The EU needs to change. Here’s how

It’s the 1st of January, 2002. 12 European countries have officially began to use Euro notes and coins as legal tender. It was seen by some then as a sign, a sign of the peace and togetherness which being a member of the European Union engendered, and a sign of the success which the European Union was enjoying.

Oh, how wrong those people were.

Since the beginning of 2002, 7 more countries have joined the eurozone, Greece has gone back and forth from the depths of economic hell, and a refugee crisis has threatened the very fabric of what the EU stands for.

Oh, and there was that whole Brexit thing.

It’s not an exaggeration in any sense of the word to state that the past few years have been eventful for the EU. However, in truth, much of the blame for the EU’s tumultuous past lies squarely on the shoulders of the EU itself. From the sheer stupidity of the idea of uniform monetary policy for almost 20 countries to the EU’s resistance to compromise with member states on almost anything, it’s fair to say that the organisation has not done itself any favours recently. However, the Union’s death-knell has not come yet. It is possible that if the EU introduces key reforms in significant areas, they could snatch stability from the jaws of disintegration. However, these reforms need to be sweeping, and come sooner rather than later, starting with the abolishment of the eurozone entirely.

Essentially, what the eurozone is is a monetary union which currently comprises 19 of the 28 EU member states; intuitively, all of these countries therefore use the euro as their currency. The monetary policy of the eurozone countries is decided by a large organisation known as the European Central Bank (or ECB). You might already see what the problem with this is, which is that a one size fits all policy cannot possibly work with 19 different countries with completely different economic and financial circumstances to each other. Whilst globalisation has made these countries more interconnected than ever before, there still remain considerable differences; one wouldn’t liken the financial situation of Greece to that of Germany, for example. If one country’s central bank heads wanted to raise interest rates, they likely couldn’t get the ECB to; it has the interests of 18 other countries to think about as well. The result of this is lacklustre growth, accompanied by growing discontent within the eurozone directed towards the ECB, and each other for acting as barricades to collective success. Therefore, the EU is left with two possible choices: ditch the euro, and let each country’s central bank dictate monetary policy, or take control of the fiscal policy of each eurozone country themselves. Given the large political and diplomatic consequences which the latter would have, it would be wise, nay, essential for the euro to go, leaving each country to synergise their own fiscal and monetary policies, facilitating the increased growth and prosperity of these countries and therefore the EU as a whole.

Moreover, the arrogance of the EU in forcing austerity upon countries such as Greece to meet their budget deficit targets, when these countries are already in recession, is confusing at best and asinine at worst. Austerity during a period of recession simply dampens consumer confidence and spending even further, creating a negative cycle of economic contraction and reduced prosperity. Proponents of Keynesian thought here would say that what Greece and countries like it require would be large fiscal stimulus packages to help trigger a positive multiplier effect and bolster the economy through long run economic growth. Having not followed this route, Greek annual economic growth rates are still firmly negative, and showing no signs of changing anytime soon. Had Greece not gone down the road of austerity, it could have potentially trimmed its budget deficits during a period of growth, rather than shatter consumer confidence and therefore any prospect of economic growth in its short-term horizons. For the EU to not see this, even now, is hinging on delusional and suggests that they see their ideas as worth more than recent evidence; the last thing you want from a respectable political institution. This arrogance and blind faith in the powers of austerity needs to go, and soon.

Complementing this arrogance is a string of inefficient directives and rules that have misallocated funds and endangered key sectors of European economies. For example, the famous CAP (Common Agricultural Policy) regulates price levels of food, artificially inflating them and therefore resulting in an oversupply and wastage of food. Arguably, some EU legislation introduced such as this is counterproductive rather than constructive, and the EU member states would do better without it. Granted, almost all countries have that element of bureaucracy within themselves, but if the EU wants to go back to competing with the likes of America, China and India on the global stage, it needs to cut down on these regulations to ensure the most efficient allocation of resources possible within its borders. Compared to its euro and austerity problem, however, this is relatively minor, and should the EU change its policy stance drastically in the way outlined here, it could potentially live to see another day. If not? Well, let’s just say that the dream of EU economic prosperity could be just that, a dream, shunned from the gates of reality by its own stupidity and stubbornness.

The choice is theirs.

How will Obama be remembered?

This image is licensed under the Creative Commons Attribution 2.0 Generic license – The photographer is Will White.

On January 20, 2009, the United States of America finally turned its back on George Bush and appointed Barack Hussein Obama as their 44th President. At the time, it was looked at as a landmark occasion; the first African-American President in the history of the most powerful country in the world. Many now say that this victory for equality has been overshadowed by backwards, regressive policy that has gone against the very agenda of progressivism that Obama stood for election for. However, others instead espouse the idea that Obama has laid the proverbial stepping stones for future progressives to unite America through economic policy. Regardless of whichever side you take, it’s undoubtable that the Obama administration has divided opinion like almost no other in contemporary politics and economics. Obama’s tax cuts for the wealthiest in society are something which have been campaigned for by many in the past, but some on the left side of the spectrum still regard him as far too business-friendly to be in any way compatible with the vision of equality for all Americans. In this regard, many of his policies have not necessarily been the most popular, yet it is still important to take into account the economic climate which the 55-year-old inherited from his Republican predecessor; the images of widespread depression and angst certainly add context to the debate, context that is needed when analysing any presidency from an economic perspective.

Today, in a global economic environment of stagnation and extraordinarily low interest rates, many are justified in claiming that we have never really escaped the proverbial wreckage of the Great Depression. Yet more economists than not claim that Obama’s Keynesian fiscal stimulus package to the tune of $787 billion, largely in the form of tax cuts to families, was instrumental in making sure that America did not stuck in a period of prolonged economic stagnation, amidst an environment of lesser trust in the prospects of the economy, and therefore less investment. According to James Feyrer and Bruce Sacerdote of Dartmouth College, the multiplier effect (the increase in final income arising from any new injection of spending) was between 1.96 to 2.31 for low-income spending, 1.85 for infrastructure spending, and finally in the range of 0.47 to 1.06 for stimulus as a whole. While this was not the only study carried out on Obama’s fiscal stimulus package, the methodology of the survey the two economists used is significant because they not only compared employment growth at state and county level, but they also compared month-by-month data to see how employment figures were changed at the point when the stimulus was injected into the economy. The significant upward trend generated by the stimulus here is thereby significant as it supports heavily the claim that the package was needed in order to usher America out of the stagnation that it previously endured; so Obama doesn’t seem to have done too badly so far.

The Dodd-Frank Financial Reform Bill also was a significant piece of legislation that Obama signed during his presidency. Described by the Washington Post as “the most ambitious overhaul of financial regulation in generations”, there’s no denying that the Bill has had and will continue to have significant effects on the way financial firms think about their operations going forward. However, it does not ameliorate the problem of the massive moral hazard which banks are allowed to possess when analysing whether to cut down on their portfolio risk or not. In the former Governor of the Bank of England, Mervyn King’s book “The End of Alchemy: Banking, the Global Economy and the Future of Money”, King argues that this is precisely what could lead to another catastrophic recession, and argues instead for a “pawnbroker for all situations” solution, one in which banks have to take significant measures before having any chance of being bailed out. Whilst I would suggest that one reads King’s book for more insight into this claim, the fundamental underlying principle is that banks will take risks if you allow them to, putting taxpayers at risk of having to bail them out once again, and for this reason, I argue that the legislation Obama approved has not gone anywhere near far enough.

And now we come to perhaps the most contentious issue of all: Obamacare. Although the program still has its glaring faults and areas where it should really be improved in order to improve the accessibility of healthcare for every American, it has to be said that the healthcare program has had overwhelmingly positive effect. For example, businesses with over 50 employees are required to have a health insurance program, with tax credits for these businesses also being put in place to help them finance this program. In my opinion, this strikes a near-perfect balance between stamping the need for increased healthcare coverage for the most vulnerable members of society and easing financial constraints on business, allowing these firms to flourish and expand their operations. If I had to summarise Obama’s economic policy in a few words, I’d use the phrase “getting there”. Whilst the African-American has made key policy moves that have steered America in the right direction, there are still large gaps that need to be filled and policy moves that need to be implemented to progress America’s economy further. He hasn’t done it all, but he’s definitely laid the foundations.

Shrey Srivastava, 16

On obstacles to poverty alleviation in India

Step foot (carefully) on the streets of the Delhi megalopolis and you’ll find an explosion of colour and a cacophony of all sorts of weird and wonderful noises. In some ways, it’s the archetypal developing city, with disorganised shops lying around in wide, bending alleyways that look almost as if they’re the fruits of a child’s imagination. In others, however, Delhi has its own unique aura, the quintessential, all-encompassing Indian tinge that has had foreigners from the Mughals to the British flocking like flies to its soil throughout history. Despite this, however, there is an elephant in the room, lying wearily beneath the glitz and glamour of a hugely unequal and somewhat segregated Indian society. You probably already know what it is: poverty. 2012 Indian government projections suggest that 21.9% of the Indian population are below its official poverty limit – to put that into context, it means that almost 1 in 4 Indians are affected by the scourge of poverty. Despite substantial amounts of aid being given to the Asian country to help solve the problem, it’s not even remotely close to going away at all. This is because of deep and wide-ranging problems in the framework of poverty alleviation projects in India, one of which is information failure in the microfinance sector leading to excessively high interest rate loans.

Primarily in Indian rural communities, a large problem with regards to supplying loans to low-income  households is that loans are advertised at lower interest rates than they are in reality. Given the relative lack of education in these areas, exploitative moneylenders can easily demand money unlawfully from families, citing a higher interest rate than the borrowing family had initially thought. Hence, this asymmetric information between lenders and borrowers, combined with the high operational costs of face-to-face lending to these communities in the first place, results in interest rates that frequently reach levels above 50%. To combat this, it’s logical that the government could introduce subsidies for microfinance institutions to reduce overall costs, thereby resulting in the pushing down of interest rates through the competition of the free market mechanism (the sheer numbers of microfinance institutions involved makes this method viable for application). Furthermore, the Indian government could make efforts to introduce a database of sorts for each rural community, spearheaded by a government-appointed official, detailing each microfinance institution and the details of the loans that they are providing to people in these communities, decreasing the potential for exploitation of borrowers. Given that corruption is such a prevalent problem within almost every Indian institution that exists, deterrents such as substantial jail sentences should be given to anyone exploiting the system, along with many avenues for which people to complain about unjustly high interest rates without fear. Obviously, this wouldn’t solve the problem entirely, but it would go a long way to decrease interest rates and therefore provide a more sustainable alternative revenue stream for families starting businesses on the back of this loan.

Moreover, while children going to school and sitting in classes matters, the end goal of all of this is for them to have an education, gaining transferable skills which they can take to work, boosting the standard of living for themselves, their families, and the wider community. In India, however, while the number of children going to school has been increasing, the number of people getting an education is a greatly different story. In 2009, India ranked 73rd out of 74 countries sampled with regards to the extent of the children’s knowledge regarding various subject matters, indicating that although children are going to school, they are actually not learning very much at all. This is in part because teachers believe that they can get away with not working as hard as possible to educate their students, due to no system of rewards or punishments being in place to provide either positive or negative incentives to teach. Therefore, what I propose is as follows: establish a more rigorous, practical system of testing for Indian children by an independent organisation to each class in schools, with positive incentives in the form of bonuses being paid to teachers whose class performs significantly well. Due to negative incentives promoting negativity and eventual apathy in the school environment, it would be unnecessary to include them with the same frequency as positive incentives, however if a teacher’s class has been doing badly for a sustained period of time, they should take a compulsory training class and be forced to accept a decrease in wages, or leave the school entirely. To make the whole system fair, classes should be allocated based on a test conducted to determine each student’s aptitude when they enter the school, making sure that the aptitude levels of each class are relatively similar. Whilst there is no suggestion here regarding how to make more children go to school, this is because it is already happening in India on a large scale, and so therefore we now must focus on how to maximise learning from going to school itself, in order to pull more and more families out of poverty.

Infrastructure has developed hugely in India since the pro-market reforms of 1991; nowadays in India, people have more opportunities than ever before due to more alternative routes to success. However, despite this, the lack of aspiration shown by some of the poorest people in India has continued on from previous years; they feel that high profile, white collar jobs that can pull their family out of poverty are out of their reach. This is because if the poor’s attempts to find a source of income do not work out, the loss that they could have faced both in time and monetary value could cripple them further than they already have been. While there is no silver bullet to fix this problem, the only way in which it could be somewhat ameliorated is through exposing the poor in these communities to people who have succeeded in the past. There is the potential that the effects of supplying information through media to these communities could have little to no effect, as the potential consequences of failing are so crippling. Hence, it is important to focus on other reforms so that people are more and more exposed to others who have succeeded, and the idea is that the allure of success would eventually drive some people to take risks, catapulting them out of the poverty trap. The most difficult thing about this process is the start; once we have a start, there will be a virtuous cycle, hence the burning need to focus on other ways in which to overcome the Indian obstacles to growth.

While growth continues in India at a breakneck pace, the most important thing now for the country is to increase the quality of living of the poorest within society. That can only be done through overcoming inherent obstacles; maybe, just maybe, once we’ve beaten these, growth and prosperity will increase like never before.

What do you think? Please leave a comment below with your thoughts, whether you’ve been attracted or repulsed by my propositions.

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.

 

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”

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 resurgence of Keynesian economic theory

In the tumultuous global macroeconomic climate, which we find ourselves in today, people are increasingly looking back in time at the ideas of one revolutionary economist: John Maynard Keynes. The cogitation of the most influential economist of the 20th century has been thrown somewhat under the water in recent decades, in wake of the 1973 oil shock and the recession that shook much of the developing world from then until 1975. However, contemporaneously with the great recession of 2008, Keynesianism has seen a resurgence, often cited by many scholars nowadays in economic debate. Regardless, even given this, the question remains: is Keynesian economic theory still relevant in today’s day and age? Continue reading “The resurgence of Keynesian economic theory”

Why Hillary Clinton is the woman America needs for 2016

With the soap opera of the Republican nominations taking over the U.S. political scene, the Democrats have been somewhat overshadowed. The few who are focusing on the Democratic elections have seen a clear frontrunner come through: Hillary Clinton. Despite the astonishing rise of Bernie Sanders, Hillary Clinton still remains the overwhelming favourite to be the Democratic candidate for 2016, and for good reason. Continue reading “Why Hillary Clinton is the woman America needs for 2016”

Lessons learnt from a 15 year old’s voyage into the financial markets

Having traded the financial markets in my holidays, and having made a little over five figures in that time, I feel that not only have I found a gratifying pastime, but also that my knowledge about financial markets has been vastly increased, from many mornings spent watching Bloomberg on a TV screen. The gains have been marvellous, the losses not so much. My general knowledge of global events and their repercussions to the markets has also increased. Above all, however, the most salient thing is that a sound base of knowledge has been built for, hopefully, a lifetime of trading on the financial markets. Many lessons have been learnt from experience, incipiently to ignore the brunt of what the news says. Continue reading “Lessons learnt from a 15 year old’s voyage into the financial markets”

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.