Tim Harford The Undercover Economist

Articles published in April, 2012

Our growth fixation is positively baffling

‘It’s official. The UK is in a double-dip recession.’

Financial Times, Lex, April 25

That sounds bad.
I hate to split hairs, but there is no official definition of recession in the UK. But if you’d like to tell yourself we’re in a recession, don’t let me stop you. What’s happened is that the UK economy apparently shrank in the first quarter of the year; it also shrank in the final quarter of last year, and two consecutive such quarters typically earn the tag “recession”. I note that after pronouncing an “official recession”, Lex described this customary definition as “arbitrary and unhelpful”, which sounds about right to me.

You seem to be denying the seriousness of the situation.
I am not denying the seriousness of the situation. I’m just sceptical that we learnt much about it this week. The nation’s commentariat has become fixated on this question of whether the economy shrank over the last quarter because if so, we can call it a recession, if not, we can’t.

You are denying the seriousness of the situation.
The situation is serious, no doubt about it. The British economy hit a peak in 2008 and we’re still not close to passing that previous peak. This is unprecedented in living memory; even in the early 1930s a recovery sufficient to pass the pre-recession peak would have happened by now. By any reasonable measure, the British economy is in deep doo-doo. This makes the fixation on whether growth in the last quarter was slightly positive or slightly negative all the more baffling. What happened this week was this: the Office for National Statistics produced an early and uncertain estimate that the economy was two-thousandths smaller at the end of March than it had been at the end of December. If the ONS had instead guessed that the economy had been two-thousandths bigger at the end of March, I hardly think we’d all be dancing in the streets.

It would have been more welcome news.
Fractionally, yes. We’re treating the whole business as a black/white, pass/fail affair. In fact, it’s all shades of grey. Remember that we’ve already had negative quarters of growth in this non-recovery, in late 2010 and twice in 2011. This time, though, two of them were consecutive. To add to the murk, it’s worth bearing in mind these figures are often revised substantially.

So growth might not be negative at all?

Indeed. Or it might be even worse than we think. Although in this particular case, it’s probably worth pointing out that alternative indicators, such as surveys of business activity, are painting a rosier picture. Many City economists think that if there is a revision of these figures, it will be up rather than down.

Ah, those infallible City economists! So, is this all about austerity or is it the eurozone crisis?
What makes you think the two are mutually exclusive? Clearly neither is likely to help the situation. Although the ONS figures cast an intriguing new light on the austerity debate.

How so?

Take a look at the back page of the ONS press release and it breaks the numbers down by sector, showing how each has developed since 2008.

And what’s the story?
A couple of sectors have done very badly, for example agriculture is down more than 20 per cent and mining is down by almost a third. Others, such as construction and manufacturing, are down by 5 per cent or 6 per cent since 2008.

Has any part of the economy grown since 2008?
Well, yes. There is one sector.

Don’t keep me in suspense – what is it?
Government.

What?
Surprising, isn’t it? Well, strictly, “government and other services”, so it includes defence, the National Health Service and so on, but also private education and private healthcare. That sector of the economy has expanded by more than 5 per cent since 2008; health and social care has expanded particularly strongly.

What happened to austerity?
A couple of things. One is that the government hasn’t really cut much yet. The main austerity measures so far have been tax rises and they might have contributed to the slowdown in other sectors of the economy. So if this is what happens when government services are still expanding, you might enjoy contemplating what will happen when austerity really kicks in.

Also published at ft.com.

Valuable advice on investment advisers

Be careful whose interests the expert is serving…

Don’t try this at home: seek professional advice. A sound maxim, one might think. Unless you know something about electrical wiring, get an electrician in; go to a doctor rather than diagnosing yourself. And, since you are a fallible investor, choose your financial portfolio with the help of an investment adviser.

But do typical investment advisers give good investment advice? Three economists recently published research exploring this question in an intriguing fashion – they mixed the experimental methods of a double-blind controlled trial with the latest behavioural economics, all seasoned with a dash of tabloid sting.

The researchers recruited professional mystery shoppers and asked them to seek advice from a variety of financial advisers in Massachusetts. Each mystery shopper was equipped with one of four imaginary portfolios.

The first portfolio exhibited the classic investor bias of buying whatever did well last year. This is likely to destroy value partly because it leads to excessive trading, which is expensive, and partly because, as the small print says, past performance is no guarantee of future results. Mystery shoppers with this portfolio were instructed to ask the financial adviser to recommend further hot stocks.

The second portfolio demonstrated a different bias: 30 per cent of its value was invested in the imaginary investor’s employer. This is common, but unwise: it reduces diversification for no good reason, and exposes people to the risk that they lose both job and savings if the employer seeks bankruptcy.

These portfolios were artfully designed, because if a financial adviser is paid on commission – and everyone in this experiment was – he will have an incentive to exaggerate the first bias and to discourage the second one, in both cases to create the opportunity for earning a slice of the resulting trades.

The third portfolio was close to perfect, at least from the point of view of the economists, Sendhil Mullainathan, Markus Noeth and Antoinette Schoar. It was diversified and packed full of US bonds and low-cost index funds invested in US equities. Good investment advice would be not to touch it; at a push, a financial adviser might suggest purchasing some index funds invested outside the US.

The final portfolio was the control: a blank slate, invested entirely in cash. The mystery shoppers holding this were told simply to ask for advice, and to state they were willing to take more risks if necessary to earn a higher return.

What I love about this experiment is the way it was done. It was double-blind: not only did the financial advisers not know what was going on, but the mystery shoppers weren’t told why they had been given a particular portfolio, nor that there were three other “treatments” doing the rounds.

Nor did the researchers know which advisers had been visited by which mystery shoppers – the logistics were outsourced to an audit firm.

And the results? Advisers made flattering remarks about the clients’ portfolios and then proceeded to try to change them in exactly the way that would tend to generate commissions. The gap between flattery and action was particularly stark in the case of the diversified low-cost portfolio; advisers were more likely to praise it, but more than 85 per cent of them tried to change the strategy.

Almost a third of advisers refused to give any advice at all until the client agreed to transfer control of their portfolio to the adviser, which makes it almost impossible to rate the quality of the advice. And a curiosity: this behaviour was substantially more common when the mystery shopper was a woman.

My financial advice? If you’re looking for investment advice, be careful whose interests your adviser is serving. And if you’re a financial adviser, beware economists bearing randomised trials.

Also published at ft.com.

A first-class reason to stockpile stamps

‘Royal Mail has increased the price of first and second-class stamps by 14p to record highs, after it was given freedom to set its own prices as it heads towards privatisation. A first-class stamp will now cost 60p, with the slower second-class service priced at 50p from April 30.’ – Financial Times

Cue panic buying of stamps
Perhaps a little. Some shops reckon they’re out of stamps. Others say they have stock, and you can always order in bulk from Royal Mail.

A risk-free investment opportunity?
Not quite. I bought almost £300-worth of stamps and am now an unsecured creditor of Royal Mail: it’s always possible that the company will simply not provide the service I thought I was paying for.

Is that likely?
Outright default is unlikely, I am sure. Chipping away at the value of what is on offer is always possible – anyone who has tried to spend air miles can testify to that.

But it didn’t discourage you from plunging in.
I think the risk is worth the reward. I suppose I could have ordered £3,000-worth of stamps, or £300,000, but I don’t really plan to become a stamp dealer. For more modest purchases the investment looks like a no-brainer. It’s very unusual to have access to an asset whose value is guaranteed to increase by 39 per cent overnight. Normally arbitrageurs would leap in to buy now and sell later so the price today would converge with the price tomorrow. But Royal Mail has the absolute right to set the price of a stamp.

Not in the secondary market.
True. We may well find that very few people buy stamps over the counter for a while, buying instead cheap stamps from the stockpilers. But it’s such a small and occasional purchase for many people that I suspect simplicity will win out and this secondary market is going to be limited.

Fattening the company up for privatisation?

Potential investors would have to be pretty thick to mistake one month’s windfall sales for a trend and the stockpiling will presumably make it hard to judge what demand really is for postage at a more expensive rate.

The new price does seem prohibitive.

Royal Mail is adamant that UK stamp prices are still among the best in Europe.

Is that true?
Well, I’ve always thought that when you think about what is involved to get a letter from one end of the country to another, stamps are a bargain. But less so at 60p a pop, I’ll admit.

And compared with other countries?
It’s not as much of a steal as Royal Mail would like you to believe. If you’re posting a heavy letter second class and make various adjustments for purchasing power parity, you can get British postage to look quite cheap. But when my colleagues on the BBC’s More or Less radio programme compared the cost of posting a couple of sheets of paper, first class, they concluded that the British postal service was about to become one of the most expensive in the world.

Damn lies and statistics, eh?
Well, perhaps. The truth is there are so many variables it’s hard to make reasonable comparisons. It’s very costly to post a letter in Peru, for instance, but they do have the Andes to contend with. And it’s pricey to post a letter in Jamaica, but apparently your letter can travel almost anywhere in the western hemisphere for the same price.

The comparison everyone is making is that stamps will be more expensive soon.
Quite so. No wonder so many people are stocking up. Hopefully the experience will set George Osborne thinking.

Hasn’t he done enough thinking? The pasty tax and all that.
Ah yes, the pasty tax. Imagine if pasties could be stockpiled like stamps.

Imagine? Some of them look like they could survive a nuclear winter.
By pre-announcing a tax on pasties Mr Osborne could stimulate the economy by encouraging stockpiling today. So, imagine what might happen if the chancellor announced next year he would increase VAT again. Everyone would have an incentive to buy now anything that could be stockpiled before prices increased. Macroeconomists such as Simon Wren-Lewis of Oxford university have argued that a pre-announced VAT rise is one of the least damaging ways for a government to implement an austerity programme.

Maybe somebody should tell the chancellor.
I’ll write him a letter. First class.

Also published at ft.com.

The one-night stand gets a digital makeover

Collaborative consumption websites and microlabour services may lower transaction costs but they raise the issue of internet-based trust

Loyal readers will recall the second-hand Volvo I bought six years ago. After an unpromising start, it’s now ticking over nicely. Well, ticking over may be the wrong phrase. Mostly it just sits around. It is occasionally invaluable for our family of five. Still, it hasn’t moved today. It didn’t move yesterday. It feels like a waste of a good car, but what is the alternative?

Digital technology is providing several alternatives, making it easier and easier to unlock the hidden value in such assets. Companies such as Zipcar will rent you a car by the hour. More radical are the likes of WhipCar, which allows owners to rent out their cars when they don’t need them. The opportunities are obvious, as are the obstacles.

WhipCar is an example of what the hip kids are calling “collaborative consumption”. The term seems to cover a multitude of activities. Ebay will let you sell your old stuff to someone who wants it more than you do. It was radical when it first appeared, not because the idea of a second-hand shop was new, but because of its unparalleled ability to find buyers – and sellers – for narrow niches.

More recent sites such as Swap.com or Freecycle will let you swap with others, or simply give away unwanted kit. On Zopa, lenders find borrowers without the need for a bank. Then there’s Airbnb (WhipCar for your spare room), or Landshare (people with unruly gardens meet people who want to do gardening).

Alongside the collaborative consumption sites are microlabour services such as TaskRabbit and Amazon’s Mechanical Turk, both of which connect people with small tasks to be done and people with time to do them. The actual offerings seem very different: TaskRabbit operates in just a few markets, such as Boston, Chicago and San Francisco, and is full of cheerful-looking background-checked locals who will run errands for you or put together an Ikea desk. Mechanical Turk distributes digital tasks anywhere in the world – but it has acquired an unenviable reputation for rock-bottom pay and spam.

For all the variety on show here, collaborative consumption and microlabour share two important characteristics. The first is that digital technology is lowering transaction costs, making it easier and easier for people to sell (or swap, or share) very small offerings. The second is that because so many of these offerings are in the hands of individuals rather than branded corporations, mechanisms for maintaining trust are very important. If we are going to let strangers stay in our homes, or drive our cars, or have custody of our dogs, on a one-night-stand basis, we may need some kind of reassurance.

Internet-based trust mechanisms where website users rate each other after each transaction also seem to be working tolerably well. Online rating systems can be tricked, but have held up better than anyone might have anticipated 15 years ago. Rachel Botsman, an evangelist for collaborative consumption, argues that trust is the pivot on which many of these new possibilities turn. It is hard to disagree. Presumably the likes of Google and Facebook are licking their lips as they contemplate their role in creating digital identities where your punctuality on eBay, efficiency on TaskRabbit and cleanliness as an Airbnb guest can be stitched together in a seamless tapestry of reputational capital.

And there is a curiosity here. Enthusiasts such as Botsman celebrate the way in which the internet enables human connection, where you can transact with real people rather than faceless corporations. But the other thing that is emerging is an ever-more-perfect market, with high price transparency, low transaction costs, and few interactions that cannot be priced and paid for.

The promise is either of creating value with a far more human touch, or of a hyper-competitive global marketplace. It would be fascinating if these things amounted to much the same.

Also published at ft.com.

Enough whingeing about price gouging

‘The latest advice is that there is no need to queue at forecourts or “top up your tank” as there will not be a strike over Easter. The [energy] department is also urging motorists to stick to speed limits to conserve fuel. ’
Financial Times, April 2

Good morning. How are you?

I’m distraught. No Easter egg for me last Sunday.

You’re joking.

It’s true. My wife went to a fancy patisserie to buy one, only to discover that they’d sold out. A cheap one would have done, to be honest.

They’re all cheap now.

They are. It’s puzzling, though. If it’s fine to cut the price of eggs when demand falls, why not raise the price when demand is high? Why didn’t the patisserie put up the price of their last few eggs, rather than sell out on Maundy Thursday?

I don’t think that would have gone down well. Price gouging, don’t you know.

I’d rather think of it as dynamic pricing. I realise people use pejorative terms to describe it, but we’d all be better off if certain products varied in price a bit more.

Example?

Well, last week we discussed water and proper metering and seasonal pricing as a rational alternative to hosepipe bans. Or petrol. Remember the petrol panic a couple of weeks back, when everybody rushed out to fill up their tanks, causing queues and shortages?

You think petrol stations should have whacked an extra 20p on the price?

Of course. Think about it. There was a sudden demand for petrol because of the fear of a strike and shortages.

It was a government-engineered panic.

It was, although the point is, the demand was purely precautionary. The actual need to drive around didn’t change. Some people whose cars were empty had to queue for hours, or even go without. Those who needed petrol would have been able to get 10 litres quickly and easily at the cost of an extra couple of pounds. Meanwhile, the people who late last month were topping up their tanks because – well, why not? – would have waited for prices to fall again. The petrol stations would have provided a valuable social service by charging more, as well as making money into the bargain.

The petrol stations that did raise prices were vilified.

They were, which shows that some people don’t know what’s good for them. The idea of the “just price” has a long history but very little economic basis. There are some theoretically sophisticated stories one can tell explaining why prices tend to stick, but the truth is that in most cases we’d be better off if they moved more. The latest toys wouldn’t all sell out at Christmas, there’d be fewer hosepipe bans, you wouldn’t need a lottery to allocate Olympic event tickets and I’d have been chowing down on an Easter egg last weekend.

Life doesn’t always respect your fancy economic models.

Indeed not, and thank goodness – although the laws of supply and demand are hardly fancy. But the fuss about price gouging really does make us worse off. There are two problems with prices that don’t rise quickly enough in the face of fixed supply and high demand. First, the goods may not reach the people who want them most. Second, even the lucky customers who get the cheap product may lose out because of the non-monetary costs of getting it.

Such as?

Such as queueing for hours to get the latest iPhone or a day pass to Wimbledon, for example. Many, surely, would happily pay a little extra to sidestep these wholly avoidable costs.

If this is such a brilliant idea, why don’t we see more of it?

The simple answer is because people hate it and call it price gouging. Why people hate it is another question and one to which there is no straightforward answer. The riddle deepens because some products are routinely sold using dynamic pricing and nobody complains – for example, seats on an aircraft.

It’s not true that nobody complains. You complain about Ryanair all the time.

Yes, but that’s because of the opaque drip-pricing, the unassigned seating and the lack of customer service. It’s not about the same type of seats at different prices. I have no problem with that idea and, curiously, I’ve never heard anyone else complain about it either. But if you tried to price Wimbledon tickets like that, there would be a riot in SW19.

Why, what’s the difference?

I have no idea. But at least I was able to feast on cut-price chocolate eggs all week.

Also published at ft.com.

The difficult question of happiness

A new paper suggests that respondents to surveys on well-being are affected by the way they are asked

How happy are you with your life? Yes, it’s back to “happynomics”, because a new paper suggests that one of the oldest findings in the field may be an artefact of the way this question is often asked.

First, some background. Happiness – “subjective well-being” – is often measured by asking survey respondents how satisfied they are with their lives, taken as a whole. Sometimes this is a multiple choice question: “very happy, fairly happy, or not very happy?” The most influential paper in happiness economics, Richard Easterlin’s 1974 “Does Economic Growth Improve the Human Lot?”, extensively discusses evidence from surveys of this kind, in which very few American respondents said that they were “not very happy”. Almost half said they were “very happy”, the most blissful response available.

People, then, are generally happy with life – too happy, perhaps, for a three-point scale. Easterlin is often quoted as having proved that economic growth does not lead to happiness, but perhaps we should say he pointed out that economic growth might not eliminate misery.

Another fascinating titbit from the old Easterlin paper, based on a 1965 survey: 53 per cent of the British respondents were “very happy” but only 20 per cent of West Germans and 12 per cent of the French. Income per head was similar at the time, as it is today. What could explain such an extraordinarily large difference? Language? Culture? Something else?

More modern research often uses a 10- or 11-point scale of happiness, often a “Likert scale”, which offers a statement such as “I am satisfied with my life as a whole these days”, and asks respondents to say how strongly they agree or disagree. Clearly this allows for shades of grey, although problems remain: Bill Gates can earn 100,000 times more than you do, but even if that makes him 100,000 times happier, there’s no way for him to express that joy on a 0-10 scale.

And there’s another problem with Likert scales: maybe something about an integer scale itself distorts the survey results? There’s an alternative: the VAS, or visual analogue scale, which replaces the 0-10 options with a single line. The respondents can mark where they would place themselves on the line between an extremely satisfactory life and an extremely unsatisfactory one.

Raphael Studer and Rainer Winkelmann, economists at the University of Zurich, used a randomised trial to tease out differences between the two scales. Some respondents were asked to report their happiness on a Likert scale and then, a month later, on a visual scale. Others were given the visual scale first and the Likert scale a month afterwards.

There were broadly similar responses to a Likert and a visual scale. But there were intriguing differences. One was that Likert respondents tended to cluster around seven and eight, being positive but avoiding extremes. The visual scale attracted a greater variety of responses; the usual findings were borne out (the middle-aged are less happy; the married are happier) but the size of each effect appeared bigger on the visual scale.

And there was one really odd result. We have long believed that women are happier than men, on the basis of decades of answers to Likert-type questions. The recent foray into happiness research by the UK’s Office for National Statistics used a 0-10 scale and replicated exactly this finding. But in Studer and Winkelmann’s randomised trial, this tendency disappeared. Women and men, who had answered differently on the Likert scale, pointed to the same point on the visual scale.

The authors conclude that the long-standing finding that women are happier than men is simply an artefact of the way the question is asked. How fortunate that nobody had been recommending gender reassignment surgery to all men as the secret of happiness.

Also published at ft.com.

The ban on hosepipes does not hold water

“Thames Water, Britain’s biggest supplier with 8.8m customers, is among seven companies introducing “temporary use bans” from April 5, after one of the driest two-year periods in southern and eastern England since records began.”

Financial Times, March 12

Hosepipe bans again?
That’s broadly the spirit of it, although what is banned varies from place to place.

But it was chucking down with rain this week. It was snowing, too. How can we be talking about drought?

Water isn’t like electricity: it can be stored, within limits. You don’t get a water shortage if you have a dry week and you don’t cure a water shortage with a few April showers. You get water shortages after a couple of years of low rainfall.

And how do you cure water shortages?

Hosepipe bans, apparently.

Is that a good idea?

Probably not. It’s appealing for the water companies because the revenue they receive is capped by the regulator. They can’t make more money by supplying as much water as possible to as many joyful customers as they can reach. It’s easier to just yell at customers to stop watering their lawns. It might be annoying but the water companies don’t lose much as a result.

No doubt you have a better idea.

The basic problem is this: for any particular household, there’s no obvious cost difference between the water you use to flush your toilet and the water you use to irrigate your garden. The sewage and waste water costs might be different, I’ll admit, but basically water is water. A hosepipe ban arbitrarily says that you can flush your toilet as often as you like and never pay an extra penny, but watering your lawn is punishable by a substantial fine. But there are lots of ways to save water: why should some count and some not?

You’re not suggesting a “flushing the toilet ban”?

I am not suggesting any kind of ban. It’s the idea of the ban that’s problematic. A new article by economists Jeremy Bulow and Paul Klemperer analyses the advantages to consumers of rationing schemes rather than simply raising the marginal price. The bottom line: the advantages are typically illusory. Rationing reduces supply, relative to what could be provided if prices were higher. It also misallocates resources – there’s no reason to expect that the people who get the scarce product are the ones who value it most. And rationing encourages all kinds of fun and games to try to get around the rules.

So you just want water to become more expensive.

I hope water will become cheaper, on average. But I certainly want it to be expensive to use lots of water at a time of shortage. We want everyone to have an incentive to save some water and the obvious way to do this is through water metering.

But what about poor households with large families who have to wash a lot of clothes and flush a lot of toilets?

Such families might also consume more energy and more food, but that is hardly a case for ordering Tesco to offer a flat price for unlimited food. The financial and environmental costs of unmetered water are very real. In any case, water companies could offer cheap rates for the first few dozen litres a day and then raise rates. This would make “some water” cheap and “lots of water” expensive.

Well, why not – but then again, why?

Because the alternative is a system built to cope with all the water we can waste, no matter what the weather. And that’s madness.

I’m convinced, I think.

You’re not the only one to be convinced. About 40 per cent of households already have water meters. The next step may be for seasonal pricing to become more widespread. The basic idea is not to make people pay more for water in total, but to make them pay more for the litres of water that are particularly difficult to provide. That should reduce the overall cost of water, as well as the environmental impact of supplying it.

It still makes me feel uneasy – water is one of life’s essentials.

The economist Al Roth has written about “repugnant markets”, where people feel uncomfortable about the use of market mechanisms to allocate resources. Examples are markets for spare kidneys, sex and the right to water the croquet lawn at your country pile. I think we need to get past the icky feeling and figure out when our moral sentiments are telling us something important and when they’re merely a costly affectation.

Also published at ft.com.

Looking after granny shouldn’t be so taxing

Why the government should accept the Dilnot Commission’s proposals for the social care of the elderly

George Osborne’s “granny tax” – or more descriptively, George Osborne’s very gradual withdrawal of a long-standing granny-tax-break – has put intergenerational conflict in the spotlight.

Compare a 75-year-old with a 35-year-old, each on an annual income of £20,000. The younger taxpayer must pay almost £2,000 a year more in tax and national insurance, to say nothing of missing out winter fuel payments, bus passes and free television licences. Then there is the state pension, which will increase in line with wages, or inflation, or 2.5 per cent, whichever is more generous. Younger recipients of state benefits can only dream of this “triple lock”. And let’s draw a veil over who pays for higher education these days.

The standard defence of this state of affairs appears to be “Grandma, we love you”. That doesn’t seem like much of an argument, but so many voters and newspaper readers are over 60 that it is probably sufficient.

For those who like a bit more rigour, let me attempt two defences of the privileges of the elderly. One, most of us will be elderly eventually and what goes around, comes around. Two, it’s all very nice to talk about a 75-year-old on an income of £20,000 a year, but pensioners, on average, are poorer than younger people, especially at a time when quantitative easing and super-low interest rates are making it hard to live off savings or buy annuities.

Neither of these arguments is compelling. What goes around may actually not come around at all: if intergenerational transfers are too large, they will prove unsustainable at an awkward moment. Today’s young people have to pay for today’s elderly, pay the interest on a growing national debt, and yet they doubt that they will be generously treated themselves in 30 or 40 years’ time – with good reason.

As for pensioners being poorer, that is true, but those who are comfortably off get the perks anyway. Osborne introduced means-testing for child benefit but spared the ageing rich.

All this is basically a zero-sum game. What one generation gains, another loses. And the frustrating thing is that there is an important proposal currently sitting on the table that could help the elderly, and their families, out of all proportion to its cost.

I’m thinking of the Dilnot Commission’s recommendations for the social care of the elderly – such as hired help to assist with shopping, cooking, bathing, getting dressed and getting around. Andrew Dilnot’s team has reasoned as follows: such costs are typically low, but for one in 10 pensioners they are more than £100,000, sometimes much higher still. Local government provision is patchy and subsidised only for the poorest; private insurance for such costs is not available, because of the long timescales and unlimited liability involved. Therefore, people must simply live in fear of losing all their assets if infirmity strikes.

The Dilnot Commission proposes that the government should provide partial insurance, capping lifetime social care costs at £35,000 a year, and introduce more generous means testing. Private insurance markets and private savings should cover the remaining costs, which are fairly predictable consequences of not dying young.

The brilliance here is that because high social care costs are the exception rather than the rule, this government subsidy is inexpensive – Dilnot estimates the cost at less than £2bn a year, a small fraction of what is spent on pensions and on NHS services for the elderly. And for this money, a unique service is provided.

If I want to have more money when I am 80, there is a very simple way for me to do this: save more money today. But if I fear a crippling bill for care in my old age, there is nothing I can do except fret. That is why the government should accept the Dilnot Commission’s proposals.

Also published at ft.com.

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