Nova workboard

a blog from young economists at Nova SBE


Education is delicate

The equilibrium in education expenditure needs to be achieved with sense and some sensibility, since educational policies have impact on the future of younger generations and countries.

The concept of public goods is central to analyze the role of the government in the resources allocation.

Public goods are defined by two characteristics such as non-excludability – It is not possible to exclude non-payers from consuming the good – and non-rivalry in consumption – additional people consuming the good do not diminish the benefit to others.

In this matter education has two dimensions, one public and another private.

Society benefits when more people get higher levels of education, because they have more probabilities of finding a good job and, consequently, earn more. Once they have higher earnings that will be reflected in taxes and contributions. More education means more knowledge, more innovation, and more productivity of the labor force, which is great for domestic production.

Education boosts productivity and enlarges prospects, being a great equalizer of opportunity when done properly. These consequences reflect the positive externalities that come from education, which contributes to increase the society’s welfare.

Education is a no-rival good because the same professor can teach Mr. A and he can also teach Mr.B. This is the public dimension of education.

Even the countries which have a public education also have private schools. It is possible to exclude non-payers and that’s why education is not a pure public good. However, in consumer theory matters this is good because the consumer has the option to choose accordingly to his preferences and, giving his budget constraint, achieving the highest utility level possible. Thus, education also has a private dimension.

The portuguese economic context is conducting to decreases in public investment in education system. This decrease is already showing some effects, such as tuitions growth as well as the inefficient amount of students per class, lots of students leaving colleges, and the Professor’s unemployment is growing.

Let’s take a look at the numbers.

In 2010, the public expenditure on education as a percentage of GDP was 5,8% in Portugal, below the OECD (6,3%) and EU (5,9%) averages (data from Education at a Glance 2013) .

Even though, in Portugal the expenditure in education has been increasing throughout these last decades, there are still low levels of qualifications in the portuguese population, as we can see in graphs 3 and 4. Therefore, the crisis shall not be allowed to make Portugal regress in this matter.

The numbers here presented reveal that the government has to carefully balance the pros and cons of certain measures in sectors as fundamentals to society as education, which is a necessary condition for the development and growth of any country.

 

Image 

Sara Simões, 643

 

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NonBranded Gasoline – a possible externality?

In the previous decade, supermarket chains in Portugal have added fuels to their product line at a lower price relative to the competitor brands. As of today, these “non-branded” fuel alternatives account for 25% of total gasoline sales, a growth entirely explained by the price differences – on average, gasoline is up to 13 cents/liter cheaper in these supermarket stations. But just how is this price difference attainable?

Gasoline and diesel oils may seem like a homogeneous product, that is, consumers can only perceive differences in prices when comparing different brands. But they are, in fact, the result of distillery processes which, depending on the refinery streams, generate different “mixtures” of fuel. And, on top, several additives are added to improve traits such as combustion efficiency, and to reduce pollutant emissions. Indeed, this is precisely the core of the price differences; supermarket chains are able to sell gasoline at lowers prices by cutting back on additives.

Not surprisingly, this has raised several questions concerning the viability of additive-free fuels. If additives are claimed to protect the engines, resorting to this cheaper alternative may jeopardize the vehicle’s performance and longevity. And, as additives are also expected to control the combustion pollutant emissions, this alternative may not be “environment friendly” and aggravate the pollution levels in the long run.

What could be done then? The pollution issue that arises from the gasoline debate is known in microeconomics theory as a market failure, namely a negative externality: a consequence or byproduct of an economic activity which harms uninvolved parties. By choosing a low-cost alternative, drivers may unknowingly be aggravating the pollution problem, generating a negative externality, as the consequences of their actions will not be borne by them alone – all living beings suffer from high pollution levels. The engine impairment also falls in the market failure context, as additive-free gasoline may be classified as a de-merit good. Regarding this, theory states that government intervention is required to correct the failures, through price mechanisms (taxes on gasoline prices) or behavior-changing legislations (demand higher standards on gasoline composition and additives).

However, this debate is far from being conclusive. While some parties advocate the hazards of additive-free fuels, others question the true efficiency of the additive mixes in emission control and pollution in general. For instance, the EPA has stated that no conclusive data has been retrieved regarded the enhancing features of fuel additives. The Portuguese Association for Consumer Defense (DECO) has also found no differences between low-cost and branded diesel oils. In addition, some additives such as MMT, while reducing air pollution, are in fact contaminating water supplies.

So the question here is not a matter of where or how the government should intervene – it is whether there is need for government intervention at all since, in the end, there is not even the certainty of an externality. The answer will then lie within future studies and conclusions regarding additives.

 

Carla Ferreira #636

 

 

Devices and Additives to Improve Fuel Economy and Reduce Pollution – Do They Really Work? (s.d.). Obtido de US Environmental Protection Agency: http://www.epa.gov/otaq/consumer/420f11036.pdf

Estudo aos combustíveis: DECO reafirma conclusões e esclarece dúvidas. (29 de novembro de 2012). Obtido de DECO PROTESTE: http://www.deco.proteste.pt/motor/automoveis/noticia/estudo-aos-combustiveis-deco-reafirma-conclusoes-e-esclarece-duvidas

Gasolina é 13,6 cêntimos mais barata nos postos dos supermercados. (17 de setembro de 2013). Obtido de Público: http://www.publico.pt/economia/noticia/gasolina-e-136-centimos-mais-barata-nos-postos-dos-supermercados-1606080


Economic Growth/ Biodiversity dilemma – The UK case

Habitats in UK have suffered several damages over the last decades as  the development´s process has been encouraged by political institutions. However, the UK economic growth has been disappointing over the most recent years, and that the UK government has intended to conciliate economic growth (through better development) and biodiversity protection.

The UK government has proposed  the  “biodiversity offsetting” system, which in general means that the developers planning to build infrastructure close to  natural environment will have to offset the damage made by paying an amount equal to that damage.

From my point of view, the crucial point regarding these biodiversity system has to with the developer´s incentives to reduce damages:  is it better for developer to implement new productions methods, more expensive but more environmentally friendly, or on the other hand  goes on  with the same production´s method ( less expensive) and pays a high amount to the government as that method implies huge damages. On the one hand, implementing new methods would not only have a lower negative impact in terms of environment but also would reduce the average costs in the long run. On the other hand, these new methods would probably require a significant amount of money.

Old technology and High damage versus New technology and Low Damage – Numerical Example

 2 Goods :

–          Technology ( T)

–          Houses ( H)

Assumptions :

–          All developers, regardless the type of technology used, have to pay an amount equal to P to government authorities for using Land

–          Implementing new technologies would reduce the damage made from D0 to D1, so that D1<D0

–          Old technology Price – 1

–          New technology Price – 2

–          The price of the house  reflects the entire construction´s cost ( for simplicity that cost is given by  P + technology´s price + Damage)

        Two hypothesis :

1         Maintain the old production method

     House price –    P + 1 + D0

2 Implementing a new technology

      House Price –    P + 2 + D1

 

       Relative prices  ( Technology price / House price)

1-      1 / ( P + 1 + D0)                                   Numerator increase  2-1 = 1

2-      2 / ( P + 2 + D1)                                   Denominator increase  1 – ( D0 –D1)   < 1

 

              As the technology price increased more than the House price ( Numerator increase > denominator increase ), then the relative price increased as well, which imply that in the short run the developers won´t have an incentive to implement new technologies . However, without such technologies, it will become hardly impossible to reduce in a significant amount the damages made. Overall, we may say that  government´s aim of economic growth along with biodiversity protection isn´t easy to achieve at all, because even if the government realized that the developers incentives weren´t  enough, it wouldn´t have much room of manoeuver to increase those incentives as it would undermine the government´s fiscal situation, at least in the short run.

     

 Alexandre Marques Correia da Silva    Student Number : 630


Giffen Good – is it a dead theory?

In 1895, Alfred Marshall in his Principles of Economics wrote about a very interesting phenomenon related with consumption behaviour of impoverished people near subsistence level of nutrition. He imagined a consumer living on these specific conditions (which actually is the living standard of one billion people all over the world) whose diet was composed by a staple good (bread) and a luxury good (meat). The first good allows consumer to get a high level of calories at low cost while the latest was preferable due to its taste but it was expensive.
A poor consumer would eat a lot of bread and use the remaining income to buy meat.

So far this example has little interest but everything changed when Marshall described what would happen in the case of an increase in the price of bread. The consumer would no longer be capable of purchase the initial bundle; therefore he would even buy more of bread and less of meat since substituting bread by meat would make his caloric intake to fall.  Although this conclusion is far from being difficult to understand, the existence of this type of phenomenon – known as Giffen good – has been intriguing successive generations of economists.

This abnormal upward slope demand curve was over decades on the basis of many empirical research projects that had been inconclusive. Even the very known example of the Irish famine of 1845, when consumption of potato increased after its price rose, was not in fact very credible because the increase in price was caused by the destruction of other remaining crops.

However in 2007 Miller and Jensen, both professors at Harvard University, conducted an experience in rural China which allowed them to provide the first real-world evidence of the existence of the Giffen Good.  (http://www.nber.org/papers/w13243.pdf?new_window=1). Using vouchers of staple food as a mean to induce small price variations on extreme poor consumers of rice and wheat they found statistical evidence of an upward slope demand for rice (the good which theory identifies ex-ante as most likely to exhibit that behaviour, especially because it is the cheapest source of calories available).  

Image

In fact if Giffen Good effect is really observable in staple nutrition, policy makers in countries with extreme poverty rates are making a big mistake whenever they launch programs as subsidized food..  As the following figure depicts, the impact of a price reduction may cause a decrease in nutrition level from point A to B (represented by iso-calories lines). ImageThis experiment was drawn in a way that internal and external validity were assured, and given that researchers found robust results, it can constitute an important and essential benchmark of microeconomic policy analysis in what concerns extreme poor communities.

#86, Diogo Matos Mendes


The Minimum Wage Versus Unemployment

In his State of the Union Address this year, President Obama pledged his support for raising the federal minimum wage to nine dollars an hour saying, “Tonight, let’s … raise the federal minimum wage to nine dollars an hour. This single step would raise the incomes of millions of working families” (emphasis added). While the minimum wage is an extremely popular policy, its proponents, including President Obama, seem to forget a few vital tenants of economics.

The minimum wage, by definition, creates unemployment. While it may increase wages for the lucky few whom manage to get employment, many others will be unable to find a job and for many a low wage is preferable to no wage. It raises the wages of labor above the equilibrium wage, creating a surplus of labor. Supporters often overlook this, but this has grave implications for the larger economy.

Take for example the labor market for McDonald’s fry cooks. Let’s say the equilibrium wage for fry cooks is five dollars an hour and there is no minimum wage. Before the application of the minimum wage, people who are willing to work for five dollars an hour or less can find work as a fry cook. Those who are only willing to work for more than 5 dollars will be voluntarily unemployed in the fry cook labor market.

If President Obama now enacts a national minimum wage of nine dollars all the workers who are willing to work as fry cooks for nine dollars or less will apply. At nine dollars an hour, however, McDonald’s cannot hire as many workers. This creates a surplus of labor for fry cooks. The supply of labor willing to work the fryers outstrip the demand for fry cooks at nine dollars. In technical terms, the minimum wage creates a price floor, preventing the market for fry cooks from reaching the equilibrium.

This result is easily generalized to the overall economy, because low skilled labor tends to be very similar and almost interchangeable. If you’re a fry cook, you could easily work many other low-skilled minimum-wage-affected jobs, such as shelf stocking or newspaper delivery. These low skilled jobs tend to be the first foothold young new workers get in the workforce and if they are unable to find employment it could mean they do no acquire the necessary human capital for more gainful employment in the future. Indeed, if you look at the unemployment rates of young adults before and after the national minimum wage was first instituted, you will find that it increased, most notably among young African Americans.

What advocates of the minimum wage need to understand is that the intentions of a new law and its effects are two separate things. If they’re so confident in the beneficial effects of the minimum wage, why not raise it to 30,000 dollars per year? Would that not end poverty?

Further Reading

Minimum Wages and Youth Unemployment. Aspen Gorry. European Economic Review. 2013. http://www.aei.org/article/economics/fiscal-policy/labor/minimum-wages-and-youth-unemployment/

Blame the Minimum Wage for Youth Joblessness: Echos. Amity Shlaes. Bloomberg. June 27, 2011. http://www.bloomberg.com/news/2011-06-27/blame-minimum-wage-for-youth-joblessness-echoes.html

Nuno Gominho


Inter-temporal budget set: an application

For now in our analysis we have focused on choices that concern only one period. But actually a great extent of choices regarding consumptions have to face with inter-temporal decisions. For example all the decisions on saving or investing .

As normal when more than one period is adopted there is an inter-temporal budget set, the simplest we can imagine is one with the possibility for the consumer to save money from one period to the other (if we hypothesize an economy with only two periods) without any transaction cost or any other frictions (for example it’s possible to assume that if she doesn’t consume a portion of a good it will go wasted). In this specific case she will be able to consume a maximum equal to her income in period 1 and a maximum of the sum of the incomes of the two periods in period 2 if she has saved all the income from period one. The budget set will be  a line connecting this two extremes points and with slope equal to one.

Now let’s move to a more complicated discussion using  a simplified budget set from Poverty traps: Ghatak and Jiang (1999) [For a brief discussion http://econ.lse.ac.uk/staff/mghatak/jde4.pdf]. Suppose there are two possibilities of subsistence: one that use only the wage (W) and the other that use a portion of capital (I), that can be subtracted from initial wealth (a), and a unit of work but produces an income (Q). There is the possibility to save a portion (s, the other is used for consumption)and the wealth passed to next period grows at a  rate (r).  The budget set should be:

a(t+1)=s[r*a(t) +w]     if   a(t)<I and she can’t use the portion of capital

a(t+1)=s[r*(a(t)-I)+Q-w]  if a(t)>I

It’s possible to show, using appropriate hypothesis on utility function that we can have either a unique equilibrium or two different equilibrium, depending on the proportion of people who can use the portion of capital to invest. And as a consequence we can have two different state of economy, one in which there is only subsistence work and the other one where people can become entrepreneurs and surpass the poverty line. In fact a subject must have her wealth above a specified threshold to obtain a loan, if we simplify to a situation without possibility to access to credit markets, then the condition is . This means that we can have the possibility that the number of people able to become entrepreneur is higher than the number of people constrained or the opposite situation. Solving the model with the important condition of setting s*r<1 (not far from reality as the coefficients are respectively an interest rate and a saving coefficient) we can find stable points:

(SEE FIG.1 IN PAPER’S TEXT)

As shows the figure the first case is obtained when the number of constrained people exceed the number of entrepreneurs. The economy has two equilibria, one for “poor” and one for wealthy people. In the second case when the number of people allowed to become entrepreneur is higher we have only one equilibrium point where the wage collapse to one point and it is bigger than the wage in case of “poor people economy” (first type). That shows one important findind: without the credit markets (as we have supposed it’s not present in our hypotesis) is not possible for a first economy type to develope in a second economy type, where the wages are more sustainable for everyone.

ANGELO SAPONARA 1612

 

 

 


Tax effect

In this article I pretend to compare two goods, leisure and consumption, in order to test the responses in the labor supply side to increases in marginal taxes variations. I made two assumptions in order to proceed with my analysis: first, that consumption and labor are perfect complements – my utility is just fulfilled if I have proportional quantities of both – this lead me to the second assumption that we are indifferent between consumption and leisure. It is easy to get the first assumption; if I want to consume more I have to work more (without any income change). The second is more tricky, because preferences vary across person, but  by common sense we know that every citizen enjoy leisure time as well as consumption.

I used the Slutsky equation to drive my conclusions. “The equation demonstrates that the change in the demand for a good, caused by a price change, is the result of two effects”: substitution and income effect.

I base my article in the paper of Nada Eissa, Taxation and Labor supply of married women: the Tax Reform Act of 1986 as a natural experiment. The author analyses the responsiveness of high income married women to a decrease in the marginal tax rate using two control groups (in which the tax rates had a lower variation) with lower income. He is interesting to test whether the labor supply increase due to the reduce of taxes or if it’s associated with shocks in the labor market. Eissa was able to prove using differences-in-differences and a regression framework that participation rates increased in the upper-income group.

Looking in a microeconomic point of view, we can easily arrive to similar conclusions. If taxes decrease the net wage increase, so I will receive more for the same hours worked. Testing with Slutsky equation, we have to measure the impact of each effect.

The straight of each effect will depend, whether the reform is permanent or temporary. Citizens can’t predict the future, so the weight of each effect depends in what they believe. The paper of Eissa mention, which already have been a pre-reform in 81. With this, we can assume that people believe that this reform could be temporary; therefore the substitution effect will be stronger than income effect.

In other words, married women with high income will enjoy the increase in the net wage, because they believe this is a “unique opportunity” and in the future periods marginal tax rates will increase again (what actually happened in 93). She shifts her demand towards labor. Working more, she can consume more but she enjoys less hours of leisure. The opportunity cost of leisure increased, so she substitute leisure for more hours of work and in this way to consume more in present and future times.

Maria Dentinho 615


The Origins of Giffen Goods and recent contributions of science regarding them – Marta Caeiro 632

Along several Microeconomic courses and respective materials, we have been covering the technical details and economical interpretation and representation of Giffen goods. Therefore, we really know and identify a Giffen good as one which demand is positively sloped, that is, as the price increases, the amount demanded or consumed also rises. And this kind of good is special because actually it “violates” the demand law and the price elasticity of demand is positive, instead of negative , as we usually face for normal goods. That means, for sure, that a Giffen good can never be a normal good. Also being an inferior good is not a sufficient condition, but a necessary one. An inferior good states a decrease of  the amount demanded when income increases.  The income effect in a Giffen good is negative and overweighs the positive effect of the substitution effect. Basically, it was what we have learned so far.

However, the origins and studies concern this specific good come out in the 19th century with the Great Famine in Ireland. This was a period of starvation, disease and emigration between 1845 and 1852, also known as Potato Famine, since one third of the population was solely dependent on this cheap crop. During the famine, approximately 1 million people died and a 1 million emigrated. These events caused Irish population to decrease about 20% and there are, until today, repercussions.

Giffen goods were named after Scottish economist Robert Giffen by Alfred Marshall in his book  Principles of Economics. The most typical example of a Giffen good is the potato given the consequences of  the great famine. Although, there are others goods that are also classified as Giffen goods, such as bread, sugar and milk, because they are essential or primary goods that satisfy basic needs. If the price of these goods increases, probably, at least the poorer households, keep consuming the same amount or even more, reducing the consumption of the more expensive goods.

Fundamentally, Mr Giffen had clarified the concept of a Giffen good as followed:

As Mr.Giffen has pointed out, a rise in the price of bread makes so large a drain on the resources of the poorer labouring families and raises the marginal utility of money to them so much that they are forced to curtail their consumption of meat and the more expensive farinaceous foods: and, bread being still the cheapest food which they can get and will take, they consume more, and not less of it.

Alfred Marshall, Principles of Economics  

The reason, as is stated above, is that sometimes the marginal utility of income is so high (when a cheap good price increases)  that poor people are not able to buy other kind of goods like meat because they remain more expensive than bread. The same happened with potato in Ireland. Maybe the price of potato also kept  increasing due to its disease. The supply was successively less and demand was not satisfied. People besides the price increase wanted more potatoes.

The purpose of the above explanations was to introduce a great  outcome derived by science evolution: the fungus that destroyed several crops of potatoes during the Great Famine was identified. So now we are able to understand the origins of the concept Giffen Good. I noticed this new on Público[1] of 22nd May 2013 (only in Portuguese) and it basically underlines  that a group of scientists from Germany, USA and Great Britain identified that fungus – Phytophthora infestans. They also concluded that no other fungus had such devastating consequences on crops as this one. It affected specially Ireland because its population was strongly dependent from it. Still today this fungus seems to be the most potential danger of potatoes crops. The detection of this fungus can conduct other experiences and investigations in order to avoid imminent destructions of potatoes crops, due to their vulnerability. In this sense, potatoes could never become again a Giffen good.

The researchers collected the total amount of genomes of 11 samples of the Phytophthora infestans extracted from leafs of potatoes along  50 years. 


Voucher System: solution or problem?

The issue of education and intervention by the government in education has always been one subject to enormous public debate. One of the policies that have been adopted in order to render more efficiency to the education system is the Education Voucher Scheme. This has been adopted in countries such as Chile and Sweden, and in some states of the United States of America.

The system can have different designs but it generally works as follows: the government will fund equally public and private schools with an amount that would correspond to the average spending per student in each municipality, in a way such that schools are funded proportionally to the number of students that they have. The reasoning behind this relies on two different effects, the so-called school and competition effect.

Firstly, assuming that private schools are in general better and more cost effective, there will be gains in efficiency and quality by the simple fact that more students are able to attend private schools. The second effect, however, can be of much greater importance. The fact that public schools are competing for students with each other and with private schools (and given that public schools do not have “soft” budget constraints and failing schools are shut down), the competition effect will surely increase the quality of both public and private schools.

Nevertheless there might be some issues, especially concerning equity. Cream-skimming can be a problem: the process of cream-skimming, whereby private schools get the better students out of public schools and into private schools might cause a lower increase in the quality of already bad public schools if there is a strong peer effect. Also, in this case, a greater segregation will arise, which will only tend to reinforce such effects. Also, this kind of policy demands enormous autonomy for both public and private schools and only through this autonomy can competition act and give rise to increases in efficiency and innovation. What is more, it also requires a good flow of information regarding quality of schools and adequate choices by the part of parents.

Yet, these problems might be solved through a proper design of the policy. For example, differentiated vouchers that recognize the fact that students with different ability/social background bring different costs could avoid the occurring of cream-skimming. Finally, information problems require that whoever regulates the system makes it mandatory the disclosure of adequate information such as evaluation of grades, and more importantly of value added by the school. In conclusion, this system can be a step towards efficiency. However, if adequate design is not present, it can also be a step away from equity.

José Miguel Cerdeira #628

“I use my phone for everything,” exclaimed the 24-year-old Kenyan-Ugandan

The mobile networks have developed rapidly in recent years in areas previously unserved in Africa.

Alongside the European Orange, Vodafone and Tigo (Millicom), it is South Africa’s MTN and Zain Middle Eastern and Moov. Their strategy is to have lower prices to increase market share, even as investments in network development is slow due to the financial crisis. A key part of the communications revolution “in Africa” factor is the reduction in roaming charges – which is to apply the local rate to a user even if it is abroad. Regional integration will increase as these strategies will spread operators and ultimately cancel the price differences from one country to another.

The increase in pan-African mobile networks can be explained by the strong presence of European operators Orange, Tigo and Vodacom, South Africa’s MTN and Zain Middle Eastern and Moov. The six operators accounted for 52% of mobile subscriptions in Africa in 2008(Figure1). The figures on the population covered by these operators are impressive: Zain and MTN had, respectively, 62 and 55 million African consumers in 2008. Vodafone is close behind with 44 million users. Other operators, Orange, Moov and Tigo together cover 25 million consumers. On the whole, 370 million Africans had a line of mobile phones in 2008, that is to say 4 out of 10 African. 

Figure 1 :

 The average rate of growth of the pan-African operators is impressive. It stood at 41% in 2008, 44% in 2009 (Fugure 2). But two newcomers (Orange, Tigo and 68% to 82%) were much better than some operators already present (Zain, MTN and 52%, 60%). Most of the growth is provided by Zain Nigeria, which represents 43% of its subscribers in Africa.

Besides, the penetration rate of mobile phones is still low, the region has a strong growth potencial. Operators in emerging countries, as well as those of European countries, this potential well integrated into their investment policies.

Figure 2 :

 

  Africa demonstrates its potential for technological innovation and commercial. It also shows that telecom operators and regulators can work together to design effective solutions in terms of cost reduction. In the European Union, of such agreements have foundered on regulatory considerations when, for example, Vodafone and Mannesmann sought to merge in 2000. The merger was self-mockery as long as the two parties offer roaming to mobile operators as other affiliates. The fact that African operators are present in a large number of countries and that PaymentsPlus re-interventions are limited allowed the development of the Pan-African network tariff.

The rise in investment in mobile telephony due to a large potential for growth in African markets. This finds its roots in an unprecedented demand by African consumers, who finally find the arrival of technology that can give them access to strong interest in the development, such as education, health, payments or trade, and also for bank. Today we see a new operation with mobile phone : transfer money with mobile phone. This new technology also new increases the demand of consumer and provide competitiveness between mobile firms To capture this new opportunity. Companies are responsible of the creation of new needs.  

The welfare of African will be increase with this new technology ? Maybe not…

Sources :

http://www.mckinsey.com/insights/economic_studies/africas_path_to_growth_sector_by_sector

 http://www.boston.com/business/articles/2011/11/09/industry_says_africa_fastest_growing_mobile_market/

 http://www.ft.com/intl/cms/s/0/0846ab76-8c8d-11e2-8ee0-00144feabdc0.html#axzz2fAukEavh

http://www.economist.com/news/middle-east-and-africa/21584037-government-expands-mobile-phone-network-tightens-its-grip-out-reach?zid=304&ah=e5690753dc78ce91909083042ad12e30 

Sandra Berthelot

#611

 


State Reform in Portugal

The state reform in Portugal is marked by strong controversy that I, personally, cannot understand. Just by looking at the numbers it becomes obvious that when a government ends up with a budget deficit higher than 10% (10,2% in 20091) and a debt-to-GDP ratio that reached 123,6% last year2 there is no other way to proceed but to raise taxes and reduce public expenditure. Some argue that Portugal could complete the consolidation of its public accounts through economic growth, keeping public expenditure high. This is not feasible for two main reasons: first and foremost it is impossible to continue borrowing the same amounts of money at pre sovereign debt crisis rates. Secondly, even if the money was available, how realistic is it to assume that a country that grew at the horribly slow pace of 6,47%3 in 10 years (2001-2010), this when economic conditions worldwide were favorable, would suddenly be able to achieve any significant economic growth during one of the worst economic crisis in history?

The reality is simply that when a government’s expenses (transfers, interest on debt, etc.) are consistently higher than its revenues (mainly through taxes), high economic growth is the only way to keep that country’s fundamentals at sustainable levels. In Portugal high growth is nothing but a distant memory, which means that the state and its citizens are living above its means and there is no other way to proceed but to either increase revenue through tax hikes or decrease public expenditure (by thinning the public sector, reducing welfare expenditure, in other words, reducing the government’s weight in the economy).

Of course reducing the weight of the state in the economy through decreasing the public expenditure has significant social cost that cannot be disregarded. These costs therefore highlight the importance of statistically well-built models to ensure that the current diminishing economic resources are well allocated. In a time when there are talks of 4,7 thousand million euros4 expenditure cuts in the public sector, these models are a key contribution from public economics to ensure that this indispensable state reform is done in the most painless way to the less fortunate.

João Rosa, #527


Municipal Elections and Public Expenditure

Public expenditure is a powerful tool, there is no doubt about it! The government spends the taxes collected from the citizens, in many different ways such as health, education, defense. Nevertheless, the governments, on times such as elections, tend to use this mobilization of funds as reelection marketing. On the 29th of September, Portugal will vote on their municipal liders for the next 4 years, and therefore I felt complied to show some insight on how politicians across the world act on their own benefit when they spend public money in reconstructing the road that has been in need of repair for the past 4 years.

Models on rent-seeking politicians exist since 1975 with Nordhaus’ model. Taking into consideration myopic voters, it was modeled that boosting the economy with expenditure, lowering unemployment, would give politicians higher attainment of votes. Despite the disregard that this model has now a days (due to the change on importance from adaptative expectations to rational expectations), it was still important to create Rogoff-Sibert (1988) model that is based on asymmetric information, which translates into politicians signaling competence in moments right before the elections in order to attain more votes.

Moreover empirics across the world, independently of the level of development, can corroborate the existence of these political business cycles. The broad result that is obtain is that in periods right before the elections public expenditure increases in items that are widely visible to the public (examples on Brasil, Israel). Interestingly, Portuguese municipalities, tend to increase expenditure on highways and streets before the elections (Veiga, L. G., & Veiga, F. J., 2007).

Just keep in mind on the 29th of September that the work of a municipality should be regarded as a whole and not only the moment right before the election. It is of the voters’ responsibility to maintain politicians accountable for the whole mandate. This can be achieved by taking into consideration all actions and not just the ones that occur in periods right before elections.

#84, Matilde Grácio


The Welfare system and its programs

The welfare state has a very important role in the protection of its citizens and in the promotion of a global well being. However, its actions may lead to some unintended negative effects.

It is discussed that America’s welfare state may not be working as well as it should (http://www.economist.com/news/united-states/21585010-americas-welfare-state-not-working-nearly-well-it-should-taxing-hard-up-americans), and this happens due to the fact that welfare recipients become dependent on the help of the State instead of considering its help as an incentive to look for a job.

Given this problem, America has tried to alter its policies in order to achieve the result intended by the creation of a welfare state.

In order to do so, it was created the Temporary Assistance for Needy Families (TANF), a program that aimed at helping people find a job, and became a temporary help (http://www.hhs.gov/recovery/programs/tanf/index.html).

This new program was created in order to try to mitigate those unwanted effects, by limiting cash benefits and forcing people who are able to work to do so. This new criterias had good reactions, by decreasing the number of people under the assistance of this program by more than 30%, and increasing employment for single mothers. (http://www.economist.com/news/united-states/21585010-americas-welfare-state-not-working-nearly-well-it-should-taxing-hard-up-americans).

The State’s main tool is the earned-income tax credit, which increases the income of a poor family until it is achieved a certain point, after this the help is gradually decreased.

Although this tax credit was considered a success, it may still cause some the consequences described above, given that people become less encourage to increase their income, due to the withdrawal of the benefits.

Another negative impact of this new program was  the increased difficulty of the people who were able to work to receive benefits, raising the number of people claiming to be disabled. This led to an increase of benefits to the disable, even though most of the people who claimed to be so, were not.

So, even though this new program had some good effects, it also provided negative consequences. As a result, I do believe that it is quite difficult to understand how to improve these types of programs, because they will always lead to positive and negative results.

Maria Almeida #637


Rendimento Social de Inserção: is it a subsidy for those who don’t want to work?

Portugal has a measure of social protection, known as RSI, which was created to help people “suffering from severe economic distress and at risk of social exclusion”.

Many people tend to believe that the RSI is given to people who do not want to work, but considering that we are currently facing a severe economic crisis it doesn’t make sense to think that people are getting the RIS by option. Furthermore, the amount of subsidy has been reduced in the last years and the beneficiaries are not only part of active population.

It is important to realize that a beneficiary receives a monthly payment that equals the difference between the RSI and their income. Without loss of generality, let’s take the example of an individual who lives alone: to get the subsidy, the sum of his monthly earnings should be less than €178.15. Let’s also assume that, in a situation without RSI, the individual optimizes his trade-off between consumption and leisure, working a number of hours equivalent to an income below €178. It is easy to see that with RSI, the individual will not work because he will receive a higher “income” than before, without obtaining the disutility of working. Additionally, some people who worked before, earning an income above this limit, may prefer to stop working since, in certain situations, the loss of consumption can be offset by gains in leisure. Thus, we may think that the RSI can create an undesired effect.

However, the RSI also implies a contract in order to help individuals “to be included socially and professionally”, which includes, e.g., the duty of seeking employment. However, I will focus on a new duty that is directly related to the implications described above. Since June 2012, the RSI beneficiaries between 16 and 60 years have to provide 15 weekly hours of activity in social institutions or municipalities.

In theoretical terms, this new rule has the power to reduce the undesired effect because some beneficiaries will prefer to work, since now the RSI requires a disutility of “volunteering”. Therefore, only beneficiaries with a very low productivity will remain receiving the subsidy.

In practice, the rule also seems to have the desired effects. In July 2013, the number of beneficiaries receiving RSI (270,000) decrease to a minimum since 2006 (after a peak in 2010). The “Segurança Social” estimates that about 23,000 people lost their right to receive the RSI because they didn’t meet the rules, especially the “15 hours requirement”, to declare other sources of income and to pay some documents. Thus, I think it was a correct measure that prevents people from receiving the subsidy by choice. Additionally, this means lower costs to the government and avoids the negative consequences of unemployment for these people (such as loss of capacity). Finally, for me, the huge decrease in the number of beneficiaries doesn’t match with the current situation; it may be explained by some other factors: more restrictive rules and the increase in the number of other types of “assistance”.

Filipe Silvério
617


Public Spending on Education: a few thoughts

Education is an area where government spends much of the taxpayer’s money. Most developed countries devote around 10-20% of public budgets to this purpose. It is, however, more illustrating to look at it in terms of percentage of GDP, in order to understand just how much of output do countries spend on education. Analysing by this method, one realizes that government education expenditure in advanced economies ranges from 7.8% in Denmark to 3.5% in Japan. The general picture is something in the middle, with the USA and the UK spending 5.5% of GDP with countries such as France spending slightly more (5.6%) and countries such as Germany investing less (4.5%).

How did countries get to spend this much in education? This is actually a recent phenomenon. Looking at figures from expenditure in education for the US in the beginning of the past century, it is clear that proportions were nothing like nowadays: in 1900, the US allocated 1% of GDP to education. After that, there is an increase in spending as percentage of GDP that only suffers a consistent drop in the 1930’s and then a greater decrease in the 1940’s, a consequence of the war effort. Later in the century, in the 1970’s, this figure stabilizes around 5-6% of output.

Why have countries started spending much more on education?  From the French Revolution on, many people have looked at education as a form of promoting orderly political behaviour and democratic participation in society. This was still a major reason for the state to promote education in some countries in the beginning of the twentieth century. For example, this was still very much the objective in widening coverage in the Portuguese First Republic, in 1910. Following this, laws that defined higher levels of compulsory schooling( supported by the creation of public networks of schools) raised levels of public investment up throughout the century. Later on, theories developed on the economic value of education for productivity. In 1958, Mincer introduced the term “human capital”, later the title of Becker’s book in 1964 that ultimately established the idea of education as an investment in such capital. Moreover, even Friedman supported the idea of public investment on education, although much more due to reasons related to promoting some set of common democratic values, and not particularly for productivity effects.

Nevertheless, how do we know if spending is enough, or too much? There is also a theory that formal education does not increase human capital, but that it instead serves as a signal of innate ability of people. Consequently, much money spent by society in general could be over-investment, if there are cheaper ways to signal productivity. Even assuming education raises productivity, later studies like Cooray (2009) indicate that the relationship between public spending on education and GDP growth is complex one and depends on the quality of the provision of education as on quantity. In conclusion, this only emphasizes the need of a broader discussion on how money is spent on education.

José Miguel Cerdeira – Student #628