Tim Harford The Undercover Economist

Articles published in February, 2006

Trading time

Dear Economist,
I am experiencing the strains of being a final-year student. This semester alone I need to complete seven projects and assignments, work on my dissertation and sit five exams.
I am the captain of the karate club, which requires a big time commitment, and I am applying for graduate jobs, which means lots of interviews and assessment days in the next few months. There aren’t enough hours in the day – how do I prioritise my tasks effectively?
Derrick, via e-mail

Dear Derrick,

Clearly you are not an economics student or you would have already solved the linear programming problem necessary to optimise your allocation of time. Let me instead give you a couple of pointers.

First, your time is spent investing rather than consuming: sitting exams and applying for jobs will expand your consumption set in the future. Under the circumstances it would be reasonable to borrow. You can borrow a little time from the future with the help of stimulants but a more practical solution is to borrow money to save time. Quit any part-time job, take taxis, hire a cleaner and order take-aways. This will save time and you can deal with the cost later when you’ve secured one of those precious jobs.

More fundamentally, look for opportunities to gain from trade. Your karate appears to be an area of comparative advantage, so perhaps you could persuade some clever weakling to write your dissertation for you. In exchange, you could beat up the boyfriend of the girl he’s been lusting after.

Five minutes of applied karate practice for you would be a life-transforming experience for your assistant; well worth many days of work on your dissertation. Capitalism is not always pretty.

Also published at ft.com.

25th of February, 2006Dear EconomistComments off

Recovery positions

The Undercover Economist – FT Magazine 25 February

An extended version published has been published in Slate.

My collection of Dire Straits compact discs languishes, unplayed, in the “ghetto” section of my music library. My decision to buy the albums dates back 15 years to a time when my brain was half-grown. The actual discs, though, are newer. They were bought for me by an insurance company after my flat was burgled and Money for Nothing, and much else, was stolen. I could have done with something aligned with my current tastes, but the insurance policy ruled otherwise. How should we rebuild after disaster strikes? Should we try to put things back as they were before, try to improve them or cut our losses? The question is much in the US consciousness six months after Hurricane Katrina flooded New Orleans and destroyed other communities along the Gulf coast.
Part of the problem is that the victims are kept out of the important decisions. My insurance company could have saved administrative expenses by writing a cheque and letting me modernise my music collection without interference. But such an approach might have left me hoping for occasional break-ins. Since a careless householder exposes his insurers to unnecessary risks, their meddling is perhaps a necessary evil.
So, too, with New Orleans. The Bring New Orleans Back Commission set up by Mayor Ray Nagin has identified areas deemed to be unliveable and recommends compulsory purchase of houses in those places and a moratorium on rebuilding. Cue outrage from locals who believe themselves the best judges of whether their homes are salvageable or not. They are probably right, but also know that the government will bail them out financially if the levees break again. It’s not surprising that the government wants to interfere, just as my insurance company did.
Unfortunately, governments have predictable blind-spots when it comes to reconstruction projects. Any city – indeed, any economy – is a mix of growth and decay, but governments are not good at recognising decay and allowing it to happen. All cities contain “Dire Straits” sections that should simply not be replaced if destroyed.
After an earthquake flattened Kobe in 1995, some areas missed out on the rapid economic recovery. Kobe had a cluster of small businesses making plastic shoes, but they were under pressure from foreign competition. No entrepreneur was interested in trying to resurrect the sector, and nor was the government. On the other hand, the port was quickly rebuilt, only to find that after recovering to pre-earthquake levels, traffic ebbed away to rival ports and to air freight.
Cities have their own trajectories, governed mostly by the dynamism of their inhabitants and surprisingly little by their infrastructure. Disasters rarely interrupt growth in a thriving city, while reconstruction rarely prevents decay in a stagnant one. According to economist George Horwich, manufacturing in greater Kobe was back to 98 per cent of pre-earthquake levels within just 15 months, despite the fact that six months after the tragedy rebuilding had scarcely started. Chicago’s central business district was destroyed by fire in 1871, but the city’s recovery was astonishing and its population trebled in 20 years. Chicago was on the way up, and the fire cleared the way for a more modern city assembled chiefly by the chaotic genius of individual entrepreneurs.
For New Orleans, a charming place for tourists, but a desperate clump of poverty and poor schooling, the question is not whether the current reconstruction plans will create a thriving city – they will not. It is whether there are any that could.

Optimising the wedding list

Dear Economist,
How many gifts should I register on my wedding list to optimise my total utility?
Claire Song, via e-mail

Dear Claire,

The wedding list reflects a rare piece of honesty in our social dealings: the admission that you do not expect your guests to choose particularly apt gifts. If only we could adopt the same candour when it comes to Christmas and birthdays the world would surely be a better place.

Nevertheless, the wedding list remains fraught with potential inefficiencies and you have evidently been thinking about that. If the list is too expansive you risk guests choosing the least preferred options: you will get the frilly lavatory roll holders while the quality saucepan set will go unpurchased. (I was married not so very long ago – I feel your pain.)

On the other hand, if the wedding list is too small you may find that the gifts run out and the guests decide to pick something a bit more “original” – obviously a disaster. Equally bad, you may find that willing guests don’t buy a gift at all.

The solution is a little labour-intensive but probably worth the effort. You need to release your wedding list in several tranches. Start with a selection of high-priority stuff and keep an eye on progress. When the choice is starting to wear a little thin, add the B-list gifts. If they, too, start to be snapped up, then unveil the C-list. Modern technology makes this fairly easy to do.

Of course, this is still a hassle. For my own wedding I planned to dispense with the gift list and instead charge for admission. That seemed much simpler all round, but my fiancee vetoed the idea.

I am not sure why.

Also published at ft.com.

18th of February, 2006Dear EconomistComments off

From the land of the free

FT Magazine, 18 February

“Don’t look a gift horse in the mouth.” This is reasonable advice, but I was recently given a couple of gift horses and looked them both in the mouth straight away. I know that whenever somebody else pays for the product or service that I am going to use, standard business practice steps through the looking glass into a world where normal rules do not apply.

The old proverb about gift horses argues that free is free and there is no point asking too many questions. At the same time, the fact that the proverb exists at all suggests that we often have reason to grumble about the things that other people buy for us.

My two gift horses were business class air tickets for the family, and the services of an international removal company (I just left one job in Washington D.C. for another based in London). There was an important difference between the perks: the removal company was chosen by my erstwhile employer. The tickets on British Airways were chosen by me.

Our move was a nightmare because the rules of the gift changed unexpectedly: we couldn’t send back by air many of the things that we had brought over by air. We had to repack on moving day. I should have read the small print, of course, but some competent advice from our move assessor would have been helpful.

But unhelpfulness is what you would expect: the victims have no means of redress. I cannot threaten not to choose them again, because I didn’t choose them this time. Whether they lovingly wrapped each item in silk and flew it first class, or doused my possessions in paraffin and set fire to them, the chance of repeat business was always going to be roughly zero.

British Airways, by contrast, was superb. I watched my little daughter snuggle up with her teddies on a flat bed as I gulped champagne. (Watching other business-class passengers contemplate a flight with a toddler was fun too.) No complaints from me then, but was it really worth the price? I’m not sure because I don’t know what the price was. I picked British Airways because I wanted the air miles. I accepted their bribe in return for carelessly throwing my employer’s money at the company that bribed me. For some reason, when it comes to air miles this behaviour is not only legal but makes acceptable dinner-party conversation.

Both of these perks produced economically inefficient results. The obvious economist’s solution is that I should simply have been given cash and paid for my own removal company and my own air tickets. But there is a reason why human resources departments choose the removal company: their employees do not move frequently enough to make informed choices.

Business class air travel, meanwhile, seems to have arisen as a stable social institution that gives roughly appropriate incentives to both employer and employee. Business class air travel is not so wonderful that employees will invent their own reasons to experience it, but neither is it so cheap that employers will demand journeys for trivial reasons. Like democracy, it is the worst possible solution except for all the other ones that have been tried.

It is refreshing to return to the everyday world of my own way. I couldn’t help noticing that the movers in Washington who packed my possessions did a splendid job – for which I rewarded them with a tip of a size chosen and paid for by me.

How the government can quit an oppressive habit

FT Comment

Never too eager to lead from the front, this week British parliamentarians followed Ireland, Spain, Italy, New York and California as they voted to introduce a ban on smoking in bars, restaurants and offices – so-called “public spaces”. (Those people who really believe offices and restaurants are public spaces might try organising a Boy Scout jamboree in one.)

The decision, of course, owes much to the fact that defending the right to smoke is politically as appealing as defending the right to pick your nose. Whether the new law is sensible is another matter.

It is easy to conjure up justifications for a smoking ban but harder to make them stand up to scrutiny. The most popular argument recently has been that smoking must be banned in public spaces because passive smoking can be dangerous. Bar staff or customers exposed to smoke from other people’s cigarettes are running a health risk.

That is true, but customers are well aware of the risks of passive smoking, as well as the stench, and can always take their money to a less smoky environment. Staff are also free to work where they please, at least since Britain outlawed slavery back in 1833. If customers really are clamouring for smoke-free places to relax and chat with friends, we should see an ample supply of them provided by some entrepreneurial company. We do, and the company is called Starbucks.

Many pubs cater profitably to smokers because there are plenty of smokers keen to pay, many non-smokers not concerned enough to look elsewhere, and bar staff who are happy to be paid to take the risks of the job. The government has no more business interfering with the pleasures of these consenting adults than it has imposing a dress code in nightclubs – not even if such a dress code might improve the typical club-goer’s experience. Nightclub owners can be the judge of that, and their customers will let them know quickly whether they have made the right call.

An alternative argument is that smokers are a drain on publicly funded or subsidised health systems, and this justifies measures to discourage smoking. Unfortunately, the sums do not add up. Life is, it turns out, 100 per cent fatal and Alzheimer’s disease is a lot more expensive than a quick coronary arrest. Anyone misguided enough to believe that individual welfare should be subordinated to the bottom line of the National Health Service should be arguing for a cigarette subsidy.

The final justification for the smoking ban is that it will help smokers to quit. Well, that is also true, but not all smokers wish to quit. Pile on enough humiliation and inconvenience and we can persuade most smokers to give up in disgust, but not all of them will thank us. The next stage in the process will be to make every smoker wear a collar and a cow bell, so that non-smokers can avoid them in the street.

No one can deny that smoking is a dangerous habit and that many smokers are tormented by their addiction and dearly wish to stop. The nannying impulse of the government is therefore understandable. But there is a better way for the government to help those smokers who want to quit, without oppressing those who do not.

It is time for a bit of policy entrepreneurship. Why not try something that has not been attempted elsewhere instead of aping the Californians or the Irish?

Here are the pieces of the puzzle: a government desperate to flex its muscles to restrain wayward nicotine-addled citizens, millions of smokers desperate for someone to be firm with them and a huge public-sector borrowing requirement.

My proposal is simplicity itself. Any smoker who wants to quit can call a government hotline or log on to a website and buy “Quitter’s Bonds”. They will be available in denominations to suit any budget.

Quitter’s Bonds will be financial assets like Treasury bills or premium bonds, but they will have an unusual feature. They will pay no interest and will not be redeemable except by the original purchaser. In order to cash in her Quitter’s Bonds she will have to pass a year of random blood tests to demonstrate that she has stubbed out the habit. Until then, the money is an interest-free loan to a hard-hearted government with unlimited reserves of moral superiority.

Quitter’s Bonds have an honourable pedigree, in the Christmas Clubs popular with American families in the 1970s. Customers would give their money, interest free, to banks. In exchange, banks would refuse to allow them to take it out until the beginning of December. Coercive, yes – but the coercion is voluntary. Anyone who preferred to save for Christmas in his own way could open a conventional bank account.

In spite of the sometime popularity of Christmas Clubs, I am not convinced that Quitter’s Bonds will have many takers, but that is perhaps the point: it is up to each smoker to decide if he would like the government to help force him to quit.

There is an added bonus. Since smokers tend to die young, there is a good chance that many Quitter’s Bonds will never be redeemed for cash. In troubled times, what could be better for the public finances?

18th of February, 2006Other WritingComments off

Money doesn’t make people happy

Forbes – 14 February 2006

“The hippies,” claimed economist Andrew Oswald recently, “are having their quiet revenge.” Oswald, a professor at Warwick University in England, is one of a growing number of economists fascinated by the question of what makes us happy. In a recent public lecture he announced, “Once a country has filled its larders, there is no point in that nation becoming richer.”

That, at least, should bring a smile to a few faces. Economists have suddenly realized that money can’t buy you happiness? This is like the squarest kid at school suddenly discovering beer, girls and music in his 30s. The rest of the world had worked it out already.

Continued at Forbes – no subscription required.

14th of February, 2006Other WritingComments off

I do, I do, I do, I do

The Undercover Economist – FT Magazine, 11 February

An extended version of this article is available at Slate.

After more than a decade of war between separatist rebels and the Russian army, there are not many marriageable men to go around in Chechnya. So acting prime minister Ramzan Kadyrov, probably not a feminist, proposed a radical step: “Each man who can provide for four wives should do it.”

Polygyny (having more than one wife, as opposed to polygamy, which is having more than one spouse) is admissible under Islamic law but not Russian law, so Kadyrov is unlikely to make much progress with his proposal. But what difference would such a law make? It’s natural to assume that polygyny is bad for women, partly because most of us would rather have our spouse to ourselves, and partly because we look at a place like Saudi Arabia, where polygyny is not uncommon, and note that women aren’t even allowed to drive.

I’m not quite so convinced. A lot of the knee-jerk reactions against polygyny are from people who can’t add up. In a society with equal numbers of men and women, each man with four wives gives women the additional pick of three men – the poor saps whose potential wives decided they’d prefer one quarter of a billionaire instead. In the Sahel region of Africa, half of all women live in polygynous households. The other half have a good choice of men and a lot more bargaining power.

It’s hardly surprising that in most poly-gynous societies the bride’s family gets large payments in exchange for her hand in marriage. If polygyny combined with women’s rights, I bet we’d see more promises to wash the dishes. Not everybody would have to share a husband, but I can think of some who might prefer half of Orlando Bloom to all of Tim Harford – including my wife.

In a society such as Chechnya where there is a shortage of young men, we would expect the reverse effect: men get to pick and choose, playing the field, perhaps not bothering to get married at all. We don’t have good data on Chechnya but we have excellent information about an unexpected parallel.

A little over one in 100 American men are in prison – but there are several states where one in five young black men are behind bars. Since most women marry men of similar age, and of the same race and the same state, there are some groups of women who face a dramatic shortfall of marriage partners.

Economist Kerwin Charles has recently studied the plight of these women. Their problem is not merely that some who would want to marry won’t be able to; it’s that the available men suddenly have more bargaining power. Goodbye to doing the dishes and paying for the rent; hello to mistresses and wham, bam, thank you ma’am. The women whose potential partners have had their ranks thinned by prison are less likely to marry, and when they do marry, are likely to marry a man less educated than they are. Meanwhile the remaining men, finding a surfeit of marriage partners, suddenly seem in no hurry to marry. And why would they?

The women’s response makes sense: girl power. The women affected do everything to make the most of single life, including staying at school for longer and hunting for more paid work. The American prison system hasn’t left them much choice.

When men are taken out of the marriage market, by war or by prison, women suffer. All this suggests that Kadyrov has a point and polygyny’s reputation needs to be rehabilitated. Nevertheless, I am resolutely against its introduction. We men are downtrodden enough already.

The ethics of leek-ripping

Dear Economist,
I recall watching a famous TV chef breaking the woody stems off asparagus and ripping the leafy tops off leeks before paying for the produce. Since supermarkets charge by weight, this saves money. I have an ethical dilemma. Should I do this or not? It seems to me that I need the money more than the supermarket does.
Darryl Tiverton, Darlington

Dear Darryl,

Your moral compass is obviously spinning, but before we let it settle let’s be clear about one thing: this is not a zero-sum game between you and the supermarket.

The supermarket does not set the price of asparagus depending on how greedy the shareholders are feeling: it does so based on the cost of getting the stuff on the shelves, and on your willingness to pay.

In a world where no customers broke asparagus stems, the supermarket would be able to charge one price per kilo. In a world where every customer broke the stems and threw the inedible half away, the supermarket would charge twice as much per kilo – or the same price per pre-broken kilo. As long as all customers do the same, it makes no difference to anybody except the man who sweeps up the vegetable section.

In the real world, some customers will rip leeks and some – lazy, high-minded or nervous – will not. That’s fine by the supermarket, which likes it when customers signal their willingness to pay. The leek-rippers are proving they’re sensitive to the price and they’re rewarded for their efforts with an automatic discount. If you’re tight for cash I suggest you join them. If you don’t have the chutzpah to do so, then you obviously don’t need the money as much as you claim.

Also published at ft.com.

4th of February, 2006Dear EconomistComments off

Driven to destruction

The Undercover Economist – FT Magazine, 4 February

The trouble with cars these days is that they’re too safe. Of course, I don’t write as a driver; I write as a cyclist. Drivers quite reasonably feel that they’re so well protected by their seatbelts, bull-bars, airbags, ejector seats and the rest that they can afford to take risks. Cyclists and pedestrians are the ones on the receiving end.

We need more dangerous cars. A spear mounted on the steering wheel, pointing at the driver’s heart, would do nicely. Cheese wire instead of seat belts would work too. Of course, these innovations would skewer and slice the typical crash-test dummy, but drivers aren’t crash-test dummies. Give them the right incentive and they will drive more carefully, to the benefit of the cyclists and pedestrians.

The idea that seatbelts cause accidents is so ridiculous it could only have come from an economist. That economist is Sam Peltzman, who in 1975 published a paper demonstrating that drivers did indeed drive more dangerously after mandatory seatbelt laws were passed in the US. He argued that despite technological evidence showing that seatbelts save lives in a given accident, there was no evidence that the seatbelt laws had reduced driver fatalities. In other words, drivers take advantage of seatbelts to drive more dangerously rather than to live longer. More compellingly, Peltzman detected a rise in pedestrian and cyclist fatalities when seatbelt laws were passed.

A little thought suggests that Peltzman isn’t quite as deranged as he first appears. We struggle with the idea of driving more dangerously but most of us accept the idea that a driver could choose to drive more safely. Logically, if he could choose to drive more safely he could also choose not to drive more safely.

Think about those occasions when your car’s safety features have let you down: the seatbelt mechanism is stuck; the one-year-old is on someone’s lap because the baby seat is elsewhere; one headlight is on the blink. In those situations, you drive more carefully – more slowly, less aggressively, with less attention to the CD under the seat or the incoming phone calls. And that means that when the safety systems are all operating well, you don’t drive as carefully.

Subsequent research has differed over the importance of the “Peltzman effect”. Steven Peterson, George Hoffer and Edward Millner, economists at Virginia Commonwealth University, published research in the mid-1990s showing that airbags seemed to cause more insurance claims for injury and more police reports of aggressive driving. But Alma Cohen of Harvard and Liran Einav at Stanford recently argued that while seatbelts don’t seem to save as many lives as they’re supposed to, pedestrians and cyclists are not at risk.

I’m forced to concede that if safety features encourage drivers to jabber on mobile phones and break the speed limit with relative impunity, then that is a benefit to those drivers, though it may not be the benefit that legislators or safety engineers had in mind. So I am tempted to argue in favour of a few safety features aimed at protecting the rest of us: rubber bumpers, automatic speed limiters, and perhaps the return of the man with the red flag walking in front of each vehicle.

The only trouble is that if these ideas catch on, we cyclists are likely to overcompensate and run red lights, leave our cycle lights and helmets at home, and whizz along on the wrong side of the road. More than we do already, I mean.

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