TIPP – UK / US trade deal

TIPP (Transatlantic Trade and Investment Partnership) is a potential trade deal between the EU and US. It is currently being negotiated by the European Commission and the US.

freightliner-railway-train

The aim of the agreement is

  • Encouraging trade and investment between the EU and the US.
  • Extend principles of European Single Market to include the US, enabling lower prices for consumers, greater trade and prosperity.

However, critics of the agreement fear that the proposal will lead to lower environmental standards, job losses, privatisation of public services, and overall is geared towards favouring big business at the expense of the consumer and environment.

The main areas of TTIP include

  • Removal of red tape and bureaucracy for firms who are exporting.
  • Setting new rules to make it easier to export, import and invest.
  • Harmonisation of rules and regulations relating to trade between EU and US.
  • Create a fairer process and clearer rules for firms who invest in other countries. This includes ISDS (Investors state dispute settlement) which enable firms to sue governments for lost profits relating to government regulation.

Potential benefits of TTIP

  • Encouraging inward investment from US companies, which will lead to the creation of jobs and kickstart the EU economy.
  • Extending the principles of the single market to reduce interference and non-tariff barriers to trade
  • Greater choice of imports, enables lower prices for consumers. This could be significant in areas like jeans and cars. It might help to reduce the price differential between US and EU in areas like clothes and computers.
  • More exports. The UK could export more to US. For example, British lamb and venison cannot currently be exported to US.
  • The EU received over €325 bn investment flows from around the world (34% of world inward investment) The British government have claimed that TTIP could add £10bn to the UK economy.

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Saltwater vs Freshwater Economics

Saltwater economists are associated with economists from the Universities on the east and west coast of the US. In particular universities such as Berkeley, Harvard, MIT, Princeton, Pennsylvania Columbia and Yale. Economic thought from these universities tends to be more suspicious of free markets and advocate a greater role for government regulation and discretionary fiscal …

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What has borrowing ever done for me?

uk-national-debt

A reader on twitter asked – How has government borrowing helped me recently?

I’m tempted to paraphrase as – What has borrowing ever done for me? – just so that I can make a reference to Monty Python and the Life of Brian? – And what have the Romans ever done for us? – apart from education, sewers, wine, roads, peace, law and order  … (youtube)

I’ve answered this question several times before:

But, I frequently get asked it, so here’s a few more ideas.

Why do we need to be in debt at all?
Surely all the money in interest (some £50bn pa?) would be better spent on ourselves as a country?

It is true that the government spends around £50bn a year on interest payments. (and forecast to rise) But, those interest payments enable higher government spending now.

We could reduce the amount of interest payments by raising taxes / cutting spending. But, it wouldn’t make us better off. It would just change how we finance current spending.

Also, who do those interest payments go to – primarily UK individuals/UK pension funds. You can think of it as a transfer payment to people within a country.

You could argue that it is a transfer payment from the average taxpayer to people with pension funds / city financiers – who are likely to be better off. But, more people with private pensions may benefit from government interest payments than they realise.

Interest rates are also very low, which means interest payments on government debt are quite a small percentage of GDP. (3%)

Use of private sector saving

In the great recession, there was a rapid rise in private sector saving. This was money not used, but just saved and unproductive.

net-lending-private-public-debt
Source: ONS

If the government borrowed nothing, these resources would remain idle, aggregate demand would be lower and the recession deeper. Through government borrowing, we made use of this surplus savings and helped to stabilise the economy. (recession not as deep)

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GDP deflator

gdp-deflator

GDP deflator (implicit price deflator for GDP) is a measure of the level of prices of all new, domestic goods and services in an economy. The GDP deflator regularly updates the type of goods and services used to measure the implicit price deflator – depending on which goods are being bought. e.g.If the price of …

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Why does deflation lead to lower spending not more?

deflation-inflation-20s-30s

Forgive me, I’m not an economist, but I am a working woman and a taxpayer and a consumer. Lowering prices does NOT encourage us to put off spending…if I see something I want or need for a lower price you can bet your butt I’m getting it before the price goes back up!

When an economy experiences deflation (general fall in price level) we tend to also see:

  • Falling revenues for firms (prices go down) therefore they get less revenue.
  • Falling wages. Firms can’t afford wage increases, so wages start to fall (or stagnate) leading to lower income. For example, in Japan between 1997 and 2012 Average earnings fell 12.2 percent, while a core measure of consumer prices — excluding food and energy — fell 6.8%. (NY Times)
  • Rise in unemployment. Often wages can’t fully adjust downwards, but firms can’t afford to pay workers. Therefore workers are made redundant and we get real wage unemployment.

If the price of a particular good goes down, this will increase demand for that good. (especially, if people think the price cut is temporary like a special offer)

However, deflation is a different situation. This is when all prices are falling (not necessarily all prices, but the average price level is falling). Furthermore, people expect prices to keep falling because of the deflationary pressures. If a TV has fallen 2%, but you expect a TV to fall another 2%, then you are more likely to delay buying because it will be cheaper  next year.

An important factor here is that peoples expectations of inflation / deflation are closely related to current inflation. If current inflation is 3%, this is what people expect future inflation to be. If there is deflation of 2%, that will be people’s future expectations of deflation.

Another important factor is that deflation invariably means falling wages. So consumers have two factors which lead to lower spending during inflation

  • The expectation prices will continue to fall.
  • The fact nominal wages are falling and they have less income to purchase goods. In 2012, Japan, a survey of consumers found  94 % expected their wages to remain the same or fall, and 96% expected to maintain their spending levels or cut them. The survey has shown the same underlying trend for nearly 20 years.

A good empirical example of the impact of deflation on consumer spending can be seen in the 1930s depression and Japan’s period of deflation during the 1990s and 2000s. Also, deflation during the 1920s was damaging for the UK economy.

deflation-inflation-20s-30s

Another real problem with deflation is that it is much harder to solve. E.g. the Central Bank can’t cut rates below zero. Therefore, once deflation is embedded, it becomes quite rational to expect continued deflation – this is one factor which makes deflation so damaging.

Why does Deflation increase the value of debt? It’s all just dollars and cents…if the value of our dollar goes up, yes the value of the debt does too so its still proportional to our currency value. So saying that the value of our debt goes up is a little misleading. It’s not going up independently and we suddenly don’t have the same amount of money.

The important feature is that deflation invariably means falling wages.

Suppose your mortgage payments are $500 a month, and your wage is $2000. You spend 25% of your disposable income on paying mortgage debt. However, if we have deflation and your nominal wages are being cut, then you have to spend a higher % of your income on paying your debt. If your wage fell to $1900, you would have to spend 26.3% of your income on your mortgage debt.

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Spanish Economic Crisis Summary

Spain

During the 1990s and early 2000s, Spain enjoyed rapid economic growth and became the 5th largest EU economy. In particular, the rapid economic growth encouraged a boom in property. In 2006, Spain started building 800,000 new homes – more than Germany, Italy, France and UK combined. (Euro Challenge.org)

However, in 2008, Spain was badly affected by the global credit crisis. The Spanish property market collapsed leading to a deep recession, that persisted for several years.

Spanish Nominal GDP

Spanish GDP
Spanish GDP at Market Prices ECB stat

Since 2008, Spain has seen a sharp fall in GDP due to a combination of:

  • Overvalued exports
  • EU recession
  • Austerity policies (government spending cuts)
  • Collapse in Property Market and banking crisis

Spanish House Prices

Spain House Prices
Source: Spain the next leg down

Current Account deficits in Eurozone

Spain was a founder member of the Euro. However, over the past few years, Spain has seen a relative decline in competitiveness compared to the Eurozone average. This has made Spanish exports more expensive. Being in the Eurozone means they can’t devalue, and therefore there is no quick fix to their uncompetitive exports.

ca

After peaking at 10% of GDP, Spain’s current account deficit has fallen to 5% of GDP, but this partly reflects a sharp drop in consumer spending on imports. To restore competitiveness through internal devaluation will require a prolonged period of high unemployment.

Unemployment in Spain

Even during the economic boom, unemployment remains stubbornly high in Spain, especially youth unemployment. Commentators have pointed to an inflexible labour market creating long-term structural unemployment.

Spanish Unemployment
Spanish Unemployment ECB

Since the recession of 2008, unemployment has increased to record levels. In April 2012, 5.6 million were unemployed. (BBC)

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Is it so bad to leave the Euro?

Leaving the Euro is supposed to be irreversible. If a country did threaten to leave the Euro – it was argued it would lead to bank runs, loss of confidence, high unemployment and a serious recession. But, what if you already have all of these components? The Greek economy is in dire state. Furthermore, their …

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A short note on Greece

Just a short note on Greece because at the moment I’m concentrating on writing revision guides. For several years I have felt that Greece would be better off to leave the Eurozone. This is partly due to economics, but also partly an intuition – that there is no greater recipe for political disaster than having …

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