Macroeconomics: UK economy, IB Economics

Larry Elliott makes the point that since 2010, there's been net inwards migration of nearly 4m people, something that would sound absurd if it were a pre-election pledge today.

However, inward migration hasn't boosted per capita GDP as you might expect it to. So why?

Larry Elliott reckons that it's a lack of infrastructure that has meant that has resulted in this and that if we are to continue to accept large numbers of immigrants we will need to invest in the infrastructure, not least in housing. 

An example of a interventionist supply-side policy, in the form of jobless 'bootcamps' has been mooted by the government as a way of increasing labour market flexibility - specifically occupational mobility - and overcoming labour shortages in key sectors. 

As ever, though, it's gets you thinking about the nature of markets - of there are skills shortages, shouldn't rising wages be attracting people to work in these sectors. If wages aren't rising in line with market forces, why not? Does this imply that many of these sectors are monopsonies, with employers using their market power to keep wages low? 

A supply-side bottleneck has appeared, with the absence of the necessary electricity grid capacity starting to impinge upon the ability of local councils to solve the housing crisis. Certainly in Oxfordshire, in Oxford and Bicester, housebuilding is being delayed by this. 

The Observer makes the case for an incoming Labour government to alter the focus of tax policy: away from tax cuts for the rich and in favour of measures to reduce child poverty, arguing that not only is there a moral imperative but that it makes economic sense too, not least given shaming levels of child poverty.

It's an interesting argument and revolves around one of the fundamental questions that underpins contemporary economic thought. Incentives. 

Free market economists will tell you that lowering taxes on the rich incentivizes them to work harder and be more innovative; equally, offering more support to the poor reduces the incentive for them to 'strive'. And yet, it's taken for granted that the MPC of the latter is higher than the MPC of the former, so increasing their incomes is likely to have more of an effect on consumer spending and thus aggregate demand. 

That, in a nutshell, is the central policy dilemma - demand-side v supply-side; rich versus poor

Another policy area, aside from the environment, where rhetoric commonly exceeds reality is education and in this case a pledge to create 20,000 new apprenticeships is difficult to argue against.

However, as with the Apprenticeship Levy before it, granting £60m to apprenticeships for under 21s doesn't mean that 20,000 young people will enrol for apprenticeships. And once again, no-one will ever be held accountable for the scheme's success or failure. 

Of course, if it should succeed, it will boost the economy's productive capacity and shift LRAS rightwards, but when judging it, you'd have to weigh up the size of this impact against the opportunity cost of the scheme.

And having talked about tight labour markets, here's an article that looks at some of the underlying reasons for this - a high, and rising level of economic inactivity as around 20% of adults of working age are not looking for work. 

Long-term illness and mental health issues have played a role, and as a result, will have supply-side implications, perhaps shifting LRAS leftwards, and affecting the ability of the economy to achieve the main macroeconomic objectives. 

Ha ha. All that high quality Economics teaching gone to waste: stagnant growth, an inability to tackle structural problems, declining public services and a rising tax burden don't strike me as an economy on track after 14 years of government. 

And yes, coronavirus has played a role but the extent to which there's been economic mismanagement, complacency and a lack of supply-side reform is, frankly, staggering. 

Indeed, we're so on track that tomorrow's Budget will, no doubt contain a couple of pre-election sweeteners (i.e. bribes) to distract the electorate from the state of the economy.  

Another pre-Budget piece this time encouraging the Chancellor to focus on fixing a 'broken' childcare system. However, why is childcare so important? 

In the first place, the greatest returns to education are in the early years sector, and this alone might justify the expenditure. However, additionally, better quality childcare would increase female participation in the labour force and boost the size of the working population, enhancing an economy's productive capacity and making the achievement of a number of macroeconomic objectives more likely. 

I'm not sure that the headline does the authors of this report many favours, making it easy to dismiss. However, my view is that the fundamental idea behind this is pretty sound.

Ed Balls seems to think that there needs to be a reset, and a genuine conversation about how to kickstart the economy For what it's worth, I think this conversation should be looking at growth and other structural issues, such as pensions, education and training and healthcare.

All of the above are things that have been seen as concerns for as long as I've been an Economics teacher, if not longer, and there's negligible incentive for any government to tackle them in the course of a 5 year term of office. 

The Mayors of the West Midlands Regional Authority and Greater Manchester, Street and Burnham, respectively have buried the 'second City' hatchet and collaborated on a plan to replace the scrapped Northern section, arguing that to do nothing would be a waste.

They argue that there are three alternatives that could be privately funded, at lower cost, that would have significant supply-side implications. I'm not offering a view on the extent to which that's true; however, it highlights the challenges and shortcomings of the existing model for building infrastructure in the UK.

Interesting Larry Elliott piece about the implications of higher net migration into the UK, with the population rising to 70 million by 2026 and then 73.7 million a decade later.

What are the implications of this? A larger working population and higher potential growth, but what about the implications for the nation's infrastructure and public service. And given that net inward migration is going to account for 90% of this increase are there other issues to consider? 

Alternatively, should we have tighter immigration controls, and if we do, what are their implications, not least for sectors of the economy that have been reliant on migrant workers, such as care homes.  

The debate about whether any incoming Labour Party should commit itself to its £28bn green investment pledge continues. In this instance, the Head of Siemens, Jurgen Maier, believes that it's essential to the future prosperity of the economy. 

I'm sure that he has a point - it will be essential to enhance the economy's supply-side - however, it's also impossible to see beyond the fact that as the CEO of a company, he's got a vested interest. 

This article is perhaps the most depressing business-related article that I've 'scooped' in a while. Not only is Britain not "Open for Business" as far as trade appears to be concerned but it's seemingly the case that even small domestic businesses are finding it harder to navigate the red tape associated with being a start-up. 

If this is the case, and there's no reason to doubt that it is, it will have an adverse effect on the supply-side and represents a waste of the entrepreneurial inclinations of many people.

Energy security, supply-side improvements and so on. But hang on, how long has the nuclear power plant at Wylfa been on the drawing board? 

I first 'scooped' the prospect of government investment in Wylfa on 4 June 2018! So, it's taken 6 years to get to this point. So, rather than celebrating this, surely it's ample demonstration of the failure of current planning and infrastructure thinking.

Phillip Inman looks at the latest labour market data and suggests that whereas unemployment is likely to rise in the months ahead, it seems as though we've moved into a new labour market paradigm when the degree to which unemployment fluctuates in line with the business cycle is much less marked. 

Unemployment is now 4.3% and may reach 5%, as a result of falling spending, but it's a world away from the double digit unemployment of the 1980s and suggests that UK labour markets have become more flexible as a result of supply-side reforms.

The prospect of inward investment to build a gigafactory is good on many levels - the multiplied effect of the investment, the impact on the local supply chain and its implications for the competitiveness of the electric car sector. 

However, there are a couple of areas that I think are really worth noting here - the fact that meeting that deadline "in the UK construction environment is quite a challenge" according to the man in charge of the project and the opportunity cost of the subsidies that have been offered by the government.  

The extent to which the workforce has shrunk since the pandemic is reiterated in this BBC piece that highlights rising levels of sickness, and the commensurate decline in the workforce.

This, of course, has significant implications for the economy's supply-side and the ability of a government to achieve its macroeconomic objectives.  

This BBC clip looks at the rise in economic inactivity in the UK and its implications for the macroeconomy as a whole. It looks at exactly who these people are - students, carers, the retired and the 2.7 million people who are outside the workforce because of health reasons, with people in their 20s more likely to be in this group than those people in their 40s. 

This shrinks the population of working age - and can shift the LRAS leftwards, making it hard to grow, making inflation more likely and costing the government more - both in terms of benefits and the opportunity cost of lost output. 

The National Audit Office has looked at the the government's reform of the rail sector and concluded that it has not hit its own targets either for restructuring or cost savings. This has come about because of poor governance and an overly ambitious schedule for the reforms, but this has adverse implications for the economy's supply-side, not least because it's combined with evidence that congestion on the nation's roads is also getting worse. 

Just read the headline: why might such a decline in the number of international students be bad news for UK universities, and the economy at large? 

You might want to think about both demand- and supply-side factors here - and, you never know, you might even be able to mention the multiplier effect. 

So, this is where the money from HS2 is going to go - £4.7bn for smaller transport projects in London and the Midlands. Will it make much in the way of difference, or it is simply a sop to the supposed Red Wall.

My suspicion is the latter. However, I'm also going to make the point that it will be most welcome. And I've a thought for you - yes, HS2 is expensive, but I find it ironic that many of those who complain about this are also responsible for some of the cost overruns. I suspect that had this infrastructure project been in the North of England, there would have been less notice taken of the nimbyism of some parts of the Home Counties. 

The Observer suggests that despite government policy focusing on subsidising innovation, there's little to suggest that UK small businesses aren't an engine for growth, and that larger companies with spare capacity are better placed to innovate. As a result, we might need to think about how we can reinvigorate our entrepreneurs. 

Lots to think about here; the implications of higher costs for the viability of HS2, the productivity and regional inequality implications, the sunk cost fallacy in all its glory.

Another example of why tackling Britain's supply-side problems continues to prove so problematic.

William Keegan looks at the shambles that successive governments have made of local government and the extent to which local councils can no longer discharge their responsibilities to the public. This is quantified by the news that 60% of public toilets in the UK have been shut since 2010. 

It's depressing, but, alas, true, that the quantity and quality of public services has fallen and without a major rethink of how to supply them, the UK's supply-side, and its ability just to provide for its citizens is under serious threat.