On June 20, the Review of the Government’s case for a High Speed Rail programme was published. This was commissioned by the Transport Select Committee from the independent consultancy, Oxera.
The programme is initially for a high-speed rail link form London to Birmingham and then subsequently for two additonal routes from Birmingham to Manchester and from Birmingham to Leeds. The whole thing is known as the ‘HS2 Y programme’
Oxera’s brief was to ‘provide an independent review of the economic case for the programme and to provide a set of questions that the Committee could use to probe the evidence base put forward by witnesses during its inquiry.’ In considering the economic case, Oxera focused on the economic, social and environment impacts, both monetary and non-monetary.
The summary to the report states that:
Overall, the case for the High Speed Rail programme seems to depend on whether and when the capacity is needed, the selection of the best VfM [value-for-money] approach to delivering that capacity, the degree of uncertainty around the monetised benefits and costs of the preferred options, and judgements on the balance of evidence relating to non-monetised items, such as environment and regeneration impacts (which are likely to be substantive in their own right but not fully set out in the Government’s assessment).
On July 19, the Institute for Economic Affairs, the pro-free-market think-tank, published a highly critical disussion paper, challenging the case for HS2. The paper, High Speed 2: the next government project disaster? arges that:
There is a significant risk that High Speed 2 (HS2) will become the latest in a long series of government big-project disasters with higher-than-forecast costs and lower-than-forecast benefits. HS2 is not commercially viable and will require substantial and increasing levels of subsidy. Taxpayers will therefore bear a very high proportion of the financial risks, which are wholly under-represented in the Economic Case presented by the Department for Transport.
The publication of the report and the IEA discussion paper has fueled the debate between supporters and opponents of HS2, as the articles below demonstrate.
Update
In November 2011, the House of Commons Transport Select Committee came out in favour of the government’s HS2 plans. According to the committee’s chair, Louise Ellman:
A high speed rail network, beginning with a line between London and the West Midlands, would provide a step change in the capacity, quality, reliability and frequency of rail services between our major cities.
A high speed line offers potential economic and strategic benefits which a conventional line does not, including a dramatic improvement in connectivity between our major cities, Heathrow and other airports, and the rest of Europe.
However, she did raise some issues that would need addressing concerning the overall level of investment in the rail network and the encironmental impact of HS2.
Investment in HS2 must not lead to reduced investment in the ‘classic’ rail network. We are concerned that the Government is developing separate strategies for rail and aviation, with HS2 separate from both. We call again for the publication of a comprehensive transport strategy.
Investment in high speed rail has potential to boost growth but may have a substantial negative impact on the countryside, communities and people along the route. This must be better reflected in the business case for HS2 and future phases of the project. We would encourage the Government to follow existing transport corridors wherever possible.
Further update
In January 2012, the government approved HS2. The Transport Secretary, Justine Greening, said:
I have decided Britain should embark upon the most significant transport infrastructure project since the building of the motorways by supporting the development and delivery of a new national high speed rail network.
The ‘articles for further update’ below give reactions to the announcement.
Articles
Is the UK’s high speed rail project a waste of money? BBC News, Rory Cellan-Jones (21/7/11)
On a collision path The Economist blogs, Blighty (21/7/11)
High speed rail dismissed as ‘vanity project’ by right-wing think tank The Telegraph, David Millward (19/7/11)
HS2 high-speed rail plans ‘a recipe for disaster’ Guardian, Dan Milmo (19/7/11)
High speed rail report shows ‘uncertainty’ over benefits Rail.co, A. Samuel (21/7/11)
Our high speed rail future BBC News, Rory Cellan-Jones (21/7/11)
Anger as high-speed rail link to London branded ‘vanity project’ Yorkshire Post (20/7/11)
Articles for update
MPs support plans for a high speed rail network BBC News, Richard Lister (8/11/11)
High-speed rail project will boost economy, say MPs Guardian, Dan Milmo (8/11/11)
High speed rail report ‘raises questions’ say opponents BBC News (8/11/11)
MPs back controversial high-speed rail link Yahoo News, Sebastien Bozon (8/11/11)
HS2 project: ‘Wrong to castigate locals’ BBC Today Programme (8/11/11)
Articles for further update
HS2 go-ahead sees mixed reaction BBC News (10/1/12)
HS2 – What’s in it for you? Channel 4 News (10/1/12)
Ready to depart: But will the HS2 express be derailed before it arrives? Independent, Nigel Morris (11/1/12)
HS2 go-ahead sees mixed reaction BBC News (10/1/12)
HS2 go-ahead sees mixed reaction BBC News (10/1/12)
Reports and discussion paper
Review of the Government’s case for a High Speed Rail programme Oxera Publishing (20/6/11)
High Speed 2: the next government project disaster? IEA Discussion Paper No. 36 (19/7/11)
Good case for high speed rail to run to Birmingham and beyond, say MPs House of Commons Transport Select Committee News (8/11/11)
Transport Committee – Tenth Report: High Speed Rail House of Commons Transport Select Committee (8/11/11)
Questions
- Itemise (a) the monetary costs and benefits and (b) the non-monetary costs and benefits of HS2 that were identified by Oxera. Try to identify other costs and benefits that were not included by Oxera.
- Why are the costs and benefits subject to great uncertainty?
- How should this uncertainty be taken into account by decision-makers?
- Explain the process of discounting in cost–benefit analysis. How should the rate of discount be chosen?
- What are the main criticisms of the report made by the IEA discussion paper?
- Assess these criticisms.
There has been much talk of a double-dip recession, with many suggesting that the UK economy is already in a recession. However, according to the British Chambers of Commerce (BCC), a recession is not inevitable. Although the businesses surveyed showed that the economy had significantly weakened, John Longworth the Director General of the BCC said that a ‘new recession is not a foregone conclusion’.
Even though many of the figures showed a continued weakening of the economy, the results are still not as bad as they were back in 2008. The concern is that if the weakness continues, as it is predicted to do in the first quarter of 2012, confidence will remain low and then the economy may stagnate and a recession becomes a more likely scenario. Action is needed to prevent this from happening, especially with the eurozone crisis still causing concern. As John Longworth said:
The UK does have the potential to recover and make its way in the world. We have the talent, the energy and the enterprise. All we need is an environment that puts business first.
At the beginning of December 2011, many analysts thought retail sales would remain low, as they had been throughout 2011. However, British consumers came through in the second half of December and retail sales were up by 4.1% compared with a year ago. According to the British Retail Consortium, this Christmas rush should not be seen as a fundamental change in the direction of the economy and will have done little to boost the overall annual sales of most retailers.
Recession ‘not foregone conclusion’ Guardian (10/1/12)
UK economy likely to shrink amid eurozone crisis, says BCC The Telegraph, Angela Monaghan (10/1/12)
UK recession is not yet inevitable, survey says BBC News (10/1/12)
UK risks recession and lengthy stagnation – BCC Reuters, David Milliken (10/1/12)
U.K recession fears build Wall Street Journal, Ilona Billington (10/1/12)
BoE stimulus expansion may not be enough for recovery, BCC says (quick ad before article appears) Business Week, Scott Hamilton (10/1/12)
Questions
- How is a recession defined?
- What data has the BCC used to come to the conclusion that a recession is not inevitable?
- What action is needed by the government to tackle ‘short term stagnation and a lack of business confidence’?
- What could explain the 4.1% increase in sales in December compared with the previous year? Why is this data not thought to represent a ‘fundamental change in the circumstances of UK consumers’?
- What is expected to happen to UK inflation and employment during the first quarter of 2012?
- Why does the eurozone crisis present a problem for confidence and British exporters?
There is a growing consensus amongst the political parties in the UK that something needs to be done to end the huge pay rises of senior executives. According to the High Pay Commission, directors of FTSE 100 companies saw their remuneration packages rise by 49% in 2010. Average private-sector employees’ pay, by contrast, rose by a mere 2.7% (below the CPI rate of inflation for 2010 of 3.3% and well below the RPI inflation rate of 4.6%), with many people’s wages remaining frozen, especially in the public sector. (See Directing directors’ pay.) In 1979 the top 0.1% took home 1.3% of GDP; today the figure is 7%.
But agreeing that something needs to be done, does not mean that the parties agree on what to do. The Prime Minister, reflecting the views of Conservative ministers, has called for binding shareholder votes on top executives’ pay. The Liberal Democrats go further and are urging remuneration committees to be opened up to independent figures who would guard against the cosy arrangement whereby company heads set each other’s pay. The Labour Party is calling for worker representation on remuneration committees, simplifying remuneration packages into salary and just one performance-related element, and publishing tables of how much more bosses earn than various other groups of employees in the company.
So what measures are likely to be the most successful in reining in executive pay and what are the drawbacks of each measure? The following articles consider the problem and the proposals.
Articles
Parties draw up battle lines over excessive executive pay Guardian, Patrick Wintour and Nicholas Watt (9/1/12)
David Cameron’s plans for executive pay may not end spiralling bonuses Guardian, Jill Treanor (8/1/12)
Executive pay: what would Margaret Thatcher have done? Guardian Politics Blog, Michael White (9/1/12)
Businesses tell the PM he’s wrong about ‘fat cat’ pay Independent, Nigel Morris (9/1/12)
Directors’ pay is not the Government’s business The Telegraph, Telegraph View (9/1/12)
I’ll end merry go round of bosses’ pay, says David Cameron Scotsman (9/1/12)
Find a place at the table for public interest directors Scotsman, leader (9/1/12)
Cameron vows executive pay crackdown Financial Times, George Parker (9/1/12)
Q&A: Voting on executive pay BBC News (8/1/12)
Will shareholders crack down on executive pay? BBC News, Robert Peston (8/1/12)
Why didn’t investors stop high executive pay? BBC News, Robert Peston (9/1/12)
Report
Cheques With Balances: why tackling high pay is in the national interest Final report of the High Pay Commission (22/11/11)
Questions
- Why has the remuneration of top executives risen so much faster than average pay?
- What market failures are there in the determination of executive pay?
- What insights can the theory of oligopoly give into the determination of executive pay?
- Compare the proposals of the three main parties in the UK for tackling excessive executive pay?
- To what extent is it in the interests of shareholders to curb executive pay?
- Why may it be difficult to measure the marginal productivity of senior executives?
- To what extent would greater transparency about pay awards help to curb their size?
- What moral hazards are involved in giving large increases in remuneration to senior executives?
Throughout the credit crunch and since then, one of the major problems in the global economy has been a lack of lending by banks. A key cause of the credit crunch and many of the debt problems countries and people face today is because of people living off borrowed money. In the past, credit was so easy to obtain – people could receive a mortgage for more than 100% of the value of their property. However, when more and more people began to struggle to make their monthly mortgage repayments, the banking crisis began and since then mortgage lenders have become increasingly wary about who they lend to and how much.
The Bank of England has said that in the coming months it will become even harder to obtain mortgages, as banks become increasingly wary about who becomes their customer and potential home buyers put off even applying for a mortgage. Although mortgage approvals are at a 2-year high, they still remain significantly below their pre-crisis level. Indeed, the Bank of England said:
“Lenders expected the proportion of total loan applications being approved to fall over the coming quarter with some lenders commenting that they had revised down expectations for households’ disposable incomes and hence the affordability of taking out new secured loans.”
As part of this new rationing of mortgages, lenders are requiring applicants to put down larger and larger deposits and so for first time buyers, getting on to the property ladder is becoming more and more of a dream. The property market has been suffering from this mortgage rationing as house sales are down below their pre-crisis level. The housing market is crucial to any economy, as so many other sectors and hence jobs depend on it. If mortgages remain scarce and the required deposit so high, the UK housing market is likely to remain stagnant and this will certainly prove damaging for the prospects of the UK economy in 2012.
Articles
Mortgage approvals hit new two-year high The Telegraph, Angela Monaghan (4/1/12)
Mortgage approvals up but overall lending weak Reuters (4/11/12)
Mortgage rationing becomes worse, Bank of England says BBC News (5/1/12)
Mortgage demand fell in Q4 2011, say lenders Mortgage Strategy, Tessa Norman (5/11/12)
Mortgage lending still stagnant, Bank figures show BBC News (4/11/12)
BoE: Lending to be tighter in Q1 2012 Mortgage Introducer, Yuan Phoon (5/11/12)
Data
Lending to Individuals Bank of England
Questions
- Why are mortgages being rationed?
- Why is the housing market so important for the UK economy?
- Which other sectors of the economy employ people whose jobs are dependent on a buoyant housing market?
- Why has the Bank of England said that in the coming months it will become harder to get a mortgage?
- Why would increased mortgage lending be a much needed stimulus for the UK economy?
- Using an aggregate demand and aggregate supply diagram, show how rationing of mortgages and other loans will affect the UK economy.
The history of macroeconomic thought has been one of lively debate between different schools.
First there is debate between those who favour active government intervention (Keynesians) to manage aggregate demand and those who favour a rules-based approach of targeting some variable, such as the money supply (as advocated by monetarists) or the rate of inflation (as pursued by many central banks), or a hybrid rule, such as a Taylor rule that takes into account a weighted target of inflation and real output growth.
Second there is debate about the relative effectiveness of monetary and fiscal policy. Monetarists argue that monetary policy is relatively effective in determining aggregate demand, which in turn affects output in the short run but only prices in the long run. Keynesians argue that monetary policy can be weak in the short run if the economy is in recession. Quantitative easing may simply be accompanied by a decline in the velocity of circulation. It’s not enough to make more money available and keep interest rates close to zero; people must have the confidence to borrow and spend. Keynesians argue that in these circumstances fiscal policy is more effective.
Third there is the debate about the size of the state and the extent of government borrowing. Libertarians, following the views of economists such as Hayek, argue that reducing the size of the state and reducing government borrowing will create a more dynamic economy, where the private sector will expand to take up the slack created by a reduction in the size of the public sector. Their approach to policy involves a mixture of cutting deficits and market-orientated supply-side policy. Economists on the left, by contrast, argue that economic growth is best stimulated in the short term by increases in government spending and that supply-side policy needs to be interventionist, with the government investing in infrastructure, research and development, education and health. Such growth policies, they argue can be targeted on the poor and help to arrest the growing inequality in society.
These debates have been given added impetus by the global financial crisis in 2008 and the subsequent recession, slow recovery and possibility of a slide back into recession. The initial response of governments and central banks was to stimulate aggregate demand. Through combinations of expansionary fiscal policy, interest rates cut to virtually zero and programmes of quantitative easing, the world seemed set on a course for recovery. But one result of the policies was a massive expansion in government deficits and debt. This led to increasing criticisms from the right, and a move away from expansionary to austerity fiscal policies in order to contain debts that were increasingly being seen as unsustainable. And all the while the debates have raged.
The following podcast and articles look at the debates and how they have evolved. The picture painted is a more subtle and nuanced one than a stark ‘Keynes versus Hayek’, or ‘Keynesians versus monetarists’.
Podcast
Keynes v Hayek: The debate continues BBC Today Programme, Nicholas Wapshott and Paul Ormerod (23/12/11)
Articles
Von Hayek Revisited – Warts and All CounterPunch, David Warsh (26/12/11)
Fed up with Bernanke Reuters, Nicholas Wapshott (20/12/11)
Paul Krugman Versus Milton Friedman Seeking Alpha, ‘Shareholders Unite’ (6/12/11)
Keynes Was Right New York Times, Paul Krugman (29/12/11)
Keynes, Krugman, and Austerity National Review Online, William Voegeli (3/1/12)
The Madness of Lord Keynes The American Spectator, Samuel Gregg (19/12/11)
Central Bankers vs. Natural Stock Market Cycles in 2012 The Market Oracle, David Knox Barker (28/12/11)
Now is the time to eat, drink and be merry Financial Times, Samuel Brittan (29/12/11)
Questions
- To what extent is quantitative easing consistent with (a) Keynesian and (b) monetarist approaches to macroeconomic policy?
- What is meant by the ‘liquidity trap’ and what are its implications for monetary policy? Have we witnessed a liquidity trap since the beginning of 2009?
- What are the arguments for and against an independent central bank?
- Explain Milton Friedman’s assertion ‘that it was the Fed’s failure in 1930 to pursue “open market operations” on the scale needed that deepened the slump’.
- What are the implications of growing government deficits and debt for policies to avoid a slide back into recession?
On June 20, the Review of the Government’s case for a High Speed Rail programme was published. This was commissioned by the Transport Select Committee from the independent consultancy, Oxera.