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

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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Should we introduce obligatory holidays?

The UK election has thrown up an intriguing idea. In a modern twist on the old offer of bread and circuses, Jeremy Corbyn’s Labour party has proposed four new public holidays — nearly a full working week’s worth. Since England and Wales currently have only eight such holidays, it would be a dramatic expansion in mandatory fun.

I like a holiday as much as the person in the next deckchair, but such days off are not costless. As any freelancer can attest, if you work less you earn less. Having a steady job with a monthly salary will hide that cost, but it’s going to pop up somewhere. Perhaps workers will receive lower pay rises. Or perhaps jobs will be lost. (Robots demand no holidays.)

But maybe these holidays would pay for themselves. A popular conceit is that many of us work inefficiently long hours, and that more vacations or shorter shifts would actually raise productivity. We can call this the “work smarter, not harder” theory of labour.

Exhibit A: The French. We British scoff at the French work ethic of four-day weekends and four-hour lunches, but the joke is on us, since the French get more done in less time. Nor are the French unique in this respect. Broadly speaking, countries with a culture of long hours are also countries with a record of low productivity per hour. According to the OECD, the Paris-based club of mostly rich nations, the longest hours in Europe are worked in Greece, closely followed by Poland, Latvia and Portugal. At the other end of the spectrum are the Danes, Dutch, Norwegians and French. Laziest of all? The Germans.

The most likely explanation for this pattern is that people in richer nations can afford the luxury of working fewer hours per year. But it’s tempting to speculate that causation runs the other way, and that short shifts and long breaks are a route to high productivity. No wonder that from time to time some think-tank or pundit proposes a six-hour working day — or a pilot scheme goes well and gets some buzz. On the face of it, it is not absurd to suggest that the British could enhance their lacklustre productivity by taking a few extra days off.

But there is an obvious objection to the idea. If a four-day week is just as productive as a five-day week, or a six-hour day beats an eight-hour day, then why don’t more employers embrace shorter hours? If it was such a good idea there would be no need for the government to impose it on anyone. It’s not impossible that the Labour party knows more than British managers about how best to run British businesses, but nor is it likely.

There is an alternative argument for the government to introduce more holidays: the hockey helmet problem. Nobel laureate economist Thomas Schelling pointed out in his 1978 book Micromotives and Macrobehavior (US) (UK) that ice hockey pros wouldn’t voluntarily wear helmets, despite the risk of horrendous injuries, because the helmets reduced visibility and put them at a disadvantage. Yet many were happy when the helmets became compulsory, offering safety without a loss of competitive edge.

Perhaps public holidays are like hockey helmets — we could usefully take time off but dare not, for fear of losing ground on our rivals. In 1998, economists Sara Solnick and David Hemenway surveyed Harvard students and found they would rather have $50,000 in a society where others were poorer than $100,000 in a society where others were richer. Students felt that money was a positional good, where what mattered was not how rich you were, but whether you were richer than others.

The Solnick/Hemenway study reached different conclusions about vacation time. The positional view — that what really matters is not how long your holiday is, but that your holiday is longer than other people’s — seems absurd. But if we’re competitive about money but not competitive about holidays, no wonder we work hard. A mandatory holiday gives every rat in the rat race a chance to catch its breath.

Even if you believe this argument for obligatory holidays — I am not sure I do myself — a final question awaits any government bold enough to introduce them. Why name a particular date? Holidays are easier and cheaper to take if other people are still working. But the Labour proposal actively emphasises national unity: we’re all to take the day off at the same time. The Scots will holiday alongside the English on St George’s day while the English return the compliment with a holiday on St Andrew’s day. Well, it might work.

But perhaps we should use holidays not to unite us, but to keep us at a safe distance from each other. We could introduce a patchwork of new holidays. Remainers could go on mini-breaks to Paris every June 22, while the Brexiters would gather on the white cliffs of Dover with warm bitter and ploughman’s lunches each June 24. A similar system in the US would spare liberals and conservatives from having to talk to each other. It seems to be the way we’re all heading, anyway — and it would be much easier to get some space on the beach.

Written for and first published in the Financial Times on 28 April 2017.

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Why prize-winners are heading for a fall

With hindsight, the timing was awkward. PRWeek had barely engraved Oscar Munoz’s name on the trophy before the chief executive of United Airlines and Communicator of the Year 2017 was engulfed in a spectacular public relations crisis. The airline had summoned the police to throw David Dao out of the seat he had paid for; the police broke his nose and knocked out two teeth; and Mr Munoz’s first response was to criticise Mr Dao and apologise to the other passengers. At least the PRWeek award has a glorious future as the answer to a pub quiz question.

I’m not even sure this qualifies as the award that turned out to seem the most ridiculous. The American Institute of Architects honoured the Kemper Arena in Kansas City with a national honour award, and then held its annual convention there in 1979. Alas, the roof of the arena collapsed a few hours after the architects’ convention left the site.

Tempting as it may be to mock the judges who hand out such prizes, having a more objective benchmark for achievement does not confer immunity. Just ask Claudio Ranieri, the football manager who masterminded Leicester City’s underdog triumph in the English Premier League last year. As soon as the points dried up, Mr Ranieri was sacked.

Why does life seem to deliver such strange reversals? The first explanation is simple but easy to miss: there are a lot of awards in the world. Many of the people or organisations notable enough to make news when they screw up will also be notable enough to have won a prize that will prove embarrassing.

The second explanation is more subtle: for statistical reasons, outstanding performances tend to be followed by something less impressive. This is because most performances involve some randomness. On any given day, the worst observed outcomes will be incompetents having an unlucky day and the best observed outcomes will be stars having a lucky day. Observe the same group on another day and, because luck rarely lasts, the former outliers will not be quite as bad, or as good, as at first they seemed. This phenomenon is called “regression to the mean”.

If you place a speed camera beside a stretch of road where the accident rate has been exceptionally high, the accident rate is likely to fall. But a garden gnome in the same place will also seem to save lives. That is because exceptionally high accident rates are partly the result of bad luck. While the speed camera may encourage safer driving, unlucky driving will tend to disappear whether it is treated with a camera or with a gnome.

Daniel Kahneman, psychologist and winner of the Nobel memorial prize in economics, was advising the Israeli air force when he noted a memorable example of how regression to the mean can mislead us. A flight instructor told Mr Kahneman that when the instructor praised cadets for a skilful landing, they usually did worse next time; when he bawled them out for clumsiness they tended to improve. The instructor concluded that harsh criticism worked; Mr Kahneman pointed out that a more likely explanation was sheer chance.

“Because there is regression to the mean, it is part of the human condition that we are statistically punished for rewarding others and rewarded for punishing them,” Mr Kahneman wrote. PRWeek now knows what he meant.

Regression to the mean probably explains why many award winners subsequently disappoint. And the disappointment will be spectacular if some people are taking bigger risks than others. The most impressive performance may combine skill with luck. In a financial market — or a casino — the easiest way to become an outlier is to make a big bet. Unfortunately, there is no way to be sure whether you will be an outlier on the upside or the downside. Treading a different path is a good way to look spectacularly right, or spectacularly wrong — or, given enough time, both.

While randomness can explain much, hubris may also play a role. A few years ago, the economists Ulrike Malmendier and Geoffrey Tate examined what happened to companies whose chief executives won accolades such as Forbes’s “Best Performing CEO” or BusinessWeek’s “Best Manager”. Ms Malmendier and Mr Tate picked a statistical control group of nearly-men and nearly-women who might have been expected to win an award, but did not.

Like the near-winners, the winners ran large, profitable companies. But those run by the winners did far worse in the three years following the award, lagging behind the near-winners by about 20 per cent. The prizewinning CEOs nevertheless enjoyed millions of dollars more in pay. They were also more likely to write books, accept seats on other corporate boards and improve their golf handicap.

Winning a prize may strengthen the hands of already dominant CEOs, enabling them to extract more money from shareholders and distracting them with the opportunity to write self-congratulatory books. Right now, I doubt that anyone is rushing to offer Mr Munoz an advance for his management insights.

Written for and first published in the Financial Times on 21 April 2017.

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Life is getting ever more volatile – or is it?

We live in an age of unrelenting change. That, at least, is what we are told by a consulting industry that thrives on a gospel of disruption, and journalists who overgeneralise from the earthquake in their own profession.

Anecdotal evidence of volatility is easy to find: the financial crisis; the cultural dominance of inventions such as Facebook (barely a teenager) and the iPhone (younger still); the rise of fringe political parties and a maverick president.

But the statistical evidence for disruption is less compelling. The most straightforward evidence of that is low productivity growth in many advanced economies. If the pace of change is really so frenetic, how come we don’t see it in the productivity statistics?

One obvious measure of volatility would be the frequency with which people change jobs. When I entered the UK labour market in the late 1990s, the received wisdom was that a job for life was a thing of the past. Yet typical job tenure is longer today than it was then. People are choosing to move between jobs less frequently.

This is true both in the UK and in the US. In a 2015 study of the UK labour market for the Resolution Foundation, a think-tank, Paul Gregg and Laura Gardiner found a striking fall in the tendency of people to move from one job to another. In the 1990s and early 2000s, about 3-3.5 per cent of people with jobs would leave them each quarter in favour of new jobs. During the financial crisis that rate fell to well below 2 per cent. It has rebounded since, but is still far below historical norms. The decline was particularly pronounced for the under-thirties.

Why does this matter, if people have jobs? It matters because, as Mr Gregg and Ms Gardiner point out, moving from one job to another often means a promotion and a substantial pay rise. When people — especially young people — find themselves in the same job for year after year, there comes a time when we no longer call this stability. We call it stagnation.

In the US, there is a similar story to be told — a long-term decline in job-to-job transition rates that cannot simply be explained away by a change in the demographics of the workforce.

A parallel trend in the US is the decline in geographical mobility. The percentage of Americans moving from one state to another in a particular year has fallen by about half since 1990 — a striking fall, and one that seems surprising given the standard narratives of a scattered and atomised society. If it’s really true that Americans don’t know their neighbours any more, then they must be working hard to avoid them, because they have those neighbours for far longer than once they did.

Perhaps we fear change more than ever. Tyler Cowen’s new book The Complacent Class (UK) (US) argues that America has become less adventurous in many ways. An album from two decades ago would sound just fine to modern ears; films wrap new special effects around well-worn plots and characters. The chief expression of our cultural courage now is to eat at a trendy new restaurant. Ethiopian or Peruvian cuisine may offer delicious fresh flavours but it is hardly a force for cultural revolution.

Mr Cowen’s argument is fascinating. But one need not invoke culture to explain the stasis in the job market. A 2016 paper from economists Mike Konczal and Marshall Steinbaum argued that the main reason people don’t quit or move to find good jobs is because there are fewer good jobs available. If companies were hungry for talent, but people were reluctant to move, wages should be soaring in a scramble to persuade them. In most industries, they aren’t.

A more upbeat account, at least superficially, comes from economists Greg Kaplan and Sam Schulhofer-Wohl. They point out that, thanks to the internet, people can find the perfect job in the perfect place and never need to move again. (The same logic implies that dating apps reduce the number of fruitless first dates. I am not sure anybody believes that.)

But Messrs Kaplan and Schulhofer-Wohl also note that economies are now more homogenous than once they were. When once people would move to Michigan to build cars, or to coastal ports to work on the docks, now every job is a service-sector job. Whether you flip burgers or perform brain surgery, you can work in any state, so there is no strong need to move.

This is plausible, but it is also sad. It suggests that given the ability to move anywhere, we stay put. I am reminded of a study of college friendships conducted by psychologists Angela Bahns, Kate Pickett and Christian Crandall. They found that students in a large, diverse campus sought out and befriended other students very much like themselves. In smaller universities with fewer friendship options, young people had more varied groups of friends because the alternative was to have no friends at all. Our bias towards the status quo is not new — but perhaps we are taking advantage of new opportunities to indulge it.

 
Written for and first published in the Financial Times on 13 April 2017.

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Why we should be grateful to immigrants

In 1929, the great economist Irving Fisher found his fortune and reputation ruined by his utter failure to forecast the great crash. Rival forecaster Roger Babson commented, not without sympathy, that Fisher’s problem was that “he thinks the world is ruled by figures instead of feelings”.

What a pitiable error. And it’s a warning to economists like me. We like to believe that the numbers speak for themselves, but the political world prefers to think with its gut. Nowhere is this more true than in the case of immigration, which economists tend to conclude is broadly a positive force. Politicians, aware that the world is ruled by feelings, tend to view immigration as something closer to a series of prison breaks: if you can’t get a grip on it, apologise and resign.

Immigration was a centrepiece of Donald Trump’s “build the wall” election campaign. It is a stated reason that the British government intends to go well beyond the referendum result and leave not only the EU but the single market. Immigration inspires strong feelings, and those feelings aren’t of happiness and gratitude. That is a shame.

Is there a gut-based case that we should be grateful to immigrants? I’d like to think so. Perhaps we should start with the golden rule of “do unto others”. It has a clarifying effect on our thinking about immigrants — or “expats”, as the golden rule suggests we call them, since that is what we call ourselves if we go to live overseas. The words are synonyms but the difference in perspective and respect is enormous.

The golden rule quickly exposes much of the talk about immigrants — expats — as hypocrisy. One popular idea is that immigration should be based on some kind of “points” system — or as the White House describes it, “merit-based” immigration. It seems reasonable. But not for a moment would we think of telling someone they couldn’t move from Detroit to Dallas because they “lacked merit”. Vox columnist Matthew Yglesias observes that he wouldn’t get away with describing white Americans without college degrees as people “without merit”. Quite.

Another seductive folly is the idea that the authorities should in their bureaucratic wisdom decide how easy it would be for different industries to recruit workers. As migration expert Madeleine Sumption has recently pointed out, an attempt to fine-tune the labour market through immigration policy might seem attractive, but it would require an extensive and expensive bureaucracy that would swiftly be surrounded by eager lobbyists. We need only ask how we’d feel if such a policy applied to us, with a Whitehall department deciding whether Cambridge required another software engineer.

We might also think that concerns about the “brain drain” were not a persuasive reason to force people from Leicester to stay there on the grounds that Leicester needs their skills. All these policies have managed to pass as moderate, sensible and even compassionate when applied to foreigners. The instant we ask if we’d apply them to ourselves we see them for what they are: a ludicrously cumbersome attempt at economic planning, and a woefully illiberal way to treat human beings.

There are many analyses of the costs and benefits of immigration. What’s not widely appreciated is that most of them simply ignore any benefits to the migrants — expats — themselves. Given this handicap, it’s striking that many serious studies find some modest net economic benefits. If I told you that a school or a hospital could pass a cost-benefit test even after ignoring the benefits to the pupils or patients, you might reasonably conclude that the school and hospital were impressive organisations. You’d also tell me it was a very strange way to do cost-benefit analysis.

In 18th-century France, workers had to show their papers to get permission to move from one town to another. The objection wasn’t that immigrants might arrive. It was that valuable workers might leave.

The French nobles were on to something. In most circumstances we’re keen to live close to other people. Densely populated areas tend to be richer, more productive, and more innovative. Because housing is compact and people travel on public transport, cities are also more environmentally friendly. And we know that cities are desirable places to live because people are willing to pay so dearly to live in them. Usually we view other people as customers, colleagues, and friends. From the church to the high street to the nightclub, other people are the lifeblood of our communities. It is only when we call other people “immigrants” that they seem to cause such anxiety.

I think we should be more grateful to the people who have the courage and energy to leave their homes and make a life somewhere new. But perhaps I’m the one who should be more grateful. As the economist Paul Seabright observes in his 2004 book The Company of Strangers (UK) (US), we humans are the recent descendants of shy, murderous apes. Somehow we have figured out a way to live together and co-operate. We have some way to go, but I am grateful for the progress we have made so far.
First published in the Financial Times on 7 April 2017.

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5th of May, 2017Undercover EconomistComments off
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Marginal gains matter but gamechangers transform

“As Olympic athletes have shown, marginal improvements accumulated over time can deliver world-beating performance,” said Andrew Haldane in a speech on Monday, which is quite true. Mr Haldane, the Bank of England’s chief economist, went on to suggest that the productivity of companies in general would benefit from the same approach.

It’s a bold claim, made more so by the regrettable fact that the most celebrated exponents of “marginal gains”, Team Sky and British Cycling, have been in the headlines for the wrong reasons.

But Mr Haldane may have a point; he usually does. The marginal gains philosophy tries to turn innovation into a predictable process: tweak your activities, gather data, embrace what works and repeat. In British cycling such tweaks reportedly include rubbing alcohol on tyres to improve grip, electrically heated overshorts to maintain muscle temperature and a ban on bikini waxes to prevent saddle sores.

But the same basic approach — using quick-and-dirty experiments, or “A/B testing” — has paid dividends elsewhere. David Cameron’s Behavioural Insight Team, known unofficially as the “nudge unit”, has used simple randomised trials to improve the wording of tax demands and the advice given to job seekers. Google tested 41 shades of blue for its advertising hyperlinks. Designers rolled their eyes — then Google claimed that the experiment had netted an extra $200m in annual revenue. As Mr Haldane says, marginal improvements can add up.

But can they add up to productivity gains for the economy as a whole? The question matters. There is no economic topic more important than productivity, which in the long run determines whether living standards surge or stagnate. Productivity growth has been disappointing for more than 40 years, particularly disastrous since the financial crisis, and worse in the UK than in most other rich nations. The idea that developed economies can A/B test their way back to brisk productivity growth is a seductive one.

An alternative view is that what’s really lacking is a different kind of innovation: the long shot. Unlike marginal gains, long shots usually fail, but can pay off spectacularly enough to overlook 100 failures. The marginal gain is a heated pair of overshorts, the long shot is the Fosbury Flop. If the marginal gain is a text message nudging you to finish a course of antibiotics, the long shot is the development of penicillin. Marginal gains give us zippier web pages; long shots gave us the internet.

These two types of innovation complement each other. Long shot innovations open up new territories; marginal improvements colonise them. The 1870s saw revolutionary breakthroughs in electricity generation and distribution but the dynamo didn’t make much impact on productivity until the 1920s. To take advantage of electric motors, manufacturers needed to rework production lines, redesign factories and retrain workers. Without these marginal improvements the technological breakthrough was of little use.

The latest evidence suggests Mr Haldane is right to remind us of the importance of marginal gains. In 2016 economists Daniel Garcia-Macia, Chang-Tai Hsieh and Peter Klenow sought to quantify different kinds of innovation in the US economy. They concluded that most productivity growth came from existing companies improving existing products, rather than new businesses or products. That was true in the 1980s and still is. In the UK, as Mr Haldane observes, leading companies have been improving their productivity, while typical ones have not. That suggests a problem not with the long shots at the frontier of innovation but with the details of everyday management.

Yet two questions remain. One is why so many businesses lag far behind the frontier. A research programme led by economists Nicholas Bloom and John Van Reenen has tried to quantify management practices, and has found that many countries have a long tail of poorly managed companies. The culprit may be a lack of competition: vigorous competition tends to raise management quality by spurring improvements and by punishing incompetents with bankruptcy. It’s no coincidence that the philosophy of marginal gains is popular in the unforgiving arena of elite sport.

But the second question is why productivity growth has been so disappointing. A/B testing has never been easier or more fashionable, after all.

The obvious answer is that the long shots matter, too. In almost every field except computing, we’ve hoped for revolutionary breakthroughs and they haven’t yet happened. Google may A/B test its way to greater profits but the company’s success has been built on a leap forward in search technology in the late 1990s, and even more fundamentally on the publicly funded efforts to develop the web and the internet.

In a data-driven world, it’s easy to fall back on a strategy of looking for marginal gains alone, avoiding the risky, unquantifiable research. Over time, the marginal gains will surely materialise. I’m not so sure that the long shots will take care of themselves.

Written for and first published in the Financial Times on 24 March 2017.

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Some things are best left to the technocrats

In case anyone needed reminding of the majestic power of democracy, Boaty McBoatface embarked upon its first mission last week. The robotic yellow submarine will explore the depths of the seas surrounding Antarctica. McBoatface may even encounter Mister Splashy Pants, a humpback whale that frequents the South Pacific.

Both names were chosen by popular vote and each, in different ways, was resisted by the organisations that decided to ask the public in the first place. McBoatface and Splashy Pants remind us that, while democracy is all very well, there’s a risk in asking the public what they think.

For all its merits, democracy has always had a weakness: on any detailed piece of policy, the typical voter — I include myself here — does not understand what is really at stake and does not care to find out. This is not a slight on voters. It is a recognition of our common sense. Why should we devote hours to studying every policy question that arises? We know the vote of any particular citizen is never decisive. It would be a deluded voter indeed who stayed up all night revising for an election, believing that her vote would be the one to make all the difference.

So voters are not paying close attention to the details. That might seem a fatal flaw in democracy but democracy has coped. The workaround for voter ignorance is to delegate the details to expert technocrats. Technocracy is unfashionable these days; that is a shame.

One advantage of a technocracy is that it constrains politicians who are tempted by narrow or fleeting advantages. Multilateral bodies such as the World Trade Organization and the European Commission have been able to head off popular yet self-harming behaviour, such as handing state protection to which ever business has the best lobbyists.

Meanwhile independent central banks have been the grown-ups of economic policymaking. Once the immediate aftermath of the financial crisis had passed, elected politicians sat on their hands. Technocratic central bankers were — to borrow a phrase from Mohamed El-Erian, economic adviser — “the only game in town” in sustaining a recovery.

A second advantage is that technocrats can offer informed, impartial analysis. Consider the Congressional Budget Office in the US, the Office for Budget Responsibility in the UK, and Nice, the National Institute for Health and Care Excellence.

Technocrats make mistakes, it’s true — many mistakes. Brain surgeons also make mistakes. That does not mean I’d be better off handing the scalpel to Boris Johnson. Better a flawed expert than a flawed amateur. Democratically elected politicians are not well placed to do technical work and neither are voters. Where democracy is not up to the job, we turn to technocracy instead.

Ultimately, democracy must trump technocracy, and it does. The Bank of England has control of monetary policy but it must aim at a target set by the chancellor, who must answer to the electorate. The chancellor, meanwhile, controls fiscal policy directly. The indirect system is working better. The monetary policy of successive chancellors has been consistent for 20 years. The fiscal policy of the incumbent Philip Hammond — raising taxes on the self-employed — did not survive a week.

But there’s a problem. Technocrats may not be too interested in politics, but politics is interested in technocrats. Successive chairs of the US Federal Reserve have been accused of treason, and (worse) being “more political than Hillary Clinton” by senior Republicans Rick Perry and Donald Trump, respectively. There is now a real sense that its independence may be under threat.

In the UK, too, Brexiters have noticed that most economic experts believe Brexit will damage the economy. Many have responded not with evidence but with smears and insults — most memorably Michael Gove’s comparison of academic economists with Nazi scientists.

The dragging of technocratic advice into the political arena has in it the makings of tragedy. I realise that sounds grandiose, but the stakes here are high. On almost any issue, logic and evidence can be eaten away once partisan polarisation takes hold.

Any democracy must debate the big political issues: how much we protect the vulnerable, the appropriate size of the state, the importance of individual freedom. But technical matters are different. How safe is the MMR vaccine? Are humans changing the climate? Does fiscal stimulus work with interest rates at the zero lower bound? Once these questions become chew toys for political attack dogs, there’s no easy way out.

It is better to keep such topics away from politics as much as possible. Complex problems cannot just be wished away. Reality cannot be fooled.

“Nobody knew that healthcare could be so complicated,” said President Donald Trump last month, while David Davis, the UK’s Brexit minister, has admitted that his department had not analysed the implications of leaving the EU without a deal.

Democratic policymaking has entered the era of Boaty McBoatface.

Written for and first published in the Financial Times.

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