Tim Harford The Undercover Economist

Articles published in September, 2017

Trump, Bannon, and the terrible lure of zero-sum thinking

As visual metaphors go, it wasn’t bad: Donald Trump ignoring expert advice and risking calamity by staring up at the sun as the moon’s shadow passed across America. Self-destructiveness has become a habit for this president — and for his advisers. A recent example: former White House chief strategist Steve Bannon called Robert Kuttner, a prominent progressive journalist, to declare that his internal foes in the administration were “wetting themselves”. Shortly after Mr Kuttner wrote about the conversation, Mr Bannon was out.

But the truly harmful temptation here is not eclipse-gazing or indiscreet interviews. It’s another idea that Mr Bannon proposed to Mr Kuttner: that the US was in “an economic war with China”. It seems intuitive; many ordinary Americans feel that they cannot win unless China loses. But the world economy is not like a game of football. Everyone can win, at least in principle. Or everyone can lose. Falling for Mr Bannon’s idea of economic war makes the grimmer outcome far more likely.

Like many dangerous ideas there is some truth in it. The American middle class has been suffering while China has been booming. Branko Milanovic, author of Global Inequality (UK) (US), has produced a striking elephant-shaped graph showing how, since the late 1980s, the rich have been doing well, as have many other groups, including the Asian middle class. But earnings near though not at the top of the global income ladder have stagnated. That does not demonstrate harm from China: there is the fall of the Soviet Union to consider, and the struggles of Japan.

However, another study, from David Autor, David Dorn and Gordon Hanson, has shown the lasting impact of the “China shock”. It was no surprise that competition from China put some Americans out of work, but Mr Autor and his colleagues showed that the effects were more locally concentrated, deeper and more enduring than expected. These are important and worrying findings.

But Mr Bannon’s “economic war” is a cure far worse than the disease, and a misdiagnosis of how the world economy works. America has still benefited from trade with Asia and attacking China — even metaphorically — will do nothing for the American middle class. This is because it is surprisingly hard to find a zero-sum game in the real world.

Most commercial transactions offer benefits to both sides, otherwise why would they take place at all? A trip to a restaurant provides good food and a pleasant evening for me, gainful employment for the waiting staff and the chef, and a lively environment for the neighbourhood. Everyone can gain. There are zero-sum elements to the affair: every penny I hand over is a loss to me and a gain to the restaurant staff or owner. But it is best all round not to obsess too much on such matters.

Zero-sum thinking apparently makes for good politics but bad policy. The UK government has shown an unnerving tendency to treat its EU negotiations as a zero-sum affair, in which the Europeans can “go whistle”, in the words of foreign secretary Boris Johnson.

In the Brexit referendum the Vote Leave campaign turned on a zero-sum claim: we send money to the EU, we should spend it on ourselves. The form of the argument was as powerfully misleading as the details: the focus on membership fees pulled the attention of voters away from the idea of the EU as a club of co-operating nations.

Populists of all stripes focus on zero-sum arguments because they’re easy to explain and emotionally appealing. Any toddler understands the idea of grabbing what someone else has; most adults prefer a situation where everyone gains.

The theory of zero-sum games was developed by the mathematician John von Neumann and the economist Oskar Morgenstern in their famous book published in 1944. It works fine for analysing chess and poker, but by itself zero-sum thinking is not much use to an economist who analyses a world full of win-win situations, of gains from trade.

Zero-sum thinking is not even that helpful to a military strategist. Von Neumann was a cold war hawk: “If you say bomb the Soviets tomorrow, I say why not today?”, Life magazine quoted him as saying. “If you say bomb them at five o’clock, I say why not one o’clock?” He was a genius, but it does not take a genius to see the blind spot in his thinking.

The populists may lack the genius but they have the same blind spot. Not coincidentally, the focus on zero-sum rhetoric has drawn attention away from more plausible solutions, many of which are purely domestic: higher quality education, publicly funded infrastructure investment, antitrust action to keep markets functioning competitively, and a more constructive welfare state which supports and encourages work rather than stigmatises and punishes idleness.

The biggest risk is that zero-sum thinking becomes self-fulfilling. Given oxygen by years of slow growth, it will lower growth further. By emphasising conflict it will intensify it. The US is not in an economic war with China, but could start one. That might help Mr Trump. It would not help those he claims to defend.

 
Written for and first published in the Financial Times on 25 August 2017.

My new book is “Fifty Inventions That Shaped The Modern Economy”. Grab yourself a copy in the US or in the UK (slightly different title) or through your local bookshop.

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Ideas about the past, present and future of the economy

Books

Book of the week is James C Scott’s Against The Grain (UK) (US) – an examination of the origins of civilisation. Scott – best known for the magnificent Seeing Like A State (US) (UK) – is on fascinating form. There’s a fine long review by John Lanchester in the New Yorker.

I’ve been enjoying Ed Thorp’s A Man For All Markets (UK) (US).  Thorp is a quite brilliant thinker about both gambling and investment – he also built a wearable computer with Claude Shannon to predict the fall of the ball on a roulette table. So far this is a fascinating autobiography. Thought-provoking foreword by Nassim Taleb, too, who emphasises the simple practicality of Thorp’s approach.

Then there’s Paul Goodwin’s Forewarned (UK) (US) – which at first glance seems to be a great survey of what works and what doesn’t in the forecasting game. (It’s next on my list to read.)

 

Bro-casts

I’m going to admit to listening to The Art of Manliness and The Tim Ferriss Show, at least on occasion, because there are occasional gems. Check out this fascinating interview about the professor who taught Homer’s Odyssey to a class including his on octogenarian father – and what both the text and the class taught him about the relationship between fathers and sons. And here’s Mr Money Moustache on Ferriss’s podcast.

And not-at-all Bro-ish, but I loved this recent episode of The Why Factor about why we ask “so what do you do?” of strangers – and whether we can do better than that question. Wonderful radio.

 

The Search For the Fifty First Thing

If you’ve been enjoying the book / series of Fifty Things That Made the Modern Economy you can vote for one more special episode here (until noon GMT 6 October 2017) – the shortlist of six is worth a look!

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18th of September, 2017MarginaliaComments off

Your chance to vote for the 51st thing that made the modern economy

It’s been such fun working on the radio series and book Fifty Things That Made the Modern Economy – but one of the frustrations was all the fascinating ideas, inventions and stories that I couldn’t squeeze into the book. Well, now there are six more on the table – and I’d love you to vote as to which of them will be the subject of one final episode.

The options are: credit cards, glass, the global positioning system, irrigation, the pencil, and spreadsheets. I chose this short-list of six from hundreds of suggestions that came in from BBC listeners.

So – please vote here before noon GMT on Friday 6 October. Or you could hold your fire until next weekend (23 September) at which point we’ll have a special podcast covering the six shortlisted ideas.

And if you’d like to pick up a copy of the book, it has received some lovely reviews. It’s out now in the UK and in the US (with the title Fifty Inventions That Shaped the Modern Economy).  Do feel free to order copies for all your friends…

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16th of September, 2017MarginaliaComments off

The psychological biases that leave us unprepared for disaster

This column was written and first published a week before Hurricane Harvey struck the US coast. – TH

Who saw the global financial crisis coming, who didn’t and who deserved blame for the forecasting failure? After a decade of debating these questions, I wonder whether we shouldn’t be asking a different one: even if we had clearly seen the crisis coming, would it have made a difference? Perhaps — but perhaps not.

Consider New Orleans in 2004. With a terrible hurricane bearing down on the city, officials realised that the situation was grim. The levees were in disrepair and a storm surge could flood the low-lying city. A hundred thousand residents would be unable to evacuate without help, and not enough help was available. A plan was hatched to evacuate families to the Superdome, a sports stadium, but managers there warned that it simply could not house so many. If only there had been more warning of disaster.

Some readers will recall, though, that the catastrophe of Hurricane Katrina took place in 2005. The storm of 2004 was Hurricane Ivan, which, after lashing the Caribbean, weakened and turned aside from New Orleans. The city had been given almost a full year’s warning of the gaps in its defences.

The near miss led to much discussion but little action. When Hurricane Katrina hit the city, evacuation proved as impractical and the Superdome as inadequate as had been expected. The levees broke in more than 50 places, and about 1,500 people died. New Orleans was gutted. It was an awful failure but surely not a failure of forecasting.

Robert Meyer and Howard Kunreuther in The Ostrich Paradox (UK) (US) argue that it is common for institutions and ordinary citizens to make poor decisions in the face of foreseeable natural disasters, sometimes with tragic results. There are many reasons for this, including corruption, perverse incentives or political expediency. But the authors focus on psychological explanations. They identify cognitive rules of thumb that normally work well but serve us poorly in preparing for extreme events.

One such mental shortcut is what the authors term the “amnesia bias”, a tendency to focus on recent experience. We remember more distant catastrophes but we do not feel them viscerally. For example, many people bought flood insurance after watching the tragedy of Hurricane Katrina unfold, but within three years demand for flood insurance had fallen back to pre-Katrina levels.

We cut the same cognitive corners in finance. There are many historical examples of manias and panics but, while most of us know something about the great crash of 1929, or the tulip mania of 1637, those events have no emotional heft. Even the dotcom bubble of 1999-2001, which should at least have reminded everyone that financial markets do not always give sensible price signals, failed to make much impact on how regulators and market participants behaved. Six years was long enough for the lesson to lose its sting.

Another rule of thumb is “optimism bias”. We are often too optimistic, at least about our personal situation, even in the midst of a more generalised pessimism. In 1980, the psychologist Neil Weinstein published a study showing that people did not dwell on risks such as cancer or divorce. Yes, these things happen, Professor Weinstein’s subjects told him: they just won’t happen to me.

The same tendency was on display as Hurricane Sandy closed in on New Jersey in 2012. Robert Meyer found that residents of Atlantic City reckoned that the chance of being hit was more than 80 per cent. That was too gloomy: the National Hurricane Center put it at 32 per cent. Yet few people had plans to evacuate, and even those who had storm shutters often had no intention of installing them.

Surely even an optimist should have taken the precautions of installing the storm shutters? Why buy storm shutters if you do not erect them when a storm is coming? Messrs Meyer and Kunreuther point to “single action bias”: confronted with a worrying situation, taking one or two positive steps often feels enough. If you have already bought extra groceries and refuelled the family car, surely putting up cumbersome storm shutters is unnecessary?

Reading the psychological literature on heuristics and bias sometimes makes one feel too pessimistic. We do not always blunder. Individuals can make smart decisions, whether confronted with a hurricane or a retirement savings account. Financial markets do not often lose their minds. If they did, active investment managers might find it a little easier to outperform the tracker funds. Governments, too, can learn lessons and erect barriers against future trouble.

Still, because things often do work well, we forget. The old hands retire; bad memories lose their jolt; we grow cynical about false alarms. Yesterday’s prudence is today’s health-and-safety-gone-mad. Small wonder that, 10 years on, senior Federal Reserve official Stanley Fischer is having to warn against “extremely dangerous and extremely short-sighted” efforts to dismantle financial regulations. All of us, from time to time, prefer to stick our heads in the sand.

Written for and first published in the Financial Times on 18 August 2017.

My new book is “Fifty Inventions That Shaped The Modern Economy”. Grab yourself a copy in the US or in the UK (slightly different title) or through your local bookshop.

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Undercover Monday – ideas about decision-making

A few interesting books have crossed my desk recently.

Garry Kasparov’s Deep Thinking (UK) (US) promises to reflect on “Where Machine Intelligence Ends and Human Creativity Begins”, although on that particular point it is not especially profound. Nevertheless Kasparov does say a lot that is interesting about innovation and risk-taking (like me he’s concerned that we’re favouring the marginal gain over riskier basic research) and there’s a terrific history of AI in chess. The heart of the book is an account of Kasparov’s battles with Deep Blue, and reads like a thriller. Great stuff.

Tali Sharot’s brand new The Influential Mind (UK) (US) discusses the social, emotional and rational cues that persuade us or deter us from taking action. It’s a familiar formula of anecdote, argument and research, but some of the research is new to me and it’s well-written and combined to good effect. Recommended.

Depressingly relevant at the moment is The Ostrich Paradox (UK) (US) by Meyer and Kunreuther; in a brief, expert book the author apply the cognitive biases literature (familiar from Kahneman and others) to disaster preparedness and crisis management. Very much focused on hurricanes and tsunamis but there’s much of relevance to other catastrophes (banking crises, industrial accidents) too.

 

And some great podcasts for your delectation. Tyler Cowen’s Conversations With Tyler is fascinating – he asks unusual and often revealing questions. The conversation with Kasparov was particularly good. Russ Roberts’s EconTalk is an old stalwart (I’ve been on twice with another appearance scheduled) but it’s often excellent. Two recent episodes – with John McWhorter on language and Benedict Evans on self-driving electric cars – were superb, perhaps because only tangentially related to economics.

 

Meanwhile the US edition of Fifty Inventions That Shaped The Modern Economy is out as of six days ago. Buy, buy! A few more days available to suggest what the 51st invention should be (details here) or pick up the UK edition here.

 

 

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4th of September, 2017MarginaliaComments off

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