Tag Archives: Coronavirus

Inflation – an historical overview and how will covid-19 impact prices?

This is a very good video on inflation from The Economist – it discusses why over the past two decades inflation has remained low in good times and bad. There is a brief look at historical rates of inflation and policy with reference to Bill Phillips (Phillips Curve) and Paul Volker (US Fed Chairman) who increased the prime interest rate to 21.5% in 1981 to tackle inflation. Also low interest rates and government fiscal stimulus could start to see an upward movement in the inflation figure. Very useful for Unit 4 of the CIE AS and A2 Economics course.

Covid-19 stimulus vs GFC stimulus

Below is a useful diagram from McKinsey & Company that compares the money used to assist the economies after the outbreak of Covid-19 and the GFC in 2017. Governments allocated US$10 trillion for economic stimulus in just two months—and for some countries, their response as a percentage of GDP was nearly ten times what it was in the financial crisis of 2008–09.

Countries in Europe have allocated around US$4 trillion which is approximately 30 times than that of the Marshall Plan in today’s value – the Marshall Plan was valued at $15bn in 1948. The size of government responses are unprecedented and they, with central banks, are moving into new territory. Global debt is estimated to reach US$300 trillion by the March quarter in 2021 with global GDP taking a huge hit. However unlike the GFC there seems to be an end point once an effective vaccine has been found but many jobs and businesses have gone and it will take time before new ones appear.

Models of Capitalism – LMEs vs CMEs during COVID-19

The Economist Free Exchange recently ran an article looking at the various taxonomies that are used to categorise models of capitalism. The book entitled “Varieties of Capitalism” (2001), distinguished between liberal market economies (LMEs) and co-ordinated market economies (CMEs).

LMEs’ rely on market mechanisms to allocate resources and determine wages, and on financial markets to allocate capital. E.G. America, Britain and Canada
CMEs, like social organisations such as trade unions, and of bank finance. E.G. Germany, Sweden, Austria and the Netherlands

Western economies tend to sit on a continuum between these two models – below is a table outlining the main criteria each:

Source: Wikipedia

Which system is better during a pandemic?

During the pandemic, CMEs have generally had a more sound strategy for containing the spread of the virus. This may be generated by unity and consistency than by the strength of the intervention that is chosen. Some countries, e.g. Sweden, avoided lockdowns completely but seemed to get a lot of public support and relied on voluntary social distancing. New Zealand implemented a lockdown policy from the outset and relied a lot on contract tracing as well as strict system of managed isolation. LMEs such as the USA and the UK have had a policy which have been on the whole disorganised and not taken the virus seriously.

However in such situations and because of their innovative nature LMEs are more likely to focus on treatments and vaccines.

Of 34 vaccine candidates tracked by the World Health Organisation
CMEs = 4
LMEs = 13
(AstraZeneca, an Anglo-Swedish drugmaker working with Oxford University, straddles both categories).

CMEs are likely to have a lower death count but LMEs seem to hold the upper hand with regard to a vaccines. Maybe a global coalition and co-ordination is needed in future to get the best of both systems.

Source: The Economist – Which is the best market model? 12th September 2020

Covid19 and unemployment – BBC Podcast

BBC World Service - The Real Story, Newshour Extra: Welcome

Below is a link to a very good podcast from the BBC ‘The Real Story’. Dan Damon discuss what should be done about rising unemployment in the age of Covid-19? Contributors include Australian economist Steve Keen author of ‘Debunking Economics’. Topics of debate include:

  • Universal Basic Income
  • Modern Monetary Theory
  • How much debt can a government sustain in propping up an economy?
  • Should a government subsidise companies taking-on workers?

Also features a very good interview with Daniel Susskind – author of ‘A World Without Work: Technology, Automation and How We Should Respond’

It is 53 minutes long but can take your mind off the commute to work.

https://www.bbc.co.uk/programmes/w3cszcnf

Eight body problem in economics

Physicists and mathematicians have puzzled over the three-body problem – the question of how three objects orbit one another according to Newton’s laws. No single equation can predict how three bodies will move in relation to one another and whether their orbits will repeat or devolve into chaos.

John Mauldin of Mauldin Economics wrote about the eight-body problem in economics in which we cannot predict how the economy will react when eight variables change. He lists the following:

What is certain is that as government fiscal intervention starts to lose its effectiveness it will be inevitable that monetary policy will continue to remain very accommodating with bond buybacks and record low interest rates. COVID-19 has turned conventional economic thinking upside down.

Reduced inflation in New Zealand with Covid-19

The inflation rate in New Zealand, as in many countries, is on a downward trajectory – it will take a lot of stimulus form the Reserve Bank to meet its policy target agreement of maintaining the CPI between 1-3%. Westpac have forecast a drop to 0.2% in 2021 and to remain below 1% until the middle of 2022. There have been some obvious reasons for less pressure on inflation:

  • Demand for goods and services both in NZ and overseas has dropped significantly and tamed any inflation. Most notably there has been a major drop in oil prices.
  • The use of ecommerce and, without the overheads of rents / staff, prices are often much lower than the high street.
  • With zero net migration and as excess capacity in long term rental market prices haven’t moved. Add to this the Government’s rent freeze.
  • A lack of tourist dollars has meant a shift inwards of the aggregate demand curve as exports of services fall – AD = C+I+G+(X-M).
  • With people having the growing uncertainty of job security there has been little additional spending or borrowing with the threat of redundancy hanging over them.
  • The wage subsidy has kept some companies afloat but there has been no room for wages increases/negotiations for such uncertain times. Therefore consumer spending has been limited compared to previous years.

Important to note that inflation figures that are quoted are usually on a yearly basis so it is the change in prices from today to this time last year. It will be interesting to see what state the economy will be in this time next year.

Unemployment drops in New Zealand

I was surprised to see the official unemployment figures issued today – down from 4.2% to 4.0%. However this reflects those workers that were laid off but unable to seek further employment due to the Level 4 lockdown but still included in the labour force. Remember the unemployment calculation is those people who are unemployed and actively seeking employment.

According to the ASB a better measure in the current environment would be underutilisation – It is defined such that jobseekers outside the labour force are captured (unlike the unemployment rate) and includes people working part-time who would like to work more hours. Utilisation rose from 10.4% to 12%. The unadjusted LCI, more of a ‘raw’ measure of wage costs, rose just 0.4% qoq, with annual growth slowing from 3.8% to 3.1%. Average hourly earnings from the QES slowed to 2.5% yoy for private sector workers, a multi-year low.

End of wage subsidy

Although these were positive signs for unemployment figures later in the year it is inevitable that these figures will deteriorate when the wage subsidy ends and we return to an economy which isn’t propped up by government spending. Unemployment is forecast to peak at 9.8% in September.

Source: ASB Bank – Economic Note – 5-8-20

Modern Monetary Theory – The Deficit Myth

I have blogged before about Modern Monetary Theory. Basically it says that you can print your own currency by having your own central bank, run large deficits, have full employment, have no inflationary pressure and do this year after year. However while large deficits and monetary stimulus make some sense during a short deflationary economic contraction, sustaining those policies for years, will lead to inflation and economic stagnation – stagflation. The video below is from BBC Reel where Stephanie Kelton, author of The Deficit Myth, argues that we need to rethink our attitudes towards government spending. Worth a look – great graphics.

Domestic tourists needed to bolster GDP in NZ

Although in New Zealand the containment of the Covid-19 has so far been successful, with no international visitors the tourism sector has seen a sharp downturn. Those that have suffered most are the smaller operators and bars, restaurants, accommodation providers. Even with the wage subsidy a lot of these firms have been forced out of business. Domestic tourism will be essentially for the survival of a lot of the tourist spots around the country. The return of overseas visitors is some way off and even when restrictions are lifted visitor numbers are likely to be limited.

Visitor arrivals in New Zealand

Source: Westpac Economic Overview – May 2020

Before Covid-19, Tourism was New Zealand’s largest export industry in terms of foreign exchange earnings. It directly employed 8.4 per cent of the New Zealand workforce. For the year ended March 2019:

  • the indirect value added of industries supporting tourism generated an additional $11.2 billion, or 4.0 percent of GDP.
  • tourism as whole generated a direct contribution to gross domestic product (GDP) of $16.2 billion, or 5.8 percent of GDP.
  • international tourism expenditure increased 5.2 percent ($843 million) to $17.2 billion, and contributed 20.4 percent to New Zealand’s total exports of goods and services.

As the economy struggles along people will be concerned about job security and look to be a lot more cautious with spending. However having been restricted during the lockdown there is the hope that New Zealanders will want to travel domestically.

Source: Tourism New Zealand

Income Elasticity of Demand and Consumer Purchases Post-Covid

I came across this material on the blog ‘Sex, Drugs and Economics’ which discusses Bruce Wydick’s post on his blog ‘Across Two Worlds’. This is very useful for NCEA Level 3 and CIE AS Level Unit 2 both of which look at Income Elasticity of Demand.

Wydick looks at who is most likely to do well and who is likely to suffer in a post-covid environment. A typical recession is generally caused by supply-side factors (oil crisis years of 1973 – prices up by 400% – 1979 – prices up by 200%) or demand-side impact (loss of business confidence and consumer confidence). Covid-19 is very different as it is a complete shut-down of certain businesses and it forced people to stop buying things that they normal do. Wydick puts goods and services into two categories:

Snap-Back goods and services – things we couldn’t buy during the Level 4 lock-down period but were purchased when we went to Level 3. Pent up demand meant that purchases of these goods and service might have been higher than normal – buying less now means buying more later.

Gone Forever – as it states. Invariably this generally refers to services like air travel, tourism, haircuts, public transport and entertainment. When it becomes safe to have a haircut you still only get one haircut as the rest of your haircuts have disappeared and there is no catch-up spending like with snap-back goods.

These are the differences between goods with low versus high income elasticity. Income elasticity of demand measures the responsiveness of quantity demanded to changes in income. We can have different types of normal goods. If a 10% increase in income brought about a 10% increase in quantity demanded, we can say the income elasticity of demand is unitary. If EY>1 we classify the good as a luxury, and if EY<1, a necessity.

Income elasticity of demand will also affect the pattern of demand over time. For normal luxury goods, whose income elasticity of demand exceeds +1, as incomes rise, the proportion of a consumer’s income spent on that product will go up. For normal necessities (income elasticity of demand is positive but less than 1 and for inferior goods (where the income elasticity of demand is negative) – then as income rises, the share or proportion of their budget on these products will fall. Wydick puts the different types of purchases in a simple 2 x 2 matrix“Snap-Back” vs. “Gone Forever” and High vs. Low income elasticity. 

It then becomes easy to see which industries are in the most trouble in 2020.  So, when goods and services are both “gone forever” and have a high income elasticity, we can expect the impact of the coronavirus pandemic to be most severe. Wydick identifies air travel, tourism, sporting events, hospitality, and transport (but not public transport). Everything else either snaps back and experiences some catch-up spending, or isn’t as affected by lower incomes. Goods that have a high income elasticity means that when you lose your job during the recession, you and others like you are even less likely to buy these things. For New Zealand the decline of the tourism industry is a significant hit to GDP and employment in this sector.