Protectionism is back. Perhaps the biggest surprise about this week's developing spat between USA and China over tyres, cars and chicken meat ( http://news.bbc.co.uk/2/hi/business/8253365.stm ) is that it didn't kick off even earlier in the global recession. There had been a hint of it in the US stimulus plan which seems like ancient history now (months actually) when it was stated that money from the federal government had to be spent on US resources. Then there were the Mexican trucks crossing the border into the US.
Now the US have said Chinese tyres were being dumped in the US.The Chinese have responded by 'investigating claims' that US exports of chicken meat and cars into China have benefitted from unfair subsidies to producers.
Everyone can see it is tit-for-tat as is usual in these matters. It seems the most effective response to an accusation of dumping or unfair practice is to counter-accuse the accuser (rather than proceed to the WTO). Retaliatory tariffs to get revenge on your accuser only leads to further reduction of jobs and output in the long run. To deny the freedom to specialise and trade is short termism and unbelievably short-sighted - but understandable, politically, in a recession.
Politicians need to be seen to be taking a stand, and the argument that protectionism damages economic growth is a difficult one to get across to an electorate that is hurting. But freedom of trade is the only way to go. The US stands to lose more than in previous trade disputes given the growing stature of the Chinese economy - now the third largest in the world and on current growth rates to be the biggest after India then the USA by 2050.
14 Sep 2009
2 Sep 2009
Behaviour and Economics
It seems there has been a rash of Behavioural Economics books published lately for the popular market. Books like "Nudge" by Cass Sustein and Richard Thaler, and "Animal Spirits" by George Akerlof and Robert Shiller have been successful in suggesting that people don't react and respond in a rational predictable manner and it is folly of economists to suggest that we all have a measurable, stable code of responses to stimuli which, if understood, would accurately foretell how we will react when there is a change in, for example, interest rates, tax rates or benefit payments.
Traditional economic theory was built on the idea that we act as rational automatons when we allocate our limited resources. Of course it isn't that simple. There are millions and millions of variables that decide how we will react when presented with an economic choice. Cost and opportunity cost are high on that list, but the weather, last night's news, whether we have a headache or a row with our partner this morning, whether our sports team won, if our train was late, a rumour about job security flying around the office, etc all impact to different degrees. We often, due to imperfect knowledge and the market failure that ensues, cannot act rationally.
But I can't help being sceptical of behavioural economics too. As Brian in Life of Brian preached to the masses - "You are all individuals!" (to which, as one voice they responded "Yes! We are all individuals!") the bulk of people do react in certain ways in given situations. That is what economic theory was based on initially, and not by mistake. Marketing - down to a fine art and highly sophisticated in its many guises thrives on the predictability of our responses when certain buttons are pushed.
I acknowledge that (as pointed out in "Nudge") small changes make us behave in a better or different way (example: when we fill out forms we are now asked to tick the box if we DON'T want to receive further information instead of as it was in the past where we ticked if we DID want information sent to us) but this just reinforces my point - the bulk of people are predictable in their actions and decision-making and behave in a consistent and stable way when allocating their resources of time, money and labour. I like my economics straight. I see labour, consumers, bankers and politicians as units that are predictable and measurable and on the whole rational.
Traditional economic theory was built on the idea that we act as rational automatons when we allocate our limited resources. Of course it isn't that simple. There are millions and millions of variables that decide how we will react when presented with an economic choice. Cost and opportunity cost are high on that list, but the weather, last night's news, whether we have a headache or a row with our partner this morning, whether our sports team won, if our train was late, a rumour about job security flying around the office, etc all impact to different degrees. We often, due to imperfect knowledge and the market failure that ensues, cannot act rationally.
But I can't help being sceptical of behavioural economics too. As Brian in Life of Brian preached to the masses - "You are all individuals!" (to which, as one voice they responded "Yes! We are all individuals!") the bulk of people do react in certain ways in given situations. That is what economic theory was based on initially, and not by mistake. Marketing - down to a fine art and highly sophisticated in its many guises thrives on the predictability of our responses when certain buttons are pushed.
I acknowledge that (as pointed out in "Nudge") small changes make us behave in a better or different way (example: when we fill out forms we are now asked to tick the box if we DON'T want to receive further information instead of as it was in the past where we ticked if we DID want information sent to us) but this just reinforces my point - the bulk of people are predictable in their actions and decision-making and behave in a consistent and stable way when allocating their resources of time, money and labour. I like my economics straight. I see labour, consumers, bankers and politicians as units that are predictable and measurable and on the whole rational.
Recovery - but for who?
There's more optimism this side of summer than there was before the holidays began. Certain indicators, beyond the stock markets, are showing signs of improvement - or are at least bottoming out. Indicators like unemployment figures that continue to get worse are, we are told by experts, lagging indicators and so will be the last to improve and that's to be expected.
Fair enough. But when the long awaited and much needed recovery does come, it will look quite different to different people. The recovery will come with a force in some economies and will be thin and hazy at best in others.
It is a fair bet that when all is said and done, and the history of this crisis is written, the key conclusion will be it marked a major transition of wealth and financial power eastwards. Everyone knows that 'Western' economies have been losing ground to BRIC and other emerging nations for some time. But the shift is not smooth, it comes in steps and when the dust settles on this crisis, a giant leap will have been observed to have taken place. Why do I think so? Because of the massive difference in how this recession has impacted on the growth rates of countries i the West and economies that are emerging.
The GDP growth rates of OECD nations have plunged into negative territory. We (in the West) have lost competitiveness over the bulk of manufacturing thanks to rigid labour laws, health and safety measures and tougher environmental restrictions on firms all pushing up unit costs of production. So we are making and selling less, and the collapse in demand slashes our investment spending and labour requirements, in turn worsening output potential. Governments are bankrupt with record debts and the jury is still out on the effectiveness of the massive fiscal injections deemed necessary months ago. True, most observers accept governments were right to act and those that did most aggressively (USA) may see positive payback most speedily. But key industries have vanished, jobs in those sectors have gone for good or are still being propped up by the state. Private debt is higher than ever, repossessions of homes and these defaults and foreclosures could get far worse in 2010 and even 2011 if interest rates are forced upwards to combat inflationary pressure coming to stores near you in mid-2010, sparked by the multiplied impact of the fscal stimuli and the rising and rising rise in oil prices.
Contrast that with the BRIC economies - still predicted to grow by 3.9% this year. Is that what the deepest global financial and economic crisis for 60 years has done to these new economies? With their fast rising GDP and increasingly domestic destinations for their output; with their more flexible labour markets and thus adaptability of firms; and finally with their debt positions (state and private) less onerous than many in the West, these BRIC economies and other emerging economies stand a greater chance to get out of the recovery more quickly.
With increased economic dominance must come increased say in the governance of the world's resources and geo-political matters - right at the very time when global issues like climate change and terrorism are highest on the agenda. I haven't seen much discussion of that in the media.
Fair enough. But when the long awaited and much needed recovery does come, it will look quite different to different people. The recovery will come with a force in some economies and will be thin and hazy at best in others.
It is a fair bet that when all is said and done, and the history of this crisis is written, the key conclusion will be it marked a major transition of wealth and financial power eastwards. Everyone knows that 'Western' economies have been losing ground to BRIC and other emerging nations for some time. But the shift is not smooth, it comes in steps and when the dust settles on this crisis, a giant leap will have been observed to have taken place. Why do I think so? Because of the massive difference in how this recession has impacted on the growth rates of countries i the West and economies that are emerging.
The GDP growth rates of OECD nations have plunged into negative territory. We (in the West) have lost competitiveness over the bulk of manufacturing thanks to rigid labour laws, health and safety measures and tougher environmental restrictions on firms all pushing up unit costs of production. So we are making and selling less, and the collapse in demand slashes our investment spending and labour requirements, in turn worsening output potential. Governments are bankrupt with record debts and the jury is still out on the effectiveness of the massive fiscal injections deemed necessary months ago. True, most observers accept governments were right to act and those that did most aggressively (USA) may see positive payback most speedily. But key industries have vanished, jobs in those sectors have gone for good or are still being propped up by the state. Private debt is higher than ever, repossessions of homes and these defaults and foreclosures could get far worse in 2010 and even 2011 if interest rates are forced upwards to combat inflationary pressure coming to stores near you in mid-2010, sparked by the multiplied impact of the fscal stimuli and the rising and rising rise in oil prices.
Contrast that with the BRIC economies - still predicted to grow by 3.9% this year. Is that what the deepest global financial and economic crisis for 60 years has done to these new economies? With their fast rising GDP and increasingly domestic destinations for their output; with their more flexible labour markets and thus adaptability of firms; and finally with their debt positions (state and private) less onerous than many in the West, these BRIC economies and other emerging economies stand a greater chance to get out of the recovery more quickly.
With increased economic dominance must come increased say in the governance of the world's resources and geo-political matters - right at the very time when global issues like climate change and terrorism are highest on the agenda. I haven't seen much discussion of that in the media.
27 Apr 2009
Labour markets need flexibility now more than ever.
Spain announced unemployment figures of a staggering 17.4% this week. Unemployment figures across the EU vary sharply, and while most are on the rise, Spain's situation is a lot worse than other eurozone countries. The answer for any EU country facing growing worklessness is surely a combination of deamnd management but more significantly a boost to the flexibility of labour markets. Reform in the labour market, so firms are not afraid to hire, where redundancy is not so expensive to firms, where National Insurance contributions are not so high, where pensions commitments are part-waived and covered by state contributions, where there are no limits to working hours, where needlessly fussy health and safety legislation is pared back and essential law is promoted and policed. And most of all, where pay levels can reflect the marginal revenue product of a worker and do not get dictated by the National Minimum Wage. Low incomes that will undoubtedly result should be rewarded and supplemented by further progressivity in the taxation system. The philosophy behind the Working Family Tax Credit, where individuals who are prepared to work achieve tax rebates if they live in a household where entire income is low is the way forward.
And allow immigration. Jobs are created, investment occurs and foreign firms are attracted when the labour markets are flexible enough. In the UK, Foreign Direct Investment has been the highest in all of the EU. 40% of Asian FDI into the EU during the 1990s came to the UK. Granted, it was a variety of attractions that brought the likes of Nissan to the UK, but a flexible labour market was high on the list.
I believe that labour markets should be friendlier to firms in the EU, and that it is imcumbent on the state to back up welfare for the most vulnerable of workers. Surely it is preferable to be supporting a worker than propping up the disillusioned unemployed?
And allow immigration. Jobs are created, investment occurs and foreign firms are attracted when the labour markets are flexible enough. In the UK, Foreign Direct Investment has been the highest in all of the EU. 40% of Asian FDI into the EU during the 1990s came to the UK. Granted, it was a variety of attractions that brought the likes of Nissan to the UK, but a flexible labour market was high on the list.
I believe that labour markets should be friendlier to firms in the EU, and that it is imcumbent on the state to back up welfare for the most vulnerable of workers. Surely it is preferable to be supporting a worker than propping up the disillusioned unemployed?
50% Income Tax!
The UK government is going to collect 50% income tax on all earnings over 150,000 pounds from April 2010. This replaces the 45% tax that was to come into effect in 2011. Many commentators are up in arms over this and see it as a return to the "bad old days of Labour - tax and spend". Well, I welcome it. And how about another tax - let's say 75% on everything earned over 500,000 gross. And how about a special Bonus tax - where managers and directors of firms hand over most of bonuses they are awarded. This money, most of which would have been saved, will, if handed onto the low income through means-tested benefits, be respent in the economy and generate increased spending several times over on the High Street. It will be a real shot in the arm for the UK's troubled consumer confidence.
The UK government has taken the decision to increase National Debt from 43% of GDP to perhaps as high as 80% by 2013. Some of the debt burden must be clawed back, and a more adventurous fiscal approach might be considered. Higher taxes on the highest of earners, to make the taxation system more progressive does this AND redistributes income more equally -surely a fundemental Labour objective.
The UK government has taken the decision to increase National Debt from 43% of GDP to perhaps as high as 80% by 2013. Some of the debt burden must be clawed back, and a more adventurous fiscal approach might be considered. Higher taxes on the highest of earners, to make the taxation system more progressive does this AND redistributes income more equally -surely a fundemental Labour objective.
Your comments
I welcome your comments - but from now on I can only allow them onto the blog if they are from a named author - no more anonymous comments please! Thanks.
16 Apr 2009
A woman from the last century
Mrs Thatcher, ex Prime Minister of the UK and now an old lady said last week that fiscal mismanagement by Gordon Brown and the Labour Party was likely to send the UK begging to the IMF as happened in 1976.
She is so wrong, and should really learn that things are different now. But for those of you who don't remember, or are young enough never to have known Maggie - a quick History lesson.
She was elected in 1979 under the slogan 'Labour Isn't Working' - a clever tagline that both took a swipe at the Labour party and growing unemployment, which had crossed the 1 million threshold. Her governments took unemployment beyond 4 million, and if it hadn't been for her manipulation of the claimant count method of measuring unemployment - she changed the rules for claiming unemployment benefits 25 times, always making it harder to qualify - the figure would have been closer to 6 million.
Things are different now. It was Tony Blair and Brown who in the late 1990s abandoned the claimant count system for counting unemployment in favour of the independent ILO system, who gave independence to the Bank Of England and the Monetary Policy Committee, who establisehed the Golden Rule of fiscal stability and it is Brown now who recognises the need for fiscal loosening on a grand scale.
Not everything the Labour governments have done since 1997 deserves praise. They have been criticised rightly for everything from expenses abuse and spin wizardry to going to war on false pretexts. But Mrs Thatcher is utterly wrong to draw comparisons to the mid 1970s. She should keep quiet and acknowledge she belonged to the last century.
She is so wrong, and should really learn that things are different now. But for those of you who don't remember, or are young enough never to have known Maggie - a quick History lesson.
She was elected in 1979 under the slogan 'Labour Isn't Working' - a clever tagline that both took a swipe at the Labour party and growing unemployment, which had crossed the 1 million threshold. Her governments took unemployment beyond 4 million, and if it hadn't been for her manipulation of the claimant count method of measuring unemployment - she changed the rules for claiming unemployment benefits 25 times, always making it harder to qualify - the figure would have been closer to 6 million.
Things are different now. It was Tony Blair and Brown who in the late 1990s abandoned the claimant count system for counting unemployment in favour of the independent ILO system, who gave independence to the Bank Of England and the Monetary Policy Committee, who establisehed the Golden Rule of fiscal stability and it is Brown now who recognises the need for fiscal loosening on a grand scale.
Not everything the Labour governments have done since 1997 deserves praise. They have been criticised rightly for everything from expenses abuse and spin wizardry to going to war on false pretexts. But Mrs Thatcher is utterly wrong to draw comparisons to the mid 1970s. She should keep quiet and acknowledge she belonged to the last century.
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