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.

 

How could we curb Venezuela’s hyperinflation?

Think of a note worth 10,000 bolívars. That seems like a lot, right? I’m a nice guy; I’ll give it to you. Go buy yourself a nice TV or something.

What’s that? They said you don’t have enough money?

Precisely.

As of July 27, 2016, this seemingly valuable note is worth just over ten dollars (it’s almost definitely worth less by the time you’ll read this). In the UK, it wouldn’t be enough to buy you a takeaway dinner. This is because of the rapid hyperinflation that’s occurring in the South American country, leaving it in a tumultuous spiral of poverty, with some not even having enough to pay for essentials such as food or heating. A recent Bloomberg report even suggested that the Venezuelan government is running out of money to print money, such is the state of the country. An analyst at Nomura even predicts that a $200 oil price is needed before the Venezuelans can balance their budgets. Estimates for the rate of decrease of prices range from 400% to 720%, meaning that Venezuelans are eager to spend their money before its worth dramatically decreases just a few weeks later. It seems that policymakers are unable to come up with a solution to the problems that Hugo Chávez’s government largely created. Is the country doomed?

Not quite.

The Venezuelan government needs to learn from the lessons of German, Zimbabwean and Brazilian hyperinflation in order to put a stop to the inflationary pressure that has roiled its economy. Fundamentally, the problem is that, due to the pegging of the bolívar against the dollar, there is an “official” exchange rate of bolívars to dollars, and then there is a black market rate, which is a cause of the hyperinflation. Officially, the bolivar trades competitively against the US currency, however on the black market, it is estimated that 10,000 bolívars are worth just over one dollar. The solution? Officially unpeg the Venezuelan currency from the dollar, and allow it to float freely, so that both the government and the people of Venezuela are on the same side: there is now only one exchange rate, and this makes the problem much easier to solve – we need only one bullet, rather than two, so to speak. In addition, this allows Nicolas Máduro and his government to significantly reduce their fiscal deficit, that came about through them getting significantly less bolívars from overseas for every unit currency than the people got through black market transactions using the unofficial exchange rate.

Now that we have a reduced fiscal deficit, the Venezuelans need to stop printing money in order to finance deficit spending. This would stabilise the aggregate money supply in the economy, reducing the potential for a further reduction in the value of money. Logic dictates that the reduced inflation will disincentivise Venezuelans from spending their money in anticipation of a coming decrease in value, which would in turn lead to an increase in savings. Aggregate demand for goods and services would therefore reduce, causing a corresponding decrease in demand-pull inflation (inflation as a result of aggregate demand outmatching aggregate supply). This leads to a continuous cycle whereby more and more people save more and more money rather than investing it, and combined with the stable money supply, inflation will continue to decrease. Years of hyperinflation have battered the Venezuelan people’s expectations, however, so it may take a long time for them to be convinced that their currency will hold its purpose as a store of value, enabling inflation to decrease substantially. While this may allow the national debt of the country to increase, it is a price worth paying for the country to return to a period of long term economic sustainability, during which tight fiscal policy (increasing taxes and cutting government spending) can help bring this debt down.

The final prong of this three-pronged attack on inflation is that when inflation decreases substantially, the likelihood is that it will still be relatively high; inflation ranging from 400% to 720% can’t simply be swatted away. Therefore, the government needs to maintain interest rates at a level such that the nominal interest rate is far higher than inflation, causing the real interest rate to be high and positive. Intuitively, this means people will see it as beneficial to further save their money rather than invest it immediately, curbing the cycle that increases demand-pull inflation. As the rate of inflation continues to decrease, the central bank should gradually decrease nominal interest rates, while keeping them high above inflation, until they have reached a level of inflation that they see as sustainable, at which point real interest rates could potentially come down.

The sad state of Venezuela is a reminder of the dangers that letting inflation go out of control can provide; Hugo Chávez has failed his country immensely. Despite this, the policies outlined above should go a long way to cut out the plague of hyperinflation, and restore peace and prosperity to the Venezuelan people.

What do you think?

Shrey Srivastava, 16

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”

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”

Free market capitalism: good or bad?

The debate on whether free market capitalism is overall good or bad has been raging for ages. Personally, I think that it would be a good thing, as I feel that prices should solely be determined based on supply and demand, but what I will do in this blog post is evaluate the pros and cons of each. Hopefully using this, some people can make up their own decisions.

A pro of free market capitalism is that companies will be driven to make the best product possible, in order to make their company the best one on the market. As of now, it could easily be argued that some companies such as Tesco are halfheartedly carrying out their daily affairs, because of the monopoly companies like them and Asda have on the market. Free market capitalism would make sure that all companies would be driven to make the best products possible, giving a wider breadth of choice to the consumer and incentivising companies to do the best job they can do.

Moreover, companies will be motivated to innovate more, creating a fast-growing economy and a fast expansive society as well, with new products being created every day, and people racking their brains to innovate. As of now, it’s quite lacklustre as people have no real drive. They need to want to innovate before all else.

Free market capitalism would also be highly beneficial to the ordinary worker. These days, people are more concerned about ethics than ever before and people will not buy a product from a company if it has a reputation of underpaying workers, or putting workers in degrading conditions. This would be better for the worker as they have more power over the companies, as even one worker speaking out could seriously damage a company’s profits.

Also, free market capitalism would incentivise new companies to come to the fore and try and make products which people like. Functioning oligarchies do not make people want t0 create companies, as they simply think that they cannot topple the Apple’s and the Microsoft’s of life. Free market capitalism would change this.

However, if an industry as a whole is not performing well, it could lead to mass unemployment, with lots of people being laid off their jobs due to demand being insufficient. This would create a problem for the government, as they cannot provide benefits for so many people. In this way, the collapse of even one industry could burden governments, which could detract from their ability to provide aid to the social services like healthcare and education. Imagine the UK without the NHS!

Finally, when companies are so driven to succeed, it means 90% of people who may be working equally as hard as the bigger companies will fail. Free market capitalism, then, could be construed as creating even bigger divisions between the rich and the poor, which is hardly what countries like the UK and the US with their levels of inequality bursting at the seams need right now.

Overall, however, in my opinion, free market capitalism is a good thing, simply because it would promote fairness in society.

Thanks for reading! Stay tuned for more!

Why trading is a harder job than people give it credit for

Now, I might not seem like I know much about this, being only 14 and all, but from my limited experiences of trading, it is not like the job that many people look at it as, with rose-tinted glasses. It’s all well and good that you can stay at home and work, but how far will that get you?

Firstly, you can’t take a day off sick. What if you have a few open positions that are losing you thousands of pounds? It is simply impossible to “not work” on a day because you have a cold, as I’m pretty sure the vast majority will value their thousands of pounds over a simple sneeze and cough. While in any other job, the fight can continue on without you, trading is the most individual kind of job there can be – it brings a whole new meaning to the term “self-employed.” Who knows, maybe even an hour without staring at that screen might bring you to a margin call.

That brings me nicely to my next point: your income is not fixed. While most other employees have a fixed hourly or day rate, traders might be earning $10,000 one day, and losing $5000 the next. The mental tension of not knowing how much you will earn the next day, or even if you will earn anything, must certainly be unbearable. What if there is an unexpected quarterly report of low profits and the company going ex-dividend? Your earnings of the past week would be wiped out immediately. Now, compare that to a normal 9 to 5 job where you work, come home and relax knowing that the money is in your account. Traders have no such luxury.

My final point is that traders never know when their livelihood could be snatched away from them. It may seem like a large exaggeration on my part, but imagine if you invested in Shell when it was at 2,600! The price right now is hovering around 2,200. A large portion of your savings for your children’s education or your retirement could be wiped away in an instant.

Put simply, the sheer mental anguish is why I will never trade for a living while being self-employed. As a casual hobby, yes, it’s all well and good, but as a job, no way José.

Why young people love volatility

These days, people are busier than ever before. With the addition of technology into the world, time has never had such a high value. If it was a stock, it’s value would be through the roof! Because of this, commodities like WTI Crude Oil and currency pairs such as EUR/USD are gaining market depth at an unforeseen rate. This is hardly likely to change in future, as we live in a technological world – and that’s going to stay with us forever.

An unfortunate consequence of the technological world we live in is that young people do not have patience anymore – this is especially through for millennium babies such as myself. The old mantra of “the tortoise beats the hare” has become obsolete. People do not care for returns over a long-term period anymore – they want quick gains, not gains they have to wait months, or even years, for. This means that the risks which are often associated with volatility are often overlooked – people are blinded by the lure of quick rewards.

This is the very reason why the gambling industry is hotter than it’s ever been before – people like to feel the rush which comes with throwing their money into a gamble. This is only compounded by the growing general consensus that the only way to make gains is through instant gratification – any money made long-term just isn’t worth it any more.

This is obviously great for companies such as CMC Markets, as trading has become less about technical analysis and more about the idea of having a quick gamble – “if it goes well for me, I’m going to make a quick buck.” They are the big winners from this modernisation of trading – how else do you think their owner has a net worth of $1.3 billion?

However, we must think about the losers from all of this – the traditional “traders”. Trading is slowly becoming more of a gambling business, and to stop this happening, society needs a reeducation.

Perhaps a daily recital of “the tortoise beats the hare” would be good.