Tim Harford The Undercover Economist

Articles published in July, 2016

Metropolitan myths that led to Brexit

The Eurosceptic myths that fuelled hostility to the EU are obvious enough. We were told that the NHS was being destroyed by immigration, when more than a third of UK-based doctors qualified overseas. We were told that the EU is a fat bureaucracy, when it employs about as many people as Lancashire County Council. And we were told that the UK was being buried in red tape, when the OECD reckons it is one of the least regulated economies in the developed world.

It is easy (and useless) to sneer. Yet the metropolitan elite that voted so enthusiastically to remain cherishes its own myths, and those myths did plenty to undermine the cause of remaining in the EU.

Here are four tenets of the trendy centre-left of British politics: first, soaring inequality means that ordinary people haven’t shared in the benefits of economic growth; second, rich people and big companies don’t pay taxes; third, gross domestic product (GDP) is a statistic that misses what really counts; and finally, economists are reliably wrong. Flip through The Guardian, browse the popular economics books in your local bookshop, and tell me that these ideas aren’t taken for granted among the chattering classes.

Before the referendum, Anand Menon, director of the “UK in a Changing Europe” project, was speaking at a town hall event in Newcastle. He explained that most economists thought Brexit would depress the UK’s GDP. “That’s your bloody GDP,” yelled a heckler, “not ours”.

Look again at the four articles of centre-left faith. If they are true, then surely the heckler was right. But while there is a little truth in each of these four beliefs, there is less than you might think.

It is true that income inequality in the UK rose very sharply during the 1980s. But by most measures it has been pretty flat since 1990. The top 1 per cent continued to pull away in the 1990s — although not this century — but, counterbalancing that, the gap between people at the 10th percentile and the 90th percentile actually fell between 1990 and 2013-14. Broadly, income inequality is a problem that emerged in the 1980s and has not worsened since. (The Institute for Fiscal Studies report Living Standards, Poverty and Inequality in the UK: 2015 was my source; the 2016 version has been published since this column went to press.)

The pressing issue for the UK has not been rising inequality but weak growth that has affected most people not only during the recession of 2008, but in the five years before and after it. The problem is not that income growth benefits only the rich. The problem is that there’s been little income growth to benefit anyone at all.

The second article of faith is that rich people don’t pay taxes. If true, it would hardly matter to ordinary voters if Brexit hurt the rich or drove them away.

But the richest 1 per cent of taxpayers pay nearly 28 per cent of income tax. And, with about 9 per cent of post-tax income, they presumably also pay about 9 per cent of VAT, which is close to being a flat tax. Of course, some other taxes are grossly regressive — most notoriously the council tax, which the European Commission did urge the UK government to reform — but the rich certainly pay enough tax that the public purse would sag if they disappeared. London, too, generated more than 25 per cent of UK taxes, and that proportion has been rising, according to Centre for Cities, a think-tank. After Brexit, who knows?

What about the idea that GDP itself is flawed? Well, yes. It is flawed. It measures things that do not matter and misses things that do. But a sharp hit to GDP will also be a sharp hit to our everyday wellbeing: people will lose their jobs; schools, hospitals and public services will be squeezed as tax revenue dries up.

Consider an alternative measure: the Social Progress Index, an attempt to measure what matters in global human development with more than 50 different indicators — including access to nutrition, healthcare and schools. The SPI explicitly excludes financial indicators. Yet there is a very high correlation between the SPI and GDP. (For my fellow nerds: Michael Green, director of the SPI, tells me that the correlation is 0.88 when GDP is measured on a log scale. That’s high.) As a measure of human welfare, GDP completely fails in theory. In practice, however, it is not such a bad yardstick.

Finally, there is the low reputation of economists, the result of a global financial crisis that only a few in the profession warned us against. But the institutes that analysed the risks and rewards of Brexit can hardly be blamed for that. The Institute for Fiscal Studies is full of experts on tax and household income; the Centre for Economic Performance studies globalisation, technology and education. Blaming these people for not foreseeing the collapse of Lehman Brothers is like blaming a brain surgeon for the spread of obesity.

Many of the people who rightly scorned the myths put around by Eurosceptics should examine their own fond beliefs. The lesson of the referendum campaign was that emotion trumps rational analysis — and that is not just true of the Leavers.

Written for and first published at FT.com

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Brexit and the power of wishful thinking

‘We are quite capable of clinging on to our beliefs by picking whatever facts support them’

So what happens now? As the aftershocks of the Brexit vote rumble on, people keep asking me to predict the future. I am not sure that is a useful exercise. But there’s a lot to be learnt from examining the recent past. The unexpected result has important lessons for anyone who wishes to see what might be ahead.

The first is that wishful thinking is surprisingly powerful. A few years ago, the economist Guy Mayraz conducted a simple experiment at Oxford university’s Centre for Experimental Social Science. Mayraz ran sessions in which the participants were shown 90 days of “wheat prices” (actually based on historical price data) and asked to predict the price of wheat on the 100th day. In addition to being paid for accurate forecasts, half the experimental subjects were told they were “bakers”, who would profit if the price of wheat fell, and half were “farmers”, who would make money if the price of wheat rose.

Logically, a farmer should make the same forecast as a baker, since the forecast does not change the outcome, and both of them are paid for accuracy. If people want to hedge even these small bets, farmers ought to forecast a lower price so that if the unwelcome outcome happens, at least they’re rewarded for their forecasting.

But that’s not what Mayraz found. Instead, nearly two-thirds of farmers predicted higher-than-average prices, and nearly two-thirds of bakers predicted lower-than-average prices. People tended to predict that their dreams would come true.

The same seems to have happened to Remain supporters — a group that included most of the British and international political and business establishment. Months before the vote, betting markets suggested that the chance of a Leave vote was about one-third. Given the likely consequences of such a vote — including the collapse of the pound, the resignation of the prime minister and a prolonged period of rudderless uncertainty — a one-third chance was worth taking seriously. Yet most of the elite seemed unwilling to countenance it. That is wishful thinking at its finest.

The betting markets, influenced as always by the weight of money, may have been displaying some wishful thinking of their own. Even during a mid-June run where nine out of 10 polls showed the Leave side ahead, the markets never gave Leave much more than a 40 per cent chance. With hindsight that seems odd.

The second lesson is that confirmation bias is everywhere: we are quite capable of clinging on to our beliefs by picking whatever facts support them. Remain voters now see the catastrophe they expected; Leave voters see a gratifying shake-up that will turn out fine in the end. Contrary evidence is easily dismissed. Eurosceptics claim that a drop in high-street footfall, a drying-up of job adverts and the emergency lockdown of property funds are not because real economic damage is in prospect, but because of gloomy Europhiles talking Britain down. The convenient thing about this argument is that it can never be falsified: recessions can always be blamed on the lack of faith of unbelievers.

I’m as guilty as anyone of confirmation bias. Like most economists, I expected that the consequences of a Leave vote would be ugly. The immediate collapse of the pound and the FTSE 100 made me feel I was right, although really they demonstrated nothing more than the fact that traders shared my view. Yet when the FTSE 100 recovered, that did not reassure me at all. I recalled that the index contains largely global companies and says little about the UK’s economic prospects. I accepted bad news when it chimed with my beliefs, and dismissed good news when it did not.

Perhaps the most important lesson is that we spend too much energy trying to foretell the future, and too little trying to be resilient whatever happens. The referendum result was unpredictable but the likely short-term consequences of a Leave vote were perfectly clear. Former deputy prime minister Nick Clegg, aka “Mystic Clegg”, outlined them in an article on the eve of the referendum that now seems clairvoyant. But most of what Clegg wrote could have been foretold by any well-informed observer who bothered to think through the consequences.

Perhaps Clegg learnt the trick of thinking things through from Vince Cable, his former colleague. Cable and I briefly worked together in the scenario planning department at Shell, a fascinating place to think about the future. Rather than making forecasts, good scenario planners sketch out different possibilities and bring together people with different perspectives to work through the details. The end result will be several plausible, internally consistent and emotionally compelling stories about the future. The scenarios will highlight hidden connections and make distant consequences seem real. But, importantly, the scenarios will also contradict each other.

It’s time for more serious scenario thinking about the UK’s future in Europe. Because scenarios are persuasive stories, they can help us face up to uncomfortable prospects and think clearly about possibilities we would rather ignore. And because scenarios contradict each other, they force us to acknowledge that, in the end, we cannot actually see into the future. As a result, we move from a sterile question to a fertile one — from “What will happen?” to “What will we do if it does?”

Written for and first published at ft.com.

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Did economists fail us over Brexit?

‘Most economists think the British public shot itself in the foot, and did so against expert advice’

You may have heard the jokes about economists equivocating and squabbling. Ronald Reagan had the best one, about an edition of Trivial Pursuit designed for economists: “There are 100 questions, 3,000 answers.”

But mainstream economists did not disagree on the EU referendum question. A fortnight before the British public voted by a slim-yet-definite margin to leave the EU, the Centre for Macroeconomics, a research group, polled a group of expert economists, asking them what they thought the overall economic consequences of such a vote would be. The response was unanimous, and the only point of contention was whether Brexit would be bad, or very bad.

Leave voters did not seem to take this unprecedented warning very seriously; nor were they moved when nearly 200 economists signed a letter to the Times; nor were they dissuaded when three of the country’s leading economic institutes issued a sober analysis in a joint statement. All these were independent views, separated from the sometimes-political world of the International Monetary Fund or the Treasury. Yet they were ignored.

In short, most economists think the British public shot itself in the foot, and did so against expert advice. So should the profession have done things differently? Or would further expert views have been drowned out in the media maelstrom?

Most newspapers had a strong preconceived view, for or against. The BBC attempted to be impartial, but many critics complain that the corporation gave too much airtime to the fringe views of a few pro-exit economists, and failed to challenge obvious falsehoods. (I should declare my own BBC role: I presented a short radio series fact-checking the referendum campaigns.)

But Paul Johnson, head of the well-respected Institute for Fiscal Studies, thinks economists have a case to answer. “It is always a mistake simply to look at the media as a scapegoat. The real failings were with my profession.”

Perhaps. But the campaign left little room for subtle analysis of the difference between a single market and a free-trade agreement, or the “lump of labour” fallacy that each immigrant worker deprives a local of a job. Even the baldest falsehoods could not be expunged.

The Leave campaign’s most prominent claim — “We send the EU £350m a week, let’s spend it on the NHS instead” — was untrue and exposed as false repeatedly by the head of the UK Statistics Authority. Yet, if a recent Ipsos Mori poll is to be believed, 47 per cent of people came to believe it.

John van Reenen, the outgoing director of the LSE’s Centre for Economic Performance, doesn’t think the profession should be too down on itself. “I’m proud of what we did,” he says, and had economists engaged more “in my frank view, it would not have made a jot of difference.”

Van Reenen has a point; there is a limit to how much experts can achieve by simply presenting the facts.

Dan Kahan is a Yale law professor who studies the way we debate controversial political issues such as climate change and gun control. He points out that our reasoning about such issues is often bound up with passionately held emotions and values. For example, people who oppose government regulations are often instinctively sceptical about climate change, fearing that it is a Trojan horse for state control; alternatively, people who distrust large corporations instinctively embrace the scientific evidence on climate change, yet tend to dismiss scientists who say that genetically-modified food is safe. Giving people evidence that threatens deep beliefs is often counterproductive, because we start with our emotions and trim the facts to fit them.

A possible solution, argues Kahan, is to recruit experts who confound people’s stereotypes — a sharp-suited City economist explaining that EU laws protect workers’ rights, perhaps. Another possibility is to acknowledge people’s values before presenting the evidence — for example, the desire to preserve a community’s character in the face of immigration. And Kahan and his colleagues have also found that when evidence is presented by a diverse group of experts, people receive it with a more open mind. Perhaps the problem is that economists don’t seem very diverse.

Ultimately, there is no substitute for sustained public engagement — a lesson scientists have learnt the hard way. After years of bruising anti-scientific backlashes, they realised they were being ignored on issues such as genetically-modified crops or vaccines because they shied away from media appearances. Charlatans and activists stepped into the vacuum.

So, in 2002, the Science Media Centre was established, with a mission to ensure that when science or pseudoscience hit the headlines, respected scientists would be available to speak to journalists. “It’s a long slog,” says David Spiegelhalter, a statistician and risk-communication expert at Cambridge university. But he says the SMC has led to better science reporting.

Should economists do likewise? Perhaps. But the conduct of the campaign will not make that easier. Economists who did step forward to explain the issues were dismissed as corrupt or incompetent in the crudest terms. Nobody could be blamed for wishing to duck such mud-slinging. But if the events of the past few weeks have shown us anything, it is that public life is too precious to be entrusted to politicians alone.

Written for and first published at ft.com.

What I’ve been reading in June

In between all that Brexit, I’ve read some cracking books of late.

TED Talks by Chris Anderson. I wrote a piece about the book here; as a person who devours books about public speaking, this is by far the best I’ve seen. Bravo. (US) (UK)

The Shock of the Old by David Edgerton. (US) (UK) Fascinating take on the history of technology, pointing out that the innovations that make the headlines aren’t necessarily the ones that really make a difference. All hail to concrete and the bicycle!

On a similar topic but a more upbeat vein, How We Got to Now by Steven Johnson is jolly good. Much I did not know here. (US) (UK)

Other People’s Money by John Kay is a magnificent book – witty, penetrating and wise. All about the gap between what the financial sector does and what it could and should do – but by someone who really understand the sector in some depth. (US) (UK)

Algorithms to Live By by Brian Christian and Tom Griffiths. (US) (UK) This one is very good too: using computer science to help understand how to get a date, how to sort a bookshelf, how to find an apartment, how to tidy your desk, etc. etc. You learn a lot about computer science and a fair bit of self-help too. It’s not quite as good as Brian Christian’s The Most Human Human (US) (UK) but since that’s perhaps the best book I’ve read all decade, no big deal.

Or if you fancy reading one of my books, I’m rather proud of The Undercover Economist Strikes Back.

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11th of July, 2016MarginaliaComments off

We’re all winners or losers now

‘When we stop admiring how much the pie has grown, we start fighting each other for a larger slice’

When it became clear that the British really had voted to leave the EU, markets around the world dropped to the floor and began twitching. One couldn’t help but be reminded of the collapse of Lehman Brothers almost eight years ago, but perhaps the Brexit vote isn’t so much an echo of Lehman Brothers as a sequel in a long story of economic disappointment.

The 2008 financial crisis shaped the rhetoric of the Brexit debate, of course. Had this vote taken place 10 years ago, the fact that most economists thought that leaving would be an act of awful self-harm would have carried weight. The prospect of investment banks moving their activities to Dublin and Frankfurt would have seemed like a disadvantage, not a two-for-one offer.

There is a good argument that, despite the crisis, both economists and banks have something useful to contribute, but that case was never likely to be heard. It was too much to expect a subtle and well-reasoned public debate on the risks and contributions of London as an international banking centre. The most prominent claim of the Leave side — that the UK spends £350m a week on EU membership and could spend that on the National Health Service instead — sailed untouched through the campaigning, despite being simply false.

But some of the seeds of this vote have been growing for much longer in the fertile soil of economic grievance. The UK, like every other major developed economy inside or outside the EU, was growing more quickly per capita before 1973 than afterwards. Slow growth has been the norm across the G7 for four decades. It has been exacerbated in anglophone countries by a sharp increase in top-income inequality in the 1980s and 1990s, which has meant that the benefits of even this modest growth have not been widely felt.

And so we see a desire to upend the status quo: Brexit, of course, but also the rise of radical politicians from Marine Le Pen in France, Donald Trump in the US and Geert Wilders in the Netherlands on the right, to Jeremy Corbyn in the UK, Trump’s opponent Bernie Sanders and Alexis Tsipras in Greece on the left.

But perhaps there are deeper forces too. In 2005, the Harvard University economist Benjamin Friedman published The Moral Consequences of Economic Growth, arguing that times of broad-based economic progress also tended to lead to moral progress, to “greater opportunity, tolerance of diversity, social mobility, commitment to fairness, and dedication to democracy”. Reverse the economic gains and the moral gains may also evaporate.

Friedman argues that we naturally compare ourselves to others. We can compare ourselves to TV celebrities (a recipe for misery, since they are all richer, more famous and better looking than we are) or, as per the platitude, to “those less fortunate than ourselves”.

But, usually, we make one of two simpler comparisons. We can feel happy because we’re doing better than we were last year, or we can feel happy because we’re doing better than our neighbours. In good times, everyone can feel happy for the first reason, but not everyone can feel happy for the second.

When prosperity is broad-based and growing, it’s cheering to look back at how far we have come. We can relax, knowing that we’re earning twice the salary, that we own a larger home, that there are savings and a pension. But in bad times there is little solace to be had by thinking about the past. All we recall is that our younger selves had hair, muscle tone and, above all, a bright future — each of which time has taken away from us.

And so in tough times we resort to the other comparison available to us: are we doing better than our neighbours? When we stop admiring how much the pie has grown, we start fighting each other for a larger slice. Many people who voted to leave did not see EU membership as a joint project for mutual benefit but as a zero-sum game that Britain was losing and Brussels was winning.

Economists are naturally inclined to see the world as a place where everyone can prosper. The Trumpish rhetoric of winners and losers is alien — and alarming — to us. But that is the world in which we now live. The economics of Brexit are daunting but, with goodwill on all sides, they are manageable. It is the zero-sum politics that worry me.

It would be wrong to suggest that economic suffering inevitably produces a backlash. In the UK, the people who have struggled most since the crisis have been the young — and, in a sadly inspiring act, they were the ones who voted overwhelmingly to stay in the EU.

Still, the economic backdrop clearly matters, both in its own right and because of its political effects. Those of us who are committed to openness and prosperity for everyone, regardless of their nationality, now have a long campaign on our hands. We should start by accepting that, if we cannot bring back broad-based and growing prosperity to the advanced economies, Brexit will not be the last political shock we must face.

Written for and first published at ft.com.

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