Normative and Positive Economics

 A positive economic statement is a statement that can be verified true or false.

A normative economic statement is an opinion. It is a view that others may disagree with.

Postive economics

• In the UK, Dec 2017 CPI inflation is 3.0%
• In the UK the rate of unemployment has increased by 50% in the past three years.

Normative Economics

This is the expression of an opinion.

• The MPC should not be concerned about the rise in CPI inflation because it is due to temporary factors.
• Unemployment is more important than inflation in the current economic situation
• The MPC should increase interest rates to deal with the rise in inflation.
• The government should try to reduce inequality
• Privatisation leads to a more efficient allocation of resources

Both the above statements are value judgements, you can’t prove it right or wrong by merely looking at statistics. Some economists believe the first statement, others believe the second statement is more valid.

Economics is part science part art. The science is the positive economics – finding data such as inflation and unemployment statistics. However, with this data, you can make very different judgements.

The rise in inflation is a good example of how economists can reach very different conclusions from the same data.

Other examples

• UK public sector debt is 60% of GDP. – positive
• An increase in GDP per capita leads to an increase in living standards – normative. Higher GDP doesn’t necessarily lead to higher living standards.
• Mixed economies are the best form of economic system. –   normative  (even though the vast majority of economists would agree.)

On a recent visit to New York, my friends took me to a popular part of Queens to an Indian restaurant. Because it is a popular area it was very difficult to find a car parking space. We ended up driving round in circles for 15 minutes before a space finally became available. When we finally parked, I was surprised to see there was no charge for parking in this busy area.

Diagram showing Excess Demand when Price is Zero

If price is £0 demand (Q2) is greater than supply (Q1)

I suggested to my friend it would be more socially efficient if there was a charge for parking.
Because it was free to park, demand was greater than supply. This shortage caused:

• Time wasted
• Stress of looking for car parking space
• Congestion on the roads as many drivers are just driving around looking for a parking space.
• More pollution as drivers create more fumes driving around looking for a space.
• It can put people off visiting restaurants because a perceived lack of parking can become a disincentive.

Advantages of charging for parking

• It would encourage people to consider other forms of transport for getting into the area.
• People might use public transport or even cycle.
• Lower emissions from cars driving into centre
• The money raised from car parking charges could be used to offset other taxes or spend on improving public transport/bicycle lanes e.t.c.
• People might walk or cycle a bit more. This would be one way to deal with obesity issues in the West.

Yet, the response of my local New Yorker friends was that ‘they didn’t want to pay another tax’.  They expected free parking and think of free parking as an entitlement. They didn’t really like driving around looking for a car parking space, but they definitely don’t want to pay.

Equity issues

Some might say car parking charges would favour rich people who would be able to afford to park in the city centre. Certainly, rich people wouldn’t be discouraged by a small parking charge. But, concerns about equality should not be dealt with through the price of car parking. We don’t reduce tax on cigarettes just because cigarette tax is highly regressive.

Amsterdam pedestrianised many areas of their city centre and made car parking very expensive. As a result, 40% of people cycle within Amsterdam, and they seem to enjoy it. (cycling Holland)

In a way car parking charges can be an effective ‘mini congestion charge’ By raising the cost of driving into city centres it makes people pay the full social cost and not just the private cost.

The high cost of free parking

“Who pays for free parking? Everyone but the motorist.”

– Professor Shoup

Professor Donald Shoup wrote a book The High Cost of Free Parking which examines the social cost of free parking in the US.

He noted that land reserved for car parking space has a very high value, yet we give it away for free. He measures the value of a Los Angeles parking space at over $31,000. As Tyler Cowen notes in a review of Professor Shoup’s work. “If we don’t give away cars, why give away parking spaces?”

Professor Shoup estimated that the value of the free-parking subsidy to cars was at least $127 billion in 2002

Trade off between unemployment and inflation

A look at the extent to which policymakers face a trade-off between unemployment and inflation. The Phillips curve suggests there is a trade-off between inflation and unemployment, at least in the short term. Other economists argue the trade-off between inflation and unemployment is weak.

Why is there a trade-off between Unemployment and Inflation?

• If the economy experiences a rise in AD, it will cause increased output.
• As the economy comes closer to full employment, we also experience a rise in inflation.
• However, with the increase in real GDP, firms take on more workers leading to a decline in unemployment ( a fall in demand deficient unemployment)
• Thus with faster economic growth in the short-term, we experience higher inflation and lower unemployment.

Increase in AD causing inflation

This Keynesian view of the AS curve suggests there can be a trade off between inflation and demand deficient unemployment.

If we get a rise in AD from AD1 to AD2 – we see a rise in real GDP. This rise in real output creates jobs and a fall in unemployment. However, the rise in AD also causes a rise in the price level from P1 to P2. (inflation)

 

Phillips Curve Showing Trade-off between unemployment and inflation

In this Phillips curve, the increase in AD has caused the economy to shift from point A to point B. Unemployment has fallen, but a trade-off of higher inflation.

If an economy experienced inflation, then the Central Bank could raise interest rates. Higher interest rates will reduce consumer spending and investment leading to lower aggregate demand. This fall in aggregate demand will lead to lower inflation. However, if there is a decline in Real GDP, firms will employ fewer workers leading to a rise in unemployment.

Empirical evidence behind trade-off

The Phillips Curve is based on the findings of A.W. Phillips in The Relationship between Unemployment and the Rate of Change of Money Wages in the United Kingdom 1861–1957. Note: originally Phillips looked at the link between unemployment and nominal wages

This graph shows unemployment and inflation rate for the US economy.

There are occasions when you can see a trade-off.

• For example, between 1979 and 1983, we see inflation (CPI) fall from 15% to 2.5%. During this period, we see a rise in unemployment from 5% to 11%.
• In the late 1980s, inflation falls from 6.5% to 2.8%. But unemployment rises from 5% to 8%
• In 2008, we saw inflation fall from 5% to 2%. During this time, we see a sharp rise in unemployment from 5% to over 10%.

This suggests there can be a trade-off between unemployment and inflation.

However, equally you can look at other periods, and the trade-off is harder to see.

UK Evidence – Unemployment v Inflation

% annual change in inflation and unemployment.

Monetarist View

The Phillips curve is criticised by the Monetarist view. Monetarists argue that increasing aggregate demand will only cause a temporary fall in unemployment. In the long run, higher AD only causes inflation and no increase in real GDP in the long term.

Monetarists argue LRAS is inelastic and therefore Phillips Curve looks like this:

Monetarist Phillips Curve Diagram

Rational expectation monetarists believe there is no trade-off even in the short-term. They believe if the government or Central Bank increased the money supply, people would automatically expect inflation, so there would be no improvement in real GDP.

Falling Inflation and Falling Unemployment

In some periods, we have seen both falling unemployment and falling inflation. For example, in the 1990s, unemployment fell, but inflation stayed low. This suggests that it is possible to reduce unemployment without causing inflation.

However, you could argue there is still a potential trade-off except the Phillips curve has shifted to the left, because there is now a better trade-off.

It also depends on the role of Monetary policy. If monetary policy is done well, you can avoid some of the boom and bust economic cycles we experienced before, and enable sustainable low inflationary growth which helps reduce unemployment.

Rising Inflation and Rising Unemployment

It is also possible to have a rise in both inflation and unemployment. If there was a rise in cost-push inflation, the aggregate supply curve would shift to the left; there would be a fall in economic activity and higher prices. For example, during an oil price shock, it is possible to have a rise in inflation (cost-push) and rise in unemployment due to lower growth. However, there is still a trade-off. If the Central Bank sought to reduce the cost-push inflation through higher interest rates, they could. However, it would lead to an even bigger rise in unemployment.

In 1970s, a period of cost-push inflation led to breakdown of Phillips Curve – or at least gave a worse trade-off.

https://cutt.ly/q09IEQR

Four Degrees That Could Ruin Your Career Chances

Source: Yahoo

Your college major might have serious implications for your future career, so choose wisely.

By Jennifer Berry

If you're going to spend the time and money to go to college, you're probably going to expect to see a good return on your investment. But here's something you might not expect: Some degrees could actually hurt your chances of getting the career you want.
Unemployment figures can range widely depending on the major, according to a 2013 study by the Georgetown University study titled "Hard Times: College Majors, Unemployment and Earnings." To understand why, it helps to look at a degree in the same way an employer might.
"Your major provides two key elements of job readiness: subject matter expertise and essential skills and training," says Carol Barash, founder and CEO of Story To College, which teaches students how to use storytelling tools to advocate for themselves in school, work, and life.
And those skills need to be in demand, too. “If you want to be employable upon graduation, you have to learn tactical skills that are needed by companies that are growing,” explains Michael Staton, partner at Learn Capital, a venture capital firm focused on funding entrepreneurs with a vision for better and smarter learning.
The good news is that for many majors with a statistically high unemployment rate among recent graduates, there are similar alternatives with lower unemployment rates. Read on to learn about a few majors with high unemployment rates - and some potential alternate degrees with better prospects.*

High-Unemployment Degree #1: Economics
Unemployment Rate: 10.4%

You're fascinated by the life-blood of our economy: money. A degree in economics might seem like a perfect fit, but think twice before you get started: With so many people pursuing this degree, you could be left high and dry after graduation.
"Economics is a very popular major - at many universities it is the most popular major," says Barash. "But there are very few entry-level jobs as economists." Why is that? "An economist is someone who analyzes and predicts trends," says Barash. "Most people right out of college don't have enough analytical experience to work as economists."
This degree can also be heavy on the theory and light on the practical know-how, says Staton. According to the College Board (a nonprofit organization committed to excellence in education), some of the classes economics majors take include comparative economic systems, economic theory, and econometrics.

More Promising Alternative: Finance

 Unemployment Rate: 5.9%

Looking for an alternative degree where you can still explore the impact of money on our modern life - but also prepare to pursue a career after graduation? Check out finance.
According to the College Board, a degree in finance can prepare you to make financial decisions for companies, raise funds, and invest wisely - all practical know-how skills that potential employers might be looking for.
How It Improves Your Odds: "Economics teaches market forces, but finance teaches you how to manipulate spreadsheets, package and evaluate financial products, and handle operational concerns of companies," explains Staton.
Next step: Click to Find the Right Finance Program.
Just look to the College Board for evidence of what you could learn: Typical major courses are accounting and statistics for financial analysis, financial management, and investments.
"Finance is replacing economics as a high-impact, high-salary career choice," adds Barash. And while Barash notes that your first job will probably be mostly working with Excel manipulating numbers, she also notes that these jobs tend to be compensated well.
Career Options**:

• Financial analyst
• Personal financial advisor

High-Unemployment Degree #2: Political Science and Government
Unemployment Rate: 11.1%

Are you a political junky, addicted to blogs and political news outlets? Before you jump into a political science and government degree, you might want to do some serious thinking, as its unemployment rate suggests it might not put you in the best position to get a job.
Why? It's another degree focused more on academics and less on applicable skills. As Staton says, "Political science covers high-level theory and research methods." Just look at some of the courses listed by the College Board: political theory, judicial processes, and contemporary political ideologies.
And while the degree may have some important application, its job potential is very narrow. According to Barash, "These are great degrees if you want to run for public office - and we definitely need young people committed to this type of public service - but not for very many other entry-level jobs."

More Promising Alternative: Criminal Justice

 Unemployment Rate: 8.9%

Want to check out a related degree with a lower unemployment rate? Why not consider criminal justice?
Criminal justice is an interdisciplinary major where you might study everything form law to psychology, says the College Board. Some of the typical classes for this major include criminology, juvenile justice, criminal law, and the U.S. criminal-justice system.
How It Improves Your Odds: Why might this be a better choice than a poli-sci degree? "Public service is out - but catching criminals and terrorists is in," says Barash. In other words, job prospects for people who get out in the world and stop the bad guys might be better than job prospects for people who theorize about political ideologies or judicial processes.
Next step: Click to Find the Right Criminal Justice Program.
"Criminal justice teaches you how to enforce and work within the growing justice system," says Staton, highlighting another benefit to this degree.
Career Options**:

• Probation officer
• Police officer

High-Unemployment Degree #3: Information Systems
Unemployment Rate: 14.7%

Given the tech-driven world we live in, you may think any computer-related degree could help pave the way to a great career. Think again. Not all computer-related degrees are created equal - and if you choose to major in information systems, you could be limiting your future career options.
"Information systems is conceptual work around information management and computer systems in the corporate environment (which is moving to the cloud, so very few people will be employed in information systems like they are now)," says Staton. In other words, with more information being stored off-site, there will be less need for people employed on-site.
Barash also points to rapid changes in technology as one reason why this degree is not what it used to be. "People with degrees in information systems used to plan the computer programs and systems that other people built," she says Barash. "But everything moves more quickly now, and the whole tech world is much more entrepreneurial." Instead of one set of people planning programs and systems and another set building them, Barash says, the builders are becoming the designers as well, so they might have degrees in electrical engineering and/or computer science.

More Promising Alternative: Computer Science

 Unemployment Rate: 8.7%

Compared to information systems, computer science has a much less frightening unemployment rate, and it could be a great alternative degree for anyone interested in computers.
If you want to design computer programs, impact the way humans and computers interact, or help pioneer artificial intelligence (all what the College Board says you could learn in this program), a degree in computer science will get you a lot further than a degree in information systems. Some of the courses typical for this major include digital system design, software engineering, and artificial intelligence.
How It Improves Your Odds: "Computer science teaches you how to write the code that makes the whole Internet work," says Staton. Demand for this degree is high, he continues, but there aren't enough qualified graduates to fill the open positions in the growing internet sector.
Next step: Click to Find the Right Computer Science Program.
Barash shares that sentiment: "Computer science is a great degree because you get actual experience writing computer code and building things," says Barash. "This is so important that we should be teaching more of it in high school."
And why is coding so important? According to Hadi Partovi, founder of Code.org, a nonprofit foundation dedicated to growing computer programming education, "Learning to code unlocks creative thinking and opens unparalleled career options. Coding is the new American Dream and should be available to everybody, not just the lucky few."
Career Options**:

• Network and computer systems administrator
• Software developer

High-Unemployment Degree #4: Architecture
Unemployment Rate: 12.8%

Do you dream of creating landmark buildings or custom homes to delight your clients? Think carefully before you sign up for that architecture degree - in the "Hard Times" study architecture has one of the highest unemployment rates among recent college graduates.
One of the main drawbacks of this degree is what it doesn't teach you. "Architects are planners, designers," says Barash. The trouble is that in today's market, she says, there's a demand for people who can design and build. "Often people with training in the build side gain the design skills later. It's much harder to do the reverse."

More Promising Alternative: Civil Engineering

 Unemployment Rate: 7.6%

So what should you consider as an alternate degree that could help prepare you for the "build" aspect of the job? Why not look into civil engineering, which reports a much lower unemployment rate among grads?
Rather than focusing primarily on design, as a civil engineering major you might study crucial practical skills which according to the College Board might include structural analysis and design, strength of materials, and environmental awareness for engineers.
How It Improves Your Odds: Civil engineering majors learn to build projects in addition to designing them - a marketable skill that many architects lack coming out of school, says Barash.
Next step: Click to Find the Right Engineering Program.
And the practical skills you learn can help prepare you to pursue a career creating buildings - or even designing communities.
"Unlike an architect who designs and plans on a small scale (think one building), a civil engineer plans and implements on a much larger scale: town and city planning, roads and bridges, redevelopment, even green urban planning," Barash says.
Career Options**:

• Civil engineer
• Construction manager