Tim Harford The Undercover Economist

Articles published in November, 2009

Should I stay single in Italy – or come home?

Dear Economist,
I’m a 32-year-old American woman; I moved to Italy about five years ago and later applied for a master’s programme at an Italian university. Average earnings for my BA in political science are low, so I wasn’t missing out on much.
My problems are two-fold: first, dating. Italy has the second-oldest population in the world. Seeing a single thirtysomething is like finding a unicorn. Eliminate men who live with their mothers, are chain-smokers, or are shorter than me, and I’m in a convent.
Second, my Italian university has decided to reverse its previous decision to accept my American degree. I am being forced to re-earn an Italian BA, which could take a further year.
I’d hate to turn down another degree, but can I handle another year’s worth of pasta and enforced singledom?
My current plan includes going to San Francisco upon my return, though I do have the choice of a semi-permanent job with Nike in the middle of nowhere. Or I could stay in Italy; but if I spend another year single, according to my mother, I will die alone.
Crying in my cappuccino

Dear Crying,

You appear to be committed to staying in a country whose food, bureaucracy and dating scene do not suit you. Your judgment has been clouded by the sunk-cost fallacy: you hoped to get a master’s degree, great food and an Italian paramour. Things didn’t work out and you have wasted five years. You’re only human if you want to waste another year or two, but you’re making a mistake. Go home.

As for your career, forget cash: the happiness literature suggests that a happy relationship and secure job are far more important. San Francisco is not famed for its excess of single straight men, but the demographics of the middle of nowhere are excellent, with many eligible bachelors. Your new life awaits.

Also published at ft.com.

28th of November, 2009Dear EconomistComments off

Political ill wind blows a hole in the climate change debate

My sunny disposition is wavering as the Copenhagen summit on climate change approaches. I believe that the governments of the world have taken the wrong approach to the problem – and if they had taken a different tack 12 years ago in Kyoto, we would be much closer to dealing credibly with climate change.

The complexities are dizzying, so it may help to be reductive for a moment. The governments of the world are focusing on reducing the quantity of greenhouse gases emitted, through cap-and-trade programmes; they should instead be focusing on increasing the price polluters must pay for emissions. The incentives provided by the two approaches are similar. Both will lead to a higher carbon price and lower emissions, and both could be tweaked over time to produce much the same trajectory of lower emissions. Either system would work well from an economic perspective.

Yet politically speaking, cap-and-trade – where an agreed cap on the level of pollution permitted in a region is set, within which companies can trade those permits between themselves so long as the cap is not exceeded – has long been regarded as the easier sell. I am not convinced it deserves that reputation. There are already several technically successful cap-and-trade schemes, but none requiring anything like the political compromises now necessary. The Kyoto protocol, a quantity-based agreement on emissions, effectively died in the US long before George W. Bush became president, took eight years to come into force and could not meaningfully accommodate China, India, Indonesia or Brazil. This is hardly auspicious.

The trouble with cap-and-trade is that countries must agree how to divide the allocation of permits. This has proved troublesome when emissions targets were assigned relative to a 1990 baseline. Rapid growth in the US economy suddenly made its allocation look stingy, while the Russian allocation looked absurdly lax following the economy’s collapse in the early 1990s. It should not have been a surprise that some economies would grow faster or slower than predicted.

Gabrielle Walker and Sir David King, in their otherwise superb book on climate change, The Hot Topic, assert the conventional wisdom that cap-and-trade is politically more achievable. This statement is somewhat undermined as they start to describe the political prerequisites for such a deal, which include agreement on a global emissions cap (a hugely contentious question) and the distribution of emissions rights among countries.

There is a form of carbon tax that would be far simpler – and would not, contrary to Walker and King’s implication, be levied by the World Bank. G20 members would agree to impose a broad-based carbon tax on their own economies. The tax would be levied by national governments and spent as they saw fit. Precise harmonisation would be unnecessary. The taxes would simply need to be broadly in line, with a commitment to keep them that way.

Cameron Hepburn, co-editor of The Economics and Politics of Climate Change, points out that quantity regulation puts knotty issues of distribution and compensation at the heart of the international negotiations. Harmonised carbon taxes put these questions to one side. They could be – and would have to be – discussed separately. Perhaps a carbon tax is the wrong approach, and it is all for the best that the whole sorry mess will be on the table at Copenhagen. That is the path the world’s governments have chosen. I sincerely hope that they are right.

Also published at ft.com.

I love Walmart: my wife hates it. Help!

Dear Economist,
My newlywed wife and I are deeply in love. There is, however, one issue that threatens the blissful fabric of our marriage. I absolutely insist upon shopping at Walmart. My wife, meanwhile, would rather avoid Walmart at all costs.
I have recently tried to convince her that not only does Walmart offer the lowest prices known to man, but that the chain is also a force for good – lower prices mean better standards of living for all consumers, increased global trade means a tighter-knit international community, and efficient operations translate into higher productivity growth for the economy. My wife complains about poor labour policies, the “fact” that Walmart squeezes suppliers, and that it puts local shops out of business.
Who is right? Will our marriage survive?
Brian Gee

Dear Brian,

I have to agree with you about Walmart. Jason Furman, then an economist at New York University, now an adviser to President Obama, famously argued in 2005 that Walmart was (unwittingly) a progressive success story. The chain’s prices don’t much affect me (I prefer Whole Foods) but Furman reckoned that they benefited low- and middle-income Americans to the tune of around $250bn a year.

Walmart does not pay much, so it may depress wages. Then again, it may boost wages by offering jobs to the otherwise-unemployed. Either way, the benefits of low prices to Walmart shoppers far outweigh any plausible costs to Walmart employees. And while it is true that Walmart employees tend to be poor, the same is true of Walmart shoppers.

Armed with this information you can confront your wife with confidence. You are sure to win the conversation. The divorce is likely to be more keenly contested.

Also published at ft.com.

21st of November, 2009Dear EconomistComments off

It’s not just Scrooge who wants Christmas abolished

Nobody has done more to damage relations between the joyous commercial festival that is Christmas and the economics profession than Joel Waldfogel. Long-term readers of this column will be well aware of Professor Waldfogel’s research paper, “The Deadweight Loss of Christmas”. Ever since it was published in 1993 it has been taken out by economic journalists and displayed like last year’s decorations. Waldfogel – a witty writer himself – has evidently decided that if everyone is going to discuss the idea, he may as well get in on the act, so has published Scroogenomics, a book that – dare I say it – looks like it would make a terrific stocking-filler.

Waldfogel’s central insight is that if I give you a £50 shirt for Christmas, and you hate the shirt, that is £50 wasted. This is the “deadweight loss” of Christmas, and Waldfogel’s original research suggested that the typical £50 gift is worth no more than £35-£43 to the lucky recipient, a deadweight loss of about 15 to 30 per cent.

When I first wrote about Waldfogel’s research I said that it was really a critique of incompetent government handouts, and that “he wasn’t really talking about Christmas at all”. He is now. Waldfogel thinks that the deadweight loss of Christmas is $25bn a year across the world, and that we are not remotely outraged enough at the senseless waste.

It’s easy to laugh at Waldfogel, but he should be taken seriously. The resources – energy, raw materials, creativity and hard labour – that go into Christmas are very real, and it’s a shame if they result in products that nobody wants. Many families incur significant and lasting debts over Christmas; Waldfogel calculates that a third of the money we borrow to spend at Christmas has not been repaid two months later. And, revealingly, Christmas spending seems to be a somewhat grudging activity. When we become twice as rich, we spend less than twice as much on Christmas. In this respect, it is like socks or petrol, and unlike caviar, sports cars or – tellingly – charitable giving.

What to do? Waldfogel admits that with some exceptions, such as gifts from older relatives to teenagers, cash is not a suitable gift. Nothing says “I don’t understand you” like a cash gift. Nor is it easy to turn one’s back on the whole ritual.

Gift cards and vouchers are no use, either. The economist Jennifer Pate Offenberg has been studying them and finds that they are often resold at a loss on Ebay, or not redeemed. This is not a deadweight loss but an unwitting donation to the gift card retailer. Most people will feel that this is little better.

Waldfogel’s own solutions are modest. He likes the idea of charitable donations instead of gifts, a concept that seems to be catching on. He thinks retailers should guarantee that unused gift card balances will be donated to charity. He is also a fan of re-labelling other purchases as Christmas gifts – so the family holiday next summer could be the husband’s gift to the wife, or “Santa’s” gift to everyone.

This is all fair enough, but I can’t help feeling that having correctly diagnosed the problem, Waldfogel has missed the real solution. All his calculations of “deadweight loss” deliberately omit the warm glow we get from giving and receiving gifts. He acknowledges this but dismisses it, pointing out that we would get the same warm glow if we chose better presents. Yes, indeed we would – but this is an angle Waldfogel seems reluctant to explore. Yet surely it is not an impossible dream. If it is the thought that counts, a first step towards a happier Christmas is to spend less, and think more.

Also published at ft.com.

Given the choice, how much choice would you like?

Is more choice better? Ten years ago the answer seemed obvious: Yes. Now the conventional wisdom is the opposite: lots of choice makes people less likely to choose anything, and less happy when they do choose.

The most famous supporting evidence is an experiment conducted by two psychologists, Mark Lepper and Sheena Iyengar. They set up a jam-tasting stall in a posh supermarket in California. Sometimes they offered six varieties of jam, at other times 24; jam tasters were then offered a voucher to buy jam at a discount.

The bigger display attracted more customers but very few of them actually bought jam. The display that offered less choice made many more sales – in fact, only 3 per cent of jam tasters at the 24-flavour stand used their discount voucher, versus 30 per cent at the six-flavour stand. This is an astonishingly strong effect – and utterly counter to mainstream economic theory.

One practical response to such experiments is that choice can be a good thing overall even if it does discourage us. I may find the choice between Robertson’s jam and Wilkin and Sons’ jam irritating and of no practical consequence to me, but you can bet that it has consequences for the two companies. We are often offered an apparently pointless choice between two equally good products, not appreciating that they are only good because we have been offered the choice.

The counter-argument was once put in a sketch about TV deregulation by Stephen Fry and Hugh Laurie: a waiter whisks away silver cutlery from a politician responsible for the proliferation of channels before dumping a sackful of plastic coffee stirrers in his lap. “They may be complete crap, but you’ve got choice, haven’t you?” Funny, but Fry and Laurie had it backwards. Zero choice is the fastest route to low quality.

But a more fundamental objection to the “choice is bad” thesis is that the psychological effect may not actually exist at all. It is hard to find much evidence that retailers are ferociously simplifying their offerings in an effort to boost sales. Starbucks boasts about its “87,000 drink combinations”; supermarkets are packed with options. This suggests that “choice demotivates” is not a universal human truth, but an effect that emerges under special circumstances.

Benjamin Scheibehenne, a psychologist at the University of Basel, was thinking along these lines when he decided (with Peter Todd and, later, Rainer Greifeneder) to design a range of experiments to figure out when choice demotivates, and when it does not.

But a curious thing happened almost immediately. They began by trying to replicate some classic experiments – such as the jam study, and a similar one with luxury chocolates. They couldn’t find any sign of the “choice is bad” effect. Neither the original Lepper-Iyengar experiments nor the new study appears to be at fault: the results are just different and we don’t know why.

After designing 10 different experiments in which participants were asked to make a choice, and finding very little evidence that variety caused any problems, Scheibehenne and his colleagues tried to assemble all the studies, published and unpublished, of the effect.

The average of all these studies suggests that offering lots of extra choices seems to make no important difference either way. There seem to be circumstances where choice is counterproductive but, despite looking hard for them, we don’t yet know much about what they are. Overall, says Scheibehenne: “If you did one of these studies tomorrow, the most probable result would be no effect.” Perhaps choice is not as paradoxical as some psychologists have come to believe. One way or another, we seem to be able to cope with it.

Also published at ft.com.

How can I be fair to my grandchildren?

Dear Economist,
My son has two children and my daughter four. I propose to give £5,000 to each grandchild in my will. Would this be equitable, given that £20,000 would go to my daughter’s side of the family and only £10,000 to my son’s?
Mr Robinson

Dear Mr Robinson,

Let me be frank: at first glance I thought your dilemma was idiotic. If you want to hand out equal shares, that’s fine – but make your mind up. Given your daughter’s fecundity and some basic arithmetic it is quite clear that you cannot simultaneously give equal shares to grandchildren and to children.

Why, then, would you hand out £5,000 to each grandchild and still fret about fairness between your children? Your children don’t get the money; your grandchildren do. Similarly, it would make no sense to hand out £15,000 to each child and then start worrying that your grandchildren had been unequally treated.

Yet arch-rationalists such as Gary Becker or Robert Barro might leap to your defence. Assume your children are Becker-Barro altruists. This means that they care not about how much cash they give, but about the total sum their children receive from all sources.

If you give your grandchildren £5,000 each, that is simply £5,000 that their parents don’t have to give. They will adjust their bequests in the light of yours. Viewed in this way, your attempts to give money to your grandchildren are really hidden transfers to your children – and you would be quite right to worry that your daughter was getting more than your son.

But before you pat yourself on the back (Becker has a Nobel prize; Barro may get one too), ask yourself if your children are Becker-Barro altruists. Most people focus narrowly on their bequests, not on the total receipts of their offspring. I doubt your children are Becker-Barro altruists. After all, you aren’t.

Also published at ft.com.

14th of November, 2009Dear EconomistComments off

Why a ‘pointless’ tax cut really counted

Dear Economist,
When the Chancellor of the Exchequer reduced value-added tax from 17.5 per cent to 15 per cent as an incentive for consumers to spend, there was a widespread view that the reduction was too small to be of use. Now that we are approaching the time when VAT returns to 17.5 per cent, some retailers say that the increase will have a negative impact. This doesn’t sound logical, but is it true?
Andrew Hewett, Hertford

Dear Andrew,

I remember the complaints well: how is a 2.5 per cent cut in the price of goods going to boost spending? (Let us leave aside the facts that while the cut was 2.5 percentage points, it was actually only 2.1 per cent; that not all goods are liable for the tax; and that some retailers decided to increase pre-tax prices rather than reduce post-tax prices.) And in truth, the VAT cut, while billed as a “stimulus”, was tiny compared with the vast government deficit.

My own view is that people are price-sensitive, so the modest VAT cut probably had a modest effect, the increase will reverse that effect, and the details will be so small that we will never know for sure.

Is it logical to claim that the cut was pointless but the rise is significant? The motive for the claim is obvious enough. And it may be justified. The switch each way caused a fixed cost: menus had to be printed, staff trained, accounts re-counted and tills reprogrammed. It is reasonable, and perhaps true, to say that the benefits for businesses of the VAT cut were swallowed by the costs of adjustment. The VAT rise, and a second round of adjustment costs, simply adds injury to the insult.

Psychology may be at work too. Behavioural economists believe in “the endowment effect”, a tendency for people to overvalue the status quo. The VAT cut seemed trivial until retailers got used to it. Now they regard it as indispensable.

Also published at ft.com.

7th of November, 2009Dear EconomistComments off

How a celebrity chef turned into a social scientist

I do not count myself as one of Jamie Oliver’s army of fans, but after looking at the chirpy chef’s antics through the eyes of an economist, I am starting to acquire a grudging respect for him. Yes, the recipe books are all but unreadable, but his “school dinners” campaign has been surprisingly successful.

Oliver’s mission to persuade schools to serve healthier lunches – and get children to eat them, and stubborn mothers not to stuff chips through the school railings – became a national phenomenon in 2005. Tony Blair and David Cameron fell over themselves to jump on the Naked Chef’s bandwagon, and soon everyone in the country had an opinion on the campaign.

What caught the attention of Michele Belot and Jonathan James, though, was the way Oliver’s project had been implemented. Belot and James – economists at Nuffield College, Oxford, and at the University of Essex respectively – noted that the campaign had created a near-perfect experiment. The chef had convinced Greenwich’s council and schools to change menus to fit his scheme; he mobilised resources, provided equipment and trained dinner ladies. Other London boroughs with similar demographics received none of these advantages – and indeed, because the programme wasn’t broadcast until after the project was well under way, probably knew little about it. The result was a credible pilot project. It wasn’t quite up to the gold standard of a randomised trial, but it wasn’t far off.

Thanks to the UK’s exhaustive school testing regime, Belot and James were able to track pupils’ performance in some detail. They concentrated on primary schools, figuring that secondary school pupils could (and probably would) avoid eating school lunches that were too worthy. (This is surely correct. My own habitual sixth-form lunch was four bars of chocolate – a pound a day well spent.)

Their answer – a provisional one, since they are still refining the research – is that feeding primary school kids less fat, sugar and salt, and more fruit and vegetables, has a surprisingly large effect. Authorised absences, the best available proxy for illness, fell by 15 per cent in Greenwich, relative to schools in similar London boroughs. And relative to other boroughs, the proportion of children reaching Level Four in English rose by four and a half percentage points (more than six per cent), while the proportion of children achieving Level Five in Science rose by six points, or almost 20 per cent. There is some uncertainty about these numbers: they could be substantially smaller or larger. There is not much that can be said with confidence about scores in other subjects, or other achievement levels – although the academic benefits of the Greenwich lunches appear to be positive, if tentatively so, in almost every case.

Obviously that discovery is important in its own right. Jamie Oliver was correct to emphasise the importance of feeding schoolchildren good food. But the whole episode matters for another reason. Too often, critical scrutiny of what works and what doesn’t in our society has been replaced by a pure emotional response. (Type “fat-tongued mockney” into Google and you’ll see what I mean, although some of the results are not for the faint-hearted.) Oliver is viewed either as a cheeky, lovable saint who has saved the nation’s children from a fate worse than death, or as a corpulent hypocrite in love with his supermarket advertising contracts.

Both points of view are lazy. Surely what counts is that a new idea was tried out on a respectable scale, and now we have a chance to figure out whether it worked. What astonishes me is that it took a television company and a celebrity chef to carry out a proper policy experiment.

Also published at ft.com.

My Big Decision

Grant Thornton did a photo-shoot and audio interview with me a few months ago about “My Big Decision”. I told them I don’t believe in big decisions, but for all three die-hard Tim Harford fans out there, here’s the interview.

6th of November, 2009MarginaliaComments off

A new “Dear Undercover Economist” video

Marketplace worked with me to produce this video about the economics of signalling in the workplace. They did a fantastic job, and you even get to hear my David Attenborough impression. The video is loosely based on one of the Dear Economist letters. Enjoy!

2nd of November, 2009Dear EconomistVideoComments off

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