The watchword on interest rates: Caution Reply

When SARB’s Monetary Policy Committee (MPC) meets again at its usual two-monthly gathering next week, will the hawks or doves prevail? For some time the SARB has been impaled on the horns of a familiar but painful dilemma: how to reconcile its concerns about rising inflation with the reality of a steadily weakening economy? The latest GDP figures show that SA’s growth rate in 4Q2015 was only 0.6%, with growth of 1.3% in 2015 and 2.2% in 2014 as a whole. Credible forecasts of GDP growth in 2016 are now well below 1%, with only slightly better growth expectations for 2017. The overall economic outlook remains both uncertain and vulnerable.

Raymond Parsons

Prof Raymond Parsons

There are a number of global and domestic factors that explain why the SA economy is currently in a bad space and which cannot be laid at the door of monetary policy. SA is again in one of those phases which is becoming chronic, namely, a serious drop in confidence. And a flexible exchange rate regime is supposed to largely act as a ‘shock absorber’, as it did with the startling replacement of Finance Minister Nene last December, to facilitate adjustment to developments.

Yet the recent decline in growth has also coincided with a two-year period of a so-called ‘rising interest rate cycle’ and steadily higher borrowing costs in the economy. Correlation or causation? And how does a pro-cyclical dearer money approach fit in when public policy is now rightly directed to re-expanding the economy and reviving the momentum of growth? It is also common cause that SA is facing a serious risk of an investment rating downgrade to ‘junk status’ this year.

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Dear undercover economist Reply

We recently rediscovered Tim Harford’s Undercover Economist advice columns and thought it might make for some interesting reading to the new generation of economics students in the School.

Dear undercover economist,

I have a simple request. I just want to be happy. Can you help?

Ms Jessica Granger, Kirby Stephen

Dear Ms Granger,

This is hardly something to be ashamed of, and you have come to the right place for advice. Economists have been studying this subject intensively. Happiness+Equation

Nobel laureate Danny Kahneman asked a large sample of working women to describe what they had done and what they had felt through the previous day. If their experience is a guide, easily your best option is to have a lot of sex. Exercise, food, prayer and socialising also made people feel happy. Commuting makes people miserable. Any kind of human company is cheering, unless the other person is your boss. If you are having sex with your boss, Professor Kahneman’s survey cannot offer advice.

But perhaps you need a more long term view of life’s choices. London School of Economics Professor Richard Layard recently surveyed the subject.

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Dear undercover economist Reply

We recently rediscovered Tim Harford’s Undercover Economist advice columns and thought it might make for some interesting reading to the new generation of economics students in the School.

Dear undercover economist,

I think I’m a likable person but I struggle to get dates. I’ve been told I give a bad first impression and just need to persuade women to get to know me a little better. Some friends are dragging me to speed-dating but I can’t see how a series of three minute conversations can be anything other than a disaster. How can I persuade the girls to give me a second chance?

James Atkinson, Clapham

Dear James,

Many people suffer from this problem – and not just people, but products too.  Imagine a new manufacturer trying to persuade skeptical customers that a new DVD player is reliable.  Nobody’s ever heard of the company name, and how do they know the DVD player isn’t going to break down after a few weeks? online dating

The solution is for the company to offer money-back guarantees offering to replace the player or refund the customer’s money if the thing breaks within, say, three years.  That gives the customer some insurance, but more importantly, it is an unmistakable signal of the manufacturer’s confidence in its product.  People who make poor-quality merchandise can’t afford to promise to fix it.

You, too, need to offer a money-back guarantee.

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Dear undercover economist Reply

We recently rediscovered Tim Harford’s Undercover Economist advice columns and thought it might make for some interesting reading to the new generation of economics students in the School.

Dear Undercover Economist

 

I live in a student house with six others.  All of us drink milk, some a lot, some a little.  Only three of us buy milk, and we buy three different varieties, meaning my preferred type can quickly run out.  Worse, my variety (semi-skimmed) seems to be the second preference of everyone else.  Free-riding is common, but I don’t want to spoil the atmosphere with strict rules and enforcement mechanisms.  What course of action would you recommend?

Haakon, Oxford

Dear Haakon, Infini fridge

 

You clearly think that people would never volunteer their fair share of the milk bill and that the monitoring systems necessary to ensure compliance would be onerous.  This is a naïve reading of economic theory because even rational economic agents can gain utility from acting honestly.  Your course of action therefore needs to be identifies empirically.

 

Draw inspiration from Paul F., also known as ‘the bagel man’.  Paul F. is a retired economist who now runs a bagel delivery business to offices.  He operates an honour system, where people take bagels and leave the cash to pay for them. More…