Tim Harford The Undercover Economist

Articles published in July, 2018

Fifty Things That Made The Modern Economy – UK Paperback

I’m delighted to report that “Fifty Things That Made The Modern Economy” is out in paperback in the UK this week. (The US edition – Fifty Inventions That Shaped the Modern Economy – is out at the end of August. Sorry you have to wait…)

I had such fun writing this book and people seem to be enjoying reading it, which is great. One of the joys of the book was the ability to leap across time and topic, pick up under-rated technologies and explored the unexpected consequences of the things we invent.

“Packed with fascinating detail… Harford has an engagingly wry style and his book is a superb introduction to some of the most vital products of human ingenuity”, said the The Sunday Times.

“It’s great fun to dip into… Harford succeeds in teaching… without resorting to technical terminology and intimidating charts and tables. Such a feat requires a kind of inventiveness in itself.” That was the  The Wall Street Journal.

You can read more reviews and get more information about where to buy the book here.

30th of July, 2018Other WritingComments off

The secret to happiness after the robot takeover

We all seem to be worried about the robots taking over these days — and they don’t need to take all the jobs to be horrendously disruptive. A situation where 30 to 40 per cent of the working age population was economically useless would be tough enough. They might be taxi drivers replaced by a self-driving car, hedge fund managers replaced by an algorithm, or financial journalists replaced by a chatbot on Instagram.

By “economically useless” I mean people unable to secure work at anything approaching a living wage. For all their value as citizens, friends, parents, and their intrinsic worth as human beings, they would simply have no role in the economic system.

I’m not sure how likely this is — I would bet against it happening soon — but it is never too early to prepare for what might be a utopia, or a catastrophe. And an intriguing debate has broken out over how to look after disadvantaged workers both now and in this robot future. Should everyone be given free money? Or should everyone receive the guarantee of a decently-paid job?

Various non-profits, polemicists and even Silicon Valley types have thrown their weight behind the “free money” idea in the form of a universal basic income, while US senators including Bernie Sanders, Elizabeth Warren, Cory Booker and Kirsten Gillibrand have been pushing for trials of a jobs guarantee.

Basic income or basic jobs? There are countless details for the policy wonks to argue over, but what interests me at the moment is the psychology. In a world of mass technological unemployment, would either of these two remedies make us happy?

Author Rutger Bregman (UK) (US) describes a basic income in glowing terms, as “venture capital for everyone”. He sees the cash as liberation from abusive working conditions, and a potential launch pad to creative and fulfilling projects.

Yet the economist Edward Glaeser views a basic income as a “horror” for the recipients. “You’re telling them their lives are not going to be ones of contribution,” he remarked in a recent interview with the EconTalk podcast. “Their lives aren’t going to be producing a product that anyone values.”

Surely both of them have a point. A similar disagreement exists regarding the psychological effect of a basic jobs guarantee, with advocates emphasising the dignity of work, while sceptics fear a Sisyphean exercise in punching the clock to do a fake job.

So what does the evidence suggest? Neither a jobs guarantee nor a basic income has been tried at scale in a modern economy, so we are forced to make educated guesses. We know that joblessness makes us miserable.

In the words of Warwick university economist Andrew Oswald: “There is overwhelming statistical evidence that involuntary unemployment produces extreme unhappiness.” What’s more, adds Prof Oswald, most of this unhappiness seems to be because of a loss of prestige, identity or self-worth. Money is only a small part of it. This suggests that the advocates of a jobs guarantee may be on to something.

In this context, it’s worth noting two recent studies of lottery winners in the Netherlands and Sweden, both of which find that big winners tend to scale back their hours rather than quitting their jobs. We seem to find something in our jobs worth holding on to.

Yet many of the trappings of work frustrate us. Researchers led by Daniel Kahneman and Alan Krueger asked people to reflect on the emotions they felt as they recalled episodes in the previous day. The most negative episodes were the evening commute, the morning commute, and work itself.

Things were better if people got to chat to colleagues while working, but (unsurprisingly) they were worse for low status jobs, or jobs for which people felt overqualified. None of which suggests that people will enjoy working on a guaranteed-job scheme.

Psychologists have found that we like and benefit from feeling in control. That is a mark in favour of a universal basic income: being unconditional, it is likely to enhance our feelings of control. The money would be ours, by right, to do with as we wish. A job guarantee might work the other way: it makes money conditional on punching the clock.

On the other hand (again!), we like to keep busy. Harvard researchers Matthew Killingsworth and Daniel Gilbert (UK) (US) have found that “a wandering mind is an unhappy mind”. And social contact is generally good for our wellbeing. Maybe guaranteed jobs would help keep us active and socially connected.

The truth is, we don’t really know. I would hesitate to pronounce with confidence about which policy might ultimately be better for our wellbeing. It is good to see that the more thoughtful advocates of either policy — or both policies simultaneously — are asking for large-scale trials to learn more.

Meanwhile, I am confident that we would all benefit from an economy that creates real jobs which are sociable, engaging, and decently paid. Grand reforms of the welfare system notwithstanding, none of us should be giving up on making work work better.

 

Written for and first published in the Financial Times on 29 June 2018.

My book “Fifty Things That Made the Modern Economy” (UK) / “Fifty Inventions That Shaped The Modern Economy” (US) is out now (or very very soon) in paperback – feel free to pre-order online or through your local bookshop.

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The topsy turvy logic of Trump’s trade tirades

When the US president attacks Canada’s prime minister as “dishonest and weak”, before staging a love-in with the dictator of North Korea, you know that the journey through the looking glass is complete.

But for economics nerds, the puzzle isn’t that Donald Trump is making concessions to a rogue state while slapping hefty tariffs on the steel and aluminium produced by his allies. It is that the entire debate about trade is upside-down and back-to-front.

Mr Trump complains of “Trade Abuse”, saying that other countries “impose massive Tariffs and Trade Barriers” while “sending their product into our country tax free”. This is narrowly true, broadly false and wholly absurd.

The narrow truth in Mr Trump’s tweet is that there are some unconscionably high tariffs around. Beyond a small quota, Canada’s average tariff on dairy imports is well over 200 per cent. The broad falsehood is the idea that only the US levies low tariffs. American tariffs are indeed low — the World Trade Organisation estimates that its weighted average tariff rate is 2.4 per cent. But at 3.1 per cent, average Canadian tariffs are only slightly higher, as are those of the EU (and therefore France, Germany, Italy and the UK). Japan’s tariffs are lower than the US.

Real obstacles to trade are higher than this, partly because there are regulatory differences that are hard to quantify, and partly because by looking at a weighted average tariff, we put less weight on any trade that has been squeezed by trade barriers. Still, tariffs between rich countries are low and there is nothing obviously unfair about the situation. If Canada’s average tariff of 3.1 per cent is cause for a trade war, it is hard to imagine a victory for either side being anything other than pyrrhic.

Now let us ponder the absurdity, the real topsy-turvy part of the entire argument. Most people — including Mr Trump — intuitively believe that most victims of Canada’s huge dairy tariff are American. They aren’t. They’re Canadian.

Any Canadian who drinks milk or eats cheese pays a higher price because inexpensive dairy imports are being taxed at the border.

And there’s a more subtle cost to Canadians, perhaps best understood by imagining a simplified Canadian economy with only two goods, milk and cars. The more milk these Canadians import, the more cars they will have to export to pay for it. A tariff on dairy imports will have exactly the same effect as a tax on car exports. The economist Abba Lerner proved this in 1936.

In the real world the dairy tariff acts as a tax on Canadian exports of anything from maple syrup to aeroplanes. Intuitively, it seems like an obstacle directed against foreign importers. But it makes just as much sense to see it as the result of an internal power struggle that Canadian dairy farmers have won — and Canadian miners, manufacturers and milkshake drinkers have lost.

The same is true for Mr Trump’s new steel and aluminium tariffs. Ostensibly an attack on perfidious foreigners, the tariffs hurt any American who directly or indirectly uses steel or aluminium, all 327m of them. And by obstructing US imports they obstruct US exports, too.

This simplified analysis leaves out some important facts. It is unclear, however, that the omissions change the argument.

There is the China shock: some US communities were damaged by the inflow of cheap Chinese imports beginning in the late 1990s. The damage was local, but deep and lasting. Still, overall US consumers benefited enormously from these Chinese imports, and in any case it’s hard to blame Canada.

There is the US trade deficit. This is the result of the world’s insatiable desire to invest in US assets, coupled with the American consumer’s preference to spend rather than save. It has little to do with tariffs on milk powder or anything else.

There is a case for “infant industry” protection — using trade barriers to shield a new industry from competition while it finds its feet. The trick is harder than it sounds, and often fails, but some emerging Asian economies have used it to great effect. But what is the infant industry in the US? It is the fading industrial titans, not the infants, that usually manage to lobby for protection.

There is the need for rules to determine what counts as a trade barrier or a subsidy. These rules rely on international institutions and norms. A happy side effect of the institutions is that they help defang lobby groups eager to blame foreigners while picking the pocket of consumers. The US wrote many of these rules. As a lone bully it is just conceivable that it might do better without them, but it is more likely simply to lose less heavily than some.

All these complications are real, but they do not change the fundamental nature of the argument about trade, which was best summarised by the British economist Joan Robinson. In 1937 she pointed out that, except as a narrow negotiating ploy, it made little sense to meet tariffs with tariffs: “It would be just as sensible to drop rocks into our harbours because other nations have rocky coasts.”

 

Written for and first published in the Financial Times on 15 June 2018.

My book “Fifty Things That Made the Modern Economy” (UK) / “Fifty Inventions That Shaped The Modern Economy” (US) is out very soon in paperback – feel free to pre-order online or through your local bookshop.

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Football’s minnows demonstrate how poor countries can catch up

Is the rest of the world catching up with the leading countries? That depends. If you are talking about economic productivity, the answer is unclear. If you are talking about football results, that is another story.

Putting aside football for now (it will not be gone for long) let us focus instead on the living standards of everyone on the planet. “Convergence” — the idea that poor countries grow faster than rich ones — is an important idea.

In a very poor country, the return on a few simple investments should be very high. Adding a paved road between two towns makes a bigger difference than adding a new lane to a road that already exists. The same is true for power lines, railways and ports. So capital should flow to poorer countries and they should grow faster than rich countries.

That is the theory, at least, and it seems plausible when one ponders the dazzling growth of postwar Japan and Germany, South Korea in the 1970s and 1980s, China, and oft-overlooked success stories such as Ethiopia.

When poor countries grow quickly, people escape from poverty and global inequality tends to fall. So if convergence was the natural state of affairs it would be good news. Alas, in the words of economist Dani Rodrik: “empirical work has not been kind to this proposition”. The crude historical fact is that the world economy sharply diverged between 1820 and 1990, with today’s rich nations expanding their share of world income from 20 per cent to 70 per cent.

That trend has been sharply reversed since then, says Richard Baldwin, an economist and author of The Great Convergence (UK) (US). But, as Prof Baldwin notes, the catch-up is highly concentrated. Between 1970 and 2010, six major industrialising countries, China, Korea, India, Poland, Indonesia and Thailand, expanded from having close to zero to more than one-quarter of world manufacturing output. The G7 has slipped from two-thirds to 50 per cent. The rest of the world has been treading water.

So economists have largely abandoned the idea of convergence as a universal phenomenon. They speak instead of “conditional convergence”. Convergence will not save Venezuela nor North Korea from catastrophic governments, but it will happen if you get the right combination of policy, institutions and economic pixie dust. Quite what that combination is and why some nations struggle to achieve it remains the trillion-dollar question.

Prof Rodrik has found evidence that unconditional convergence does happen, not for economies as a whole but for specific manufacturing sectors in those economies, such as “macaroni and noodles” or “knitted or crocheted apparel” or “plastic sacks and bags”.

If such a sector is well behind the global cutting edge, it can expect labour productivity to grow by 4-8 per cent a year, enough to double every decade or two. This tendency holds regardless of what else might be happening in the economy. Why?

The likely answer is that such manufacturing sectors get drawn into global supply chains. They can learn quickly, and must do so to respond to the incessant threat of competition. They will be doing business with suppliers and customers who can provide swift feedback and instruction. In the modern global economy, certain kinds of know-how travel fast, small tasks are unbundled, and part-finished goods and components shuttle back and forth across borders. Any enterprise plugged into this process will improve quickly. It may be more closely integrated into global supply chains than its own local economy, which might not keep up.

All of which brings us back to football. Two economists, Melanie Krause and Stefan Szymanski, decided to examine whether the unconditional convergence hypothesis holds for international men’s football, as it does for manufacturing sectors. (Prof Szymanski is the co-author, with the Financial Times’s Simon Kuper, of Soccernomics. (UK) (US)) Football, after all, offers a long data set and some clear measures of performance. International football’s governing body, Fifa, has more members than the UN.

Sure enough, Profs Krause and Szymanski found that the strength of international football teams is converging. The minnows are acquiring bite, and the old cliché, “there are no easy games in international football”, is far truer today than it was in 1950.

Perhaps we should not be surprised. As with manufacturing, the standard of competition is fierce, performance metrics unforgiving, and the very best ideas will be copied. As an additional spur to progress, elite football offers a global labour market: a strong player from a weak national team will spend most of his time at a top club side in the company of world-class dietitians, trainers, and teammates. His home nation will enjoy the benefits.

It is tempting to draw grand conclusions from all this, about the increasing importance of knowledge in globalisation; about the bracing effects of robust international competition; about the benefits of being open to international migrants. But perhaps it is better to just watch the football. In an age of distressing reality-TV politics, here, at least, is a competitive spectacle we can all enjoy.

 

 
Written for and first published in the Financial Times on 22 June 2018.

My book “Fifty Things That Made the Modern Economy” (UK) / “Fifty Inventions That Shaped The Modern Economy” (US) are out soon in paperback – feel free to pre-order online or through your local bookshop.

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The progressive case for auctions for everything

Korean pop sensations BTS are coming to London in October, which means the Undercover Economist spent a morning recently with multiple browser tabs open, trying in vain to secure tickets from a variety of websites that were claiming to sell them. Grey-market tickets of unknown provenance are now available at high prices.

The struggle for BTS tickets is hardly unique. The World Cup is coming up, and then there’s Wimbledon, and don’t even get me started on Hamilton.

Economists have had a solution to such frustrations for so long that it is becoming our cliché. The problem is that a limited supply of BTS tickets is priced too cheaply relative to demand. Auctioning off the tickets to the highest bidders would fix that problem, and all but eliminate touts and scalpers: if true BTS fans have already submitted their highest bids in the auction, there is little profit left for re-sellers.

Of course, some people find auctions distasteful, and BTS may not want to be tainted by that. But leaving such qualms aside, the auction design problem itself is more intriguing than it might appear.

What seems at first to be a single commodity — concert tickets — is actually a cluster of related products. Standing, seated, on Wednesday, on Thursday, far back, close up, two tickets for the diehard fans among us or five for the whole family — different combinations of these products might have appealed, depending on their absolute prices and their prices relative to each other. And BTS might have been willing to perform an extra show on the Tuesday, too, if there was enough demand.

Elizabeth Baldwin and Paul Klemperer, economists at Oxford university, have designed auction software that can easily accommodate such complexity. I could have submitted a bid for tickets along the lines of: “Five tickets at up to £50, or two tickets at up to £100, an extra £5 if it’s Thursday rather than Wednesday and up to £20 a head more for the VIP package.”

Looking at hundreds of thousands of such bids, aggregated by a computer, BTS could sell tickets to the keenest bidders, but could also adjust the mix on offer by installing some seats in an area previously reserved for standing, or arranging an extra tour date. It could easily allow favourable terms for fans with proven loyalty.

A more important (and likely) use of such a “product mix” auction would be a treasury raising money from the bond markets. How much money might be borrowed, and at what maturities, would depend on the demand. It is more efficient to combine several separate bond auctions into a single process.

The Bank of England has used “product mix auctions” to inject liquidity into the banking system. They could be used in most situations where a range of similar goods might be bought or sold in different mixes, depending on relative prices.

I confess to having a soft spot for auctions; I wrote a thesis on the subject two decades ago, and Prof Klemperer was my supervisor. But even I hesitate at the radicalism of some economists — such as Eric Posner and Glen Weyl, authors of a new book, Radical Markets. (UK) (US)

One of several eye-catching ideas in the book is, in effect, that everyone’s big possessions — your car, your house — should be up for auction all the time. I would put a price on my car — say, £5,000. It would go into a searchable public register, and if you thought the price was attractive, you could buy it. Having named the price, I would have no right to refuse.

If my car had a sentimental value, I could put a higher price on it to ensure that I kept it. (£5,000 is several times its value already.) But I would hesitate to name a crazy price like £5m, because under Messrs Posner and Weyl’s system, my taxes would be determined by the self-declared value of my assets.

This system has enormous potential — simple, fair, progressive taxes and a more dynamic economy. It would be much easier to develop new infrastructure, build new homes, buy your neighbour’s garden, and pour concrete all over twee villages to build monorails or airport runways.

I once tried to buy a scrap of underused backyard in Hackney. The owner agreed a price, then on reflection, tripled it, and the deal fell through. Neither of us will ever know whether a good trade was scuppered by our posturing.

Under Messrs Posner and Weyl’s system, such questions would not arise: mutually beneficial trades would not be derailed. And compulsory purchase would no longer be a piece of contested bureaucratic coercion: homeowners would name their price (and thus their tax bill) and the developers of Heathrow airport, the Hyperloop, or the latest stunt skyscraper would decide whether or not to pay it.

Not everyone would see these as advantages; I do. But the idea of posting a public selling price for all my property makes even an auction fan like me a little squeamish.

It is not necessary to go so far to ensure a more dynamic economy. Before we consider an auction for villages, kidneys, immigration visas, or my garden shed, I hope that we will at least get round to auctioning off tickets to see BTS.

 

Written for and first published in the Financial Times on 8 June 2018.

My book “Messy: How To Be Creative and Resilient in a Tidy-Minded World” is now available in paperback both in the US and the UK – or through your local bookshop.

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