Economics help blog – Page 138

Definition of fiscal responsibility

10 January 201813 October 2016 by Tejvan Pettinger

Fiscal responsibility implies a government pursues the appropriate level of government spending and tax to: Maintain sustainable public finances. Ensure fiscal policy aids the optimal rate of economic growth. Maintain appropriate levels of public investment. The UK chancellor has proposed a fiscal charter – which requires the government to run a budget surplus within three …

Was the Pound really overvalued?

17 November 201711 October 2016 by Tejvan Pettinger

In recent post, I looked at whether Pound Sterling would have fallen without Brexit vote? There was a good case to say it was overvalued, but there are a few other factors I’d like to mention. Big Mac index According to the Big mac index, the Pound wasn’t overvalued at all. In fact, on this …

Blaming immigrants and a tolerant society

17 November 20177 October 2016 by Tejvan Pettinger

I recently watched a BBC documentary (No place to call home) about Britain’s housing crisis, focusing on a suburb of London (Dagenham). It was an insight into the desperate situation many find themselves in because of a shortage of housing, very high rents and a feeling the council / government is unable to help with …

Benefits of small firms

14 March 20196 October 2016 by Tejvan Pettinger

Readers Question: Why do some firms prefer to remain small? In recent times, the tendency is for product markets to be dominated by large multinational corporations who can benefit from various economies of scale. However, despite this general trend, there are still advantages to being a small firm. Benefits of being a small firm Concentrate …

Question: can governments overcome market forces on currency markets?

18 January 20205 October 2016 by Tejvan Pettinger

Readers Question: Between markets and concerted central banks intervention, e.g in currency and shares, which forces are likely to prevail? Market forces can be very strong in influencing the value of currency or shares (or bond yields). Governments and Central Banks can try and influence the value of the currency and bond yields. In certain …

Would a cap on house prices work?

10 September 20214 October 2016 by Tejvan Pettinger

Readers Question: Would a cap on house prices work?

Despite the recession and credit crunch, UK house prices continue to rise. (See: Why are UK house prices so high?) This has caused record levels of house price to income multiples. For homebuyers in London, house prices are approaching a record seven times average earnings. Understandably many feel house prices are already too expensive, and there is a strong case for trying to limit future house price increases.

For example, the Royal Institution of Chartered Surveyors have suggested that the Bank of England impose a cap of 5% a year on house price growth. (Independent link)

Firstly, how would a house price cap work?

The Bank of England cannot influence supply in the short term. Therefore, they would have to influence demand through credit controls (e.g. limiting amount of mortgages) and possibly interest rates. Both have drawbacks and limitations.

1. Interest Rates

In theory, The Bank of England could use interest rates as a tool to influence house prices. A rise in interest rates, in the current climate, would inevitably cause an end to the house price growth as mortgages would become more expensive. Mortgage payments are a large % of disposable income, therefore any change in interest rates will have a significant impact on reducing housing affordability and housing demand.

However, the use of interest rates to control house prices has significant drawbacks.

The main aim of monetary policy is the control of inflation and economic growth. If the Bank is asked to also target house prices, it would mean the Bank of England are placed in a difficult position. To prevent house price rises in London, may require higher interest rates. But, at this stage in the economy cycle, a small increase in interest rates could sniff out the recovery. Interest rates can only achieve so much.
Time lags. A change in interest rates will take time to feed through into the housing market. Ideally, the Bank of England would anticipate house price changes, but in practise this is difficult to do. Few would have predicted the strong rise in house prices in recent years. If the Bank did increase interest rates to affect demand for houses and mortgages, it could easily get it wrong. By, the time mortgage rates rose, house prices may be falling anyway.

2. Mortgage regulation

A more realistic option is for the Bank of England to adopt new regulation which makes mortgage lending scarcer. If house prices are rising too quickly, the Bank of England could introduce controls which limit the availability of mortgages. This could involve insisting on certain size of deposits or limiting the size of income multiples.

Question: Why are more students going to university, despite the higher costs?

18 January 202014 September 2016 by Tejvan Pettinger

Readers Question: Why are more students going to university, despite the increased costs associated with higher education

radcliffe-camera-sky-10 — Radcliffe Camera, Oxford University, photo Tejvan

The number of students in full time education has dramatically increased in the past few decades. In the 1960s and 1970s, a full time university degree was a minority choice, but it has become increasingly popular. It is true the number of students has risen despite the rapidly increasing costs of studying to gain a degree.

Number of Students UK

student-numbers — Number of students UK. Source: Ox Univ

From less than 400,000 students in the 1960s, in 1995-6 the number rose to about 1.6 million students undertaking courses of higher education in the UK. 1.1 million were in full time education. the rest in part time.

European unemployment crisis

18 January 201812 September 2016 by Tejvan Pettinger

Unemployment in many European countries has risen sharply due to the credit crunch and global recession. The worst hit countries include Spain (ES) and Greece (EL), who both have unemployment rates of over 24%. In the past few months, there has been a slight reduction in European unemployment, but the prolonged period of mass unemployment is leaving significant social and economic problems for the whole Eurozone.

Unemployment rate in the Eurozone area: 11.5% (July 2014)
EU-28 Unemployment is slightly lower at 10.2% (July 2014)
Total unemployment in the EU-28 is 24.850 million (July 2014)
The Eurozone (EA-18) jobless total is now 18.409 million. (link) The highest since records began.
Youth unemployment rates in the EU 27 is 21.8% (July 2014)
The lowest unemployment rates are in Austria (4.9 %) and Germany (4.9 %). The highest rates are in Greece (27.2 % in January 2014) and Spain (24.5 %).
By comparison, unemployment in Japan is 3.6%, and in US 6.8%. UK unemployment is 6.5%
Eurostat unemployment figures

Source: ECB

Causes of European unemployment crisis

After falling to 7.5% in 2008, the prolonged recession of 2008-13, has caused a sharp rise in unemployment. The continent seems to be stuck in a deflationary spiral and is facing a prolonged double-dip recession. Hardest hit debtor countries, such as Spain, Greece, Portugal and Italy are facing stringent budget cuts – which are depressing demand.

Will Eurozone break up?

But, in the Eurozone, there is little relief available to boost demand. Countries are unable to devalue. Monetary policy set by the ECB has been unflinching in targeting low inflation and offering little monetary easing – despite the prolonged recession. Also, depressed demand throughout the region is making it difficult to grow through increasing exports. Even northern Europe, which has had large current account surpluses are engaging in modest austerity. The result is that demand has remained depressed across Europe.

Despite its potentially damaging social and economic impact, throughout the 2008-13 European crisis, unemployment has had a relatively low profile – European policymakers have always given the impression they are more concerned about appeasing bond markets and low inflation than tackling the more pressing problem of unemployment. There has been a reluctance to tackle the fundamental deficiency of aggregate demand which is leading to lower growth and falling employment. Efforts to reduce unemployment have centred on talk of more flexible labour markets. This may be part of the solution for structural unemployment, but increasing labour market flexibility alone cannot deal with the cyclical unemployment.