Cow’s Blog

May 27th, 2008

photo: B a m s h a d

As a student currently embarking on a university degree, I’m looking forward to the freedom university will offer and meeting a whole bunch of new people from across the world. But one major worry is the finance: the cost of going to university.

Many people only look at tuition fees when they think about going to university. In the UK, university tuition is roughly £3,000 a year. For a 4 year masters degree course, this adds up to £12,000.

Tuition Fees: £12,000

But there’s the cost of accommodation, which is typically at least as large as the tuition costs. The cost of accommodation varies. In some of the larger cities, a room will typically cost £120/week. In some smaller town universities, £80/week might be closer to the norm. A 40-week let on university accommodation will set you back £4,000 a year. However, in later years of university, most students will live outside of university halls and this will be more expensive. Assuming an average accommodation cost of £4,500 per year, this adds up to £18,000 over a 4 year degree course.

Accommodation Cost: £18,000

photo: paolo màrgari

There is a much bigger cost which most people don’t even think about. Because studying at university and getting a full-time job are mutually exclusive options, by choosing to go to university you are actually saying “I will not be going to work” as well as “I will be going to university”. Economists call this the opportunity cost.

By choosing to study at university, you are foregoing 4 years of salary which you would have earnt otherwise. The typical starting salary for somebody leaving school with A-Levels but no university degree is £15,000 a year. By working, you’d potentially have earnt £60,000.

Opportunity Cost: £60,000

The other significant cost which needs to be considered is housing. Over the last few years, house prices in the UK have been rising by about 10% a year. What this means is that a house which will cost £100,000 today will cost £110,000 this time next year. Leaving university with £30,000 of debt and without £60,000 of salary means that university graduates must wait even longer before they can put together a deposit and get a foot on the housing ladder. On top of that, graduates may have to take out a larger mortgage on their first home because they cannot make a large upfront payment. Obviously, the appreciation in housing value depends on market conditions, but I think £10,000 is a reasonable ballpark estimate.

Housing Appreciation Cost: £10,000

So to sum it all up, when we take in all the costs of university:

£3,000 a year for tuition X 4 years = £12,000
£4,500 a year for accommodation X 4 years = £18,000
Direct Financial Costs: £30,000

£15,000 a year could have earnt in basic non-graduate job X 4 years = £60,000
Opportunity Cost: £60,000

House price rise in the additional time you must wait before buying = £10,000 (obviously this depends on whether house prices are rising)
Housing Appreciation Cost: £10,000

Total Cost of going to university: £100,000

It’s pretty depressing reading. University is a very, very expensive enterprise. It’s easy to see from these calculations why so many lower income families find it very difficult to send their children to university.

photo: Thiru Murugan

But I think it also calls into question whether it’s worth going to university to study certain degrees. According to the government’s graduate prospects website, graduates in humanities earn £51,549 more in their lifetime and graduates in arts earn £34,949 more. Are the real costs of going to university greater than the benefits?

On average for all degree courses, those who graduate from university earn on average £160,000 more over their lifetime. This would still seem to indicate that going to university is good value for money. But the net benefit is probably less than people would think.

I really don’t want to put anybody off studying at university and I don’t think money should ever stop anybody from pursuing their dreams. But what is true is that going to university is an extremely expensive enterprise these days and students may be getting a bit of a raw deal.

• Economics , Politics , UK
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May 26th, 2008

photo: Topyti

The World Wildlife Fund’s Living Planet report (full report as PDF) is an interesting read. Page 19 of the report contains an interesting observation. The graph plots Human Development Index against Ecological Footprint.

The Human Development Index is the UN’s measure for standard of living and development. “Human Development Index (HDI) is an index combining normalized measures of life expectancy, literacy, educational attainment, and GDP per capita for countries worldwide.” The threshold for acceptable human development is defined as a HDI of 0.8.

The Ecological Footprint measures the use of natural resources and effects on the ecosystem.

It compares human consumption of natural resources with planet Earth’s ecological capacity to regenerate them. It is an estimate of the amount of biologically productive land and sea area needed to regenerate (if possible) the resources a human population consumes and to absorb and render harmless the corresponding waste, given prevailing technology and current understanding.

An ecological footprint of 1 means that if everybody in the world made use of resources in the same way as the citizens in this country, the Earth could just sustain it. An ecological footprint of 2 means two planet Earths would be needed to sustain this lifestyle if everybody in the world lived like this. Of course, if the ecological footprint is more than one planet Earth, this lifestyle is not sustainable.

photo: Drown

As you’d expect, the two are correlated. The higher the standard of living, the greater the ecological footprint.

It’s interesting to note that the only country which is sustainably developed is Cuba. If everybody on Earth was to adopt the Cuban lifestyle, everybody would have an acceptable standard of living and we would be operating at 80% of our planet’s ecological capacity.

What this suggests is that if everybody in the world adopted the lifestyle of US citizens, we would need more than 5 planet Earths to sustain it. The USA is obviously appropriating well more than it’s fair share of natural resources.

Of course, I’m not seriously suggesting we all adopt Cuban laws and lifestyles but I think it’s a good way of visualising how sustainable the lifestyles of different countries are. Perhaps there are a few ideas we could adopt from Cuba though.

• Economics , Environment , Politics
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May 15th, 2008

photo: 708718

Congestion and pollution are two “external costs to society” which are associated with driving. When you take your car out of the garage and take a trip down to the local supermarket or pick up the kids from school, you are imposing costs on other people: exhaust fumes which others must breathe and you take up space on the road contributing to traffic jams.

To correct for social costs, governments use taxes to make sure the individual pays for the costs they impose on society or to “internalise the external costs”. There are three taxes which are used to try and discourage driving:

• VAT on Buying a Car
• Road Tax
• Fuel Tax

People hate taxes. People remark that death and taxes are the only two certain things in life and I think that fuel tax is one of the most hated (in the UK, fuel tax is 64p for every litre). The government argue that this fuel tax is to correct for “external costs” but I will argue that the fuel taxes is unfair and are targeting the wrong people.

The Costs of Driving

photo: Pro-Zak

Urban motorists impose greater external costs on society. City roads are full to their capacity and that means traffic jams everywhere. An extra car on the road is only going to make it worse. Congestion wastes everybody’s time. Secondly, population density is so much higher in cities meaning that the exhaust fumes produced will affect a lot more people. And not to mention noise pollution…

In contrast, rural roads are much quieter and less congested. Because there is so much spare capacity on the roads, an extra car on a rural road isn’t really going to add to congestion or effect anybody else. And although exhaust fumes are still emitted and noise pollution is still produced, it effects a lot less people: there are less people for it to affect.

So the external costs imposed by drivers in cities are greater than the external costs imposed by drivers in the country.

The effects of taxes

photo: kevindooley

When you buy a car, you pay value added tax on the vehicle. To keep the car on the road, you must also pay road tax. Both of these taxes will discourage people to own a car because they increase the cost of owning one. But once you own a car and it’s licensed to drive on the road, these taxes will play no part in your decision about whether to use the car to drive to work or not: whether you use it or not you’ve already paid the tax. And whether you live in the city or the country you pay the same amount of VAT and road tax.

The other tax is fuel tax. This affects people’s decision on whether to drive to work or school. If it costs £2 to drive to work you might choose to do it every day but if it cost £8 you’d probably only drive if it was raining or for some reason the trains weren’t operating.

As I’ve mentioned, the external costs of urban driving are greater. So a fair tax which “internalises external costs” should penalise urban drivers more. But the taxes on urban driving are actually lower than taxes on rural driving. Places in the city are situated much closer to each another and so less fuel is needed to drive between them. As the amount of tax paid is directly linked to the amount of petrol used, this means urban motorists are paying less tax than rural motorists. This is unfair.

Is it essential to drive?

photo: fabbio

Another factor that economists must consider is “how necessary is it to drive?”

In the city, there are a huge range of alternatives to driving. In London, there is a flat rate 90p charge on all bus journeys, where ever in London you go. Buses are also very frequent: you shouldn’t have to wait any more than 10 minutes. I’ve found that I rarely have to wait more than a few minutes.

When I’m in the country, it often costs £3 for a single bus journey and the bus only comes once an hour or sometimes even every 2 hours. And there is about a 20 minute window for the time that the bus arrives.

In the city, everything is also much closer to each another. That makes cycling or walking a much more viable option.

So in the country there is often no choice except from to drive because everything is so far away from each another and there are no viable public transport options. In these areas, motorists must pay extortionate amount of taxes. Meanwhile urban city drivers, with the luxury of viable alternatives such as the bus, escape with lower amounts of tax. I think this is the fundamental unfairness of fuel tax.

Solving the problem

photo: billjacobus1

The problem is that fuel tax penalises the wrong people. The solution is to tax urban drivers more to account for the greater amount of “external costs” they impose by driving.

In London we also have the congestion charge zone (£8 to enter Central London per day) and the low emission zone (£200 per day for heavy polluting vehicles to enter London). I think this somewhat solves the issue but it’s only restricted to London.

A few years ago the Labour government floated plans for a national road charging scheme.

Motorists will receive regular bills, possibly monthly, charged at variable rates by time and geography: rural country lanes would likely be charged at the bottom of the range, around 2p a mile, with inner city rush hour roads attracting the top £1.30 rate. The government hopes motorists will change their driving habits - by staggering journeys, sharing cars or switching to public transport - to the extent that there could be a 50% cut in congestion.

From a point of view of an economist, I feel that this is the perfect solution to the problem. It would reduce congestion which would lead to time savings for everybody and stop country motorists from being unfairly penalised.

In 2007, 1.7 million people signed a petition against the national road charging scheme. The idea seems to have fallen from the agenda. Because of the inherent unfairness in fuel taxation, I hope the government will reconsider a national road charging scheme.

• Economics , Environment , Politics , UK
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May 14th, 2008

photo: World Economic Forum

In what must be the strangest news I’ve heard in a while, British Prime Minister Gordon Brown wants to star in his own Apprentice-style TV reality show

The email from producer Margaret McCabe pitched the show, which would feature aspiring politicians as contestants, as being targeted for the “Apprentice meets Maria/Strictly Come Dancing audience”.

The memo added that the show was “not stunt TV” and as a judge, Brown could become “more popular than Alan Sugar”.

A spokesman for Blears confirmed that a reality show was in the works: “It is a very worthy programme idea. These young people would engage and have some kind of competition, and then there would be a way of electing a young prime minister for a day.

“The idea is to get more young people interested in politics. But it hasn’t been commissioned yet. It is very early days.”

It has been documented before that Gordon Brown is a big fan of the X Factor.

I think it’s interesting how Gordon Brown is such an unpopular prime minister that he now feels like he needs to be a judge in a television reality show. There will of course be worries that this show could cheapen politics. I can’t remember whether it was just an idea which was floated or an idea which actually happened in some country, but people talked about having a reality show to determine a candidate who would stand for Member of Parliament. Of course, the problem is the winner of the show has had an unfair amount of publicity and would probably easily win election based on the fact they were once on TV, regardless of whether their politics were actually any good.

Anyway, the “Junior PM” project is still in the very early days so it’ll be interesting to see whether it gets any further.

• Politics , UK
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May 3rd, 2008

I stayed up last night to follow the results of the mayoral elections in London. I had quite an interest in the election being somebody who will be living in London over the next few years but also as someone who had previously met Boris.

Both Boris and outgoing mayor Ken Livingstone gave really good speeches when the results were announced. I was quite impressed at how Boris planned to work across party differences, and it almost seemed like he offered Ken and Liberal Democrat candidate Brian Paddick a job in his administration.

It’s an important job and I believe this appointment makes Boris one of the most senior Conservative politicians in the country. The BBC has a short biography of Boris which I felt was really interesting. I really recommend “Boris: The Rise of Boris Johnson” by Andrew Gimson as a more complete biography of our new mayor.

I met Boris at a networking event last year. In typical Boris style, he turned up about half an hour late but nobody seemed to mind. He was the main attraction of the evening. Boris spoke about his political career and about some of the controversies he has been involved politically. He was the friendly personality that you see on television and I think he’s a genuinely nice guy. People have publicly wondered whether he is competent for the job because of the number of gaffes he has made. I gained the impression that he was just very upfront and much more willing to have a laugh than most politicians were. It is true that the way he acted on the London campaign trial could be described as “new Boris” so it’d be interesting to see what happens when he starts on Monday!

I think the Boris Versus Ken contest has given the Barack Versus Hillary contest some competition for most interesting political battle of the year.

• Politics , UK
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April 3rd, 2008

Tory MP for Henley and Mayor of London candidate Boris Johnson is set to release a single called “Is Fatboy Slim a DJ?”. The producers of the single say that the single will be released sometime after the election for Mayor of London (1st May). A video is currently in production but you can listen to a snippet from the dance mix on the Borisborisboris.com website.

I met Boris last year and he is a really lovely person. He talked about his career in politics and many of the controversies he’s been in. and I was also lucky enough to ask him a few questions about education & young people and get an autograph. I wish Boris the best in the Mayor for London elections next month and in hitting the number 1!

If you’re a fellow Boris fan, I strongly recommend reading his biography!

• Cool Stuff , Politics , UK
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March 20th, 2008

The Economist reports on a study by two economists on the costs of the Iraq War for American households. The study wasn’t simply a look through the government balance books to look for direct financial costs: it also looked at the knock-on impact on oil prices, number of deaths or injuries caused (and perhaps controversially putting a financial value on these lives), bonuses paid to recruits who were put off by the war and also the opportunity cost (see my previous post on cost-benefit analysis).

The opportunity cost is the benefits to the USA which would have been gained if it didn’t go to war in Iraq: for example the money which went to the war might have funded better education or healthcare insurance.

The study was carried out by Joseph Stiglitz, a Nobel prize-winner in economics and Linda Bilmes, budget and public finance expert from Harvard. They found the total costs were $3 trillion. The Economist asks:

SUPPOSE that, five years ago, George Bush had asked every American household to stump up $25,000 to pay for an imminent war on Iraq. How would they have responded?

Of course, this study doesn’t conclude that the Iraq War was a bad idea. To weigh that up, you need to look at the benefits which were gained. We now know Saddam doesn’t have weapons of mass destruction. Is that knowledge worth $3 trillion?

What I really want to get across is this: economics and cost-benefit analysis offers a much better way of analysing whether government policies have been successful. It’s great to have an opinion based on what is published in the media but things are not always as they seem. Cost-benefit analysis offers a logical method to evaluate the consequences of a policy.

• Economics , Politics
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March 16th, 2008

The British tabloid, Daily Mail, earlier this week published an opinion piece talking about the commercialisation and globalisation of football. The article highlights the performance of British clubs in the UEFA Champions League:

You may not have noticed, or even care, that out of the eight clubs that have just made it into the last round of the European Champions League, four are English.

That may not sound like a big deal.

But if one considers that clubs from dozens of European countries are eligible, and that these countries collectively speak for hundreds of millions of people, it is interesting that half of the finalists should come from a single country - England - with a population of only 50 million.

Germany has one team out of the eight, Spain another. Italy and Turkey account for the other two. (France, note, has none.)

It then goes on to talk about how football in Britain has been transformed in the last 25 years with higher attendances; racism has been stamped out; stadia are now state-of-the-art.

If that’s not enough evidence of the commercial nature of football, England’s failure to qualify for Euro 2008 is believed to cost the British economy £1billion.

My interest in football is only really a passing one but what I found really interesting was how this article looked at football from an economics viewpoint and then argues for protectionist policies.

To take some of the Daily Mail’s articles in turn:

Protectionism - Protecting British footballers 

In the same year that four “English” teams have made it into the last eight of the Champions League, England’s national team has failed to qualify for this summer’s European Cup.

The article argues that because so many foreign players are playing in British sides, British players never get the opportunity to reach the top flight. This is a parallel argument to trade barriers in international trade. Some countries argue that if they import lots of food from abroad cheaply, domestic farmers will never be able to develop and would have to shut up shop.

According to economics, protectionism is a very bad thing. Let’s take tea: in Britain we import our tea from countries such as India. Why? Because they’re better at producing tea. They can produce more tea, and sell it for less. We could impose some trade barriers and encourage British tea growers. But our climate and weather just don’t suit growing tea. So we use greenhouses and contribute to climate change and our tea costs more to produce. Or alternatively, we could stick to producing something that we’re good at (e.g. financial services). If we trade our financial services for tea from India, then both countries benefit.

Bringing this all back to football, does foreign players playing in British clubs really damage the chances of British footballers? I don’t think so. Football brings a lot of money into Britain; money which then goes towards academies and training for youngsters. A substantial number of young people in Britain do play football in their school breaks.

A loss of national identity

And yet this loss of local or even national identity in the Premier League is an extreme version of what has happened in our country. Mass immigration is justified on the grounds of greater economic efficiency. One consequence, though, is the weakening of a sense of belonging.

An interesting way of arguing against immigration, a favourite topic of the Daily Mail. But of course immigration has brought huge benefits for Britain. Migration-friendly policies mean that companies situating in the UK have access to the best workers from all across the world. These companies and workers contribute to the economy through taxation as well as greater efficiency.

Of course, there has been a homogenisation of city centres across the world. You’ll find a McDonalds in almost every large city across the world. But what is happening is that we’re all gaining from being able to experience more cultures. Visiting a typical city centre, you might have a choice of Japanese sushi, Italian pizza or American hamburgers. Are we really losing our identity or are we just benefiting from access to more?

The free movement of labour has also done wonders to for tackling world hunger and poverty. We might have nurses come to Britain from poor African countries; they earn money here and send it back home. They may, at a later date, take those skills home. Indeed, it is believed that globalisation and trade has done more for the third world than handouts ever have.

Similarly in football: who’d have expected some of the poorer third-world countries to participate in the World Cup? Skilled footballers playing for British clubs gain experience; this benefits their national side in the World Cup.

Globalisation is a win-win situation. It makes no sense to argue for protectionism: everybody loses out. That applies both to international trade and to football.

• Economics , Politics , UK
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March 13th, 2008

The Economist reports on a cost-benefit analysis of anti-terrorist spending. Economists at the University of Texas found that the benefits gained by tackling terrorism have been a tenth of the costs.

For those of us who don’t study economics of pretend to know anything about it, cost-benefit analysis is a method used to make decisions between competing choices, or to determine whether a decision was beneficial.

What is cost-benefit analysis? 

Let me indulge you with an example: The building of Terminal 5 at London Heathrow airport. When the government decided whether to build Terminal 5, they would have used a cost-benefit analysis.

The first step is to list all the costs: this would include the cost of the building materials and workers, upgrade to surrounding infrastructure and increased security. As well as the direct financial costs, effects such as greater noise pollution are quantified and someone must make a judgement - something like “the greater levels of noise caused to residents by Terminal 5 equate to £1bn of damage”.

After listing all the costs to society, the benefits to society are then listed. For Terminal 5, this would be time saved for travellers in airports, jobs provided to local residents and so on. After completing the cost-benefit analysis, we then look at whether the cost or the benefit is greater. If the benefits are greater than the costs, it is a good decision: if we spend £5bn and get a return of £10bn, we’re £5bn better off. But if costs are greater than the benefits, we are all made worse off by the building of Terminal 5.

Anti-terrorism

Economics lesson over… The study found the US has spent $65billion on homeland security since 2001, or $200bn if this is broadened to include the “War on Terror”. By my own calculations, that is $110 per person in the USA per year.

Anyway… the study found terrorism only reduced economic activity by $17 billion. So fighting terrorism cost $200 billion and only $17 billion of benefits were gained, the benefits are about a tenth of the costs. Or in other words, the country is $180 billion worse off.

The Economist adds:

In 2007 Britain’s prime minister, Gordon Brown, said his country had disrupted 15 al-Qaeda plots since 2001. Yet so big is counter-terrorism spending and so limited is terrorism’s economic impact that, even if 30 attacks like the London bombings of July 2005 were prevented each year, the benefits would still be lower than the costs.

Now of course, there are a lot of criticisms to looking at anti-terrorism measures in such a way. Many people argue that the value of a human life is infinite or very high; it doesn’t matter if we spend millions to save a small number of lives. Additionally, there is the psychological effect: would we all be as happy as we were if the government did nothing about terrorism and just let it happen?

I think this study really highlights some great points. I feel that perhaps the government has been curbing too many civil liberties and freedoms lately under the guise of anti-terrorism measures. Take ID cards in the UK… very expensive, liable to data losses and presenting fairly small benefits.

I don’t think anybody should take this study to say that we shouldn’t try and fight terrorism, but perhaps, let’s reconsider just how we do it and make sure that we’re not harming ourselves more than the terrorists have.

• Economics , Politics
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March 3rd, 2008

Just a few musings:

• if a country launches a cyber-attack on another country is it considered a declaration of war? A cyber-attack could arguably have more damage than conventional weapons: it could take electricity and security systems offline which could endanger lives.
• Is a country attacked by electronic means allowed to respond using conventional bombs?
• Given the amount of danger a cyber-attack could cause, should it be added to the list of prohibited weapons which currently include biological, chemical and nuclear weapons?

• Asides , Politics
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