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?
The pound is regarded as an international currency. However, the financial crisis has caused the value of the pound to fall, reaching a four-month low against the euro in September. This recent weakening of sterling is partly the result of worries that the Lloyds Banking Group will find it difficult to meet the ‘strict criteria to leave the government’s insurance scheme for toxic banking assets’ set for it by the Financial Services Authority.
However, one of the main reasons relates to recently published figures showing UK debt (see for data). The UK’s public-sector net borrowing has now reached £16.1bn and the government’s overall debt now stands at £804.8bn: 57.5% of GDP. This represents an increase of £172bn in the past year. Over the longer term, this is unsustainable. The government could find it increasingly difficult to service this debt. This would mean that higher interest rates would have to be offered to attract people to lend to the government (e.g. through bonds and bills), but this, in turn, would further increase the cost of servicing the debt. Worries about the potential unsustainability of UK govenrment debt have weakened the pound.
But isn’t a lower exchange rate a good thing in times of recession as it gives UK-based companies a competitive advantage over companies abroad? The following articles consider UK debt and the exchange rate.
Pound plumbs five-month euro low BBC News (21/9/09)
Market data Telegraph (22/9/09)
Pound slides back against dollar and euro Guardian (21/9/09)
Pound drops as UK stocks fall for first time in seven days Bloomberg (21/9/09)
Public sector borrowing soaring BBC News (18/9/09)
Govt spending cuts ‘could help pound’ Just the Flight (21/9/09)
Pound dips to four month euro low BBC News (18/9/09)
Weak pound hits eurozone holidaymakers Compare and save (21/9/09)
Questions
- What is the relationship between public debt and the value of the pound? How do interest rates play a part?
- What is quantitative easing and has it been effective? How does it affect the exchange rate?
- What are the advantages and disadvantages of a freely floating exchange rate relative to a fixed exchange rate?
- If the UK had joined the euro, do you think the country would have fared better during the recession? Consider public debt levels: would they have been restricted? What would have happened to interest rates? What would have happened to the rate of recovery
For some time now, education has been a top priority for the government. They have been tackling standards in schools and have a target of a 50% participation rate in higher education. Most people agree that school education should be free, but opinion is divided when it comes to higher education. Is the return to the individual greater than that to society or vice versa? Is it the same for all degrees? This is one of the questions that affects funding. Should the individual pay? Or the government? Or should there be a mixture of funding?
The question of university education has become even more of an issue in the current recession, with many seeing a university education as a way of avoiding, what could be, inevitable unemployment. With this increase in demand, there is increasing pressure on the funding: it is simply not fiscally feasible to fund everyone’s university education. As such, business leaders have advised a rise in tuition fees. Students could be charged thousands more and made to face a higher interest rate on any loans. This highly contentious issue is considered in the articles below.
Charge students more, say bosses BBC News (21/9/09)
Middle class university students ‘should pay more’ Telegraph (21/9/09)
Elite universities plan to cut UK student numbers amid funding drop Telegraph (20/9/09)
Fee rise must aid poor students BBC News (27/7/09)
Loans delay for 150,000 students continues Daily Mail (19/9/09)
‘No fee degrees’ university plan BBC News (8/7/09)
‘New market’ in education (podcast) BBC Today Programme (8/7/09)
Bring back tuition fees for middle class students Scotsman (11/9/09)
CBI advises raising university fees to £5,000 a year to tackle funding crisis Guardian (21/9/09)
University ‘way out of recession’ BBC News (8/9/09)
Schools secretary Ed Balls under fire over education cuts Mirror (21/9/09)
Students should pay more – CBI (video) BBC News (21/9/09)
Questions
- Why is education described as a merit good? Explain the characteristics and why it constitutes a market failure.
- Identify any externalities involved in higher education. Do they imply that the free market would led to a level of higher education that is above or below the social optimum?
- List the costs to society of a university education. (Think about opportunity cost).
- What are the arguments for (a) only the individual funding their university education (b) the government funding university education (c) a combination of both?
- Is it a reasonable policy to increase university fees? If so, should students receive loans to cover this increase? If not, what do you think is an alternative option to help this funding crisis?
All nations are interdependent and few have escaped the recent economic turmoil that began with the collapse of the sub-prime mortgage market in America. Businesses have gone under; interest rates have been cut and then cut again; profits have fallen; unemployment has risen and expectations have remained gloomy.
But, what’s the latest? How is the British economy faring and what about the rest of the world? Some sources suggest that we are already in a recovery, whereas others suggest that the current downturn is not yet over. House prices recovered somewhat in July, but various sources suggest that they experienced their biggest fall in August. The following articles look at recent economic developments.
Job cuts at Vauxhall likely as GM agrees sale to Magna Telegraph (10/9/09)
A look at Economic developments around the globe The Associated Press (10/9/09)
BoE holds QE at 175 bln stg, rates at 0.5 pct Reuters (10/9/09)
Kesa’s UK recovery hit by European slowdown Times Online (10/9/09)
Top US banker criticises bonuses BBC News (9/9/09)
Austrian GDP contraction slowed in Q2 Reuters (10/9/09)
Europe and America’s economies to beat UK, OECD says Telegraph (4/9/09)
Britain will be behind rest of world in emerging from recession Times Online (3/9/09)
Bank of England holds rates at 0.5pc and QE at £175 bn The Telegraph (10/9/09)
Questions
- Do you think the evidence suggests that the outlook for the global economy is improving?
- Why will Britain probably take longer to recover from the recession than other major economies?
- What is the theory behind low interest rates helping the economic recovery?
- Which policies have the UK and other governments used to tackle this economic downturn? Would any others have been more successful?
- In what ways and for what reasons are countries economically interdependent?