The linked articles below look at the state of the railways in Britain and whether renationalisation would be the best way of securing more investment, better services and lower fares.
Rail travel and rail freight involve significant positive externalities, as people and goods transported by rail reduce road congestion, accidents and traffic pollution. In a purely private rail system with no government support, these externalities would not be taken into account and there would be a socially sub-optimal use of the railways. If all government support for the railways were withdrawn, this would almost certainly result in rail closures, as was the case in the 1960s, following the publication of the Beeching Report in 1963.
Also the returns on rail investment are generally long term. Such investment may not, therefore, be attractive to private rail operators seeking shorter-term returns.
These are strong arguments for government intervention to support the railways. But there is considerable disagreement over the best means of doing so.
One option is full nationalisation. This would include both the infrastructure (track, signalling, stations, bridges, tunnels and marshalling yards) and the trains (the trains themselves – both passenger and freight – and their operation).
At present, the infrastructure (except for most stations) is owned, operated, developed and maintained by Network Rail, which is a non-departmental public company (NDPB) or ‘Quango’ (Quasi-autonomous non-governmental organisation, such as NHS trusts, the Forestry Commission or the Office for Students. It has no shareholders and reinvests its profits in the rail infrastructure. Like other NDPBs, it has an arm’s-length relationship with the government. Network Rail is answerable to the government via the Department for Transport. This part of the system, therefore, is nationalised – if the term ‘nationalised organisations’ includes NDPBs and not just full public corporations such as the BBC, the Bank of England and Post Office Ltd.
Train operating companies, however, except in Northern Ireland, are privately owned under a franchise system, with each franchise covering specific routes. Each of the 17 passenger franchises is awarded under a competitive tendering system for a specific period of time, typically seven years, but with some for longer. Some companies operate more than one franchise.
Companies awarded a profitable franchise are required to pay the government for operating it. Companies awarded a loss-making franchise are given subsidies by the government to operate it. In awarding franchises, the government looks at the level of payments the bidders are offering or the subsidies they are requiring.
But this system has come in for increasing criticism, with rising real fares, overcrowding on many trains and poor service quality. The Labour Party is committed to taking franchises into public ownership as they come up for renewal. Indeed, there is considerable public support for nationalising the train operating companies.
The main issue is which system would best address the issues of externalities, efficiency, quality of service, fares and investment. Ultimately it depends on the will of the government. Under either system the government plays a major part in determining the level of financial support, operating criteria and the level of investment. For this reason, many argue that the system of ownership is less important than the level and type of support given by the government and how it requires the railways to be run.
Articles
The case for re-nationalising Britain’s railways The Conversation, Nicole Badstuber (27/8/15)
Lessons from the Beeching cuts in reviving Britain’s railwa The Conversataion, Andrew Edwards (7/12/17)
Britain’s railways were nationalised 70 years ago – let’s not do it again The Conversation, Jonathan Cowie (1/1/18)
FactCheck Q&A: Should we nationalise the railways? Channel 4 News, Martin Williiams (18/5/17)
Britain’s railways need careful expansion, not nationalisation Financial Times, Julian Glover (5/1/18)
Right or wrong, Labour is offering a solution to the legitimacy crisis of our privatised railways Independent. Ben Chu (2/1/18)
Whether or not nationalisation is the answer, there are serious questions about the health of Britain’s railways Independent. Editorial (2/1/18)
Why Nationalising The Railways Is The Biggest Misdirect In Politics Huffington Post, Chris Whiting (5/1/18)
Questions
- What categories of market failure would exist in a purely private rail system with no government intervention?
- What types of savings could be made by nationalising train operating companies?
- The franchise system is one of contestable monopolies. In what ways are they contestable and what benefits does the system bring? Are there any costs from the contestable nature of the system?
- Is it feasible to have franchises that allow more than one train operator to run on most routes, thereby providing some degree of continuing competition?
- How are rail fares determined in Britain?
- Would nationalising the train operating companies be costly to the taxpayer? Explain.
- What determines the optimal length of a franchise under the current system?
- What role does leasing play in investment in rolling stock?
- What are the arguments for and against the government’s decision in November 2017 to allow the Virgin/Stagecoach partnership to pull out of the East Coast franchise three years early because it found the agreed payments to the government too onerous?
- Could the current system be amended in any way to meet the criticisms that it does not adequately take into account the positive externalities of rail transport and the need for substantial investment, while also encouraging excessive risk taking by bidding companies at the tendering stage?
The UK is a productivity laggard. Compared to many developed countries over the recent past it has experienced weaker growth in output per worker and output per hour worked. This is detrimental to our longer-term well-being and to peoples’ living standards. An important contributory factor has been the weakness of growth in (non-financial) capital per worker. Recent ONS figures show that UK experienced a decline in capital per worker from 2012 to 2015, which was only ended in 2016.
Non-financial capital assets (also known as fixed assets) are defined as already-produced, durable goods or any non-financial asset used in the production of goods or services. This includes items such as dwellings, buildings, ICT, machinery and transport equipment.
Chart 1 shows the value of net capital assets in the UK since 1995. ‘Net’ figures account for the depreciation of assets and so reflect the market value of the capital stock. At the end of 2016 the net capital stock was estimated at £7.54 trillion (at 2015 prices) compared to £4.94 trillion (at 2015 prices) in 1995, an increase of 53 per cent or about 2.4 per cent per year.
However, as the chart shows, the rate of growth slowed markedly following the financial crisis of the late 2000s, averaging a mere 0.8 per cent per year since 2010. (Click here for a Powerpoint of the chart).
Capital intensity can be measured by the amount of capital per employee. Capital intensity is important because the growth in net capital per employee impacts on productivity. Its growth has an impact on the current effectiveness of capital and labour in production and on the future growth in potential output per employee.
Chart 2 shows that, following the financial crisis, falling employment levels temporarily boosted the growth in net capital per employee. Then, as employment levels recovered and began growing again, the weakness in investment meant that net capital per employee began to fall.
In 2016, as employment growth slowed, the now stronger flows of investment meant that, for the first time since 2011, net capital per employee was finally rising again. (Click here for a PowerPoint of the chart).
The persistent weakness experienced by UK in the growth of capital intensity in the 2010s is a drag on productivity and on supply-side growth. The weakness of UK productivity growth looks like remaining for some time one of the biggest economic challenges facing policymakers. Productivity needs its capital.
Articles
UK business investment on ice until more Brexit progress, warns BCC The Guardian, Richard Partington (11/12/17)
Budget 2017: Can Digital Plug The UK’s Productivity Gap? Hufttington Post, William Newton (27/11/17)
UK productivity estimates must be ‘significantly’ lowered, admits OBR The Guardian, Richard Partington and Phillip Inman (13/12/17)
UK productivity sees further fall BBC News (6/10/17)
Data
Capital stocks, consumption of fixed capital in the UK: 2017 ONS
Questions
- How might we measure productivity?
- Compose a list of items that are examples of non-financial (or fixed) capital.
- How can the growth of non-financial (or fixed) capital affect productivity?
- What is meant by capital intensity? Why is this concept important for long-term growth?
- What factors might affect the rate of capital accumulation? Are there interventions that governments can make to impact on the rate of capital accumulation?
- Discuss the possible reasons why the UK has become a productivity laggard.
These are challenging times for business. Economic growth has weakened markedly over the past 18 months with output currently growing at an annual rate of around 1.5 per cent, a percentage point below the long-term average. Spending power continues to be squeezed, with the annual rate of inflation in October reported to be running at 3.1 per cent compared to annual earnings growth of 2.5 per cent (see the squeeze continues). Moreover, consumer confidence remains fragile with households continuing to express particular concerns about the general economy and unemployment.
Here, we update our blog of July 2016 which, following the UK vote to leave the European Union, noted the fears for UK growth as confidence fell sharply. Consumer confidence is frequently identified by macro-economists as an important source of economic volatility. Indeed many macro models use a change in consumer confidence as a means of illustrating how economic shocks affect a range of macro variables, including growth, employment and inflation. Many economists agree that, in the short term at least, falling levels of confidence adversely affect activity because aggregate demand falls as households spend less.
The European Commission’s confidence measure is collated from questions in a monthly survey. In the UK around 2000 individuals are surveyed. Across the EU as a whole over 41 000 people are surveyed. In the survey individuals are asked a series of 12 questions which are designed to provide information on spending and saving intentions. These questions include perceptions of financial well-being, the general economic situation, consumer prices, unemployment, saving and the undertaking of major purchases.
The responses elicit either negative or positive responses. For example, respondents may feel that over the next 12 months the financial situation of their household will improve a little or a lot, stay the same or deteriorate a little or a lot. A weighted balance of positive over negative replies can be calculated. The balance can vary from -100, when all respondents choose the most negative option, to +100, when all respondents choose the most positive option.
The European Commission’s principal consumer confidence indicator is the average of the balances of four of the twelve questions posed: the financial situation of households, the general economic situation, unemployment expectations (with inverted sign) and savings, all over the next 12 months. These forward-looking balances are seasonally adjusted. The aggregate confidence indicator is thought to track developments in households’ spending intentions and, in turn, likely movements in the rate of growth of household consumption.
Chart 1 shows the consumer confidence indicator for the UK. The long-term average of –8.6 shows that negative responses across the four questions typically outweigh positive responses. In November 2017 the confidence balance stood at -5.2 roughly on par with its value in the previous two months, though marginally up on values of close to -7 over the summer. However, as recently as the beginning of 2016 the aggregate confidence score was running at around +4. In this context, current levels do constitute a significant change in consumer sentiment, changes which do ordinarily mark similar turning points in economic activity.(Click here to download a PowerPoint of the chart.)
Chart 2 allows to look behind the European Commission’s headline confidence indicator for the UK by looking at its four component balances. From it, we can see a deterioration in all four components. However, by far the most significant change in the individual confidence balances has been the sharp deterioration in expectations for the general economy. In November the forward-looking general economic situation stood at -25.5, compared to its long-run average of -11.6. (Click here to download a PowerPoint of the chart.)
The fall in UK consumer confidence is even more stark when compared to developments in consumer confidence across the whole of the European Union and in the 19 countries that make up the Euro area. Chart 3 shows how UK consumer confidence recovered relatively more strongly following the financial crisis of the late 2000s. The headline confidence indicator rose strongly from the middle of 2013 and was consistently in positive territory during 2014, 2015 and into 2016. The fall in consumer confidence in the UK has seen the headline confidence measure fall below that for the EU and the euro area. (Click here to download a PowerPoint of the chart.)
Consumer (and business) confidence is closely linked to uncertainty. The circumstances following the UK vote to leave the EU have undoubtedly created the conditions for acute uncertainty. Uncertainty breeds caution. Economists sometimes talk about spending being affected by two conflicting motives: prudence and impatience. While impatience creates a desire for spending now, prudence pushes us towards saving and insuring ourselves against uncertainty and unforeseen events. The worry is that the twin forces of fragile confidence and squeezed real earning are weighting heavily in favour of prudence and patience (a reduction in impatience). Going forward, this could create the conditions for a sustained period of subdued growth which, if it were to impact heavily on firms’ investment plans, could adversely impact on the economy’s productive potential. The hope is that the Brexit negotiations can move apace to reduce uncertainty and limit uncertainty’s adverse impact on economic activity.
Articles
UK consumer confidence slips in December – Thomson Reuters/Ipsos Reuters (14/12/17)
UK consumer confidence drops to lowest level since Brexit result Independent, Ben Chu (30/11/17)
2017 set to be worst year for UK consumer spending since 2012, Visa says Independent, Josie Cox, (11/12/17)
Carpetright boss warns of ‘fragile’ consumer confidence after profits plunge Telegraph, Jack Torrance (12/12/17)
UK consumers face sharpest price rise in services for nearly a decade Guardian, Richard Partington (5/12/17)
UK average wage growth undershoots inflation again squeezing real incomes Independent, Josie Cox (13/12/17)
Bank sees boost from Brexit progress BBC News (14/12/17)
Data
Business and Consumer Surveys European Commission
Questions
- Draw up a series of factors that you think might affect consumer confidence.
- Explain what you understand by a positive and a negative demand-side shock. How might changes in consumer confidence generate demand shocks?
- Analyse the ways in which consumer confidence might affect economic activity.
- Which of the following statements is likely to be more accurate: (a) Consumer confidence drives economic activity or (b) Economic activity drives consumer confidence?
- What macroeconomic indicators would those compiling the consumer confidence indicator expect the indicator to predict?
- Analyse the possible short-term and longer-term economic implications of a fall in consumer confidence.
- How might uncertainty affect consumer confidence?
- What do the concepts of impatience and prudence mean in the context of consumer spending? When consumer confidence falls which of these might become more significant for consumer spending?
UK CPI inflation rose to 3.1% in November. This has forced Mark Carney to write a letter of explanation to the Chancellor – something he is required to do if inflation is more than 1 percentage point above (or below) the target of 2%.
The rise in inflation over the past few months has been caused largely by the depreciation of sterling following the Brexit vote. But there have been other factors at play too. The dollar price of oil has risen by 32% over the past 12 months and there have been large international rises in the price of metals and, more recently, in various foodstuffs. For example, butter prices have risen by over 20% in the past year (although they have declined somewhat recently). Other items that have seen large price rises include books, computer games, clothing and public transport.
The rate of CPI inflation is the percentage increase in the consumer prices index over the previous 12 months. When there is a one-off rise in prices, such as a rise in oil prices, its effect on inflation will only last 12 months. After that, assuming the price does not rise again, there will be no more effect on inflation. The CPI will be higher, but inflation will fall back. The effect may not be immediate, however, as input price changes take a time to work through supply chains.
Given that the main driver of inflation has been the depreciation in sterling, once the effect has worked through in terms of higher prices, inflation will fall back. Only if sterling continued depreciating would an inflation effect continue. So, many commentators are expecting that the rate on inflation will soon begin to fall.
But what will have been the effect on real incomes? In the past 12 months, nominal average earnings have risen by around 2.5% (the precise figures will not be available for a month). This means that real average earnings have fallen by around 0.6%. (Click here for a PowerPoint of the chart.)
For many low-income families the effect has been more severe. Many have seen little or no increase in their pay and they also consume a larger proportion of items whose prices have risen by more than the average. Those on working-age benefits will be particularly badly hit as benefits have not risen since 2015.
If inflation does fall and if real incomes no longer fall, people will still be worse off unless real incomes rise back to the levels they were before they started falling. That could be some time off.
Articles
UK inflation rate at near six-year high BBC News (12/12/17)
Inflation up as food costs jump – and gas crisis threatens worse to come The Telegraph, Tim Wallace (12/12/17)
UK worst for pay growth as rich world soars ahead in 2018 The Telegraph, Tim Wallace (12/12/17)
Inflation rises to 3.1%, adding to UK cost of living squeeze The Guardian, Larry Elliott (12/12/17)
UK inflation breaches target as it climbs to 3.1% Financial Times, Gavin Jackson (12/12/17)
Inflation surges to 3.1% in November, a near six-year high Belfast Telegraph (12/12/17)
Data
CPI annual rate of increase (all items) ONS: series D7G7
Average weekly earnings, annual (3-month average) ONS: series KAC3
UK consumer price inflation: November 2017 ONS Statistical Bulletin (12/12/17)
Commodity prices Index Mundi
Questions
- Apart from CPI inflation, what other measures of inflation are there? Explain their meaning.
- Why is inflation of 2%, rather than 0%, seen as the optimal rate by most central banks?
- Apart from the depreciation of sterling, what other effects is Brexit likely to have on living standards in the UK?
- What are the arguments for and against the government raising benefits by the rate of CPI inflation?
- If Europe and the USA continue to grow faster than the UK, what effect is this likely to have on the euro/pound and dollar/pound exchange rates? What determines the magnitude of this effect?
- Unemployment is at its lowest level since 1975. Why, then, are real wages falling?
- Why, in the light of inflation being above target, has the Bank of England not raised Bank Rate again in December (having raised it from 0.25% to 0.5% in November)?
What do tulips, nickel mining in Australia, South Seas trading, Beanie Babies and cryptocurrencies have in common? The answer is that they have all been the subject of speculative bubbles. In the first four cases the bubble burst. A question currently being asked is whether it will happen to bitcoin.
Bitcoin
Bitcoin was created in 2009 by an unknown person, or people, using the alias Satoshi Nakamoto. It is a digital currency in the form of a line of computer code. Bitcoins are like ‘electronic cash’ which can be held or used for transactions, with holdings and transactions heavily encrypted for security – hence it is a form of ‘crytocurrency’. People can buy and sell bitcoins for normal currencies as well as using them for transactions. People’s holdings are held in electronic ‘wallets’ and can be accessed on their computers or phones via the Internet. Transfers of bitcoins from one person or organisation to another are recorded in a public electronic ledger in the form of a ‘blockchain‘.
The supply of bitcoins is not controlled by central banks; rather, it is determined by a process known as ‘mining’. This involves individuals or groups solving complex and time-consuming 
mathematical problems and being rewarded with a new block of bitcoins.
The supply of bitcoins is currently growing at around 150 per hour and the current supply is around ₿16.7 million. However, the number of new bitcoins in a block is halved for every 210,000 blocks. This means that the rate of increase in the supply of bitcoins is slowing – the number generated being halved roughly every four years. The supply will eventually reach a maximum of ₿21 million, probably sometime in the next century, but around 99% will have been mined by around 2032.
The bitcoin bubble
The price of bitcoins has soared in recent months and especially in the past two. On 4 October, the price of a bitcoin was $4226; by 7 December it was nearly four times higher, at $16,858 – a rise of 399% in just nine weeks. Many people have claimed that this is a bubble, which will soon burst. Already there have been severe fluctuations. By December 10, for example, the price had fallen at one point to $13,152 – a fall of nearly 22% in just two days – only to recover to over $15,500 within a few hours.
So what determines the price of bitcoin? The simple answer is very straightforward – it’s determined by demand and supply. But what has been happening to demand and supply and why? And what will happen in the near and more distant future?
As we have seen, the supply is limited by the process of mining, which allows a relatively stable, but declining, increase. The explanation of the recent price rise and what will happen in the future lies on the demand side. Increasing numbers of people have been buying bitcoin, not because they want to use it for transactions, whether legitimate or illegal over the dark web, but because they want to invest in bitcoin. In other words, they want to hold bitcoin as an asset which is increasing in value. These people are known as ‘hodlers’ – a deliberate misspelling of ‘holders’.
But this speculation is of the destabilising form. The more prices have risen, the more people have bought bitcoin, thus pushing the price up further. This is a classic bubble, whereby the price does not reflect an underlying value, but rather the exuberance of buyers.
The problem with bubbles is that they will burst, but just when is virtually impossible to predict with any accuracy. If the price of bitcoins falls, what will happen next depends on how the fall is interpreted. It could be interpreted as a temporary fall, caused by some people cashing in to take advantage of the higher prices. At the same time, other people, believing that it is only a temporary fall, will rush to buy, snapping up bitcoins at the temporary low price. This ‘stabilising speculation’ will move the price back up again.
However, the fall in price may be seen as the bubble bursting, with even bigger falls ahead. In this case, people will rush to sell before it falls further, thereby pushing the price even lower. This destabilising speculation will amplify the fall in prices.
But even if the bubble does burst, people may believe that another bubble will then occur and, once they think the bottom has been reached, will thus start buying again and there will be a second speculative rise in the price.
The crash could be very short-lived. This happened with the second biggest cryptocurrency, Ethereum. On 21 June this year, the price at the beginning of the day was $360. It then began to fall during the say. Once its price reached $315, it then collapsed by 96% to $13 with massive selling, much of it automatic with computers programmed to sell when the price falls by more than a certain amount. But then, on the same day, it rebounded. Within minutes it had bounced back and was trading at $337 at the end of the day. It is now trading at around $450 – up from around $300 four weeks ago.
Whether the bubble in bitcoin has more to inflate, when it will burst, and when it will rebound and by how much, depends on people’s expectations. But what we are looking at here is people’s expectations of what other people are likely to do – in other words, of other people’s expectations, which in turn depend on their expectations of other people’s expectations. This situation is known as a Keynesian Beauty Contest (see the blog, A stock market beauty contest of the machines). Perhaps we need a crystal ball.
Information site
Articles
- Is Bitcoin a bubble? Here’s what two bubble experts told us
Trade Online, Timothy B. Lee (8/12/17)
- Bitcoin and tulipmania have a lot more in common than you might think
Business Insider, Seth Archer (8/12/17)
- Bitcoin ends dramatic week with 20% slump followed by recovery
The Guardian, Jill Treanor (8/12/17)
- Putting a price on Bitcoin
The Economist, Buttonwood’s notebook (8/12/17)
- Is Bitcoin a Bubble Waiting to Pop?
InvestorPlace, Matt McCall (8/12/17)
- Bitcoin bubble follows classic pattern of investment mania
Financial Times, John Authers (8/12/17)
- The Bitcoin bubble – how we know it will burst
The Conversation, Larisa Yarovaya and Brian Lucey (6/12/17)
- Bitcoin isn’t a currency – and unless it becomes one it could be worthless
The Conversation, Vili Lehdonvirta (6/12/17)
- How Bitcoin futures trading could burst the cryptocurrency’s bubble
The Conversation, Nafis Alam (13/12/17)
- Op-ed: Bitcoin Is Not a Bubble; It’s in an S-Curve and It’s Just Getting Started
Bitcoin Magazine, Brandon Green (8/12/17)
- Bitcoin vs history’s biggest bubbles: They never end well
CNN Money, Daniel Shane (8/12/17)
- The 10 Most Ridiculous Price Bubbles In History
Business Insider, Vincent Fernando and Anika Anand (11/10/10)
- After bitcoin’s wild week, traders brace for futures launch
Reuters, Saqib Iqbal Ahmed (10/12/17)
Cryptocurrencies current market prices
Questions
- To what extent does Bitcoin meet the functions of money?
- Why is bitcoin unsuitable for normal transactions?
- To what extent is bitcoin like gold as a means of holding wealth?
- How would you advise someone thinking of buying bitcoin today? Explain why.
- Does a rapid rise in the price of an asset always indicate a bubble? Explain
- To what extent is the current rise in the price of bitcoin similar to that of the tulip, Poseidon and Beanie Baby bubbles?
- If bitcoin is appreciating relative to the dollar and other currencies, does this mean that the price of goods and services valued in bitcoin are falling? Explain.
- Explain and comment on the following sentence from the first Conversation article: “Like any asset, Bitcoin has some fundamental value, even if only a hope value, or a value arising from scarcity.”
- How might the introduction of futures trading in bitcoin impact on its price and the volatility of price swings?
- Explain and assess the argument that the price trend of bitcoin is more likely to be an S curve rather than a roller coaster
The linked articles below look at the state of the railways in Britain and whether renationalisation would be the best way of securing more investment, better services and lower fares.
But this system has come in for increasing criticism, with rising real fares, overcrowding on many trains and poor service quality. The Labour Party is committed to taking franchises into public ownership as they come up for renewal. Indeed, there is considerable public support for nationalising the train operating companies.
