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Posts Tagged ‘inequality’

A broken economy

According to a new report, Time for Change published by the Institute for Public Policy Research (IPPR), ‘The British economic model needs fundamental reform.’

It is no longer generating rising earnings for a majority of the population, and young people today are set to be poorer than their parents. Beneath its headlines figures, the economy is suffering from deep and longstanding weaknesses, which make it unfit to face the challenges of the 2020s.

The report by the IPPR’s Commission on Economic Justice is an interim one, with the final report due in the latter part of next year. The commission was set up in 2016 and includes business leaders, such as the heads of John Lewis and Siemens, the TUC General Secretary, the Archbishop of Canterbury and other leading figures.

Commenting on the interim report, Justin Welby, the Archbishop of Canterbury said

Our economic model is broken. Britain stands at a watershed moment where we need to make fundamental choices about the sort of economy we need. We are failing those who will grow up into a world where the gap between the richest and poorest parts of the country is significant and destabilising

The report found that wages have stagnated for the majority of the population since the financial crisis of 2007/8. Wage income has fallen as a proportion of national income, while the proportions going to income from profits and property have risen. Young people are poorer than previous generations of young people.

Despite low unemployment, many people are on zero-hour contracts, part-time contracts or employed on a casual basis. For many, their jobs are insecure and they have no bargaining power.

The UK for many years has had a lower rate of investment that other developed economies and productivity, in terms of output per hour, is the lowest of its major competitors. Productivity in Germany is 36% higher than in the UK; in France and the USA it is 29% higher. Although there are some internationally competitive UK firms with high productivity, the country has:

a longer ‘tail’ of low-productivity businesses, in which weak management and poor use of skills leads to ‘bad jobs’ and low wages.

There are many other challenges, including an ageing population, uncertainties from Brexit, a large current account deficit, increased competition from abroad and growth once more in private-sector debt, which means that consumption may cease to be the main driver of economic growth as people seek to curb their borrowing.

The report is also critical of fiscal policy, which with record low interest rates could have been used to finance infrastructure projects as well as supporting public services.

The report recommends three approaches:

The first is institutional reform to support investment.

The second is making the economy more competitive through a coherent industrial strategy, reform of the financial sector to support long-term investment, reform of corporate governance to promote business success and tackling the market dominance of companies such as Amazon and Google.

The third is to bring greater social justice and equality through encouraging more secure and better-paid jobs, strengthening trades unions and reforming the tax system to make it fairer and smarter.

Not surprisingly the government has defended its record of reducing debt, presiding over falling unemployment and reduced inequality as measured by a reduced Gini coefficient. However, there has only been a modest fall in the Gini coefficient, from 0.333 in 2009/10 to 0.315 in 2016/7, and this has largely been the result of the very rich seeing a decline in income from assets.

Articles
Britain’s economy is broken and failing to tackle inequality, says major new report Independent, Ben Chu (6/9/17)
UK’s economic model is broken, says Archbishop of Canterbury The Guardian, Phillip Inman (5/9/17)
Tax wealth or see the UK tear itself apart, Cable will warn Bloomberg, Alex Morales and Thomas Penny (6/9/17)
Archbishop of Canterbury calls for radical economic reform BBC News (5/9/17)
Archbishop warns economy is “broken” as report reveals longest period of wage stagnation for 150 years Huffington Post, Rachel Wearmouth (6/9/17)
Britain’s economy is broken. We desperately need new ideas The Guardian, Tom Kibasi (4/6/17)
Carney: Britain is in the ‘first lost decade since the 1860s’, Business Insider, Oscar Williams-Grut (6/12/16)
Our broken economy, in one simple chart New York Times, David Leonhardt (7/8/16)

Report
Time for Change: A new Vision for the British Economy IPPR Commission on Economic Justice (6/9/17)

Questions

  1. Why have wages for the majority of the UK population stagnated for the past 10 years?
  2. Why is productivity in the UK lower than in most other developed economies?
  3. Is it possible for poor people to become poorer and yet for the Gini coefficient to fall?
  4. What institutional reforms would you suggest to encourage greater investment?
  5. Explain the possible advantages and disadvantages of abandoning ‘austerity policy’ and adopting a more expansionist fiscal stance?
  6. Does it matter that Amazon and Google are dominant players in their respective markets? Explain.
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Populism and economics

Economists were generally in favour of the UK remaining in the EU and highly critical of the policy proposals of Donald Trump. And yet the UK voted to leave the EU and Donald Trump was elected.

People rejected the advice of most economists. Many blamed the failure of most economists to predict the 2007/8 financial crisis and to find solutions to the growing gulf between rich and poor, with the majority stuck on low incomes.

So to what extent are economists to blame for the rise in populism – a wave that could lead to electoral upsets in various European countries? The podcast below brings together economists and politicians from across the political spectrum. It is over an hour long and provides an in-depth discussion of many of the issues and the extent to which economists can provide answers.

Podcast
Should economists share the blame for populism? Guardian Politics Weekly podcast, Heather Stewart, joined by Andrew Lilico, Ann Pettifor, Jonathan Portes, Rachel Reeves and Vince Cable (23/2/17)

Questions

  1. Why has globalisation become a dirty word?
  2. Assess the arguments for and against an open policy towards immigration?
  3. In what positive ways may economists contribute to populism?
  4. Do economists concentrate too much on growth in GDP rather than on its distribution?
  5. Give some examples of ways in which various popular interpretations of economic phenomena may confuse correlation with causality.
  6. Why did the proportions of people who voted for and against Brexit differ considerably from one part of the country to another, from one age group to another and from one social group to another?
  7. In what ways have economists and the subject of economics contributed towards a growth in human welfare?
  8. What are the advantages and disadvantages of the trend for undergraduate economics curricula to become more mathematical (at least until relatively recently)?
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Measuring wellbeing

GDP is often used as a measure of wellbeing, even though it is really only a measure of the market value of a nation’s output or an indicator of economic activity. But although higher consumption can improve living standards, it is only one contributor to wellbeing, whether at individual or social level.

There are essentially four types of problems from using GDP as a measure of how society is doing.

The first is that it does not include (as negative figures) many external costs, such as pollution, stress and family breakdown related to work.

The second is that it includes things that are produced to counteract the adverse effects of increased production, such as security, antidepressants, therapy and clean-up activities.

The third is that it ignores things that are produced and do contribute to wellbeing and yet are not traded in the market. Examples include volunteer work, the ‘output’ of clubs and societies, work within the home, production from allotments and various activities taking place in the ‘underground economy’ to avoid taxation.

The fourth is the sustainability of economic growth. If we deplete natural resources, the growth of today may be at the cost of the wellbeing of future generations.

Then there is the question of the distribution of the benefits of production. Although GDP figures can be adjusted for distribution, crude GDP growth figures are not. If a few wealthy get a lot richer and the majority do not, or even get poorer, a growth in GDP will not signify a growth in wellbeing of the majority.

Then there is the question of the diminishing marginal utility of income. If an extra pound to a rich person gives less additional wellbeing than an extra pound to a poor person, then any given growth rate accompanied by an increase in inequality will contribute less to wellbeing than the same growth rate accompanied by a decrease in inequality.

The first article below criticises the use of crude indicators, such as the growth in GDP or stock market prices to signify wellbeing. It also looks at some alternative indicators that can capture some of the contributions to wellbeing missed by GDP figures.

Articles
Want to know how society’s doing? Forget GDP – try these alternatives The Guardian, Mark Rice-Oxley (27/1/17)
The Increasingly Inadequate Measurement Of Productivity The Market Mogul, Chris Woods (20/1/17)
Why GDP fails as a measure of well-being CBS News, Mark Thoma (27/1/16)
Limitations of GDP as Welfare Indicator The Sceptical Economist, zielonygrzyb (31/7/12)

Questions

  1. Should GDP be abandoned as an indicator?
  2. How could GDP be refined to capture more of the factors affecting wellbeing?
  3. Go through each of the indicators discussed in the first article above and consider their suitability as an indicator of wellbeing.
  4. “Everywhere you look, there are better benchmarks than these tired old financial yardsticks.” Identify three such indicators not considered in the first article and discuss their suitability as measures of economic performance.
  5. How might the benefit you gain from free apps be captured?
  6. Consider the suitability of these alternatives to GDP.
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Interest rates – too low, for too long?

Interest rates have been at record lows across the developed world since 2009. Interest rates were reduced to such levels in order to stimulate recovery from the financial crisis of 2007–8 and the resulting recession. The low interest rates were accompanied by extraordinary increases in money supply under various rounds of quantitative easing in the USA, UK, Japan and eventually the eurozone. But have such policies done harm?

This is the contention of Brian Sturgess in a new paper, published by the Centre for Policy Studies. He maintains that the policy has had a number of adverse effects:

 •  There will be nothing left in the monetary policy armoury when the next downturn occurs other than even more QE, which will compound the following problems.
 •  It has had little effect in stimulating aggregate demand and economic growth. Instead the extra money has been used to repair balance sheets and support unprofitable businesses.
 •  It has inflated asset prices, especially shares and property, which has encouraged funds to flow to the secondary market rather than to funding new investment.
 •  The inflation of asset prices has benefited the already wealthy.
 •  By keeping interest rates down to virtually zero on savings accounts, it has punished small savers.
 •  By rewarding the rich and penalising small savers, it has contributed to greater inequality.
 •  By keeping interest rates down to borrowers, it has encouraged households to take on excessive amounts of debt, which will be hard to service if interest rates rise.
 •  It has lowered the price of risk, thereby encouraging more risky types of investment and the general misallocation of capital.

Sturgess argues that it is time to end the policy of low interest rates. Currently, in all the major developed economies, central bank rates are below the rate of inflation, making the real central bank interest rates negative.

He welcomes the two small increases by the Federal Reserve, but this should be followed by further rises, not just by the Fed, but by other central banks too. As Sturgess states in the paper (p.12):

In place of ever more extreme descents into the unknown, central banks should quickly renormalise monetary policy. That would involve ending QE and allowing interest rates to rise steadily so that interest rates can carry out their proper functions. Failure to do so will leave the global financial system vulnerable to potential shocks such as the failure of the euro, or the fiscal stresses in the US resulting from the unfinanced spending plans announced by Donald Trump in his presidential campaign.

Although Sturgess argues that the initial programmes of low interest rates and QE were a useful response to the financial crisis, he argues that they should have only been used as a short-term measure. However, if they were, and if interest rates had gone up within a few months, many argue that the global economy would rapidly have sunk back into recession. This has certainly been the position of central banks. Sturgess disagrees.

Articles
Damaging low interest rates and QE must end now, think thank warns The Telegraph, Julia Bradshaw (23/1/17)
QE has driven pension deficits up, think-tank argues Money Marketing, Justin Cash (23/1/17)
Hold: The ECB keeps interest rates and QE purchases steady as Mario Draghi defends loose policy from hawkish critics City A.M., Jasper Jolly (19/1/17)
Preparing for the Post-QE World Bloomberg, Jean-Michel Paul (12/10/16)

Paper
Stop Depending on the Kindness of Strangers: Low interest rates and the Global Economy Centre for Policy Studies, Brian Sturgess (23/1/17)

Questions

  1. Find out what the various rounds of quantitative easing have been in the USA, the UK, Japan and the eurozone.
  2. What are the arguments in favour of quantitative easing as it has been practised?
  3. How might interest rates close to zero result in the misallocation of capital?
  4. Sturgess claims that the existence of ‘spillover’ effects has had damaging effects on many emerging economies. What are these spillover effects and what damage have they done to such economies?
  5. How do low interest rates affect interest rate spreads?
  6. Have pensioners gained or lost from QE? Explain how the answer may vary between different pensioners.
  7. What is meant by a ‘natural’ or ‘neutral’ rate of interest (see section 3.2 in the paper)? Why, according to Janet Yellen (currently Federal Reserve Chair, writing in 2005), is this somewhere between 3.5% and 5.5% (in nominal terms)?
  8. What are the arguments for and against using created money to finance programmes of government infrastructure investment?
  9. Would helicopter money be more effective than QE via asset purchases in achieving faster economic growth? (See the blog posts: A flawed model of monetary policy and New UK monetary policy measures – somewhat short of the kitchen sink.)
  10. When QE comes to an end in various countries, what are the arguments for absorbing rather than selling the assets purchased by central banks? (See the Bloomberg article.)
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The lost decade: reflections by Bank of England chiefs

In two recent speeches, the Governor of the Bank of England, Mark Carney, and the Bank’s Chief Economist, Andy Haldane, have reflected on the growing inequality in the UK and other countries. They have also answered criticisms that monetary policy has exacerbated the problem. As, Andy Haldane puts it:

It is clear monetary policy has played a material role in lifting all boats since the financial crisis broke. …[But] even if monetary policy has lifted all boats, and could plausibly do so again if needed, that does not mean it has done so equally. In particular, concerns have been expressed about the potential distributional effects of monetary policy.

Jan Vlieghe [member of the Monetary Policy Committee] has recently looked at how monetary policy may have affected the fortunes of, among others, savers, pension funds and pensioners. The empirical evidence does not suggest these cohorts have been disadvantaged to any significant degree by the monetary policy stance. For most members in each cohort, the boost to their asset portfolios and the improved wages and profits due to a stronger economy more than offset the direct loss of income from lower rates [of interest on savings accounts].

Andy Haldane’s speech focused largely on regional inequality. He argued that productivity has grown much more rapidly in the more prosperous regions, such as London and the South East. This has resulted in rising inequality in wages between different parts of the UK. Policies that focus on raising productivity in the less prosperous regions could play a major role in reducing income inequality.

Mark Carney’s speech echoed a lot of what Andy Haldane was saying. He argued that expansionary monetary policy has, according to Bank of England modelling, “raised the level of GDP by around 8% relative to trend and lowered unemployment by 4 percentage points at their peak”. And the benefits have been felt by virtually everyone. Even savers have generally gained:

That’s in part because, to a large extent, the thrifty saver and the rich asset holder are often one and the same. Just 2% of households have deposit holdings in excess of £5000, few other financial assets and don’t own a home.

But some people still gained more from monetary policy than others – enough to contribute to widening inequality.

Losers from the lost decade
Mark Carney looked beyond monetary policy and argued that the UK has experienced a ‘lost decade’, where real incomes today are little higher than 10 years ago – the first time this has happened for 150 years. This stalling of average real incomes has been accompanied by widening inequality between various groups, where a few have got a lot richer, especially the top 1%, and many have got poorer. Although the Gini coefficient has remained relatively constant in recent years, there has been a widening gap between the generations.

For both income and wealth, some of the most significant shifts have happened across generations. A typical millennial earned £8000 less during their twenties than their predecessors. Since 2007, those over 60 have seen their incomes rise at five times the rate of the population as a whole. Moreover, rising real house prices between the mid-1990s and the late 2000s have created a growing disparity between older home owners and younger renters.

This pattern has been repeated around the developed world and has led to disillusionment with globalisation and a rise in populism. Globalisation has been “associated with low wages, insecure employment, stateless corporations and striking inequalities”. (Click here for a PowerPoint of the chart.)

And populism has been reflected in the crisis in Greece, the Brexit vote, Donald Trump’s election, the rise of the National Front in France, the No vote in the Italian referendum on reforming the constitution and the rise in anti-establishment parties and sentiment generally. Mainstream parties are beginning to realise that concerns over globalisation, inequality and a sense of disempowerment must be addressed.

Solutions to inequality
As far as solutions are concerned, central must be a rise in general productivity that increases potential real income.

Boosting the determinants of long-run prosperity is the job of government’s structural, or supply-side policies. These government policies influence the economy’s investment in education and skills; its capacity for research and development; the quality of its core institutions, such as the rule of law; the effectiveness of its regulatory environment; the flexibility of its labour market; the intensity of competition; and its openness to trade and investment.

But will this supply-side approach be enough to bring both greater prosperity and greater equality? Will an openness to trade be accepted by populist politicians who blame globalisation and the unequal gains from international trade for the plight of the poor? Carney recognises the problem and argues that:

For the societies of free-trading, networked countries to prosper, they must first re-distribute some of the gains from trade and technology, and then re-skill and reconnect all of their citizens. By doing so, they can put individuals back in control.

For free trade to benefit all requires some redistribution. There are limits, of course, because of fiscal constraints at the macro level and the need to maintain incentives at the micro level. Fostering dependency on the state is no way to increase human agency, even though a safety net is needed to cushion shocks and smooth adjustment.

Redistribution and fairness also means turning back the tide of stateless corporations.

… Because technology and trade are constantly evolving and can lead to rapid shifts in production, the commitment to reskilling all workers must be continual.

In a job market subject to frequent, radical changes, people’s prospects depend on direct and creative engagement with global markets. Lifelong learning, ever-greening skills and cooperative training will become more important than ever.

But whether these prescriptions will be accepted by people across the developed world who feel that the capitalist system has failed them and who look to more radical solutions, whether from the left or the right, remains to be seen. And whether they will be adopted by governments is another question!

Webcast
Roscoe Lecture Bank of England on YouTube, Mark Carney (5/12/16)

Speeches
One Car, Two Car, Red Car, Blue Car Bank of England, Andrew Haldane (2/12/16)
The Spectre of Monetarism: Roscoe Lecture, Liverpool John Moores University Bank of England, Mark Carney (5/12/16)

Articles: Andrew Haldane speech
Bank of England chief economist says monetary stimulus stopped ‘left behind’ from drowning Independent, Ben Chu (2/12/16)
BoE’s Andrew Haldane warns of regional growth inequality BBC News (2/12/16)
‘Regions would have faced contraction’ without rate cuts and money printing Belfast Telegraph (2/12/16)
Bank of England chief: UK can be transformed if it copies progress on Teesside Gazette Live, Mike Hughes (2/12/16)

Articles: Mark Carney speech
Governor’s ‘dynamite’ warning on wages and globalisation Sky News, Ed Conway (6/12/16)
Mark Carney warns Britain is suffering first lost decade since 1860 as people across Europe lose trust in globalisation The Telegraph, Szu Ping Chan and Peter Foster (5/12/16)
Mark Carney: we must tackle isolation and detachment caused by globalisation The Guardian, Katie Allen (6/12/16)
Bank of England’s Carney warns of strains from globalization Reuters, William Schomberg and David Milliken (6/12/16)
CARNEY: Britain is in ‘the first lost decade since the 1860s’ Business Insider UK, Oscar Williams-Grut (7/12/16)
Carney warns about popular disillusion with capitalism BBC News (5/12/16)
Some fresh ideas to tackle social insecurity Guardian letters (7/12/16)

Report
Monitoring poverty and social exclusion 2016 (MPSE) Joseph Rowntree Foundation, Adam Tinson, Carla Ayrton, Karen Barker, Theo Barry Born, Hannah Aldridge and Peter Kenway (7/12/16)

Data
OECD Income Distribution Database (IDD): Gini, poverty, income, Methods and Concepts OECD
The effects of taxes and benefits on household income Statistical bulletins ONS

Questions

  1. Has monetary policy aggravated the problem of inequality? Explain.
  2. Comment on Charts 11a and 11b on page 19 of the Haldane speech.
  3. Does the process of globalisation help to reduce inequality or does it make it worse?
  4. If countries specialise in the production of goods in which they have a comparative advantage, does this encourage them to use more or less of relatively cheap factors of production? How does this impact on factor prices? How does this affect income distribution?
  5. How might smaller-scale firms “by-pass big corporates and engage in a form of artisanal globalisation; a revolution that could bring cottage industry full circle”?
  6. Why has regional inequality increased in the UK?
  7. What types of supply-side policy would help to reduce inequality?
  8. Explain the following statement from Mark Carney’s speech: “For free trade to benefit all requires some redistribution. There are limits, of course, because of fiscal constraints at the macro level and the need to maintain incentives at the micro level”.
  9. Mark Carney stated that “redistribution and fairness also means turning back the tide of stateless corporations”. How might this be done?
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A risky dose of Keynesianism at the heart of Trumponomics

The first article below, from The Economist, examines likely macroeconomic policy under Donald Trump. He has stated that he plans to cut taxes, including reducing the top rates of income tax and reducing taxes on corporate income and capital gains. At the same time he has pledged to increase infrastructure spending.

This expansionary fiscal policy is unlikely to be accompanied by accommodating monetary policy. Interest rates would therefore rise to tackle the inflationary pressures from the fiscal policy. One effect of this would be to drive up the dollar and therein lies significant risks.

The first is that the value of dollar-denominated debt would rise in foreign currency terms, thereby making it difficult for countries with high levels of dollar debt to service those debts, possibly leading to default and resulting international instability. At the same time, a rising dollar may encourage capital flight from weaker countries to the US (see The Economist article, ‘Emerging markets: Reversal of fortune’).

The second risk is that a rising dollar would worsen the US balance of trade account as US exports became less competitive and imports became more so. This may encourage Donald Trump to impose tariffs on various imports – something alluded to in campaign speeches. But, as we saw in the blog, Trump and Trade, “With complex modern supply chains, many products use components and services, such as design and logistics, from many different countries. Imposing restrictions on imports may lead to damage to products which are seen as US products”.

The third risk is that the main beneficiaries of Trump’s likely fiscal measures will be the rich, who would end up paying significantly less tax. With all the concerns from poor Americans, including people who voted for Trump, about growing inequality, measures that increase this inequality are unlikely to prove popular.

Articles
That Eighties show The Economist, Free Exchange (19/11/16)
The unbearable lightness of a stronger dollar Financial Times (18/11/16)

Questions

  1. What should the Fed’s response be to an expansionary fiscal policy?
  2. Which is likely to have the larger multiplier effect: (a) tax revenue reductions from cuts in the top rates of income; (b) increased government spending on infrastructure projects? Explain your answer.
  3. Could Donald Trump’s proposed fiscal policy lead to crowding out? Explain.
  4. What would protectionist policies do to (a) the US current account and (b) dollar exchange rates?
  5. Why might trying to protect US industries from imports prove difficult?
  6. Why might Trump’s proposed fiscal policy lead to capital flight from certain developing countries? Which types of country are most likely to lose from this process?
  7. Go though each of the three risks referred to in The Economist article and identify things that the US administration could do to mitigate these risks.
  8. Why may the rise in the US currency since the election be reversed?
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The future of capitalism

Some commentators have seen the victory of Donald Trump and, prior to that, the Brexit vote as symptoms of a crisis in capitalism. Much of the campaigning in the US election, both by Donald Trump on the right and Bernie Sanders on the left focused on the plight of the poor. Whether the blame was put on immigration, big government, international organisations, the banks, cheap imports undercutting jobs or a lack of social protection, the message was clear: capitalism is failing to improve the lot of the majority. A small elite is getting significantly richer while the majority sees little or no gain in their living standards and a rise in uncertainty.

The articles below look at this crisis. They examine the causes, which they agree go back many years as capitalism has evolved. The financial crash of 2008 and the slow recovery since are symptomatic of the underlying changes in capitalism.

The Friedman article focuses on the slowing growth in technological advance and the problem of aging populations. What technological progress there is is not raising incomes generally, but is benefiting a few entrepreneurs and financiers. General rises in income may eventually come, but it may take decades before robotics, biotechnological advances, e-commerce and other breakthrough technologies filter through to higher incomes for everyone. In the meantime, increased competition through globalisation is depressing the incomes of the poor and economically immobile.

All the articles look at the rise of the rich. The difference with the past is that the people who are gaining the most are not doing so from production but from financial dealing or rental income; they have gained while the real economy has stagnated.

The gains to the rich have come from the rise in the value of assets, such as equities (shares) and property, and from the growth in rental incomes. Only a small fraction of finance is used to fund business investment; the majority is used for lending against existing assets, which then inflates their prices and makes their owners richer. In other words, the capitalist system is moving from driving growth in production to driving the inflation of asset prices and rental incomes.

The process whereby financial markets grow and in turn drive up asset prices is known as ‘financialisation’. Not only is the process moving away from funding productive investment and towards speculative activity, it is leading to a growth in ‘short-termism’. The rewards of senior managers often depend on the price of their companies’ shares. This leads to a focus on short-term profit and a neglect of long-term growth and profitability – to a neglect of investment in R&D and physical capital.

The process of financialisation has been driven by deregulation, financial innovation, the growth in international financial flows and, more recently, by quantitative easing and low interest rates. It has led to a growth in private debt which, in turn, creates more financial instability. The finance industry has become so profitable that even manufacturing companies are moving into the business of finance themselves – often finding it more profitable than their core business. As the Foroohar article states, “the biggest unexplored reason for long-term slower growth is that the financial system has stopped serving the real economy and now serves mainly itself.”

So will the election of Donald Trump, and pressure from populism in other countries too, mean that governments will focus more on production, job creation and poverty reduction? Will there be a movement towards fiscal policy to drive infrastructure spending? Will there be a reining in of loose monetary policy and easy credit?

Or will addressing the problem of financialisation and the crisis of capitalism result in the rich continuing to get richer at the expense of the poor, but this time through more conventional channels, such as increased production and monopoly profits and tax cuts for the rich? Trump supporters from among the poor hope the answer is no. Those who supported Bernie Sanders in the Democratic primaries think the answer will be yes and that the solution to over financialisation requires more, not less, regulation, a rise in minimum wages and fiscal policies aimed specifically at the poor.

Articles
Can Global Capitalism Be Saved? Project Syndicate, Alexander Friedman (11/11/16)
American Capitalism’s Great Crisis Time, Rana Foroohar (12/5/16)
The Corruption of Capitalism by Guy Standing review – work matters less than what you own The Guardian, Katrina Forrester (26/10/16)

Questions

  1. Do you agree that capitalism is in crisis? Explain.
  2. What is meant by financialisation? Why has it grown?
  3. Will the policies espoused by Donald Trump help to address the problems caused by financialisation?
  4. What alternative policies are there to those of Trump for addressing the crisis of capitalism?
  5. Explain Schumpeter’s analysis of creative destruction.
  6. What technological innovations that are currently taking place could eventually benefit the poor as well as the rich?
  7. What disincentives are there for companies investing in R&D and new equipment?
  8. What are the arguments for and against a substantial rise in the minimum wage?
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Trump and trade

President-elect Donald Trump has blamed free trade for much of America’s economic problems. He argues that cheap imports from China, partly from an undervalued yuan, have led to a loss of jobs and to large-scale income flows from the USA to China. “They have taken our jobs; they have taken our money; and on top of that they have loaned the money to us and we actually pay them interest now on money,” he claimed to The Economist.

And it’s not just trade with China that he criticises. He sees cheap imports from developing countries generally as undermining US jobs. The solution he advocates is the imposition of tariffs on imports that threaten US jobs and scrapping, or fundamentally renegotiating, trade deals.

He refers to NAFTA – the North American Free Trade Agreement with Canada and Mexico – as the worst trade deal in US history and blames it for the loss of thousands of US manufacturing jobs. He has said that he will demand better terms from Mexico and Canada. If they don’t agree to them, he’d pull the USA out of NAFTA altogether.

A more recent trade agreement is the Trans-Pacific Partnership (TPP) with 11 other Pacific rim countries (but not including China). The agreement was signed on 4 February 2016, but is awaiting ratification from member countries. Amongst other things, the agreement cuts over 18,000 tariffs. Donald Trump has said that he would block the deal, even though it would lead to the elimination of tariffs on most US manufactured and agricultural products exported to the other countries. He argues that it would lead to a large-scale loss of US jobs from cheap imports.

Another major trade deal criticised by Trump is that being negotiated between the USA and the EU – the Transatlantic Trade and Investment Partnership (TTIP). It has already faced fierce opposition in Europe, with many fearing that it would give too much power to US corporations in their operations in Europe. With the opposition from Trump, it looks unlikely that the agreement will be signed, even in an amended form.

So is this more protectionist stance by Donald Trump in America’s interests? The main argument against restricting imports is that people generally in the USA would be poorer. This is the prediction from the law of comparative advantage. Trade allows a country to consume beyond its production possibility curve by specialising in the production of goods with relatively low opportunity costs and importing goods which would have had a higher opportunity cost if they were produced domestically (see, for example, Economics, 9th edition, pages 711–4). By imposing tariffs or other restrictions on cheap imports, consumers would end up paying more for such goods if they now have to be produced domestically. Cheap Chinese t-shirts would be replaced by expensive US ones. Real US incomes would be lower.

Another danger of pursuing protectionist policies is that other countries might retaliate. Trade wars might result, with the world ending up poorer.

Then there is a problem of locating products. It is not a simple question of saying a product is made in the USA or elsewhere. With complex modern supply chains, many products use components and services, such as design and logistics, from many different countries. Imposing restrictions on imports may lead to damage to products which are seen as US products.

An open trade policy, by contrast, not only leads to higher consumption, it stimulates economic growth and the extra competition it creates improves domestic productivity. As the pro-free trade article by Graeme Leach, linked below, argues:

There is overwhelming evidence that free trade improves economic performance by increasing competition in the domestic market. Trade disciplines domestic firms with market power, and simultaneously promotes productivity growth. Research also shows that a 10 per cent increase in trade leads to a 5 per cent increase in per capita income. More open trade policies are associated with higher per capita incomes.

And as the article by Clark Packard argues:

There is no question that America’s middle and lower classes have benefited from our trade liberalization. Through the widely accepted principle of comparative advantage in our trade policies, productivity has surged and prices have declined. Lower prices save the average American family thousands of dollars a year on goods they consume, raising the standard of living through enhanced purchasing power.

Despite these arguments, there is one crucial problem with free trade. Although overall levels of consumption may be higher, trade may make some people poorer. If workers in the US steel or garment industries lose their jobs because of cheap imports, they will certainly feel worse off, especially if there is no prospect of them getting another job elsewhere. They may lack transferable skills or have too many family or personal ties to move elsewhere in the country.

The government could help to ameliorate the problems of those made unemployed by providing retraining or resettlement grants or by investing in infrastructure projects that require relatively low skilled, but local, construction workers. But, as the Forbes article states:

It is in helping displaced workers of all types that US government, as well as the leaders of other rich countries, have largely failed. Little has been done to assist laid-off workers whose industries simply cannot compete in developed countries anymore.

What is more, inequality has been growing in the USA, and in most other developed countries too. International trade and investment and the growing concentration of power in large corporations has meant that most of the gains from trade have gone to the richest people. Many of the poor blame trade for their plight and the argument that they have still made some gains is either not believed or is not enough to appease them.

An interesting insight into why people may have voted for Trump and his policy of protectionism is provided by the Ultimatum Game (see also). As the final article below explains:

The game itself involves two players. The first player receives a sum of money, and gets to propose how to divide it between the two players. The second player can do only one thing: accept or reject the proposal. If the second player accepts, then the money is divided between the two players as proposed. But if the second player rejects the proposal, then neither player gets anything.

It might seem that the rational thing for the second person to do is to accept whatever the first person proposes, however little it gives to the second person providing it is something – after all, even a little is better than nothing. But experiments show that people playing the second person do not behave in that way. They seek a fair distribution. If the proposed distribution is perceived as unfair, they would prefer to reject the proposal, with both players getting nothing.

This may help to explain the psychology of poor blue-collar workers. They would rather punish the rich a lot, and possibly themselves a little, than let the rich continue getting richer while they are stuck on low wages with little prospect for improvement. But, of course, they may also believe Trump’s rhetoric that they will indeed be better off from protectionist policies that help save their jobs.

What precisely Donald Trump will do about trade agreements and protection, we will have to wait and see. Often what is pledged in an election campaign is not carried out in office or is substantially watered down.

Articles
How Donald Trump thinks about trade The Economist (9/11/16)
What President Trump’s victory means for the most important trade deal in the world Independent, James Moore (9/11/16)
Trump and trade: A radical agenda? BBC News, Ben Morris (9/11/16)
Trump could change trade stance, says former Bush adviser BBC News, Tom Espiner (11/11/16)
3 Ways President-Elect Trump May Shake Up Trade Policy NPR, Marilyn Geewax (9/11/16)
Donald Trump Win to Upend Trade Policy Nasdaq, William Mauldin and John Lyons (9/11/16)
Stiglitz Grades Donald Trump an F on Economics Bloomberg, Enda Curran and Angie Lau (19/9/16)
Trump can kill trade deals but he can’t kill globalisation The Conversation, Remy Davison (10/11/16)
Anti-free trader Donald Trump is on a collision course with economic reality City A.M., Graeme Leach (9/11/16)
What Trump And Clinton Both Get Wrong On Trade Forbes, Simon Constable (4/11/16)
The Rabble Understands Trade Pretty Well Huffington Post, Brad Miller (4/11/16)
Contrary to Donald Trump’s claims, free trade benefits the poorest Americans U.S.News, Clark Packard (27/10/16)
The Meaning of Open Trade and Open Borders The New Yorker, Bernard Avishai (17/10/16)
We just saw what voters do when they feel screwed. Here’s the economic theory of why they do it. Quartz, James Allworth (9/11/16)

Questions

  1. Use a simple two-product production possibility diagram to demonstrate the possible consumption gains to a country from trading with another country and specialising in exporting the good in which it has a comparative advantage.
  2. Search Donald Trump’s speeches to identify statements he has made about the trade policies he will pursue as president.
  3. Explain why some people may gain more from free trade than others. Why do the people who have gained the most tend to be the richest people?
  4. What are the arguments for and against the free movement of labour (a) within countries; (b) between countries?
  5. Compare the relative benefits and costs of tariffs and various forms of administrative constraints on trade.
  6. If the second player in the ultimatum game rejects an ‘unfair’ offer, should this behaviour be described as ‘irrational? Explain.
  7. Find out the details of the Trans-Pacific Partnership agreement. In what ways, other than through increased trade, would the agreement benefit the residents of the member countries?
  8. Does free trade threaten employment in the long term? Explain.
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The UK gender wage gap

Women in the UK on average earn less per hour than men. According to the Annual Survey of Hours and Earnings, the mean hourly pay for women in 2015 was 17.5% less than that for men. This figure is for all employees, full and part time. As far as full-time employees is concerned, the gap was slightly smaller at 13.9%. Nevertheless, as you can see from Table 6 in the linked Excel file, these gaps have decreased in recent years – but only slightly.

A recent paper from the Institute for Fiscal Studies has disaggregated the figures to give a better picture of this wage gap. It finds that having children is a major contributing factor to the gap. It also finds that this has a bigger impact on the earnings of graduates and those without a degree but with A levels.

On entry to the labour market, men and women earn roughly the same. People’s wages tend to rise during their 20s, but men’s rise slightly faster than women’s, causing a pay gap to open and widen – but slowly at first. Average (mean) men’s wages continue to grow during their 30s and a bit during their 40s. However, average women’s wages flatline. Thus the wage gap grows substantially, especially for the higher educated.

The paper argues that the arrival of children is a major contributing factor to this picture. It looks at the gap before and after the arrival of children. “The crucial observation is that the gap opens up gradually after the first child arrives and continues to widen for many years after that point.” By 12 years after the first child is born, the wage gap has widened to 33%.

The paper does not offer reasons for the small gap that exists before the arrival of children. But it does give possible reasons for the widening gap after having children. A major one, it suggests, has to do with labour market experience.

“As women are likely to do less paid work after the arrival of children, the level of labour market experience they have falls further and further behind that of their male counterparts, and the wage gap therefore widens.” They may also miss out on promotions.

Each year a woman spends away from the labour market is associated with an average 2% drop in pay compared with those who remain in work. For those with at least A levels, the penalty is 4%; but there is no drop in pay for those without A levels.

Other possible explanations include mothers taking work that requires a lower skill level, and at lower hourly pay, in order to gain flexibility in working hours. However, the evidence suggests that women who move to part-time work on having a child suffer no immediate drop in pay. But their hourly pay does grow more slowly, thus contributing to a widening of the gap.

Another explanation is employers exercising market power to discriminate against women with children. The paper does not consider this explanation.

The articles discussing the paper look at policy implications and identify various things that can be done to narrow the gap. Read the paper and articles and try answering the questions below.

Videos and podcasts
IFS: gender pay gap widens after first child Compendium of News Reports from BBC News at Six, Channel 4 News, ITV News at Ten and BBC Newsnight from Incorrigible Forever on YouTube (23/8/16)
Gender Pay Gap Hits Women With Children Hardest Sky News (23/8/16)
In Business: Supportive partner = success at work World of Business, BBC Radio 4, Peter Day (25/8/15)
Gender Pay Gap More or Less, BBC Radio 4, Tim Harford (26/8/16)
Gender pay gap: Why do mums increasingly earn less? BBC Victoria Derbyshire programme (23/8/16)

Articles
UK women still far adrift on salary and promotion as gender pay gap remains a gulf The Guardian, Katie Allen (23/8/16)
Gender pay gap: mothers returning to work earn a third less than men The Telegraph, Tim Wallace (23/8/16)
Mothers’ pay lags far behind men BBC News (23/8/16)
Four ways the gender pay gap isn’t all it seems BBC News Magazine, Simon Maybin (29/8/16)
Six ways to tackle the gender pay gap BBC News, Emma Atkinson (23/8/16)
Wage gap for UK women unchanged in 20 years Financial Times, Gemma Tetlow (23/8/16)
The UK’s slow march to gender pay equality Financial Times (23/8/16)
Gender Pay Gap For Mothers Widens For 12 Years After Having Children, New Research Finds Huffington Post, Jack Sommers (23/8/16)
Motherhood costs women a third of their salary compared to men, report reveals Independent, Joe Watts (23/8/16)
The gender pay gap means that more women will be in poverty later in life – but there is something the government can do Independent, Claire Turner (26/8/16)
Gender pay gap won’t close until 2069, says Deloitte The Guardian, Katie Allen (24/9/16)

Papers and Reports
Gender wage gap grows year on year after childbirth as mothers in low-hours jobs see no wage progression IFS Press Release (23/8/16)
The Gender Wage Gap IFS Briefing Note BN18, William Elming , Robert Joyce and Monica Costa Dias (23/8/16)
Women in STEM: Technology, career pathways and the gender pay gap Deloitte (September 2016)

Data
Gender pay differences: Annual Survey of Hours and Earnings: 2015 Provisional Results ONS Statistical Bulletin (18/11/15)
All data related to Annual Survey of Hours and Earnings: 2015 Provisional Results ONS datasets (18/11/15)
ASHE 1997 to 2015 selected estimates (See Tables 1 to 4, 6 and 9) ONS dataset (18/11/15)
All Employees – ASHE: Table 1 ONS dataset (18/11/15)

Questions

  1. Identify possible reasons for the wage gap between men and women.
  2. Why is the median wage gap different from the mean wage gap?
  3. Why is the wage penalty for periods without work greater for more highly educated women?
  4. To what extent is the gender wage gap a reflection of marginal productivity differences?
  5. Is the gender pay gap primarily about men and women being paid differently for doing the same job?
  6. What evidence is provided by the Chartered Management Institute (CMI) on women’s lack of pay progression?
  7. What could the government do to reduce the wage gap?
  8. Discuss the relative effectiveness of different policy alternatives.
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Perspectives on poverty

In this post we focus on three aspects of poverty around the world. The first is the definition of poverty. Is it an absolute or a relative concept? Does its definition change as the world develops. The second is the extent of poverty. Is the problem getting worse as inequality deepens, or are the numbers (absolutely or proportionately) getting smaller despite increased inequality? The third is policy to tackle the problem. What can be done and is being done? What answers are being given by policymakers in different parts of the world?

As far as the measurement of poverty is concerned, the simplest distinction is between absolute and relative poverty. Absolute poverty could be measured as income below a certain real level deemed necessary to achieve a particular standard of living. This could be specified in terms of sufficient income to have adequate food, shelter, clothing and leisure time, and adequate access to healthcare, clean water, sanitation, education, etc. An obvious problem here is what is considered ‘adequate’, as this is partly culturally determined and will also depend on physical and geographical features, such as climate.

The World Bank defines extreme absolute poverty as living on under $1.90 per day in purchasing-power parity terms. However, even after adjusting for purchasing power, what is considered the poverty threshold differs enormously from country to country. As the Wikipedia entry states:

Each nation has its own threshold for absolute poverty line; in the United States, for example, the absolute poverty line was US$15.15 per day in 2010 (US$22,000 per year for a family of four), while in India it was US$1.0 per day and in China the absolute poverty line was US$0.55 per day, each on PPP basis in 2010.

Relative poverty is normally taken to mean when a person’s income falls below a certain percentage of the mean or median. Thus in richer countries, for a given percentage, the poverty threshold would be at a higher absolute income. In the EU, people in relative poverty are defined as those with disposable income (after monetary benefits) less than 60% of the median.

Both approaches focus on consumption. Other approaches include social and cultural exclusion as dimensions of poverty.

What is clear is that poverty has a number of definitions. One problem with this is that politicians can focus on whatever definition suits them. Thus in the UK, with relatively high levels of employment, but often at low wages and only part-time employment, the Conservative government has redefined poverty as where no-one in a family is in work. Yet many working families have very low levels of income, considerably below 60% of the median.

The second aspect of poverty is its extent and whether it is growing. According to the United Nations, globally ‘extreme poverty rates have been cut by more than half since 1990. While this is a remarkable achievement, one in five people in developing regions still live on less than $1.25 a day, and there are millions more who make little more than this daily amount, plus many people risk slipping back into poverty.’

Despite this progress, in many countries extreme poverty is increasing. And in others, although the number in extreme poverty may be declining, it is still high and inequality is increasing so that more people are living only just above the extreme poverty line. The articles look at dimensions of poverty in different countries.

For example, the first The Conversation article argues that the financial crisis of 2008–09 led to a substantial increase in poverty across the European continent.

The impoverishment of Greece, Italy, Cyprus, Spain and Portugal has been so severe that these southern European countries, taken together, had higher levels of poverty and deprivation than many of the former Communist nations that joined the European Union in 2004.

The third aspect is how to tackle the problem of poverty. There are three broad policy approaches.

The first is the use of cash transfers, such as unemployment benefits. The second is providing free or subsidised goods and services, such as healthcare or education. The ability of a country to support the poor in either of these ways depends on its tax base. Also, clearly, it depends on its priorities. There is also the issue of incentives. Do benefits encourage or discourage the recipients from seeking work? This depends on the design of the system. For example, if childcare is subsidised, this may both aid poor parents and also encourage parents responsible for looking after young children to seek work.

The third is to attempt to improve the earning power of the poor. This may in part be by the second approach of improving education, training and health. But it may also involve removing restrictions to employment, say by making various forms of discrimination illegal. It may also involve increasing land rights. In many developing countries land is very unequally distributed; redistribution to the poor can make a substantial contribution to relieving poverty. Another approach is to encourage agencies which supply microfinance for poor people wishing to set up their own small business.

The articles below look at a number of dimensions of poverty: its measurement, its extent and its alleviation. They look at the problem from the perspective of different countries. It is interesting to see to what extent the problems and solutions they identify are country-specific or general.

Articles
Extreme poverty affects 1 in 8 globally Buenos Aires Herald (20/7/16)
How poverty has radically shifted across Europe in the last decade The Conversation, Rod Hick (20/7/16)
The economics of poverty The Tribune of India, S Subramanian (22/7/16)
Poverty Chains and Global Capitalism. Towards a Global Process of Impoverishment Global Research (Canada), Benjamin Selwyn (20/7/16)
Asia’s cost of prosperity The Nation, Karl Wilson (24/7/16)
Private rental sector is the ‘new home of poverty’ in the UK The Guardian, Brian Robson (20/7/16)
Challenges in maintaining progress against global poverty Vox, Martin Ravallion (23/12/15)
California, sixth largest economy in the world, has highest poverty rate in US wsws.org, Marc Wells (22/7/16)
How gross inequality and crushed hopes have fed the rise of Donald Trump The Conversation, Nick Fischer (21/7/16)

Information
Sustainable Development Goals – Goal 1: End poverty in all its forms everywhere United Nations
Children of the Recession: Innocenti Report Card 12 UNICEF, Gonzalo Fanjul (September 2014)
Listings on Poverty Joseph Rowntree Foundation
Poverty The World Bank
Hunger and World Poverty Poverty.com

Questions

  1. Distinguish between absolute and relative poverty. Give examples of specific measures of each and the extent to which they capture the complex nature of the problem.
  2. Discuss the appropriateness of the seven measures of poverty used in the first The Conversation article.
  3. How did the financial crisis affect the proportion of people living in poverty? Explain.
  4. What is the relationship between poverty and inequality? Does a more unequal society imply that there will be a greater proportion of people living in poverty?
  5. How has international poverty changed in recent years? What explanations can you give?
  6. What are the advantages and disadvantages of using income per head as a measure of poverty, whether absolute or relative?
  7. Why is poverty so high in (a) the USA as a whole; (b) California specifically?
  8. How does globalisation affect poverty?
  9. Are adverse environmental consequences an inevitable result of reducing poverty in developing countries?
  10. Is freer trade likely to increase or decrease poverty? Explain
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