What is the function of fiscal policy?

Fiscal policy is that a government adjusts its spending level and tax level to influence the country's economic growth. However, government can use subsidies and taxation to target some microeconomics problems, such as externalities. Which policy made by the UK chancellor catches the most attention today? The sugar tax. The purpose of this policy is to reduce the children obese problem. However,  I feel surprised that it can catch so much attention. It will influence the food industry; however, in terms of the UK economy,  the impact is almost zero. I believe that the priority of fiscal policy is to maintain a sustainable budget and a stable economic growth. Maybe we have overestimated the impact of monetary policy and underestimated the fiscal policy. Today we may have reached the limit of what monetary policy can achieve. If we would like more policies to create more positive momentum, these policies will be fiscal policies. Fiscal policy can especially impact on the least productive industries. Removing subsidies or increasing tax could force companies to improve their productivity or leave the market. This could increase unemployment rate in the short term; however, in the longer term, if we can have a faster economic growth rate, there will be more opportunities in the labour market. Given the current low unemployment rate, a short-term cost for a long-term gain should be considered. Fiscal policy does not only have an impact on improving productivity, it can also influence the financial market. The bailout made by the government during the latest financial crisis is an example showing what a government could achieve. More than saving the market in bad times, using taxation could change banks' behaviour as well, thus improving the stability of the banking sector. In conclusion, I believe there is much room left for fiscal policy to influence the economy when some central banks have their hands tied.

How should rates change?

Today the American banking industry asked for raising rates, as their profits have been hit by the low interest rates. Moreover, they suggested lowering interest rates could affect the market confidence, rates should only be cut further when the economy is in very bad shape. The positive side of raising interest rates is to give some profits to the banking industry, which had losses over the last half a year and to show the market that the economy is good shape. The negative side is obvious as well. It will increase the difficulty for companies to get refinanced, leading to a decrease in investment. Currently, many large companies have "too good" cash flows on their balance sheets, benefiting from the low interest rate policy, and some of the cash has been thrown to the stock market by many buyback programs, instead of investment. In addition, the default rate increases, which increases the risk of the banking sector. Raising interest rates could increase banks' profitability and reduce their incentives to take risky strategies to increase profits. Providing some evidence of optimistic economic growth and raising interest rates can restore the market confidence as well. Increasing interest rates can cut large companies' unnecessary borrowing, thus improving financial resource allocation effectiveness. Therefore, in general, I believe it is a right time for the Fed as well as the Bank of England to raise rates with some supportive policies for small businesses.

The ageing population might be our natural response to scarce resources

What causes ageing population? Firstly, increase in incomes could be one of many causes. When income increases, a family no longer needs more family member to support the family spending. Increase in incomes could be linked with the improvement of productivity. In addition, the increase in incomes also provides an issue of tradeoff between having more children and having higher living standards. Secondly, ageing population is a historical issue. As after the Second World War, there was a huge decrease in all countries' populations. Therefore, the population had incentives and had also been encouraged to have more children. At that time, there was a sharp increase in birth rates. Now the people born during the "baby boom" now get old and this is another cause of the ageing population. Thirdly, people receive relatively better health care and have higher living standards. When people now can live longer, the number of older people increases. These three reasons show us the ageing population might be a temporary problem. Moreover, it might be our natural response to scarce resources, as we realize the cost of having an extra child could be larger than the benefit that it brings to us. Therefore, I think the ageing population is a temporary issue and shows our response to scarce resources, after a certain period, the population will get smaller but have a healthy age structure.

Some questions about the world economy

I have several questions about the current economy. Firstly, what will explode the next economic crisis? Secondly, what can be the driver of our economy? Thirdly, how do we solve inequality, especially when technology can replace many of our positions?

Some consumption decisions could be independent from budget

The companies with high profit margin products must have done research on how discount offers affect people's consumption decisions. We all have some experience of consuming some products because their offers are too nice to be rejected, even sometimes we do not necessarily need them. Being informed about the discount offers is important. When we are informed about the pre-discounted price, we may raise our expected value of one good and decide to consume it. However, if we are offered a discount but not informed, we are less likely to consume the good as our expected value does not change. Moreover, when we are making individual consumption decisions, we do not usually consider about the budget constraint. We do care about prices, but make individual consumption decision based on if the price matches the utility the good gives us. Therefore, when we think about individual consumption decision, it is not a question of utility constrained by budget, instead it is a question that whether the price could match the utility the good provides. From logic, budget is determined by income, then budget will then be split into small parts of individual expenditures, we decide our consumption based upon these small parts. However, in reality, we have a big image of our budget, but we make individual consumptions relatively independent of the budget, unless the consumption requires a significant portion of the total budget. To conclude, when people's incomes increase, their consumption decisions made might become more independent from their budgets, and vice versa.

The ECB has done its best, now maybe the governments could do a bit more.

What is today's biggest news? The ECB's new expansionary stimulus.  Today Mario Draghi, the president of the European Central Bank (ECB) has announced his new policy of cutting its benchmark rates as well as providing cheap short-term loans and longer-term liquidity and expanding the QE. How satisfied is the market? Not quite. As we can see from today's market response, the market rally quickly burnt out quickly after the ECB's announcement. Why? Firstly, Draghi said he would not cut the rates further unless some extreme cases happen. This signals the market that the ECB's further stimulus will be very limited. Secondly, the further rate cut increases inflation risks that the market fears that all the inflationary pressure could explode some time in the future at once. Thirdly, the stimulus does not meet everyone's demand. Some economists suggest that it only meets the minimum requirement. My opinion is the ECB has done almost everything can be done, the problem of the European market is a structural problem in some particular countries. Ireland suffered the subprime crisis but now has the fastest growth in Europe, this shows that the ECB's policy works. The failure in some countries is caused by their structural failure, rather than lack of stimulus from the ECB. Therefore, I do not think there will be another cut in rates in the near future, especially big cuts; I believe the real solution of the European economy is upon those governments and it is necessary for them to restructure their economies when the global economy is far from optimistic.

Maybe it is a good time to narrow the wealth gap in China

I watched a short video on Financial Times about the Chinese labour market. It suggests that the migrant miracle ends. More people decide to look for jobs in their hometowns and the ageing population creates labour shortage and rise in labour cost. If the data is correct in the video, then there will be more opportunities in small cities and towns. When people decide to stay in their hometown, the population will increase faster than it in large cities, such as Beijing and Shanghai. The problems in large cities are high living cost, well formed social and business structures. The high living cost could make high income in large cities less attractive. Well formed social and business structures form barriers for new enters. This does not mean people will be differentiated in the labour market; however, it means the difficulty to break into higher ranks in the society rises. Moreover, large cities have all necessary services and infrastructures. This is what smaller cities and towns might not have, which means people can start their business in these areas. In addition, the cost of starting a business in small cities is much lower than it in a large city. Therefore, we could see in the future, more resources will be moved from large cities to small cities and small cities will experience faster economic growth and create more job positions compared with large cities.

The FT video link: https://next.ft.com/content/0a86583e-e5f2-11e5-bc31-138df2ae9ee6