I’ve been listening to the discussions of this report by the IFS on the Today programme this morning and have had time to really read and think about it but what it does illustrate is that, perhaps, the problem with recession is that some people suffer more; if all incomes fell by 5% maybe that’s okay but in this case it seems that middle incomes are worst affected (falling by 7%). If memory serves, middle incomes are those of 35,000 or less.
Lots of basic concepts in Economics have being swirling round in my mind over the last few months and I’ve be re-thinking what I understand. Though, I haven’t written it here, yet, I’m clearer in how I think of the balance of trade but over the last few weeks I’ve been thinking about the benefits of growth.
The thought that occurred to me was how the improvement in my material well being had improved my standard of living when I compare it to my life as a boy in the 1970s and how I perceived my parents’ lives at theat time.
It occured to me that the only benefit that I really would miss, were I returned to the 1970s would be central heating; my bedroom was cold at night (getting out of a warm bed into a cold room was a challenge). Thinking a little more deeply, IT has been of some benefit to me and I suspect will be even more so in the future. Most practically, mobile phones. I recall waiting for my wife at various places in the early 90s and becoming very grumpy when she was late. Now of course, she can send my a text and say “sorry, held up on bus” and I can safely sit in the pub for a while. Mr Storey pointed out to me that the quality of goods has improved; cars being the main example, which are now safer and more efficient. and, of course, buses that go pssshhhhh.
The trouble is lots of things which appear to be better, well, may not be much better. TV is a good example, there were three channels in the 70s and my (maybe rose tinted view) is that there was a better chance of finding something decent to watch that now, when we have hundreds of channels churning out pretty dismal progamming (exception being sports broadcasting which is certainly better). Healthcare’s better, yes, sure, but the doctors my cure our diseases more often but, on average we’re fatter than in the 70s (much fatter). Is education better? My instinct is that it is not.
Before anyone accuses my of being to nostalgic for childhood, I promise I am not, in fact, I have just as much fun now as I did then. My point is that the improvements in my material well being haven’t made that much difference to my quality of life especially when we consider just how much richer we are now than in the 1970s (three times richer).
I leads me to think about recession; so what, if there were a recession? If incomes all fell by 10%, we could afford less stuff, it’s true but would that be so bad. The simplistic answer is no but, a recession is likely to hit some people much worse than others. While people in a job might see their real incomes drop and suffer without too much pain, others will lose their jobs and this, I think is very serious for them.
I’ve just been listening to another excellent podcast by Russ Roberts who casts doubt on the perception in the states that those on the median income have seen no rise in living standards since the 1980s.
http://www.econtalk.org/archives/2011/10/bruce_meyer_on.html
Some links that might help http://timetric.com/
http://www.bbc.co.uk/news/uk-15141327 the story on food poverty.
Stories about inflation recently:
http://www.bbc.co.uk/news/uk-england-15157723
I commend to your attention:
http://news.bbc.co.uk/sport1/hi/rugby_union/welsh/14811173.stm
and
http://www.bbc.co.uk/blogs/bendirs/2011/09/dysfunctional_england_in_need.html
One team suffers a marginal defeat by the world champions the other scrapes a marginal victory over a second rate team.
There are a couple of points to make with regards to my previous, rather silly example of trade between Wales and England. The good thing is that it reflects the position of countries which trade within the Eurozone, Greece and Germany for example. It is a pretty good illustration, too, of trade between the USA and China (the latter having fixed its currency against the dollar). In this post I want to explore the effect of trading between two countries with independent currencies.
Before I do so I have to confess to a deficiency in my earlier models (a deliberate simplification honestly). It emerged that a country with a trade surplus is either lending money to the country with the deficit or buying its assets (land or company shares). There will be an additional flow of money from those lendings or assets. Surely, if England has a surplus and is lending money to Wales is charging interest. Also, if they own land in wales they will be able to collect rent from it or likwise dividends from the company shares they own. The Welsh deficit will be even worse.
Consider now trade between the UK and the US and the trade again in two goods; cowboy boots and bowler hats, ignore everything else. We have to introduce here another market; foreign exchange. For what ever reasons, some people, whether British or American, hold or want either dollars or pounds and they trade them (let’s imagine a boat in the middle of the Atlantic where people trade the currencies). Again, for simplicity’s sake, suppose that the prevailing exchange rate is £1 buys $2.
Initially trade is balanced with the US exporting $20million dollars worth of cowboy boots. The British importers go to the forex market; spend £10m to buy $20m and then use this cash to buy the boots. American pay for their bowler hats in dollars, being charged $20m and the British importers exchange these for £10m to take home. Everything is balanced; £10m is taken to the forex market by British cowboy boot importers and £10m is taken away by the British bowler hat exporters. The value of the goods imported and exported by both countries is equal.
Let’s now suppose that demand for cowboy boots in the UK increases and people want to buy £15m or $30m worth but there is no corresponding increase in the demand (among Americans) for bowler hats. And let’s suppose too that the British can fund this spending (more on this soon). So, now, £15m will enter the forex ‘boat’ (in exchange for $30m) but Americans only need £10m ($20m) to buy the bowler hats. £5m will be unsold – supply of sterling exceeds demand. At the same time the Americans will only be bringing $20m to the forex market when $30m is actually demanded by the British – demand for dollars is excessive. Surely, traders who are holding sterling will have to cut the price at which they are selling to the Americans in an attempt to increase the amount of sterling they are willing to buy. This amounts to the same thing as the traders holding dollars to demand a higher price for their currency. The deficit, surely, means that the exchange rate must fall for the pound (£1 buys fewer dollars) or equivalently that the value of the dollar rises ($1 buys more pounds).
More soon
