Fiscal Responsibility in the UK and the Role of the OBR

by Viva Avasthi

Why is it in all governments' interests to ensure that they and their policies are seen as credible? How is it that the British government manages to maintain a relatively high level of credibility?


These were the main questions raised and addressed by Professor Stephen Nickell at the lecture I attended on Wednesday which was organised by and held at the University of Birmingham.

Professor Nickell, who is a member of the UK Budget Responsibility Committee (find out more about him here) started his lecture by answering the first of the two key questions. He explained that if a government plans to spend only as much as it plans to tax, and it is believed to follow its plans fairly stringently, people will be willing to lend to that government (by purchasing its bonds, known as gilts). However, if the credibility of the government is weak, people will want to be compensated through higher interest rates for the risks they are taking in lending to that government.



The UK has hit its inflation target, but how are other countries doing?

by Viva Avasthi

Here's some good news for us here in Britain: the UK's inflation rate (as measured by the Consumer Price Index, the CPI) fell from 2.1% in November to 2.0% as announced earlier this week. It's the first time in four years that the target has been met. Use the graph below to see how inflation levels have changed over the years.




tradingeconomics.com



You might be wondering why this is good news - after all, is it not just another statistic? The answer which most economists would give at this point is, "absolutely not". This figure of 2.0% is significant because it is the medium-term inflation target set by the Bank of England (the UK's central bank). The BBC has written a clear and simple article perfect for newcomers to the subject on what achieving this target means for the British economy and the general public.  The Telegraph has written a more detailed article on the matter, which includes a variety of interesting opinions. However, I'd like to focus a little on why the target was set as 2.0% in the first place. I'll then go on to look at how successful other countries have been with their inflation targets recently.

I, Eraser

By Loren Chue
Her author profile can be found below this article.

I am a rubber eraser, a common tool often kneaded and worn by children, students, and adults alike.

I help expunge stray marks of pencil leads, heavy marks, you name it, and I’ll obliterate them all with a trusty rubbing of elbow grease.

But believe me—there’s much more behind my seemingly simple makeup and outer façade. Simple, you say. But have you ever thought of how much juggling I do in my metamorphosis from rubber to functional eraser?

So follow me from inception to full functionality and maturity. Swing around the globe from the USA to Malaysia, where my journey begins. I’m born as part of a rubber tree, a natural resource. A worker taps my tree by cutting a thin strip of bark away at 30 degree angle, allowing the latex to drain into a collecting container. Now a chemical is added to stop my latex from coagulating. After a few days, diluted acetic acid or formic acid is added to allow me to coagulate into slabs within the aluminum partitions of the tanks I’m poured into. I’m passed through rollers (such a tight squeeze!) to absorb excess water, and then I’m packed into bales and bales, bound with metal straps (I can’t escape now), and shipped to manufacturers several hundred miles away in China or Japan.

Some Thoughts on the Minimum Wage

By Loren Chue

Her author profile can be found below this article.

 

Imagine strolling in your local shopping center or mall. Your stomach growls, and try as you might to suppress the hunger pangs, your stomach chides you for not feeding it and satiating its need for food. Without further ado, you stroll into the nearest Subway, eager to purchase a five-dollar footlong. As you stand waiting, you watch a young lady prepare your lightly toasted sandwich. She is about high school age, and you think, She really should be taking a break or studying right now. The young lady hands you the sandwich and you order an extra bowl of steaming minestrone. Heading towards the cashier, this time a middle-aged man, adds up the cost and says “$7.50 please.” You hand him your credit card to swipe, and he hands you the receipt, places your food in the bag, adds a few extra napkins, a fork and a spoon, and off you go, ready to enjoy a fresh, hot meal.

 

In the Journal of Economic Issues, the liberal economist Robert Prasch defends the minimum wage. These, he writes, are the three main benefits of putting a price floor on labor: “First, it increases the level of effective demand; second, it provides an impetus for rapid technical change; and third, it equalizes bargaining power in labor markets.”

 

Here’s the breakdown:

 

Prasch asserts the minimum wage increases the level of effective demand by transferring the purchasing power over from “profits, perks and overheads to those who earn low wages.” He also writes that transferring purchasing power will “increase domestic spending.”
 

Ideology and economic thought

by Jaime Bravo

Brenna made a response to my article - see here. She wrote some arguments that were supposed to refute my theories on austerity and public spending. But there are, yet, arguments to be said. She tried to build a model mixing up economics and politics; she even quoted paragraphs of the American Constitution. This is not of my concern in here. But still, I have something to say about what she wrote.

In Response to Jaime

By Brenna Fisher 
Her author profile can be found below this article.

A few weeks ago, Jaime Bravo wrote an article refuting my stance on reducing the United States’ federal deficit. After reading his article and doing some more research of my own, I stand by my position of reducing the government debt. It is very clear that he is an intelligent young economist and has done ample research into the subjects on which he writes. I respect his opinion and his work; it would be foolish to try and claim otherwise. However, I cannot agree with, or condone, the examples or solutions he poses in response to my article.

First off, I would like to address some of his rebuttals to my points. Jaime seemed to generalize from my article that I believe all government spending is wrong and all debt should be eliminated. He states, “She assumes (by writing this article) that debt is a problem and that therefore, we should cut it.” However, never in my original article did I claim such a thing. Government spending is a crucial component to Gross Domestic Product and necessary to keep a country strong and expanding. Whether it is the federal government or the states individual responsibility to spend money on programs for education, transportation, and technological process is a long debated issue but, in the end, it should not be eliminated permanently, and a moderate amount is healthy. The government deficit should not be entirely eliminated either, but balanced with budget surpluses to create a more evenly equitable budget. Some government debt used to encourage GDP growth is good; 17 trillion dollars worth of debt, of which a majority is being spent on social welfare programs, is not. I have yet to read any concrete evidence of how an exorbitant amount of money spent on welfare programs profits the country in the long run.

Opportunity Cost in the College Decision

By Michaela Miller
Her author profile can be found below this article.

There's another one, an innocent-looking envelope sitting in my lap, just waiting to be opened. I've sorted through all the other mail, the advertisements, the catalogues, the bills (thankfully not mine), trying to forget its presence but to no avail. It taunts me with its computer-generated cursive printing and its happy, fall-colored exterior. "Dream" it says on the front! Encompassed in that simple word are the endless possibilities open to me if I a
ttend Vanderbilt University. The only problem? This is probably the tenth college brochure I've received in the past two weeks, all full of normative statements about the large amount of utility students get from attending the advertised school, all claiming my worth as human capital will be exponentially increased should I attend whichever college the brochure represents. I finally overcome my reluctance and open the packet, only to discover exactly what I knew I would find: yet another potential college further confusing my decision of where I should go.

How will online education affect demand for traditional colleges?

By Anna Mitchell 
Her author profile can be found below this article.

For decades, the image of an ivy-coated Gothic turret on a perfectly groomed campus has popped into people’s minds when they imagine an ideal education. Colleges are supposed to churn out legions of innovative and intelligent leaders, the people who will change the world with new technologies or policies. Their graduates should be equipped with unique ideas that they could only form thanks to their post-secondary educations. But increasingly, this ideal isn’t depicting reality. A change in the price of a substitute good, online education, has decreased. While online colleges such as the University of Phoenix have existed for years, only in the past two years have online college courses from top schools been offered for free. With this decrease in price of the substitute good, demand for expensive educations, especially from lesser-known schools, may start to decrease. In response, schools may be forced to lower their tuition or improve their product to compete.

Why Lloyd Shapley was Wrong

By Michaela Miller
Her author profile can be found below this article.



Lloyd Shapley (right) won the Nobel prize for economics in 2012 alongside Alvin Roth (left).
Image credits to The Guardian (UK).

Now heading into my eleventh grade year, I can finally begin to appreciate the amount of stress that accompanies students of this age. As if nine classes, the SATs, and a job weren´t enough, it is in this season that I will be forced to think about that dreadful thing they call college. Now don´t get me wrong, I´m excited for college. I want to meet people my age with the same interests and goals, I want to root for the team, and I want to figure out the rest of my life. I´m just not all that excited about the hours of stress involved with the admission process. Why do I have to worry about this now, when my time is a scarce good? If only the process was something a bit more like the 2012 Nobel prize winner Lloyd Shapley´s suggestion... right?

“Walmart is good for you!” Oh, really?

By Stephanie Canavan
Her author profile can be found below this article.

With the holidays approaching, one can hardly turn on the TV without being bombarded by commercials shouting that their store has the best deals and lowest prices. Perhaps one of the loudest culprits of these holiday season adds is Walmart. Long known for its low-price guarantees, Walmart is a front runner in boasting its benefits toward your microeconomic holiday family budgets. But from a macroeconomic perspective, Walmart can have less than positive repercussions for the economy as a whole. I recently read an economically faulty article, written by Tom Van Ripper, entitled “Walmart is good for you” which presented an alternative opinion, supported with scanty facts and jumpy assumptions.

Tom Van Ripper began his argument on a foundation of sand, basing virtually his entire debate on the misguided conclusion of a recent study which stated “between 1985 and 2003, personal income, overall employment and retail employment grew faster in counties with a Walmart than in those without one.” The lousy economist incorrectly placed assumptions that because of this finding, Walmart must be the sole beneficiary force causing these positive economic happenings. In fact, there could be a myriad of other factors that caused this economic growth, such as higher investments in education or monetary policies. Van Rippers article continues with more misused statistical proof by quoting a statement from the Federal Reserve “Nearly 90% of the U.S. population lives within 15 miles of a Walmart store, and two-thirds of all retailers are located within five miles of one, the Fed’s report says.” Simply because the Federal Reserve released this statement does not mean it can be used as evidence towards the economic benefits of Walmart. Conversely, this statement simply shows the vast spread of the Walmart enterprise and how greatly such a behemoth could affect the US economy.

No, Brenna, the US Should Not Reduce Government Spending

By Jaime Bravo

Brenna Fisher, a partner of mine in this blog, wrote today an article speaking about the possibility of reducing government spending and why it was necessary. Here is her take. After reading it - and I must say that I have been reading about austerity in Europe and in the US for a long time - I cannot agree with her thoughts. Austerity, as we know it in Europe and specially in Spain, has been intellectually defeated. Austerity has been widely used only for ideological and political purposes, that is, the implementation of austerity is good, but only if you are rich - which is exactly what Mark Blyth said a few days ago on The Guardian. So, if austerity has been defeated, why do we still support it in some ways? Because it keeps our political aims alive. Make no mistake, I really respect Brenna's work. I enjoyed her last article on music and recessions and I share my thoughts with her on Twitter - see here. It is just there are some failures on economic assumptions that we still consider as facts. It is not Brenna's problem, it is a problem of economic thought.

Do not follow the European path

Europe is one of the most complex economic experiments of all time. It is not my aim to write about it here but we have to work on a few facts. First, Europe is driving himself into a liquidity trap. I have worked widely on it - you can read my work here; it is in Spanish though. Mario Draghi said a few weeks ago that the ECB is going to low the interest rates at 0,30%. But Europe has a particularity:  members have not the control of their own currency; the US does. So it means that, devaluation is easier in the US than in Europe. Then, you cannot make a proper analysis withouth considering the job the ECB does. You have to assume that the ECB has not the same ideas than the FED: Janet Yellen is an economist who knows how to drive the economic scenario of the US while Draghi is limited by Germany. Austerity has been already used. And it had many effects on the economy. Let's take a look at the next graph, which shows a correlation between austerity and growth in many countries:

How might the US Government Boost the Economy?

By Brenna Fisher
Her author profile can be found below this article.



Credit to CBS News

In this controversial age where Democrats and Republicans are at each other’s throats daily, debating the politics and economic problems that face America today, it seems like any simple question will receive a long, complex answer. Unsurprisingly, as the United States enters deeper into a economic stagnation, fueling economic prosperity is on everyone’s minds. But just how simple is the answer? Certainly, there are many different opinions, and there is no “easy” button to press and fix the financial turmoil. However, one tactic could solve a majority of the problems, though it wouldn’t be the popular decision.

The Effect of Homeschooling on the Economy

By Stephanie Canavan
Her author profile can be found below this article.

I’m sure everyone has heard at least one negative quote from anti-homeschooling politicians or superintendents that belittles home education, claiming it “robs the system of resources” and results in “socially inferior citizens”.  But results are showing that not only is homeschooling saving the government large quantities of funds, but also resulting in a higher quality of education and return on investment, which in turn can significantly benefit economic growth.

Homeschooling is often overlooked in regards to the economy since it is classified under household production in the circular flow diagram. Household production is when a household produces a product or service for itself instead of purchasing it from a firm or other entity and, since there is no market transaction, it is not taken into account when calculating GDP.  Many people may incorrectly assume that this means household production has absolutely no effect on the economy. In fact, it is often thought that homeschooling deprives the economy of resources as it requires a parent to stay home to educate their child instead of entering into the workforce.  However, just because it is not valued monetarily into GDP now does not mean it will have no effect upon the future economy.

To What Extent Does a Rational Economic Man Exist?

By Timur Almazov

Economic theories are meant to represent patterns of the real market, but since we live in a complicated world, economists have to simplify the reality to fit economic models. They have included assumptions into their theories and the idea of rational economic man was one of the most popular ones. Its purpose was to describe the preferences and actions of humans, but to cut long story short, it didn’t do a good job.

The definition of an economic man is: a rational and selfish agent, whose preferences do not change. In this essay and in the longer version I have looked at the assumptions of economic rationality and how close it is in describing us as “rational”. Most economists agree that rational agents are those who have the same constant preferences (usually to make a profit) and make “internally consistent” decisions. This means that rational people follow logical coherence, which does not necessarily have to be reasonable. A rational person can believe in magic as long as all of his or hers other beliefs are consistent with the existence of magic.

Music and Recessions: An Unexpected Correlation

By Brenna Fisher
Her author profile can be found below this article.


Commonly known throughout the world are the economic effects of inflation and recession. Inflation, when increasing at a steady rate is more prosperous, while recession means, to some degree, a financial crisis. However, one of the lesser known facts about inflation and recession is how it affects a country euphonically. A noticeable trend in music occurs during the ups and downs of the economic cycle. During recessions, the popular music tends to be upbeat and positive, while during an inflation, it tends to be melodiously slower and slightly more melodramatic. During the Great Recession from 2007 until 2009, many countries, including the United States of America, was entering into a downturn. Norway however, was entering a period of financial prosperity, as seen in the graph below. Comparing the popular music during this time, it appears that the trend stays true.

2008 was the peak of the recession for America. Over a million employees were out of a job and the labor force was suffering. However, some of the Billboard Top 100 Hits during this period were “So What” by P!nk, “When I Grow Up” by the Pussycat Dolls, and “Pocketful of Sunshine” by Natasha Bedingfield. Despite the economic downfall, these songs emphasized a catchy up-beat tune and lyrics meant to empower. “When I Grow Up” focuses on the future, rather than the present and “So What” is an offbeat piece meant to highlight the general mentality “who cares, it doesn’t really matter anyways.” Natasha Bedingfield’s hit stresses the positive events and the triumphs, encouraging listeners to be optimistic and forget about the bad. It is no coincidence that many of the listeners were having a difficult time actually finding the positives in their life, so they looked to popular music to encourage it.

Some thoughts on the McCallum work (wonkish)

by Jaime Bravo - jbravo@beneficiomarginal.com

Bennet McCallum was a reputed economist who highlighted some of the biggest questions in the economics field. Many of his questions still need to be resolved. It is the case of the gravity puzzle and the equations needed to solve the border puzzle. In the international trade literature, the border puzzle refers to the phenomena committed to study how borders participate of global trade - in the classical scenario, free trade. This theory has been developed by many economists. However, I decided to bring it to here as a part of the McCallum model because of the relevance of a paper published by Professor Anderson from Boston College and by Professor Van Wincoop from the University of Virginia - see references. The authors present that the McCallum model, based on the border puzzle, has some good points. Firstly, it correlates bilateral trade with GDP (Image 1) and with distance and other relevant factors for trade. They take into account, too, the commercial barriers established by modern states.

Quantitative easing? What's that?

by Viva Avasthi

This diagram shows the first part of the quantitative easing process.
Credit to awadvisors.com

You've probably heard of 'quantitative easing' when listening to the news, or read a bit about it and its implications while perusing various newspapers. It may have sparked your interest, but you might have found that in trying to do a little research on the topic you ended up having masses of technicalities to understand and opinions to wade through. If that's the case, you'll hopefully find this series useful.

The most recent reportage on quantitative easing (also known as QE) involved the US Federal Reserve's announcement in June of this year that it would scale back on its QE, and then its unexpected decision last month to postpone the scaling back. Both announcements (in June and in September) drastically affected markets and the economies of countries outside of the US, most notably India and China. The impact of the use of QE in the US will be explored in more detail in another article; this article will look at how QE works, when and where it was developed, why it's used and what the perceived risks of its usage are.

Although the theory, which I shall explain shortly, is quite straightforward, QE is fairly complex when applied to and analysed in the real world. The reason for this is that it depends upon what Keynes referred to as 'animal spirits', whether other countries are also using QE and how clear the channels which QE works through are, among other factors which can be difficult to predict and influence. That's one of the reasons why predicting the success of QE has been difficult in the past and why many people believe that QE has not been an effective policy tool at all.

Blurred Lines?

by Clemency Flitter 



Blurred Lines has been heavily criticised for condoning rape

It is said that in the West we live in an equal and progressive society; but how can that be the case when almost half of men (between the ages of 18-25) believe it is okay to continue to pursue sexual relations with a woman even if she has changed her mind and is no longer giving consent? Perhaps even more worryingly a further 1 in 4 men said that they would have sex with someone they knew was unwilling. These statistics will not be helped by songs such as 'Blurred Lines', heavily criticised for trying to blur the line between consent and rape. This song, which contains the lyrics such as “And that's why I'm gon' take a good girl. I know you want it”, has even been banned from 5 UK universities but this has not stopped it spending weeks as a No 1 hit. How can we call ourselves a progressive and modern society when rape culture is still so pervasive, a big issue, but one people still refuse to address?