Tim Harford The Undercover Economist

Articles published in December, 2015

An economist’s dreams of a fairer gig economy

We should decide what the state should provide and how generously, writes Tim Harford

It has never been easier to find little jobs for little payments. If you are being paid through Amazon’s Mechanical Turk to tag people’s photos or being hired to put up shelves via TaskRabbit, who needs a real job? For enthusiasts, these micro-jobs mean sticking two fingers up to the Man and rejecting wage-slavery in favour of freedom. For pessimists, they are precarious ways to earn a living that offer no pension or health insurance. Welcome to the “gig economy”, a phrase that evokes both the romantic ideals and the grinding poverty of life as a journeyman musician.

The app-based gig economy is still small. Perhaps one in 200 American workers rely on it for their main source of income; nobody is really sure. Yet it seems likely to grow, and, as it grows, so will a question: does the way we link social protections to jobs make sense?

Details vary but most advanced countries have a list of goodies that must be provided by employers rather than the government or the individual. In the UK a full-time worker is entitled to 28 days of paid leave. In the US the default provider of health insurance is your employer. In many countries, employees cannot be sacked without long notice periods and a decent pension is the preserve of people with a decent job. As for freelancers, they may enjoy flexibility and independence and sometimes even a good living — but as far as social protections go, they are on their own.

It is easy to understand the politics of this: pensions, healthcare and paid holidays are expensive, and asking employers to pick up the bill obscures their true cost. But the emergence of companies such as Uber is changing the calculus. Are Uber drivers employees or not?

Uber maintains that they are not. That seems defensible: a driver can switch the app on or off at any time, or work for a competitor such as Lyft on a whim. Few employees who acted in this way would be employed for very long.

Then again, does a driver who puts in 60 or 70 hours a week providing Uber-assigned rides according to Uber-determined rules and rates not deserve some sort of security? Some authorities think so: the company has lost a number of rulings in California as judges and arbitrators have found that, in certain cases, Uber drivers are employees.

Such judgments are likely to vary from case to case and place to place, and the uncertainty helps nobody bar the lawyers. Alan Krueger, former chairman of President Barack Obama’s Council of Economic Advisers, draws a parallel with the emergence of the workers’ compensation system a century ago. Sensible rules were agreed, he says, once lawsuits over industrial accidents became expensive and unpredictable.

But what should the new rules be? Mr Krueger’s approach is to adapt the status quo by extending some employment benefits to gig economy workers. He and his co-author, Seth Harris, recently proposed a third category of “independent workers”, neither pure freelancers nor pure employees. They receive “all the benefits that employees get”, Mr Krueger told me, “except for the ones that don’t make sense”.

As the global economy heals, a brave new world is emerging for workers in which more temporary jobs are being created — especially for the young

For example, if Uber drivers enjoyed the status of independent workers, they could form or join a union, and be protected under anti-discrimination laws. Uber, for its part, might offer pensions, health insurance and other products that its drivers could find attractive without fear this would lead the courts to rule that it was an employer. But independent workers would not receive paid holiday or protection from dismissal.

The Harris-Krueger proposal is based on the idea that the current package of employment rights in the US is attractive, and that America would be a better place if it was available as widely as possible. In the eurozone, where double-digit unemployment seems to be customary, it is hard to see how most protections could be applied to independent workers — and harder still to see why that would be a progressive step.

So here is a far more radical approach: we should end the policy of trying to offload the welfare state to corporations. It is a policy that hides the costs of these benefits, and ensures that they are unevenly distributed. Instead we should take a hard look at that list of goodies: healthcare, pensions, income for people who are not working. Then we should decide what the state should provide and how generously. To my mind, there is a strong argument that the state should provide all of these things, to everyone, at a very basic level. What the state will not provide, individuals must pay for themselves — or seek employers who provide these benefits as an attraction rather than a legal obligation. Call it libertarianism with a safety net.

No doubt this is just an economists’ pipe dream. Even the far tamer Harris- Krueger ideas seem unlikely to gain political traction any time soon. That is a shame. While traditional jobs suit most of us, the gig economy is perfect for some people and some circumstances. It would be a shame if our welfare state and labour laws failed to catch up.

Written for and first published at ft.com.

In praise of Scrooge

‘Scrooge didn’t waste his money on extravagances for people whose desires he didn’t really understand’

Ebenezer Scrooge is underrated. Literature’s most notorious misanthrope gets no respect from anyone. He’s a miser, a bully and a sociopath. Only with the most strenuous pleading from three supernatural mentors does he embrace the spirit of Christmas and, in so doing, join the human race. Dickens’s story is viewed as a journey of redemption; I am not so sure.

In his original, miserly form, Scrooge actually gives us much to admire. He was a model of inadvertent benevolence. He earned vast sums and avoided spending so much as a farthing if he could help it. The economic implication of this? Regardless of Scrooge’s motives, because he spent little, everyone else enjoyed more, as surely as if Scrooge had divided his fortune and sent a few coins to everyone in the country. As the economist Steven Landsburg once wrote: “There is nobody more generous than the miser — the man who could deplete the world’s resources but chooses not to.”

This isn’t an intuitive proposition but it is true. Scrooge reminds me of Bill Drummond and Jimmy Cauty, formerly of successful dance band The KLF, who in the summer of 1994 filmed themselves burning 20,000 £50 notes — £1m — on an island in the Inner Hebrides. People who wouldn’t have batted an eyelid if Drummond and Cauty had blown the cash on fast cars and drugs were outraged at the waste. As the Ghost of Christmas Yet To Come might have pointed out, the money could have been spent on a worthy cause. On a chat show, in front of a jeering audience, Drummond explained that “burning that money doesn’t mean there’s any less loaves of bread in the world, any less apples, any less anything. The only thing that’s less, is a pile of paper.”

Drummond was quite right. He had a claim on £1m worth of goods and services and by burning the money, he didn’t destroy those goods and services — he merely relinquished his claim and let others enjoy them instead. The likely economic effect is that everything in the country became a tiny bit cheaper. If the Bank of England had worried about the (minuscule) fall in the money supply, it could have printed replacement banknotes for a couple of grand.

Scrooge’s self-denial had a similar effect: he could have splashed his money around buying houses and sweets and anything else Victorian London might offer but, in doing so, he would have denied those pleasures to others. In a deep recession, one might be concerned that Scrooge was failing to support aggregate demand but in normal economic times the effect of his skinflintery was to ensure that everyone else was able to enjoy a little more.

Ah, but we might claim: it is the thought that counts, and Scrooge thought of nothing but workhouses and humbug and himself. True. But are the rest of us really any better? We engage in a seasonal fit of generosity but generosity is not the same as empathy — as thinking deeply about what someone else might want.

Loyal readers will know that 22 years ago, Joel Waldfogel, an economist, wrote an article titled The Deadweight Loss of Christmas, in which he quantified something we all instinctively know: a lot of the presents that people give and receive aren’t terribly well chosen. We spend money on things that people don’t really like — and thereby we waste energy, material resources and labour that could have been far better deployed making something people did want.

More recent research by psychologists — notably Gabrielle Adams and Francis Flynn of Stanford, and Harvard’s Francesca Gino — has revealed a startling lack of self-awareness in our gift giving. A few of their results:

● Gift givers believe that spontaneous gifts are as welcome as those on a wish list, while wish list gifts seem charmless and impersonal. Recipients feel otherwise — they have no problem being given something from a list, and often lament the poor choices when people venture away from it.

● People feel awkward giving money yet are perfectly happy to receive it.

● Gift givers think more expensive presents are appreciated more yet gift recipients don’t care about the expense either way.

It is hard for us to grasp the discrepancy between how we see the world when giving gifts and when receiving them. Recipients may appreciate cash or presents from a list and not fuss too much about expensive gifts; gift givers, in contrast, imagine that the ideal present is an expensive surprise. It isn’t. All this suggests we should probably be spending less on presents, and thinking a lot more about the presents we do buy.

Which brings us back to Scrooge himself. When he finally did decide to embrace the conventional spirit of Christmas, he didn’t waste his money on demonstrative extravagances for people whose desires he didn’t really understand. Instead, he gave three superb gifts. First, a prize turkey that he knew — thanks to a ghostly premonition — was much needed by the Cratchit family. Second, the gift of his time and attention, playing games and making merry with his nephew. Finally, he gave Bob Cratchit the greatest Christmas gift of all: a pay rise.

As I say: underrated.

Written for and first published at ft.com.

Economics: still a job for the boys?

‘There are two or three male undergraduate economists for every female undergraduate economist in the US. That is not good’

The world’s most powerful economist is a woman — but chair of the Federal Reserve Janet Yellen doesn’t have a great deal of female company at the economic top table. Christine Lagarde runs the International Monetary Fund, it is true — although she is a lawyer. But the president of the European Central Bank has never been a woman, nor the president of the German Bundesbank, nor the governor of the Bank of England. The US Treasury secretary has never been a woman, nor has the UK chancellor of the exchequer, nor the president of the World Bank.

To some extent this reflects the well-known fact that women are under-represented in positions of power. But beyond that it suggests that economics itself is a curiously male-dominated discipline. There has still only been one female winner of the Nobel Memorial Prize in Economic Sciences: Elinor Ostrom in 2009 (she shared the prize with Oliver E Williamson), and she was not a mainstream economist herself.

Quite why economics is so testosterone-laden is unclear. The situation at the top of the profession now is partly a reflection of the state of economics education decades ago. Ostrom’s desire to study economics was set back by the fact that she was discouraged from studying mathematics at school because she was a girl. We cannot travel back in time to give her a more enlightened maths teacher.

In the younger echelons of the profession there is more cause for cheer. The John Bates Clark medal, for example, is awarded to economists based in America under the age of 40; it is a prestigious award and in many cases a precursor to the Nobel Prize. Until 2007 it had been an exclusively male preserve but it has since been won by three women.

Another hopeful development is the blossoming of psychological realism in economics, in the form of behavioural economics. Behavioural economics doesn’t have all the answers but it is certainly asking some good questions. Since psychology is as popular among female undergraduates as economics is unpopular, it seems plausible that behavioural economics will make the dismal science more appealing to women.

Perhaps we should simply wait, then, and the women will break through? That seems doubtful. The American Economic Association publishes a regular newsletter from the “Committee on the Status of Women in the Economics Profession”, and two summers ago the newsletter pondered a depressing trend — or rather a depressing lack of a trend.

“The fraction of all bachelor of arts candidates majoring in economics has not budged much over the past decade,” wrote Cecilia Conrad of the MacArthur Foundation, co-editor of the newsletter. There are two or three male undergraduate economists for every female undergraduate economist. That is not good — but at least the ratio isn’t getting worse. In the UK, the ratio is similar but has shown a marked decline between 2002 and 2013. The basic explanation is lack of demand: too few women wish to study economics.

Tempting as it might be to blame the financial crisis for this trend, the sharpest movement occurred a decade ago, before the crisis hit. The downward trend in the percentage of women enrolled in UK undergraduate economics courses has continued since then but much more slowly.

One possible explanation is that unconscious sexism is depriving young women of role models in the profession. Justin Wolfers, an economist and New York Times contributor, recently complained that when journalists wrote about economics research with both male and female authors, journalists routinely quoted the man or cited the paper as though the man were the senior author.

(My own confession: I once committed the same sin in demoting Wolfers’ co-author Betsey Stevenson when she should have been cited first. And another confession: one indignant reviewer on Amazon pointed out that my first book, The Undercover Economist, habitually uses “he”, “his” and “him” in situations where female pronouns would have been perfectly proper. These days I try to do better.)

Unconscious sexism is hardly the exclusive preserve of economics, though, so what else is going on? Diane Coyle, an economist and FT contributor, wonders if mathematics is the problem, since girls are less likely than boys to study mathematics at A-level. She recently sounded a call to arms on her blog: “Girls, women, brush up on the maths a bit if you need to, but above all come and study economics!”

I can’t disagree with that but we cannot just blame imbalances in mathematics. A recent study by Mirco Tonin and Jackie Wahba of the University of Southampton found that even among A-level maths students, girls were less likely than boys to choose economics. And in the United States, where economics degrees are just as male-dominated as in the UK, girls have long since achieved gender parity in advanced high-school maths.

The sad truth is that economics just does not seem to be terribly attractive to young women. That is a shame, and it has financial consequences, since economics graduates tend to be well paid. But the real loss is to economics. If we cannot make the subject relevant to half the world, we have a problem.

Written for and first published at ft.com.

How to See into the Future

9th of December, 2015SpeechesVideoComments off

The window tax — an open and shut case

‘People respond in profound ways to tax incentives. They adjust their behaviour to avoid tax’

The adage ‘free as air’ has become obsolete by Act of Parliament,” thundered Charles Dickens in 1850. “Neither air nor light have been free since the imposition of the window tax. We are obliged to pay for what nature lavishly supplies to all, at so much per window per year; and the poor who cannot afford the expense are stinted in two of the most urgent necessities of life.”

Dickens prevailed: the window tax, which had been levied in England since 1696, was abolished within a year. But the curious story of the tax, explored recently by Wallace Oates and Robert Schwab in the Journal of Economic Perspectives, holds lessons for us today.

The details of the tax varied across the centuries but with the broad theme that the more windows your house had, the more tax you had to pay. At first glance, the tax seems clever, even brilliant. Rich people had larger houses, and so paid more tax. Windows are easy to count from outside the premises, so the tax was easy to assess. Poor people didn’t own large houses, so they weren’t affected by the tax. And the number of windows in a house doesn’t change, so the tax was impossible to avoid.

Wrong, wrong, wrong.

The tax was probably progressive but not nearly as progressive as it might seem. Many poor people did live in large houses — as servants or in tenement blocks. They suffered from the tax, as we shall see. Adam Smith himself, in The Wealth of Nations (1776), nailed the other problem with the idea that the tax was paid only by the rich: “A house of £10 rent in the country may have more windows than a house of £500 rent in London.”

A more fundamental error is the idea that architecture doesn’t respond to tax incentives. When William Pitt tripled the tax in 1797, thousands of windows were bricked or boarded up almost overnight. Later, the president of the society of carpenters in London told Parliament that almost every homeowner on Compton Street had approached him to reduce the number of windows. A new apartment building in Edinburgh was designed with an entire second floor filled with windowless bedrooms.

When Dickens complained that the poor were being denied light and air, he wasn’t speaking figuratively. Poor people did not have to pay the tax out of their own pockets but their landlords did, and the poor dwelt in stuffy darkness as a result.

After 1747, the window tax followed a strange structure. Houses with fewer than 10 windows paid no window tax; those with 10-14 windows paid six pence per window per year. As a result, the cost of having a 10th window was that you also had to pay tax on the other nine. Tax wonks call such discontinuities “notches”, and there were further notches at 15 and 20 windows.

If these notches seem absurd to you, modern governments don’t seem to have a problem with them. Stamp duty, a tax on property transactions in England and Wales, contained notches until last year, and the UK income tax system recently acquired a new notch: a transferable tax allowance for married couples, worth more than £200, evaporates abruptly if one of the couple strays into a higher tax bracket, even by a single pound. All of this distorts our behaviour.

Nonsensical as the notches are, they help economists to see the effect of the tax. In the recent study, Oates and Schwab combed through tax records from the mid-1700s. They found that nearly 50 per cent of the total number of houses had the tax-efficient totals of nine, 14 or 19 windows — an intelligent response to a foolish tax. People who bricked up a couple of windows to bring the total down to nine were inconvenienced by the tax, yet the Treasury earned no revenue from them. Most taxes will produce some of this sort of waste but the window tax was particularly egregious.

If it seems strange that tax policy could shape the architecture of a country, consider New Orleans’s distinctive camelback houses, one storey high at the front (the part of the home that’s taxable) but with two storeys at the back — a tax-efficient architectural style.

And ponder the research of economists Joshua Gans and Andrew Leigh, who noted that twice as many births were recorded in Australia on July 1 2004 than on June 30 2004. Why? The July babies were eligible for a “baby bonus” of A$3,000 and the June babies were not. Gans and Leigh even found that many Australians delayed their deaths — or perhaps the moment their deaths were recorded — long enough to escape inheritance tax when it was abolished on July 1 1979. If our births and deaths respond to tax incentives, it shouldn’t be surprising that a few windows might be bricked up.

There is a useful lesson to be learnt from the window tax: it is that people will respond in quite profound ways to tax incentives. That is why economists often call, more in hope than expectation, for a tax on carbon emissions. People would adjust their behaviour to avoid the tax, which is exactly what we need.

But perhaps a more realistic lesson is this: it’s perfectly possible for a bad tax to last for 155 years.

Written for and first published at ft.com.

Eyes on the innovation prize

‘Coming up with something new is for suckers; smart people sit back and rip off the idea later’

In 1737, a self-taught clockmaker from Yorkshire astonished the great scientists of London by solving the most pressing technological problem of the day: how to determine the longitude of a ship at sea. The conventional wisdom was that some kind of astronomical method would be needed. Other inventors suggested crackpot schemes that involved casting magic spells or ringing the world with a circle of outposts that would mark the time with cannon fire.

John Harrison’s solution — simple in principle, fiendishly hard to execute — was to build an accurate clock, one that despite fluctuating temperatures and rolling ocean swells, could show the time at Greenwich while anywhere in the world. Harrison and countless other creative minds were focused on the longitude problem by a £20,000 prize for the person who solved it, several million pounds in today’s money.

Why was the prize necessary? Because ideas are hard to develop and easy to imitate. Harrison’s clocks could, with effort, have been reverse engineered. An astronomical method for finding longitude could have been copied with ease. Inventing something new is for suckers; smart people sit back and rip off the idea later. One way to give non-suckers an incentive to research new ideas, then, is an innovation prize — that is, a substantial cash reward for solving a well-defined problem. (Retrospective awards such as the Nobel Prize are different.)

For decades after Harrison’s triumph, prizes were a well-established approach to the problem of encouraging innovation. Then they fell out of favour, with policymakers instead encouraging innovation with a mix of upfront research grants and patent protection. Now, however, prizes are making a comeback. The most eye-catching examples have been in the private sector: the $1m Netflix prize for improved personalisation of film recommendations or the $10m Ansari X prize for private space flight. Last year Nesta, a UK-based charity for the promotion of innovation, launched a “new longitude prize” of £10m for an improved test for bacterial infections, marking the anniversary of the original prize’s founding in 1714.

But the big money potential is in the public sector. In 2007, several governments (and the Gates Foundation) promised a $1.5bn prize for a vaccine for pneumococcal meningitis. The prize, called an “advanced market commitment”, is structured as a dose-by-dose subsidy rather than one giant cheque. It is being paid out and millions of children have already been vaccinated. Much bigger commitments are possible: before US senator Bernie Sanders began his run for the presidency, he introduced two Senate bills that would have provided almost $100bn a year as medical innovation prizes.

But why are innovation prizes attractive, when the existing system of grants and patents seems to have served us reasonably well so far?

Research grants may be too conservative, favouring establishment figures working on unambitious projects, and rewarding process rather than results. Such conservatism is not inevitable but it goes with the territory. An innovation prize seems more meritocratic and, since it pays only for results, the prizes can set radical goals.

Patents are particularly problematic, since they encourage the development of something that anyone can use — a new idea — with the perverse reward of restricting access to that idea. That is a trade-off that is easily bungled, with patents that last too long, are too broad, too easy to secure and too difficult to challenge.

Even a well-crafted patent system depends on there being a ready market for the innovation in question. Few people will pay much for a malaria vaccine but it would be socially very valuable, as would a new class of antibiotics. A prize can easily reward long-term social priorities such as these; a patent cannot.

But there is a danger of expecting too much from prizes. If we are to scrap patents entirely, prizes would be far too narrow a replacement. (Who would have sponsored a prize “for inventing the internet”? Not all innovations exist to solve precooked problems such as finding longitude.) If we use patents and prizes in parallel, however, there’s a self-selection problem: inventors with truly valuable ideas apply for patents, while those with dross apply for prizes. A new working paper from economic historian Zorina Khan points out that Royal Society of Arts prizes in the 19th century suffered from exactly such adverse selection.

Khan also observes that many celebrated historical innovation prizes were actually mired in controversy, with prizes awarded for unoriginal or ineffective ideas, or denied to the deserving. It’s easy to point to a few success stories but there are plenty of those for patents and grants too.

For my money the patent system urgently needs reform, with patents that are harder to earn and easier to challenge. Innovation prizes definitely have their place, especially where markets for a socially valuable innovation may not exist. But we do a good idea no favours by overselling it. We should also probably stop going on about the Longitude Prize or at least we should admit what Nesta’s new prize website does not: that Harrison’s invention was rewarded with decades of suspicion and controversy. The Board of Longitude, the government body set up to administer the prize, questioned both the accuracy of his clocks and whether they could be replicated. Harrison did receive numerous payments for his efforts — but neither he nor anyone else ever won the Longitude Prize.

Written for and first published at ft.com.

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