Tim Harford The Undercover Economist

Undercover EconomistUndercover Economist

My weekly column in the FT Magazine on Saturday’s, explaining the economic ideas around us every day. This column was inspired by my book and began in 2005.

Undercover Economist

Ice bucket challenge: the cold facts

In a world of limited generosity, who is to say which cause should be at the head of the queue?

Last week I finally succumbed to social pressure and invited some colleagues at the BBC to film me having a bucket of iced water tipped over my head. As surely nobody needs telling by now, the deal is that people film themselves being drenched, donate money to the US-based ALS Association or its British equivalent, the Motor Neurone Disease Association, and then nominate three further people for the same treatment.

The challenge is an infectious plague, humiliation TV and pyramid scheme all rolled into one, and it’s fundraising genius. Lady Gaga’s done it; Mark Zuckerberg has done it; George W Bush has done it. By the time this column is in print, I imagine everyone on the planet will have done it.

Social pressure is a powerful thing, and it’s refreshing to see it being used to spread smiles and encourage a generous spirit. This is not new, of course. Charities have long sought celebrity endorsements, and seeing famous people have liquids poured on them is a venerable tradition. As for seeking sponsorship to run a marathon or climb Kilimanjaro, we all know that shamelessly pressuring friends and colleagues to give money is the very essence of the exercise.

Peer pressure can also produce reluctant givers. Adriaan Soetevent, an economist at the University of Groningen, studied church collections in an open basket versus a closed collection bag. The open basket elicited larger donations. And in another clever field experiment run by three economists, Stefano DellaVigna, John List and Ulrike Malmendier, fundraisers went door to door raising money. Some households, chosen randomly, had received a flyer warning them exactly when the fundraisers would be around: this warning dramatically increased the chance that the door would not be opened. Not all of us welcome the opportunity to give money to randomly selected charities, it seems.

This time, the social element seems to be a source of no small joy: at a family gathering recently, people were gleefully ice-bucketing each other until the garden had become a swamp. Surely the ice bucket challenge is a good thing, raising money for a worthy cause while giving us a good chuckle into the bargain.

But any good economist has to ask – and I do apologise about this – “a good thing compared to what?” Some critics have suggested that charitable donations are a zero-sum game: more money for the ALS and MND associations means less money for other charities. The evidence for that proposition is thin, as it happens, but even if the many tens of millions raised by the ice bucket challenge are brand-new charitable giving, we could still ask where that money would best be spent.

The strength of a viral giving campaign is also its weakness: people join in for a laugh because their friends have put them up to it, rather than because of a logical analysis of the most worthy cause. Motor neurone disease traps people in their own bodies as they lose the ability to move, speak, eat and, eventually, even to breathe. It is a truly dreadful condition – but so is bowel cancer, fatal diarrhoea or simply starving to death. In a world of limited generosity and finite resources, who is to say which cause should be at the head of the queue?

The fact that ice-bucketeers are donating to the ALS Association feels entirely arbitrary. If the Red Cross or the American Cancer Society had happened to be the beneficiaries instead, very little else about the viral campaign would have changed. Would that have been a better situation?

GiveWell is an organisation which seems well placed to answer such questions: it aims to give donors the information they need to make the most effective donations. It sounds like an impossible job. GiveWell’s approach is to find cost-effective, evidence-based approaches such as distributing antimalarial bednets, and then search for transparent, efficient charities pursuing that approach. One of their top recommendations, for example, is the Schistosomiasis Control Initiative – a charity that could use a catchier name. It organises treatment for parasitic worms, a very unsexy cause indeed. But the worms can do a lot of harm and are absurdly inexpensive to treat – hence the finding that the SCI offers value for your donated money.

In the end, I sent a few pounds of my ice bucket donation to the Motor Neurone Disease Association. It would have felt wrong, somehow, to do otherwise. I sent a more substantial donation to SCI, surely one of the least media-friendly charities on the planet. All lives are equally valuable but some lives may be saved far more cheaply than others. It seems strange not to respond to a philanthropic bargain.

No doubt some will find this line of reasoning colder than a bucket full of iced water. But the truth is that whenever we give money to one cause rather than another, we’re making a decision about how deserving that cause is. When a social media campaign gathers momentum, it is human nature to make that decision spontaneously and without a moment’s reflection. It feels good. But feeling good and doing good are not the same thing.

You can donate to the SCI at www3.imperial.ac.uk/schisto

Also published at ft.com.

Undercover Economist

Here today, gone tomorrow

Don’t draw up your task list in the morning – do it the evening before, when you will have a more distant perspective

What does going on a diet have in common with time management? Here’s a musical clue: Little Orphan Annie sings: “Tomorrow, tomorrow, I love you, tomorrow – you’re always a day away.” Sheila Hancock’s song “My Last Cigarette” has a more cynical bent: “I’ll give up the habit, I will even yet, when I’ve had just one more cigarette.”

The songs could hardly be more different but the common thread is the way that the promise of tomorrow is transformed overnight into something altogether different: today. Strange things happen to us when tomorrow turns into today. Tomorrow we’ll eat fruit rather than candy bars. Tomorrow we’ll watch Krzysztof Kieślowski’s Blue rather than Sleepless in Seattle. And yet curiously when tomorrow arrives, we eat chocolate and watch romcoms. Our preferences flip.

This isn’t just my whimsical summary of human nature: the psychologist Daniel Read of Warwick Business School and his colleagues have conducted experiments finding pretty much exactly this behaviour. Experimental participants, given the opportunity to select food or movies in advance, are more likely to choose the highbrow film or the healthy snack. When the moment of truth arrives, they often change their minds if given the option.

Economists give this tendency the charmless name of hyperbolic discounting. Hyperbolic discounting poses some obvious and well-understood problems for those of us going on a diet or saving for a pension. The problem of personal productivity, however, is far thornier.

On any typical day – indeed, from moment to moment – we have to decide how to spend our time. We have a choice of long-term and short-term projects, big and small tasks/jobs, fixed commitments and free time, all within a daily rhythm of productive moments and postprandial slumps. To add to the challenge, unexpected tasks are always arriving in the inbox.

Armed with traditional tools of to-do list and calendar, this already looks like a tough enough optimisation problem. Add hyperbolic discounting and it looks vicious.

“Managing time is almost inhumane in its requirements,” says Dan Ariely, a behavioural scientist at Duke University. He’s right. While trying to figure out the wisest way to spend our time, we are constantly tempted to surf around on YouTube. Or perhaps we engage in busy-work, reorganising the filing cabinet and kidding ourselves that just because it’s work, it’s worth doing. Tomorrow’s priorities – applying for a promotion, starting the next big project, learning a new language – keep evaporating whenever tomorrow turns into today.

What are the solutions?

One possibility is to schedule tasks ahead of time in the calendar. The big presentation, the Japanese revision, the washing-up, all of it gets a diary slot. There’s promise in this approach. It still requires willpower but putting long-term priorities firmly in the calendar helps deal with the hyperbolic discounting problem. But an overstuffed diary is inflexible and one missed target means an entire calendar must be reworked. The system is unlikely to work for all but the most predictable lists of tasks.

Perhaps technology can save us. Ariely is part of a team producing a new smartphone app, Timeful, which aims to deliver the diary-stuffing approach more intelligently. The idealised form of the software would know everything you wanted to get done – from writing a novel to having a drink with old friends to doing the laundry. It would know how long each task would take, by when it had to be done, how important it was and when might be a productive time to do it. The software would also have access to your calendar, and it would tentatively schedule your tasks wherever it found free space. Over time it would learn about your productivity.

This seems enormously useful, although much depends on how close the algorithm comes to this idealised vision – and how much fuss it is to interact with it. (Users of iPhones can give it a try right now.)

. . .

For those who prefer a pen-and-paper approach to productivity, what to do about the hyperbolic discounting problem? I have two suggestions. The first helps bring a long-term perspective to the daily to-do list. Don’t draw up your list of tasks first thing in the morning – do it the previous evening, when you will have a slightly more distant perspective. When you do so, think about the two or three tasks you would feel most satisfied to have ticked off. Put those at the top of the list and make them your priority.

The second suggestion flips the telescope around and brings today’s perspective to tomorrow’s commitments. When being invited to do things months in advance, the diary usually looks pretty clear and it’s tempting to say “yes”. But whenever a new invitation arrives, ask yourself not, “should I accept the invitation in March?” but, “would I accept the invitation if it was for this week?”

The fundamental insight of hyperbolic discounting is that while tomorrow always looks different, eventually tomorrow will be today. If the flattering invitation would be impossible to accept for this week, what on earth makes you think the first week of March will look any different once it arrives? Tomorrow is always a day away – but your rash commitments are not.

Also published at ft.com.

Undercover Economist

When crime stops paying

To an economist, tougher sentencing in the wake of the 2011 riots offers a fascinating natural experiment

The third anniversary of the 2011 London riots is this week. They erupted so suddenly and spread so quickly across the capital and to other English cities that at the time the disintegration of British society seemed, if unlikely, at least conceivable. In the rear-view mirror, though, the riots are eclipsed by the London Olympics and much diminished by the passage of time.

For parochial reasons, the riots remain vivid to me. My son was born in Hackney just a few days before they started. As violence flared a couple of streets away to the south and to the north of us, my wife and son slept while I stood on the doorstep of our home and watched as a pair of helicopters droned directly overhead.

A year after the riots I wrote a column pointing out that they were essentially random events. They had a cause, of course. The spark was the shooting of Mark Duggan by the Metropolitan Police, and one source of fuel was the perception that police stop-and-search powers were being used crassly and with a racial bias. Yet similar grievances have emerged at other times and in other places without provoking mass civil unrest. Chance plays a major element in such stories.

The criminal justice system responded sharply to the riots. More than 1,000 suspected rioters were charged by the Metropolitan Police during the first week of trouble, and over the same time period more than 800 of them made a first appearance in court. By September 2012, 4,600 people had been arrested, out of about 13,000-15,000 people who are believed to have participated in the trouble in some way. Given the initial sense of impunity, that is a high rate of unwelcome police attention.

More striking was the way in which judges handed out sentences as though they were on steroids. Two people were sentenced to four years in prison each for Facebook postings inviting others to run amok in Cheshire, an unlikely location for a revolutionary uprising. Nobody showed up to “smash dwn in Northwich town” or “riot in Latchford”, so the sentences raised eyebrows. So did the 10-month sentence handed out to a teenager who carried two left-footed trainers out of a shop in Wolverhampton. She thought better of it and immediately dropped them – surely one of the most short-lived thefts in history. Sentences were, in general, more severe than normal. The thinking behind all this was that the true crime that needed to be punished was not theft or incitement but participation in a moment of grave civil peril.

Were these sentences an essential crisis response or a draconian overreaction? To an economist, they are something else: a fascinating natural experiment. With the news full of crushing punishments, it must have seemed plausible that the risks of committing a crime had soared. So did the threat of harsh punishments deter crime?

The usual statistical problem is that sentencing policy might influence crime rates but crime rates might equally influence sentencing policy. Cause and effect are hard to disentangle. In the case of the riots, however, the surge in crime that provoked the crackdown was sudden, unexpected, highly localised and brief. The sentencing response was drawn-out and stories of harsh sentences appeared in the national and London press for months.

. . .

As a result, a mugger or burglar in an area of London entirely unaffected by the riots might still feel conscious that the mood of the judiciary had changed. Three economists, Brian Bell, Laura Jaitman and Stephen Machin, used this sudden change in the judicial wind to measure the impact of tough sentences on crime. Across London, they found a significant drop in “riot crimes” – burglary, criminal damage and violence against the person – over the six months following the riots. Meanwhile, other crimes showed a tendency to increase, as though criminals were substituting away from the “expensive” crimes and towards the “cheaper” ones.

This shouldn’t be too much of a surprise. (I wrote an entire book, The Logic of Life, arguing that the most unlikely people in the most unlikely circumstances turn out to be greatly influenced by simple incentives.) But it’s a useful result because rigorous evidence on such matters is hard to find.

One of my favourite exceptions is an article by two economists, Jonathan Klick and Alex Tabarrok, who examined the impact of periodic terrorism alerts in Washington DC in the couple of years following the attacks of September 11 2001. Whenever alert levels were raised, police officers flooded sensitive locations, most of which (such as the White House and the Capitol) are on or near the National Mall.

Over the 16 months studied, the Mall and surrounding district experienced about 8,500 crimes, often theft from or of cars, not really al-Qaeda territory. Klick and Tabarrok argued that the occasional surges in police numbers were not caused by car thefts but did successfully deter them.

There may well be cheaper, more effective and more humane ways to reduce the crime rate.

But such studies have helped to build confidence that the world isn’t an entirely irrational place. Raise the costs of crime and criminals will respond.

Also published at ft.com.

Undercover Economist

Why tax systems are trickier than Martian algebra

Only radical restructuring has a chance of creating fair taxation, writes Tim Harford

Tax is a divisive subject but everyone seems to agree on one point: taxes are too complicated and should be simpler. Unfortunately, tax systems did not receive the memo.

In the UK only a few years ago, almost everyone in work used to be taxed at a marginal rate of either 31 per cent or 41 per cent, depending on how much they earned. (If Brits do not recognise those numbers, it is because the UK has two cumulative systems of income tax, one of which goes by the code name of “national insurance”.)

The system is trickier today than Martian algebra. Paul Johnson of the Institute for Fiscal studies points out that, over different levels of income, a non-working spouse with two children will be taxed at marginal rates of 12 per cent, 32 per cent, infinity, 42 per cent, 60 per cent, 42 per cent, 60 per cent, 42 per cent and 47 per cent. You might ask what kind of muppet designed a tax schedule like that, and one answer would be George Osborne, chancellor of the exchequer, and Alistair Darling, his predecessor – the last two men to be in charge of the UK tax system.

Another answer would be that this is just the sort of thing that happens without diligent maintenance. Window frames rot. Iron structures rust. Tax systems become complex.

Having nine different marginal tax rates is an ugly sign that things are not well. There are others. Cereal bars attract value added tax at 20 per cent but flapjacks enjoy a zero rate; vegetable chips are tax-free if the vegetable in question is not a potato; dried fruit is subject to VAT unless destined for a cake. On a gingerbread man, chocolate icing attracts a substantial VAT liability unless the icing constitutes the eyes. There are more things in tax accounting, Horatio, than are dreamt of in your philosophy.

If a tax break for unfrosted gingerbread seems uniquely British in its eccentricity, it is not. Officials in New York state have been obliged to rule on the tax status of burritos. (Legally they are sandwiches and attract sales tax of 8 per cent.) Or consider Pillow Pets, a stuffed toy/ pillow whose slogan – “It’s a pillow, it’s a pet, it’s a Pillow Pet” – poses a dilemma for US Customs. For the purposes of levying a tariff, is it a pillow? Or is it a tariff-free toy pet?

Then there are tax subsidies for agricultural land in places such as Florida. Agricultural land is no easier to define than a flapjack or a sandwich. Rent a cow, let it graze on your garden or vacant lot; if that is not agriculture, what is?

All this matters not just because the rules are hard to understand and expensive to obey but also because taxes shape our behaviour. The “camelback” houses of late 19th century New Orleans, with a hump of two storeys at the rear and a long single-storey snout stretching to the street, were tax-efficient because property taxes were levied based on the number of storeys at the front of the house. Abba’s outlandish outfits are reported to have been inspired by tax rules: they were tax-deductible only if they were too outré to be worn anywhere other than on stage.

These are trivial examples of tax-efficient charm but the same principle can be harnessed for a far greater good: a carbon tax to shift our energy system towards low-carbon fuels. Well-designed taxes can raise revenue while rewarding green behaviour.

Meanwhile complex, illogical taxes raise less revenue while rewarding clever accountants. There has been outrage over celebrity tax-dodging in the UK but the tax avoidance schemes usually involve a government attempt to provide a tax incentive for the British film industry or some other hobbyhorse.

What is behind such insanities? Partly, absurd loopholes exist because special interest groups demand them; hence the subsidies for land with cows on it. Partly, voters are given the tax systems they deserve because we sympathise with highly vocal losers whenever a loophole is closed and we fall for simple tricks that hide taxes behind a veil of complication.

The UK’s two-tier income tax system is a good example. Basic income tax rates have tended to fall over time, while national insurance rates have tended to rise. True income tax rates for the typical worker are similar to those of 35 years ago but they seem much lower. The sleight of hand is politically convenient but increases complexity, creates unfairness and opens opportunities for tax avoidance.

It is tempting, then, to call for a radical simplification, for taxes simple enough to write on the back of a postcard. But this ignores the third reason that taxes are complex, which is that fair taxation is a genuinely complex business. This year’s piecemeal reform efforts become next year’s loopholes.

Only radical, systemic reform has much chance of success – and it may be less elegant than some reformers hope. A per-person “poll tax” was introduced in the UK 25 years ago, and promptly ended the premiership of Margaret Thatcher. It was undoubtedly simple – but in taxation, as in life, simplicity is not the only virtue.

Also published at ft.com.

Undercover Economist

What tech jerks can teach us

Added to the familiar gallery of corporate monsters are those making money from parasitic smartphone apps

Fat cat bankers swimming in taxpayer subsidies. Oil barons battening on indigenous peoples. Corrupt media moguls poisoning politics. To the familiar gallery of corporate monsters, a new horror has been added: tech jerks making money through parasitic smartphone apps.

The term #JerkTech was minted recently, complete with hashtag, by Josh Constine, a San Francisco-based writer for the technology website TechCrunch. Constine pointed at ReservationHop, which aimed to make reservations at popular restaurants, then sell the reservations on to eager diners; and at MonkeyParking, which allowed people parked in a public parking space to auction it off when they left. (San Francisco’s city attorney had already sent MonkeyParking a cease-and-desist letter threatening substantial fines to users.)

There are several other examples, and it seems that the world was waiting for the word JerkTech, which spread as fast as the latest internet meme – and nothing spreads faster. Before long, both MonkeyParking and ReservationHop announced a pause for reflection.

The outrage was as much a reflection of Silicon Valley’s tarnished image as about these particular business models. Stories have circulated about a misogynistic “brogrammer” culture in some tech firms, while protesters in San Francisco have objected to Google sending free buses to the city to pick up employees, thus driving up rents. Constine himself made the link between JerkTech apps and contemptible behaviour elsewhere. As with bankers, oilmen and newspaper proprietors, the debate is emotionally charged by the broader sense that technology companies may not have our best interests at heart.

At the risk of injecting a dose of logic into the debate, it seems worth asking what exactly is objectionable about JerkTech apps themselves.

What are the common features? First, commodification: they sell or take commission on the sale of something that previously wasn’t a commodity at all: a reservation to eat at a popular restaurant; the opportunity to park in a public space. These things have always been valuable but they’ve been hard to buy and sell.

This is an odd complaint. Trading something such as sex, or a kidney for transplant, might be said to change the nature of what is being traded. But a restaurant meal is already a commercial transaction. Although one restaurateur has complained that such apps are wrong because “hospitality has no price”, all the restaurants I know do expect me to pay for the food at some stage. It’s odd to insist that the reservation itself occupies a separate, almost spiritual domain.

A second complaint is that such apps rob the poor (the government, a small business, the everyday consumer) and give to the rich (people who are willing to pay a premium). This objection is also odd. Genuinely poor people rarely own cars, and being willing to pay $5 to find an otherwise-free parking space hardly requires you to be a billionaire. None of the people hoping to secure a reservation at a Michelin-starred restaurant is poverty-stricken.

The critics are on stronger ground when they point out that JerkTech firms are appropriating someone else’s property. A driver has the right to park on the street but she does not own the space that will be vacated when she moves on. A restaurant reservation service might make a reservation under a false name (“Dick Jerkson”, suggests Constine) then sell the details to a customer who will actually show up and buy a meal. If the reservation is unsold the restaurant will lose out but the JerkTech start-up faces no loss. Most reservations are made on a trust-based system, and restaurants always run the risk that this trust will be abused. But JerkTech can exploit that trust on an unprecedented scale.

This is more than an argument about propriety: JerkTech might also have consequences. Restaurants might have to demand a credit card from customers, or proof of ID. Parking JerkTech encourages people to park in the street, simply waiting for a bid to move their car. San Francisco’s city attorney alleged that one JerkTech company was planning to pay people by the hour to occupy parking spaces for resale at the right price. This is close to extortion.

. . .

And yet: when a market is being “disrupted”, that is sometimes a sign that the status quo is rotten. Scarce restaurant reservations could sensibly be sold. That is exactly what a few restaurants do – for example, Alinea in Chicago. It would be no surprise to see tech start-ups emerge to help restaurants do exactly that.

As for parking, many cities waste this scarce resource by underpricing it. Instead of paying money into the public purse, drivers pay in wasted time. Their quest for parking spaces burns fuel and causes congestion.

Two lessons emerge from JerkTech: scarce public resources shouldn’t be given away for free to all comers; and simple technology can make it easier to match scarce resources with people who need those resources. Westminster Council, in London, is rolling out a smartphone app that will help drivers find vacant parking spaces and pay for them. If JerkTech can make a market work, there’s probably a JerkTech-free way to make that market work too.

Also published at ft.com.

Undercover Economist

Crime prevention: where’s the evidence?

It may seem mind-bendingly obvious but we need to test and evaluate ideas

How do we keep young people away from a life of gangs and violent crime? You can see one answer if you fire up YouTube and type “Scared Straight” into it. You’ll have the pleasure of seeing muscular prisoners bully terrified teenagers while police officers stand by and watch. It’s an American reality TV show called Beyond Scared Straight and it’s into its seventh season.

Before Beyond Scared Straight there was Scared Straight. It was a 1978 documentary about a crime prevention programme of the same name, in which teenagers spent a day inside a prison being frightened by the inmates. The film was presented by Peter Falk at the height of his fame as Columbo, and it won an Oscar for best documentary. Its producer-director, Arnold Shapiro, went on to make the US version of Big Brother and Beyond Scared Straight.

The Scared Straight approach is popular as TV, and seems popular as public policy. But while Scared Straight was a success as a documentary, Scared Straight is a failure as a policy. We know this because, on seven occasions, administrators have allowed the programme to be evaluated rigorously using a controlled trial. Some troubled teens experienced the joys of Scared Straight while others did not, allowing a fair test of the programme’s results.

These seven rigorous evaluations form the foundation of a review of Scared Straight (and similar interventions) by the Cochrane Collaboration. The review concludes that “programmes such as Scared Straight increase delinquency relative to doing nothing at all to similar youths. Given these results, we cannot recommend this programme as a crime prevention strategy.”

If there is a question mark over a programme’s effectiveness then we need to make sure we’re not wasting effort, or even causing harm without meaning to. We should routinely test ideas, and adapt them if they’re not working. If that might seem a mind-bendingly obvious idea, let’s compare it with how programmes are evaluated in reality.

Consider Your Life You Choose (YLYC), a programme involving magistrates, police and prison officers which began in Ealing, west London, and which aims to reach 11- to 12-year-olds and steer them away from a life of crime. It hasn’t yet been rigorously evaluated.

Oddly, media reports seem to wish that YLYC was like Scared Straight, even though Scared Straight does not work. A recent headline in the London Evening Standard described YLYC as “Schoolchildren in north London taught lessons on life behind bars: Children put in handcuffs and prison van in anti-gang drive.” The article was accompanied by cheesy photographs of 11-year-olds in … well, handcuffs and a prison van.

Despite the Evening Standard’s enthusiasm for such photos, YLYC bears a blessedly superficial resemblance to Scared Straight – it’s delivered in schools, not prisons. Pam Ullstein, the YLYC project leader, says the handcuffs and van may “provide some entertainment” but are not the point of the programme. Good.

So YLYC might indeed work, and it might not. It would be wonderful to find out. Time for an evaluation?

Alas, the government’s leading authority on the matter, Damian Green – who this week lost his post as the Minister for Police and Criminal Justice – seemed to think no evaluation was needed. “Official figures demonstrate that it really is having an impact,” he said of YLYC in a speech in March.

I asked the Ministry of Justice what Green had in mind when he said this. I was directed to a page on the YLYC website itself, in which a police sergeant observes that in Ealing, youth convictions have fallen sharply in recent years. (Oddly, the web page also features Ealing’s Conservative MP, Angie Bray, praising YLYC with exactly the same words as Green: “Official figures demonstrate that it really is having an impact.”)

. . .

The fall in crime is good news, and perhaps that’s what Green and Bray mean by “official figures”. Yet youth convictions have also been falling sharply in England as a whole, so perhaps it’s a coincidence. If we are to have serious evidence on YLYC – or any other programme – we need rigorous evaluations, not a nod towards “official figures” of passing relevance.

The sociology of this is fascinating: we have an unproven programme that politicians are happy to praise and that a newspaper admires for its faint resemblance to a proven failure.

None of this is a criticism of YLYC, which may indeed be effective. We’re fortunate that people want to set up programmes such as YLYC and volunteer to support them. But we don’t want them to waste their time, so we should provide help in figuring out whether what they do actually works.

The good news is that help is available. There’s Project Oracle, for example, a new London-focused outfit that aims to support programme providers in gathering useful evidence about what’s working, while also educating the people who commission such programmes that it’s important to ask for evidence. Professor Georgie Parry-Crooke, co-director of the project, tells me that an evaluation of the effectiveness of Project Oracle itself is on the cards. That’s all to the good: reality TV is no basis for figuring out what works and what doesn’t. The evidence revolution will not be televised.

Also published at ft.com.

Undercover Economist

Underperforming on performance

State education in Britain consists not of families choosing the best schools but of good schools choosing the best families

What is the collective noun for indicators of public service performance? A thicket? A fudge? Whatever it may be, the British government has announced yet another league table, this time packed with indicators of public safety in English National Health Service hospitals.

Logging on to the NHS Choices website, I discover my local hospital is “among the worst” as far as “infection control and cleanliness” are concerned. The website adds that all “Care Quality Commission national standards” have been met. This is baffling. The hospital is filthy yet meets all care quality standards? Maybe the collective noun should be “a contradiction of indicators”.

“I think we’re getting a bit overwhelmed now with these packages of indicators,” says John Appleby, chief economist of the King’s Fund, a healthcare think-tank. “As a patient, I wouldn’t know what to make of these at all.”

If they are merely useless and confusing, that’s one thing. But some indicators in the past have caused serious collateral damage. Consider two examples from either side of the Atlantic.

In the UK in the late 1990s, Tony Blair’s government set a range of targets for how quickly ambulances should respond to emergency calls. In an “immediately life-threatening” case in an urban area, first responders should arrive within eight minutes, three-quarters of the time. The target swiftly backfired. By 2003 the data were showing odd patterns – for one ambulance service, more than 900 calls were recorded as having been met in seven minutes and 59 seconds, with just a handful met in eight minutes. The definition of “immediately life-threatening” mysteriously varied by a factor of five from one ambulance service to the next. Crews were split and given bikes or small cars, allowing a lone paramedic on a bike to hit a target, even if he couldn’t take you to hospital.

In the US, “report cards” provide data on the performance of cardiac surgeons and cardiac wards. David Dranove, Daniel Kessler, Mark McClellan and Mark Satterthwaite, four economists who studied the report cards, found a most unwelcome consequence: doctors resisted operating on the severely ill and favoured surgery for patients who might not even need it. A healthy patient is a strong candidate to thrive after heart surgery, no?

None of this should surprise. There are three ways to improve your score on any performance metric: first, actually improve performance; second, focus on ways to look good on the metric in question; third, cheat.

That said, surely performance metrics can sometimes identify and encourage what’s best in public service. What might help is a sense of who is supposed to use these metrics, and how they might react.

Gwyn Bevan of the London School of Economics suggests four models of public service. In “trust and altruism”, noble doctors and teachers always do their best, and indicators help them do their jobs. In “targets and terror”, public servants are assumed to be selfish, whipped into shape by a central government with a dashboard of performance data. In the “quasi-market” system, the indicators are provided to the public, who act as consumers and choose their preferred school or hospital. Finally, “name and shame” uses league tables to humiliate losers and lionise winners.

None of these four systems is obviously absurd, so what does the evidence suggest? Devolution in the UK provides an interesting natural experiment. The Welsh government abolished school league tables and the Scottish government eschewed targets for hospital waiting times. In both cases, researchers from Bristol University and elsewhere showed that the English system worked better. This supports “name and shame” (for schools) and “targets and terror” (for hospitals). It is bad news for the “trust and altruism” model.

We know that true markets often work well but there are question marks over the effectiveness of “quasi-markets” for education and healthcare. The British state education system consists not of families choosing the best schools but of good schools choosing the best families, while bad schools chug along without going out of business. Americans may be savvy consumers of cars or phones but appear to pay little attention to publicly available evidence on the quality of hospital care.

“Name and shame” is the idea that indicators work not because they inform bureaucratic overseers, nor because they help consumers pick the best services, but simply because nobody wants the embarrassment of propping up the bottom of a league table. It seems a crude approach but an influential research paper by Judith Hibbard, Jean Stockard and Martin Tusler found evidence that “name and shame” might work.

Hibbard and her colleagues studied how Wisconsin hospitals reacted to a report on quality of care. Some of the hospitals were included in a widely disseminated quality evaluation. Others, chosen at random, received a confidential report on their own performance – the ideal approach for a world of “trust and altruism”. A third group of hospitals received no report at all.

Hibbard’s research suggested that Wisconsin healthcare did not function as a regular market. Poorly performing hospitals were not afraid of losing market share, and rightly so. But they did make substantial efforts to improve, nonetheless – citing a concern for their reputation.

Perhaps we have that collective noun after all: it’s an “embarrassment of indicators”.

Also published at ft.com.

Undercover Economist

All aboard the volatility express

Should we treat low volatility as a portent of disaster, or as a sign that the world economy is finally on the right track?

For years this newspaper has been reporting financial markets as a rollercoaster. It was refreshing, then, to find the summer ushered in with a series of stories about how low volatility had become by early June. Yet the general tone in the financial press has been far from soothing. “It’s quiet . . . too quiet”, goes the refrain, followed by the pointed observation that the last time volatility was so low, it was just before the financial crisis began.

There is a commonsense alternative to the idea that this must be the calm before the storm: it’s that no news is good news. So which view is right? Should we treat low volatility as an eerie portent of disaster in the making, or as a sign that the world economy is finally on the right track?

The answer to the question depends on whether we look at financial markets, or at the real economy of goods and services, production and investment.

From a financial perspective, low volatility should indeed make us nervous. That’s the lesson of the late Hyman Minsky. Minsky was once neglected but, since the financial crisis, we are all Minskyites now. Your bluffer’s guide to Minsky is that when things are going well, people become complacent and take too many risks – in particular, the classic leverage risk of borrowing to invest. Calm breeds complacency. Stability is destabilising.

If this all seems a little hysterical right now, perhaps it is – but there are plenty of reasons to worry. US first-quarter growth was disappointing. China’s property market is in trouble. Geopolitics from Iraq to Crimea look shocking. The soothingly low financial volatility of early June looks surreal.

But what happens to the rest of the economy when all is calm? Nick Bloom, a British economist working at Stanford University, has a useful recent research paper on “Fluctuations in Uncertainty” in which he tries to unpick the relationship between economic turbulence and economic trouble.

In 1921, the economist Frank Knight influentially defined risk as the unknown outcome of a known probability distribution such as the toss of a coin or the spin of a roulette wheel; uncertainty, by contrast, was where the probabilities weren’t known at all. Risk is a convenient, tractable concept but uncertainty is a more realistic benchmark for dealing with most economic problems.

Bloom turns to a variety of proxy indicators of both risk and uncertainty: the VIX index, which is a market-based indicator derived from traders’ bets on volatility over the following 30 days; disagreements between economic forecasters; forecasters’ own expressions of uncertainty; newspaper mentions of the word “uncertain” or “uncertainty” and “economy” or “economics”. In all cases, these measures are higher during recessions, although the measured spike in uncertainty is usually when the recession itself is well under way, so this is not much help as a forecasting tool.

What about more fine-grained measures of uncertainty? Bloom looks at the spread between the fastest-growing and fastest-shrinking firms in each industry, and the dispersion between fast-expanding and fast-contracting manufacturing plants in the US.

No matter what the indicator, the story is similar: low volatility, low uncertainty and low dispersion are what happens in good economic times. Recessions are high-volatility, high-uncertainty and high-dispersion events. Low levels of uncertainty may breed complacency but they are also what the economy seems to need. Bloom speculates that, in a vicious circle, uncertainty is both a cause and a consequence of recessions.

. . .

There are some good theoretical reasons why growth goes hand in hand with low levels of uncertainty. Consider a company making a hard-to-reverse decision such as hiring a new permanent member of staff or buying a new factory. If the company was confident of modest growth, it should take the plunge, invest and expand. But if the forecast of modest growth is very uncertain, and growth might be exhilarating or disastrous, then why not wait and find out? If conditions turn out to be right, the factory can always be built later; the worker can always be hired tomorrow.

That makes investment sound like an emotional business but the reasoning above is a matter of pure logic. A computer or a Vulcan would recommend the “wait and see” approach as profit-maximising. Of course, when everybody is waiting, all they will see is further economic depression.

Emotion also matters, of course. Andrew Eggers and Alexander Fouirnaies, two political scientists at the London School of Economics, recently published a working paper titled “Red Zero, Black Zero”, which looked at what happened when growth figures were either fractionally above or fractionally below zero. The difference is of no direct economic consequence in its own right but triggers very different media stories. Eggers and Fouirnaies find that companies don’t worry over the distinction, but consumers do.

All this suggests that low volatility really is good news. It may be seductively dangerous for financial markets. Yet it is what both consumers and producers need to get things back on track. I hope it is no longer necessary to point out that what is worrying for market-watchers is not necessarily bad news for the rest of us.

Also published at ft.com.

Undercover Economist

Let’s play economics-by-metaphor

The patient was seriously ill. Dr Balls advised antibiotics but Dr Osborne argued it was a virus

“A riddle wrapped inside a mystery inside an enigma.” That was Winston Churchill’s view of Russia one month after the outbreak of the second world war in Europe. It was also Andy Haldane’s view of the British economy in a speech given in Scarborough on June 18. Coming from the Bank of England’s new chief economist, this seems an alarming parallel, although all Haldane meant to say was that the situation was hard to read.

Haldane, who has long given the Bank’s most thought-provoking speeches, is fond of a literary flourish – indeed, his Scarborough speech was an extended metaphor on cricket, with the uncertain prospects of the economy compared to a well-bowled cricket ball. Should the Bank respond like England’s veteran batsman Ian Bell (take the initiative, front foot forward) or like newcomer Joe Root (wait for things to become clearer, acting at the last possible moment) or, for that matter, like the long-retired Geoff Boycott (commit to a relentlessly defensive strategy regardless of circumstances)?

The context for this – although Haldane did not say it – is that his boss, Mark Carney, has abruptly shifted his stance. Carney spent the first few months of his tenure committing to low interest rates, and is suddenly warning that rates will rise sooner than anyone expects. Geoff Boycott, after fending off ball after ball, has suddenly started trying to slog everything over the members’ pavilion.

Some international readers will be none the wiser after all these cricketing similes but I’ve decided that the game of economics-by-metaphor is lots of fun, and have been pondering what the best metaphor might be for the puzzling state of the UK economy.

Haldane’s evocation of Churchill prompts me to compare the UK in 1939 with the UK in 2008. The man in charge when it all began fumbled some things badly but got no credit for good decisions in an impossible bind. The bank bailouts were like Dunkirk – a heroic, improvised, last-gasp tactic that laid some foundations for future success, while conceding that everything up to that point had basically been a catastrophe. Then came grinding dogmatism, often incompetently managed, which postponed the long slog. Eventually a victory of sorts was won thanks to the industrial power of the US; the bloodied UK was never quite the same again. (This analogy gives David Cameron the role of Winston Churchill but no parallel is ever exact.)

But what of the UK today? The image that comes to mind is of an overconfident City wide boy on gardening leave, waiting for his next well-paid job. He’s feeling flush because his flat in gentrifying Hackney has doubled in value. He’s spending liberally on home improvements, on restaurant meals, on cocaine and Polish lap-dancers. (The Office for National Statistics will now be recording this activity as part of GDP.) Above all, he’s buying nice stuff from abroad. There is lots of activity for the low-paid service sector and for importers but whether our City boy will actually get another real job soon is an open question.

Perhaps instead we should view the British economy as a fractious marriage. Hubby is English; swaggering and self-obsessed, he keeps telling his Scottish wife she’s beautiful and that they’re great together. Yet he never takes her seriously or listens to a word she says. She yearns to get away from him but she’s afraid to leave. Her single friends in Iceland and Ireland have had some tough times but at least they have their identity and self-respect. He’s cocky and has convinced himself that she’s never going to leave him, yet she may well walk out a few months before Christmas. Any divorce is going to be hellish because their financial affairs are all tangled up together. He’s probably going to get angry, resentful and drunk, and, before you know it, he’ll say something he regrets to his neighbours Angela and François. Give him five years and he’ll quit the neighbourhood entirely to spend the following decade in his vest and underpants, obsessed with whatever’s on Sky.

. . .

Then there’s the question of who takes the credit for what is, undoubtedly, a far stronger recovery than anyone expected a couple of years ago. Here a medical metaphor may suffice.

For a long time the patient was seriously ill. Dr Ed Balls advised a short course of mild antibiotics, on the grounds that a long course of strong antibiotics would be too expensive. Dr George Osborne argued that the patient was suffering from a virus and antibiotics would simply be wasteful and ineffective. No reliable diagnosis being available, the two men yelled at each other across the hospital bed, with Dr Osborne’s assistants periodically walking in, slapping the patient and yelling at him not to be such a malingerer. Now that the patient has staggered out of the hospital and is self-medicating on espresso, Dr Osborne argues that Dr Balls has been exposed as a fraudulent quack.

Each man will be hoping to run the economy after next year’s election, so British voters may decide to give them both the metaphor they deserve, good and hard.

Also published at ft.com.

Undercover Economist

A good economic bet

Pundits who make wagers may look grubby but at least they are accepting a cost for failure

Two economists disagree about the state of the economy. That’s not terribly surprising; you can insert your own joke here. Refreshingly, they’ve decided to put money on the table: instead of spouting hot air, they have made a bet. Bravo. More public intellectuals should follow suit.

Jonathan Portes is director of a UK think-tank, the National Institute for Economic and Social Research. Andrew Lilico runs Europe Economics, a consulting firm. Portes thinks that there’s plenty of spare capacity in the British economy, and that even as economic growth picks up, inflation will remain modest. Lilico disagrees. The men have staked £1,000 – inflation-adjusted, naturally.

The bet says (roughly) that once economic growth tops 2 per cent in the UK, inflation will exceed 5 per cent within 18 months. Economic growth has indeed picked up, so the bet is on and the clock is ticking. By October 2015 we should have a winner.

There is a long-running debate about whether this sort of wager is to be welcomed. Alex Tabarrok, an economics professor at George Mason University, is all in favour. “A bet is a tax on bull****,” he wrote after statistical journalist Nate Silver offered a wager on the results of the 2012 presidential election, with profits to go to charity. The New York Times public editor, Margaret Sullivan, disagreed. Silver was writing for the newspaper back then, and Sullivan declared it was “inappropriate” for journalists to be publicly wagering that their opinions were well founded.

Who’s right? Sullivan’s main argument against Silver’s wager was that it created the “appearance” of a conflict of interest. Albeit indirectly, Silver stood to profit from a victory for the Democratic Party, if only by avoiding having to make a charitable donation. Suddenly he was no longer disinterested. This is a shallow foundation for the case against public wagers.

And there are strong counter-arguments. Pundits who make wagers may look grubby but at least they are accepting a cost for failure. A more subtle advantage is that betting encourages forecasts that are specific and quantifiable.

This matters, because too many forecasts are both vague and consequence-free. A pundit can shoot his mouth off about what will happen in the future and nobody much cares. If the forecast should happen to come true, the pundit can revisit his words and claim to have predicted the financial crisis, the fall of the Berlin Wall or whatever. What’s more, many forecasts are hazy enough, especially on timing, to make them impossible to falsify.

Making a wager helps correct both these problems. A forecast that is specific enough to bet on is also specific enough to come true, or to fail. And for any wager, there is at least one person with an incentive to keep track of what happened.

The most famous bet about economics is that between Paul Ehrlich, ecologist, doomsayer and author of the massive 1968 bestseller The Population Bomb, and Julian Simon, an economist most famous because he persuaded Ehrlich to bet with him. Ehrlich believed that overpopulation would cause disaster and widespread scarcity. Billions would die, developed countries would disintegrate, India was beyond saving. Simon thought that people would find substitutes for scarce resources and that things would be fine.

The bet, however, needed to revolve around something specific. It was that the price of five metals would rise between 1980 and 1990 as scarcity continued to bite. Instead prices fell, dramatically. Ehrlich lost the bet. In some ways, this story shows the value of the wager. Because the bet was specific, we now know that Ehrlich was wrong and Simon, who died in 1998, was right.

Yet the tale of the Ehrlich-Simon bet is not entirely reassuring. The very fact that the bet was so specific means that long after Simon won, the argument continues to rage about whose worldview was truly correct. I have never met an environmentalist who was convinced by Simon’s victory that technology will save the world. And I have encountered many conservatives who seem to believe that because Paul Ehrlich was wrong about the price of metals in the 1980s, all environmentalists are wrong about everything.

Paul Sabin, a historian who wrote a book about the bet, argues that the affair brought more heat than light. He reports that Ehrlich took his loss with poor grace, sending Simon a cheque with no cover note. And Ehrlich seems unrepentant. In a recent interview with NPR’s Planet Money show, he said of the late Simon, “It’s hard to be more wrong… he knew absolutely nothing about anything important.”

This pigheadedness is disheartening but unsurprising. Perhaps the wager pushed each side into stubborn tribalism and encouraged a reductive view of complex affairs.

Yet on balance, the world needs more wagers between pundits. The alternative is intolerable: a world full of confident forecasts that nobody ever bothers to verify. The betting man must be thoughtful and specific or his wallet will suffer the consequences. We should all be quicker to ask ourselves before we open our mouths: would I be willing to bet on this?

Also published at ft.com.

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