In an attempt to stave off recession, countries around the world have made extensive used of fiscal stimuli. Combinations of tax cuts and increases in government expenditure have been used to boost aggregate demand and thereby to halt falling national income. “The G20 group of economies … have introduced stimulus packages worth an average of 2% of GDP this year and 1.6% of GDP in 2010.”
But how much will national income respond to a particular fiscal stimulus? It depends on the size of the fiscal multiplier for each type of government expenditure increase or tax cut. The bigger the multiplier for each expansionary measure, the more will national income rise. Clearly, to estimate the effects of their fiscal measures, governments would very much like to know the size of these multipliers. But that’s not so easy, as the following article from The Economist explains.
Much ado about multipliers The Economist (24/9/09)
Questions
- What are the formulae for (a) the government expenditure multiplier; (b) the tax multiplier?
- Why is the value of the multiplier likely to vary with the type of government expenditure increase or tax cut that is used? Which types of government expenditure increases and tax cuts are likely to have (a) the largest effects; (b) the fastest acting effects?
- Why is the size of any particular fiscal multiplier difficult to predict? How do expectations impact on the size of the multiplier?
- Under what circumstances are fiscal measures likely to be ‘crowded out’? How can monetary policy be used to prevent, or at least minimise, crowding out?
The leaders of the G20 countries gathered in Pittsburgh on 24 and 25 September 2009 to discuss a range of economic issues. These included co-ordinated action to ensure the world economy maintained its fragile recovery; reforming the IMF; agreeing action on bank regulation and the limiting of bankers’ bonuses.
The following is a selection of podcasts and videos looking at various aspects of the summit and its outcomes. The first one, to set the scene, is a webcast from the IMF looking at the state of the world economy and the role of macroeconomic policy and banking regulation. There are also some articles looking at the achievements of the summit. (See here for G20 draft communiqué)
World Economic Outlook, September 2009 (video) IMF Webcast (22/9/09)
G20: Who will feel the pain and when? (video) BBC Newsnight (25/9/09)
G20 leaders meet in Pittsburgh BBC Today Programme (25/9/09)
‘Little change’ in bank regulation BBC Today Programme (25/9/09)
World Bank’s Zoellick on G20 Summit (video) CNBC News (25/9/09)
G20 ‘was a successful meeting’ BBC Today Programme (26/9/09)
Obama on G20 plans for financial reforms (video) BBC News (25/9/09)
Greater role for emerging powers BBC News, Amartya Sen (25/9/09)
Preventing Another Global Crisis (video) CBS News (25/9/09)
Obama hails progress at G20 (video) Reuters (26/9/09)
World map of deficits and stimulus spending
The cost of the financial meltdown: Deficits and spending BBC News
Articles:
G20: Banks to be forced to double capital levels Telegraph (25/9/09)
Will tough new G20 measures work? BBC News (26/9/09)
Analyst View: G20 ends reign of G7 in Pittsburgh Reuters (25/9/09)
Leaders bury differences over bonuses to agree standards FInancial Times (26/9/09)
Same tune, different fiscal instrument on bank bonuses Times Online (25/9/09)
G20: History and fudge Peston’s Picks, BBC News (25/9/09)
What the G20 said on bonuses (and why it didn’t say much at all) eFinancialCareers (27/9/09)
Hamish McRae: G20 communiqué signals transfer of power to the emerging world Independent on Sunday (27/9/09)
The G20 fantasy Guardian (27/9/09)
Questions
- Explain the issues faced by the G20 countries.
- To what extent is trying to reach international agreement on co-ordinated action a prisoner’s dilemma game? Is it, nevertheless, a positive sum game?
- What was agreed at Pittsburgh and to what extent will it lead to action as opposed to being mere rhetoric?
- The G8 is effectively dead, having being replaced by the G20, plus Spain, The Netherlands and various international bodies, such as the IMF. What are the advantages and disadvantages of this move?
Up until a year ago, milk and cheese prices were soaring woldwide (see Cheddar – the king of cheeses at £2000 per tonne). A surging world economy and rapidly growing demand from China and India were driving up commodity prices, including milk and milk-based producs. In the UK, average farmgate prices for milk had risen from 19 pence per litre (ppl) in 2006 to 27.4ppl by October 2008 (see here for data). Since then, however, as the global economy has plunged into recession, milk prices have fallen. By September 2009, the farmgate price had fallen by over 18 per cent to around 22.4ppl. With rising costs for fuel and cattle feed, many dairy farmers are now making a loss and are either quitting, or considering quitting, the industry.
It’s a similar story in Europe, North America and other dairy producing regions of the world. In Europe “the mood is turning sour. Last week 300 tractors dragged milk containers over fields in southern Belgium, dumping a day’s worth of production (see video). Similar protests were made in Germany, France, the Netherlands and Luxembourg. The crisis has driven many EU farmers into a ‘milk strike’, with thousands refusing to deliver to the industrial dairy conglomerates that produce everything from skimmed milk to processed cheese.”
So is this just market forces in action and will prices rise again as the world economy recovers? Or is it a reflection, in part, of the monopsony power of the supermarkets and the milk processing industry? The following articles look at the issues, both in the UK and the rest of Europe and in the USA.
Milk ‘strikes’ and shortages hit Europe as UK dairy industry reels from crisis Observer (20/9/09)
German agriculture ministers meet as European milk crisis escalates Deutsche Welle (17/9/09)
EU Milk Strike Joined by More Than 60,000 Farmers, Group Says Bloomberg (18/9/09)
EU to boost aid for dairy farms BBC News (17/9/09)
Milk: Commission proposes further measures to help dairy sector in short, medium and long term European Commission Press Release (17/9/09)
Milk output fell in August as dairies cut herds Chicago Daily Herald (19/9/09)
New England tries to save dairies The News Journal (Delaware) (20/9/09)
Questions
- For what reasons are many dairy farmers now making a loss?
- For what reasons has the power balance in the wholesale milk market shifted towards milk purchasers (such as supermarkets) and away from farmers?
- How would a phased liberalisation of EU milk production help the UK’s dairy farmers?
- Discuss the likely effectiveness of the European Commission’ proposed measures to help dairy sector in short, medium and long term.
- What is likely to happen to milk prices over the next two years and what will be the likely effect on supply? Explain your answer and consider the relevance of price elasticity of supply.
- “Agriculture officials and farmers in Vermont, New Hampshire and Massachusetts have launched a program called Keep Local Farms. … Organizers say they hope to appeal to consumers’ growing taste for local foods” (see final linked article above). What determines the likely effectiveness of such ‘buy local’ movements? What incentives are there for people to buy local? If countries in general encourage people to buy local, is this a zero sum game? Explain.
Is the power supply industry a cartel? Are the energy companies exploiting a position of market dominance to increase profits at the expense of consumers? At first sight, it would certainly seem so. Despite falling wholesale prices for gas and electricity, the six main power suppliers have not reduced prices to their customers. The result has been a substantial rise in profits. Over the past three years, the average annual gross profit for supplying each dual-fuel customer has been £110. The figure has now risen to £170, a rise of 55%. This is likely to rise further in the short term with further reductions in wholesale energy prices over the next few weeks.
But despite this large increase in profits, the power companies are considering increasing prices this coming winter if wholesale energy prices start to rise again, even though the expected wholesale price rise would still leave them with a gross profit of £140 per dual-fuel customer.
Ofgem, the gas and electricity industry regulator, wrote to the six main companies asking them to explain their pricing position. You can read Ofgem’s report from the link below. In it, Ofgem argues that there is scope for the companies to cut their prices. But Ofgem no longer has the power to cap prices: in 2002 the RPI-X system of price cap regulation was abandoned, since it was felt that there was enough competition between suppliers not to warrant price regulation.The articles below consider the question of whether the companies are justified in their pricing policy or whether they are exploiting their market power to make excessive profits.
No energy cuts despite huge profits (video) Channel 4 News (18/9/09)
Energy bills may rise despite wholesale price drop Times Online (19/9/09)
Where is the will to power? Times Online (19/9/09)
Energy bills set to rise further, companies warn Guardian (18/9/09)
Energy bills ‘unlikely to fall’ BBC News (18/9/09)
Bills face a power surge (Douglas Fraser’s Ledger) BBC News (18/9/09)
An Electricity and Gas Price Cartel? Why Ofgem Can’t Tell iStockAnalyst (17/9/09)
Evidence from Ofgem:
Ofgem’s letter to the six main suppliers and their responses to Ofgem can be read here
Ofgem’s findings can be read in Quarterly Wholesale / Retail Price Report – August 2009
Ofgem Factsheet: Household energy bills explained
Questions
- Assess the justification by the power companies for not reducing the price of gas and electricity to their customers.
- Explain what is meant by ‘hedging’ in the context of the purchase of gas and electricity.
- The power suppliers are an oligopoly. If there is collusion between them, what form does it take? Why is it very hard to find evidence of collusion?
According to labour market data released by Office for National Statistics on 16 September, unemployment has risen to a 14-year high. The Labour Force Survey figures show a rise in unemployment from 2.26 million (7.2%) in the three months to April 2009 to 2.47 million (7.9%) in the three months to July 2009. The data also show a 12,000 rise in the claimant count between July and August.
However, there are signs that the UK economy is growing again. This was underlined by evidence given to the House of Commons Treasury Select Committee on 15 September by the Governor of the Bank of England. So does this mean that businesses will take on more labour and that unemployment will fall?
The problem is that unemployment is a lagging indicator of economic activity. The reason is that many firms are reluctant to shed labour in recession and simply take up the slack as the economy recovers, without taking on extra labour. Even if they are short of labour, they may prefer to offer overtime to existing staff rather than employing new staff for fear that the upturn may be short-lived.
So what is likely to happen to unemployment over the coming months? Will it slowly fall or will it go on rising and, if so, for how long? Read the articles and then attempt the questions.
UK unemployment at 14 year high (video) BBC News (16/9/09)
UK jobless rate hits 14-year high Telegraph (17/9/09)
Unemployment crisis creates divide between private and public sector Telegraph (16/9/09)
Record one in five young people out of work (including video) Times Online (16/9/09)
Unemployment hits highest since 1995 Guardian (16/9/09)
Rising UK unemployment (charts of UK unemployment from 1984 to the present day) Guardian (16/9/09)
Unemployment at highest level since 1995 (including video) Channel 4 News (16/9/09)
Questions
- What is meant by the terms ‘leading indicators’ and ‘lagging indicators’? Give some examples of each.
- What determines the length of lag between a rise in output and (a) a rise in employment and (b) a fall in unemployment?
- Is unemployment a good measure of the excess supply of labour in the labour market? What other evidence might you need in order to assess the degree of slack in individual labour markets?
- If labour becomes more flexible in terms of the hours that people are prepared to work, will the unemployment lag increase or decrease? Explain.
- Under what circumstances does obtaining a university degree improve your job prospects?
- To what extent would reforming the benefits system, so as to reduce the poverty trap and give people a greater incentive to work, reduce unemployment (a) during a recession and (b) over the long term? What type of unemployment would be affected?