Tim Harford The Undercover Economist

Articles published in March, 2011

The biggest confusion in British politics

Johann Hari has an article on “the biggest lie in British politics“. I tweeted that he could have done a better job of clearing up confusion between the debt and the deficit, and then received a few requests for elaboration. So here goes.

Johann’s argument is that the government is frightening us with tales of incredibly high debt, whereas in fact the debt is not high. And furthermore, that accumulating debt is a good idea right now because that will stimulate the economy. (I think he states the cases for stimulus with a certainty that the evidence doesn’t support, but I won’t say he’s wrong. He may be right.)

I certainly agree that UK government debt isn’t especially high. I may have missed something, but most of the government claims I’ve seen focus not on cutting debt but on cutting the deficit. Certainly nobody is envisaging cutting the debt any time soon.

What’s the difference? The deficit is the amount of new debt accumulated in a year, or alternatively, the amount by which government spending exceeds taxes.  Johann didn’t mention the deficit in his piece. If he had I am sure he would have said that while UK government debt isn’t high, the deficit is high – extraordinarily high. So Johann is getting what he wants: a massive fiscal stimulus by a government spending far more than it takes in in taxes.

The government’s position is that the deficit is so high that it must be cut back quickly. Markets may not be worried by absolute levels of debt, which are low to middling, but will worry if it seems that the government is utterly incapable of controlling spending. Although the deficit (and stimulus) will continue for a while, it’s going to be phased out. In a few years there will be no deficit and no stimulus, and debt will no longer be increasing.  I certainly hope the recession will be long over by then.  I’m making no promises.

A sensible alternative view is that while the deficit (and stimulus) cannot continue indefinitely it can continue for a while, and that cuts should come later. A separate alternative view is that that if the deficit has to be reduced it should be reduced by higher taxes and tighter enforcement, not by spending cuts. I suspect Johann would support both. Fine.

Pension reform: just the job?

Reading the coverage of Lord Hutton’s review of public service pensions, you could be forgiven for concluding that he had recommended that existing public sector workers should have their pensions cut. Not so.

Every commentator seems to believe either that Hutton’s proposals (not to be confused with those of Will Hutton, on fair pay) are wonderful because public sector workers are over-pensioned, or that they are dreadful because public sector workers are losing perks they deserve. If we were all assigned to be “public sector workers” or “private sector workers” on leaving school, this debate would make sense. Since we aren’t, it is nonsense.

People can and do move between public and private sector. Two friends of mine are in the process of making that move, in opposite directions. Disillusioned bankers can become teachers; NHS nurses can work in private nursing homes. (In some cases the move is harder than in others.) Pay and pension will naturally affect such decisions.

So the question is not whether some immutable clique of public sector workers should get more or less money in future, because public sector employment is available to everyone. The real question is whether we’d like to attract the best people into public service, or would prefer that they favoured the private sector.

This is not a question about the moral worth of public versus private, but about where smart people generate more value. I’d like the very best doctors and teachers, but also the very best engineers and middle managers. Since not every sector can have all the best people, there’s a question of balance.

And the balance has real effects. A study by Emma Hall, Carol Propper and John Van Reenen found that NHS staff were paid less well in London, relative to the private sector alternatives, than they were in northern England. The result was that London NHS trusts tended to over-promote staff and rely on agency staff – and there was a substantial increase in the patient death rate as a result. Skimping on public sector pay can be deadly.

But it’s possible to under-reward private sector workers instead: we need competent accountants, plumbers and farmers, too. (I am aware that high pay does not guarantee competence – step forward the banking industry – but it should at least give recruiters a better choice of candidates.)

Lord Hutton’s big ideas, then, translate as follows. In future, public sector employment should be less attractive, and so some competent people will be tempted into the private sector. In addition, the last few years at the top of the public sector (head teachers, police commissioners, Whitehall mandarins) will be less of a pension bonanza, making it more likely that these people will leave early to seek high-paying jobs in the private sector.

In short, Hutton would like the quality of private sector workers to rise relative to the quality of public sector workers, especially for the higher echelons. Is that a good idea? I haven’t a clue.

There is one aspect of Lord Hutton’s proposals that does seem unambiguously sensible: the idea that future public pensions will be paid out later by default. Rather than altering the balance between public and private sectors, this proposal tilts the playing field in favour of keeping experienced public servants in their jobs, and away from paying them to sit on the beach for almost as long as they spent in the workforce.

Fiddling with the relative pay of public versus private sector workers is a matter of fairness only in the short term. In the long term, it’s about deciding which parts of the British economy most urgently need talented people. Although Lord Hutton’s supporters and critics do not use this language, that is what is really at stake.

Also published at ft.com.

George Osborne, an unlikely Robin Hood

George Osborne, we were told, would be offering a “Robin Hood” budget. It is a bold piece of branding, ranking alongside Jeremy Clarkson’s heartfelt environmentalism. In most ways after all, the chancellor with his privileged upbringing is an unlikely Robin Hood.

But Mr Osborne is trying to tap into something rather deep in the nation’s psyche: the idea that the country is stuffed full of super-rich bankers, tax-evading multinationals and Lear-Jet-riding non-doms, and that he, Mr Osborne, is keen to rob from them to give to the rest of us.

Movements such as UK Uncut argue that if only Mr Osborne had the courage to play Robin Hood, the deficit could be banished without the need for cuts or tax rises for ordinary voters. About £80bn a year should do the trick. But are £80bn a year of easily harvested tax revenues simply sitting there, begging for Mr Osborne to collect them? Learn More

Some notes on a cash crisis

Joy for some customers of Australia’s Commonwealth Bank recently, as rogue cash machines began dispensing munificent sums, thanks to a software problem. Given the amount of money the western world has flung at its banks over the past three years, it makes a nice change when the banks fling some back.

The cash machine escapade has already led to the conviction of one rather reckless teenager, who reportedly took out AS$1,500 and high-fived a friend while police were watching. It also reminded me of the reverse scenario being discussed at the height of the financial crisis: what would happen if a bank had to shut down its cash machines?

“I don’t think I’d want to be in a society where people couldn’t get their hands on their money,” says Paul Smee, the chief executive of the UK’s Payments Council – and thus one of the people in charge of making sure that doesn’t happen. I recently spoke to Smee and to Edwin Latter, director of the Link cash machine network, to weigh up the risks.

Naturally, both men were keen to convey a sense that they are ever vigilant and that the cash machine network is safe. Cash machines can fail for technical reasons, and occasionally they do, but there is plenty of redundancy in the system. If Link failed, for example, customers would still be able to withdraw cash if they seek out their own bank’s machines. They would also be able to use credit cards and get cash from shop tills, which operate on different networks. The system used to deposit salaries in bank accounts, Bacs, is on yet another network. In the unlikely event of a sustained failure of one of these systems, there seem to be plenty of alternative ways to prevent the collapse of society.

In short, the weakest Link in the cash machine networks is one few people imagined until 2007: the banks themselves. If a bank fails and is not rescued either by a competitor or by the government then its customers will find themselves cast adrift, explains Latter: “the [cash machine] operators would say, ‘we’re no longer dispensing cash to your customers’.”

The terrifying prospect is that your cash cards would be refused, not because you were out of cash but because your bank was. No wonder governments stepped in to rescue banks. The hope is that they are now acquiring the legal and organisational tools which, in some future crisis, would allow them to rescue customers without necessarily rescuing the banks.

While Northern Rock and Lehman Brothers are the most obvious symbols of the crisis, its first symptom was a sudden jump in the rate at which banks were willing to lend money to each other. But Latter points out that even if the interbank lending market dried up completely, so that banks were utterly unwilling to lend to each other – he calls this a “very apocalyptic scenario” – the cash machine network is small enough that it could continue unaffected, at least for a while.

In the UK there are 100 million bank cards, typically with a £250 daily limit, so if we were truly panicked, we could collectively withdraw £25bn per day, which is 50 times the usual total. It might give the armoured car companies something to worry about as they tried to top up 63,000 cash machines, but even £25bn is a smaller sum than one might think. The interbank network Chaps typically carries £300bn per day, 600 times as much as is usually withdrawn from cash points. “You could add up every note in every ATM in the UK,” says Latter, “and it wouldn’t come close to the sums in the interbank markets.”

Latter adds that at no stage in the crisis was there the slightest indication that we were collectively withdrawing more cash than usual. The economists, it seems, were more alarmed than the public.

Also published at ft.com.

Outside Edge: Date tips for the lovelorn stats nerd

The basket of goods and services chosen by Britain’s Office for National Statistics to calculate inflation provides a geek’s-eye view of the way we live. But it also reveals a kind of truth. Each year the list is updated to reflect spending habits, providing a glimpse of the nation’s changing soul, as expressed through its wallet.

This week, online dating was included for the first time. That feels right. Dating agencies were once the place losers went to date other losers: who else chooses to seek professional help in meeting people who have themselves been forced to resort to professional help? But now internet dating is YouTube to conventional dating’s three-channel TV, while speed dating provides a chance to quite legitimately make a pass at 20 people, in less time than it takes to watch a film.

But I detect a hidden agenda. Might not Britain’s lonely and lovelorn statisticians have an ulterior motive for combing over the mountains of data churned out by these dating media? Indeed, knowing the romantic insights these might allow them to exploit, might they not have lobbied hard to include them in the basket?

For let us be clear: these are data to bring a flush of passion to any statistician’s cheeks. Speed dating generates reams of evidence about who says “yes” to a second date, and why. Previously, such gold dust for the lonely-hearted required decades of covert surveillance, and a persuasive lawyer.

Web dating offers even larger troves, as researchers bestacnedrug.com comb digital profiles. From this, the psychologist Dan Ariely, and economists Ali Hortaçsu and Günter Hitsch, discovered that those in search of romance online claim to be implausibly rich, slim, blonde and beautiful; that men don’t reply to women who claim to earn high salaries; and that everyone should post a photograph – otherwise suitors draw their own conclusions.

Surely it is no coincidence that the nation’s lecherous statisticians have alighted on such data-driven tips for dating success. The number-crunchers are looking for love too, and they, of all people, know that numbers are their friends.

Yet, for real insight, these impassioned bean counters should turn to economists Michèle Belot and Marco Francesconi, whose work digs into the dos and don’ts of speed dating. Some conclusions may not be surprising: the women liked rich men; the men liked slim women. But their true insight is in showing how users react to market conditions. If pickings are slim, both men and women will quickly lower their standards, taking the best of whatever is on offer, even if the best is not terribly good.

This, then, is one sure-fire dating tip even the unloved of the ONS can take to heart. Forget about surreptitiously combing spreadsheets in search of that perfect romantic gambit. Instead, go speed dating – but bring a short, ugly friend with you.

The writer is a tall, blond non-smoking millionaire with above average looks and a GSOH.

Also published at ft.com.

Management Lessons from the War in Iraq

My talk at TEDx Warwick is now online – a sneak preview of Chapter Two of Adapt.

7 June 2011, Speech at LSE

On Tuesday 7 June 2011 at 6.30pm, I’ll be giving a talk on “Preventing Financial Meltdowns”, one of a series of seven “Adapt Lectures”. Please come.
Venue: Sheikh Zayed Theatre, New Academic Building

In this lecture, Tim Harford, the author, radio presenter and newspaper columnist looks at the lessons we can learn from the financial crisis and how the collapse of Lehman Brothers has close parallels in disasters such as Three Mile Island and Deepwater Horizon. This lecture marks the launch of Tim Harford’s new book Adapt: How Success Always Starts With Failure.

This event is free and open to all with no ticket required. Entry is on a first come, first served basis. For any queries email email hidden; JavaScript is required or call 020 7955 6043.

Media queries: please contact the Press Office if you would like to reserve a press seat or have a media query about this event, email email hidden; JavaScript is required

Full details from the LSE website here.

Qualifications that still count

The Guardian’s highly respected “Bad Science” columnist, Ben Goldacre, is a doctor and a medical researcher. But The Guardian’s highly respected economics editor, Larry Elliott, has a degree in history. What does this tell us about the state of economics journalism – or about the state of economics?

Elliott is not alone in writing about economics without the obvious academic qualification. The Guardian’s economics leader writer, Aditya Chakrabortty, also has a degree in history. James Surowiecki of The New Yorker has a degree in history too, and studied for some time for a PhD. David Leonhardt, economics columnist at The New York Times, breaks the pattern: his degree is in mathematics. (His Nobel-garlanded colleague Paul Krugman has a greater claim to academic excellence in economics.)

Some financial journalists do have obviously relevant qualifications. Greg Ip of The Economist has a degree in economics and journalism; Neil Irwin of the Washington Post has an MBA. Stephanie Flanders and Evan Davis of the BBC both worked for the Institute for Fiscal Studies. The Financial Times practically has an economics faculty (I have a master’s degree in the dismal science).

Perhaps such educations are a disadvantage. When I had the temerity to raise the subject on Twitter, many replies claimed that formal training in economics was simply brainwashing us into docility. According to this view, the perfect economics commentator should have been carefully protected from academic economics until old enough to see through the nonsense. One celebrated economics columnist told me, off the record, that he sympathised with this view. Larry Elliott was kind enough to dismiss it out of hand. “It would be stretching the point a bit to say an economics degree is an impediment to writing about economics,” he said.

That seems like good sense, but the fact that anyone thinks otherwise should make economists nervous about the sudden diminution in status of their subject. Science journalism provides an interesting contrast: while there are some respected science journalists who lack science degrees, few people would regard that lack as a badge of honour.

Perhaps good journalism has nothing to do with formal academic achievement. “The thing that divides people is not background knowledge, it’s motivation,” says Ben Goldacre. Academic experience can be helpful in reporting a subject, he argues, but if reporters can be bothered to think and do their homework, they’ll do a good job. If not, they won’t.

The challenge for economics journalism, then, is not to send the top journalists back to school for reprogramming; it is to raise the basic economic literacy of generalist reporters who don’t ask the right follow-up question of a politician who spouts some absurdity, or who swallow and regurgitate a dubious press release without carefully chewing over the contents.

“The level of ignorance in the press corps about economics is just enormous,” says Gabriel Kahn, a professor of journalism at the University of Southern California and former Wall Street Journal bureau chief. David Leonhardt goes further: “We need more numerate journalists,” he told me, in an e-mail, “people who aren’t afraid of numbers but who understand their factual power.”

As for the reputation of academic economics, the pendulum swings back and forth. At the height of the Freakonomics boom, merely being an economist conveyed an air of genius, and newspapers were hungry for new tales of economic derring-do. Today, the working assumption is that economics is in crisis and its theories are absurd. Perhaps if academic economists simply wait, they will find themselves fashionable again in due course.

Also published at ft.com.

Outside Edge: A bonus in his fingertips

Minutes of the March 11 2011 meeting of the remuneration committee of HotShots Bank

The committee approved the minutes of the previous meeting.

The committee contemplated the conclusions of Project Merlin, under which it had promised to pay exactly the bonuses it had been planning to pay all along, before moving on to its main business: the pay and conditions of star trader, Mr Charles Sheen, following recent complaints about his highly unusual behaviour.

The committee heard that, at Mr Sheen’s most recent performance review, he was asked by his line manager whether he had been abusing prohibited substances.

He replied: “I am on a drug. It’s called Charlie Sheen. It’s not available because if you try it, you will die. Your face will melt off and your children will weep over your exploded body.”

It was suggested to Mr Sheen at the time that, in fact, “Charlie Sheen” was not the only drug he was taking. He replied, “I probably took more drugs than anyone could survive. I was banging seven-gram rocks, because that’s how I roll. I have one speed, I have one gear: Go.”

When it was further put to Mr Sheen that this was incompatible with HotShots Bank’s code of ethical business practices, he blamed the bank “for giving me this much dough knowing who they were giving it to.”

When asked to comment on his business performance, Mr Sheen replied, “I’ve got magic. I’ve got poetry in my fingertips. Most of the time – and this includes naps – I’m an F-18.”

Noting grave concerns about his deportment in the office environment, the remuneration committee moved to the matter of Mr Sheen’s behaviour in front of the parliamentary working group on banking reform, at which he had waved a machete and declared himself to be “winning”. His convictions for domestic violence were also officially recorded in his personnel file, and it was noted that his wife had recently been awarded a restraining order against him.

The committee then considered objective measures of Mr Sheen’s performance. These were impressive: Mr Sheen’s trading had contributed tens of millions of pounds to the bank’s bottom line over the previous year.

At this point the committee was minded to view Mr Sheen’s transgressions as a private matter, and not one over which it behoved HotShots Bank to take an excessively paternalistic line.

It was also noted that Mr Sheen, a self-pronounced “total freakin’ rock star from Mars” appeared to regard himself as very mobile. If not paid a bonus in line with his compensation expectations, he would surely quit.

It was not clear exactly how Mr Sheen’s compensation expectations were formed, nor what psychological condition he was in when he formed them. Nevertheless the remuneration committee concluded that Mr Sheen was “winning” and unanimously decided to award him £48m plus a guaranteed bonus of the same size next year.

There being no other business, the committee concluded the meeting.

Also published at ft.com.

Facebooked

I have finally succumbed and created a Facebook page. If the technology works out, it should contain selected tweets plus the articles published on this site – and more to the point, suggestions and contributions from everyone else.

If you’d like to take a look, the page is: http://www.facebook.com/timharford1

8th of March, 2011MarginaliaComments off
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