Well, I partially agree with your comment, my friend. But, speaking of the tax plan, it seems to be a "discrete" fiscal plan rather than a "permanent". During recession or recovering periods, they offer a temporary tax cut, but it sounds like going up again.
The coalition will have a dlilema about it. In terms of my prediction, as long as Britain sticks to Maastricht treaty, her economy hardly recovers.
Although I disagreed with Labour and Gordon Brown, the national debt should have been incured more before the recovery was ensured (without increasing tax which Labour and Gordon Brown insisted on 'cos of the restriction on incuring debt by Maastricht treaty) rather than introducing a temporary tax cut which concerns with the problem of Ricardian-equivalence (People already know the tax will rise in the near future so an effect of temporary tax cut won't work as much as the policy expects).
The first 10,000 quid you earn free of tax itself is fine. But, it does not seem to be effective enough when the total recovery from the recession caused by what the former gov't party Labour created!
I do usually not agree with incuring an extra national debt for a temporary recession, but the currently going recession shall be called the "depression" caused by the artificial economic boom plotted by Labour. The coalition gov't eventually need to either increase the national debt beyond Maastrict treaty's restriction or increase the tax again...
I do not put this comment to contradict you, but this is my worry about British politics for the moment, and I wish some gentlemen like you may listen to it...
Friday, May 14, 2010
Thursday, May 13, 2010
Econometric Analysis of Employment Rate based on New Economic Geography theory
Abstract:
This project attempted to create the model to indicate the significant factors influencing the employment rate in countries. As the author was sceptical about the traditional macroeconomic concepts the new economic geography theory approach is used. European countries are assessed in this project as Europe has a flexible labour mobility and is more convenient to assess the impact of language speaking ability in labour market than the USA where majority of people speak English. The Employment Rate Index (ERI), the index of employment, was based on the exponential of the employment rate subtracting the minimum employment rate in the data and then multiplied with 10 in order to make a symmetric variable (The raw data for the employment rate was very asymmetric). There are two explanatory variables are used; one indicates the employment opportunity in the other countries, and the other indicates the advantage to speak English in trade in both with other countries and within a country. Generalised Least Squares (GLS) estimates showed these two variables are significant enough to explain about the employment rate in a country.
1. Introduction:
This research was carried out to investigate to explain how the employment rate changes in terms of the New Economic Geography theory approach.
2. The reason why the data sets in European countries are used:
Europe has a flexible labour mobility as same as the USA unlike Asia and South America where people rarely change their job in their life. Europe is more convenient to assess the impact of language speaking ability in labour market than the USA where majority of people speak English. The global research encounters with lack of data set for the employment rate figure.
3. The Simultaneous Equation Problem in the traditional Macroeconomic theories:
The traditional macroeconomic theories claim that the employment rate is negatively correlated with the real wage. However, this assumption encounters with the simultaneous equation problem. The real wage rate is highly affected by the employment rate itself. For example, when the employment rate decreases, the real wage starts being depreciated in order to encourage employers to employ labour more. A part of Keynesian wage theory claims that when the employment rate decreases, the nominal wage should increase in order to encourage employees to work more.
4. The significance of using Geographic data:
The best variable explaining the unemployment rate is considered as the Gross Domestic Product (GDP). There is a high demand for productions when the GDP rises so that the demand for labour rises whilst there is a low demand for productions when the GDP falls so that the demand for labour falls. Nonetheless, John Maynard Keynes (1936) claimed that the productivity and the demand of labour is not always positively correlated. When the productivity rises, the production method can alter the labour incentive to the capital incentive. In addition, whenever the employment rate (or any variable representing it) is regressed on the GDP, it causes the endogeneity problem. Therefore, the GDP hardly becomes the best explanatory variable.
Alternatively, geographical aspects are recommended to be used as explanatory variables. Any variables used in economics tend to be measured by a common measure such as money. All variables introduced in IS-LM model are correlated each other. For example, the investment rate, the consumption rate, and the money supply are highly correlated with the productivity, and the productivity is highly correlated with these variables as well. On the other hand, the variables representing geographical aspects are not affected by any economic data generally speaking although these geographic data may affect the economic data. For instance, the geographic distance between cities and latitude (not used in this project but commonly used in the NEG theory) are not modified by any social scientific data sets.
Instead of analysing by the real wage effect inside the countries, the real wage effect in outside the countries is used to analyse the employment rate. Focusing on the graph below, rise in the real wage implies either decrease in the labour supply or increase in the labour demand. When the labour supply decreases in a country, there is a lack of labour supply or labourers in this countries are reluctant to work anymore. Therefore, there is more employment potential for immigrant labourers from outside this country. When the labour demand increases in a country, there is also more employment potential for immigrant labourers from outside this country. By contrast, fall in the real wage implies the opposite effect to the rise in the real wage by referring to the graph below.
This project used the matrix algebra (Explained in Chapter 6) to explain the employment potential in the other countries. The variable representing this is called the Wage Potential Index (WPI) in this project. In order to show this potential, the minimum distance between capital cities is used. As the countries are closer each other the effect of the real wage on employment in a country is stronger whilst as the countries are farer each other the effect of the real wage on employment in a country is weaker. The matrix algebra enables to asses this effect of all the countries surrounding the country assessed by this analysis simultaneously.
5. Shared Language provides more employment opportunities
The NEG theory also uses a variable (variables) representing the human capital index (indices). This project focused on the effect of shared language in both an domestic and international trade. For both non-skilled and skilled workers, language skill is necessary to find a job opportunity. This project focused on English as it is the most commonly used shared language as a shared language in international academic and business activities. As many people speak English in a country, people there find more employment opportunities in the other countries trading with this country. As both a country and the other country trading with have more people speaking English it is more convenient to trade each other.
6. Formulae used:
* The Annual Inflation Rates are the average of the five years.
7. Regression Analysis:
The time periods used are 1995, 2000, and 2005. The countries used are United Kingdom, Ireland, Netherlands, Belgium, Luxembourg, France, Switzerland, Spain, Portugal, Germany, Austria, Czech Republic, Slovak Republic, Italy, Malta, Slovenia, Greece, Cyprus, Finland, Sweden, Norway, Denmark, and Iceland. The reason why the number of time periods and countries is restricted is due to the lack of data sets in some other countries not introduced in this project. But, the author's previously carried out research on the real GDP per capita in a global data showed it did not make a difference between using all countries in a globe and using some representative of the economic regions in a globe. Therefore, the author was confident enough to use the data set able to use as much as possible to analyse the employment in this project.
The Generalised Least Squares (GLS) was used because one of the explanatory variable, the LPI, does not vary across the time (The author could not find a data for this varying across the time), the fixed-effect estimator based the Ordinary Least Squares (OLS) could not be used due to the multicollinearity between the dummy variables used in the OLS and the variable not varying across the time. The pooled OLS should not be used as the unit specific effect in the countries is significant. There is a certain level of the employment rate fixed over the time period. Therefore, the unit specific effect is included in the dummy variable "inside the error term". The regression result is as follows:
Both the WPI and the LPI are significant and positively correlated. The Breusch-Pagan test indicates that the random effect estimate based on the GLS should be used, and the Pooled OLS is not appropriate to use. The Hausman test indicates that the hypothesis claiming there is not an endogeneity problem cannot be rejected. According to what this table shows, the GLS estimates are essential to do this regression, and there is not an endogeneity problem so that this regression analysis is consistent.
8. Conclution:
Having analysed the employment rate, the real wage in the other countries, which represents the potential for labourers in one country to be employed, the geographical figures (the geographical distance represented in this project), and learning English are significant factors influencing the employment rate. This project proved that the NEG theory is able to explain the employment rate in labour market.
Data Sources:
Gleditsch and Ward (2001) Minimum Distance Data // Kristian Skrede Gleditsch
http://pwt.econ.upenn.edu/php_site/pwt_index.php
http://www.imf.org/external/pubs/ft/weo/2010/01/weodata/weoselgr.aspx
http://en.wikipedia.org/wiki/List_of_countries_by_English-speaking_population
Saturday, May 01, 2010
The reason why Greece and Spain are in the Eurozone
The Eurozone, which is also called the European Monetary Union (EMU), was created in order to stimulate trade among European countries. Some advanced countries, such as the UK, and many Scandinavian countries did not choose to join the EMU because of the disharmony in their business cycle with the Eurozone economy. When there is a disharmony among the monetary union members, sharing a common currency disturbs all economies in the monetary union. As there has already been a frequent trade between nations, these nations benefit more from sharing a common currency because they are able to avoid the price uncertainty caused by the exchange rate mechanism. However, if there is not a frequent trade between nations, although sharing a common currency may increase a trade between them, it is rather a disadvantage because it disables setting their own interest rate and the volume of money supply.
Some new members from the Eastern Europe, the former communist nations, have not fulfilled the conditions to be a part of the EMU. In order to join the EMU, the fiscal structure has to be organised in order to reduce the risk of increasing the national debt and the price inflation caused by the Seigniorage effect (increasing money supply to pay for the government budget deficit). They are required to balance their budget balance without relying on the national debt and the Seigniorage effect in order to harmonise their business cycle to the Eurozone economy.
Nevertheless, there is a question arising from the current crisis caused by the negative systemic shock caused by the world financial crisis. The crisis in Greece became permanent. Greece is a typical country which has been relying on filling her budget deficit by the national debt and the Seigniorage effect due to the poorly organised fiscal structure (though it is mainly caused by her geographic nature).
As a matter of fact, Greece has never been ready to join the monetary union. Greece has had a large proportion of the international trade partners from outside the EU on the top of their fiscal structure. Therefore, joining the EMU was a disadvantage rather than an advantage. Nonetheless, the EU accepted Greece to join the EMU although the EU hardly accepts many Eastern European countries whose level of the economic structural problem is the same as or slightly less than the Greek one.
This reason shall be political rather than economical. As same as German Third Empire led by Adolf Hitler thought of Ancient Greece as an origine of European civilisation so that they claimed that German was highly influenced by Ancient Greece as well. Both Germany Third Empire and the EU seem to seek Greece as their "holy-land" as the origine of their civilisation. Therefore, including Greece into their political peer group may prove that their peer political group has a long history.
On the other hand, Spain has had an economical advantage to join the EMU unlike Greece. Spain has a large proportion of the international trade with the EU nations. For example, the investment into Spanish property market by North Western European nations is vital. Spanish tourist industry is her prominent export business. There is a significant demand for Spanish tourist from the European nations.
However, the problem of Spain for joining the EMU is a disharmony of the business cycle between Spain and the rest of the Eurozone countries. Spanish economy excessively expanded so that the positive output gap was excessively big. This factor perpetuated the negative affect of the world economic crisis. When the positive output gap has been expanded so much, as the economy started to go into the downturn the speed of decline becomes too fast. Therefore, it is easier for Spainish business cycle to result in the hard-landing so that it ends up with creating the huge negative output gap. This dramatic change would have been able to be avoided if Spain had had an autonomy in controlling their fiscal policy, especially for her national debt, and the monetary policy (the interest rate and the money supply).
Some new members from the Eastern Europe, the former communist nations, have not fulfilled the conditions to be a part of the EMU. In order to join the EMU, the fiscal structure has to be organised in order to reduce the risk of increasing the national debt and the price inflation caused by the Seigniorage effect (increasing money supply to pay for the government budget deficit). They are required to balance their budget balance without relying on the national debt and the Seigniorage effect in order to harmonise their business cycle to the Eurozone economy.
Nevertheless, there is a question arising from the current crisis caused by the negative systemic shock caused by the world financial crisis. The crisis in Greece became permanent. Greece is a typical country which has been relying on filling her budget deficit by the national debt and the Seigniorage effect due to the poorly organised fiscal structure (though it is mainly caused by her geographic nature).
As a matter of fact, Greece has never been ready to join the monetary union. Greece has had a large proportion of the international trade partners from outside the EU on the top of their fiscal structure. Therefore, joining the EMU was a disadvantage rather than an advantage. Nonetheless, the EU accepted Greece to join the EMU although the EU hardly accepts many Eastern European countries whose level of the economic structural problem is the same as or slightly less than the Greek one.
This reason shall be political rather than economical. As same as German Third Empire led by Adolf Hitler thought of Ancient Greece as an origine of European civilisation so that they claimed that German was highly influenced by Ancient Greece as well. Both Germany Third Empire and the EU seem to seek Greece as their "holy-land" as the origine of their civilisation. Therefore, including Greece into their political peer group may prove that their peer political group has a long history.
On the other hand, Spain has had an economical advantage to join the EMU unlike Greece. Spain has a large proportion of the international trade with the EU nations. For example, the investment into Spanish property market by North Western European nations is vital. Spanish tourist industry is her prominent export business. There is a significant demand for Spanish tourist from the European nations.
However, the problem of Spain for joining the EMU is a disharmony of the business cycle between Spain and the rest of the Eurozone countries. Spanish economy excessively expanded so that the positive output gap was excessively big. This factor perpetuated the negative affect of the world economic crisis. When the positive output gap has been expanded so much, as the economy started to go into the downturn the speed of decline becomes too fast. Therefore, it is easier for Spainish business cycle to result in the hard-landing so that it ends up with creating the huge negative output gap. This dramatic change would have been able to be avoided if Spain had had an autonomy in controlling their fiscal policy, especially for her national debt, and the monetary policy (the interest rate and the money supply).
Friday, April 16, 2010
"Long the "Euro" ( € ) !" : The Euro-bond and the movement toward EU Federalism may appreciate the Euro
The rescue plan by the European central government to save Greek economy has been put into practice in return for the collateral agreement between the assisting side, Germany and Great Britain, and Greece. Greece has also already incurred Geek bonds to inject a fiscal stimulus into Greek economy to fill the current budget deficit. The IMF has offered loan to the EU in order to assist Germany rescuing Greece.
Many economists have already predicted that Greek economic depression will not be ended, and the deflation spiral goes on permanently. The part of reason is that Greece is no longer able to use the own monetarist policy, which increases the money supply to finance to fill the budget deficit and/or provoke the price inflation to reduce the net present value of the cost of borrowing. Pro-Europeanists have strongly suggested that the fiscal budget of the member states should be collectively controlled by one European federal government in order to avoid the instability such as a currently ongoing fiscal crisis in the Eurozone economy.
However, at the fist stage of establishing the Europeau Union, the fast full integration into the European Federation was denied. Many European states required for a slow pace of the integration process. Pro-Europeanist monetalists (distinguished from the Euro-Sceptic monetarist such as Prof. Milton Friedman) assumed that sharing a common currency encourages trade among these sharing economic regions, and therefore the system automatically harmonises the business cycle in these regions. Many Pro-Europeanists were convinced by this theory so that the current Eurozone system was adapted without a strong federalism. But, the currently ongoing crisis contradicted the assumption claimed by the Pro-Europeanist monetarists.
Although many people once expected for the appreciation of the Euro. These people imagined that the Euro would be the world leading currency instead of US dollar because of the weakening position of US economy. This is not based on a rational hypothesis; this is totally a mobs' irrational exuberance! Although US economy has lost an initiative which the USA used to hold, the situation will be neither the USA becomes collapsed nor the Eurozone economy becomes dominant to overwhelms the world economy. The USA still has her military power financed by the half of the world total millitary expenditure. This fact implies that the USA still has a capacity to gain her finance and resources split from those spent on military. Furthermore, the USA still has a huge human capital assets which are technology, higher education, and work ethics. These human capital assets will assist US economic recovery in spite of the pressimistic prediction of US economy which many anti-US modests have ranted on. In addition, even though the Eurozone economy may become a much stronger economic region than the current situation, the Eurozone will not become the super-power nation which the USA acted as during the cold war period. The globalisation after the end of the cold war has encouraged many emerging economies to catch up to become the advanced economy. The Eurozone may be still capable to exist as "one of" the centres of the international trade. Nonetheless, it is impossible to become one dominating economic super power. The post globalised world shall not have a super power state holding the economic dominance. The world will be more globalised, but it will not be based on the autocracy of one nation. The post-globalised world will be more pluralistic than the pre-financial crisis period.
Many people now started to expect the Euro will be depreciated and then fail so that the Eurozone system will be fragmented as same as the time when the all member states had their own currency. These mobs' irrational exuberance is often disappointing. Although once they expected that the Euro would be appreciated further, they now start saying that the Euro will cease. They seem to be unable to analyse the economic situation more rationally. My perspective is "Euro-sceptic", and contradicts the over-estimation of the Euro. However, I bet on that the Euro ( € ) will still exist.
There are still a lot of sceptical aspects about this European integration under the role of European federalism. Nonetheless, it will be the fact that European federalism will be reinforced due to the mistake learnt from this crisis. Pro-Europeanists are now confident with the further European integration. Almost all of us now have realised that the current Eurozone system does not work stably. The Eurozone can only decide to do either going back to the old system or going toward the European federation.
According to the political, rather than economic, situation, majority of Europeans tend to prefer being integrated further into one European community. Therefore, they seem to prefer keeping the Euro as one of the symbols of European integration.
In order to avoid the currently ongoing financial crisis inside the Eurozone, the collective responsibility on the fiscal policy among these member state is inevitably required. The European Union will share the common fiscal policy (tax, public expenditure, and national debt).
Greek national debts will keep depreciated further. Greece herself has not a capability to repay her debt back. Although Germany and Great Britain assist Greece, Greek economy does not have strong industries and human capital assets which stimulate a boost of economic recovery to overcome from this depression spiral. Therefore, it means that Germany and Great Britain make a loss from investing on expecting for Greek recovery. It seems to a fate for Greek economy to default. When a national economy default, there are many different cases happen by means of each different situation. In this case scenario, this national economy will be "purchased" by someone. It is less likely to be bought by one individual who turns Greece into the dictatorship. As Europeans tend to think of Greece as a birth place or the origin of European civilisation and her history the EU central government is very less likely to isolate Greece to hand her to a certain dictator. Thus, the agent purchasing Greece will be the EU central government.
The situation that Greece is purchased by the EU central government means that the European central government will be in charge of Greek fiscal policy and legal system. As it happens to Greece all the other member states will be eventually looked after by the European central government to be fair. All the Eurozone member states will be enforced to relinqush their right to incur their own national debt.
Under the currently going Eurozone system, Maastrich treaty technically prohibits incurring national debt more than 3% and owning national debt more than 60% of their GDP (But, realistically not many nations follow this agreement). The reason to put such a restriction is to avoid causing a disharmony of the price inflation among the member states and the budget deficit caused by fiscal inefficiency and corruption by government bureaucrats. Allowing these states to avoid this agreement and to set their own more flexible fiscal policy relatively works well unless they keep their own monetary policy (I have mentioned a lot in the other entries in this blog).
However, this current system is highly restricted to stimulate the Eurozone economy by fiscal stimulus when the economic crisis hits all over the Eurozone member states. Some relatively well-off EU countries have agreed to spilt their government finance to rescue Greece. But, these countries are also in the recession as well! Therefore, under the current Eurozone system, helping the most deprived member state induces all the member states to be collapsed!!
If the European central government plays a role as the European federal government which is the only institution holding a right to incur a national debt (i.e. the same system as the USA), it will provide a more efficient and effective fiscal stimulus without harming the Eurozone economy. The EU is planning to call this bond as "the Euro-bond", which is not still installed but will be inevitably introduced. This idea is far more effective than the current system because the EU is simply able to issue the Euro-bond to fund for the all member states simultaneously while the recession hits all over the Eurozone. As this bond is based on the value of the whole Eurozone the credibility of this bond will be stably high. Therefore, many other national governments and many individuals will buy the Euro-bond, and the golden role will work out. All in all, it is easier to provoke the recovery which enables the Eurozone to repay back the debt if the Euro-bond is introduced.
Under this new system recommended by European federalists is more flexible to control over the whole Eurozone economy. The reason is that the larger proportion of the fiscal stimulus will be fund by the European central government than the current system, the expenditure plan in the member state has to be monitored by where the funding source is coming from. In addition, the EU central government will make sure that all its fiscal stimulus is efficiently spent to stimulate the member states' economy so that the legal system in these states will be revised and amended by the EU central government.
The opposing opinion against this European federation and the Euro-bond is that roles of the fiscal policy in all the member states have to be enforced to follow and censored very strictly. This means that all the member states will be no longer sovereign countries. They will be the states of the European federation.
If this case scenario becomes true, although the countries which are already the Eurozone member states will be integrated into the EU federalism further, the advanced non-Eurozone nations, such as Great Britain and Scandinavian countries, except for Finland, will keep a distance further in terms of their economic policy. There will be a clear distinction between members in inside and outside the Eurozone in the EU. The EU members in outside the Eurozone may avoid the censorship on their fiscal policy by the EU central government as they still keep their own monetary and fiscal policy unless they decide to join the Eurozone in the future.
Great Britain has such an independent business cycle from the Eurozone member states and has a strong own initiative of her financial market in the global market. These factors of Great Britain detests the EU fiscal integration which disturbs British business cycle. Joining the Eurozone discourages the initiative of British financial market because the power of financial market will be more concentrated on Frankfurt because Great Britain will be enforced to harmonise her business cycle to the continental Europe. Great Britain is able to keep her own market initiative as she keeps her own role of acts in financial market. Liberal Democratic party is quite happy to abandon the traditional market initiative to be integrated into the European federalism. But, due to British voting system (First Past the Post) will always elect either the Conservatives or the Labour which prefer keeping a marginal distance (not the complete Independence from the EU though) from the EU.
Scandinavian countries have a quite rigid labour market and a strong trade union power, which strongly requires a tight monetary policy to keep the price inflation level to be low. As it has been seen in the last oil price shock in 2008 the central banks in Scandinavian countries frequently changed their interest rate in order to carefully set the rate not too high but not too low. If it is too low, it perpetuates the stagflation (stagnation + inflation) caused by both the oil price and the wage bargaining. If it is too high, it discourages the economy and then induces the recession. The economy with a rigid labour market is more likely to increase unemployment. As a matter of fact, the Eurozone economy supports the flexible labour market, which means less rigid labour market (less labour right, someone may say), in order to make the wage level to be adapted to the market clearing rate. If Scandinavian countries decided to adapt the Euro, the common currency, they have to discard the rigidity of their labour market. This is one of the reasons why Denmark and Sweden do not have the full EU membership and Norway is not a member of the EU at all.
If Scotland independent from the United Kingdom, Scotland will either join the Eurozone or keep a distance from the EU as same as Scandinavian countries. But, Scottish Nationalist Party (SNP), the party insisting on Scottish independence from the UK, has not made a clear consensus to decide which way Scotland should follow.
In conclusion, it might be worth-off to long the Euro( € ) in the long run although it seems to be better to short it in the short run. It is difficult to see the best time to decide whether long or short the "Euro" ( € ). The prediction is that the value of the Euro( € ) will not be zero because of the strong political support from the European people regardless of its economic aspect. Altough the Euro( € ) will be depreciated further for a while, it will appreciate again when the Euro-bond is introduced. Ummm, difficult to make a decision. If you are willing to actively but carefully trade often in the foreign currency market, you had better short the Euro( € ) in the short run and long it in the long run. If you are bothered to cautiously watch movements and European political situations all the time, then I may recommend you to long the Euro( € ).
Many economists have already predicted that Greek economic depression will not be ended, and the deflation spiral goes on permanently. The part of reason is that Greece is no longer able to use the own monetarist policy, which increases the money supply to finance to fill the budget deficit and/or provoke the price inflation to reduce the net present value of the cost of borrowing. Pro-Europeanists have strongly suggested that the fiscal budget of the member states should be collectively controlled by one European federal government in order to avoid the instability such as a currently ongoing fiscal crisis in the Eurozone economy.
However, at the fist stage of establishing the Europeau Union, the fast full integration into the European Federation was denied. Many European states required for a slow pace of the integration process. Pro-Europeanist monetalists (distinguished from the Euro-Sceptic monetarist such as Prof. Milton Friedman) assumed that sharing a common currency encourages trade among these sharing economic regions, and therefore the system automatically harmonises the business cycle in these regions. Many Pro-Europeanists were convinced by this theory so that the current Eurozone system was adapted without a strong federalism. But, the currently ongoing crisis contradicted the assumption claimed by the Pro-Europeanist monetarists.
Although many people once expected for the appreciation of the Euro. These people imagined that the Euro would be the world leading currency instead of US dollar because of the weakening position of US economy. This is not based on a rational hypothesis; this is totally a mobs' irrational exuberance! Although US economy has lost an initiative which the USA used to hold, the situation will be neither the USA becomes collapsed nor the Eurozone economy becomes dominant to overwhelms the world economy. The USA still has her military power financed by the half of the world total millitary expenditure. This fact implies that the USA still has a capacity to gain her finance and resources split from those spent on military. Furthermore, the USA still has a huge human capital assets which are technology, higher education, and work ethics. These human capital assets will assist US economic recovery in spite of the pressimistic prediction of US economy which many anti-US modests have ranted on. In addition, even though the Eurozone economy may become a much stronger economic region than the current situation, the Eurozone will not become the super-power nation which the USA acted as during the cold war period. The globalisation after the end of the cold war has encouraged many emerging economies to catch up to become the advanced economy. The Eurozone may be still capable to exist as "one of" the centres of the international trade. Nonetheless, it is impossible to become one dominating economic super power. The post globalised world shall not have a super power state holding the economic dominance. The world will be more globalised, but it will not be based on the autocracy of one nation. The post-globalised world will be more pluralistic than the pre-financial crisis period.
Many people now started to expect the Euro will be depreciated and then fail so that the Eurozone system will be fragmented as same as the time when the all member states had their own currency. These mobs' irrational exuberance is often disappointing. Although once they expected that the Euro would be appreciated further, they now start saying that the Euro will cease. They seem to be unable to analyse the economic situation more rationally. My perspective is "Euro-sceptic", and contradicts the over-estimation of the Euro. However, I bet on that the Euro ( € ) will still exist.
There are still a lot of sceptical aspects about this European integration under the role of European federalism. Nonetheless, it will be the fact that European federalism will be reinforced due to the mistake learnt from this crisis. Pro-Europeanists are now confident with the further European integration. Almost all of us now have realised that the current Eurozone system does not work stably. The Eurozone can only decide to do either going back to the old system or going toward the European federation.
According to the political, rather than economic, situation, majority of Europeans tend to prefer being integrated further into one European community. Therefore, they seem to prefer keeping the Euro as one of the symbols of European integration.
In order to avoid the currently ongoing financial crisis inside the Eurozone, the collective responsibility on the fiscal policy among these member state is inevitably required. The European Union will share the common fiscal policy (tax, public expenditure, and national debt).
Greek national debts will keep depreciated further. Greece herself has not a capability to repay her debt back. Although Germany and Great Britain assist Greece, Greek economy does not have strong industries and human capital assets which stimulate a boost of economic recovery to overcome from this depression spiral. Therefore, it means that Germany and Great Britain make a loss from investing on expecting for Greek recovery. It seems to a fate for Greek economy to default. When a national economy default, there are many different cases happen by means of each different situation. In this case scenario, this national economy will be "purchased" by someone. It is less likely to be bought by one individual who turns Greece into the dictatorship. As Europeans tend to think of Greece as a birth place or the origin of European civilisation and her history the EU central government is very less likely to isolate Greece to hand her to a certain dictator. Thus, the agent purchasing Greece will be the EU central government.
The situation that Greece is purchased by the EU central government means that the European central government will be in charge of Greek fiscal policy and legal system. As it happens to Greece all the other member states will be eventually looked after by the European central government to be fair. All the Eurozone member states will be enforced to relinqush their right to incur their own national debt.
Under the currently going Eurozone system, Maastrich treaty technically prohibits incurring national debt more than 3% and owning national debt more than 60% of their GDP (But, realistically not many nations follow this agreement). The reason to put such a restriction is to avoid causing a disharmony of the price inflation among the member states and the budget deficit caused by fiscal inefficiency and corruption by government bureaucrats. Allowing these states to avoid this agreement and to set their own more flexible fiscal policy relatively works well unless they keep their own monetary policy (I have mentioned a lot in the other entries in this blog).
However, this current system is highly restricted to stimulate the Eurozone economy by fiscal stimulus when the economic crisis hits all over the Eurozone member states. Some relatively well-off EU countries have agreed to spilt their government finance to rescue Greece. But, these countries are also in the recession as well! Therefore, under the current Eurozone system, helping the most deprived member state induces all the member states to be collapsed!!
If the European central government plays a role as the European federal government which is the only institution holding a right to incur a national debt (i.e. the same system as the USA), it will provide a more efficient and effective fiscal stimulus without harming the Eurozone economy. The EU is planning to call this bond as "the Euro-bond", which is not still installed but will be inevitably introduced. This idea is far more effective than the current system because the EU is simply able to issue the Euro-bond to fund for the all member states simultaneously while the recession hits all over the Eurozone. As this bond is based on the value of the whole Eurozone the credibility of this bond will be stably high. Therefore, many other national governments and many individuals will buy the Euro-bond, and the golden role will work out. All in all, it is easier to provoke the recovery which enables the Eurozone to repay back the debt if the Euro-bond is introduced.
Under this new system recommended by European federalists is more flexible to control over the whole Eurozone economy. The reason is that the larger proportion of the fiscal stimulus will be fund by the European central government than the current system, the expenditure plan in the member state has to be monitored by where the funding source is coming from. In addition, the EU central government will make sure that all its fiscal stimulus is efficiently spent to stimulate the member states' economy so that the legal system in these states will be revised and amended by the EU central government.
The opposing opinion against this European federation and the Euro-bond is that roles of the fiscal policy in all the member states have to be enforced to follow and censored very strictly. This means that all the member states will be no longer sovereign countries. They will be the states of the European federation.
If this case scenario becomes true, although the countries which are already the Eurozone member states will be integrated into the EU federalism further, the advanced non-Eurozone nations, such as Great Britain and Scandinavian countries, except for Finland, will keep a distance further in terms of their economic policy. There will be a clear distinction between members in inside and outside the Eurozone in the EU. The EU members in outside the Eurozone may avoid the censorship on their fiscal policy by the EU central government as they still keep their own monetary and fiscal policy unless they decide to join the Eurozone in the future.
Great Britain has such an independent business cycle from the Eurozone member states and has a strong own initiative of her financial market in the global market. These factors of Great Britain detests the EU fiscal integration which disturbs British business cycle. Joining the Eurozone discourages the initiative of British financial market because the power of financial market will be more concentrated on Frankfurt because Great Britain will be enforced to harmonise her business cycle to the continental Europe. Great Britain is able to keep her own market initiative as she keeps her own role of acts in financial market. Liberal Democratic party is quite happy to abandon the traditional market initiative to be integrated into the European federalism. But, due to British voting system (First Past the Post) will always elect either the Conservatives or the Labour which prefer keeping a marginal distance (not the complete Independence from the EU though) from the EU.
Scandinavian countries have a quite rigid labour market and a strong trade union power, which strongly requires a tight monetary policy to keep the price inflation level to be low. As it has been seen in the last oil price shock in 2008 the central banks in Scandinavian countries frequently changed their interest rate in order to carefully set the rate not too high but not too low. If it is too low, it perpetuates the stagflation (stagnation + inflation) caused by both the oil price and the wage bargaining. If it is too high, it discourages the economy and then induces the recession. The economy with a rigid labour market is more likely to increase unemployment. As a matter of fact, the Eurozone economy supports the flexible labour market, which means less rigid labour market (less labour right, someone may say), in order to make the wage level to be adapted to the market clearing rate. If Scandinavian countries decided to adapt the Euro, the common currency, they have to discard the rigidity of their labour market. This is one of the reasons why Denmark and Sweden do not have the full EU membership and Norway is not a member of the EU at all.
If Scotland independent from the United Kingdom, Scotland will either join the Eurozone or keep a distance from the EU as same as Scandinavian countries. But, Scottish Nationalist Party (SNP), the party insisting on Scottish independence from the UK, has not made a clear consensus to decide which way Scotland should follow.
In conclusion, it might be worth-off to long the Euro( € ) in the long run although it seems to be better to short it in the short run. It is difficult to see the best time to decide whether long or short the "Euro" ( € ). The prediction is that the value of the Euro( € ) will not be zero because of the strong political support from the European people regardless of its economic aspect. Altough the Euro( € ) will be depreciated further for a while, it will appreciate again when the Euro-bond is introduced. Ummm, difficult to make a decision. If you are willing to actively but carefully trade often in the foreign currency market, you had better short the Euro( € ) in the short run and long it in the long run. If you are bothered to cautiously watch movements and European political situations all the time, then I may recommend you to long the Euro( € ).
Thursday, April 01, 2010
Health Care Issue is the most complicated and ethically controversial issue in public sector economics
I know the dispute concerning health care and the national insurance the most complicated issue in public sector economics. It is extremely controversial and concerns with the ethical issue when we declair to privatise them without a condition. But, on the other hand, the nationalisation (or any sort of public sector ownership) makes the system breaks the trust based relationship between doctors and patients (Prof. Milton Friedman mentioned in his "Freedom of Choice").
Everyone has almost the same risk to be sick or harmed regardless of any status. Generally speaking, nobody wants to be sick and harmed all the time and avoid being sick and harmed as much as possible i.e. everyone is risk averse.
Therefore, it is difficult to deal with the risk premium.
The incentive for inovators of new technilogy to make a profit is important. In the short run, and probably in the medium run as well, the price may rise dramatically. But in the long run the price will be calmed down and the technology invented will be shared among other agencies as well i.e. the supply increases.
Nonetheless, it must face the problem of monopoly in this market which has been seen in the USA. When we excessively rely on the saving of patients, economy won't be developed and progressed further as the economic multiplier will be shrunk. The private insurance scheme causes the "free riding" problem. One company with richer customers will monopolise the market and the other insurance companies faces bankruptcy or charges a huge cost on customers. Therefore, the collective responsiblity is eventually required.
In the past, the health care system was based on a very smaller schale so that we did not need a huge distribution system.
But, nowadays, there are so much stuff to administrate technology, information, and risks involved in dairy life (e.g. trafic, new diseases, longer life expectancy has brought more concerns about illnesses during the life as well).
All in all, it is very complicated, and all the economists are struggling with dealing with this issue...
Everyone has almost the same risk to be sick or harmed regardless of any status. Generally speaking, nobody wants to be sick and harmed all the time and avoid being sick and harmed as much as possible i.e. everyone is risk averse.
Therefore, it is difficult to deal with the risk premium.
The incentive for inovators of new technilogy to make a profit is important. In the short run, and probably in the medium run as well, the price may rise dramatically. But in the long run the price will be calmed down and the technology invented will be shared among other agencies as well i.e. the supply increases.
Nonetheless, it must face the problem of monopoly in this market which has been seen in the USA. When we excessively rely on the saving of patients, economy won't be developed and progressed further as the economic multiplier will be shrunk. The private insurance scheme causes the "free riding" problem. One company with richer customers will monopolise the market and the other insurance companies faces bankruptcy or charges a huge cost on customers. Therefore, the collective responsiblity is eventually required.
In the past, the health care system was based on a very smaller schale so that we did not need a huge distribution system.
But, nowadays, there are so much stuff to administrate technology, information, and risks involved in dairy life (e.g. trafic, new diseases, longer life expectancy has brought more concerns about illnesses during the life as well).
All in all, it is very complicated, and all the economists are struggling with dealing with this issue...
Wednesday, March 10, 2010
Free tade is the only fair trade
When the free trade caused an unfairness, either side of traders may have a problem. For example, some of the countries need to amend their own system by themselves to have a fair trade in free trade. The fairtrade supporters usually mourn that it is the nature of free market causing the unfairness, and ones who take an advantage of trade have to aid. But, this is ethically wrong. The fair trade these buggers support causes a major unfairness in the long-run. We had better let these weak economies to feel pain to allow them what kind of problems they have got rather than let them to be spoiled by the aid. This logic works for the colonial management of British empire. The reason why some colonies have been collapsed by trade and immoral is because these poor colonials deserved to be like that! The fact that there are many successful British colonies succeeded in prosperity via trade with British empire, their suzerein is the proof. Free trade without putting priority on fairness brings the best optimum outcome giving these economies either positive or negative sanctions owing to their paformance. All in all, the fair trade and the human right activists criticising about the free capitalist international trade are scum.
I just hate the idea and the brand-name of "fair trade" because this is very hypocritic. That's why I reject buying the product named fair trade. The margine for the labour cost is in fact not too different from the other products.
Speaking of monopoly, the floating exchange rate enables traders to adjust the rate to bring the fair outcome. When the monopoly of trade by Country A is concerned, Country B may put a higher exchange rate to restrict the monopoly power of Country A. The reason why some developing country depreciate the value of their currency rather than appreciate is to "dump" their product; it is not the case that advanced nations monopolise the market.
The free trade principles, floating exchange rate mechanism, liberated financial market, and freedom of choosing trading goods and their price, are the key figures to bring the stable equilibrium in the longer term.
* Small-scale producers in many poor countries are not necessary to be sustained to survive. As long as the products from the richer nations give better quality and quantity with a competitive price. As many commodities and services with inexpensive price become available from the import, then they can be more concentrated on investing the other sort of industries.
* The trade loss would be inevitable for these economies with a significantly lower productivity in the current globalised market. But, it is not the responsibility of richer economies and the "fair trade" is not a particular answer for decreasing the loss. The management of these poor countries have to become sophisticated. The method shall be either sending intellectuals from more advanced economy to teach then a lesson or let these poor economies to decide what they should do.
* Sometimes, these poor countries need to restrict the foreign trade when they are relying on the import too much. The reason why East-Asian economies could developed faster than the other LDCs is that their entrepreneurship and deligency to work were already capable to the global trade. However, I know some other poor economies are not capable enough. If they wish to join the global trade, they should temporary put priority on developing the entrepreneurship and civilising their own civilisation through welcoming the intellectuals from the advanced civilisations. I.e. Development dectatorship in these countries is necessary such as what Singapore did. Uncivilised economies such as all African economies and some South American economies should be isolated from the international society or become inducted by the more advanced and civilised economies.
* Extremely deprived economies with lack of natural resources still can be benefited from "free trade". They can still sell their cheap labour force! For instance, Bangladesh economy became far more developed and civilised after being involved into the global free trade. Therefore, "farmers in poor countries have few options for generating an income and many live in poverty" still can abandon their traditional income earning method and sell their cheap labour into the global economy. This industrial revolution and the dynamic change from traditional society to modern society (Westernised i.e. more civilised society) were also seen in Western nations inside their own economy in centuries ago. Now, the revolutionary movement having seen in Western economy in the past takes place in the "globe". Abandoning traditional life styles and abandoning traditional pre-industrial patterns makes the real income gain higher as the average commodity price index in the globe will go down owning to the productivity growht. Freer trade will accerelate this revolutionary movement further!
I just hate the idea and the brand-name of "fair trade" because this is very hypocritic. That's why I reject buying the product named fair trade. The margine for the labour cost is in fact not too different from the other products.
Speaking of monopoly, the floating exchange rate enables traders to adjust the rate to bring the fair outcome. When the monopoly of trade by Country A is concerned, Country B may put a higher exchange rate to restrict the monopoly power of Country A. The reason why some developing country depreciate the value of their currency rather than appreciate is to "dump" their product; it is not the case that advanced nations monopolise the market.
The free trade principles, floating exchange rate mechanism, liberated financial market, and freedom of choosing trading goods and their price, are the key figures to bring the stable equilibrium in the longer term.
* Small-scale producers in many poor countries are not necessary to be sustained to survive. As long as the products from the richer nations give better quality and quantity with a competitive price. As many commodities and services with inexpensive price become available from the import, then they can be more concentrated on investing the other sort of industries.
* The trade loss would be inevitable for these economies with a significantly lower productivity in the current globalised market. But, it is not the responsibility of richer economies and the "fair trade" is not a particular answer for decreasing the loss. The management of these poor countries have to become sophisticated. The method shall be either sending intellectuals from more advanced economy to teach then a lesson or let these poor economies to decide what they should do.
* Sometimes, these poor countries need to restrict the foreign trade when they are relying on the import too much. The reason why East-Asian economies could developed faster than the other LDCs is that their entrepreneurship and deligency to work were already capable to the global trade. However, I know some other poor economies are not capable enough. If they wish to join the global trade, they should temporary put priority on developing the entrepreneurship and civilising their own civilisation through welcoming the intellectuals from the advanced civilisations. I.e. Development dectatorship in these countries is necessary such as what Singapore did. Uncivilised economies such as all African economies and some South American economies should be isolated from the international society or become inducted by the more advanced and civilised economies.
* Extremely deprived economies with lack of natural resources still can be benefited from "free trade". They can still sell their cheap labour force! For instance, Bangladesh economy became far more developed and civilised after being involved into the global free trade. Therefore, "farmers in poor countries have few options for generating an income and many live in poverty" still can abandon their traditional income earning method and sell their cheap labour into the global economy. This industrial revolution and the dynamic change from traditional society to modern society (Westernised i.e. more civilised society) were also seen in Western nations inside their own economy in centuries ago. Now, the revolutionary movement having seen in Western economy in the past takes place in the "globe". Abandoning traditional life styles and abandoning traditional pre-industrial patterns makes the real income gain higher as the average commodity price index in the globe will go down owning to the productivity growht. Freer trade will accerelate this revolutionary movement further!
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