Throughout October we saw widespread strikes, from bins to the post and airline flights to buses – and it’s not yet over. (See article The Winter of Discontent: the sequel?) Last November, BA cut the number of cabin crew members, despite strike action, which delayed hundreds of flights. This issue has yet to be resolved and over the weekend, there were further talks to try to reach some agreement. However, no truce was reached and so further strikes are now expected. Indeed, the Unite union announced the results of another ballot of cabin crew, showing even larger support for strike action.
However, BA is not the only airline facing strike action. Some 4000 pilots at Lufthansa, a German airline, called a four-day strike, following disputes over job security. This has led to thousands of flights being cancelled and thousands of passengers left stranded. Although the strike was suspended after one day, the dispute is not settled.
The stimulus for this action appears to date back to the huge turnover that Lufthansa made in 2007, with pilots feeling they should have a share in this success, along with its recent purchase of Austrian Airlines and the need to turn this into a profitable enterprise. The Lufthansa pilots are concerned that foreign pilots will be brought in to replace them in order to reduce costs. The airline fears that this strike could cost them about £21.9 million per day. With both sides unwilling to yield, it looks as though many passengers may find themselves stranded for a bit longer.
Articles
Questions
- How effective is the strike action by Lufthansa and BA likely to be? Which factors affect this?
- With a huge turnover in 2007, why were pay cuts at Lufthansa felt to be necessary by the company?
- How would wages be determined in the airline industry without trade unions? Illustrate this on a diagram and use that to explain why some workers get paid more than others.
- On your diagram of wage determination, now illustrate the effects of a trade union entering the market. How are wages and the equilibrium level of employment affected?
- Other than striking, what other options do workers and unions have?
- If strike action is costly to BA and Lufthansa, why don’t they simply agree to the unions’ demands?
In 2008, the UK government set up a National Equality Panel to investigate inequality. “The Panel was asked to investigate the relationships between the distributions of various kinds of economic outcome on the one hand and people’s characteristics and circumstances on the other.” The panel delivered its report, An Anatomy of Economic Inequality in the UK, in January 2010. It “addresses questions such as how far up or down do people from different backgrounds typically come in the distributions of earnings, income or wealth?”
The aspects of inequality examined include: educational outcomes, employment status, wages and other sources of income (such as benefits) both for the individual and the household, and wealth. “In our main report, we present information on the distributions of these outcomes for the population as a whole. Where possible we indicate how they have changed in the last decade or more, and how the UK compares with other industrialised countries. But our main focus is on the position of different social groups within the distributions of each outcome.”
A major influence on people’s income was the income, wealth and class of their parents since these affected education, peer groups and a whole range of other life chances. This made it virtually impossible to achieve equality of opportunity.
The report also looks at policy implications. These include not just the redistribution of incomes, but also the more fundamental issue of how to create equality of opportunity. “The challenge that our report puts down to all political parties is how do you create a level playing field when there are such large differences between the resources that different people have available to them.”
So what has happened to inequality? What explanations can be offered? And what can be done to lessen inequality? The following articles look at the findings of the report and offer their own judgements and analysis.
Rich-poor divide ‘wider than 40 years ago’ BBC News (27/1/10)
The Big Question: Why has the equality gap widened even through the years of plenty? Independent, Sarah Cassidy (28/1/10)
UK is one of world’s most ‘unequal’ societies Irish Times, Mark Hennessy (28/1/10)
Unequal Britain: richest 10% are now 100 times better off than the poorest Guardian, Amelia Gentleman and Hélène Mulholland (27/1/10)
No equality in opportunity Guardian, Phillip Blond and John Milbank (27/1/10)
Has the wealth gap really widened? Guardian, Tom Clark (27/1/10)
Inequality in a meritocracy Financial Times, Christopher Caldwell (29/1/10)
Who wants equality if it means equal poverty? (including video) Times Online, Antonia Senior (29/1/10)
A Major miracle on equality Public Finance, Richard Reeves (29/1/10)
UK one of the worlds most unequal societies; report says The Sikh Times (29/1/10)
Only policies, not posturing, will bring down inequality Independent (28/1/10)
The Report
The full 457-page report can be accessed here.
A 44-page summary of the report can be accessed here.
A 6-page executive summary can be accessed here.
Click here for the charts and tables from the report.
Another good source of information on the distribution of income is the Annual Survey of Hours and Earnings published by the Office for National Statistics.
Questions
- How can we measure inequality?
- Outline the findings of the report.
- Why is inequality so high in the UK and why has it continued to deepen?
- Have tax credits helped to reduce inequality?
- To what extent are greater equality and faster economic growth compatible economic objectives? How are incentives relevant to your answer?
- What specific policies could be adopted to give greater equality of opportunity? Identify the opportunity costs of such policies.
The most popular sport in the world: football. What else?! Huge games and salaries to match. But is it really as glamorous as we think? We may see some top players receiving a salary per week that most people can’t hope to come close to in a year, but players at Portsmouth have had to go without their wages on three occasions, as the club entered financial strife. It is these high salaries that prevent many clubs from breaking even, let alone making a profit. Whilst a lack of salary to footballers is a rare occurence, the football industry isn’t the money-churning machine that it appears to be.
We’re used to seeing full stadia and fans decked out in their club’s regalia, so surely football clubs are awash with money? But things aren’t so rosy. Research published by the Centre for the International Business of Sport at Coventry University in 2008 revealed that clubs in the top four tiers of English football between the 2001/2 and 2005/6 seasons made an aggregated loss of more than £1bn. In addition, 56 clubs in the English leagues went bankrupt between the Insolvency Act’s introduction in 1986 and June 2008.
We’ve seen a number of buyouts of clubs in recent years by extremely wealthy families. The Glazer family bought Manchester United in 2005, yet this buyout and many others are heavily leveraged and servicing their debts is now proving a problem. Whilst some clubs publish annual profits, it doesn’t mean they are without debt. Manchester United, defending champions of the English football league, earned profits of £48.2 million in the 2008/9 season, but its debts are estimated at around £700 million. The club received a loan of £509.5 million and had to pay £41.9 million in interest.
The owners of Chelsea and Manchester City have recently converted £340 million and £304.9 million of loans into equity respectively. Financiers, however, say this is simply “moving money from their left pocket to the right”. Manchester City reported a massive loss of £92.6 million for the 2008/9 financial year. Unfortunately for them, these figures ignore outlays since May 2009 for Carlos Tevez, Kolo Toure and Emmanuel Adebayor. Portsmouth’s £7 million share of TV revenue has been diverted directly to other clubs to whom they owe money for transfers.
So, how much of a money-maker is football? Well stadia are still full and it’s certainly growing in popularity in Asia. Premier teams are now appreciating how much money can be made out there by selling television rights. However, in 2008 the FA chairman Lord Triesman still estimated that English football debts stood at £3bn. With all this debt, are there any positives? Just one – at least it’s less than the UK’s public debt!
Abu-Dhabi family reduce debt for Manchester City Campden FB (7/1/10)
Manchester City post massive loss BBC News (6/1/10)
What a waste of money – the Premier League’s best paid flops Guardian, Jamie Jackson (10/1/10)
Portsmouth players still not paid as Premier League expresses concern at crisis Telegraph, Paul Kelso (6/1/10)
Paying by the rules The Lawyer, Adam Plainer (11/1/10)
Jacob unimpressed by fan protests Press Association (11/1/09)
Cardiff City to face winding up order BBC Sport (8/1/10)
Debt swap is ‘window dressing’ The Independent, Nick Clark (7/1/10)
Manchester United aim to raise £500m in bond sale in bid to reduce mounting debt Telegraph, Mark Ogden (11/1/10)
Chelsea debt wiped off by Roman Abramovich but club still record loss Telegraph (30/12/09)
Manchester United to raise £500m BBC News (11/1/10)
Cristiano Ronaldo saves Man-Utd – Again Sky News (11/1/10)
Tony Fernandes and David Sullivan vie for control of West Ham Telegraph, Jason Burt (16/1/10)
One thing at Manchester United isn’t going downhill – their debt Guardian, David Conn (6/1/10)
Premier League looks to cash in on Asia BBC News, Guy de Launey (29/12/09)
Questions
- Why do footballers receive such high wages? Illustrate why wages in the Premier League are so much higher than those received by players in non-league teams. What’s the key factor?
- What is debt swapping?
- In the Independent article: ‘Dept swap is Window dressing’, what does it mean by (a) window dressing and (b) debt swap is ‘moving money from their left pocket to the right’?
- How can a club such as Manchester United record a profit, but have substantial debts?
- What is leveraging and why is it a problem for some football teams?
- How will an issue of bonds enable a football club to refinance its debt?
- What opportunities does Asia present to English football?
With banks around the world revealing massive profits and huge bonuses, governments are getting increasingly uneasy that their bailouts have lined the pockets of bank executives. Not surprisingly voters are demanding that bankers should not be rewarded for their reckless behaviour. After all, it was taxpayers’ money that prevented many banks going bankrupt during the credit crunch.
Banks, of course, seek to justify the bonuses. If you don’t pay large bonuses, they maintain, then senior staff will leave and profits will suffer. It’s nothing to do with ‘morality’, they claim. It’s the market. ‘If you don’t pay the market rate, then executives will leave and take higher-paid jobs elsewhere.’
So are governments calling this bluff? In his pre-Budget report in December, the UK’s Chancellor of the Exchequer, Alistair Darling, announced a 50% tax on bank bonuses over £25,000. This was followed by an announcement by Nicholas Sarkozy that the French government would impose a similar 50% tax on bonuses over €27,500.
Then in mid January, President Obama proposed a tax on financial institutions with balance sheets above $50 billion. This would be levied at a rate of 0.15 percent of certain assets. But this was not a tax on bank bonuses, as favoured by the British and French governments, nor a tax on financial transactions – a type of Tobin tax – as favoured by Angela Merkel (see Tobin or not Tobin: the tax proposal that keeps reappearing). Nevertheless, it was another way of recouping for the taxpayer some of the money used to rescue banks and prevent a banking collapse.
So is this payback time for bankers, or will it simply be bank shareholders that suffer? And why can banks pay such large bonuses in the face of so much public hostility? The following articles explore the issues.
To leave or not to leave: the supertax question Financial Times, Patrick Jenkins and Kate Burgess (9/1/10)
French tax to raise €360m Financial Times, Scheherazade Daneshkhu and Ben Hall (13/1/10)
Oversized bank bonuses: classic case of overcharging The Business Times (Singapore), Anthony Rowley (15/1/10)
Obama vows to recoup ‘every dime’ taxpayers lent banks Belfast Telegraph (15/1/10)
Obama outlines $117bn bank levy (including video) BBC News (14/1/10)
Obama lays out his proposal to tax big US banks Sydney Morning Herald, Jackie Calmes (16/1/10)
Obama’s bank tax will only work if there’s a master plan in place Telegraph, Tracy Corrigan (14/1/10)
Turning the tables The Economist (14/1/10)
Obama’s bigger rod for banks BBC News, Peston’s Picks, Robert Peston (14/1/10)
Will Obama’s tax go global? BBC News, Peston’s Picks, Robert Peston (15/1/10)
Darling: I won’t do an Obama and tax the banks Scotsman, Eddie Barnes (16/1/10)
Obama tax is only the beginning of the banking Blitz Telegraph, Edmund Conway (15/1/10)
Bank taxes edge closer to the real target Guardian, Dan Roberts (15/1/10)
Questions
- Compare the incentive effects on bankers of the British, French and US measures discussed in the articles.
- Why does the ‘market’ result in high bank bonuses? Where does economic power lie in the market?
- Assume that you hold shares in Bank A. Would you welcome (a) high bonuses for executives of Bank A; (b) a tax on bank bonuses; (c) a ceiling on bank bonuses; (d) a tax on certain bank assets? Explain.
- What insights can game theory provide for the likely success in clawing back bank bonuses without doing damage to the economy?
- Consider whether Obama’s tax will “go global”.
The UK section of the North Sea used to be sufficient to supply all of the country’s gas requirements, but now some has to be imported from countries such as Norway. With the cold weather, the usage of gas has increased to record levels and there are now concerns for future supplies, especially if the cold weather returns.
However, the National Grid has said that there isn’t a problem, despite a glitch with a Norwegian gas supply. Gas supplies from various sources have been increased to deal with this record demand. There have been calls for Britain to build more gas storage facilities and the National Grid did issue ‘gas balancing alerts’, asking power firms and other large industries to cut back on their gas consumption. There are suggestions that even if supplies of gas aren’t a problem at the moment, we could see serious shortages in a few years.
Following growing demand for gas supplies, wholesale prices rose, but they did fall again when supplies were increased. Prices of household bills could be affected in the future, but for now, it’s too soon to tell. However, rising prices could spell further trouble for ours and other economies suffering from extreme weather on top of a financial crisis. Economic recovery could be put in jeopardy.
This fear of gas shortages and security of supply has led environmental and business groups to argue that Britain needs to diversify its energy supplies and become less dependent on foreign exports. This issue fits in with the latest developments in new investment in wind turbines.
Who knew that something as beautiful as snow could cause so much trouble and provide so much economic analysis!
National Grid warns of UK gas shortage Guardian, David Teather (5/1/10)
Is the United Kingdom facing a natural gas shortage The Oil Drum (9/1/10)
Wind farms: Generating power and jobs? BBC News (8/1/10)
Gas rationing in -22C Britain increases fears of energy crisis Mail Online, Martina Lees (8/1/10)
Gas usage hits new high in UK cold snap BBC News (8/1/10)
Energy fears over gas and kerosene shortages Scotsman (6/1/10)
Gas shortages highlights firms’ exposure to energy security risks Business Green, Tom Young (8/1/10)
Uh-oh: the return of $3 gas CNN Money, Paul R La Monica (7/1/10)
Natural gas prices seen rising with winter shortages Global Times, Chen Xiaomin (4/1/10)
Gas demand hits record on Thursday Reuters (8/1/10)
Gas demand in UK hits another highBBC News, Hugh Pym (7/1/10)
Questions
- Illustrate the effects in the gas market of increasing demand and the resulting shortages. Then show the effects of increasing the supplies of gas. How is equilibrium achieved when there is a shortage in the market?
- Why did energy prices increase and then fall?
- To what extent should the government have been able to forecast this higher demand? Should better contingency plans have been in place?
- The article from CNN Money looks at the effect of rising prices of oil and energy and how this is likely to affect consumer spending. Why could rising prices of these commodities adversely affect economic recovery?
- What is an ‘interruptible contract’ and how useful have they been in dealing with these gas shortages?
- Why has this gas shortage presented environmental groups with an opportunity to promote renewable energy supplies? Think about economic interdependence.
- What alternatives are there to our current gas sources? Are they realistic alternatives?