Tim Harford The Undercover Economist

Undercover EconomistUndercover Economist

My weekly column in the Financial Times on Saturdays, explaining the economic ideas around us every day. This column was inspired by my book and began in 2005.

Undercover Economist

Think like a supermodel if you want to win from the gig economy

Are we misunderstanding the endgame of the annoyingly named “gig economy”? At the behest of the UK government, Matthew Taylor’s review of modern working practices was published this week. The title could easily have graced a report from the 1930s, and the review is in many ways a conservative document, seeking to be “up to date” while preserving “enduring principles of fairness”.

Mr Taylor, chief executive of the RSA and a former policy adviser to the Blair government, wants to tweak the system. One proposal is to sharpen up the status of people who are neither employees nor freelancers, calling them “dependent contractors” and giving them some employment rights. In the US, economists such as Alan Krueger — formerly the chairman of Barack Obama’s Council of Economic Advisers — proposed similar reforms.

There is nothing wrong with this; incremental reform is often wise. Quaint ideas such as the employer-employee relationship are not yet obsolete. Yet they might yet become so, at least in some industries. If they do, I am not sure we will be ready. The obsolescence I have in mind was anticipated by Silicon Valley’s favourite economist, Ronald Coase. Back in 1937, a young Coase wrote “The Nature of the Firm”, calling attention to something strange: while corporations competed within a competitive marketplace, corporations themselves were not markets. They were hierarchies. If you work for a company, you don’t allocate your time to the highest bidder. You do what your boss tells you; she does what her boss tells her. A few companies dabble with internal marketplaces, but mostly they are islands of command-and-control surrounded by a sea of market transactions.

Coase pointed out that the border between hierarchy and market is a choice. Corporations could extend their hierarchy by merging with a supplier. Or they could rely more on markets, spinning off subsidiaries or outsourcing functions from cleaning and catering to IT and human resources. Different companies make different choices and the ones that choose efficiently will survive.

So what is the efficient choice? That depends on the nature of the job to be done. A carmaker may well want to have the engine manufacturer in-house, but will happily buy bulbs for the headlights from the cheapest bidder.

But the choice between hierarchy and market also depends on the technology deployed to co-ordinate activity. Different technologies favour different ways of doing things. The bar code made life easier for big-box retailers. While eBay favoured the little guy, connecting buyers and sellers of niche products.

Smartphones have allowed companies such as Uber and Deliveroo to take critical middle-management functions — motivating staff, evaluating and rewarding performance, scheduling and co-ordination — and replace them with an algorithm. But gig workers could install their own software, telling it where they like to work, what they like to do, when they’re available, unavailable, or open to persuasion. My app — call it GigBot — could talk to the Lyft app and the TaskRabbit app and the Deliveroo app, and interrupt me only when an offer deserves attention.

Not every job can be broken down into microtasks that can be rented out by the minute, but we might be surprised at how many can. Remember that old line from supermodel Linda Evangelista, “We don’t wake up for less than $10,000 a day”? GigBot will talk to your alarm clock; $10 or $10,000, just name the price that would tempt you from your lie-in.

It is easy to imagine a dystopian scenario in which a few companies hook us in like slot-machine addicts, grind us in circles like cogs, and pimp us around for pennies. But it is not too hard to imagine a world in which skilled workers wrest back control using open-source software agents, join electronic guilds or unions and enjoy a serious income alongside unprecedented autonomy.

Nothing empowers a worker like the ability to walk out and take a better offer; in principle the gig economy offers exactly that. Indeed both scenarios may come true simultaneously, with one type of gig for the lucky ones, and another for ordinary folk.

If we are to take the best advantage of a true gig economy, we need to prepare for more radical change. Governments have been content to use corporations as delivery mechanisms for benefits that include pensions, parental leave, sick leave, holidays and sometimes healthcare — not to mention the minimum wage. This isn’t unreasonable; even a well-paid freelancer may be unable to buy decent private insurance or healthcare. Many of us struggle to save for a pension. But if freelancers really do start to dominate economic activity — if — the idea of providing benefits mostly through employers will break down.

We will need governments to provide essential benefits, perhaps minimalist, perhaps generous, to all citizens. Above that safety net, we need portable benefits — mentioned warmly but briefly by Mr Taylor — so that even a 10-minute gig helps to fill a pension pot or earn time towards a holiday. Traditional corporate jobs have been socially useful, but if you push any model too far from reality, it will snap.

 
Written for and first published in the Financial Times on 14 July 2017.

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Fantasy gaming can be better than reality

“The only thing that can make me happy is computer games!” So declares my five-year-old son, tears streaming down his cheeks, with a vehement desperation that merely encourages me to ration this potent experience. I don’t recall my own parents restricting the time I spent gaming, but then I didn’t have access to computers until I was nearly 10, with the arrival of an Oric-1, with 8 glorious colours and a magnificent 48K of memory.

Maybe I didn’t spend much time on the computer anyway — my ability to play games would have been limited by the fact that my mother, something of a hacker, would be hogging it. Or perhaps I found the games less addictive than my son does, although I seem to remember many hours as a teenager playing the magnificent interstellar odyssey Elite. It cannot be denied that games are getting better: varied, beautiful, narratively engaging, and often social, too, with millions logging into online worlds, forging alliances and waging battles, all in character and alongside friends. Some games are dreadful clickfests, little better than slot machines. But that should not discredit all games any more than Fifty Shades of Grey discredits Finnegans Wake.

I stopped playing computer games in 1999, at the age of 25. Increasingly realistic games on ever-larger screens gave me motion sickness — few disincentives are quite as visceral as nausea. Then, in 2004, I met Edward Castronova. He is an economist who had enjoyed some media attention after calculating the gross domestic product per capita of Norrath, the entirely-imaginary setting of an online game called EverQuest. Mr Castronova pointed out that players who slogged away at the mundane parts of the game could earn real money. In-game achievements — stronger characters, magical abilities — could be sold to other players who wanted a short-cut. The wage was about $3.50 an hour, not a lot for a New Yorker, but serious money if you lived in Dar es Salaam.

The surprising idea that people could earn a living slaying orcs attracted some attention, but Mr Castronova pointed out something else: some gamers were spending serious amounts of time online. They played not for money but for fun, devoting many hours a week to engaging, challenging and persistent online roles. And if games are really such fun, who needs reality? Why work in Starbucks when you could command a starship? Mr Castronova published a book, Exodus to the Virtual World (UK) (US), in 2007, describing people turning their back on the physical world and spending more time in virtual ones. It seemed highly speculative at the time. But data from the US labour market increasingly suggest that Mr Castronova was on to something.

Four economists — Mark Aguiar, Mark Bils, Kerwin Kofi Charles and Erik Hurst — have published their latest research paper studying the impact of awesome computer games on the US job market. The basic observation is this: the unemployment rate in America is at its lowest level for 16 years; if it drops a little further it will be at its lowest level since 1969. Yet some people — young men in particular — are completely disengaged from the labour market. (They don’t count as unemployed because they’re not looking for work.) In 2016 — excluding full-time students — 15 per cent of men in their twenties did not work a single week in the entire year. In the year 2000, the last time unemployment was this low, the comparable figure was 8 per cent

So at a time when most of the people looking for jobs find them, why are so many young men not even looking? One explanation is that they think there is no hope, but another explanation is that they would rather be playing a game. Food is cheap; living with your parents is cheap; computer games are cheap. Why work? Distinguishing the two hypotheses is not easy, but Prof Aguiar and his colleagues make a good case that the pull of video games is an important part of the story. Women and older men — who spend less time playing games — are more engaged with the labour market.

This is an alarming trend: if basement-dwelling videogamers are turning their backs on reality, they are missing a vital opportunity to pick up the skills, experience and contacts they will need if they’re ever to earn a proper living. The long-term prognosis is worrying.

Then again, good games do bring happiness. Joblessness is usually a reliable predictor of misery, yet men under 30 are far less likely to be unhappy than in the early 2000s. The proportion saying they’re “very happy” or “pretty happy” has risen from 81 to 89 per cent, almost halving the rate of unhappiness. The reverse is true for men over 30.

Without exception, the longest and firmest friendships in my life are with other gamers. I favour face-to-face games with dice and pencils, but those games still involve me and my friends stepping into a fantasy world. I am worried that so many young men are disconnected from the job market. But perhaps we should stop blaming the games, and see if we can get reality to pull its socks up.

 
Written for and first published in the Financial Times on 7 July 2017.

My new book is “Fifty Things That Made The Modern Economy” – out now in the UK and coming very soon in the US. Grab yourself a copy in the US (slightly different title) or in the UK or through your local bookshop.

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We are still waiting for the robot revolution

The cash machine turned 50 this week — old enough, I think, to teach us a few lessons about the dawning of a new machine age. It seems a good advertisement for practical innovation that makes life a little easier. But with its very name a promise to replace a human being, the “automated teller machine” seems a harbinger of mass technological unemployment.

The story of the robot takeover has become familiar: robots came first for the bank tellers, and I did not speak out, for I was not a bank teller. Then overnight the robots were driving trucks, performing legal research and interpreting mammographic X-rays. The only jobs remaining were those writing books with titles such as Race Against The Machine and Rise of the Robots.

The difficulty with these visions of technological joblessness is that there are plenty of jobs around at the moment. In the UK, the employment rate is nearly 75 per cent; it hasn’t been higher since records began in 1971. The job situation is not quite so rosy in the US, where participation in the labour market is down since the Clinton and Bush years. Still, the unemployment rate is at a 16-year low. A job apocalypse this is not.

The ATM may help to explain this apparent puzzle. James Bessen of Boston University points out that the ATM did not, in fact, replace bank tellers — there are more bank teller jobs in the US now than when the ATM was introduced.

This should not entirely be a surprise: the original story of the cash machine is that its inventor John Shepherd-Barron had the door of his local bank slammed in his face on a Saturday lunchtime, and was frustrated that there was no way to get his money until Monday morning. Mr Shepherd-Barron didn’t invent a replacement for human tellers so much as a way to get cash at any time of the day or night. Banks opened more branches and employed humans to cross-sell loans, mortgages and credit cards instead. The automated teller worked alongside more human tellers than ever.

The ATM is no outlier here. Mr Bessen found that in the 19th century, 98 per cent of the labour required to weave cloth was automated — yet employment in the weaving industry increased as our demand for clothes more than offset the labour-saving automation. The same process seems to be at work today in the legal sector: artificial intelligence is increasingly being deployed to do tasks once done by legal clerks, but employment of those clerks is up, not down. Mr Bessen has found only one clear example of automation entirely eliminating a human job: elevator operators. There are other jobs that haven’t been taken by robots, but nevertheless have disappeared — Hansom cab driving, or operating a telegraph. Banks are not being replaced by cash dispensers so much as bypassed entirely by contactless payments and online accounts.

Overall, though, machines have been tools that have enhanced human productivity. They automate some routine tasks. This expands output and it also boosts demand for humans to perform complementary, non-routine tasks. This leads to better pay, more interesting work and as many jobs as ever overall.

Or at least — it should. Our chief economic problem right now isn’t that the robots are taking our jobs, it’s that the robots are slacking off. We suffer from slow productivity growth; the symptoms are not lay-offs but slow-growing economies and stagnant wages. In advanced economies, total factor productivity growth — a measure of how efficiently labour and capital are being used to produce goods and services — was around 2 per cent a year in the 1960s, when the ATM was introduced. Since then, it has averaged closer to 1 per cent a year; since the financial crisis it has been closer to zero. Labour productivity, too, has been low.

Plenty of jobs, but lousy productivity: imagine an economy that was the exact opposite of one where the robots took over, and it would look very much like ours. Why? Tempting as it may be to blame the banks, a recent working paper by John Fernald, Robert Hall and others argues that productivity growth stalled before the financial crisis, not afterwards: the promised benefits of the IT revolution petered out by around 2006. Perhaps the technology just isn’t good enough; perhaps we haven’t figured out how to use it. In any case, results have been disappointing.

There is always room for the view that the productivity boom is imminent. A new policy paper from business economists Michael Mandel and Bret Swanson argues that we are starting to find digitally driven efficiencies in physical industries such as energy, construction, transport, and retail. If this happens, Silicon Valley-style innovation will ripple through the physical economy. If.

It is in the nature of exponential growth that the near future can easily outweigh the recent past. But we are still waiting. For now, the machine has stalled and the error message reads: “Sorry: this robot takeover could not be completed at present.”

Written for and first published in the Financial Times on 30 June 2017.

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Why we need to build more homes

If we were living in a movie, the ash-blackened cage looming over West London would be a metaphor for something. Instead, the Grenfell Tower disaster — so catastrophic that we are told we may never know how many people died — is a distinctly un-metaphorical national disgrace.

The least we can do now is learn the lessons of the fire, as we did not after the Lakanal House fire of 2009, which killed six people. Some of those lessons should emerge from the public inquiry. Grenfell Tower was built in 1974 but had recently been renovated. In a sane world such a renovation should have improved safety standards. Apparently we do not live in such a world.

But beyond the life-and-death details of fire safety rules and enforcement, a bigger picture has long been apparent: the British housing system, particularly in London, is in a shocking state. Decades of policy failure have left us with unaffordable housing. That is why the residents of unsafe housing feel trapped and voiceless, unable to afford to move, and powerless to demand change.

A better politician than Theresa May might have used this tragedy to justify housing reform, announcing a bold plan to build a million new quality homes before 2020. That target is less ambitious than it sounds, merely making up many years of undersupply. Having many more decent homes on the market would lower rents and make other housing policy goals — choice, fairness, quality, safety — easier to achieve. But perhaps that expecting too much of Mrs May. Stronger prime ministers in luckier circumstances have failed to make headway on housing.

What of Jeremy Corbyn, the man who is keen to remind us that he’d be quite willing to run the country? The Labour leader certainly made a better job of appearing prime ministerial after the fire, showing concern where Mrs May seemed distant. But this — the performance part of the job — is not what matters most. Boris Johnson could also have played the necessary role to perfection, but that would hardly qualify him to lead the country.

What we really need from our politicians is a willingness to advocate and execute wise policies. Mr Corbyn, instead, focused on grabbing and redistributing property. “There are a large number of deliberately kept vacant flats and properties all over London,” he told ITV journalist Robert Peston, arguing that these properties should be used to house the victims of the fire. When pressed for detail he added, “Occupy, compulsory purchase it, requisition it, there’s a lot of things you can do.”

This is a telling statement — even leaving aside the use of the word “occupy”, which seems to wink at the idea of breaking into other people’s homes. Since Mr Corbyn’s remarks are often uncharitably interpreted by the British press, let us assume that was not his goal.

Still, there is little ambiguity in the word “requisition”. This reflects a consistent theme in Mr Corbyn’s thinking: that the British public can best be served by forcing others — including international corporations and foreign property investors — to bear most of the cost.

It’s not hard to see why this seems appealing. It taps into the same ideals exploited by Donald Trump and the Leave campaign: that there’s money being left on the table, that foreigners are rigging the game against us. Time to give the “Gnomes of Zurich” a poke in the eye.

Such xenophobia-tinged ideas have taken nations to very dark places in the past, but today it is more likely that they will simply lead to inept policies and bad outcomes. Seizing foreign-owned property in London — even proposing seizure — will reduce the tax base and do yet more harm to the reputation of the UK as a grown-up country. (Perhaps that ship has sailed.)

Rich and apparently wasteful foreigners are an easy scapegoat for the problem of high prices and high rents in London. But they have become a target based on anecdotes. What limited data we have — it is admittedly patchy — suggests that the idea of widespread “buy to leave” is a myth. Wealthy foreign investors did not become so by squandering rental income.

We should be taxing all property, with expensive properties taxed at higher rates, occupied or not, foreign-owned or not. There is no need to be vindictive. And we should be building more. There is still scope in London — to say nothing of the leafy south-east — to build safe, pleasant apartments in high-rise and medium-rise blocks. There are costs of doing so, but the costs of not doing so are far greater.

As for the survivors of the Grenfell Tower fire, plans have been announced to offer them homes in a new local development. Good. Surely the British taxpayer is willing and able to do what is right, and pay from our own pockets to rehouse them swiftly and well. There is no need to requisition anything.

This disaster should provoke a rethink not just of rules on sprinkler systems, but the entire rotten edifice of British housing policy. I am not optimistic; I fear we’re getting the politics — and the politicians — we deserve. But the residents of Grenfell Tower deserved so much better.

 

Written for and first published in the Financial Times on 23 June 2017.

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Wishful thinking in politics is a recipe for foolishness

Shortly after the hilarious UK election, I had the opportunity to ask a Conservative politician (retired, centrist) what he made of the result. “Good news for a soft Brexit,” was one of his conclusions. That was my impression, too. Since both of us were Remainers, it was a comforting thought.

And then I reflected for a moment. Back when Theresa May was expected to secure a stonking majority, wasn’t that also supposed to be good news for a soft Brexit? I reflected on how I’d felt when Mrs May called the election. My dismay at the political choices on offer was offset a little by the hope that, with a clear victory, Mrs May would be unafraid of the extremist Eurosceptics.

I was forced to admit that I could take almost any scenario and produce a soothing interpretation of it. Wishful thinking is a powerful thing, and common. Recently the data journalist Nate Silver wrote that “Donald Trump is making Europe liberal again” and explored the possibility that Mr Trump’s toxic reputation in Europe was helping to suppress the far-right from Austria’s Freedom party and France’s Front National to Britain’s UK Independence party. Mr Silver made a good case, but I couldn’t help feeling that it was widely shared among my European liberal friends because it’s exactly what they wanted to believe.

A more scientific illustration of the same tendency in US politics comes courtesy of the psychologists Ben Tappin, Leslie van der Leer and Ryan McKay. The researchers wanted to tease apart two psychological tendencies that are often conflated: confirmation bias and desirability bias. Desirability bias is wishful thinking: we see what we want to see. Confirmation bias is our tendency to see what we expect to see (now that I’m aware of confirmation bias, I see it everywhere).

A month before the US presidential election, Mr Tappin and his colleagues recruited US-based experimental participants in four categories: Hillary Clinton supporters who expected her to win, Trump supporters who expected him to win, and supporters of each candidate who expected to be disappointed. Then the researchers showed their participants fresh opinion poll data that suggested either that Mrs Clinton was likely to win, or that Mr Trump was.

The research suggested that people seized not upon what they expected to see, but what they hoped to see instead. They tended to focus on encouraging evidence, whether or not it was surprising. They ignored unwelcome evidence. Desirability bias was stronger than confirmation bias.

There is a place in the world for wishful thinking — for example, in business. Without the sunny overconfidence of entrepreneurs few good ideas would ever get off the ground, because the chances of failure are so high.

Even the successes tend to generate more benefits for customers than shareholders. One study, by the great economist Bill Nordhaus, concluded that US companies retained less than 4 per cent of the social value of their innovation. The other 96 per cent went to customers. Given their inability to profit even when things go well, rational entrepreneurs would never quit their day jobs. Business innovation is built on the back of giddy optimism.

Wishful thinking even has its role in politics. The quest for marriage equality, for civil rights, for votes for women and for the abolition of slavery were all once distant dreams. Emmanuel Macron has surfed to success on a wave of optimism that an untested centrist can fix what ails France; I hope he succeeds, but hope alone will not be enough.

In many cases wishful thinking in politics is a recipe for foolishness. Much of Mr Trump’s appeal lay in the idea that the people who said policy was complicated were lying. Solutions were simple if you were strong and smart. It turns out that wishful thinking does not solve problems, but creates them.

Wishful thinking infects the political left, too. Many diehard Democrats seem bewildered that Republicans have had five full months to impeach their own man and still haven’t done it. In the UK, Jeremy Corbyn and his fan base have been enthused by his better than expected performance but seem not to have noticed that he lost the election.

Last year’s Brexit campaign was based on a simple piece of wishful thinking: Boris Johnson’s idea that the UK could have its cake and eat it. How, exactly, was never quite clear, but desirability bias gave a foolish idea more credibility than it deserved. Voters hoped that Mr Johnson was right, and so they began to believe him: it is so much easier to believe what we already wish is true.

That glib optimism stood in stark contrast to what experienced technocrats were saying behind the scenes. They warned that the UK simply didn’t have the time, the people or the expertise we needed to handle the process of leaving and then forging new trade agreements.

Mr Johnson told us that things were easy; the mandarins cautioned that they were difficult. I have my suspicions as to who will be proved correct, but we already know which proposition resonated with the voters. We need to be careful what we wish for.

Written for and first published in the Financial Times on 16 June 2017.

My new book is “Fifty Things That Made The Modern Economy” – out last week in the UK and coming soon in the US. Grab yourself a copy in the US (slightly different title) or in the UK or through your local bookshop.

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If your country lets you down, make a new one

Forget Brexit: I’m declaring independence from the rest of the UK. I’ll always have a deep and special connection with the land where I was born and grew up. Nevertheless, I’m taking back control, just as soon as I can figure out what that means.

I also need to choose a name for the divorce process. “Texit” sounds like a fajita laced with pesticide. “Hexit” is better, with something of the evil eye about it. Then there’s just the simple formality of the exit negotiations — if I can find someone in the British government with enough authority to negotiate.

To be clear, this isn’t because of petulance about the election, which did at least give us an amusing twist at the end. Well, it is — but not the result so much as the campaign, and what that campaign revealed. Both Labour and the Conservatives have traditions that I find admirable, but seemed to have concluded that none of those admirable traditions would win votes. The spin-doctors had decided that they could either appeal to me, or the typical British voter, but not both.

But as a wise man once sang, it seems like I’m not alone in being alone. Many people feel like strangers in their own country. Many Scots would rather not be British citizens; there are secessionists in California; and of course, the now-familiar threats of American liberals that they will move to Canada. (In a poetic display of trolling, Emmanuel Macron responded to Donald Trump’s rejection of the Paris agreement by inviting Americans to come to France to work on climate change.)

Such woes are felt across the political spectrum. Many Leave voters felt that Britain was being dragged away from them by a strange coalition of Brussels bureaucrats, the Westminster establishment and a gang of Lithuanian fruit-pickers. Any referendum result that would have pleased me would have left them feeling more alienated than ever. No result could have made both sides happy.

Still, that’s democracy for you: everyone has a vote, and if most people don’t see things your way, you just have to take it on the chin. Or do you? That’s not how things work in other parts of life. If you don’t like the coffee at Starbucks, go elsewhere or brew a cup at home. If your boyfriend is a slob, dump him and find someone better.

So if you don’t like the turn your country has taken, why not join another country — or even start up your own? I live in Oxford, surrounded by people who ride bicycles, marry foreigners and voted Remain. I don’t agree with my neighbours about everything but we do seem to be on the same wavelength. An Ivory Tower city state? Or maybe we could carve out a larger independent nation: London, Oxford, Cambridge, Brighton. Maybe Bristol, too. I love Bristol. And since the rest of the UK never seemed to like London much, maybe it’s best all round if we separate.

Of course, I’m not very serious about this idea. But then Brexit was never a very serious idea either. It’s going to happen, nevertheless.

A more flexible breakaway nation would float. Libertarian Patri Friedman — grandson of economist Milton and protégé of PayPal co-founder Peter Thiel — champions the idea of “seasteading” (UK) (US), setting up ocean-going colonies, powered by waves, wind and the fresh air of freedom. If you don’t like the way your particular floating city is going, unplug and find another one. It’s an intriguing alternative to traditional democracy. If you can’t live with the decisions of your fellow citizens, find some new fellow citizens.

Cory Doctorow’s new dystopian novel Walkaway (UK) (US) explores what happens when some people decide they’d rather fend for themselves than accept life in a default corporate world. It turns out that scavenger drones and 3D printers can get you a wonderful quality of life — until someone powerful doesn’t like what you’re doing and calls an air strike.

This is awkward. Being small makes you vulnerable. Ask Qatar. Oxford doesn’t have much of an air force; I don’t think we even have any tanks. I’m not sure what we’d do if Milton Keynes invaded.

Still, Iceland, Monaco and Singapore all seem to be surviving. Globalisation and peace does make it easier to be small. If the typical nation has a stiff border tariff and 10 infantry divisions, it pays to be one of the big boys. Yet as trade barriers fall, micro-nations become viable. Two decades ago the economists Alberto Alesina, Enrico Spolaore and Romain Wacziarg pointed out that there was a clear negative correlation between the average tariff rate and the number of independent countries in the world. Economic integration allows political disintegration.

There’s a cruel irony in all this. Small nations rely on being able to plug into a liberal global economy shielded from protectionists, pirates and week-long waits to clear customs. The very forces that make people like me worry for our own nations — nationalism, illiberalism and xenophobia — also make the world a more difficult place for breakaway states.

On reflection, perhaps it would be better to stay and try to sort things out. But the predicament is harder to swallow than a pesticide-laced fajita.

Written for and first published in the Financial Times on 9 June 2017.

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Donald Trump and Theresa May Give U-Turns A Bad Name

A few weeks ago Donald Trump set a record that I assumed was unassailable; Theresa May has since sailed past it with ease. The leaders of the US and the UK have become so proficient at changing direction that “U-turn” no longer seems adequate. Donald and Theresa are spinning policy doughnuts.

Mr Trump has a notoriously flexible approach to his own pledges. He has reversed course on issues as diverse as whether he will put Hillary Clinton in jail (yes, then no), whether he would force a vote on healthcare reform (yes, then no) and whether it was wise to attack Syria (no, then yes).

His most dizzying day, in mid April, included U-turns on a bewildering array of substantial policy issues: Nato (“I said it was obsolete; it’s no longer obsolete”), whether China was a currency manipulator, a hiring freeze on federal workers, closing the US Export-Import bank and whether he might reappoint Janet Yellen as head of the Federal Reserve.

It was an impressive record — but surely a record no longer. Over the past year Mrs May has changed her mind on everything from Brexit to a bill of rights, energy pricing to nuclear power. She reversed a 2015 manifesto commitment, reversed the reversal, and has now taken the unprecedented step of tearing pages out of her own manifesto just days after launching it. She offers a “strong and stable” slogan, a weak and wobbly reality, and a rich seam of irony.

What most concerns me about all this is that Mr Trump and Mrs May are tarnishing the very idea of changing one’s mind. U-turns can be valuable, but they already have a poor reputation, reflecting a lazy journalistic trope. The U-turn is a gift to the journalist in a hurry: either the policy was wrong before, or it is wrong now. Little more need be said.

Of course there is something to be said for being consistent. Stubbornness in negotiations is risky but can be an advantage. Foreign policy requires that allies and enemies know where they stand. When politicians promise something to voters, they should make an effort to deliver.

But it is easy to take consistency too far. The most straightforward solution to many a grave policy error is to stop and do something else. This is something the Conservative party would be well advised to do with a damaging limit on immigration that it has promised three times and never come close to delivering.

Discarding what does not work is an essential part of progress in almost any sphere of life. Designers and engineers make prototypes. Programmers debug. Writers edit. Medical researchers use randomised trials to figure out whether a treatment works or is worthless. Evolution works through survival of the fittest. In each case, there’s a way to evaluate and discard what is failing.

Economic growth is built on trial and error, with good ideas spreading and bad ones disappearing. Agile businesses reinvent themselves, but often the market does the job for them through the bankruptcy courts.

Policymaking needs the same mechanism, and often lacks it. Because governments can levy taxes, dole out subsidies, and alter the rules of the game, they can do a great deal of good — but they can also prop up bad ideas indefinitely.

This is true even in democracies; in dictatorships, the pet projects of the powerful can squander money almost without limit. The Soviet Union was ruined, in part, by the inability of anybody to criticise and modify failing projects. And China began to move away from poverty when Deng Xiaoping allowed first farmers, then industry managers, to experiment with new ideas and shut down old ones.

For many government policies, it’s important to have an emergency stop to prevent bad ideas getting worse. But Mr Trump and Mrs May are like train passengers who hit the emergency stop because they’re having a nice chat on the phone and don’t want to be interrupted by a tunnel. There should be a penalty for misuse — and perhaps there will be.

I have no objection to bad ideas being reversed, but the problem here is that the reversals have been so nakedly political.

A wise policymaker changes course thus: “We had a promising idea, we tried it out on the smallest practical scale, we gathered data, we expanded our pilot programme, and then once the evidence was in, we decided that the idea wasn’t working. We’ve learned a lesson and will stop.”

Such changes of direction are what grown-ups do — and any well-run country should expect to see them regularly. Unfortunately there is no sense that either Mr Trump or Mrs May have changed direction on anything because they have been moved by new evidence on whether it works. Instead, they promised what seemed popular, and flinched at the first glimpse that it may not be popular at all.

The rest of us, meanwhile, conclude that politicians are inconstant liars who will say anything to win votes. Where did we get such a preposterous notion?

Written for and first published in the Financial Times on 26 May 2017.

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The age of the Microsoft and Amazon economy

One of my first economics lessons contrasted perfect competition, which was judged to be a good thing, with monopoly, which was not. There are worse places to begin than by being shown the difference between championing the miracle of the free market and favouring the depredations of dominant businesses.

But monopoly power has often seemed like yesterday’s issue. Standard Oil was broken up in 1911; AT&T in 1984. To the extent that we economists worried about companies being too big, we were thinking about the systemic risks from banks that were too big to fail. But we are starting to notice again the risks not of corporate failure but of corporate success.

The most obvious examples are the big digital players: Google dominates search; Facebook is the Goliath of social media; Amazon rules online retail. But, as documented in a new working paper by five economists, American business is in general becoming more concentrated.

David Autor and his colleagues looked at 676 industries in the US — from cigarettes to greeting cards, musical instruments to payday lenders. They found that for the typical industry in each of six sectors — manufacturing, retail, finance, services, wholesale and utilities/transportation — the biggest companies are producing a larger share of output.

For example, in the early 1980s the largest four players in any given US manufacturing industry averaged 38 per cent of sales; three decades later the figure was 43 per cent. In utilities and transportation the typical market share of the biggest four companies rose from 29 per cent to 37 per cent. In retail, overshadowed by Walmart and Amazon, the rise was dramatic: 14 per cent to 30 per cent.

This is surprising. As the world economy grows, one might expect markets to become more like the perfectly competitive textbook model, not less. Deregulation should allow more competition; globalisation should expose established players to pressure from overseas; transparent prices should make it harder for fat cats to maintain their position. Why hasn’t competition chipped away at the market position of the leading companies? The simplest explanation: they are very good at what they do. Competition isn’t a threat to them. It’s an opportunity.

What Professor Autor and his colleagues call “superstar firms” tend to be more efficient. They sell more at a lower cost, so they enjoy a larger profit margin. Google is the purest example: its search algorithm won market share on merit. Alternatives are easily available, but most people do not use them. But the pattern holds more broadly: superstar firms have grown not by avoiding competitors but by defeating them.

This is not entirely bad news. But it’s not entirely good news, either. The superstar firm phenomenon is the best explanation we have of a little-noticed but worrisome trend: since 1980, in the US and many other advanced economies, workers have been getting a steadily smaller slice of the economic pie (the distribution of this labour income also became much more unequal during the 1980s and 1990s).

Workers, from shelf-stackers to chief executives, have seen their total share of economic value-added fall from about 66 per cent to about 60 per cent in the US since 1980. This decline in “labour share” is often blamed on international trade making life harder for workers and easier for footloose capital. Prof Autor and his colleagues find little evidence for this idea.

Superstar firms, instead, seem to be the cause. The story is simple. These businesses are highly productive and achieve more with less. Because of this profitability, more of the value added by the company flows to shareholders and less to workers. And what happens in these groups will tend to be reflected in the economy as a whole, because superstar firms have an increasingly important role.

All this poses a headache for policymakers — assuming policymakers can pay attention to the issue for a long enough. The policy response required is subtle: after all, the growth of innovative, productive companies is welcome. It’s the unintended consequences of that growth that pose problems.

Those consequences are not easy to predict, but here are two possibilities. Either the US economy ends up like Amazon, or it ends up like Microsoft. The Amazon future is one of relentless competition, a paradise for consumers but a nightmare for workers, and with the ever-present risk that dominant businesses will snuff out competition as the mood takes them.

The Microsoft future epitomises the economist John Hicks’s quip: “the best of all monopoly profits is a quiet life”. Microsoft in the 1990s became famous as a once-brilliant company that decided to pull up the drawbridge, locking in consumers and locking out competitors.

In either scenario ordinary people lose out, unless they can enjoy returns from capital as well as returns from working. In the very long run a superstar economy could become a technological utopia, where nobody needs to work for a living. That would require quite a realignment in our economic system; I wouldn’t bet on such an outcome happening by chance.

 
Written for and first published in the Financial Times on 19 May 2017.

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Where the truth really lies with statistics

As any magician can tell you, the real trick often takes place offstage. The deck has already been stacked; the card placed into the shoe. No matter how closely you look, you’ll never spot the sleight of hand.

So it is with statistics. We often pay attention to the wrong thing, scrutinising the numbers with a forensic eye without asking about what those numbers really describe. Sometimes there is no intent to deceive; there doesn’t need to be. We deceive ourselves.

A simple example: the recent official figures showing the number of homicides recorded by police in England and Wales jumped by more than 100 deaths, or 21 per cent. What could explain this? The Labour party called it “worrying”, which it is, and promised to hire more police officers.

Crime data cognoscenti know that the police database has long been regarded as a poor measure of anything very much, because the policy on recording crimes has changed over the years.

But the true reason not to be alarmed by the rise in homicides in 2016 is that the deaths did not take place in 2016. Ninety-six people died as a result of the disaster at the Hillsborough football stadium in April 1989. After years of campaigning these deaths were recorded as “unlawful killing” 27 years later. Deaths in 1989 became homicides in 2016. Sometimes the statistics are not counting what we assume they are counting.

Unexpected definitions can affect targets as well as trends. In the UK, the most notorious target is the one that keeps being missed: a promise to keep net migration under 100,000. In 2010 the then prime minister David Cameron challenged voters to kick him out if he missed the target. He did, and in a way, so did they. Encouraged by six years of failure to hit the target as home secretary, Theresa May has, now as prime minister, renewed the promise again.

How is this to be achieved? Leaving the EU won’t do the job alone: net immigration from outside the bloc has consistently exceeded 100,000. So attention has turned to a policy that many people regard as obvious: keep low-skilled immigrants out, and prioritise the highly skilled. For example, a recent policy paper published by the lobby group “Leave Means Leave” calls for a “moratorium on unskilled visas”. The paper proposes that working visas should be issued only to those who meet certain requirements, including a job offer on a salary of at least £35,000.

But this is an interesting slippage in the use of the word “unskilled”. About three quarters of UK employees earn less than £35,000, and as Jonathan Portes of King’s College London points out, the majority of nurses, primary schoolteachers, technicians, paralegals and chemists earn less than this figure.

Proposing an end to “unskilled migration” sounds reasonable to many voters; they might find it less reasonable if they realised that some definitions of “unskilled” would exclude a teacher or an intensive care nurse.

The word “cut” can also mean something different when it emerges from the mouth — or the Twitter account — of a politician. A few days ago the Labour leader, Jeremy Corbyn, tweeted: “Labour will stop the Conservatives’ £22 billion cuts to our #NHS immediately.”

No argument about the figure of £22bn: it is based on an estimate from NHS England two years ago. The problem is the word “cut”. The budget of the NHS in England is not being cut. It is increasing by £8bn after inflation.

The difficulty is that NHS England estimated that it needed not £8bn but £30bn. One might use many words to describe the £22bn shortfall — for example, “shortfall” — but “cut” is not one of them.

Amid all these surprising, confusing or deliberately vague labels, it was refreshing to see John McDonnell, the shadow chancellor, in action early in the election campaign. He promised that Labour would ensure that “the rich pay their way more”.

Normally, such statements mean very little. George Osborne, the former chancellor, was fond of saying that “those with the broadest shoulders” should bear the greatest burden, which sounds good but could mean almost anything. One definition of “rich” would be “earning more than £35,000” — most people don’t, as we’ve seen. Another might be “assets over £2.9m”, which according to the Institute for Fiscal Studies would put a British household in the top 1 per cent. Usually when politicians say “tax the rich” they hope that voters will hear “tax someone else”.

To Mr McDonnell’s credit, he actually produced a definition of “the rich”: people making more than £70,000 to £80,000 a year. That is admirably clear. Whether or not you agree with his definition or with his policy, at least we can understand it. This is rare.

Statisticians are sometimes dismissed as bean-counters. The sneering term is misleading and unfair. Most of the concepts that matter in policy are not like beans: they are not merely difficult to count, but difficult to define. If we don’t understand the definition there is little point in looking at the numbers. We have fooled ourselves before we have begun.

 
Written for and first published in the Financial Times on 12th May 2017.

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Personal finance sets traps for dinosaurs

It was free!” announces Bob the Dinosaur, an adorable moron from the Dilbert cartoon. Bob is driving a bright red convertible. “They just make you sign papers!”, he elaborates. That cartoon is a quarter of a century old, but some things never change. The suspicion lingers that too many people are buying cars using financial products they do not fully understand.

In the UK, the finger of suspicion is pointing at personal contract purchase agreements, or PCPs, which account for 80 per cent of new cars sold. The Prudential Regulation Authority and the Financial Conduct Authority are looking into the car finance sector (the FCA is supposed to prevent us being ripped off; the PRA is supposed to prevent banks accidentally ripping themselves off — thankless tasks).

It is difficult to explain quite how PCPs work, but easy to see the problem. Graham Hill, of the National Association of Commercial Finance Brokers, told the FT recently that using a PCP, drivers could pay less for a new BMW or Mercedes than for a second-hand Ford Focus. Or, as Bob the Dinosaur might put it, “they just make you sign papers!”

This miraculous effect is achieved by endlessly rolling over one quasi hire-purchase into another one, never quite buying a car. They are flattered by a buoyant used car market that is likely to sag before long. Yet manufacturers like them because they encourage people to buy new cars more often; car dealers like them because they generate more commission; and customers like them because the monthly payments are low. If you’re not worried yet, I have a car to sell you.

Some PCPs may be good value. The problem is that it is hard to tell. The closest analogy to a PCP — and it is not particularly close — is buying and selling a series of homes using interest-only mortgages. PCPs are a hybrid of several different financial products, part lease, part hire-purchase, and part option to choose between the two. Variables include contract length, the guaranteed value of the returned car, the deposit, purchase price of the car itself, maintenance contract tie-ins, mileage allowances, and (of course) the interest rate.

There is no reason to think customers can navigate these complexities. Suzanne Shu, an economist at UCLA, has shown that picking the cheapest mortgage deals is a problem that will fox even MBA students. PCPs are harder. We’ve seen this story play out before. There seems to be something about consumer finance that turns us all into Bob the Dinosaur.

George Akerlof and Robert Shiller, Nobel laureate economists and co-authors of Phishing for Phools (UK) (US), argue that the fallibility of consumers creates a profit opportunity. Consumer finance features heavily in their book, alongside junk food, cigarettes and slot machines — unflattering company. Given that a loan or insurance could be a life-saving product, why do financial services so often disappoint?

One reason is that finance shifts purchasing power over time and across different risky outcomes. We exhibit well-known biases when evaluating these different prospects, paying exorbitant prices to postpone a cost or eliminate a small risk. Payday loans, credit cards and extended warranties are real-world examples of that fallibility.

Second, financial contracts can create complexity out of simplicity. Even if we were thinking coolly about what was on offer, we might not be able to understand the small print — Suzanne Shu’s students couldn’t.

Third, many financial contracts are bundled up with other purchases — the PCP, plus mobile phone contracts and overpriced insurance for short-term car hire. Payment protection insurance is the infamous rip-off endgame.

Costly add-ons are not always a disaster. Everyone knows that popcorn is expensive at the cinema, and no regulatory intervention is needed. But all too often we’re seeing the primary product serving as bait for a consumer finance trap.

The best defence of laissez-faire in such cases is not that the market works well, but that regulators would make it worse. Is that true? Do regulators have a sensible response to the toxic tangle of slick salesmanship, financial wizardry, and consumer incompetence?

We could ban complex contracts: tempting, but heavy-handed. Most financial contracts have a rationale and a value to some customers. Richard Thaler and Cass Sunstein, authors of Nudge (UK) (US), have proposed an alternative system they call RECAP — for “Record, Evaluate, Compare Alternative Prices”. A RECAP rule would require finance companies to provide the entire pricing schedule in a computer-readable format, which would allow customers to go to third-party websites and compare different deals in a sophisticated way.

What auto finance needs — what most consumer finance needs — is for key information to be made simple and salient. Competition cannot work if consumers struggle to understand what they’re being sold and what it will cost. The car market’s heady mix of prestige products and bewildering finance will resist efforts at reform. Yet we must try. Bob the Dinosaur needs help.

Written for and first published in the Financial Times on 5th May.

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