VSI – Top 10 things you should know: Behavioural Economics

The Oxford University Press ‘Very Short Introduction’ series are excellent publications and particularly useful for extending students at A Level. Below is a video of Michelle Baddeley, author of Behavioural Economics: A Very Short Introduction, who gives her top 10 things you should know about the science of behavioural economics and how it relates to our everyday lives. You can find more videos on VSI here.

Shorter hours, higher productivity and yoga

According to surveys today’s millennial job applicants don’t want to work all hours – it seems that younger workers place a work-life balance ahead of career progression. During the GFC an applicant who asked a prospective employer about leaving work early on a Friday to go to yoga wasn’t taken seriously. However with the global economy growing at its fastest rate since 2011, qualified jobseekers are scarce so workers can start to make demands.

IG Metall – Germany’s biggest trade union – struck a deal that allows members to work 28-hour weeks for up to 2 years, typically when they have small children. Although Germany is unique, other national economies might follow suit if they have a limited supply of workers. It is important to note that in boom times the substitution effect comes into play as more people want to substitute money for leisure time – this is shown by the backward bending supply curve of labour. In most A2 courses income and substitution effects are examined. The textbook identifies each as follows:

Income effect – higher real wages might persuade people to work less hours and enjoy extended leisure time (see graph – SS2).

Substitution effect – people have an incentive to work extra hours because the financial rewards of working are raised, and the opportunity cost of not working has increased (see graph – SS1).

Work-life balance is typically discussed as a personal issue and again Germany has been leading the way:

1960 – average West German working year = 2,163 hours
2018 – average German working year = 1,363 hours

Furthermore once they leave work in the mid afternoon a lot of them are actually free of the office and more importantly emails. Daimler automatically erase emails to employees who are on holiday.

Workaholic countries slowing down

Countries that are renowned for working long hour – South Korea, China and Thailand – have already limited school homework. South Korea wants to reduce average annual working hours to less that 1,800 from 2,069 in 2016 – the most for any OECD high-income country.

Average wages are not above pre-crisis levels in all developed countries except the UK and Greece. The eurozone’s jobless rate is the lowest and US wage growth the fastest since 2009. Shorter hours won’t help the poorest paid workers, who can’t afford to work less but for the broad middle in rich countries a new working life is emerging. It could look like Germany – shorter workdays, high productivity and yoga.

Source: Why the 30-hour week is almost here – Simon Kuper – FT Magazine February 15 2018

Indifference Curves – Mindmap and Video

Been covering this topic with my A2 class and it is one of the more complex parts of the micro course. The video is particularly useful.

Income and Substitution Effects with Indifference Curves
Any price change can be conveniently analysed into 2 separate effects – the INCOME EFFECT and the SUBSTITUTION EFFECT.

Income effect of a price change: – when there is a fall in the price of a product, the consumer receives a real income effect and is able to buy more of this and other products in spite of the fact that nominal income is unchanged. If the consumer buys more of the good when the price falls it is a Normal good. If the consumer buys less of the good when the price falls it is seen as an Inferior good.

Substitution effect of a price change: – when there is a rise or fall in the price of a product, the consumer receives a decrease or an increase in the utility derived from each unit of money spent on the product and therefore rearranges demand to maximise utility. This is distinct from the income effect of a price change. For all products, the substitution effect is always positive such that a fall in price leads to an increase in demand as consumers realise an increase in the satisfaction they derive from each unit of money spent on the product.

Remember for normal goods, both the income and substitution effects are positive. But the income effect can be negative: if a negative income effect outweighs the positive substitution effect, this means that less is bought at a lower price and vice-versa. This good is therefore known as a Giffen good.

Giffen goods are generally regarded as goods of low quality which are important elements in the expenditure of those on low incomes. A good example is a basic food such as rice, which forms a significant part of the diet of the poor in many countries. The argument, not accepted by all economists, is that when the price of rice falls sufficiently individuals’ real income will rise to an extent that they will be able to afford more attractive substitutes such as fresh fruit or vegetables to makeup their diet and as a result they will actually purchase less rice even though its price has fallen.

Dairy debts make NZ Banks vulnerable

New Zealand dairy farmers are making banks worried about their ability to keep up with their mortgage payments. Four recent issues haven’t helped the cause:

1. Falling produce prices making it harder for farms to service debt
2. Mycoplasma bovis cutting productivity and profitability of the sector
3. Regulatory changes  – restrictions on foreign ownership and therefore reducing the value of dairy farms
4. Environmental regulations – increasing operating costs for farms

Whilst the last two might improve the long-term sustainability of the dairy sector they could reduce the profitability of highly indebted farms and their equity buffers.

Banks are closely monitoring about 20% of their dairy farm loans because of concerns about the borrowers’ financial strength. Although a dairy downturn is unlikely to threaten the solvency of the banking system, it does weaken their position if there is another external shock like another GFC. Bank lending in the dairy sector has been consistent over the last few year years but the proportion of loans on principal and interest terms has increased from 6% in January 2017 to 12% in March this year.

Although the average mortgage for most farm types has decreased in dollar value over the past six months, the average mortgage amount increased in the dairy farms – see graph below. The average mortgage for dairy farms is the highest at $5.1 million for the first time since the survey began in August 2015.

The table below shows the average current mortgage by sector over the years shown. Dairy farmers continue to hold the largest proportion of mortgages in excess of $2 million. They are also more likely to have a mortgage over $2 million – 62.5% of all dairy farms – and $20 million – 3.4% of dairy farms.

Source: Federated Farmers of New Zealand – Banking Survey – May 2018

New Zealand smokers affected most by inflation.

Smokers in New Zealand are particularly vulnerable to the inflation because the price of cigarettes has been increasing much more rapidly than earnings and the CPI. Māori households are worst affected as the New Zealand Health Survey showed that, in 2016/17, 35% of Māori adults were current smokers, while 15.7% of all adults smoked.

Cigarette and tobacco prices have been subject to annual increase in excise duties since 2010 as a measure to prevent smoking – see graph below. However the addictive nature of the habit – very inelastic demand – makes it very difficult to quit. The majority of smokers would like to stop smoking, and each year about half try to quit permanently.  Yet, only about 6 percent of smokers are able to quit in a given year.  Most smokers will need to make multiple attempts before they are able to quit permanently.

Rather than taxing the product a more realistic solution could be to prevent people from smoking i.e. focusing on the demand side rather than the supply side of taxing cigarettes. I blogged on this last year when discussing the war on drugs. War on drugs: Supply or Demand – that is the question

Demand-Side interventions seem to be a better option and they are also a lot cheaper. Weighing up reducing supply by destroying coca crops in remote areas against drug education in schools and you find the latter is a much more plausible option – see graph below. A dollar spent on drug education in U.S. schools cuts cocaine consumption by twice as much as spending that dollar on reducing supply in South America

Status Quo as the NZ Government makes too much money.
However the Government does make a lot of money from the excise tax – $1,710 million last year which was up $1,068 million from 2010: an increase of 60%. Only 61.7 million was spent on the national control programme in 2014/15 which equated to just 4.1% of the tobacco excise duty collected that year.

Source: BERL NZ

USA China trade war – who would win?

After a third round of trade talks between China and the US ended in stalemate a US$100bn trade war is on the horizon. America has published a list of 1,300 Chinese products which it proposes to hit with a 25% tariff. China has it own list covering 106 categories. As the Chinese embassy in Washington DC said “As the Chinese saying goes, it is only polite to reciprocate.” See graph below from The Economist.

US list covers Chinese products worth – $US$46bn in 2017 – 9% of exports to USA.
Chinese list covers US products worth – US$50bn in 2017 – 38% of exports to China

Historians of trade have an advantage over those who study wars of the military kind. Each side is a trade dispute lays out in detail the products to be affected. That makes it easier to analyse their strategies. Trump’s blunt attack targeting of a particular industry – steel and aluminium – is to supposedly make the industry in the US stronger. China retaliated by placing tariffs on US$0.2bn-worth of iron and steel tubes, pipes and hollow profiles, and US$1.2bn-worth of aluminium waste.

The US face a trade-off between protecting their own industries with import tariffs at the same time as increasing the cost of goods for its consumers. There is also the likelihood of causing disruptions to the US economy by increasing the cost of intermediate goods (aircraft parts, robots, semiconductors) which ultimately leads to higher prices.

Good long-run deal for China

It seems that China has the dominant position for the following reasons:

  • China can stop purchasing US aircraft
  • Impose an embargo on US soybean products
  • Dump US Treasury Bills and other securities
  • Chinese companies could reduce demand for US business services
  • The government could persuade firms not to buy US products

China is indirectly one of America’s biggest employers. China could look to buy all it commercial aircraft from European consortium Airbus rather than Boeing. That move alone wold cost 179,000 US jobs. China controls key components in global supply and production networks

Initially a trade war would mean job losses for both countries but in the long-run with China looking to develop a more domestic led consumption model the export market becomes less significant – Project Syndicate. See video below:

Source:                                                                                                                                                        The Economist – Blow for Blow – April 7th 2018

A2 Economics – using whiteboards to teach externalities

Once again with my A2 class I successfully used whiteboards to get across the concepts of positive and negative externalities. Below are the graphs done by Sarah Cheng. As I have stated before whiteboards are a very useful way of getting across difficult graphs.

The externalities topic at A2 Level Economics involves being able to draw and understand four graphs. A different way of teaching this area of the course was to get students to use A3 size whiteboards so that they could practice drawing these graphs. This proved to be very successful with students for the following reasons:

  • the novelty of using whiteboards
  • if they made a mistake this could be easily rubbed out and they could start again
  • it allowed me to go around the class to correct graphs where necessary
  • students took pride in their graphs
  • the best set of graphs was posted on the econfix blog
  • students who were struggling could learn off others

China and Pollution

Interesting video from Al Jazeera about pollution in China.

Smog levels in Beijing were almost seven times the maximum exposure recommended by the World Health Organization. That makes the smog a matter of life and death. In the first quarter of this year more than 90 percent of Chinese cities failed to meet the government’s own air-quality standards.

Air pollution contributes to 17 percent of all deaths in China. As many as 1.6 million people died this year as a result of air pollution, the Berkeley Research Group estimates. That’s about 4,400 people dying every day. But what is the government doing to tackle the issue? And why has it failed to strike a balance between economic growth and public health?

Coal remains one of the easiest and cheapest form of energy and this is very apparent in India where usage is about 62% of energy needs. India is the second largest consumer after China and ahead of the USA. Also coal consumption is growing about 7 percent a year to power the country’s economic catch-up. As China is going through a growth period similar to Europe many years earlier, their argument will be that European countries polluted the environment by a similar amount

Climate change activists have highlighted concerns of rising temperatures by 2100, however are rising temperatures as significant when you consider the long-term implications of much higher unemployment?