Raining on the Royal Wedding

Today was of course, the royal wedding and a day of national celebration so as only an economist can do, i must dampen the situation. It is thought that the royal wedding could potentially bring in a £107 million to the city of London. This seems positive news however, the UK economy will experience a much greater loss due to the bank holidays recently. Over a 2 week period there will have been 4 bank holidays which means that the economy is effectively not producing and so there is a loss of productivity. This could equate to a fall in GDP of 0.1% this year or £1.5 billion. When this is added to the security costs of the day which are around £20 million, which is coming from the taxpayers, suddenly it is looking like a rather expensive day. When this is coupled with the recent growth reports of 0.5% which were published on wednesday, could the royal wedding cause the UK economy to slip into a double-dip recession?

This whole situation ties in nicely with my current revision for my final economics A-level exam. Does the royal wedding illustrate the limitations of GDP as an indicator of living standards. The general idea is that higher GDP levels indicate higher standards of living and happiness. However, here we see that GDP may fall due to the royal wedding and recent bank holidays but the most people would be happier with the extra days off work and sense of national pride that the wedding has caused. Therefore, if GDP were to fall we must not think that living standards are deteriorating. After all, Happy workers are good workers.

Growth!!

Struggling for time at the moment as i am preparing for my A2s so this blog has had to be put to one side. However, growth figures released today show that the UK economy grew by 0.5% in the first 3 months of 2011, Yipppeeeee! Here is the article which explains it further and shows how uncertain times ahead still are. http://www.bbc.co.uk/news/business-13206430

The North Caucasus...

I have just read a really good article in The Economist (9th-15th April edition), it is entitled "From Moscow to Mecca" and it raises a couple of interesting points. In short the article tells us how fundamental islam is taking a strong grip on the region of North Caucasus in Russia. The area is dominated by muslims who are separated into two main groups, Sufis and Salafis. Sufism is a traditional form of islam which recognises the state and includes local customs. Salafism however, rejects the state and insists that islam should "rule all spheres of life". This separation led to the second Chechen war in 1999 where the different ideologies clashed and the police and Russian army sided with the Sufis. What is striking from the Russian prospective is that the state have not done themselves any favours in the fact that they have not been trying to conquer the "Hearts and Minds" of their opponents. The police is often responsible for brutality which goes unpunished and the abolishment of local elections has led to an increase in support for the fundamentalists. 50% of the population of Novosasitli (a region within North Caucasus) now consider themselves Salafis, an increase of 40 percentage points on ten years ago. It seems that Russia is straining to stay intact. From an economists point of view, what this shows is that Russia is too large a country with many different ethnic groups to be ruled centrally. Is Russia showing managerial diseconomies of scale? What is true however is that local elections need to be reintroduced so that the people of North Caucasus can elect their leaders themselves (at present leaders are appointed directly from the Kremlin) which would hopefully stem some of the violence. What can also be seen from this situation is the effect it would have on the Russian economy. The violence, corruption and political instability is holding back economic growth for the region which would help to win over the "Hearts and Minds" of the people. Surely if the economy was prospering the violence and insecurity would subside.

Good News. Really?

Recent unemployment and inflation figures released recently have shown that unemployment has fallen by 17,000 in the three months leading to the end of Feb and CPI inflation has fallen by 0.4% on last month to 4%. Could this mean that we are out of the woods and that we are on the road to recovery?

Well, it appears that the unexpected fall in inflation was mainly due to falling food prices (which fell by 1.4% on this time last year) and by increased exports (up 15% from this time last year). On the unemployment front, it appears that the fall must be due to the private sector as the spending cuts are increasing public sector job losses. I am surprised that unemployment has fallen as ONS figures have shown that wages grew on average by 2% in the year to February. This is well below the level of inflation and so indicates that real wages have fallen, which puts a squeeze on consumer spending power. This should reduce aggregate demand and therefore increase demand-deficient unemployment. I fear money illusion may be at work.

Getting back to my question, it is feared that once the public sector spending cuts have been implemented fully, unemployment will rise again. Also, if oil prices rise for many reasons ( eg increased global demand or Libyan crisis continuing) this will further increase inflationary pressures and put different kinds of pressures on the MCP to increase interest rates. In short, i dont think we are out of the woods yet. Although the recent figures are positive, the outlook continues to look rather bleak on the unemployment and inflation fronts. Maybe one way to solve both problems is to substitute automated processes with more labour intensive ones if oil prices continue to rise and wage growth remains stagnant.

The euro continued...

Just found this really interesting article from Stephanie Flanders blog, definitely worth a look.Economics vs Politics in the eurozone. A point that she makes is that the rise in the base rate will hurt the countries that least need it ( Ireland, Portugal etc) as they have floating interest rates which vary according to the base rate. This comes on the back of the Portugal bail out request. Is the eurozone unravelling at the seams?

Currency boards and the "tequila crisis"

Just started reading a new book by Krugman about the financial crisis of 2008. Anyway, he talks about the "tequila crisis" in Latin America and mentions a rather interesting situation called a currency board. Basically it is a situation where the currency of one country is pegged to another currency at a fixed exchange rate. In Argentina's case, the peso was pegged to the US Dollar at a one to one ratio which helped to curb the soaring inflation as the number of pesos in circulation equal the reserves of dollars the central bank in argentina have. This is so that every peso is covered for if they are wanted to be exchanged for dollars. As the story continues this leads to the peso being overvalued which leads them to depreciate it (hoping for export led growth and renewed foreign investment). What i found interesting in the story was this devaluation led to a financial collapse as foreign investors anticipated a further fall and signaled that the economy was in trouble. The idea of a currency board therefore doesnt seem like a good idea in the case for Argnetina but it is an effective way of slowing down rises in the money supply as new notes can only be printed in exchange for currency against which the domestic currency is pegged. Learn something new everyday.

Tuition Fees... The Debate.

The recent Browne review of university funding has concluded that from September 2012 universities will be able to charge students up to £9000 per year, up from the current level of £3,290. This is obviously very disappointing for students and means that graduates with a three year course could face debts around £38000 (if the maximum fees are charged). I want to examine why these changes have occurred and what effects they will have on higher education. I will not dwell on the politics of the situation as the hypocrisy of the Lib Dems has been very well documented recently. I want to concentrate on the economics of the matter.

Firstly, the rise in tuition fees has been necessary following the recent news that 40% would be cut from the higher education budget over the next 4 years. The rise in tuition fees is therefore needed to recover these losses. Having met with Richard Williams, Pro-Vice Chancellor of Leeds university, he disclosed that currently it costs Leeds university £21000 per medical student per year to educate. Therefore it seems that at present these students are getting an incredibly good deal and maybe they should be charged higher fees, especially as Doctors are well paid. Without the tuition fee rises the quality of teaching would inevitably fall.

Secondly, will the tuition fee rises lead to an elitist situation where only the very rich can afford to go to university? Well history tells us this may not be the case. The Higher Education Act of 2004 which allowed fees to rise to the current level from £1000 per year sparked massive debate. Many thought that this decision would reduce the number of university students but in fact the opposite has been true where now universities are not able to cope with the number of applicants. Now i know that the increase this time around is a much larger increase  (in real terms) but history may indicate that demand for higher education may not fall by as much as expected. What is more concerning about the top up fees is that universities may now try and compete on price. This may mean that very strong candidates from poorer backgrounds may be disincentivized to apply to the best universities (which will charge the maximum fees) because they feel they can not afford to. Oxford university has said however that it will charge lower fees to students from deprived backgrounds as well as increasing the number of bursaries available. This price competition situation looks unlikely to occur however as 21 universities have already confirmed they will charge the maximum fees to students. What the top up fees should do though is to encourage students to think if university is really right for them. I am not saying that people shouldnt go to university but some students may just go to university for the sake of delaying getting a job. Many jobs do not require a university education and the fee rises may encourage students to further their education in other ways such as apprentices etc.

What is interesting is whether these top up fees will be profitable for the government. It is estimated that 70% of graduates will not fully pay back their loans for which the taxpayers will have to pick up the bill. Now, im sure the government have done their maths and got the figures right but because of the changes to the way the loans are repaid this could be a very expensive (and unpopular) mistake if they've got it wrong. Just a thought