Economics - easy-reading books that make you think.

It's always good to find some easy-reading books which make you think about the world.

I would recommend all of these - you can pick them up, put them down, dip into a chapter and it doesn't matter if you are new to the idea of Economics as they are accessible, interesting and occasionally amusing.  After all Economics is an anagram of comic nose.


23 Things They Don't Tell You About Capitalism Paperback – 1 Sep 2011
by Ha-Joon Chang  (Author)


The Undercover Economist Paperback – 3 May 2007
by Tim Harford  (Author)


Freakonomics: A Rogue Economist Explores the Hidden Side of Everything Paperback – 18 Jun 2007
by Stephen J. Dubner  (Author), Steven D. Levitt  (Author)


The Undercover Economist Strikes Back: How to Run or Ruin an Economy Paperback – 3 Jul 2014
by Tim Harford  (Author)


Superfreakonomics: Global Cooling, Patriotic Prostitutes and Why Suicide Bombers Should Buy Life Insurance Paperback – 24 Jun 2010
by Steven D. Levitt  (Author), Stephen J. Dubner  (Author)


Naked Economics: Undressing the Dismal Science Paperback – 7 May 2010
by Charles Wheelan (Author), Burton G. Malkiel (Author)


The Armchair Economist: Economics & Everyday Life Paperback – 10 May 2012
by Steven E. Landsburg  (Author)

Where does Growth, Income and Wealth come from?

There are a number of theories about this but think about a simple village where you have a number of families tending the land.  All the land is fully utilised, there is no unemployment and when they aren't working the land they are doing domestic chores, raising children, etc.  They produce enough to get by and so there is no wealth accumulation as such.

How could such an economy grow?

I put this to an undergraduate Economics class at UWE, Bristol and here were their ideas:

• Division of Labour and Specialisation -using the ideas of the economist Adam Smith, look at how they could divide up tasks and get individuals to specialise - perhaps one would be an expert at ploughing, another at digging, another at chopping, another at carrying.  This should result in efficiencies leading to greater output from the same amount of land.
• Education - training and development of individuals will hopefully make them more productive which should lead to greater output.
• Technology - developments in how land is sown or fertilised and developments of the plough could increase output.
• Immigration - new immigrants may find it hard to find work as there is no extra income to pay them, however, if new immigrants have skills lacking in the community then this may help them - a new immigrant may have new knowledge or working practices which can benefit everyone in terms of increasing ouput.
• Expansion - perhaps the town can expand outwards from its borders and utilise new natural resources.
• Trade - the town could find other towns and perhaps trade with them - these other towns may have products which they are particularly good at producing and mutual trade may benefit both places.

What is 'Middle Income'?

Ex-Conservative Chancellor of the Exchequer, Norman Lamont was on Newsnight this week and one of the points he made was that the 40% tax bracket which starts at around £42,500 (this is on total yearly income) is harming 'middle-income earners'.

http://www.bbc.co.uk/news/uk-politics-26572914

There is a debate to be had about what an appropriate high level of income tax should be, however, what is meant by middle income?

If you get data from the official source, the Office of National Statistics, this is what you find:

• Gross (total before tax) yearly earnings are just under £27,000 per year on average (average being median - the middle-earner when you line everyone up in order) when you look at all full-time equivalent workers.
• For women the figure is closer to £24,000 per year.
• There are differences depending on the region you live in - in the South-West, for example, the average is around £25,000 per year when you look at all full-time equivalent workers.
• And if you happened to be someone who was in what is called the 75th percentile, that is earning more than the 74% below you but less than the people above you, you would be earning around £38,000 per year.

Therefore, is £42,500 a middle-income.  Short answer, based on the evidence, No.

However, if Lord Lamont has alternative data, do get in touch.

Source:  http://www.ons.gov.uk/ons/dcp171766_353368.pdf

Profit margins - who is making money and how much is too much?

There's a great deal of fuss in the papers about company profit margins.  Profit is the thing you make as a reward for running a business.  It also gives you the money you need if you want to invest in new products, machinery or buildings.

How much profit is too much?  Perhaps it depends on the industry and perhaps it depends on your political views.  However, when you see figures such as Tesco making £2,188,000,000 (just over £2 Billion), remember that it depends on how this relates to their total sales - in Tesco's case it is just £3.3% or £3.30 per £100 of stuff that they sell.

Below are some examples of Operating Profit Margins.  SSE, nPower and Centrica (British Gas) are all power companies - you will recognise the rest of them.

 

SSE	2.34%
nPower	7.57%
Centrica	10.96%
Tesco	3.30%
Sainsburys	3.81%
Next	19.51%
Wetherspoons	7.14%
Vodafone	10.64%
Apple	28.67%
HSBC	27.31%

Mr Cameron - the real problem of UK Competitiveness is NOT the EU

The UK Prime Minister, David Cameron spoke last week about a 'crisis of European Competitiveness'  http://www.number10.gov.uk/news/david-cameron-eu-speech/ and he cited issues such as the rights of workers, including the Working Time Directive, as being a source of some of the problems. (More on the Working Time Directive here: https://www.gov.uk/maximum-weekly-working-hours/weekly-maximum-working-hours-and-opting-out).

The evidence on this is mixed and it could be argued that the crisis in competitiveness is the fault of the UK itself and its own economic failures rather than anything 'European'.

Economic students will know that economic growth is largely dependent on a country's improvements in 'productive capacity' in terms of investment in technology, factories, infrastructure and people.  An economy needs to spend money on the future in order to ensure that it can increase production and remain competitive compared to its neighbours.  To what extent has the UK done this?

Labour productivity

The UK Office for National Statistics has looked at a range of data and the productivity figures are very interesting. http://www.ons.gov.uk/ons/rel/icp/international-comparisons-of-productivity/2011---first-estimates/stb-icp-sep2012.html

If you measure the amount of GDP per each hour worked by each worker in the economy, Germany is around 21% higher and France is around 23% higher.  (Gross Domestic Product is the total output of the economy in a year.)

If the UK were as productive as them then UK workers could work four days a week instead of five and still produce the same amount of output!

Why this is the case could be due to any number of reasons: lack of investment, poor UK management, inefficient and lazy UK workers, lack of training, a less educated workforce, poor use of technology, etc.  However, what is less likely to be the cause for this differential is European legislation because surely that would equally affect France and Germany?

Granted, there is a small case to be made when comparisons are made between Europe and the USA which has higher levels of productivity than all three countries mentioned here, but this could be due to a variety of factors including the economies of scale of the US being such a massive market.

Investment

Economists refer to Business Investment in factories and infrastructure as Gross Fixed Capital Formation.  On this basis the UK spends around 14% of GDP, Germany 18% and France 20% on Investment.  http://data.worldbank.org/indicator/NE.GDI.FTOT.ZS

This has tended to be the case for a number of years, therefore every year our competitors are improving their productive capacity to a greater extent than the UK.

Conclusion

The UK has a competiveness problem but David Cameron's focus on elements such as the Working Time Directive and other similar points seem to be misguided - the argument for reducing the rights of workers is complicated, both economically and politically, moreover, they don't appear to be the main problem.

Before the UK looks to 'Europe' as the cause of the competitiveness issue we could do with learning some lessons from some of our continental cousins and then sort out our own shortcomings first.

House prices and the economy.

RBS (the large banking group) produce really useful 'economic insights' which you can sign up to for free delivery via email - a great way of staying up-to-date with the major economic events and announcements.

The one dated 5.11.12 mentions a number of things including the following:

"Nationwide's house price index grew 0.6%m/m in October. While growth of any sort is good news, this is only the fourth month this year in which prices have risen. The average house price has remained about the same since January 2010 and is currently 11% below the October 2007 peak. However, accounting for inflation the real average house price is 25% below peak. With September mortgage approvals unchanged, and little growth in mortgage lending, the market is treading water."

http://www.rbs.com/news/2012/11/burn-baby-burn-economics-weekly.html

As you can see, those with houses who bought at the peak have seen the value of this asset deteriorate.  Some people will have bought many years before the peak and therefore would still have seen an overall increase in the value of their house - however, if they are the kind of people who took out a second mortgage on the house (like many people did in the boom years up to 2007) in order to buy a new kitchen, new car, or fund a holiday, they may be feeling a bit poorer now.

House price rises tend to exaggerate booms as people feel wealthier and take out extra loans and mortgages due to this feeling of wealth that their house price rise has given them.  If house prices then go down it can make the economic downturn even worse.  The effects of this can be seen in the Consumption (C) part of Aggregate Demand (AD) and is one of the things which is prolonging the current economic slump.

On the positive side, at least houses are now more affordable, especially for first-time buyers.  BUT that depends on whether people have a safe job, a deposit for a house and are able to get a mortgage - this is the problem which is keeping the housing market flat.

The knock-on effect of this is that if people aren't moving house and don't feel wealthy in the house they are in, they will tend not to buy furniture, new carpets, new kitchens, etc.  This can affect the wider economy and hence makes an economic downturn worse.

Eventually people will get more confident and the housing market will pick up but it is difficult to know when.  But it's probably a good time to buy if you can afford it!

Supply of food - shift in the supply curve

Farmers have announced that they are looking at a particularly bad harvest this year.  With a drought at the beginning of 2012 followed by too much rain for the rest of the year, it has been a difficult time for a range of crops.

From an economist's point of view, these crops are sold directly to consumers but are also commodities and raw materials used in the manufacture of other products.  The problems with the supply will cause a shift in the supply curve to the left for these products and will also hit the supply curves for products which use these crops as raw materials.  Read the article, have a think about the knock-on effects of the price rises and perhaps draw a supply and demand diagram for an associated product which may be affected.

http://www.bbc.co.uk/news/uk-19890250