The monopoly power of Amazon

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In the late nineteenth century, firms with great monopoly power were the US railroads and oil companies. These days we have a new set of monopolies, companies like Google, Amazon.  For example, Amazon has over 30% of the online retail of books and DVDs.  Also, a firm with a monopoly selling power like Amazon can often create monopsony buying power. If you are an author, there are only a limited number of firms who will take your e-book and sell it for you. Given the little choice of firms to retail your product, puts authors and publishers in a weak position, meaning Amazon can dictate the amount they pay to authors – especially small independent authors.

Amazon market share of books in US

If you want to sell e-books, Amazon is a dominant firm. In 2012 in the US, Amazon has 27% of the market share for selling book units (traditional and e-books). (book publisher).

Share of online books, DVDs & music

Online Books DVDs & Music Sales
Source

For online sales, Amazon’s position is greater. With online sales, rising to 36% of the market.

Market Share of e-Book sales

For sales of e-books, Amazon’s share of the market is 60% in 2012 – (down from 90% in 2007). (link) Apple has 10%, and Barnes & Nobel 25%.

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Why is the stock market doing well when the economy is doing badly?

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Readers question: Why is the stock market peaking when the economy is doing badly? There is an old saying that the stock market has predicted 10 out of the last three recessions. Similarly, you could argue the stock market has been predicting several recent economic recoveries which haven’t really materialised. How to explain why the …

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Impact of fiscal consolidation on debt levels

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In recent years, I’ve frequently stated that fiscal consolidation can actually increase debt levels. It may seem a paradox because fiscal consolidation aims to reduce the budget deficit by increasing taxes and cutting spending. Yet, under circumstances, policies to reduce debt levels can actually cause a rise in debt to GDP. This seems to be …

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The bizarre logic of deficit reduction increasing UK growth

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The Prime Minister has got into a bit of pickle by trying to maintain the view that deficit reduction policies have not reduced economic growth, and in fact have had the opposite effect.

“They (are) absolutely clear that the deficit reduction plan is not responsible (for low growth); in fact, quite the opposite.” (link)

There is an economic logic to arguing that given the size of  the UK budget deficit, the government need to consider policies to reduce it. Economists will disagree over the timing of deficit reduction. Some economists argue that the deficit shouldn’t be reduced whilst we are still in a recession. Others may argue, we have no luxury of waiting.

I favour the former view that recovery should come before austerity. But, I can at least understand the argument that we should cut the deficit now. However, what I can’t understand is the belief that if you cut public spending in the middle of a recession, that it will have not have some negative impact on economic growth – and in fact spending cuts will have the opposite effect in boosting economic growth. It is really a bizarre logic to hope that cutting spending at the present time will increase economic growth. With falling output, falling construction output  there is no evidence of any ‘crowding in’ in the UK economy. There is however plenty of alternative evidence, e.g. IMF reports, that austerity has caused a negative multiplier effect and reduced growth.

I wonder if there are any economists who really believe that cutting government spending during a period of private sector deleveraging will actually increase economic growth? If David Cameron wrote an A-level essay on ‘discuss the impact of a fall in government spending’ – he would really struggle to get an E grade, and would probably fail.

Has the UK responded to news of public sector wage freezes and lower government spending by rejoicing at the planned reduction in the budget deficit and gone on a spending spree to celebrate?

UK consumer confidence

The impact on confidence has been the opposite. Relatively minor spending cuts have created pessimistic expectations. There has been no confidence fairy miracle. As you would expect spending cuts in an already depressed economy have further reduced real GDP.

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Universal Credit – how it works and criticisms

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Universal credit is a new means-tested benefit, which, in October 2013, will replace several different means-tested benefits, such as: income-based Jobseeker’s Allowance income-related Employment and Support Allowance Income Support Child Tax Credits Working Tax Credits Housing Benefit. The aim of universal credit is to provide a simplified means-tested benefits system, which provides income to those …

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RPIJ – a new inflation measure

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For those who like to keep track of the myriad different rates of inflation, the ONS will shortly be publishing a new measure – RPIJ.

  • RPIJ will be basically RPI, but calculated in the same way as CPI which uses a geometric mean.
  • CPI = official household inflation measure (CPI) – calculated using a geometric mean.
  • RPI = CPI + Mortgage interest payments and council tax. RPI is also calculated using an arithmetic mean. (The RPI doesn’t mean international standards for calculating inflation.)

gap-between-rpi-cpi

RPI is traditionally higher than CPI. The DWF state since its introduction in 1988, the RPI has averaged 0.73% more than the CPI which is mainly attributable to the “formula effect”. Some argue, because of the way it is being calculated, the RPI is over-estimating inflation. However, with pensions often linked to RPI, changing the way it is calculated could lead to lower annual increases in pensions. Therefore, the decision was taken to introduce a new measure RPIJ and keep the old measure RPI going.

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Italy hopes to leave austerity behind

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After a rather lengthy post on evaluating EU fiscal rules, a more immediate and simple political criticism of the EU’s general austerity policies from Mr Bersani of the Italian Democrats (Pd). The new Italian political leader has argued: “We must leave the austerity cage,” “A change of course is absolutely necessary given that five years …

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EU Fiscal rules – economic issues and problems

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In 2012, the EU introduced a new form of its growth and stability pact. The main rules for EU fiscal policy are:

  • Total Government debt must not be more than 60% of gross domestic product;
  • The Government deficit must not be more than 3% of GDP except in particular circumstances.

Excessive Deficit Procedure EDP

If a country breaches these rules, it becomes subject to the Excessive Deficit Procedure EDP. This means that the country in question is subject to EU surveillance and must comply with EU decisions on how to deal with the high debt. The country then has to meet medium term budget requirements to reduce deficits. If countries fail to make satisfactory progress, they can be given financial penalties, (‘e.g. an interest-bearing deposit of 0.2% of GDP will be imposed on non-compliant euro-area countries’.)

Countries undergoing EDP

Currently 23 out of 27 EU countries are considered to have excessive debt and are subject to EDP.

For example, Ireland has been given until  2015 to meet the deficit requirement of 3% of GDP.   Ireland has until 2018 to meet the debt requirement of 60% of GDP. (Current EU rules)

 

Reasons for Fiscal Rules

  1. Overcoming political resistance to spending cuts. Politicians often have an incentive to allow higher short term budget deficits and ignore the long-term consequences. Fiscal rules put pressure on governments to stick to fiscal responsibility. The EU would say the constitutional fiscal rules reduce the political cost of unpopular decisions.
  2. Lower bond yields. In 2010-12, the Eurozone was hurt by rising bond yields, as markets feared the liquidity of Eurozone nations. If countries stick to fiscal rules, markets will have more confidence that borrowing will be sustainable and the Eurozone will not see the expensive rise in bond yields, which increase the cost of interest payments.
  3. Single currency makes fiscal rules more important. Countries in the Eurozone cannot rely on an independent Central Bank to print money and buy bonds, therefore fiscal responsibility becomes more important. Some argue these fiscal rules are the first step towards fiscal union.

Problems with Implementing fiscal rules

  • Most countries are exceeding these fiscal rules, and to comply with the rules, European governments have had to adopt strict austerity measures to try and achieve the target. This involves cutting government spending and increasing taxes. The consequence of this deflationary policy aiming at deficit reduction has been to cause lower economic growth and rising unemployment.
  • Lack of alternative policies. Countries pursuing fiscal austerity, in the Euro, have not been able to adopt other macro-economic policies to stimulate demand. Eurozone countries have not been able to devalue or promote expansionary monetary policy. Therefore, there are several factors reducing demand all at once. A country like the UK, at least as its own monetary policy to offer some stimulus.

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