Tim Harford The Undercover Economist

Articles published in 2010

Happiness: A measure of cheer

‘The welfare of a nation can … scarcely be inferred from a measure of national income.’
So the US Congress was warned in 1934 by Simon Kuznets, who thus continued a long tradition of pointing out that there is more to life than money. But the economist’s comments broke particular ground: they were attached to the first serious attempts to produce national income accounts – the tally of all that a country produces and earns – for the US. Kuznets and his small research team had built them, and he knew their limits.
Where Kuznets led, others have followed. From the upper echelons of the administration of President Barack Obama to the offices of Nicolas Sarkozy, his French counterpart, to David Cameron, UK prime minister, the goal of gauging a nation’s well­being has captured the imagination of policymakers. They join less likely countries such as Bhutan, whose mission to measure “gross national happiness” has made the Himalayan mountain kingdom a trendsetter.
Mr Cameron was the most recent to take up the cause, saying Britain needed to look for alternative measures that would show national progress “not just by how our economy is growing, but by how our lives are improving; not just by our standard of living, but by our quality of life”. While some analysts suspect each politician has his own motives – appearing nice to electors, flattering the economy and so on – the result has been to create a sense of momentum behind happiness economics. Learn More

Christmas presence

Christmas looms. Personally, I’m delighted. I have young children, they love Christmas and, therefore, so do I. If you must, by all means moan about the stress and the expense and the orgy of greed. But you are surely compelled to acknowledge that Christmas, as celebrated in modern western societies, has evolved into the perfect festival for children.

The anticipation, the decorations, the carols, the traditions, the magic of the stockings being filled, and of course the sweets and the toys – it’s hard to imagine what could beat it. (And yes: for broken families or those unable to participate without financial hardship, it can be miserable. That’s not a flaw in the festival itself, but a recognition that families need certain resources to join in properly.)

Some families, of course, choose not to take part. My five-year-old daughter came home from school last year to announce that her classmate “didn’t believe in Father Christmas”. My hackles rose in indignation at the vicious rumour, until my daughter pointed out her classmate was a Muslim. Hmm. Well, yes – I suppose it is reasonable for Muslim children to deny the existence of Saint Nick.

It’s easy for atheists to join in with much of the spirit of Christmas: dig into the turkey, pass the brandy, and go easy on the God thing. But for families bringing their children up in an entirely different religion, the whole business is a bit more tricky. And if their children have classmates who are eagerly anticipating Santa Claus, these families may feel compelled to fight fire with fire by creating a substitute Christmas.

The idea might sound strange, but three economists, Ran Abramitzky, Liran Einav and Oren Rigbi, have recently discovered evidence of exactly that. In research published recently in The Economic Journal, they explore what effect Christmas might have on the celebration of festivals in an entirely different religion: specifically, Hanukkah, a relatively minor Jewish festival which just happens to take place in December.

One clue comes from a survey of undergraduates in Tel Aviv and Stanford. The Israeli students overwhelmingly included Passover and Rosh Hashanah, the Jewish new year, among the three most important Jewish holidays, with Hanukkah, Sukkot and Shavuot as the main also-rans. In the US, Hanukkah was emphatically on a par with Passover and Rosh Hashanah: it is simply a more prominent festival there.

The economists looked for stronger evidence than this, and found it. They discovered that the surge in Hanukkah celebrations is stronger in families with children under 18, and that this effect itself is stronger among reform Jews – who are far more likely than orthodox Jews to be living in Christian neighbourhoods and sending their children to largely Christian schools. The effect is even discernible in retail sales figures. However measured, Jews who have children and mix with non-Jews tend to get into Hanukkah in a big way, just as Christmas approaches.

It will be interesting to see whether the finding generalises.

Do Islamic festivals compete with Christmas where Muslims are an integrated minority group? What happens when Jews are a minority in Islamic countries – do they compete with the most “attractive” Islamic festivals?

Yet the other striking conclusion from all this is how gregarious our festivals are. If Hanukkah responds to Christmas, isn’t it reasonable to suggest that Christmas also feeds off itself? The bigger the fuss we see others making, the bigger the fuss we ourselves tend to make. And of course, competitive gift-giving is hardly limited to rivalries between religions. Christmas, then, in all its consumerist glory, is a self-perpetuating piece of groupthink.

I love it. But it is possible to have too much of a good thing – even at Christmas.

Also published at ft.com.

Why education fails the poor

Students took to the streets of London last month to protest against a stiff increase in course fees.

I can hardly blame them, but the fee increase is not the great injustice that they claim. In one sense it is unfair, of course: earlier generations of students paid less. Some paid nothing at all. My Oxford education was free – as was that of David Cameron, who did the same course in the same college less than a decade before me – and I am grateful.

But was that free education an example of great social progress? Cameron’s family was hardly poor. He did well enough out of his Oxford education. Is it really outrageous to suggest that he, rather than taxpayers, should have paid for some of it?

And while the percentage of under-thirties attending university rose from 5 per cent to 35 per cent between 1960 and 2000 – with a surge during the early 1990s – it is still the preserve of relatively wealthy families. According to the economists Jo Blanden (University of Surrey and LSE) and Steve Machin (LSE and UCL) this expansion actually widened the participation gap between richer and poorer children. (To oversimplify, only kids from well-off families go to university, but whereas it was once just the bright boys, now the girls and the dim boys also get to go.)

In short, a university education is a valuable product, largely consumed by the sons and daughters of well-off families, which plays a major role in ensuring that the sons and daughters are themselves well off – and, helps them to marry each other. This is the perk that students demand that the taxpayer should provide.

Of course, raising fees will discourage students a little. My reading of a recent study, commissioned by the Department for Business Innovation and Skills and conducted by researchers from the Institute for Fiscal Studies and the Institute for Education, is that adding an extra £5,000 of annual tuition fees, and funding that with an extra £5,000 of cheap loans, would dent higher education participation by about 6 percentage points. That is bad news (and subject to a high margin of error). But regressive? No.

If you want something to get angry about, I wouldn’t look at tuition fees. I’d look at a little graph produced by Leon Feinstein of the Institute for Education, which shows tests of cognitive development given to almost 2,500 children at the age of 22 months, 42 months, five years and 10 years. The very brightest 22-month-old working-class kids were inexorably overhauled by the very dimmest children of professional or managerial parents – apparently by the age of about seven, and emphatically by the age of 10.

Research by Jo Blanden and by Paul Gregg and Lindsey Macmillan of the University of Bristol, underlines this. We know that “income persistence” is high in the UK – that is, parents wealthier than average have kids who also grow up to be wealthier. In other words, social mobility is low. We also know that education seems to play a strong role in this: countries such as Denmark have egalitarian schools and low income persistence. Blanden, Gregg and Macmillan have found that you can predict much of this income persistence simply by looking at exam results at age 16. Higher education is the icing on the cake.

The real problem in British education starts very early indeed. Subsidising tuition fees for relatively prosperous students is not the solution. Subsidising poorer kids to stay on at school after 16 might help – although even that is too late for many – but this is a policy which the coalition government is set to scrap. It’s the three- and four-year-olds from poor families who have for decades been let down by this country’s education system. But toddlers don’t take to the streets in protest, no matter how right their cause might be.

Also published at ft.com.

One thing at a time, please

I just splashed out on a new widescreen monitor, which I have rotated and set alongside the near-identical widescreen monitor I already own. Now I have two tall screen monitors, side by side, and I feel like the operator of a nuclear power station.

Publilius Syrus, a Roman slave with a knack for writing maxims, observed that “to do two things at once is to do neither”. Presumably he would not have approved of the twin-monitor arrangement, had he had the faintest idea what a twin monitor was.

Poor old Publilius would have gone into conniptions if he’d seen what today’s teenagers get up to: watching television while sitting with a laptop, surfing the web, sending text messages and instant messages, and listening to music. No wonder so many commentators are concerned about our growing addiction to multitasking.

I have some sympathy. When I indulged, for the first time, in “live-tweeting” one of the leaders’ election debates in April (I’m @timharford on Twitter, by the way: follow me if you’d like to see my Publilius Syrus impersonation) I discovered something striking: while I had fun commenting and reading the comments of others, I later had very little recollection of what any of the three potential prime ministers had actually said. This is worth bearing in mind: I now strongly suspect that anybody who claims to be commenting live from any event is unlikely to remember much about what happened.

Researchers who study multitasking wouldn’t be surprised. In 2006 Karin Foerde, Barbara J. Knowlton and Russell A. Poldrack, then psychologists at the University of California, Los Angeles, showed 14 people various shapes flashing on a computer screen while playing them low and high tones. In some experimental runs the subjects were asked simply to make predictions based on recognising patterns in the shapes; in other runs they also had to count the number of high tones.

The result was fascinating: on the multitasking runs, people were perfectly good at making predictions on the fly, but couldn’t then explain the underlying patterns, or apply them flexibly in other contexts. The technical term for this is that their “declarative learning” was stunted by the distraction. In short, multitaskers seem competent at the time but may not be taking much away from their experiences.

I try hard not to make that mistake. Even the twin monitors are designed so that while I’m reading a research paper on screen, this column stays in view.

But I am guilty of an entirely different form of multitasking: in any given month, I have lots of projects on the go. This feels a world away from distracting myself with instant messaging. In fact it feels symptomatic of being a grown-up in the 21st century. But perhaps it, too, is unhelpful.

The psychologists’ lab isn’t well-suited to testing that hypothesis, but there is a new working paper from three economists, Decio Coviello, Andrea Ichino and Nicola Persico. They studied the caseload of 31 judges in a specialised court in Milan, who over five years dealt with over 58,000 cases. Because of the way cases are randomly assigned, and a rule stating that cases must open no later than 60 days after assignment, some judges find themselves with many more cases open at the same time. Coviello and his colleagues find that judges who have been obliged to work on many cases in parallel take longer to complete similar portfolios of cases. One implication is that the 60-day rule probably slows the average case down rather than speeding it up.

The message for the rest of us is that Publilius Syrus was right about multitasking. One thing at a time is best. The exception, I suppose, is if you’d rather not remember what you’re supposed to be doing. No wonder so many of us check our BlackBerries in meetings.

Also published at ft.com.

Putting pay in perspective

Like all good economists, I am both frugal and insensible to considerations of style, so my battered old spectacles are now more than a decade old. I’d be lost without them, quite literally. My unaided eyes are unable to read a book at a distance of more than four inches. Occasionally, this serves as a superpower – I can take my glasses off in tedious meetings and drift away, as blissfully blind as if I had pulled my jumper over my head. Usually, however, I prefer to be able to see, and so the glasses have followed me into the shower, the karate dojo, and a number of other situations that need not be detailed here. As a result, I rarely mislay my glasses – which is lucky, because they are slim enough that I find them invisible at a range of 3ft.

On the occasions when I do lose them, one thought often leaps into my mind: thank goodness I was born after eyeglasses were invented. Without them I would be severely disabled; with them perched on my nose, that description seems absurd.

The modern world is, of course, full of helpful stuff, from spectacles to penicillin to e-mail – stuff we tend to take for granted, but shouldn’t. The economist Timothy Taylor, editor of The Journal of Economic Perspectives, begins his introductory economics lectures by asking his students whether they would rather be making $70,000 a year now, or making $70,000 a year in 1900.

“$70,000 a year back in 1900, you probably have to multiply that by 10 or more to get how much income it would be right now,” he explained to NPR’s Planet Money show. “So we’re not just talking about just being average rich, we’re talking about really being darn rich – we’re talking about the mansion and the servants.”

Ten times is an underestimate: according to Samuel Williamson’s “measuring worth” database, $70,000 in 1900 is worth almost $2m today adjusted for consumer prices. (Relative to the average unskilled wage, it would be $8.5m today.)

Yet about two-thirds of Taylor’s students would rather have the decent income today than the millionaire lifestyle in 1900. And who is to say they are wrong? Many of the regular things of life – such as central heating, air conditioning, a car, a shower, and restaurant meal – are likely to be as least as good in 2010 on a middle-class salary as in 1900 on a rich man’s income. Even the spectacles would have been awkward and prone to breaking back then. Many modern conveniences would have been unavailable for any money.

This thought experiment is an arresting counterweight to the oft-made observation that we seem to be no happier than our parents or grandparents were, despite the fact that we are richer. Taylor’s students seem to believe they would have been happier than their great-grandparents even if their great-grandparents had been colossally richer.

It also puts into perspective our incessant efforts to adjust nominal prices to take account of the cost of living. By almost any reasonable measure, there has been plenty of inflation over the past 110 years.

A modest pension of $7 a week in 1900 would be worth $184 a week today if it had been linked to consumer prices. Many people believe such index linking is outright stingy, and propose a link to wages. Fine: $7 a week in 1900 would be $1,340 a week today if linked to wages in manufacturing. The idea of such indexation is that $7 was a lot of money in 1900 and it buys very little today.

But Timothy Taylor’s students believe that in some contexts, $7 now is worth more than $7 in 1900. And if you want a mobile phone subscription – or you have an infected abscess and need antibiotics – they may be right. It’s nice to have a justification for looking at the modern world through rose-tinted glasses.

Also published at ft.com.

Call no man happy until he is a government statistic

The British government is apparently planning to measure our happiness. Stop smirking – this is serious business. Happiness is a big deal, especially among economists. Daniel Kahneman, a psychologist and winner of the Nobel memorial prize in economics, has been studying the subject intensively. Two other Nobel laureate economists, Amartya Sen and Joseph Stiglitz, have been working on measures of economic well-being for Nicolas Sarkozy, the French president. President Barack Obama has appointed happiness experts – Cass Sunstein, Betsey Stevenson and until recently Alan Krueger – as senior officials. David Cameron, if not leading the charge, is joining the in-crowd.
The irony is that in proposing to measure the national mood, Mr Cameron seems to have misread that mood. His core supporters on the centre-right are disinclined to give much weight to government-sponsored studies of well-being. The centre-left are instinctive supporters of the idea, but they are feeling a little grumpy right now and are unlikely to crack a smile at anything Mr Cameron proposes.
But what is Mr Cameron proposing? The Office for National Statistics won’t say much for now, although a statement refers to the need to look at “broader” and “more comprehensive” measures of well-being and progress, rather than focusing solely on gross domestic product, or GDP. Part of that might involve measuring “subjective well-being”.
The cynical response is that the government is about to dose us all up with Soma as we enter the brave new world of austerity Britain. The truth is more prosaic, and fortunately I speak Happyconomist so I can translate. The standard measure of economic activity is GDP, and the ONS is thinking about presenting some variations on the theme – which might include adjustments for environmental damage, time wasted in commuting, the value of “non-market work” – that is, doing the dishes – and the like. These GDP variants use the same framework but add extra elements. Alongside them the ONS might gather other data measuring health, inequality and that curious item, “subjective well-being”.
But what is this? One answer is that it’s what economists prefer to speak about instead of “happiness” – I once interviewed Prof Krueger on this and he firmly told me subjective well-being was his preferred term because “happiness sounds a bit frivolous”. Learn More
20th of November, 2010Other WritingComments off

Time to tidy the tax mess

Given the importance of the subject, there isn’t much debate about the fundamentals of taxation. Fundamentalism, yes: on the right, the idea that all tax is theft and that any cut in tax rates will raise revenue; on the left, the idea that the country’s fiscal – and indeed social – problems could be solved quite simply if only the government had the courage to tax the rich more heavily.

(For context: the top 5 per cent of UK earners take in a quarter of the country’s income and pay almost half of all income tax; the top 1 per cent make 12.5 per cent of income, and pay over a quarter of all income tax. Make of that what you will.)

But fundamental principles, no. Instead, we have the increasingly frequent pageant of Budget day, in which the chancellor of the exchequer juggles statistics and pulls rabbits out of hats, while the media scrabble to explain who wins and loses from the performance.

Earlier this month there was a performance of a very different kind when a procession of heavyweight economists, led bythe Nobel laureate Professor Sir James Mirrlees, presented the results of a fundamental review of British taxes by the Institute for Fiscal Studies, the first such exercise for more than 30 years. The results are a bracing blast of fresh air, which deserves to scour away some of the tax junk that has accreted over the decades.

For example, at the top of the income distribution, marginal tax rates rise to 40 per cent, then 60 per cent, fall back to 40 per cent and rise again to 50 per cent – the effect of gradually withdrawing tax allowances above an income of £100,000 a year. In fact the situation is more baffling than that, because national insurance contributions are payable at various rates on wages, but not on income from other sources.

At the bottom end of the income scale the situation is even more cluttered and implicit tax rates are even higher: one case study, for a lone parent, shows take-home income rising, in cliffs and plateaus, from about £220 to about £300, as the parent earns between zero and £230. The marginal tax rate there is around 80 per cent, and in some cases the interaction of benefits is even more baffling.

The broad conclusions of the Mirrlees review are easily summarised: it would be possible to raise the same amount of tax, with roughly the same redistribution of income, more efficiently. There would be fewer loopholes, fewer losses from people making decisions explicitly designed to reduce tax, and fewer arbitrary distinctions between people who deserve to be treated similarly.

One principle that can’t be emphasised enough is that redistribution is a function of the tax system as a whole, not of any particular tax. At the moment, low or zero-VAT rates on items such as food, books, and domestic fuel distort what we buy and encourage us to waste energy in the name of redistribution. This is silly: better to let the income tax system do the redistribution and keep VAT broad and simple. Income tax should also absorb national insurance, which has long been an arbitrary, distorting and opaque parallel income tax.

Not every recommendation of the Mirrlees review tends towards simplicity. For instance, the review advocates tweaking child tax credits, national insurance contributions and the pension system with the aim of giving parents with school-age children and people over 55 and under 70 much stronger incentives to work.

Utopian ideas of tax design must bow both to the messy reality of law and accounting, and to political convenience. Yet the Mirrlees review makes a compelling case that even if tax will never be fun, it could be somewhat simpler and much more effectively collected. The government should take note.

Also published at ft.com.

How to be financially literate

Here’s a little test. You buy a new £1,000 computer, but you need to take on some debt to finance it. You have two options: pay in 12 instalments, £100 a month for a year; or borrow at an interest rate of 20 per cent and pay back £1,200 at the end of the year. Which is the better offer?* Or are they both the same?
Take your time. Annamaria Lusardi, an Italian economics professor now based at Dartmouth College in the United States, has been asking a lot of people this question. Only www.order-isotretinoin.com seven per cent of Americans get the answer right. Even simpler multiple choice questions about interest rates and minimum payments on credit cards baffle the majority of people.

Read the whole column here. The answer is below… Learn More

A case for consultants?

Management consultants don’t have the most stellar reputation for offering value for money – although, truth be told, the infamy of investment bankers has long since left them in the shade – so I was impressed when, early this year, rumours reached me of a fascinating new study in which a consulting firm was implicitly agreeing to subject its advice to a randomised trial.

Not to put too fine a point on it, that’s a ballsy decision. Almost the only people who ever agree to test their stuff in a randomised trial are the pharmaceutical companies, and I am fairly sure they’re underwhelmed by the experience.

Perhaps Accenture (for it was they) didn’t realise what they were letting themselves in for. After all, the study – conducted by a team of economists at the World Bank, Berkeley and Stanford – was ostensibly about whether modern management techniques would improve the productivity of large textile firms in India. (A draft, “Does Management Matter? Evidence from India”, is available from the website of co-author Nick Bloom at Stanford.) But how do you improve management techniques? You send a management consulting firm in.

The researchers hired Accenture to provide management consulting services to 14 factories in Mumbai, chosen at random from a group of 20. The other six factories served as a control group and received a diagnostic performance audit but little serious advice. The World Bank and Stanford paid Accenture at a heavily discounted rate; the factory owners paid nothing.

The results were undeniably impressive. The effect of a few months of consulting advice was that profits rose by almost a fifth, to the tune of several hundred thousand dollars a year. (The latest draft of the study puts the figure at $230,000; an earlier calculation reckoned it was even higher.) Output was up, inventory was tighter and defect rates were halved.

Accenture’s fees for the five-month consulting gig, at commercial rates, would have been roughly the same amount as the increase in profits – so the arrangement would have paid for itself by the end of the year. If any of the consulting advice stuck, this would have been a fantastic investment. The indications are that the advice more than sticks: the new procedures generate more information, more ideas for running a tight ship, and a spiral of continuous improvement.

But before we all rush out to hire a management consultant, two notes of caution. The first is that as the experiment was designed to evaluate management techniques rather than consultants, Accenture was left in charge of collecting its own performance data. (The data was subject to some independent checking, however, and there is no evidence that anything was amiss.)

The more substantial caveat is that textile companies in India have their own distinct problems: tools and machinery were left lying around, and stock control was frequently non-existent. If a worker needed to find a particular item, the technique of choice was to forage around in the storage bins until something useful emerged. Modern inventory-management techniques made a big difference in this particular sector of Mumbai’s economy, but that does not mean that Vodafone or Barclays or the civil service have as much to gain from bringing the consultants in.

Nick Bloom and his colleagues have also studied management practices across the world, and Brazil, China and India rank poorly. Just imagine what these emerging giants will do once they get the consultants in.

As for whether management consultants can earn their keep in London or New York – I don’t know the answer. But I know a few economists who would happily supervise a randomised trial.

Also published at ft.com.

Outside Edge: Sleepless in Seoul

As I write this paragraph, it’s midnight. Or possibly lunchtime. I’m in a hotel room in a city which, I am reliably informed, is Seoul. I got here too late for breakfast but in plenty of time to go to bed at 3pm. Does that make any sense? I really am extraordinarily jet lagged.
The South Koreans are very proud that the G20 summit was held in Seoul, but perhaps that is mostly relief that they didn’t have to negotiate in the wrong time zone – no such luck for most of their guests.
This is in the nature of summitry: leaders whose powers of decision are so indispensable they fly all over the globe, exercise those powers of decision in what can only be described as a highly impaired state.
I have become very concerned – possibly this is just an insomniac’s paranoia – at the amount of important business that seems to be conducted by people who are equally sleep-deprived. The German finance minister called American monetary policy “clueless” last week. I am not sure it was fair then. But it seems a pretty accurate description of how many of the sleepless summiteers must have been feeling last night.
Powers of decision? Even my eyeballs are indecisive. Every time I stop concentrating on them – I was going to write “looking at them”, but how can you look at your own eyeballs? – they start drifting around, sometimes bumping into each other and sometimes edging apart. Is this a common symptom of sleep deprivation, or is it just me?
You’re also going to have to forgive the odd tpyo, I’m afraid.
Don’t get me wrong. I can handle jet lag. It’s just that I’m not sure it’s a terribly good idea to do anything important in this state. Should the future of the world economy really be decided by men and women so tired they just want to curl up in a corner?
This may account for some of the summit’s disappointments. For example, the Americans and Koreans have failed to agree a bilateral trade deal, the whole point of which was to create an impression of progress which the summit proper was always likely to lack.
Jet lag explains all. I get very ratty myself when I’m short of sleep. At least nobody has repeated the performance of the late Shoichi Nakagawa, the Japanese finance minister who managed almost simultaneously to sign away a colossal sum of money to the International Monetary Fund, and slur his words at a G7 press conference last year.
Mr Nakagawa blamed medication for a cold, and others speculated that he had been at something stronger. The way I feel, I can assure you all that the jet lag would have been enough to cause his incoherence. Now we hear that grumpy late-night discussions about currency wars at the G20 were only resolved by an agreement to pass the buck to the IMF. That makes some sense. Say what you like about IMF staff, they always try to get a good night’s sleep.
The writer is going to bed

First published on ft.com
13th of November, 2010Outside EdgeComments off
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