Sunday 25 January 2015

Pros and Cons: Mixed Economy

A mixed economy is the most common in today's world, and seems to be the most efficient balance of private and state participation in the economy. It is positioned between a complete command economy (in which the economy is totally run and planned by the governing authorities), and a totally laissez-faire, free market economy in which the government has little/no role, rather private companies and individuals operate everything (though no economy has yet fully devoted itself to this, not even the US).

The concept of a mixed economy is by no means a recent discovery, but perhaps its greatest proponent was John Maynard Keynes. Arguably the greatest economist of the 20th century, much of his work investigating the potentially positive effects of state intervention in the economy was particularly relevant in times of crises- FD Roosevelt, US President who led the nation's recovery out of the Great Depression of the 1930s attributed much of his policy decisions to Keynes.

So, let's look deeper into the idea of mixed economy by evaluating the pros and cons of a market economy.

PRO- Monopoly.

Government involvement in the economy can prevent market failures, such as the emergence of monopolies (for more information on these see this previous article). This is largely done by government regulation; the UK has 'competition laws', designed to prevent massive business blocking smaller ones from entering a market. This means companies that, for example, block competition by setting rock bottom prices for their products that they know their smaller competition won't be able to maintain (a practice known as predatory pricing), can be prosecuted and penalised by authorities. Shell and Esso were two fuel companies accused of this malpractice in 2013.

The breaking up/prevention of monopolies means that all businesses in the economy are able to compete on a level playing field, and ensures that the most efficient and popular businesses are those that succeed most.

CON- Monopoly.

There is another side of this argument, however; that is that certain types of government involvement in a mixed economy can itself create monopolies. This was a significant argument behind the privatisation of the Royal Mail; despite its supposed 'loss of monopoly' in 2005 when other competitors were allowed to enter the market, the state-owned Royal Mail, though slightly weakened, maintained its domination of the postal market. Monopoly can encourage complacency- and the Royal Mail was accused of gross inefficiency when the idea of privatisation was being kicked about.

Some argue that state ownership leads to sector monopolies- the energy market a couple of decades ago was another example- and thus reduce competition and innovation. The private sector on the other hand is seen to encourage competition, as long as the barriers to entry are low.

PRO- Motives.

The actions of the government in an economy hold an advantage over those of private entities in that the government is directly accountable to its people. The government is less likely to act against the wishes of its citizens because if it does so it is far less likely to be re-elected and maintain power.

Furthermore, the profit-making motive is not ingrained in state institutions as it is in the private sector. State institutions such as the NHS and (formerly) the Royal Mail were created not to make the government money, but rather to serve the people of Britain; ultimately creating a service more helpful to the patient. Compare the NHS with private health systems across the world; the lack of a profit motive is the reason why, for example, no doctor in Britain will advise for extra treatments/medicines solely to extract money from you, and it is a major reason why the British healthcare is renowned across the world.

Open access to healthcare for all citizens has been of huge benefit to Britain; looking at the masses of debt accumulated by people across the world due to circumstances out of their control (such as accidents), one can see how effective and beneficial for the people the NHS is. It allows the poor to have access to healthcare, and thus prevents the socio-economic gap in Britain increasing to the extent of countries such as the USA.

The governments' motives to maintain favour with the public and genuinely serve the public rather than make profits makes it often more effective in improving the lives of the citizens.

CON- Motives.

One the other side of the coin, however, government economic policy is occasionally branded as short-termist, unsustainable electioneering. Gaining favour with the voting public can often be done via short term economic boosts. The MacMillan government of the 1950s is an example of this; two major tax cuts in 1954 and 1959 (just before elections) of a combined value of £504m certainly gained favour with the people, but this ultimately contributed to a massive deficit of over £800m five years later. Had the tax cuts not been made, it is likely the economic situation later would not be so dire; but the desire of the government to instantly win votes led to pursuit of short term policies that ultimately damaged the economy as a whole more than it benefited it.

Libertarians argue this as a reason why the government should have little/no role at all in economic management; that the primary motive of a politician is to be re-elected rather than benefit the country, reasoning that certainly has credence. Whether there is a better alternative or not though, remains an open question.

PRO- Investment.

Linked to the earlier pro of motives, one of JM Keynes' major contributions to the arena of public economic policy was that the government should intervene in times of trouble to invest in employment, through state-led projects. These could be anything, such as a development of infrastructure (hiring people to design and build roads, public buildings, etc.), or more employment in publicly owned entities like the NHS.

For private companies chasing profits, the best way to do so is often not to try to increase income but to decrease expenditure- and a way to do this is to cut down on employment. In recent times this has not just come in the form of job cuts but outsourcing also; the cheap labour available throughout the world has encouraged companies to cut on jobs domestically and save money by hiring labour elsewhere.

This is something the government would be less prepared to do- Britain's recovery from the 1930s crisis showed this, as the government invested more in jobs in order to get out of its hole, upon Keynes' advice. More people found work, boosting spending again and eventually bringing the economy into recovery.

CON- Taxes

Taxes, the bane of any proponent of 'laissez-faire'. More state intervention in the economy, of course, requires greater investment from the government, which largely comes from tax revenues. Therefore an argument against intervention is that the more there is, the more people must be taxed- and higher income tax for example, is claimed to be a cause of a reduction in motivation to work, as an individual will see a large proportion of the money he earns go to the taxman.

Therefore libertarians often argue that less state intervention in the economy allows taxes to fall, increasing peoples' motivation to work as they see more of the money they earn go directly to them.

Lone Editor

Saturday 24 January 2015

15 Scary Facts About The US Economy

1. 1 in 5 American families are totally unemployed- that is no family member holds a job, according to the Bureau of Labour Statistics.

2. Research from UC Berkeley academic Emmanuel Saez shows that while incomes of the top 1% increased by over 11% since the end of the recession, the other 99% saw a decrease in salary of 0.8%.

3. Multinational Corporations have accumulated almost two trillion dollars in accounts outside of the USA in order to avoid domestic taxes.

4. The proportion of US families holding ownership in small business reached an all-time low of 11.7% in 2013.

5. According to the University of Arizona, two years after graduation almost half of college graduates are still relying on parents or family members for financial support, due to a lack of prosperous employment opportunities.

6. Median household income has fallen for the past 5 consecutive years. In today's terms, the average household wage was almost $88,000 in 2003- a decade later, this figure was just $56,335- a 36% decline.

7. US National Debt grew by over a trillion dollars in 2014.

8. The percentage of Americans who own their homes (64.8%) is the lowest since 1995.

9. An estimated 49 million Americans have limited/uncertain access to a sufficient amount of food.

10. During 2013, the Chinese sold $440bn worth of exports to the US, who sold $121bn to China, creating the largest recorded trade deficit in history. 

11. In 2012, there were more American women relying on food stamps than women with full time jobs.

12. One third of Americans would not be able to afford more than a month of mortgage payments if they lost their job.

13. In 2013, female full-time workers were paid on average 78% of that which their male counterparts were paid.

14. Between 2001 and 2011, over 56,000 American manufacturing facilities were shut down- a rate of 15 per day.

15. American consumer debt has increased by 1700% (multiplied by 17!) in the past 40 years.

Sources for these facts can be found in links within.
Lone Editor

Sunday 11 January 2015

What are Economic Bubbles?

We reflected earlier in a previous article on whether we, as humans, were rational actors- to be rational is to be objective and well reasoned in all decision-making (it’s an unclear concept, one could say there’s no real definition for it).

Anyway, the main conclusion arose that we are not rational actors as individuals- though perhaps as a large population irrationalities may balance each other out, even still we are humans- subject to emotion (we often get excited easily, and make silly decisions as a result), and often a basic lack of knowledge of the effects of what we are doing- sometimes we are at fault for this, sometimes not. 

Now let’s explore something that perhaps exemplifies human irrationality best in the field of economics- bubbles.
No, not the soapy ones, but economic bubbles are certainly similar in nature (hence the name)- in essence, an economic bubble is a massive economic boom that has grown so quickly and expansively that it is, like a soap bubble, in danger of being popped in an instant. An economic expansion, followed by a prompt plunge- that’s pretty much the basic structure of an economic bubble.

The South Sea Bubble caused spectacular devastation.
Bubbles aren’t some abstract theoretical idea, they have occurred numerous times throughout history- the earliest formally recorded bubble is believed to be from the early 18th century. The bursting of the South Sea Bubble of 1720 was the result of wildly heightened expectations of the South Sea Company, which had taken responsibility of the entire British national debt in exchange for total control of all trade in the South Sea. In January 1720, SSC stocks were priced at £128. February 1720, £175. April 1720, £330. By June, a whopping £1050- almost 10 times what it had been just 6 months ago. 
But this was the peak. The bubble had grown too much. 
By September, just 3 months after South Sea Company stocks had reached a record price, it was almost back to square one- stock price shrunk to just £175. 
This had devastated numerous investors- who were caught up in the initial hype of this company ambitiously taking on all of Britain’s debt in promise of finding profit. But in truth, the South Sea Company had little chance at all. They were a massive failure; partly during to their own mismanagement, partly due to the crippling debt they had just taken on and partly due to the huge reduction in South Sea trade after the Treaty of Utrecht was signed in 1713. Whatever/whoever was responsible, the bubble had burst and proven all the hype, all the investment, all the trust, to be false.

The California Gold Rush, the ‘dotcom' bubble of the 1990s and early 200s, the 2008 financial crisis- all examples of bubbles and/or their catastrophic burstings. 
Take the most recent financial crisis of 2008. Now there’s much to talk about when it comes to the causes of the crash, but simply put, it was caused by a massive housing bubble that had developed not just in the US (although perhaps most seriously here), but throughout the world. 
Like all bubbles, the housing market in the USA had initially seen a massive boom- caused by radically low interest rates (which had been at an all time low of 1% in 2004), irresponsible lending from financial institutions and the power given to banks to be able to conduct such activity.

Low interest rates made purchasing housing a very attractive option- a rate of 1%, set by the Federal Reserve with the aim of boosting spending after the 2002 post-dotcom recession, was almost a free loan, and therefore many Americans went on to grab the opportunity and buy their own houses.
For the financial institutions (the banks), this 1% provided an issue- it meant their profit margins would be far lower than before, when the rate was closer to 5%. In seeking increased profits, they took on more loan requests. The regular system of financial discretion was almost abandoned, and banks began lending to more and more risky individuals, many of whom ended up being unable to pay their loan and thus homeless.
The banks had such a huge pot to lend from because every bank has customers- people who deposit their money, in the trust that the bank will keep it available for them whenever they need it. But gradual recession of the Glass-Steagall Act, which initially prevented the lending side of banks to use the customers’ deposits, meant that banks eventually were able to use money deposited by customers to fund lending and other investment activity. This gave them a huge amount of money- and thus the banks could afford to be more reckless and risky with their money management. 

Wall St.- responsible for the 2008 financial crisis?
This increase in house buying caused a surge in house prices- causing even more people to jump onto the bandwagon, presenting what seemed to be a great investment in an asset that appeared to be endlessly growing in value. The bubble was pumped up more and more- house prices peaked in 2006, then the big burst came in 2008- the burst that cost the USA an estimated $648 billion lost in economic growth between September 2008-December 2009, roughly $5,800 in lost income for every US household, and is still haunting the global economy.
The bubble had popped, and the liquid stains are going to take a long time to rub off. 

The problem with bubbles is that their usual steps of boom then bust are very tricky to work out. The initial boom is by no means a promise of an oncoming burst; indeed an economic boom is often good, providing employment, wealth that can potentially itself prevent a bubble from arising.  
Economist Hyman Minsky is famous for calling out symptoms of an oncoming bubble- yet mystery still hovers over which booms of today are going to become the popped bubbles of tomorrow. Will it be the housing market again? The technology industry, again? Another industry altogether, or none of them?

Only time will tell.
Lone Editor

Saturday 3 January 2015

3 Reasons Why Advertising Works (With Textbook Examples)

Advertising is perhaps the most omnipresent symptom of the modern global economic system. It is something that is not just pretty much unavoidable in one's regular daily life, but something that has grown to become far more than just a piece of material promoting a single product. Prominent pioneer of media studies Marshall McLuhan famously dubbed advertising "the greatest art form of the 20th century": look at the tearjerking recent Sainsburys ad, or Aleksandr Orlov from 'Compare the Market', and one could argue this claim to be applicable to today. 

Advertising has developed rapidly along all forms of media. Beginning largely in newspapers, ads moved onto our streets, onto our radios, onto our tv screens, onto the internet, and now, onto our smartphones and computer technology. 

The very fact that Britain's expenditure on advertising is set to hit £20bn next year shows that it is a method clearly relied upon by businesses to attract customers. Research suggests that on average, US supermarket sales increased by $89 per $1 spent on advertising

While many of us would attest that we are unaffected by advertising ("we know it's not real!"), one cannot deny that it does what it is intended to do: seduce us, make us want more- unleashing the consumers within us, as well as the money out of our pockets. 

So why exactly is advertising so effective? And furthermore, why is it so when most of us understand that advertisements are not always accurate representations of the real world/product? There are numerous answers to this of course, but let's have a look at three such reasons why advertising is so effective that even we are not always aware of its charm.

1. Personal Connection

A key to unlocking the minds of those a company is advertising to is the development of a close connection with the target audience. This creates trust, confidence and a love for the brand that simply cannot be bought.

One way in which this is done is by marketing their products as something the audience will genuinely like and lead to self betterment. Take 'Special K' cereal for example- this ad connects with women, by particularly attaching itself to the 'embrace yourself' movement. Many women (well, people in general) have worries about their size- and this ad allays those worries by spreading the message that size does not matter, that those potential customers watching are 'More than a number'. 

The advert does not actually feature anything related to cereal, it shows no more of the product than its logo, and it potentially goes against Special K cereal's appeal as a product consumed to lose weight- but this ad develops trust and admiration for the brand in the viewer that arguably is more powerful when it comes to buying decisions than the cereal itself. 

Another way a personal connection can be developed is by identifying with the viewer via a familiar face. Think George Clooney advertising Nespresso coffee, Taylor Swift advertising Diet Coke or Gary Lineker opening a pack of Walkers crisps; these are faces that people trust, admire, and brands can use them effectively to translate this trust with their products.

2. Exaggeration 

It goes without saying that a major way that advertisers rope us in is by simply exaggerating their product or service. 
Whether it's that internet provider's exaggeration of its download speeds or the over the top claimed health benefits of a familiar blackcurrant soft beverage, exaggeration is part and parcel of any modern advertisement, and it comes in many forms. 

Take a quick look at this Samsung Note advert, in particular the small text at the bottom of the screen beginning 0:04- "Screen images simulated... sequences shortened". This message must appear for legal reasons, but most people are unlikely to pay much heed to it- they will watch the entire ad thinking that all that watching-film-while-simultaneously-checking-emails action will be as buttery smooth in real life as in the video (if you've owned any multitasking smartphone of any sort you may understand that this is rarely the case). 

Another form of exaggeration that really needs little introduction is most commonly seen in fashion-related advertisements- that is the copious amount of editing of the bodies of the participants. Again, they exaggerate the effects of the product- unless the product they are selling is Photoshop, that is. 

But exaggeration is certainly only part of the art of advertising. Its effect is arguably dulled by the fact that most of us know it is there in almost every ad we see: a Lab42 survey of 500 consumers reported that just 3% of respondents described claims made in advertisements to be very accurate. 
So why are we still enticed by adverts when we know they are likely to be exaggerating? The next and final reason may perhaps be the most subtle yet significant.

3. Development of Inadequacy

This is the big one, that pretty much all the other advertising techniques culminate in. 

Advertisements make us feel incomplete, insufficient, inadequate. It's their job- to make us feel like we have a hole in our lives shaped exactly like their product.

This is a feature of every advert. Feeling hungry? Walkers' crisps will fill you up. Bad hair day? L'Oreal shampoo will ensure it never happens again. In need of entertainment? Buy a PS4.

But the most prominent, exaggerated use of this technique can be seen particularly in the advertising of upmarket, luxury products. This Mercedes 'Video Brochure' for example, promotes far more than just the car itself. Yes the car is indeed the main feature of the video but subtle things, like the house we are shown at the beginning that the 'owner' lives in, the 'owner's' clothes, the conveniently handsome young 'owner' himself.

The video promotes not just the car but the whole lifestyle, packaging the car as a part of it. Chances are, most people don't have a house that nice and clean, and aren't that photo (or video)-genic- and so we compare, we re-evaluate our own lifestyle in comparison with what we see on the screen and, unfortunately, many of us see our own as incomplete, inadequate, because we don't have a mansion or a luxury sports car.

One could ask- if most viewers of the promotional material can't afford to buy such an expensive product, why do companies like Mercedes bother with marketing? The answer is pretty straightforward, and it's why we see more adverts on TV from broader car companies like Mercedes rather than niche brands like Ferrari. One could call it the 'halo effect' of advertising, branding. We may take a look with our jaws dropped at the beauty of the Merc in the ad- and although we know we can't afford it, the company does sell cars at a considerably cheaper price, but ones that follow a similar design template. The S-Class Coupe in the video costs well over £100k, but the Mercedes C Class Coupe costs closer to £30k. So we may not be able to afford the former, but the latter may appear more attractive an option due to it being from the same carmaker. So the viewer may not buy the car directly advertised, but they'll still be more likely to buy a Mercedes. Ferrari don't sell cheap cars, so this halo effect is not present because if you can't afford one Ferrari model, you probably can't afford any of them.

The rose-tinted lifestyles presented in advertisements have the negative effect of constantly unsettling viewers, creating 'aspirations' that are often disguises for being unhappy with what may have previously been a perfectly comfortable life. You may have been happy with your 40 inch Sony TV, but when you see some celebrity showing off a 60 inch 4K curved-screen TV, your perception of your TV may completely change. You may therefore strive to be able to afford said 60 inch TV by working yourself harder while sacrificing social and family commitments, stressing more over finances, and generally in more of a rut. Should you finally make the purchase, after a few years your TV will soon inevitably be dwarfed by some new technology shown off on your TV. Your perception of your TV may change, and the deadly cycle of stress and consumption starts again.

Advertisements are not inherently dangerous. They can in fact be incredibly informative and entertaining, but that's not to say one should not be careful in assessing the impact of promotional material on our lives. Over-susceptibility to the bells and whistles of adverts can lead to dangerous consequences indeed.


Lone Editor