Equilibrium - Issue 4

EQUILIBRIUM LITE IN THIS ISSUE UK & GLOBAL NEWS UPDATE INFLATION POST COVID: IS IT INEVITABLE? THE SECOND SUEZ CRISIS? TEST AND TRACE: MONEY DOWN THE DRAIN? NEGATIVE INTEREST RATE: A BRIGHT FUTURE? BOOK REVIEW: WHO COOKED ADAM SMITH'S DINNER? A WALK TO THE PARK...THROUGH THE EYES OF AN ECONOMIST MAY 2021 ISSUE 4

UK & GLOBAL NEWS UPDATE ZAVER DHANANI & JOSH HEIMANN UK Update: The Institute of Economic Affairs published a paper saying that debt incurred during the pandemic “can be coped with” and argued against raising taxes to reduce it, believing economic growth and deregulation will cut borrowing.

UK house prices are 7.1% higher than they were this time last year, rising by an average of £15,926. Economists associate this with the halt in the supply of houses, as well as changes in confidence during the pandemic, however some are wary that this is an early sign of the housing ‘bubble about to burst’.

The UK car market is being hit by a global microchip shortage as a consequence of the pandemic. A lack of chips, which has previously affected the supply of PS5 and Xboxes has now made its way to the car industry. As a result, brands such as JLR, Renault and VW are planning temporary shutdowns at some plants.

Ford is investing US$22bn in electric technology globally by 2025, making the group the largest carmaker so far to pledge all-electric sales by 2030 in the UK and Europe.

Global Update: Financial markets recently worried about collapsing growth and falling prices have changed sentiment. They are now focused on inflation as a result supply shortages and higher commodity prices.

President Biden recently announced plans for a US$2.2 trillion infrastructure bill, as well as corporation tax hikes from 21% to 28%, and a more rigorous climate change plan including aiming for the US to be net zero by 2050.

Finance ministers from the G20 group of the world’s largest economies are exploring a global minimum tax on corporate profits, amid growing international consensus on tackling avoidance.

US GDP grew 1.6% in Q1 2021 fuelled by a jump in consumer spending.

However the Eurozone fell into recession, as the combined GDP of the 19 countries shrank 0.6% on the back of a slow vaccine rollout and an increase in pandemic restrictions.

The IMF has announced a US$650 billion currency boost, intending to help countries’ currencies without adding to debt burdens. However some economists are sceptical of this, and believe that a global restructuring of nations’ debts is needed instead, a much more difficult and complicated task.

INFLATION POST COVID: IS A HIKE INEVITABLE? HANNAH MOSHAL & HATTIE BOLCHOVER Inflation is the sustained rise in the general price level, leading to a fall in the purchasing power of money. The UK is committed to its aim to keep inflation low and stable at 2%, which in normal times, allows for economic growth without the consequences of inflation.

However, at the height of the coronavirus pandemic, governments of wealthy countries around the world started piling money into the economy in order to help those who lost their jobs due to the obvious fall in output as a consequence of the national lockdowns. This could result in an ‘overheating’ of the economy, with money pouring in but no corresponding goods or services being produced. An example of this was the furlough scheme, where anyone unemployed due to the pandemic was offered 80% of their pre-pandemic salary.

Although at the time, this seemed necessary to reduce relative poverty and reduce redundancies, it has come at a cost, increasing government spending and borrowing has added to inflationary pressures. Government spending has also increased in relation to quantitative easing. Quantitative easing involves electronically creating money to purchase government bonds which increases the liquidity of banks and lowers interest rates.

Furthermore, economists are predicting a spending spree once restrictions are lifted, that will outpace the ability of firms to restore and expand their capacity in time, leading to a rise of prices.

An equally important of question to ask is: how will inflation impact UK consumers?

The UK economy may be able to manage this burst of inflation due to economic uncertainty, with job insecurity still high and economic anticipations still low, it is not guaranteed that consumers will spend when restrictions are lifted.

Inflation poses a threat to the economy and to the consumers of the UK. Rising inflation will have an adverse impact on the competitiveness of the UK economy (UK prices will be higher than other prices worldwide leading to less people purchasing UK goods and more UK citizens turning to foreign markets). However, the extent to which this happens will depend on the relative rate of inflation in key trading partners. Biden promised a $2.2 trillion stimulus in America and in January, retail sales were 7.4% higher than a year earlier, suggesting inflationary pressure in the US. Additionally for individuals, If wages in the UK do not rise with prices, the standard of living will fall. If we have learnt anything from the events of the last year, it is the importance of preparing for rare events, the return of inflation is no exception.

Source: Bank of England’s Inflation Expectations: Monetary Policy Report, May 2021.

THE SECOND SUEZ CRISIS? JOSH HEIMANN In late October 1956 a shock wave was sent throughout the world when the Suez Crisis had began leading to a bloody conflict between Egypt, Britain, France and Israel. Sixty‐five years later another crisis would happen in the Suez Canal, this time not involving tanks or battleships, rather a single cargo ship that affected all corners of the world’s economy.

On 23rd March the Ever Given, one of the world’s largest container ships, unexplainably became stuck in the middle of the Suez Canal. Apart from just disrupting the delivery of the 18,300 containers it carried, the ship blocked access to over 400 ships also attempting to pass through the canal. The Suez Canal is one of if not arguably the most important transport routes in the world, connecting Europe to Asia. Around 12% of global trade passes through it. Just as an example, over 2 million barrels of oil and around 8% of global liquefied natural gas, both essential commodities, pass through each day. The blockage which lasted until 29th March didn’t just affect the Egyptian economy or the global shipping industry but impacted ecommerce orders placed by European consumers.

It is estimated that the stranded ship was holding up approximately US$9.6 billion of trade, costing global trade US$6.7 million a minute. Further freight prices, the price of transporting goods via cargo ships, between China and the Mediterranean Sea increased by 500% from a year ago. There were knock‐on delays at major ports and a huge loss of many perishable items. Specifically microchips, already experiencing a global shortage, were delayed impacting everything from video games to cars.

Other short‐term effects were that many ships were forced to divert their route, going around Africa, adding an extra 9 days to their journey and exposing many ships to the dangers of Somalian pirates. Additionally many manufacturers were forced to use air travel to transport their goods, which costs over 3 times that of shipping.Finally, thousands of shipping containers have not returned back to producers in Asia, which has caused huge delays in the shipping of future goods.

Producers are still waiting for spare containers and it is believed that the full effect of this crisis will be felt for the next 3 months and potentially for the next year.

TEST AND TRACE: MONEY DOWN THE DRAIN? EMMA CHOPPING Over two years, £37 billion has been allocated to the government’s test and trace program, £22bn for 2020-21 and £15bn for 2021-22. For comparison, in 2019-20 £46.5bn was spent on secondary school education. When it was introduced, the aim of the system was to prevent a second lockdown, yet since then we have had two more, so on that front it has failed.

“The promise on which this huge expense was justified- avoiding another lockdown- has been broken, twice.” -Meg Hillier MP, chair of the Public Accounts Committee The government has been criticised for assigning contracts, worth billions of taxpayers’ pounds, as direct rewards to without competition and without the usual tendering process; however, it was claimed that the urgent need for a system called for such fast and direct measures.

The key statistics are: NHS T&T has 2,500 consultants The highest daily rate paid is £6,624, in a month £198,720, meaning in one month the top consultants could earn more than the PM could in a year.

Test and Trace has contacted 2.5 million people testing positive, and advised a further 4.5 million who may have been in contact with the virus to self-isolate In the UK there have been 4.4 million confirmed cases of coronavirus.

Whilst the fast and expansive rollout of the testing system was impressive, the actual tracing system less so. The system was limited due to the fact that not everyone was willing or able to download the tracking app, have bluetooth on constantly and willingly sign in to every venue they entered.

The Test and Trace system is an example of government intervention. This is regulatory action taken by government that seek to change the decisions made by individuals, groups, and organisations about social and economic matters. The government intervenes when there is a market failure (when a freely functioning market is not allocating resources efficiently). The government intervened in this situation due to under-provision of testing services. However, some may argue that due to policy myopia, which is when the government looks for a “quick fix” solution, and excessive costs, the Test and Trace system was an example of government failure.

NEGATIVE INTEREST RATES: A BRIGHT FUTURE? ZAVER DHANANI Early this year, the Bank of England (the England’s Central Bank) (BoE) was reported to have instructed banks to prepare for negative interest rates. What are they and why could they be a potential tool to achieve the country’s economic objectives?

What are interest rates (IR)? If you’re a borrower, the IR is the amount you are charged for borrowing money. Interest is what you pay for the privilege. If you’re a saver, it’s the same except the interest is paid to you – because banks are paying to hire your money. The Bank Rate is the most important rate in the UK. It determines the rate at which the BoE lends money to commercial banks. It therefore influences the rates at which commercial banks charge people to borrow money or pay on their savings. The current rate is 0.1%. A negative IR means the effective rate would be below 0%.

Positive Impacts of Negative IRs on GDP:. Economists expect that negative IRs will have an expansionary effect on household consumption. This is because banks will be incentivised to lend money due as they will be charged for holding capital with the BoE. In turn, households will have access to cheaper loans and will not receive any return on their savings which is expected to lead to UK households opting to spend their disposable income, stimulating consumption. Additionally, government spending is likely to remain high. Lower IRs will make it cheaper for the Treasury to borrow in order to finance government expenditures, especially given the need to nurture the pandemicweakened economy. Further to this investment by businesses would be expected to accelerate. Commercial banks are incentivised to lend money to firms as otherwise they would be charged for capital held with the BoE. Increased consumption, increased government spending and increased invested would collectively drive GDP growth.

Risks associated with Negative interest Rates: One possible risk is called a ‘liquidity trap’, when despite negative or low IRs households remain cautious and uncertain about their economic prospects and don’t spend. Secondly, commercial banks could make less profit due to the lower interest earned on their loans, combined with the new interest charge from the BoE for holding their capital.

So...are Negative IRs a good economic policy for the BoE to adopt? Negative IRs are likely to have a positive impact on each GDP element. Thus, they could be a useful tool for the UK in its recovery from the pandemic. Negative IRs should ideally be used as part of a broader arsenal of monetary and fiscal policy working constructively together.

BOOK REVIEW: WHO COOKED ADAM SMITH'S DINNER? HANNAH MOSHAL I found this book to be such a fast-paced, exciting and enjoyable read, that I finished it scarcely 24 hours after it arrived in the post. This is unsurprising, seeing as it was a perfect blend of two of my favourite topics, economics and feminism. Economics is a discipline, like many other academic fields, where women and their achievements are severely undermined. Marçal writes with a specific focus on the role women play in the economy, ranging from non-monetary work such as housework, and female immigration in pursuit of employment, to the frequent discrimination women face in the workplace. She explores how these culminate to create a world that blocks women from economic opportunities, leading to only ‘15 female heads found on the Forbes 500 list’.

Marçal explores the anti-feminist research conducted by economists at Chicago University, who wrongly argued that women earned less money as a consequence of lower productivity. Research showed that well-educated women earned less than an equally educated man lead to various explanations, which Marçal succinctly tackled, leading to an overall conclusion that, there is no valid reason why women should be earning less than men. It was interesting to receive an insight into the way economists behave and perform, making changes to their theories, often going round in circles, as was the case of the Chicago economists.

Marçal also explores behavioural economics, namely flaws within the ‘homo economicus' assumption that economists make. She continues to assess the way women simply do not fit into this mould because they are not an ‘economic man’ that is assumed to be unemotional, objective and lacking in complexity. This links in with the way biological excuses and women’s bodies are often used to justify the patriarchy, and hence exclude women from key economic opportunities by arguing they are biologically and therefore by nature less suited to them. Because economics is a subject that revolves around maximising productivity, for centuries society was able to bar women from opportunities by effectively employing an argument that women, because they were tied to a ‘corporeal reality’, were less suited to employment.

Despite a large focus on feminism, the book is not exclusively about it, and Marçal explores an enormous range of topics. These range from Reagan’s new liberalism, to the founding of economic science, to the effectiveness of economic incentives in stimulating a response. I enjoyed most the way Marçal logically talked through these arguments, explored their flaws and neatly rebutted them, instead proving that not only do women deserve a place in the economic world, but it is a necessity. I found her humorous, exciting and informative, and look forward to exploring more of her works. To quote another one of Marçal’s reviewers, ‘buy [this book] as a pledge to change the world’.

A WALK TO THE PARK...THROUGH THE EYES OF AN ECONOMIST MRS J WOLFSON The trouble with being an Economist, is that you can’t not be an Economist.

Economics is all around us and, like everyone else in our wonderful Habs Economics department, I just can’t help myself spotting economics in action.

So out I go for a walk in the park past a dog and then another dog, and then a family with two dogs. The BBC website states that the prices of dogs have gone up by over 100% during the Covid pandemic and up to 300% in some cases.

This is due to a massive increase in the demand for dogs, and a lower supply due to lockdown causing difficulties for breeders. Those dogs represent so much economics….but then I am distracted by the queue outside the chemist for the Covid vaccine. An incredible government led programme to try and vaccinate the population so that eventually maybe we can all get back to work, go shopping, go to the gym etc. How much economics does that queue represent: government spending, taxation, supply chains, government borrowing, ‘printing money’, furlough, changes in the high street – but then I notice the local takeaway has changed hands, changed shape and now has a serving hatch directly onto to the street ….Schumpeters “creative destruction” or the impact of Covid?

Turning the corner, I see a Tesco and a Sainsburys delivery van on the same stretch of road. Online grocery sales have nearly doubled since Covid started, providing new jobs opportunities for those who have lost their jobs in other sectors. We have heard of pilots and opera singers who now have jobs as delivery drivers, I find myself thinking what were those drivers doing two years ago. I think back to the miner we met on holiday who devastatingly lost his job in the 80’s but was back showing visitors round a coal mine in Wales. “An unbelievable turn around,” he said.

The dry cleaners who used to do alterations on pretty party dresses have two pairs of trousers and a suit jacket on their alterations rail. I wonder what happened to all the caterers, party planners, florists, tablecloth cleaners and waitering staff. ….. are they driving the vans? I cross the road, quieter than normal, and think of the signs hanging up in the bakery, unaffected by the Covid crisis, but could face increasing costs due to Brexit and shortages of foreign staff.

I head up to the park, now I can just admire the flowers and take in the peace and quiet. I notice the beautiful flower beds which I then consider are planted by local government employed gardeners, and notice that the little café in the park has now re‐opened with lots and lots of happy dog walkers sitting around.

I clock the recycled ice cream tub providing a water bowl for the dogs and meet up with my brother….who, genuinely, has just acquired a dog!

A WALK TO THE PARK...THROUGH THE EYES OF AN ECONOMIST

EDITING AND DESIGN TEAM: JOSH HEIMANN ZAVER DHANANI KATYA ISRAEL MAYA TRICOT STAFF SUPPORT TEAM: MRS G LYONS MS M SOROHAN

If you would like to write an article for Equilibrium Lite or want to find out more about the newsletter, please contact: ecosoc@habsboys.org.uk equilibriumlite2020-21@live.habsgirls.org.uk MAY 2021 ISSUE 4