To what extent can the government help boost domestic industry and manufacturing?
In recent weeks, several politicians have talked about their desire to help UK manufacturing and boost industrial production. It may be a noble endeavour to try and boost UK industry and rebalance the economy away from financial services to manufacturing. But, how practical is it for the government to actually boost manufacturing output?
Can a government halt the long-term decline of UK industry?
The main ways governments might be able to help industry could include:
How much is the internet helping to increase productivity? Do distractions like Facebook and Twitter mean the overall benefits of the internet are less than we might hope? How does the internet compare to other technology revolutions, such as stem power and electricity?
I often work from a cafe. It’s a nice combination – good Italian coffee, a bit of caffeine and writing becomes quite enjoyable. At a cafe, there are less distractions that at home – no telephone to answer, no door-to-door canvases to politely turnaway. The growth of the internet and the laptop has enabled more people to work away from home and really work anywhere. Working from the comfort of a cafe is one of the brave new world of flexible working practises. When I go to a cafe, I always see quite a few other people of this new generation of laptop workers.
I’m not a nosy person, I wouldn’t want to look at what other people were working on. But, sometimes, you can’t help but glance at a screen. The funny thing is that when ever I see a screen, it nearly always seems to be Facebook! I have no idea what people do on Facebook (I don’t have an account). But, my theory is that if you take a random look at a laptop, 50% of the time people will be logged on to Facebook. So are all these laptop workers really increasing their productivity by working from home?
This ‘survey’ is hardly scientific. But, it’s ironic that a new technology like the internet has given so many opportunities to increase productivity, but at the same time given so many opportunities to decrease productivity.
When Henry Ford made use of the assembly line, he enabled a huge growth in productivity through exploiting economies of scale, but there was no real downside. True working on an assembly line can become boring and there is a danger of reducing worker morale, but the assembly line doesn’t give an infinite supply of distractions like funny cat photos or instant messaging from people you went to school with 20 years ago. The assembly line is pretty much a one way conveyor belt to increased productivity. The internet, by comparison is a different kettle of fish.
Through using the internet, you can find information much quicker than the old method of going to a library and handing in a request to the librarian. It has enabled more data to be made available that previously was unavailable.
But, the problem with having all your information at your finger tips, is that there are innumerable distractions. Bored with researching UK inflation? well there are plenty of more entertaining things to pass your time. Before you know it, hours can pass and the original intention of working has been lost in a sea of innumerable videos, links and comments.
In the good old days, you would go to work in a library. If you got bored you could stare out of the window or perhaps make a paper airplane to throw out of the window, but now when you go to work, you can be inundated with numerous distractions and temptations.
How much is the internet actually increasing productivity?
In the past few years, we continue to make huge technological strides. The price of laptop computers continues to fall, whilst their power increases. Yet over the past few years, labour productivity statistics in countries like the UK and US have been mostly disappointing.
Readers Question: I wanted to ask if it is necessary to include some facts, figures or information about what is really going on in the world. I am not really sure about it. I’ve seen my friends include details like the National Income figure of some countries or mention recession and what is really going on in the world to illustrate their answers.
As an examiner, I can say it is possible to get full marks without remembering data from the real world. It is certainly not required.
However, having said that, I think a good student should have a reasonable background on the main trends which the economy has been experiencing. e.g. if you don’t know the UK has experienced a recession in the past few years, then this is a limiting factor. You don’t need to memorise the fact GDP fell 6% in 2009, and recovered by +0.6% in Q2 2013 – this kind of detail is not expected (I can’t always remember off the top of my head.)
I remember one A-Level question (2007): Explain the trends in UK unemployment in past 10 years. – If you didn’t know unemployment had fallen in the years 2007-1997, you would struggle. You don’t need to remember any exact figures like the unemployment rate, but you should be aware of the main trends.
As a teacher, you also tend to find there is a very strong correlation between students who take an interest in the real world economy and those students who get good grades. I think this is for a few reasons:
If people take time to read about what is going on in the economy, they are very likely to spend more time understanding the theory too.
One of the best ways to learn theory, is to read what is happening in the economy and relate it to the material. I remember as an A-Level student, I always got mixed up about the effects of a devaluation. But, because I read newspapers, I could always remember that when the Pound fell, exporters were generally happy. So I could check that I was writing a devaluation makes exports cheaper and increases the quantity of exports.
Using examples from the real world can make an answer much stronger. For example, if you have a question:
– Discuss the effect of an interest rate cut
A satisfactory answer would say lower interest rates should increase spending and AD because borrowing is cheaper. But, if you know about the UK economy, you could add for evaluation:
However, a cut in interest rates doesn’t always stimulate higher economic growth. When the Bank of England cut interest rates to 0.5% in 2009, there was little increase in spending. This was because consumer confidence was low, therefore, although interest rates were zero, we didn’t see much increase in investment and spending because people still preferred to save. Also, a cut in interest rates will not have much effect if commercial banks don’t pass the interest rate cut on to consumers. In 2009/10 many banks didn’t pass the full base rate cut onto consumers.
According to Search marketing agency the Eword, Google hold 89.5% of the market share for internet search in the UK.
Bing (owned by Microsoft) taks only a relatively small 6.11%.
For such an important market, this is a very high market share, and shows Google has extensive monopoly power. This monopoly power has also been maintained for several years. In 2007, Google’s market share was actually lower at 79%
Market share of Google 2007
What enables Google to maintain Monopoly power?
To maintain monopoly power of 89%, there need to be significant barriers to entry.
Economies of scale? Typically, a firm with such market share, is likely to be a natural monopoly, with very high fixed costs and economies of scale. However, in the case of search engines, this does not seem to be the case. Clearly, there are some economies of scale. Google’s dominance enables them to invest almost unlimited funds in improving their search. However, these economies of scale are not insurmountable. In theory, set up costs are relatively low. It’s not like building a network of railways or pipes across a country. It’s the kind of industry, where if you get the right people and right formula you can be as good as a much bigger firm.
Readers Question Why did bond yields in the USA rise at news of the Fed Tapering back in August?
The Federal Reserve has been engaged in a policy of quantitative easing. This involves:
Creating money electronically
Using this created money to buy assets, such as government bonds.
The aim of quantitative easing is to stimulate economic activity – increase economic growth and avoid inflationary pressure. QE aims to stimulate economic growth through increasing the money supply and reducing interest rates in the economy.
When the Fed buys bonds, the greater demand pushes up the price of bonds.
However, with an increase in the price of bonds, the bond yield falls.
With the Federal Reserve buying bonds, other investors are also keener to buy bonds. The Fed is pushing up the price of bonds so whilst this is occurring other investors may be encouraged to also buy bonds and benefit from the rising prices.
Fed Tapering
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.
A decision that the Fed would be beginning to end quantitative easing, will encourage investors to start selling bonds.
If the Fed stops buying bonds, the price is likely to stop rising; and if quantitative easing is reversed, bond prices could fall. This expectation of falling bond prices will encourage investors to sell. Markets are always trying to anticipate future movements. Therefore, even a weak signal that bond purchases may start to be tapered was seen as a signal that now would be a good time to sell bonds and move into something else.
As bond prices fell, the yield started to rise (the inverse relationship again)
The UK housing market always provides something to write about. Just when you thought house prices were already too expensive. It looks like the government’s second phase of ‘right to buy’ could push up prices even more.
The scheme allows buyers to purchase a property under £600,000 with just a 5% deposit. The government have brought forward the scheme. In anticipation traffic to Zoopla, a popular property search website, immediately jumped 17% compared to a week earlier. Whilst demand is rising, the number of properties listed has fallen 14% compared to last year.
The fear is that the surge in demand for limited houses could see a return of the phenomena of ‘gazumping’ This occurs when you’ve nearly bought the house, but someone comes in at the last minute to bid a higher offer. It is a particular weakness of the UK housing market. You are most vulnerable to gazumping when price rises are very high. It can take a long time to complete the paperwork – solicitors, surveyance e.t.c. During this time of getting documents ready, if housing is in a short supply, some may be tempted to offer a higher bid.
Should we help people to buy a house?
From a personal perspective, I was grateful to get a little help from parents to buy a house in 2005. With a deposit, I was able to get a mortgage that was many times income (I dare not admit how much) It is better than renting for the rest of my life. I can definitely understand the personal aspiration to buy a house rather than rent.
But, from a macro-economic perspective there does seem something very short sighted about a scheme that helps to increase the availability of credit to buy already over-priced houses. The scheme will do little to help improve the availability of supply, it will only increase demand and push prices higher. It may not cause a boom in house prices. At the moment, the economy is still weak. But, it will continue to artificially inflate house prices, and that is damaging for the economy in the long-run. Why should we subsidise home-ownership? Does home ownership have positive externalities for the rest of the economy? No, in fact the reverse.
Readers Question: National debt is now extremely high. However aren’t there different kinds of debt e.g that which funds current spending, that which funds investment in infrastructure and emergency (bank bail out etc) Surely it’s the first we should really be worried about and less concerned with borrowing that makes the economy more efficient such as infrastructure
1. ‘National debt is now extremely high.’
But, is national debt extremely high? In one sense, a public sector debt of £1,193.4 billion is very high. But, if we compare national debt as a % of GDP (which is most meaningful comparison) over the past 100 years, it is significantly lower than between the 1920s and the 1970s. The increase in national debt we have seen in the past few years, is partly a reflection of the recession and rise in cyclical borrowing. In a recession GDP falls, but tax revenue also falls and government spending increases. If the private sector cut back on spending in a recession, it is helpful to the economy for government borrowing to rise temporarily.
If you look at the cost of servicing national debt (interest payments as % of GDP) it is also relatively low. The cost of debt interest payments as a % of GDP was significantly higher in the 1980s.
2. aren’t there different kinds of debt
Not really. When selling bonds, the government doesn’t distinguish between the use of the government borrowing. However, we can split debt up into
Structural deficit – the level of borrowing that would occur if the economy was operating at full capacity (i.e. ignoring borrowing as a result of the recession)
Cyclical deficit – the level of borrowing that has occurred as a result of the economic downturn.
Resale price Maintenance RPM used to be a common practise for manufacturers to set a minimum price for retailers to sell their goods. In the UK, the use of RPM was quite common in the post-war period from clothes to books, records, clothes and electronic goods. It ensured a minimum price of resale and avoided price competition. However, in recent years it has rapidly disappeared from the UK economy.
This post was inspired by Robert Peston’s BBC documentary – Robert Peston goes shopping because it reminded my how common RPM used to be.
The logic of resale price maintenance is that:
It helps retailers to be more profitable. Manufacturers may like this as they feel that if they keep retailers profitable, then retailers are more able to keep selling their goods.
It prevents damaging price wars with retailers under-cutting each other in a race to the bottom.
Provides support for smaller retailers, who cannot buy in bulk, to remain profitable. For example, small bookshops benefited from a RPM for books because they can’t benefit from purchase economies of scale. Since the removal of RPM on books, many smaller independent retailers have gone out of business, losing out to large scale distributors like Amazon.com
It enables manufacturers to reward shops who promote their product through advertising. It also enables manufacturers to invest more in future products. For example, since the end of RPM in books and music, the industry claims it has lost some types of investment in music production and in the promotion of authors.
RPM can also reward firms who provide a high quality of personal service. For example, without RPM, consumers can take the free advice of knowledgeable sales assistants and then go and buy online from a cheaper provider. In effect the online retailer who doesn’t offer any service is free riding on the ‘bricks and mortar’ shops who can offer a personal service.
Consumers don’t have to waste time searching around for the best deal. They know the price will be the same where-ever they buy it.
Criticisms of RPM
It artificially inflates prices, leading to a decline in consumer surplus and gives consumers less discretionary income to spend on other goods. It is allocatively inefficient as the price is likely to be above marginal cost.
