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Posts Tagged ‘economy’

  1. A media-fuelled recession?

    March 15, 2013 by superlative

    This blog post is a bit economics-based, sorry, but I read an interesting article in the Economist this week and it resonated with something I’ve been thinking about for a while.

    The article concerns consumer spending habits in the UK, and the effect they have on our economy and GDP – in other words, on whether we are in a recession or not. A recession is usually defined as two consecutive quarters of a country’s GDP going down rather than up. I was surprised to read in the article that spending by private households accounts for a whopping 63% of the UK’s GDP, and so changes in our spending naturally have a large effect in our overall growth.

    Since the beginning of the financial crisis in 2008, many people have felt (and in lots of cases are) poorer. We are also more worried about money generally, and keener to reduce the size of our debt and increase our level of savings. These are noble ambitions, as an over-reliance on debt by the country as a whole played a big part in creating the crisis. It has always been my view that, as far as is possible, it is much better to save up for something and then buy it than it is to buy it with debt and pay for it later.

    The article describes how our saving rate fell from 6% in 2001 to zero in 2008 – meaning we as individuals were spending pretty much everything we earned by 2008, confident in our expectations that our incomes would continue to grow and we didn’t need to save for the future. Then came the financial crisis, and our saving rate jumped back up to 7% and has stayed that way for five years. We have been responsibly saving for a rainy day and not splashing out like we used to. In comparison with previous recessions, where spending returned to its previous level after a couple of years, this has been a much longer period of belt-tightening. What interested me is the Economist‘s assertion that if our spending rate fell back to around 4%, an extra £41billion would be released into the economy, raising GDP by 2.7% and therefore taking us well out of recession.

    I found this interesting because I have often felt that the reason we are so pessimistic about the future, about the woes of the euro and the financial crisis on a global level, is that the media never shuts up telling us to be worried about it. We become paralysed by a fear that our livelihoods are threatened because we are told that this is the case, not because we are aware of it ourselves, and it is the effect that this has on our behaviour that makes the situation much, much worse.

    If we were never told any news about the state of our economy, or of Europe’s, how much would we really have felt affected by the financial crisis? For me personally as a public sector worker, the answer is fairly little. The main effects have been that the administrative staff union at my institution has agreed to more modest than usual cost-of-living increases to our salaries, and the organisation has restricted recruitment, preferring to recruit internally as much as possible. My income has continued to grow though, albeit more slowly than in previous years, and on top of that I have still received an annual increment to the next salary point, as these are contractual and I get them whatever happens. I think that’s the case for quite a lot of public sector workers.

    Many people have been affected more than this of course, particularly if their employer has folded completely or has had to lay people off (like my Dad, who lost his job). Some of this comes back to consumer spending though – people haven’t been buying their products, and the company can only endure a drop in income for so long before their finances fall apart. It becomes a vicious circle where individuals and companies hunker down to weather the storm, they restrict their spending and their hiring to give themselves a more secure financial base, and in doing so drag down demand even further.

    More people then end up unemployed, inflating the state’s welfare bill further and making government spending more difficult, and they can’t then go out and spend lots of money because they only have benefits to live on.

    Individuals, companies and banks have all been hoarding cash as much as they can to reduce their exposure to future risks; and it is this lack of confidence to spend that perpetuates the need to save. It is for this reason that some people argue that the government should borrow more so that it can spend, and help to improve confidence generally in the country and break the cycle. I don’t agree with the government borrowing more, but I can see the point of the argument.

    I just feel that, if we weren’t so worried about how dire the state of our economy is, if we weren’t always being told to worry about it and that we’re in the midst of a disaster, the economy would actually be in much better shape. And this seems rather sad, rather cyclical, and rather pointless, like much of economics.

  2. More silly protests

    September 28, 2009 by superlative

    There was another anti-government protest in Brighton at the weekend, apparently attended by Sloth from The Goonies (see picture – courtesy of the Argus).

    As if the Labour Party Conference weren’t disruptive enough for the citizens of Brighton, we also have to put up with vague and pointless protests cluttering up our streets.
    Fortunately, this one seemed rather smaller than the Smash EDO idiocy, and by the time I ventured down to the seafront to take a look it appeared to consist of a man standing on a plinth and some bored-looking policemen. I was pleased to see that there were also stacks and stacks of unused placards on Madeira Drive, where they’d clearly not had as many people turn up as they’d been hoping for.
    As with the previous protest, it was the diffuse and varied aims of this one that really made it pointless for me. Some people seemed upset about bankers’ bonuses; some didn’t want cuts in public services; some thought Vestas should be nationalised (er, bit late); some were anti-war; and some were just generally anti-anything because they think protesting is cool. The problem with that, I feel though, is that the protest doesn’t end up achieving anything, because no one is really sure why they’re there.
    This one was particularly pointless because I’m sure it caused no disruption at all to the Labour Party delegates, who were safely tucked up inside the windowless Brighton Centre and probably couldn’t hear or see any of what was going on.
    I also don’t really get some of the arguments that the protesters make. Some of their placards said “Fight for the right to work”, which I found odd. There isn’t an unlimited supply of jobs out there, and I don’t think the Human Rights Convention says we all have a right to a job which the government must provide and pay for.
    The ‘no cuts in public services’ ones also seemed misguided. There is a huge deficit in the public finances which has to be repaired. Regardless of how it got there (I’ll come to that in a minute), it has to be remedied. The country doesn’t have secret stacks of cash it’s keeping squirrelled away – the only way to cut the deficit is to make cuts in spending, or raise taxes. They seem to think that just ‘taxing the rich’ more is going to sort it out, but it’s not realistic. Why do they think that all the major parties have acknowledged the need for cuts? Even Labour says so now, after trying to dodge the word cuts for ages. Efficiency savings won’t be enough, there need to be actual cuts, and we will all feel the effects. But the alternative is a much longer and more painful recession or depression – you can’t just ignore the problem and expect the economy to sort itself out.
    There was quite a bit of talk about bankers’ bonuses too, and apportioning of blame on the banking sector for our financial woes. While I agree it was the bursting of the credit bubble and overly-risky investing by the banks that dragged the economy down, outlawing bankers bonuses is a purely populist measure that won’t actually fix the state we’re in. Yes the banks behaved badly – but the problem was that they were allowed to do so. We should be talking now about much tighter financial regulation and imposed margins on the banks’ balance sheets, to ensure it doesn’t happen again. Complaining about bonuses doesn’t address the real issue at all.
    And yes it’s annoying that some of the people who caused this are still getting big bonuses. Fine. The banks shouldn’t be giving those people financial rewards, if they’ve even still got their jobs. But the issue isn’t an across-the-board one for all banks, and the backlash against the financial world will only discourage the bright and talented people we need to repair the damage from joining the sector. The same as with the social workers/Baby P thing: now no one wants to be a social worker, so there are no good social workers out there fixing a flawed system.
    Anyway, I’ve digressed a little. The protest was pointless, and to me it achieved nothing except some venting of anger and to confirm for me that lots of people really don’t understand economics, politics, or how the country works in general.