why this is being done, and it really begs the question of whether this will succeed. Why, if you are a Bristol trader, would you actually use these things? They have the same nominal value as a normal pound, yet you can only use them in a restricted geographical area. What happens if your suppliers are outside the local area?

The bottom line is we trade because there is a mutual benefit from doing so - both parties benefit. If someone outside the Bristol area can do something more efficiently, why not let them do it, so Bristol folk can get on with things they are good at? Why instead have Bristolians waste time and effort replicating at greater cost what others do better? Why not instead have them being innovative and thinking about new ways to add value and be creative?

Localism is an increasingly popular movement, yet it is a rather short sighted one once it loses sight of the fact that trade creates opportunity - if we all do the things we're good at, more is produced - it's not a zero sum game.

Thursday, February 2, 2012

Novel ways to measure economic activity

Following on from class discussions in weeks 3 and 4 on GDP measurement, here's an interesting post at FT Alphaville (highly recommended reading generally) on Gangster Economics - the point essentially is trying to measure the state of the economy via non-standard means - so not GDP or unemployment, but instead making use of the vast amounts of data out there online about the economy such as Google searches for pickup trucks, used cars, and even guns!

If you're not acquainted, Google Trends is a fantastic resource, enabling you to get information for how often a term is searched for on Google. You can search for multiple terms too, and hence you could search for just how often people search for Labour over Tory, and restrict it to the UK, or how often people are searching for the current Republican candidates in the US, if you're politically inclined, or sporting wise you can check how often folk search for your favourite team vs your rivals...

Tuesday, January 31, 2012

Assignment 2...

Depending on how much you enjoyed the alternative arrangements now in place for classes on econ101b, you'll either be delighted or daunted by the fact that Assignment 2 is now on WebCT...

The first question asks you to look at a plot of unemployment rates for the UK and a few other countries. In there is both the claimant count unemployment rate, and the standardised rate - two ways of measuring unemployment. As you'll see, the two do differ; the plot of unemployment on the assignment is:

The red lines are UK data, as the legend (top left) shows. The solid red line is the standardised rate, the dotted line the claimant count, and as was discussed in class, often (but not always), the claimant count is below the standardised rate - often considerably so - in 2005 the standardised rate was nearly 5% while the claimant count was just over 2.5%. What drives these kinds of differences?

Moreover, what has unemployment done in the UK over the years?  There's a fascinating discussion of unemployment in the UK on the blog Not the Treasury View, which looks at structural unemployment and something they call the unemployment gap. The blog talks about factors that have influenced unemployment in recent years, and may help you think about this. When was unemployment high, and why might it have been high? When was it low, and what helped it to become so low?

Moving on to inflation, the plot for the second question on the assignment is:
We have data here for CPI inflation for all goods. We could restrict it to core inflation, which excluded energy and food prices - if you're keen, you could search for that data on the OECD Statistics website and compare it to these inflation rates. What you may well find is that core inflation rates between countries differ a little more - the inflation rates we've plotted here include energy and food prices, which are globally traded items and hence a high price of energy in one country is a high price elsewhere too.

Why has the UK had a particular inflation history? What factors have influenced the UK? What about the recent inflationary history, since around 2006 or so?

I'm looking forward to reading your blogs - do let me know links when you've set your blogs up and don't be shy - making your blog more publicly available is a real asset and something that'll look great on your CV in years to come, and will help create even better discussions amongst your class mates.

Enjoy assignment 2 and your classes in weeks 5 and 6!

Saturday, January 21, 2012

An Example of Economics Laced With Values

Much more in the US than here, right wingers, and particularly Libertarians, command huge audiences. Following on from our discussions these coming weeks about values in economics, here is a whopping great example of value-laced economics - an attempt by a libertarian to promote the research of a think tank that has clear ideological and hence political leanings.

The research suggests that the tax rate on capital gains should be lower than others have suggested. Now, was that research by an independent, value-free, positive economics think tank? The think tank is called IRET, the Institute for Research on the Economics of Taxation, and the blogger, David Henderson, possibly deliberately, makes us believe that it's linked to Ohio State University by immediately after writing the IRET's name, he lists the researcher's university.

Is IRET unbiased, politically de-linked, and hence able to construct positive (what could happen), rather than normative (what should happen)?  The website paints a reasonably sensible picture of what the organisation does, although given it is set up to influence politicians is suggestive, but not indicative, of it holding some political motive. However, it reveals the founder of the Institute was an advisor to the Reagan government in the 1980s, and involved in many policies cutting taxes and keeping them low. The bottom line is, this is not an institution that looks politically neutral - when analysing tax, it will suggest taxes are kept low. I could be wrong, but I'm sceptical.

So what is my point here? Are we not to believe anyone at all who writes about economics? Of course not, we are not to stop believing everything we read. But we must be careful about what we read; if we want our economics to be value free, we must ensure that it is informed by those that are, as much as possible, value free. Think tanks that are not overtly political do exist; the Institute for Fiscal Studies in the UK is an excellent example, critiquing the tax and spend policies of all the major political parties around election time.

We are not to take refuge in cynicism, but instead to be careful about what we read!

Another interesting article on macro ideas

Simon Wren-Lewis is a macroeconomist at Oxford, and he writes a blog called Mainly Macro - it's very good, and he writes in a style which should be accessible to all. He's written a post in the last day or so (currently in Japan so it's hard to tell when the days end and start relative to the UK) about macroeconomic ideas, and it's a good read.

He talks about how ideas become "controversial" in a somewhat cynical manner - because political parties set up think tanks who state bad economic ideas (tax cuts pay for themselves) and hence the media thinks there is a debate about these issues.

It's a cynical view, and it's one that elevates Simon Wren-Lewis's ideas about macroeconomics and dismisses discussion about ideas perhaps a little too much. There is something called mainstream macroeconomics, where the more accepted ideas lie, but there is still those on the fringes of the mainstream whose ideas aren't quite so widely accepted, and hopefully in econ101b we'll do justice not just to the mainstream, but also to the ideas that don't make up part of the mainstream.

There is a debate out there, and it does appear to be influence by values, or political leanings - as you'll be discussing in classes this week and next!

Thursday, January 19, 2012

Improving on GDP...?

In the lectures Rob gave this week, you will have learnt a little bit about GDP - the market value of all the recently produced final goods and services in the economy.

Now of course, it's far from perfect as a measure - not least, how do you add up all the outputs of things that are hard to add up? Can you account for what are arguably negative contributions such as nuclear bombs and pollution?

Of course, many have tried. One of the articles referred to on the question sheet for classes for weeks 3-4 encourages you to have a go, and so you could get some tips and pointers from the comments there.

But how many judgement calls will you need to make in forming a new measure? And will it really be any good? Should it actually replace GDP, since at the end of the day GDP isn't designed to measure welfare...?

All this and more you can discuss in your classes these next couple of weeks...

Wednesday, January 18, 2012

Value Free Economics

Should economics be free of values? By this we mean moral values or political values, rather than measurement values like inches or ounces.

Why does macroeconomics seem to be so bound up in politics? Is it because we deal with the entire national economy, rather than individual markets? Is it because we deal with very complicated concepts, trying to think about millions of people making billions of decisions?

In economics we have a distinction between positive and normative economics, where the former aims at being objective, giving a description of things, while the latter provides a perspective on whether something should happen - hence is objective and allows politics or ethics or morals to enter. If we are moral beings, why should we attempt to make economics amoral? Can we even manage it?

All these things and more you might discuss on your blog, and in your first class for econ101b in the next couple of weeks...

Sunday, January 15, 2012

Blogging on econ101b

Students taking econ101b, Principles of Macroeconomics, are about to discover the method that they are being assessed (formatively - so not counting towards final grade but helping to show how you're getting on with the course) is changing this current term.

Instead of submitting an essay at some point during the term, as was the format last term for econ101a (and also for econ101b in previous years), this term you're expected to write blog posts for each assignment for each class.

Why would you want to bother to do this? Well, those of you that blog will already be aware that blogging is a very good way of helping you collect your thoughts and structuring them in a way that makes sense and is readable/understandable. This is a hugely important skill as you work your way through not just your degree but also your university life and after that - when you get a job.

A blog is public so once you've written something, there's no hiding! But it's better to dwell on the more positive - a blog is a form of presentation, and we're trying to encourage you to develop your presentational skills as you progress through your degree.

Additionally, writing a blog article will help you prepare for each class, where the assignment you blogged on will be discussed. You can start from what you wrote in your blog and develop your arguments further, and see if you're able to combat the arguments put forward by others. You'll be able to comment on the blogs of others in your class, and they will (hopefully!) comment on yours, so that an online as well as real discussion takes place regarding the various things we're going to be covering in econ101b this coming term.

So all in all, while you don't need to take part in this (you can of course just not bother) - it will be for your huge benefit if you do contribute, and hopefully it'll also be great fun too!