A Scrooge’s Christmas

If you find Christmas a horrid task, not the actual day, but the seemingly never ending build up to it. If you find the constant queuing, the packed shops and the crying kids painful, in the back of your mind you might be thinking “is all this worth it?” 

Then you may be pleased to know that economics carries a rather convincing argument why Christmas needs a rethink.

Buying Presents

The buying of presents is a tradition started with the three kings, who each brought gifts of gold, frankincense and Myrrh to baby Jesus. Not an entirely useful present for a new born baby. And indeed the three kings were to set the trend for thousands of years to come. The only difference being that the three obscure materials are replaced by obscure knitted jumpers.

But in the giving of gifts there is a serious problem of waste. In the example above the three kings brought highly valuable gifts. But they were not highly valued by baby. The kings could have used the money to buy something valued more by the baby, like a room in the inn.

Effectively the kings have destroyed value by giving something they place high value to, to someone who places little or no value to. Of course baby Jesus could have sold the items and then brought the things that he really wanted. Which then begs the question, why didn’t the kings just give him the money?

Losing the Value

When we buy our loved ones presents we are, thankfully, more thoughtful than the three kings, but it doesn’t change the problem that baby Jesus had.

We all have a limited budget to spend on things that we want and things that we need. We all are faced with a basic economic problem of how to spend our income in a way that maximises our happiness. For example you might spend £1000 on a holiday abroad, but you only do so because it will add more than £1000 value to your happiness, let’s say £2000.

Since only ourselves really know what we value the most, purchasing decisions should be made by ourselves. Otherwise you would end up with a highly valued gift, which you don’t value as much. If only you had been given the cash, you could have brought the things you really wanted.

Can I have…

Surely this problem can be easily solved by just asking for certain items, or by writing a wish list?

Unfortunately not, it does help increase the value of the present, but it is still suboptimal when compared with the cash.

Let’s say you ask for the latest Coldplay CD which is priced £10. But then if you really do want it, why haven’t you already brought it?

The value that the Coldplay CD adds is perhaps greater than £10, let’s say you value it at £11, but you haven’t brought it yet because you’re saving for that holiday abroad, which for you, every £10 you save you will get £20 worth of happiness. In this case it would still be better to just have the money.

The real concern for economists is that billions of people around the world who participate in the Christmas institution are spending hundreds of billions on gifts to one another which is resulting in a loss of value. Just like the three kings who destroyed the value of their ill thought gifts, we are destroying value by not giving cash as a present. 

Jobs and the Economy

 

You might think that Christmas is useful because it increases spending, creates jobs and therefore improves all of our lives.

Not so. Instead of the economy producing things that people want, it isn’t. For example, a factory that should be producing ski jackets is instead producing knitted jumpers. A builder, who should be building inns, is instead busy harvesting Myrrh.

Merry Christmas everyone.

Time to leave a broken Europe

The idea of a unified Europe is a great one. All countries under the same trading arrangements, where all people are allowed to travel freely and are able to do business without any barriers is a concept that brings prosperity to all. However, great ideas can become warped and twisted in politics, as is the case with the EU.

The greatest part of being in Europe is free trade. Since countries operate on a relative level playing field in Europe, it means that countries can specialise in certain industries, trade more and produce more. But this level playing field need not cost as much as it does.

The Cost of Europe

From 2007 to 2013, Britain will contribute €103bn, in return it will receive €46bn in benefits, the net benefit being -€57bn. Every man woman and child in Britain is paying -€937 just so we can be in the EU.

Where does all the money go?

The EU has an annual budget of €120bn, much of which goes on development programs to Eastern Europe, which, in fairness, cannot be criticised as it is an investment into Europe’s future. However the largest single item on Europe’s bill is on agriculture!

CAP

The Common Agricultural Policy (CAP) is an agreement where the EU will buy any unsold crops that the EU lists. It was a policy developed after WW2 to ensure farmer’s incomes were supported and their means of production were kept in place. If the farmers went out of business, there was a perceived risk that Europe might go hungry, something which is no longer relevant today.

Since the farmer knows he will get money back for the crop he will produce, he will produce as much of it as he possibly can. The EU is therefore left with ‘butter mountains and milk lakes’ at a cost of around €50bn a year, a large proportion of which is poured away or buried.

 

The farmers are paid to produce things that no one wants, and then what they produce is thrown away. It would be better just to give them the money.

What’s more, why are farmers, who are some of the wealthiest people in Europe, receiving most of the EU budget? Farmers represent less than 2% of the EU and yet they receive 50% of the budget. Why not schools, hospitals, or even another industry?

The truth is, changing anything in Europe in nigh on impossible. There are so many members that any changes are likely to impact one or more nations negatively. Since several members possess a veto, they are able to block any changes they don’t like. France in particular has a very strong farmers union, which has a great deal of political clout. Any adverse effect to them would put such a great pressure on the French government that they would be likely to veto any reform.

The Euro

The Euro was an audacious but smart idea. The most effective way of removing trade barriers between nations is to remove any currency exchange uncertainty. If you run a business that exports to another nation, there is a risk that all your profits could be wiped out by adverse movement in exchange rates. By having that risk removed (or reducing the cost of risk reduction), there is encouragement for trade.  

For the Euro to function correctly, it requires governments to change they way the operate. They would no longer have control over interest rates or have the ability to print money. Governments must try to harmonise their budgets with the rest of Europe so that the monetary policy can be applied in the correct way.

Rules were set up stating that no Euro Zone country’s budget deficit should exceed 3% of GDP and no National Debt should exceed 60% of GDP. These rules were crucial for the long term stability of the Euro and yet they were ignored by most of its members.

Eventually money markets realised that the high levels of debt the Euro zone countries were accumulating was unsustainable and since they cannot print money, they would default on their debt.

Even though a clear prerequisite was set, leaders failed to play by the rules. This is the case with many EU ideas, the principles are sound, but are rarely acted upon correctly by most nations.

The Political Game

As soon as one country breaks an internationally agreed law or rule, others can either point it out, or allow it to occur unchallenged.

A self defeating cycle comes about because if you allow the breach of law to go unchallenged it means that you will be allowed to break a law in return. When France broke agreed deficit limits not one single country protested, instead they themselves ran large deficits as well.

This week the EU gathered to try to reset these laws, but this time they mean it. There will be automatic sanctions against all those who have too high deficits (which will impact most of the Euro Zone). They also wanted to impose tough financial regulation and set the ground for a tax on all international financial transactions (80% of which occur in London). David Cameron vetoed Britain’s involvement as it was not in the UK’s interest (which it isn’t). But the greater question Mr Cameron should be asking himself is why does free trade cost Britain €103bn and why are we in the EU in the first place?