On my commute to work on the 6th May, I happened to listen to a programme on BBC radio 4, which provided some fascinating discussion on a variety of economic issues. Technological change is constant and unstoppable and the consequences of it are likely to be both good and bad.
In this programme some top economists, including Joseph Stiglitz offer their analysis of the impact of technology and how the future might look, by considering a range of factors, such as youth unemployment, the productivity of labour, education, pensions and inequality. The benefits of new technology can be seen as endless, but the impact on inequality and how the benefits of technology are being distributed is a concern for many people. The best introduction to the programme and its content is simply to reproduce the description provided by BBC radio 4.
The baby boom generation came of age when it was accepted knowledge that innovation and productivity would always lead to higher standards of living. The generations which followed assumed this truth would continue into the future indefinitely. With the crash of 2008 the upward mobility the middle classes assumed was their right evaporated, and it is unlikely to return.
Martin Wolf, chief economics commentator of the Financial Times, asks how the work force of the future will be changed by the advancements of technologies. How should governments respond to a jobs market which is hollowing out opportunities for traditional educated professions and how will rewards for innovation and income for labour be distributed without creating a society plagued by endemic inequality?
We will speak with optimists and pessimists on both sides of the argument to find out how the repercussions of these changes will affect the way we all live now and well into the future.
It is well worth listening to and provides some interesting insights as to what the future might look like, as the inevitable technological change continues. The link for the programme is below.
The future is not what it used to be BBC Radio 4 (6/5/14)
Questions
- What are the expected costs and benefits of technological change?
- Which factors are discussed as being the main obstacles to upwards mobility? Why have these become more prevalent in recent decades?
- Using a diagram, explain how technology can improve economic growth. To what extent is the multiplier effect important here?
- How is technology expected to affect the labour market? Use a diagram to help your explanation and make sure you consider both sides of the argument.
- What is meant by the idea that the benefits of new technology are likely to be felt in the long run?
- How important is education in creating equal opportunities?
- What is meant by secular stagnation? Is it seen as being a problem?
Last month the Swiss air freight company Kuehne + Nagel International AG was fined just over NZ$3m (around £1.5m) by the New Zealand Commerce Commission for their part in a price fixing cartel that ran for 5 years.
In 2002 the firms in the industry faced higher costs due to increased security measures imposed by the British government. They formed a cartel to agree to pass these increased costs on to their customers for air freight services from the UK to a number of countries, including New Zealand. The investigation by the New Zealand competition authority followed a leniency application by one of the participants in 2007. Five other participants had previously been fined, but Kuehne + Nagel decided to fight the case. The fine imposed on them brought the total fines to almost NZ$12m (around £6m).
A previous post on this site highlighted how golf played a prominent role in several previous cartels. However, this cartel seemed to have had a fixation on gardening and referred to the cartel as the gardening club. Other parties involved in the cartel were referred to as fellow gardeners and the agreed upon price as the price for asparagus! When a participant suspected a rival may have cheated on the cartel agreement email exchanges such as this one took place:
I hear… concerns about the price of produce from the garden of Velcro, which appears to be operating as a charitable cooperative for the benevolence of vegetable eaters rather than growers…
It is not known whether the Kuehne + Nagel employees involved in the cartel were placed on gardening leave during the investigation!
‘Gardening Club’ hid hardcore air freight cartel New Zealand Herald, Hamish Fletcher (04/04/14)
‘Gardening Club’ Air Freight Forwarding Cartel Finally Buried by High Court Handy Shipping Guide (08/04/14)
Swiss firm fined $3.1 million over cartel 3 News (08/04/14)
‘Gardening Club’ freight cartel participant, Kuehne + Nagel, fined $3.1m The National Business Review (08/04/14)
Questions
- Why is an increase in costs likely to trigger price fixing behaviour?
- Why might the members want to use code names to run a cartel’s activities?
- Why do competition authorities grant leniency to cartel members that inform them about price fixing behaviour?
Life expectancy is increasing across the world and the latest set of figures from the Office for National Statistics show that in the UK it has passed 79 for boys born in 2010–12, and 82 for girls born then. In fact the prediction is that over a third of babies born in 2013 will live to more than 100. The data throws up some interesting questions. How well prepared are we for lives that last this long? And how evenly distributed is this increase in life expectancy? Pensions’ minister, Steve Webb, has called for better information on life expectancy to be shared. How would this impact on our decision making?
It seems reasonable to think that increasing life expectancy must be good news. And of course, for individuals it can be. In 1951 the average man retiring at 65, in England and Wales, could expect to live and draw a pension for another 12.1 years. By 2014 this had risen to 22 years.
But while we can look forward to longer life, for the government, it presents some challenges The first is that we just don’t save enough for our old age. This seems to be partly because we find it hard to make decisions that will have an impact so far in the future. There are a number of measures that have been put in place to encourage us to save more, including auto-enrolment into company pension schemes. This is being rolled out across businesses over the next three years. In the 2014 Budget, the Chancellor announced that people reaching retirement age will be able to draw all their pension as a cash lump sum, rather than having to take it as a regular income.
Another concern for government is the variations that we find in life expectancy across the UK. The 2014 ONS data identified that life expectancy for men born in Glasgow in 2012 is 72.6, in East Dorset it is 82.9. 25% of those in Glasgow are not expected to live to 65. The gap in years of good health is even greater. This presents governments with a long-term problem. How do they achieve greater equality in this instance? Do they focus resources on the areas that need it most? Do they legislate to address behaviour? Or do they rely on the provision of good advice – on diet, exercise and other factors?
Information has a role to play in both areas identified above. In April 2014, Steve Webb, suggested that in order to make good decisions at the point of retirement, people need to understand more about what lies ahead. He said:
People tend to underestimate how long they’re likely to live, so we’re talking about averages, something very broad-brush. Based on your gender, based on your age, perhaps asking one or two basic questions, like whether you’ve smoked or not, you can tell somebody that they might, on average, live for another 20 years or so.
This suggestion has led to some concerns being expressed at what appears to be an over-simplistic approach. Estimates can only be based on a mix of averages modified by individual information. Would the projections be shared with pension providers? What would you do if you exceeded your forecast life expectancy – by a long way – and had spent all your money? Could you sue someone?
Will your pension pot last as long as you will? The Telegraph, Dan Hyde and Richard Dyson (23/4/2014)
Scientists invent death test that will tell us how long we have to live Metro (11/8/13)
Games host Glasgow has worst life expectancy in the UK The Guardian, Caroline Davies (16/4/2014)
Pensioners could get life expectancy guidance BBC News Politics (17/4/14)
ONS reveals gaps in life expectancy across the UK FT Adviser Pensions, Kevin White (23/4/14)
Health care aid for developing countries boosts life expectancy Health Canal, Ruth Ann Richter (22/4/14)
A third of babies born this year will live to 100 This is Money.co.uk, Adam Uren (11/12/13)
Questions
- Thinking about the UK, what are the factors that might explain variations in life expectancy across different regions? How might the government address these differences? Why would they want to do so?
- Do the same factors explain variations between countries? Who can address these differences? Who would want to do so?
- If you could have a reasonable prediction of your life expectancy at 65, would you want it? How would your behaviour change if you were predicted a longer than average life expectancy? How would it change if you were predicted a shorter than average life expectancy?
- If you could have an accurate prediction of your life expectancy at 18, how would your answers differ? If this were possible, would it present any problems?
Calls for an independent Scotland have focused on a variety of economic issues. These have included taxation, government spending, currency, fiscal policy and monetary policy. However, the BBC News article below looks at another factor which may be affected by a ‘yes’ vote – the price of stamps.
Having just returned from 10 days in the Highlands, I certainly agree with the BBC article that it would be an expensive business to deliver to the remotest parts of Scotland and would definitely require ‘trains, planes, ferries, Land Rovers and vans’ and, in an extreme case, a fishing boat.
So is the price we pay for postage to less rural areas of the UK used to subsidise the higher costs of delivery to the remotest parts of Scotland and, in particular, to the small islands off the Scottish coastline? What would a ‘yes’ vote mean for the cost of stamps in Scotland and in the remainder of the UK? The following articles consider this rather odd question.
Why postage should be cheaper in UK if Scots vote ‘Yes’ BBC News, Brian Milligan (19/4/14)
Tories warn over post service costs The Courier (6/4/14)
Questions
- What happened when the Royal Mail was privatised?
- What are the benefits and costs of privatisation?
- Using a cost and revenue diagram, explain how the different costs of delivery between urban parts of the UK and the remotest parts of Scotland should be reflected in different prices of postage.
- If the price of postage is the same for delivery everywhere in the UK, use your diagram to explain how this happens.
- What does your diagram suggest will happen to the price of postage stamps if a ‘subsidy’ is no longer available?
Officials of the Club Financial Control Body (CFCB) of UEFA met on Tuesday 15th April and Wednesday 16th April to decide the fate of a number of European clubs. The job of the CFCB is to implement UEFA’s Financial Fair Play (FFP) rules. Manchester City and Paris Saint-Germain (PSG) are said to be nervously awaiting the outcome of these meetings.
UEFA’s FFP rules apply to teams who want to play in either the Champions League or the Europa League. In order to be eligible to compete in these competitions teams not only have to perform well in their domestic league they also have to obtain a license from UEFA. The application process normally takes place midway through the current season for entry into either the Champions League or Europa League for the following season.
UEFA’s FFP rules cover a broad range of issues such as requirements for clubs to pay taxes, transfer fees and players’ wages on time in order to receive a license. However it is the ‘Break Even’ requirement that has caught the attention of a number of economists. This provision limits the size of the financial losses that team can incur before they become subject to sanctions from UEFA. Some of the stated aims of the policy are to:
– Introduce more discipline and rationality in club football finances
– Encourage clubs to operate on the basis of their own revenues
– Encourage responsible spending for the long-term benefit of football
– Protect the long term viability and sustainability of European club football.
The Royal Economic Society held a special session on the potential impact of the ‘Break Even’ requirement at its annual conference in April of this year.
One key way in which the UEFA rules differ from the rules imposed in the Championship in England is that the financial performance of the clubs is judged over a 2/3 year period rather than just one. The initial assessment period is over 2 seasons – 2011-12 to 2012-13. After this the monitoring period is over 3 seasons. Teams can make an initial loss of €5 million in total over the first two year period but this can increase to a maximum permitted loss €45 million over the two years – approximately £37 million – if the team’s owner is willing to fund this loss out of their own money. Certain categories of expenditure are exempt such as the cost of building a new stadium/stand or spending on youth development and the local community.
Manchester City made a total financial loss of £149 million over the last two seasons, far in excess of the permitted £37million, but these losses are falling which may count in their favour. They made losses of £97.9 million in 2012 and £51.6 million in 2013. Also some of the club’s expenditure will have been on some of the exempted categories so that the actual losses subject to FFP will be lower. Chelsea made a profit of £1.4million in 2011-12 and a loss of £49.4million in 2012-13. Although the losses over the two seasons were greater than £37 million, once adjustments were made for exempted expenditures the club was within the maximum permitted loss so was not subject to a full investigation.
In order to implement its FFP regulations UEFA created the Club Financial Control Body (CFCB). The CFCB has two departments – an investigatory chamber and an adjudicatory chamber. The investigatory chamber does the bulk of the work by investigating the accounts of all the 237 clubs that play in UEFA competitions. It was initially reported that the accounts of 76 clubs were being investigated in some detail because it was thought that they might have failed to meet FFP guidelines. However after further investigations in February it was reported that this number had fallen to below 20 teams. The investigatory panel met on Tuesday 15th April and Wednesday 16th April in order to make its final decisions which will be announced May 5th. The body can choose from one of the four following options in each case:
– Dismiss the case
– Agree a settlement with the club – effectively putting it on probation
– Reprimand and fine the club up to €100,000
– Refer the club to the CFCB adjudicatory chamber
The last option is the most serious as the adjudicatory chamber has the power to issue more serious penalties such as
– A deduction of points from the group stages of UEFA competitions.
– Withholding of revenues from UEFA competitions.
– Restrictions on the number of players that a club can register for participation in UEFA competitions.
– Disqualification from future UEFA competitions.
One issue that concerned UEFA was the possibility that very wealthy team owners might try to artificially inflate the revenues their club’s generate so as to circumvent the rules and make it look as if the team was meeting the FFP guidelines. In particular deals might be struck between other organisations that the club owner has an interest in and the football club at rates far in excess of the normal market level. For example some concerns have been expressed about the nature of the back-dated sponsorship deal of £167 million/year signed by PSG with the Qatar Tourism Authority. PSG are owned by Qatar Sport Investment which itself is a joint venture between the Qatari government and the Qatari Olympic Committee. The CFCB have said that they will analyse these types of deals and adjust club accounts if necessary so that they reflect true market rates.
May 5th could prove to be a very significant day for some of the biggest and most wealthy clubs in Europe.
Webcast
The Economics of “Financial Fair Play” (FFP) in European Soccer (EJ Special Session) Royal Economic Society (7/4/14)
Articles
UEFA probes ‘fewer than 20’ clubs over financial fair play rules Sky Sports, (14/4/14)
Manchester City confident of satisfying Uefa financial fair play rules The Guardian (15/4/14)
Uefa’s Financial Fair Play rules explained The Telegraph (15/4/14)
Man City sweating over sanctions as UEFA prepare to rule over excessive spending Daily Mail (15/4/14)
How Bosman’s lawyer is plotting another football revolution BBC Sport (2/10/13)
Manchester City await fate as Uefa’s financial rules kick in BBC Sport (16/4/14)
Manchester City and Paris Saint-Germain face financial fair play fate The Guardian (14/4/14) .
Questions
- In standard economic theory it is assumed that both consumers and producers act rationally. What precisely does this mean?
- One of the stated aims of UEFA FFP is to ‘introduce more discipline and rationality in club football finances’. Why might the owners of a football club act in an irrational way?
- Consider some of the advantages and disadvantages of assessing the financial performance of a team over 3 years as opposed to 1 year.
- One of the major arguments made against the UEFA FFP rules is that they will lead to a ‘fossilisation’ of the existing market i.e. the current top clubs are more likely to maintain their leadership. Explain the logic of this argument in more detail.
- Which of the possible sanctions for breaking FFP regulations do you think would hit the clubs the hardest in terms of the revenue they would lose? i.e. Which of the sanctions would they most like to avoid?
