Double Dip already?

Most Economists predicted 0.2%-0.6% growth in the last quarter of 2010,  I thought I was sticking my neck out a bit predicting 0.2-0.4% and stating we would go into negative growth in 2011. However despite being being convinced we will go into double dip, I was very much taken back when Oct, Nov and Dec of 2010 growth figure was -0.5% growth!!

As we can see from the graph this is serious, it is more of a dip than at the beginning of the credit crunch. I decided to plot the Prime Ministers and parties onto the graph, it highlights mainly that David Cameron inherited an economy in recovery and has now knocked it down into near to a double dip. This graph also highlights how John Major managed to recover GDP from the 1990s recession and then hand the boom over to Tony Blair who kindly have Gordon Brown the bust! 

It seems that Fiscal policy is more important than George Osborne hoped, lets hope that this is just teething problems for Crowing out theory. Theoretically all this negative growth means is more surplus capacity for new businesses to expand into as the public sector contracts..

Yet to say that GDP is all a result of Government policy would be wrong though. Its easy to blame Gordon Brown for the credit crunch but in reality it was not his fault. Equally to colour in this dip blue and blame it on the coalition is also naive. George Osborne has blamed the fall in GDP down to the cold weather. 

If we break down the figures it is true that construction was the driving factor behind the fall in GDP however to say it was all down to bad weather I think is also being naive, there have been many Government construction projects canceled in the wake of budget cuts, this also could have hurt construction. According to this BBC article the ONS said: '...even if the weather impact had been excluded, activity would have been 'flattish'"  So even the snow can't explain the poor performance!

All in all wether the negative growth was the Governments fault or not going down a road of fiscal contraction during a period of negative growth is reckless.  

Net Neutrality

Net Neutrality is a term that has been appearing across the internet and in American Media, but what is it and how does it link to Economics.

What is Net Neutrality?
Net Neutrality means neutrality across the internet, which is the theory that each user on the internet should have equal access to websites and each website should have an equal chance.
In other words you pay for internet access but not for each website.

Why is it an issue at the moment?
Net neutrality has become an issue at the moment because some american internet provides are not following the ideals of net neutrality, they are changing more for some websites than when accessing others.

What is the importance of Net Neutrality?
Net Neutrality is vital, at present the internet is a 'free' while you must pay for access once on the internet each website has an equal footing with the next website. If firms start charging for access to websites there are huge social and economic consequences!
Socially it will mean that smaller websites will be weakened against larger websites, if their is free access to main stream media and it costs a lot more to access an independent website then instantly the free of speech on the internet becomes threatened. The advantage of the Internet now is that everyone has an equal say, you can go to any website and it will cost the same as accessing another, so you can choice where to get your news, information and entertainment. If firms break net neutrality then they can price out the competition.
Economically the fall of Net Neutrality is a disaster. What is glorious about the internet is is very few barriers to entry, which has greatly increased competition is most markets and in the internet industry itself lead to huge leaps of innovation and markets that are close to that of perfect competition (the blog market for example).
Also with the fall of net neutrality firms have an anti-competitive weapon to used to wipe out their competitors, as explained in the video bellow if internet providers can charge consumers for each website they access then they can offer some for free and charge huge amounts for others which will wipe them out.

Steve Wozniak co-founder of Apple is amount many trying to save net neutrality. It should be a social and economic priority for all peoples and nations!

Top American Youtube news reporter and Vlogger Phillip DeFranco explains the concept perfectly in this video:

The new macro economic challage, supply side woes of getting things moving!!

Forget fiscal policy to get agreegate demand moving, it appears that this winter we are stuggling to get anything moving at all!

Its easy to over look the impact of weather in Economics but is a very important factor.
For a start weather gives out externalities, a rainy day could have negative externalities believe it or not! Perhaps the snow will make people happier and more productive.. though this is debated!

Where weather plays a key part though is the supply side of the economy. Shifts in weather conditions could damage crops or reduces solar power yeild lower agreegate supply. Famines can damage supply in market increasing prices and panic buying due to weather has drastic effects on sum markets.
This quick example shows the classical theory for what happens in the market for tinned beans short term in a panic buy. The supply is fixed short term as shown by being totally inelastic. The demand is also inelastic as demand will not be effectected by price rises. A jump to D1 leads to a drastic increase in price from P to P1.

This is exactly what plucky shop keepers can do in times of high demand. Although the large super markets like tesco and sainsbury's could be hindered by pricing policy, in this case it would be the small independent shops and francises (like Spar) that would benefit. Although classic theory tends not take into account customer loyalty that would be damaged for years to come for any shop keeper that abused his customers this way.

However the problem facing the UK at the moment is the effect of weather, in this case snow, on the mobility of the factors of production. Mobility of labour, land, capital and even enterprize is a very important supply side concept. To improve the supply side of the economy we can improve infrastructor like motorways to improve mobility of these factors.. so what happens when the economy is snowed to a stand still?
"The insurer RSA estimated that the freezing weather could cost the UK economy up to £1.2bn a day, with retailers and the restaurant and bar industries likely to be the worst affected." -Big freeze could cost UK economy more than £6bn - guardian.co.uk
For each person that does not get to work, each factory that's supplies are delayed and each school child that can't be educated the economy suffers.

Yet there is some good news, due to the internet things are not as bad as they could be. People are working from home and businesses can use webcams and phones to hold meetings, I know infact of a business now conducting a board meeting via skype.
Businesses are also offering their own solution, Miniture scifi model producer Games Workshop emailed its customers telling them while they can't promise Chirstmas orders they are offering online vouchers that can be given over the internet to solve Christmas gift woes. Ending their email with an appropreate image, I've shared with you bellow, to lift thier fans spirits.

Snow causes chaos but we just have to 'battle' through and hope the smiles a white Christmas will put on peoples faces will out weight the chaos, after all at the end of the day Economics is not really about money its or even dare i say it factors of production, but whats best for us all and thats happiness. 

Tuition fee increase: Political not economic.

Many would have use think that the Tuition fee increase is way of raising finance for the Government, that in these tough times we all must pay. Nick Clegg said his reasons for flip flopping on his promise to the NUS about not increasing them was because after he saw the 'true extent of the debt' he changed his mind. However after a bit of reading around, I've come to the conclusion that in fact it is no an economic move at all.. it is a political move based upon ideology.

The Government wants to reduce exspenditor, so it will cut University funding and increase tuition fees. As a one off this will cut the expenditior for that department as now less funding will go out to Universities. Yet this will cancel out becuase the Government will have to give out more loans. This is not a short term stragegy because it will take some time for these loans to be paid back, the Government will start seeing the return after this term in office. Not to mension the huge costs of setting up the new system!
Its claimed that the increase in tution fees will not have an effect on people going to university, that students will not be put off by high debts and the new system is fairer. This is not true at all, just from first hand experience I can say that many students are being put off from going to university and it can be seen but the civil up roar displited by the students all across the country that it is very much not regarded as fairer.
Increasing the skills and education that works have is a good way of developing the economy. It is a core supply side policy. If we deter people from going to collage then growth will suffer in the economy. On average those with a degree earn 35% more than the national average. This means that if less people go to university the Government will collect less taxes! No only this but the cut to university funding will mean Universites will have to scale down their research, this again will put Briton behind.

So what is too gain from this? Freeing tution fees is on more step to privatising it, the Conservitive party believe in the free markets. The best universities will be able to offer higher charges so will have a higher income. This means the top Universities will have more money to spend but what about those that can't charge so much?
Could we be faced with Universities disappearing? Those that don't perform may be wiped out.  This could just be the begining of policy. The Government will keep pushing up tutuin fees and liberating Universites until it becomes a business. Those that don't attract will fail. Is this really what we want?
There are serious implicaitons to slowing increasing tution fees, re-making university for the elite could be a danger. The question is, is this in the Converitives interest? Some might say so.
If fees are pushed up but the Government whats to still make it viable for everyone to go to University then they will have to increase grant, those maybe this is not a consern for the present Government.
We have established that higher tuition fees will put people off university but perhaps this is the point. Some people believe that their are too many University course and many are useless. Could this be the motive, to put those off that will not benefit themselves or society by going to University?

Really what have the Tories got to loose from upsetting students, they are not a key group of supports of the Conservative party! Those that are, are unlikely to change their view based upon this. The only ones loosing out are the Lib Dems and the students ofcourse.

Yet we must remember for all of this speculation of Conservative gain it was Labour that brought in tuition fees in the first place...

Predictions for 2011

That most reliable and well-established organization known as the independent office for budget responsibility is telling us its all going to be just fine, I would care to disagree.

First lets look at what the OBR are saying:
A revised growth for this year 1.8% which is 0.6% higher than predicted. This does make some sense considering the 3^rd quarter was 0.8% growth, which is a lot higher than predicted. This figure also predicts good figures for the final quarter of this year. This is disputable, however sales figures for Black Friday were 0.2% higher than last year, which could suggest a strong final quarter to the year.
What is dubious is that it predicts 2.1% growth next year. I would question this, increased retail sales are likely to be being fueled by the VAT increase in spring, it makes sense to buy now. Also inflationary pressure (the multiplier effect) is only going to add to that. So this is only short term, next year consumption will fall and other sectors are likely to be hit. Construction is likely to take a hit from Government cuts and we are yet to see figures published from other industries. However some indicators do not look good.
The housing market has been falling dramatically; this is a good indicator of an impending recession in the UK. Also if we analyze these consumption and confidence graphs we can see that as the recovery took hold consumption and confidence went up however now it is falling again! These all point towards a double-dip. 

The OBR has altered its prediction of public sector job losses to 330,000 instead of 490,000. This however does not take into account all those on contract, the job losses may be made up elsewere, this is statistical fiddle because contracted workers are not public sector. The reason stated however was that benefit cuts have been higher and departmental cuts lower, this would of course lower the job losses but it is still likely to hurt the economy. Benefit cuts give consumers less to spend, which will cut consumption away. If anything direct benefits cuts have more of a direct impact on the economy.
The OBR is yet to truly be tested, its independence is questioned but it appears to be more optimistic than bias. They are not the only ones though:

We shall see what 2011 holds but I don’t believe it will be a good growth year!

I would predict low growth for this year 0.2-04% for the 4th quarter, but next year will see us slipping into negative growth.

UK Debt is not a problem!

Liberal-Conservative coalition is convinced that their emergency tightening of the budget is the right thing and that the economy will cope. I'm not so sure and here is why.

I’d hate to repeat my self on the topic of why the UK economy is a mess… as discussed in my article on the fallacy on the 0.8% growth figure and my analysis on the latest OBR prediction the economy is not doing as well as the present Government would suggest with its policies.
Basic theory dictates if you withdraw fiscal stimulus (low taxes and high Government spending) then you will strain the economy and perhaps knock it back into recession. In this case we have a very weak recovery with a Government about to introduce tax increases, public sector cuts and benefit withdrawal, this would point to economic suicide. But why is the Government doing this? Because the country is ‘bankrupt’ we have the ‘worst deficit in the G20’ a ‘debt time bomb’ and we have to do something about it! Here is a novel idea… how about not bothering about the debt?

101 reasons not cut Government spending (now)

1) Firstly lets look at what economists consider the main objects to target in the economy. 1: GDP growth, 2: Inflation, 3: Unemployment, 4: Balance of payments (money going in and out of the economy). To pure economists these are the main objectives to target, is Government debt one? No... Government debt or what economists call the PSNCR is the 5^th objective that is often omitted from the list. Why bother about it?

2) Ok so just because economists don’t list it, as a main objective does not mean it is important, in fact in resent years focus has been on equality and happiness also. But still number two Government debt does not have a direct effect on the Economy.
3) When a nation goes into recession something know as automatic stabilizers kick in.  These help stabilize the economy but increase Government debt short term. Automatic stabilizers consist of: lower taxes because of higher unemployment, lower wages and less profits and higher benefits to unemployed. A vast proportion of the debt is automatic stabilizers.
4) The UK Government bought out RBS and shares in other banks to stabilize them, this is not lost money! These shares were bought low and can be sold back later… that’s not debt that’s investment.  Bank bail out shares can be sold back at profit!
5) The Government is not anywhere near bankrupt! We have AAA rating that’s far from bankrupt. If we were bankrupt all our money would be worthless
6) The way the Government raises finance is by selling bonds, these are promises to pay the barer the sum of money on a date, these bonds are fixed we have a long time to pay them back. Why not wait?
7) Ahhh but you say that who will buy these shares? Well shares are bought on the bond market, so has this market been more reluctant to trade out bonds? Has it heck! People will buy our bonds. 8) But that’s not the issue, the issue is that our interest goes up because we have to attract people to buy them. True the price is increasing (which is bad) but it is by no means much by international standards and at just under 4.5% it is less than most consumers could get a loan.
9) Journalists like to compare debt to a persons debt… well consider this how much was your house worth when you bought it? How much were you earning? Now work out the value of the house against your yearly salary… that is your equivalent to government debt now. I should image its quite high? Government debt is around 70%.
10) How about me? Well a rough estimate tells me after I’ve taken my university loans and worked out my income its rough estimate of 660%. Oh no I best panic and sell my laptop… what!?
11) This is a key one: DEBT IS REDUCED WITH TIME – INFLATION ERRODS DEBT. Take out a loan for £100 now, and spend it when you come to pay it back a  year later assuming inflation is 2% your debt is worth 2% less because the person you are now paying £100 too will need £102 to buy what you bought with it last year. That’s inflation!
12) So remember that figure of 4.5% interest on Government bond repayments. its actually 2.5% if you negate inflation. That’s assuming inflation is 2%. It is actually 3%+ at the moment.
13) Compared with the past our debt is minimal:

14) compared to recent past it is minimal:

15) Debt is at a fixed point in time. If our debt is 60% of GDP in 2010 by 2030 it is likely out economy will have grown by 40% so the debt will be proportionally less of our countries income when we come to repay it.
16) If we cut spending now we will lower Government spending that will lower AD (total demand or spending) which will lower GDP17) If we cut spending now we will cause unemployment, like the 2+ million predicted from the budget.
18) If we increase unemployment we will likely increase crime.
19) If we decrease public sector budgets there may be union action20) Cuts to infrastructure will damage UK business! (damages AS)
21) Cuts to the education system will mean the next generation will have less knowledge/skills so the economy will suffer in the long run. (reduction in supply side)
22) People made unemployed in the public sector will spend less money, so those in the private will suffer! 23) People with less benefit will spend less money, so those in the private will suffer!24) The last time we were in this situation we found our self in a depression then WW3…
25) maybe we should not cut our military in just in case.26) Increasing Taxes such as VAT to 20% is recessive creating more inequality.
27) If we go into double dip the automatic stabilizers that are out of the Government control will increase making the debt worse!
28) If we continue to support GDP by spending then automatic stabilizers will fall and are falling! 29) Government deficit is already falling; even without a budget slashing Spending things will begin to get better.
30) Next time the economy is in ‘overheat’ we can reduce spending to stop a positive output gap and prevent another recession. 31) Next time we have high demand pull inflation we can deduces spending to create a positive Government account and pay back some of the debt and sole inflation problems.
32) Ireland is in economy difficulty and so it 33) USA this means we will have less exports to these countries and they are our main exports. This is bad for the economy Government needs to make up for this fall in exports.34) House prices are falling, this is a signal that the economy is becoming heading towards recession, surely this would suggest we do not have a strong enough to take the hit of cuts. 35) Equally consumer spending is falling36) Unemployment is a lagging indicator, so if we go into a double-dip which theory states we may do if we cut back now then unemployment will only get worse and say like that for a long time.
37) Those employed by the public sector have skills that are not valued by the private sector! Crowding out theory suggests the private sector will create jobs with cut backs, how can this happen. What kind of private sector business wants to employ millions of civil servants? 38) Those unemployed require training to get back into the labour market, how can they do this with increased tuition fees, less adult education etc..
39) The longer people are unemployed the more their skills depreciated, the focus should be spending to get unemployed back to work not creating more unemployed making it more competitive for people to find jobs.
40) “the number of vacancies for the three months to October 2010 was 453,000, down 27,000 over the quarter” –ons Where are the jobs for the unemployed and soon to be unemployed?41) Front line services will be cut WITH implications to their service provided.
42) Government bonds are sold to the general public, the government represents the public. we owe our selves money? – a bit of  a silly argument granted. However:
43) The UK created £200bn in Quantitative Easing, the other name for this is Asset purchasing. This means we purchased £200bn worth of bank and Government debt. The proportion we bought from the Government can be written off.
44) If we do go into a double-dip then we can’t lower interest rates to raise AD and help us back into recovery because they are at 0.5%
45) Equally if we go into double-dip it would cost more to launch a new stimulus package to bring us back to positive growth than it would be to simply wait before cutting the debt

At this point the time opportunity cost of listing another 56 would out weight listing them so I will chose to stop this list here… 

The point is why are we so concerned about this debt! Yes it is a problem but we can pay it back later when we have good strong growth, as Labour should have done during the recent boom.

Another interesting read on the subject can be found on the Hutton Economics Society website: The National Debt? Timebomb?

The Historian

"A historian is a profit in reverse"

Always a favourite quote of mine and now it seems to be more relevant than ever.

Were we are now
With the spending review just around the corner questions are being raised as to what it will mean for the UK economy.The UK has a national debt of around 950 billion (that's: 950,000,000,000!!), this staggering figure is the problem now facing Chancellor George Osborne but what is he going to do about? This is the question on the mind of many, will raising tuition fees be part of repaying the debt, cancelling child befit is certainly one part of it.
The front line services such as police have already begun making cut backs and other areas of the public sector cringes in the knowledge its almost certain to see heavy job loses.
George Osborne may be cutting back to reduce the budget deficit but what will happen to the Macro economic objectives? Government spending (G) is a key part of Aggregate demand (AD), plotting a reduction in G and thus AD on a Long Run Aggregate Supply (LRAS) has the effect shown bellow:
Output falls from O to O1 and thus GDP falls.. the economy goes into recession! Surely George Osborne knows this? Well a major part of the conservatives plan on keep the economy afloat release a theory called crowed out, as explained in full by a fantastic article written by Joe RS: Joe's Article. Basically the Government expects the private sector to fill in the gap as they deplete the public sector, a valid theory. However this only possible if businesses have money to expand, something which is about to get a whole lot harder if the Monetary Policy Commity decides to raise interest rates!
Has George Osborn factored this into his theory? It certainly raises questions as to how qualified he is to run the economy, lets find out:

The Man in charge
Name: George Gideon Oliver Osborne
Age: 39
Born: Paddington UK
Degree: Modern History.
Job History:
NHS: recording deaths
Selfridge's: Tidying towels
The Conservative Party
Experience in Economics (including GCSE ):
NONE

Anyone else shiver at the sight of that résumé, Well the city of London for a start! On the positive side every single one of you now reading this probably can say: "I have more experience in economics than the man in charge of the UK economy!" So how did he get the job.. well another Quote springs to mind, this time by Benjamin Franklin exasperated by politics:
"Democracy is two wolves and one lamb voting on what to have for lunch"
Alas more fitted for the present times would be:
"Two politicians and an economist voting on what to do with the economy"
At least there is one good thing, if he studied modern history he should be able to tell us about the 1930s.

The Past
During the period of 1930s the world economy was in a state of depression, in the US this was know as the great depression lasting from 1929 to around 1939 while the UK's problems started in 1918 but were not quite as bad by the late 1939s.
Economic growth was negative, between 1918 and 1921 there was a fall of 25% in output in the UK! The Government debt was large and the government was pressured to lower the deficit, this didn't help the economy!

Many nations were pinned down by something known as the gold standard that fixed their currencies so they could not export effectively.
As a result of the economic depression extremism increased, the Nazi party rose up in Germany and to a lesser extent in the UK, the KKK became stronger in the US and in Italy and Spain far right dictatorships rose up. Eventually Adolph Hitler rose to power in Germany and consumed Europe in war.

The future? (The apocalyptic edition)
World war 1 = war on terror
The Gold standard = The Euro
Economic down turn = Credit crunch
Right extremism = Tea Party Movement, BNP etc..
Government cut back? = Spending review?
World war 3 anyone?

OK so that's the extremest prediction possible (unless we look back the fall of Rome), but there some merit in looking back at the past to judge the future, there are many similarities to then and now and Keynesian models suggest these cut backs will lead to bad times ahead. We have to learn the lessons of the past, lets hope George Osborne did in his history classes. A final quote to consider:
"History repeats itself because no one was listening the first time"

Sinking Economy

The Credit Crunch has had its casualties, around 2.5 million unemployed (Labour force survey) but here is a quick case study of an industry hit hard.
The kitchen industry saw quite large growth during the resent boom of the 2000s, being an luxury product the consumption of designer kitchens is linked with peoples incomes, high income elasticity. As as soon as the economy goes into decline peoples confidence falls and as a result they cut back on luxuries. One of the first industries to bit hit hard by this was the of course the kitchen industry, it easy to cut back on the new kitchen you were planning.
I happen to know a kitchen fitter who was made redundant from three kitchen firms then finally ended up long term unemployed. GDP has now moved up to 1.1% thus the UK is in recovery. low and behold as basic economic theory suggest, he now has his job back.
A clear sign that things are picking up, although as a possible double dip looms it could be worst times ahead for luxury industries.



Bonus fact: "A zero income elasticity (or inelastic) demand occurs when an increase in income is not associated with a change in the demand of a good. These would be sticky goods." - wikipedia