A new Chancellor, a new age?

New Chancellor Phillip Hammond has made clear his intentions for the future of fiscal policy in the UK, deciding to scrap George Osbourne’s failing long term plans dating back to 2010 of achiving a fiscal surplus, for which he consistently pushed back his set deadline. Does this mean the years of austerity are finally over?

Hammond announced his intentions to invest around £2bn into housing to build 40000 homes by 2020. However, Hammond did make clear that since the Brexit vote, the UK faces a future of uncertainty, and these changing times require a change in policy. He did not criticise Osbourne since his policies were right for the times, but now we require more expansionary policy. However, this does not mean there won’t be cut backs in future, since the budget is ‘eye-wateringly large’, Hammond must keep a close eye on this as well.

Hammonds plans to invest into housing will be beneficial in the long term of the UK economy. In the short-term the increase in employment helps to stabilise the economy, encouraging further spending, which is required to offset the likely drop in spending due to uncertainty of Brexit. In the long term, infrastructure will help to improve the productivity in the UK and will hopefully help us compete more on international markets.

With Theresa May announcing the intention to invoke article 50 by March 2017, the need for more expansionary policy became clear, with austerity policy may do more harm than good in current economic conditions. Saying this is contrary to growth statistics since the brexit vote which have been surprisingly postive, but hard times ahead are expected. Nevertheless, Brexit negotiations will likely have a greater impact on the future of the UK economy than fiscal policy in the years to come, with the hope than the UK can negotiate some trade deals which will ensure the preservance of the UK export markets and FDI.

Is inequality a problem?

A few years ago Russell Brand, comedian, may have been a strange place to start an economics blog, but now Russell Brand, revolutionary, has the voice to dispute the problems of this country. Even though I don’t agree with everything he says, Brand is very vocal on the issue of inequality which has been growing in the UK ever since the Thatcher Era.

Russell Brand comments largely on problems with transgenerational inequality, meaning those with rich parents are more likely to be rich themselves due to unfair advantages given by private schooling and parent contacts helping job searches. This poses the question of what is fair rather than inequality itself. It is difficult to dispute inequality if it is those who work hardest earning the most, however in todays society this is not the case. Inequality is often the result of the ‘accident of birth’. Hierarchical systems have historically set out the make up of society causing a poverty trap for those in the working class. These low social and economic classes, Brand argues, are abandoned by the political system which emphasises problems within their societies, causing social unrest. The exploitation of these poorer people has become a norm in society today. For example, Brand points out that during austerity following the financial crisis, caused by banker’s, welfare payments to the poorest in society were slashed while at the same time the conservative party were fighting in EU courts for banker’s bonuses.  This policy strategy is detrimental to the lower classes, further widening the gap between rich and poor.

Not all inequality is bad. Some is required to provide ambitions to those who are poorer. By having a gap between rich and poor this provides an incentive for the poor to work harder and strive to better themselves in order to earn more. But when the gap is too large this may be counter-productive as people see the gap being unbridgeable and therefore lose their ambitions, leaving the inequality gap to widen further.

Trickle-down inequality is another argument used to support inequality, often used to justify Thatcher’s policies during her reign as Prime Minister. Theoretically, by giving business owners more they will expand their firms, employing more workers and therefore sharing their wealth with the poorer through greater employment. However in reality this does not work with the big businesses keeping the wealth at the top, as seen by the sharp increase in inequality from 1979 onwards.

Therefore, in the UK there does need to be action to reduce inequality between the classes.

To start to bridge the gaps you need to find the source of the problem, which is education. Inequality in education leads to income inequality later in life. The arguably unethical Perry Pre-School Study shows the importance of education, with those randomly selected to be put in smaller classes of a disadvantaged school (therefore receiving better quality education) were more likely to graduate high school, earn £20000 by the age of 40 and less likely to have been arrested. Therefore, equal levels of education for all children would help to reduce levels of transgenerational inequality, making equal opportunity for those of all classes.

In my opinion, May’s plans to reinstate Grammar Schools in the UK, allocating places based on ability is a positive step towards more equal education, so those from poorer backgrounds will have the chance to receive a high quality education. It could be argued that these grammar schools accentuate inequality since those from the poorest backgrounds may have not had the primary education to enter into a grammar school, therefore inequality within the lowest classes may be increased. Nevertheless, grammar schools are a positive step towards closing the gap between the working and middle classes later in life.

Private schooling from aged 5 in 2003 to aged 18 in 2016 would have cost, on average £180000. This is a luxury the majority of people simply cannot afford. However there are questions about the effectiveness of some private schools and whether they are worth the money. Fees have risen and will continue to rise due to an influx of foreign students coming over for the high standards of education. To a certain extent private schooling may be classed as a positional good, however it is also responsible for high levels of income inequality giving richer students an advantage into higher education and then higher paid jobs in future, as shown by Card and Krueger’s paper on ‘Does school quality matter?’.

Further government funded or endorsed programmes such as apprenticeships and other work schemes are positive steps to helping the poor or less educated make a start in a career. Increasing participation rates in these schemes will benefit the UK economy through increasing the skill level of the workforce and by increasing the general wealth of its citizens in the long term.

While I have mostly spoken of UK inequality, it is a worldwide problem with global inequality rising over the past decades. At the most recent G20 summit in Hangzhao, China there has been a discussion on how to reduce this with Mr Xi saying he wishes to ‘make the pie bigger and ensure people get a greater share of it.’

Therefore, inequality is effecting the smooth running of economy’s with unrest amongst working classes. With some government help and investment into the state education system this can be reduced to more sustainable levels.

The economic impact of the Olympics

 

It may seem simple, the organisers borrow large sums to invest into new stadiums and infrastructure in order to host the Olympics with the hope that when the big two-week event comes around ticket sales and tourist spending is great enough to cause economic benefit. Its cost-benefit analysis. However, its not quite as easy as that.

 

Political instability and inequality

Rio 2016 has been stained by Brazilian protests with the majority of ‘the people’ not seeing any benefit from the mass investment in Rio. These people living in the favelas claim to have seen no improvement in their living standards despite the $15bn being spent on the Olympic games. However the Brazilian government claim they have spent much less public money on the games, with private investors providing most of the funds, seeking large returns on their investments following the games. This will simply increase the already high inequality in Rio.

Additionally, increased spending in host nations due to tourism is unevenly distributed towards business owners rather than workers, again increasing the inequality within the nation. However, with this stronger economy, trickle down economics seems to come into its own, with many poor areas where Olympic events are held, such as the Deodoro area now having access to clean water, basic sanitation and public transport which before the games seemed a long way away. Although these basic needs are not yet universal for example the Guanabara Bay remains an area of mass sewage and household waste. These areas would need to be cleaned up for the overall benefits of the Olympic games to be a reality. Corruption, a bigger problem in Rio than in London 2012, with poor economic conditions and unstable politics there is little possibility development in these crucial areas.

 

Economic growth

Previous games:

London 2012 saw a boost to the UK economy of £9.9bn, while the figure is met with scepticism, there is no doubt that overall there was economic benefit from the 2012 games. There was high levels of inward investment into the UK, not just London, additional spending from Olympic-related promotions and overseas contracts for architects to design venues in other host nations, as a result of the success of the London games. This greater prosperity helped to create more jobs in the economy and left behind a great legacy for Great Britain.

 

The announcement of Beijing hosting the 2008 Olympics put China on the map as a real international player in the world economy. To prepare for the games China invested around $40bn in infrastructure from 2001-06 transforming the landscape of Beijing. As well as the sporting venues there was new transport infrastructure including a city rail line, new airport, new roads, all benefiting Beijing as an international city. Most notable were the environmental improvements with regulations on air pollution drastically changing the air quality for the games, improving the health of those living in Beijing. Estimates showed the games added 2.5 percentage points to economic growth from 2002 until the games in 2008. This shows the huge impact an Olympic Games can have.

 

The overall economic effect is yet to be seen for the Rio Games, but similarly to China it will not come without some protests arguing against the games. Nevertheless, the long term legacy the games can have in bringing greater infrastructural investment is potentially astonishing.

Have we been abandoned politically?

 

First David Cameron, then Boris Johnson and now Nigel Farage. Did things just get too difficult or have these political leaders stepped down for good reason?

It was generally believed before the referendum that David Cameron would step down in the event of a leave vote. In my opinion he had little other choice but to resign since he would not have been the right person to negotiate terms to take our country out of the EU, after all he himself had wanted to remain. It makes sense that someone who had campaigned to leave would take on leadership of the country.

Boris, for example. Oops?

In a shocking turn of events Boris Johnson announced he would not be running in the Conservative Party leadership race, having previously been the favourite to succeed David Cameron. Why did he step down? He simply didn’t believe he was up to the job, having discussed this with his colleagues, however having led the country out of the European Union, I feel he has some responsibility to the country in helping us get out of this perceived mess that he arguably caused. Nevertheless, he left when the going got tough, so perhaps we’re better off without him. Instead, from the leave campaign, we’ve been left with Michael Gove, who doesn’t even have the backing of his peers, with the majority believing Theresa May will make the best successor. Gove, previously saying he did not want to be PM surprisingly decided to enter the race instead of Boris. It is my belief that the Tory Leave campaigners believed he was a better candidate to represent the Leave side rather than Boris who has been exposed far too much in the media for example his rugby antics in Japan, getting stuck on a zip wire in London and his backwards basketball shot. These are not actions of a Prime Minister. Can you imagine if Boris Johnson and Donald Trump were the leaders of two superpowers?

Now we come to Nigel Farage. What is there to say? He embarrassed himself at the EU Commission last week, not helping the UK’s position in its negotiations and now he has resigned as UKIP leader, claiming he has done what he planned to do. All I have to say is he’s left the job half done, abandoned ship before it got any worse. Instead of developing a plan for leaving the EU, they just campaigned to leave and now left the job to get the country back on track to everyone else. Pathetic. Irresponsible.

These MP’s have left the country out to dry. Making false promises which they instantly went back on and now resigning before the are required to implement any change, which they know they can’t do. They promised we would get our country back, but I’m not sure I want it back now that it’s falling apart. It only thanks to the Bank of England that we’re still afloat. Today they reduced banking restrictions freeing up around £150bn for lending and 8 banks have also agreed with George Osborne to extend government spending if necessary.

Therefore, tough times ahead still seem inevitable, despite the best efforts of the bank, no thanks to our leading politicians.

Brexit. What will happen now?

I’m sure I wasn’t the only one sitting up to watch the results of the EU referendum being unravelled last night, slowly watching the leave campaign edge ahead but still not facing the reality that we would actually leave the European Union. Looking at the breakdown of the results, younger generations tended to vote to remain in the EU whilst it was the older generations who voted to leave. Whilst I know this is a generalisation it does seem a little unfair that older generations get to vote on our future, we have now lost access to live and work in all EU countries freely, severely limiting our opportunities.

Union_flag_1606_(Kings_Colors).svg

Nevertheless, what an eventful day it has been, David Cameron has resigned, Mark Carney has pledged to take measures to ensure the financial sector remains stable, willing to provide an extra £250 billion to banks if they run short on reserves. Nicola Sturgeon has said another Scottish independence referendum is on the table. Nigel Farage has already gone back on promises.

Watching the results coming in live from different constituencies last night saw Sterling fluctuate largely with it. This highlights the uncertainty in the British economy as no one really knows what will happen now. It was expected that Sterling would depreciate with a Brexit vote and that’s just what happened, the GBP depreciated to a 30 year low, a lot due to speculators making money though I imagine.

Screen Shot 2016-06-24 at 12.17.28

As seen, the drop off was due to the Brexit decision, but due to Carney’s and the Bank of England’s speech, Sterling began to recover once again, however it might be a while before it gets back to where it once was. The stock markets have been crashing all day, worldwide. Stock exchanges in Europe have suffered worse than the UK, still waiting to see the effect on the NYSE when it opens.

Before the referendum I said there would be a recession if we were to leave the EU, this is still to be seen, however I believe that the economy will be able to cope better than expected due to the Bank of England and Treasury response, although the UK inevitably has some tough times ahead.

In my previous blog post I mentioned the Leave campaigns false promises. Almost instantly UKIP’s Farage proved me right. On ITV’s This Morning programme he said he can’t guarantee the NHS will benefit from the £350m saved from EU membership. Just one promise that the leave campaign can no longer claim to be true. I hope promises of free trade deals with the EU will not be broken. The UK could be in a very difficult situation in the coming years.

With David Cameron’s resignation there is now big talk about who will be the next Prime Minister. I think Boris Johnson or Theresa May must be the front runners to lead the Conservative Party. Boris made a political move to back the Leave campaign knowing he would be in a favourable position to lead if there were a Brexit. May, on the other hand, kept convenient quiet throughout the campaigns but has the experience in the cabinet to be a great leader. It will be an interesting race. Regardless of who wins, they will have a large task on their hands to ensure the future of Britain remains bright. There is the need to make new trade deals, ensure the financial sector (Britain’s largest industry) remains strong, ensure the NHS is secure and improved as well keeping all other promises made during the leave campaign.

Now we have voted to leave the EU, I fear for the future of the EU and the free movement of people, goods and services. Many great leaders have worked so hard to make this single market and a greater union for the greater good of all countries. However now the UK has left I fear we may ‘open the floodgates’ for many other countries to now want to leave, restricting the ability for the single market to work. If this were to happen, the future for Europe as a whole could be very dark.

The unity of Europe isn’t the only worry. The UK itself is at risk of being split up with remain votes being dominant in Scotland and in Northern Ireland. This could bring a desire to campaign for independence referendums. I predict Scotland will become independent within the next few years since it is unfair to take them out of Europe when Brexit votes came mostly from England and Wales.

I hope I’m wrong about the future of the UK and Europe. However, it may turn out that the UK may bite back at the many people who voted leave as a rebellion against big institutions and the government or voted for the false promises from the leave side. Yesterday was a once in a lifetime decision and now the population be forced to suffer.

The EU Referendum, media coverage and should we stay or should we go?

 

Todays BBC headline reads ‘’David Beckham backs EU Remain vote’’, this is typical of the type of journalism that surrounds this debate, with less on the reasons for either side of the argument but more on the people who back the remain or leave campaigns. While I don’t doubt such celebrity endorsements can be used effectively by each sides campaign I worry that such articles will convince the British people to vote either way for the wrong reasons. Additionally, YouGov conducted research on how people thought fictional characters might vote in the EU referendum and all I can think is ‘who cares?’.

The campaigns have become too focused on people, but not ‘the people’ who matter, us. It is our everyday lives that will be effected by the result of the referendum so it is important that come Thursday 23 June you go out to vote for what you believe. This is a once in a lifetime vote. In this post I will discuss the important matters to give you a guide of what could happen if we vote each way. Personally I will be voting to remain in the EU, but on either side there is uncertainty of what the outcome will be.

National Sovereignty. The leave campaign claim that the UK gets bossed around by Brussel’s, however since 1999 the UK has been on the winning side of decisions 2466 compared to being outvoted just 56 times (just 2.27% of decisions). Although some UK laws are made in Brussels and other member states can force through laws against the UK’s wishes, this is rarely the case. Even so, Britain retains a veto in many important areas and additionally Cameron’s EU deal allows national parliaments to block EU legislation.

Immigration. As mentioned in a previous post, most peoples concerns over immigration are shown to be wrong as in total EU migration helps to benefit the UK economy. However, as I am from the East Midlands I understand many concerns as I have seen first hand ghettos forming within this country, driving out many UK natives as they are being ‘overrun’. Nevertheless, I believe the free movement of people within the EU and being part of this would be better for the UK.

Trade. Currently, as a member of the EU we can trade freely with other member states, with around half of the UK’s overseas trade with Europe. If we were to leave the EU, it is likely this trade would reduce, causing some firms to struggle and the likely result is higher unemployment. The leave campaign points to other countries which trade freely with the EU without being a member state, for example the Swiss model. However, such a transformation for the UK not guaranteed as trade deals cannot be made overnight and there are many risks that high EU trade barriers could become a problem for UK export industries. Not forgetting likely higher prices for imported goods, reducing overall consumer welfare. So there is too much uncertainty for trade if we were to leave for my liking.

Uncertainty. In this run up to the referendum uncertainty is high. Will we leave? What happens if there is a Brexit? What will the future hold? Simple economics can tell you that uncertainty can lead to a slowing economy through a fall in spending and investment as no one really knows what will happen in the future. Q2 growth in the UK is expected to fall to 0.2% from 0.4% in Q1 due to the uncertainty of the referendum result. If we vote to leave the EU, the future will be uncertain, it is likely that growth will slow further. This link http://www.ft.com/cms/s/2/0260242c-370b-11e6-9a05-82a9b15a8ee7.html#axzz4CDpif0Pv gives an excellent explanation of the possible consequences a Brexit might have.

Therefore, while I have not covered every possible topic up for debate in this referendum, I hope I have provided a clearer understanding as to the reasons why some people want to leave or stay in the EU. The only thing that we know is that the future is uncertain, whether we leave or stay with high political pressure on both sides. In my view, we should stay in the European Union as we gain more from it than we contribute and the future if we leave is uncertain with many promises that will be broken from the leave campaign.

Immigration: Why we should have more, not less.

 

In the UK, immigration has become an increasingly sensitive issue, with many opposing the free movement of labour within the EU. Many people have negative opinions on immigration, however they do not see the positive effects immigrants have on the economy. Larger immigration flows have positive effects fiscally, on the labour market and on total factor productivity and growth, therefore skilled immigration should be encouraged by governments.

The Roy model shows how immigrants choose to migrate, shown in the figure. In the UK, there are high returns to skills so immigrants tend to be positively selected, for example on average immigrants have 1.1 more years of schooling than natives (Bell, 1997). Therefore, migrants from the EU on average are more highly skilled than UK natives, providing the basis for positive immigration effects.

peopling-of-new-york-city-lecture-4-slides-8-728

One criticism of large numbers of immigrants is the negative effect on wages, however it has been convincingly shown that there are small effects on the relative wages of natives (Card, 2009). Similarly, following the Mariel boatlift natural experiment in 1980, despite a 7% increase in the local population (mostly unskilled), there was no effect on the wages or employment outcomes of natives and there was little effect on the outcomes for other immigrants since industries were able to absorb the migrants (Card, 1990). Therefore, this suggests the immigration surplus is small, however for skilled migrants this immigrant surplus is larger due to production complementarities between skilled labour and capital (Borjas, 1995). Therefore, although immigration may lower the wages of skilled workers, this is more beneficial to firms and may help to reduce inequality (Card, 2009). Further, Goldin suggests that immigrants are complementary to native workers, making notable contributions to innovations, increasing wages in the long term.

Moreover, the immigration surplus benefits consumers as a 10% increase in immigration reduces the cost of immigrant-intensive services such as gardening by 2% (Cortes, 2008). Further consumer benefits come as an increase in skilled labour from the Soviet Union was showed to reduce consumer prices since these workers have higher elasticities and lower search costs (Lach, 2007).

In Exceptional People, Goldin points out that people dislike sharing with people ‘unlike’ themselves, therefore they dislike immigrants benefit shopping. However, in the UK, immigration has been shown to be beneficial to the economy fiscally. Between 2000-11, migrants from EU-15 paid 64% more in taxes than they received in transfers and benefits. Those from the accession countries contributed around 12% more, this is while the government runs a deficit showing further the positive impact of migrants (Dustmann & Frattini, 2014). Therefore, opinions about migrants not paying their fair share are unconvincing.

However, since governments believe migrants are considered a socioeconomic underclass they do not always realise their potential, for example the UK government restricting EU migrants access to the welfare state for 4 years in a newly negotiated deal with the EU may deter some immigrants away. However, such policies such as the PBS introduced in 2008/10 ensures skilled non-EEA migrants are allowed entry. In a paper for the IEA, Gary Becker suggested making a market for migration through pricing visas in order to only allow entry to those who would gain the most from it and therefore add the most to the UK economy. Such a policy would be more efficient than immigration quotas and would also raise government revenue.

Additionally, improved productivity and growth from immigration shows further benefits. In a paper for the IEA, Portes showed that immigration brings different complementary skills to the country, benefitting long run productivity and growth. For example, innovation. Goldin states 25% of patent applications in the US are from immigrants (who make up just 12% of the population). In the UK, in a study for the National Institute for Economic and Social Research (NIESR), Max Nathan showed immigrants have similar innovative effects. Therefore, in the long term immigration has positive effects on growth through improvements in total factor productivity (Ortega & Peri, 2013).

In conclusion, the effects of immigration are largely positive and rather than aim to reduce immigration in the UK, the government should instead provide greater incentives for skilled workers immigrate.

 

Works cited

Becker, G. (2011). The Challenge of Immigration: A Radical Solution.

Bell, B. D. (1997). The Performance of Immigrants in the United Kingdom: Evidence from the GHS. The Economic Journal.

Borjas, G. J. (1995). The Economic Benefits from Immigration.

Card, D. (1990). The Impact of the Mariel Boatlift on the Miami Labor Market.

Card, D. (2009). Immigration and Inequality.

Cortes, P. (2008). The Effect of Low-Skilled Immigration on U.S. Prices: Evidence from CPI Data.

Dustmann, C., & Frattini, T. (2014). The Fiscal Effects of Immigration to the UK.

Goldin, I. (2011). Exceptional People.

Lach, S. (2007). Immigration and Prices.

Ortega, F., & Peri, G. (2013). The Effect of Trade and Migration on Income.

Portes, J. (2016). The Economic Case for Migration .