Tim Harford The Undercover Economist

Articles published in February, 2016

The consequences of cheap oil

‘When oil prices are high, people may get out of their cars and walk, cycle or get public transport’

After years in which $100 oil was the norm, the price of Brent crude is now around a third of that. Assume for a moment that Russia and Saudi Arabia fail in their efforts to get the price back up. Will $30 oil change the world? The answer is yes, of course. Everything is connected to everything else in economics, and that is particularly true when it comes to oil. For all the talk of the weightless economy, we’re not quite so post-industrial as to be able to ignore the cost of energy. Because oil is versatile and easy to transport, it remains the lubricant for the world’s energy system.

The rule of thumb has always been that while low oil prices are bad for the planet, they’re good for the economy. Last year a report from PwC estimated that a permanent fall in the price of oil by $50 would boost the size of the UK economy by about 1 per cent over five years, since the benefits — to most sectors but particularly to heavy industry, agriculture and air travel — would outweigh the costs to the oil production industry itself.

That represents the conventional wisdom, as well as historical experience. Oil was cheap throughout America’s halcyon years of the 1950s and 1960s; the oil shocks of the 1970s came alongside serious economic pain. The boom of the 1990s was usually credited to the world wide web but oil prices were very low and they soared to record levels in the run-up to the great recession. We can debate how important the oil price fluctuations were but the link between good times and cheap oil is not a coincidence.

Here’s a piece of back-of-the-envelope economics. The world consumes nearly 100 million barrels a day of oil, which is $10bn a day — or $3.5tn a year — at the $100 price to which we’ve become accustomed. A sustained collapse in the oil price would slice more than $2tn off that bill — set against a world economic output of around $80tn, that’s far from trivial. It is a huge transfer from the wallets of oil producers to those of oil consumers.

Such large swings in purchasing power always used to boost economic growth, because while producers were saving the profits from high prices, consumers tended to spend the windfall from low ones. One of the concerns about today’s low prices is that the positions may be reversing: the big winners, American consumers, are using the spare cash to pay off debts; meanwhile, losers such as Russia and Saudi Arabia are cutting back sharply on investment and public spending. If carried to extremes, that would mean a good old-fashioned Keynesian slowdown in a world economy trying to spend less and save more; the more likely result of which is that lower oil prices fail to give us the boost we hope for.

It is intriguing to contemplate some of the less obvious effects. Charles Courtemanche, a health economist at Georgia State University, has found a correlation between low gasoline prices and high obesity rates in the United States. That is partly because, when oil prices are high, people may get out of their cars and walk, cycle or get public transport. Cheap gasoline, on the other hand, puts disposable income into the pockets of families who are likely to spend it on eating out. Low oil prices may make us fat.

Another depressing possibility is that low oil prices will slow down the rate of innovation in the clean energy sector. The cheaper the oil, the less incentive there is to invent ways of saving it. There is clear evidence for this over the very long run. As recently as the late 1700s, British potters were using wasteful Bronze Age technology for their kilns. The reason? Energy was cheap. Wages, in contrast, were expensive — which is why the industrial revolution was all about saving labour, not saving energy.

More recently, David Popp, an economist at Syracuse University, looked at the impact of the oil price shocks of the 1970s. He found that inventors emerged from the woodwork to file oil-saving patents in fields from heat pumps to solar panels.

It is always possible that the oil price collapse will do little to affect some of the big technological shifts in the energy market. The scale of oil production from hydraulic fracturing (fracking) in the US may be curtailed but a huge technological leap has already happened. As the chief economist of BP, Spencer Dale, recently commented, fracking is starting to look less like the huge, long-term oil-drilling projects of the past, and more like manufacturing: cheap, lean, replicable and scalable. Low oil prices cannot undo that and the efficiencies may well continue. We can hope for ever-cheaper solar power too: photovoltaic cells do not compete closely with oil, and we may continue to see more and more installations and lower and lower prices.

That said, when fossil fuels are cheap, people will find ways to burn them, and that’s gloomy news for our prospects of curtailing climate change. We can’t rely on high oil and coal prices to discourage consumption: the world needs — as it has needed for decades — a credible, internationally co-ordinated tax on carbon.

Written for and first published at ft.com.

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Online dating? Swipe left

‘It is crazy to believe someone’s eye colour, height, hobbies and musical tastes are a basis for a lasting relationship’

Online dating promised so much. “This is one of the biggest problems that humans face and one of the first times in human history there was some innovation,” says Michael Norton, a psychologist at Harvard Business School.

Finding the right partner, whether for life or for Saturday night, is so important to so many people that you would think we might have cracked it by now. By assembling a vast array of date-worthy people in a searchable format, online dating seems like it should be a huge improvement on the old-fashioned methods of meeting people at work, through friends, or in bars and nightclubs. But it’s not clear that the innovation of online dating is helping very much.

A simple survey that Norton conducted with two other behavioural scientists, Jeana Frost and Dan Ariely, revealed that people were unhappy with their online dating experience in three obvious ways. The first was that the “online” bit of the dating was about as much fun as booking a dentist’s appointment. The second was that it took for ever — the typical survey respondent spent 12 hours a week browsing through profiles and sending and receiving messages, yielding less than two hours of offline interaction. Now, 106 minutes are plenty for certain kinds of offline interaction but, however people were spending their time together, they didn’t seem satisfied. This was the third problem: people tended to have high expectations before the dates they had arranged online but felt disenchanted afterwards. To adapt a Woody Allen joke: not only are the dates terrible but there are so few of them.

Given that online dating tends to be tedious, time-consuming and fruitless, it is no surprise that we seem hungry for a better way. Most approaches to online dating have tried to exploit one of the two obvious advantages of computers: speed and data-processing power. Apps such as Grindr and Tinder allow people to skim quickly through profiles based on some very simple criteria. (Are they hot? Are they available right now?) That is, of course, fine for a one-night stand but less promising for a more committed relationship.

The alternative, embraced by more traditional matchmaking sites such as Match.com and OkCupid, is to use the power of data to find the perfect partner. We badly want to believe that after giving a website a list of our preferences, hobbies and answers to questions such as, “Do you prefer the people in your life to be simple or complex?”, a clever algorithm will produce a pleasing result.

Because these pleasing results seem elusive, wishful thinking has gone into overdrive. We hold out hope that if only we could be cleverer, the algorithms would deliver the desired effect. For example, Amy Webb’s TED talk “How I Hacked Online Dating” has been watched more than four million times since it was posted in 2013.

In a similar vein, Wired magazine introduced us to Chris McKinlay, “the math genius who hacked OkCupid” and managed to meet the woman of his dreams after cleverly reverse-engineering the website’s algorithms. The brilliance of McKinlay’s achievement is somewhat diminished by the revelation that he had to work his way through unsuccessful dates with 87 women before his “genius” paid dividends.

This should hardly be a surprise. Imagine looking at the anonymised dating profiles of 10 close friends and comparing them with the profiles of 10 mere acquaintances. Using the profile descriptions alone, could you pick out the people you really like? The answer, says Dan Ariely, is no. “It’s terrible. It’s basically random.”

It is crazy to believe that someone’s eye colour and height, or even hobbies and musical tastes, are a basis for a lasting relationship. But that is the belief that algorithmic matching encourages. Online dating is built on a Google-esque trawl through a database because that’s the obvious and easy way to make it work.

Is there a better way? Perhaps. Jeana Frost’s PhD research explored an alternative approach to online dating. Why not, she asked, make online dating a bit less like searching and a bit more like an actual date? She created a virtual image gallery in which people had a virtual date, represented by simple geometric avatars with speech bubbles. The images — from Lisa and Jessica Simpson to George Bush and John Kerry — were conversation starters. People enjoyed these virtual dates and, when they later met in person, the virtual date seems to have worked well as an icebreaker.

Virtual dating has not taken off commercially, says Norton, in part because companies have tried too hard to make it realistic, and have fallen into the “uncanny valley” of the not-quite-human. I suspect, but cannot prove, that virtual spaces such as World of Warcraft are perfectly good places to meet a soulmate, assuming your soulmate happens to like orc-bashing. Perhaps mainstream virtual dating is just waiting for the right design to emerge.

Or perhaps the problem is deeper: online dating services prosper if they keep us coming back for more. Setting someone up with a romantic partner for life is no way to win a repeat customer.

Written for and first published at ft.com.

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How to keep your gym habit

‘Might a commitment strategy allow you to pay yourself to go to the gym?’

How are those resolutions going? Still going to the gym? If not, you’re not alone.

Let’s think about incentives. If some benevolent patron had paid you a modest sum — a few pounds a day, perhaps — for keeping your resolution throughout January, would that have helped you keep fit now that January is behind us?

The answer is far from clear. An optimistic view is that by paying you to look after yourself in January, your mysterious patron would have encouraged you to form good habits for the rest of the year. The most obvious case would be if you were trying to give up cigarettes; paying you to get through the worst of the withdrawal period might help a lot. Perhaps diet and exercise would be similarly habit-forming.

Yet some psychologists would argue that the payment is worse than useless, because payments can chip away at our intrinsic motivation to exercise. Once we start paying people to go to the gym or to lose weight, the theory goes, their inbuilt desire to do such things will be corroded. When the payments stop, things will be worse than if they had never started.

The idea that external rewards might crowd out intrinsic motivation is called overjustification. In a celebrated study in 1973 conducted by Mark Lepper, David Greene and Richard Nisbett, some pre-school children were promised sparkly certificates as a reward for drawing with special felt-tip pens. Others were given no such promise. When the special pens were reintroduced to the nursery classrooms a week or so later, without any reward on offer, the researchers found that the children who had previously been promised certificates for their earlier drawing now spent half as much time with the pens as their peers. Only suckers draw for free.

There’s a big difference between exercising and colouring, however: while many children like felt-tips, many adults do not like exercising. A payment can hardly crowd out your intrinsic motivation if you don’t have any intrinsic motivation in the first place. Systematic reviews of the overjustification effect suggest that incentives do no harm for activities that people find unappealing anyway.

So perhaps the idea of paying people to exercise is worth thinking about after all. In 2009, two behavioural economists, Gary Charness and Uri Gneezy, published the results of a pair of experiments in which they tried it. Some of their experimental subjects were paid $100 to go to the gym eight times in a month, while those in two alternative treatment groups were either paid $25 for going just once, or weren’t asked to go to the gym at all.

The results were a triumph for the habit-formation view. The payments worked even after they had stopped. In one study, the subjects were exercising twice as often seven weeks after the bonus payments stopped than before they started; in the other, the increase was threefold 13 weeks after payments had stopped. People who were already regular gym-goers didn’t change their behaviour — so there was no crowding-out — but there was a surge in exercise from people who hadn’t previously done much. A later study by Dan Acland and Matthew Levy found a similar habit-forming effect among students, although, alas, the good habits often failed to survive the winter vacation. In other experiments, incentive payments have been shown to be modestly successful at helping smokers to give up.

There is much to be said for a benign patron who pays you to stay healthy while you form good habits. But where might such a person be found? Take a look in the mirror — your patron might be you.

Inspired by the ideas of Nobel laureate Thomas Schelling, economists have become fascinated by the idea of commitment strategies, where your virtuous self takes steps to outmanoeuvre your weaker self before temptation strikes. A simple commitment strategy is to hand £500 to a trusted friend, with instructions that they are only to return the cash if you keep your resolution.

Might a commitment strategy allow you to pay yourself to go to the gym? It might indeed. Economists Heather Bower, Mark Stehr and Justin Sydnor recently published the results of a long-term experiment conducted with 1,000 employees of a Fortune 500 company. In this experiment, some employees were initially paid $10 for each visit to the company gym over a month. Some of them were then offered the opportunity to put money into a commitment savings account: if they kept exercising, the money would be returned; otherwise it would go to charity. The approach was no panacea: most people did not take up the option, and not everyone who did managed to stick to their goals. But even three years later, those who had been offered commitment accounts were 20 per cent more likely to be exercising than the control group.

That chimes with my experience. I once wrote a column about sending $1,000 to a company called Stickk, which promised to give it away if I didn’t exercise regularly. The contract was for a mere three months — and I succeeded. Eight years after my money was returned, I’m still sticking to the habit.

Written for and first published at ft.com.

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The five best economics podcasts of 2016

It’s been a while since I revisited my list of the best economics podcasts. Here are my current top five.

  1. NPR’s Planet Money remains the very best economics podcast out there. Great production values, very creative, serious economics topics treated with a light touch. The team also produced the superb economics documentary, The Invention of Money.
  2. A new entrant on my list, the FT’s Alphachat podcast is a smart, well-informed and economically literate discussion of the economics and finance news of the week. (Disclosure: I’m employed by the FT so have a clear bias. But I don’t know the Alphachat crew, who are based in New York.)
  3. Freakonomics Radio remains a firm favourite. Stephen Dubner’s relentless curiosity keeps us rolling along, with a variety of serious topics (how can we fix education, or close the gender pay gap?) and the lighter stuff (can economics help us understand what makes a suspenseful screenplay?).
  4. If you like Alphachat, you’ll love Slate Money, presented by Felix Salmon with Cathy O’Neil and Jordan Weissmann. Imagine Alphachat, but everyone’s had a glass of pinot noir before they started, and you get the idea. Feisty yet highly intelligent.
  5.  If you’re more of a behavioural economics fan, try The Hidden Brain with Shankar Vedantam, featuring Daniel Pink. Recent episodes included a live show with Richard Thaler.

 

 

I’m a big podcast fan so let me give a shout out to a few others, including my own program More or Less, a weekly guide to the numbers that surround us – and the thirteen short episodes of Pop Up Economics, mostly by me but also featuring guests including Gillian Tett and Malcolm Gladwell.

 

Russ Roberts’s EconTalk is pure economics: Russ, a professor at George Mason University, has strong views of his own – he’s a Hayek man through and through – but brings on a wide range of guests and gives them a sympathetic hearing. Some great recent conversations with the excellent young blowhard Noah Smith and with Nobel laureate Jim Heckman.

Radio 4’s Analysis often covers economics topics, as does Peter Day’s World of Business (in depth, on location) and Evan Davis’s The Bottom Line (studio discussion with business leaders).

The London School of Economics has a stellar collection of speakers and releases many events as podcasts.

The FT produces a range of podcasts but I particularly enjoy the FT Money Show and World Weekly.

Finally, in the hidden gems category, check out No Such Thing As A Fish, and Futility Closet – both addictive podcasts that have nothing whatsoever to do with economics.

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2nd of February, 2016MarginaliaRadioComments off

Hidden truths behind China’s smokescreen

‘When countries become richer, do they pollute their environment more or less?’

The pictures from Beijing tell their own story: pollution there is catastrophic. Bad news for residents, and awkward for me too. Just over a decade ago, I wrote a book, The Undercover Economist, which among many other things cheerfully asserted that particulate air pollution in urban China was sharply falling as the country grew richer. It’s a claim I believed at the time (based on well-regarded research in the 2002 Journal of Economic Perspectives) but with each new report of smog over China, I felt a nagging sense that I had led readers astray. I figured it was time to do some more research and to set the record straight.

There is a broader question here. When countries become richer, do they pollute their environment more or less? For a while it seemed obvious that pollution and riches went hand in hand: industrialised nations spewed out more of everything.

But then the leading countries began to crack down on pollution. London no longer suffers from smog. The European Union reduced sulphur dioxide emissions by more than 80 per cent between 1990 and 2011. At the same time, the United States has reduced atmospheric lead by 98 per cent.

In the early 1990s, Princeton economists Gene Grossman and Alan Krueger coined the phrase “environmental Kuznets curve” to stand for the idea that as countries become richer, their emissions first rise but then fall, as richer citizens demand cleaner air from the governments they elect and the companies from whom they buy. There’s some evidence that this is true but it’s hard to interpret that evidence. An optimistic view is that countries reduce pollution with or without economic growth because they can use clean technologies developed elsewhere. If true, China may be able to clean up its air faster than we’d expect.

A grimmer possibility is that the richer countries aren’t really reducing pollution — they are exporting it, by banning dirty factories at home while happily buying from dirty factories abroad. On this view, China is unlikely to be able to clean its air any time soon.

How serious a problem is offshoring pollution? It’s not trivial. In 2007, Joseph Aldy of Harvard’s Kennedy School published research showing clear evidence of this pollution-export effect within the US. Richer states seemed to be emitting less carbon dioxide per person as their economies grew. Alas, Aldy concluded that the effect could be explained entirely by the rich having bought their electricity from poorer states rather than generating it at home. A more recent study (Peters, Minx, Weber and Edenhofer 2011) estimated that by 2008, developed countries were net importers from developing countries of goods whose production represented about 1.6 billion tonnes of carbon dioxide emissions, roughly 5 per cent of the global emissions total. No prizes for guessing that much of this energy-intensive manufacturing is taking place in China, alongside the production of steel, cement and coal-fired electricity for domestic use.

The dreadful air quality in Beijing, then, is no mystery. First, China is not yet rich, so it may be on the wrong side of the environmental Kuznets curve anyway, the side where pollution has not yet begun to fall. Second, China is not a democracy, and that will partially dampen the power of its citizens to demand cleaner air. Third, China is a major exporter of manufactured goods.

But as I stood ready to pen my correction, I realised something: I didn’t actually have a time series for air pollution in urban China. I could see that things were bad but not what the trend was.

“The challenge with particulates is that we keep changing what we want to measure and regulate,” Aldy told me. Researchers now track PM2.5, very fine particles thought to be particularly hazardous to health; but, in 1985, when my original data series began, nobody was collecting PM2.5 data.

So how much worse have things got in China? I called Jostein Nygard of the World Bank, who has been working on Chinese air pollution issues for more than two decades, and I was surprised at his response: in many ways, China’s urban air quality has improved.

Sulphur dioxide is down and coarser particulate matter is also down since good records began in 2000 — a fact that is explained by Chinese efforts to install sulphur scrubbers and to move large pollution sources away from the cities. “You could see the air quality improving through the 1980s and 1990s and to the 2000s,” says Nygard. PM2.5 is very bad, he says — but not necessarily worse than 10 years ago, and serious efforts are now under way to track it and reduce it.

To my surprise, not quite a correction at all, then. But if local air pollution in China is actually on an improving track, how come we see so many stories about pollution in China? One reason, of course, is that the situation remains serious. Another is that the Chinese government itself seems to be using smog alerts as a way to send a message to local power brokers that clean air is a priority. But there is also the question of what counts as news: sudden outbreaks of smog are newsworthy. Slow, steady progress is not.

Written for and first published at ft.com.

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