It is strange that in an economy where competition is encouraged and monopolies are avoided and regulated the BBC can maintain its legally enforced monopoly over the TV broadcasting industry. The problem is not with the BBC or the way that it funds itself it is simply with the fact that a TV licence is compulsory whatever channels you are intending to watch. This makes it extremely hard for competitors since their audience is already paying a subscription to the BBC.

Main Problems

1. Consumers may want to watch TV but not the BBC but still have to pay for the BBC. This means tha the amount consumers are required to pay exceeds the amount that the other channels need to supply the service creating inefficiency in the market.
2. It destroys the market for non-advert TV since no one can enter a market where the consumer is forced to buy their rivals product if they want to buy theirs. This will lead to a fall in  the quality of non-advertised TV since the BBC has no incentive to improve.

Solution

What I can see as the simplest solution is to make the license fee and optional subscription to the BBC. People who want to pay it (probably most people) can carry on paying as normal and receive the BBC with no adverts but people who do not wish to pay can still enjoy the other channels but cannot access the BBC.

It is given that something needs to be done to reduce the massive budget deficit and start paying off part of the governments debt. One possible option is raising taxes but this may not necessarily work. This is because whilst raising taxes would increase revenue for the government if people didn’t change their behaviour, higher levels of tax will reduce peoples incentives to work and reduce their ability to spend which could eventually lead to a fall in tax revenues.

Why tax revenue could fall:

1. People will have less incentive to work so may end up paying less tax. If the percentage fall in income from reduced work is greater than the percentage increase in the tax then the amount of tax being paid will fall. Clearly this means the higher the starting point for the new tax the more likely this is to occur.
2. A higher level of tax will mean that disposable incomes will fall so that people spend less reducing GDP (therefore leading to joblosses or lower pages and lower corporation tax revenues) and VAT revenues.

How to decide – Laffer Curve

So does this mean cutting taxes will always raise more revenue? No. Clearly if you tax at 0% you wont raise any money since your not taking any but you also wont at 100% since no one will perform any transaction since all the profit will be taken from them. This leads to the laffer curve which is a graph of tax revenue against the tax rate. It starts a 0 rises to a maximum revenue and then falls back to 0 at 100% tax as shown below.

Laffer curve showing the tolerable rate of tax T

The diagram shows a tolerable tax level,T, where tax revenue is maximised. If we are at point T the goverment should do nothing, if we are at B it could raise more revenue by cutting taxes beacuse of the reasons outlined above and if we are at point A it should raise taxes. The question for the goverment is where does it think we are?

There is discussion at the moment about whether student tuition fees should be increased to £5,000 but I think people should also be considering whether or not they are reduced, possibly even to 0. People argue that since it is the student that gains from earning more from their degree then they should be the ones who pay for it. However, there are three problems with this:

1. The students don’t have the money to pay for their degree when they are studying them.
2. Because the tax system is progressive then the proportional increase in taxes paid is much greater than the proportional  increase in the taxes paid. Not to mention the fact that in absolute times the cost of the tuition fees is  repaid many times over in the additional taxes that a person earns.
3. The economy as a whole gains from a more highly educated work force since they are more productive in working in industry etc.

Point 2 is the most important. If we suppose that the level of income  to pay 40% tax is £30,000 and that there isnt a tax free allowance (a tax free allowance would make the system more progressive and therefore strengthen the argument) and all other income is paid at 20%. If our student was only going to earn £30,000 before they would pay £6,000 but if going to university doubles their income to £60,000 they would now pay 3 times as much tax, £18,000, even though they have only doubled their income. As a result the percentage pay off to the government is greater than it is to the student and the government should therefore contribute to the costs.

How they Should be Paid For

The problem if we decide that the government should pay some or all of the tuition fees is how it would be able to afford the increased fees. What  I think is the est method would be to reduce the number of university places available or at least have a smaller number of them which the government pays. This would not only reduce the bill which the government would have to pay for the fees but it would also increase the value of degrees since only a small number of people have them.

If the goverment wanted to avoid the cost of paying for the tuition fees now and only pay for it when they were receiving the higher rates of tax from the graduates then they could allow for the tuition fees loan to be offset against the graduates income tax at a certain rate a year. Say for example the graduate had a tuition fees loan of £10,000 and was paying £5,000 in tax in a given year then the tax could be reduced to £4,000 to allow the graduate to pay off £1,000 of their loan.

Why the number of places could be reduced

The purpose of higher education for most people is one of the following:

1. To provide a higher level of education so that the students can perform a specialised job, eg) medicine or engineering
2. To enable students to differentiate themselves from each other and demonstrate a level of intelligence which will improve their chances of employment (whether they actually use their knowledge or not)
3. In order to go on to do a PHD and research.

The UK economy only benefits from people in group 1 since they actually need their degrees to do their job. People in group 2 use their degree to prove their ability in order to get a job but dont actually use anything they have learnt to do the job and could therefore do it equally as well had they not spent 3 or 4 years studying for it. It seems the majority of people eventually end up in group 2 even if they start off in group 1 since they may find that they are actually better at something else or they can earn more by moving into management, this is also reinforced by the fact the economy isn’t perfectly aligned with our academic subjects.

Since only a fraction of the jobs lie in group 1 we don’t have to worry that a cut in student places would damage the productivity of the economy and since group 2 is about differentiating people it doesn’t make sense to have too many people doing a degree else they wont be any different. Over all the number of students could easily be reduced without damaging the economy or peoples incomes.

Have your say

If you have an opinion on this topic please vote on the poll below and leave a comment

Many people are quick to blame bankers and their bonuses for the recession but this doesn’t seem to make much sense. The bonuses were being paid for by the banks and the banks had no interest in paying the bankers to ruin them. Politicians say that banks shouldn’t reward failure but it isn’t rational for them to do so. The bankers themselves also had nothing to gain from the collapse of the banks, it has usually meant that they have been forced to resign or at least take a pay cut losing and have gained a bad reputation that may damage their income in the future.

So why did these bonuses lead to bankers making decisions that have contributed to the collapse of the banks. First of all we need to make some observations about the system:

• The bankers (particularly the board of directors) are paid for by the bank and ultimately by the shareholders.
• The bankers job is to maximise the return for their shareholders
• Most share holders are short term investors
• There are many other banks and potential directors for the banks
• The bankers ultimate aim, like every other working person, is to maximise their life time earnings.

This means that the shareholders will reward with bonuses the bankers who can maximise their returns. Since these returns occur in the short run they are interested in rewarding bankers who can help the bank grow rapidly in the short run and hence bonuses are paid for short term growth, profits etc.

We must also remember that if a banker decided they would take the less risky approach to banking then the short term growth and profits of the bank would fall. Since this would damage the short term shareholders they may decide to remove the banker in favour of another one who could make them more profits.

In addition to this is the fact that up until the recession hit their hadn’t been any problem with the way that the banks were being run. You can imagine how hard it would be to convince shareholders that the bank should be run one way when all the other banks are being run differently and making much larger profits for the shareholders.

Who is to blame then?

There are many groups of people who are responsible for recession which include bankers and their bonuses but also include other groups like consumers, the government, FSA, shareholders and the short terms nature of the stock exchange. When looking at who to blame you must look beyond peoples actions to see the reasons for those actions. For most of the groups involved you will find that they acted rationally and without a conflict of interests (the bankers took the high risk and high short term profits strategy that they were paid to take to maximise the profit for their investors). You must also remember that organisations such as banks aren’t their for the public good but in order that their owners can make money.

However, the government has an important role as its purpose, through organisations such as the FSA, is to create and economy and legal system that will encourage people to act rationally in a way that will benefit society at large.

The recession is likely to mean that once the economy has recovered to its position immediately before the recession the price of oil, house and other goods that take a long time to produce will be much higher. This is because the fall in demand for goods has lead to a fall in production which will lead to a shortage of supply when the economy grows and demand increase again.

Which goods will be affected?

The goods which will be affected are ones with a long production cycle causing them to have a low price elasticity of supply (PES: a measure of how responsive supply is to price).

For example it takes a long time to get from the stage where an oil company decides it wants to sell more oil because of higher prices to the point where it has bought the exploration rights to land and sea, drilled in these areas and found new oil, built a production platform with the required number of wells and finally brought this new oil to market.

similarly it takes a long time for a building firm to get from deciding to start a new development to the stage where they have bought the land, got the necessary planning permission, built and decorated the houses and infra-structure and got the houses on to the market.

Why their price will spike

However the PES of these goods is also much greater when the price falls compared to when the price rises. These firms can easily halt production of oil or leave houses half built but it is much harder to re open the closed wells or continue building new houses. Because of this they can quickly shut down production now to cope with a fall in demand caused by the recession but their will be a much longer delay between the economy recovering back to its original position and the production of these goods increasing to match. This delay will cause a temporary shortage of goods such as oil and housing leading to a price spike far beyond the original levels before the recession.

By David Woodford

The UK government borrowed £16 bn in August but what does this actually mean for the economy and is it worth the debt repayments?

There are three reasons why the government is borrowing so much:

1. Government spending automatically increases as the economy shrinks in a recession because the unemployment and other benefits it is forced to pay out increase with rising unemployment .
2. Tax revenues to the government automatically fall during a recession as falling wages, company profits and level of employment reduce the levels of income and corporation tax the Government receives whilst falling house prices will reduce the level of council tax people have to pay. Also a fall in consumption will reduce tax revenues from VAT and excise duty on goods such as petrol (through income from cigarettes may increase as these are an inferior good).
3. Part of the Governments strategy for recovery from the recession relies upon using increase Government spending to compensate for a fall in consumption and investment to help reduce the overall fall in spending in the economy.

Points 1 and 2 are clearly beyond the Governments immediate control (though had they not positioned the UK where they had leading into the recession then these impacts would have been reduced) but point 3 is a deliberate effort by the government.

However we should ask will this increased government spending really help the economy recover or should they aim to reduce it instead. One of the main arguments for the Government reducing its spending and borrowing is the “crowding out theory” which lead to Gordon Brown establishing the Golden Rule which he then proceeded to break when it was at its most importance.

Crowding Out

The basics of crowding out suggest that the Governments demand for money to borrow is very inelastic (it doesn’t respond much to a rise in interest rates because it has committed to spending the money). Therefore the Governments entry into the market to borrow the money will cause an increase in demand equal to the amount it needs to spend which is the same at all levels of interest rates. This forces up interest rates, since supply has remained constant.

However, the private sectors demand for money (used for investment by businesses and consumption by consumers), is elastic (changes greatly when the interest rates for borrowing change). This is because business are seeking to maximise profits on investments and once interest rates are above a certain level other investments will become a better use of the companies resources. It is elastic for consumers because they can only afford credit up to a certain level, which is reduced because of the recession.

The elasticity of the private sectors demand for borrowing money means that when interest rates rise due to the Governments entry to the market the level of borrowing by the private sector will fall leading to reduced investment and consumption and therefore a further fall to total spending in the economy. This will greatly reduce the impact of the extra Government spending on the economy as the overall increase in total spending will be much less than the increase in government spending.

Opportunity Cost of borrowing

There is also an opportunity cost to the government borrowing this money. These are the interest repayments it must make in the future. Since these will have to be paid for by the Government they will reduce the Governments ability to spend in the future which will cause a fall in total spending (aggregate demand) just as the economy is beginning to recover from the economy therefore making the recovery longer and more painful than it need be

Please leave comments below

Isnt it great, ive done one post on this blog when the economy was looking great wishing for a ressecion and now one is here. The timing is great for anyone starting uni this year with any hope the following will happen:

• House prices will continue to fall but start to recover in the summer of year two so that they are at their bottom but rising just as I am looking to buy my first house.
• Companies wont have been hiring many graduates during the recession so will be looking to expand there work force and will want to take on more graduates to ensure they have enough new people in training. Also the experience of older people wont count for as much as many of them will have been out of work for a year or 2.
• Low interest rates mean that repayments for the student loan will be lower and hopefully as the economy begins to approach full capacity again there will be a period of high inflation (the goverment wont notice that the growth is becoming unsustainable untill its too late) meaning that the size of both the student loan and the small mortgage from low house prices will quickly reduce over time.

Anyway all we can do is hope for the worst for the economy and the best for me

Because of the economy at the moment the price of houses has become very high meaning most first time buyers cant afford a house (or need a massive mortgage that they cant afford, though banks might stupidly lend it to them). Anyway people not being able to afford houses is a bit of a problem because people generally need somewhere to live.

So in a recession houses prices will fall because:

1. People will be made redundant or have falling incomes meaning their houses will be repossessed. This will cause the banks to sell them off cheaper and therefore the overall price of houses will fall.
2. People will be less confident in the economy so are less willing to borrow large amount of money, especially if they think they are likely to lose their job
3. People may try to free up some of the money they have in their house by selling it.
4. If people expect house prices to fall they will be less willing to invest large amount of their money in their house and will therefore be willing to pay less for a given house causing its value to fall.
5. There are many many more that i haven’t listed.But if you think you have an important one I’ve left out please add it in the comments.

Falling house prices mean that first time buyers can might actually be able to afford a house. Now i know some people will claim wages will fall etc so ftb’s still wont be able to afford a house but fingers crossed people still need to eat so tesco will still employ shelve stackers, etc. Also in a recession their will be less investment, this will mean that efficency falls so they will need to pay more people to do the same work than before (especcially unskilled work that is most liley to be being done by the people im talking about)

Anyway i no some people will argue with me so please leave your comments(whether you agree or not) :)

Welcome to ukrecession, this is my site about, belvie it or not, why the UK needs a ressecion and how you and me could benefit from it. It will be frequntly updated so come back in a few days time to look at some of my posts. See you soon,

dave

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