Economic issues for the UK General Election

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I’m off to New York on Wednesday, I’m tempted to stay until May 8th, so I can miss the UK General election campaigning, which so far has been quite depressing for the poor quality of economic debate.

This is just an outline of some issues for consideration. I may expand upon these in the coming weeks.

Whose fault was the 2008/09 economic crash? –

Essentially a global financial crisis, exacerbated by weak financial regulation. But, who was advocating much stricter regulation of the banks pre 2007?

See: who is to blame for great recession

Would the great recession have been worse?

Yes:

  • if UK had been in EURO.
  • If UK had not pursued expansionary fiscal policy in 2009
  • If Bank of England had not pursued expansionary monetary policy

Was the great depression caused by reckless government borrowing under Labour?

uk-national-debt

In 2007/08, UK public sector debt was close to the lowest level achieved since before the First World War in 1914.

See also: Government debt under Labour

Note debt levels in 1945, when Labour introduced NHS, welfare state and nationalised key industries!

Is reducing the budget deficit an important economic objective – when the economy is recovering from recession?

Reducing debt may be an important political objective. But, ironically, many economists feel that reducing deficits (through austerity) can be counter-productive.

Why is austerity so politically popular, when so many economists state it is damaging?

What is the economic impact on immigration on the UK economy?

Many benefits for tax revenue, labour supply, economic growth and reducing debt to GDP. Though it does add to the added pressure on housing market, congestion and transport.

See: Economic effects of immigration

Economic record of the coalition

 1. Economic growth

real-gdp-growth-00-14-trend-line

Economic recovery – better than Europe.

Recovery came, but did period of austerity in 2011 unnecessarily delay the recovery? Should the recovery have been much stronger? Have we permanently lost output? Austerity pros and cons

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Effects of Zero inflation on Aggregate Demand (AD)

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Readers Question: I was really hoping you might be able to inform me of the effects that zero inflation (which the UK is currently experiencing) might have on aggregate demand in the economy?

Firstly, this post will help consider the impact of zero inflation on AD and economic growth  – Is zero inflation a good thing?

To add a few things to this. Let us look at an AD curve

Aggregate Demand Curve AD-curve

If we look at an aggregate demand curve, we usually assume that a lower price level causes a movement along the AD curve (and higher AD).

Therefore, zero inflation should, in theory cause higher AD. The AD curve is sloped like this because:

  • A lower price level, ceteris paribus, gives consumers more disposable income. Assuming constant nominal wage growth a fall in the inflation rate, will give consumers more income, and so they will be more willing to spend.
  • A lower price level will, ceteris paribus, make UK goods more competitive and therefore encourage UK exports (X is a component of AD)
  • At a lower price level, interest rates usually fall, encouraging more spending (see effect of lower interest rates.)

However

  1. This simple model of AD – plotting Price Level (PL) and National Income (Y) is an over-simplification. We talk about a lower price level, when often we mean just a fall in the inflation rate. I’m often uncomfortable with this model that slips in between price level / inflation rate. But, for A – Level economics at least, we don’t make the model more complicated.
  2. The UK has seen a fall in the inflation rate to zero, but this fall in the inflation rate has occurred in many other European countries (some EU countries have experienced outright deflation), therefore the UK has not seen a big boost to competitiveness, and we would not expect a big rise in export demand as a result of zero inflation. Furthermore, the European economy is sluggish, there is weak export demand – even if we were more competitive.
  3. Interest rates have been at 0.5% since March 2009, so with this fall in inflation to zero, monetary policy has effectively become tighter – real interest rates have increased.

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Dealing with a shortage of lorry drivers

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lorry-overtake-cyclist

Despite high unemployment in the UK, there is a shortage of LGV drivers and it is estimated that the UK will need an extra 150,000 drivers by 2020.

lorry-overtake-cyclist

In Nottinghamshire, it is estimated that for every nine vacancies there is only one qualified candidate. (link)

The average age of a (LGV) Large Goods Vehicle driver is 53. Only 2% of drivers are under 25.

Regular readers of this blog will know that I tend to favour green transport – Bicycles, freight by rail, solar power, higher taxes on petrol e.t.c. But, I also know that 99% of the goods that I buy are delivered by LGV vehicles. Lorries are an essential part of the economy – almost as important as perhaps coal miners were in the 1960s and 70s. If one section of workers could bring the UK economy to a standstill, it is LGV drivers.

Why Shortage of Lorry drivers?

1. We don’t value vocational careers / qualifications. Young people don’t see a career in logistics as a long-term career. As a society, we tend to place less value on non-academic qualifications which are essential for the economy.

2. Lack of funding for driver training. It costs £3-£5,000 to gain the necessary qualifications to become a LGV drivers; and only 50% of applicants pass the test. This seems a lot. (Here the Daily Mail blames the shortage of lorry drivers on the EU Regulations which require good driver training – the mandatory Certificate for Professional Competence.)

But, compared to the cost of a three year university degree, training for LGV training is a fraction of the price. (BTW: Given the importance and potential danger of driving LGV vehicles, it is quite right we have very high standards. EU regulations could save lives. The problem is that as a society we are happy to spend £100,000 to put a student through three years of university to get a degree, but we are reluctant to spend £5,000 on LGV training.)

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Effect of falling share prices on the economy

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stock-price-cape

How do falling share prices affect the economy?

  • Lower share prices mean investors will see a fall in wealth. However, this is unlikely to influence consumption significantly. Most people who buy shares are relatively affluent; if their stocks decrease in value it doesn’t mean their consumption will suffer. Usually, people who buy shares see it as speculative investment.
  • Nevertheless, if the fall in shares is prolonged it will have a small effect in reducing consumer spending.
  • In the long term, lower share prices will harm investment trusts and pension funds. This could leave people with lower pension payouts. However, this is very much a long term factor.
  • More difficult to raise finance for investment. Some firms use the stock market as a way to raise finance for investment. If share prices fall, it will be more difficult to raise equity through share issues and so it could reduce investment. However, this is only a relatively small influence on investment levels.

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How to create equal opportunities

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relative poverty

Readers Question: How can we make sure children have equal opportunities? Equal opportunity means that all young people have a fair chance to succeed in life. Equal opportunities mean that wherever you are born in society, you would still have a good chance to reach any job, profession or position in society. It should mean …

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Fall in Euro

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Recently, the Euro has fallen from 1.5 Dollars to 1 Euro in 2011 to near parity in March 2015.

Fall in Euro

The fall in the value of the Euro has been very steep in the last six months.

This is a very significant depreciation in the Euro, and primarily reflects the greater economic weakness in the Eurozone. Related to the economic weakness, is the decision of the Eurozone to recently begin expansionary monetary policy (quantitative easing).

Why the Euro is falling

1. The ECB are embarking on Quantitative easing – the creation of money to purchase government bonds. Quantatitive easing tends to reduce the value of a currency because:

  • This increase in the money supply tends to reduce the value of the currency (greater supply tends to reduce price.)
  • Q.E raises expectations of higher inflation  – higher inflation tends to reduce the value of a currency because it will become less attractive to buy EU goods.
  • Also purchasing government bonds will reduce bond yields in Europe, making it less attractive for private investors to save money in the Eurozone – you get a lower return on Eurozone assets. Investors would rather save in US assets, where interest rates are more likely to rise and you will get a better rate of return.

2. General weakness of the Eurozone economy. Some analysts believe that EU’s quantitative easing maybe a case of too little too late; they believe Q.E. in Europe may actually have a quite limited effect. This is due to two factors:

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Snob / Ostentatious Good

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snob-ostentatious-good

Readers Question: What is the name of a type of good that only has value to someone if no one else possesses it? A snob or ostentatious good is a good where the main attraction is related to its image of being expensive, exclusive and a symbol of social status. These goods will have restricted …

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Was Britain better off in 1914?

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Readers Question on Debt and GDP Readers Question: OK so the debt to GDP looks manageable when it is compared to the figure during the world wars but : Q1. how do you calculate GDP rationally in wartime , did factories sell tanks to the army, were soldiers and workers paid commensurately for their labour ? GDP …

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