The pensions problems facing many of the developed world are well documented and are largely caused by changing demographics, including rising life expectancy, more people in education, retiring earlier and the ‘baby boomers’ nearing or entering retirement. All of this has contributed to unsustainable pension systems and hence a need for reform. The latest review is by Lord Hutton and looks at public-sector pensions. It makes a number of recommendations about reform. The main thing to come out of the report is that public-sector workers will have to pay larger contributions. work for longer and may receive less in their pension.
Many public-sector pensions have been based on a final salary scheme, which gives workers an extremely generous pension on retirement. The proposal is to change these to career average pensions, which will reduce the generosity for some and hence play a role in reducing the pension deficit. He suggests that public-sector retirement age should be increased in line with the state pension age, which will simultaneously increase the number of workers and hence output, but also reduce the number of years spent in retirement and hence reduce pension payments.
The government will now consider the recommendations laid out in the Hutton Review, but will need to bear in mind potential reactions by the unions, which have already hinted at strike action if the proposals go ahead. As the TUC general secretary, Brendan Barber, said:
‘Public-sector workers are already suffering a wage freeze, job losses and high inflation. They are now desperately worried that they will no longer be able to afford their pension contributions, and will have to opt out.’
With such concern about these proposals, and yet an unarguable case for pension reform, this is certainly an area where we will undoubtedly see significant media coverage.
Articles
Hutton reveals his pension plan – and is blasted by unions Guardian, Polly Curtis (10/3/11)
Pensions anger from unions following Hutton review (including video) BBC News (10/3/11)
High-wire act fails to balance public and private Financial Times, Nicholas Timmins (10/3/11)
A fairer pension deal that is long overdue Telegraph (10/3/11)
Hutton: This changes the basis on which I accepted the job, says teacher Guardian, Jessica Shepherd and Jill Insley (10/3/11)
No winners over public sector pensions if ministers or unions rush to battle Guardian, Polly Toynbee (10/3/11)
Career-average pensions: How do they work? BBC News, Ian Pollock (10/3/11)
Hutton pensions review: Q&A Telegraph, Harry Wallop (10/3/11)
Tackling the intractable The Economist (10/3/11)
Trade unions: pension reforms are unfair and misguided Guardian, James Meikle (10/3/11)
Report
Independent Public Service Pensions Commission: Final Report Pensions Commission, Lord Hutton, HM Treasury, March 2010
Independent Public Service Pensions Commission: Interim Report Pensions Commission, Lord Hutton October 2010
Questions
- Identify the main causes of the pensions problem. Explain how each issue has added to the pensions deficit.
- To what extent is it equitable that public sector workers should pay more in contributions and retire at the same age as the state pension age?
- Who will benefit the most from a change from final-salary to career average schemes?
- How might higher contributions affect the incentive to work? What could we see happen to labour supply? Think about both income and substitution effects.
- What are the union’s main arguments against the proposals? To what extent Is striking likely to solve the problem?
Are we heading for ‘perfect storm’ in commodity production and prices? Certainly the prices of many commodities have soared in recent months. These include the prices of foodstuffs such as dairy products, cooking oils and cereals, crude oil, cotton, metals and many other raw materials. The overall world commodity price index has risen by 28% in the past 12 months. The following are some examples of specific commodities:
Price rises in the 12 months to February 2011
• Wheat 62%
• Maize 59%
• Coffee 70%
• Beef 39%
• Sugar 46%
• Palm kernal oil 142%
• Soybean oil 50%
• All food price index 32%
• Crude oil 20%
• Cotton 132%
• Fine wool 55%
• Softwood timber 25%
• Iron ore 78%
• Copper 29%
• Tin 55%
• All metals index 58%
• Rubber 79%.
The problems are both short term and long term, and on both the demand and supply sides; and the effects will be at micro, macro and global levels. Some hard choices lie ahead.
The following webcast, articles and reports explore both the current position and look into the future to ask whether rising commodity prices are likely to continue or even accelerate.
The first link is to a BBC World Debate which considers the following issues: “Is scarcity of natural resources a serious challenge for developing and advanced economies? How great is the risk that scarcity might lead to conflict, both within and between nations? Might a scramble for resources lead to a retreat from globalisation and to greater protectionism?”
Webcast
World Debate: Resources BBC World Debate, Louise Arbour, President and CEO, International Crisis Group; James Cameron, Global Agenda Council on Climate Change; He Yafei, Ambassador and Permanent Representative of China to the UN; Malini Mehra, Founder and CEO, Centre for Social Markets; Kevin Rudd, Minister of Foreign Affairs, Australia (19/1/11)
Articles
Global Food Prices Continue to Rise Reuters, Steve Savage (7/3/11)
The 2011 oil shock The Economist (3/3/11)
Global Food Prices Will Probably Be Sustained at Record This Year, UN Says Bloomberg, Supunnabul Suwannaki (9/3/11)
Food prices to stay high as oil costs, weather weigh livemint.com, Apornrath Phoonphongphiphat (9/3/11)
‘Perfect storm’ threatens agriculture in developing nations Manila Bulletin, Lilybeth G. Ison (9/3/11)
IMF sees no immediate respite from high food prices Commodity Online (7/3/11)
Drought, supply, speculation drive world food prices to record high NZ Catholic (8/3/11)
The Factors Affecting Global Food Prices Seeking Alpha, David Hunkar (7/3/11)
World food prices climb to record as UN sounds alarm on further shortages FnBnews (India), Rudy Ruitenberg (9/3/11)
Food crisis: It’s a moral issue for all of us New Straits Times (Malaysia), Rueben Dudley (8/3/11)
Oil prices: Green light from the black stuff Guardian (5/3/11)
Cotton hits $2 a pound Guardian, Terry Macalister (17/2/11)
Supermarkets are raising prices faster than inflation, says UBS The Telegraph, Philip Aldrick (1/3/11)
What next for commodity prices? BBC News, Jamie Robertson (5/5/11)
Reports
FAO Cereal Supply and Demand BriefFood & Agriculture Organization, United Nations (March 2011)
Rising Prices on the Menu Finance & Development (IMF), Thomas Helbling and Shaun Roache (March 2011)
Data
Commodity prices Index Mundi
Commodities Financial Times, market data
Questions
- Identify the various factors that are causing rises in commodity prices. In each case state whether they are supply-side or demand-side factors.
- How can the price elasticity of demand and supply, the income elasticity of demand and the cross-price elasticity of demand be used to analyse the magnitude of the price rises?
- To what extent are rising food prices the result of (a) short-term (i.e. reversible) factors; (b) long-term trends?
- Why are food prices in the shops rising faster in the UK than in many other countries?
- To what extent is the future of food security and prices and moral issues?
- Why may current oil price rises become an opportunity for the future?
- What might be the respective roles be of government, business and consumers in responding to natural resource constraints?
Oil is a commodity like any other – its price is affected by demand and supply. Back in 2003, with the impending war in Ira and strikes in Venezuela, oil prices increased and continued to do so as further supply concerns developed in Saudi Arabia, Russia and Nigeria. This upward trend continued until 2008, when with the growing banking turmoil and demand for oil falling, the price began to decline. However, the crisis in Libya is only making matters worse. Its credit-rating has been downgraded with the potential for it to be lowered further and concerns are deepening about the country’s crude exports. As Libya is the world’s 12th largest exporter of oil, these supply concerns have started to push up oil prices once more.
With inflation rates already high and political turmoil pushing oil prices up further, consumers and firms are feeling the squeeze. These changes have also been reflected on stock markets across the world. Analyst, Michael Hewson at CMC Markets said:
‘Given the fact that we have seen massive gains in stock markets over the last few months, investors have been nervous about a possible correction for some time… The tensions in the Middle East with Libya imploding and concerns that the unrest could spread to Saudi Arabia could provide a catalyst for (this) correction.’
The disruption in the Middle East has caused companies such as Eni of Italy and Repsol YPF of Spain to shut down production, leading to output losses of some 22% of Libya’s production. As supply contracts from this region, prices will inevitably rise. However, the Saudi oil Minister has said that he is ready to boost production to offset any decline, but that at present there is no oil crisis. So, what can we expect to happen to oil prices in the coming months? It will all depend on changes in demand and supply.
Articles
Libyan crisis threatens to spark oil crisis Financial Times, Javier Blas and David Blair (22/2/11)
Libya protests: oil prices rise as unrest continues BBC News (22/2/11)
Oil producers, users sign charter as prices spike Associated Press (21/2/11)
Oil shock fears as Libya erupts Telegraph, Ambrose Evans-Pritchard (22/2/11)
Arab protests pose energy threat BBC News, Damian Kahya (22/2/11)
All eyes on Bahrain as Gulf tremors frighten oil markets Telegraph, Ambrose Evans-Pritchard (22/2/11)
Saudi Arabia seeks to calm market with words not oil Reuters (22/2/11)
Saudi Arabia says oil market needs no intervention Associated Press (21/2/11)
Peace in Bahrain is key to stopping oil prices from surging Live Oil Prices (22/2/11)
Data
Commodity Prices Index Mundi
Crude Oil Price Chart WTI
Questions
- What are the key factors that influence the supply of oil? How will each factor affect the supply curve?
- What are the key factors that influence the demand for oil? How will each factor affect the demand curve?
- Putting your answers to questions 1 and 2 together and using your knowledge of recent events in the oil market, explain the changes in oil prices.
- How are oil prices affected by OPEC?
- How have rising oil prices affected the stock market? What’s the explanation for this relationship?
- How might higher prices affect the economic recovery? Think about the impact on consumers and firms.
One of the key areas discussed in the election was welfare and in particular what to do about those who remain long term dependent on welfare. How can the UK government encourage people back to work? A key issue is the poverty trap: some people are simply better off living on benefits than they are getting a job. Here, we’re talking about the marginal-tax-plus-lost-benefit rate. When you start earning, you get taxed, pay national insurance contributions and lose some of your benefits. All this leads to a situation where work doesn’t pay.
In a paper ‘Escaping the Poverty Trap’ by Lawrence Kay, he considered how much better off people are moving from different benefits into work, taking into account the high costs of actually finding a job and then starting work. He found that after 16 hours of work, someone on Job-seekers’ allowance would be £15.07 poorer and someone on Employment and Support Allowance would be £39.35 worse off. In many cases, people were facing a marginal effective tax rate in excess of 100%. Given this, it’s hardly surprising that Lawrence Kay found that ‘Long term welfare claims have been Britain’s blight for many years’.
However, the Coalition has plans to change this and make sure that those in work are paid more and are better off than those on benefits. By making working life a more attractive option, this should encourage those for whom work doesn’t pay to enter the labour force. This will obviously benefit them, increase the potential output of the economy (hence growth) and improve net taxes, as tax revenue rises and benefits expenditure falls. While this may not lead to tax cuts for those in work (as benefits spending falls), it may mean that more tax revenue is devoted to areas such as health and education or that the government can close the budget deficit.
The ‘universal credit’ aims to simplify the current system and make work pay, by re-introducing a culture of work in households. There is also a plan to place sanctions on those turning down work and place a cap on benefits to any single family. There was also be tax changes aimed at helping those moving into work keep more of their money, thereby removing, or at least reducing, the poverty trap. However, some families will lose out – as the IFS noted, any reform ‘creates winners and losers’. However, the reforms are a step in the right direction. As David Cameron said:
“I think that will, over time, solve the whole poverty trap issue that has bedeviled governments of all colours.”
The Labour party does back some of the changes, but questions whether there is enough help for people finding work. Another issue that must be considered is while it is undoubtedly a good plan to encourage more people to move into work and off benefits, which jobs will they move into? With unemployment still high, now is not exactly the best time to be looking for a job. However, whatever the state of the economy, providing incentives for people to move from benefits into work is definitely a good plan, but of course the methods used will be under constant scrutiny.
Articles
Iain Duncan Smith sets out Welfare Reform Bill plans BBC News (17/2/11)
Bill ditches housing benefit cut The Press Association (17/2/11)
Life on benefits is no longer an option Mail Online, James Chapman (17/2/11)
Universal Credit welfare switch ‘to hit 1.4m homes’ BBC News (12/1/11)
Nick Clegg blocks housing benefit cut for jobless Guardian, Patrick Wintour (17/2/11)
It’s time to end this addiction to benefits Telegraph (17/2/11)
Report
Escaping the Poverty Trap Policy Exchange, Lawrence Kay 2010
Questions
- What is the poverty trap? Which factors make it worse?
- Why does the poverty trap act as a labour supply disincentive for those on benefits?
- If taxes of those in work have to be increased, what happens to their incentive to work more hours? Think about the income and substitution effects of a real wage change.
- Why is it that working may not pay?
- How does the Universal Credit aim to alleviate the poverty trap? Who are likely to be the winners and losers from the government’s proposed welfare reforms?
- What is a marginal-tax-plus-lost-benefit rate? How do you calculate it?
- Are there any other policies that could also reduce the poverty trap? How effective are they likely to be?
Economics is about choice – and choices occur in all parts of our lives. One area is personal relationships. Are we making the best of our relationships with family, friends and sexual partners? Increasingly economists are examining human behaviour in such contexts and asking what factors determine our decisions and whether such decisions are rational.
A recent book looks at the economics of marriage and goes under the title of ‘Spousonomics‘. Its authors, Paula Szuchman and Jenny Anderson, use economics “to master love, marriage and dirty dishes”. As they say:
Every marriage is its own little economy, a business of two with a finite number of resources that need to be allocated efficiently.
They look at ways in which such resources can be allocated efficiently. They also look at apparently irrational behaviour and seek to explain it in terms of various ‘failures’ (akin to market failures). They also examine how these failures can be rectified to improve relationships.
So is this economics stepping on the toes of relationship counsellors and psychologists? Or is this the legitimate domain of economists seeking to understand how to optimise in the context of scarce resources – including time and patience?
Spousonomics gets to heart of the matter Belfast Telegraph (19/1/11)
Run your marriage with ‘Spousonomics’: A new book says applying economic rules with transform your relationship Mail Online, Lydia Slater (31/1/11)
Spousonomics: How Economics Can Help Figure Out Your Marriage Book Beast (31/1/11)
Spousonomics Lesson #1: Loss Aversion YouTube (15/1/11)
Economist’s Explanation For Why Getting Married Isn’t Rational Huffington Post, Dan Ariely (15/1/11)
How Economics Saved My Marriage Newsweek, Paula Szuchman (30/1/11)
Want your marriage to profit? New York Post, Sara Stewart (29/1/11)
Spousonomics: blog, Paula Szuchman and Jenny Anderson
Questions
- How would you define ‘rational behaviour’ in a personal relationship?
- Why may marriage be a better deal generally for men than for women?
- Give some examples of asymmetry of information in marriage and why this may lead to bad decision making?
- Give some examples of risk averse and risk loving behaviour in personal relationships?
- Why are many actions in marriage apparently irrational? Could such actions be explained if the concept of ‘irrationality’ is redefined?
- Why may a simple demand curve help to explain why sexual relationships tend to wane in many marriages?
- Why does moral hazard occur in marriage? Does a combination or moral hazard and asymmetry of information help to explain divorce?
- Should marriage guidance counsellors study economics?!