Author: John Sloman

With recession biting, many people are cutting back on spending. This has not been even across products, however. People have tended to shift from more luxurious products, such as foreign holidays and branded products, to holidays at home and supermarkets’ own-brand products (see Shoppers opt for supermarket brands Financial Times (4/8/09)). There has also been a decline in spending on consumer durables, such as cars, furniture and kitchen appliances.

One sector that has fared better than most, however, is the teenage market. “So far it seems teenagers have not cut back on their shopping. Teen-targeted retailers such as Primark, New Look, H&M, Asos and Hot Topic are all weathering the recession better than rivals aimed at an older demographic.” This is a quote from the first of the two linked articles below, which look at this market and its future prospects.

Teenage spenders struggle to learn BBC News (4/8/09)
Hollister: the shop that smells like teen spirit Times Online (5/8/09)

Questions

  1. How is spending on particular products during a recession related to their income elasticity of demand? How does the income elasticity of demand depend on the length of the time period under consideration?
  2. Why has the teenage market been less susceptible to the recession than many other markets?
  3. To what extent will being ‘bargain savvy’ be enough for teenagers to survive the recession without having to make substantial changes in spending patterns? Consider the concept of price elasticity of demand in your answer.

Whilst some economists predicted the banking crisis of 2007/8 and the subsequent global recession, many did not. Was this a failure of macroeconomics, or at least of certain macroeconomic schools of thought, such as New Classical economics? Or was it a failure to apply the subject with sufficient wisdom? Should the subject be radically rethought, or can it simply be amended to take into account aspects of behavioural economics and a better understanding of systemic risk?

The four linked articles below from The Economist look at the debate and at the whole state of macroeconomics. The other articles pick up some of the issues.

Will the ‘crisis in macroeconomics’ lead to a stronger subject, more able to explain economies in crisis and not just when they are working well? Will a new consensus emerge or will economists remain divided, not only about the correct analysis of how economies work at a macro level, but also about how to tackle crises such as the present recession?

What went wrong with economics The Economist (16/7/09)
The other-worldly philosophers The Economist (16/7/09)
Efficiency and beyond The Economist (16/7/09)
In defence of the dismal science The Economist (6/8/09)
How to rebuild a shamed subject Financial Times (5/8/09)
What is the point of economists? Financial Times – Arena (28/7/09)
Macroeconomic Models Wall Street Pit (23/7/09)
Macroeconomics: Economics is in crisis – it is time for a profound revamp Business Day (27/7/09)

Questions

  1. Distinguish between ‘freshwater’, ‘saltwater’ and ‘brackish’ macroeconomics.
  2. Explain why economists differ over the efficacy of fiscal policy in times of recession. To what extent does the debate hinge on the size of the multiplier?
  3. Why is the potential for macroeconomics higher now than prior to the recession?
  4. What is meant by the ‘efficient market hypothesis’? How did inefficiencies in financial markets contribute to the banking crisis and recession?
  5. Should economists predict the future, or should they confine themselves to explaining the present and past?

The current recession has seen the re-emergence of many of the intellectual battles fought amongst economists between the two worlds wars and again from the 1960s to the 1980s. The current debate has hinged around the appropriate policy response to the current recession. Is the solution a Keynesian one of stimulating aggregate demand; or is it a new classical one of keeping public spending under control to make room for private spending and to allow the market to function to best effect? And what about banking reform? What are the arguments here? The following articles by Lord Skidelsky examine the debate.

Robert Skidelsky, Economists clash on shifting sands Financial Times (9/6/09)
Robert Skidelsky, Economic reform needs a dose of reality Guardian (27/7/09)

See also the following video:
Robert Skidelsky, The financial challenge of our times Guardian (2/3/09)

Questions

  1. Explain the ways in which economics is (a) similar to and (b) different from the natural sciences.
  2. For what reasons would new classical economists criticise the fiscal stimulus packages pursued by many countries in the past few months?
  3. Under what circumstances would a fiscal stimulus crowd out private spending? Do these circumstances apply (a) today; (b) over the next two years?
  4. Why may crowding out in practice depend on issues of confidence?
  5. What ‘Keynesian lessons’ have been learned from the banking crisis and recession?

Preliminary figures for Quarter 2 UK GDP suggest that the UK economy has been declining faster than many had expected. Does this mean that the recession in the UK will be more prolonged, or can we expect a return to growth by the end of the year? How much does the outcome depend on policy decisions taken now and what should be done in terms of quantitative easing and other policy measures?

The answers to these questions depend to some extent on the reliability of the figures, which, after all, are only preliminary estimates. Past estimates have tended to understate the level of output and growth, but could the latest estimates understate the depth of the recession? The following articles look at the figures and their implications for policy. The two articles from The Economist look at the global context.

UK economy continues to contract BBC News (24/7/09)
Recession Britain Guardian (24/7/09)
‘Shocking’ GDP figures raise fears of long road to recovery Herald (25/7/09)
Hopes of early end to recession dashed Independent (25/7/09)
Treasury defiant on growth despite gloom over GDP Times Online (26/7/09)
UK GDP: What the economists say Guardian (24/7/09)
Hamish McRae: The GDP figures were profoundly gloomy … but they were wrong Independent (26/7/09)
The shrinking economy BBC News, Stephanomics (24/7/09)
Here comes August, the cruellest month of all Observer (26/7/09)
Rebalancing global growth: a long way to go Economist (23/7/09)
Unpredictable tides Economist (23/7/09)
Gross domestic product, Preliminary estimate, 2nd quarter 2009 Office for National Statistics, Statistical Bulletin (24/7/09)
Gross domestic product, Preliminary estimate, 4th quarter 2008 Office for National Statistics, Statistical Bulletin (24/7/09)

Questions

  1. What factors will determine whether the UK economy starts to growth again by the end of 2009?
  2. Plot the quarterly growth rate of GDP from 2007 Q1. Plot two lines on the same graph: one from the 2008 Q4 estimates and one from the 2009 Q2 estimates (see last two links above). How would you explain the discrepancies between the figures?
  3. What policy measures would you recommend to the Bank of England and the government in the light of the GDP estimates?
  4. ’The deeper and longer the recession, the more will potential (as well as actual) output fall.’ Do you agree with this statement? Explain your answer.
  5. Referring to the two Economist articles, what conditions are necessary for sustained long-term economic growth?

On July 8 the UK government published its long-awaited White Paper on reform of the system of banking regulation. Several commentators had called for the abolition of the ‘tripartite’ system of regulation, whereby responsibility for ensuring the stability and security of the banking system is shared between the Financial Services Authority (FSA), the Bank of England and the Treasury. Some have advocated a considerable strengthening of the role of the Bank of England and even abolishing the FSA. What is generally agreed is that there needs to be ‘macro-prudential’ regulation that looks at the whole banking system and at questions of systemic risk and not just at individual banks. Several of the articles below debate this issue.

The government’s White Paper proposes keeping the tripartite system but also strengthening various aspects of regulation. Amongst other things, it proposes giving the FSA powers to ‘penalise banks if their pay policies create unnecessary risks and are not focused on the long-term strength of their institutions’. It also proposes setting up a ‘new Council for Financial Stability – made up of the FSA, the Bank of England and the Treasury – to meet regularly and report on the systemic risks to financial stability’. Banks would also be required to increase their capital adequacy ratios. The first two articles below give an outline of the proposals. The detailed proposals are contained in the third link, to the Treasury site.

Chancellor moves to rein in ‘risky’ banks Independent (9/7/09)
Banks to face tougher regulation BBC News (8/7/09)
Reforming financial markets HM Treasury (8/7/09)
Treasury sees devil in the detail Financial Times (7/7/09)
How to police the banking system Independent (8/7/09)
City regulation: a quick guide Telegraph (8/7/09)
Treasury White Paper: what it means for the financial services industry Telegraph (8/7/09)
Key issues: Financial regulation BBC News (8/7/09)
Alistair Darling accuses banks of ‘kamikaze’ attitude to loans Telegraph (5/7/09)
HSBC boss on banking reform BBC News video (3/7/09)
Bankers ‘want to be proud of what they do’ BBC Today Programme, Radio 4 (7/7/09)
Divisions on display at Mansion House BBC Newsnight video (18/6/09)
Who should supervise the banks? BBC Newsnight video (18/6/09)
Governor wants more bank powers BBC News video (17/6/09)
King puts spotlight on banks too big to fail Times Online (21/6/09)
Mervyn King: Banks cannot be too big to fail Edmund Conway blog, Telegraph (17/6/09)
The City doesn’t need any more rules Telegraph (6/7/09)
Treasury admits ‘intellectual failure’ behind credit crisis Telegraph (8/7/09)
Bankers to face draconian pay veto Times Online (8/7/09)

Questions

  1. What do you understand by macro-prudential regulation? What would be the difficulties of applying regulation at this level?
  2. Why may liquidity ratios and capital adequacy ratios that are deemed appropriate by individual banks be inappropriate for the banking system as a whole?
  3. If banks are too big to fail, why does this create a moral hazard?
  4. Examine the case for splitting universal banks into retail banks and investment banks.
  5. Examine the arguments for and against regulating the level and nature of remuneration of senior bank executives.