On Holiday and Foreclosure spotting

I am currently on holiday in New York, US. I will probably post little until I return to UK on 1st September.

I found it funny that some of my friends in New York are playing a game of "foreclosure spotting". They keep their eyes peeled for signs of empty houses - evidence of foreclosure. They expect the number of foreclosures to rise quite soon. They live close to a relatively poor area - Jamaica, Queens, NY. They say this area was targeted in the period 2000-2006 with aggressive mortgage sales campaigns. They find it very interesting to see how the market has flipped to the other side.

After writing so much about the US housing Market problems, it's fascinating to see it in action and also examine how ordinary (non-economists) view the issue.

Forecast for Dollar

Euro to Dollar in past 5 years

See also: Forecast for dollar in 2011

After being in long term decline for several years, the dollar has recently staged a comeback. Will this renewed strength be temporary or does it signal the end of a long dollar bear market?

The present strength of the dollar reflects the fact that the Euro, UK and Japanese economies have come from behind in the race to enter a recession. For a long time, the US looked the most at risk, but, Euro output has shown a marked turn around, recently dropping into negative growth. This has led to a fall in the value of the Euro amidst expectations of lower Euro interest rates. Furthermore, the Euro economy may not recover as quickly as they like. European housing markets are even more overvalued than US housing markets and although they don't have the same sub prime mortgage problems, Europe could see a protracted downturn in house prices.

Problems for the dollar.

The pessimists for the dollar point to underlying weakness in the US economy. Strong export growth, negative real interest rates and tax cuts have provided a temporary fix. But, when exports slow and the tax cuts fade away, the US economy is still left with its sub prime debt, falling house prices, mortgage defaults and weak consumer confidence. I predict the US economy will go into recession in 2009, and there will be little that can be done to prevent it. Whilst the US economy is in recession, the dollar's weakness will remain.

The important question will be to what extent the US can ride out the credit crisis. If mortgage defaults stop rising and if stability can return to the financial system, it may enable the Federal reserve to return to a period of higher (i.e. positive real interest rates). Then the dollar may enter a bull market. But, those are both big ifs.

The long term fundamentals of the dollar still look grim

• Large current account deficit
• negative real interest rates (as Fed tries to stimulate growth)
• low savings ratio
• Bad debts throughout the financial sector.

The main thing to be said for the Dollar, is that - well it's competitors are just as bad.

Related

• Forecast for dollar in 2011

How Can Economics Help the Environment

Economics is concerned with the optimal distribution of scarce resources. Since the environment is by definition a scarce resources, in theory, economics should be able to play an important role in protecting the environment and overcoming the market failure that is often the cause of environmental problems.

The difficulty is in incorporating environmental values into traditional economic models. Before concepts of global warming, species extinction and pollution were common, it was generally assumed that increasing economic welfare meant increasing economic output. Economists only disagreed about the best way to increase growth. Those on the 'left' would argue for government intervention, those on the 'right' for free markets. However, both shared an aspiration to produce and consume more. The main economic models are still based on this assumption.

The environment complicates economic models because it brings into the equation externalities and the potential drawbacks of higher consumption. In fact the negative externalities of growth may be so high, some may argue economic growth could decrease social efficiency.

How Economics Can Help The Environment.

Evaluate Social Cost.

If we can make people pay the social cost of production and consumption, we can achieve socially efficient levels of output and pollution. If people just pay the private cost of driving, there will be too much driving and too much pollution. If people are forced to pay all the social costs of driving, they have incentives to find more environmentally friendly methods of transport.

Equate Environmentalism to Economic Welfare.

The problem is that people equate environmentalism to making sacrifices. - "Yes, we would like to go green, but, we just can't afford to." This has been a frequent refrain of George Bush in explaining why America (the richest country in the world) can't afford to reduce carbon emissions. However, this is the wrong attitude. Environmentalism should be promoted as a way to improve our long term economic welfare. If depletion of the environment causes problems such as: loss of wildlife, water shortages, freak weather, then the economic cost is very high. By making small sacrifices now, we can improve our future economic welfare significantly.

Discounted Future Costs and Benefits.

Environmental costs are often in the future. But, the taxes we need to pay are now. In the political system, it is difficult to justify costs now (e.g. higher petrol tax) for future benefits.

• Rather than taking a static approach to economic welfare, economics can give a greater weighting to future consequences. This will help justify painful decisions now.
  

You can't leave it to individual altruism.

Often green groups say we need to encourage people to change their lifestyle. A minority (usually a relatively well off minority) may change their lifestyle e.g. buy recycled paper, cycle to work, but most people don't. It is the traditional tragedy of the commons, - if we reduce our consumption, it doesn't make any difference if everybody else keeps consuming. Economic welfare is too important to be left to individual choices.

Separating myth and Fact

The environment creates an emotive appeal. It is often assumed some behaviour must be 'good' for the environment and some behaviour 'bad'. But, these assumptions are often false. Good intentions is not enough. An economist never takes anything for granted.

e.g Airmiles and environmental cost

Is a Stronger Dollar A Good Thing?

I have just arrived in New York for a holiday (my posting schedule may tail off until September), Unfortunately, the recent strength of the dollar in the past few weeks, increased the cost of my holiday by about 10%. If I had travelled earlier in the year I could have got closer to $2 for a £1, rather than the $1.8 to a £1 I got yesterday.

Euro Dollar Exchange Rate


After reaching a low of 0.62 Euros per dollar, the dollar has regained some of its lost ground - now trading at 0.67 Euros. But, as this graph shows the recent 'strength' of the dollar is insignificant compared to its long term fall.

However, even this small reversal will come as welcome news to Americans who love to travel and buy from abroad.

For the US economy the strong dollar is something of a mixed blessing.

Exports The weak dollar has been boosting growth in the US, at a time when other sectors have been struggling. Without exports increasing by 8% a year, the US economy may already be in recession; as it is the US economy continues to struggle along.

• However, on the other hand, you could argue that relying on a very weak dollar to underpin the economy, provides only a mere temporary respite and masks the underlying problems of the US economy.

Inflation. Despite the economic slowdown, inflation continues to pose a threat. A stronger dollar helps reduce inflationary pressure because:

• Imports cheaper.
• Lower demand for exports and hence domestic Aggregate Demand
• Exporters forced to try and increase efficiency.

If the dollar had remained very weak and inflation continued to rise, there would have been pressure on the Federal Reserve to increase interest rates; something they wouldn't like to do in the current situation, even if real interest rates are negative.

Current Account deficit. The current account deficit seems of small concern these days, with the housing and financial crisis. The recent weakness of the dollar has slightly improved the deficit from 6.5% of GDP in 2006 to about 5% of GDP now.

The Wrong Kind of Inflation

A few winters ago, British Rail explained the late arrival of trains because of the the 'wrong kind of snow'. Presumably they were hoping for the kind of snow, that cleans the tracks before obligingly melting away. With global inflation increasing, many are talking of the 'wrong kind of inflation' This is because the inflation is cost push. It increases living costs (aggregate supply shifts to the left) and discourages consumer spending. The other type of inflation is demand pull (e.g. growth too high). With demand pull inflation, consumers are spending. It is easier to control because when growth is too fast, Monetary policy can be used to slow down consumer spending.

However, for central Banks, this wrong kind of inflation presents a difficult dilemma. They are faced with inflation rising and economic growth falling. Using interest rates they can't deal with both problems. Therefore, they are forced to either target inflation or help growth; it is not possible to solve both at once simultaneously. The ECB and UK central Bank are currently caught in the middle and are keeping rates stagnant in the hope that the problem will dissipate.

Japan Deflation and The Wrong Kind of Inflation

For a whole decade of in the 1990s and early 2000s, the Japanese economy suffered damaging periods of deflation, which discouraged consumer spending and led to stagnant or falling growth. Here the deflation was very damaging for the economy - nobody wanted to spend with prices falling. The government tried very hard to increase the money supply - interest rates of 0%, and fiscal expansion. Many argued that what Japan needed was a bit of inflation. (BTW- This is why Central Banks target inflation at 2% and not 0%)

Currently, Japan is experiencing inflation (it is only 2%), but, it is of no relief for the economy. The inflation is created by rising commodity prices, chiefly food and oil. It is a story repeated in many countries. But, this rising inflation is discouraging consumer spending. Nominal wage growth in Japan is low. In fact, in firms of more than 30 workers, nominal wage growth fell 0.6% last year. With costs of living rising, Japanese consumers are having their disposable income squeezed.

Combined with slowing exports, rising unemployment and general economic uncertainty the Japanese economy is facing another contraction. This time it is not alone and the causes are primarily global. But, it has come at a bad time. - Just when the sickly Japanese economy was looking to be making a fresh start along comes a supply side shock, leaving policy makers little room for manoeuvre.

Related

• Essays on Inflation and unemployment
• Bank of England inflation target

Euro Economy First into Recession

The Eurozone economy shrank by 0.2% in the second quarter of 2008. This is the first time the economy has contracted since the introduction of the Euro in 1999. If the economy shrinks in the next quarter, the Eurozone will have officially entered a recession. It is likely the Eurozone will be the first major economy to enter recession.

Causes of Economic contraction

Living costs squeezing disposable income. Rising fuel and energy prices have caused a decline in disposable income for many consumers. This has led to a fall in consumer spending

Interest rates stagnant. Faced with rising inflation (increased to 4.1% yesterday), the ECB have been reluctant to cut rates to boost growth (interest rates are 5.25%). Governments have also little room for manoeuvre with fiscal policy; most countries already have high levels of government debt and are close to breaking the fiscal and stability pact. This approach contrasts with the US, who have aggressively cut interest rates and implemented tax cuts to try and stave off recession.

Strong Euro. Although the Euro has recently weakened against the Dollar; it still remains highly overvalued on Purchasing power parity standards. The strength of the Euro and weakness of global demand is harming Euro exports, traditionally a strong aspect of the Euro economy.

Falling Housing Markets. After a decade of booming housing markets, many countries are now seeing their housing market go into reversal. In particular Spain and Ireland are likely to see painful reversals. Overvalued prices and excess supply is likely to contribute to falling prices and job losses in the construction industry. Although, France and Germany are less susceptible to housing volatility, they may still

The biggest decline in growth came in Germany (0.5%) and France (0.3%)

Comment

It is rather ironic that the Euro economy has beaten the US into recession. For a long time all the bad news seemed to stem from the US. The Euro recession seems to have creeped on us with less notice. Maybe the ECB are hoping a little pain now, will be worth it in the long run.

• Prospects for Euro
• Europe teeters on brink of recession at Times

Forecasts for Pound Sterling

Although, the global downturn hit America first, it appears Europe and the UK economies may actually be first to enter negative economic growth and a recession.

The UK economy has been hit by a series of poor data (high inflation, rising unemployment, falling house prices, lower consumer spending). Recently, Mervyn King, gave a downbeat assessment of the UK economy predicting flat economic growth by the end of the year:

"But the unique combination of food and energy price rises and the dislocation of the financial sector will make a difficult adjustment for the UK economy."

Against a backdrop of impending recession, the Pound has fallen from its previous peaks against the dollar. There are various factors contributing to the recent deterioration in Pound Sterling

• UK house prices are falling by 12% a year - with prospects of more falls to come. House prices in the UK are very important because so much wealth is tied up in people's housing. Lower house prices slow consumer spending and put downward pressure on interest rates.
• Prospects of Recession.
• High Inflation.
  
• Sterling's relative strength against the dollar, masks its greater weakness against a basket of other currencies. The Pound sterling, on a trade weighted index, is now at its lowest level since 1996.

The Pound is Weak but so is Euro and Dollar

However, although the UK economy is weak and at risk of recession, its main international competitors are in a similar situation. Both the US and Eurozone are struggling with the combined effects of cost push inflation, the credit crunch and prospects of recession. Given the general weakness of other currencies, the Pound is unlikely to fall significantly against the Euro and Dollar - If only because these currencies are likely to be weak over the next 12 months.

For example, the Dollar has rallied in recent weeks, but, the economic fundamentals in America still remain weak. Due to extensive expansionary fiscal and monetary policy, growth in US has been maintained; but, this may prove to be a mere temporary respite before the coming recession.

Related

• Recession Looms in US and UK
• Factors influencing exchange Rates
• snapshot UK economy - July 2008 - How quickly things change
  

Abolition of Property Rights in US Economy

Readers Question: Explain how the abolition of property in land and application of all rents of land to public purposes would affect the US economy and society in general? Marx thought these changes would make society more egalitarian. What do you think? Do you agree? Explain.

I would love to see someone standing for American President on a platform of Marxist fundamentals. Somehow, I've got this feeling he would struggle to get elected. (this is in a country where someone can be labelled 'Socialist' for promising to increase income tax by 1%)

- The question seems so hopelessly hypothetical, it is difficult to take it seriously. It's also difficult to know where to start.

Firstly, it depends how you abolish all property. The Soviet-Communist approach would be to nationalise everything, basically transfer everything to common ownership by the state.

It is rather a cliche to say Communist economic systems failed because of lack of incentives e.t.c. Just to offer a contrarian approach, we could point to the rapid economic expansion of the Soviet economy in the 1930s. The 5 year plans really were a huge success (at least, if you measure economic welfare by things like the production of steel and iron ore). Workers were so motivated they often did unpaid overtime, just for the greater glory of the Communist revolution and maybe to win a medal for Stalin.

• However, whether Americans would share the same enthusiasm for doing overtime for a Communist ideal and perhaps getting a medal from Comrade Bush, is rather a mute point. :)

An anarchist approach, would abolish private property but decentralise the common ownership of the means of production. There is no controlling central state, only local anarchist syndicates. You can find the odd example of anarcho-syndicates, during the Spanish revolution of 1936 (ironically, the anarchist revolution was destroyed by the Soviet backed Communists - but, here I digress...)

You could argue America has had the odd anarchist communes. Perhaps the extreme right or certain puritanical religious communes - like the Shakers in the nineteenth century. - I doubt they would label themselves as such and I can't see the ideal becoming mainstream.

What Would Happen?

The economic turmoil would be vast. People are so attached and used to the idea of private ownership, I don't know how people would respond, but, I would expect a dramatic fall in production and output. Americans have no sympathy or even tolerance of Socialist ideals. The American dream means working for yourself, not working for the fruits of your labour to be shared with your brothers. Why work hard and invest, when the profits are to be equally shared amongst all and sundry?

Would it Be more Egalitarian?

Inequality is pretty high in America. Common ownership of the means of production, could definitely help improve reduce inequality. But, despite falling inequality, people would probably be still worse off as economic growth would fall.

There is of course, a lot more to be said. But, since the idea is so divorced from practical reality, I can't inspire myself to give it serious consideration.

Why Boom and Busts are common in Housing Markets

If you look at a graph of UK or American house prices - It tends to remind you of one thing - A Rollercoaster. (BTW: since end of graph, UK house prices have fallen £20,000)

Why are House prices so Volatile? Why don't house prices increase at a constant rate, or even remain close to the inflation rate.

On first glance, you might expect house prices to be steady:

• Houses are difficult to buy and sell. There are both financial costs and costs in terms of time. It's not like a stock commodity which can easily be traded.
  
• The majority of people who buy, do it to live in - not as a speculative investment.

These are some of the reason to explain house price volatility.

Interest rates.

The last boom in house prices in the UK, was burst by a rapid increase in interest rates. If interest rates doubled from 6% to 12% alot homeowners suddenly start defaulting; it is a major disincentive to buy. Interest rates are used to control inflation and the economic cycle - not to stabilise house prices.

In the US, many housing problems were exacerbated when the Federal reserve increased rates from 2% to 4% in 2006. 4% interest rates are still relatively low, but, many had borrowed up to the hilt. This small rise in interest rates stretched their affordability.

Time Delays in Building House

When house prices are rising, builders want to increase supply. However, from planning to completion can take up to 2 years. Therefore, if builders start building at peak of boom, when prices are falling, new houses are still coming onto the market. Therefore, the increase in supply, magnifies the falling prices (particularly a problem in the US at the moment). At the start of the boom, an inelastic supply squeezes prices upwards, even with relatively moderate demand. (this is the case in the UK)

Confidence Factor

When prices are falling, people want to delay their purchase - after all it could save you tens of thousands of dollars. Therefore, falling house prices deter buyers, causing even lower prices. This is exacerbated by media headlines which highlight the 'housing crisis'

When prices are rising, the opposite happens. People see it as an opportunity to make equity gains or consolidate debt. It becomes easy for people to slip into notion that 'house prices always rise' Housing has generally been seen as the safest investment you can make - I mean it's not like buying some obscure dot com firm.

Mortgage Industry is Cyclical.

When prices are rising, mortgage firms become more willing to lend 100% mortgages. Homeowners need less deposit, because the hope is for rising house prices to effectively create the deposit. When prices are falling, the need for a deposit rises to insure mortgage firms against negative equity. This is the reason why mortgages are often more diffficult to secure during falling prices.

• Of course, during the present credit crunch the cyclical nature of the mortgage industry has reached unprecedented levels.

The big question is whether we will ever be able to restore normalcy to housing markets. Will governments and financial authorities be able to prevent future housing booms and busts?

What determines house prices?
Overvalued housing markets
How bad are falling house prices?
More reasons to explain boom and busts in House prices

Costa Coffee UK and Sales Techniques.

I am writing some articles on my laptop here in Costa Coffee, Waterstones, Leeds, UK. I like writing in a cafe because there is no internet and therefore less distractions when writing.

I just ordered a cappuccino and the waitress asked if I would like medium or large. I wanted a small cappuccino so I chose the medium size. When I was charged £4.10 (pastry as well) and got a cup the size of a soup bowl, I realised that I had been cleverly sold a size bigger than I wanted. It was only an extra 40p. But, it was more coffee than I wanted. The annoying thing is that I have made this mistake at Costa coffee several times. I assume it is corporate strategy because they do the same thing in the Oxford branch.

Now, you might be thinking the problem is the stupid customer - i.e. me. I mean if you want a small cappuccino, make sure you ask for it. In my defense, coffee sizes are often confusing. Firstly, they are never in English, on the board we have - Primo, medio and massivo. In Starbucks it is something different like Vende, Grande (I can never actually remember) all I know is that they definitely don't sell something called 'small'.

Costa are probably quite happy because they get an extra 40p when the marginal cost of a medium is probably 0.5p. However, what there marketing strategy forgets is the impact on customer loyalty. I am annoyed with myself for falling for this basic marketing trick of getting you to buy more than you need / want.

You could also argue this is a clever form of price discrimination. A regular would know that you can get small size, which is cheaper. A non regular customer wouldn't find out about the small size and so would end up paying a higher price, but, an infrequent customer is likely to have a more inelastic demand and therefore doesn't mind paying the extra 40p.

• In this way, Costa are able to sell cheaper coffee to regular customers (with elastic demand) and sell more expensive coffee to infrequent visitors. This is a strategy not just associated with Costa, but, is a fairly common strategy for any multinational.

At the risky of being a grumpy old man - One other observation. Why does the cafe have air conditioning on when it is 15 degrees outside and raining? - My hands are cold. O well, at least I have a nice big steaming bowl of coffee to keep my hands warm!

Who is to Blame for Credit Crunch?

Who is to Blame for Credit Crunch?

Banks for Making Poor Loans

In the boom years, banks made an increasing number of loans with little regard to ability to repay. Banks found ways to increase the number of mortgage loans through strategies such as interest only mortgages, 100% mortgages and lending to people with poor credit histories. The result is that more homeowners are at risk of mortgage defaults. It is this rise in mortgage defaults that led to bank losses and reduced their willingness to lend.

• UK and European banks could argue that they have been positively responsible compared to their American counterparts. UK banks will argue that without the US Subprime debacle, the mortgage industry wouldn't have collapsed like it has. Mortgage repossessions in the UK, although increasing by 40% in last 12 months, are still a small % of the total mortgage market.
• The American subprime mortgage firms who made a rash of bad loans to people with poor credit, can find little to excuse their behaviour.
  
• The whole banking system for selling and buying the sub-prime mortgage debts as Triple A star safe loans. Certainly the mortgage companies who sold irresponsible loans can be blamed. But, somehow these risky loans were absorbed into the whole financial system. There was a general failing in evaluating the riskiness of loans. Over confidence and complacency seeped into the whole financial system and was not just isolated in a section of the US mortgage industry. This is why the problems in a section of the US mortgage industry affected the global capital markets.
  

Consumers

Surely consumers should take some responsibility for taking out mortgages they couldn't pay back. However, whilst this is true to some extent, I think it is disingenuous to blame consumers too much. Mortgage companies actively targeted people with aggressive sales pitches. The real cost of mortgages were often hidden, especially in the US. It is not unreasonable for a consumer to assume if a bank is so keen to lend a mortgage then the consumer must have a reasonable chance of repayment.

Speculators

Rising house prices encouraged people to buy houses. In London, many houses were snapped up by foreigners, this contributed to the boom. It is in these areas where house prices are now falling rapidly. However, this merely exacerbated volatility of house prices rather than causing the credit crunch.

Estate Agents

Estate agents would be a populist target. However, I don't think they can be blamed for cause of the credit crunch. They may give bad advice, like trying to encourage people to buy at the peak of a boom, but, the price of houses are determined by market forces and not estate agents. Estate agents may have fed the myth that house prices would never fall, but, they are not the ones giving mortgages to people with poor affordability.

The Government

It could be argued the government should have done more to regulate banks who were lending irresponsibly. The credit crunch has shown that financial institutions can easily abuse systems of self-regulation. The big question is whether government bail outs of banks in trouble has created moral hazard. - By preventing banks going under, have the governments given tacit approval for future bad decision making?

• Credit Crunch remains
• Credit Crisis 2008

Economics of Copyright And Patents

• Innovation is good. Monopoly is bad.
• Patents encourage both.

The argument is that inventors need the incentive of a patent to develop new products. Without patents and the prospect of monopoly profits, it is argued there would be less inventions and society would be worse off. Therefore, although monopoly is bad, patents are seen as the best solution.

Supporters of patents will say that although they may make monopoly profits on some successful patents, this is necessary to combat the losses on unsuccessful inventions which are never sold.

On the other hand critics will point to drug companies who can charge up to £7 for producing a drug that costs 10p to make. It is argued the high price of the drug prevents people from being able to take potentially life saving medicine. Surely, this is a good case to strip the monopoly power of the drugs company.

Is there Any Alternative to Patents?

Just because most people accept patents as the accepted norm, doesn't mean it is necessarily the best approach for the issue of invention.
One solution is for the government to pay inventors for successful patents and then release them into the public domain. In theory, everyone is happy.

The inventors get paid for the invention without the worry of dealing with commercial aspect. The government can then sell the patent at reasonable cost to prospective firms. This means there is the prospect of several firms using the patent. This could even increase the rate at which technology improves.

The problem is that:

• Would a government body know which are the good patents to buy?
• Would the government pay sufficient recompense for inventors to develop new products?

Related

• Patents, copyright and economic growth

Why Economics Matters

A report by the BBC suggested that last year only 3 people trained to become Economic Teachers. [link] As an economics teacher I should be happy, - a shortage of supply should in theory push up our wages. Alas, when it comes to the setting of wages for economics teachers, market forces seem to mysteriously disappear (either that or our Marginal productivity is much lower than we would like to believe).

Anyway does it matter whether people study Economics at A Level?

Some argue Economics A level doesn't matter - what matters is studying Maths so you can take Economics at University. However, I would argue the exact opposite - The obtuse mathematical models taught at University Economics are only necessary for specialists. Society would, however, benefit from more people understanding the basic principles of Economics. You will say I am biased, but, I really feel Economics should be taught at not just A Level but GCSE 15 year olds.

Why Economics matters

Economic and Financial literacy

There is a general economic illiteracy amongst the population. Many People don't know what is meant by concepts like National Debt, Inflation, Real Interest rates, Balance of payments. If people misunderstand concepts like real interest rates and inflation they will make poor financial decision for themselves. Many subjects lack practical application to the real world. Studying economics can improve your financial situation - there is a clear personal benefit from studying economics.

Political Process

The political process tends to promote populist policies, even if they are not beneficial for society. This includes calls for tax cuts, higher spending, tariffs to protect domestic industry. If people understood the concept of externalities it would be easier to implement new carbon taxes and taxes on rubbish. People would understand that new taxes can improve economic welfare, rather than the usual shrill opposition to any new taxes.

Opportunity Cost

The political debate seems to be framed without reference to opportunity cost. The other day, I was reading the Daily Mail, who in the same edition complained at the level of Government debt, were arguing for a 10p cut on petrol tax and also complained about underfunding of the NHS. Greater understanding of economics would enable people to appreciate the opportunity cost of populist policies.

Good Intentions are Not Enough

It is not enough to have good intentions about overcoming poverty - throwing money at developing countries and campaigning against free trade and the WTO do not necessarily improve the living standards of developing countries - whatever ill informed campaigners may claim. Learning economics would help demystify a lot of the myths and claims surrounding issues like free trade and globalisation. (Free trade policy and paradox)

Related

• The difference between economists and non economists

US Economy Defies Gloomy Predictions - So Far

The Federal Reserve and US government have certainly done their best to try and avoid a long expected recession.

• Interest rates slashed from 4% to 2%
• Generous fiscal tax breaks for companies and consumers

Despite falling house prices and the impact of rising living costs, the Fed have increased their expectations for growth in 2008 from 1% to 1.6%. On face value economic growth of 1.6% is not bad for an economy, many assume is already in recession. But, the problem now is that there is little else left they could do to stimulate the economy.

• Real Interest rates. - With inflation running at 5%, real interest rates are negative by almost 3%. If the Fed wants to maintain low inflationary credentials and end an era of lax borrowing, real interest rates surely need to rise rather than fall further. Even if they did cut nominal interest rates, the problem remains that banks will still be reluctant to lend because of the credit crunch.
  
• Fiscal boost. Some are arguing for a second wave of fiscal tax cuts. But, government borrowing is already high and it is clear whether tax cuts can do anything other than provide a very temporary boost in spending.
  
• Exports. The strongest sector for the US economy is currently exports. Helped by a weak dollar, US exports have risen strongly. However, with a slowdown in the EU and other economies this source of strength may soon be coming to an end.

10 Reasons to Stop Subsidising Cotton

1. A Pound of Cotton can be produced for 12 pence in Burkina Faso, compared to 42 pence in the US. Subsidies are keeping inefficient, high cost American farmers in the global market.
   
2. Subsidies to US, EU and Chinese cotton farmers reduces the price of cotton by 10-15%. This costs farmers in West Africa $75- $100 million a year.
3. Removal of all cotton subsidies and import tariffs would boost economic welfare by $283million per year. The largest beneficiary would be sub Saharan Africa, which would benefit by approximately $147 million. Many of those who would benefit are poor farmers.
4. More than 66% of people surviving on less than $1 a day are agricultural labourers or small holding farmers.
5. Agriculture is the largest employer in low income countries. about 60% of labour force and 25% of GDP
6. Every $1 lost in economic welfare actually costs a lot more. The lower income means lower investment as farmers struggle to get enough income to survive.
7. Higher cotton prices and incomes would enable a boost in investment and diversification in many developing countries.
8. Cotton exports are relatively insignificant to the US economy, but cotton farmers are a powerful political lobby politicians are reluctant to annoy. By contrast, cotton accounts for 50% of Burkina Faso's exports; the removal of cotton subsidies and tariffs would have a big impact on this developing economy.
9. Cost to US Taxpayer of subsidising cotton.
10. Would help general trade negotiations
    

Related

• Disadvantages of Common Agricultural Policy
  
• The illogic of Farm subsidies at Freakonomics
• Cotton subsidies at Oxfam
• The Cotton Debate
  

Credit Crunch Crisis Persists

It is 12 months since the credit crunch hit the headlines and has become one of the most memorable phrases of the past year.

This is a post I wrote on The Credit Crunch 12 months on at my Finance Blog.

Other articles

Problems of Credit Crunch
Overvalued housing markets
Timeline of credit crunch at Reuters
Credit Crunch - Whose to Blame? at BBC

Fair Trade: Arguments for and Against

Fair trade products are one of the fastest growing branches of food items. Initially focused on coffee growers, fair trade now includes many agricultural products such as bananas, chocolate, honey and tea.

• In 2006, UK retail sales of fair trade products accounted for £300 million up from £20 million in 1998.
  
• The market is expected to keep growing as consumers increasingly choose products based on ethical standards.

Fair Trade Foundation - Aims of fair trade are:

• "...To achieve this vision, Fairtrade seeks to transform trading structures and practices in favour of the poor and disadvantaged. By facilitating trading partnerships based on equity and transparency... (Fair Trade Foundation)"
• Provide farmers with a higher share of the final selling price
• Enter into long term partnerships with farmers, helping them to deal with volatile swings in prices.
• Fair Trade.org.uk
  

There are numerous examples, of farmers in developing countries who have been able to use extra income to improve the long term infrastructure of the agricultural sector.

Criticisms of Fair Trade

• It only benefits a small % of farmers who benefit from higher prices. Other farmers will be worse off.
• The majority of farmers who benefit are in Mexico a relatively developed country. Only small parts of the poorest African countries are included
• Fair trade may distort market signals. For example, the coffee industry has suffered from oversupply. Giving some farmers subsidies only encourages them to remain in an oversupplied industry. The falling price of coffee is indicative of too many farmers. The fair trade subsidy only supports farmers in an uncompetitive industry. The real long term solution is for farmers to diversify into other income sources.

According to the Adam Smith Institute

• Just 10% of the fair trade premium actually goes to the produce. Firms at other stages of the production process take the rest.
• Fair trade helps landowners as opposed to agricultural labourers.
• Unfair Trade: at Adam Smith Institute
  

Fair trade is certainly a clever marketing ploy. There is a desire by consumers to make sure growers get a fair deal. There are many aspects of fair trade which are admirable - attempts to deal with volatile markets, provide a fairer share of the cake. However, the programme also has many limitations - Doesn't address underlying problems in agriculture. Doesn't help the poorest.

The most powerful strategy for helping developing countries would be to remove agricultural tariff barriers in the West.

• Fair trade certified - USA
  

Recession Looms in US and UK

Unemployment in the US continues to increase at the fastest rate for 5 years.

Fresh unemployment claims in the US reached 448,000 last month. Some sectors like the construction sector have been particularly hard hit. US officials claim that his large jump was partly due to an effort to encourage people to claim benefits, however, it is hard to deny the slowdown in the economy.

There has also been a rise in disguised unemployment. For example, an extra one million employees have had full time jobs downgraded to part time. Part time work is not counted as unemployment and helps to disguise the weakness of the labour market.

The US economy has avoided recession so far - helped by a weak dollar and booming exports. However, the global slowdown threatens to harm US exports as well. Economists now predict a contraction in US economy next quarter as falling house prices, rising living costs and declining consumer confidence continue to reduce consumer spending.

It appears the summer tax cut may be insufficient to prevent an official recession.

• Surviving a recession
• Causes of Recession
• Iraq War and US Recession
• US recession on verge of making history at Bloomberg
  

Backlash Against Multinationals

There was a time when big multinationals like McDonalds, Starbucks and Nike had everything their own way. Growth seemed effortless, no matter what they did, their expansion seemed guaranteed. This even led some critics to argue that multinationals were able to brainwash consumers into buying their products.

However, increasingly consumers are becoming more critical of big companies, both Starbucks and McDonalds have faced growing consumer led criticism.

McDonalds was hit by persistent criticism of its standard and healthiness of food. Documentary films like 'Super Size Me' displayed in graphic detail the effects of a McDonalds diet. Sales in many countries started to decline as people looked for healthier alternatives. In response McDonalds changed its strategy introducing salads and healthier food. The criticism was perhaps unexpected, but did show how even great multinationals need to be continually responsive to consumer trends.

Starbucks also provides an interesting case study. For many years, they had an enviable growth strategy. They would open up stores close to existing coffee shops on the main high streets. They could then draw customers away with superior décor, variety of coffee and extras. In fact they helped create a much bigger market for coffee, especially in places like the UK. In a way they have become victims of their own success. Their rapid growth encouraged more rivals into the market. The effect is that the market has reached saturation point, with a large array of competitors on the high street. Also their success has created opposition. Whilst, they were once perceived as being new and dynamic, they reputation increasingly reflects (whether fairly or unfairly( the slight arrogance of a dominant monopoly. Starbucks now face local campaigns to prevent the opening of new stores. Many have criticised the quality of their coffee saying it has declined as they forget their core values. (Is Starbucks a rip off?)

The future of Starbucks is now more uncertain, they face growing competition, it may even lead to price wars (something unheard of in coffee markets so far) with no guarantee of continual growth.