Unemployment Stats in the UK

To what extent do the official UK figures for unemployment accurately reflect economic reality ? (30)

View: answer here - unemployment

See also: Measuring Unemployment - a look at the Claimant Count and Labour Force Survey measures

An interesting question on the extent of unemployment in the UK. It is easy to look at the government statistics and feel everything is rosy. However, if you delve closer into the statistics we realise they often mask other issues. The unemployment figure is a good example.

Side note. When I was an economics student back in the early 1990s I attended a conference with Arthur Scargill as a guest speaker. The one thing that stuck in my mind was that he kept referring to the 4.5 million unemployed. - This was at a time when the official unemployment figure was 2.2 million.

See: true extent of unemployment

Related

• UK Unemployment at BBC
• Unemployment at National Statistics
  

Question on WTO

I am moving to a new blog software.

I have posted my first blog entry, which is a readers question about the WTO

• Has the WTO abused its power?

See also:

• WTO
  
• Basic principles of the WTO

UK Economy: Low unemployment and inflation

Q. Examine the factors which might explain the UK’s low inflation and low unemployment of recent years (60)

The UK has experienced a fall in unemployment from 3 million in 1992 to under 1 million in 2007. Inflation has also remained very low. Since 1997, CPI inflation has remained close to the government's target of 2% +/-1

The first factor to explain the fall in unemployment is economic growth. The UK has experienced a long period of uninterrupted economic growth since 1992. Growth has averaged 2.6% which is close to the long run trend rate of growth. This economic growth creates increased output and therefore firms employ more workers; this means cyclical unemployment is very low. Economic growth is one of the most significant factors for low unemployment in the UK, this is because when the UK experienced a recession in 1992, unemployment increased to 3 million.

Economic growth often causes inflation, because as the economy approaches full capacity, prices start to rise. However, in the case of the UK this has not occurred. Inflation has remained low because economic growth has remained steady and sustainable. Growth has never been much higher than the long run trend rate (2.5%). Therefore, growth has been non inflationary. This steady rate of economic growth is a significant factor in maintaining low inflation, if the growth was too fast then inflation would occur.

Many give credit to the MPC for these relatively benign economic conditions. The MPC have independence in setting interest rates; when inflationary pressures increase they respond by raising interest rates. Therefore, this has helped to keep inflation low and growth positive. The MPC have also helped reduce inflationary expectations because people have confidence in them. This has increased their effectiveness.

However, aggregate demand cannot alone explain low unemployment and low inflation. The low inflation in a period of economic growth suggests there are supply side factors helping to maintain low inflation. For example, increased productivity in the economy is keeping costs low; new technologies such as the internet and micro computers are helping to reduce costs for many firms. It is difficult to quantify the effects of this on inflation. However, for many electrical goods we can see falling prices, therefore it is important for some goods.

Global factors are also important, low inflation is not just a UK phenomena. Low inflation has occured in most of the OECD economic countries. This is related to the competitive effects of globalisation and lower raw material prices. However, in the EU, the low inflation has not been matched by low unemployment. The EU has higher unemployment than the UK, this suggests that the UK has benefited from better supply side policies.

For example, it is argued that UK labour markets are relatively flexible. In recent years the power of trades unions has fallen and it is easier to hire and fire workers than in the EU. This helps to explain the lower natural rate of unemployment and low inflation in the UK. However, it is worth remembering that the UK still has a high minimum wage, and some labour market restrictions, therefore it is difficult to quantify the true effects of these supply side factors.

• Unemployment revision notes
• Reasons for unemployment amongst ethnic minorities
  

Decriminalisation of Cannabis

Interesting article here in the Guardian about the fall in Cannabis Use.

Since its category was downgraded to a class C drug, use has fallen quite significantly. The proportion of young people using cannabis has fallen from 23.5% to 20.9%

This is despite the downgrade of the drug to class C.

Ironically, since the drug was downgraded the police have increased the numbers of street warnings about using cannabis. The number of people dealt with by the police for cannabis possession has doubled since the drug was downgraded.

However, this shows that problem is not solved by prohibition, quite often prohibition can create different kinds of problems such as:

• Benefits criminals who can deal in illegal drugs for good profit margins
• More difficult to control quality of drugs (e.g use of . Skunk has become more widespread)
• Making it illegal may make it seem more dangerous and interesting

Making Cannabis fully legal would enable the government to collect tax and regulate its quality. However, if it was made fully legal to smoke, consumption may increase compared to its current class C status.

Nevertheless, as the article suggests, there is a good case for taking the decision of drug classification out of the hands of politicians.

See also: Should drugs be legalised?

A short note on the European Union

How has the EU misused their power?

1. Common Agricultural Policy inefficient use of EU money. Subsidies given for political reasons rather than economic. Cost of CAP was over 60% of total EU budget, this has now fallen to 45%

2. Bureaucracy. Costs of bureaucracy of EU are a high % of total expenditure

3. Common Fisheries Policy. This is estimated to cost at least £1 billion a year to Britain in lost jobs and reduced catches. But, has also failed to stem over fishing in the north sea. [1]

4. Over Regulation - It is estimated that 70% of new British laws come from Brussels. Holland claimed that enforcing EU regulations has led to a cost equal to 2% of GDP.



[1] Report is by Bruges group which is anti european. Statistics can be manipulated. For example, the Bruges group claim the cost per head of EU membership is £873, but, according to Foreign and Commonwealth office the cost is about £300 per head [1] (and this is before the benefits of membership are included.

[2] To answer the question has the EU misused its power may require a consideration of political factors, such as loss of local democracy. However, the impact of the political nature of the EU, is not in the remit of Economics


See also: Benefits and disadvantages of EU membership

What is the Terms of Trade

Readers Question: What is the terms of trade?

The Terms of Trade measures the relative price of exports compared to the price of imports.

Terms of Trade = 100 * Average export prices / Average Import prices


Basically, the terms of trade refers to how many exports will need to be sold in order to be able to purchase imports.

• If the price of exports increases, there will be an improvement in the terms of trade.
• If the price of exports falls, there will be a decline in the terms of trade.

If a country like Cuba, relies on the export of sugar, their terms of trade will depend a lot on the price of sugar. If there is a fall in the price of sugar, Cuba will experience a deterioration in the terms of trade.

Fall in the exchange Rate.

If there is a fall in the exchange rate, there will be a deterioration in the terms of trade because the price of exports falls.
For example, the devaluation of the dollar has worsened the US terms of Trade.


What is the Importance of the Terms of Trade?

To some extent we can use the terms of trade to measure the strength and well being of an economy. A prolonged fall in the terms of trade will reduce living standards. The US, will find that it can increasingly purchase less imports from abroad. But, at the same time it is also quite limited. For example, a devaluation doesn’t necessarily harm a country. A devaluation does make exports more competitive and can increase economic growth.

There is much more to the strength of an economy than the terms of trade. For example:

• Volumes of trade
• productivity
• capital flows
• economic growth

See also: Measuring international competitiveness

Forecasts of More Financial Shocks

The Bank of England yesterday published a report, in which it suggested that there is still a real threat of a future financial crisis. This crisis could be like the recent run on the Northern Rock building society, and potentially even worse.

The Bank of England pointed to several factors that could potentially cause financial volatility in the near future:

• Financial institutions are already relaxing lending practices, going back to offering risky loans.
• Confidence has returned too quickly causing over confidence in lending.
• Potential of house price falls, - which would reduce consumer confidence and make remortgaging more difficult.
• Potential volatility of commercial property and buy to let sector. A fall in house prices would be magnified in the commercial property sector and amongst buy to let investors. This is because any uncertainty tends to hit these sectors more than others.
• Weakness of the business model 'originate and redistribute' - This refers to the practise of lending money to consumers and then raising the money by selling the debt onwards (rather than financing the lending through attracting savings) This model is risky because it relies on the well being of companies who are willing to buy debt bundles. - This is what knocked out Northern Rock.
• Continued weakness in US Sub prime markets. The fall out from the US sub prime mortgage sector is still occurring. More defaults are predicted as interest rate increases continue to bite.
• Large losses by big financial corporations. Related to the fall out from the sub prime mortgage industry is the fact that many banks will have to write off bad debt. This negatively affects their liquidity and ability to lend.
• Despite the relatively benign economic conditions (low inflation and stable growth) there are many underlying problems in the economy. This issues have often been neglected as people feel confident in the long period of economic expansion.
• Threat of recession in America - this would reduce global growth and adversely impact on stock markets around the world.
  
• Record debt levels in the UK

Related article

• Northern Rock and effect on economy
  
• Bank of England fears rerun of credit crisis - article at Guardian

Policies for Motorway Congestion

Congestion in the UK is a serious problem. see: Economics of congestion
The fundamental problem is that demand for road use has increased faster than than the supply.

Demand has been increasing for various reasons:

• Increased economic growth - more demand for transport
• Increased car ownership - demand for cars is income elastic. (as income rises, there is a bigger % increased in demand for cars)
• Rising population.
• Increased cost of traveling by bus and train.

Congestion is costing the UK economy billions of pounds in lost output and wasted costs. Yet, the government is struggling to deal with the problem, because often the solutions are politically undesirable.

Policies to Overcome Congestion on Motorways

1. Electronic Road pricing - a new tax to make people pay the true social cost. Efficient from an economic point of view, but, politically unpopular. See: electronic road pricing
   
2. Build More Roads - Expensive, but does tackle problem of shortage of supply. However, in some areas there is not space to build new roads. There is also a significant external cost of damage to the environment. Critics also argue that building more roads just encourages more traffic and merely delays the problem
3. Use Hard Shoulder. - In a pilot scheme the Highway's Agency has experimented with using the hard shoulder on the M42 during peak hours. This is a relatively cheap way of increasing road capacity, but there are concerns it compromises road safety because it is more difficult for emergency vehicles to access accidents.
4. Invest in Alternatives - To get people off the motorways there needs to be an alternative to traveling by car. In recent years, subsidies to train companies have fallen. The cost of train travel has increased faster than car use. Arguably the government should invest in increasing the capacity of long distance rail travel and subsidise tickets to reduce their cost.
5. Permits to drive - A radical solution would be to limit the number of cars per household, or even to limit the number of motorway journeys. These policies are not being taken seriously at the moment.
   

Related

• Hard shoulder driving to reduce congestion at the Times

Predictions for Euro - Dollar 2008

During 2007, the Euro has appreciated sharply on the back of a falling dollar. Some now consider the Euro as an appropriate heir to the world's dominant currency. There is speculation that OPEC countries will increasingly start to price oil in Euros rather than dollars. Although this is mostly speculation at the moment, if it did occur then it would strengthen the value of the Euro.

The euro is currently trading at about 1 Euro = US$1.42 - staying short of its latest all-time high against the U.S. currency.
When the Euro was launched in 2001, the exchange rate was 1 Euro to 1 Dollar.

The Euro economy is showing signs of renewed growth, with subdued inflation. Economic growth is currently a steady 2.5% with inflation right on target at 2%. This creates a good economic environment for a strong currency. With inflation under control, the ECB can maintain low interest rates and allow the economy to expand. However, if growth picks up next year, interest rates could continue to remain higher than US interest rates, this will could cause a further appreciation. Interest rates are currently 4.66%

There have been concerns that the appreciating Euro is causing hardships for European exporters, but at the moment demand is proving to be quite inelastic and not particularly sensitive to changes in the currency. If anything European exporters are proving resilient in maintaining export sales.

• Forecast for US Dollar
• Reasons for fall in US dollar
• Exchange Rates
  

Dealing with Obesity

In a previous essay, I argued for a 'fat tax' - a tax on unhealthy foods to reduce the problem of obesity.

Basically, the premise was that unhealthy foods are demerit good with significant social costs. Therefore, it is good that the government increase the price of unhealthy foods to make it reflect their true social cost.

However, tax is not the only way that governments can try to reduce the problem of obesity.
An NHS pioneer R. Le Grand is suggesting several options to make it much more difficult to live an unhealthy lifestyle. He recommends options such as:

• Smoking permit. - To smoke it will be necessary to get a permit, perhaps from a doctor
• Free fruit - free fruit for children to be given at school.
  
• An exercise hour at work. - P.E. Lessons at work... (can't see this one happening)
  
• Zero tolerance on salt in foods. no salt in processed food (you can always add it yourself)
  
• Making it more difficult to buy alcohol.
• letters to parents to let them know the weight of their children (Sorry, but your kid is 8kg overweight)
  

• Radical proposals for obesity

Bad Financial habits

I wrote this article for Pick the Brain:

• Are these 10 common money mistakes keeping you poor?

bad habits include:

• Compulsive overspending
• never checking for cheaper deals
• Borrowing on credit cards at 17%
• Placing all emphasis on money
• Having a negative attitude to money
• Being swayed by sales techniques
• Not having a savings plan
  

what are your bad financial habits?

Other articles of interest:

• Finance tips for those leaving college
• 7 simple steps for getting out of debt
  

Advantages of inflation

There are many Disadvantages of inflation.

Are there any advantages of inflation?

Firstly it is interesting to note the government's target for inflation is CPI = 2% +/- 1. They have a target of 2% rather than 0%

If inflation is 0% or lower (deflation there can be several disadvantages)

• Deflation can cause lower spending. The value of money is increasing so people wait before buying goods.
• A small amount of inflation makes it easier for the relative price of goods to update.
• Deflation can cause real wages to rise above the equilibrium level. Workers resent a cut in nominal wages. Therefore a moderate amount of inflation enables an increase in nominal wages, without causing excessive real wage rises.

to summarise there are some advantages of having a low rate of inflation e.g. 2%. However, as inflation rises above 2% we start to see the disadvantages outweighing the advantages
Problems recovering from recession

Elastic and Inelastic Supply

Readers question: Also can you please explain the difference between elastic,inelastic and fixed supply

Elastic supply means that an increase in price causes a bigger % increase in supply. It has a PES of greater than 1.



Supply will be elastic if it is easy for a firm to increase supply e.g. spare capacity, easy to employ more factors of production

Inelastic supply. This means that an increase in price causes a smaller % increase in supply. It has a PES of less than 1



Supply is often inelastic in the short term, when it is difficult for firms to increase their capacity.

Fixed supply means that supply is not dependent on the price level. Whatever the price, the supply will remain the same. Supply is perfectly inelastic.

• Price Elasticity of supply

Inflation and the Function of Money

Readers Qu. EXPLAIN HOW INFLATION AFFECTS THE FUNCTIONS OF MONEY

Money is said to have four functions


1. Medium of Exchange - used for buying and selling goods.

2. Store of Value: We value goods and wealth through money. Money makes it easy to compare goods

3. Standard of Deferred Payment: Money is used to pay back debt.

4. Unit of Account: prices and accounting records use money


Inflation means an increase in the general price level. An inflation rate of 10% means that the average price level rises by 10%. Inflation means that the value of money decreases. If goods are more expensive a £10 note will buy less over time.

Inflation reduces the effectiveness of money as a medium of exchange. High inflation means that it becomes difficult to place a value on goods because the value of money is always falling. In extreme cases of hyper inflation prices can rise so much that money becomes worthless and people resort to a barter economy. e.g Hungary 1946, Germany 1922

As inflation increases, the volatility of the inflation rate tends to increase. This means that it is harder to place a value on money, thus it becomes more difficult to use it as a store of value.

With a high rate of inflation, the real value of debt erodes. This means that it is effectively easier to pay back the debt. Therefore, in periods of high inflation, banks will be less willing to lend money because they will lose out if people pay back the debt in the future when money is worth less. They will not lend money unless they can charge an interest rate higher than the rate of inflation. If the rate of inflation is stable it is easier to make these calculations.

With high inflation there will be greater Menu costs. This is the cost of changing price lists to reflect the changing value of money.

The Death of Inheritance Tax

Inheritance tax

The chancellor recently increased the tax threshold for inheritance tax to £600,000, for married couples. This was widely seen as a popular move; in effect the government were merely stealing a popular idea of the Conservatives. There was little if any support for the benefit of an inheritance tax, which is strange when we consider the nature of inheritance tax.

Inheritance of wealth exacerbates inequality in society.
Inheritance of wealth creates disincentives to work. If young people inherit large sums of money then there is the potential for them to avoid working.
A tax on wealth is efficient. An efficient tax is one that doesn't distort the workings of a free market. For example, an income tax may discourage people to work. A tax on goods creates disincentives to buy them. But, generally speaking a tax on inheritance does create disincentives, in fact the opposite can occur.

• An inheritance tax may force people to sell homes, but, this is not necessarily a bad thing. It helps to avoid inflated house prices. If 50% of the population were to inherit a house, it would mean that the other 50% would have great difficulty in buying a house, creating inequality.
• Equality of opportunity. The social philosopher John Rawls, suggests that the best outcome for society is one where we would be equally happy to be born in different circumstances. Large inheritance enables people to have inequitable opportunity.
• Removing inheritance tax means other taxes will have to rise. (the governments proposed tax on foreigners will not meet the £2 billion loss). People don't like inheritance tax, but, they will dislike, even more, the other taxes that have to be increased as a result.

• Inheritance tax may confuse even more

Post Office Strike

My opinions about the post office strike might be coloured by the fact I am still waiting for my September wage check to get sent to my bank. It is lost in the post strike and is more than a minor inconvenience.

Strikes have a history of polarizing public opinion. Over 20 years ago, the country witnessed a very bitter battle between the mining unions and the Thatcher government. When the Miners were defeated many saw this as the beginning of the end for mass trades union power in the UK. However, despite a decline in union membership, they do retain some influence in certain sectors of the economy.

Some notes on:

• Trades Unions
• Advantages and Disadvantages of Trades Unions

Economic Effects of the Postal Strike

• Lost output and productivity.
• Many small businesses rely on mail to deliver cheques and goods
• Will affect mail order companies the most, although there is evidence that companies like Amazon are searching for other options
  
• Late Payment for Bills. Could lead to adverse credit rating for some people.
• Royal Mail is losing confidence and contracts. This could lead to job losses in the future.
• It may make it easier for new firms to enter the mail industry. The mail industry was deregulated (opened to competition) a few years ago. However, it is difficult to enter because the significant economies of scale make it almost a natural monopoly.

• One postal worker explains why he is on strike at BBC
• Questions and answers about the postal strike

Forecast for Canadian Dollar 2008

I have written frequently about the decline in the US Dollar.

• Reasons for Fall in US Dollar
  
• Predictions for US dollar 2008

Mirroring the decline in the US Dollar, the Canadian Dollar (nicknamed the Loonie, after the bird that appears on coins) has experienced a significant appreciation.
The strength of the Canadian dollar is due, not just to a falling US dollar, but also the strength of its exporting raw material sector.

I have written here about The future prospects for the Canadian dollar

Forecast for UK Economy 2008

According to the self congratulatory speeches of Gordon Brown and the New Chancellor, Alistair Darling, the UK Economy is one of the best performing economies in the world.
However, is their cheerful optimism matched by economic reality?

Reasons to Be Optimistic about UK Economy

• Economic Growth: Current Economic growth for 2007 is forecast to be 3.1%. This may be revised slightly downwards, but, it does make the UK one of the fastest growing OECD countries.
• Inflation: CPI inflation is on target. It is currently very close to the government's target of 2%. It is just under at 1.9%
• Economic Cycle: The end of the Economic Cycle? The UK economy has been experiencing its longest uninterrupted economic expansion on record. Since the end of the last recession in 1992, economic growth has been positive. There is even evidence the Long run trend rate of growth (basically the average growth) has slightly increased. With an independent monetary policy the UK seems to have brought an end to the boom and bust economic cycle which destabilised the economy so much in the post war period.

Why Prospects may be Worse than Government Predict

Many experts predict that the government's growth forecasts are over-optimistic. The government itself has reduced growth forecasts to 2.25% for 2007. However, they predict growth will spring back to 3% in 2009 and 2010. Economists argue the government has failed to take into account potential adverse effects on the economy

Potential Problems for UK economy

• House Price Collapse. - If not a collapse, house price growth could fall significantly, this would take a lot of the energy out of consumer spending. - Are House prices set to fall?
  
• Global credit Crunch - The impact of the US mortgage crisis has yet to be fully felt in the UK, despite the recent Northern Rock crisis.
• Recession Possible: It is unlikely we have seen the end of the economic cycle. There is a good chance we will see a much more marked slowdown in growth than the government predict.
• Current Account Deficit. At the moment the current account deficit is 3% of GDP. This is not as serious as the US deficit (at around 6%) but, in the long term it may require a readjustment and lower consumer spending to reduce the deficit.
• Government Borrowing. Despite being at the peak of the economic cycle, government borrowing is already close to breaching the 3% ceiling (imposed by the government themselves.) Any slowdown in growth next year will cause tax revenues to be less than predicted. Therefore, the chancellor may find himself in the unwelcome position of having to increase taxes or limit public sector spending. Something he would hardly like to do before an election. (the government may yet regret not having an election this autumn.
• High Level of Debt. The UK savings ratio is at an all time low. The level of consumer debt is very high (partly caused by rising house prices) This level of debt makes the economy more vulnerable to any interest rate changes. It may mean that consumer spending could fall, when confidence reduces. - Record debt levels threaten UK economy
  
• RPI inflation is 4.1% For those who feel inflation is under control, it is easy to forget that the old measure of inflation, RPI is actually above the government's target. Arguably this gives a more convincing account of inflation because it includes more items than the new CPI measure. Therefore, the persistence of underlying inflation means that the scope for interest rate cuts is much less than many hope for.
  

Conclusion

The UK economy is doing well. However, the budget deficit will be an increasing problem because I feel that the government is being overoptimistic in projected tax revenues. At the moment the chance of a recession is pretty remote, but, with a global slowdown and a decline in house price growth. It is is quite likely growth could be much lower than forecast in 2008 and 2009


Prospects for UK Economy

• The Economy: In this uncertainty a recession is a possibility - at Independent

Chinese Economy and Costs of Growth

Readers Qu. how china using pro growth policies can cover all the negative externalities of growth through its net inflow of income. any ideas???

Yesterday I wrote about some of the Problems of Chinese Economic Growth

China is trying to maintain growth as fast as it can. In particular their current economic policy includes:

1. Undervalued Yuan. The Chinese currency is undervalued against most currencies. Tied to the dollar it has dropped further in the past 12 months. A weak currency makes Chinese exports cheaper and increases exports. This helps to boost demand in the economy.
2. Relatively Low Interest rates. Chinese interest rates are relatively low for its stage in the economic cycle. (although they have increased interest rates this year) The one year lending rate is 7.02%. The rate for deposits is 3.6%
3. Done little to reduce the housing and property price boom

The high economic growth and exports has created a current account surplus. (value of exports greater than imports). This has given the Chinese economy a surplus of foreign currency. They mostly invest this overseas. For example, buying US bonds. I presume this is what they mean by net income flow of money.

The Chinese government should also receive greater tax receipts as a result of the strong economic growth.

Negative Externalities of Chinese Growth include:

• Pollution
• Inequality
• Regional inequality
  
• Unemployment
• Congestion
  

(see problems of Chinese growth for more details)

Can the Proceeds of Growth be Used to Combat these negative Externalities?

• Higher incomes should enable the government to invest in measures to reduce pollution. E.g. public transport.
• Taxes could be raised on the use of cars and polluting industries.
• Growth is the best solution for the unemployment created by privatisation. If growth slowed down it would be difficult to create jobs.
• The regional inequality is more difficult to address. Despite government attempts there is a strong incentive to set up a business in the South East, near to ports. Therefore, there continues to be a flow of people from north to South
• Shortage of power and raw materials is also difficult to deal with. Especially since creating more power is likely to cause more negative externalities.
  

However, just because the Chinese government could use extra income to combat pollution, it doesn't mean that it is doing so effectively. At the moment, they seem relatively unconcerned about taking steps which will reduce pollution.

• Should China revalue currency?
• China economic growth breaks records
• China raises interest rates at NY Times
  
• China Interest rates still too low at Economist
  

Credit Card Tips for Students

Unfortunately financial education for students is often very limited. This lack of knowledge can lead to costly financial mistakes that can needlessly cost money and create a poor credit rating. In particular careful use of credit cards is very important for avoiding expensive financial mistakes. These are some tips for students who may be considering getting their first credit card.

1. Never Miss Making a Payment.

If you miss a credit card payment it will not just cost you money, but, also damage your credit rating. This may not mean much now, but, it will cause problems when you try to get a loan or mortgage later. If you miss payments your credit rating deteriorates this means banks are less willing to lend you money. To avoid missing a payment, you can set up a direct debit to pay either the minimum of full amount.

2. Avoid Borrowing on a Credit Card.

Credit cards are useful for making purchases. it gives you four to six weeks to pay back the credit card company. However, if you start borrowing money on a credit card and don't pay the full amount. You will find yourself paying a very high interest rate of 17%. This means a £1,000 debt will cost you £170 a year in interest payments alone. If you are not careful, you can find yourself paying a lot of money paying the interest payments and struggle to actually reduce the debt amount. Therefore, make it a rule to not borrow on a credit card. If you have to borrow try student loans, arranged overdrafts or a personal loan. At least here the interest rate is likely to be much less, perhaps 6 or 7%

3. Move to 0%.

If you do have a balance, accumulating interest at 17% then try switching it to a new card which offers 0% balance transfers. Some credit card companies offer 12 months interest fee for balance transfers. These can be of great help in saving money. Be careful, if you miss a payment this introductory rate will be cancelled. Don't try to be clever and borrow thousands of pounds at 0% and then putting it into a bank account at 5%. You are unlikely to make much and credit card companies don't like people who try to have too many cards. Save this for when you really need it.

4. Don't Be Swayed by free gifts.

When choosing a credit card, don't worry too much about a free cuddly toy or whatever is offered. It is more important to get a credit card which is useful. Don't add credit cards just for the sake of it.

5. Avoid Impulsive Spending.

A credit card can make it easier to overspend. The problem is that when we put things on plastic it seems much easier. If we had to pay cash we may think twice. If you have real problems with this, you might be better off not having a credit card at all. However, this is a shame because credit cards are useful. Try to feel each time you spend on credit you are parting with your hard earned cash. Make sure you have sufficient funds in your account.

• See also Top 10 Financial mistakes to avoid

Rubbish Tax - A load of Rubbish?

Apologies for the predictable tabloid headline

But, a rubbish tax is an interesting dilemma. I often written in favour of taxes for goods which create negative externalities. For example, cigarette tax, obesity tax. But, do these argument apply in the case of rubbish?

Arguments for a tax on Rubbish.

• Rubbish imposes costs on society such as:
  
• There is a shortage of landfill sites.
• It is expensive to dispose of waste. A tax means people are charged for the external costs that they create.
• Rubbish incineration also causes environmental costs such as greenhouse gases. Rubbish in landfill sites also causes pollution to rivers and water table.
• Without a tax there is no incentive for people to reduce the rubbish that they create. This creates a moral hazard. It means people who don't recycle and seek to reduce their waste are given no penalty. Arguably this is unfair on those who do try to reduce their waste.
• Raises revenue for the government which enables better quality refuse collection or to lower other taxes (although the tax raised is likely to be quiet small.)

Arguments against a Tax on Rubbish.

• It is expensive and difficult to collect the tax
  
• It will encourage people to flytip. This is a nuisance and expensive for the council to deal with.
• Could encourage poor sanitation as people leave rubbish illegally.
• Discriminates against big families. - They are more likely to have to pay. But, you could argue that a family of 5 should pay more than an old lady in a household of 1.
• Unfair. Takes a bigger % of income from poor people. True, but, this is not necessarily a reason to stop the tax, if equality is a real concern other taxes and benefits can be adjusted to compensate from the small increase in inequality.
• Will cause resentment at another tax. - Not an economic argument but likely to be a practical factor.

Conclusion.

As an economist I agree with the principle of a rubbish tax. It is good that people are charged for the social costs that they create. I think the tax will help reduce excessive garbage. I also feel companies should be taxed for using excessive packaging (but that is another debate)

However, In practice, I think the tax will be difficult to implement. The hassle of collecting taxes and avoiding tipping may equal or outweigh the relatively small gains of the tax. The problem of flytipping is a serious concern.

If a rubbish tax is introduced, I won't complain. But, it would be a 'courageous' politicians who came out strongly in favour of a rubbish tax.


See Yes Minister for a delightful explanation of a ' Courageous' political decision.

"Very courageous minister" - civil servant

"what do you mean "courageous" ? - Minister

" I mean it is electoral suicide, minister" - civil servant

Effect of Economic Growth on Monetary Policy

Reader Qu. Discuss the impact if an increase in domestic demand on the country's economy and the strategy that is used by your country in order to stabilize domestic demand?

• Effect of domestic demand on a country's economy

If there is an increase in domestic demand it will be likely to influence Monetary policy and, to a lesser extent, fiscal policy

In the UK, the main tool for stabilising domestic demand is Monetary Policy. Monetary policy is controlled by the MPC, which is part of the Bank of England. They have a target for inflation of CPI = 2% +/-1. Therefore, an increase in domestic demand is likely to impact on their decisions when setting interest rates.

Each month the MPC try to predict future inflationary pressure. If inflation is likely to increase above the target then they will need to increase interest rates to reduce demand. An increase in domestic demand is likely to increase the risk of inflationary pressure, unless the economy is below full capacity. Therefore, a rise in domestic demand will probably cause interest rates to rise.

The MPC look at over 30 statistics to try and get the best indication of inflationary pressures. Domestic demand is one of the most important.

If the increase in domestic demand is very significant, governments may also use fiscal policy. Fiscal policy can be used to deflate the economy through high taxes and lower spending.

Related:

• Fiscal Policy
• What determines effectiveness of monetary policy?
• UK Monetary Policy
  

The Effect of Domestic Demand on an Economy

READER's QUESTION: Discuss the impact of an increase in domestic demand on the country's economy?

An increase in Aggregate Demand (domestic Demand) will have the effect of increasing economic growth and possibly inflation.



The higher output is likely to reduce unemployment. This is because as output increases, firms demand more workers to produce the extra goods.

If AD increases too much, the economy will get close to full capacity and therefore will cause inflation.

The increased domestic demand may also cause a deterioration on the current account balance of payments. This is because higher domestic demand would lead to an increase in imports.

The Effect of Increased Demand Depends on Many Factors.

1. What is the Long Run Trend Rate of Growth?

In China the economy can grow by 7-8% without causing inflation.
In the UK, the long run trend rate (average sustainable growth) is about 2.6%. Therefore, if domestic demand in the UK rose by 4-5% it would be likely to cause inflation and lead to a boom and bust economic cycle. This is because increasing AD by 5% is unsustainable. It would lead to a shortage of goods and therefore inflation would occur. This inflationary growth is unsustainable

2. How Much Spare Capacity is There?

If the economy is below full capacity, or if there is a recession, then an increase in AD will cause higher economic growth without causing inflation. However, if the economy is already close to full capacity then an increase in domestic demand will cause inflation.

3. Depends on Marginal Propensity to Import.

The MPM is the % of extra income that is spent on imports. If the MPM is high then the increase in domestic demand is likely to cause a big deficit on the current account balance of payments. The MPM is high if there is a shortage of goods produce in the country. The UK and US have a high MPM because they have had a reduction in their manufacturing sectors.

Homework for Parents

The parents of Damion Frye’s ninth-grade students are spending their evenings this fall doing something they thought they had left behind long ago: homework.

Damion Frye believes that if parents keep interested in their child's education then it guarantees their best results. As a consequence he asks their parents to take part in the homework. Otherwise he reduces the grade of the student. Despite some mutterings he is said to be a popular teacher.

• Spreading homework amongst the parents

News from the Onion

• Alligators dangerous no matter how drunk you are
• Educational puppet pelted with crayons
  

A Break from Economics - It's the Weekend

Picture from The Thames looking towards Magdalen College, Oxford. Picture taken yesterday, autumn just starting here.

Articles on Other Sites

• How to Help friends in financial difficulties at Pick the Brain
  
• Tips for Using Credit Cards at Mortgage Blog
• How To Enjoy a Nine To Five Job at Dumb Little Man
• 10 Simple Tips for Using Email
• 13 Tips for increasing productivity on the internet
• This week in pictures at the Guardian

Economics will be back on Monday

How Should Higher Education be Funded?

University Education has been a hot topic as governments increasingly struggle to find the funds for universities. In the UK, the government is increasingly shifting the burden on to students and their parents. With the expansion in student numbers the problem is likely to become more pressing. What is the best way to fund University Education?

Firstly, should University Education be free at the point of use?

- Arguments for free education
- Arguments against free education

Personally, I feel that the external benefits of university education are relatively low. Most of the benefit from university education accrues to the individual. There is an opportunity cost of spending on university education which is reduced spending on other areas. Arguably, the government would be better off investing in primary and secondary education, rather than trying to make university education free for everybody. Furthermore, with the rapid expansion in university numbers, the idea of free education for all becomes more difficult to make a reality.

Methods of Paying for University Education

Higher Tax

The government could increase tax to fund university education, but, I feel with demographic changes placing greater demands on government spending. It would be better to use tax increase to spend on public transport or health care. To increase tax rates for free university education would be to place an undesirable burden on the taxpayer. Also, the government may gain a better return from spending any extra cash on vocational training on primary and secondary education.

Student Loans

At the moment, student loans play an important role in financing university education. One benefit is that students don't have to pay back until they are earning a certain amount. However,

• Going into debt may discourage students going to university
• Debt can create stress
• There is a high % of defaults on student loans.

Graduate Tax

This raises revenue by charging extra income tax on those who benefited from universities. This would be equitable in the sense that income tax is progressive, taking a higher % from high earners. Students may argue it is unfair. But, if a university degree increases their earning potential there is some justification in making them pay part of that extra earning potential. I prefer a graduate tax to student loans.

Sponsorship Deals

In the US, there is greater use of encouraging students to gain sponsorship from big companies. This involvement of the private sector encourages university degrees to be more relevant to the needs of the workforce.

Reduce Number of Students going to university.

• Should 50% of the Population be going to University?
• Should university education be free?
  

Should Government Run Public Transport?

Should government Run Public Transport or Leave it to the Private Sector?

Public transport such as trains creates positive externalities. When people take the train rather than driving we get a reduction in pollution and congestion which benefits society. Therefore, the social benefit of taking the train is greater than the private benefit. However, in a free market individual consumers ignore the external benefits so there is underconsumption.


The free market equilibrium is at Q1. But, Social efficiency occurs SMC = SMB. Therefore the government should intervene to either subsidise trains or provide them directly.


Government provision will also help to increase equality. It makes transport affordable for those on low incomes. Government can also offer discounts for low income groups like pensioners.

However, it can be argued that the private sector have a profit incentive. Therefore, they have a motivation to provide better quality service with more efficiency. Often, government run public services become inefficient and squander taxpayers money.

In Oxford public transport is left to the private sector and there is a comprehensive bus network. Government subsidies may reduce the price, but, demand is likely to be inelastic. Therefore, it is an expensive way of increasing use of public transport.

A government monopoly faces no competition. If private firms compete for custom, there is likely to be an added incentive to improve service. However, it is difficult to increase competition for trains, the infrastructure is a natural monopoly, therefore these is little scope for competition.

Private sector have helped provide a better quality service. There is adequate provision. However, with the problem of congestion increasing, there are quite high positive externalities of public transport and therefore, the government should subsidise some aspects such as investment in the infrastructure and improving safety. it is mistake to leave it all to the private sector

Should 50% of Students Go to University?

At the moment the UK government has a target for 50% of school leavers to enter university.

But, is this necessary or desirable?

• The UK has a shortage of plumbers, electricians and nurses. Encouraging people to take a degree will not solve these shortages.
  
• A highly skilled workforce is essential to a successful economy, but, it is not clear that university education is the best way to create a highly skilled workforce.
• Some argue the primary benefit of higher education is as a signalling mechanism. i.e. a degree signals more ability and capacity, but, it does little to increase labour productivity directly. (this, of course, varies between subjects e.g. medicine)
• Perhaps, greater emphasis should be placed on practical, vocational training. This does not require 3 expensive years of higher education, but, the benefit to the economy is more direct.
  
• Also, with an ageing population, an increase in the student population will further reduce the already shrinking labour force. This will put further pressure on government finances.
  
• Everyone should have the right to go to university, but, that does not mean we should encourage everyone to spend 3 years studying at university.
  
• Perhaps university should remain selective. Why do we want someone with 2 Es at A level to spend another 3 years studying? If a student gets say DDD at A level, I really don't know how helpful it is for them or the economy to spend another 3 years of academic study.
• University education is very expensive. An expansion in student numbers means that resources will be more stretched. The government want more people to go to university, but, they don't particularly want to pay for it. The result is we have an expansion in university numbers, but, a declining ratio of teachers per student. Is Quantity really preferable to quality?
• If the number of students going to university is decreased (or kept constant) it will be easier to finance it. But, if the % going to university increases to 50% it will require higher top up fees or more taxes.
• In the UK, there is still an element of class status about getting a university degree. Somehow getting a degree helps you enter the middle class. There is nothing wrong with this attitude, but, I think it is a mistake to undervalue vocational training qualifications such as becoming and electrician.
  

What do you think? Is it desirable to encourage more people to go to University?


It is worth noting that many of our competitor economies have a much higher % of students going to university. Some argue the low % of students going to university is responsible for holding back the UK economy

Price of Gold and Forecasts 2008

(image source: Price of Gold)

Also, what do you think about the current increases in the price of gold? I've read about some artificial limit on the value of commodities that was removed/released not too long ago, but is it at a suitable level now? Even though it's at record highs, I've read in some places that relative to currency (dollar?) prices it's still lower than much of the past.

Note: This diagram is not adjusted for inflation. It means that the real price of Gold was much higher in Jan 1980. ($700 was worth alot more in 1980 than $700 today in 2007.)

The price of Gold would have to rise to $2,250 to meet (in real terms) the record price of Gold - See inflation adjusted Gold Price

The Strength of Gold is due to Several Factors

Weakness of the Dollar.

It is a long held belief that an alternative to the dollar is to hold Gold. Therefore, as prospects for the dollar plummet, people switch to the alternative which is Gold.

Financial Instability

Credit Markets have been shaken by the fall out from the US sub prime crisis. There is a danger of more defaults and bankruptcies. Therefore, people have gone for the security of Gold.

Growing Demand in China and India.

Economic Growth in China and India is creating an unprecedented increase in demand for Gold. The new middle classes in China and India are buying significant amounts of Gold, helping to keep the price high.

Shortage of Supply

Demand has been increasing, but, supply has not been keeping pace.

Forecast for Gold 2008

I would be quite happy to have Gold Stocks. In 2008, I feel that the dollar will continue to remain weak. Economic imbalances, such as large current account deficit, and house price falls, are still unresolved. Given the weakness of the US economy, Gold will remain very attractive. There is also no other obvious alternative to the dollar. At the moment the Euro has taken the slack, but, there is a limit to how much the Euro can appreciate.

Demand from China and India is likely to keep growing. Therefore, amidst financial uncertainty Gold has very good prospects for 2008.

Thanks for questions, William.

Forecast for Pound Sterling 2008

what's likely to happen to the value of the pound over next few years? What'd happen if there was a crash in the housing market, for example? Or if the dollar continued to drop?

Interesting Question.

Firstly: Factors that influence Exchange Rates

1. Interest Rates
2. Competitiveness of British Goods
3. Confidence / expectations of investors

Factors that influence Forecast for Pound Sterling

• House Price Crash? - It is quite likely there could be a fall in house prices. If this was to occur we would see a significant fall in consumer spending growth. This lower spending would reduce inflationary pressures and enable the MPC to cut interest rates. Lower Interest rates could reduce the value of the pound. (less people want to save in UK banks)
• Continued Weakness of the Dollar - It the dollar depreciates further against the pound - which is quite likely, the pound will continue to rise against the dollar, but, our main trading partner is the EU. Therefore, the key question is will the Pound rise or fall against the EURO (66% of trade is with EU, 16% with US)
• The Pound is Overvalued - According to the Big Mac index the Pound is at least 21% overvalued against the US dollar. The Big Mac reflects purchasing power parity and this shows that the strength of the pound has meant that British goods are more expensive. - Just go to America and see how much cheaper electronic goods are.
• However, the Big Mac index is a very poor guide to future currency movements. Currencies can often remain overvalued permanently. For example, the Yen has been overvalued for several years.
• Comparison with Other Countries - 2008 could see UK interest rates fall, however, if European and US interest rates fall by the same rate there will be no downward pressure on the Pound.
• Balance of Payments - Current account deficit in the UK is about 3%. A large current account deficit can contribute to a devaluation. - The US deficit is 6% of GDP and is a factor in the dollar's devaluation
• Market Sentiment - This one is very difficult to predict. Generally, the Pound has been seen as a reasonable investment. The UK economy is doing relatively well and we have a good record of low inflationary growth. I can't see this changing fundamentally.

Conclusion

I think it is likely that the pound will remain overvalued on PPP measures such as the Big Mac Index. The UK economy may slow down next year, however, at the moment, I cannot see a serious crash. The slowdown is unlikely to be any more serious than our trading partners. Therefore, the pound will continue to be strong especially against the dollar.

Interest Rate Forecast

Yesterday, the Bank of England kept UK base Rates at 5.75%. Although they released no statement it is believed that they are still uncertain about future inflation prospects. They will probably say that it is too early to judge the impact of the financial crisis. Economists feel that the Bank is in rush to cut interest rates, despite several factors suggesing the interest cycle is about to turn

Factors Which will Influence Future Interest Rates

• House prices are starting to fall. The Halifax reported a 0.6% fall last month. Annual house price inflation is still in double figures. But, if this monthly fall is not a one off it will significantly change the state of the economy and make future inflation
• The Cost of loans is rising. Especially cost of loans to non - financial corporates. This is a result of increased risk associated with loans and the malfunctioning credit market.
• Slowdown in Consumer Spending. - Retailers have been reporting slower sales.
• Strong Pound and Euro - The Pound and Euro are strong against its main trading partners, although, it is not certain how much of a problem this is going to be.
• US slowdown - Will it spread to Europe and the UK?
• Will Cost Push inflation rise as a result of increased commodity prices?

• At the moment UK inflation is close to the Bank's CPI inflation target of 2%
• EU interest rates were also kept steady at 4%

Reasons not to be Concerned by Consumer Led Growth

In this post: I suggested several problems of relying on consumer led economic growth. However, there are some reasons Not to Be Concerned by Consumer / Service Sector Led Growth

1. Changing Comparative Advantage.

Due to lower labour costs in China and other parts of Asia, it is much cheaper to produce labour intensive manufactured goods in China and not the US. Therefore, there is no reason why the US should feel obliged to try and compete with low labour cost countries. Countries should specialise in goods where they have a comparative advantage. For the UK and US this is no longer in manufactured goods but in industries like finance, insurance and education.

2. Increased Export Revenue from the Service Sector.

It is a mistake to feel that manufacturing is the best source of export revenue. Increasingly the UK and US achieve net foreign income flows through foreigners coming to study at American and British universities. This counts as a positive item on the current account. Therefore, there is nothing intrinsically wrong with relying on a service sector based economy. It is just that in the US consumer spending grew too fast and was unsustainable.

3. Self Correcting Mechanisms

If a country experiences a growing current account deficit it is not necessarily a problem. Firstly for many years Asian investors were willing to balance the current account deficit by buying US securities - causing a surplus on financial account, Balance of Payments. Now that these funds are drying up, it is causing a devaluation in the dollar. A devaluation should help correct the imbalances. It makes imports more expensive so reduces demand for imports. Over time it should help reduce the current account deficit.

• Economic Growth essays and revision notes

Problems of US style Consumer led Economic Growth

Should we be concerned about Consumer / Service Sector led Growth?

In the past 10 years the UK and US economy has experienced strong economic growth, but, the main determinant of economic growth has been from consumer spending rather than increased manufacturing output. It has been suggested that economic growth is unbalanced. Furthermore, both the UK and US economies have relied on a booming housing market to finance consumer spending. The results has been a fall in the savings ratio, a rise in debt and growing current account deficits. What the are the effects of relying on consumer led growth? Should governments do more to boost balanced growth?

Problems of Consumer Led Growth

Balance of Payments deficit.

As a result of consumer led growth, the US has experienced a large deficit on the current account. This is because the imports of goods and services is greater than the exports of goods. The US current account deficit has approached 7% of GDP and is a significant problem and reflection of the unbalanced nature of growth.

Devaluation

The devaluation in the dollar is partly related to this high level of consumer spending and current account deficit. Because American consumers are spending more on imports the supply of dollars is greater than the demand from other countries. With a net outflow of money, this causes a devaluation of the dollar. (There are other reasons behind the devaluation but, this is one factor)

Growth Dependent on Housing Market.

One reason why US consumer spending has been so strong is that it has been buoyed by rising house prices. Rising house prices have enabled people to remortgage; it has also increased consumer confidence. Therefore, the housing market has played a key role in the economic growth of the US and UK. However, now that the US housing market is in decline, it means that many people who took out risky mortgages are now in danger of defaulting. It is also causing a marked slowdown in growth.

However: There are also reasons not to be concerned about Economic Growth

More on:

• Economic Growth

• Should Government increase Economic Growth?

Are UK House Prices Set to Fall?

For a long time people have been predicting falls in UK house prices. Some people have been predicting the imminent collapse of the UK Housing Market for the past 6 years. However, a drop in house price may soon become a reality. What has changed in the past 12 months which now make house price falls more likely?

1. Sub Prime Mortgage Crisis.

Defaults on US mortgages don't directly affect UK house prices. But, many mortgage lenders have gone bankrupt, and therefore, financial institutions are much less willing to buy mortgage debt from banks like the Northern Rock. As a consequence the price of mortgages is likely to rise, especially for adverse credit mortgages - this is because they are considered more risky and therefore, require a higher premium. The increased cost of mortgages will discourage people to buy houses

2. Lower confidence.

As a result of the sub prime crisis, falling house prices in US and the northern rock crisis, many people are now more fearful about the future of house prices. In particular, this is discouraging buy to let investors. Some people may see 2008 as a year to sell and capitalise on their house price gains.

3. Increased interest Rates.

To combat rising inflationary pressure (which is actually still quite low) the Bank of England have increased interest rates 5 times in the past 13 months. Interest rates are now at 5.75%. Often there is a time lag for increased interest rates to have an effect. For example, people on fixed mortgages will be facing much higher deals when they remortgage over the next couple of months. Therefore, the impact of higher interest rates will continue to bear down on the affordability of mortgages and hence reduce demand for buying houses.

4. Ratio of House Prices to Incomes.

For many first time buyers the ratio of house prices to incomes means that it is difficult to save for a mortgage and difficult to save for a deposit. In the past first time buyers have often got around this difficulty by borrowing from parents and / or using unconventional mortgages like interest only or self certification mortgages. However, the sub prime crisis means mortgage lenders are now more reluctant to lend large income multiples. Therefore, the demand from first time buyers is likely to dry up.

• Are property prices likely to fall? - written in April 2007
• The effects of a fall in House Prices
• Why Roof fell in on US Housing Market
• Why House Prices set to Fall - more arguments for falling house prices.
  

Tesco Profits Grow Amidst Competition Enquiry

Tesco recently announced that its pre tax profits had continued to grow to reach £1.3bn pre tax. Sales also increased to over £25 billion.

• Tesco's said that its growth had come from various areas including:
• New markets e.g. China
• Increased UK market share of supermarkets to 32% (nearest rival is Asda on about 17%)
• Successful Diversification into non food items such as electronics and clothes
• Growth of online business.

Sir Terry Leahy, the chief executive of Tesco, announced that he was unconcerned about the OFT inquiry into overcharging of dairy products. He argued most British consumers had a choice of 3 supermarkets. He expected the OFT to clear Tesco of wrong doing.

• Question - Do You Think that the Supermarket industry is contestable?

See: Contestable Markets

Why Top Up Fees are a Good idea.

In this post I offered some arguments - Why University Education should be Free.
However, in this post, I want to argue why top up fees are a good idea and should be extended in the UK

1. Means Testing enables poor people to still go to university.

Those from low income families should still be able to go to University. i.e. Not everyone should pay all fees. Middle classes benefit most from university education. Therefore, why should the average worker subsidise a university student to get a higher salary.

2. The positive externalities of university education are not that great.

Many degrees give mainly a private benefit of a higher salary to the worker. Spending 3 years on studying English literature gives little social benefit. Therefore, if the main benefit of a degree is a higher salary, it seems fair the student should somehow pay for the personal benefit he recieves.

3. A degree is mainly a signal for higher productivity.

A degree in many subjects doesn't actually increase productivity that much. Employers like to employ graduates, not because the Ancient History degree is of any use in an Investment Banks, but, because a person with a degree is likely to have a greater intelligence / dilligence.

4. It reduces time wasters.

At the moment, there is a high drop out rate from university; but, if you have to pay, people will only study if they really want to. However, it could be said some students will have to drop out because they can't afford the top up fees.

5. Government subsidies of higher education may encourage inefficiency.

If universities have to raise revenue privately they have to respond to market signals. e.g. Getting sponsorship from the corporate sector may encourage universities to supply course of relevance to the modern world

6. Raises revenue

Top up fees enable more investment in UK universities. It will also help attract and keep the best teachers and researchers. At the moment, the UK loses many top researchers to the US, where salaries are mostly double the UK.

Why University Education should be Free.

With the expansion in university numbers, there has been a divisive debate about how much students (and their families) should actually pay.

There are several arguments to suggest the government should provide university education free at the point of use, and make it available to everyone.

1. Greater Equality.

Free education enables everyone to have the opportunity of studying. It also avoids the complexity of means testing systems

2. University Education is a Merit Good.

People often underestimate the benefits of studying at university. This is exacerbated by the fact that the benefits of studying are a long time in the future. If people have to pay it will encourage people to leave education at 18 or 16.

3. Positive Externality of University Education.

University education gives benefits to the rest of society. For example, a qualified doctor helps treat other people. People with degrees can become teachers and impart knowledge. Therefore, the social benefit of universities are higher than private benefit. Therefore, in a free market university education will be underconsumed, because the free market ignores these positive externalities. This justifies the government providing it free at the point of use.

4. Difficulty of Finance

In the US, students often leave university with very significant debts. This creates financial stress from a very young age. In the UK, student debt is becoming an increasing problem. It forces many students to take part time jobs whilst studying. Student loans can be a disincentive to get a better paid job, because low paid jobs do not need to pay them back

See also: Why Students should pay to goto University

New Exam in Drinking Alcohol

Apparently, it is worth 'half a GCSE' - I'm not exactly sure what that means. But, the new qualification is aimed at educating young people about sensible drinking.

With alcohol abuse costing the economy over £3billion a year, - not to mention health and social affects, there seems to be some good reasoning behind the new scheme.

It is estimated 25,000 school children drink to excess every week.

Make Mine a half

Effect of US recession on Japan and China

What Would be the Effect of a US recession on the Japanese and Chinese economies?

With the US heading towards recession, or at least a marked slowdown in growth. There are concerns about how much a US recession would effect the rest of the global economy.

1. Exports To US.

32% of Chinese Exports go to the US. If there was a slowdown in US consumer spending this would adversely affect the Chinese manufacturing industry.
23% of Japanese exports go the the US, in particular the automobile industry is heavily reliant on the US economy.
The Export sector are crucial to both Japan and China.

2. Japanese subsidiaries in the US.

Many Japanese firms have subsidiaries in the US. These subsidiaries would be directly affected by a US recession. It would mean that the main companies would have less potential to invest, because their profits are lower.

3. Global Confidence.

Although the US economy is less important than in the past, a US recession would still have a major impact on economic confidence around the globe. In particular a US recession may lead to lower European growth which will harm both China and US.

Reasons not to Be Worried About US Recession

1. Inflation.

The Chinese economy is growing too fast. It is close to overheating, therefore, a slowdown in exports to the US, may help to reduce inflationary pressures.

2. Chinese Middle Classes.

Global economic growth is becoming less dependent on the US consumer. There is a growing Chinese and Indian middle class, which provides a new potential for the purchase of manufactured goods.

3. Helps to reduce global trade imbalances

The long period of US growth has been at the expense of a deterioration in the US current account. US growth has been financed by borrowing from China and Asia. A slowdown in the US economy would help to rectify this growing imbalance.

References

• Would a US recession negatively effect Japan?
• Warnings of US recession
  

Does Cutting Taxes cause Inflation?

Does cutting taxes lead to inflation?

Cutting Income Tax

• Reducing income tax will increase disposable income of consumers. Therefore consumer spending and AD will increase. This could cause inflation, if the economy is already quite close to full capacity.
• If economic growth is already low, a cut in income tax is unlikely to cause inflation.
• It also depends on consumer confidence. For example, if consumer confidence is very low, a cut in income tax may not lead to extra spending. People may prefer to save the increase in disposable income. Therefore, inflation will not increase in this case.
• It is possible cutting income tax will increase incentives to work and therefore, in the long run AS may increase. However, I feel this effect is very minor.

Cutting Indirect Taxes like VAT

• If the govt cut VAT, from 17.5% to 15% it would effectively increase the spending power of consumers, therefore, there may be an increase in AD and possibly inflation.
• However, a cut in indirect taxes will also directly reduce the RPI measure of inflation. This is simply because many goods will be cheaper because of the reduction in Tax. However, this will be just a one off reduction in the inflation rate.
• Some measures of inflation therefore ignore the temporary effects of taxes.

The effect of lower taxes depends on Government Spending / Borrowing

• The effect of a reduction in taxes also depends on Government spending.
• If the government cut taxes but also reduce government spending, then the net effect on AD will be neutral and there will be no inflationary affect.
• If the Government cut taxes and increase borrowing it should lead to an increase in AD.
• However, some economists will argue a cut in taxes, financed by borrowing will lead to "crowding out" - Private sector buy more bonds so reduce their income.
• Generally, lower taxes may have an inflationary impact, but the actual effect depends on many variables, such as the ones mentioned here.

The Cost of Failing Exams

I wonder how my students would react if I returned a failed test paper with an application form for McDonalds. - Not that there is anything wrong with working for McDonalds of course. - At least, you get a nice uniform and discounted french fries.

Related

• Why we should Tax Unhealthy foods
• Funny Exam Answers