Tim Harford The Undercover Economist

Articles published in May, 2009

How unusual is my husband’s porn habit?

Dear Economist,
Having become more computer-literate in recent months, I have made an unpleasant discovery. My husband has been visiting pornographic websites and has also downloaded explicit videos. I love my husband, but am not sure what to do now. Is his behaviour common?
A disappointed wife, Cincinnati, Ohio

Dear DW,

If only you had a subscription to the Journal of Economic Perspectives. One of its regular features is a data-driven description of different markets in action, most recently a study by Benjamin Edelman asking “Who buys online adult entertainment?”

The latest data reported are from 2006, when adult entertainment clocked up $13bn in retail sales in the US – about $50 per adult, presumably somewhat skewed towards men. Much of this was video sales and rentals, but internet and cable subscriptions are also substantial and, unlike video, growing briskly.

Paid subscriptions to internet porn sites remain a minority hobby. Edelman studied subscriptions to one top 10 service provider and found that almost all states had between two and three subscribers per 1,000 home broadband users. Ohio, incidentally, is towards the low end of that range.

Is your husband, then, unusual? Not that unusual. Scale up Edelman’s numbers to include other service providers, add cable subscriptions and you’d conclude that about 5 per cent of connected households are paying for regular porn. This doesn’t include the largest category, video rental – and more importantly, doesn’t include free internet porn. Since free internet porn is ubiquitous and presumably more private, one can only surmise that it is far more widespread.

I can’t tell you what to do about your husband – but he is certainly not alone.

Also published at ft.com.

30th of May, 2009Dear EconomistComments off

It’s time to stop being shy about retiring – we can’t afford it

If 80 is the new 60, and 50 is the new 30, I’m a teenager again, looking forward to a bright future at university. I certainly had a thought-provoking tutorial recently at the hands of UBS’s professorial George Magnus, one of the prophets of the credit crunch but also the author of a book about demographics, The Age of Aging.

The statistics about an ageing population are starting to become familiar: people are living longer and having fewer children, and this is true not only in rich countries but much of the developing world. But the implications are often misinterpreted. An ageing society is not, primarily, a demographic crisis. The problem is a failure to adapt – a failure that afflicts politics, management and society.

The simplest way to see this is to think again about what the demographic “problem” is supposed to be. It is simply that people are tending to live longer and longer, often in good health. That doesn’t sound like a problem to me – are we supposed to prefer a world in which people die younger and younger?

But our institutions are adapting too slowly. Too many companies rely on a seniority system that, if not “dead man’s shoes”, is certainly “retired person’s shoes”; such systems struggle to deal with employees who no longer deserve or want the top jobs, but who could still be employed at a more “junior” rank. Final salary schemes, still popular in the public sector, amplify the problem, with their presumption that the final salary will also be the highest salary that a worker ever earns. The law offers no help: mandatory retirement on the sole grounds of age remains perfectly legal in the UK. Speaking as someone who once shared an office with an inspirational mentor more than 50 years my senior, I can affirm that on this point, the law is an ass.

Then, of course, there are state pensions, which are still paid out on the basis of age rather than ill-health, and at ages that have not risen to keep pace with our longer lives.

When Bismarck introduced the world’s first state pension, 120 years ago, it was payable from the age of 70; few men would have lived long enough to collect it, although Bismarck himself was 74 at the time. Now, it is not unusual to collect a state pension for 20 years. Several countries are increasing the state pension age – most recently, Australia – but very slowly.

Much ink has been spilt over the question of financial sustainability: have we saved enough into our personal pensions, have our employers properly funded our final salary schemes, and has the government got enough money to pay state pensions in the future? All distractions, because no amount of financial engineering will solve the underlying economic problem of a small number of workers trying to support a large number of retirees. There are really only two solutions: we consume less, or we settle for a longer working life.

If retirement were not hedged about by an institutional thicket, these solutions would arrive without much fuss. Faced with labour shortages, companies would raise wages; meanwhile, as a large cohort tried to retire together, the price of houses and shares would fall, while annuity rates would also be miserly. Working a little bit later and enjoying slightly less of that long, long retirement would become a very tempting offer.

I sympathise with state and corporate paternalism in the world of pensions, because thinking on a 50-year timescale and coping with complex investments are two areas where our enormous brains often seem to let us down. Yet if these helping hands simply push us into premature retirement, we will have little reason to be grateful.

Also published at ft.com.

Why print’s death throes deal democracy a body blow

It is hard to avoid the conclusion that newspapers, at least in their printed form, are dying out. True, almost half of US adults still read a daily newspaper, but that figure is down from more than 80 per cent in 1964. The most obvious impact has been on local competition: a century ago, nearly 700 US cities had more than one daily paper; now, only about a dozen still enjoy the privilege. And this year has already seen the loss of the print editions of the Seattle Post-Intelligencer, Denver’s Rocky Mountain News and the Citizen of Tucson.

All this is despite America’s long-standing Newspaper Preservation Act, which in 1970 gave distressed local newspapers an exemption from competition laws, allowing them to form business alliances, fix prices to advertisers and subscribers, and prop each other up. The act is evidently not enough to keep competition alive.

The internet, of course, is both a cause of this trend and, perhaps, the reason it may not matter much. Publishers are more worried about the loss of advertising revenue than readership. Newspapers flourished by bringing together local advertisers and local readers, but in an internet age, that no longer looks like such a difficult trick.

But while the internet is chipping away at print’s foundations, it also provides an amazing range of alternative sources of information. Journalists and the nostalgic may wring their hands, but should anyone else care? There has never been a wider range of opinion and analysis, available to anyone with an internet connection.

Yet new research by two Princeton-based economists, Sam Schulhofer-Wohl and Miguel Garrido, suggests that we should all be nervous about the trend. They studied what happened when The Cincinnati Post closed at the end of 2007. The answer: local politics suffered. In the suburbs of Cincinnati where the Post had the strongest presence, fewer candidates ran for municipal office in the election after the paper folded, voter turnout fell, and incumbents grew more likely to win re-election.

This may not surprise economists. Matthew Gentzkow of the University of Chicago concluded in 2006 that, in crowding out radio and newspapers, television was a substantial contributor to falls in voter turnout and in the typical person’s political knowledge, as measured by questionnaire. (Gentzkow’s statistical method relies on the fact that television was introduced to different regions at different times.) A study from 2000, co-authored by the Princeton academic Alícia Adserà, found that those US states with higher newspaper circulation also had less corruption. The same was true when the authors compared countries, although in each case it is hard to be sure about the direction of causation.

There is no doubt about causation in the case of The Cincinnati Post. The Post’s date of closure was all but predestined in 1977, when a 30-year joint venture with the Cincinnati Enquirer was established with an expiry date of December 31 2007. (As an evening newspaper, the Post had been losing readers for decades.) Five years ago, the Enquirer announced that it would not be renewing the joint venture and the Post’s fate was sealed. This makes the statistical analysis more persuasive, because it means that the closure date was not determined by some other factor – such as a sudden local recession in Cincinnati – which might also have affected local politics.

It seems that neither blogs nor online news sources serve the same role in Cincinnati’s political life as The Cincinnati Post. That may change, but the trouble is that, with some glorious exceptions, blogs seem to be heavy on opinion and analysis, light on reporting. Analysis is valuable, but is it enough?

Also published at ft.com.

Can you help me to stop procrastinating?

Dear Economist,
I tend to procrastinate and leave tasks until the very last moment. As a consequence, I always feel as though I could have done more and that my potential has been somewhat unfulfilled. However, I find I concentrate much better and am more prolific with a deadline dangerously close. Can economics help me resolve this tension?
T.N., Limerick, Ireland

Dear T.N.,

The answer is obvious: make sure you always have a deadline to hand, and you will always be prolific. That, at least, is the logical implication of your letter. It is also backed up by research.

The behavioural economists Dan Ariely and Klaus Wertenbroch conducted an instructive study of procrastination with three groups of students at MIT. Each group had to complete three assignments over the course of the 12-week course. The first group had a separate deadline for each paper, after four, eight and 12 weeks. The second group had no intermediate deadlines: all three papers were due at the end of the course. Students in the third group were asked to impose their own deadlines.

Students with well-spaced deadlines – those in the first group and a subset in the third who had spaced out their deadlines – tended to achieve the highest grades. Students who had assigned themselves no intermediate deadlines, or had been assigned none, fared poorly.

You must learn this lesson. Ensure that a binding deadline is always looming. Chop up large tasks into smaller ones and assign a deadline for each one. If you do not have a professor willing to make these deadlines meaningful, you can do so yourself. Make firm commitments to your colleagues or clients. Alternatively, write out a schedule and make bets with a few friends that you’ll stick to it. If “the very last moment” is always “now”, you’ll be the world’s most productive procrastinator.

Also published at ft.com.

23rd of May, 2009Dear EconomistComments off

The development dilemma: Can parking tickets explain why poor countries are poor?

Economic Gangsters: Corruption, Violence, and the Poverty of Nations, by Raymond Fisman and Edward Miguel, Princeton: Princeton University Press, 240 pages, $24.95

Many economists think corruption is a rational response to irrational incentives. The World Bank’s “Doing Business” database lists 40 countries, from Iraq to Ethiopia, in which legally acquiring the necessary permissions to export a single standard cargo container takes more than one month. The more difficult it is to do something legally, the larger the temptation to do it illegally. Small wonder that in developing countries, few people make more money than customs officials.

If perverse incentives create corruption, that suggests a simple solution to an age-old problem. Hence for the last decade or so the mantra of aid agencies has been “institutions matter”—even if it is not clear what humanitarians are supposed to do with this insight.

There is a popular alternative view that says corrupt countries are corrupt not because the incentives are perverse but because they’re stuffed full of crooks, born and bred. In this view, corruption is cultural, and poor countries are poor because their citizens are dishonest (or lazy, or fools).

Into this controversy strode two economists, Raymond Fisman of Columbia and Edward Miguel of Berkeley, with a 2006 research paper that was brilliant and trivial in roughly equal measure. Fisman and Miguel realized that to test the two theories about corruption, you would ideally need to pluck people from all over the world, place them into a community whose laws they could ignore with impunity, then see who cheated and who was honest.

Impossible? Not at all. The United Nations in Manhattan kindly provided guinea pigs for just such an experiment. Diplomatic immunity meant that parking tickets issued to diplomats could not be enforced. The decision to park legally or not, therefore, was a matter of each person’s conscience… Learn More

16th of May, 2009HighlightsOther WritingComments off

I’m leaving England. Should I sell up?

Dear Economist,
Should I sell my home and liberate cash? If I sell today I will have made a 400 per cent return over 12 years. I am not English and will be leaving the country for an extended period, perhaps for ever. However, I don’t have to sell and I love my home dearly.
Max Mulhern

Dear Max,

You need to move away from qualitative pros and cons, especially since few of the ones you give stand up to scrutiny. A quantitative estimate of costs and benefits is more useful.

Let’s start with your estimate of a 400 per cent return over 12 years. You do not state whether this is before or after inflation, but who cares? It is the likely future return that matters for your decision. You do not know that and neither do I, but I suspect it will be poor.

Make a guess, and add the income you would expect if you let out your house – assuming this is what you would do. Those are the financial benefits of keeping the house.

On the other side of the equation, make a guess as to the return you could earn if you simply sold your home and invested the cash in the best available prospects. Bear in mind that you might even buy a home overseas; this would have the distinct advantage that you could live in it. These are the opportunity costs of retaining your existing house.

So, yes – the opportunity costs will outweigh the likely financial benefits of keeping your home. Fine. You imply that you are wealthy and declare that you love your home. Perhaps this affection is strong enough to outweigh the financial loss, but I doubt it. Behavioural economists warn of the “endowment effect”, in which people irrationally overvalue what they already have – the “bird in the hand” maxim inflated to unwise proportions. So make your choice: but first, figure out how much your sentimentality will cost you.

Also published at ft.com.

16th of May, 2009Dear EconomistComments off

Switch to renewable energy? If only it were that simple

A confession: I have been too complacent about technological fixes for the twin problems of climate change and finite oil and gas reserves. Without looking very closely at the numbers, I figured that if politicians would finally get their act together, and if we avoided some of the more unlucky possibilities (such as the release of methane ice from the oceans), cheap, clean energy would be within our grasp, given suitable research incentives and some technological brilliance.

Looking at progress in computer chips, I dreamt about how cheap photovoltaic solar panels might become over the next 50 years. Solar wallpaper, solar paint – who needs fossil fuels? Most climate-change scenarios look at a 100-year time scale. Surely, in that time, we should have figured out a way to take greenhouse gases out of the atmosphere again.

I still wouldn’t rule out such techno-fantasies, but having read a remarkable book by David J.C. MacKay, a Cambridge physicist (you can download it at www.withouthotair.com) I am far more pessimistic about the potential of technology to help us out. In Sustainable Energy – Without the Hot Air, Professor MacKay makes this point very simply by sidestepping the economics altogether. Technological progress and economic growth loosen the corset of cost-benefit analysis, but not the laws of physics. No matter how cheap and efficient solar collectors become, there is only so much solar power available per square metre of land. Hydroelectric energy is constrained by the quantity of rainfall and the height of reservoirs above sea level. The most perfectly designed windmill is limited by the energy of the wind. It would barely be possible to make the numbers add up even if renewable energy generators were free.

To power a modern country through renewable energy requires country-scale facilities – hundreds of miles of wave turbines, solar panels on every roof, and windmills blanketing highlands and coastal waters. Nuclear fission is more promising, but nuclear fuel is also finite. Technological progress will be essential but, barring a breakthrough in nuclear fusion, it will not set us on a path to an energy system purged of fossil fuels.

MacKay defies glib summaries, but it is fair to say that he sees considerable potential in energy-efficiency measures such as light electric cars and better-insulated homes. This is a different kind of issue because it is a decentralised problem.

The challenge is to encourage the right behaviour. Centrally mandated efforts will not do the trick, in part because “the right behaviour” is not a universal constant. Take, for example, the intermittency of wind power. A nation equipped with battery-powered cars could charge up when the wind is blowing and scale back during lulls. Yet on any given day one individual might desperately need a reliable charge for her car. To a central planner this is simply unknowable. Yet a discount for those relying only on intermittent power would encourage people to fit in with the scheme whenever they could.

Governments also have an inglorious history of getting even the basics right. The British still subsidise fossil fuels by charging a bargain rate of tax on domestic fuel. European subsidies for offshore wind power, a technology of little interest to Mexico or China, are likely to do little to transform the world’s energy system.

Dealing with climate change will need many small decisions to be made differently. The government cannot micromanage these. This is why a carbon price, whether set through taxes or emissions permits, is needed. It is not so much a nudge as a shove in the right direction.

Also published at ft.com.

Business Life: The value of a network

First published in Business Life, January 2009
What is Facebook worth? The social networking website’s apparent value has fluctuated wildly: only founded in 2004, a deal with Microsoft in October 2007 seemed to value the company at about $15 billion; by the summer of 2008, Business Week was reporting that shares were being sold privately at prices implying that Facebook was worth less than $5 billion.
Business fashions come and go. But the uncertainty over the valuations of networking sites such as Facebook and MySpace is not surprising to an economist. Networks have a curious and controversial economics.
The value of a network, presumably, is something to do with the number of connections it makes possible. It is not hard to count them. A computer whiz called Robert Metcalfe even proposed, back in 1980, what later became known as “Metcalfe’s Law”: the value of a network is proportional to the square of the number of users (or devices) on that network.
Metcalfe reasoned thus: A single fax machine is useless. A pair of fax machines can make a single connection, and there are three ways in which a trio of fax machines can talk to each other: connections between A and B, B and C, or C and A. Four machines can connect six ways and five can connect ten ways. Because each new fax machine can talk to any of the existing fax machines, each new fax machine is worth more than the last.
Metcalfe was no slouch: he invented the Ethernet standard for computer networking and then when on to become a high-tech entrepreneur and venture capitalist. But while the mathematics of Metcalfe’s law is indisputable, its economic logic is debatable. That matters, because while Metcalfe conceived of his law as applying to small Ethernet networks, it has often been uncritically applied to much larger networks – notably during the dot-com bubble.
The problem is that not every connection is equally important. The first telegraph linking Europe and the US was hugely valuable. The ability to fax the next cubicle is not.
When Microsoft bought a slice of Facebook, Facebook had about 90 million users. Four thousand trillion two-way connections were mathematically possible, but few will ever be useful.
For economists, the value of a network also depends critically on the ease with which people can switch to another network. Fifteen years ago it would have been inconceivable for everyone to scrap their fax machines and switch to a new, incompatible generation of faxes. Yet it is not so hard to imagine Facebook’s users deserting in droves for the next big thing in social networking. And a network that can be abandoned overnight is a network whose value can be destroyed overnight, too.

15th of May, 2009Other WritingComments off

Should I pay more for a guilt-free smoke?

Dear Economist,
I notice that my tobacco packet includes merely a helpline number for people who want to quit, and not a grotesque picture of someone in the advanced stages of a smoking-related disease. This leads me to conclude that I might be prepared to pay more for my tobacco if its legally required guilt trips were in text form rather than pictures. Am I on to something?
Ms Lovegrove, Oxford

Dear Ms Lovegrove,

I think you just might be. The pictures you describe are a form of “product sabotage”, a tactic used by companies with some pricing power. Some customers are very sensitive to price while others pay less attention to it. The sensible business, then, will try to separate the two groups and charge them different prices for similar products. This can be easier if the cheaper product is given some additional defect that the price-sensitive customer will swallow and the price-blind customer will not.

Examples abound. Tesco Value products are cheap, but the packaging reminds me of an emergency food drop from the United Nations. The “short cappuccino” from Starbucks is cheap – and not advertised on the menu. Most software packages have a cheaper version in which features are disabled at the vendor’s expense. Some hardware does, too.

The government could allow the sale of tobacco under two different conditions: the current version, with tax and disturbing pictures, and a “guilt-free” version with no pictures but a higher tax. The effect would be something to test, but I would expect school children and the poor to choose the traditional version, while older and more affluent smokers would buy the premium version. I would guess that with two different schemes available, the government should be able to discourage more smokers while also raising extra cash.

Or perhaps I am just smoking something.

Also published at ft.com.

9th of May, 2009Dear EconomistComments off

Promises, promises and why it pays not to break them

By raising the top rate of income tax to 50 per cent, Alistair Darling broke a manifesto promise not to do so in the lifetime of this parliament. It was a self-imposed rule whose spirit had already been ignored; now he doesn’t even bother to pretend.

We can leave to one side the merits of the policy itself; both its costs (driving away entrepreneurs) and its benefits (raising revenue) seem to be exaggerated. What interests me more is the value of government promises.

They can be fragile things. Governments can sign contracts, of course, but without strong constitutional oversight, they can violate those contracts. In any case, contracts do not usually apply to the generosity of future state pensions, to tax rates, or to the changing regulatory climate. When citizens, foreigners and businesses make their decisions, then, they have to guess at how the government will behave in future. A government that lacks credibility will invite a hesitant and economically wasteful response.

Politicians from developing countries know that a reputation for whimsicality can send foreign investors running for cover. Some of those politicians do not much care, and their citizens suffer as a result. Yet the governments of rich countries have a credibility problem, too, and it can be costly.

Gordon Brown’s first flourish as chancellor was to give independence to the Bank of England, a decision that economists continue to applaud, precisely because it adds credibility to the fight against inflation. That fight is much easier for a credible general.

Inflation is a constant temptation for governments. It temporarily creates economic activity because, until people figure out what has happened, they mistakenly feel richer. Mervyn King, with less need to court popularity, finds it easier to resist the temptation. It is not credible for Gordon Brown to promise low inflation; it is more credible for him to say that, having given King his authority, he will not revoke that decision.

Other credibility problems are harder to fix. The multiple incarnations of Washington’s efforts to create a market for toxic securities have foundered, and one reason is that the government cannot credibly promise not to offer further bail-outs. A hedge fund might be tempted to buy some trashy assets from a bank, but the bank may quite reasonably expect that if the assets stay where they are, weighing down the balance sheet, further government support will be forthcoming. The two sides will not be able to agree a price.

The problem exists in medicine, too. Governments occasionally override patents, or threaten to do so, in times of emergency. The makers of anti-anthrax drug Cipro and flu-fighter Tamiflu have both had their arms twisted in recent years. Pharmaceutical companies contemplating investing billions of dollars in an HIV vaccine must be given pause for thought by this; does anyone seriously think that the inventor of such a vaccine would be allowed to charge what the market would bear, free of political interference? And so a vaccine becomes less likely.

All this is a shame, but perhaps inevitable. Movies about heists, cons and double-crosses are gripping because the criminals cannot make binding promises to each other, and so resort to tricks and violence. While it is fun to watch, it cannot be much fun to experience.

That is why the credibility of government promises matters. There is little that can restrain a government making a fleetingly popular decision. Constitutional oversight can help, but so can years of reputation-building and precedent. Every little lie has a long-term cost.

Also published at ft.com.

9th of May, 2009Undercover EconomistComments off
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