Traffic jams: An economic perspective

You know the feeling.

The skies are grey, and fat drops of rain batter your windscreen: it’s almost as if the sky’s crying for you. You’re stuck in a sandwich of motorised vehicles – progress only comes a few inches at a time, slowly but not always surely. You curse as the faint hope you had of speeding ahead is dashed, falling away like droplets from the sky.

But then, after long hours of waiting, it happens. One car edges ahead, then another, then another. Finally, it’s your turn; your car moves forward, breaking the seemingly endless deadlock. It’s emotional catharsis the likes of which you can only experience after hours of frustration. Finally, you’re home, free from the scourge of traffic (until next morning, at least).

When the adrenaline rush wears off, though, you realise that you just wasted precious hours of your life that you’ll never get back. You could have spent that time watching television, playing chess, or even working more if you had to. In addition to the emotional outrage faced by many drivers across the planet, this congestion also has severe economic consequences for car-owning households. According to The Economist, traffic jams cost Los Angeles $23 billion a year, and that isn’t even when we take into account environmental impact. But why exactly do traffic jams happen, and what exactly can we do about them?

Well, part of the blame for traffic jams lies squarely on the shoulders of the people themselves. Public transport in the form of predominantly buses is a “key mode of public transport for those on low incomes”, according to Transport for London. As incomes go up, naturally the proportion of people using public transport in a particular country will decline. Don’t believe me? Hear me out. Public transport is an inferior service, which essentially means that demand for it decreases as consumer incomes go up. This is natural, as cars are inherently more prestigious than buses or trains; they grant you a degree of privacy and exclusivity, and they almost always look better. Therefore, you’d expect that as people become more affluent, more of them will ride in cars and other private forms of transport. Still don’t believe me? Look at the UK. According to the BBC, the number of cars on the streets of Britain rose by almost 600,000 in one year, with the average weekly wages in the United Kingdom also steadily rising. In this case, the correlation implies a heavy degree of causation. What can be done about this? In truth, not much; people’s opinions are not going to radically change. We could, however, simultaneously create more low-skilled jobs in the cleaning sector and clean up our public transport, which appears to be surprisingly dirty. Cleaning up and renovating some of our aged public transport, thereby making it somewhat more prestigious, could go some way to dampening the tradeoff between consumer income and public transport use, although, admittedly, the effect probably won’t be too drastic. It would help though, so why not try it?

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Improving the quality of public transport could diminish the correlation between income and car use. PHOTO CREDITS: Route 79

It’s also important to consider that as of right now, roads are mostly free at the point of use across the world. Therefore, many people see the use of roads as a given: something for which there is no cost. Hence, the number of cars on the road are surging, as the only thing people actually have to pay for is the payments associated with the car itself and fuel. If governments around the world could somehow introduce a system whereby people are charged for the duration of time that they spend on the roads, demand for cars would fall due to increased price leading to a decrease in quantity demanded, as per the demand curve. This is because an increase in the cost of driving means that for more and more people, the marginal utility gained by using a car is offset by its substantial total cost (in layman’s terms, it costs more than it’s worth). Although this would lead to potential job losses in the auto manufacturing industry, it is necessary to carry out to offset both the economic loss of productivity and the severe environmental damage on air quality caused by traffic jams. In short, while painful for one industry, we need to do this for the greater economic and environmental good.

While campaigns encouraging walking, cycling and use of public transport are almost ubiquitous in today’s world, and have no doubt had their effects, more still needs to be done in order for the prevalence of cars on the roads to decrease dramatically. The difficulty of cycling is one factor why for many, the utility gained in terms of exercise and fitness is less than the cost, in terms of their commute becoming drastically longer and also the safety risk that it entails. What I am proposing to solve this is to build more cycle lanes next to roads, thereby increasing their supply. The increased ease by which many can now find an easy way to cycle to the workplace would decrease the costs of cycling, thereby making the utility/cost tradeoff more favourable, hence spurring demand for bicycles with which to cycle to work, potentially helping the cycling industry also. Given that these cycle lanes take up considerably less space than new roads would, they are both a quicker and more effective solution to the problem of traffic congestion (the increased supply of roads would simply spur demand for cars in the same way as demand for bicycles is spurred above).

Applying economics to the problem of traffic congestion may seem unorthodox at first, but I am convinced that inherently, many of the world’s problems are economic. After applying economics to this situation, it’s entirely possible that you may just spend less time stuck on the roads.

Agree? Disagree? Please leave a comment below, whether you’ve been attracted or repulsed by my ideas.

 

Could the FTSE 100 see new highs post-referendum?

Photo by Raimond Spekking

When the bombshell arrived last week that 51.9% of our country voted to leave the European Union, the prognosis for the FTSE 100 looked bleak. Indeed, on Friday itself, the index initially fell by as much as 8.7%, wiping off almost a tenth of its total value. The financial sector was among the hardest hit, with shares of banks such as Lloyds Banking Group dropping by as much as 19.93%. All the cards were in place for a further drop in the index, so in characteristic stock market fashion, the FTSE surged and reached 6577.83 on Friday, reversing completely the drop made last Friday. This unexpected rise isn’t just due to investor irrationality, however; there are some solid fundamentals behind why the FTSE 100 rose this much, and these fundamentals also mean that there is reason to believe that the index could rise even higher. Another sustained gain such as that seen this week could, indeed, see it push beyond the 7122.74 intra-day high made at the end of 27 April last year; it’s definitely within the realm of possibility, especially given the recent actions of the Bank of England.

On Thursday, the governor of the UK central bank, Mark Carney, suggested that the Bank of England may cut interest rates to levels below the 0.5% of today, given Brexit concerns and uncertainty. Intuitively, this decreases the rate at which banks can borrow money, making borrowing cheaper for these financial institutions. Coupled with the £3.1 billion cash injection into the UK’s banking system, the future for banks operating within the UK became a little brighter, causing shares of banks such as Barclays to rise. Given that financial institutions constitute a major proportion of the FTSE 100 companies, this boost to their immediate and future prospects caused their share prices to appreciate not just on Thursday but also on Friday, in turn causing the FTSE to rise by a considerable amount. Whilst there remains considerable doubt over the long term prospects of banking given the worldwide recession which some reputable economists are forecasting, the Canadian’s actions will go a considerable way to ensuring their short-term prosperity in the event when a Brexit finally materialises later down the line. Thus, there is solid reason to believe that banking shares could rise in value, hence causing the FTSE to upswing in the same vein.

After our country sensationally voted for Brexit, many were sure that Cameron would immediately trigger Article 50, beginning our withdrawal from the juggernaut trade bloc. Instead, he announced that he was to resign as Prime Minister in October, plunging both his party and the future of our country as a member state of the EU into a multitude of uncertainty. The subsequent race for the next leader of the Conservatives is overwhelmingly likely to be won by the Home Secretary Theresa May, who has a reputation for prioritising safety and stability above radical change. Her comments in her recent speech that if she were to become Prime Minister, Article 50 would not be triggered by the end of the year also meant that, at least for some months, companies who would be drastically affected by a Brexit (ergo, most of them) have some degree of certainty regarding their short-term future prospects. In addition to this, the fact that once Article 50 is triggered a Brexit would likely take up to 2 years to materialise, ensures that these companies have some time in which to decide on their future prospects, and to formulate a plan for when the inevitable exit from the EU finally happens. This means that they will be ready for the short-term economic consequences of the event, and with knowledge of this, investor sentiment towards these companies could heighten, causing both their individual share prices and the FTSE 100 to rise.

Given that the constituents of the FTSE 100 are almost exclusively large-cap transnational corporations, a large amount of their revenue is earned from abroad. Carney’s aforementioned comments and the short-term economic pounding that would ensue following our European exit have caused the British pound to decline and to be projected to decline in future; our credit rating downgrade from S&P has done nothing to alleviate this. On Friday, after a staggering initial drop following the EU referendum and Carney’s comments Thursday, the pound was worth $1.33, a far cry from the $1.48 it was worth last Thursday. This sudden and large drop in the value of the pound means that the value of the revenue of the multinationals comprising the FTSE suddenly increases, in terms of the pounds. For companies that display revenue on balance sheets in terms of the pound, this increased revenue could be seen as a strong sign of potential future success by investors, thus perhaps causing the share prices of these companies and the FTSE 100 as a whole to appreciate. In a world where no one really knows what’s going to happen next, at least big business can do well, right?

Shrey Srivastava, 15

 

 

 

Capitalism has hit a crossroads

Photo by DAVID ILIFF. License: CC-BY-SA 3.0

This is morbidly fascinating.

Without us even knowing it, we’ve stumbled across one of the most critical moments we’ve ever reached with regards to our economic ideologies. For decades, the unbridled, free market bent of capitalist thought has dominated society, with the capitalist ethos themselves being the key to the “good life” in the words of John Maynard Keynes. But while it remains the key to ensuring economic prosperity for as great a number of people as possible, its critics have been slowly growing, and people are slowly becoming aware of the gradual damage it’s doing to our societal values. The old Keynesian notion of the good life really doesn’t stand up when we take into account that the Western world is now gradually becoming unhappier and unhappier. The pursuit for material goods and relativist, superficial wealth has resulted in the average person becoming far more preoccupied with their money than ever before, and hence unhappier. Really, though, who can blame them? When laissez-faire capitalism, which in itself rewards the accumulation of capital above all else, has changed all our lives in some way, we’ve no choice but to conform. And that, in itself, is the problem. That is why capitalism needs to change.  Continue reading “Capitalism has hit a crossroads”

How did finance lose its way?

In recent years, especially since the advent of the 2008 financial crisis, the worst one of the century, bankers have seen a spectacular nosedive in public approval. Many see them as the orchestrators of this crisis, and although they were not wholly responsible, it is true that banking, and more broadly the finance industry as a whole, has had systemic problems that are not even close to being solved to this day. Tales of plunging share prices and financial woe have been what today’s generation have grown up with; almost everything they have known has been financial negativity. It’s almost redundant to say at this point that a field which was created in order to benefit the public should really not be hoodwinking and failing them in the way which it has. Continue reading “How did finance lose its way?”

Should our economies take the road less travelled?

Photo by kakidai on Wikimedia, License: CC BY 3.0

Whenever the devil in you wants to see a spectacular economic fall from grace, look no further than Japan. After decades of strong economic growth, culminating with it becoming the world’s third largest economy in the latter part of the 20th century, growth has stalled in recent years, igniting strong fears regarding the long term future of the Asian country. From Japan’s much publicised ageing population to its astronomical debt to GDP ratio, the future looks bleak for Shinzo Abe and his countrymen, with no solution to its financial woes foreseeable. Regardless, if much of the developed world want to stop themselves from plunging into the same economic quicksand that Japan finds itself in now, they need to look at the country, and examine exactly where it went wrong. Continue reading “Should our economies take the road less travelled?”

Game theory: A gem of microeconomics

Microeconomics has many captivating branches within it, but the newest and most exciting one has to be game theory. In fact, just two years ago in 2014, the Nobel Memorial Prize in Economic Sciences went to the game theorist Jean Tirole. This is indicative of just how far game theory has come in such a short time, since John von Neumann set the building blocks for game theory not even a century ago, in 1944. Nowadays, it is an essential part of microeconomics, which helps one understand how firms operate in a variety of different situations. But what exactly is it? Continue reading “Game theory: A gem of microeconomics”

The surge of Amazon: What makes it so incredible?

Photo by Steve Jurvetson, Licence: CC by 2.0

Amazon, quite simply, is an American e-commerce company that has erupted onto the global market in recent years, with its share price rocketing and customer base booming. Its founder Jeff Bezos has ensured that his brainchild has continued to be relevant in an ever changing market, and, as of today, Amazon not only survives, but thrives. Although other companies such as Alibaba have seen a rapidly depreciating share price, Amazon makes sure that its profits continue to soar and that it takes up an ever increasing market share, in a market that should be positively brimming with competition and fresh faces. It does this through a simple but ingenious business model, which has ensured itself a steadily growing base of regular users, who are willing to spend disposable income on items sold and marketed by Amazon. Continue reading “The surge of Amazon: What makes it so incredible?”

Why Bernie Sanders would be bad for the U.S. economy

It is fair to say that Bernie Sanders has received a quite sensational surge in popularity over recent months. His increased popularity comes as a result of the idealism which he exhibits, which has appealed to many a disaffected American. However, while this surge in popularity could come as a newfound victory for American progressivism as a whole, it means that not enough people are taking the time and effort to properly analyse his economic policies, which are quite frankly ludicrous and absurd. While I admit that some of his progressive policies, such as to greatly decrease unnecessary government spending, would actually help the economy, most of the policies which he goes on and on about are simply not going to work. The first absurd policy of his, which I will hopefully try to debunk here, is the Robin Hood tax on Wall Street speculators. Continue reading “Why Bernie Sanders would be bad for the U.S. economy”

How I think we can reduce absolute poverty

There is no denying that poverty is an absolute cancer of society. The fact that even one person does not have the resources necessary to sustain life is categorically abhorrent, let alone millions. Some say that absolute poverty will always exist, but to that, I quote the prominent lecturer Charles Aked, who said that “the only thing necessary for evil to triumph is that good men do nothing”. As such, I have immortalised my musings on the matter below. I must stress, before I get to the proverbial meat of this article, that these are simply my thoughts on the topic, and I do not proclaim them to be unequivocally correct in the slightest. In actuality, I am welcome to any elucidations or critiques of my thoughts in the comment section below. Continue reading “How I think we can reduce absolute poverty”

Why millennials do not trust the stock market

About a month ago, Goldman Sachs released a poll which came out with some quite stupefying results. It showed that only 18 percent of the young adults trusted the stock market as “the best way to save for the future.” This means that investor confidence within this age group is at an all time low, and that the stock market has gone “out of fashion”, as it were, in that people do not want to invest their money in stocks, especially given the uncertain nature of the economic climate, instead turning to crowdfunding and community banks as a way to secure income for later years. Above all, there are some key reasons why this generation do not trust the stock market as a way to generate income, the first of which being the economic crash of 2008.

When stocks plummeted in 2008, many millennials saw their elders lose the shirts off their backs, which extirpated the trust that had been gradually built up in previous years. The cost of living is rising rapidly as it is, therefore people need a stable source of income now more than ever. It is unmistakeable that stocks cannot provide this anymore, especially when we look at the recent volatility that the Chinese markets have been experiencing, with quite a few investors gaining a great deal of wealth and losing it almost as quickly. As student loan is higher now than ever, aspiring and enterprising people are having to sacrifice a large chunk of their income just to pay back these loans, which means that a steady stream of “extra” income is needed, not   a rapid gain and loss of wealth.

The general populace is also aware of more information than ever before these days, especially with sites such as Wikileaks coming to the fore, revealing information which national governments did not wish to be released. As such, millennials now know that the stock market is at least somewhat rigged, with stock prices surging far ahead of economic growth over the past five to ten years. The market being rigged also means that there is no longer a level playing field when investing in the stock market, as some high profile investors are aware of more information than others, giving them a greater chance of making money than their not so sagacious counterparts. In my opinion, millennials need the knowledge that they have the same chance of making money as anyone else off the financial markets, and, as this has not been provided thus far, they have been disincentivised to invest, and risk their money to the whims and fancies of society’s higher-ups.

Finally, some millennials just do not have the knowledge required to invest in the stock market. The Goldman poll showed that 16% of people believed that they did not have the practical knowledge required to invest in the financial markets, which links itself to a lack of financial literacy education in high school. Let us take America as an example. Only 17 states require financial literacy education in high school, which means that not enough millennials are aware of the opportunities for wealth creation that the financial markets provide. It follows that people will definitely not want to risk their money in an environment which they do not understand in the first place, and would rather have a stable, albeit comparatively low source of income than a volatile, fluctuating base of wealth. It remains to be seen whether these concerns can be addressed, and perhaps then the stock market will return to its previous place as a viable alternative to secure income for later years.

I must stress that these reasons are not meant to be taken as fact, but rather as a strong personal opinion of mine as to why millennials just do not want to invest in the financial markets anymore.