There has been much in the news recently about the attempts of governments around the world to tackle two problems: (a) soaring deficits and debt and (b) a slow recovery and a possible slide back into recession. As the previous news item, Over stimulation? Trying to prevent a double dip as Japan’s debt soars, reported, Japan’s approach has been to tackle the second problem first and to give a massive fiscal boost to the economy. Its debt can be tackled later as the economy, hopefully, recovers.
The Irish government, by contrast, in its Budget on 9 December announced sweeping cuts in government expenditure. This included substantial pay cuts for public-sector employees. Getting the public-sector deficit down (projected to be 11.6% of GDP in 2010) was the government’s major priority.
Greece too is under tremendous pressure to cut its public-sector deficit and debt. Forecast to be 125% of GDP in 2010, its public-sector debt is the highest in the eurozone. There are serious worries as to whether Greece will be able to fund the debt.
Meanwhile in the UK, Alistair Darling presented the government’s pre-Budget report. This took a mid-course between the two objectives. He announced modest increases in tax, including a 1% increase in national insurance contributions from 2010, and modest increases in benefits. The overall effect was pretty neutral, leaving the projected public-sector deficit at around 12.6% of GDP in 2010/11, hopefully falling to around 4.4% by 2014/15 as economic growth increases tax revenues. So was this the best compromise: not too tough so as to stifle recovery and not too expansionary so as to cause a soaring of debt and difficulty in funding the necessary borrowing?
So what is the correct balance? Are the situations very different in the four countries or have they merely chosen to prioritise them differently? Should countries make cuts early in order to get their deficits down and avoid a collapse in confidence, but risk falling back into recession? Or should they get growth firmly established before tightening fiscal policy? The following articles look at the issues.
The UK
Key points: The pre-Budget report at-a-glance BBC News (9/12/09)
Alistair Darling to borrow more this year (including video) BBC News (9/12/09)
Walking the line BBC News, Stephanomics, Stephanie Flanders’ blog (10/12/09)
Larry Elliott’s analysis on the pre-budget report (video) Guardian, Larry Elliott and Mustafa Khalili (9/12/09)
Pre-budget report: All boxed in Guardian (10/12/09)
Tax and mend Economist (9/12/09)
Darling defends economic forecasts (including video) Financial Times, Chris Giles and George Parker (9/12/09)
Prevarication and Newspeak will not fix our finances Financial Times, Willem Buiter (9/12/09)
Is UK government debt really that high? BBC News, Richard Anderson (22/12/09)
The measures announced in the pre-Budget report along with a video of the speech, press releases and the full report as a PDF document can be found at the Treasury’s Pre-Budget Report 2009 site.
The Institute for Fiscal Studies has a part of its site dedicated to the pre-Budget report. This contains briefings and analysis. See Pre-Budget Report 2009
Greece
Why Greece Could Be the Next Dubai Time, Adam Smith (9/12/09)
Greece’s debt crisis signals problems for the European Central Bank Guardian, Nils Pratley (8/12/09)
Greek stocks fall 6% on fears over the country’s debt BBC News (8/12/09)
Greek stocks fall 6% on fears over the country’s debt (video) BBC News (8/12/09)
Greece threatens bankruptcy, and the eurozone The Atlantic, Megan McArdle (8/12/09)
Greece Struggles to Stay Afloat as Debts Pile On New York Times, Rachel Donadio and Niki Kitsantonis (11/12/09)
Greece ‘worthy’ of eurozone place BBC News (14/12/09)
Greek PM to unveil steps to allay deficit fears Forbes, Dina Kyriakidou (14/12/09)
Default lines The Economist (3/12/09)
Greeks denying gifts BBC News blogs, Stephanomics, Stephanie Flanders (29/1/10)
Davos 2010: Greece denies a bail-out is needed BBC News (28/1/10)
Ireland
Ireland suffers harshest budget in decades Financial Times, John Murray Brown (9/12/09)
Strong medicine fails to soothe Irish Financial Times, John Murray Brown (9/12/09)
Irish Wince as a Budget Proposal Cuts to the Bone New York Times, Sarah Lyall (9/12/09)
A time to grin and bear it Irish Times (10/12/09)
Germany
German government heads for record debt BBC News (29/12/09)
German minister warns of fiscal crackdown Financial Times, Bertrand Benoit (17/12/09)
Goverment’s draft budget includes record debt levels Deutsche Welle (16/12/09)
General
The banking crisis: Till debt us do part Times Online, David Smith and Jenny Davey (13/12/09)
Sovereign debt burdens keep traders on red alert Fiinancial Times, David Oakley (12/12/09)
Questions
- Are the objectives of tackling recession and getting the public-sector deficit and debt down contradictory aims, or is it merely a question of sequencing?
- To what extent are the situations in the UK, Japan and Ireland similar? Should they be following similar macroeconomic policies?
- Why does it matter if a country has a rising public-sector debt as a proportion of GDP?
- Distinguish between a cyclical deficit and a structural deficit. Why has the UK’s structural deficit got worse? Will it fall as the economy recovers, or will it be only the cyclical deficit that falls?
- Why does Greece’s debt crisis signal problems for the European Central Bank?
- What determines a country’s sovereign credit rating?
Latest figures suggest that Japan could be entering a ‘double-dip’ or ‘W-shaped’ recession. In the second quarter of 2009, Japan managed to achieve a modest 0.9% growth after four quarters of contraction. Growth then accelerated to 1.2% in the third quarter. It now seems likely, however, that the fourth quarter could see a contraction of the economy again – or at best a slow-down in growth. Prices are falling as demand remains stagnant, and this deflation could encourage people to hold back from spending as they wait for prices to fall further.
As the British government announces planned spending cuts to tackle the rapidly mounting public-sector deficit and debt, so Japan has just announced a massive further fiscal stimulus of ¥7.2 trillion (£50 billion) or 1.5% of GDP. Although Japan’s public-sector deficit is no longer the highest of the G7 countries – 7.4% of GDP, compared with 12.6% for the UK, 11.4% for the USA and 8.2% for France (see OECD Economic Outlook November 2009, summary of projections – its debt, currently at 190% of GDP, is by far the highest of the G7 countries (this compares with 115% for Italy, 76% for France, 73% for Germany, 69% for the UK and 65% for the USA).
More than half of the fiscal stimulus will go on increases in government expenditure, especially on public works. However, much of the spending is in the form of a transfer to regional governments, which would otherwise be forced to make spending cuts because of falling tax revenues. So is the stimulus too much, too little, or of little relevance? Read the linked articles below, which consider the issues.
Japan growth estimate slashed Sydney Morning Herald (9/12/09)
Double dip could be taking shape for Japanese economy Market Watch, Lisa Twaronite (9/12/09)
Japan to boost recovery with giant stimulus plan Sydney Morning Herald, Kyoko Hasegawa (8/12/09)
Japan steps up stimulus spending Sydney Morning Herald (8/12/09)
Japan public debt to hit record this fiscal year AsiaOne News (Singapore) (8/12/09)
Japan govt unveils $81 bln economic stimulus Economic Times of India (8/12/09)
Japan’s economic growth figure lowered BBC News (9/12/09)
Japan agrees $81bn stimulus package BBC News (8/12/09)
Japan unveils $80bn of direct spending in $274bn stimulus package Telegraph (8/12/09)
It is Japan we should be worrying about, not America Telegraph (1/11/09)
Japan keeps pouring money into its ailing economy Times Online, Leo Lewis (9/12/09)
Japan’s Leader Promotes $81 Billion Stimulus Plan New York Times, Hiroko Tabuchi (8/12/09)
Japan sets out $81bn stimulus plan Financial Times, Mure Dickie (8/12/09)
Fiscal challenges ahead The Asahi Shimbun (Japan) (8/12/09)
Bond jitters as Japan launches yet another stimulus plan Telegraph, Ambrose Evans-Pritchard (8/12/09)
New Stimulus Won’t Save Japan From Deflation, Soaring Deficit Money Morning, Jason Simpkins (8/12/09)
Questions
- Use the threshold concepts of stocks and flows to explain the difference between public-sector deficits and public-sector debt.
- Why might an economy go into a ‘double-dip’ or ‘W-shaped’ recession?
- For what reasons might this latest stimulus package be regarded as (a) too large and (b) too small to tackle Japan’s macroeconomic problems?
- Discuss the proposed policy of banning firms from hiring temporary workers.
- Why does deflation (in the sense of falling prices) create a problem for governments?
- What are the implications for the market for Japanese government bonds of the latest stimulus package?
When we examine industries and markets in economics, one of the key things we look for is how competitive the market is. A question that we ask is, under what type of market structure is this firm operating? To answer this, we will need information on the number of competitors, the products, prices, advertising, profits, efficiency and how the firms are likely to behave in both the short and long run.
A lot of the time firms are independent: their behaviour doesn’t affect the actions of rivals. This is usually because each firm within the industry only has a relatively small market share. If one firm changes the price, or how much it spends on advertising/product development, this won’t have an impact on the market equilibrium.
However, it’s not as easy for an oligopolist, as interdependence is a key characteristic of this market structure. As such, it’s not surprising that firms have a decision to make: should they compete with the other firms and try to maximise our own profits, or should they collude and try to maximise industry profits? Whilst collusion is illegal in many countries, activities such as price fixing do go ahead and it can be difficult to prove, as the ACCC is finding with a petrol price-fixing case in Melbourne. In 49 of the 53 weeks studied, when one of the big petrol stations changed their price, the industry followed these movements exactly.
As competition in a market decreases, it could be a sign that an oligopoly is developing. A few firms are beginning to dominate the market and this could spell trouble for customers. Indeed, in the Australian banking sector, there are concerns that an oligopoly will develop if more competition is not introduced. The Deputy Chairman of the Australian Bankers’ Association said: “We’ve got four major banks that are repricing all their commercial and small business customers’ margins upwards”. Customers may therefore lose out with higher prices and less choice, while the dominant firms see their profits growing.
The market structure under which a firm is operating will have a major impact on its decisions and the outcomes in the market, as shown in the articles below.
ACCC on safe political ground in targeting the Mobil takeover The Australian Business, John Durie and Martin Collins (3/12/09)
Nippon Steel Chairman warns of Australian oligopolies Market Watch, Stephen Bell (10/11/09)
Government’s bank guarantee hurting BOQ: Libby Business Day (2/12/09)
Regulators to scrutinise BHP and Rio’s Australian joint venture Financial Times, William McNamara and Elizabeth Fry (7/12/09)
Crackdown on price fixing draws mixed reaction The Korea Herald (7/12/09)
Questions
- What are the main characteristics of an oligopoly?
- Illustrate a cartel that fixes prices and show how a member of this cartel must sell at that price and at a given quantity.
- Some factors make collusion more likely to occur and more likely to succeed. In the Australian banking sector, which factors do you think are allowing price fixing to occur?
- Is the example of petrol price fixing barometric price leadership or dominant firm price leadership? Explain both of these terms and use a diagram, where possible, to illustrate the effects.
- The articles suggest that oligopolies are bad for competition. Explain why this is the case.
- To what extent are oligopolies against the public interest? Use examples from the articles to back up your argument.
Life must be very hard for bankers in the UK. Not only are they being partly blamed for the current financial crisis, but they may now have to survive on just their salary. Imagine trying to have a happy Christmas when you’ve only earned £200,000 over the past year: it really will be a cold and hard Christmas for them. Unless of course, the government does call the bluff of the RBS directors who have threatened to quit if an estimated £1.5bn bonus pool for staff at the investment arm of the bank is blocked. Let’s not forget that RBS is largely owned by the public: 70% or an investment of £53.5bn. It’s our taxes that will be used to pay these bonuses giving 20,000 RBS bankers a salary that is at least 3 times greater than the national average.
RBS directors have threatened a mass walkout if the government does withhold the ‘competitive bonus package’. Given that many blame bank directors for plunging us into the credit crunch, some may laugh at their argument that if the bonus package is withheld, then ‘top talent will leave the bank’. However, it is a serious threat: pay out or we leave and you’ll see the profitability of the bank decline, making it less likely that taxpayers will see a ‘return’ on their investment. RBS needs to make profits to repay the taxpayer, but is the taxpayer willing to pay out? RBS directors argue that if its bankers do not receive bonuses, then RBS will lose out in recruiting the best talent. Why would a banker choose to work for a bank that doesn’t pay out bonuses?
Lord Mandelson said: “I understand the point that RBS directors are expressing – they say they have to remain competitive in the market in recruiting senior executives, and this is why it’s important that all the banks are equally restrained, and RBS is not singled out.” One solution here would be a one-off windfall tax on bonuses, or even a permanently higher rate of tax (a ‘supertax’) on bonuses.
Over the past year or so, not a day has gone by when banks are not in the news and the next few days look to be no exception. This is another issue that affects everyone, so read the articles below and make up your mind! The government has an important decision to make, especially given than it’s the taxpayers who will decide on the next government.
‘Bankers need to join the real world’ minister says BBC News (3/12/09)
UK seeks to calm fears of RBS walk-out over bonuses Reuters, (3/12/09)
RBS chief Stephen Hester set to walkout over bonus row Scotsman, Nathalie Thomas (3/12/09)
RBS directors threaten to quit over bonuses Big On News (3/12/09)
Thousands of Bankers paid £1m in bonuses Sky News (3/11/09)
Barclays bankers to get 150pc pay rise Telegraph, Jonathan Sibun and Philip Aldrick (3/12/09)
PM reacts to RBS Director’s threat ITN (3/12/09)
Banks criticise plans for windfall tax on bonuses BBC News (7/12/09)
Will biffing bankers also biff Britain? BBC News, Peston’s Picks, Robert Peston (3/12/09)
Roger Bootle: Bank reform hasn’t gone far enough (video) BBC News (25/12/09)
Questions
- How are wages determined in the labour market? Use a diagram to illustrate this.
- Why do bankers receive such a high salary? (Think about elasticity.)
- What are the main arguments for paying out bonuses to bankers?
- If bonuses were blocked, and the RBS directors did walk out, what do you think would be the likely repercussions? Who would suffer?
- One argument for paying bonuses is that bankers need an incentive. Excluding monetary benefits, are there any other methods that could be used to increase their productivity?
- When we consider the labour market, we look at economic power. Who do you think has the power in this case and what do you think will be the outcome?
In the run-up to the United Nations climate Change conference in Copenhagen from 7 to 18 December, many countries have been setting out their preliminary positions. The conference aims to set the terms for the agreement that will succeed the Kyoto Protocol in 2012.
Senior scientists, economists and politicians have been warning about the dire necessity of reaching a comprehensive agreement. One such economist is Sir Nicholas Stern. He argues that the EU should impose a unilateral cut in greenhouse gas emissions of 30% from 1990 levels by 2020, irrespective of the any agreement in Copenhagen. The EU has pledged to increase its targeted cut from 20% to 30% only if substantive progress is made at the talks.
Other countries have set out their preliminary positions. China has offered to reduce its carbon intensity by 40% (i.e. the proportion of carbon emissions to GDP); the USA has offered to reduce emissions by 17% by 2020 compared with 2005 levels; and India has offered to reduce its carbon intensity by 24% over the same period.
However, as the Washington Post article below states, “During a weekend meeting, India, along with China, Brazil, South Africa and Sudan, decided it would not agree to legally binding emission cuts, international verification of reductions without foreign funding and technology, and imposition of trade barriers in the name of climate change.”
Meanwhile the news from Australia has come as a blow to those seeking to extend tradable permit schemes around the world. The Australian senate has rejected a bill to set up an Emissions Trading Scheme (ETS), designed to cut Australia’s carbon emissions by up to 25% below 2000 levels by 2020.
Copenhagen climate talks: Main issues Independent (30/11/09)
Factfile on UNFCCC, Kyoto Protocol, Copenhagen talks Independent (30/11/09)
Copenhagen summit: Is there any real chance of averting the climate crisis? Observer, James Hansen (29/11/09)
A heated debate Economist (26/11/09)
Getting warmer Economist (3/12/09)
Is it worth it? Economist (3/12/09)
Good policy, and bad Economist (3/12/09)
The Carbon Economy Economist (3/12/09)
Copenhagen climate summit: 50/50 chance of stopping catastrophe, Lord Stern says Telegraph (1/12/09)
UK Economist: Climate Skeptics are Confused U.S.News, Meera Selva (1/12/09)
Growing Scientific Consensus on Climate Change Ahead of Copenhagen Conference Voice of America, Michael Bowman (1/12/09)
EU ‘should cut emissions by 30%’ BBC News, Roger Harrabin (1/12/09)
Stern says Copenhagen could still save world Environmental Data Interactive Exchange (1/12/09)
Moves by U.S., China induce India to do its bit on climate Washington Post, Rama Lakshmi (2/12/09)
Why do climate deniers hold sway in Australia? Guardian, Fred Pearce (1/12/09)
Australian Senate defeats carbon trading bill Guardian, Toni O’Loughlin (2/12/09)
Failed CPRS ‘may lead to better plan’ Sydney Morning Herald (2/12/09)
Australia carbon laws fail, election possible Reuters, Rob Taylor (2/12/09)
Australian Senate rejects Kevin Rudd’s climate plan BBC News (2/12/09)
The following is the official conference site:
United Nations Climate Change Conference Dec 7–Dec 18 2009
Questions
- Why cannot tackling global warming be left totally to the market?
- To what extent can the market provide part of the solution to global warming?
- How can a cap-and-trade system (i.e. tradable permits) be used to achieve (a) emissions reductions; (b) an efficient way of achieving such reductions?
- Why could the atmosphere be described as a ‘global commons’? Does it have either or both of the features of non-excludability and non-rivalry (which are both features of a public good)?
- To what extent are climate change talks a prisoner’s dilemma game? How may the Nash equilibrium of no deal, or an unenforceable deal, be avoided?
