Throughout 2009/10, a new millionaire was created in Brazil every 10 minutes – not bad for a developing country! Despite the global recession, Brazil has managed growth of almost 5% and is set to overtake both the UK and France to become the world’s 5th largest economy. Brazil will hold the next World Cup and the Olympic games after London, bringing it further recognition as a global power. It has the third largest aircraft manufacturing industry in the world and is even doing its bit to tackle climate change, with 50% of its cars running on bio-fuels. It exports more meat than any other country and is looking to become an energy power. With falling unemployment, a buoyant economy, growing confidence, fantastic beaches and 6 millionaires created every hour, Brazil looks like the perfect place to live.
However, that is just one side of the story. Brazil is still a country with deep poverty – approximately 60 million people. The slums, or favelas, are home to 1 million people in Rio alone, where unemployment is high and drug wars common. There has been a concerted effort to reduce the drug trafficking business, but this has only created more unemployment. There is little sanitation, poor electricity and minimal chance of escape. Neighbourhoods need rebuilding, and despite high growth and arguably the most popular president in the world (Lula da Silva), there are calls for political, social, taxation and labour market reforms. This cycle of poverty and the equality gap needs addressing before the Brazilian economy can really be considered a global power.
Webcasts and podcasts
Will Brazil’s economy keep growing? BBC News, Matt Frei (27/5/10)
Brazil’s bid to be ‘world’s breadbasket’ BBC World News America, Paulo Cabral (26/5/10)
Tackling Brazil’s poverty BBC World News America, Gary Duffy (28/5/10)
Brazil’s development spurs economic quality hopes BBC World News America, Matt Frei (27/5/10)
Brazil’s air industry takes off BBC World News America, Paolo Cabral (24/5/10)
‘Our growth quality is better than China’ BBC World News America, Marcelo Neri (25/5/10)
Brazilian economy poised to overtake UK’s BBC News Today, Matt Frei (27/5/10)
Data
Economic data Banco Central do Brasil
Brazil Economy EconomyWatch
Brazil CIA World Factbook
Brazil Geognos
Brazil data World Bank
Questions
- What are the main causes of (a) inequality and (b) poverty in an economy? What is the difference between these concepts?
- How does the government subsidised housing programme aim to help low income households. Use a diagram to illustrate the effect.
- What policies can be used to reduce the equality gap?
- Are those living in the favelas in absolute poverty? How do we distinguish between absolute and relative poverty? Is it the same across the world?
- What are the adverse effects of fast growth in Brazil?
With the Conservatives and Liberal Democrats now in power in the UK and with the Labour Party, having lost the election, being now in the midst of a leadership campaign, politicians from across the political spectrum are balming Gordon Brown for the ‘mess the country’s in’. The UK has a record budget deficit and debt, and is just emerging from a deep recession, when only a few years ago, Gordon Brown was claiming the end of boom and bust. But is the condition of the UK economy Mr Brown’s fault? Would it have been any better if others had been in charge, or if there had been even greater independence for the Bank of England of if there had been an Office of Budget Responsibility (see)?
The following podcast by Martin Wolf, chief economics commentator of the Financial Times, considers this question. He argues that:
Everybody would like to blame Gordon Brown for the financial crisis. But he was only acting in line with the national consensus on economic policy.
The economic legacy of Mr Brown FT podcasts, Martin Wolf (13/5/10)
The economic legacy of Mr Brown Financial Times, Martin Wolf (13/5/10)
Questions
- Explain what is meant by ‘the great moderation’.
- Should regulation of the banks be handed back to the Bank of England?
- Why may controlling inflation not necessarily result in stable economic growth? Is this a case of Goodhart’s Law?
- Why was the UK economy especially fragile during the banking crisis and its aftermath?
- What, according to Martin Wolf, was Mr Brown’s biggest mistake?
- Could a mistake be now being made by following the conventional wisdom that cutting the deficit is the solution to achieving sustained recovery?
Research from the Halifax estimates that the total wealth of UK households at the end of 2009 was £6.316 trillion. Putting this into context, it means that the average UK household has a stock of wealth of £236,998. In real terms, so stripping out the effects of consumer price inflation, the total wealth of households has grown five-fold since 1959 while the average wealth per household has grown three-fold while. The growth in wealth per household is a little less because of the increase in the number of households from 6.6 million to 26.6 million. For those that like their numbers, total household wealth in 1959 was estimated at £1.251 trillion (at 2009 prices) while the average amount per household was £72,719 (at 2009 prices).
But, do changes in household wealth matter? Well, yes, but not necessarily in a consistent and predictable manner. That’s why so many of us love economics! For now, consider the prices of two possible types of assets: share prices and house prices. The prices of both these assets are notoriously volatile and it is this volatility that has the potential to affect the growth of consumer spending.
It might be, for instance, that you are someone who keeps a keen eye on the FTSE-100 because you use shares as a vehicle for saving. A fall in share prices, by reducing the value of the stock of financial assets, may make some people less inclined to spend. Housing too can be used as a vehicle for saving. Changes in house prices will, of course, affect the capital that can be realised from selling property, but also affect the collateral that can be used to support additional borrowing and, more generally, affect how wealthy or secure we feel.
The Halifax estimates that the household sector’s stock of housing wealth was £3.755 trillion at the end of 2009 while its stock of financial assets (such as savings, pensions and shares) was £4.024 trillion. In real terms, housing wealth has grown on average by 5% per year since 1959 while financial assets have grown by 2.8% per year. Of course, while households can have financial and housing assets they are likely to have financial liabilities too! We would expect households’ exposure to these liabilities – and their perception of this exposure – to offer another mechanism by which household spending could be affected. For instance, changes in interest rates impact on variable rate mortgages rates, affecting the costs of servicing debt and, in turn, disposable incomes.
The Halifax reports that the stock of mortgage loans was £1.235 trillion at the end of 2009, which, when subtracted from residential housing wealth, means that the UK household sector had net housing equity of £2.519 trillion. It estimates that the stock of mortgage loans has increased on average by 6.5% per year in real terms since 1959 while net housing equity has grown by 4.5%. The stock of households’ unsecured debt, also known as consumer credit, was £227 billon at the end of 2009. In real terms it has grown by 5.3% per year since 1959.
The recent patterns in household wealth are particularly interesting. Between 2007 and 2008 downward trends in share prices and house prices contributed to a 15% real fall in household wealth. The Halifax note that some of this was ‘recouped’ in 2009 as a result of a rebound in both share prices and house prices. More precisely, household wealth increased by 9% in real terms in 2009, but, nonetheless, was still 8% below its 2007 peak.
Given the recent patterns in household wealth, including the volatility in the components that go to comprise this stock of wealth, we shouldn’t be overly surprised by the 3.2% real fall that occurred in household spending last year. Further, we must not forget that 2009 was also the year, amongst other things, that the economy shrunk by 4.9%, that unemployment rose from 1.8 million to 2.5 million and that growing concerns about the size of the government’s deficit highlighted the need for fiscal consolidation at some point in the future. All of these ingredients created a sense of uncertainty. This is an uncertainty that probably remains today and that is likely to continue to moderate consumer spending in 2010. So, it’s unlikely to be a time for care-free shopping, more a time for window shopping!
Halifax Press Release
UK household wealth increases five-fold in the past 50 years Halifax (part of the Lloyds Banking Group) (15/5/10)
Articles
Household wealth ‘up five-fold’ UK Press Association (15/5/10)
We’ve never had it so good: Families five times richer than in 1959 Daily Mail, Steve Doughty (15/5/10)
Household wealth grows five-fold in past 50 years BBC News (16/5/10)
Average household wealth jumps £150,000 Telegraph, Myra Butterworth (15/5/10)
Questions
- Draw up a list of the ways in which you think consumer spending may be affected by: (i) the stock of household wealth; and (ii) the composition of household wealth.
- What factors do you think lie behind the annual 5% real term increase in the value of residential properties since 1959?.
- How might the sensitivity of consumer spending to changes in interest rates be affected by the types of mortgage product available?
- Why do you think consumer spending fell by 3.2% in real terms in 2009 despite real disposable income increasing by 3.2%?
- What would you predict for consumption growth in 2010? Explain your answer.
It was the 12th May 2010 and George Osborne’s first day as the UK’s new Chancellor of the Exchequer. His arrival at HM Treasury coincided with the latest ONS labour market release. Just in case you were rather distracted by political events, we take the opportunity here to trawl through some of the latest labour market numbers, focusing, in particular, on those that may pose real challenges for George Osborne and the new coalition government.
From the ONS release we observe that in the three months to March the total number of economically active individuals in the UK was 31.340 million. Of these, 28.829 million were employed while 2.510 million were unemployed (but actively seeking work). The number of people employed fell by 76,000 over the quarter (and by 341,000 over the year) while the number unemployed rose by 53,000 (279,000 over the year).
Now we consider the rate of unemployment. The unemployment rate expresses the total number unemployed as a percentage of those economically active. Over the first quarter of 2010 the unemployment rate rose to 8.0%, a rise of 0.2 percentage points on the previous quarter and a rise of 0.9 percentage points from a year earlier. It is the highest quarterly unemployment rate since the 8.1% recorded in Q3 1996.
Next, consider unemployment and gender. Of those unemployed in the first quarter of the year, 61.6% were male and 38.4% were female. The increase in the male unemployment rate during the economic slowdown has been especially marked. The male unemployment rate in Q1 2010 rose to 9.2%, up from 7.9% a year ago and 5.6% two years ago. The female unemployment rate has increased to 6.7% in Q1 2010 from 6.1% in Q1 2009 and 4.8% in Q1 2008. Therefore, over the past two years the male unemployment rate has risen by 3.6 percentage points while the female rate has increased by 2.1 percentage points.
Another troubling issue is unemployment amongst the young. The unemployment rate amongst those aged 18-24 is considerably higher than the overall rate. In the three months to March the unemployment rate for this age group was 17.9% compared with the overall rate of 8%. But, more than this, the current rate of unemployment amongst those aged 18-24 is actually higher than during the early 1990s when it peaked at 17.8% in Q1 1993. The male unemployment rate amongst this age group is especially high having risen to 20.7% in the first quarter of the year, up 2 percentage points on the year and up from 14.2% in Q1 2008. The female rate amongst this age group is 14.6%, up 1.3 percentage points on the year and up from 9.8% in Q1 2008.
Another issue that emerges out of the statistics is the rise in long-term unemployment. The number of people unemployed for more than one year rose to 757,000 in the first quarter, up from 509,000 a year ago and 397,000 two years ago. Perhaps, it is easier to see the magnitude of this problem when we note that 30.2% of those unemployed have been unemployed for at least one year – this is up from 24.5% in Q1 2008. Amongst females, 25% of those unemployed have been without work for at least one year, but amongst males this rises to 33.4%. In other words, one-quarter of unemployed females and one-third of unemployed males are now regarded as being long-term unemployed.
As troubling as these numbers are, the issue of long-term unemployment is one that, over the past two decades, has never really gone away. On average since 1992, 29.4% of those unemployed have been without work for at least one year (34.2% amongst men and 21.6% amongst women).
And now to our final observation: the historically high number of economically inactive individuals of working age. In the first quarter of 2010, 8.166 million of those of working age were economically inactive, up by 86,000 over the year. As a proportion of the working population, this equates to 21.5%, which is not in itself a record high – during 1983 it reached 23.2% – but it is, nonetheless, up from 20.7% a year ago. The inactivity rate amongst those of working age is highest amongst females at 25.9% (up from 25.7% a year ago) compared with 17.4% amongst men (up from 16.1% a year ago).
One factor that helps to explain the overall rise in inactivity is the 43,000 increase in the number of students who have become economically inactive over the past year. But, we also note upward pressures on inactivity over the past year from the increase of 37,000 in the number of people who are ‘long-term sick’ and from the 13,000 increase in the number who feel ‘discouraged’ from seeking work. These pressures highlight some of the many costs that arise from unemployment and potentially raise some tricky policy challenges for the new government.
Articles
UK unemployment rises in first quarter Investment Week, Hannah Smith (12/5/10)
UK unemployment climbs to a 16-year high Irish Independent, Svenja O’Donnell Brian Groom (13/5/10)
UK unemployment increases to 2.51 million BBC News (12/5/10)
Unemployment: what the experts say Guardian (12/5/10)
UK unemployment hits highest since 1994 The Times, Robert Lindsay (12/5/10)
Jobs recovery still fragile, ‘dire’ data shows Financial Times, Brian Groom (12/5/10)
Scottish unemployment rises by 10,000 in three months BBC News (12/5/10)
Unemployment rises to highest level since 1994, ONS says inthenews.co.uk, Sarah Garrod (12/5/10)
Data
Latest on employment and unemployment Office for National Statistics (12/5/10)
Labour Market Statistics, May 2010 Office for National Statistics (12/5/10)
Labour market statistics page Office for National Statistics
For macroeconomic data for EU countries and other OECD countries, such as the USA, Canada, Japan, Australia and Korea, see:
AMECO online European Commission
Questions
- What is meant by somebody being economically active? Do they have to be in a job to be economically active?
- Using the figures in the commentary, calculate the number of economically active people in Q1 2009 and so the change up to Q1 2010.
- If the number of people unemployed rises does this mean the rate of unemployment rises? Explain your answer.
- What factors might explain the persistent problem of long-term unemployment? What policy prescriptions would you offer the new coalition government in attempting to tackle this problem?
- Looking back through the commentary, pick out some of the notable gender differences. What factors might help to explain these?
- Are there any factors identified in the commentary that may be affecting the economy’s potential output?
The International Monetary Fund published a report on banking, ahead of the G20 meeting of ministers on 23 April. The IMF states that banks should now pay for the bailout they received from governments during the credit crunch of 2008/9. As the first Guardian article states:
It is payback time for the banks. Widely blamed for causing the worst recession in the global economy since the 1930s, castigated for using taxpayer bailouts to fund big bonuses, and accused of starving businesses and households of credit, the message from the International Monetary Fund is clear: the day of reckoning is at hand.
The Washington-based fund puts the direct cost of saving the banking sector from collapse at a staggering $862bn (£559bn) – a bill that has put the public finances of many of the world’s biggest economies, including Britain and the United States, in a parlous state. Charged with coming up with a way of ensuring taxpayers will not have to dig deep a second time, the top economists at the IMF have drawn up an even more draconian blueprint than the banks had been expecting.
The IMF proposes two new taxes. The first had been expected. This would be a levy on banks’ liabilities and would provide a fund that governments could use to finance any future bailouts. It would be worth around $1500bn: some 2.5% of world GDP, and a higher percentage than that for countries, such as the UK, with a large banking sector.
The second was more surprising to commentators. This would be a financial activities tax (FAT). This would essentially be a tax on the value added by banks, and hence would be a way of taxing profits and pay. Currently, for technical reasons, many of banks’ activities are exempt from VAT (or the equivalent tax in countries outside the EU). The IMF thus regards them as under-taxed relative to other sectors. If such a tax were levied at a rate of 17.5% (the current rate of VAT in the UK), this could raise over 1% of GDP. In the UK this could be as much as £20bn – which would make a substantial contribution to reducing the government’s structural deficit of around £100bn
Meanwhile, in the USA, President Obama has been seeking to push legislation through Congress that would tighten up the regulation of banks. On 20 May, the Senate passed the bill, which now has to be merged with a version in the House of Representatives to become law. A key part of the measures involve splitting off the trading activities of banks in derivatives and other instruments from banks’ regular retail lending and deposit-taking activities with the public and firms. At the same time, there would be much closer regulation of the derivatives market. These complex financial instruments, whose value is ‘derived’ from the value of other assets, would have to be traded in an open market, not in private deals. A new financial regulatory agency will be created with the Federal Reserve having regulatory oversight of the whole of the financial markets
The measures would also give the government the power to break up financial institutions that were failing and rescue solvent parts without having to resort to a full-scale bailout. There is also a proposal to set up a nine-member Council of Regulators to keep a close watch on banking activities and to identify excessive risks. Banks would also be more closely supervised.
So is this payback time for banks? Or will higher taxes simply be passed on to customers, with pay and bonuses remaining at staggering levels? And will tougher regulation simply see ingenious methods being invented of getting round the regulation? Will the measures reduce moral hazard, or is the genie out of the bottle, with banks knowing that they will always be seen as too important to fail?
IMF Webcast
Press Briefing by IMF Managing Director Dominique Strauss-Kahn IMF Webcasts (22/4/10)
Transcript of the above Press Briefing
Articles
The IMF tax proposals
IMF proposes two taxes for world’s banks Guardian, Jill Treanor and Larry Elliott (21/4/10)
IMF gets tough on banks with ‘FAT’ levy Guardian, Linda Yueh (21/4/10)
Q&A: IMF proposals to shape G20 thinking Financial Times, Brooke Masters (21/4/10)
The challenge of halting the financial doomsday machine Financial Times, Martin Wolf (20/4/10)
IMF’s ‘punishment tax’ draws fire from banking industry Financial Times, Sharlene Goff, Brooke Masters and Scheherazade Daneshkhu (21/4/10)
Squeezing the piggy-banks Economist (21/4/10)
IMF, part two Economist, ‘Buttonwood’ (21/4/10)
IMF proposes tax on financial industry as economic safeguard Washington Post, Howard Schneider (20/4/10)
IMF wants two big new taxes on banks BBC News blogs, Peston’s Picks, Robert Peston (20/4/10)
Obama’s proposals
Obama pleas for Wall Street support on reforms Channel 4 News, Job Rabkin (22/4/10)
Q&A: Obama’s bank regulation aims BBC News (22/4/10)
US banks may not bend to Barack Obama’s demands Guardian, Nils Pratley (22/4/10)
President Obama attacks critics of bank reform bill BBC News (23/4/10)
US Senate passes biggest overhaul of big banks since Depression Telegraph (21/5/10)
Finance-Overhaul Bill Would Reshape Wall Street, Washington Bloomberg Businessweek (21/5/10)
US Senate approves sweeping reforms of Wall Street (including video) BBC News (21/5/10)
Obama gets his big bank reforms BBC News blogs: Pestons’s Picks, Robert Peston (21/5/10)
Questions
- What would be the incentive effects on bank behaviour of the two taxes proposed by the IMF?
- What is meant by ‘moral hazard’ in the context of bank bailouts? Would (a) the IMF proposals and (b) President Obama’s proposals increase or decrease moral hazard?
- Why may the proposed FAT tax simply generate revenue rather than deter excessive risk-taking behaviour?
- What market conditions (a) encourage and (b) discourage large pay and bonuses of bankers? Will any of the proposals change these market conditions?
- What do you understand by the meaning of ‘excess profits’ in the context of the banks and what are the sources of such excess profits?
- Criticise the proposed IMF and US measures from the perspective of the banks.