Energy price caps

Labour leader Ed Miliband has recently announced that is Labour were to be elected, there would be a 14 month cap on energy prices. Anyone with a keen eye on business or an interest in economics will no doubt be intrigued as to the underlying business and economics behind this.

The first thing which strikes me about the price caps is that energy is a fairly competitive marketplace. There is no one company with a monopoly and a number of companies compete for customers’ revenues.  One must assume that the price caps would allow companies to operate and generate profit, and if this is the case, why does one company not simply drop its prices and take the business of competing firms?  Whilst one can assume that a start-up company cannot compete in the market due to the extortionate barriers of entry, namely capital investment and the infrastructure required, one could reason that a large company, such as Centrica could afford to be dominant in terms of price due to the economies of scale which they utilise to lower the cost of production.

The next pertinent question is whether the companies actually can afford to lower their prices. Centrica made £2.5 billion profit on a £23 billion turnover last year ; an 11.5 % net profit, meaning that if revenue were to decrease by about 10 % due to price caps, and costs of factors of production were to rise , Centrica would almost certainly be making a loss. It would then be likely that mass layoffs and downsizing would be necessary , to mitigate the diseconomies of scale which raise costs and alter the Marginal Cost curve for firms, which is again untenable as more companies would need to be created to fulfil consumer demand , which they cannot do due to the aforementioned barriers to entry.

Either way, the energy price cap gives us a fascinating insight into the economics and finances of large energy corporations.

Graduate employment in the city

Is the city the best place for our best and brightest mathematicians and economists ?

It is the year 2013 and bonuses are firmly back in the city. With them, incentives for bright and motivated individuals are back, with pay packets standing at multiples of the salaries offered in other industries such as engineering and medicine.

Concurrent to this, the city is beginning to become more and more quantitatively difficult market, replaced with a mathematically-able “quant “ who uses complicated algorithms to determine success. Maths plays a bigger role in the city than ever, with strong pHD level mathematical ability a pre-requisite for many jobs in the city.

As such, mathematics and economics graduates are being tempted into the city, lured by an image of glamour, prestige and high pay. Any student at a top UK university is almost guaranteed to have seen or have been inundated by offers for employment from top investment banks, many of whom going on to accept these same offers.

One has to question whether the abilities of these graduates could be employed better elsewhere. Does the city really contribute that much to us both as a society and as an economy? Whilst bankers are often in the highest tax band, banks and other large corporations have employed complex tax avoidance methods and, of course, have speculated wildly, precipitating the financial crisis, causing untold economic and social woe both nationally and globally.

Whilst speculation is a valid profit-generating activity for banks and other investors, we must be careful to regulate it so as to prevent another crisis. One has to question whether bright minds could be employed more creatively, and we must ensure that they are not employed destructively.

The North/South divide and Economic Growth

Here is a  fascinating article from Larry Elliott, economics editor at the Guardian newspaper, which highlights the illusion that is  UK  economic  recovery  :

"Go to Preston and tell them that Britain is booming and the notion will be greeted with a hollow laugh. Tell the folks in Hull that the housing markethas caught fire and they will assume you have taken leave of your senses. Mention in Rochdale that a corner has been turned and you are likely to be run out of town.

Ed Miliband's big idea at last year's Labour conference was One Nation Britain. This is a nice as an aspiration but bears no relation to the country we actually inhabit.

The latest growth figures are a classic example of Disraeli's dictum that there are three sorts of falsehoods: lies, damned lies and statistics. Sure, if you take the UK as a whole it is true that growth has returned. National output is expanding by 3% a year, slightly above its long-term trend.

But the country-wide average disguises considerable regional disparities, which are reflected in Britain's political make-up. Areas where the Conservatives are strong tend to have above-average prosperity; areas where Labour is strong tend to be poorer than the average. Marginal seats are clustered in those areas where the two nations collide.

House prices are one example of how regional economic performance varies. The Office for National Statistics said last week that property was 3.3% dearer in July 2013 than it had been a year earlier. But strip out London, where the cost of a home increased by almost 10%, and the south-east, and in the rest of the country prices were up by just 0.8%. That's below inflation, meaning that property prices are falling in real terms. In Scotland and Northern Ireland they are falling in absolute terms.

Now look at the regional breakdown for workless households, where the five areas with the worst record are all former industrial powerhouses lying north of a line drawn from the Severn estuary to the Wash: Glasgow, Liverpool, Hull, Birmingham and Wolverhampton. For the UK as a whole, 18% of households do not have anyone in work; in the unemployment blackspots it ranges from 27% to 30%.

At the other end of the scale, the areas with the fewest workless households are all in the south of England. Hampshire has the lowest percentage, at 10.6%, followed by North Northamptonshire (11.2%), Buckinghamshire (11.3%), West Sussex (11.3%) and Surrey (11.4%).

The north-south divide is not new. Far from it. There has been a prosperity gap for at least a century, ever since the industries that were at the forefront of the first industrial revolution went into decline. But the disparity between a thriving London and the rest has never been greater.

On past form, there will be a ripple effect from the south-east and there are tentative signs that this may be happening. But it is early days and, understandably, there is concern in the rest of the UK when it is mooted that economic policy needs to be tightened to tackle a problem that is chronic and heavily localised.

This is well illustrated in an article by Paul Ormerod published in Applied Economics Letters. Ormerod drills down into the UK labour market to see what has been happening to unemployment at the local authority level.

He notes that most labour market economists have seen the cure for unemployment as a good dose of "flexibility".

According to this approach, joblessness will only persist over time due to "rigidities" in the labour market. Remove the rigidities – such as over-generous welfare systems, employment security provisions, working time regulations, national pay bargaining – and the price of employing workers will adjust (ie reduce) to a level that will ensure that everybody who wants to work can find a job.

Unemployment blackspots

That's the theory. Ormerod tests it by looking at what has happened to unemployment over time. If greater labour market flexibility is the answer, then local authority areas with high levels of unemployment 20 years ago should have witnessed an improvement. But Ormerod finds no such correlations.

Those parts of the country that had relatively high levels of unemployment in 1990 still had them in 2010, even though the rates of joblessness went up or down according to whether the national economy was booming or struggling. "The striking feature of the results is the strength of persistence over time in patterns of relative unemployment at local level," Ormerod said.

Those who say flexibility is the answer may counter that the problem with Britain is that the labour market is still not flexible enough, and that only by making the UK more like the US can the problem of persistent unemployment be tackled. The only difficulty with this argument is that high levels of unemployment persist in America as well, although the correlation is not quite so strong as it is in Britain. This, though, may have more to do with the willingness and the ability of Americans to move than it does with the flexibility of the labour market.

Ormerod concludes: "The labour market flexibility of the theorists, beloved by policymakers, appears to be at odds with reality. This is especially the case in the UK, where relative unemployment levels persist very strongly over long periods of time. The findings certainly call into question the efficacy of policies that were designed to increase flexibility and to improve the relative performance of regions."

The cross-party support for a new high-speed rail link to the Midlands and the north is one attempt to find new ways to tackle the two nations problem. Supporters of HS2 say the cost will be worth it because the new line will lead to higher investment, increased rates of business creation and enhanced spending power in the northern regions.

Another solution to the north-south divide would be for London, rather than Scotland, to get its independence. Although Britain is not part of the single currency, London is Europe's unrivalled financial capital. From the dealing floors of Canary Wharf in the east to the hedge-fund cluster in Mayfair to the west, London is where the action is. Upmarket estate agents can tell where the world's latest troublespot is by the source of the foreign cash buying up properties in Belgravia and south Kensington: currently, it is Syria.

Were the government to publish regional trade figures, they would show that London runs a current account surplus with the rest of the UK, offset by capital transfers from the rich south to the poorer north. As an independent city state, London would have a higher exchange rate and higher borrowing costs. The rest of the country would, by contrast, get a competitive boost.

The reality is that London is a separate country. Perhaps we should make it official."

Wealth Disparity

Wealth disparity increasing

New data published by the Guardian newspaper suggests that the prevalent global wealth disparity is increasing worldwide. The wealth of the 400 wealthiest individuals in the United States has increased significantly since 2012, rising from 1.7 trillion dollars to 2.1 trillion dollars.

Whilst the wealth of the top 400 people in a country is by no means an entirely accurate or complete representation of the distribution of assets and by extension wealth , these statistics make for interesting reading given the current wealth distribution of the United States.However, I think it is important to note that wealth of ultra high net worth individuals is correlated to stock market indices , for much of the wealth of these individuals is held in shares of their own companies, or large portfolios of stocks in multiple different companies.

A simple Google search reveals that the asset allocation of the United States is incredibly disproportionately biased towards the upper echelons of economic society. Whilst the top 1% of people by wealth hold 34.6 % of the wealth, the bottom 40 % hold a frighteningly low 0.2 % of wealth, statistics which make for worrying reading for those who rightfully wish for a more equal society with equal quality of life for all.

How Lehman Brothers unfolded

Here is a brief summation of the Lehman Brothers collapse and subsequent chaos. The short span of time between the collapse and further  problems is telling !

15 September 2008

Lehman Brothers collapses after efforts by Bank of America and then Barclays to take over the Wall Street firm fail. Bank of America instead buys Merrill Lynch.

17 September

Lloyds TSB steps in to rescue HBOS after its share price halves in the first hour of trading as markets are gripped by crisis. The American authorities step in to provide an $85bn lifeline to the insurance company AIG.

20 September

The US treasury secretary, Hank Paulson, ask Congress to back a $700bn plan to buy up bad loans, known as the Troubled Asset Relief Programme or "Tarp". A battle begins in Congress to get the programme passed.

21 September

Goldman Sachs and Morgan Stanley formally become banks, allowing them access to the Federal Reserve's funds but subjecting them to tougher regulation.

7 October

Alistair Darling, the chancellor, is told by the RBS chairman Sir Tom McKillop that the bank only has enough cash in hand to keep operating for a few more hours.

8 October

Iceland's three biggest banks collapse.

11-12 October

Government ministers and top bankers spend the weekend thrashing out plans to bail out RBS, Lloyds and HBOS. Barclays agrees to raise its own funds, eventually turning to investors in the Middle East.

13 October

The bailout is announced and the banking system brought back from the brink. Darling says the government does not want to be "in the business of running banks" – "we are in the business of stabilising banks, that is our purpose".

2 April 2009

A crucial G20 summit approves a planned $5 trillion stimulus for the global economy and agrees to take steps to rein in banks.

27 April

The banking crisis starts to hit eurozone countries, as Greece's sovereign debt is downgraded to junk

Lehman Brothers, Five Years On.

As many of you will know, the Lehman Brothers' (LB) collapse was one of the most tumultuous and dangerous events which precipitated the meltdown of the global financial crisis. The LB collapse is not only significant for the magnitude of it's effects, but also for the fact that large ratings agencies such as Moody's gave LB an "A " rating only a week before its sudden collapse which left employees jobless within a day with no prior warning.

Since then, one would have to question whether any significant and meaningful changes have been made to the financial system to prevent a repeat of the LB collapse. Despite increasing levels of regulation, derivative usage is still prevalent, which essentially validates the statement made by former chancellor Alistair Darling : " As long as people think they can make money out of nothing, it will happen again "

In my opinion, despite what appear to be major regulatory changes, most of the alterations made are from an architectural, and not a mechanical viewpoint. For example, the FSA has been replaced by the PRA / FCA, yet it is unclear exactly how this is supposed to help prevent crises of liquidity. 

Furthermore, despite the Basel III agreement stating that banks should aim for a 7% capital ratio by 2019, a fierce debate has ensured regarding something known as the leverage ratio ; whereby banks were disallowed to judge which assets were inherently riskier than others. The way in which the debate regarding asset volatility still ensues shows not only the complexity of modern financial assets, but also , in my opinion, why they are such a fascinating subject to study.

UK Unemployment down

The UK’s unemployment has edged closer to the 7 % target stated by Bank of England governor Mark Carney which is thought to be the level at which the economy could successfully withstand an increase from the record low 0.5 % interest rate which was designed to ameliorate the effects of the recession and encourage borrowing, as the cost of borrowing is of course correlated  with the Bank of England base interest rate.

The unemployment rate has been validated by both the International Labour Organisation’s method of unemployment measurement and the claimant count method, both of which show a marked decrease in unemployment.

In response to the changes in unemployment, a surge of sterling purchases pushed the pound to a 7-month high against the Euro, as analysts still continue to predict a stronger economic regeneration than the Bank of England’s monetary policy committee ( MPC ).

There is still however a sizeable bank of information to suggest that conditions in the labour market remain precipitous for many, with wages rising at only 1.1 %- Significantly below the 2.8 % rate of inflation, which is still above the Bank of England’s 2.0 % target and which erodes the value of people’s wages, with the high inflation and meagre rise meaning that in real, that is to say inflation-adjusted terms , wages are actually lower this fiscal year than last. Furthermore, nearly a million people remain long term unemployed and youth unemployment has risen, again suggesting that the economy has a long way to go for long term, sustainable growth.

Blackberry Share price

Ailing fortunes for Blackberry maker RIM

The fortunes of the Blackberry brand and it’s owner, Research in Motion, have been struggling over recent years in response to increased levels of competition from rival smartphone makers, such as Samsung, Apple, LG et al. Thus far, efforts to revitalise the brand, through new models such as then Z10 have failed, with a flagging share price and a consistently reducing market share, resulting in repeat and widespread losses on the basis of reduced revenue and rising development costs. Furthermore, the brand is also now suffering from a depleted image, being seen as unfashionable and firmly unpopular compared to fresh new devices such as the iPhone 5 and Samsung Galaxy iterations.

As such, the company’s market capitalisation has decreased to just over $6 billion, with a share price of approximately $11.00 at the time of writing ( September 2013 ). Help appears to be on the way, however, with a reported buyout from the largest shareholder in the troubled company, Fairfax financial holdings LTD, which holds a 10 % stake in the business. 

One can assume that the takeover is a serious proposition , as the chairman of Fairfax resigning from the Blackberry board in order to avoid any possible recriminations arising from a potential conflict of interest. Further details provided below courtesy of the Guardian :

“BlackBerry's biggest shareholder has approached several large Canadian investment funds about forging a deal to take the smartphone maker private, but the proposal is still "an airy-fairy, 'what if' kind of thing," according to a source with direct knowledge of the situation.
The shareholder, Fairfax Financial Holdings Ltd, has a 10% stake, and its chairman and chief executive, Prem Watsa, has left BlackBerry's board already to avoid any possible conflict of interest as the company assesses its strategic options.
The source, who declined to be identified because the still-preliminary talks are private, said that in addition to Watsa's Fairfax there had been an early and informal approach about a possible deal from another investor.
The person declined to name the second party.
"There have been various calls saying 'if we came up with some kind of a proposal would you look at it?'," the source said.
Fairfax did not respond to a request for comment, and Waterloo, Ontario-based BlackBerry said it does not comment on speculation.
BlackBerry, which has bled market share to rivals including Apple's iPhone and phones using Google's Android technology, said last month it was weighing its options, which could include an outright sale.
BlackBerry shares rose more than 6% on Monday after Britain's Sunday Times newspaper said Watsa was closing in on a rescue deal for BlackBerry, with support from Canada's influential pension funds.
The big funds, including Canada Pension Plan Investment Board and Ontario Teachers' Pension Plan, declined to comment.
BlackBerry shares closed at $11.53 on the Nasdaq, up from $10.84 at the close on Friday, giving the company a market capitalization of just over $6bn.
The source said any deal would likely involve more than one of Canada's powerful pension funds, which would have to weigh the possible benefits of helping a fallen Canadian icon with the risks of getting involved in such a deal.
If a concrete proposal was on the table - something that is not yet the case - things would likely "go quiet" while investors looked at their options, the source said.

“

Financial / Management accounting

Whilst trawling the internet for career information, I became more aware of the similarities and differences betwixt Financial and Management accountants.

Essentially, a financial accountant  is responsible for profit and loss accounts and other financial information which is utilised by people outside of the organisation, such as tax authorities or those considering an investment in the company.

A management accountant, on the other hand, works within the organisation and produces reports for management. Unlike financial accountants, whose reports are structured to be compiled at certain dates or intervals, management accountants are not only called upon to report on the financial state of the organisation at any given time, but also analyse a wider range  of data, such as cost efficiency, budget and comparative analysis , feasibility reports and merger and consolidation reports.

If I were to pursue a career in accountancy, I feel I would enjoy management accounting more due to the increased variability of the work ; Rather than compiling profit and loss accounts on a daily basis, analysing the feasibility of a merger or acquisition of another company seems interesting an enjoyable, and lends itself well to a number of other careers within business and finance, such as an Equity Sales role within the city of London ( i.e stockbroking ). Stockbroking is an enticing career option for me again due to the variety of the work ; A stockbroker is required to know every intricate detail regarding the companies which he or she is aiming to sell shares, and as a result learns a great deal about some truly fascinating businesses.

HMRC wrong again on the scale of Corporate Tax Avoidance

I recently came across this segment of an article whilst researching my EPQ piece on tax avoidance, and found it fascinating in the way it ably demonstrates the sparsely documented scale of tax avoidance by large corporations.
“A fascinating parliamentary answer by David Gauke MP, the Exchequer Secretary responsible for HMRC to Michael Meacher gives an extraordinary insight into a number of critical tax issues.
This is the exchange, which was noted on Tuesday:
Mr Meacher: To ask the Chancellor of the Exchequer pursuant to the answer of 13 May 2013, Official Report, column 29W, on taxation: business, how many large businesses contributed to HM Revenue and Customs’ total additional revenue of £6.9 billion gained via compliance activity in 2011-12. [156966]
Mr Gauke: HM Revenue and Customs (HMRC) deals with around 10,400 large businesses. The largest 800 businesses are managed within HMRC’s Large Business Service and 381 of those businesses contributed £5.0 billion additional revenue in 2011-12 as a result of HMRC’s compliance activities.
The remaining large businesses are managed within HMRC’s Local Compliance (Large and Complex Unit) and from these HMRC secured £1.9 billion additional compliance revenue in 2011-12. The information to show how many businesses were involved in the enquiries that produced this additional revenue could be provided only at a disproportionate cost.
Now let’s analyse that.
First, let’s note that £5 billion of extra money was raised from just 381 large businesses in the UK in 2011-12. That is an average of £13.1 million each.That’s a staggering scale of tax avoidance per company.
But let’s look at the total next. According to HMRC’s most recent estimate of the tax gap total tax avoidance was £5 billion a year. However, since just 381 companies were seeking to avoid £5 billion in tax (and remember this excludes the well documented multi billion pound abuse of IT companies) it is obviously impossible that this estimate is right. “
I think that this article is a pertinent , accurate, and powerful demonstration of the scale of the problem of tax avoidance by both large domestic and large transnational corporations. HMRC’s most recent estimate of the amount of tax avoided by corporations stood at £5 billion, yet just 381 corporations have been found here to be avoiding that much in tax.
There are two possible implications of this ; Either HMRC simply has no idea of the scale of tax avoidance by large corporations, or it does not wish to face the problem full-on and instead chooses to hide behind what is clearly a vastly reduced estimate. Given both the scale of the problem, and the fact that a copious quantity of (taxpayer’s ) money has been invested into HMRC to solve the increasingly prevalent problem of tax abuse, by individuals, criminals, and corporations, either prospect is worrying.

Zero hours contracts

Zero hours contracts have received media coverage from a multitude of sources recently, with almost all coverage being negative. Zero hours contracts are essentially a type of employment whereby hours are flexible, but dictated almost entirely by the employer. As such, employers do not have to guarantee any work or pay, as well as holiday and sick pay.

Recent research has suggested that just over a quarter of UK companies use zero hours contracts, with the prevalence of their use being approximately twice as high amongst college and higher education employers than any other sector.

Those for and against the use of zero hours contracts cite advantages and disadvantages associated with their usage. Whilst it is true that zero hours contracts do provide workers with employment when they may otherwise be forced to claim benefits from the state, it seems unfortunate that the only way they are able to do so is through a contract which seems to place the employee at essentially the employer’s whim.

Another problem that I see with zero hours contracts is that they would appear to support short term economic growth ( when there is a shift in Aggregate Demand but not supply ). As such, despite overall demand for goods and services within the economy increasing, the overall productive capacity of the economy remains the same, for workers ( represented by the term “labour “ in the four factors of production which form an economy’s productive capacity ) are not actually becoming more skilled, being arguably “exploited “ by contracts which on average pay 40 % less than traditional employment.

Whilst zero hours contracts are providing some growth to the economy, it is simply not the basis for growth that we as both a society and an economy wish to see.

How the EU affects the UK economy's prospects for long term growth.

In an economy, there are four factors of production : Land, Labour, Capital, and Enterprise/Entrepreneurship . Joining the European Union allows greater connectivity between the UK and the other member nations, meaning that the UK benefits from more free trade and freer movement of goods, services, and people.

These reduced trade restrictions will affect the four factors of production.  The UK’s membership of the EU means people are more able both to immigrate to the UK and emigrate to other EU countries. The UK has several advantages over many other countries in the European Union which make it favourable for immigration, namely free health care and an expansive benefits system. As such, the UK joining the EU will result in a greater net immigration to the UK, due to the increased ease of immigration and the greater incentives to immigrate to Britain in comparison to other EU countries. This will result in a greater amount of people in the UK and hence more labour. This increased competition for jobs will result in a labour supply/demand disequilibrium, resulting in low prices and hence higher demand for labour, increasing the inelasticity of the Aggregate Supply (AS) curve and increasing the output of the UK.

This increased quantity and decreased cost of labour will have knock-on effects on Entrepreneurship. Entrepreneurs combine the other three factors of production- Land, Labour, and Capital. A decreased cost and increased quantity of labour means that entrepreneurs can utilise more efficient workers for lower prices due to the increased competition from the aforementioned labour Supply/Demand disequilibrium. This increased efficiency means that entrepreneurs can create products and services cheaply and hence can make more potential profits, increasing the incentive for entrepreneurship, which should in turn mean that there are more entrepreneurs and new businesses, again an increase in a factor of production available to UK AS caused by the UK entering the EU.

An increase in Entrepreneurship of course means more businesses, which need more capital to expand their Production Possibility Frontier (PPF). As such, demand for Capital will increase,  and supply of Capital should hence increase to meet this greater demand. Companies supplying this capital will of course also benefit from the increased quantity and cost efficiency of labour gained from the UK’s entry to the European Union and hence should have enough Factors of Production for supply to meet the increased demand. Therefore, the UK joining the European Union should again increase UK aggregate supply due to an increase in Capital, one of the four Factors of Production.

The final factor of production, Land, will not be affected greatly by the UK entering the EU, as a country’s natural resources will remain the same unless depleted, e.g oil being used up. However, land can be used more efficiently by the usage of more efficient machinery which can be imported into the UK more easily due to the reduced trade restrictions, and hence land, as a factor of production, may be increased slightly.

To conclude, the UK joining the EU will mean that the UK can exchange greater amounts of labour and goods with other EU member states, leading to a greater amount of Aggregate Supply owing to the increase in each of the four factors of production : Land, Labour, Capital, and Entrepreneurs. This increase is caused by the greater quantity of labour, which in turn reduces labour prices, increasing incentive for entrepreneurs and increases demand for capital. The reductions in trade restrictions also mean that improved technology can be imported to the UK with more ease, hence meaning that land can be used more efficiently and hence all factors of production are raised following the UKs merger with the EU, as is overall Aggregate Supply.

The consequences of unemployment

As Eurozone unemployment sits at a huge 12.1 %, and UK unemployment remains above 8 %, I thought it may be an appropriate time to discuss the Economic consequences of unemployment :

Labour is one of the four factors of production, the other three being Land, Capital and Entrepreneurship. As such, unemployment represents Labour not operating at it’s full capacity, and has many important consequences for the rest of the economy and the people living within it.

One of the most important consequences of unemployment is Lost Output. As Labour is one of the factors of production, a decrease in employment means that less goods and services will be produced within the economy. It is, however, important to note that the potential Aggregate Supply is not dependent on the amount of people unemployed, for the quantity and quality of labour is not affected by the amount of people unemployed. As such, not only will less goods and services be produced during high unemployment, but people will have less disposable income with which to spend on these aforementioned goods and services, hence meaning that supply and demand both lower to reach a new equilibrium meaning reduced output. This lower output means a reduced material standard of living, due to the reduced real GDP and reduced amount of expendable money for many people to spend.

          Another important consequence of unemployment is reduced tax revenues, both from direct and indirect sources. People will have less money to spend due to the increased unemployment, and whilst the average propensity to consume will increase due to the lower income, overall consumer spending will be lower, meaning less revenue from VAT. Furthermore, this lower income will result in lower income tax receipts for the government, hence meaning reduced tax income for the government. As such, the government can either raise tax rates to recoup the losses, which will mean that people and businesses have less money to spend and invest, resulting in reduced aggregate demand. Alternatively, the government could keep taxes constant and reduce spending in order to maintain a balanced budget, meaning reduced government  spending, one of the components of aggregate demand, and hence reduced AD. Keeping government spending constant or raised despite the lower tax receipts for the government will result in an imbalanced budget, meaning that the government will need to borrow, increasing long-term interest and, in the long-run, reducing spending power of the government and eventually reducing aggregate demand.

          Similarly, the problems caused by the likelihood of increased government spending are accentuated by the increased government spending on unemployment benefits. This increases spending on the welfare sector in turn means that less money can be spent on other areas such as education ; Less education in turn means that workers are less well-trained and hence the quality of labour may well be diminished. Therefore, greater unemployment means an opportunity cost as amounts of other public goods will be reduced,  which in turn may have negative externalities on society, as aforementioned.

         Not only does the increased spending on unemployment benefits have negative effects on the public sector via the increased proportion of unemployment benefit expenditure, but increased unemployment results in pressure on other aspects of government expenditure, as unemployed people face great deals of stress, due to the pressure of financial difficulties. This stress manifests itself in increased illness, both physical and mental, and increased amounts of crime. In turn, government expenditure on these public goods is likely to increase, and as aforementioned, government expenditure may well decrease due to the reduced government tax receipts. As such, a select few public goods may receive a disproportionate amount of the (potentially reduced) government expenditure within the economy.  Other sectors of government expenditure will then struggle to maintain efficiency with their disproportionately low funding, exacerbated by the aforementioned possibility of lower government spending as a whole.

          It is important, however, that we do not forget that there are obvious effects to the unemployed themselves. The aforementioned stress not only contributes to increased illness, but also increases the probability of marital break-up and may decrease people’s feelings of social status or their own self-worth.

         As such, another consequence of unemployment, hysteresis, may take effect in the long term. As people become unemployed for longer periods, their skills and hence efficiency and productivity may be diminished, meaning that employers will be reluctant to employ these workers, causing a continued, vicious cycle of unemployment, in which some may become discouraged to apply for jobs and may become used to the life afforded to them by state benefits.

        These seven different consequences of unemployment are all inexorably linked and hence it is possible that different economists will have opposing views on their respective importance. However, in my opinion, many of the consequences stem back to the Lost output caused by unemployment. This lost output manifests itself as reduced standards of living and is ultimately the most pertinent consequence of unemployment to the entire public, whether they be unemployed or not. The only real way that the problems caused by the lost output can be mitigated is to increase employment, which is why I believe that the human consequences of unemployment : Increased Stress and Hysteresis. It is these human factors which make the labour force less efficient and hence reduce the quality of labour, reducing Aggregate Supply and hence interfering greatly with the entire economy.

As such, in my opinion, the final three consequences of unemployment, namely Lost Tax revenue, government spending on unemployment benefits, and pressure on other forms of government spending, whilst still important, are the three less important of the consequences of unemployment.  In my opinion, the Lost Tax revenue is more important than either the Pressure on other forms of government spending, or the increased gov.spending on unemployment benefits, for the Lost Tax revenue has an immediate effect on government spending, which accounts for 47 % of our GDP. Furthermore, the Lost Tax revenue may result in higher tax rates to increase tax revenue, which will have another knock-on effect to all people and businesses, making the Lost Tax revenue a more expansive and hence important consequence of unemployment than  either the increased government spending on unemployment benefits or pressure on other forms of government spending, which are the two least important effects of unemployment.

          To conclude, unemployment affects nearly all aspects of the economy, having many knock-on effects on the general public. Whilst it is debatable which of these effects or consequences is the most adverse or important, in my opinion Lost Output is the most important, followed by Costs to the Unemployed and Hysteresis, followed by Lost tax revenue, government spending on unemployment benefits and pressure on other forms of government spending.

Keynesian / Free-Market Debate

The Keynesian vs Free Market debate has been a cause for contention and fiercely contested throughout recent history of economic thought, with strong arguments being put forward for either argument. Proponents of the free-market ideology, such as the acclaimed Historian Hayek , cite improved allocative efficiency inherently created by the free market and distorted by the Keynesian system, in which the government intervenes and often gets into debt in order to sustain growth. However, in my opinion, there is no conclusive answer to the age old debate, with the current accepted status-quo being praised or ripped apart dependent almost entirely on the state of the economy at any given time.
For example, the 1920s in the USA signalled a rapid change in society and consumption,with cheap credit being readily available to relatively high-risk customers, prompting an increase in Aggregate Demand and by extension an increase in Gross Domestic Product. Concurrent to this, the 1925 introduction of liberty bonds allowed the general public their first opportunity to invest in financial products and instruments , commodities which quickly caught on with the both the general public and financial institutions alike ; By 1928, 40 % of all of the money borrowed in the USA was "invested " ( read : gambled ) in the stock market. As we now know, excessive demand over a sustained period of time , precipitated only by overconfidence can only lead to a bubble , which, once the excessive confidence is removed, is disastrous. Once this bubble burst, the American economy , and much of the global economy, plunged into a depression of a magnitude which has yet to be replicated.
This of course all occurred in a deeply laissez-faire, free market economy, and it was not until the mid 1930s when Keyne's views received the attention they deserved.
As a result, one would be forgiven for thinking that we as a planet would have learnt the danger of free-market forces acting untethered, yet 80 years on, overconfidence has resulted in a bubble and subsequent widespread economic difficulties. For decades, people were hasty to purchase property on mortgages  which were simply unattainable for them,  a huge  problem  compounded  by these same mortgages being used to form the basis of financial products such as derivatives, which unfolded themselves to collapse corporations (Lehman brothers ) and entire countries ( Greece ).
Governments are now intervening ( Keynesian ). Following a period of rampant free market activity which caused a recession. Sound familiar?