Click on the graph to see it full size

Anyone considering an Economics degree will find good news in research announced this week by the Institute for Fiscal Studies. It is a massive study, looking at what 260,000 university graduates in England are earning, ten years after graduating.

The IFS found “substantial” differences in the money people were earning, depending on the subject they took at university. Economists are most likely to be the top earners, by a clear margin.

“Medical students were easily the highest earners at the median ten years out, followed by those who studied economics. […] For males, it is estimated that approximately 12% of economics graduates earned above £100,000 some ten years after graduation; by contrast, 6% of those studying medicine or law earned more than £100,000.

“For females, it is estimated that approximately 9% of economics graduates earned above £100,000 some ten years after graduation; by contrast, just 1% of those studying medicine and 3% of those studying law did so.”

The researchers recognise that some of these differences are due not to the degree itself but the type of people who apply for the degree. Even taking this into account, Economics (as well as Medicine) leads to “much higher earnings” than expected. One way to see this is to compare Economics students against those with similar A-Levels who took a creative arts subject.

For economics, male graduates earn a premium of £14,000 at the median over those in creative arts, and female graduates a premium of £20,000.

One of the paper’s authors, Anna Vignoles of the University of Cambridge, is reported as saying,

“The research illustrates strongly that for most graduates, higher education leads to much better earnings than those earned by non-graduates, although students need to realise that their subject choice is important in determining how much of an earnings advantage they will have.”

Thanks to Prof. John Sloman for turning the IFS figures into a handy chart, which you can view or download from the link above.

Link: press release from the IFS and the full paper.

First, a technical recession has a very strict definition, namely two successive quarters of negative economic decline. Such a rigid definition gives rise to anomalies. It could be argued that the UK is currently in one of those anomalies. In 2011Q4 the UK’s output fell by 0.3%, in 2012Q1 it fell by 0.2% (preliminarily). Compare this to the last UK recession, which began in 2008Q2 and finished in 2009Q2, where the average quarterly fall in GDP was 1.5%. Granted no one can be sure where this current downturn will end but to compare both periods like for like by defining them both as a ‘recession’ is nonsensical.

Second, it is important to look at the economic performance of the UK prior to the current recession. In the four quarters prior to the recession (2010Q4 – 2011Q3) GDP grew 0.2%. Moreover, GDP growth between 2010Q3 and 2011Q4 has alternated between positive and negative rates every quarter. This low average level of GDP growth and large fluctuations in GDP growth during the year prior to this recession is more worrying for the UK economy than the last two quarters of very small GDP contractions.

Third, GDP growth in services actually rose during 2012Q1, after falling in 2011Q4. Services accounts for a vast majority of the UK’s total output and growth in this sector will be vital for a prosperous UK economy in the decades to come.

Although the UK economy is going through difficult economic times, critiquing the rhetoric that many politicians and media outlets spew can result in much different conclusions. Perhaps policy makers should be less concerned with avoiding a double-dip recession and more concerned with creating a long-term stable environment for UK businesses and the public.

Unless you have been living in a hole for the last year then you have probably heard that the European financial system is in a bit of a mess. Put simply, the countries of the Euro-zone have borrowed quite a lot of money. Some of the people that governments have borrowed this money off of have become less than convinced that the euro-zone countries pay it back. As a result debt holders have been selling a lot more than buying, which has forced the price/value of these loans down and interest rates up. All-in-all, not too pretty.

The question most people are asking, is how likely is it that the cost of debt gets so high for a country (say Italy), that it will have no choice but to default on its debt. This is a very hard question to answer.

So turning to the other side of the story, what happens if a country defaults? I thought it would be interesting to take a look back at one of the more colourful periods in financial history, the Spanish Bankruptcies.

A little History

In 1492, Rodrigo de Triana became the first European to set sight on the Americas in almost 500 years. Few at the time would have thought that the sighting of land sailor on la Pinta, one of three ships in the expedition led by Christopher Columbus, would transform the shape of Europe. The ships had been sent to discover a trade route around the east of the globe to the orient. The goal was to ship spices, which were extremely valuable is Europe at the time from the east, thus making a fortune. The Portuguese would get the spice route as it later became known but the Spanish got a lot more.

It became apparent, over the next few decades that the Americas were extremely rich. Areas that now include Mexico, Peru and Bolivia had huge reserves of gold and silver. At Potosi, there was a mountain which contained the largest reserve of silver ever found. So large in fact that it is still being mined to this day. The value of gold and silver was particularly important in the 16^th century as it was literally used as currency. The influx of gold and silver made the Spanish exceedingly rich, unfortunately this didn’t last.

What would you buy with all the gold in the world?

By the time the Spanish had begun to realise the extent of their new-found wealth a new family had come to power, the Habsburgs. The Habsburgs were extremely ambitious and used their money to finance a large number of wars in order to consolidate and expand their power. They fought for control of Italy, they fought against France and later they fought against protestants in the form of the Dutch, the English and later still many Germans. They didn’t just fight. They donated huge amounts to the catholic church, building the Vatican in its current form. They even built a brand new city from the ground up, which would become their capital, Madrid.

One of the problems they faced was that while the government had a lot of money to spend, by spending it they increase the supply of money in their own lands and inevitably throughout Europe. The rate at which the money supply grew was like nothing Europe had ever seen. Not only that but it grew far faster than the Spanish economy, causing a huge amount of inflation. This impoverished the lower and middle classes and the domestic economy stagnated.

The well dries up

By 1557 Spain’s finances were extremely overstretched and the Spanish were forced to declare a state bankruptcy. This caused chaos in the European financial system of the day. It bankrupted a large part of the Fugger family which had been the Habsburgs main financiers. At the same time the Spanish crown began to borrow large amounts of money, largely from the Genoese (ironically Columbus was born in Genoa).

Continued borrowing and debt led to more bankruptcies in 1576 and in 1596. They lost the great bulk of their European possessions outside of Spain itself and the financial mismanagement in the 16^th century set the stage for the perennial decline of the Spanish Empire over the next two hundred years.

I am not saying that the west is going to go bankrupt. The two situations are not very comparable. It was fiscal mismanagement, a high growth in the money supply and overspending on foreign wars that caused the Spanish Empire to decline. It’s worth not forgetting just how bad, bad economic policies can be.