Tim Harford The Undercover Economist

Articles published in May, 2016

How the sense of an ending shapes memory

‘Composers, novelists and film directors try to end on a high. Restaurants keen to manipulate their online reviews have found a similar trick’

Many years ago, I listened to a string quartet perform a challenging piece of contemporary music. The piece, we were told, represented a journey of suffering and redemption. It would descend into discordant screeching for nearly 20 minutes before finally resolving harmoniously. The small concert hall was packed — there were even people seated on stage behind the performers — so there was little choice but to stick it out.

Everything unfolded as promised. The performance sounded like a succession of cats being tossed into a food processor. Eventually, though, the dissonance became resonance, the chaos became calm. It was beautiful.

But then came a sound that had not been in the score; the electronic peal of a mobile phone rang out across the tranquil auditorium. To make matters worse, the beeping arpeggios were emerging from the pocket of an audience member who was sitting on the stage. He was so close to the performers that he could easily have been downed by a solid backhand swing with the viola. It must have been tempting.

The music had been ruined. But it’s curious that 20 minutes of listening can be redeemed or destroyed by what happened in a few moments at the conclusion.

Daniel Kahneman, psychologist and Nobel laureate, tells a similar story about a man enraptured by a symphony recording that is ruined by a hideous screech — a scratch on the vinyl — in the final moments.

“But the experience was not actually ruined,” writes Kahneman, “only the memory of it.” After all, both concerts were almost complete when interrupted. The lived experience had been unblemished until the final moments. The remembered experience was awful.

When we recall things — a concert, a holiday, a bout of flu — we do not play out the recollection minute by minute like a movie in our minds. Instead, we tell ourselves a little story about what happened. And these stories have their own logic in which the order of events makes a difference.

Consider Jenson Button’s 2009 season in Formula One. The British racing driver easily outpaced his rivals in the first seven races of the season, building a vast lead. Then, as the relative performance of the cars changed, Button failed to win any of the remaining 10 races. His rival Sebastian Vettel couldn’t quite catch him, though, and Button became champion with a limp fifth place finish in the penultimate race. One pundit defended Button against his many doubters with the feeble line: “There have been many less gifted world champions than Jenson Button.”

But imagine if the order of results had been reversed. After being beaten in almost every one of the first 10 races by Vettel, Button would have mounted a magnificent comeback, sealing his world championship with a victory in the final race. The same results in a different order would have told a very different story. And the story matters.

Kahneman and his colleagues have run a number of experiments testing these ideas. In one, people were asked to hold one hand in painfully cold water for 60 seconds. Some subjects then had to keep their hand in the water for another 30 seconds while a hidden valve released fractionally warmer water. So, which experience was worse: 60 seconds of pain, or 60 seconds of pain followed by 30 seconds of somewhat lesser pain? The experimental subjects preferred the longer experience with the happier ending.

In another study with Don Redelmeier, Kahneman surveyed colonoscopy patients every 60 seconds while they underwent a distinctly uncomfortable procedure, producing a minute-by-minute record of just how painful the colonoscopy was. Then, Redelmeier and Kahneman asked the patients “the total amount of pain” they had experienced. The responses were strongly correlated with the average of two factors: the pain experienced at the worst moment, and the pain experienced at the end.

This is summarised as the “peak-end” rule. Our memories of experiences are governed by — of course — the most memorable things about them. Had the doctor left the probe inside the patient, without prodding around, for an extra 10 minutes, the final moments wouldn’t have felt too bad and the entire memory of the procedure would have been less grim.

No wonder Jenson Button’s 2009 season seemed mediocre: his peak performances were great but his final performances less so. And no wonder that disruptive mobile phone was so aggravating: since the best moment of the music came at the end, one ringtone managed to spoil both the peak and the end.

Of course, it is no coincidence that the best bit of the music was at the finale: composers, like novelists and film directors, try to end on a high.

Restaurants keen to manipulate their online reviews have discovered a similar trick: twice recently I’ve dined at restaurants in unfamiliar towns that were highly rated on TripAdvisor. Both times, the food was good but unremarkable. Both times, the proprietor pressed gifts upon us as we left — a free glass of grappa, a nice corkscrew. It seems that when people thought back and wrote their reviews, they remembered this pleasant send-off. That makes sense: if you want people to remember you fondly, it’s best to engineer things so that the last thing they remember of you is something other than signing a bill.

Written for and first published at ft.com.

What I’ve been reading in May

Angela Duckworth’s new book Grit (US) (UK) – you can read some of my thoughts here. Enjoyable, but not the best book I read this month; if you liked the TED talk you’ll like the book.

Felix Martin’s superb book Money (US) (UK) – some wonderful stories about the evolution of key pieces of financial technology from the tally stick to international banking. A surprisingly light read for a learned book. Strongly recommend.

Equally strong recommendation for William Goetzmann’s Money Changes Everything (US) (UK) – this is a more technical history of finance from Uruk to Rome and beyond. Smaller print, heavier read, but still full of fascinating nuggets and extremely well researched.

I’ve been enjoying Will Gompertz’s Think Like an Artist (US) (UK) which teaches you a lot of art and art history under the guise of a self-help manual. Very nicely done.

Mark Miodownik’s Stuff Matters (US) (UK) is a clever reflection on material sciences. I loved the chapter on concrete, which tells you something about his lightness of touch.

Next on the pile, Robert Gordon’s magisterial The Rise and Fall of American Growth. (US) (UK) Self-recommending; I’ve not read it yet but must hasten.

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28th of May, 2016MarginaliaComments off

The refugee crisis — match us if you can

‘However many refugees we decide to resettle, there’s no excuse for doing the process wastefully’

Writing in the 1930s, Lionel Robbins, head of LSE’s economics department, defined economics as “the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses”. It’s the study of who gets what and why.

That typically means that economists study conventional markets: how prices work, how people respond to them and how the whole system might function or malfunction. But sometimes a market simply will not do. We don’t allocate children to state school places based on their parents’ willingness to pay. Most countries don’t sell passports to the highest bidder. We do not have a legal market in iced kidneys.

Whether we like it or not, the problem of who gets what and why remains. Sometimes it is grubbily resolved by the emergence of parallel markets — for example, children can be placed in desirable schools at taxpayer expense if their parents buy or rent expensive homes in the right areas.

Over the past few decades a small group of economists — most notably Nobel laureate Alvin Roth, author of Who Gets What — and Why (2015) — has been designing “matching mechanisms” to address allocation problems without resorting to traditional markets. A typical problem: matching teaching hospitals with trainee doctors. The doctors want good hospitals and the hospitals want good doctors. Each side will also have a focus on a particular field of medicine, and the doctors may have preferences over location. Some doctors may be dating fellow medics, who are themselves searching for a teaching hospital.

A good matching mechanism tries to satisfy as many of these preferences as possible. And it ends the need for people to second-guess the system. Bad matching mechanisms reward people who say that a compromise option is really their top preference. Such mind-games are alienating and unfair; in a well-designed matching system, they can be eliminated.

Roth and a growing number of his students and colleagues have designed matching mechanisms for schools and hospital placements, and even mechanisms to ensure the best match for donated kidneys. In each case a market is socially unacceptable but ad hoc or lottery-based allocations are also poor solutions. Nobody wants a random kidney, or to be assigned a place on the whim of a well-meaning bureaucrat who doesn’t really understand the situation.

By balancing competing demands, good matching mechanisms have alleviated real suffering in school systems and organ donation programmes. Now two young Oxford academics, Will Jones of the Refugee Studies Centre and Alexander Teytelboym of the Institute for New Economic Thinking, are trying to persuade governments to use matching mechanisms in the refugee crisis.

Most popular discussions of the crisis focus on how many refugees we in rich countries should accept. Yet other questions matter too. Once nations, or groups of countries, have decided to resettle a certain number of refugees from temporary camps, to which country should they go? Or within a country, to which area?

Different answers have been tried over the years, from randomly dispersing refugees to using the best guesses of officials, as they juggle the preferences of local communities with what they imagine the refugees might want.

In fact, this is a classic matching problem. Different areas have different capabilities. Some have housing but few school places; others have school places but few jobs; still others have an established community of refugees from a particular region. And refugee families have their own skills, needs and desires.

This is not so different a problem from allocating trainee doctors to teaching hospitals, or children to schools, or even kidneys to compatible recipients. In each case, we can get a better match through a matching mechanism. However many refugees we decide to resettle, there’s no excuse for doing the process wastefully.

There is no perfect mechanism for matching refugees to communities — there are too many variables at play — but there are some clear parameters: housing is a major constraint, as is the availability of medical care. Simple systems exist, or could be developed, that should make the process more efficient, stable and dignified.

One possibility is a mechanism called “top trading cycles”. This method invites each refugee family to point to their preferred local authority, while each local authority has its own waiting list based on refugee vulnerability. The trading cycles mechanism then looks for opportunities to allocate each family to their preferred location. The simplest case is that, for example, the family at the top of the Hackney waiting list wants to go to Hackney. But if the family at the top of Hackney’s list wants to go to Camden, the family at the top of Camden’s list wants to go to Edinburgh, and the family at the top of Edinburgh’s list wants to go to Hackney, all three families will get their wish.

Right now, the UK is a promising candidate to pioneer the use of one of these matching mechanisms to place refugees. The government has pledged to resettle 20,000 Syrian refugees now in temporary camps. Local authorities have volunteered to play their part. But to make the best possible matches between the needs of the refugees and the capabilities of these local authorities, it’s time to deploy a little economics.

Written for and first published at ft.com.

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A billion prices can’t be wrong

‘A “big data” approach to inflation is helping us understand the fundamental question of why recessions happen’

In the dying days of 2015 came news to set any geek’s pulse racing: the declaration of a “statistical emergency” by Mauricio Macri, the new president of Argentina. Macri’s move enabled Jorge Todesca, head of the statistics bureau, to suspend publication of some basic economic data. That might seem extreme but Argentina’s inflation numbers were widely discredited.

The International Monetary Fund censured Argentina in 2013 for its implausible numbers under previous president Cristina Fernández de Kirchner. Government statisticians say they were leaned on by her administration to report low inflation. Todesca himself used to be a private-sector economist, and, in 2011, his firm was fined half a million pesos for publishing numbers that contradicted the official version. (Half a million pesos was about $125,000 at the time; it is $35,000 these days, which rather proves the point.)

But one economist found a way to publish plausible inflation statistics without being prosecuted. His name is Alberto Cavallo, and he realised that by gathering price data published by online retailers, he could produce a credible estimate of Argentine inflation from the safety of Massachusetts. Cavallo’s estimate averaged more than 20 per cent a year between 2007 and 2011; the official figure was 8 per cent.

So began the Billion Prices Project and its commercial arm PriceStats, both collaborations between Cavallo and fellow MIT economics professor Roberto Rigobon. “Billion Prices” sounds hyperbolic but that is the number of prices collected each week by the project, from hundreds of retailers in more than 60 countries.

While the project confirmed that Argentina’s inflation numbers could not be trusted, it also showed that the US inflation numbers published by the US Bureau of Labor Statistics could be. Several maverick commentators had argued that hyperinflation would be the inevitable consequence of money printing at the Federal Reserve. When hyperinflation plainly failed to materialise, some critics suggested the BLS was hiding it — as if nobody would notice.

A second advantage, swiftly noted, was that the daily flow of data from PriceStats was a good predictor of official inflation statistics, which are typically published once a month. Cavallo and Rigobon like to point out that their US online price index started to fall the day after Lehman Brothers declared bankruptcy; the official Consumer Price Index took a month to respond at all, and two months to respond fully.

The BPP is also shedding light on some old economic mysteries. One is the problem of adjusting inflation for changes in quality. To some extent this is an intractable problem. The Edison phonograph cost $20 at the end of the 19th century; an iPod Nano costs about $145 today. What inflation rate does that imply over the past 117 years? There is simply no good answer to that question.

But statistical agencies are always wrestling with smaller slices of the same problem. A new model of washing machine is introduced at a premium price, gradually discounted over the years and eventually sold at clearance prices and replaced with a swankier model. The same thing is happening over differing timescales with computers, summer dresses and cars. If the economic statisticians mishandle these cases, they will get their measure of inflation badly wrong; usually they rely on careful substitutes and clever theory, but success can never be assured.

Cavallo and Rigobon argue that the sheer volume of prices collected by the BPP helps resolve the problem. Every day, the project gathers the prices of hundreds of washing machines. By observing that the availability of the Scrub-O-Mat 9000 overlaps with that of the Cleanado XYZ, it’s possible to adjust as new products are introduced and old products discounted and then phased out.
This “big data” approach to inflation is also helping us to understand the fundamental question of why recessions happen. Without opening a big bag of macroeconomics at this stage in the column, one influential school of thought is that recessions happen (in part) because prices don’t adjust smoothly in the face of a slowdown. Like a small rock that starts an avalanche, this price rigidity causes big trouble. Unsold inventory builds up, retailers slash their orders, and manufacturers go bankrupt.

The trouble with the idea that price stickiness causes recessions is that, according to official inflation statistics, prices routinely change by amounts large or small, which suggests no price rigidity.

But it turns out that many small price changes are statistical illusions. For example, if a product is missing from four monthly inflation surveys and is 1 per cent more expensive when it returns in the fifth month, official statisticians will quite rightly smooth over the gap by imputing a 0.2 per cent rise per month. But it would be a mistake to take this as evidence that retailers did, in fact, repeatedly raise prices by 0.2 per cent. Collecting billions of prices removes the need to fill in these gaps, and in the BPP data very small price changes are rare. Prices will move by several per cent if they move at all. One might guess that in physical stores the cost of relabelling products is higher, and small price changes are even rarer.

The BPP’s big data approach has rescued the important macroeconomic idea of price stickiness. It is a reminder that we often gain from having a second opinion — or a billion of them.

Written for and first published at ft.com.

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Why everyone should give a TED talk and how to do it

I found out the hard way that bad public speaking is contagious. As a schoolboy I was pretty good at speeches, in a schoolboyish way. I won competitions; being a sharp, witty speaker was a defining part of who I felt myself to be.

Then I grew up and started a corporate job, and something strange happened. My talks sagged into “presentations”, burdened by humourless clip art and plodding bullet points. The reason? I was surrounded by people who were stuck in the same beige offices giving the same beige presentations. Like many workplaces, we had reached an unspoken consensus that giving bad talks was just the way things were done.

Aside from tradition — and it is a powerful one — why else are most talks bad talks? One reason is fear. Being afraid does not itself make a speech bad; fear can make a talk electrifying or touching. But most speakers take the coward’s way out. Afraid of running out of words, they overstuff their speeches. And they prop themselves up by projecting their speaking notes on the wall behind them, even though everyone knows that providing rolling spoilers for your speech is a terrible idea.

A second reason is lack of preparation. Most speakers rehearse neither their argument nor their performance. That is understandable. Practising in front of a mirror is painful. Practising in front of a friend is excruciating. Rehearsing offers all the discomfort of giving a speech without any of the rewards of doing so. But it will make the end result much better.

For these reasons, I think you should give a TED talk. Almost anyone can. All you need is 18 minutes, a topic and an audience — if only your cat. No matter how often or how rarely you usually speak in public, the act of trying to give a talk in the tradition of TED will change the way you think and feel about public speaking.

As with anything popular, TED talks have their critics, but it is hard to deny that the non-profit organisation behind the videoed presentations on subjects from science to business has helped reinvent the art of the public speech.

TED talks are vastly more entertaining than traditional lectures, while more thought provoking than most television. But that is TED from the point of view of the audience. From the view of an aspiring speaker, the lesson of TED is that most speakers could raise their game. A few TED talks are by professional politicians or entertainers such as Al Gore or David Blaine. Most are not.

There are more than 1,000 talks on the TED website with more than 1m views, typically delivered by writers, academics or entrepreneurs who have been giving mediocre talks as a matter of habit, and who have been suddenly challenged to stop being mediocre. Faced with the obligation to deliver the talk of their lives, they decided to do the work and take the necessary risks.

These speakers have been offered good advice by the organisers of TED, but that advice has never been a secret. It is now available to anyone in the form of TED Talks (buy in the UK) (buy in the US), a guide to public speaking from Chris Anderson, the TED boss. It is excellent; easily the best public speaking guide I have read. (I should admit a bias: I have spoken twice at TED events and benefited from the platform that TED provides.) Unlike many in the genre, Anderson’s book is not a comprehensive guide to going through the motions of wedding toasts and votes of thanks. Instead, it focuses on the stripped-down TED-style challenge: an audience, a speaker, plenty of time to prepare, and 18 minutes to say something worth hearing.

There is no formula for a great talk, insists Mr Anderson, but there are some common elements. First and most important: there is a point, an idea worth hearing about. Second, the talk has a “throughline” — meaning that most of what is said in some way supports that idea. There may be stories and jokes, even surprises — but everything is relevant.

Third, the speaker connects with those listening — perhaps through humour, stories, or simply making eye contact and speaking frankly. Finally, the speech explains concepts or advances arguments by starting from what the audience understand, and proceeding step by step through more surprising territory. It can be very hard for a speaker to appreciate just how much she knows that her audience do not. One reason to rehearse is that an audience can tell you when they get lost.

Most speakers are able to do some of this, some of the time — an interesting anecdote, a funny line, an educational explanation. We are social beings, after all. We have had a lot of practice talking.

Much of what turns a half-decent talk into a brilliant one is the ruthless excision of the fluff — the throat-clearing introduction, the platitudes, the digressions, the additional points that obscure the central message, and the “er, that’s about it” conclusion. With an audience of 60 people, for instance, every minute you waffle is an hour of other people’s time you are wasting. Sharpen up.

My only quibble is that the book offers less to a speaker who is short of preparation time. Because Mr Anderson is so keen to tell speakers how to prepare, he does not fully engage with the challenge of improvised speaking or debating.

Marco “Rubot” Rubio’s presidential dreams may have been snuffed out because he seemed over-rehearsed and unable to improvise. And Martin Luther King Jr’s greatest moment as a speaker — the second half of “I have a dream” — was unscripted. Sometimes the improvised response is more powerful than a prepared speech can ever be.

Instead, Mr Anderson’s aim is to help readers give a full-blown TED talk, despite the hard work that entails. Fair enough. Preparing to give a high-stakes speech is like training for a marathon or studying for an exam: even if you only do it once, the process will teach you things you will always remember.

Written for and first published in the Financial Times.

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A short-cut to speeches

A TED-style talk takes weeks of preparation. What if you have hours, or minutes, to prepare?

• Say something worth hearing. “It’s not about you,” says Chris Anderson, who warns that business presentations are often sales pitches or boasts. He adds that the same information will land much better if it is “here’s what we’ve learnt” rather than “look how great we’ve been”.

• Less is more. Once you have found something worth saying, focus. Strip it down to a single core point. Everything about your speech — stories, jokes, statistics, graphics — should connect to that point.

• Your speaking notes should not intrude. Bullet points are a good idea if they are written on handheld cards, but not when projected on the wall behind you. If your speech is scripted, do not try to memorise it if you have no time, but become familiar with it. “There’s a big difference between being 90 per cent down in the script, and 60 per cent up and connected,” says Anderson.

• You are usually your own best visual aid. By all means use pictures, diagrams or video when they are good. But do not use substandard slides as wallpaper; when you have nothing to show, show nothing. Hit “B” to blank the screen and focus attention on you, or use empty slides.

• Practise. Even one run-through with a friend will help. Or find an empty room and record yourself on your phone. It is awkward but worth it.

• First and final impressions last. Improvised talks often suffer from a slow start and a limp finish. Think of a good opening and closing, and practise them. If you can start and finish strongly, you and your audience will both feel better.

11th of May, 2016Other WritingComments off

The odds are you won’t know when to quit

‘The truth is that there are no foolproof methods for knowing when to hold ’em and when to fold ’em’

There is a strong case to be made for persistence. As a child I was told the legend of Robert the Bruce. Cowering and hiding in some dank cave in Scotland, he felt like giving up his struggle against the English. Then he noticed a spider repeatedly failing to spin a web before eventually succeeding. Heartened, King Robert returned to give the English a sound thrashing in 1314. Even for an English boy, it was an inspiring tale. If at first you don’t succeed, try again.

But there is an equally strong case to be made against being stubborn. When Irving Fisher and John Maynard Keynes failed to predict the Wall Street Crash of 1929, the two great economists reacted differently. Fisher stuck to his guns; Keynes shrugged and changed direction. Fisher was ruined; Keynes died a millionaire. If at first you don’t succeed, do something different next time.

Do we tend to quit too soon or quit too late? Are we too stubborn or not determined enough? There has been much excitement recently around the idea of “grit” — a personality trait representing commitment to and enthusiasm for long-term goals, championed by psychologist Angela Duckworth. She argues, plausibly, that grit is more important than talent in predicting a successful life.

The idea is appealing in principle but one must ask what Duckworth’s brief “grit” questionnaire is really measuring. (Perhaps I am just sore because I took the questionnaire and discovered I have less grit than the average marshmallow.)

While Duckworth’s work suggests that perseverance is vital, other psychological research suggests that we sometimes persevere when we should not. Nobel laureate Daniel Kahneman, with the late Amos Tversky, discovered a tendency called “loss aversion”. Loss aversion is a disproportionate dislike of losses relative to gains, and it can lead us to cling on pig-headedly to bad decisions because we hate to stop playing when we’re behind.

My favourite study of loss aversion concerns players of the TV game show Deal or No Deal, in which players must periodically decide whether to keep gambling or accept an offer from the mysterious “Banker” to buy them out of the game. In one notorious Dutch episode, a contestant named Frank was offered €75,000 to stop; he kept playing and lost his next gamble. The Banker’s next offer was just €2,400, which was actually a fair offer. But at that point loss aversion kicked in. With the lost €75,000 in mind, Frank refused all further deals, kept gambling and kept losing. He eventually won just €10.

A study of Deal or No Deal by behavioural economists including Thierry Post and Richard Thaler found that while Frank’s fate was spectacular, his behaviour was statistically typical. People hate to quit if they feel they’re losing.

Loss aversion warps investment strategies in a similar way. We happily sold our stocks in Google and Apple but clung on to those in Enron and Lehman Brothers. The same tendency affects house prices: we hate to sell for less than we paid. Recent research by Alasdair Brown and Fuyu Yang finds that the same thing is true when people are offered the opportunity to cash in a bet on a sporting event that is still in progress. They are happy to cash out if their team is a goal up, even though that will cut their possible gains, but they will cling on if their team is a goal down even though they could cut their losses.

I was struck by a recent FT article by equity analyst Daniel Davies describing how a portfolio based on expert research recommendations would tend to do badly, but if the same portfolio had a “stop-loss” rule that simply jettisoned stocks after a 10 per cent loss, it would tend to do very well. The stop-loss rule cancelled out the instinctive tendency to hold on stubbornly to losers. Yet Warren Buffett seems to do very well by buying and holding.

The truth is that there are no foolproof methods for knowing when to hold ’em and when to fold ’em. But I have three suggestions. The first is to look resolutely away from sunk costs and towards future prospects. Whether you paid $70 or $130 for your Apple shares should be irrelevant to your decision to sell them today for $100. Bygone profits and losses are a distraction.

The second is to persevere flexibly rather than stubbornly. Angela Duckworth’s family follows a “hard thing” rule: the children have to choose an activity, such as music or athletics, that requires dedication and practice. They’re allowed to quit but only at a natural break point and only if they find an alternative “hard thing”. That seems to steer a course between the Scylla of obstinacy and the Charybdis of laziness.

The third is to view decisions as experiments. Signing up to learn the violin is an experiment; so is moving cities or careers. Of course, one can end an experiment too early or doggedly persist too long. But viewing a decision as an experiment gives a useful perspective because experiments are always designed to teach us something. We can keep asking: what have I learnt? And am I still learning? If a new project or activity keeps teaching us new things, it is probably worth continuing — even if the lessons are sometimes painful.

Written for an first published at ft.com.

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How to give a TED talk in a hurry

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4th of May, 2016VideoComments off

Could an income for all provide the ultimate safety net?

‘Though the idea of a basic income is far from mainstream, it has had astonishingly broad support’

Last week, I pondered how society should protect or compensate people whose jobs have been lost to the forces of globalisation or technological change. I did not, however, discuss the most obvious idea of all: that we should simply give people money — a basic income for everyone, regardless of what they do or what they need. It’s the ultimate social safety net.

For an idea that is so far from mainstream political practice, the payment of a basic income has had astonishingly broad support, from Martin Luther King Jr to Milton Friedman. It’s on the lips of the policy wonk community too: the Freakonomics podcast recently devoted an episode to the case for a universal basic income. The Royal Society for Arts, a venerable British think-tank, has published a report enthusiastically supporting the idea. Dutch journalist Rutger Bregman is just as keen, as outlined in his recent, eloquent book Utopia for Realists.

Policy experiments are also on the way. The charity GiveDirectly has just announced plans to run a randomised trial in which 6,000 Kenyans will receive a basic income for more than a decade. Various Silicon Valley types — with one eye on the looming Robot Job Apocalypse — are making serious-sounding noises about running experiments too. Pilots are planned in Canada and Finland, and the Swiss have a referendum on the topic in June.

Could a basic income really work? The answer is yes. But the plan may be more painful than some of its advocates are willing to admit.

First, let’s establish what we’re talking about. A universal basic income is a cash payment from the state, paid to everyone unconditionally. For the sake of being concrete, let’s call it £10 a day. That seems like a lot of money to be giving to absolutely everyone, but it’s within the bounds of reason. Such a payment would cost £234bn a year across 64 million UK residents, so it could be largely paid for by scrapping all social security spending, which is £217bn.

There are lots of other proposals that one might call a basic income. Leftwing advocates might want far more than £10 a day but that would require a huge expansion of the state, with much higher taxes. The more libertarian proponents of the idea might also approve of a higher basic income, in exchange for a rolling back of state-provided services. Privatising the entire health xanax and education system in the UK would free up £240bn, easily enough to double the basic income to £20 a day for every man, woman and child. But that money would need to cover school fees and medical bills.

All this is within the bounds of affordability. But is it desirable? Here are two big question marks over the idea.

The first is whether people would simply stop working. Several large experiments conducted in the US and Canada in the late 1970s and early 1980s suggest that a minimum income would encourage people to reduce their hours a little. If such slacking-off undermined the tax base, the entire project could become both economically and politically unsustainable.

But the tax base is probably safe enough, because the people who might be tempted to quit work and live on £10 a day are not the people whose taxes pay for most state spending. In the UK, the richest 15 per cent of taxpayers — people who pay at least some tax at the 40 per cent rate — supply about two-thirds of income tax revenue. Few of these people are likely to find the basic income a tempting inducement to leave the labour force.

In some cases, we might celebrate a decision to stop work. Some people volunteer; others care for children or relatives; some might use the income to fund themselves as they stay in education or retrain. Some, alas, might use the money to stay alive as they write poetry.

The second objection is more worrying: if the welfare state is to be replaced by a basic income, it will provide far too little for some. A tenner a day is less than half the new UK state pension, so it’s hard to imagine pensioners embracing the idea with much gusto.

On the other hand, if the basic income is to be supplemented by a raft of special cases — people with disabilities, people with expensive rent, people who are elderly — then it may become as complex as the tangle of benefit entitlements it aims to replace, or hugely expensive, or both.

Andrew Hood of the Institute for Fiscal Studies says that compared with current welfare benefits, a basic income would “either be a lot less generous or a lot more expensive”. Take your pick.

In the end, the idea appeals to three types of people: those who are comfortable with a dramatic increase in the size of the state, those who are willing to see needy people lose large sums relative to the status quo, and those who can’t add up.

A basic income makes perfect sense once we arrive at an economy where millions work for low wages while automation produces a bountiful economy all around them. The debate turns on whether that world has already arrived.

Written for and first published at ft.com.

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3rd of May, 2016Undercover EconomistComments off


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