Undercover Economist

My mother-in-law’s favourite complaint is that the government ignores the interests of rural communities in favour of cities. I was reminded of that view when reading a recent report from the UK’s “Rural Advocate”, a government appointee whose job is to worry about such things. Stuart Burgess argued that rural areas were not living up to their potential, in part because of a lack of government support.

This isn’t a uniquely British trait. Proclaiming support for rural areas is de rigueur for a US presidential candidate. (Barack Obama: “If Washington continues policies that work against America’s family farmers, our rural communities will fall further behind.” John McCain, although lukewarm on government-funded anything, would make an exception for better internet access: “Government has a role to play in assuring every community in America can develop that infrastructure.”)

But who really gets the bad deal: the rural hicks or the city slickers? Urban areas are, on average, richer than rural ones, but it is a real stretch to blame that fact on a lack of government support.

Rural areas get plenty. There are the agricultural subsidies, of course. But there are also bizarre handouts – The New York Times pointed out in 2006 that Wyoming was receiving more than five times the anti-terrorism funding, per person, than New York State. The ordinary workings of the tax system distribute money to rural areas, too: according to a report published by Oxford Economics last year, Londoners pay £1,740 per person more in taxes than they receive in public services; the average resident of largely rural Wales enjoys £2,870 more in public spending than he or she pays in taxes. Per person, rural areas have more roads, miles of phone line, gas pipe and electricity cable than urban ones – funded either directly by the government, or indirectly through regulated companies.

Rural areas are not struggling because of a lack of government support. They are struggling for the obvious reason: a lack of density is a serious disadvantage. Spread over greater distances, more spending on roads, public transport subsidies, or broadband internet provides less in the way of results. Even when infrastructure is good, mere distance may make it hard to get to the closest hospital, library or Michelin-starred restaurant. With thinner labour markets, both rural employers and employees have to make the best of imperfect job matches.

Most importantly, rural areas are terribly vulnerable to economic change and the inevitable creation and destruction of jobs. If a large business shuts its doors in London or New York, sacked employees can be in job interviews for comparable positions within a few days. If the same closure happens in a small town there are no alternatives, and if you want to sell your house and move somewhere with better job prospects, you’ll find few buyers.

The rural advocate admits that rural economies enjoy high “inputs” (new businesses, educated workers, lots of “knowledge businesses”) but low “outputs” (jobs, wages). He hopes that the situation can be corrected, but I strongly suspect that it is as inevitable as the fact that few city dwellers have large gardens.

While the government can – and does – try to help deal with these disadvantages, it can only do so much. The same is true of the advantages and disadvantages of urban life. It’s not impossible that the government could provide some decent inner-city schools – although from where I live in Hackney, the prospect still seems remote. But it is impossible that government assistance could give all Londoners cheap homes and traffic-free streets.

Sometimes my wife and I grow tired of the inconveniences of urban living. I suppose we could always swap places with my mother-in-law.

Also published at ft.com, subscription free.

In the early hours of November 8 2000, the vice-president of the United States, Al Gore, was travelling to Nashville to make his concession speech. But then the messages began to arrive on Gore’s pager, suggesting that perhaps he wasn’t behind. Having already conceded, informally and in private, Gore called Bush again to tell him that he’d changed his mind.

November 8 was not the only pivotal date. On December 8, the Florida Supreme Court ordered a recount in certain counties, raising the chance that Gore would win. On December 13, after the federal Supreme Court halted the recount, Gore conceded to Bush.

Because these sudden decisions were hard to anticipate, they provide an excellent test of the value of political connections to listed companies. If politics means profit, a “Republican” company should have taken a knock on December 8, but surged on December 13, when Bush’s victory was confirmed.

A recent study by financial economists Eitan Goldman, Jongil So and Jorg Rocholl found exactly that: Republican companies beat the market by 3 per cent over the week after Bush’s victory was assured; Democratic companies took almost a 3 per cent knock. Goldman, So and Rocholl defined “Republican” companies as those with board members who had served as Republican senators or congressmen or members of a Republican administration, and with no Democratically connected board members.

Another example: in May 2001, Senator Jim Jeffords abruptly left the Republican party to become an independent senator. That decision handed control of the Senate and its committees to the Democratic party. Seema Jayachandran, an economist at UCLA, studied the market’s reaction and concluded that it was bad news for the share price of large companies that had donated to the Republicans. The gains to Democratic donors were not as large, so the total effect was to wipe $84bn off the price of US shares.

Broadly the same story seems to hold true internationally, and Thomas Ferguson, a political scientist, and Hans-Joachim Voth, an economist, have shone a light on a ghoulish example. Adolf Hitler was appointed chancellor of Germany in January 1933 as head of a coalition government; after the Reichstag fire, a snap election and a constitutional change, the Nazis had a stranglehold on power by the end of March. There was a surge in the stock market valuation of the (mostly large) companies who tied their fortunes to the Nazis between January and March 1933.

The question, of course, is why these political connections are valuable. Perhaps the intelligence and energy that propelled Tony Blair and Al Gore to high office would have justified their work with, respectively, JPMorgan and Apple, irrespective of any political connections.

A less comforting possibility is that political connections give companies access to the regulations that suit them, or to juicy government procurement contracts. Goldman, Rochol and So have found evidence that such contracts do seem to flow to companies affiliated with the party in power.

If so, that is a disgrace, if not entirely a surprise.

But not every study reaches this conclusion. Economists Ray Fisman, Julia Galef and Rakesh Khurana, and the epidemiologist David Fisman, have tried to estimate the value of personal ties to Dick Cheney. One strategy was studying the share price of Haliburton – where Cheney was CEO from 1995-1999 – when news broke of his heart problems. The estimated value of ties to Cheney? Zero – “precisely estimated”. It would be nice to feel sure of that.

Also published at ft.com, subscription free.

Last week I mused about whether people in general were saving enough for retirement. (The answer: as far as we can tell, most people are.) This week I have decided to take on a far more important question: am I saving enough for retirement?

Apparently this activity is called “retirement planning”, which strikes me as a silly phrase given the imponderables involved.

Saving for retirement is usually posed as a problem of willpower: foolish, impatient people save too little and doom themselves to an old age devoid of Caribbean cruises. The real problem is not lack of willpower but lack of omniscience.

Hip kid that I am, I started my planning by opening up a spreadsheet. The next steps would have been to project the growth rate of my income, monthly savings, the path of inflation, the return on my growing savings pot, and (eventually) the likely annuity rate on retirement.

That all seemed like hard work, so I shut down the spreadsheet and searched for an online pension calculator instead. These products allow you to type in your basic details and let the computer do the rest. The first British calculator I found, kindly provided by the Department for Work and Pensions, told me that I could collect my state pension when I was 67. This was useful news, but only mildly so, since the DWP did not deign even to guess at what the state pension would be worth in 2040.

Other calculators proved a bit more helpful, but relying on them is a hazardous business, not least because they are often provided by companies trying to sell retirement investments.

Most of them were applying smooth growth rates to judge the growth of my salary and my pension pot. This did at least give me a sense of how much saving is required to produce a certain income, and how much difference early or late retirement might make. I had thought that my hefty regular contribution to my personal pension was likely to be overkill; a retirement calculator informed me that it was nothing of the sort.

But beyond that, those smooth capital-growth curves, so easy for computers to generate, are misleading. Not only do they not incorporate in any realistic way the gyrations of the stock market; more profoundly, they cannot deal with uncertainty over whether I will leap to the top of the corporate ladder in my fifties, be sacked, or be forced to retire because of ill health.

Nor can they tell me when I will die. I have read that the industry rule of thumb is that I should assume I’ll live two years longer than my father did. Happily my father is still alive, and if he wasn’t, I wouldn’t have to plan for any retirement at all. The rule of thumb is utterly useless for most people under the age of 40; which is awkward, since another industry rule of thumb is that you should start planning for retirement in your twenties.

These are not problems of willpower; they are problems of guessing the future in an uncertain world. Insurance, not investment, is what is in short supply. And it matters: research based on surveys of people’s income and consumption suggests that the people who really suffer in retirement do so not because they were spendthrifts but because they were forced to retire sooner than they had expected.

The sensible approach seems to be not to try to foretell the future, but to buy critical illness insurance when it is available on sensible terms, check occasionally with a retirement calculator that you are vaguely on track, and hope for the best.

Most of us manage this, but “retirement planning” just doesn’t come into it.

Also published at ft.com, subscription free.

Here’s the conventional wisdom on pensions: you’re a weak-willed and short-sighted fool who isn’t saving enough, and as a result you will spend your retirement in poverty. The US press is loaded with hand-wringing on the subject – largely, although not exclusively, based on “research” from companies who sell pensions and investments. In the UK, the definitive statement was made by Adair Turner’s Pension Commission in 2004: “Most people do not make rational decisions about long-term savings without encouragement and advice.” Ouch.

The sense of impending doom has been deepened by the realisation that both corporate pension schemes and implicit pension promises from governments may have too little cash behind them. That may be true, but it is only indirectly relevant to the question of personal pension saving.

One of the results of this nervousness has been a search for ways to encourage people to save more: tax breaks and enrolment by default, for example.

But look more closely, and it is far from obvious that there is a serious and generalised problem with personal pension saving. It’s hard to say for sure, partly because the future is unknown and partly because it’s hard to say exactly how much money should be in a sensibly funded pension. For example, if someone is making £60,000 a year, what pension income would count as sensible? £75,000 would probably be excessive – but what about medical and long-term care costs? £25,000 a year seems low, but many people get by happily on less.

Yet economists have been gamely making the effort; they look for “consumption smoothing” as a sign of sensible saving. In practice that means that aiming to consume about as much after retirement as before. But even that simple comparison can be misleading. The economist Erik Hurst has recently calculated that while most American households do cut back on spending after retiring, that does not literally mean tightening their belts: the cutbacks mean spending less on commuting and work clothes. Spending on food also falls, but the retirees eat just as well: they simply spend more of their plentiful leisure time cooking at home. Spending on entertainment and donations to charity increase. No sign there of a penurious dotage.

An admired analysis of retirement saving was published in 2006 in the Journal of Political Economy by John Karl Scholz and two colleagues. They concluded that more than 80 per cent of Americans seemed to be on track to retire with enough money in the bank; the remainder were mostly not far short of sensible savings. Another economist, Laurence Kotlikoff, is famous for his calculations that the US government has run up a staggering implicit debt in the form of Medicare and social security promises, but seems sanguine about private saving. Kotlikoff believes that the savings plans that tend to be recommended by the “retirement calculators” on investment company websites recommend saving too much and buying too much insurance. (Kotlikoff is now marketing his own retirement calculator.)

So should we be more relaxed about personal pensions? It’s hard to be sure. Some people do suffer impoverished retirements, but they tend to fall into two categories: those who were poor for most of their lives anyway, and those who unexpectedly lost their jobs or their health in their fifties. In neither case is “more saving” the answer to the problem.

The adequacy of personal pensions in the UK is hard to evaluate. James Banks, a pensions expert at the Institute for Fiscal Studies and University College, London, says that the US calculations haven’t been replicated here, because the necessary data have only recently been collected.

In any case, trying to work out how much to save for retirement is hardly a relaxing problem. The mystery is not that some people fail, but that anybody succeeds.

Also published at ft.com, subscription free.

Alistair Darling did something rather strange recently, to baffling applause from his own backbenchers, and cries of “bribery” from the opposition: he announced a tax on teenagers.

Darling’s plan – for those who missed it – is to cut income taxes temporarily for all but the most prosperous taxpayers. The apparent windfall is £120 a head. A similar plan is already in place in the US, where a temporary “tax rebate” began to arrive in the bank accounts of a grateful nation about a month ago.

But there is no such thing as a free lunch: since neither the UK nor US governments plans to alter its spending plans, these tax holidays will be funded by government borrowing – borrowing that must eventually be repaid. That will require taxes to go up in the future, or not to fall when they otherwise might.

Who should celebrate? Not the typical taxpayer, that is for sure. The tax cut makes no difference to her. If she – assume she is British – had wanted an extra £120 right now, she could already have it in her pocket, either by withdrawing it from savings or by borrowing the money. If she did that, of course, she would later have to repay £120 plus interest. But that is exactly what Darling’s successor as chancellor will require of her. To look at it another way, the rational taxpayer should save the £120 windfall now, keeping it to pay the higher taxes that are surely on the horizon.

But whichever way you look at it, the US and UK governments are handing their citizens borrowed cash – and the citizens themselves are liable for the debt. If my bank manager arranged a surprise loan in my name and handed me the cash, I might feel pampered or put-upon depending on whether I was planning to take out the loan myself anyway. Either way, I doubt I would feel any richer.

Of course, some people should count themselves wealthier after the tax cut. Anyone expecting to die without making a bequest should be pleased: if the Grim Reaper knocks on the door before the taxman does, he can spend the tax rebate now and leave the bill for some other sucker.

Who will be the fall guy? We don’t know for sure, because we can’t say who a future government will tax. But an obvious candidate would be today’s teenagers, very few of whom are paying income tax right now, but most of whom will pay it in the next few years. Their best hope is that their grandparents add the tax windfall to their bequests rather than blowing the money on a weekend in the sun.

The idea that a debt-funded tax cut makes little difference to anybody is called “Ricardian equivalence”, after David Ricardo, one of the founders of modern economics. The equivalence is between government taxes and government borrowing. However government spending is funded, it generates a bill that will fall due sooner or later. Far-sighted taxpayers will immediately take note.

Clearly, there are reasons for some taxpayers to care whether taxes arrive today or later on with interest. Even so, these tax gimmicks matter much less than we might think. It is current government spending, not current government taxation, that is the real measure of a government’s size.

Empirical economists are still arguing over whether Ricardian equivalence holds good, but one study by Matthew Shapiro and Joel Slemrod concluded that most US citizens used a 2001 tax windfall to pay off their debts, leaving more money available to pay future taxes – Ricardian equivalence in action.

That suggests that as consumers and taxpayers, we aren’t fooled by fiscal sleight of hand. Are we fooled as voters? Alistair Darling obviously hopes so.

Also available at ft.com, subscription free.

The Financial Times has been calling for a credible price to be put on carbon emissions, either through a carbon tax or a serious cap-and-trade scheme. Most economists – including this one – would agree.

The textbook argument is that putting a price on carbon would raise the cost of everything we consume that contributes to carbon dioxide emissions. The result would be that consumers and businesses would waste less energy and would switch to lower-carbon alternatives, while businesses would develop new low-carbon technology.

That is all fine in theory.

In practice, would it happen? It’s important to find out. For one thing, politicians remain unconvinced, often insisting – probably because of political cowardice – that consumers do not respond to such taxes.

And there are other reasons beside politicians’ feebleness to indicate that a carbon tax might not be as effective as economists would hope.

Behavioural economists have shown that we sometimes procrastinate. This could be a real problem: a carbon tax could make it rational to install double-glazing, insulate the loft and buy an energy-efficient fridge. Yet as frail human beings, we might put off all of those rational investments, perhaps indefinitely. Or we might waste energy because we are ignorant of our energy-saving options. (How much money, for instance, could you save, each year, by buying a more efficient fridge? I haven’t a clue.)

Perhaps businesses are more rational, but even there, a carbon tax is not guaranteed to inspire the kind of carbon-saving innovation we need. The problem is the vagaries of innovation: not all spending on new ideas produces a patent, and not all patents produce profits – even if society as a whole stands to gain.

That’s why textbook assumptions can’t be waved through without question. We need some evidence as to what consumers and businesses would actually do if faced with a carbon tax. The main evidence comes from analogies with previous energy price spikes or regulatory efforts.

David Popp, an economist at Syracuse University, used patent data to evaluate the response to the energy crisis of the 1970s. He found some cause for optimism: as oil prices rose and rose, more and more energy-saving patents were applied for (and eventually approved) in every field from heat exchangers to solar panels. The process wasn’t automatic, and patent applications seemed to peter out before oil prices reached a maximum – perhaps all the obvious ideas had been applied for. But Popp’s analysis suggests that high prices do inspire an innovative reaction.

So too does research by Suzi Kerr of Motu, a New Zealand think-tank, and Richard Newell, of Duke University. They looked at the response to gradually more rigorous standards on the lead content of petrol in the US. Refineries brought in the latest technology as the standards tightened, and appeared to be rational about the timing of their investments.

Even Joe Public, the regular consumer, is not as stupid as he seems. One study, by Alexander Brill, Kevin Hassett and Gilbert Metcalf, asked whether ignorance might explain our unwillingness to invest in energy-saving home improvements. It seems not: more educated consumers make the same decisions as less educated ones. But the return on such improvements is closely correlated with consumers’ willingness to make them.

Metcalf is convinced that any sustained rise in the price of carbon emissions would be rewarded with lower pollution. In the long run, simple energy saving should trim energy demand by 3 to 5 per cent for each 10 per cent rise in the price of energy. That is a worst-case scenario, ignoring the possibility of technological improvements and switching to low- or no-carbon fuels.

The textbooks seem to be at least partially right. To find out for sure, all we need is some backbone in our politicians.

Also published at ft.com, subscription free.

Economic forecasting is a long-standing joke, but the laughter has turned harsh and bitter in the wake of the credit crisis. The conventional wisdom seems to be that economic forecasting is impossible, and that economic forecasters are charlatans.

“In that case,” asked Professor David Hendry in a spring lecture at the Royal Economic Society, “why am I wasting my time on this?”

For one of Britain’s most respected economists, Hendry gives the strong impression of a man ploughing a lonely furrow.

His choice of field – the theory of economic forecasting – is to blame. It is viewed with scepticism not only by laymen but by most academic economists, too. But his research – a heady mix of bewildering computer-assisted mathematics and straightforward common sense – has convinced me that economic forecasting shouldn’t be consigned to the realm of quackery quite yet.

There is a simple reason why most economic forecasts are useless, which is that forecasting is hard. We don’t fully understand the underlying economic processes that produce the results we wish to forecast (growth, inflation, house prices), nor can we measure all the variables accurately, nor anticipate the sudden shifts caused by politics or technological change. Some forecasts – notably of the price of shares and other assets – are intrinsically self-defeating, because if it was obvious that share prices would rise, then they would have risen already.

But one of Hendry’s insights – developed with his co-author Michael Clements – is that not all of these difficulties produce bad forecasts. What really screws up a forecast is a “structural break”, which means that some underlying parameter has changed in a way that wasn’t anticipated in the forecaster’s model.

These breaks happen with alarming frequency, but the real problem is that conventional forecasting approaches do not recognise them even after they have happened. Oil-price forecasters have been predicting since 2000 that the oil price will fall; all the while it has been climbing. The reverse problem applied during the 1980s: oil prices collapsed, but the expert consensus was that the price would recover soon. That consensus persisted for years. The pound appreciated sharply in 1997; for the next eight years, forecasters predicted this appreciation would soon be reversed.

In all these cases, the forecasts were wrong because they had an inbuilt view of the “equilibrium” oil price or sterling exchange rate. In each case, the equilibrium changed to something new, and in each case, the forecasters wrongly predicted a return to business as usual, again and again. The lesson is that a forecasting technique that cannot deal with structural breaks is a forecasting technique that can misfire almost indefinitely.

Hendry’s ultimate goal is to forecast structural breaks. That is almost impossible: it requires a parallel model (or models) of external forces – anything from a technological breakthrough to a legislative change to a war.

Some of these structural breaks will never be predictable, although Hendry believes forecasters can and should do more to try to anticipate them.

But even if structural breaks cannot be predicted, that is no excuse for nihilism. Hendry’s methodology has already produced something worth having: the ability to spot structural breaks as they are happening. Even if Hendry cannot predict when the world will change, his computer-automated techniques can quickly spot the change after the fact.

That might sound pointless.

In fact, given that traditional economic forecasts miss structural breaks all the time, it is both difficult to achieve and useful.

Talking to Hendry, I was reminded of one of the most famous laments to be heard when the credit crisis broke in the summer. “We were seeing things that were 25-standard deviation moves, several days in a row,” said Goldman Sachs’ chief financial officer. One day should have been enough to realise that the world had changed.

Also published at ft.com, subscription free.

Would smokers prefer that cigarettes be expensive? The Office of Fair Trading seems to think so, to judge by its recent announcement alleging that some supermarkets and tobacco companies had been fixing the price of tobacco.

Certainly, higher cigarette prices would make smokers healthier. There is plenty of evidence that smoking is very bad for you, and almost as much evidence that people smoke fewer cigarettes if they are expensive. But “healthy smokers” are not the same thing as happy smokers.

So, do high cigarette prices make smokers happier? If smokers are rational, they don’t. But if smokers are wracked by temptation and are trying unsuccessfully to quit, then higher prices might make them happier by encouraging them to smoke less, or even to stop entirely.

This turns out to be a controversial point for economists, surely members of the only profession that could argue about whether smoking is rational. The “rational addiction” theory was put forward by the celebrated pair Kevin Murphy and Gary Becker, a Nobel laureate. They argue that people weigh up the health risks of smoking, the possible social and psychological benefits and the fact that it is habit-forming, before deciding whether to light up.

That is not as absurd as it sounds. Even smokers know that their habit is dangerous; in fact, the economist Kip Viscusi established that smokers overestimate the risks. And there is nothing necessarily irrational about deciding to embark on a course of action that many find enjoyable but that is painful to reverse. Otherwise marriage would be irrational, too. Addictive or not, the question is whether, for some people, the benefits might reasonably outweigh the costs.

A second possibility is that, rather than acting rationally, smokers are helpless puppets who will pay any price for a smoke. If so, expensive cigarettes are bad news for them; making them poorer without encouraging them to quit. But that possibility doesn’t fit the facts: we know that smokers respond to price signals by smoking less. They also smoke less if prices are expected to rise at some later stage. This implies that smokers both think about the future and recognise their own addiction, because a self-diagnosed addict who expects prices to rise may try to begin the difficult process of quitting before the habit becomes expensive.

A third possibility is that smokers are neither puppets nor ultra-rational robots, but simply creatures of flesh and blood. They recognise the risks and would like to quit, but keep valuing the short-term bliss of the nicotine hit over the longer-term benefits of kicking the habit. For smokers who fit this description, expensive cigarettes can indeed be a blessing by encouraging them to cut down or quit. Rational and temptation-wracked smokers behave in similar ways, smoking less if prices rise; they just feel differently about price-fixing in the cigarette market.

One way to resolve the debate is to ask smokers how they feel. Six years ago, the economists Jonathan Gruber and Sendhil Mullainathan did the next best thing, looking at two large sets of data on overall happiness, one covering Canada and one the US. By comparing what happened to happiness in US states and Canadian provinces where cigarette taxes rose, they were able to take an educated guess at whether high prices made smokers more or less cheerful. They had to make some heroic assumptions, but the results did point in the direction of the temptation model: where cigarette taxes rise, “potential smokers” – the people whose age, class, income and domestic circumstances suggest that they are likely to smoke – are happier. If the tobacco industry did collude to fix prices, at least it may have spread a little cheer while it did so.

Also published at ft.com, subscription free.

I was recently invited to appear on radio to give an economist’s perspective on the costs and benefits of local exchange trading schemes (LETS), which are alternative currencies that circulate around a small community. This made me scratch my head a bit. I could not think of any real benefits, but then I couldn’t really think of any serious costs, either.

Advocates of community currencies argue that they have social, economic and environmental advantages. BerkShares, which organises a local currency in Massachusetts, claims that the currency helps businesses to connect with their customers, and strengthens the regional economy by favouring locals. In the UK, “transition towns”, which are seeking to use less oil, are exploring the environmental benefits of local currencies.

The common-sense economic case for these currencies was summed up for me by John Walker, acting treasurer of Brixton LETS in London: “They’re more appropriate for local communities, because the money doesn’t drain out of the local community.”

That seems plausible: the money (“Brixton Bricks”) goes round and round Brixton and isn’t sucked away by the insidious multinationals of neighbouring Clapham.

But this is one of those cases where common sense lets us down. Money (whether pounds or Brixton Bricks) isn’t wealth. It’s just a way of keeping accounts, and swapping one system of accounts for another isn’t going to alter the basic productive potential of Brixton.

True, community currencies may very gently encourage trade with locals rather than strangers. But the gains from more trade with locals are more than offset by the losses from less trade with strangers – otherwise, economic sanctions would be a blessing. This also explains why no community currency movement tries seriously to restrict broader trade. Everyone knows that is a recipe for a return to the dark ages.

There have been times and places when national currencies have so malfunctioned that community currencies would have been preferable: Weimar Germany, modern Zimbabwe, perhaps also the Depression-era US, where community currencies briefly flourished. There is also a healthy debate in economics over the appropriate size of a currency union, but few serious economists think that the optimal currency area is the size of Brixton or the Southern Berkshires.

Nor are the environmental benefits of community currencies terribly persuasive. Local trade sounds environmentally friendly, but it is a distraction: the environmental costs of driving to the shops or growing food on inappropriate local land far exceed the costs of carbon emissions from long-range shipping.

The real benefits, if they exist, are not economic but social, and best explained not by an economist like me, but by a sociologist such as Ed Collom, a professor at the University of Southern Maine.Collom’s work looks at first glance like bad news for the community currency movement.

He has found, for example, that most currency schemes in the US last only a few years before collapsing. The ones that thrive are in places that already have strong, liberal, middle-class communities, such as Portland, Oregon, or Ithaca, New York.

In rust-belt regions that would seem to need them more, they have not taken root. Also, the schemes take a lot of effort to set up: Brixton LETS, for instance, is only in its early stages.

But despite the obstacles, Collom is convinced that local currencies can strengthen neighbourhood ties and allow people to make friends: they are a focal point for the community-minded, even when they do not last.

That is possible. I live near a determined, community-minded entrepreneur who owns the local cafe, the sort of person who helps to get community currencies started. But rather than minting a Hackney dollar, she has founded a traders’ association and is trying to set up a street market. I think she has her priorities straight.

Also published at ft.com, subscription free.

If markets are efficient, you will never make profitable trades as a result of reading the Financial Times. Efficient markets move quickly and respond to any new headlines – disappointing earnings, a cut in interest rates, a fraud or a safety incident. Markets will sometimes overreact, drifting backwards after a lurch, or underreact, taking time to digest the true impact of the new information – but overreactions and underreactions should balance out. And when no news is available, the prices of an efficient market won’t change much.

But do markets really react efficiently to news? It would be easy to tell if it were easy to identify all genuine news. Sadly, it is not. Yet two inventive new academic papers claim to have solved the problem of identifying news, in two very different contexts. The studies could not be more unalike. One looks second-by-second at trading data from one of the world’s most active financial exchanges. The other analyses market information that is more than two centuries old.

Karen Croxson and J. James Reade of Oxford University studied the Betfair exchange, a sports betting site that supports many more trades than the London Stock Exchange. Betfair allows punters to bet on football games, and the market stays open throughout the match. Croxson and Reade studied how the price of different bets varied as goals were scored during English league games.

This is an excellent test of the market’s response to news: the bets have a clear value at the end of the game, goals are scarce and important events – and (unless one is a referee) they are easy to spot. And the stakes are not trivial: hundreds of pounds a second are wagered during the match.

The idea of using sports betting to test market efficiency came from Steven Levitt (the co-author of Freakonomics) and Ricard Gil. Levitt and Gil had conducted an earlier study in rather thinner betting markets, and found that prices jumped immediately after a goal, but they then drifted further in the same direction. Was that because the traders were sluggishly digesting news of the goal? Or was it because the clock was ticking down, no news being good news for the team in front? Croxson and Reade offer a clever answer, by looking at those goals scored just before half time. Relevant news hardly ever emerges during half time and the pair find that, although trading is active during the break, prices barely move at all. This shows that the market traders instantly absorb the news of a goal. After the second half begins, prices start to drift again, just as Gil and Levitt found.

That suggests an efficient response both to news and to the absence of news, in sports betting markets at least.

But Peter Koudijs of Barcelona’s Universitat Pompeu Fabra has a different perspective. He looked at prices of three English stocks (the East India Company, the Bank of England and the South Sea Company) on a secondary market in Amsterdam from 1771 to 1777.

Koudijs realised, and proved, that relevant news flowed almost exclusively from London to Amsterdam – and always through the same channel, a boat sailing across the North Sea bringing market data to Amsterdam. Depending on wind speed and direction, the “packet boat” might arrive promptly or after a delay of more than a week, occasionally starving the Amsterdam market of news for days on end.

Koudijs discovered that when the wind was unfavourable and no news was available, Dutch prices for these English companies were highly volatile anyway. That is not an efficient market.

So, have we discovered something uniquely inefficient about Dutch markets, or something uniquely efficient about sports betting? I am not sure. An analysis of Dutch football games is the logical research extension.

Also published at ft.com, subscription free.