Cycling generated £2.9 billion for the UK economy in 2010 – a rise of 28% over 2009. This amounts to an average ‘Gross Cycling Product’ of £233 for each of Britain’s 12½ million cyclists. What is more, the figures are likely to continue growing rapidly in future years. This is the central finding of the LSE report, The British Cycling Economy, authored by Dr Alexander Grous, a productivity and innovation specialist at the Centre of Economic Performance (CEP) at the London School of Economics.
The major benefits to the economy from cycling include the sale of cycles and accessories, cycle maintenance, the generation of wages and tax revenues from 23,000 people employed directly in bicycle manufacture, sales, distribution and the maintenance of cycling infrastructure. There are also health benefits. These are partly the direct benefits to the economy of fewer days taken in sick leave by cyclists (a contribution of £128 million in 2010) and partly the health and well-being benefits to the individual and the saving on healthcare expenditure.
But are enough people being encouraged to get on their bikes? What are the major incentives for people to cycle? The report identifies the following:
• Cycling being made both segment- and gender-neutral, appealing to the widest number of user groups, across all ages and genders;
• Coordinated and preferential traffic signals that facilitate faster and safer journeys;
• ‘Short cut’ routes in dense urban areas and capital cities that join arterial road routes;
• Traffic calming initiatives that include road narrowing and speed restrictions that range from 30km/h to ‘walking speeds’;
• Extensive parking and in some areas, designated women-only spaces with CCTV and enhanced lighting;
• Established bike rental schemes;
• Long-running training programmes for children;
• The prevalence of strict ‘liability laws’ that assume a car driver is responsible in the event of a collision between a car and a cyclist.
Read the following articles and report and then consider, as an economist, how the benefits and costs should be analysed and what policy implications might follow.
Articles
Wheels of fortune: how cycling became a £3bn-a-year industry Independent, Tim Hume (22/8/11)
Cycling worth £3bn a year to UK economy, says LSE study Guardian (21/8/11)
Cycling industry gives economy £3bn boost BBC News (22/8/11)
Growth in cycling ‘boosting economy’, says LSE BBC News (22/8/11)
Britain Gets Back On Its Bike British Cycling (22/8/11)
‘Gross Cycling Product’ worth £2.9bn to UK economy says LSE Road.cc (22/8/11)
Report
The British Cycling Economy: ‘Gross Cycling Product’ Report LSE, Dr Alexander Grous
Questions
- How is the figure of £2.9bn derived? Explain whether it is a ‘value-added’ figure?
- Which of the benefits can be regarded as externalities?
- Are there any external costs from cycling? If so, what are they and how might they be minimised?
- How might incentives be changed in order to encourage more people to cycle?
- Assume that you are a government or local authority considering whether or not to increase investment in cycle paths. What factors would you take into consideration in order to make a socially efficient decision?
Friday 5 August 2011 saw the end of a very bad fortnight for stock markets around the world. In Japan the Nikkei 225 had fallen by 8.2%, in the USA the Dow Jones had fallen by 9.8%, in the UK the FTSE 100 was down 11.6% and in Germany the Dax was down 14.9%. In the first five days of August alone, £148 billion had been wiped off the value of the shares of the FTSE 100 companies and $2.5 trillion off the value of shares worldwide.
But why had this happened and what are likely to be the consequences?
The falls have been caused by the growing concerns of investors about the health of the global economy and the global financial system. There are worries that the European leaders at their summit on 21 July did not do enough to prevent the default of large countries such as Spain and Italy. There are concerns that the US political system, following the squabbling in Congress over raising the sovereign debt ceiling for the country, may not be up to dealing with the country’s huge debts. Indeed, the rating agency, Standard & Poor’s, downgraded the USA’s credit rating from AAA to AA+. This is the first time that the USA has not had top rating.
Then there are worries about the general slowing down of the world economy and how this will compound the problem of sovereign debt as it hits tax revenues and makes it harder to reduce social security payments. Underlying all this is the fear that the problem of indebtedness that contributed to the banking crisis of 2007/8 has not gone away; it has simply been transferred from banks to governments. As Robert Peston states in his article, linked to below:
The overall volume of indebtedness in the economy is therefore still with us – although it has been shuffled from financial sector to public sector.
And if you took the view four years ago that the quantum of debt in the system was unsustainably large, then you would argue that by propping up the banks, the day of reckoning was being postponed, not cancelled.
… just like the awakening in 2007 to the idea that many of the housing loans and associated financial products were worthless, so there is a growing fear that a number of financially overstretched governments, especially in the eurozone, will not be able to repay their debts in full.
Which brings us to the consequences. Key to the answer is confidence. If governments can reassure markets over the coming days and weeks that they have credible policies to support highly indebted countries in the short term and to sustain demand in the global economy (e.g. through further quantitative easing in the USA (QE3)); and if they can also reassure markets that they have tough and credible policies to reduce their debts over the longer term, then confidence may return. But it will not be an easy task to get the balance right between sustaining recovery in the short term and fiscal retrenchment over the long term. Meanwhile consumers are likely to become even more cautious about spending – hardly the recipe for recovery.
Videos
Markets turmoil: What you need to know BBC News, Jonty Bloom (5/8/11)
Turmoil on stock markets persists as share prices fall BBC News, Robert Peston (5/8/11)
Global stock market crash – video analysis Guardian, Larry Elliott and Cameron Robertson (5/8/11)
S&P downgrade US AAA credit rating BBC News, Marcus George (6/8/11)
U.S. loses AAA credit rating Reuters, Paul Chapman (6/8/11)
U.S. loses AAA credit rating from S&P CNN (5/8/11)
US loses AAA rating ITN (6/8/11)
Shares slump amid euro fears Channel 4 News, Faisal Islam (4/8/11)
What triggered the turmoil? Financial Times, Sarah O’Connor and Edward Hadas (5/8/11)
Fears eurozone woes will spread BBC News, Stephanie Flanders (5/8/11)
Articles
FTSE 100 tumbles in worst week since height of the crisis The Telegraph, Richard Blackden (5/8/11)
Global recession fears as stock markets tumble to nine-month low The Telegraph, Alistair Osborne (3/8/11)
Global markets on the brink of crisis Guardian, Larry Elliott (5/8/11)
A week of financial turmoil: interactive Guardian, Nick Fletcher, Paddy Allen and James Ball (5/8/11)
Turmoil on stock markets persists BBC News (5/8/11)
Bank worries bring echoes of 2008 BBC News, Stephanie Flanders (5/8/11)
The origins of today’s market mayhem BBC News, Robert Peston (5/8/11)
Time for a double dip? The Economist (6/8/11)
Rearranging the deckchairs The Economist (6/8/11)
High hopes, low returns The Economist (4/8/11)
The debt-ceiling deal: No thanks to anyone The Economist (6/8/11)
Six years into a lost decade The Economist (6/8/11)
Debt crisis Q&A: what you need to know about Standard & Poor’s credit rating The Telegraph, Richard Tyler (6/8/11)
U.S. Will Roll Out QE3 After S&P Rating Cut, Li Daokui Says Bloomberg (6/8/11)
China flays U.S. over credit rating downgrade Reuters, Walter Brandimarte and Gavin Jones (6/8/11)
US credit rating downgraded to AA+ by Standard & Poor’s Guardian, Larry Elliott, Jill Treanor and Dominic Rushe (5/8/11)
Reaction to the US credit rating downgrade Guardian (6/8/11)
Market turmoil and the economics of self-harm Guardian, Mark Weisbrot (5/8/11)
Week ahead: Markets will sort through credit downgrade Moneycontrol (6/8/11)
S&P Statement
S&P statement on lowering US long-term debt to AA+ Guardian (6/8/11)
Stock market indices
FTSE 100: historical prices, 1984 to current day Yahoo Finance
Dow Jones Industrial Average: historical prices, 1928 to current day Yahoo Finance
Nikkei 225 (Japan): historical prices, 1984 to current day Yahoo Finance
DAX (Germany): historical prices, 1990 to current day Yahoo Finance
CAC 40 (France): historical prices, 1990 to current day Yahoo Finance
Hang Seng (Hong Kong): historical prices, 1986 to current day Yahoo Finance
SSE Composite (China: Shanghai): historical prices, 2000 to current day Yahoo Finance
BSE Sensex (India): historical prices, 1997 to current day Yahoo Finance
Stock markets BBC
Questions
- Why have share prices been falling?
- Does the fall reflect ‘rational’ behaviour on the part of investors? Explain.
- Why does ‘overshooting’ sometimes occur in share price movements?
- Why has the USA’s credit rating been downgraded by Standard & Poor’s? What are the likely implications for the USA and the global economy of this downgrading?
- How is the downgrading likely to affect the return on (a) existing US government bonds; (b) new US government bonds?
- Why might worries about the strength of the global recovery jeopardise that recovery?
- To what extent has the debt problem simply been transferred from banks to governments? What should governments do about it in the short term?
Economics is about choice – and choices occur in all parts of our lives. One area is personal relationships. Are we making the best of our relationships with family, friends and sexual partners? Increasingly economists are examining human behaviour in such contexts and asking what factors determine our decisions and whether such decisions are rational.
A recent book looks at the economics of marriage and goes under the title of ‘Spousonomics‘. Its authors, Paula Szuchman and Jenny Anderson, use economics “to master love, marriage and dirty dishes”. As they say:
Every marriage is its own little economy, a business of two with a finite number of resources that need to be allocated efficiently.
They look at ways in which such resources can be allocated efficiently. They also look at apparently irrational behaviour and seek to explain it in terms of various ‘failures’ (akin to market failures). They also examine how these failures can be rectified to improve relationships.
So is this economics stepping on the toes of relationship counsellors and psychologists? Or is this the legitimate domain of economists seeking to understand how to optimise in the context of scarce resources – including time and patience?
Spousonomics gets to heart of the matter Belfast Telegraph (19/1/11)
Run your marriage with ‘Spousonomics’: A new book says applying economic rules with transform your relationship Mail Online, Lydia Slater (31/1/11)
Spousonomics: How Economics Can Help Figure Out Your Marriage Book Beast (31/1/11)
Spousonomics Lesson #1: Loss Aversion YouTube (15/1/11)
Economist’s Explanation For Why Getting Married Isn’t Rational Huffington Post, Dan Ariely (15/1/11)
How Economics Saved My Marriage Newsweek, Paula Szuchman (30/1/11)
Want your marriage to profit? New York Post, Sara Stewart (29/1/11)
Spousonomics: blog, Paula Szuchman and Jenny Anderson
Questions
- How would you define ‘rational behaviour’ in a personal relationship?
- Why may marriage be a better deal generally for men than for women?
- Give some examples of asymmetry of information in marriage and why this may lead to bad decision making?
- Give some examples of risk averse and risk loving behaviour in personal relationships?
- Why are many actions in marriage apparently irrational? Could such actions be explained if the concept of ‘irrationality’ is redefined?
- Why may a simple demand curve help to explain why sexual relationships tend to wane in many marriages?
- Why does moral hazard occur in marriage? Does a combination or moral hazard and asymmetry of information help to explain divorce?
- Should marriage guidance counsellors study economics?!
Skin cancer is on the increase in the UK. Calls are thus being made by both retailers and cancer charities for a cut in VAT on sun cream.
At present the VAT rate on sun cream in the UK is the standard rate of 17.5%, which is due to increase to 20% in January 2011. But would cutting the rate to 5%, as is being proposed, be effective in cutting skin cancer rates? What information would you, as an economist, need to assess this claim?
Articles
Government urged to cut VAT on sun cream amid skin cancer fears Guardian, Rebecca Smithers (27/7/10)
Brits Get Burned By Vat Rise On Suncream PRLog (7/7/10)
Why we still think bronzing is tan-tastic Irish Independent, Susan Daly (27/7/10)
Evidence on sun creams
Sunscreen Wikipedia
Sun creams Cancer Research UK
Questions
- What would determine the incidence of a cut in VAT on sun creams between consumers and retailiers?
- If there were a 50:50 incidence of a VAT cut between consumers and retailers and the VAT was cut from 17.5% to 5%, what percentage fall in the retail price would you expect?
- Assume that the price elasticity of demand for sun cream is –1 and price elasticity of supply is +1, how much would sales of sun cream rise if the VAT rate fell from 17.5% to 5%? Are these realistic values for the price elasticity of demand and supply?
- Under what circumstances may promoting the use of sun creams encourage the development of skin cancer?
- Are people being rational if they choose to expose themselves to the sun for long periods in order to receive a ‘fashionable’ tan? How are time preference rates (personal discount rates) relevant here?
- What market failures are involved in the tanning industry? If the use of sunbeds contributes towards skin cancer, should they be banned?
In the aftermath of the credit crunch and the recession, many banks had to be bailed out by central banks and some, such as Northern Rock and RBS, were wholly or partially nationalised. Tougher regulations to ensure greater liquidity and higher proportions of capital to total liabilities have been put in place and further regulation is being planned in many countries.
So are banks now able to withstand future shocks?
In recent months, new threats to banks have emerged. The first is the prospect of a double-dip recession as many countries tighten fiscal policy in order to claw down debts and as consumer and business confidence falls. The second is the concern about banks’ exposure to sovereign debt: i.e. their holding of government bonds and other securities. If there is a risk that countries might default on their debts, then banks would suffer and confidence in the banking system could plummet, triggering a further banking crisis. With worries that countries such as Greece, Spain, Portugal, Italy and Ireland might have problems in servicing their debt, and with the downgrading of these countries by rating agencies, this second problem has become more acute for banks with large exposure to the debt of these and similar countries.
To help get a measure of the extent of the problem and, hopefully, to reassure markets, the Committee of European Banking Supervisors (CEBS) has been conducting ‘stress tests’ on European banks. On 24 July, it published its findings. The following articles look at these tests and the findings and assess whether the tests were rigorous enough.
Articles
Bank balance: EU stress tests explained Financial Times, Patrick Jenkins, Emily Cadman and Steve Bernard (13/7/10)
Seven EU banks fail stress test healthchecks BBC News, Robert Peston (23/7/10)
Interactive: EU stress test results by bank Financial Times, Emily Cadman, Steve Bernard, Johanna Kassel and Patrick Jenkin (23/7/10)
Q&A: What are the European bank stress tests for? BBC News (23/7/10)
Europe’s Stress-Free Stress Test Fails to Make the Grade Der Spiegel (26/7/10)
A test cynically calibrated to fix the result Financial Times, Wolfgang Münchau (25/7/10)
Europe confronts banking gremlins Financial Times (23/7/10)
Leading article: Stressful times continue Independent (26/7/10)
Europe’s banking check-up Aljazeera, Samah El-Shahat (26/7/10)
Finance: Stressed but blessed Financial Times, Patrick Jenkins (25/7/10)
Were stress test rigorous enough? BBC Today Programme, Ben Shore (24/7/10)
Banks’ stress test ‘very wooly’ BBC Today Programme, Peter Hahn and Graham Turner(24/7/10)
Stress test whitewash of European banks World Socialist Web Site, Stefan Steinberg (26/7/10)
Stress tests: Not many dead BBC News blogs: Peston’s Picks, Robert Peston (23/7/10)
Not much stress, not much test Reuters, Laurence Copeland (23/7/10)
Stress-testing Europe’s banks won’t stave off a deflationary vortex Telegraph, Ambrose Evans-Pritchard (18/7/10)
European banking shares rise after stress tests BBC News (26/7/10)
Euro banks pass test, gold falls CommodityOnline, Geena Paul (26/7/10)
Report
2010 EU-wide Stress Testing: portal page to documents CEBS
Questions
- Explain what is meant by a bank stress test?
- What particular scenarios were tested for in the European bank stress tests?
- Assess whether the tests were appropriate? Were they too easy to pass?
- What effect did the results of the stress tests have on gold prices? Explain why (see final article above).
- What stresses are banks likely to face in the coming months? If they run into difficulties as a result, what would be the likely reaction of central banks? Would there be a moral hazard here? Explain.