Articles published in August, 2006

Dear Economist,

I am 72 and about to prepare my will. Knowing that some of my daughters have married well, and the other will probably remain single (and therefore be financially disadvantaged in comparison), there seems to be a moral justification to be more generous to the latter. Observing that my unmarried daughter might be more likely to provide assistance to me in my old age, why should I not be more generous to her? I would, in economic terms, be repaying her for services (hopefully to be rendered) which her siblings will probably be either too busy, or too absorbed with their children, to offer. Please give me an economic justification for being more generous to my unmarried daughter.

Tom Holden, Australia

Dear Mr Holden,

Let’s deal with this one point at a time. Divorced women tend to take a financial hit while divorced men tend to be better off than they were when they were married. What does that tell you? You might think that it suggests divorce is bad for women, but it equally suggests that marriage is bad for them. Women must hate being married if they are willing to pay to get divorced. And men must like marriage, since they would be richer if they walked out the door. So don’t feel too sorry for your single daughter: her married sisters are probably praying for a chunk of inheritance so that they can afford to divorce their husbands.

A better justification is your unmarried daughter’s expected contribution to your care in your dotage. Perhaps you should be a bit more explicit about the arrangement: why not offer to pay her by the hour to spend time clearing up after you? To be fair you should also pay the others if they come to visit. This method may produce a hidden benefit: you can switch to a competitive tender on the open market. You may find that your children are not low-cost providers at all.

First published at ft.com

The Undercover Economist – FT Magazine

“Parents, brace yourselves.” With those words, Oprah Winfrey introduced news of a teenage oral-sex craze in the US. In Atlantic Monthly, Caitlin Flanagan wrote “The moms in my set are convinced – they’re certain; they know for a fact – that all over the city, in the very best schools, in the nicest families, in the leafiest neighborhoods, 12- and 13-year-old girls are performing oral sex on as many boys as they can.”

Are they right? National statistics on teen fellatio have only recently been collected, but the trend seems to be real. Professor Jonathan Zenilman, an expert in sexually transmitted infections at Johns Hopkins University, Baltimore, reports that both the adults and the teenagers who come to his clinic are engaging in much more oral sex than in 1990. For men as recipients it’s up from about half to 75-80 per cent; for women, it’s risen from about 25 per cent to 75-80 per cent.

In some quarters that might be regarded as progress, but how you feel about it probably depends on whether you are a teenager or a parent of teenagers. I am neither but, as an economist, I feel uniquely qualified to opine on why it is happening.

Schoolchildren are now bombarded with information about the risks of sex, particularly HIV/Aids. Oral sex can be safer than penetrative sex: it dramatically reduces the risk of contracting HIV and reduces the effects of some other sexually transmitted infections (although you can still pick up herpes, warts and thrush). An infection that might have made a girl infertile instead gives her a sore throat.

The rest is basic economics. When the price of Coca-Cola rises, rational cola-lovers drink more Pepsi. When the price of penetrative sex rises, rational teenagers seek substitutes. Perhaps we shouldn’t be surprised that even as the oral-sex epidemic rages, the Centre for Disease Control, a US government agency, reports that the percentage of teenage virgins has risen by more than 15 per cent since the beginning of the 1990s. Those who are still having sex have switched to using birth-control methods that will also protect them from sexually transmitted infections. Use of the contraceptive pill is down by nearly a fifth, but use of condoms is up by more than a third. The oral-sex epidemic is a rational response to a rise in the price of the alternative.

Now this is a glib explanation. A real economist would want a tighter hypothesis and serious data to back it up. That economist might well be Thomas Stratmann, who with the law professor Jonathan Klick has pushed the idea of the rational teenage sex drive. Their hypothesis is that if teenagers really did think about the consequences of their actions, they would have less risky sex if the cost of risky sex went up. They discovered a very specific source of that higher risk: in some US states there are abortion-notification laws, which mean that teenagers can’t get an abortion without their parents being informed. If teenagers are rational, such laws would discourage risky sex amongst teens, relative to adults.

Continued at ft.com

Why would a company deliberately hide its best product?

Starbucks does.

Why would a company deliberately damage its best product?

Many high-tech companies do that, and even my favourite local restaurant does.

It doesn’t sound like a winning formula, but it’s at the heart of the way many companies do business.

Take the secret cappuccino, which you can buy in two of the leading coffee chains, Starbucks and Coffee Republic.

The sales assistants know what the drink is and they have a little button on their cash tills to ring it up. It’s cheaper than the other drinks on offer, but it doesn’t appear on the menu.

Starbucks claims that’s because they don’t have room on the menu board. Coffee Republic doesn’t even have that excuse: there’s a blank space with no price where this drink should be listed.

It’s called the “short cappuccino”, and it’s smaller, cheaper and better than the smallest size on the menu, the “tall”.

So what is going on?

It’s all part of an attempt to aim different prices at different types of customer.

Any shop would love to be able to charge high prices whenever they could, while still offering low prices to customers who would otherwise shop somewhere else.

Of course, if shops just asked their customers whether they would like a discount, every customer would say “yes”, so shops need to get a bit smarter about working out which customers will pay which price.

Some of the attempts are obvious, such as discounts for students or pensioners.

You didn’t think it was out of a sense of social justice, did you? Companies simply charge more to people who have jobs, because those people are willing to pay more.

Similarly, when a restaurant or a tour operator offers free meals or accommodation for kids, that’s just a way of charging more to charging childless people who usually have more disposable income…

Continued at BBC Online

The original verison of this article incorrectly said that travel agents offer deals for families with children. In fact these deals are offered not by agents but by tour operators and other suppliers of holiday fun. Apologies to my readers and to offended travel agents.

Dear Economist,

When I go to a restaurant a dish that costs more to make – perhaps lobster or the product of an expensive chef’s imagination – costs more to purchase. The same is true when I go to a clothes store.

However, when I go to see a movie at my local cinema, no matter what the film, no matter how much it cost to make, it costs the same to see.

As I only go to big-budget flicks that have been praised to the rafters, I feel I am being subsidised by the poor folks who are watching cheap run-of-the-mill pictures. Why don’t movie theatres have adjustable pricing?

Arthur Spirling, Rochester, NY

Dear Mr Spirling,

You are confused. You are not consuming a film but a film screening, and film screenings cost the same to produce no matter what is in the projector. The price of producing the film in the first place is irrelevant.

Nevertheless, there is a puzzle here. While we shouldn’t expect big-budget films to command higher ticket prices, these prices should surely vary in an attempt to get every seat in the house full. It’s not obvious that popular movies should be more expensive: the most popular books tend to enjoy the greatest discounts. But completely uniform pricing is odd…

Continued at ft.com

The Undercover Economist – FT Magazine

The view from my upstairs window in Hackney has changed a little now that the beautiful old neighbourhood church has been flattened. The church disappeared almost overnight despite attempts to preserve it – or, more accurately, because of attempts to preserve it. No surprise to an economist, but what’s going on?

The story is simple. Hackney Council was discussing the possibility of extending a conservation area to include the church. Once that happened, it would be difficult to get permission to demolish the church and build something else. The developers weren’t stupid, and knocked the old building down while they still could.

In the US, the Endangered Species Act of 1973 gives broad powers to federal agencies to restrict development in order to protect species. This can produce the same perverse incentives as Hackney’s conservation area. Economists Dean Lueck and Jeffrey Michael studied what happened when the rare red-cockaded woodpecker was discovered in commercially valuable forests in North Carolina. Forest owners who were unwilling landlords to the woodpecker were, of course, not allowed to cut timber. But woodpeckers tend to move about, so there are no prizes for guessing that the forest near the woodpecker, but outside the restricted zone, was cleared immediately.

Michael Margolis, Daniel Osgood and John List found a similar situation in Arizona regarding rare pygmy owls. In 1997, developers discovered that large tracts of land near Tucson were about to be designated “critical habitat”, which would mean restrictions on development. Naturally, the developers didn’t wait.

In many cases, “pre-emptive development” is relatively harmless. Land is developed sooner than it might be, and the environmental regulations don’t do what they were supposed to, but that’s the end of it. However, sometimes the development would never have happened. The church in Hackney might have stood for another hundred years; the North Carolina forests might have been thinned or even left standing forever. If the development was worthwhile, it would already have happened.

Without regulations, the church’s owner would not have leapt to demolish it. Depending on various imponderables, it might have been more attractive to use the church for fancy apartment conversions, rather than raze it and throw up a cheap new building. It was probably worth waiting to see how the local market developed…

Continued at ft.com or subscription free at Slate.

From BBC Online

What do love, war and poker have in common?

High stakes, perhaps.

Certainly, in all three you spend a lot of effort trying to work out what the other side is really thinking.

There is another similarity: economists think they understand all three of them, using a method called “game theory”.

Game theory has been used by world champion poker players and by military strategists during the cold war.

Real enthusiasts think it can be used to understand dating, too.

The theory was developed during the second world war by John von Neumann, a mathematician, and Oskar Morgenstern, an economist.

Mr von Neumann was renowned as the smartest man on the planet – no small feat, given that he shared a campus with Albert Einstein – and he believed that the theory could be used to understand cold war problems such as deterrence.

His followers tried to understand how a nuclear war would work without having to fight one, and what sort of threats and counter-threats would prevent the US and the Soviets bombing us all into oblivion.

Since the cold war ended without a nuclear exchange, they can claim some success.

Another success for game theory came in 2000, when a keen game theorist called Chris “Jesus” Ferguson combined modern computing power with Mr von Neumann’s ideas on how to play poker.

Mr Ferguson worked out strategies for every occasion on the table.

He beat the best players in the world and walked away with the title of world champion, and has since become one of the most successful players in the game’s history.

Game theory is a versatile tool.

It can be used to analyse any situation where more than one person is involved, and where each side’s actions influence and are influenced by the other side’s actions.

Politics, finding a job, negotiating rent or deciding to go on strike are all situations that economists try to understand using game theory.

So, too, are corporate takeovers, auctions and pricing strategies on the high street.

But of all human interactions, what could be more important than love?

The economist using game theory cannot pretend to hand out advice on snappy dressing or how to satisfy your lover in the bedroom, but he can fill some important gaps in many people’s love lives: how to signal confidence on a date, or how to persuade someone that you are serious about them, and just as importantly, how to work out whether someone is serious about you.

The custom of giving engagement rings, for instance, arose in the US in the 1930s when men were having trouble proving they could be trusted.

It was not uncommon even then for couples to sleep together after they became engaged but before marriage, but that was a big risk for the woman.

If her fiance broke off the engagement she could be left without prospects of another marriage.

For a long time, the courts used to allow women to sue for “breach of promise” and that gave them some security, but when the courts stopped doing so both men and women had a problem.

They did not want to wait until they got married, but unless the man could reassure his future wife then sleeping together was a no-no.

The solution was the engagement ring, which the girl kept if the engagement was broken off.

An expensive engagement ring was a strong incentive for the man to stick around – and financial compensation if he did not.

Modern lovers might think the idea of engagement ring as guarantee is a thing of the past, but they can still use game theory to size up their partners.

When a couple with separate homes move in together, selling the second home is an important signal of commitment.

That second home is an escape route – valuable only if the relationship is shaky.

If your partner wants to hang on to his bachelor pad, do not let him tell you it is merely a financial investment.

Game theory tells you that he is up to something.

Tim Harford is a Financial Times columnist and author of “The Undercover Economist”. He presents a new BBC series, Trust Me, I’m an Economist, starting on BBC Two at 7pm on Friday 18 August.

Few readers of this site will need convincing, but here is a short video interview with the BBC in which I talk about the new show, “Trust Me, I’m an Economist” and argue the case for the economics of everyday life.

Tim Harford is one of a new breed of economists who promise to solve everyday problems with the power of economic theory. He claims to be able to show people when and where they’re being ripped off and so learn how to get a better deal…

read more.

Dear Economist

I notice that your book, The Undercover Economist, has a list price of £17.99. In it you emphasise that rationality and calculation underlie economic behaviour. If so, why do so many prices end in .99? Do consumers really think that £17.99 is only £17?

Daniella Acker, via e-mail

Dear Daniella,

A more likely explanation – from Steven Landsburg, an economist at the University of Rochester – is that these prices are designed not to exploit incompetence but to fight dishonesty.

A typical bookshop will experience a certain amount of shoplifting, especially of products as tempting as my book. Nobody is better placed to benefit from shoplifting than the shop assistants.

If books – or any products – were roundly priced at œ10, œ15 or œ20, then customers would frequently offer the correct change. In such cases it would be simple for the shop assistant to bag the item without ringing it through the till, and to pocket the cash.

The book would appear to have been stolen by the customer, but this is a far more attractive proposition than trying to fence a stolen copy of A la recherche du temps perdu, or even The Undercover Economist, and the risk is probably lower. All rational shoplifters should get jobs in shops.

However, the more awkward the pricing, the more unlikely those thieving till-jockeys are to be able to pull off the trick…

Continued on ft.com

The Undercover Economist – FT Magazine

The coffee-chain cappuccino is an excellent barometer of pricing, since it is, unlike a salad or a plate of spaghetti, a uniform product. The Economist magazine has taken advantage of this fact by constructing a “Starbucks tall-latte index” to check currency valuations, but budget constraints for the humble Undercover Economist meant that my own investigations took me no further than Watford Gap.

Watford Gap is the oldest motorway service area (MSA) in the country. After a long wait in the queue there, I purchased a Costa Coffee cappuccino – which, apart from being 10 per cent more expensive, was identical to the high-street product in all respects – and something called a “ham and three cheese tostato”, which was quite disgusting and carried nearly the same premium. Most travellers will recognise the distinctive motorway experience of high prices and low quality, but they may not know who is to blame. Underneath the elevator music and sad Formica tables for the single traveller lies a remarkable government campaign, as old as Watford Gap itself, to make MSAs as grim as possible.

Naturally, the companies that provide motorway services could do a better job and charge less. But anyone who expects that result from the benevolence of the butcher and the baker will be disappointed. Companies give us what we want only when their competitors are doing likewise. MSAs do not pit Starbucks against Costa because they know that that sort of intense competition, while good for customers, will drive down prices and lower profits.

Competition between MSAs could fix all that, and this is where the government campaign against the motorist comes in. First, it is almost impossible to build a new MSA. Entrepreneurs must first persuade the local planning authority that there is a need – as if anyone would be tempted to offer roadside snacks when nobody was buying. They must distance themselves from competitors. (One government agency, the Office of Fair Trading, tries to stop such attempts to limit competition, but the Department for Transport makes them mandatory.) Then they must secure permission from the local authority, whose constituents are the last to benefit from a vast car park in their back yards. Finally, they must build slip roads and maintain free car parks and toilets all year round. Small wonder that despite the sky-high prices, there are few new entrants.

Even stranger is the desperate attempt to deny motorists information on the quality of the product. No information about the MSA can be signposted on the motorway until half a mile before the junction; even then, only the company name can be listed, which means the big players have been forced to resort to changing their names to incorporate their strongest offerings. Instead of Moto and RoadChef we have “Moto M&S” and “RoadChef Costa Coffee”…

Continued on ft.com

Dear Economist,

It was my birthday recently and I made some resolutions: to slim for the beach, read more serious novels, save money and quit smoking. I am doing OK on the cigarettes so far but I am already back to watching Big Brother and I have put on 3lb. Did I take on too much at once?

– Rebecca Furniss, Parson’s Green, London

Dear Rebecca,

An interesting new paper by three University of Michigan economists argues that willpower is a scarce resource like any other. You cannot exceed your allocation of willpower any more than you can buy a round of drinks with an empty purse.

It’s a plausible view: economic psychologists have found that people make more impulsive decisions if they have already had to resist earlier temptations than if they come fresh to the chocolate bar. Many of us have caved in and given ourselves a “reward” after a day of hard work.

It seems likely that your success in kicking the smoking habit has drained you of the psychic resources to read anything other than Dan Brown. Worse, were you to redouble your efforts to plough through something by James Joyce, your cigarette habit might return, leaving you at risk of becoming the most cultured corpse in the morgue.

The solution is clear enough. First, outsource tough decisions whenever you can…

Continued at ft.com

The BBC 2 TV series, “Trust Me, I’m an Economist”, begins at 7pm on August 18th

It is, I admit, an implausible piece of casting. I am ungainly, balding, bespectacled and rather shy. I make an unlikely television presenter. But I bluffed my way past the front door of a production company called Tiger Aspect, which makes successful children’s cartoons and sitcoms but is not famous for economic analysis. Then it bluffed its way past the front door of the BBC.But the BBC, rather unexpectedly, called those bluffs, so we had to make a television show. I moved my family across the Atlantic to London, abandoned my wife among the packing cases and tried to keep bluffing my way all the way through to the final product: Trust Me, I’m an Economist. The show’s concept is simple: an economist uses his theories to solve problems for ordinary people, finding them dates or new jobs, and explaining a little bit of economics along the way. This is the story of how it all happened.

February 15

I am already discovering things I like about being a television presenter.

1. You get called “the talent”.
2. Other people pay for your sandwiches.
3. You get to take a lot of taxis.
4. You get free clothes, chosen by the producer, who is fresh from producing What Not to Wear. This makes her dangerous. The disgust with which she looks at my existing wardrobe is humiliating. But for a free sandwich, I can cope with this. I could get used to being a television presenter.

February 17

Practice day. I am to spend an hour or two filming at a branch of Coffee Republic. I do the walking-and-talking thing while the cameraman and director walk backwards into lampposts. I enjoy whispering to camera that Coffee Republic has a “secret cappuccino” that is cheaper than its other drinks and is widely available but never advertised. This is going to be dynamite!

The manager’s face wrinkles with concern, and she seeks reassurance from the director that nobody will ever see the footage.

Coffee Republic later confirms that we will not be allowed to film the series on their premises. Oops.

March 2

The first day of proper filming is at Harrods. I have no idea what I’m doing, but saunter through the menswear department caressing the designer suits as the director requests. We film some semi-scripted discussions with the sales assistant, who has more experience on camera than I do.

Harrods is an auspicious place to begin filming, but the day quickly nose-dives as we head to the Harlequin shopping centre in Watford, a mall of epic proportions.

The unpromising trajectory continues as I climb into a small green plywood booth advertising “FREE ADVICE ABOUT ANYTHING”. It is then my role, for the next three hours, to offer witty and incisive advice, soundly based on economic principles, in response to whatever questions the good people of Watford care to throw at me.

Twelve-year-old boys run up to ask:

How can my friend sort out his tiny knob?

and run away again without waiting to hear my wisdom.

A bruiser in a shell suit wanders past, surveying the booth much as a rhinoceros ponders an offending Land Rover. The booth does not feel very sturdy, and I look anxiously around for the assistant director, who is half my size, but I would back in a fight against a rhinoceros any day.

Then a lisping black man in tap shoes and a waistcoat approaches.

I understand that you will answer any question?

Of course.

Excellent. You may know the film Easter Parade, starring Judy Garland and Fred Astaire. But Astaire was given the role after the first-choice actor broke his ankle. Who was the role originally intended for?

I blink. Surely Milton Friedman never had to cope with this.

March 14

The day begins with the producer tearing strips off me for not delivering scripts on time. (Silently, I blame television’s fuzzy deadlines. You know where you are with the printing press.) I am so discombobulated by this that I then fluff my lines dozens of times while walking along Upper Street in Islington. It’s an impossibly difficult set-up anyway, with the camera 200 yards away and plenty of opportunity for people to get in the way, walk behind me making daft faces, or try to sell me the Big Issue mid-shot. I can feel my carefully cultivated facade of serenity crumbling, but after completely losing my cool I do then buy a copy of the Big Issue and feel a bit better.

Afterwards we drive to an organic farm, where I chase organic turkeys until I fall spectacularly into a pile of distinctly organic turkey guano.

March 16

I am starting to realise that film crews exploit people all the time. It’s not the desperate exploitation of the sad cases who would do anything to get on television – although there is plenty of that – but the vampiric drain on the goodwill of everyone we encounter. The assistant producer will persuade a shop owner to let us film for five minutes, and then the crew will scare away the customers for the next four hours. It makes me uncomfortable, but I catch on eventually. If you told the truth, you’d never be allowed to start; if you kept your promises, you’d never finish. Fortunately, we’re never going to see any of these people again.

March 22

This is one of the more surreal shoots. At 9am at a casino on Piccadilly, I am surrounded by handsome men in expensive shirts and beautiful women in strappy party dresses, all of whom have shown up to pretend to play roulette for a couple of hours, with no prospect even of travel expenses. Where do they come from? What jobs have they abandoned for this unparalleled opportunity to do nothing in particular?

We also have a heroic contributor, Andy, who has agreed to look for love with the eyes of the world upon him, guided only by an economist. Within a minute of sitting down at the roulette table with him, I understand why: he’d like to be a television presenter and he wants to know how to get into the business.

“Well, I don’t really know,” I offer. “How did you get into the business?” he presses eagerly. “I wrote a book about economics, but that might not work for you.”

This is the feeblest career guidance of all time, but Andy manfully conceals his disappointment. I promise that, armed with economics, I will find him love. He doesn’t flinch. Good man.

The evening is even more surreal. I meet Andy in a Soho bar for his promised date. He is showing rather a lot of chest hair and a medallion, but despite the sartorial expertise of the producer, this isn’t What Not to Wear, and I am forced to limit myself to advice based solidly on economic theory.

It’s a speed date, and Andy is to pick his moment to move in on his favourite lady, armed with a pair of tickets to a top West End musical, and the economic insight that will allow him to prove that he is a sensitive, loyal man rather than a playboy. A minor problem is that we forgot to bring the tickets with us. A more substantial problem becomes apparent only after Andy is putting the moves on the lovely Brooke from Perth. My fault, no doubt, but it turns out that Andy does not actually understand the economic advice I gave him and proceeds to bungle the whole thing. The only question now is whether Brooke will notice Andy’s mistake. bastardised economics, dubious flirting, great television.

March 24

My kind of filming: I deliver the first lines of the entire series staring up at the camera from the comfort of my own bed. I need a few takes, but that suits me very well.

March 29

We’re filming in a pool hall in Notting Hill, so that I can demonstrate an odd piece of economic psychology by concealing pool balls inside champagne buckets: Paul Daniels without the good looks and gravitas. The patient contributor sounds exactly like Ricky Gervais and looks quite like him too, which is disconcerting. I keep studying his eyes for the twinkle that would reveal a deliberate impersonation, but to no avail.

I have an embarrassing admission here. There is absolutely no point in this experiment. It is interesting and has a wonderful history involving the economist and Vietnam dissident Daniel Ellsberg, but it does not remotely advance the economic ideas in the show. It looks great. It stays in. I think it’s the only time we include a camera-friendly non sequitur – with dozens of scenes and examples in the series, I suppose that is forgivable.

31 March

A nightmare shoot. On Friday night we drive to Essex and seek nourishment in the most bizarre restaurant I’ve ever encountered – at one point a live lobster, faced with being flambeed, rolls off the table and makes a break for freedom. Shortly afterwards we are served with lobster pizza, complete with half lobster in the shell. I feel trapped in a Terry Gilliam movie.

We then move to the shoot itself, in which we film six unsuspecting couples, all expecting a baby within a few weeks, enjoying yoga and pre-natal advice. I stand with the yoga class in the background explaining why economics predicts divorce for some of them. I try to speak sotto voce so that the camera can hear, but the yoga class cannot. By take 20 the camera still hasn’t heard but the yoga class has a pretty good idea.

April 3

A better day. I advise a primary-school teacher who wants to change careers and become a maitre d’ at a top London restaurant. A spot of optimal contract theory and she has a chance, serving at lunch but bearing all the performance risk herself. The restaurant is beautiful. She is beautiful. The manager is beautiful. Even the economics are beautiful. She gets the job.

April 11

Just when I thought all the humiliations were complete, I show up to the shoot wearing, as requested, black trousers and a long black leather jacket. The black is useful for the special effects on the shoot – although we’re not talking Jurassic Park here – but so appalling is the fashion blunder that the production assistant spends half an hour on the phone to the producer seeking advice. I can’t hear much but I do catch a shrill “You didn’t let him wear his own clothes, did you?” I wouldn’t mind, but it’s my favourite outfit.

April 12

Finally, I get to watch something resembling a finished version of the “love” show, our flagship. And. it’s pretty good. I mean, there’s me blundering around in the middle of it, pulling odd faces and speaking in a funny voice. But apart from that, it’s not bad at all. It’s funny, there is some economics in it and it mostly makes sense. The camera work is gorgeous. The music is fun. Andy’s quest for a date is as rich in tragicomedy as it is in economic theory. I can actually imagine somebody watching this. Trust me.

First published in FT Magazine

Benjamin Franklin reminded us that death and taxes were life’s only certainties. Franklin was plain wrong. It is easy to avoid most taxes. If you don’t want to pay sales taxes, don’t buy things. If you don’t want to pay income tax, don’t earn money. If you’d rather avoid tax on petrol, ride a bike.

Typically the result of this perfectly legal tax dodging is what we economists call “deadweight loss” and what normal people might call a pointless waste. If you’re willing to pay £8.50 for a T-shirt but not £10, VAT will tip the balance between you buying and not buying. Because of the tax, you don’t get the shirt you wanted, the shop owner doesn’t collect the money she wanted – and, of course, the taxman doesn’t collect any revenue either. Everybody is worse off.

This is just another example of a favourite economic maxim: “People respond to incentives.” It’s cute, and true, but not always helpful. We need to know how much, and in which direction. Sometimes the question has huge policy weight. For instance, there’s an enthusiastic movement in the US that believes income tax cuts can raise revenue because they stimulate more work and more income and take a smaller slice of a much bigger pie. This view is implausible at anything other than very high tax rates. Cut taxes from 30 per cent to 25 per cent, and the economy needs to expand by a fifth before total revenues recover. That is an implausibly large expansion. In fact, it’s not even obvious that income tax cuts stimulate more work. They might indeed encourage people to work overtime knowing that they will keep more of the proceeds. They might equally encourage people to slack off: with take-home pay rising, why work so hard?

Still, it is unwise to underestimate the power of taxes to alter behaviour. Perhaps following Franklin, Margaret Mitchell commented in Gone with the Wind, “Death, taxes and childbirth! There’s never a convenient time for any of them.” She should have seen the economic research emerging from Australia. It turns out that death, taxes and childbirth can be and are rescheduled to suit the needs of Australian bank accounts.

The economists who realised this are Joshua Gans and Andrew Leigh, who have been publishing a series of papers and notes showing some suspicious patterns in Australian birth and death rates. Australia passed legislation to abolish estate taxes in 1978, meaning that anyone who died on or after July 1 1979 was entirely exempt, but anyone dying before that date would be fully subject to the inheritance tax, paid by about one in 10 of the departed. The fall in the death rate in late June of that year is quite striking, as is the sudden rise in early July. Gans and Leigh estimated that one in 20 likely deaths in the last week of June were postponed long enough to escape inheritance tax. With 90 per cent of estates too small for tax anyway, this suggests that fully half the likely taxpayers managed to escape death long enough to escape the tax too.

A happier example of the same phenomenon came in the summer of 2004. The Australian government announced in May that it would pay a “baby bonus” of A$3,000, about £1,250, to each family of a child born on or after July 1. The effect was unsurprising, at least to an economist: the number of happy events on July 1 was an all-time record, and twice as many as on June 30.

I shall bear this in mind. The Harford family is due to expand in September – or possibly October. We shall have to see what the incentives are before we decide.