Tim Harford The Undercover Economist

Articles published in June, 2010

Business Life: The psychology of a recession

First published in Business Life magazine, November 2009

The financial crisis has certainly taught me a few lessons. Sitting with my extended family one evening about a year ago, I advised them on which banks might or might not be about to collapse. It was the kind of conversation most of us thought had been consigned to the 1930s.
Our chat made me think about how the experiences of the great crash of 1929, or of the great depression, must have shaped the attitudes of those old enough to remember them. As a cocky youth I used to assume that the elderly stored cash under the mattress because they were too silly to understand how banks worked. Now I realise it may not have been senility – just the symptoms of a long memory.
Such issues are beginning to attract economic attention. Ulrike Malmendier and Stefan Nagel, both California-based economists, have been investigating how economic experiences early in life seem to shape our later behaviour.
Using financial surveys that date back to the 1960s, they look at how the stock-market returns each investor has witnessed tend to shape his or her behaviour. They control for age (perhaps 65 year old retirees are always more cautious than 40 year olds) and for the year (everyone investing in, say, 1988, faces a particular investing environment) but nevertheless find that an individual’s experiences affect how they invest.
For example, young investors in the late 1990s were keen stock market investors, having experienced a lifetime of excellent returns; old investors were more cautious. Yet in the early 1980s, it was the older investors who were more bullish: they could remember the good times of the post-war boom, and the young investors simply couldn’t.
Related work by Paola Giuliano of UCLA Anderson School of Management and Antonio Spilimbergo of the International Monetary Fund, looks not at investor behaviour but at political attitudes. Using a large annual social survey conducted in the US, the researchers ask how recession experiences shape those attitudes.
They discover that people who have been exposed to a sharp regional recession in their youth – between the ages of 18 and 25 – change their attitudes and carry those changed attitudes with them forever. They express a stronger preference for government redistribution, and they also tend to believe that success in life is more a matter of luck than hard work. They also tend to lose their confidence in government institutions.
As for the future, perhaps the stock market will become an old timer’s game, tempting only for those greybeards who remember the long boom of the 1980s and 1990s. That is, if the young revolutionaries born around 1990 don’t sweep the stock market itself away in a fit of revolutionary zeal.

30th of June, 2010Other WritingComments off

Is internet dating fatally flawed?

Dear Economist,

With yet another one of my relationships in the toilet, I find myself back on the internet dating websites. I have long been confused by the strategy of women on these sites. As a man, I am seeking to convey, modestly, that I have a good, stable job and that I am not a weirdo.

I have no idea what most of the women are on about on the site – most of them have paragraphs of drivel, punctuated with statements such as: “I like going to the theatre and for walks in museums” or “I want a creative man”.

Do the women not realise that most men look at their photos and get in touch with the fit ones? I have a reasonable level of success, so I must be on to something. Why do they waste so much time with their reams of gibberish?

Digital Lover

Dear DL,

Game theorists describe this as a “cheap talk” game because anyone can claim anything online. The question is whether the cheap talk can help people to find a good match.

Saying “let’s meet at Kaffeine at noon” helps to co-ordinate a successful date. “I like going to the theatre” could also serve that purpose, but only if men respond honestly, instead of, like you, saying, “yeah whatever, I like that, too” then hoping to get lucky.

Sadly, women bear much of the cost of your scattergun approach so I can hardly expect you to change it. But perhaps you should, because what you gain in the number of dates secured you may lose later because you have nothing in common. You say that “yet another one” of your relationships is “in the toilet”. Quite.

The psychologist Dan Ariely, with three colleagues, studied internet dating and discovered that people spend 12 hours a week searching and e-mailing, but only two hours a week on dates. Dan Ariely blames the dating websites for being poorly designed. I blame you.

Also published at ft.com.

26th of June, 2010Dear EconomistComments off

Hard lessons, difficult choices: dilemmas of parent-run schools

The most appealing aspect of an often bizarre Conservative election platform was the proposal to make it far easier for new schools to enter the state-funded sector. Under Tory proposals, anyone who passes regulatory muster can set up a school and bid to attract pupils, who will come neatly packaged with state funding. The Conservatives want to expand dramatically the range of choices, introducing new, innovative schools and perhaps reinvigorating older schools with the bracing winds of competition. But will it work?

The Conservatives point to Sweden and to the US, both of which have introduced policies along these lines. In their manifesto they wrote that in Sweden, “standards have risen across the board as every school does its best to satisfy parents”. The evidence is more ambiguous than that. Early studies of the Swedish reforms looked impressive; more recent work has raised some questions.

In the US, the evidence is more encouraging, but – warns Joshua Angrist of the Massachusetts Institute of Technology – it comes with a health warning. British reformers sometimes talk casually about the benefits of American “charter schools” as though this was some well-defined category. But different US states have very different regimes. Some have simply liberalised entry without much regulatory oversight. Others, such as Massachusetts, are stricter and close down charter schools that are failing to deliver.

The most credible research studies a particular subset of schools, typically in New York and Massachusetts. They are typically “no excuses” schools that emphasise discipline, long hours and short holidays. They are oversubscribed. The disadvantage here is that researchers are looking only at charter schools that parents already reckon are succeeding. But the advantage is that places are allocated by lottery and so researchers can compare lottery winners and losers. The encouraging conclusion is that such charter schools can be dramatically effective, especially for poor children and ethnic minorities.

Several questions remain unanswered, however. One is about how much autonomy charter schools should really have. The ideal combination in the US seems to be freedom from dealing with teacher unions and public school schedules, but nevertheless a tight leash as far as performance is concerned. The schools which give their pupils “no excuses” are allowed few themselves. More laissez-faire approaches to charter schools in other states appear to work less well, which suggests that parent power alone is not enough.

A second question is whether charter schools boost the performance of other schools, hollow them out, or do nothing to them. In Sweden, the signals are mixed. In the US, I am aware of no credible evidence either way. If charter schools are to raise the standards of regular schools, parents need to be able to distinguish good schools from bad. Some new research from Simon Burgess of Bristol University, Ellen Greaves of the Institute for Fiscal Studies, and others, suggests that parents in the UK do sensibly weigh up the academic quality of schools. Parents do like schools with low poverty rates – which might push towards segregation – but they don’t seem to care about race. Poor parents have broadly similar preferences to rich parents.

This suggests that more choice can raise standards in British schools. The Conservative policy is well worth trying. But there is one more obstacle: the Tories need to be willing to shut less successful schools if standards are truly to rise. This has proved a tough sell in Sweden. Will David Cameron’s softer, kinder Tories do better?

Also published at ft.com.

The unpaid bill behind our sofas

Halfway through her second glass of champagne on Monday night, my wife sheepishly suggested that perhaps we should hold our own emergency Budget. If George Osborne feels obliged to pronounce gloom and make swingeing cuts, shouldn’t we do our bit too? She took a guilty-looking sip.
I admonished her not to feel the weight of the champagne on her conscience, partly because it was our anniversary, but mostly because, in buying champagne and tipping the Polish waiter, we were selflessly doing our bit to stimulate the economies of our fellow Europeans.
That said, the idea of a household Budget is intriguing. I have recently taken to dividing Budget numbers by 60m, roughly per capita, or by 25m, roughly the number of households in the UK. The effect is bracing: Britain is borrowing £6,000 per household this year. This is, to use a technical macroeconomic term, a fair whack.
Such an approach can draw the sting from some of the chancellor’s more eye-catching initiatives. Take the abolition of Alistair Darling’s tax break for the video games industry; supposed to pay for corporation tax reform, this is a bold fiscal tightening of just £1.60 per household. By forgoing the revenue from a higher cider tax, Mr Osborne will increase the deficit by a dizzying 60 pence per household.
Admittedly, what Mr Osborne’s fiscal tightening lacked in subtlety it more than made up for in determination. Over the next four years we shall see £90bn of tax rises and spending cuts, more than half of which were inherited from Labour. That is £1,500 a year per person or £300 per household per month. We are going to notice.
Yet while breaking the cuts down per household is a handy way to put things in perspective, most Budgets bear little resemblance to a household efficiency exercise. No sensible family would tolerate the grandstanding that chancellors of the exchequer tend to enjoy.
In the real world, a budget would involve adding up income and spending, taking a realistic view of future income and figuring out the least painful place to spend less. Tough choices, perhaps, but you can figure out your own emergency Budget with little more than pen, paper and Mr Micawber’s dictum about the sixpences.
In Westminster, Budgets are very different. The ideal Budget skewers about 30 per cent of the population in some subtle way and showers the other 70 per cent with eye-catching goodies. The losers may be rotated from year to year, although if they are smokers they will suffer every time.
I am not sure how this would work in the Harford household. Suppose I had let my wife spend a decade or so rearranging chocolate button quotas. Then I would sweep in, announcing that I had suddenly found a gigantic credit card bill stuffed behind the sofa, when in fact it had been attached to the front of the fridge. I would then give each of my daughters a lollipop and send them out to work on an assembly line, preferably outside the south-east so I’d enjoy a tax break. That’s what I call private wealth creation.
This time around, the Budget did feel different, and not just because the chancellor was younger than England’s goalkeeper and flanked by Liberal Democrat fullbacks, poised to intervene if young George fumbled a shot from the backbenches. No, this Budget was different because Mr Osborne really did start to sound like Micawber. For one thing, neither seems to have any idea what fiscal stimulus is.
A more surprising parallel: I have not checked the speech transcript but I am fairly sure that at one point Mr Osborne burst into tears as he declaimed: “Welcome misery, welcome houselessness, welcome hunger, rags, tempest, and beggary!”
But third, and more seriously, the Budget really did seem to involve totting up everything we were earning, everything we were spending, and doing whatever it took to make the numbers add up. Result happiness? I am not sure. But it was quite a change.

Also published at ft.com.

Which economics articles should I read?

Dear Economist,
I am a diligent worker and an avid reader of your column. I have, however, become a victim of imperfect information. I am about to do my first-year exams and have just found out that not only should I have been reading your articles, but the whole of the FT and The Economist as well. I may not have substituted enough leisure for work and fear I am about to pay the price. What should I do? And would it be right for a journalist of high calibre to use his perfect information to suggest articles on macro and micro economics over the past year?
Will, Cambridge

Dear Will,

Nice try, but your story doesn’t stack up.

The Financial Times and The Economist are invaluable sources of information about the real world. You, on the other hand, are about to sit economics exams at Cambridge. If you have not yet learnt to appreciate the difference between reality and Cambridge economics, I really am worried about you.

This is especially true if your ignorance has survived your professed diligence. But I rather doubt that you have worked as carefully as you claim. You say that you are a victim of imperfect information, but surely previous exam papers are available for all to see.

A more likely interpretation is that you’re a victim of hyperbolic discounting, where you irrationally regard revision as a chore that fails any cost-benefit test, right up to the last few days before your exam. It’s a subject you may encounter in your third year, if you get there.

It’s not too late. Memorise your Taylor series and a couple of variants of the prisoner’s dilemma, and you’ll be fine. As for articles, I’m proud of a column I wrote for this magazine on November 6 last year on the economics of Jamie Oliver. It won’t get you through your exams but at least you’ll be able to whip up a fresh garden salad for summer.

Also published at ft.com.

19th of June, 2010Dear EconomistComments off

China’s rise will change the nuts and bolts of British business

Should we feel threatened by the rise of China? The relentless progress of what my colleague Martin Wolf describes as the world’s largest ant colony is giddying. Exports from China have risen by almost half in the past year, causing a political stink in Washington, while Chinese workers are reminding their employers, and rulers, that cheap Chinese labour cannot be taken for granted. China has a habit of outrunning any superlative we can apply to the place. (The statistics about China I included in my book The Undercover Economist – published in 2005 – have been shredded by the pace of Chinese growth.)

Philippe Legrain’s new book Aftershock reports the most eye-catching statistic about China I have seen for a while: that China now exports every six hours as much as it did in the whole of 1978. Consumers have enjoyed cheaper goods, but now that businesses across the world have to compete with the “China price”, it’s hard not to feel nervous about this new economic superpower.

China is also a business opportunity, of course. Peter Mandelson once cited a 19th-century commentator who remarked that “if everyone in China lengthened their shirt tails by a foot, the textile mills of England would spin for a year”. At a recent gathering of business leaders in Manchester, that 19th-century sentiment was going strong. These entrepreneurs were worried about the slump and the tight purse strings of the banks – but about China? Never: China was viewed as one big opportunity, even if shirt tails no longer top the list of Mancunian exports.

This is the right attitude. It’s not that doing business in China is easy. (It isn’t, even for the Chinese: the World Bank “Doing Business” database lists 150 countries in which it’s easier to set up a new business.) But the opportunities are there and they will grow.

Less obvious is the dynamic introduced into our economy by the rise of China, and here a simple economic model may help. Imagine a British economy with eight million workers producing eight million nuts, while four million workers in the more productive bolt industry produce eight million bolts – 12 million workers in total producing eight million nut-and-bolt pairs. When the Chinese arrive, offering to sell two nuts for every British bolt, the British nut industry goes bust and the unemployed workers are hired by the bolt industry. The total output of the 12 million workers is now 24 million bolts, of which 16 million stay in the UK and the rest are swapped for Chinese nuts. Every British worker is still employed and the British economy has twice as many nut-bolt pairs as before.

That is a sketch of the familiar calculations offered in economics textbooks to explain the gains from trade. The textbooks are largely correct, although they omit much, not least the juddering shock of workers having to try to switch from one industry to another.

Yet what has always remained implicit in such accounts is the competition between domestic companies. The aggrieved nut industry might claim to have been put out of business by cheap Chinese competition, and in a way it has been. But it has also been put out of business by the efficient British bolt industry.

If someone invented a machine that would turn a bolt into two nuts or two nuts into a bolt, nothing important would change about the story. Rather than sending bolts to China, the bolt industry would pour them into the machine.

The nut industry would still go bust and the bolt industry would still expand.This is the hidden story of trade. Rather than competing with British businesses, China is altering the playing field on which British businesses compete with each other.

Also published at ft.com.

Who should I support in the World Cup?

Dear Economist,
I am an Indian but my country never qualifies for the World Cup. I usually support the Netherlands because I am a fan of Dutch football. But this year is different, because I work in England, pay my taxes here and feel that if England wins the World Cup it will lead to positive externalities for me. My boss may go easy on me, the general mood of the country will lift and even the looming spending cuts may feel more bearable. But should I sacrifice my love of Dutch football for the sake of my stake in the British economy?
Deepan Banati, London

Dear Deepan,

I am glad to see you are taking the beautiful game seriously, but puzzled that you are so determined to impale yourself upon the horns of an imaginary dilemma. You seem to think that supporting England and supporting the Netherlands are substitutes with sharply decreasing returns – in other words, you can only afford to support one or the other. I do not really understand why this should be true.

Until the two teams actually meet, you can support both. This has many merits. You have a real interest in twice as many matches, for example, and are more likely to have some wins to celebrate. If the teams do meet, the situation will be slightly more difficult. But this cannot happen until the semi-finals at the earliest. And it may not happen at all: neither England nor the Netherlands are exactly permanent fixtures in the World Cup’s last four.

In the unlikely event that your divided loyalties are tested, find a Dutch pub and cheer the Dutch with abandon. At work the next day, resume the demeanour of an England fan, whether celebrating victory or heroic failure in a penalty shoot-out.

Economists always assume that people may hide their true preferences; this is one assumption to which you should adhere.

Also published at ft.com.

12th of June, 2010Dear EconomistComments off

How I lost my head in the volcanic ash cloud

Six weeks ago, marooned in Helsinki by a rogue Icelandic volcano, I noticed a strong divergence of opinion between those of my colleagues in a similar situation and those with no travel plans. For me and my fellow FT columnist Gideon Rachman, it was the end of the world – even if Gideon, who wasn’t rushing back for his wife’s birthday, accepted it with a sangfroid that I failed to muster. For those safely in the UK, the ash cloud was a minor distraction from important matters such as the Euro crisis and the British election.

My agitation wasn’t mere self-centredness (it’s important because I’m important) but an example of what psychologists and behavioural economists call the “availability heuristic” – that something must be important because it’s easy for me to call it to mind.

I might have blamed sleep deprivation and uncertainty for my lack of good cheer as I tried to work out how to get back home in time to hand my wife a bunch of flowers and resume my election coverage, but what really tipped me into an economists’ hysteria was trying to buy a copy of the FT and realising I couldn’t. (Presumably it is not printed within an easy drive of Helsinki.)

At that point, I started to muse on some dismal scenarios. What else depended on air travel? The FT, of course, can be read online. The Kenyan flower business depends on air travel but is far more important to the Kenyans than to us. Salads we can live without. But what else? I am reliant on my mobile phone – but what if the phone network developed a fault in Hackney and the system engineer who knew how to fix it was also stuck in Helsinki? What if production lines started to fail in Birmingham and the components to fix them were in Nagoya? It was starting to look like something more serious than a few grumpy frequent flyers, especially since Eyjafjallajökull is quite capable of erupting for years. Another, larger volcano, Katla, stands nearby and has tended to erupt not long after Eyjafjallajökull does, as explained by Lucas Laursen in this magazine article (May 22/23). I’ve just looked at a map of the nine “main volcanoes” of Iceland. Eyjafjallajökull isn’t one of them.

I started writing e-mails to my colleagues in London pointing out that there was a small chance that European air travel could be rendered completely unreliable for years, and if so there was a small chance of the world’s economy being dealt a shattering blow. This was potentially the biggest story of the decade rather than the third-biggest story of the week. A senior colleague wrote back, more politely than I deserved, telling me to calm down and get a sense of perspective.

He was almost certainly right. Even if the ash cloud returns often, market economies have tended to be surprisingly resilient. Terrible events such as the Kobe earthquake or the 9/11 attacks made little lasting impression on the world’s economy. While some sectors would suffer from sustained disruption to air travel, others would benefit. We’d substitute local vegetables for salads and read the FT online, while businesses would relocate essential staff and hold more inventory to allow for disruptions. We’d adapt.

Or would we? In a system as complex as the economy of Europe, it is hard to be absolutely confident about what impact any event would have – witness the damage wreaked by apparently small misjudgments about subprime mortgages. This is Nassim Nicholas Taleb’s message when he warns of “black swans”. Every now and then something unlikely but very important happens. Thanks to the availability heuristic, few people will have paid it any attention. Those who did will, as I did, have made fools of themselves in the interim.

Also published at ft.com.

How do I set myself up as a photographer?

Dear Economist,

I consider myself a good documentary photographer, but my full-time job is in another field. I want to start a career in wedding photography, so I need to build a portfolio. But how?

I tried to offer a cut-rate service that basically covers the production cost. No luck.

My theory is: this is a glamorous business, like Hollywood. If you are the client, you probably won’t worry about cost unless you’re on a shoestring. You won’t trust a new start-up on a unique event. If you are on a shoestring, you probably won’t look at a professional photographer’s price list.

I have considered offering myself as a free assistant or second shooter. But as you may notice, wedding photographers are like plumbers – they have quite a local base. I doubt they would want to help out a competitor in their own back yard. So how do I get started?

Camera for hire

Dear Camera for hire,

Actually, your business is more like hedge fund management or heart surgery. Nobody goes for a cut-price heart surgeon.

You really have two options. One is to take photographs at friends’ weddings. You don’t need permission from a rival photographer, you just need permission from a friend.

But I have a more radical suggestion. To win business you need to demonstrate confidence in your expertise. Tell prospective clients that you will pay them for the privilege of taking photos at their wedding, and that you’re confident you’ll make money anyway because they will want to buy your prints. Not only does this scheme give them some compensation if you prove to be an amateurish snapper, but more importantly it sends a signal of your self-confidence. A true incompetent would never be able to afford such a deal. I only hope you are as good as you say you are.

Also published at ft.com.

5th of June, 2010Dear EconomistComments off

Why the NHS doesn’t know what it isn’t doing

When is a wait not a wait? When a bureaucrat holds the stopwatch. That is my conclusion, based on my experience of trying to get a cancer scan on the National Health Service. The NHS commitment is that – with some narrow exemptions – no patient will wait longer than 18 weeks for treatment. I’ve been waiting for a year.

My point is not to claim that the NHS is an institution on the brink of collapse, nor that the figures are being fiddled. Something subtler is going on here: we are bumping up against the limits of what any bureaucracy can know.

The way waiting times are measured by the NHS has evolved over time, as Nick Timmins explained in this magazine on March 13. The latest metric is Referral-to-Treatment, or RTT. The clock starts when a general practitioner (GP) refers the patient; it stops when the patient receives initial treatment. It’s a reasonable enough measure, but it does not tell the whole story.

Take my own case. My mother died in middle age from the same type of cancer that killed her brother and several other relatives. Standing on the brink of middle age myself, I concluded it was time to ask for a precautionary scan.

So I called my GP. I couldn’t get through. I called again. I couldn’t get through. After many failed attempts I made a note to try again in a few days. I wasn’t on the waiting list, but I was waiting.

My first appointment with the doctor generated not a referral but a second appointment. (“Come back with more details of your family history.”) The dance continued for four months, delayed by my own procrastination, the doctor’s part-time schedule, and above all, the understaffed reception desk.

Eventually I secured a hospital consultation, but arrived to find that the computers were down and the scan itself could not be booked. A few weeks – and pestering phone calls – later, I was sent an appointment out of the blue. It was on a day when I was in New York. I called, left messages and wrote to rearrange, but nothing penetrated the bureaucratic fog. I was noted down as a missed appointment, and the clock stopped at fewer than eight weeks.

I’ve no idea how typical my experience is. Nobody does. It is hard for a bureaucracy to measure delays if the delays are caused by an inability to be noticed by the bureaucracy.

(I recently tried again to book a scan, but the online booking system couldn’t find me a slot.)

Friedrich Hayek would not have been surprised at any of this. His 1945 essay “The Use of Knowledge in Society” emphasised the importance of local knowledge: the receptionist is overworked; the patient is in Manhattan; the computer has a bug. It is hard to centralise and process such information. In some cases it is impossible.

I am largely with Hayek, although the point can be pushed too far. John Appleby, chief economist at the King’s Fund, points out that centralised waiting list targets, combined with plenty of extra cash, have pushed NHS waiting times down so far that delays are no longer the chief concern of patients.

Yet the NHS data on waiting times remains a cautionary tale for me. Faced with any statistic, it is always worth asking exactly how the raw data can possibly have been gathered, and what might be missing.

I don’t even know, now, whether I am on a waiting list. I do know that I have been waiting. But this morning, an appointment suddenly appeared in the post. Perhaps by the time you read these words, my invisible wait will have ended.

Also published at ft.com.

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