Tim Harford The Undercover Economist

Articles published in June, 2011

Smashing plates won’t rescue this taverna

“With all due respect, doctor, I don’t think it’s me who needs to see a shrink.”

“Don’t worry. A lot of people feel a bit awkward when they first lie on this couch. This is a safe, non-judgmental space.”

“I wish the Essex Community Business association was as relaxed.”

“But you’re the chairman of the ECB association. Tell me why you feel that way.”

“Look, I always felt that the ECB association was supposed to be an informal talking shop, a way for people with shared interests to make new friends and perhaps even launch joint projects. Everyone was really happy when Georgios, the new owner of the Plaka Taverna, wanted to join – the more the merrier.”

“That all sounds very reasonable.”

“Well, sure. But then it turned out that the Plaka had some pretty serious problems when Georgios took over. It had been running up debts that none of us knew about. Georgios blamed the previous owner of the Plaka. Whatever – suddenly Georgios is knocking on the door of Mr Saville, the bank manager, asking for a bigger overdraft.”

“I see. But why did that cause a problem for you?”

“Because Mr Saville didn’t want to lend any more money to Georgios. He said that Georgios’s business wasn’t growing fast enough. Mr Saville didn’t think Georgios could repay his debts.”

“Isn’t that between Georgios and Mr Saville?”

“Well then Georgios came to us, and for some reason the ECB association decided to have a whip round so that we could tide Georgios over until business picked up.”

“I see. And is there any reason to believe that business will pick up?”

“Not really. Business is slow – to be honest, he’s overcharging for mediocre souvlaki. And his own costs are high: Georgios’s staff are overpaid and underemployed.”

“It sounds like Georgios needs to reduce his prices, sack some waiters and cut the wages of the rest.”

“We told him that, but his staff are complaining that suddenly the Essex Community Business association thinks it’s running the taverna. They’ve been protesting, stealing stock and frightening away the customers. It’s crazy.”

“It does seem unhelpful – but perhaps they’re hoping that somebody else will take the pain.”

“Look, there’s no way that Mr Saville the bank manager is going to lend another penny to Georgios. Georgios himself is still borrowing money just to pay his staff – leave aside the money he owes to Mr Saville and to the ECBA.”

“But what I can’t understand is why the ECBA got involved at all.”

“It think it’s partly that we felt it would look bad for a fully paid-up member of the ECBA to go bankrupt.”

“It’s looking bad already: Georgios’s staff are burning boxes of ECBA ties in the street.”

“It’s not just that. We’re worried about Mr Saville. If Georgios doesn’t pay his debts then Mr Saville will lose money. That’s going to make trouble for him. He may be less willing to lend money to other ECBA members. I know José is likely to want an overdraft extension too.”

“But does José have a viable business?”

“Are you joking? He has a chain of tapas bars all over south Essex. It’s been tough but he’ll pull through for sure, if he gets the money.”

“So if I understand the situation, you’re lending money to Georgios that you know he can never pay back, and demanding that his staff make sacrifices they are transparently unwilling to make, in order to protect Mr Saville’s bank, in order to protect José, who in some unspecified way is connected to Georgios’s fate.”

“It does sound a bit strange when you put it like that. I think the theory is that if we don’t throw money and yell impractical and unwelcome management advice at a transparently bankrupt business, then maybe a perfectly viable business will be damaged. Especially since there won’t be any money left, because we’ll have given it all to Georgios, who will have given it all to his waiters. Does that make sense?”

“You tell me.”

“You’re right. It makes no sense whatsoever.”

“Please don’t be defensive – I didn’t say that. However, I do think we need to continue this conversation twice a week on an indefinite basis. We’ve got a lot of progress to make.”

First published at ft.com

Globalisation and the mafia

In September 1996, Boris Sergeev, the director of an import-export company from Rome, was in Russia to conclude negotiations for a lucrative contract to import frozen meat (his name has been changed). Negotiations went well, and Mr Sergeev celebrated by booking a suite at a luxury hotel near Red Square and heading to the fourth-floor bar.

At five minutes to seven on September 23, two men entered the hotel, displayed a fake pass to reassure its armed guards, and took the elevator to the fourth floor. They walked past the prostitutes at the bar and approached Mr Sergeev’s table. Then they pulled out two silenced pistols and shot him four times in the head. The men then calmly walked back to the elevator, returned to the lobby, and six minutes after entering the hotel, they had disappeared into the bustle of the Moscow night.

It is with this story that Federico Varese begins his book, Mafias on the Move. Professor Varese, of Oxford university, is an expert in the study of organised crime. Mr Sergeev, it transpires, was attempting to establish an outpost of the leading Russian mafia group, the Solntsevskaya, in Rome itself – one of many attempts by a mafia group to open an international branch.

Given that everything seems to be global these days, including the drug trade and the sex trade, it stands to reason that mafias should be global too. By “mafias”, criminologists mean a particular type of criminal group that tries to control markets and territories. Mafias on the move do so far from home.

For example, more than 50 years ago, the ’Ndrangheta mafia from the south of Italy attempted to cartelise the construction industry in Bardonecchia and the drug trade in Verona, both in the north of the country. Mr Sergeev’s mafia was even farther afield. The conventional wisdom, bolstered by a host of popular books, is that globalisation makes these efforts easier and that crime is now thoroughly transnational.

Varese begs to differ. Mafias, he says, are intrinsically local. They derive their power in part by a penetration of local civil society and politics, and in part from the inability of their victims to relocate.

Rocco Lo Presti, an ’Ndrangheta boss from Calabria, was entirely successful in transplanting his mafia to Bardonecchia. But the process had nothing to do with trade between the north and south of Italy. Lo Presti’s methods were to control local politics and to cartelise the construction industry, which by its very nature was immobile. Many construction firms welcomed Lo Presti’s policy of keeping out their competitors; illegal migrant workers thanked Lo Presti for finding them jobs. Lo Presti provided valuable services to well-entrenched local interests at the expense of society as a whole.

But when the ’Ndrangheta tried to monopolise Verona’s large drug trade they found themselves frustrated. Verona was too large to have its elections manipulated, and Verona’s drug dealers had no need of ’Ndrangheta protection because they knew and trusted each other.

But the chief problem for the ’Ndrangheta was that the drug trade is intrinsically mobile and competitive. When threatened, dealers and couriers moved around. Precisely because drugs were a footloose industry, the southern mafia failed to control them.

It turns out that globalisation itself is no help to a mafia, and frequently a hindrance. We should be more wary of emerging-market economies where there is money to be made but a weak state. Without a local industry in need of protection, there is little opportunity for a mafia to gain a foothold.

“If mafiosi exist in an area where no significant unprotected market exists,” writes Varese, “I contend that they will simply be unemployed mafia enforcers.”

Also published at ft.com.

How to ring-fence a casino marriage

“Have you considered a complete split? Separation?”

“No. That would be going too far. But Bob is just behaving intolerably. I just need more stability. He’s been taking advice from some special commission.”

“Well – have you considered ringfencing? That nice boy George Osborne says it’s a good idea.”

“How does it work?”

“Well, let’s imagine that your marriage is like a large bank.”

“It’s not that bad.”

“I hear you. But just imagine. Banks have two sides to them. There’s the ‘utility’ and the ‘casino’. The ‘utility’ is all the banking stuff that’s actually useful, like being somewhere safe to store your money and taking the money you deposit and lending it out for mortgages or small business loans. And making sure your pay cheque actually arrives in your account.”

“And Bob’s pay cheque.”

“Yes. And the ATMs and debit cards. The kind of stuff that if it all went away, civilisation would collapse into some sort of zombie apocalypse. This is all utility banking.”

“Right.”

“And then the casino bank is a gang of wide boys and mad scientists making huge bets with each other in an attempt to make money. The losses at the casino can cause trouble in the utility. Which is why you need ringfencing.”

“So how should I ringfence my relationship with Bob?”

“The first thing to do is to ensure there’s no possibility of cross-contamination from any risky activities he’s been undertaking.”

“Don’t be disgusting! Bob would never … would he?”

“They all said Bernie Madoff was a pillar of the community, didn’t they?”

“God, you’re right. Shall we get another bottle?”

”Excellent idea. But let’s focus, my love. So you could start by erecting a Chinese wall in the bedroom.”

“I could. It wouldn’t make much difference, he hardly comes near me. Except occasionally after he has been on a bender.”

“But that’s why you need the protection. You don’t have much to do with each other, except the shared name and the shared accommodation and it’s those occasional attempts to grab your assets that do the damage.”

“OK. You’ve convinced me. Chinese walls it is. But what about the finances? Bob can make a lot of money in a good month but then sometimes he’ll blow it on the horses. At least he says it’s the horses. And then he’s dipping into the joint account to tide him over and the next thing I know we can’t make the mortgage payments.”

“That is another thing – you could always deleverage. Stop taking so many holidays, pay off some of the mortgage. Maybe even sell the house and move somewhere smaller.”

“No way. The house is undervalued. We’re holding it to maturity.”

“Suit yourself. But you need to ringfence the household account. This is the money you need to meet your regular obligations. Think about the school fees, the car, the one-on-one Pilates sessions. You have to protect your core activities.”

“And I don’t think Daddy will be willing to give us a capital injection next time.”

“You’re lucky he did the first time around.”

“You’re right. You’re right. God, I need a drink. And I’m still worried.”

“About what?”

“Well – is it really possible to do this ringfencing? Bob’s name is still on the house and the car. He can run up debts using our joint assets. I suppose we could put them in my name only. But even then, he might find a way around it. And I don’t think I could afford this without Bob’s salary.

“And he’s so smart! He advises me on my pension and my investments. I need Bob’s advice there but what if he uses them to take the same old risks? And if I take them over, who’s to say I’ll be any better?”

“I see what you mean. But you need to try. You need some self-respect, darling. You can make your own way in the world. You can’t be the dowdy, boring old thing who just hangs around with Bob.

“You’ve got to be your own woman, make your own money, be respected for what you do. You can be a part of this relationship with Bob and still be proud of yourself.”

“Are you sure?”

“Yes! No. I mean, maybe. It’s going to be difficult. Maybe you should go for the divorce after all.”

First published at ft.com

18th of June, 2011Since You AskedComments off

When experts argue

In 1984, a young psychologist called Philip Tetlock began an extraordinary two-decade investigation into the limits of expertise. As the most junior member of a committee of the National Academy of Sciences, Tetlock was charged with figuring out how social scientists might help interpret the implications of Ronald Reagan’s hawkish stance in the cold war. He canvassed every expert he could find, and was struck by the fact that the most influential thinkers on the cold war flatly contradicted each other.

Tetlock’s resulting book, Expert Political Judgment, is excellent but technical. It has become influential: you can read accounts of it in Nassim Nicholas Taleb’s The Black Swan, Dan Gardner’s Future Babble and Kathryn Schulz’s Being Wrong. Dan Gardner’s book asks the logical next question: if, as Tetlock shows, expert forecasts are such a disappointment, why do we seem to be so addicted to them? It is a puzzle. Although we know forecasters are often humbled, it doesn’t stop our strange fascination with forecasting: we love to be told, confidently, what will happen next.
Disagreement between talking heads seems to be the natural order of the universe, but Tetlock wasn’t content to leave it at that: after all, when the leading experts simply disagree about the key problem of the age, what should that tell us about the limits of expertise? So he rounded up nearly 300 experts, from a variety of professions and academic disciplines, asked them to make specific, quantifiable forecasts – they answered 27,450 questions between them – and then waited to see whether the forecasts came true. They rarely did. [Apologies – this paragraph was missing. T.H.]

I am often asked to make forecasts myself, to my bafflement. The honest answer to “will the cuts cause a double-dip recession?” or “will the eurozone survive?” is “I don’t know”. Perhaps I should just offer a prophecy instead – after all, says Gardner, nobody is likely to catch me out. We don’t follow up on forecasts. We assume correct forecasts are the result of brilliance rather than luck, and we fail to call people on forecasts-gone-wrong. We are also happy to accept feeble excuses: the forecast almost came true; or the forecast will come true eventually. (One of the secrets of Tetlock’s study was simply that he kept careful records and wouldn’t let his experts wriggle away from failed forecasts.)

No wonder economists make forecasts: we are supplying what the market demands.To the New Yorker’s Louis Menand, “the best lesson of Tetlock’s book may be the one that he seems most reluctant to draw: Think for yourself.” It’s a sound enough principle but there’s a reason why Tetlock himself hesitates to draw that conclusion: his results clearly show that experts outperform non-experts.

To my mind, the problem is not the experts. It’s that the world is simply too complicated for anyone to analyse with much success. One response to that is not to demand forecasts when forecasts are useless. But that approach only goes so far, because most decisions in life involve some element of forecasting. George Osborne’s austerity budgets, Steve Jobs’s “walled garden” strategy for Apple, my decision not to study for a degree in English literature – all of these choices required a view about what the future holds.

That means that our plans will often need to be torn up. This doesn’t sit easily with many voters, or shareholders. Margaret Thatcher famously said “the lady’s not for turning”, while Tony Blair proclaimed that he didn’t have a reverse gear. These would not be attractive attributes in cars, but they seemed to go down well enough with voters, who rewarded the pair with six general election victories between them. Yet if the road ahead is unknowable, the ability to change direction should not be underrated.

Also published at ft.com.

Banks, bills and bail-outs

I’ve been getting a few e-mails and tweets recently asking how much of the deficit is the result of bailing out the banks. It turns out that the answer is simple: none of it.

Let’s look at the situation in the UK. The bail-out – if that is the word – came in a number of forms, including the nationalisation of Northern Rock, compensation for depositors who lost money in Icelandic banks, capital injections into the likes of RBS and Lloyds, and extensive guarantees of bank debt designed to reassure investors and so make it easier for banks to raise money and keep on doing business.

Hundreds of billions of pounds were ostensibly on the line, but such figures were always somewhat deceptive: they described the maximum possible losses on the government’s guarantees and capital investments. What were the actual losses?

The final bill is not yet in, and won’t be until the government successfully divests itself of its shares in banks. But you can get a rough idea of the trajectory by looking at Budget statements in recent years. Alistair Darling’s 2009 Budget estimated that total cost of the Treasury’s interventions would eventually add up to £20bn-£50bn, a hefty sum indeed – but still not enough to explain a deficit of around £150bn two years running. Darling’s 2010 Budget revised the figure to a much-less-frightening £6bn, as the price of bank shares recovered and guarantees expired without being used. George Osborne’s emergency budget a few months later offered a figure of £2bn.

Now the Office for Budget Responsibility has the job of calculating these figures. Its estimate at the time of the last Budget: a profit of £3.4bn.

No sooner had these figures emerged than the US Treasury published its own estimate of the costs of its bail-out operations. The result: a profit of $24bn.

One reader writes to point out the so-called “bail-outs” were in fact successful investments by governments operating as vulture funds. That may be putting it a little too strongly – but it is a far more accurate view of the situation than the view summed up by the advertising slogans of a new film on US cable TV, Too Big to Fail: “Main Street took the fall. Wall Street got the cheque.”

Are we fussing about nothing, then? Not at all. The “bail-outs” might easily have cost money: just because an insurance policy has no claims on it, does not mean the policy was free to offer. In other circumstances – smaller states, more incompetent banks, cruder interventions – support for the banks has brought governments to their knees. Anyone reading this in Ireland will know exactly what I mean. There is no reason to believe that a future bail-out will not be ruinous.

So why does this discussion matter? It alters the debate about what we want to do to the banks. If you take the perfectly understandable – but wrong – view that the banks have swallowed a huge public subsidy and have delivered little in return, you should be delighted at their threats to move to Switzerland or Singapore. If you recognise that well-functioning banks are vital to the economy, the policy problem becomes far harder: keep them, discipline them, make them more robust and far less likely to risk public money next time. All of which is a far harder problem than cheerily waving them goodbye.

And yet it is a problem that must be solved. The banking crisis did appalling damage to the economy as weak banks hoarded capital, leaving ordinary businesses and consumers gasping for credit. Andrew Haldane of the Bank of England has estimated that the cumulative loss of output in the UK economy, in net present value, could be several trillion pounds. So by all means, let us blame the banks – but not the bail-out.

Also published at ft.com.

On A.C. Grayling, odium and the Stasi

“Have you heard about this new private university that A.C. Grayling bloke is setting up?”

“The one that’s 18 grand a year?”

“That’s the one.”

“Can’t say I’ll be queuing up to pay that myself.”

“Why would you? You’re thirty-nine. You’ve had an education at the University of Life.”

“The University of Life doesn’t come cheap either, mate. Seems a bit funny, though, to pay over £50,000 for a degree based on the promise that you might get to see Richard Dawkins give a lecture. I mean, you can see Richard Dawkins give a lecture at Waterstones if you’re willing to wait for his next book tour.”

“Terry Eagleton agrees with you. I read this thing he wrote in the Guardian. He said the whole idea was odious.”

“Odious?”

“That was the word. He said that Grayling peddles Just So stories and Dawkins touts a simple-minded version of history, and neither of them are likely to turn up very often. So it’s going to be rubbish. Also, he says it’s going to be an ultra-Oxbridge, the beginnings of an educational apartheid, where rich students stroll into plush jobs thanks to their degrees from the New College of the Humanities.”

“Interesting. I suppose one of those things might be true.”

“Either of them might be true, mate. Either of them. Probably not both at once, though.”

“Smart bloke, though, that Terry Eagleton. I read his book Literary Theory once. Good stuff.”

“Yes. He says education shouldn’t be a commodity. His students shouldn’t be asked to choose between the mediocre £10 insights on Wuthering Heights and the sparkling £50 version. True words. How much did Literary Theory cost you?”

“It was £7.99 if I recall. It was a few years back, though. Paperback.”

“Paperback? And of course those Eton types would have been able to afford the hardback for twice the price. Odious.”

“At least the article in the Guardian was free. If you had an internet connection. Otherwise you had to pay. A bit of a two-tier system, come to think of it.”

“Another pint?”

“Thanks. The last round cost me almost as much as a copy of Eagleton’s Literary Theory – and it was over a lot more quickly, too.”

“So what do you reckon is going to happen to this private university?”

“I don’t know. If they’re charging twice as much as anyone else for a substandard product I expect they’ll be as profitable as a taxidermist specialising in stuffed puppies.”

“Who cares? It’s not as if it’s the Millennium Dome – I mean, we’re not paying for it, are we?”

“Probably not. Unless A.C. Grayling is backed by a loan from a nationalised bank, which is not a possibility I’d like to rule out.”

“But if it’s going to go belly up and it’s not taxpayer funded, what’s the problem?”

“I don’t know, really. Maybe the problem is that it will end up being really successful, pioneering all kinds of high-quality educational techniques, freeing up space at other universities and attracting talented academics to London from around the world, but only rich kids will enjoy the benefits.”

“I can see how it would be worrying. It would be a bit like West Germany in the days of the Berlin Wall – very inconvenient for the more community-minded citizens of the East if money-grubbing pushy types keep trying to go west.”

“I don’t think Terry Eagleton is planning to gun down would-be NCH students with a Kalashnikov, to be honest.”

“No, fair play. I’m sure not. At 54 grand for a degree I don’t think he’ll need to, either. It’s probably going to be a disaster.”

“It probably is. I suppose there is the chance that they might experiment with all kinds of new ideas, though, and discover something useful about providing a good education. And those good ideas might even be copied by the rest of the university system.”

“Don’t make me laugh. It’s not likely, is it?”

“No. It’s not likely. And it’s certainly not a chance we should take. Odious is the word.”

“Yes. Mind you, the country is full of odious things. There’s Razzle, and Frappuccino, and celebrity biographies. Look at us. A free country, and this is how we choose to spend our money.”

“Yes. A disturbingly free country. Odiously so.”

Also published at ft.com.

RSA Event video: Why success always starts with failure

The RSA have edited highlights of my talk on Monday, introducing some of the ideas behind “Adapt”.

A failure tour of New York

NPR’s Planet Money took me on a tour recently. Listen here.

On today’s Planet Money, we hit the streets of Manhattan with economist Tim Harford. In his new book, Adapt, Harford argues that success always starts with failure.

Harford takes us on a failure tour of New York. Highlights include a Gutenberg Bible (turns out the Bible business wasn’t so good to Gutenberg) and the Woolworth Building (Woolworth’s had some great innovations in its day, but eventually got beat by big-box stores).

Failure, Harford argues, is essential to economic growth. Old companies fail and are replaced by newer companies with fresh ideas.

Perhaps inevitably, we wind up on Wall Street.

“Of course we have this classic phrase now, ‘too big to fail,'” Harford says. “That really tells you what was wrong with Wall Street: We created institutions that couldn’t fail safely.”

Subscribe to the podcast.

 

5th of June, 2011RadioComments off

Regrets? I’ve had a few

Can failure really be a spur to success? By Tim Harford and Emma Jacobs
First published in FT Magazine 4 June 2011

One June evening in the summer of 2002, the Shubert Theatre in Chicago played host to a new ballet/musical, Movin’ Out. The show was an unlikely collaboration between Twyla Tharp, a dynamic and challenging choreographer, and the songwriter Billy Joel. It was scheduled to open on Broadway that October, but the critics hated it, offering reviews varying from “stupefyingly clichéd and almost embarrassingly naive” to “pile-driving and ill-conceived”.
So enthusiastic was the criticism that the New York paper Newsday broke with tradition to reprint one of the choicer reviews, well in advance of the Broadway opening. It was left to Twyla Tharp, who had dreamed up the project and directed and choreographed it, to somehow fix the multi-million-dollar mess.
Tharp’s experience, as related in her book The Creative Habit, exemplifies the textbook response to failure: she took the criticism on board, made the necessary changes to her show, and opened on Broadway to glowing reviews. The show won two Tony awards, one for Tharp’s choreography.
The story of Movin’ Out is striking not just because it offers an inspiring narrative of adversity and triumph, but because this sort of transformation is unusual. The idea that one should bounce back from failures is an old one. King Robert the Bruce’s eventually successful war against the English is said to have been inspired by a persistent spider spinning a web in the cave where he was hiding. This was eight centuries ago, yet suddenly the idea seems fashionable – perhaps because there is a lot of failure to go round these days.
In the abstract, learning from your mistakes is an easy and uncontroversial idea. In practice, the whole, facile concept is shot through with difficulty. Who is to say that a mistake has been made? Are the lessons to be learnt really so obvious?
We approached public figures – entrepreneurs, artists, politicians and, of course, bankers – associated with spectacular setbacks of one form or another, asking them to explain what effect the failure had had on them. There were few takers, and one of the refusals – from the former chief executive of a failed bank – was particularly colourful. It seems that these redemptive stories of “learning from mistakes” are less inspiring from the wrong end of the steamroller. Learn More

But I can only afford a doll’s house

‘Two-thirds of 8,000 20- to 45-year-olds who do not own homes now believe they have no hope of ever purchasing one.’ The Financial Times, May 18

“Dad?”

“Yes, my darling?”

“Ed Miliband says that I’ll have to wait until I’m 40 before I own my own home. Is that true?”

“Who can say, my dear? You already own a modernist doll’s house and a sugar-pink play house. Let’s not wish our days away, shall we?”

“But houses are so expensive.”

“You’re telling me. That hand-crafted wooden one cost a fortune and I hardly ever see you playing with it. And grown-up houses are expensive, too.”

“Why?”

“It’s partly supply and demand. While the Labour government was in power, we had open borders, meaning more people came to live in the country. And we had tough planning restrictions, which made it hard to build new houses. So rent and house prices had to rise until people were forced to cram themselves into small homes. Financial regulation played a role too. Banks were ever more willing to lend implausibly large sums and nobody wanted to stop them. The Bank of England was instructed to target inflation, which made it hard to do anything about a possible bubble. The result was that anyone with any sense was priced out of the housing market.”

“Gosh. I didn’t know. It’s very noble of Mr Miliband to campaign against the legacy of that Labour government. What party is he in, Dad?”

“That’s a little complicated to explain. It’s not clear whether the new government is doing anything very different on these questions, in any case. House prices seem to be falling because the banks stopped funding silly speculative bets, but don’t worry: I’m sure it’s just a matter of time before they start shovelling money out of the door again. Why are you so eager to own a house, anyway?”

“My friend’s Dad says that renting a house is throwing money down the drain.”

“Is he the one who hates his job and hates his boss but can’t move because his house is worth £50,000 less than he paid for it?”

“I’m not sure, Dad.”

“Well, in any case, he may be right and he may be wrong. If you buy a house for £200,000 with a 5 per cent mortgage, you need to pay the bank £10,000 a year to rent its money, before there’s any question of paying off the mortgage itself. Whether it’s cheaper to rent the house or to rent the money is an empirical question. House prices have often gone up over time but so have share prices.”

“Oh.”

“There’s a decent argument that everyone should borrow a few hundred thousand pounds, use it to buy shares, and gradually pay off the loan – seems to me just as sound as taking out a mortgage. Either way, it’s a risk. Buying a house does hedge you against future fluctuations in house prices, but it’s what we call a ‘leveraged bet’. They don’t always work out so well.”

“Everyone says there’s no substitute for owning a place of your own.”

“That’s true. If you were renting a house there’s no way the landlord would let you trash your bedroom the way your mother does. But there are disadvantages to owning a house, too. The economist Andrew Oswald reckons that unemployment is positively correlated with home ownership. That may be something to do with people struggling to move to where the jobs are, or more likely, the fact that every spare penny of investment capital is sucked into the housing market rather than being invested in new businesses. Remind me to tell you about the 2007 credit crunch.”

“Dad, they’re calling us ‘generation rent’. I don’t want to be part of ‘generation rent’.”

“Sticks and stones. I’m not sure quite what the problem is supposed to be. I agree it’s terribly expensive to own a house, and it’s very hard to get a mortgage to buy one unless you’re already rich. It’s hardly surprising that very few houses are changing hands – which means we don’t really know what the price of an average house is, because we have so few data points. But house prices do seem to be falling. So I wouldn’t pity ‘generation rent’. I’d pity the people who are slightly older and bought at the wrong moment. Let’s call them ‘generation negative equity’. Now, back to your doll’s house. With any luck you can forget about the topic for a couple of decades.”

Also published at ft.com.

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