Government Intervention.

Here are some examples to practise your chains of analysis and evaluation skills with regards to government policy and market failure.  Do not forget that intervention can result in government failure.

  • subsidies e.g. the bio-fuel debate or subsidies for industries affected by globalisation
  •  indirect taxes e.g. environmental taxes or taxes designed to curb demand for / consumption of de-merit goods
  • the introduction of competition into a market e.g. postal market liberalisation
  • an increase in government spending on public goods and merit goods such as flood defence schemes, free entry to museums and galleries
  • different strategies designed to reduce income and wealth inequality e.g. the national minimum wage or a rise in the top rate of income tax
  • the introduction of carbon trading as a way of reducing CO2 emissions
  • different policies designed to reduce unemployment e.g. comparing the effectiveness of investment in training with an employment subsidy for the long term unemployed
  • major infrastructural projects such as new motorways, London 2012
  • a decision to relax planning controls on new house-building

Looks like I’ll have to sell my other Ferrari!

ownership of cars limited

To reduce the negative externalities brought about by private transport, Kuwait plans to adopt a new policy limiting the amount of cars a household can own. The ‘genius’ (and there’s quite a bit of sarcasm here) solution that they’ve come up with is to limit the amount of cars a Kuwaiti can own to two, and an expat to one. Surely if they were truly looking out for the future generations, they would have it the other way around – it is the expats who need to be allowed the greater number of cars so that they’re able to drive to work, and do the jobs that the Kuwaitis cannot, and do not want to, do. The Kuwaiti Government plans to tax expats owning more than one car a fee of 100KD, but whether this is a one-time thing or not remains to be determined.
Kuwait is home to 2.2 million foreigners, making up two thirds of the country’s population. Of those foreigners, the ones who don’t own cars, or more than one car, are most likely to be unskilled workers and domestic helpers. Therefore, the tax burden will fall primarily on the skilled labourers, and should they decide to relocate,  the consequences of this brain drain could be very damaging to the Kuwaiti economy. But Kuwait’s got oil and money, so yolo.

(PS – since I haven’t heard a whole lot about this, I’m not sure how reliable the article is. Still, even if it isn’t true, it’s still something to keep in mind when answering a question about policies to reduce negative externalities of private transport; the evaluation part will be a breeze.)

Deck the halls with Macro Follies!

With the holidays around the corner… 🙂

Each year, our attention turns to the holidays… and to holiday consumer spending! We’re told repeatedly that, because consumer spending is 60 – 70 percent of measured GDP, such spending is vital to economic growth and job creation. This must mean that savings, the opposite of consumption, is bad for growth.

This view of macroeconomics was first popularly asserted by Thomas Malthus in 1820, nearly 200 years ago. Malthus believed recessions where caused by “underconsumption” because there was a “general glut” of goods unsold. To recover from a recession and grow, we needed to stop all the saving and spend more to buy up all the goods on store shelves. Savers are like the miserly Ebenezer Scrooge. If you want a happy holiday, you’ve got to clear those shelves and give people a reason to produce more and create jobs. Or so Malthus thought…

John Maynard Keynes resurrected this approach and built on it with his influential “General Theory”, which now underpins much of our government policy and public discussion of spending and economic growth. Keynesians believe aggregate spending drives the economy and savings is a “leak” out of the flow of spending. Indeed, this economic philosophy underpins many people’s widespread obsession with retail sales each holiday season. Keynesian Macro Santa’s sack is filled with spending.

But there is another view on recessions, recoveries and growth.

Classical and Austrian economists such as Adam Smith, Jean-Baptiste Say and Friedrich Hayek viewed savings as the vital lifeblood of economic growth and production as the means by which we live better and consume more in the long term. Our savings aren’t simply taken out of the economic system, but become the source of capital that entrepreneurs use to create new goods and increase productivity. These economists believe this increased productivity is the key to a wealthier world. Before we consume, we must effectively produce what others value — at prices that cover the costs. This fundamental idea, that our demand for goods is enabled and constituted by our supply of other goods came to be known as the “Law of Markets” and later “Say’s Law”. For classical and Austrian economics, recessions happen when producers make mistakes. They create goods that can’t be sold at a profit. These malinvestments tend to cluster in a recession as a result of systematic problems, such as disruptions in the financial system that cause monetary “disequilibrium”, often as the result of government interventions in the economy since they can be system-wide.

Recovery and growth in the classical and Austrian view is driven by restructuring production so that entrepreneurs discover again the best — i.e. the most valuable and sustainable — ways to serve customers. That process is lead by new entrepreneurs and driven by savers who make capital available to fund new investments and new ventures. Sustainable saving and investment means creating more value for others while using fewer resources. This process lies at the core of healthy economic growth, including better job opportunities and a rising standard of living. If there are problems in the financial system such that our savings aren’t effectively being invested but sitting idle in bank vaults, or people are hoarding cash under their mattress in distress, a classical approach seeks to get the root of that problem and resolve the monetary problems with monetary solutions such as increasing the money supply to meet demand and other approaches. Using up more real resources through additional consumption in such a case is a applying the wrong medicine to the disease.

Consuming is our end goal, but producing value must be the means to that end. That is to say, Macro Santa’s sack is filled with saving…


Germany and the Minimum Wage

Until November 2013, a minimum wage in Germany did not exist yet unemployment was low, the economy strong; and German workers were renowned for strong job protection- perhaps this could mean a minimum wage is not entirely necessary. However the non-existence of a minimum wage led to some employees being paid terribly low wages; and this surely is a sign of inequality and hence market failure. Also, if a minimum wage did exist to prevent this, should wages be negotiated between workers and their industries or should one wage be set to cover all workers? If trade union bargaining power is deemed limited, maybe a national wage would be most effective.


minimum wage

The Impossible Trinity – 60 Second Adventures in Economics

Further to our discussions in class – The Impossible Trinity. Not everything can be controlled…

The Impossible Trinity or ‘trilemma’ suggests that it is impossible for a country to maintain a fixed exchange rate, free capital movement and an independent monetary policy at one and the same time.


The Tragedy of the Commons

– Part 1 – What happens when many people seek to share the same, limited resource? – Chalk Talk – Part 2 – Are there any solutions to The Tragedy of the Commons? – Chalk Talk – For the Khan Academy enthusiasts… 🙂

 Also, you may want to check out these real-life examples of the Tragedy of Commons…

Monetary Policy. An exact science?

Further to Mashiat’s post about the MPC setting interest rates.  Mark Carney yesterday commented on how increased pressure in the housing market and falling unemployment wouldn’t necessarily cause interest rates to rise.  We know that managing the macro economy is akin to driving down the 30 in reverse, with all the windows blacked out, and a 20 second delayed reaction to braking and accelerating.   So what is the criteria the MPC consider before changing interest rates?

bank of england interest rate changes                               the governor