Carbon Taxes and Negative Externalities

Hello readers, welcome back to rsira-economics.com. Last time, you might remember me discussing inflation and what the most recent figure from the ONS means to the everyday consumer.

In this post, I thought I would do something slightly different. I have recently finished writing an essay, which argues that ‘a large and extended tax on carbon’ is the best policy response to the negative externalities caused by carbon emissions, and I thought I would share it with you all. In the essay, I discuss why this is the case and how the other alternatives simply can’t offer what a tax is able to do. I have used a number of countries as case studies to back up my arguments and have exhausted the reasons as to why other alternatives such as Cap & Trade or Carbon Capture and Storage (CCS) have many problems. If you like the sound of this and think it would interest you, then please give it a read and post your own comments or views on the topic below or send them to rajveersira@gmail.com. I have attached the link below which will allow you to read the PDF version.

If you decide to research the topic further yourself, you will find that it’s a very controversial topic and that different people will have different opinions based on their understanding of the situation. Take Donald Trump for example. He thinks it’s all just a “hoax” and doesn’t think it’s his responsibility to protect future generations from climate change and its damaging effects.

Nevertheless here’s my take:

 

corpus-christi-essay-q4

 

UK Inflation hits 1.8%. What does this mean for you…?

Hello readers, welcome back to rsira-economics.com. If you are still reading these posts, hopefully, it’s because you’re finding them interesting and are coming back for more relevant information about the dynamic world in which we live in and not because you are hoping that my next post could be more exciting.

Last time I discussed two major political influences for 2017: Brexit and Trump. Although it may have been a lot to take in, you should now understand where the two countries stand economically, and the possible effects they may have on the rest of the world.

This week, I will be discussing the idea of inflation, what it means for you and why it has recently risen to its highest rate for two and a half years, in the UK. If you have no idea what inflation is, stick with me, as I will be explaining this briefly before I begin. Although I’ve used the term before in many of my other posts, I haven’t actually explained the economic benefits and consequences of it in general terms, and why it is so important in the world of economics.

You’ll be glad to know that today’s post won’t be as intense as last week and by the end of reading it, you should have a sound understanding of inflation. If you have any questions or would like further clarity, please post your comments below or send them to rajveersira@gmail.com.  If you would like to know more about a particular economics related story you have read, let me know and I will see what I can do.

 

What exactly is Inflation?

Economists as Paul Krugman says in his book the ‘Accidental Theorist’, like to use their own complex language to talk about things, which are actually quite simple. Inflation, although it may sound complex is, just the sustained increase in the general price level over a given period of time i.e goods and services are more expensive in one year compared to another year. Now you are probably wondering why we have inflation in the first place. There are many reasons why but these are actually a little more complex and I won’t bore you with it all today. In a nutshell, it’s all to do with the exchange rates, the natural forces of supply and demand and other factors such as interest rates. You can even have negative inflation and this is known as deflation-the sustained decrease in the general price level.
screen-shot-2017-02-15-at-15-50-28

 

Can Inflation ever be good and what are the consequences?

Let us consider the example of purchasing a new car. If the price of the car started to fall, you would probably wait, to see if the car would fall any further as you could save yourself hundreds maybe even thousands of pounds. But imagine if the price of the car now starts to rise. This would encourage you to buy it before it gets even more expensive.  Therefore a little inflation encourages you to buy sooner – and that boosts economic growth. Rising prices also make it easier for companies to put up wages and they can give employers the flexibility not to increase wages by as much as inflation, but still offer their staff some sort of a rise. In a world of zero inflation, some companies might be forced to cut wages. Inflation also benefits the government who has a huge debt, which according to the BBC is getting bigger ‘thanks to a deficit of £90bn’, as it helps to erode some of it and makes it easier for governments to pay it back.

Too much inflation can cause of boom and bust cycles in the economy, producing low growth and higher unemployment. It can also lead to higher interest rates, which might be good for savers, but bad for borrowers and this could lead to housing issues across the country. If wages are not increasing but inflation is, people have less real disposable income and so will have to give up something in exchange (we say there is an opportunity cost). Also if inflation is too high people will have less money to spend on other things and this could lead to the economy contracting in certain sectors. Therefore there needs to be a balance and so the Monetary Policy Committee (MPC) have set an annual target of 2.0% and they control this through a number of different instruments.

screen-shot-2017-02-15-at-15-48-36

How is inflation actually measured?

Inflation is officially measured through CPI in the UK. CPI stands for consumer price index and is essentially a virtual shopping basket of over 700 goods and services, which are weighted according to relative importance. These goods and services such as transportation, food and medical care, are chosen by using the ONS Family expenditure survey and 150 different regions across the country are considered.

The value is calculated by taking price changes over time for each item in the predetermined basket of goods and averaging them. Changes in the CPI are used to assess price changes associated with the cost of living. The CPI statistics cover professionals, self-employed, poor, unemployed and retired people in the country and thus can be unrepresentative of certain groups of people as an average figure is produced.

From March 2017 however, the ONS will be changing the official of measure of inflation in the UK to CPI-H, which will add accommodation and the costs of owning a house to the consumer basket. It is thought that this change is to better reflect everyday price changes. The change is likely to show inflation is higher than currently indicated. Although CPI already includes the cost of renting and running a home, it leaves out special costs faced by property owners. CPIH will include what are called the “costs of housing services associated with owning, maintaining and living in one’s own home”.

 

Why has inflation risen to its highest rate since 2014?

According to the Office for National Statistics, this increase was caused largely by the rising cost of fuel and food, as well as the costs of raw materials and goods leaving factories. This is mainly due to higher oil prices and the weakened pound, thanks to Brexit.

This was offset by low food prices. Over the past three years, food and non-alcoholic drink prices have fallen sharply as supermarkets engaged in a price war. However, the rising cost of imported food has started to alter this trend. As it stands food and non-alcoholic drinks are still 6% cheaper than they were three years ago but this could all change.
Inflation is expected to rise further this year, past the target of 2% as the effect of the weaker pound feeds through to consumer prices. The Bank of England expects consumer price inflation to peak at about 2.8% early next year. Despite this, we don’t know exactly how much of the rise in input prices will be passed on to consumers and how quickly this will happen. Shoppers are already faced with higher prices for imported cars, computers and kitchen equipment, and very soon our own factories could be charging substantially more as well.

In summary, Brexit, although it has not physically changed much in the economy it has created uncertainty and speculation, which has resulted in the fall in the value of sterling. Although this has made Britain’s exports cheaper and more competitive, as well as increasing tourism in the UK, Britain’s imports are significantly more expensive, and once manufacturers and companies start to pass on more of the increased costs to the consumers, retail prices could rocket up. This mean interest rates will almost definitely increase making car payments, mortgages and loans more expensive. It is unlikely that wages will rise by the same amount and this will reduce the real purchasing power of money and could lead to a slowdown in the economy. After Brexit, things could be more positive as confidence rises and the exchange rate improves, however we don’t know how long that could take. It may be two years or 10 years.

screen-shot-2017-02-15-at-15-26-47

 

 

Sources Used:

http://www.bbc.co.uk/news/business-30778491

https://www.ft.com/content/ab614c34-f28d-11e6-95ee-f14e55513608

http://www.bbc.co.uk/news/business-38966692

 

 

Still want some Brexit news to keep you in the loop?

Check out the article by the financial times, which discusses the main challenges Britain will face as it leaves the EU:

https://www.ft.com/content/6e3aeb4a-ec65-11e6-930f-061b01e23655

If you don’t have time to read the full article or don’t have a financial times subscription I have summarized the key points below:

  1. Lack of time. Once article 50 has been triggered, Britain will only have two years to exit the EU, unless the European Council unanimously decides to extend this period.“The chances of securing an extension are slim”, thus the limit is two years. However, businesses will need clarity a good year before the end and so the deadline is well before this. As a result, the UK’s leverage will rapidly dwindle.
  1. Divergent interests. Negotiating with the European Commission, 27 countries and the European Parliament, will be difficult since they will all have different priorities and interests. Many will want to show that exit is costly and many will feel that the longer the talks drag on, the greater the chance of having UK-based business “fall into their laps”.
  1. Money– As discussed last week, Britain will have to pay a hefty €60 billion. “a far cry from the £350m-a-week bounty promised by Brexit campaigners during the referendum campaign”.
  1. Complexity– the divorce will cover outstanding commitments such as scientific research and citizens’ rights. London has also decided on a very complex post-Brexit trading arrangement.
  1. UK trade may shrink by up to a quarter in both services and goods. It is true that the short-term economic effect has been far less than many thought, although we must remember that the exit has not yet begun.

 

Stay tuned to rsira-economics.com with more interesting posts to come such as ‘will robots replace our workforce’ as well as a few book reviews on economics books by authors such as Paul Krugman and Tim Harford.

 

What have Trump and May done so far…?

Hello readers, welcome back to rsira-economics.com.

Last week I warned you that I would be discussing both Mr Trump and Mrs May in one go. If you can’t face reading any more about these two, then I suggest you close this page and continue with whatever you were doing before. On the other hand, if you are dying to know what is going to happen next with Brexit and what ridiculous policy Trump is going to come up with next, then please read on!
Recently the two politicians, arguably the most powerful in the world have flooded the media and it seems that every time you switch on the TV, you see at least one of them announcing something new.

Over the last week we have seen how Trump has: imposed travel bans on seven Muslim countries (which has been overruled for now), made his intentions clear that he still wants to build a wall across the Mexican border (although it is unclear who is funding it at this stage), as well as undo the work of his predecessor including removing Obama-care. I guess he really did mean what he said in his campaign and was not just doing it to gain popularity as many people believed. These announcements, particularly the travel ban, have sparked outrage across the globe including many protests across the USA. In the UK a petition was signed to prevent Trump from making a state visit and this reached over 1.8 million signatures. Although he has said that his travel bans are not specifically targeted at Muslims and that he is doing it to make America great again, he is completely out of his mind. In this day and age, we cannot ban people based on their religion. According to some sources, this is actually a breach of human rights hence one of the reasons the order has been blocked for now. Although some may disagree; banning an ethnic minority because of their beliefs could actually be termed as racism, prejudice, and discrimination. Economically the Muslim population in America plays a significant role and without it, America would suffer many skill shortages. The image below also shows how instead of banning Muslims Trump should really focus his efforts on banning something else.

screen-shot-2017-02-06-at-19-36-48

On the other side of the Atlantic, Mrs May has announced that Britain can no longer be part of the single market, and has clearly stated that she has put immigration first above trade, as this is what ‘Brexiteers’ ultimately wanted from Brexit. Her justification is that it’s the only way to ‘protect’ our borders and ‘get our country back’.

Now we could spend the entire time saying why the pair have made terrible decisions, and continue to discredit Trump’s announcements, but since it has already happened, we might as well get on with the economic analysis. I hope that by the end of reading today’s post, you will have a clear idea of what the two have done and what they could do next. If you’ve been watching the news then this will be a great summary of everything and will help you understand the economic implications. If you haven’t, as per usual I will ensure that the post is easy to follow. I hope to keep it short and be optimistic for the year ahead. As always, if you have any questions or don’t understand something, or have read something different to what has been said today, then please do contact me at rajveersira@gmail.com or leave your comment below and I will try to get back to you. If you are enjoying reading rsira-economics.com and are feel like you are benefiting from reading it, then please do share it with someone who might also enjoy it. Also if you have any suggestions or improvements / want to know about a particular economics related topic? Just drop me a line and I’ll get back to you.

Before we get started I’d like to acknowledge that those people who said we want change certainly have got it. It’s surprising to think how different our world would have been had Hilary Clinton won the election and had the people of Britain just voted to remain. Nevertheless, we are where we are and only time will tell whether the decisions made were sensible.

You might also be wondering why I am talking about 2 major stories in one. Well, the answer is that in an article by the Economist, it was found that Brexit and Trump actually have a lot in common. You might at this point have the image of Nigel Farrage and Donald Trump standing next to each other (like the one below), but actually, from an economic point of view, there are some similarities. Further, they are arguably the most important issues the world is facing at this moment in time and it is important to keep up with them and understand their links and global implications.

screen-shot-2017-02-06-at-09-29-54

Firstly during the campaign, Mr Trump called himself “Mr Brexit” and promised “Brexit plus, plus, plus” for America. Secondly there was a correlation between people who signed the petition against Trump and those who voted Brexit:

screen-shot-2017-02-06-at-16-32-23

The data show that people who didn’t like Brexit don’t like Mr Trump. Proportions of petition signatories are highest in cosmopolitan and heavily Remain-voting cities like Brighton, Bristol, and Cambridge, all with large populations of university-educated, white-collar residents. On the flipside, petition signatories are lowest in older, post-industrial, pro-Brexit area where skills are also relatively low: Wolverhampton, and Doncaster.

 

Brexit

Let us first consider the problem in the UK.

I set you all some ‘homework’ last week to read the article by the BBC about Brexit. If you didn’t do it then the points below will ensure you are up to date and ready to understand the situation further.

Brexit in a nutshell:

  • Theresa May has said that “Brexit means Brexit” and that “Britain can no longer be part of the single market”, in other words, she has opted for the so-called ‘hard Brexit’ and there is no chance of a second referendum or Brexit being reversed.
  • The government lost the court case to trigger article 50 by royal prerogative and instead the issue was settled by the Supreme Court, who said parliament must have a vote before article 50 could be invoked. This was carried out and the UK has been given the go-ahead to “Leave” the EU.
  • Theresa May is aiming to trigger article 50 by the end of March and this will formally start the 2-year negotiations period to leave the EU. Once article 50 has been triggered there is no turning back and upon completion, Britain will have to pay an exit fee of £52 billion, the cost of HS2 (see last week’s post for more information).
  • HSBC will move up to 1000 jobs to Paris. Others are less optimistic. Hilary Jones, a director at UK cosmetics firm Lush said the company was “terrified about the economic impact. She added that while the firm’s Dorset factory would continue to produce goods for the UK market, products for the European market might be made at its new plant in Germany. Clearly, Brexit has led to high level of uncertainty across the economy and low ‘animal spirits’.

 

Now for the moment you’ve been waiting for- The economic impacts:

  • Nicola Sturgeon has said a second independence referendum for the country is now “highly likely”, although not in 2017. She has said she wants Scotland to stay in the single market and said Mrs May’s decision to rule out the UK staying in the single market “undoubtedly” brings the referendum closer.
  • We could move to a point based immigration system like Australia making it harder for immigrants to enter the UK and replace the aging population in the UK. Although it may help fill certain skill shortages, immigration actually fuels the UK economy and without the low paid jobs they provide, productivity would decrease, as many Brits would not be able to perform to the same level as highly motivated immigrants.
  • Already companies such as HSBC have announced that, although they are keeping their global headquarters in London, they will be moving 1000 workers to Europe. It is likely that other companies will follow suite in order to prevent losing access to the single market. Too complicated? Well maybe if we all just did the sensible thing and voted to remain we would not be treading in unknown waters.
  • Mrs May said the U.K. would no longer be subject to freedom of movement rules or laws made in the European Court of Justice and pledged to strike new deals with trading partners around the world, including the U.S.  May, also said she would “change the basis of Britain’s economic model” and if Brussels didn’t play ball she would dramatically lower corporate taxes in order to entice big EU-based banks and other companies to the U.K. If the EU tried to “punish” Britain for leaving, she said, it would be “an act of calamitous self-harm.” However this is purely speculation and guesswork, and we will only know where Britain stands after negotiations.
  • Britain is Europe’s second-largest economy, behind Germany, so both sides want to work out a deal. However, a pain-free Brexit could encourage other EU members to leave. German Chancellor Angela Merkel has warned that Britain cannot “cherry-pick” the best features of its EU membership and dispense with the rest.
  • This is the first time a nation has left the EU, so it’s uncharted territory. Negotiators will be unpacking 43 years’ worth of treaties and agreements, covering thousands of different issues.
  • The negotiations can be extended beyond two years, but only if every EU country agrees. If no deal is approved within the allotted time, all EU laws and treaties will automatically cease to apply to the U.K. Risks after risks after risks…

 

 

Trumponomics:

This is perhaps even more controversial than Brexit, as it has created a worldwide dispute. Here are some of Trump’s proposals, what he has done to date and the economic effects:

  • He has actually got on with what he set out to do pretty quickly, and for that, he could be commended. I’m afraid the good news ends here.
  • He imposed a travel ban which included: the suspension of refugee programmes for 120 days, a ban on Syrian refugees, a ban on anyone arriving from seven Muslim-majority countries, with certain exceptions, and a cap of 50,000 refugees. The effect was felt at airports in the US and around the world as people were stopped boarding US-bound flights or held when they landed in the US. It’s actually quite ironic that Trump is putting such strict controls on immigration considering his wife is actually an immigrant.
  • It remains to be seen how Mr Trump will pay for the wall, although he has repeatedly insisted that it will be fully paid for by the Mexican government, despite their leaders saying otherwise. Senator Majority Leader Mitch McConnell has said the Republican-led Congress will need to come up with $12-$15bn more, and “the funding fight – and any construction – will come up against issues with harsh terrain, private landowners, and opposition from both Democrats and some Republicans”.
  • Construction of two controversial pipelines – the Keystone XL and Dakota Access has been give the green light. Again reinforcing the idea that Trump clearly has no reagard for sustainability and future generations. Mr Trump told reporters the terms of both deals would be renegotiated, and using American steel was a requirement,(even though Trump towers are made from Chinese Steel).
  • America is withdrawing from the Trans-Pacific Partnership- showing how he is completely for protectionism.
  • He wants to get on Putin’s ‘good side’ and it is possible that Trump could start a Trade war with China.
  • He has no concern for the environment and thinks it’s just a “hoax”, going against 99% of environmentalists who have devoted their lives to investigating climate change. (more about climate change, in particular, the idea of market failure coming soon).
  • Companies such as Starbucks have agreed to take 10,000 immigrants and in response to this, the hashtag boycottStarbucks has been seen all over social media.
  • He has said he is going to cut taxes and ‘Make America great again’ by making drastic improvements to infrastructure. Again it is unclear how he is going pay for this since he his reducing the tax revenue. Furthermore, his wall is expected to cost billions of dollars and if he does end up paying for it then it could have serious economic implications for the US economy.

The most controversial policy seen so far, as outlined at the start, has been Trump’s travel bans and the way he views Muslims. For those of you who are addicted to YouTube and want to understand more about what this whole issue, I recommend that you watch the Oxford Union Society Debate where Mehdi Hassan argues about the topic of Muslims and terrorism that Mr Trump keeps going on about.

https://www.youtube.com/watch?v=d2DZ8bbxd8U

So what now?

For now, we just have to wait and see what Trump is actually going to do. I have discussed what he has done so far and what he could do, but as for what will happen, we will have to be patient. What is clear though is that both Mrs May and Mr Trump are fighting against immigration and want to get ‘their’ borders back. They believe that immigration is having a negative effect on their countries and are perhaps being myopic and are not thinking about the long term. They are both also reviewing their trade situations and it clear that massive changes to the current set up will be seen, with Britain leaving the single market and Trump focusing on the idea of protectionism.

screen-shot-2017-02-06-at-09-30-38

Sources used:

http://theweek.com/articles/677612/whats-next-brexit

http://www.economist.com/blogs/bagehot/2017/01/long-list

https://www.ft.com/content/480b4ae0-aa9e-11e6-9cb3-bb8207902122

http://www.bbc.co.uk/news/world-us-canada-38695593