Since You Asked

Mile-high bid to step up to a better class

Auctions seem a fine way of assessing willingness to pay, writes Tim Harford

‘For those seeking a way out of the economy cabin, a number of airlines, including Virgin Atlantic, Etihad, Austrian Airlines and Tap Portugal offer a facility whereby you tell them what you are prepared to pay to get upgraded.’
Financial Times, May 15

Am I supposed to be impressed? Isn’t the normal method of being upgraded to pay for it?

I think the distinction here is that traditionally, the customer – or the customer’s employer or client – pays the sticker price to fly business class or first class. This new scheme invites the customer to suggest the price. The airline will sit on that bid for a while, see whether better offers come in and, depending on how busy the front of the aeroplane is, will accept or reject the offer.

I see – that is a change.

Yes, but not a big change. A well-designed auction flushes out information about what people might be willing to pay, and charges accordingly. In some markets that is a very useful innovation, but there’s a reason why Tesco doesn’t run auctions when you pop in to buy milk.

It’s too much hassle, of course.

Partly that – although it is possible to run auctions incredibly quickly and cheaply in some circumstances. Every time you type in a search term on Google, the company runs a quick auction to decide which adverts to display. But Tesco doesn’t need to bother trying to figure out how to run auctions because it already has a fantastic amount of information about willingness to pay in general. It may also have information about your own shopping habits through which it can offer selective discounts.

And the same must be true for airlines.

Yes. Airlines are always tweaking the prices of their seats on each particular flight as the departure date looms and the plane starts to look full or empty. The auction may generate a bit of extra information, and therefore a bit of extra cash, but it seems marginal. My theory is that airlines want to differentiate between people who insist on flying business class and people who are willing to take a chance that they will not. A good way to offer different prices to these people is to sell some seats upfront and others in a more opaque auction.

Still, you’re making auctions sound rather passé.

This idea seems passé, but auctions certainly aren’t. The Bank of England uses auctions to determine how to inject liquidity into the banking system, for instance. This is a challenge because the problem is multidimensional: the BoE could offer loans backed by all sorts of different collateral, but would rather lend against safe collateral than riskier stuff. The potential interest rates at which the loans might be made depend on how desperate the system as a whole is for liquidity, but the spread between loans on safe collateral and loans on dodgy collateral should also vary depending on demand. Paul Klemperer, an economist at Oxford university, calls this general problem a “product mix auction” and has figured out a way to make the process run instantaneously, rather than dragging out for weeks as government auctions of yesteryear used to do.

It’s a long way from Sotheby’s, though. Or for that matter, a long way from eBay.

Both Sotheby’s and eBay accept proxy bids that come into play only when needed, and that is the key to Prof Klemperer’s scheme. And Sotheby’s could use a product mix auction to sell off a wine cellar, full of cases of similar but not identical wines. But you are right: auctions are becoming automated and a lot of auctions take place without us puny humans knowing. Your electricity supplier may soon be installing a computer that will vary the price of electricity by the second, and if prices are high some of your appliances will drop out of the bidding: the lights will dim, the fridge will allow the temperature to rise a little, the immersion heater will wait for a more propitious moment. An auction is a natural way for the computers to determine who gets priority.

I, for one, welcome our new silicon masters. Anything else?

You can already auction off your time to the highest bidder through Amazon’s “Mechanical Turk”, an online marketplace for small tasks requiring a bit of human judgment. It’s possible that sort of thing might become more widespread. On which point, I’ll have to leave you. This conversation was pleasant enough but I’ve just received a better offer.

Also published at ft.com.

Proof that leaders need to look the part

We expect successful people to be attractive, writes Tim Harford

‘Governor Chris Christie, who once famously called himself “the healthiest fat guy you’ve ever seen”, disclosed Tuesday he had secretly undergone weight-loss surgery, a major new step by the potential Republican presidential contender to address both his health and a political vulnerability.’
Associated Press, May 7

I always thought Governor Christie was too fat to be president.

You shouldn’t judge a book by its cover, even if it is a padded cover. Mr Christie claims the surgery was for health reasons anyway.

I’m sure I don’t know the inside of Mr Christie’s mind, even if I do now know more about the inside of his abdomen than I care to. I just think the American electorate, like many electorates, judge politicians at least in part by their appearance.

That does seem to be true. Presidential elections are usually won by the taller candidate, for example. The last president to be elected who was shorter than the average American man was William McKinley; that was in the 19th century. Most presidents have good hair. Every president so far has had a penis.

Quite – none of these are terribly profound indicators of political competence.

Don’t be quite so sure of that. Nobody doubts that striking looks are an asset for a film star or a model. Perhaps they make other people more productive – people in sales, for instance. We do know that more beautiful people tend to earn more; slimmer people tend to earn more; taller people tend to earn more and better-groomed people tend to earn more. Maybe this is discrimination, or maybe beautiful people are better at their jobs. After all, we want politicians to speak persuasively. Why shouldn’t we want them to look persuasive, too? Or maybe something else is going on.

Such as?

It’s possible that physical appearance is correlated with something else we care about. People have made the same complaint about Mr Christie’s weight as they made about President Barack Obama’s nicotine habit: that it showed a lack of willpower. Admittedly, that’s not a very good argument – being fat is a pretty weak indicator of low willpower and one would hope that the campaign trail would provide a slightly better guide to a politician’s character.

Tall politicians win elections, but you can’t gain height through sheer determination.

Height is interesting for a different reason. There is a correlation between being tall and having a good job, and the natural explanation for that is some kind of discrimination. But the economists Anne Case and Christina Paxson argue that height is also correlated with intelligence, even for children. What seems to be going on is that poorly nourished children will tend to lose out both mentally and vertically.

I know some tall people who are pretty dim.

Of course you do. These are just statistical tendencies. When we make a snap judgment about someone because they are fat, or short or ill-groomed, we are doing both them and ourselves a disservice. Which leads to another intriguing possibility: that years of these unfair snap judgments make pretty people self-confident and ugly people shy, hesitant or bitter – and so the superficial judgments eventually become self-fulfilling.

That sounds very speculative to me.

There is some evidence for the idea, though. Two researchers, Markus Mobius and Tanya Rosenblat, confronted their experimental subjects with a series of maze puzzles, asking them to guess how quickly they could solve the mazes before inviting them to have a go. More beautiful subjects were more self-confident, but not actually any better at the task. So perhaps there is something in the idea that our appearance ends up having important effects on personality.

We’re faced with an embarrassment of riches.

True. There are many reasons why appearance may be correlated with success in life. But one study by the economist Daniel Hamermesh cleverly isolated the purely superficial effect. Professor Hamermesh looked at candidates who stood for election to an association more than once, and showed that their chances of success rose when they used a more flattering photograph.

Voters can be so superficial.

It is disappointing – especially since this should, in theory, have been the world’s most rational electorate: the members of the American Economic Association.

Also published at ft.com.

Boycotts will not help Bangladesh’s poor

Human cost of an embargo would be higher than the recent factory collapse, says Tim Harford

‘The EU is considering moves against Bangladesh, including restricting trade access to the European single market, in an attempt to press the country to improve its labour practices after last month’s deadly factory collapse.’
FT.com, May 1

Quite right, too. The Rana Plaza collapse was appalling. Truly shocking.

It was. It is not the only thing that is shocking about Bangladesh, though. For every 1,000 children born there, 46 will die before their fifth birthday. The rate in the UK is five per 1,000, so you could say that Bangladesh’s lack of development is responsible for the other 41. Across Bangladesh, that is 123,000 preventable deaths a year, just of children. That’s one Rana Plaza collapse every weekday.

So you think “don’t touch the precious sweatshops because they’re good for the economy and the economy is good for the little children”?

If the EU does impose some sort of sanction on the country, the human cost is likely to be far higher than that of Rana Plaza. Bangladesh has been a development success story; poverty is high but falling fast. Literacy and life expectancy are improving. That appalling under-five mortality rate of 4.6 per cent used to be far worse – 20 years ago, it was 12 per cent. When we see the pictures of the Rana Plaza wreckage, it’s easy to imagine a backdrop of stagnation, complacency and despair in which nothing ever changes, no matter how awful the tragedy. But the true context is a country making rapid improvements in nutrition, health, education and women’s employment. If the EU’s threat galvanises improvements in wages, working conditions and building standards – all of which Bangladesh can afford – then good. But if the threat were to be carried out, that would be a disaster, albeit one that will not be televised.

But we’re culpable here – western companies bought clothes from the Rana Plaza factories.

Are we now so obsessed with brands that human misery only counts when we can connect it to something we can buy on the high street? The most notorious example was when, in 2010, 10 workers at a Foxconn electronics factory in China killed themselves – a shocking fact that tarnished Foxconn’s most famous customer, Apple, and caused millions of iPhone owners to feel faintly guilty. But the factory employed an astonishing 400,000 people; so the reported suicide rate, rather than being shockingly high, was implausibly low, a sixth of the Chinese average.

I understand that rich-world consumers can frame all these tragedies as part of their own personal drama. That doesn’t mean multinational companies can get away without taking action.

What action do you want them to take? While a few, such as Primark, have said they will take some responsibility, others have distanced themselves from the disaster. There is a record here: Nike’s supply-chain practices have been under the human rights spotlight for many years, and the company has responded by trying to improve working conditions. It has found it difficult because the systems are complex, fluid and messy. Even if a local factory satisfies every demand for decent working conditions, it can easily outsource production to the likes of Rana Plaza. There is a risk that, while lesser brands (or non-branded industries) do as they please without scrutiny, high-profile companies decide it would be easier simply to pull out.

But that risk might persuade the Bangladeshi government to sort out local regulations.

Let’s hope so. And charities, or development agencies such as the World Bank, can add a carrot to that stick through what is known in the jargon as “capacity building” – that is, helping governments draft sensible regulations, put together a bureaucracy capable of enforcing them and so on.

One other thing: poor countries need to allow trade unions to operate – unlike in Bangladesh, where union activists have been harassed and even killed.

It’s not like an economist to back trade unions. I thought you were all Thatcherite?

There have been times and places where unions have been a force for chaos and stagnation. Bangladesh in 2013 isn’t one of them. Ultimately, whatever western consumers demand, what determines whether rules about working conditions are upheld is that workers on the factory floor have a voice and some power.

Also published at ft.com.

The culture secretary has strange designs on an engine of growth

The UK minister responsible for the arts hopes cake can rescue a crumbling economy, writes Tim Harford

‘Maria Miller will tell arts leaders on Wednesday to stop moaning about government cuts and start making the case for how their organisations can boost economic growth.’
FT.com, April 24

Interesting. Any idea what the culture secretary means?

You mean, do I have any idea what she means, or does she have any idea what she means? The answer’s no, either way. Although she did say that “culture is able to deliver things which few other sectors can”, which suggests that she thinks it’s a bit like Federal Express.

She must have given some examples.

That’s the problem. Every example tells a different story. For instance, she was keen to talk about the £5m a year that the Yorkshire Sculpture Park contributes to the local economy, according to a report commissioned by the Yorkshire Sculpture Park.

The basic benefits measured here were that visitors to the sculpture park might spend money locally, and the park itself also spent money locally, perhaps by buying chocolate cake from Wakefield and selling it to visitors. There is no cost-benefit analysis, so no way of asking whether the Wakefield cake-baking industry might have been stimulated more effectively in another way. Nor is it clear how many of these cakes might have been bought anyway – or in some different part of Yorkshire or indeed the UK.

Still, it is undeniable: people visiting cultural attractions don’t just spend money in the gift shop, but in nearby hotels, restaurants and shops. There’s money to be made.

She must have had some broader vision of the economic value of the arts.

Perhaps. The Arts Council has published a handy guide for arts organisations figuring out their economic benefit and you would be surprised how much of it is about cake-sale uplift, although they do not put things in quite those terms. The guide also mentions that organisations which publish estimates of their value to the local economy do tend to get press coverage, so that’s good, I suppose.

Let’s have some other examples. You’re being mean now.

The culture secretary pointed out that our cultural fame helps foster trade relationships. Perhaps that’s true, but Germany seems to be doing pretty well on the old trade-relationship front despite the fact that its cultural image revolves heavily around Beethoven and Wagner.

Ms Miller was proud of the fact that Norman Foster’s architectural practice is doing well in Hong Kong. She celebrated the fact that the Buxton opera festival had a turnover of £1m, although if economic value is the topic, profit is typically a more interesting number than turnover. And she mentioned that the musical Matilda looks like doing jolly well on Broadway – well done to the Royal Shakespeare Company – while Skyfall, the latest James Bond movie, made an awful lot of money.

If you can see the overarching link between these examples, you’re doing better than I am.

Wasn’t Skyfall produced by Sony anyway?

I think so. Ms Miller also said that “arts and culture are now thought to be as valuable to Merseyside’s economy as The Beatles and football”. Apart from suggesting that The Beatles don’t count as culture, I have absolutely no idea what that means. It may be the cakes again, or something else.

You seem very cynical about funding the arts.

I’m not one who is cynical. The cynic is the person who deploys an economic methodology that cannot distinguish between a museum and a rollercoaster. It is worth asking, though, whether arts funding really constitutes the seed capital that the culture secretary and arts grandees sometimes like to talk about.

I’m looking at a list of the 32 organisations that have received more than £5m from Arts Council England. Opera, ballet, symphony orchestras and theatres all but run the show – mostly venerable institutions. Giving millions of pounds to the RSC, the National Theatre and the English National Opera may be worthwhile; it hardly constitutes “seed funding”.

But the RSC did produce Matilda and the National Theatre produced War Horse.

True. And if you add a few other famous cultural creations – Bond movies, The Lord of the Rings, Harry Potter and a cornucopia of Jane Austen adaptations – it’s hard to avoid the conclusion that the real source of ideas is the British novel, which seems to me to be resolutely unsubsidised.

Also published at ft.com.

Fine for my backyard, not my neighbour’s

Perhaps we should simply scrap planning permission altogether, writes Tim Harford

‘Eric Pickles has promised a hasty rethink of proposals to let homeowners bulldoze their back gardens without planning consent in another setback for government efforts to streamline the planning process.’
FT.com, April 16

I am never entirely reassured by the words “hasty” and “rethink” in proximity.

Proximity is what this is about – Mr Pickles, the local government secretary, was trying to pass a law that would enable people to build substantial home extensions without planning permission.

How substantial?

Eight metres, which would consume my entire back garden and half of the garden beyond that. But the idea looks like it will be modified, because many Conservative MPs, local councillors and others don’t like it. Zac Goldsmith, who has led the rebellion, said it was a “recipe for community disharmony” and suggested instead that developments should go ahead by default if neighbours did not oppose them.

Sounds reasonable.

Sounds nonsensical. Moving from a scheme where you decide what you build in your garden to a scheme where your neighbours decide what you build in your garden may change what gets built, but does nothing to reduce community disharmony. The same people will argue about the same things. Close neighbours often have conflicting interests about development – which is one reason why we have planning rules in the first place.

So what is Mr Pickles trying to achieve?

He wants more building. British homes are prohibitively expensive because we haven’t built enough of them – new homes are being built at about half the rate that new households are forming. What’s more, it’s a good time to make up some of the shortfall. The economy is depressed and construction activity would be a good stimulus. Unfortunately the government’s attempts to kick-start construction have not yet borne fruit.

Don’t lose hope. Perhaps George Osborne can delay the recovery so that Mr Pickles can make a difference.

Ha! Perhaps. I wonder, though, whether Mr Pickles shouldn’t think differently about planning reform. His current proposals will benefit homeowners with plans to expand, rather than large developers – whom journalistic ethics require me to describe as “canny”.

What would you suggest?

The basic problem is simple enough. The market tells us there is a huge pent-up demand for building new homes – converting some shops and offices, but in particular building on green space. However, we are wary of letting the market allow any building without planning permission, because of the possible spillovers – new developments can clog roads, raise the risk of floods or simply look ugly. Building new luxury homes all over Hyde Park would be profitable in its own right but awful for London; a similar, if gentler, consideration applies to building in any field or garden. And so we have rules aimed at figuring out what should be allowed.

And do they work?

Not really. Casual observation suggests that planners allow all sorts of monstrosities while imposing a huge cost on homeowners – although probably not on “canny developers”, whose knowledge of the intricacies of the planning system is a barrier to pesky competitors.

So what is to be done?

We could scrap planning permission, of course – the system was introduced in 1947 and it’s far from clear that the UK’s cityscapes have improved since then. But I suspect most people believe the island is too crowded to return to pure libertarianism. A more practical approach could retain the existing system, which gives planners widespread authority to determine what is best for a local area, but use market signals to persuade planners to approve more.

How might that work?

One proposal, floated by the think-tank CentreForum, would allow councils to reap the financial benefits of granting planning permission – which in some parts of the country can increase the value of agricultural land to a few million pounds per hectare. The landowner enjoys all that windfall – why should that be so? The duly motivated council would still be democratically accountable; considerations of safety, environmental hazard, congestion and aesthetics would remain on the table; and local taxpayers would benefit from local development. And yet we’d see more houses. All without fighting with the neighbours.

Also published at ft.com.

The ins and outs of organ donation

If we automatically put people on the donor register we’d presumably see more transplants

‘NHS achieves ground-breaking 50% increase in deceased organ donors’
National Health Service press release, April 11

That’s good news.

Absolutely – although about 1,000 people a year die waiting for an organ. Half of those who receive kidneys wait more than three years, and being on dialysis is not fun. So we need to do more. And it turns out that economists are experts on allocating scarce resources.

You are about to propose a market for human organs?

No, I think we can agree that the idea of a market for live kidney donations is a non-starter. Except in Iran.

Iran?

Yes, buying kidneys is legal in Iran. Can we move on? Proposal number two is to establish a different way to exchange kidneys. The idea is simple: many patients have friends, spouses or siblings who are willing to donate a kidney but cannot because of incompatible tissue or blood types. In 1986 Felix Rapaport, a leading transplant surgeon, floated the idea of putting together patients and donors to allow each donor to give a compatible kidney to the other donor’s loved one. Even now the idea is called “paired donation” because “exchange” might sound too much like a market.

But surely nobody could object to such a thing.

It has caught on and been made more effective by the efforts of economists such as Al Roth, a recent Nobel laureate based at Stanford University. They have designed algorithms to maximise the number of successful transplants. Another idea, the brainchild of a surgeon, Michael Rees of the University of Toledo, is to set up long chains of donations, beginning with a single altruist who is willing to donate a kidney to a stranger without needing to enter some sort of paired donation arrangement.

Are such schemes making their way over to the UK?

They are indeed; we have several kidney sharing schemes here. But they are small compared with the number of people waiting for kidneys. And it is not so easy for a living donor to offer a heart or a lung.

Any other brilliant economic ideas?

Here’s a curious observation, from a 2003 paper written by the behavioural scientists Eric Johnson and Daniel Goldstein: in countries where people must opt out if they don’t want to donate their organs, “consent” rates are typically close to 100 per cent. In countries such as the UK, where people must opt in to become donors, consent rates are much lower. This leads to the natural observation that if we just automatically put people on the donor register unless told otherwise, we’d see more organ transplants and more lives transformed. Wales looks likely to adopt this position.

And rightly so, I’d say. Thank goodness for behavioural economics.

Not so hasty. It’s not at all clear that presumed consent would help. Many deceased donors were never on the register and many people on the register end up not being donors. One of the reasons why more transplants are taking place is because the NHS is getting more competent – and has clearer legal authority – at making sure they happen. This means identifying donors, persuading families to give consent and even performing procedures on patients who are not yet dead.

So a lot of this is actually about medical practice and bureaucratic efficiency?

Of course it is. And what families feel about it is also important. If we fill our donor registry with auto-enrolled donors, will that really persuade distraught families to support transplants? In any case, behavioural economics suggests a more elegant alternative.

Do tell.

Prof Johnson and Dr Goldstein are often cited in favour of presumed consent. But they also discovered that if you demand a yes or no answer, most people willingly join the register. You don’t need to sneak them on to it by default: you can just request that they express a preference. Since July 2011, people applying for driving licences in the UK have been faced with just this choice. The majority of new donors now arrive on the register in this way, although disappointingly the “not now” answers outnumber the “yes” or “already registered” answers by more than two to one. But, encouragingly, a new trial will be experimenting with different prompts, words and images with the aim of discovering what approach works best. That’s good. When doctors and nurses are trying to win approval from grieving families, it will be far more helpful if people are registered donors by choice, not by default.

Also published at ft.com.

Statistical tomfoolery spins in Treasury

Osborne has hurled himself down the slippery slope, writes Tim Harford

‘I’m going to level with people about the difficult economic circumstances we still face and the hard decisions required to deal with them.’
George Osborne, chancellor of the exchequer, Budget speech, March 20

Did he?

George Osborne was very good at levelling with people about how bad things are in the eurozone and how badly Labour managed the economy. He wasn’t quite so keen to draw attention to the plank in his own eye.

Nobody can be surprised that Mr Osborne spun things to his own advantage. But are you actually accusing him of statistical tomfoolery?

Of course I am. I’m ever more struck by the bizarre symmetry between Gordon Brown and Mr Osborne: both enormously pleased with themselves; both ideologically pre-committed to a particular course of action, regardless of the evidence; and both absolutely addicted to statistical fiddles.

But Mr Osborne established the independent Office for Budget Responsibility. You have to give him credit for that.

But he is in danger of making the OBR look ridiculous. The OBR is indeed independent and appears to be perfectly competent too, but it is obliged to respect statistical conventions. The chancellor has exploited those conventions without shame.

For example?

It is very important to Mr Osborne to be able to claim that the deficit is falling by some tiny amount – and equally important to his opposite number, Ed Balls, to be able to claim that the deficit is rising by some tiny amount. Just for the record, these are the only two men on the entire planet who care. Nobody else gives a flying fiscal target about it. But because these two overgrown school bullies care, Mr Osborne must manufacture a falling deficit, no matter what. He has done so through transparently shabby means. The most shamefaced is that he has informed the OBR that he will not be mailing his cheque to the World Bank until the next tax year, which begins in a fortnight.

Why does that help?

In practical terms it makes no difference to anything, except perhaps to mildly embarrass us in Washington. Nothing about the UK’s fiscal position is changed if Mr Osborne accidentally leaves that stamped addressed cheque to the World Bank in the glove compartment for a fortnight. But the OBR is obliged to recognise the spending as taking place next year. Mr Osborne could even change his mind about delaying the payment to the World Bank, now that the OBR estimates have been published – although even he might find that embarrassing.

What other tricks has he used?

He has moved cash from the Bank of England to the Treasury. The Office for National Statistics has decided that the appropriate way to account for this is to reduce the deficit. Any sane observer would conclude that the underlying economic reality has not changed.

At least he hasn’t used the off-balance sheet tricks so beloved of Mr Balls and Mr Brown.

Mr Brown was a master at this. He launched his unsuccessful election campaign in 2010 in a brand new hospital in Birmingham that was paid for using the private finance initiative – or to be more precise, which we are therefore all still paying for and will be for many years. But Mr Osborne’s big flourish this week was an attempt to pump air into the UK’s slowly deflating housing bubble by borrowing extra money and lending it on to homebuyers. He said proudly, “because it’s a financial transaction, with the taxpayer making an investment and getting a return, it won’t hit our deficit”.

But he’s still borrowing extra money – isn’t he?

Of course he is. But it’s off the balance sheet. It’s true that Mr Osborne is borrowing to invest in equity in British housing and so it’s possible that he will make a profit on the deal in the long run. But Mr Osborne could equally, and more wisely, borrow to invest in much-needed infrastructure. That could also pay off in the long run – but the accounting is less convenient.

This is ridiculous. Isn’t somebody supposed to be stopping him getting away with this kind of thing?

My colleague Chris Giles fears the ONS has been losing its independence.* But I suspect the truth is that if politicians decide to twist the statistics, they will succeed in doing so. And it will always be a pyrrhic victory. Whether or not you back Mr Osborne’s policies, nobody takes his statistical spin seriously any more. Mr Balls no doubt understands how that feels.

Also published at ft.com.

EDIT: Because of an editing error, the starred sentence above was originally published reading “The ONS has been losing its independence.” I respect Chris’s views but they are Chris’s views and not mine.

Chinese takeaway leaves Britain hungry

The economy needs more than a pot noodle factory, writes Tim Harford

‘A British food producer is delivering arguably the ultimate blow to the one-time factory of the world – it is transplanting noodle-making from Guangzhou to Leeds.’
FT.com, March 12

Wow. Undercutting the Chinese on noodles – that’s like shipping coals to Newcastle and beating the Geordies on price.

Not really. Symington’s aren’t planning to sell pot noodle to the Chinese, I don’t think. They’re planning to sell them to hapless British students, the same as always.

But they are planning to make them on UK soil. This is an important trend, I think: British companies giving up on “offshoring” their manufacturing.

We should reserve judgment on that: it’s not clear that it’s a trend and neither is it clear that it’s important. Symington’s are going to create 50 jobs in the UK, about 0.0002 per cent of the UK workforce. Good for them, but let’s not get carried away.

You’re being deliberately dense. Leeds’s noodle boom is an instance of something bigger.

I am sure there are many other examples. There are also plenty of examples of British companies merrily continuing to close factories in this country and shift production overseas. And there are countless other influences on the UK trade balance and the health of British domestic production. On Tuesday, for instance, the latest trade figures came out: the trade deficit was £2.4bn in January, up from £2.1bn a year previously. That does not suggest any switch towards domestic production.

You’re such a pessimist.

Not really. In the long term, the picture is remarkably stable: the UK has had a trade deficit for decades as a result of a persistent trade surplus in services outweighed by a larger persistent trade deficit in goods. The British share of world trade has been shrinking, which is pretty much what you’d expect in a world where China and other emerging markets are growing so rapidly. But British trade has grown strongly over the years. We still don’t ship many coals to Newcastle, so to speak – in 2008, before the full crisis broke, we exported more to France than to Brazil, Russia, India and China combined. That is progress of a sort: in 1998 we exported vastly more to France than to Brazil, Russia, India and China combined.

It sounds as though we are getting left behind in the race to trade with the key emerging markets.

A little. For almost every emerging market, the share of imports which came from the UK fell between 2002 and 2007, according to a report from the Department for Business, Innovation and Skills, published in 2011. This is partly because many emerging markets have developed stronger regional trading partners, and partly because of their growing appetite for commodities, not something the UK specialises in exporting.

So you are not excited by this revival in British manufacturing?

I’ve nothing against it. It will be interesting to see whether it does continue. It seems, at least in part, to be a function of the weakening pound, which in turn surely reflects the enthusiasm with which the Bank of England has created new money. But it may also have something to do with the relative decline of two of the country’s successful yet most problematic industries: crude oil and financial services. Both have contributed a great deal to our trade balance; and both have helped to keep the pound strong, making life difficult for companies producing tradeable products in other sectors of the economy. They employ lots of capital and relatively small numbers of very highly paid workers, so neither industry is brilliant for generating large numbers of satisfying and well-paid jobs, even if they do generate a lot of tax revenue. But we all know how the City has fared in the past five years and the UK became a net importer of oil in 2005. This decline may help other sectors, including manufacturing. But don’t you feel we place too much emphasis on manufacturing?

Not at all. Manufacturing is a vital part of generating sophisticated economic activity. I know that we can in principle pay for everything we need just with oil or financial services. But in practice such monocrop economies are rarely resilient.

You may have a point: oil, banking and selling services to oilmen and bankers is not much of an economic strategy. Manufacturing will surely play a part in any revival. Alas it’s going to take more than a pot noodle factory to regenerate the British economy.

Also published at ft.com.

A ‘simple rule’ about migrants and benefits

Clues to the UK’s woes lurk in its own backyard, writes Tim Harford

‘Iain Duncan Smith, the work and pensions secretary . . . said the number of EU migrants claiming benefits in Britain had reached a “crisis” and confirmed the government was “looking at what we can do” to limit new arrivals’ access to welfare’
FT.com, March 6

Never a man to waste a good crisis, that IDS fellow.

Or manufacture one. Mr Duncan Smith’s declaration hits all the right notes for a Conservative politician: the welfare scroungers are picking our pockets; there are too many foreigners around; and it’s all the fault of the EU. But behind the mood music there isn’t a lot of substance. We don’t know for sure how many EU migrants claim benefits but Mr Duncan Smith’s Department for Work and Pensions did publish a fascinating estimate in January 2012.

Which found?

The DWP looked at people who were of working age, and who were not UK citizens at the time they applied for a national insurance number. They found that in February 2011, 6.6 per cent of such people were claiming a working age benefit such as jobseeker’s allowance.

That must be hundreds of thousands of people, though.

Over a third of a million people, yes. But 93.4 per cent of the working-age immigrant population are not claiming working-age benefits. This ratio compares very favourably indeed with the homegrown working-age population: 16.6 per cent of us were claiming working-age benefits. Is this really what an immigrant benefit crisis looks like?

But Mr Duncan Smith particularly drew attention to immigrants from the EU.

I don’t know why. The DWP’s own figures show that EU accession countries hardly figure in the list of benefit claimants, who are much more likely to come from India, Pakistan, Somalia or Bangladesh. There are a lot of Poles in the country but they only come seventh on the list of benefit-claiming immigrants.

But immigrants also use public resources such as care in the National Health Service or school places.

And they pay for them too. An analysis by University of College London’s Centre for Research and Analysis of Migration, published in July 2009, found that immigrants from the EU8 accession countries had been net contributors to the public purse in every year since May 2004, when these central and eastern European states joined the EU. Given that the UK population as a whole had been draining the public purse by running a deficit, this is an impressive achievement.

But the situation might change when Romanians and Bulgarians are allowed to work here next year.

Lots of things might happen. Forecasts on this question have been very poor in the past. Official forecasts of how many immigrants might show up when the borders were opened to eastern Europe in 2004 were dramatic underestimates. But despite this unexpected immigration bulge, things have been fine. I mean, the country has gone to the dogs since 2004, but it’s hard to make a case that the Poles themselves caused any trouble.

Unless Gordon Brown has a Polish grandmother?

Or George Osborne. Or Fred Goodwin. Or Sir Mervyn King. Whoever you want to blame for the state we’re in, it needs a peculiarly xenophobic mindset to point the finger at immigration, even if it did happen on a far greater scale than anyone expected.

Social cohesion has to be an issue. I see Ed Miliband wants to ensure that people speak English. No wonder: the 2011 census found a million households in England and Wales that speak no English.

So a number of commentators claimed – for instance Jackie Ashley in the Guardian. The census actually found something different: 1m households where English or Welsh was not the first language. But that doesn’t tell us anything about whether English was spoken well, poorly or not at all.

The Labour leader wants a ‘simple rule’: to make sure people who work in the public sector, face to face with the public, can speak English.

Does this country really hire lots of public sector workers who are unable to function because they can’t speak English? If we do, that’s a sign of a serious problem and one that will not be fixed by the sticking plaster of Mr Miliband’s “simple rule”. The British economy and public finances are in a bad state. If our borders had been closed to eastern Europe in 2004 they would be worse.

Also published at ft.com.

A way to burn a hole in Britain’s pocket

Negative rates might tackle the liquidity trap but they are unlikely to be introduced, says Tim Harford

‘In evidence to the Commons Treasury committee, Paul Tucker [deputy governor of the Bank of England] raised the possibility of imposing negative interest rates on a portion of banking reserves, effectively charging banks rent to hold money at the BoE, but stressed that any action was not imminent.’
FT.com, February 26

It’s about time the banks got a taste of their own medicine. They’ve been borrowing my money and charging me for the privilege, one way or another, for years.

Oh, stop moaning. This isn’t the Parable of the Horrid Banker. Mr Tucker has floated this idea – very hypothetically, I should add – not because it would punish the banks but because it might encourage them to lend money to the likes of you and me. The BoE has been creating money enthusiastically with the hope that people may spend it. Yet nervous bankers have undone much of this effort because they are hesitant to lend. Negative interest rates on the reserves held at the BoE could nudge them into expanding their ambitions.

Ultimately, then, this is all about getting lending and spending going again. Wasn’t that what quantitative easing was all about? What’s wrong with the economy if printing squillions of pounds can’t persuade people to spend?

It is awkward, I agree. But it’s not entirely unexpected. There’s this thing called a “liquidity trap”, which sounds like the sort of thing that a Bond villain would unveil in a monologue but instead describes the situation where people (or companies, or banks) would rather stick their cash under a mattress than spend it. If the central bank prints money and hands it out we just sock that cash away too.

Surely a central bank with the ability to create infinite quantities of money should be able to do something about that?

That seems right, and we’re not in a pure liquidity trap: people will spend money. They just need a lot of prodding. The BoE has created about £6,000 a person and spent it on UK government bonds. There is surely some amount of money – £60,000 a person? £60m? £60bn? – at which people will be tempted to spend, or someone in whose pocket the money will burn a hole.

And then inflation will take off.

It might, but the thinking is that before it does, inventories will fly off the shelves, laid-off workers will find jobs again and the economy will recover. And at that point the BoE can hoover up the cash again, as long as it hasn’t done something silly such as write off all that government debt.

But printing literally trillions of pounds might be difficult to undo – is this why there’s this talk of negative interest rates instead?

Yes. If the economy is in some kind of liquidity trap, or slowed down by a few liquidity potholes, then the bank might look for more elegant ways to get people spending than what Ben Bernanke, the US Federal Reserve chairman, once approvingly called “the logic of the printing press”. Negative interest rates on bank reserves are one approach. Another is to threaten that even if inflation is difficult to produce, once the BoE has found some at the back of the kitchen cupboard, the British public will get that inflation good and hard for years to come.

Why on earth would a central bank want to promise to create inflation?

It’s that liquidity trap thing again. If the economy is in a slump, then people may hold on to whatever cash they can lay their hands on and this behaviour will simply prolong the slump. But if the BoE threatens to create enough inflation to evaporate our savings, and if we believe the threat, then we will spend money and that should get the economy moving again.

So why doesn’t the BoE threaten a decade of double-digit inflation?

The Monetary Policy Committee has a mandate to hit an inflation target, so such promises are probably illegal. George Osborne may in private be urging the MPC to create inflation, but the chancellor has not dared to change the inflation target. And without a change in mandate, central bankers who threaten to create inflation are like soft parents who threaten to withhold TV time. Nobody believes a word of it and so the threat has no effect. Central bankers are reduced instead to musing idly about ideas that won’t happen – such as introducing negative interest rates.

Also published at ft.com.