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Welcome to the Sloman Economics News Site. This blog contains links to topical stories in the news discussing key economic issues and concepts.

Each news item starts with an introduction to the issue. This is followed by several links to relevant news articles – some to videos or podcasts. The item finishes with discussion questions that can be used either for self-testing or for use in class.

Scroll down below to read the latest articles posted, or use the search facilities on the left-hand side to search the articles by date, keyword and your chosen textbook.

Most of the postings are by Elizabeth Jones, John Sloman, Dean Garratt, Matt Olczak, Jon Guest and Alison Wride.

We also welcome guest posts from lecturers using one or more of the books in their teaching – see the About this Site section on the left for more details.

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Insolvencies down – lessons learned?

Insolvencies in England and Wales have fallen to their lowest level since 2005, official records show. The Insolvency Service indicates that bankruptcy, individual voluntary arrangements and debt relief orders have fallen, with the largest and worst form of bankruptcy falling by 22.5 per cent compared to the same period in 2014. There has also been a fall in corporate insolvencies back to pre-crisis levels.

The British economy is recovering and despite an increase in consumer borrowing of £1.2 billion from February to March, which is the biggest since the onset of the credit crunch, the number of people in financial difficulty and living beyond their means has fallen. However, there are also suggestions that the number could begin to creep up in the future and we are still seeing a divide between the north and south of England in terms of the number of insolvencies.

There are many factors that could explain such a decline in insolvencies. Perhaps it is the growth in wages, in part due the recovery of the economy, which have enabled more people to forgo borrowing or enabled them to repay any loan more comfortably. Lower inflation has helped to reduce the cost of living, thereby increasing the available income to repay any loans. Interest rates have also remained low thus cutting the cost of borrowing and the repayments due. But, another factor may simply be that lending is now more closely regulated. Prior to the financial crisis, huge amounts of money were being lent out, often to those who had no chance of making the repayments. More stringent affordability checks by lenders may have a large part to play in reducing the number of insolvencies. President of R3, the insolvency practitioner body, Phillip Sykes said:

“It may be too early to draw conclusions but demand could be falling as a result of low interest rates, low inflation and tighter regulation. This trend is worth watching.”

Mark Sands, from Baker Tilly added to this, noting that fewer people were now in financial difficulty.

“As well as this, we are seeing lower levels of personal debt and fewer people borrowing outside of their means due to more stringent affordability checks by creditors.”

Whatever the main reason behind this data, it is certainly a positive indicator, perhaps of economic recovery, or that at least some have learned the lessons of the financial crisis. The following articles consider this topic.

Personal insolvencies fall to 10-year low Financial Times, James Pickford (1/5/15)
Personal insolvencies at lowest level since 2005 BBC News (29/4/15)
Personal insolvencies drop to lowest level in a decade Guardian, Press Association (29/4/15)
Corporate insolvencies at lowest level since 2007 Telegraph, Elizabeth Anderson(30/4/15)
Interview: R3 President Phillip Sykes Accountancy Age, Richard Crump (1/5/15)
< a href="http://www.independent.co.uk/news/business/news/northsouth-gap-widens-in-personal-insolvencies-10205783.html">North-South gap widens in personal insolvencies Independent, Ben Chu (27/4/15)
Insolvency rates show ‘stark’ north-south divide Financial Times, James Pickford(27/4/15)

Questions

  1. What is meant by insolvency?
  2. There are many factors that might explain why the number of insolvencies has fallen. Explain the economic theory behind a lower inflation rate and why this might have contributed to fewer insolvencies.
  3. How might lower interest rates affect both the number of personal and corporate insolvencies?
  4. Why has there been a growth in the north-south divide in terms of the number of insolvencies?
  5. Do you think this data does suggest that lessons have been learned from the Credit Crunch?
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An environmentally friendly Church

Climate change is a global issue and reports indicate that more and more people are concerned about buying environmentally friendly products. We have seen tighter emissions targets and companies across the word investing in new technologies to reduce their emissions. But what can the Church of England do?

The Church of England has numerous investments, which help generate its revenue. Some of these investments are in fossil fuel companies, which are extracting resources and polluting the environment. The Church’s new environmental policy will see it selling any of its investments in companies where more than 10% of its revenue is generated from extracting thermal coal or the production of oil from tar sands. Estimates suggest that this is a total of £12 million. The Deputy Chair of the Church’s Ethical Investment Advisory Group (EIAG) said:

“The Church has a moral responsibility to speak and act on both environmental stewardship and justice for the world’s poor who are most vulnerable to climate change … This responsibility encompasses not only the Church’s own work to reduce our own carbon footprint, but also how the Church’s money is invested and how we engage with companies on this vital issue.”

However, some have seen this as ‘trivial act’, suggesting it will have limited effect on the environment and have criticised some for suggesting that the biggest moral issue facing the world is climate change. But, with more companies recognising their ‘moral responsibility’, perhaps this decision by the Church of England is unsurprising. The following articles consider this topic.

Church of England divests from coal, tar sands as adopts new climate change policy Reuters (30/4/15)
Church of England wields its influence in fight against climate change Guardian, Damian Carrington (1/5/15)
Church of England Bishop provokes anger by saying the biggest moral issue affecting the world is … CLIMATE CHANGE Mail Online, Steve Doughty (2/5/15)
Church of England to sell fossil fuel investments BBC News(1/5/15)
Church of England blacklists coal and tar sands investments Financial Times, Pilita Clark (30/4/15)
Church of England ends investments in heavily polluting fossil fuels Guardian, Adam Vaughan (30/4/15)
Church of England pulls out of fossil fuels, but where does it invest its cash? Independent, Hazel Shefield(1/5/15)

Questions

  1. Why is climate change a global issue?
  2. How might the Church of England’s decision affect environmental policy in fossil fuel companies?
  3. What other action has the Church of England taken to tackle climate change?
  4. The Church and the articles suggest that the poor are the most vulnerable to climate change. Why is this?
  5. Do you think the Church of England will lose money by divesting itself of some of these investments?
  6. If the Church of England now has more money to invest, which factors might influence its decision as to where they should invest?
  7. Where does the Church of England get is money from? What does it spend it on?
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What’s really on offer?

For years, the UK consumer organisation, Which?, has exposed misleading supermarket pricing practices. These include bogus price reductions, ‘cheaper’ multi-buys, smaller pack sizes and confusing special offers. Claiming that these practices are still continuing, Which? has made a super-complaint (available to designated consumer bodies) to the competition regulator, the Competition and Markets Authority (CMA).

Commenting on this action, Which? executive director, Richard Lloyd said:

“Despite Which? repeatedly exposing misleading and confusing pricing tactics, and calling for voluntary change by the retailers, these dodgy offers remain on numerous supermarket shelves. Shoppers think they’re getting a bargain but in reality it’s impossible for any consumer to know if they’re genuinely getting a fair deal.

We’re saying enough is enough and using one of the most powerful legal weapons in our armoury to act on behalf of consumers by launching a super-complaint to the regulator. We want an end to misleading pricing tactics and for all retailers to use fair pricing that people can trust.”

The CMA will consider the issues raised under the super-complaint to establish whether any of them are significantly harming the interests of consumers. It will publish a response within 90 days from the receipt of the complaint on 21 April 2015. The possible outcomes include:

recommending the quality and accessibility of information for consumers is improved
encouraging businesses in the market to self-regulate
making recommendations to government to change the legislation or public policy
taking competition or consumer enforcement action
instigating a market investigation or market study
a clean bill of health

Some 40% of groceries are sold on promotion. Supermarkets are well aware that consumers love to get a bargain and use promotions to persuade consumers to buy things they might not otherwise have done.

What is more, consumer rationality is bounded by the information and time available. People are often in a hurry when shopping; prices change frequently; people are often buying numerous low-value items; and they don’t know what competitors are charging. People may thus accept an offer as genuine and not spend time investigating whether it is so. Supermarkets know this and use all sorts of tactics to try to persuade people that they are indeed getting a bargain.

Videos
Supermarkets Face Super-Complaint On Pricing Sky News (21/4/15)
UK supermarkets face possible probe over pricing practices Reuters, Neil Maidment (21/4/15)
Which? launches ‘super-complaint’ against supermarkets BBC News, Stephanie McGovern (21/4/15)

Articles
UK supermarkets dupe shoppers out of hundreds of millions, says Which? The Guardian, Rebecca Smithers (21/4/15)
Supermarkets face inquiry into ‘rip-offs’ The Telegraph, Dan Hyde (21/4/15)
15 supermarket rip-offs that led to an inquiry The Telegraph, Dan Hyde (21/4/15)
What does Which?’s supermarket pricing complaint mean for you? The Guardian (21/4/15)
Supermarkets hit back over Which? report on pricing Financial Times (21/4/15)

Press release
Which? ‘super-complains’ about misleading supermarket pricing practices Which? (21/4/15)

CMA case page
Groceries pricing super-complaint Competition and Markets Authority (21/4/15)

Questions

  1. Give examples of supermarket offers that are misleading.
  2. Why are supermarkets able to ‘get away with’ misleading offers?
  3. How can behavioural economics help to explain consumer behaviour in supermarkets?
  4. Identify some other super-complaints have been made to the CMA or its predecessor, the Office of Fair Trading. What were the outcomes from the resulting investigations.
  5. What is meant by ‘heuristics’? How might supermarkets exploit consumers’ use of heuristics in their promotions?
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US interest rates and growth

The US economy has been performing relatively well, but as with the UK economy, growth in the first quarter of 2015 has slowed. In the US, it has slowed to 0.2%, which is below expectations and said to be due to ‘transitory factors’. In response, the Federal Reserve has kept interest rates at a record low, within the band 0.0% to 0.25%.

The USA appears relatively unconcerned about the slower growth it is experiencing and expects growth to recover in the next quarter. The Fed said:

“Growth in household spending declined; households’ real incomes rose strongly, partly reflecting earlier declines in energy prices, and consumer sentiment remains high. Business fixed investment softened, the recovery in the housing sector remained slow, and exports declined.”

Nothing has been said as to when interest rates may rise and with this unexpected slowing of the economy, further delays are likely. An investment Manager from Aberdeen Asset Management said:

“The removal of the Fed’s time dependent forward guidance could be significant. It means that any meeting from now on could be the one when they announce that magic first rate rise.”

Low rates will provide optimal conditions for stimulating growth. A key instrument of monetary policy, interest rates affect many of the components of aggregate demand. Lower interest rates reduce the cost of borrowing, reduce the return on savings and hence encourage consumption. They can also reduce mortgage repayments and have a role in reducing the exchange rate. All of these factors are crucial for any economic stimulus.

Analysts are not expecting rates to rise in the June meeting and so attention has now turned to September as the likely time when interest rates will increase and finally reward savers. Any earlier increase in rates could spell trouble for economic growth and similar arguments can be made in the UK and across the eurozone. The following articles consider the US economy.

Federal Reserve keeps interest rates at record low BBC News, Kim Gittleson (29/4/15)
Shock stalling of US economy hits chances of early Fed rate rise The Guardian, Larry Elliott (29/4/15)
US Fed leave interest rates unchanged after poor GDP figures Independent, Andrew Dewson (30/4/15)
Fed could give clues on first interest rate hike USA Today, Paul Davidson (28/4/15)
Fed’s downgrade of economic outlook signals longer rate hike wait Reuters, Michael Flaherty and Howard Schneider (29/4/15)
Five things that stopped the Fed raising rates The Telegraph, Peter Spence (29/4/15)

Questions

  1. By outlining the key components of aggregate demand, explain the mechanisms by which interest rates will affect each component.
  2. How can inflation rates be affected by interest rates?
  3. Why could it be helpful for the Fed not to provide any forward guidance?
  4. What are the key factors behind the slowdown of growth in the USA? Do you agree that they are transitory factors?
  5. Who would be helped and harmed by a rate rise?
  6. Consider the main macroeconomic objectives and in each case, with respect to the current situation in the USA, explain whether economic theory would suggest that interest rates should (a) fall , (b) remain as they are, or (c) rise.
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California’s new targets on greenhouse gas emission

The Governor of California, Jerry Brown, has issued an executive order to cut greenhouse gas emissions 40% from 1990 levels by 2030 (a 44% cut on 2012 levels). This matches the target set by the EU. It is tougher than that of the US administration, which has set a target of reducing emissions in the range of 26 to 28 percent below 2005 levels by 2025.

The former Governor of California, Arnold Schwarzenegger, had previously set a target of reducing emissions 80% below 1990 levels by 2050. Brown’s new target can be seen as an interim step toward meeting that longer-term goal.

There are several means by which it is planned to meet the Californian targets. These include:

a focus on zero- and near-zero technologies for moving freight, continued investment in renewables including solar roofs and distributed generation, greater use of low-carbon fuels including electricity and hydrogen, stronger efforts to reduce emissions of short-lived climate pollutants (methane, black carbon and fluorinated gases), and further efforts to create liveable, walkable communities and expansion of mass transit and other alternatives to travelling by car.

Some of these will be achieved through legislation, after consultations with various stakeholders. But a crucial element in driving down emissions is the California’s carbon trading scheme. This is a cap-and-trade system, similar to the EU’s Emissions Trading Scheme.

The cap-and-trade rules came into effect on January 1, 2013 and apply to large electric power plants and large industrial plants. In 2015, they will extend to fuel distributors (including distributors of heating and transportation fuels). At that stage, the program will encompass around 360 businesses throughout California and nearly 85 percent of the state’s total greenhouse gas emissions.

Under a cap-and-trade system, companies must hold enough emission allowances to cover their emissions, and are free to buy and sell allowances on the open market. California held its first auction of greenhouse gas allowances on November 14, 2012. This marked the beginning of the first greenhouse gas cap-and-trade program in the United States since the group of nine Northeastern states in the Regional Greenhouse Gas Initiative (RGGI), a greenhouse gas cap-and-trade program for power plants, held its first auction in 2008.

Since January 2014, the Californian cap-and-trade scheme has been linked to that of Quebec in Canada and discussions are under way to link it with Ontario too. Also California is working with other west-coast states/provinces, Oregon, Washington and British Columbia, to develop a co-ordinated approach to greenhouse gas reductions

To achieve sufficient reductions in emissions, it is not enough merely to have a cap-and-trade system which, through trading, encourages an efficient reduction in emissions. It is important to set the cap tight enough to achieve the targeted reductions and to ensure that the cap is enforced.

In California, emissions allowances are distributed by a mix of free allocation and quarterly auctions. Free allocations account for around 90% of the allocations, but this percentage will decrease over time. The total allowances will decline (i.e. the cap will be tightened) by 3% per year from 2015 to 2020.

At present the system applies to electric power plants, industrial plants and fuel distributors that emit, or are responsible for emissions of, 25,000 metric tons of carbon dioxide equivalent (CO2e) per year or more. The greenhouse gases covered are the six covered by the Kyoto Protocol ((CO2, CH4, N2O, HFCs, PFCs, SF6), plus NF3 and other fluoridated greenhouse gases.

Articles
California governor orders aggressive greenhouse gas cuts by 2030 Reuters. Rory Carroll (29/4/15)
California’s greenhouse gas emission targets are getting tougher Los Angeles Times, Chris Megerian and Michael Finnegan (29/4/15)
Jerry Brown sets aggressive California climate goal The Desert Sun, Sammy Roth (29/4/15)
California’s Brown Seeks Nation-Leading Greenhouse Gas Cuts Bloomberg, Michael B Marois (29/4/15)
California sets tough new targets to cut emissions BBC News, (29/4/15)
California’s New Greenhouse Gas Emissions Target Puts Obama’s To Shame New Republic, Rebecca Leber (29/4/15)
Governor Brown Announces New Statewide Climate Pollution Limit in 2030 Switchboard, Alex Jackson (29/4/15)
Cap-and-trade comes to Orego Watchdog, Chana Cox (29/4/15)
Cap and trade explained: What Ontario’s shift on emissions will mean The Globe and Mail, Adrian Morrow (13/4/15)
California’s Forests Have Become Climate Polluters Climate Central, John Upton (29/4/15)
States Can Learn from Each Other On Carbon Pricing The Energy Collective, Kyle Aarons (28/4/15)

Executive Order
Governor Brown Establishes Most Ambitious Greenhouse Gas Reduction Target in North America Office of Edmund G. Brown Jr. (29/4/15)
Frequently Asked Questions about Executive Order B-30-15: 2030 Carbon Target and Adaptation California Environmental Protection Agency: Air Resources Board (29/4/15)

Californian cap-and-trade scheme
Cap-and-Trade Program California Environmental Protection Agency: Air Resources Board (29/4/15)
California Cap and Trade Center for Climate and Energy Solutions (January 2014)

Questions

  1. Explain how a system of cap-and-trade, such as the Californian system and the ETS in the EU, works.
  2. Why does a cap-and-trade system lead to an efficient level of emissions reduction?
  3. How can a joint system, such as that between California and Quebec, work? Is it important to achieve the same percentage pollution reduction in both countries?
  4. What are countries coming to the United Nations Climate Change conference in Paris in November 2015 required to have communicated in advance?
  5. How might game theory be relevant to the negotiations in Paris? Are the pre-requirements on countries a good idea to tackle some of the ‘gaming’ problems that could occur?
  6. Why is a cap-and-trade system insufficient to tackle climate change? What other measures are required?
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