dtbsmith

[dtbsmith]

http://www.project-firefly.com/node/14736

A redraft on my short essay on the Fiscal Multiplier published by Project Firefly, the thought leadership forum.

Introduction

The International Monetary Fund (“IMF”) October 2012 World Economic Outlook publication1 may have gone, understandingly, unnoticed by the general population but brought about much discussion from popular economists such as Gavyn Davies,2 Financial Times commentator and former head of the Global Economics Department at Goldman Sachs. This is because the paper served as an indirect assessment of government policy in tackling the economic crisis to-date. The eight words that, whilst sounding so simple, have great consequence on the economy; “[the] fiscal multiplier may have been larger than expected.”3The reason why the multiplier is so controversial is because of the polarisation in political4 and economic5 ideology on how to overcome the current economic crisis and embark on the structural reforms needed in countries that are running seemingly “unsustainable deficits"67. In terms of both government spending relative to taxation receipts and current account balances. This paper will outline the economic realities faced by pro-austerity governments in tackling the diametric challenge of spending cuts and driving growth, in light of the IMF publication on the fiscal multiplier and why this matters...

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This interesting article on the Financial Times website discusses a recent IMF publication in it's World Economic Outlook on the multiplier effect of a government's fiscal policy on the economy. This is the capacity of which government spending or cuts will have an impact on the whole economy. The reason the multiplier effect is so important right now is because of the polarisation of political ideology as to how to embark on the structural reforms needed in countries that are running (now) highly unsustainable deficits, both in terms of government spending versus taxation and current account balances.

There is a great consensus from all but the very ardent left of the political spectrum that there is a need for reform to restore competitiveness in some countries and balance the economies of others. In most cases this starts with welfare reform, particularly pension benefits. It has long been underfunded relative to potential liabilities of the post-war baby-boomer generation with average life expectancy substantially greater than when the concept of the modern welfare state was first envisaged following the Beveridge Report of 1942. Given the greater levels of voter turnout in older generations politicians have been wary of turning this large voting block against them in fear of being unelectable, simply "kicking the can" as it were on to further generations rather than introduce the necessary tax increases. Merely relying on the hope that population growth, with that tax base, increases enough to keep the ponzi-scheme of underfunded state welfare going.

However it is the timing of the reforms, given the global economic crisis that most serious individuals are debating, yet the hand of governments is being pressed by sovereign bond markets demanding high yields in return for the risk that the country's taxation receipts wont catch up to its spending and it's government will be forced to take a bailout subordinating debt held on the market. Pro-austerity economists, such as Ken Rogoff of Harvard University and formerly the IMF, believe that cutting government spending right now is important for reducing deficits. The thesis being that government spending will fall faster than the economic contraction thus reducing the deficit as a percentage of GDP. Keynesian economists, such as Princeton University Professor and New York Times columnist Paul Krugman, believe that more government spending is needed to fuel economic growth as austerity measures wont work.

The IMF article seemingly leans towards favouring Keynesian economics (for now) as the pro-austerity policies, many of which have been conditions of IMF bailouts, as it is becoming evident that the policies are actually self-defeating because of the fiscal multiplier effect, which in layman's terms is the relative impact on the economy of changes in government spending. Assuming a 1.0x multiplier a 5% increase in government spending should have a 5% increase in GDP, with the reverse being true for a decrease. Though structural reforms are needed because of the economic crisis the pro-cyclical nature of the reforms are worsening the economic contractions and, as the article points out, efforts to fix the economics of the crises countries because of the mathematical necessity of austerity policies is that government spending falls faster than GDP, as it had previously been assumed that the multiplier was 0.5x so a 10% cut in government spending should only reduce GDP by 5%. In reality it has turned out that this is not so, as evidence has shown that as a result of cuts in government expenditure government deficits as a percentage of actually GDP rise rather than fall as the fiscal multiplier is believed to be as high as 1.7x.

Context is an important consideration here; government spending on welfare increases during economic downturns as unemployment rises and wages are squeezed pushing people in relative poverty thus falling onto the welfare safety net. It is also worth noting, in reference to the point on pensions, as younger generations consume rather than save a greater percentage of their income than older generations for economic growth it might be argued it is better for the economy and government taxation receipts to have younger generations in employment than keeping older generations in their jobs through an increased retirement age. So as youth unemployment rises because of an increase in the retirement age reducing the number of vacancies it has a negative impact on the economy despite the efforts of decreasing government expenditure on pensions, as taxation receipts are depressed and government expenditure rises because of the increase in welfare payments as a result of youth unemployment.

Though, as I mentioned above, in many countries structural reform is needed yet the multiplier effect outlines that on its own it can be counter productive during economic downturns and instead calls for counter-cyclical measures. Yet it also establishes a perfect moment for governments to dampen the blow of structural reforms with value added infrastructure spending. The political will could be found on the right, as it coincides with the longed-for reforms to the expansionist welfare states of the late 90's and early 00's, and on the left, as infrastructure spending will bring with it jobs. In the UK this could be done by restoring some much needed credibility to the Department of Transport, after the West Coast Main-Line backtrack, by speeding up the building of the long delayed High Speed 2 railway lines, allowing the UK's train network to catch up to the rest of continent.

So in conclusion, political ideology about the size of government aside, whilst there is a clear pressure from bond markets and the present economic realities that governments need to reduce their structural deficits (mandatory spending) it is equally clear that government's need to take a two pronged approach. As central banks are having to resort to monetary policy to help boost economies in this  prolonged economic crisis governments are committed to their Plan-A, as UK Chancellor of the Exchequer George Osborne is, it should be paired with spending that encourage growth and add value to the economy because of the importance of the fiscal multiplier effect. This should create the jobs needed to cut youth unemployment, even if the older generations are delaying/facing delayed retirement, and with that government deficits.

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HBS Prof. Malhotra's speech to Harvard's MBA Class

I found this online this afternoon whilst doing some research for an essay. Though an hour long, it's a great speech with some some great take aways for the viewer. There is some irony to having found this the week of my last exams as an undergraduate at Manchester Business School.

Enjoy.

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Writing my last exam as an undergraduate at University of Manchester - Manchester Business School with a @GoldmanSachs pen #godswork

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A million dollars isn't cool. You know what's cool? A billion dollars."

WSJ: Facebook prices it's IPO at $38... Mr. Zuckerberg is selling shares worth upto $1.2 billion in the IPO.

http://online.wsj.com/article/SB10001424052702303448404577409923406193162.html

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Royal Bank of Scotland - Indian Summer Final

The final of the Indian Summer RBS GBM - One Day Entrepreneurial Challenge was held yesterday at the RBS HQ in The City of London.

Having raised £6,079.74 in one day we were pretty confident ahead of the big day. Andrew and myself headed to London on Tuesday to crank out the presentation and the portfolio we were going to hand to the judging panels. It turned Team Manchester had raised the most money, 20% of the £30,000 total. 

Our portfolio was pretty spot on, I was surprised to find no one had printed our their slides or a handout to give to the judges. Instead some teams had particulars of the various things they had sold to fund raise, examples being Exeter with their Indian themed flavours of popcorn and Bristol with their darjeeing tea.

Semi-Final Round

Our presentation went perfectly. It was professional, the portfolios containing supporting materials that backed up what we had done and show cased the creativity and handwork in planning the team had put in.

It was no real surprise to me that we made it through to the final. 

Final Round

We were in the final round, presenting to a panel consisting of Stephen Hester (CEO of RBS Group), John Hourican (CEO of RBS Markets and International Banking), Charles Dunstone (Chairman of The Prince's Trust), Elaine Arden (Human Resources Director of RBS), Penny Hughes (Non-Executive Director of RBS), and Laura Moore (Entrepreneur and star of reality TV show The Apprentice).

As the other two teams went first we had to wait half an hour for our turn.

The presentation went very well! We showed no nerves. Everyone enjoyed our video. The panel was impressed by the professionalism showed, our strong team bond, the amount of effort we had put in, and creativity in creating what was at this point the Team Manchester brand. I felt very confident ahead of the judged retiring to decide. We had raised 74% of the total of the 3 teams in the final. That said, credit to the other two teams, the Indian popcorn was a great product and Bristol though not having raised the £1,000 target for the day had a very good poet they leveraged for the creativity element of the presentation. 

The 15 minutes went-by very quickly. It was exciting rather than nerving. 

The Result: Runners-Up.

Exeter won the competition.

Obviously we were very disappointed to not have won, particularly for all the hard work  we had put in, but it was an honour to present to such a prestigious panel, who told us they were very impressed by our presentation - certainly not everyday one gets to shake hands with Stephen Hester and John Hourican. 

All credit to Exeter. We went out to celebrate with them, they are a great group so I wish them the best of time in India and I hope we stay in touch, and the RBS team who organised the competition. Not just for networking purposes, it was nice to relax at what has been a very long two months and get to know one another.

The Thank Yous

I would like to thank Mohit for organising such a good competition for a great cause, Yvette for being a great mentor and steering the team to raise so much money in one day, the panel for giving up their value time when they are so important, the other teams because without them their wouldn't be a competition, and my Team Manchester team mates who are now some friends I will have for life and I hope I was a great Team Captain for them.

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Team Manchester Here to Win Video

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Team Manchester Introduction Video

We decided to map a funny video in the style of The Apprentice to use as a better way of introducing ourselves to the RBS panel. It is a great way to display creativity, having fun, and our sense of humour rather than awkwardly passing off to one another throughout the presentation.

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After Party

I finalised the details of the After Party for after the concert next week this afternoon, thanks in no small part to help from the wonder Emma - party planner at Revolution Bar on Deansgate Locks. The venue looks great and it will be going on with their 'Random Night' theme.

The Details

When: 19th April 10pm-2am (after the concert)

Where: Revolution Bar on Deansgate Locks

Price: £15 for a VIP wristband to access the Vodka Lounge and 3 free drinks, though entry to the general bar is free

[dtbsmith]

Team Manchester Promotional Materials

With little over a week to go I have decided to upload the promotional materials that I have designed for Team Manchester here, as well as on Facebook. They don't look half bad. Then again, I would say that. Follow the link to see them all:

http://www.danielbadzire-smith.com/TeamManchesterPromotionalMaterials

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Just seen this on my bro's site. Makes a good point of the hypocrisy of the Occupy Movement. Whilst I'm not going to pass comment on whether it is or isn't a baseless cause, as they make some strong points on grounds of ethics. The annotation here points out that MNCs are an integral part of society.

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Pasty Tax "class warfare" fallacy

The largest argument, by largest I do mean loudest, to have come from the budget is the "class warfare" rhetoric from the shadow government and other opposition over the application of VAT on all hot foods.

It is, plain and simple, not class warfare. Yes VAT is a regressive tax given it increases the cost of general and lifestyle consumption decreasing the discretionary spending power of low-income earners to a greater extent than high-income earners. However:

1. Greggs, Sayers, etc. does not HAVE to push the cost of the tax through to the price of their goods now affected by the change.

2. Greggs is a profitable company with a 1.4% like-for-like sales growth 1 which meant they outperformed the economy as a whole for 2011.2 Which they have attributed to their "savouries", having looked at their online menu, this means the sausage rolls, pasties, pies etc. that are going to have the VAT applied. Basic economic principle in play here, supply and demand, the supplied price point intersecting demand here is very appealing to consumers so potentially they are under priced.

3. Consider the actual effect of the VAT on the price (assuming the full cost is passed on to consumers). A cornish pasty costing £1.50 is now £1.80 (the math 1.5*1.2). The marginal utility of 30p is very little to anyone. The opportunity cost is almost none existent. 

4. Let's consider a substitute, its high-street fast food: McDonalds Big Mac is £2.49; Marks and Spencers Club Sandwich is £3; and Costa Coffee Chicken and Pesto sandwich £3.50. The price range in price difference is £0.69-1.70. Given that the UK dipped into negative growth last quarter 2011 and we are currently in a period some economists are referring to as "the Great Recession"3 here, pressure on essential living costs may move people down on their discretionary spending so Greggs, even with the price rise, becomes an affordable and attractive option.

5. Aggregating the cost of price rise over a year, assuming a 5-day week 50 week working year, is £1.50 a week or £75 a year. The price per week is actually less than the cost of the sandwich from Costa. How much better off would you be (marginal utility) to the tune of £1.50 a week? Not every, the opportunity cost isn't event a Sunday Newspaper.

6. The aggregated cost of the substitutes is £172-425. Now that is, relatively, an amount of money with real marginal utility and an opportunity cost.

This is pasty tax is something that should really be understood in context, granted the argument "we're all in it together" is hard to stress with the cut in higher rate tax because of the reported relative benefits of rate cuts. Its rhetoric, designed to sell papers and win political points with the swinging voters. If the opposition and the media want a better example of class warfare use the increased duty on tobacco products, though they won't, since a greater proportion of the lower social classes smoke4, its an addictive product with little real substitutes and will affect discretionary spending much greater than paying an extra 30p for a cornish pasty. 

References:

1. http://www.thisismoney.co.uk/money/markets/article-2122258/Greggs-vs-pasty-tax-City-analysts-assess-impact-VAT-furore.html?ito=feeds-newsxml

2. http://www.bbc.co.uk/news/business-17533800

3. I'm going to attribute the Great Recession to Paul Krugman because the first time I heard the term was from his blog/Op-Ed column http://krugman.blogs.nytimes.com/2012/03/07/europes-two-depressions/

4. http://www.nice.org.uk/nicemedia/documents/smoking_and_health_inequalities.pdf

Update - this is from one of my friends on his thoughts: "I thought about this last night and concluded that those 'out of touch' are the media and the Labour party for insinuating that the staple of a working class individual's diet is a pasty and the rich never touch them. Frankly, if I were 'the working class' I would find it outrageous that these people have such a low opinion of me.

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This had to be shared.

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General Update

So as I said with the Team Manchester Update post I have been super busy of late. Working on the Team Manchester project, enjoying the weather (mostly just by being outside when I've been busying about), studying for my exams in May, and reading The Black Swan. I'm also working on what to do next year, masters applications and job applications. I would say I'm not ready to stop learning so a masters is, academically, the next logical step but the right offer for a challenging and rewarding job can in many ways offer a masters course real competition.

Now then; The Black Swan really is one of the best books I have read but it is taking me a while to get through because of how busy I have been and Taleb's writing style, or more accurately styles, make it a slow process for me who can usually cram through a book. It's a really interesting dynamic on thinking and I would encourage everyone to read it. 

That will be all. I'm pretty busy.

[dtbsmith]

The Pirates! In Adventures with Scientists 3D Review

So I went to watch this last night with my Grandpa because, this also serves as a point of disclosure because this review is going to be heavily bias, my uncle was one of the creators of the film. He works at Aardman so as my baby (well, 4 year old but it's all relative) cousin says this is "daddy's film".

It's a nice way of doing a pirate film, technically the film is brilliant. The effort that animation with models requires really is superb and so when you're aware of how labour intensive the process is, for what might be trivial things in live action films like facial expressions, you really appreciate the film. The film itself is a real compromise for its target audience(s). Plenty of people will like this film and certainly should go and see it. So my review is going to form an advert of such, but keep reading, that remains relatively objective (is that a paradoxical expression?) as to why the different age groups should go and see it.

Children and parents:

The little people (as they're called at my grandparents house) will enjoy this because its slap-stick funny, bright and colourful (little children are like magpies for bright colour and, with a 3 year old brother, I'm perfectly qualified in making this statement). Grownups will enjoy it because there are plenty of nods to jokes over the children's heads that will make them laugh. I'm not going to use an example because I don't want to sign post one for you.

Young adults:

It's a good film, it's funny, you will enjoy it. Plus, Ari Gold does the voice for a pirate.

Older Adults:

This is your kind of film, it's artistic and technically brilliant. It's not an action packed sequel and its funny. You'll enjoy guessing the voices as well as the jokes that I mentioned above. Plus there's a whole load of cultural references for you to enjoy that younger people won't understand, I don't mean because you were alive 150 years ago, so you can be in the culturally privileges section of the audience picking up on things.

The bullet points:

- technically the film is superb, I really can't stress that enough, because of model animations and worth seeing on this ground alone

- 3D was a waste of money, nothing really jumps out at like it should and this is a major problem with 3D films, so just see it in 2D

- the voice acting is great, as I said above its fun to work out who's who in the film

- the story, the cultural references, the characters all add value to the technical nature of the production

Rating: 4/5

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Team Manchester Update

So I have been REALLY busy the past few days organising things and getting everything together. Making phone calls, designing marketing materials, making phone calls, delegating things out to the team, making phone calls and sending LOTs of emails. Did I mention, by the way, I have been making a ton of phone calls?

So here is the poster for the concert. Doesn't look too bad, if I say so myself. But then; I did design it.

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UK Budget 2012

The budget came out yesterday and people from all sides of the political spectrum are saying how bad it is. The right for not giving big enough tax cuts which they claim are needed for growth and the left saying more austerity is bad for the system.

It's an interesting dynamic because of the two arguments in play here. Keynesian economics teaches us that through government spending we will increase aggregate demand, raising GDP to decrease the deficit relative to GDP which is most relative measure of public sector spending and debt. However, the growing concern is that the markets are demanding (as politicians believe) fiscal responsibility because without it gilts become riskier and thus demand is lower and borrowing costs become higher. Thereby increasing government spending on debt servicing and can create a downwards spiral past the reportedly dangerous 7% rate that is deemed unsustainable. That said, as the UK has its own central bank QE can be used to bring borrowing costs down but this can lead to inflation and crowding out of the bond markets for investors so ultimately the only purchaser of gilts becomes the BoE and this could become very dangerous for economic and political reasons.

The reported cuts on welfare benefits and tax credits vs the reduction in highest rate of income tax is an interesting debate in itself. Those on benefits and/or needing state support are going to spend them majority of their income domestically on standard living costs (food, clothes bills, etc.) so this is direct stimulus for consumption to lift aggregate demand and GDP. However the argument in favour of cutting welfare spending to pay for tax cuts to the highest rate is two pronged: 1. it incentivises individuals and companies to conduct operations in the UK because the tax rate becomes more favourable whilst lessening (in theory) the reason for tax avoidance and evasion; 2. as higher earners are less likely to spend the greatest percentage of their earnings (versus low income earners) on living costs and general UK based consumption (as opposed to holidays abroad etc.) so this unspent earnings are deposited in banks which can then be leant out in the forms of business loans, mortgages, etc. to boost the economy this way just as with the cuts in corporation tax.

George Osborne said the budget is one to incentive work and in many ways it does do this. The increase in the threshold of tax for low income earners, at the same time as welfare payment cuts, increases the incentive for people to take jobs, rather than fall into the benefit dependency trap whereby the marginal utility of being a member of the work force is diminished because the underclass (sorry for using this term if anyone is offended by it) are financially better off unemployed because the benefits are greater than their pay cheque or the effort required to work isn't, perceived by the underclass, to be great enough for the marginal increase in financial standing.

The interesting point is the increase in stamp duty for homes over £2m. I personally believe (this is the first time I am using my own opinion here) this is a tactful political play to off-set the damage from the cut in the highest rate to appeal to the centre and the left for the concept of "we're all in this together".

Time will tell whether George Osborne has made the right (not 'the right') decisions here, economically as to whether the economy will grow and politically as to how the Coalition fares in opinion polls and ultimately the 2015 election. There will probably be greater squeezing in the middle (sorry for the cliche) but this is where taxation revenues come from, there are less people at the top and very little taxable income and spending at the bottom, so the country just has to hope it isn't squeezed too hard.

A final point; I am honestly in favour of the Coalition of the two parties, the balancing of fiscal responsibility with social progression is a good thing. This temporary pause of polarised partisan politics is a good thing with compromise reflecting what people want.

Details on the budget as well as the full documents are available for download from the BBC website:

http://www.bbc.co.uk/news/uk-politics-17450719