This week, we have seen some major potential changes in the UK’s welfare state. One key change involves child benefit. (see Who won’t benefit from child benefit?) However, a more recent development stems from a problem that has built up over a number of years and is not just peculiar to the UK: Pensions.
As technology advances and medical procedures improve, there has been a general increase in life expectancy for both men and women across the world. People are living for longer and longer and hence pensioners can be in retirement for over 30 years. This is over double the retirement time we used to see decades ago. Therefore, pensioners are eligible to receive their state pension or their private pension for much longer and hence the cost is becoming unsustainable.
Lord Hutton has led a review into public sector pension schemes and has concluded that public sector workers should be paying higher contributions. Lord Hutton has said that employees should be working for longer and hence retiring later. This would increase their contributions throughout their lives and also reduce the time period over which they receive a pension, hence cutting costs. There was also a recommendation that ‘final-salary pension schemes should be scrapped and changed to so-called ‘career-average’ schemes. The final-salary scheme benefits high earners and not those who make gradual progression up the career ladder. This possible change should certainly reduce the pension you are eligible to receive and hence should positively affect the sustainability of pension provision in the UK.
However, public sector workers who may face higher contributions and have already, in some cases, faced pay cuts or pay freezes, are unsurprisingly upset. They argue that accepting work in the public sector means accepting a lower wage than they could achieve in the private sector. The compensation, they argue, is the reward of a higher pension, which could be about to change. However, the independent review has found that the contributions made by the public sector do not reflect the true cost of the benefit they receive in their pension. This is likely to be a contentious issue for some time to come. Below are some articles considering this, but keep a look out for further developments.
Articles
Public sector pensions report explained BBC News (7/10/10)
Public sector pensions review: Q&A Telegraph (9/10/10)
Pensions reforms to focus on high earners Independent, Simon Read (9/10/10)
Why Lord Hutton could make public pensions bills bigger … not smaller Financial News, Mark Cobley and William Hutchings (8/10/10)
Lord Hutton: I busted the myth that public sector pensions are gold-plated Telegraph, Lord Hutton (8/10/10)
Key points of UK public sector pension review Reuters (8/10/10)
Public pensions review recommends higher contributions BBC News (7/10/10)
Public sector workers paying ‘less tax’ due to generous pension rules Telegraph, Myra Butterworth (8/10/10)
Asda closes final salary pension scheme Telegraph, Jamie Dunkley (9/10/10)
Hutton report: he’s no friend of gold-plated pensioners Guardian, Patrick Collinson (9/10/10)
Asda to close final salary pension scheme BBC News (8/10/10)
Lord Hutton: what the pension revolution means for public servants Telegraph, Emma Simon (8/10/10)
Report
Independent Public Service Pensions Commission: Interim Report Pensions Commission, Lord Hutton October 2010
Questions
- What is the purpose of a pension? Think about the idea of redistribution.
- Why should average-career pension schemes be less costly than final-salary pension schemes? Which is the most equitable arrangement?
- What are the key problems that have led to the pensions problem in the UK?
- What are the main recommendations of the independent pension review?
- How is opportunity cost relevant to problem of pensions provision?
- Is it fair that public sector workers should pay higher contributions towards their pensions?
- The BBC News article, Public sector review recommends higher contributions states that: “The recent decision to uprate pensions in line with the consumer prices index (CPI) rather than the retail prices index (RPI) has shaved 15% from the cost of the schemes.” Explain why this is the case?
One of the key problems faced by all countries over the past three years has been a lack of consumer demand. Firms face demand from a number of sources and when the domestic economy is struggling and domestic demand is weak, a key source of demand will be from abroad. By this, we are of course referring to exports. However, it was not just one country that plunged into recession: the global economy was affected. So, when one country was suffering from a weak domestic market, it turned to its export market and hence to other countries for demand. However, with these economies also suffering from recession, the export market was unable to offer any significant help. In order to boost exports, governments have tried to make their export markets more competitive and one method is to cut the value of the currency. Japan, South Korea, Thailand, Columbia and Taiwan are just some of the countries using this strategy.
Following these interventions, the Brazilian finance minister has commented that a new trade war has begun. Speaking to a group of industrial leaders in Sao Paulo, Mr. Mantega said:
‘We’re in the midst of an international currency war. This threatens us because it takes away our competitiveness.’
As more and more governments intervene in the currency market in a bid to boost exports, those refraining from intervening will suffer. Furthermore, interest rates throughout the developed world have remained low, as central banks continue their attempts to boost economics. However, this has led vast amounts of money to be transferred into countries, such as Brazil, where there is a better supply of high-yield assets. This has worsened the state of affairs in Brazil, as the Brazilian currency is now thought to be the most heavily over-valued currency in the world. This adversely affects Brazil’s export market and its trade balance. The following articles look at the lastest developments in this new ‘war’.
Articles
Currencty ‘war’ warning from Brazil’s finance minister BBC News (28/9/10)
Brazil warns of world currency war Telegraph (28/9/10)
Brazil warns of world currency ‘war’ Associated Press (28/9/10)
Brazil defends exporters in global currency battle Reuters (15/9/10)
Kan defends Japan’s intervention in the currency markets Associated Press (25/9/10)
US and China are still playing currency Kabuki Business Insider, Dian L. Chu (21/9/10)
How to stop a currency war The Economist (14/10/10)
What’s the currency war about? BBC News, Laurence Knight (23/10/10)
Exchange rate data
Exchange rate X-rates.com
Statistical Interactive Database – interest and exchange rates data Bank of England
Currencies BBC News
Currency converter Yahoo Finance
Questions
- Demand for a firm’s products comes from many sources. What are they? Illustrate this on a diagram.
- Why is a weak currency good for the export market?
- How will a country’s trade balance be affected by the value of its currency?
- Explain the process by which investors putting money into high-yield assets in countries like Brazil leads to currency appreciation.
- What are the options open to a government if it wants to devalue its currency? What are the advantages and disadvantages of each method?
If we are faced with simple and limited choices, we may make careful decisions based on a number of criteria: in other words, we will identify various characterisitics we are looking for and see how well the various alternative products or activities meet our criteria. When we have lots of choice, however, we may be less careful or get confused.
In this Guardian podcast, the panelists discuss complex choices between many products and/or characteristics. Are people being ‘rational’ when making such choices? Is being less careful simply a rational use of scarce time? Do people really want lots of choice or would they prefer more limited choice? Can experiments where people are given choices help us to understand how people choose and how much choice businesses or government should give people? Then there is the question of producers/suppliers of products. Does choice promote competition and product development and is there an optimum amount of choice to achieve this?
The Business: Choice Guardian Podcasts, Sheena Iyengar, Julian Glover and Andrew Lilico in conversation with Aditya Chakrabortty (1/9/10)
Questions
- Are people ‘rational’ when they make choices? For what reasons may they not be rational?
- Can you make rational choices if your information is imperfect?
- Is there an optimum amount of choice and how would you set about establishing that optimum?
- How useful are experiments in understanding the process of choice? What are the weaknesses of such experiments?
- Should people be limited in the amount of choice they are given over medical treatment and schools?
- What are the advantages to other people of giving people more choice?
- How much does culture influence our attitudes towards choice?
Here’s an exciting bit of news. Lake Eyre in South Australia is filling and the Lake Eyre Yacht Club’s sailing regatta started on 5 July. So what, you may ask! Well, Lake Eyre is in the middle of one of the driest deserts in the world. It virtually never rains there and most of the time, the ‘lake’ is one huge dry salt pan.
But just a few times per century, the rainfall many kilometres away is heavy enough to fill the dry river beds of Cooper Creek, Finke River, Georgina River and Diamantina River. These ‘rivers’ drain about one sixth of the whole of Australia (about the size of Germany, France, Italy combined) – but a sixth where rainfall is normally very low. But this season’s rains have been exceptionally high; the rivers are flowing – and the lake is filling.
When the lake does fill, it teems with life. Fish eggs that have lain buried in the salt for years hatch. Sea birds fly in nearly 1000 kilometres from the Southern Ocean. And it’s then that the enthusiasts come to play.
What’s this got to do with economics? Well economics is about scarcity and choice. Many of the choices we make are not simple buying and selling choices. Many clubs and other organisations thrive on the enthusiasm of their members. They’re not there to make money but certainly add to people’s ‘utility’. And enthusiasm, and hope, is what the members of the Lake Eyre Yacht Club have in abundance. Let’s hope they get lots of utility from sailing in the desert over the coming weeks.
Articles
Outback Sailors 10 News (6/7/10)
Floods and boat race brings life to desert lake ABC News (7/7/10)
Flightseeing Lake Eyre Stuff.co.nz, James Shrimpton (25/5/10)
Gone (not fishing) flying over Lake Eyre Australian Daily Telegraph, Maralyn Parker (6/6/10)
The Lake Eyre Yacht Club Lounge of the Lab Lemming, Chuck Magee (21/3/10)
Lake Eyre Regatta ExplorOz, The Landy blog (14/6/10)
Boom follows boom in the Lake Eyre Basin ABC Western Queensland, Julia Harris (23/3/10)
Entries flood in for rare outback regatta ABC News (23/6/10)
Yacht club sails into history with a desert regatta The Age (7/7/10)
Chasing water to Lake Eyre ABC Rural, Caitlyn Gribbin (6/7/10)
Lake Eyre brims with life ABC News, Paul Lockyer (15/6/10)
Yachting regatta in Australian desert for first time in 20 years Telegraph, Bonnie Malkin (7/7/10)
Plain sailing for desert regatta Gulf Times (7/7/10)
Information sites
Lake Eyre Yacht Club
Current Lake Status Lake Eyre Yacht Club
Lake Eyre Wikipedia
Lake Eyre Rita’s Outback Guide
Questions
- What attitude do the members of Lake Eyre Yacht Club have towards risk and uncertainty?
- How would you set about estimating the consumer surplus that members are likely to gain from attending the regatta and sailing on the lake?
- How price elastic would you expect the demand for and supply of services to be, such as ferry crossings and accommodation?
- What business opportunities are likely to be associated with sailing on the lake? Would it be ‘rational’ to set up such a business?
Below you will find links to the manifestos of the three main UK-wide parties for the general election on May 6. It’s not our role to suggest to those of you living in the UK with the right to vote how you should vote. The one thing we would suggest is that you consider carefully what the parties are proposing.
What is clear is that the state of the economy and the policies necessary to tackle economic problems are central to all the manifestos. As a student of economics, you should be able to assess the manifestos in terms of how the parties set out the economic problems facing the UK and what they propose doing about them.
So look through the manifestos below and then answer the questions we’ve posed about the UK economy and about the economic policies being proposed. If you are uncertain about how to answer them, then ask yourself what extra information would I need to enable me to give a good answer.
The manifestos (in alphabetical order)
The Conservative Party manifesto
The Labour Party manifesto
The Liberal Democrat Party manifesto
Other sources
We are reluctant to recommend newspaper articles, as all newspapers at election time tend to be highly partisan and are therefore likely to give you a very specific ‘spin’ on the parties’ proposals. Perhaps the two best independent sources are the BBC and the Institute for Fiscal Studies. See:
Election analysis 2010 Institute for Fiscal Studies
Election 2010 BBC News
Stephanomics Stephanie Flanders’ blog (this links to the archive).
Questions
- How do the analyses of the economic problems facing the UK differ between the three manifestos?
- Compare the policies of the three parties for cutting the public-sector deficit. Consider the following issues: the size and nature of any cuts in government expenditure; the size and nature of any tax increases; the timing of the meaures.
- What assumptions are being made about the determinants of aggregate demand over the coming months and the role of fiscal policy in this?
- Compare the policies of the three parties towards the distribution of income. To what extent have the parties taken into account possible incentive/disincentive effects of policies of redistribution?
- To what extent are the parties proposing using the tax system to tackle problems of externalities? Give examples and assess how effective the policies are likely to be.
- To what extent do each of the manifestos leave you with unanswered questions about the economy and how their proposed policies will tackle economic problems?