Since You Asked

The weighty problem of road and fat taxes

‘The UK needs to impose a “fat tax” of at least 20 per cent on unhealthy foods to have any significant impact on rising levels of obesity.’

Financial Times, May 15

I thought it was supposed to  be  a  10  per  cent  fat  tax?

That was the British Journal of Nutrition in December. This is the British Medical Journal, this week. Do try to keep up.

Either way, would it work?

It all depends on what you mean by “work”. Inasmuch as anything can be said to be certain in social science, a tax on some foods would certainly reduce the consumption of those foods, just as surely as cigarette taxes have reduced the consumption of cigarettes. Whether that reduction is desirable is another question.

You’re saying obesity is a good thing?

No, but ice cream is a good thing and obesity is a potential unwanted side-effect of ice cream. If you tax ice cream, people will be less obese, which is good, but they will also be enjoying less ice cream, which is bad.

Which is sophistry.

Not at all. Ice cream versus obesity is the key imponderable about the whole policy. I find there’s a striking contrast with the idea of a congestion-based road tax, as advanced by the Institute for Fiscal Studies this week. The case for the congestion tax is pretty unanswerable: every driver who joins rush-hour traffic is making it worse for every other driver. If we could all get together and agree to drive a bit less, we’d all be better off because when we did drive, our journeys would be quicker and less uncertain. But we can’t enforce that kind of agreement, hence the need for the tax.

It’s all the same: obesity is bad and traffic is bad. I’m not sure why you’re trying to make a distinction.

It’s not the same at all. Each driver causes a problem for others and she can’t be expected to take that into account. But an ice cream lover is causing a problem only for himself. It remains to be demonstrated that he would find an ice cream tax helpful.

What about the cost to the National Health Service?

That is certainly a consideration, although don’t be too quick to assume there is a net cost. It’s fairly clear that smoking should, on this logic, be subsidised because it tends to kill people, often quite quickly, just as they have finished paying their taxes but before they start to draw their pensions. Perhaps obese people are more costly, but this is a double-edged argument. The Department of Health has published estimates suggesting that obesity and related conditions cost the NHS an extra £2.2bn, a figure that is rising rapidly. What the impact on pension costs might be is not clear.

Why do we tax cigarettes, then?

Partly because they’re a good revenue source, partly because of passive smoking. But I think a key reason is that because nicotine is so addictive, many smokers ardently want to be non-smokers but find it hard to quit. And surely this is the basic idea behind a “fat tax” as well: it is to help weak-willed people do the right thing. The economists Sendhil Mullainathan and Jonathan Gruber put their finger on the key issue about 10 years ago with a clever research paper titled: “Do cigarette taxes make smokers happier?” Which seems to be an important question.

And the answer?

It seems that cigarette taxes do indeed make smokers happier. More specifically, it seems that the reported happiness of people with a propensity to smoke rises in parallel with increasing state cigarette taxes in the US, but not with increases in other taxes. You need to jump through a lot of statistical hoops to reach this conclusion but the research makes a pretty good case. Presumably this is because smokers often do have self-control problems and the fact that the tax helps some of them to quit outweighs the fact that the tax also makes the non-quitters poorer.

And that’s the case for the fat tax in a nutshell, isn’t it?

It might be, if the research paper had instead been called: “Do fat taxes make fat people happier?” I hope and trust that someone has examined that question but I am not aware of any attempts to do so.

George Osborne is taxing pasties – perhaps he’s ahead of the curve.

I am sure he eagerly awaits his plaudits from the BMJ.

Also published at ft.com.

That’s a lot of Wonga for a business loan!

‘Wonga, the online lender that charges annual interest rates of 4,000 per cent on short-term loans, has launched a service for cash-strapped small businesses that offers to make credit available in as little as 15 minutes.’

Financial Times, May 7

Wow.

The chief executive of Wonga describes it as a “premium service”.

I’ll say. Are they planning to charge 4,000 per cent to small businesses, too?

Apparently not. Their maximum rate is 2 per cent a week, which sounds modest but compounds to about 280 per cent a year. Sharlene Goff, the FT’s retail banking correspondent, reckoned that the largest loan (£10,000) for the longest term (a year) would rack up almost £11,000 in charges. All of this is some way short of 4,000 per cent but it’s not cheap.

How can they possibly get away with that?

You mean, why doesn’t someone put them in prison?

Well – yes, why not?

Because there are no caps on lending rates in the UK. If you treat people fairly and are transparent about your rates, you can charge whatever you like.

That raises another question: how can they possibly find anybody willing to pay that kind of money?

Assuming they do – which remains to be seen – I think there are two possible explanations. The first is that customers are idiots. The second is that some customers badly need the money and have no alternative funders.

Start with hypothesis one.

The thing that makes me nervous here is the fact that the newspaper stories all report that Wonga will release funds in as little as 15 minutes. Surely this is only a selling point for the extremely impulsive or the extremely shortsighted. Most small businesses would be just fine with a lender who took a few days to release funds. We also know, thanks to research from economists such as Annamaria Lusardi and Jonathan Zinman, that a lot of people are financially illiterate and have poor intuitions about the costs of compound interest. You might hope that most company directors would know better, but presumably there will be some exceptions to that rule.

And what about the alternative view: that a loan at an annual interest rate of several hundred per cent or more might be a good business proposition for the borrower?

First, remember that an annual percentage rate might not be the best way to evaluate the cost of a small, short-term loan. If I need to borrow money for a few weeks as a bridging loan, the lender has to bear certain costs and risks – but even a small charge would balloon into a huge annual interest rate because the loan was so brief.

In other words, charges of a few quid might look huge expressed as an APR.

In some circumstances, yes. Remember, if you stumble into an unauthorised overdraft from a high street bank you may end up paying charges of which a payday lender can only dream. I’ve written before about a randomised trial conducted by Dean Karlan, economist, and Mr Zinman on the impacts of loans at 200 per cent APR in South Africa; surprisingly, such loans seem to help borrowers because they allow them to buy work clothes or transport and so actually get or keep a job. It’s not hard to imagine situations where a few grand for a couple of months could keep afloat a fundamentally sound business with cash-flow problems.

Fair enough, but if there are so many fundamentally sound businesses with cash-flow problems, why aren’t banks lending to them?

You’re assuming that they aren’t and I have to say you may be right. The Bank of England’s latest “Trends in Lending” report finds that the stock of lending to small businesses is shrinking fast.

Perhaps because small businesses are paying off their debts and don’t want to borrow?

That’s logically possible, but the cost of borrowing is also rising. I think it’s safe to say that the banks aren’t keen to lend, either because of their own funding costs or because they are nervous about getting paid back.

So Wonga is filling a market niche?

I think Wonga’s main niche is likely to remain cash-strapped, naive consumers, but the publicity this business-lending launch has earned them will do no harm. I can’t get too excited about payday loans for businesses: I am more worried about the fact that they are a symptom of very tough times.

Also published at ft.com.

Queues at Heathrow: a numbers game

‘Heathrow passport control misses target’

Financial Times, May 3

How bad are the queues, actually?

Damian Green, the immigration minister, has told parliament that the worst queueing experience was an hour and a half, at Heathrow last week.

Sorry – the worst queue at Heathrow last week was an hour and a half, or Heathrow was the place with the worst queue, ever?

Good question. Meanwhile, Heathrow’s operator, BAA, released data showing the worst queue was three hours.

I’m confused.

The way in which the statistics are gathered and reported doesn’t help either. The Border Force is supposed to ensure that passengers from outside the EU get through immigration checks within 45 minutes 19 times out of 20, while EU-based passengers should get through within 25 minutes, again 19 times out of 20.

They aren’t exactly stretch targets, are they?

No. The Home Office has been proudly pointing to its latest report that shows all these targets have been hit with room to spare.

Hurrah!

Which tells us that things were going smoothly in October to December last year.

Hurroo . . . 

Quite so. And normally we’d just have to wait for the Home Office to get around to publishing data for January to March and finally, in the summer some time, we’d get to hear about what happened in April.

So how come everyone is reporting that the targets were missed in April?

This is unofficial data released by BAA.

Are we comparing apples and oranges, then?

Not really. Both BAA and the Home Office use the same basic methodology. At regular intervals they pick somebody joining the back of the queue and then time how long it takes for that person to clear immigration. There is one difference: BAA picks a person to track every 15 minutes; the Home Office only does it once an hour.

So that might explain why Mr Green and BAA were reporting different numbers.

Yes. Also, the worst cases reported by BAA actually happened shortly after Mr Green had made his statement. Mr Green, incidentally, was trying to have his cake and eat it by using unpublished data to bolster his argument in the House of Commons. His numbers are supposed to be either official statistics or he is supposed to keep them to himself. I suspect the UK’s statistics watchdog will take a dim view of that.

Can we start talking about how to fix the problem now?

Patience. There is one nerdy point about the numbers worth attention. Imagine Heathrow has 10 hours in which 1,000 passengers an hour arrive and walk right through, followed by one hellish hour in which 10,000 passengers arrive and end up camping out half the night.

It’s easy enough to imagine – go on.

Well, in that case half the passengers have had a terrible time. But the way passengers are sampled by both BAA and the Home Office, it was only in one hour out of 11 that things went badly and so only one passenger out of 11 suffered excessive queues. The sampling method they’re using systematically under-samples times when the airport is very busy, which is the very time that queues are longest – Mr Green did, after all, blame “bunching of arrivals” for recent problems.

I get the point. So things may be worse than the official numbers suggest.

Yes. And since the official numbers suggest that almost a quarter of non-EU arrivals at Terminal 5 in April had to wait more than 45 minutes, the baseline is hardly great.

How do we solve the problem?

More staff. As a rough reckoner, if a queue is an hour long and you open up a new desk, every person you pull out of that queue saves an hour of queueing time. If an immigration official can check 60 people an hour then she is saving 60 hours of passenger time for one hour of her time.

But who is going to pay them? The government? The airlines?

The point is, the benefits are greater than the costs, so if the government can’t figure out how to make the queues go away they’re not fit for office.

At least the Border Agency is recruiting, right?

No, they’re going to cut staff by 18 per cent over the next three years.

This is insane! I’m going to complain to the Home Office.

Really? Join the queue.

Also published at ft.com.

Our growth fixation is positively baffling

‘It’s official. The UK is in a double-dip recession.’

Financial Times, Lex, April 25

That sounds bad.
I hate to split hairs, but there is no official definition of recession in the UK. But if you’d like to tell yourself we’re in a recession, don’t let me stop you. What’s happened is that the UK economy apparently shrank in the first quarter of the year; it also shrank in the final quarter of last year, and two consecutive such quarters typically earn the tag “recession”. I note that after pronouncing an “official recession”, Lex described this customary definition as “arbitrary and unhelpful”, which sounds about right to me.

You seem to be denying the seriousness of the situation.
I am not denying the seriousness of the situation. I’m just sceptical that we learnt much about it this week. The nation’s commentariat has become fixated on this question of whether the economy shrank over the last quarter because if so, we can call it a recession, if not, we can’t.

You are denying the seriousness of the situation.
The situation is serious, no doubt about it. The British economy hit a peak in 2008 and we’re still not close to passing that previous peak. This is unprecedented in living memory; even in the early 1930s a recovery sufficient to pass the pre-recession peak would have happened by now. By any reasonable measure, the British economy is in deep doo-doo. This makes the fixation on whether growth in the last quarter was slightly positive or slightly negative all the more baffling. What happened this week was this: the Office for National Statistics produced an early and uncertain estimate that the economy was two-thousandths smaller at the end of March than it had been at the end of December. If the ONS had instead guessed that the economy had been two-thousandths bigger at the end of March, I hardly think we’d all be dancing in the streets.

It would have been more welcome news.
Fractionally, yes. We’re treating the whole business as a black/white, pass/fail affair. In fact, it’s all shades of grey. Remember that we’ve already had negative quarters of growth in this non-recovery, in late 2010 and twice in 2011. This time, though, two of them were consecutive. To add to the murk, it’s worth bearing in mind these figures are often revised substantially.

So growth might not be negative at all?
Indeed. Or it might be even worse than we think. Although in this particular case, it’s probably worth pointing out that alternative indicators, such as surveys of business activity, are painting a rosier picture. Many City economists think that if there is a revision of these figures, it will be up rather than down.

Ah, those infallible City economists! So, is this all about austerity or is it the eurozone crisis?
What makes you think the two are mutually exclusive? Clearly neither is likely to help the situation. Although the ONS figures cast an intriguing new light on the austerity debate.

How so?
Take a look at the back page of the ONS press release and it breaks the numbers down by sector, showing how each has developed since 2008.

And what’s the story?
A couple of sectors have done very badly, for example agriculture is down more than 20 per cent and mining is down by almost a third. Others, such as construction and manufacturing, are down by 5 per cent or 6 per cent since 2008.

Has any part of the economy grown since 2008?
Well, yes. There is one sector.

Don’t keep me in suspense – what is it?
Government.

What?
Surprising, isn’t it? Well, strictly, “government and other services”, so it includes defence, the National Health Service and so on, but also private education and private healthcare. That sector of the economy has expanded by more than 5 per cent since 2008; health and social care has expanded particularly strongly.

What happened to austerity?
A couple of things. One is that the government hasn’t really cut much yet. The main austerity measures so far have been tax rises and they might have contributed to the slowdown in other sectors of the economy. So if this is what happens when government services are still expanding, you might enjoy contemplating what will happen when austerity really kicks in.

Also published at ft.com.

A first-class reason to stockpile stamps

‘Royal Mail has increased the price of first and second-class stamps by 14p to record highs, after it was given freedom to set its own prices as it heads towards privatisation. A first-class stamp will now cost 60p, with the slower second-class service priced at 50p from April 30.’ – Financial Times

Cue panic buying of stamps
Perhaps a little. Some shops reckon they’re out of stamps. Others say they have stock, and you can always order in bulk from Royal Mail.

A risk-free investment opportunity?
Not quite. I bought almost £300-worth of stamps and am now an unsecured creditor of Royal Mail: it’s always possible that the company will simply not provide the service I thought I was paying for.

Is that likely?
Outright default is unlikely, I am sure. Chipping away at the value of what is on offer is always possible – anyone who has tried to spend air miles can testify to that.

But it didn’t discourage you from plunging in.
I think the risk is worth the reward. I suppose I could have ordered £3,000-worth of stamps, or £300,000, but I don’t really plan to become a stamp dealer. For more modest purchases the investment looks like a no-brainer. It’s very unusual to have access to an asset whose value is guaranteed to increase by 39 per cent overnight. Normally arbitrageurs would leap in to buy now and sell later so the price today would converge with the price tomorrow. But Royal Mail has the absolute right to set the price of a stamp.

Not in the secondary market.
True. We may well find that very few people buy stamps over the counter for a while, buying instead cheap stamps from the stockpilers. But it’s such a small and occasional purchase for many people that I suspect simplicity will win out and this secondary market is going to be limited.

Fattening the company up for privatisation?
Potential investors would have to be pretty thick to mistake one month’s windfall sales for a trend and the stockpiling will presumably make it hard to judge what demand really is for postage at a more expensive rate.

The new price does seem prohibitive.
Royal Mail is adamant that UK stamp prices are still among the best in Europe.

Is that true?
Well, I’ve always thought that when you think about what is involved to get a letter from one end of the country to another, stamps are a bargain. But less so at 60p a pop, I’ll admit.

And compared with other countries?
It’s not as much of a steal as Royal Mail would like you to believe. If you’re posting a heavy letter second class and make various adjustments for purchasing power parity, you can get British postage to look quite cheap. But when my colleagues on the BBC’s More or Less radio programme compared the cost of posting a couple of sheets of paper, first class, they concluded that the British postal service was about to become one of the most expensive in the world.

Damn lies and statistics, eh?
Well, perhaps. The truth is there are so many variables it’s hard to make reasonable comparisons. It’s very costly to post a letter in Peru, for instance, but they do have the Andes to contend with. And it’s pricey to post a letter in Jamaica, but apparently your letter can travel almost anywhere in the western hemisphere for the same price.

The comparison everyone is making is that stamps will be more expensive soon.
Quite so. No wonder so many people are stocking up. Hopefully the experience will set George Osborne thinking.

Hasn’t he done enough thinking? The pasty tax and all that.
Ah yes, the pasty tax. Imagine if pasties could be stockpiled like stamps.

Imagine? Some of them look like they could survive a nuclear winter.
By pre-announcing a tax on pasties Mr Osborne could stimulate the economy by encouraging stockpiling today. So, imagine what might happen if the chancellor announced next year he would increase VAT again. Everyone would have an incentive to buy now anything that could be stockpiled before prices increased. Macroeconomists such as Simon Wren-Lewis of Oxford university have argued that a pre-announced VAT rise is one of the least damaging ways for a government to implement an austerity programme.

Maybe somebody should tell the chancellor.
I’ll write him a letter. First class.

Also published at ft.com.

The ban on hosepipes does not hold water

“Thames Water, Britain’s biggest supplier with 8.8m customers, is among seven companies introducing “temporary use bans” from April 5, after one of the driest two-year periods in southern and eastern England since records began.”

Financial Times, March 12

Hosepipe bans again?
That’s broadly the spirit of it, although what is banned varies from place to place.

But it was chucking down with rain this week. It was snowing, too. How can we be talking about drought?

Water isn’t like electricity: it can be stored, within limits. You don’t get a water shortage if you have a dry week and you don’t cure a water shortage with a few April showers. You get water shortages after a couple of years of low rainfall.

And how do you cure water shortages?

Hosepipe bans, apparently.

Is that a good idea?

Probably not. It’s appealing for the water companies because the revenue they receive is capped by the regulator. They can’t make more money by supplying as much water as possible to as many joyful customers as they can reach. It’s easier to just yell at customers to stop watering their lawns. It might be annoying but the water companies don’t lose much as a result.

No doubt you have a better idea.

The basic problem is this: for any particular household, there’s no obvious cost difference between the water you use to flush your toilet and the water you use to irrigate your garden. The sewage and waste water costs might be different, I’ll admit, but basically water is water. A hosepipe ban arbitrarily says that you can flush your toilet as often as you like and never pay an extra penny, but watering your lawn is punishable by a substantial fine. But there are lots of ways to save water: why should some count and some not?

You’re not suggesting a “flushing the toilet ban”?

I am not suggesting any kind of ban. It’s the idea of the ban that’s problematic. A new article by economists Jeremy Bulow and Paul Klemperer analyses the advantages to consumers of rationing schemes rather than simply raising the marginal price. The bottom line: the advantages are typically illusory. Rationing reduces supply, relative to what could be provided if prices were higher. It also misallocates resources – there’s no reason to expect that the people who get the scarce product are the ones who value it most. And rationing encourages all kinds of fun and games to try to get around the rules.

So you just want water to become more expensive.

I hope water will become cheaper, on average. But I certainly want it to be expensive to use lots of water at a time of shortage. We want everyone to have an incentive to save some water and the obvious way to do this is through water metering.

But what about poor households with large families who have to wash a lot of clothes and flush a lot of toilets?

Such families might also consume more energy and more food, but that is hardly a case for ordering Tesco to offer a flat price for unlimited food. The financial and environmental costs of unmetered water are very real. In any case, water companies could offer cheap rates for the first few dozen litres a day and then raise rates. This would make “some water” cheap and “lots of water” expensive.

Well, why not – but then again, why?

Because the alternative is a system built to cope with all the water we can waste, no matter what the weather. And that’s madness.

I’m convinced, I think.

You’re not the only one to be convinced. About 40 per cent of households already have water meters. The next step may be for seasonal pricing to become more widespread. The basic idea is not to make people pay more for water in total, but to make them pay more for the litres of water that are particularly difficult to provide. That should reduce the overall cost of water, as well as the environmental impact of supplying it.

It still makes me feel uneasy – water is one of life’s essentials.

The economist Al Roth has written about “repugnant markets”, where people feel uncomfortable about the use of market mechanisms to allocate resources. Examples are markets for spare kidneys, sex and the right to water the croquet lawn at your country pile. I think we need to get past the icky feeling and figure out when our moral sentiments are telling us something important and when they’re merely a costly affectation.

Also published at ft.com.

VAT reform would keep our pasties hot

“David Cameron has attempted to dispel Labour claims that he leads an elitist ‘out of touch’ government, when he declared his love of Cornish pasties, one of the hot foods that will be taxed more under Budget VAT rises.”

Financial Times, March 29

The FT? Surely The Daily Mash or The Onion.

No, it’s true. This really is the topic of the day. You clearly feel it’s not serious.

I can think of bigger issues. At the risk of being po-faced about the whole thing, do you realise how much is at stake here?

I do. The tabloids are full of the story. And the Guardian quoted the finance director of the West Cornwall Pasty Company as saying that introduction of VAT at 20 per cent would raise the price of a pasty from £3.40 to £4.50.

You, the Guardian and the finance director of the West Cornwall Pasty Company might want to do the maths on that. I’ll wait.

Hm. You have a point. It’s more like 33 per cent than 20 per cent, isn’t it?

That’s not the only way in which this tax rise has been blown out of all proportion. Government tax revenue is £575bn. Her Majesty’s Revenue & Customs reckons the pasty tax will raise £50m this year. You did such a good job on the last maths problem, can you tell me what percentage of the total tax base £50m is?

Not a very big one.

Quite so – about 0.01 per cent, although HMRC reckons it will rise to closer to 0.02 per cent over time. To put it another way, every British citizen pays an average of almost £10,000 in tax and the pasty tax will raise one pound a head.

But people who subsist solely on hot pasties and sausage rolls will be sorely affected.

Well, that’s true. And it was great to see Ed Miliband and Ed Balls calling attention to their plight by travelling to a Greggs bakery to eat sausage rolls in front of the cameras. Whoever said that great ideological clashes were a thing of the past?

I don’t think you appreciate the seriousness of the issue.

Probably not. My father made himself a sandwich lunch almost every day of his working life, so I never got to experience first-hand the lifestyle of someone who eats so many hot sausage rolls that this makes a big dent in the standard of living.

Such people do exist.

I am sure they do, but the budget already cut income tax for low- to middle-income families by over a hundred pounds a year, which will buy a lot of pasties. And if you care about poor families, note the cut in the welfare budget by £10bn a year, or 200 times the sum at stake with the pasty tax.

There’s a broader principle at stake here.

Which is?

Um . . . Well, maybe there isn’t a broader principle at stake here. It just feels like rotten politics.

I don’t disagree.

And it creates absurd anomalies – for instance, a warmish sausage roll will be subject to VAT, or not, depending on whether it’s a cold day or a hot day.

I agree, but VAT is already subject to absurd anomalies, such as whether Jaffa Cakes are cakes or biscuits, and thereby exempt from or subject to VAT.

Biscuits, obviously.

Obviously. But the courts disagreed, so Jaffa Cakes enjoy a tax break relative to chocolate digestives. But serious tax-watchers reckon that the UK’s VAT system makes very little sense, and the pasty tax is a perfect example of it.

How so?

When you wait for a pasty to cool down in order to consume it free from tax, everybody loses: the taxman doesn’t get his tax and you don’t get your hot fresh pasty. That distortion leads to what we economists call “deadweight loss”. The UK system is full of such distortions because so many items are VAT exempt.

So what should be done?

The Mirrlees Review is an attempt to figure out what the UK tax system would look like in an ideal world, and I looked it up. The authors reckon that you could levy a uniform rate of VAT on almost everything, raise benefits, pensions and tax credits, increase the income tax threshold by £1,000, cut the basic rate of tax to 18 per cent and the higher rate to 38.5 per cent, and leave pretty much everyone better off – the government would have more revenue and citizens would be more likely to buy what they really wanted rather than what the tax system nudged them to buy.

So you’re arguing that VAT shouldn’t just be introduced for sausage rolls, but for everything?

Yes. Fancy a sandwich?

Also published at ft.com.

At last: a nice surprise from the taxman

‘Income tax payers will receive a personal statement next year in an effort to increase the transparency of government financing and stir public resentment at the level of taxes and borrowing.’

Financial Times, March 19

Stir public resentment?

That one’s a bit weird, isn’t it? The assumption seems to be that if only people knew how much tax they were paying and the outrageous things the money was being spent on, they would immediately come round to the small-government Conservative way of thinking.

Would they?

I’m not sure. My back-of-the-envelope calculations show that about a quarter of income taxpayers pay more than the average income tax bill, and about three quarters pay less than the average.

What kind of witchcraft mathematics is that?

The rich pay a lot of income tax because they face higher tax rates and have a lot of income. The average income tax bill, per taxpayer, is roughly £5,000 – about £150bn spread over about 30m people. But you’d need to earn more than three-quarters of your fellow income taxpayers do before you paid that much tax. The top 1 per cent of income taxpayers pay more than a quarter of all income tax.

Sounds like the rich are getting a rough deal.

Not necessarily, but it does sound as if they’re useful to have around if you want to pay for public services. My point is that when these tax statements arrive, three quarters of people will be paying less income tax than the average. They might be pleasantly surprised.

So will these statements change the way people behave?

I doubt it. The economists Ritva Reinikka and Jakob Svensson published a study showing that transparency about grants to local schools in Uganda dramatically reduced corruption. The UK government is releasing a lot more data about spending on big contracts, which is welcome – but unlikely to reveal Ugandan-scale graft. Another economist, Raj Chetty, has demonstrated that making sales taxes more obvious to shoppers can discourage them from spending . But it’s hard to make the leap from such research to a major change in attitudes in the UK.

I read in the Guardian that the statements lump together unemployment benefit with more popular spending on pensions, family and disability benefits, to discredit the idea of “welfare”.

Yes, I read that piece, and was baffled about what the problem was supposed to be. I admit that in choosing what to lump together and what to itemise, the government can influence us in subtle ways. But the mock-up tax statement – so much clearer than any document I’ve yet received from the taxman – breaks out unemployment, pensions, family support, housing benefit and disability benefits. Until I saw the breakdown I had no idea that spending on unemployment benefit was so tiny, at 3 per cent of the welfare budget.

Any other surprises in this tax statement?

I hadn’t realised defence cost more than the police, the courts, the fire service and prisons put together. And I hadn’t realised that we spend more on “recreation, culture and religion” than on universities. The statements are a real eye-opener, but will they stir resentment? I’m not sure. Take the Treasury’s hypothetical taxpayer, on £15,000 a year, who pays nearly £2,500 in income tax and national insurance. He will be told that he is paying £12.13 for the fire service and another £12.13 for a contribution to the European Union. Not obviously an outrage. Nor will he necessarily faint when he discovers that the three biggest items on his tax statement are pensions, schools and the NHS.

But these tax statements are still tricksy. They deliberately omit regressive taxes such as council tax, VAT, fuel duty and taxes on alcohol and cigarettes.

Hold on a second. What you’re saying makes no sense on so many levels. First, council tax already comes with a similar kind of statement. Second, the government can’t tell you how much you’ve spent on indirect taxes unless they collect data on every penny you spend. Third, fuel duty isn’t regressive because the poorest people rarely own cars. VAT isn’t regressive either – because poorer households spend disproportionately on low- or zero-VAT items such as food and heating.

And cigarettes?

I would gladly have a pie-chart from the Treasury slapped on every packet of ciggies, both as a gesture of transparency and as an incentive to quit.

Also published at ft.com.

Who’s impressed with Osborne’s big bond?

“Mr Osborne will announce plans for the Debt Management Office to test market appetite for “super-long gilts” of 100 years or more, designed to cash in on investor confidence.”

– Financial Times, March 14

What’s this? George Osborne wants to show that his bond is bigger than the next man’s?

Something like that. The UK Treasury, unlike, say, Spain’s or Italy’s, is able to borrow from investors very cheaply. On the surface the chancellor appears to be thinking “instead of borrowing cheaply for two years, I could borrow cheaply for a 100 years, or perhaps for ever”. However, I think his real thoughts are closer to: “I wonder what might provoke every newspaper to mention that the UK Treasury, unlike, say, Spain’s or Italy’s, is able to borrow from investors very cheaply.”

Good politics, bad economics, in other words.

This is George Osborne we’re talking about.

Why is it bad economics?

Well, let’s be clear. Issuing long-dated bonds isn’t necessarily bad economics. But arguing that you can lock in today’s low rates for long periods of time is terrible economics. Today’s low rates are unusual. Why would investors want to extend them for a century?

There’s the Homer Simpson theory of bond investors, of course.

You’re thinking of Homer buying a car on credit and accepting the “CPB clause”?

Yes, the “crippling balloon payment”.

It turns a great deal into a terrible one, but postpones the day of reckoning.

As Homer said, “but that’s not for a while, right?”

I’ll admit that not every bond investor has shown signs of genius, but you can disprove the idea that investors will lend cheaply for ever by looking at bond yields today. Two-year bonds are yielding about 0.5 per cent. The 20- and 30-year bonds are yielding over three per cent, and the “War Loan” bonds, which never stop paying out, are yielding nearly 4 per cent. Just because investors will give you a cheap short-term loan doesn’t mean they will agree to the same rate at any maturity you care to name.

So Mr Osborne can borrow right now at 0.5 per cent, or lock in an interest rate of four per cent for a 100 years?

Pretty much, yes.

That sounds like a terrible idea. Why did you say issuing long-dated bonds wasn’t necessarily bad economics?

At a first approximation, it makes no difference whether bonds are short- or long-dated. Investors who want to lend money briefly can just sell long-dated bonds on the open market and get their money back at any time. Investors who want to lend money for long periods of time can keep reinvesting in a series of short-dated bonds. If either long- or short-dated bonds looked bad value, investors would vote with their feet.

So why are short-dated bonds so cheap right now?

Mostly because investors expect future short-term yields to be much higher, and are figuring they can lend for 10 years at, say, 2.3 per cent, or they can lend at 0.5 per cent now with the likelihood of being able to lend at 3 per cent later. It will all come out in the wash.

Why does anybody care about bond maturities, then?

I only spoke about a first approximation. The UK has benefited from having had a lot of long-term debt when the crisis began, which protected it from short-term panics. And there’s another consideration: in an uncertain world, bond investors will choose the maturity that fits their needs to reduce the risk of something unexpected happening. Some financial institutions like short-term bonds because they have flexibility even in a crisis; whereas pension funds will go for 20- or 30-year index-linked bonds because that matches the payments they have to make to pensioners.

Who likes 100-year bonds?

Nobody that I can think of. The National Association of Pension Funds has already said they are too long. But giant tortoises of the Galápagos can live for well over a century. Perhaps there is a market for Tortoise Bonds.

There’s a tree in California nicknamed Methuselah. It’s over 4,800 years old.

Methuselah Bonds! Now you’re showing some real ambition, although I am not sure that bristlecone pines have the same presence in the bond market as, say, Pimco. Still, who’s to say Mr Osborne’s prudence won’t earn the nation 5,000 years’ worth of credibility? Just show me where to sign up.

Also published at ft.com.

Sex, shopping and the statistics of happiness

“How satisfied are you with your life these days?”

Beg pardon?

On a scale of 0-10. I’m reading a question from this new Office for National Statistics report on happiness. Here’s another one: “How happy did you feel yesterday?” On a scale of 0-10.

This isn’t that economics-of-happiness nonsense is it?

It is indeed. Hm. “How anxious did you feel yesterday?”

On a scale of 0-10?

Yup.

I wasn’t feeling anxious yesterday but I am now, thank you for asking. How many questions are you planning to throw at me?

Only four. This is the last one. “To what extent do you feel the things you do in your life are worthwhile?”

Right. And the answers are supposed to revolutionise economic policy and pave the way for an alternative to gross domestic product as a measure of national wellbeing? I won’t hold my breath.

I think you’re expecting a bit much. You haven’t even answered the questions yet.

I don’t mean my answers specifically. I mean, our answers in general, however many people they’ve asked.

Eighty thousand.

Eighty thousand, fine. They’ve spent however many millions of pounds going around the country asking 80,000 people if they felt happy yesterday. This is supposed to be some transformative statistical exercise, right? Let me ask you a question: to what extent do you feel the things the government is doing to measure happiness are worthwhile?

On a scale of 0-10?

Oh, shut up.

I’d give it about a 4 out of 10. I suspect it will be only faintly useful but I also suspect the cost of doing this is modest. Remember, the ONS went to a huge amount of time and trouble to interview a suitable sample of 80,000 people but they were going to do it anyway. Adding an extra four questions can’t have broken the bank.

What have we learnt, then, from this cheap and cheerful exercise?

Not a lot, yet, because so far the ONS hasn’t produced a detailed statistical analysis. We know that Londoners are the most anxious people in the country and that the Northern Irish are the most satisfied with their lives by the three measures on offer. Women are more content than men. The middle-aged are less happy, more anxious and less likely to consider their existence worthwhile.

Is any of this a surprise?

I didn’t know the Northern Irish were so delighted with life, but previous work on life satisfaction has counselled against being middle-aged or male, so this isn’t new.

What else do we already know about happiness, other than money not buying it?

Actually, one thing we do know about happiness is that money does buy it. Take any society and the rich will be happier than the poor; they will be more likely to rate their lives as “going very well” .

I was sure the happiness research said money doesn’t buy happiness.

You’re thinking of the Easterlin Paradox. The economist Richard Easterlin, in the 1970s, couldn’t find evidence that societies as a whole got richer as they got happier. But the reason this is a paradox is because richer individuals do tend to be happier than poorer ones. The societal half of the Easterlin Paradox is a matter of active debate right now .

Thanks to David Cameron and the ONS.

Well, right now it’s thanks to surveys being conducted by the likes of Gallup. But I can imagine the ONS effort will come in handy eventually .

But you obviously feel the ONS could do better.

I’d like to see deeper questions along the lines of those asked by Alan Krueger and Daniel Kahneman.

Those names sound familiar.

One is the chairman of Barack Obama’s Council of Economic Advisers. The other has a Nobel Prize for economics. But before Mr Krueger’s political appointment, he and Mr Kahneman were using an approach that produces a lot more detail about the kinds of activities that make people unhappy, such as commuting or going to meetings.

I see. Any gems from this line of research?

Sex is fun, shopping is annoying and people like lunch and spending time with other people . And it’s been nice spending time with you. Aren’t you happy we talked?

Also published at ft.com.