The Economy, Money, & Politics

Three of our favourite things, well at least mine. The election is in full swing here in the United Kingdom, and there is currently the build up to the primaries in the United States.

In the case of the United Kingdom we are facing an election of considerable uncertainty, the outcome of a coalition is highly expected considering current polling. But it will undoubtedly come up to post election day to see who can craft this arrangement.

In the liberal air of university one may find incredible support for the Green party, on the premise that a vote for them is a vote for the beginning of change in parliament, even though they themselves have basically stated it will be near impossible for them to have a serious impact on decisions or push through any of their manifesto ideas. So the disillusionment with the two party system has become ever-clear. The general distaste for austerity based policy is also extremely clear.

The question is should we do a u-turn right now? Krugman says yes, undoubtedly. He was ferociously battling Austerity based policy 5 years ago, and in this last week released an article which is his parade lap of saying he was right and still is right.

http://www.theguardian.com/business/ng-interactive/2015/apr/29/the-austerity-delusion

The only issue is, is that he is not necessarily right. We don’t get the opportunity to test out economic policy in isolated environments, he is basing his success by noting the apparent failure of austerity. Yet we lack an example of any economy which didn’t pursue austerity after the financial crisis. Fiscal based stimulus may have equally failed, but we will never be in the position to know for this occasion.

I am not defending austerity in any manner but I would be cautious to jump onto the other boat, Krugman himself noted while yes a deficit can be managed for a long time there is a point where it is undoubtedly damaging to the health of the economy. Austerian economics is by no means popular or in the post financial crisis economy that effective. However it does highlight a period in which we have explored unconventional policies. The main issue with austerity has been the inequality which it has helped perpetuate, this can be seen in regards to the year on year increase of millionaires and billionaires, but an increasing rate of poverty in developed economies. One may ask who the government is serving, the people as they should be? or the special interests of large corporate institutions? As it is clear that the growth that we have achieved has not been felt by the marginalised factions of society.

I mentioned earlier the upcoming primaries in the United States, I have taken this example specifically due to the data available in regards to where the money that supports candidates comes from. Take the sample below between two democratic primary candidates Hillary Clinton (who has just recently launched her campaign with an advertisement showing how she supports the “regular” American) and Bernie Sanders.

GovMoney

Hillary Clinton has received donations from Citigroup, Goldman Sachs, Morgan Stanley, J.P. Morgan, Credit Suisse, etc. The list goes on. Obviously this does not mean that she will enact policy specifically to disadvantage the people while supporting the financial industry. However, there is a distinct conflict of interest. In comparison to Bernie Sanders he has mostly received contributions from workers unions, and manufacturing related companies. If one was to argue who is more likely to serve the peoples interest, from a financial standpoint it would be Bernie Sanders. But even in this case I believe that campaign contributions to some degree cause a conflict of interest. How can we expect politicians whether they are in the United States or the United Kingdom to make economic policy decisions without an appreciation of the influence that arises from campaign contributions, party contributions, and the coaxing of lobbyists.

The reader will have no doubt that I lean towards the right in regards to political and economic policy. However, I believe that governments have betrayed their ultimate purpose – “serving the people”. With a smaller government I would argue there is less room for financial pressure on elected politicians. As well as the issue of career politicians who get to enjoy the warm cushion of contributions for their entire lives. This is not a comment on the lifestyle or pay of politicians, but how their position is compromised due to the nature of money in politics.

This is critical when we come to assess the type of economic policy whether fiscal or monetary that countries push through. Austerity can seem like a valid decision on the basis that the government would not be crowding out investment, while offering expansionary monetary policy on the side. This has not helped the integral strength of the economy, but specific sectors. While we clearly understand the failures of over-specialisation regardless of how developed the economy.

Economics for Telecommunications

Tim Miller is an economic consultant who spoke about his role as an economic consultant specialized in the telecommunications industry. In this specific area there is the the consideration of implementing new networks such as the next generation of data services for example 5G. Furthermore, in his role he provides costing analysis for the functioning of telecommunication businesses. This would take into account termination rates, spectrum holding, antennas, and the amount of users.

Termination rates are a consequence of calling or texting someone who is on a different network provider. Consider calling from your mobile, you connect to antenna, which provides access to the general network. It is at that point where the connection is made, as the other mobile connects to an antenna on its network and is then brought to the general network. In this the termination rate is incurred on the caller, this is due to the call/message going across a network.

In the early 2000s termination rates were around 7 pence per minute, however today they are as low as 2 pence per minute, partly a consequence of regulation by OFCOM in the United Kingdom. This is not the case for the United States with to some extent a duopoly active between Verizon and AT&T both of which charge between $50-$100 for an average contract, in comparison to around £10-£45 in the UK.

If we consider the nature of the termination rates we may note that they are inelastic. In that we have no particular choice in rate, with research suggesting the price elasticity of demand to be around -0.01. Showing the danger that consumers may face if this went unregulated. With termination rates declining year on year, so the question is where does mobile service revenue come from?

Firstly, termination rates are still providing on average £1.5 billion to the four main mobile service providers in the United Kingdom (O2, Three, Vodafone, and EE). Then there are huge profit margins on services such as texts as the average cost per text for the providers is around 0.0007 pence, whereas the average cost per text for the consumer is 5 pence. At first glance one would assume that data provides the next biggest stream of revenue, however from an industry perspective consumers are not paying enough for data and are not willing to spend more. In the majority of data packages for mobile phones once a threshold amount of data is used the provider begins to make a loss for that particular service up until they are able to apply surcharges for the consumer going beyond their data allowance.

The growing issue for mobile service providers is the type of costing analysis they decide to follow. With the greatest issue being the emergence of costs that are difficult to account for when the network is not one whole unit but rather segmented between the different providers. In this we essentially see the issue of share of spectrum, volume of users per spectrum held, and the number of antennas available. Market share is not defined by the share of spectrum held, this is because the share of the spectrum held is a constraint and it is difficult for providers to realize how much spectrum is required in a given area. Furthermore, we can consider antennas in that they are not all owned by the individual provider, but shared as well. With the complexity in costing a result of the need for only one network as it would be inefficient to have two but then the issue of creating a share for each provider of that network.

In regards to the future, as we have a growing consumption of data it will be interesting to see how the industry transforms to deal with the higher data requirement. With now a greater variety of services for calling and messaging rather than through the provider which all use data. For example the average smartphone will be able to have Skype (messaging/calling), Whatsapp (messaging), facebook, and twitter, just to name the popular data based services that can be accessed. This brings up the possibility of having a data only network, and contracts that are only based on data rather than minutes and text allowances.

The main issue in my opinion is still the lack of true competition within this sector, and consequently a lack of drive for innovation. There seems to be an acceptance that we will just go along with one-generation movements as we have seen with 2G, 3G, and now 4G. Contracts with the big four mobile providers in the UK are all relatively similar with the main differences occurring outside of the contract such as EE providing cinema tickets, O2 with priority ticket purchases, etc. To change the situation however would prove intangible, principally a consequence of the fact there is only one network and only so much spectrum that may be accessed.

Copyright Almog Adir © 2014 · All Rights Reserved · My Website

Unemployment in Goa

Goa Taxi Regional Employment Case Study

Due to the halt in mining activity in the Goa-Karnataka region there has been an increase in unemployment. The government is attempting to reduce the unemployment from the mining market by introducing more tourist taxis in the region to go to the Dudhsagar Waterfalls due to its increasing popularity in India.

Analysis:

Unemployment is defined as: People who are out of work but actively seeking work at the current wage rate.

To decrease the unemployment the government has chosen to intervene by increasing the supply of labour in the taxi market to meet the demand by tourists. This will counteract the unemployment that occurred due to the halt of the mining activity in the region; the idea is that those who lost their jobs will be able to become tourist taxi drivers. Taxi driving in the region could support similar salaries to the workers, as their salaries are based upon how many customers they receive as they are paid a cut of their fee.

Unemployment in the Mining Market:

Picture1

The quantity of labour demanded has decreased due to the halt of mining activity, since there has been no effect on the quantity of workers there is the presence of a surplus. A surplus in this sense represents the existence of unemployment in the market. There is a considerable gap in the quantity of labour demanded versus the quantity of labour supplied; this gives the miner several options. The miners could offer to work at the equilibrium price even though the demand for labour has dropped thereby increasing the price. The other more likely option is to simply leave the market and seek employment elsewhere, preferably at a similar wage rate and working conditions. This alongside the governments support is what transfers the now underutilised human capital and places this in the tourist taxi market, having the following effect.

Picture2

From the graph above it can be noted that there is an outward shift in the supply curve as more taxi drivers have entered the market. This has caused a fall in the price of the labour (fall in wages). This has not caused a surplus in the taxi driver market, as the government recognised that there was a shortage of taxi drivers for this tourist destination and has now been able to meet the demand. It should be noted that this increase in supply won’t be instantaneous as it will take time for those that were employed in the mining market to move to the taxi market due to licensing requirements and the expense of a taxi car.

Evaluation:

The government has successfully solved part of the unemployment issues caused by the halt of mining within the region. There are however several possible consequences to the employment boost in the taxi market. These issues can be identified as competition, environmental effect, future unemployment, and a decrease in government revenue.

Due to the increase of taxi drivers there will be greater competition to get customers, especially during off-season times. The taxi driver’s wages will be dependent on how many passengers they will get and the size of the fee. The taxi market can be identified to contain strong elements of perfect competition, as the consumers have extensive choice of supplier especially after an increase in the number of taxi drivers. The consumer also gets the lowest price possible from the drivers as they are looking for as many customers as possible, and the increase in taxi drivers means greater competition. In a sense there is also freedom to enter and exit the market, because once the taxi driver has a car and a license they can choose when to drive or not. This can be favourable at times when it is off-season and there are not as many tourists to meet the supply of taxis. The consequence of this is the possibilities of making low wages in one particular month, taxi drivers may seek out other work, drive their taxi elsewhere, or simply become underutilised and therefore not benefit economy or themselves. There are however factors that represent the monopolistic nature of the market. It is possible for certain taxi drivers to have nicer cars or offer to double up as tour guides, this may give that particular taxi driver market power in the short-run therefore an advantage.

There may be adverse effects on the environment of the local area due to the increase in the number of taxi drivers. It can be argued that the governments halt to mining activity in the region was to solve the environmental externality of mining. The possible effect of increased taxis may be small in comparison to the pollution caused by mining, however a result of more taxis means that there is a bigger flow of human traffic. The report mentions the need to ensure the continued protection of the rare Olive Ridley Turtles who lay eggs within the popular tourist region, the increased presence of people may affect their population. The report also mentions that the road used to get to the tourist destination is through the forest on a dirt road, this means that there may be increased erosion in the area. What makes the region a tourist destination is not only the waterfalls, but also the natural beauty of the surrounding areas. Therefore, increased traffic in the area may provide a boost to the tourism industry but prove to be a risk for the value of the region.

In the long term there may be more unemployment, as it is unlikely that all of those who had jobs in the mining industry will be able to enter the taxi driver industry. The government would need to find another source to create new employment opportunities. There may also be a decline in government revenue as more tourists will use the taxis rather than the train service (government owned) that runs a route from Goa to the popular tourist destination.

The government has effectively solved the unemployment problem that arose from the halt in mining in the region, but in a short-term manner. There may be consequent issues to the solution the government has opted for. This solution very much depends on how successful the region maintains itself to be a tourist destination in the future.

Obama Vs. Romney (Economic Policy)

 

 

In January either Romney or Obama will begin to form their economic policy for the next four years. Both candidates have different views on how to run the economy, with different aims as a result of their policy.

Since being initially elected Obama has stressed the importance of creating greater financial equality amongst the citizens of the United States. Alongside this there is the development of welfare within the country. Obama has attempted to implement social welfare and the redistribution of wealth by introducing what the Democrats consider fair taxes (middle-class tax cuts, upper class increase). Beyond that, he favoured the increase of federal minimum wage as to establish a method of efficiently redistributing wealth. It is true that Obama was handed the economy during a time of crisis, but the question always was whether it was Obama’s policy that ensured recovery or a natural occurrence. Moreover, during a time of recovery he attempted to implement a national health service.

Romney has always stressed strong links between the financial sectors in the United States, and his economic policy. To some extent Romney can be seen as a business man rather than a political leader. Following a capitalistic approach there is the avoidance of nationalising companies or subsidising them, in favour of keeping business private. There is also the use of contractionary policies in an attempt to reduce deficit. As a method of sustaining economic growth, Romney proposes to expand the military and invest in private security firms such as Halliburton. A major controversial aspect of his economic policy is the interest of reducing the top bracket of income tax. There is also the forethought that Romney wants a U.S. with less reliance on foreign imports for its consumption. This is important in regard to the manner in which Romney would handle trade deficit, and what kind of trade relationships can be expected now.

Both politicians have valid policies backed by theory. Neither of them have the ultimate solution to develop an economy that will grow, while cutting unemployment, as well as improving the quality of people’s lives. Now all we can do is what and see who will be elected, and who will recant possible false promises on what can be done to improve the economy.