Tim Harford The Undercover Economist

Articles published in August, 2004

Pushing drugs

Dear Economist,
My younger brother has recently received a police caution for trying to sell drugs. How can I convince him that there’s no future in life as a drug pusher?
G.S., London

Dear G.S.,
Let’s not be hasty. You can’t say he’s making the wrong decision before you look at the facts. Once you’ve discussed them together, I’m sure you can reach a reasonable conclusion.

We know a fair bit about the attractiveness of selling crack cocaine because the celebrated economist Steven Levitt and his co- author Sudhir Venkatesh have analysed the accounts of one street gang in urban America. Assuming these accounts are representative, income for the basic drug-pusher is low – less than two pounds per hour in bad times and five pounds per hour when things go well.

However, the earnings for gang leaders are excellent – up to Pounds 70 per hour, tax-free. Turnover is high and many members anticipate rapid promotion.

It is a myth that the typical dealer is rich. Taking into account the low starting wage but also the prospects for advancement, on average dealers earn between Pounds 5 and Pounds 10 an hour, plus some perks. This looks like a poor wage, but with local unemployment high and skills typically low, it compares favourably with taxable alternatives such as cleaning or flipping burgers.

Your brother should consider his own earnings potential and weigh up the pros and cons. There are some things he should bear in mind: in a four-year period, he can expect to be shot twice, arrested six times, and he runs a one-in-four chance of being killed.

Once he has decided how much he values his life he can make a rational choice. You may or may not be glad to hear that the gang typically meets funeral expenses.

First published at ft.com.

21st of August, 2004Dear EconomistComments off

Anniversary present

Dear Economist,
My wedding anniversary is fast approaching. What should I get my wife to show her how much I love her?
— Malcolm Hayfield, Whitstable

Dear Mr Hayfield,

That depends on how much you love her. If you think she would be pleased to know, best to make a clear signal of your ardour. If the grubby truth is that love’s flame burns less brightly than once it did, better to hide in the mainstream of mediocrity.

Good examples of also-ran gifts are flowers and chocolates – always appreciated, not too expensive. Your wife will be unable to tell whether she is unloved or you are merely uninspired.
Your question suggests, however, that you conceive of your love as something to shout about from the rooftops. The simple solution, then, is to buy something hugely expensive as a signal that you expect many more years of wedded bliss. A less ardent husband, who expected fewer years or less bliss, would never choose to give such a signal.

Your choices do not end there. Any expensive signal will serve – even burning £50 notes in front of her. But not all signals convey equivalent overtones. Buying risque underwear does not convey the same message as giving your wife stock in General Electric, even if the price tag is identical.

Your final consideration should therefore be to give a present that nobody would think of if they did not completely understand your wife’s dreams and desires. Whether it is a specially commissioned oil painting of her favourite place, or the signed Stone Roses memorabilia that recalls her wild youth, this is your triumph. Your gift will signal first that you remembered the anniversary, second that you are committed to the marriage, and finally, that you understand the wife.

First published at ft.com.

14th of August, 2004Dear EconomistComments off

Betting against Britain

Dear Economist,
I had high hopes for a successful sporting summer but it took only a few days for it all to fall apart. England have been humiliated at football, cricket and rugby while “Tiger” Tim Henman went out of Wimbledon with hardly a whimper. Now the Olympics are fast approaching and I think the suffering is going to be too much for any English sports fan to bear. Can you suggest any way of easing the pain?
Terry Price, Manchester

Dear Mr Price,

Life is full of uncertainty. Sometimes there are pleasant surprises – you must recall your joy when England’s footballers beat Germany 5-1, or when the rugby team lifted the World Cup last year. But the memory of those happy times raises expectations and makes reverses more painful. Therefore, I recommend a financial re-engineering of your sporting portfolio.

As a passionate sports fan, you are highly exposed to the vagaries of fortune – the form of David Beckham, the fitness of Jonny Wilkinson. This is not rational behaviour if you, like most people, are risk-averse. It is better to diversify by betting heavily against the results that you crave. You can get odds of 6-4 that the British team won’t bring home a single gold from the Olympics. A few pounds on that and you can either celebrate if Paula Radcliffe wins, or buy enough beer to drown your sorrows if she is beaten.

Of course, losing money when the results are good means that neither the highs nor the lows will be as intense. That is the nature of insurance.

There is an added bonus. British bookies often find that punters like to bet on a home win. These irrational fans, by increasing their own risk, are subsidising your insurance.

Be sure to take advantage.

First published at ft.com.

7th of August, 2004Dear EconomistComments off

Import workers, or export jobs?

This essay won a bronze ($5000) prize in the 2004 Shell-Economist writing contest.

The local economy is facing new competition from cheap imitators to the east. Our trade deficit is large and growing. I see immigrants everywhere I turn, while jobs are being destroyed by economic change. In short, life is good.

Economists are notorious for their inability to understand the human impact of migration or outsourcing, even as they praise the abstract phenomenon of economic globalisation. Yet the more closely one looks at real people, the better globalisation appears for all concerned. Import workers, or export jobs? Both, please, for all our sakes.

Start with the local economy and the cheap competition from the east. My local economy is Dupont Circle, Washington DC. To the east lies the booming region of 14th Street, where new apartment blocks are quickly rising from the rubble of abandoned warehouses, while former pawn shops, brothels and fortified liquor stores metamorphose into stylish furniture showrooms and hip bars – inasmuch as anything is ever stylish or hip in Washington. The change is incredible; 14th Street’s economy is probably growing faster even than that of China. It’s hard to tell because 14th Street, unlike China, does not report economic accounts.

One might think that the success of 14th Street must be coming at the expense of Dupont Circle’s restaurants, shops and bars. Dupont Circle hasn’t adopted income accounting either, so anecdotal evidence will have to serve. Wandering around on a balmy June evening, the bars are overflowing and the late-night shops have plenty of customers. There is no hint that the Circle is suffering as a result of competition. The truth is that one region is growing more prosperous without drawing wealth away from the other – a process mysterious to some, but which economists call ‘growth’.

How did the growth happen? First, Dupont Circle imported workers. The waiters and kitchen staff are ‘economic migrants’; they actually live in other parts of the city, and travel to where they can earn more money. Dupont Circle could never have begun to prosper by employing only locals.

Then, Dupont Circle started to export jobs. As the Circle grew more popular as a night spot and the space grew more crowded and more expensive, entrepreneurs saw an opportunity to replicate success. First 17th Street and then the more economically deprived 14th Street played the role of Japan and China – investing heavily, bringing the latest ideas, and training new staff to keep up with demand. (14th Street, like China, plays host to a lot of investment by outsiders.)

Yet no matter how many jobs Dupont Circle exports, it still seems to have as many as it started with. This is hardly surprising. 14th Street is only a competitor at all because of the high rents around the Circle. The high rents are a symptom of success, not a cause of failure. The ice-cream shop that moved from the Circle to 14th Street wasn’t sucked away by low rents: it was pushed out by the fashion boutique that was willing to pay more for the space.

When economists talk about gains from trade through ‘comparative advantage’, they are talking about the ice cream shop moving from Dupont Circle to 14th Street, because although the shop is a good business for the Circle, the boutique is an even better one. This shouldn’t be a frightening process. American wages are higher than those in China for precisely the same reason as rents are high in the Circle, and American jobs are ‘exported’ to China not because they are unproductive relative to China, but other parts of the American economy are even more productive.

Even those newspapers which accept that trade makes us richer, not poorer, will wring their hands over mysterious numbers – for instance, America’s bilateral trade deficit with China. But what does this statistic mean? My own family’s bilateral trade deficit with 14th Street is enormous. We spend money there almost every day, even though all our income is earned on Penn Avenue. (Economist Steven Landsburg helpfully and accurately defines a trade deficit as “the amount you spend in a given place minus the amount you earn there.”) Self-evidently, my family’s bilateral trade deficit with 14th Street is a blessing, not a problem. But it’s the kind of thing that politicians get excited about in election year, especially when the deficit is with China rather than 14th Street.

All very well, but surely the competition between Dupont Circle and 14th Street is not the same as that between, say, the United States and China? The process is surprisingly similar: Dupont Circle – or the United States – finds a formula that works, imports workers, and prospers. After a time, others (14th Street, or China) find a way to copy those ideas, import capital, and they, too, grow in wealth. The rest is detail. What is happening in China seems different because the Chinese are emotionally and physically more distant than the 14th streeters – and because national income accounts are drawn up so that newspapers can report the bilateral trade deficit with China, as though that number meant something. What is going on in China is just as beneficial as what is going on in 14th Street. It is a natural and familiar process of economic growth, led by economic connections between regions. The only difference is that it is on an unprecedented scale.

Many Chinese still remember the Great Leap Forward, which resulted in a famine so severe that people were reduced to cannibalism. Twenty-something Washingtonians recall cruising down 14th Street for a teenage thrill, looking at the prostitutes and giggling at the risks they were taking by entering an area where drug-related violence was rife. In both cases, thanks to importing workers and exporting jobs, the suffering is becoming no more than a memory.

There may be little economic difference between what happens at the local level and what happens at the global level, but there is a large political difference. The Chinese cannot emigrate to the United States with the ease that a 14th Street shopkeeper might open a business in Dupont Circle.

The reasons are not hard to see. Governments do not win elections with a soft line on immigration. The lucky residents of rich countries labour under the strange impression that an Afghan farmer might expend the money and take the risks necessary to make his way to Britain or France simply to enjoy a life of ease on the welfare state. It’s easy to conjure up such paranoid fantasies as long as one doesn’t think too hard.

It is clear enough that when workers from move from places where they are not productive to places where they are is good news for them. The more interesting question is whether the poorer countries which are losing their brightest people are suffering unfairly.

Often, they are not suffering at all. The Mexican labourers who built the apartment block in which I live used their wages to send home money – part of the ten billion dollars which flow every year to the citizens of Mexico from relatives abroad. This is five hundred times what Mexico receives in grants from other governments. For developing countries as a whole, five dollars of remittances flow in for every two dollars of government grants and loans. The remittances are more stable than private investment or government money, and they flow disproportionately to small and poor countries, according to Dilip Ratha of the World Bank. So those who claim that the migrants should stay in Mexico, for the good of Mexico, are not fooling anyone but themselves.

Washington is also full of highly skilled migrants – doctors, software engineers, and even economists – sparking talk of a ‘brain drain’ back home. Yet according to Professor AnnaLee Saxenian of the University of California, Berkeley, many of these skilled migrants return home, or hook up with contacts at home. Returning migrants from Silicon Valley are behind the growth of Chennai, Bangalore and Shanghai.

Not everyone returns home. My Iranian doctor has lived in America most of her adult life. A moment’s reflection about the position of women in Iran may tell you why. Some governments, and some societies, do not deserve to keep their best people. If the threat of emigration encourages them to reform, that is one more argument in favour of it.

We live in a world where borders are still barriers. Wherever the barriers can be more easily breached by brave and adventurous, but otherwise quite ordinary people, the world becomes a freer and a wealthier place. We learn that lesson not from the newspapers or from economics textbooks, but by looking at our own neighbourhoods. Import workers, or export jobs? We’d be fools not to do both.

5th of August, 2004Other WritingComments off

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