With the deepening euro crisis, the slide back into recession in many developed countries and the slowing down of fast-growing developing countries, such as China and India, confidence is waning.
But just as pessimism increases, so too does uncertainty. The global economy is getting more and more difficult to forecast. So should economists give up trying to forecast? Should we rely on guesswork and hunch, or looking into crystal balls?
Bank of England representatives have been appearing before the Treasury Select Committee. And they have reiterated the consensus that things are getting more difficult to forecast. As Mervyn King said in his evidence:
There is just enormous uncertainty out there. I have no idea what is going to happen in the euro area.
And this uncertainty is making people cautious, which, in turn, damages recovery. As Dr King went on to say:
There is no doubt that with the additional uncertainty this year there’s evidence of people behaving in a very defensive way, being unwilling to invest and of course the most extreme example of that would be if we were to get to a liquidity trap where essentially the main assets people wanted to hold were claims on the central bank.
Part of the reason for the uncertainty about global growth prospects is uncertainty about what European leaders will decide about the future of the eurozone. Another is uncertainty about how people will respond to the uncertainty of others. But predicting how others will predict is very difficult as they will themselves be predicting what others will predict. This dilemma was observed by Keynes when observing how investors on the stock market behaved, all trying to predict what others will do, and is known as the Keynesian Beauty Contest dilemma (see also).
So are governments and central banks powerless to counteract the uncertainty and pessimism? Can they restore confidence and growth? Members of the Bank of England’s Monetary Policy Committee believe that further action can be taken to stimulate aggregate demand. Further quantitative easing and cuts in interest rates could help as, according to Dr King, we are not yet in a liquidity trap.
UK Economic Outlook Uncertain Amid Euro Zone Crisis – BOE NASDAQ, Ilona Billington (26/6/12)
BOE King: UK Not In Liquidity Trap; No Limit On QE Market News International (26/6/12)
BOE King: Unity On Loose Policy; Not Half Way Through Crisis Market News International (26/6/12)
Full Text Of BOE MPC Dale At Treasury Select Committee Market News International (26/6/12)
Recovery still five years away, Mervyn King warns The Telegraph, Philip Aldrick (26/6/12)
Governor pessimistic on recovery ShareCast, Michael Millar (26/6/12)
Bank’s King says ‘pessimistic’ about worsening economy BBC News (26/6/12)
UK economic outlook getting worse, warns Bank of England Guardian, Phillip Inman (26/6/12)
Questions
- Why is it worth economists forecasting, even if those forecasts rarely turn out to be totally accurate?
- Why is it particularly difficult in current circumstances to forecast the state of the macroeconomy 12 months hence – let alone in two or three years?
- In what ways is the global macroeconomic situation deteriorating? What can national governments do about it?
- What limits the effectiveness of government action to deal with the current situation?
- What is meant by the liquidity trap? Are we close to being in such a situation today?
- Explain what is meant by the Keynesian Beauty Contest? How is this relevant today in explaining economic uncertainty and the difficulty of forecasting the economy?
Academic research is encouraged by universities. Indeed, the number and quality of research publications is the most important criterion for promotion in many universities.
Periodically university research in the UK is publicly assessed. The latest assessment is known as the Research Excellence Framework (REF) and will be completed in 2014. Most research that will be considered by the REF is published in peer-reviewed journals. Most of these journals are subscription based. Universities pay large amounts of money in subscriptions.
In recent years there has been much criticism by both academics and universities about the high cost of such subscriptions. In a movement dubbed the Academic Spring, pressure has mounted for journal articles to be made available free of charge – i.e. on open access.
The government too has been concerned that the results of publicly-funded research has been disappearing behind ‘paywalls’ and hence not available free to people outside the universities which subscribe to such journals. Indeed, no single university can afford licences for all the 25,000 peer-reviewed journals currently being published. As a result, the government set up a committee under the chair of Professor Janet Finch to examine alternative ways of making research more accessible. The committee has just published its report.
It advocates an expansion of open-access journals:
The principle that the results of research that has been publicly funded should be freely accessible in the public domain is a compelling one, and fundamentally unanswerable…
Instead of relying on subscription revenues provided by or on behalf of readers, most [open-access journals] charge a fee to authors…before an article is published. Access for readers is then free of charge, immediately on publication, and with very few restrictions on use and re-use.
Under this model, universities would essentially pay to have their academics’ articles published rather than paying to purchase the journal. Alternatively, research councils could fund the publication of articles based on research already funded by them.
Many people go further. They argue that authors ought to be able to have their published research in any journal made freely available, after an embargo period, through their university’s website.
So is the current pricing model the best for encouraging research and for disseminating its findings? Or is open access a better model – and if so, of what form? Or would it discourage publishers and lead, in the end, to less being published or to a less rigorous peer review process? The questions are ones of pricing, incentives, choices and investment – the questions that economists are qualified to consider.
Articles
Open access may require funds to be rationed Times Higher Education, Paul Jump (21/6/12)
Set science free from publishers’ paywalls New Scientist, Stephen Curry (19/6/12)
Scientists must make research an open book Independent, Martin Hickman (18/6/12)
Report calls on government to back open access science BBC News, Pallab Ghosh (19/6/12)
Open access is the future of academic publishing, says Finch report Guardian, Alok Jha (19/6/12)
Open access to science – its implications discussed in UK raport ZME Science (19/6/12)
UK move to ‘open access’ in publishing Phys.Org, Justin Norrie (20/6/12)
Report
Finch Group Report: Overview Research Information Network (June 2012)
Finch Group Report: Executive Summary Research Information Network (June 2012)
Finch Group Report: Full Report Research Information Network (June 2012)
Questions
- Explain the difference between the ‘gold’ and ‘green’ models of open-access journal article publishing?
- What externalities are involved in journal publication? What are the implications of this for socially efficient pricing?
- How could journal publication be made profitable under an open-access system?
- What are the incentive effects for (a) academics and (b) universities of ranking journals? Does the REF, whereby research articles are judged on their own merits, overcome problems of ranking journals?
- Does the existence of journal rankings allow the top journals in each discipline to maintain a position of market power? How is this likely to impact on journal or article pricing?
- How would university finances be affected by a move towards gold open access journals (a) in the short term; (b) in the long term?
- Would it be in universities’ interests to produce their own open-access journals?
In oligopoly markets, because there are a small number of firms, each firm is affected by its rivals’ decisions. This interdependence results in a tension between cooperation and competition. On the one hand, firms collectively benefit from cooperating and keeping prices high.
On the other hand, an individual firm then has an incentive to undercut its rivals to steal a larger share of the market. This incentive to undercut can potentially result in price wars between firms. This is exactly what has recently occurred between pizza sellers on the Avenue of Americas in Midtown New York. Here, until recently the 6th Ave. Pizza company was selling pizza for $1.50 per slice. However, the entry of two competitors nearby sparked an intense and bitter price war.
First, an outlet called Joey Pepperoni’s Pizza opened nearby and charged $1 per slice. This price was then matched by the 6th Avenue Pizza company. Then, the 2 Bros. pizza chain opened an outlet almost next door to the 6th Avenue Pizza company. Initially, they also charged $1 per slice.
However, this did not last for too long. First 6th Avenue cut its price to 79 cents and then 2 Bros. responded by cutting its price to 75 cents, which 6th Avenue quickly matched.
Which company started this price war has been subject to some debate. The owners of the 6th Avenue Pizza company were angry, alleging that 2 Bros. was trying to force them out of business. However, the owners of 2 Bros. claimed that they were simply responding to the 6th Avenue Pizza company’s decision to start charging 79 cents per slice and they even have evidence from their security cameras confirming this! When asked why they cut their price the owners of the 6th Avenue company said that:
He was taking away our customers. How were we going to pay our rent?
So what will happen next in this market? One of the owners of the 2 Bros. company has said that they will go back to $1 per slice if the 6th Avenue Pizza company does the same, as they can’t make any profit at the current price. However, the tension between cooperation and competition suggests this may be difficult to sustain.
In the meantime, both are quoted suggesting that they may be tempted to reduce prices even further. 6th Avenue Pizza company stated:
We may go to 50 cents. I want to hit him. I want to beat him.
2 Bros. said:
We might go to free pizza soon.
Of course, while the price war continues, the clear winners are the consumers. In the article one is quoted as saying:
I think it’s beautiful. We need 75-cent hamburgers next.
Articles
Questions
- Why is it difficult for firms to maintain high prices in oligopolistic markets?
- What are the key features of competition in the pizza market?
- Is this the type of market where you would expect price wars to be likely?
- How might firms in this market try to differentiate their product?
- Do you think prices will ever return to $1.50 per slice in this market? Explain.
The pensions crisis is one area of social policy that has been the focus of attention for some years. With an ageing population, more people entering higher education and a rather substantial deficit facing the government, pension reform has been high on the agenda and not just in the UK.
A number of factors have contributed towards the so-called pensions crisis: rising life expectancy; the ‘baby-boomers’ retiring; more people staying in education for longer; an ageing population. All of these have led to a dependency ratio that is becoming worse – fewer workers to support every pensioner. Over the past few years, strikes have taken place in protest to government pension plans, especially for public sector workers, who see the proposals as making them worse off once they retire. Doctors are the latest group to strike in protest over having to work longer before retiring and having to pay higher national insurance contributions.
So, are the doctors justified in their protests? They are currently on a final-salary pension scheme, which is a very generous scheme, although it is being phased out and replaced with a career average scheme, which will have big implications for doctors’ pensions. Furthermore, there was an overhaul of their pensions in 2008, thus the criticism that further changes are now being made to make them even worse off. Doctors do pay higher national insurance contributions than other occupations, such as teachers and they will naturally receive a higher pension than other NHS workers, such as nurses simply because they earn more. However, this does have big implications for their future.
Inequality is a big issue across the UK and this doesn’t only refer to income. Those earning higher salaries are more likely to live longer than the average worker. So, we see life expectancy inequality as well. The consequence of this is that once an individual retires at say 60, if your life expectancy is 85, then you have 25 years to live in retirement receiving whatever pension you have accumulated throughout your working life. If, however, your life expectancy is only 75, perhaps because of your background, your occupation, your health, then you will only spend 15 years in retirement. The person that lives longer therefore receives significantly more in pension payments and if this differing life expectancy is related to your occupation and thus your salary, then inequality of income clearly has some very wide implications for pension schemes and rates of contribution.
There are, of course, wider effects of any industrial action by doctors. Whilst some may agree with their view that this further pension reform is unfair, if any strike action does take place there will be wider economic effects. Those in need of treatment may have to delay it and if that means more people taking sick days, then the economic cost to the economy could be significant. The following articles consider the latest controversy in public-sector pensions.
Report
Independent Public Service Pensions Commission Final Report HM Treasury, Pensions Commission March 2011
Articles
Doctors’ strike: how the cost of NHS pensions soared Telegraph, Matthew Holehouset (21/6/12)
Are doctors’ pensions too generous Guardian, Hillary Osborne and Jill Insley (21/6/12)
Lansley: ‘Doctors’ pension scheme is generous’ BBC News (21/6/12)
Doctors get a nasty taste of Gordon Brown’s pension medicine Telegraph, Philip Johnston (18/6/12)
Doctors wrong on pensions, says Hutton Financial Times, Sarah Neville and Norma Cohen (19/6/12)
BMA ‘Inherent unfairness’ in doctor pensions BBC Radio 4 Today (21/6/12)
Reluctant move against intransigent government Scotsman, Dr Brian Keighley (21/6/12)
Will you be affected by the doctors’ strikes? BBC News (15/6/12)
Questions
- Explain the main factors that are contributing towards the so-called pensions crisis. In each case, is it a demand-side or supply-side issue?
- What are the main proposals to tackling the pensions crisis (not just for Doctors)?
- What is the difference between a career average and a final salary pension scheme? Which is better for (a) those on a higher salary at the end of their career and (b) those who are on a relatively lower salary at the end of their career? Make sure you explain your thinking!!
- What are the arguments both for and against this new round of pension reforms for doctors? Do you think the doctors are justified in taking strike action?
- What are the wider implications of industrial action? Think about the effect on individuals and on the economic performance of the wider economy.
- 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?
- How might higher contributions affect the incentive to work? What could we see happen to labour supply? Think about both income and substitution effects.
World leaders have been meeting in Rio de Janeiro at a United Nations Conference on Sustainable Development. The conference, dubbed ‘Rio+20’, refers back to the first UN Conference on Environment and Development (UNCED) held in Rio 20 years ago in June 1992.
The 1992 conference adopted an Agenda 21. It was “comprehensive plan of action to be taken globally, nationally and locally by organizations of the United Nations System, Governments, and Major Groups in every area in which human impacts on the environment.”
The 2012 conference has looked at progress, or lack of it, on sustainability and what needs to be done. It has focused on two major themes: “how to build a green economy to achieve sustainable development and lift people out of poverty, including support for developing countries that will allow them to find a green path for development; and how to improve international coordination for sustainable development.” Issues examined have included decent jobs, energy, sustainable cities, food security and sustainable agriculture, water, oceans and disaster readiness.
But just what is meant by sustainable development? The conference defines sustainable development as that which meets the needs of the present without compromising the ability of future generations to meet their own needs. “Seen as the guiding principle for long-term global development, sustainable development consists of three pillars: economic development, social development and environmental protection.”
The articles below look at prospects for national and global sustainability. They also look at a new measure of national wealth, the Inclusive Wealth Index (IWI). This index has been developed under the auspices of the International Human Dimensions Programme on Global Environmental Change (IHDP) and published in its Inclusive Wealth Report 2012 (see report links below).
The IWR 2012 was developed on the notion that current economic production indicators such as gross domestic product (GDP) and the Human Development Index (HDI) are insufficient, as they fail to reflect the state of natural resources or ecological conditions, and focus exclusively on the short term, without indicating whether national policies are sustainable.
The IWR 2012 features an index that measures the wealth of nations by looking into a country’s capital assets, including manufactured, human and natural capital, and its corresponding values: the Inclusive Wealth Index (IWI). Results show changes in inclusive wealth from 1990 to 2008, and include a long-term comparison to GDP for an initial group of 20 countries worldwide, which represent 72% of the world GDP and 56% of the global population. (Click on chart for a larger version.)
So will growth in IWI per capita be a better measure of sustainable development than growth in GDP per capita? The articles also consider this issue.
Articles: summit
Rio+20 deal weakens on energy and water pledges BBC News, Richard Black (17/6/12)
Rio+20: Progress on Earth issues ‘too slow’ – UN chief BBC News, Richard Black (20/6/12)
Rio+20 Earth Summit Q&A The Telegraph, Louise Gray (16/5/12)
Rio+20 Earth Summit: campaigners decry final document Guardian, Jonathan Watts and Liz Ford (23/6/12)
A catastrophe if global warming falls off the international agenda Observer, Will Hutton (24/6/12)
Analysis: Rio +20 – Epic Fail The Bureau of Investigative Journalism Brendan Montague (22/6/12)
Articles: IWI
Accounting for natural wealth gains world traction Atlanta Business NewsKaty Daigle (17/6/12) (see alternatively)
New index shows lower growth for major economies Reuters, Nina Chestney (17/6/12)
A New Balance Sheet for Nations: UNU-IHDP and UNEP Launch Sustainability Index that Looks Beyond GDP EcoSeed (20/6/12)
World’s leading economies lag behind in natural capital Firstpost (18/6/12)
Beyond GDP: Experts preview ‘Inclusive Wealth’ index at Planet under Pressure conference EurekAlert, Terry Collins (28/3/12)
New sustainability index created that looks at more than gross domestic product bits of science (17/6/12)
For Sustainability, Go Beyond Gross Domestic Product Scientific AmericanDavid Biello (17/6/12)
Report
Inclusive Wealth Report 2012: Overview IHDP
Inclusive Wealth Report 2012: Summary for Decision-makers IHDP
Inclusive Wealth Report 2012: full report IHDP
Questions
- What progress has been made towards sustainable development over the past 20 years?
- What are the limitations of conferences such as Rio+20 in trying to achieve global action?
- With the current challenges faced by the eurozone and the global economy more generally, is this a good time to be discussing long-term issues of sustainable development?
- Explain how IWI is derived and measured?
- Looking at the chart above, explain the very different positions of countries in the three columns.
- What are the strengths and weaknesses of using growth in IWI compared with using growth in GDP as measures of (a) economic development; (b) economic wellbeing?
And this uncertainty is making people cautious, which, in turn, damages recovery. As Dr King went on to say: