Ireland economic growth since the crisis
Source: OECD Stats Economic outlook no.92 Dec 2012 | Accessed March 2013 (2014 e)
Ireland GDP at constant market prices
Ireland economic growth
The recession is over but not the depression
Some thought provoking analysis from NIESR. Firstly, they define recession and depression in an interesting way.
- Recession – a period of time where output is falling.
- Depression – The period of time where output is below it’s peak.
The UK economy is now growing, at a decent pace (0.8% in Q3). However, output is still significantly below the old 2008 peak. This means that the recession is over. But, with output still below the 2008 peak, the prolonged period of depression is still not over, according to this definition.
Also, if we compare this ongoing economic downturn (2008-2013) with other periods of serious economic stagnation, the UK economy is performing worse now than even the 1920s or 1930s.
The NIERS don’t expect the 2008 GDP peak to be regained until 2015. Meaning, we will have a 7 year period of stagnating real GDP. An unprecedented length of economic stagnation. See also: more on comparison of different recessions
But, it doesn’t feel like a depression?
There are no commonly agreed definitions of what constitutes a depression. Most definitions tend to emphasise a significant fall in real GDP or a prolonged fall in GDP for a period of over 3 years. For example, if real GDP falls by over 10%, that would be classed as a depression. A depression also implies a very high rate of unemployment (perhaps greater than 15%).
The UK unemployment rate is relatively low by the standards of other recessions (helped by falling productivity and flexible labour markets) Therefore, with economic growth, and ‘reasonably’ low unemployment, it feels a different climate to the great depression of the 1930s.
On the other hand, although unemployment could be much higher, there has been a widespread fall in living standards, which is unprecedented in the post war period. Figures show UK living standards have dropped to their lowest in a decade after average real incomes fell a further 3 per cent last year.
Tapering and the effect on interest rates
Readers Question: As the FED is talking about tapering and at the same time keeping interest rate low. How can they both go together? Tapering will raise yield as bond prices go down in absence of any freak buying. And interest rate will chase yield this causes interest rate to climb up.
Fed Tapering means that the Federal Reserve will begin to stop buying bonds, and no longer continue to create money and buy bonds. This tapering could also be seen as a preliminary to reversing quantitative easing and selling the bonds that have been accumulated.
Even a suggestion they begin to taper did cause bond yields to rise. See: Why Fed Tapering causes bond yields to rise
Different interest rates
It is important to bear in mind there are different interest rates in the economy.
- Discount rate – set by Federal Reserve
- Federal Funds rate – short term interbank lending rate, influenced by open market operations of the Fed.
- Long term bond yields. – Effective interest rate on 10 year Treasury bonds.
Discount Rate
The Federal Reserve can change the discount rate (see: Federal Reserve discount rate). This is the rate that the Fed charges commercial banks to borrow directly from the Federal Reserve. This is a short-term interest rate because commercial banks borrow from the Federal Reserve to meet temporary shortfalls in their cash flow.
The Federal Reserve discount rate is currently 0.75% (link)
This Federal discount rate does influence other interest rates in the economy. If commercial banks find the discount rate has increased, then they are likely to increase their interest rates on loans to consumers. If commercial banks see the discount rate has increased, they tend to increase mortgage rates. Therefore, the Federal Reserve can influence other bank rates.
It is a similar situation in the UK. The Bank of England change the base rate. This base rate usually has a strong influence on other bank rates in the economy.
Effective federal funds rate
Another important interest rate in the economy is the effective Federal Funds Rate – see FEDFUNDS. This is the short-term inter bank lending rate. It is influenced by the Fed discount rate, but also the willingness of banks to lend to each other. It is also, influence by the Federal Reserve’s actions in open market operations. The FED has a target for the Federal Funds rate. When the Fed starts to sell bonds, you would expect this to depress the price of bonds and push up the Federal Funds Rate. With the Fed currently buying bonds, this has pushed up bond valued and decreased interest rates.
Economics of Scottish Independence
A look at the pros and cons of Scottish independence from an economic perspective.
It is said you can’t put a price on freedom and cultural identity. But, when it comes to independence, economics seems to be one of the biggest factors to sway voters in Scotland. When asked in a poll, only 21% favour Scottish Independence if it leaves them £500 a year worse off. Only 24% favour retaining union with Britain if it leaves them worse off. (Economist)
Benefits of Scottish Independence
- Oil and Gas Reserves in the North Sea are potentially a lucrative source of tax revenue and this has become more profitable with higher oil prices. According to the Scottish government, Scotland represents 8.4 per cent of the UK’s total population, but they generate 9.4 per cent of its annual revenues in tax — equivalent to £1,000 extra per person. (link) However, with dwindling reserves, income from oil and gas may dry up in future years.
- Independence may give freedom to set low corporation tax rate and attract business from overseas.
- Reform of tax and welfare system. Crawford Beveridge, chairman of the Scottish Fiscal Commission, claims that smaller countries, such as Ireland and New Zealand have considerable success in collecting tax. He argues an independent Scotland could scrap 1,000 tax exemptions and make the tax system simpler and encourage greater work incentives. “The UK tax system is complex and costly, and does not fully reflect the unique characteristics and needs of Scotland. There is considerable room for improvement in its design and operation.”
- Some argue that independence might increase self-confidence of the country, attracting more business and tourism. It may enable Scotland to have a stronger brand loyalty for its traditional exports like whisky and tartan kilts.
Costs of Scottish Independence
- Would lose ‘subsidy’ from Westminster. Scottish people get around £10,212 spent on them every year by the UK government, compared with around £8,588 — £1,624 less — for people in England. Independence may make it more difficult to maintain this spending. Independence may end some of the generous subsidies in Scotland for university education, trains and health care. However, this Scottish ‘subsidy’ is controversial as oil and gas revenues help give a Scotland bigger (£1,000) per capita tax revenue (New Statesman)
- Debt Levels. After independence, UK debt levels would be share on a per capita or per GDP level. This would leave Scotland with a national debt of £80bn and growing. Although debt would be split according to the respective GDP, the recent experience of smaller countries on the Eurozone periphery mean that Scotland may struggle to meet debt payments
Did the government use the right policies to reduce the budget deficit?
Readers Question: Do you believe the Coalition Government has used the right macroeconomic policies with regards to reducing the budget deficit? No. I’ve written a few times that I believe the coalition government made a big mistake in prioritising deficit reduction over economic recovery in 2010. The consequence of trying to reduce the budget deficit …
Inflation – Unemployment Relationship
A look at the relationship between inflation and unemployment and whether there is a trade off as suggested by Phillips Curve.
Externalities and the free market
Readers Question: I understand “externalities” and why certain economic actors will tend to dispute the scale/existence of them. What about the complementary idea, of benefits conferred by many societies which are centrally planned and financed (roads, defence etc.)? Libertarians of any political stripe may downplay/deny their importance though benefitting. My question: is there a technical term for all this? “Internalities” would be logical. Some of these are easier to perceive and defend than others. Roads are “good”. NHS more controversial. Hardest to define, benefits of a society which is liberal, promotes trust, provides robust safety net etc. Thanks, Mark
I’m sure most economists would accept the existence of externalities, both negative and positive. If there are negative and positive externalities, there is a clear argument that this will lead to market failure. For example:
I would argue that health care is a clear case of a service which has a strong positive externality. If you look at standards of public health in the Ninenteenth Century, death rates were much higher. It is in everyone’s interest to provide a minimum level of public health because everyone benefits. If you have a situation where people catch infectious disease because the free market has failed to provide decent sewage or vaccination, everyone is more susceptible to catching infection too.
Solution to Externalities
The solution to externalities may differ. I’m not too aware of extreme Libertarian ideas because I find it difficult to take them too seriously. I know the presidential candidate Ron Paul argued there was no need for public health care because in the absence of government, local communities would chip together to offer local charitable provision.
A libertarian may also argue, that even if there is a theoretical case for government intervention to overcome market failure, the government should still nothing. The argument is that the costs of government intervention (such as incentive reducing income taxes), poor information, and the ‘inevitable’ government corruption will always outweigh the benefit.
Personally, I don’t accept this idea. Health care workers, such as nurses and doctors don’t become inefficient because they are working for the government NHS rather than a profit making health firm. In fact, perhaps the opposite.
The depth of the European recession
Interesting graph which shows the depth of the EU recession compared to the great depression of the 1930s.
UK recession compared
This graph is from the start of 2013. Since, then the UK economy is showing signs of picking up. But, it is still worth bearing in mind the length of the decline in GDP since the start of the recession.
Comparing different recessions
For the first 15 months, the decline in real GDP is comparable to the great depression of the 1930s. The great depression shows a bigger fall in GDP (-8.0%) from peak. But, during the 2008- recession, GDP stagnated the longest.