Tag: may

Why, for me, the euro has and will continue to fail

On By Shrey Srivastava6 Comments

Photo Credits: Ottmar Hörl License: CC BY-SA 3.0

Whatever your views on the euro, it’s clear to see that it isn’t in the best of places right now.

Really, it’s a culmination of a number of things that have led to its current malaise, starting from when the concept was first introduced, all the way back in 1993. Six long years and stern British and Danish opposition followed, but on New Year’s Day in 1999, the single currency went from a theoretical concept to a practical reality. It was even used by every country in the then EU apart from the UK and Denmark, who still now have a fixed exchange rate with it. Under the control of the Frankfurt-based European Central Bank, the euro has grown to become the world’s second largest reserve currency, and ECB decisions affect directly 340 million people across the globe. Given all this, the fortunes of the euro take on that much greater global significance worldwide, which is why it’s crucial that it finds its way out of the doldrums or ceases to exist altogether. Draghi and his team have tried to find a way to accomplish the former, however their measures haven’t gone nearly far enough to soothe the economic pain of oh so many. For me, this is because the euro in its current state is fundamentally unworkable; it cannot exist without imposing massive economic damage to a large proportion of its users. Here’s why.

Firstly, what the euro is trying to do is apply uniform monetary policy to a number of different states with different economies and different concerns that need to be assuaged. What this, of course, means, is that some policies will definitely not fit the needs of what some countries desire. As the former Bank of England governor Mervyn King claimed in his first book The End of Alchemy, the discontent caused by some nations having to bail out others (such as Greece recently) for what could be plain fiscal irresponsibility “may become too great to remain consistent with political stability”. I would argue strongly for this, extending on King’s point that this monetary union creates conflict between a “centralised elite” on one side and the “forces of democracy” on the other. Furthermore, I am of the belief that to stop King’s suggested wave of discontent, the only long-term sustainable option available to European policymakers is to bring together these countries in a fiscal union, and thus let the centralised elite coordinate the synergy of fiscal and monetary policy to what they believe to be the best interests of all parties involved. Obviously, there exists a problem with this: the backlash of the masses against what they perceive to be a moneyed elite. We’ve seen this with the famous Brexit and Trump’s election, so even this option presents substantial political risk that could, in my opinion, bring down this monetary union altogether. As we’ve seen here, there really isn’t a path which the EU can go down with this that doesn’t lead to some sort of political backlash or economic hardship: both of which could prove treacherous for the European establishment.

This point also becomes important when you have exogenous shocks affecting economies that cannot use their monetary policy tools to combat them. For example, the European Central Bank has set an interest rate of -0.40% on reserves, which in theory, should stimulate investment and economic growth within member economies. Setting aside the fact that the interest rate channel has proved relatively ineffectual in Europe till date, if it does indeed stimulate growth in a Eurozone economy, what happens if this economy overheats? The natural response would be to encourage saving by raising interest rates, however who now has the power to do this? That’s right: the European Central Bank. This also happens to be an institution who has to take into account the needs of the other tens of countries that happen to be at its monetary mercy, and when you have such an arrangement, be sure that the ECB’s decisions won’t always be what you need. This just makes a potentially negative situation that affects Europe worse, not just for the directly affected country, but for the Europe as a whole. This is because worsening economic conditions within a country could reduce consumer spending and aggregate demand for goods and services within that country and hence worsen export markets for other European countries. The excessive interconnectedness shown here acts as an amplifier that could shave down both European growth and that of the wider world.

However, it’s still possible that through some economic masterstroke, European policies largely benefit a majority of EU states. That’s one route of salvation for the EU, right? Unfortunately, as so occurs when one contrasts theory with reality, it doesn’t seem like this is anywhere close to a reality. Independent research has time and again proven that European austerity breaks the backs of Eurozone countries and further dampens private spending and investment. It seems that senior European policymakers do not see eye-to-eye with many academic experts (such as the famous Stiglitz) on the issue, and hence European growth continues to stagnate. While this is due in part to demographic decline, the lack of jobs in these advanced economies have led to youth unemployment being more than 50% in countries like Spain. When you combine European incompetence with the fundamental unworkability of uniform mass monetary policy, what you get is a concoction that proves so toxic for European economies.

That’s why, for me, the euro can’t work.

 

Price discrimination: the bane of consumers everywhere

On By Shrey Srivastava3 Comments

Photo by James Petts. This file is licensed under the Creative Commons Attribution-Share Alike 2.0 Generic license.

If you’ve been to two different branches of the same retailer, one in the heart of London and one in a less central area, chances are you’ve been a victim of price discrimination. The “discrimination” part of this phrase is probably ringing a few alarm bells with you already, but in the end, price discrimination is just another (relatively harmless) way of firms’ seeking to maximise profits, as basic economic theory states that they do. But what is price discrimination? Essentially, what this is is when firms charge different prices to different buyers for the same good or service. This manifests itself in many forms in our daily lives, from our taking advantage of age discounts to the annoyance we feel when paying large amounts for coffee in Leicester Square. Whilst often denounced by many as simply a discrete form of consumer exploitation, I see it as an ingenious tactic employed by firms to yet again slip under the watchful eye of the average buyer; however, the reason you don’t see price discrimination employed in the real world as often as you thought it might have been is because there are a certain set of criteria that need to be fulfilled in order for price discrimination to take place, the first of which relates to price elasticity of demand.

Intuitively, one of the only reasons that price discrimination works in the first place is because different groups of people will think differently about changing their quantity demanded in response to the change in price of a good or service. Hence, a prerequisite for price discrimination to be viable is that the price elasticity of demand (the responsiveness of demand after a change in a product’s own price) by different consumer groups is different. If the price elasticity of demand for a product were to be similar for two different consumer groups, they would both, ceteris paribus, reduce their quantity demanded by around the same amount for an equivalent increase in price, therefore rendering this pricing strategy ineffective. The firm will also need substantial information about consumer preferences to be able to confidently change the prices for the same good for different consumers, which may prove difficult for a number of firms that are strapped for cash and cannot easily carry out the essential market research. The firm must also not be operating within a perfectly competitive market (otherwise any attempt at price discrimination would simply result in the firm’s getting priced out of the market), and with this, there cannot be a great deal of market seepage (whereby consumers buy the good/service where there is a high price elasticity of demand and sell where demand is comparatively inelastic).

As with many business strategies, price discrimination can take many different forms, with their severity denoted by the “degree” suffix, with first being most severe, and third being the least severe. First degree discrimination is when a particular firm produces products for the same marginal cost, but then sells each product at a different price, depending on the consumer. For example, if I were to want to buy a packet of crisps at a Tesco in Harrow, I’d find that the price of a packet would be quite comparatively cheap. Why? Because I’m surrounded by other retailers that could potentially take my money as opposed to Tesco, and more importantly, I, like many others buying a packet of crisps in Harrow, am likely not in any sort of hurry to buy one. If I’m in bustling central London, however, and am running late to meet my friends, then I’d want to buy a packet of crisps as quickly as I possibly can. Here’s where firms can exploit you. Because you’re less willing to look for alternatives in central London than Harrow, firms can charge you a higher price here, due to the price elasticity of demand for this consumer group being lower than it would be in Harrow. This reduces consumer surplus for the consumers in central London, while giving firms higher revenues. Clever, isn’t it?

Let’s now move on to second-degree price discrimination. Basically, this is when the average cost per item decreases when you buy the items in bulk. This can be used by companies who are not able to pick apart consumer groups as well as the ones carrying out first-degree price discrimination, for example. When companies want to shift excess supply due to changing consumer preferences, for example, they could potentially use this form of price discrimination as although profit margins will be hit, they get the double benefit of at least making some profit on the items and also shifting the excess stock that they needed to shift. This is quite frequently also employed in major retailers such as Tesco and Asda and also at restaurants such as McDonalds and Burger King in order to shift stock of items that just aren’t selling very well any more. Second-degree price discrimination is not exclusively limited to these scenarios, however, and could be used in a wide variety of other contexts, although it has to be said that this form of discrimination is probably quite ineffective in general when compared with the former.

Finally, we move on to third degree price discrimination, which is perhaps the most widely employed in everyday life. Unlike the previous version of price discrimination, this relies heavily on differentiation between different consumer groups. Normally, what happens is that a firm (for example a company offering trips to the cinema) splits ticket prices (broadly) into adults, seniors and children, due to the latter two having a higher price elasticity of demand than adults, for whom the cost of a cinema fare is a comparatively small proportion of their income. The firm attempt this only if if they feel that P1Q1 + P2Q2 + P3Q3 > P0Q0, where P1 and Q1 are the price and quantity demanded for adult tickets respectively, P2 and Q2 are the price and quantity demanded for senior tickets respectively, P3 and Q3 are the price and quantity demanded for child tickets respectively, and P0 and Q0 are the price and quantity demanded had there been a uniform ticket price for all ages of people. Given that first-degree price discrimination occurs quite rarely, and second degree price discrimination is comparatively ineffective, this form of price discrimination is the most lucrative for a potential firm to engage in.

So now we come to the question: is price discrimination ethical? Well, it depends. The profit motive is always going to encourage firms to try to maximise their revenues while minimising their potential costs, and this obviously means that some consumers will lose out; however, the fact remains that price discrimination strategies are employed by firms only because they work, plain and simple; they generate more profit than they would have done without these price discrimination strategies, meaning that the targeted consumers are, by and large, still willing to buy goods for which the strategies are employed, even if they don’t know exactly what firms are doing behind the scenes. Simply, this is just another development in the cat-and-mouse game that is firms’ trying to maximise profits and consumers trying to maximise potential utility, and the fact that firms are finding this worthwhile to do shows that we as a society don’t really have an objection to this happening, even when it’s happening right in front of our eyes (as shown in the third degree price discrimination example above). As firms continue to become more and more savvy to make profits, it’s down to consumers to ensure they’re not being continually one-upped by price discrimination.

So consumers, the ball is in your court.

Traffic jams: An economic perspective

On By Shrey Srivastava24 Comments

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.