60 Second Economist

Okay it’s not really an “art” more of an “economics”; well of course it would be or else it wouldn’t have made it into this blog.

Let’s think about this for a moment; the best gifts are given to you by your significant other (a boyfriend or a girlfriend)- alot of thought goes into these presents. It’s the gift from grandma that tends to be hopeless – and that’s because grandma doesn’t see you very much.

If you buy a present and the present is unwanted, those are real resources that have been wasted – energy, hard work, time and materials.

That’s why the best present from grandma is cash and we economists believe that the best present anyone should  ever give or recieve should be cash.

Most people tend not to give cash because it signals to the recipient the value we put on our relationship with them & this can be very embarrassing. So if you must give a gift instead of money…

Your gifts should be as inexpensive as possible, because the waste from poorly chosen gifts is far smaller if the gift itself is small.

Have a wonderful Christmas!

The causes of the crisis remain ambiguous, with many theories and assumptions offered by economists and governments around the globe. While a significant amount of literature has been published regarding the attributing factors of the 2008 financial crisis, this article attempts to simplify them into a few basic points:

1. The collapse of the Icelandic Banking System

2. Speculative asset demand a.k.a. The UK’s Bank Run

The Icelandic Banking crisis has been cited as the flashpoint for the recession hitting Europe; the three biggest Icelandic banks collapsed in the wake of substantial difficulties in refinancing short-term debts. This led to detrimental effects to the UK’s economy, where over GBP 840m had been invested in Icelandic banks by local and federal authorities.

Speculative Demand is defined as the demand for financial assets which is not otherwise affected by actual transactions. For example, if, say… a well-known news provider reported on a bank applying for a liquidity loan from the Central Bank of England because it was unable to repay short-term loans attributed from the massive reduction in demand for securitisation of sub-prime mortgages, it sends a clear message out to the bank’s customers, who then decide that it would be most prudent to withdraw their savings from said bank with great urgency. More customers, privy to the withdrawal habits of their fellow account-holders, decide to jump on the withdrawal bandwagon to safeguard their savings.

This is precisely what occurred in the case of Northern Rock, with the BBC’s Robert Peston reporting on the bank’s predicament, leading to the bank’s run and its subsequent nationalisation. The bursting of the US’s subprime mortgaging bubble was a key player in this sordid affair of imprudent choices; look out for this in the next few posts.

Guest Post by Clement Chew

We all know that voting is a democratic right.

After all The Universal Declaration of Human Rights recognises the integral role that transparent and open elections play in ensuring the fundamental right to participatory government. So why is it that some vote but not everyone?

Research shows that most economists don’t vote because voting introduces costs such as time, effort, lost productivity etc - with no real payoff except perhaps some sense of having exercised your democratic right or played a full part in society.

If you were to ask an average non-voter and why they don’t vote. The most common answer you’ll get is “my vote really wouldn’t make a difference”. The funny thing is they are absolutely right!

The odds that your vote will actually affect the outcome of a given election are very, very, very slim.

But people who do not vote are missing a very fundamental point when they give an answer like the one above; it demonstrates they are only thinking of personal benefits not the benefits to society. Imagine half the population had the same excuse of not voting. If after the elections had taken place the winning candidate got 50% of the votes. What this means is that only 25% of the whole population actually support the candidate who is leading the country or region. Is that democracy?

If voting gives you personal satisfaction and you get utility from it then by all means it makes micro-economic sense to go out there and cast your vote.

As the local/regional and mayoral elections are in town in Britain today make sure you do what you feel is right. It’s most important not to follow the crowd.

Austerity is defined as a set of policies which seek to reduce spending in public services and benefits as part of a deficit-cutting measure that a government may pursue. If we apply this to the UK, this is demonstrated in the recent cuts to public services e.g. the police, the NHS and the armed forces in light of the economic recession which has blighted the UK economy since 2008.

The theory behind financial austerity is that of the “Expansionary Fiscal Contraction” theory, which suggests that a major reduction in government spending that alters expectations of taxes, will therefore increase consumption, leading to economic growth as part of the GDP formula:

C+I+G+(X-M) 

Has austerity worked? Is cutting valuable public services which people pay for (through tax and National Insurance contributions) really the way forward to rebooting Britain’s economy? What about cutting the salaries of MPs for a start? I’ll let you be the judge of that.

Guest Post by Clement Chew

Rising fuel, clothes and food prices meant that the CPI inflation had risen to 3.5% in March.

The inflation figures measure the rate at which prices are rising compared with the same month a year ago.

The argument against the BoE is that these historically low interest rates (currently at 0.5%) are making things cheaper and causing people to spend too much. Thus increasing inflation. The bank hopes that the several rounds of quantitative easing (pumping money into the economy)will boost economic growth. It does this by buying assets such as government bonds, with the aim of freeing up cash for increased lending by commercial banks. It had already expanded the stimulus by £50bn to £325bn this year.

However more money into the system risks higher inflation. The bank has had to make some difficult decision during the time of the financial crisis- but of course some objectives are conflicting to each other. For example low inflation means low growth and high unemployment. ( and Vice Versa)

But we must look at why the bank has kept interests rates so low and decided to put so much money into the economy. As a direct result of this:

• We’ve avoided sustained deflation
• We’ve avoided a depression
• Some parts of the economy is rebalancing.

The crisis was unprecendented and external factors are outside the jurisdiction of the bank to control or influence.

We’ve only got to look over to some of our trading partners in Europe to see what a mess they’re in.

Lets be happy that we’re in a much better position.

In southern and eastern England we’ve had exceptionally two dry years since records began. With no way of knowing what mother nature will bring us, Thames Water, along with others have introduced “temporary use bans”. To you and me that means hosepipe bans.

So after this, The 60 Second Economist is left with a dilemma.

Do I water my garden or break the law?

In recent days we’ve seen huge amounts of rainfall so lots of people have been moaning about this so called “drought”. However remember you don’t cure a water shortage with some April showers neither do you get a water shortage from a dry week. We take averages over an entire year.

There’s a flaw with the water ban; it targets how the water is transported not its consumption.  It basically says you can flush your toilet 2000 times but risk getting a fine for using a hosepipe to wash your car. But then no fine for using buckets and buckets of water to clean your car.

There are even loopholes* within the law:

• You can power wash your patio if healthy & safety concerns you.
• Fountains may flow if they lead to a pond containing goldfish.

You get the idea how we can make the law work around our own needs & desires.

From an economics point of view rationing is a crude solution, instead we should incentivise the use of less water-CentreForum, a think-tank, also thinks the same.

Lets have a basic rate for the first X litres anyone uses. From there onwards increase the rate for every extra Y amount. Commercial water users would then pay more for using more and domestic users can still do basic things like wash and bathe.

Of course this may mean installing metres in every household-which can be costly but in the long run it should pay off.

*Loopholes pointed out by The Economist (Print Edition)

The Centre for Economics and Business Research (CEBR) said each bank holiday costs the UK in the region of £2.3 billion. They say that we lose £19bn per year from these “breaks”. If we didn’t have these holidays the GDP (Gross Domestic Product) of the UK would be £19bn more!

‘We have done some maths on this and about 45 per cent of the economy suffers, the offices, the factories, the building sites where people tend not to go to work on Bank Holiday”

~CEBR founder Douglas McWilliams

If this is the case surely we should cut down on the amount of Bank Holidasy we ahve in the UK or just rid of them. But apparently not- we should instead spread them out as people ‘would enjoy them a lot more’.

Its not just one think tank which seems to think this.

The Governor of the Bank of England, Mervyn King, warned that GDP in the second quarter of this year might shrink owing to the number of bank holidays. Lets face it we do have quite a few this year.

“This year’s extra bank holiday for the Diamond Jubilee means there are five in April, May and June outside Scotland, where Easter Monday is not a holiday.”

~BBC News

However compared to our trading partners & other developed economies we don’t have many Bank Holidays.

• Japan, South Korea 15
• Spain, Malta 14
• Portugal, Austria 13
• Greece, South Africa 12
• France, Italy, Brazil, New Zealand 11

Source: Mercer HR, December 2011

So is it time David and his mates at Number 10 had a rethink on the whole issue?

The National Minimum Wage (NMW) is a minimum amount per hour that most workers in the UK are entitled to be paid.Currently workers aged 21 and over can expect to be paid a minimum of £6.08 per hour. It is all well and good that the governemnt sets a limit on how much workers should be paid but lets now take a look at some of the problems.

Consider the diagram above. Its a very basic illustration of the laws of demand & supply within the labour market. We can see that the when there is no NMW present in the market the Quantity of labour employed is at E1 and the wage rate is at W0. When the NMW is introduced it incentivises more people to enter the labour market hence supply is now at E3 but the NMW also gives a dis-incentive to employers and the demand fro labour drops from E1 to E2. (Its now too expensive to employ labour!)

Now it sure doesn’t take an economist to work out that we have deviated from the market equilibirum and created ourelves a little problem. The difference between E3 and E2 is the amount of people unemployed under the new wage rate.

Valentines day has come and gone. Some of you are left heartbroken whilst others filled with joy. Whatever’s happened next time the 14th of Feb comes round make  sure to take a leaf out the 60 Second Economists book.

Valentines day is concerned with signalling-give out the right signals and you may impress the other half. Bear in mind though it doesn’t have to be gifts worth thousands of pounds. (Just those little touches that show you’ve gone the extra mile) Of course from an economics point of view the most efficient gift is cash but it seems some people get offended if you give them money.

If all fails or you’re not so confident in showing your love and affection in the usual ways, just grab a piece of paper & pen to draw it on a graph. Who says Economists can’t be romantics eh?

The rose is red, the violet’s blue The money is green The economy grew

Image courtesy of: http://fosslien.com/

Have you ever though about the economics of vouchers? Well here is a 60 second case study to get you thinking…

You can get restaurant vouchers for nearly everywhere now and Pizza Express (the example we will use) is no exception. With less than a minute to explain I will not go in to specifics about how much Pizza Express may make on each pizza/pasta but the sake of argument, let’s agree that it is not a lot! The margins are even smaller when people (and the majority now do) use vouchers.

• Companies don’t reduce their profit margins for fun and so here are the 3 reasons I believe Pizza Express et al use vouchers: - Get customers through the door. Once you are through the door they have the opportunity to impress you and make you a long term customer.
•  Drinks. This one is simple, people who go out for meals will always have a couple of drinks on average per person – margins on those are still good.
•  By giving you, the customer, a discount that increases your satisfaction with the meal you got from Pizza Express. As economists I’m sure you are all screaming ‘Marginal Utility’ at the screen and if you are not, it’s worth looking up. (If nothing else, at least you are potentially aware of a new concept?!). You are therefore more likely to go to Pizza Express again, in theory at least…

BUT, the question I am going to leave you with is this… how many of those who go to Pizza Express for the first time because they have a voucher, go back as full-paying customers in the future? (The minute is over… so go on treat yourself to a pizza (or not if you’re cynical), it is economics after all!)

Guest post by Will Roberts

The UK’s inflation rate for December has been published. The RPI stands at a staggering 4.8%. The Bank of Enlgand base rate stands at 0.5% for 26 months in a row. Surely if inflation is rising and people are spending too much then the Bank of England should increase the base rate to reduce the incentive of borrowing and hence spending but No.

The Monetary Policy Commitee voted to keep the rate at 0.5%. The last change in the rate was back in March 2009.

There is however specualtion going around in various economcis circles that the hgih inflation may help us pay the debt we owe. The amount we owe just passed the £1 trillion mark. So with a high inflation rate we may be able repay less in real terms.

Clever or what?  Well only time will tell I guess.

Inflation is not just about prices but a growing tax on consumers time.

The official measures of inflation focus upon the rise of cost.

In these tough economic times an increasing number of people are fighting to reduce their costs. What we do not consider is the rising amount of time people spend shopping around.

There’s a whole array of discounts available on the markets-whilst this is welcoming, it means consumers spend far too much time trying to work out which one minimises their costs.

Therefore consumers have to either make do with lesser discounts or find a growing tax on their time.

This hidden inflation shows the difference the rich and the poor. It means the rich can buy whatever goods they wish with little time and effort whilst the poor find themselves with a 2nd job -having to spend a lot of time bargain hunting.

We’ve all heard it the number 42 is “the answer to life the universe and everything”.

Whilst the number 42 has uses its uses in fields of Mathematics, Science, Technology, Astronomy & Religion- it seems not in Economics.

However in the world of Economics & Finance we have the 72 Rule. A very odd number (well mathematically its even). The rule of 72 is used to predict the doubling time of an investment.

We can also use it to predict the time required for an economy to double its GDP.

GDP =  Gross Domestic Product = The value of goods and services produced in an economy over a given period of time.

Here’s an example for you:

If you were to invest £10 with compounding interest at a rate of 8% per annum, the rule of 72 gives 72/8 = 9 years required for the investment to be worth £20.

We’re cutting household budgets but to really get the economy growing we need spending to go up. So with a tight purse that won’t happen.

Governemnt spending is being slashed- it would have to be much higher than it is today. Supply Side Policies- We’ve been deregualting markets year on year but where are the jobs this reduction in red tape is meant to create?

Do austerity measures work? -Sadly not.

Do bear in mind as an economist I’m making assumptions and trying to predict what may happen. Economists are usually rubbish at predicting. As an old joke goes

“Economists are so great they’ve predicted 10 out of the last 4 recessions

What the 60 Second Economist is referring to is your economic Vote.

Believe it or not the economic vote has influence on politics and the economy.

Each £1 (or penny) spent is an economic vote.

Every time you spend some amount of money at your local supermarket you are essentially giving your vote to that company to stay in business over its competitors.

However, many “economic voters” become disenfranchised – resources go to where demand and profit is highest. What we mean here is that the poorest may not have much voting power in this kind of democracy.