For many people, internet access is something we take for granted and if you can’t afford to connect, you might be seen to be in relative poverty. Whilst you can afford food, clothes, housing etc, other goods and services are increasingly being seen as necessities. Everyone should be able to afford a mobile phone, a television, the internet. These are all factors that contribute towards a feeling of social inclusion, which is something the government has promoted since its election in 1997.
Although internet access is the norm for most people, in the UK our internet speeds are actually significantly slower than those in other industrialised countries. All this could be about to change, with Labour’s proposal for a 50p monthly tax on households’ landlines to fund super-fast broadband across the country. However, this plan has been condemned by some influential MPs, who argue that the tax is regressive.
“We believe that a 50 pence levy placed on fixed telecommunication lines is an ill-directed charge. It will place a disproportionate cost on a majority who will not, or are unable to, reap the benefits of that charge.”
More important, they argue, is to make sure that everyone has internet access, rather than that everyone has fast access, which is not needed at the moment. When there is a demand for high-speed access from the masses, the market will provide it. However, the government argues that high-speed access is crucial to our economic growth, as it allows access to huge social, economic and health benefits. On the other hand, could such a tax reduce growth, by limiting technological innovation? The Conservatives have promised that if elected, they will scrap this broadband levy and instead aim to fund high-speed internet access by providing ‘BT’s rivals with regulatory incentives to roll out new telecoms networks’. This highly contentious issue is discussed in the articles below.
The Broadband tax: dead in the water? BBC News, Rory Cellan-Jones (23/2/10)
Broadband tax plan condemned Press Association (23/2/10)
Social tariff users need to be made aware of broadband tax exemption Broadband Expert (17/2/10)
Broadband tax could dissuade technology innovation Broadband (27/1/10)
Tories pledge rise in broadband speed Financial Times, Andrew Parker and Ben Fenton (9/2/10)
Fast broadband: an election issue? BBC News, Rory Cellan-Jones (3/2/10)
Questions
- What will be the effect of a tax on landlines? Illustrate this on a diagram and think about who will be affected. What type of tax does it represent: direct, indirect, specific, ad-valorem, etc?
- Is the tax fair? Why is it argued to be regressive?
- How will the Conservative party’s aim to provide regulatory incentives to BT’s rivals allow them to provide high-speed internet access? Is their solution better than Labour’s proposal?
- Why might the provision of high-speed internet access (a) stimulate economic growth and (b) constrain economic growth?
- Use a growth model to illustrate the importance of technological progress in achieving high levels of economic growth.
- How will a tax affect households? Consider the impact on income and consumption and hence on aggregate demand.
Is this a problem you find when you go shopping? Maybe that’s because the shop that sells it has closed. A report by the Local Data Company has revealed that one in eight shops stand empty on Britain’s high streets, after the recession saw vacancies shoot up by 24% in the second half of 2009. The number of empty town-centre shops climbed to 17,880 in the second half of 2009, equivalent to 12% of the 149,000 shops covered by the research.
Margate in Kent and Wolverhampton in the Midlands were two of the worst-hit areas, where vacant shops stood at 27% and 24% respectively. Take a stroll down a high street in almost any city or town in the UK and you are bound to see ‘Shop for let’. We’ve seen Woolworths and Borders close down and Threshers’ parent company collapse. But these stores have largely remained empty.
Empty houses have also been a problem as the number of repossessions increases. Statistics show an average of 126 people a day were thrown out of their homes in 2009. What is the explanation behind this?
An obvious answer is the recession. As shops felt the strain of low demand, some were simply unable to cope and they shut down as a result. At the same time, new firms were reluctant to take the risk and enter the market during an economic downturn – and who can blame them?
However, are there other reasons why Britain’s high streets are seeing more and more empty shops? The following articles look at the reshaping of our high streets and some of the explanations behind it.
Empty Shops
Shops ‘empty due to recession’ The Press Association (11/2/10)
UK recession has left one in eight shops empty Telegraph, Graham Ruddick (11/2/10)
Bradford second worse for empty shop premises Telegraph and Argus, Will Kilner (11/2/10)
25% of town shops now empty Express and Star (11/2/10)
British town centres in crisis, conference told Reuters, Sinead Cruise (10/2/10)
Empty shop numbers continue to rise in UK Property Week, Laura Chesters (10/2/10)
Empty shops caused by more than recession Startups (12/2/10)
Empty Homes
Buy-to-let: Landlords blow as tenants struggle to pay Telegraph (11/2/10)
Housing Minister says repossession is the ‘best thing’ for homeowners Telegraph, Myra Butterworth (11/2/10)
Home repossessions at highest since 1995 This is Money (11/2/10)
Questions
- What are the main factors behind the high number of empty shops? Use a demand and supply diagram to illustrate these factors.
- In the Startups Article, the BRC Director says: “High street shops are often battling big bills for business rates and rents, parking and access difficulties, as well as failure to manage and invest in the area.” Illustrate this on a diagram and explain how this effect has contributed to empty shops.
- To what extent is more internet shopping the main cause of the problem? Why is it cheaper to run a business via the internet than on a high street?
- Why have some cities and towns been more affected than others?
- Is there a link between empty shops and repossessions?
- What more could the government and local councils do to try to encourage businesses to set up on the high street?
President Obama has proposed a major reform of the US banking system. This follows on from the proposed levy to be imposed on banks’ assets announced a few days ago (see “We want our money back and we’re going to get it”).
There are two elements to the new proposals. The first is to limit the size of banks’ market share. Currently, banks’ deposits are not permitted to exceed 10% of total retail deposits in the USA. This 10% limit would be extended to cover wholesale deposits and other liabilities. The idea is to reduce concentration and increase competition. At present the largest four banks hold over half the total assets of banks in the USA.
The second element involves separating casino banking from retail banking. This would be achieved by barring retail banks from owning or investing in private equity or hedge funds or from engaging in ‘proprietary trading operations’. As the second BBC article below states:
Proprietary trading involves a firm making bets on financial markets with its own money, rather just than carrying out a trade for a client in which only the client’s money is at risk.
This comes close to restoring the Glass-Steagall Act, which was repealed in 1999. The Act, which was passed in 1933 in the wake of the 1929 Wall Street cash and the subsequent Great Depression, separated commercial banking and investment banking. It was designed to prevent customers’ deposits being exposed to the riskier activities of investment banking.
What have been the reactions to President Obama’s announcement? Are these reactions justified? Will the proposals prevent another banking crisis and credit crunch? The following articles explore these questions.
Obama hammers the banks Financial Times, Tom Braithwaite and Francesco Guerrera (22/1/10)
Obama pushes new bank regulation (including video) BBC News (21/1/10)
Q&A: Obama’s bank curbs BBC News, Martin Webber (21/1/10)
Obama announces dramatic crackdown on Wall Street banks (including video) Guardian, Jill Treanor (21/1/10)
Barack Obama bank reforms: Trying to fix a broker society Telegraph, Louise Armitstead and Helia Ebrahimi (23/1/10)
Glass-Steagall lite The Economist (22/1/10)
Obama’s Plan Finally Attacks “Too Big to Fail” The Huffington Post, Neil K. Shenai (21/1/10)
Obama Sizes Handcuffs For Banks Forbes, Liz Moyer (21/1/10)
Obama’s Showdown With Wall Street Forbes, Richard Murphy (22/1/10)
President Obama shows the way Independent (23/1/10)
Wall Street’s $26m lobbyists gear up to fight Obama banks reform The Observer, Andrew Clark (24/1/10)
Obama’s drawn first blood – now it’s the UK’s turn The Observer, Ruth Sunderland (24/1/10)
Gordon Brown to push for ‘Tobin tax’ after Wall Street crackdown Guardian, Larry Elliott and Jill Treanor (22/1/10)
Myners: UK does not need to copy Obama banking reforms Guardian, Andrew Clark, Jill Treanor, Paul Owen (22/1/10)
Debate on London’s banking system The Observer, Will Hutton and Boris Johnson (24/1/10)
What Obama’s bank reforms really mean BBC News blogs, Peston’s Picks, Robert Peston (22/1/10)
Davos 2010: Central bankers seethe behind closed doors BBC News, Tim Weber (29/1/10)
Questions
- What are the arguments for and against separating retail banking from the more risky elements of investment banking?
- Should banks be allowed to fail? Explain your answer and whether it is necessary to distinguish different types of banks.
- Would putting a limit on the market share of banks prevent them from achieving full economies of scale?
- Why did banking shares fall after President Obama’s announcement? Was this a ‘good sign’ or a ‘bad sign’?
- What is meant by the ‘broker-dealer’ function of banks? Explain each of the specific types of broker-dealer function.
- Compare recent UK measures to control banks with those in the USA.
Kraft was seeking to take over Cadbury since September 2009, (see Cadbury: Chocolate all change and A Krafty approach to Cadbury). But the Cadbury board had rejected previous bids as being too low. The September bid, for example, was valued at £10.2bn. On 19 January 2010, however, after heated negotiations the board accepted the latest offer by Kraft valued at £11.5bn ($19bn).
But is the deal good news? Or will what is sweet for senior management and the financial institutions which brokered the deal be dark bitter news for the main stakeholders – consumers, workers and shareholders? The following articles explore the issues.
Cadbury battle ends with midnight handshake Financial Times, Lina Saigol (19/1/10)
Cadbury takeover: a crafty bit of business or an overpriced confection? Telegraph, Jonathan Sibun (20/1/10)
Cadbury’s sweet City deal leaves a bitter taste in Bournville Guardian, Heather Stewart and Nick Mathiason (19/1/10)
Thousands of Cadbury jobs under threat as Kraft swallows a British icon (including video) Times Online, Helen Nugent and Catherine Boyle (20/1/10)
Cadbury deal ‘the price of globalisation’ Financial Times, Jenny Wiggins and Jonathan Guthrie (19/1/10)
Cadbury sale ‘right thing to do’ FT video (19/1/10)
Bitterness as Kraft wins Cadbury Independent, Nick Clark (20/1/10)
The winners: Management duo in line for bumper pay packet from takeover deal Independent, Nick Clark (20/1/10)
Kraft came hunting in the only country that would sell – Britain Independent, James Moore (20/1/10)
Kraft’s takeover leaves a bitter taste in the mouth Telegraph, Tracy Corrigan (19/1/10)
A sweet deal – or a takeover that is hard to swallow? Independent, Hamish McRae (20/1/10)
Cadbury: banks are the real winners BBC News blogs: Peston’s Picks, Robert Peston (20/1/10)
Warren Buffett blasts Kraft’s takeover of Cadbury Guardian, Graeme Wearden (20/1/10)
Cadbury says job cuts inevitable after Kraft takeover (including videos) BBC News (19/1/10)
Cadbury and the open market theory: they’d better be right Guardian blog, Michael White (20/1/10)
The Business: Bonus season and the Cadbury takeover Guardian podcast, Aditya Chakrabortty
How did Quakers conquer the British sweet shop? BBC News Magazine, Peter Jackson (20/1/10)
Why Kraft must keep organic cacao farmers sweet Guardian blog, Craig Sams (20/1/10)
Questions
- What were the incentives for the Cadbury board to accept the proposed offer by Kraft?
- Do such incentives lead to the efficient operation of markets?
- Explain what is meant by ‘competition for corporate control’. To what extent is such competition in the interests of consumers?
- What economies or diseconomies of scale are likely to result from the takeover? What will determine the extent to which changes in costs are passed on to the consumer?
- How will the following stakeholders fare from the takeover, both in the short run and in the long run: (a) consumers; (b) workers; (c) shareholders?
- Examine Warren Buffet’s arguments for rejecting the deal.
Increasing traffic on the roads is observable by everyone and government policy is focused on reducing the demand for road space, rather than increasing its supply. One method has been to improve public transport and make it a viable substitute for car travel. Private costs of motoring have increased, but if there is no viable alternative, people will continue to demand car travel. Investment in buses and trains has improved their quality: they are more frequent, more reliable, arguably more comfortable and supposed to be part of an integrated transport policy. Local bus services provide a crucial link for local communities, but it is these services that are now facing problems.
In your economics lectures, you may have looked at local bus services, when you considered monopolies, oligopolies and possibly contestable markets. Oligopolies, whilst closer to the monopoly end of the market spectrum can be very competitive, but are also open to collusion and anti-competitive practices. The local bus sector has been referred to the Competition Commission by the Office of Fair Trading through complaints of ‘predatory tactics’ by companies. It is argued that local bus services, by limiting competition, are causing prices to rise and the quality of service to fall. One key issue is that those companies established in the market are alleged to be acting aggressively towards smaller bus companies and thus reducing competition in the industry. A low number of bids for supported service contracts in many areas, local bus routes dominated by a few large companies and predatory actions by incumbent firms are all complaints that this industry is facing.
This investigation is especially important, given the amount of public money that goes into the bus industry: £1.2bn. Investigations found that in areas of limited competition, prices were 9p higher. A number of take-overs have contributed to this situation. Two-thirds of bus services are controlled by only five operators. This limits competition in the market and hence is argued to be against public interest. Yet, industry representatives still argue that the market is competitive. Read the following articles and answer the questions about this issue. Was the OFT right to to initiate this investigation?
Local buses to be re-regulated BBC News (27/9/09)
OFT refers UK bus market to Competition Commission Dow Jones Newswires, Kaveri Nihthyananthan (7/1/10)
Office of Fair Trading prompts probe into bus services Guardian (7/1/10)
Trasport groups fear OFT competition probe over buses Telegraph, Alistair Osborne (4/1/10)
Bus industry competition queried BBC News (20/8/09)
OFT refers bus industry on poor service and prices Times Online, Francesca Steele (7/1/10)
Inquiry into local bus market ‘may delay investment’ Scotsman, Hamish Rutherford (5/1/10)
Questions
- Why are local bus services argued to be (a) a monopoly; (b) an oligopoly?
- What are the main aspects of UK competition policy?
- What is a concentration ratio and how does this apply to the bus industry?
- What predatory tactics are being used in the local bus industry and how do they affect competition, prices and quality?
- Why may limited competition be against the public interest?
- Traffic congestion is a major problem. Explain the economic theory behind government intervention in this area. Think about the effects of taxes; building more roads; investment in substitutes. Which is likely to be the most effective method?