Category Archives: Politics

Should Central Banks still be independent?

Video from CNBC looking at why central banks became independent and if it still should be the case – very informative and they use the Phillips Curve in their explanation. WIth the ongoing inflation problems in the 1970’s and 80’s it was thought that giving central banks independence of government control should be implemented. It was argued that policy makers would struggle to convince the public they were serious about containing inflation if politicians retained a say on setting interest rates. In 1989 New Zealand become the first country to introduce an independent bank with the 1989 – Reserve Bank Act. The mandate was to keep inflation between 0-2% but later changed to 1-3%.

With the GFC in 2008 it was central banks who slashed interest rates and implemented several rounds of quantitative easing to stimulate demand. However the GFC could have been prevented if central banks intervened to stop the biggest asset-bubble in history instead of focusing purely on keeping inflation low. Furthermore the European Central Bank were slow to act and the recovery was stymied. The fact that Germany is under the threat of deflation means that the ECB have cut interest into negative territory and are relaunch another round of quantitative easing – they are running out of options. Economists are focusing on fiscal stimulus – tax cuts and government spending. Therefore monetary and fiscal policy should be working together. According to Larry Elliott of The Guardian. central bank independence is a product of the neoliberal Chicago school of economics and aims to advance neoliberal interests. More specifically, workers like high employment because in those circumstances it is easier to bid up pay.

Liberalism v GDP per capita

Martin Wolf in the FT wrote an interesting piece entitled ‘Liberalism will endure but must be renewed’. He states that liberalism is not a precise philosophy, it is an attitude. Liberals share a belief and trust in the capacity of human beings to decide things for themselves and express opinions and participate in public life.

Liberals share a belief that agency depends on possession of economic and political rights. As Martin Wolf stated ‘institutions are needed to protect those rights’ but liberalism also depends on markets to co-ordinate independent economic actors, free media to allow the spread of opinions, and political parties to organise politics. The graph below shows that economic growth and political freedom tend to go together as both depend on the rule of law. Liberal societies tend to be rich and rich societies tend to be liberal. Note that :

  • New Zealand is one of the most liberal economies – approx 98 on the index – with its GDP per head being just over US$40,000.
  • Singapore has a GDP per head over US$100,000 in relation to a Liberal Freedom index of approximately 72.
  • Eritrea ranks as the lowest

Brexit and the EU explained

No doubt you are aware of the what is happening in the UK with regard to leaving the European Union – Brexit. Below is a very informative video from CNBC which explains the history of the UK when it entered the EEC (as it was formerly known) in 1973 under Ted Heath’s government to today where there is chaos as to the process of leaving the EU.

New Green Deal – more about politics than economics

In Unit 3 of A2 CIE economics course you will no doubt have come across externalities – see graphs below. In simple terms the cost to the consumer must also be accompanied by the external costs (referred to as externalities) which is normally not paid by the consumer. Externalities are common in virtually all economic activities. They are defined as third party (or spill over) effects arising from the production and/or consumption of goods and services for which no appropriate compensation is paid.

Externalities can cause market failure if the price mechanism does not take into account the full social costs and social benefits of production and consumption. The study of externalities by economists has become extensive in recent years, not least because of concerns about the link between the economy and the environment.

This all seems very straight forward as you would assume the external cost (externality) of driving a car (emissions) would be added to the private cost of running the car (petrol etc). However carbon taxation is politically elusive as only 20% of global emissions are covered by schemes that put a price on carbon and only 1% of emissions subject to such schemes face a price as high as $40 per tonne of carbon dioxide. The Green New Deal proposes to a move to a 100% clean and renewable energy within a decade or two, and to zero net emissions by mid-century. Those who support the idea are sceptical about costs and funding as decarbonising the economy will require some serious capital.

For the Green New Deal to work it must mobilise a majority that are more passionate than the remainder. A carbon tax with a dividend may be appealing but the financial benefits are small when divided by the number of voters. Remember that an associated tax would encourage an aggressive response from wealthy fossils-fuel firms. A Green New Deal, in contrast, might promise sufficient goodies to organised interest groups, such as labour unions and domestic manufacturers, to gather a winning political coalition.

Some see the Green New Deal is something more radical. Roosevelt saw the Depression as both a threat to liberal democracy and the product of an economic system that put profits ahead of the welfare of the working man. Similarly, left-wing activists view climate change as the result of unbridled capitalism. They aim to solve it by redistributing economic and political power.

Source: The Economist – A bold new plan to tackle climate change ignores economic orthodoxy. 7th February 2019

US and China trade war and what it means.

Doing trade barriers with my NCEA Level 2 class and below is a good clip from Al Jazeera about the issues that are arising from it and who will lose the least from a trade war. The last ten years saw a marked improvement in trade between the United States and China. But Trump’s battle of the tariffs is threatening that. And there are fears of an all-out trade war. The U.S. is putting tariffs on 50 billion dollars worth of Chinese imports. The president says he wants a fairer trade with China. But Beijing’s fired back with a tit-for-tat response. It’s published a list of more than 600 American products it plans to hit with its own taxes. Is it a case of who blinks first in this economic brinkmanship? And what will it mean for global trade? The comments by Philippe LeGrain are particularly good.

The 3 heads of Donald Trump

Below is a great cartoon clip from the FT with Gillian Tett talking about the 3 heads of Donald Trump. With some excellent cartoon graphics she goes through each of the following:

  1. The sensible serious Trump
  2. The love to shock Trump
  3. Sleezy, freewheeling, write my own rules, anti elitist Trump

One wonders which Trump will be more prevalent in his presidency? A lot of references to economics – animal spirits, NAFTA, tax cuts, corporate tax etc. As Gillian Tett points out ‘nobody really knows who he is’