Australian Sugar tax

This post is really a marker for those who will be undertaking Year 11 IB in 2017.

The sugar tax has been a topic of discussion in many countries in the last year. The Grattan Institute has issued a report and the Green party have drafted legislation on an Australian sugar tax. As discussed in previous posts it is a good idea as it helps deal with a negative externality of consumption.

Deputy Prime Minister Barnaby Joyce has called the tax 'Bonkers mad'. Takes one to know one.

The ABC covers the story here

An IA article must not be more than twelve months old when the commentary is written. Previous articles and taxes highlighted on the blog will be out of date for the 2017 Year 11 cohort, but not this!

A minimum wage for South Africa

South Africa has struggled with unemployment for many years. Until 1994 there was not an accurate figure, but it was thought to be as high as 40% and  it has never been less then 20%. In addition those in work earned low wages, often as 'day labourers' often working just one or two days each week.

It is perhaps surprising in a country with a background of inequality and low employment that no minimum wage has been established. It is now proposed that one is set.

There are arguments for and against this measure.

It will establish a wage floor that will protect the low paid from exploitation. This is very important when people are desperate for work and employers will allow competition to cut wages to below a 'living wage' level. (In effect the profits of firms are being raised through this.) It will also go some way to reducing inequality in the labour market.

Against it are the point that it might lead to more unemployment if the rate is set too high. Also it does nothing to raise the income level of those who do not work.

It seems unlikely that the minimum wage proposed is too high as the government appear to be starting at a low wage, perhaps with the idea of raising it over time. It seems more likely that it will force businesses to pay more to workers and prevent them from exploiting the large pool of competing labour they draw on.

There will be winners and losers in this, but it does seem a long overdue measure.

The BBC cover the story here

The concept of a minimum wage arises in the micro section of the IB course, but the concept of inequality is part of the macro course. Therefore this is something that could easily be turned into a Macro IA. Consider also the effect of AD of raising wage levels and the effect on AS of raising firms costs.

Australian wages growth at record low

The growth in wages in Australia is about half the rate it was four years ago at 1.9%. In a stark contrast to the period of the 1970's and 1980's this is a cause for concern.

During the 1970's Prices and Incomes policies, where governments tried to limit pay rises to control inflation, subdued wages growth would be the cause for celebration. This is because firms costs are closely linked to the prices they charge as wages make up a significant proportion of those costs. Therefore the low rise in wages indicates that inflation in Australia is likely to stay low for now.

In fact inflation is so low that it is a significant cause for concern. It indicates a low level of Aggregate Demand (AD) growth, which is threatening Australia's overall economic growth.

The cause of this low wage growth has several roots. One is the end of the mining investment boom of course and the adjustment of the economy to non-mining sectors. However usually low wages growth is associated with rising unemployment (the Phillips Curve relationship) and in Australia unemployment has been trending downwards.

As noted in several other posts the unemployment figures are misleading. In fact there is growing part-time work and underemployment. In addition the participation rate is falling as people leave the labour market. This is making the unemployment rate look lower as it is calculated using the formula:

Unemployed

                   Employed + Unemployed     x 100

As those not participating in the labour market are counted as neither employed or unemployed the falling participation rate leads to a lower recorded unemployment rate (i.e. they would be unemployed if looking for work).

The ABC provides an excellent commentary with data on this story below.

The ABC story is here

This is an excellent subject for IA's in macro. Note the ABC article has too much analysis to be a good base article, but there should be plenty of articles out there that deal with the story without spoiling the chance to analyse what is going on.

Free trade is the way to prosperity - but now it is under threat.

Donald Trump's election will provide a great many challenges, including a threat to the environment. The greatest threat will, however, be to free trade and so the prosperity and wellbeing of the whole world.

That might sound a bit dramatic, and I am trying not to be political here. The fact is that specialization and trade are the basis of all the gains we have made in the standard of living and anything that restrict that makes us worse off. This is a lesson known for many years and most persuasively put by Smith and Ricardo and refined by J.S. Mill and all economists working in the field since.

There are costs of free trade. The one that is presently causing people like Donald Trump to get elected is that some industries decline due to trade. For one place to specialize in a good or service others cannot. This means some people lose their jobs in industries which are uncompetitive. People so affected tend to be pretty unhappy about it.

Economists point out that while some industries decline, others grow and so resources in a country transfer from one industry to another. The result is improved efficiency in the allocation of resources and a higher standard of living for everyone. The costs of adjustment are temporary.

It's a difficult sell, but until now we have relied on the education, good sense and long term vision of those in government to do no more than slow transition and cushion the blow for those affected. Now we have people being elected who are happy to pander to those who shout loudly, but don't have the necessary perspective. Make no mistake if the free trade arrangements we have worked so hard to build over more than one hundred years are unwound we will all suffer.

There are many articles out there on this issue right now. Below is the Guardian's.

The Guardian article is here

Egypt floats it's currency to gain advantage

Egypt has announced that its currency will move from a fixed to a floating exchange rate from Sunday. In anticipation of a decline in the value of the Egyptian Pound it has been devalued in the fixed rate system by 48% (almost certainly to prevent speculative gains).

This is a pretty rare event and hardly ever seen in the opposite direction (floating to fixed), so its probably a permanent move, which is important for our analysis.

The Egyptians hope that the depreciation/devaluation (both are going to occur floating/fixed regimes) will boost their economy. The competitiveness of Egypt as a tourist destination will be greatly improved, and this is their most important industry. Whether this will be enough to persuade tourists to return is another issue as the country has been very unstable recently.

Notice in the article the Egyptians acknowledge that it will take eighteen months 'to see changes' and this is possibly a reference to the 'J-Curve' effect.

Notice how maintaining the fixed exchange rate has caused significant problems for Egypt recently and the examples of how they have tried to maintain the chosen fixed rate.

There is a massive downside to this move. Imported goods will cost more and this is going to impact on the poorest households the most as imported food and fuel rise in price. There will be a significant impact on the distribution of income.

Will this move actually work? Well that will depend in part on the Marshall-Lerner conditions being met. If they are then Egypt will see an improving current account balance and a reduction in the rate they are accumulating foreign debt. However the problem of tourism isn't one of price (or Price Elasticity of Demand), rather the demand curve for Egyptian holidays by foreigners shifted violently to the left due to the political instability the country has experienced.

In the long term, and this must be seen as an irreversible move, the potential gains may only be fleeting. Egypt will gain competitiveness initially, however their high inflation will continue to erode that. Further they will now have to cope with the unpredictability of a floating exchange rate and it might be expected that the Egyptian Pound will be quite unstable in the longer term bringing a large dollop of uncertainty to the already hard pressed businesses of Egypt.

Note that floating the exchange rate is one condition of IMF help to the country. This is another issue, but space dictates it can't be dealt with here.

The NYTimes covers the story here

This story is really for IB students. It has relevance to both International Trade and Development economics and is an excellent modern example of the debate between fixed and floating exchange rates.

Income inequality - a cause for concern?

In Australia the degree of income inequality is increasing. That's what the data tells us, although frustratingly 2012 is the last year for which we have reliable data.

That data shows that the Gini-coefficient for Australia has risen by a greater degree than in all but two other OECD countries. This in a period when, by the same measure, around half of OECD countries saw a more even distribution of income, but with a slight rise in inequality on average.

A survey reported in The Guardian says that most Australians feel that inequality has become worse and that it harms society by creating social division.

The chart gives a summary of Australia's income and wealth.

Recall that income is a flow concept, it shows how much money households receive each month or year, whereas wealth is a stock concept, it shows the assets households have accumulated over time. The two are related as unequal distribution of income will generally mean that wealth will accumulate to high income households who can afford to save, while poorer ones cannot.

How to deal with income inequality is a matter of debate, as is the idea of what a 'fair' distribution of income is. The survey shows there is little agreement on how to proceed, although typically for Australia they do agree someone other than themselves should bear the burden. Perhaps surprisingly there is significant opposition to an estate duty (inaccurately called an inheritance tax in the article) which taxes you when dead, rather than when alive. It has much to recommend it.

The Guardian reports the survey here

The goal of income distribution is downgraded in importance in the 2017 VCE study design, but is still very relevant. IB students can be asked an essay question on this in Paper 1 and policy measures are an essential part of that.