China and its journey to be a superpower

Useful video from DW which looks at China which over 40 Years ago opened up its economy to the rest of the world. Although Chinese President Xi Jinping vowed to press ahead with economic reforms he made it clear that Beijing will not deviate from its one-party system or take orders from any other country. China has a system of market socialism in which the political system of communism exists in parallel with market capitalism and private ownership. The Irish Times Beijing correspondent Clifford Coonan makes some very good points.

Natural Rate of Unemployment explained.

Good video here from Marginal Revolution University. The natural rate of unemployment is a situation where there is no excess or deficiency of demand for labour. Known as the equilibrium rate of unemployment, it is caused primarily by frictions in the labour market. Types of unemployment which are likely to cause this rate to rise would include structural; technological; frictional and seasonal. The video covers types of unemployment which impact the natural rate of unemployment and also explain the difference between the actual rate and the natural rate.

Major contributions to inflation in New Zealand – NCEA Level 2 External

Finishing off the Inflation external standard with my NCEA Level 2 class and came across an ASB Bank publication which outlines what the main drivers of inflationary pressure are in New Zealand. They list 5 categories which are shown below and note that housing and commodity prices are quite prevalent. This would suggest that the government are trying to get the RBNZ to target house prices.

Source: ASB Bank Economic Note

Outlook
It is forecast (ASB) that the CPI will rise to around 2.5% – cost-push and demand-pull factors with strong NZ$ being superseded by higher external costs and prices. The inflation target for the RBNZ is 1-3% with a target of 2% but the inflation figure above the midpoint should be treated the same as when inflation is below the midpoint. Therefore this does not mean that the RBNZ will necessarily raise interest rates.

Source: ASB Bank. Economic Note – 5th March 2021

Unemployment figures in New Zealand nearing pre-Covid levels.

Been covering unemployment with my Yr 13 class and showed them this graph today during our online class. As well as talking about recent changes it was useful to mention the boom period in the early 2000’s, the GFC in 2007 and how they impacted the level of unemployment. Also note the correlation between the labour cost index (changes in wages and salaries) and the unemployment rate. As labour becomes more scarce (lower levels unemployment) the LCI starts to rise and vice versa.

Source: Westpac Economic Overview. February 2021

The most recent figures publish show that the unemployment rate in New Zealand fell 0.4 percentage points to 4.9 percent in the December 2020 quarter which surprised a lot of commentators who predicted an increase. This time last year the unemployment rate was 4.1%. The number of those unemployed fell by 10,000 to 141,000 in the December quarter, while the number of those employed rose by 17,000 to 2,734,000 in seasonally adjusted terms. The proportion of the working-age population that were in the labour force also rose in the quarter. The labour force has seen sectors affected in different ways:

Negative – sectors in retail, hospitality and transport have seen major job losses.
Positive – with increased government spending there was employment growth in health, education and public services. Employment in the construction industry expanded by 8.2 percent between the December quarters, with Stats NZ reporting that more people were “working in areas such as plumbing and electrical services, roofing, and concreting”.

Differences in the economic fortunes of various sectors explain why there are reports of skill shortages at the same time as unemployment has risen. On the whole New Zealand is in a very lucky position relative to other parts of the world.

Introducing Unemployment with UB40

I recently started teaching the Unemployment topic to my Year 13 A2 class and remembered that one of the first albums I bought was UB40 Signing Off released in 1980 (see below).

The front cover and reverse has been made to look like the UB40 unemployment benefit attendance card from which the band took their name. Their UK top-ten hit “One In Ten” was an attack on Thatcherism and is mistakenly cited as referring to the number of unemployed in the UK at that time. It is in fact a song about government statistics in general, and how politicians use them to de-humanise problems. Useful way to introduce the subject especially if the class like reggae. I found it useful to have two windows open and play the video along side the lyrics. Click here for the lyrics of the song and here to see UB40 perform on Top of the Pops in 1981.  I was surprise at how many of the class knew of the band.

Making economics relevant to students

Although a few years old now the mini-documentary below is very good and features many notable economists and economic thinkers. They basically look at the issue of financial stability, or the lack thereof, and discuss what is at the core of the problem. It includes Joseph Stiglitz, Gillian Tett, David Tuckett, Stephen Kinsella, John Kay, David Weinstein, Steve Keen and Dirk Bezemer. I have used this post to try and bring some reality to a lot of prescribed economics courses at high school level.

The economic environment is said to be determined by agents or economic decision-makers. Today, an economy is a much more intricate machine which aims to allocate scarce resources to satisfy the utility of economic agents such as individuals, firms and government. The dominant model for many years has been “Dynamic Stochastic General Equilibrium” (DSGE) and it takes all the characteristics of an individual (this person is typically called the representative agent) which is then cloned and taken to represent the typical person in an economy.These agents make supposedly perfect decisions by optimising, working out the kinds of mathematical problems in an instant. However the rise of behavioural economics has shown that cognitive errors are now assumptions in many aspects of economics namely – heuristics, confirmation bias, overconfidence and distorted probability weights.

According to a paper entitled “Mindful Economics: The Production, Consumption, and Value of Beliefs” by Roland Bénabou and Jean Tirol research has shown that beliefs often fulfill important psychological and functional needs of the individual. Examples include:

  • confidence in ones’ abilities,
  • moral self-esteem,
  • hope and anxiety reduction,
  • social identity,
  • political ideology
  • religious faith.

Therefore people hold beliefs because of the value they attach to them, as a result of the tradeoff between accuracy and desirability. As a consequence of this some of the beliefs do not consider prior knowledge of conditions or events that might be related to their beliefs – Bayseian Updating – this refers to people who are willing and able to modify their beliefs based on new, objective information. This non-Bayesian behaviour includes ignoring signals about their beliefs and denying what in turn will be the reality. Nevertheless motivated beliefs will respond to costs, benefits, and stakes involved in maintaining different self-views and world-views which leads to self-sustaining “social cognitions.”

Overconfidence
Bénabou and Tirol suggest that overconfidence is the most common indicator of the motivated beliefs experience. Overconfidence can be seen as quite damaging although moderate confidence can be quite useful as it often enhances an individuals ability to act successfully on their own behalf and work well with others. Research has shown that psychologically “healthy” people display some degree of overoptimism and biased updating, while it is primarily depressed subjects who seem to be more objective.

If beliefs are shared between parties they may magnify each other and there is a tendency to follow the herd, especially if information is uncertain, incomplete, and asymmetric (some people are more informed than others). Basically, in a world of bounded rationality (the limits of the human brain in processing and understanding information), herding makes sense to most people. Herding is a fast and frugal heuristic (short-cut) that has been used by both human and non-human animals across the millennia. Some behavioural economists see herding as irrational because people aren’t basing their decisions on objective criteria. If herding is seen as rational it can result in price cascades leading to excessive booms and busts in the prices of financial assets. Case and Shiller (2003) surveyed the expectations of homeowners during the real-estate bubbles of 1988 and 2003. In both cases, 90 percent of respondents thought housing prices in their city would “increase over the next several years,” with an average expected gain for their own property of 9 to 15 percent per year over the next ten years.

The strategies of self-deception and dissonance-reduction used to protect valued beliefs are many and varied, Bénabou and Tirol group them into three main types: strategic ignorance, reality denial, and self-signaling.

Strategic ignorance is when a believer avoids information offering conflicting evidence.

Reality denial refers to troubling evidence that is rationalised away: house-price bulls might conjure up fanciful theories for why prices should behave unusually, and supporters of a disgraced politician might invent conspiracies or blame fake news.

Self-signaling is when the believer creates his own tools to interpret the facts in the way he wants: an unhealthy person, for example, might decide that going for a daily run proves he is well.

Final thought

People derive utility from a sense of belonging to communities and having a positive self-image. Optimistic beliefs can also be valuable motivators to overcome self-control problems, as well as helpful in strategic interactions. In order to maintain this level of utility people tend to disregard Bayesian updating and are not willing to modify their beliefs based on new, objective information. Even if they did consider new information they will manipulate it to align with what their beliefs are.

Overconfidence is the most common indicator of the motivated beliefs experience and this can be impacted by the behaviour of others. Their confidence is often reinforced when people know that other people, including experts, and the rich and famous, are doing the same. In a world of bounded rationality, such behaviour may make sense – even though it can result in errors in decision making.

Sources:

“To err is human; so is the failure to admit it” – The Economist June 10th 2017

“Mindful Economics: The Production, Consumption, and Value of Beliefs” by Roland Bénabou and Jean Tirol. Journal of Economic Perspectives—Volume 30, Number 3—Summer 2016—Pages 141–16

UK growers see high wage inflation.

Since 2016 UK growers of fruit and vegetables have seen their labour costs rise by at least 34% since 2016. This is when farmgate prices have stayed virtually the same.
This increase threatens domestic production in the UK growers and they need a higher price to halt them locating overseas or finding another revenue stream with the land that they have.

Between 2015 and 2020 there has been an increase in the hourly rate for workers of 34% rising from £6.50/hour (NZ$12.40) to £8.72/hour (NZ$16.63). However many growers have seen a 40-50% rise in employment costs since 2015 as:

  1. Lower output and reduction in productivity with newly recruited UK labour because of Brexit. Fruit and vegetables are normally picked by some 70,000 to 80,000 migrant workers, mainly from eastern Europe who tend to be much more productive than local labour. From this year any foreign worker wanting to come to the UK will have to meet a minimum salary threshold of 25,600 – well above what farm pickers would normally be paid.
  2. A weaker £ also makes it less attractive for foreign workers as when they convert their income in £ it buys them less of their own currency.
UK Farmers Weekly

Labour costs account for 40-70% of a growers revenue which mean some are seriously looking at the financial viability of their business. This is concerning as the domestic growing industry contributes more than £3.8bn to the UK economy. What is true is that although some agricultural sectors are highly mechanised there is still a need for manual jobs carried out by labour. A report, by farm consultant Andersons suggested that a farmgate price increase of between 9% and 19% is needed simply to offset the increase in the National Living Wage (NLW) hourly rate – it will rise to £8.91/hour (NZ$17.12) from 1 April 2021. The problem with the NLW is that it doesn’t take into consideration the differences in the cost of living in a country e.g. London as compared to Manchester. However evidence suggests that workers are more motivated when the living wage is being paid and staff retention is higher.

Source: UK Farmers Weekly 15th February 2021

Economic growth becoming a malignancy – Dr Mike Ryan WHO

Most economics courses will include the topic of limitations of Gross Domestic Product as an indicator of standard of living. US senator Robert F Kennedy pointed out 50 years ago that GDP traditionally measures everything except those things that make life worthwhile. I was very taken by Dr Mike Ryan’s (WHO) recent speech about how Covid 19 is a wake up call to how we live our lives. A lot of references to the fact that we can’t keep just focusing on economic growth. Well worth a look.

Game Theory and online cheating in tests

Michael Cameron’s blog Sex, Drugs and Economics had an interesting post regarding game theory and cheating in online assessment. He mentions a paper by Eren Bilena Alexander Matros entitled ‘Online cheating amid COVID-19’ in the Journal of Economic Behavior and Organization. They use a simple game theory model below to show the payoffs of the student and the professor with the student cheating or being honest.

Sequential-move game
In the sequential-move game, the student chooses to either cheat or be honest. The professor observes the student choice and decides either to report the student for cheating or not. There are four outcomes in this game, but the professor and the student rank these outcomes differently – see table below.

The table (right) gives an example of players’ payoffs. This game has a unique mixed-strategy equilibrium, which means that the student and the professor should randomise between their two actions in equilibrium. Thus cheating as well as reporting is a part of the equilibrium.

To find the Nash equilibriums you use the ‘best response method – for each player, for each strategy, what is the best response of the other player. Where both players are selecting a best response, they are doing the best they can, given the choice of the other player (this is the textbook definition of Nash equilibrium). In this game, the best responses are:

  1. If the student chooses to cheat, the professor’s best response is to report the student (since 3 is a better payoff than 2);
  2. If the student chooses not to cheat, the professor’s best response is not to report the student (since 4 is a better payoff than 1);
  3. If the professor chooses to report the student, the student’s best response is to not cheat (since 2 is a better payoff than 1); and
  4. If the professor chooses not to report the student, the student’s best response is to cheat (since 4 is a better payoff than 3).

A Nash equilibrium occurs where both players’ best responses coincide – note that there isn’t actually any case where both players are playing a best response.

In cases such as this, we say that there is no Nash equilibrium in pure strategy. However, there will be a mixed strategy equilibrium, where the players randomise their choices of strategy. The student should cheat with some probability, and the professor should report the student with some probability.

Source: Sex, Drugs and Economics – Combating cheating in online tests