Warnings of hysteresis for the EU economy

The recession and financial crisis may lead to a permanent loss in potential economic output and a slower trend rate of growth in the future according to a new study by the European Commission. The fall in potential GDP will be an example of hysteresis effects across the European economy and the cyclical downturn in output and jobs creates long term damage.

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Newspapers and Micropayments

Geoff has written an excellent piece for econoMAX, our digital magazine for A Level Economics Teachers and Students on whether and how newspapers should charge for content.  For those of you who are new to econoMAX, here is the article:

Micropayments and the Economics of Newspapers

The Hunt Continues…

I am still looking to fill a vacancy for September. Do get in touch if you are interested.

Calling all Business Studies and Economics teachers: If you are looking for a job from September I would be very interested to hear from you. I have a vacancy in the department for a full time teacher. We offer GCSE, A Level and IB Economics and Business Studies.

Email me directly if you are interested and would like further details, I would be delighted to hear from you (jmace@warminsterschool.org.uk).

The school website.

Credit card cheques as a demerit good

The government has announced a move to ban credit card cheques addressing the issue of the soaring value of UK consumer debt.  The move is part of a broader range of measures that attempts to partly bridge the informational failures (and resultant market failure) that lead to consumers inadvertently taking on debt that is beyond their means; and this recent measure highlights the government’s view on it as a demerit good.

Should museum entry be free?

Here is a link to a discussion on the Today programme between Dr Michael Dixon, of the Natural History museum, and Guardian columnist Simon Jenkins, also chairman of the National Trust. A good resource as an introduction to any lesson on museums, charges and the costs and benefits of a free entrance policy.

Two VAT Stories - Sports Goods and Restaurants

Changing the rate of value added tax (VAT applied to a product should bring about a change in the retail price of a good or service to the consumer. The current rate of VAT in the UK is 15% following a temporary cut from 17.5% in November 2008. Today the Public Health Commission has started to lobby for a reduction in VAT to the min rate allowed under EU law - 5% - for products such as sports equipment. The justification is that lower prices will increase the affordability of leisure products and help encourage more people to follow a healthy life style. As always a reduction in an ad valorem tax will have a great impact on the price of more expensive equipment - for example the £1000+ cost of a concept 2 rower compared to an entry level tennis racket. The arguments are raised in this BBC news article.

Across the Channel the cost of eating out will fall as a result of a cut in VAT by the French government. Value-added tax (VAT) has been reduced from 19.6% to 5.5%, in an attempt to increase consumer spending and create thousands of jobs.

On a different matter I didn’t realise until last week that VAT is applied to razor blades - one reason (but not the main one) behind the scandalously high prices that the likes of Gillette and Wilkinson Sword charge for their cartridges.

One and Five keeps Bingo alive

An increase in the tax on the profits of bingo companies was the subject of a demonstration in London today. The new tax will be 22% up from the previous level of 15% and campaigners argue that this will lead bingo companies to raise admission prices or perhaps cut prize money on offer. The bingo industry has already come under pressure from the smoking ban and changes in gambling laws which have limited the types of fruit machines allowed on their premises. For hundreds of thousands of elderly people bingo is a regular pastime, indeed it is part of the social fabric of many less affluent areas. But the demand for bingo halls has declined over the years - an example perhaps of a service which has a negative income elasticity of demand.  The Bingo Association is fighting to have the tax hike reversed but unless there is a change of government, they are unlikely to strike lucky.

The tax rise does seem inequitable especially as bookmakers, the football pools and casinos pay a gross profits tax of 15 per cent - surely bingo is at the softer end of the gambling industry?

Volterra Insights

Volterra Consulting are producing eInsight a free email service where their economists summarise some of the most interesting developments and economic indicators. Their 2nd edition provides some insights on oil prices, unemployment as a lagging indicator and what to look for in terms of green shoots. Head to Volterra for further details

East Coast Rail Line is Nationalised

The East Coast rail line north of Newcastle heading into Northumberland towards Berwick upon Tweed is one of the most glorious on the entire rail network. There are stunning views looking out to Holy Island, Bamburgh Castle and the delightful village of Alnmouth. And as trains pull out of Durham there is a simply fantastic panorama featuring Durham Cathedral, a view to take the breath away whatever the weather. Even the most hardened commuter is tempted away from their laptops to soak up the view. It is unlikely that senior executives at National Express will be in the mood to savour these delights today since the government is taking the East Coast rail line that runs from London to Edinburgh into public ownership.

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E.T… Phone home…

The role of competition commissions around the world is to protect the public interest, particularly against firms abusing their dominant positions.  In this light, another victory has been struck by the EU Competition Commission today as an earlier judgement comes finally into force as the cost of sending text messages when abroad has been capped.  We’ve also seen a fall in the maximum charge for receiving and making a phone call, whilst abroad. 

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Spending £75 for a piece of 3D card?

…or £75 for a limited edition souvenir that may rise in value in the future – which of these is rational? This debate is raging on many blogs following an offer from AEG, the promoters of the Michael Jackson ‘This is it’ tour that would have commenced later this month in London. Approximately 800,000 people have already paid from £50 to £75 for the tickets, and will now be given the option of having their money back or of receiving the ‘souvenir tickets’ – and no refund. AEG say that the tickets feature graphics ‘inspired and designed’ by Jackson, and will become collectors pieces. A quick scan through the comments following this piece on the BBC website gives a roughly even split between those who want their money back and see the offer as AEG trying to keep the cash, and those who welcome it as a way of having something to keep as a ‘personal memento’ of the singer. Very much a matter of personal opinion and so open to irrational, non-economic thought, and could be an example of behavioural economics.

Announcing the tutor2u Economics Moodle VLE for 2009/2010

Details of our Moodle-based Economics VLE are now available.  We’ve had tremendous positive feedback on the trial version of the Economics VLE which has been developed over the last 15 months with the help of colleagues in several schools and colleges.  Now your students and departmental colleagues can join in the collaborative approach which has been so successful to-date.

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Jacko and the Depth of the Recession

Sorry for the gratuitous link with the recently-departed ‘Prince of Pop’ but according to Philip Thornton (formerly of the Independent and now running Clarity Economics) the year on year GDP decline is now the steepest since the year Michael Jackson was born. Perhaps the revised data for the second quarter will “beat it”.

Petrol-Diesel Price Difference Narrows

Crude oil prices are heading towards $75 a barrel as speculators bet on a stronger-than -expected global economic recovery and naturally prices for fuel on the forecourts are heading northwards too. But an interesting feature of the latest price changes is the narrowing of the price premium that drivers with diesel-fuelled vehicles must pay. Apparently the closing of the gap is due to a relative abundance of diesel fuel stocks on the international market.

The name comes from German inventor Rudolf Diesel, who built the first diesel-powered engine in 1892

Madoff’s behaviour

Dan Ariely applying behavioural economics to Madoff’s $65 billion dollar fraud. And an earlier article that discusses human irrationality when it comes to herding behaviour.

A cookie for anyone who makes the link with the photo below.

Greg Woods reports on Madoff’s sentencing in New York

Less is more - Universal phone chargers…

We’ve all experienced the scenario at some point – you go away for the weekend and you’ve left your mobile phone charger at home, but all your friends have different phones and none of their chargers fits your phone. Well, you may never have to go through that frustration again! An agreement has almost been reached on universal phone chargers

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Rise in Baltic Dry Index hints that worst of global trade slump may be over

Shipping the world’s goods around the globe is often used as a guide to the overall health of the world economy and the extent of globalisation in tangible products. The Baltic Dry Index provides a signal about the strength of demand for freight in the world index - the index is the market place for the buying and selling of shipping freight contracts and the value of the Baltic Dry seems to have recovered a little from the lows of a few months ago, largely it appears on the back of a rise in demand for cargo into the Chinese economy. This BBC video provides good background on the recent volatility in the value of the Baltic Dry Index.

UK Recession - Deep Very Deep

The latest set of macroeconomic indicators for the UK show the steepest quarterly decline in national output for over fifty years. GDP in real terms in the first quarter of 2009 fell by 2.4 per cent compared with the previous quarter driven lower by an especially weak construction sector. Construction output fell 6.9 per cent compared with a fall of 5.0 per cent in the previous quarter. The wider measure of industrial production was 5.1% down on the quarter and capital spending fell 7.5 per cent and is now 13.2 per cent below the first quarter of 2008.

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Mobile Takeovers - Who will gain if five becomes four?

The press is full of coverage about a possible takeover bid by Vodafone for T-Mobile UK which is currently owned by Deutsche Telekom. Nothing is certain yet - but if a takeover goes ahead and is allowed by the competition authorities, Vodafone will have around 40 per cent of the market for mobile phone users in the UK.

The approximate market shares would look something like this:
Vodafone 40%
O2 (owned by Spain’s Telefónica) 27%
Orange (owned by France Telecom) 22%
3 (owned by Hutchison Whampoa) 8%

If Vodafone and T-Mobile become one business there is one obvious cost saving (or synergy) - namely that the merged business would have to run only one mobile network instead of two, for example, so Vodafone could aim to secure significant savings in capital and operating spending. For any would-be purchaser the risk is over-paying for a business, there are plenty of examples of the ‘winners’ curse’ in past takeover bids.

The mobile phone market is a classic case of an oligopoly with just a handful of corporations dominating the market - but you do not always need a large number of operators to create genuine price and non-price competition in the industry. Indeed the UK is the only major European market with five mobile operators, and some analysts claim that the fierce battle for market share has had the effect of cutting profit margins and reducing the profits needed to reinvest in rolling out the next generation of mobile phone technology and improving the speed and reliability of a mobile phone network that needs to cope with an ever-increasing number of data-rich applications.

Having four rather than five major players looks on the surface to be reducing competition, but perhaps all of the remaining businesses will gain from higher profits at a time when the recession has hit the demand for new handsets and mobile phone services. Vodafone is a giant in the industry reporting revenues of £41bn for the year to March 31, 2009 and an operating profit of £11.8bn.

In the mobile phone service provider market there is always a balance to be struck between economic efficiency and welfare. Competition keeps prices down for consumers and helps to make fast mobile connections more affordable to millions. But the businesses themselves must be able to finance investment on enormous networks and generate a sufficient rate of return for their shareholders. It will be interesting to see how the competition authorities respond to the next wave of consolidation in the industry.

Game Theory and North Korea

In the post-AS lull, we have been studying the basics of game theory; and this week had a great discussion on game theory applied to the current political hot potato that is North Korea and its nuclear program.  Various aspects of game theory can be applied to the issue of North Korea’s nuclear programme, from credible threats, brinkmanship, to dominant strategies. 

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EconoBlog

Sean O’Grady at the Independent has a newly launched blog - well worth popping over to

Buffett’s Veblen buffet

Whilst it seems that a dinner with the legendary investor Warren Buffett still retains its Veblen good features (when peoples’ preference for buying a good increases as a direct function of its price, instead of decreasing according to the standard laws of demand); it seems that it also has an inelastic YED, with the credit crunch having a limited impact.

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Government failure in the opium trade

This article in the Financial Times is excellent for discussing how to resolve market failures of demerit goods like opium, and the associated government failure that can occur alongside it. 

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Guardian Interactive Guide - UK Unemployment

This is an excellent interactive guide to changes in UK unemployment and employment over the last twenty five years

Land grabs and market power in retailing

The Observer carries an article today which focuses on what appears to be a spending spree by cash-rich supermarkets to take advantage of falling demand for and prices in the commercial property market.

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Exchange Rates Quiz

Do you know your dongs from your ringgits?  And what currency do they use in Belarus?  Try this starter quiz to test your knowledge on foreign currencies.

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BoE Health Check on the UK Economy

The Bank of England has released its latest health check on the stability (or otherwise) of the UK financial system.

Without a recovery in financial sector balance sheets and a return of an appetite to lend and unfreeze the supply of credit, any recovery will be delayed and weak.

Banks continue to de-leverage aggressively and I have met several owners of profitable and well managed smaller businesses in recent weeks who have complained that their banks are getting in touch directly to change the conditions of their credit facilities. In some cases the banks are adding 1 or 2 per cent to the rates charged for overdrafts and loans - which themselves are already a high multiple of the policy interest rate. It is the banking equivalent of the rip-off extra charges for people flying with the lower-cost airlines.

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Status races - PTA school fete wars hot up

This delightful feature in the Times looks at the increasingly bitter battle to offer the best prizes or the most opulent home-made food for Parent Teacher Association events. The school fete provides an ideal breeding ground for Mum and Dad to display their high relative income. From the rapid bidding wars at prize auctions to organic meat providing the stuffing for £6 burgers, here we have yet further proof of the desire to be seen consuming and offering more than your rivals. It is a welcome relief that some schools are making a point of scaling back such displays of wealth and going back to basics. 

Is recession the mother of invention

A snappy and relevant discussion on the Today programme about how recessionary conditions can provide an impetus to invention and innovation.

Corus culls jobs as global steel output slumps

Hundreds of workers will lose their jobs in a huge jobs cull by steelworker Corus as a result of the slump in global steel demand.

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