Tim Harford The Undercover Economist

Articles published in November, 2005

Undercover Economist on ‘Here and Now’

Here’s a brief interview from NPR Boston’s ‘Here and Now‘.

10th of November, 2005MarginaliaComments off

‘The Undercover Economist’ book reading

RadioEconomics is hosting a second podcast (the first is an interview) of me reading the introduction to The Undercover Economist. Short and – I hope – sweet.

8th of November, 2005MarginaliaComments off

You can’t take it with you…

Dear Economist,
My boyfriend is always encouraging me to save money or put it in a pension. (We are both in our early 30s.) I say any day could be your last, and you shouldn’t feel guilty about splashing out. Who’s right?
Yours sincerely,
Rebecca Marr, Sheffield

Dear Rebecca,

You are right, of course. Your boyfriend appears, at first glance, to be more rational.

After all, you are both likely to live for several decades to come. Your plan to spend everything you have and more as soon as possible seems a certain recipe for a penurious old age. Indeed it is.

But your boyfriend’s idea is worse. He risks saving too much. Better to die in debt than a millionaire: he can’t take it with him. He might claim that he will optimise his consumption patterns so as to avoid leaving too much money behind, but this is naive. The economists Wojciech Kopczuk and Joel Slemrod argue that people tend to deny the possibility of their own mortality, which explains why they tend not to make wills or buy enough life insurance. (Personally, I feel that people don’t buy life insurance because they realise it’s a bizarre bet that you can win only by dying young.) Because people like your boyfriend refuse to stare directly at death, they end up compulsively saving for a future they will not live to see.

Your plan is a compromise. You know that in 20 years you are likely to be saving too much, so you remove that temptation from your future self by spending all the money now. Even better would be to find ways to commit to optimal spending throughout your lifetime, but this is not easy. Perhaps you could start with a lifetime’s subscription to the Financial Times?

Also published at ft.com.

5th of November, 2005Dear EconomistComments off

Why we allow petrol stations to overcharge us

The Undercover Economist – FT Magazine, 5 November 2005

Few costs infuriate the modern consumer more than the price at the pump. Type “fuel price riots” into Google for a list of fatal incidents from Yemen to Indonesia. US pundits have been raging against “price gouging” in the wake of Hurricane Katrina’s damage to the energy infrastructure, while in Britain a fuel protest never seems far away. There are plenty of reasons why oil prices should be high at the moment: record world economic growth, disappointing exploration results, disruptions in Venezuela, Nigeria and Iraq, and a Gulf of Mexico full of storm-damaged drilling rigs. But motorists may wonder why the price of petrol leaps up so quickly when the crude oil it comes from was sold when the price was much lower.

It can take weeks or months for oil to get from the fields beneath the Gulf of Mexico into an SUV’s petrol tank. So while crude oil prices have risen, and with them the wholesale price of refined gasoline, the underground tanks at petrol stations have been full of cheaper petrol bought earlier. Yet the price at the pump has risen quickly. It’s infuriating to be paying tomorrow’s high prices today. Surely this is price-gouging?

Not so fast. If petrol stations were able to raise prices on a whim, they wouldn’t need to wait for a hurricane. After all, retailers don’t just price-gouge in emergencies; they price-gouge every day to the maximum extent of their powers. Fortunately, their powers are extremely limited and in fact the only time retailers can put prices up immediately is when high prices are obviously looming.

Imagine a world where wholesale gasoline prices are increasing but prices at the pump don’t rise immediately. You and I would want to fill up immediately with cheaper petrol. But service stations would have little interest in selling us this cheap petrol, because pump prices are going to rise in a couple of days. The owners of independent stations might regard this as the perfect time to close for the weekend and check out the sights in Blackpool. Why sell cheaply, if their petrol inventory is about to climb 10 per cent in value?

In a world of eager buyers and reluctant sellers, it is no wonder that price increases do not, in fact, wait for the arrival of the expensive petrol in the storage tanks.

The thoughtful motorist might be satisfied with this explanation, until they ponder the conundrum a few weeks later: crude prices and wholesale petrol prices start to fall, but pump prices do not. Petrol prices seem to follow “rocket and feather” behaviour: up quickly and down slowly. This is puzzling. The reverse argument should apply: retailers want to get the expensive petrol sold before the cheap petrol arrives, while motorists, anticipating the fall, should hold off on buying. (There are limits to this, of course: you can only hold off until the gauge starts showing empty.)

So if prices stay high, isn’t this yet more evidence of price gouging? Again, not so fast. The petrol retailers are not to blame – we lazy consumers are. Why? Because if we were prepared to look around more for lower prices, we would pay less. As Matthew Lewis, a young economist at Ohio State University, has pointed out, drivers who see a petrol station with a higher price than the previous week may drive past and look for a better deal. But checking prices is a hassle; customers who see a petrol station with lower prices are unlikely to bother searching further. This means that rising prices encourage competition, but falling prices do not. That makes sense. If you get a clean bill of health from your doctor you are unlikely to ask for a second opinion.

So next time you find yourself emptying your wallet to fill up, don’t blame the petrol station owner. Not unless you’re prepared to spend another half hour looking for a cheaper price.

Financial Times Magazine, 5 November

Undercover Economist reviewed in The Economist

Why things cost what they cost
Gumshoe economics

Nov 3rd 2005
From The Economist print edition

MOST economists are nine-to-fivers. Calculating rationalists during the working day, they are much like the rest of us when they are at home with their boots off. But Tim Harford, who works at the World Bank and writes a regular newspaper column, never seems to take off his boots at all. He sees the fingerprints of supply and demand everywhere he looks: at work and at play, sipping coffee, shopping for groceries, even playing poker with friends.
His new book, “The Undercover Economist”, is a playful guide to the economics of everyday life, and as such is something of an elder sibling to Steven Levitt’s wild child, the hugely successful “Freakonomics”, which came out earlier this year.
While Mr Levitt wanders freely among sumo wrestlers, game-show contestants and other inhabitants of the outer fringes of economics, Mr Harford takes care of the home turf—scarcity, competition, taxes and trade. He is happy to learn from his elders, which is all to the good. The best stuff is not always the latest stuff, after all. As far back as 1817, David Ricardo explained why the best farmland often makes money for the landlord, not the farmer. And his analysis serves perfectly well to explain why today’s coffee companies don’t make much money from a high-priced latte in Waterloo railway station.
That said, Mr Harford does not take himself too seriously. He is at his best illuminating the economics of small things. He rehearses some of the familiar arguments in favour of globalisation and mounts a spirited defence of competitive markets, on the grounds that they discover the “truth” about our wants, and how much it costs to meet them. (Taxes, which make some things more costly than they truly are, in order to make other things cheaper, are a kind of “lie”, he says, though often a white one.) He also makes some impish forays into charged issues, such as environmentalism, which he thinks too important to be left to the moralists. But in general, as befits a covert operative, his tone is quizzical and low-key, rather than bombastic and judgmental.
For anyone schooled in blackboard economics, “The Undercover Economist” succeeds in taking the chalkdust out of the subject. But does it also serve the reader who has no economics at all? The difficulty is to avoid talking over readers’ heads, without talking down to them either. It is a trick Mr Harford carries off well, for the most part, though he can sometimes seem almost too anxious to entertain. The best detective stories are usually told straight.

3rd of November, 2005MarginaliaComments off

Undercover Investment Tips

I’ve always been a fan of The Motley Fool so was delighted when they asked to interview me about the investment lessons from The Undercover Economist. Read Undercover Investment Tips at the Motley Fool, or in my favourites section.

1st of November, 2005Other WritingComments off
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