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Why Osborne’s sugar tax is half baked

I’m all in favour of a sugar tax, as I wrote in the FT Magazine on Saturday. It’s a shame, then, that — despite the headlines to the contrary — George Osborne hasn’t introduced one.

His proposal instead is to tax the manufacturers and importers of a particular variety of sugary drink. I am no dentist or dietitian, but it seems strange to take the view that sugar in general poses no risk to the nation’s teeth or waistline, unless it comes in a soft drink.

Coke and Pepsi are a problem, apparently. But it seems that sugar lumps in tea or coffee are not. Neither are cartons of chocolate milk. Nor syrupy concoctions from Starbucks and Costa. Nor soft drinks produced by boutique producers. Mars bars are fine. So are cakes. So are Coco Pops and Frosties, and for that matter the remarkable quantities of sugar that infuse cereals such as Bran Flakes, or are buried in the recipes of many ready meals. All these forms of sugar will continue to reach our taste buds free of a sugar tax.

Mr Osborne’s proposal will work, after a fashion. There is abundant evidence that people adjust their behaviour in response to financial incentives, whether through the window tax-avoiding architecture of 18th-century Britain or the inheritance tax-avoiding feat of Australians in postponing the date of their deaths to a more tax-efficient time.

So yes, as Mr Osborne expects, large companies will try to put less sugar in their soft drinks, or raise the prices of those drinks, or both. Sugar consumption from those sources will fall. But they may well rise elsewhere. For many people, a chocolate bar and a fizzy drink are substitutes. If the fizzy drink gets more expensive, the chocolate bar is a tasty alternative for the sweet-toothed consumer. It has more fat in it, too.

It’s clear enough why the chancellor has opted for this approach. He wants to blame large companies, not voters, and hide the fact that ultimately consumers will pay the tax. A broad-based tax on sugar itself would have been simpler, braver and far more effective. But Mr Osborne wanted his Budget to leave voters with a sweeter taste in the mouth.

Written for and first published in the Financial Times.

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17th of March, 2016Other WritingComments off
Undercover Economist

These are the sins we should be taxing

‘The UK already relies more than most rich countries on fuel, alcohol and tobacco duties’

Is it time to rethink the way we tax sin? The UK has long levied special taxes — “duties” — on products that pollute the environment, the lungs, the liver or the pocketbook: driving, flying, tobacco, alcohol and gambling. There are good reasons for these taxes. The government must raise revenue somehow, so there is much to be said for taxing products that are price-insensitive, socially harmful or, at the very least, unhealthy temptations.

But the way sin taxes are levied in practice is an incoherent muddle. Plenty of products that are bad for us (bacon, butter, sugar) get favourable tax treatment, attracting no value-added tax, although the standard VAT rate is 20 per cent. Heating and lighting our homes also attracts a concessional rate of tax, although a kilogram of carbon dioxide emitted from a power station or a gas boiler contributes to climate change just as much as a kilogram emitted from a car. Vehicle excise duty is a tax not on driving but on owning a car. And the rate of duty on alcohol varies depending on how we drink it.

It is easy to see how successive chancellors bodged their way to this point. Taxes on the pint or at the pump are eye-catching; raising them seems morally serious but cutting them is a crowd-pleaser. And so they bounce around like the political football they are.

George Osborne has an opportunity to fix the situation this Wednesday during his Budget speech. Here’s what he should do.

First, similar harms should attract similar taxes. The UK duty on 10ml of pure alcohol, roughly the amount in a shot of vodka or half a pint of beer, varies wildly. It is about 7p in strong cider, 18p in strong beer, or 28p in whisky and wine. A consistent price per millilitre would make more sense.

Second, he should broaden the sin tax base. UK duties are concentrated on tobacco, motor fuel and alcohol. As the Institute for Fiscal Studies showed in its “green budget” in February, revenue from duties has been falling for decades, from 4.1 per cent of national income in the early 1980s to 2.6 per cent last year. This drop is the net result of falling duties on fuel (back to the levels of 20 years ago in real terms), declining duties on alcohol and lower consumption of both tobacco and alcohol.

Should the chancellor, then, raise duties? Perhaps, but there are limits. The UK already relies more than most rich countries on fuel, alcohol and tobacco duties. Above a certain level, the smugglers and bootleggers take over.

A wiser approach is to tax sins that have thus far escaped attention. The most obvious is congestion: fuel taxes do not distinguish between driving along an uncongested country road and driving in rush-hour in a built-up area, which causes vastly more social harm. Congestion charges, which are now technically feasible, are fair and efficient, if the political case can be made.

Another obvious sin is sugar. While one can be too puritanical about nudging people to take care of their health and waistline, it seems strange that perfectly reasonable activities such as buying a T-shirt or earning a living attract tax, while sugar is tax-free. A sugar tax of a half-penny a gram would add about 18p to the cost of a can of Coke, more than that to a family pack of Bran Flakes, 25p to a 200ml bottle of ketchup and 45p to the price of a packet of chocolate digestives.

Third, Osborne should avoid arbitrary cut-offs where possible. In a bygone age it must have been simpler to slap a tax on an item in a particular category but this has led to the infamous “Jaffa Cake” problem. Are Jaffa Cakes — sponge discs with an orange jelly topping, partly coated in chocolate — cakes (zero VAT) or biscuits (VAT at 20 per cent)? A tribunal in 1991 mused that Jaffa Cakes are packaged much like biscuits, are sold next to biscuits, are the same size and shape as biscuits and, like biscuits, are eaten without a fork. However, it also noted that they are made of a cake-like dough, are soft and, like a cake, they go harder when stale. The tribunal eventually concluded that Jaffa Cakes are cakes, and thus they remain tax-advantaged, even as they nestle on the supermarket shelves next to their biscuitish rivals.

All of this is nonsense from any angle. In discouraging unhealthy eating, the relevant issue should not be whether food is circular or requires a fork but how much sugar, salt and saturated fat it contains. Sugar can be measured and taxed by the gram, whether it comes dissolved in oft-demonised soft drinks or added to bread, cereal, ready-meals, chocolate bars or anything else.

Finally, we should not worry too much about the distributional consequences of sin taxes. This isn’t because distribution doesn’t matter — it does. But, by some measures at least, alcohol and fuel duties hit the middle classes harder than they hit the poor. In any case, there are better ways to deal with inequality than by cutting sin taxes. People on low incomes need support but that help is better provided through tax credits, child benefit or good public services rather than cheap booze, sweets and tobacco. We are all free to buy vodka and cigarettes. Yet trying to make them cheaper would be a strange way to address social injustice.

Written for and first published at ft.com.

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The lost leisure time of our lives

‘Keynes was right to predict that we would be working less but overestimated for how long that trend would continue’

Three hours a day is quite enough,” wrote John Maynard Keynes in his 1930 essay Economic Possibilities for our Grandchildren. The essay continues to tantalise its readers today, thanks in part to a forecast that is looking magnificently right — that in advanced economies people could be up to eight times better off in 2030 than in 1930 — coupled with a forecast that is looking spectacularly wrong, that we would be working 15-hour weeks.

In 2008, economists Lorenzo Pecchi and Gustavo Piga edited a book in which celebrated economists pondered Keynes’s essay. One contributor, Benjamin Friedman of Harvard University, has recently revisited the question of what Keynes got wrong, and produced a thought-provoking answer.

First, it is worth teasing out the nature and extent of Keynes’s error. He was right to predict that we would be working less. We enter the workforce later, after long and not-always-arduous courses of study. We enjoy longer retirements. The work week itself is getting shorter. In non-agricultural employment in the US, the week was 69 hours in 1830 — the equivalent of working 11 hours a day but only three hours on Sundays. By 1930, a full-time work week was 47 hours; each decade, American workers were working two hours less every week.

But Keynes overestimated how rapidly and for how long that trend would continue. By 1970 the work week was down to 39 hours. If the work week had continued to shrink, we would be working 30-hour weeks by now, and perhaps 25-hour weeks by 2030. But by around 1970, the slacking-off stopped. Why?

One natural response is that people are never satisfied: perhaps their desire to consume can be inflamed by advertisers; perhaps it is just that one must always have a better car, a sharper suit, and a more tasteful kitchen than the neighbours. Since the neighbours are also getting richer, nothing about this process allows anyone to take time off.

No doubt there is much in this. But Friedman takes a different angle. Rather than asking how Keynes could have been so right about income but so wrong about leisure, Friedman points out that Keynes might not have been quite so on the mark about income as we usually assume. For while the US economy grew briskly until the crisis of 2007, median household incomes started stagnating long before then — around 1970, in fact.

The gap between the growth of the economy and the growth of median household incomes is explained by a patchwork of factors, including a change in the nature of households themselves, with more income being diverted to healthcare costs, and an increasing share of income accruing to the highest earners. In short, perhaps progress towards the 15-hour work week has stalled because the typical US household’s income has stalled too. Household incomes started to stagnate at the same time as the work week stopped shrinking.

This idea makes good sense but it does not explain what is happening to higher earners. Since their incomes have not stagnated — far from it — one might expect them to be taking some of the benefits of very high hourly earnings in the form of shorter days and longer weekends. Not so. According to research published by economists Mark Aguiar and Erik Hurst in 2006 — a nice snapshot of life before the great recession — higher earners were enjoying less leisure.

So the puzzle has taken a different shape. Ordinary people have been enjoying some measure of both the income gains and the leisure gains that Keynes predicted — but rather less of both than we might have hoped.

The economic elites, meanwhile, continue to embody a paradox: all the income gains that Keynes expected and more, but limited leisure.

The likely reason for that is that, in many careers, it’s hard to break through to the top echelons without putting in long hours. It is not easy to make it to the C-suite on a 20-hour week, no matter how talented one is. And because the income distribution is highly skewed, the stakes are high: working 70 hours a week like it’s 1830 all over again may put you on track for a six-figure bonus, while working 35 hours a week may put you on track for the scrapheap.

The consequences of all this can emerge in unexpected places. As a recent research paper by economists Lena Edlund, Cecilia Machado and Maria Micaela Sviatschi points out, urban centres in the US were undesirable places to live in the late 1970s and early 1980s. People paid a premium to live in the suburbs and commuted in to the city centres to work. The situation is now reversed. Why? The answer, suggest Edlund and her colleagues, is that affluent people don’t have time to commute any more. They’ll pay more for cramped city-centre apartments if by doing so they can save time.

If there is a limited supply of city-centre apartments, and your affluent colleagues are snapping them up, what on earth can you do? Work harder. Homes such as Keynes’s elegant town house in Bloomsbury now cost millions of pounds. Three hours a day is not remotely enough.

Written for and first published at ft.com.

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How to make good guesses

‘Would you say that someone reading the FT is more likely to have a PhD or to have no college degree at all?’

What’s the likelihood that the British economy will fall into recession this year? Well, I’ve no idea — but I have a new way to guess.

Before I reveal what this is, here’s a totally different question. Imagine that you see someone reading the Financial Times. Would you say that this individual, clearly a person of discernment, is more likely to have a PhD or to have no college degree at all?

The obvious response is that the FT reader has a PhD. Surely people with PhDs better exemplify the FT reader than people with no degree at all, at least on average — they tend to read more and to be more prosperous.

But the obvious response is too hasty. First, we should ask how many people have PhDs and how many people have no college degree at all? In the UK, more than 75 per cent of adults have no degree but the chance that a randomly chosen person has a PhD is probably less than 1 per cent.

It only takes a small proportion of non-graduates to read the FT before they’ll outnumber the PhD readers. This fact should loom large in our guess, but it does not.

Logically, one should combine the two pieces of information, the fact that PhDs are rare with the fact that FT readers tend to be well educated. There is a mathematical rule for doing this perfectly (it’s called Bayes’ rule) but numerous psychological experiments suggest that it never occurs to most of us to try. It’s not that we combine the two pieces of information imperfectly; it’s that we ignore one of them completely.

The number that gets ignored (in this example, the rarity of PhDs) is called the “base rate”, and the fallacy I’ve described, base rate neglect, has been known to psychologists since the 1950s.

Why does it happen? The fathers of behavioural economics, Daniel Kahneman and Amos Tversky, argued that people judge such questions by their representativeness: the FT reader seems more representative of PhDs than of non-graduates. Tversky’s student, Maya Bar-Hillel, hypothesised that people seize on the most relevant piece of information: the sighting of the FT seems relevant, the base rate does not. Social psychologists Richard Nisbett and Eugene Borgida have suggested that the base rate seems “pallid and abstract”, and is discarded in favour of the vivid image of a person reading the pink ’un. But whether the explanation is representativeness, relevance, vividness or something else, we often ignore base rates, and we shouldn’t.

At a recent Financial Times event, psychologist and forecasting expert Philip Tetlock explained that good forecasters pay close attention to base rates. Whether one is forecasting whether a marriage will last, or a dictator will be toppled, or a company will go bankrupt, Tetlock argues that it’s a good idea to start with the base rate. How many marriages last? How many dictators are toppled? How many companies go bankrupt? Of course, one may have excellent reasons to depart from the base rate as a forecast but the base rate should be the beginning of the journey.

On this basis, my guess is that there is a 10 per cent chance that the UK will begin a recession in 2016. How so? Simple: in the past 70 years there have been seven recessions, so the base rate is 10 per cent.

Base rates are not just a forecasting aid. They’re vital in clearly understanding and communicating all manner of risks. We routinely hear claims of the form that eating two rashers of bacon a day raises the risk of bowel cancer by 18 per cent. But without a base rate (how common is bowel cancer?) this information is not very useful. As it happens, in the UK, bowel cancer affects six out of 100 people; a bacon-rich diet would cause one additional case of bowel cancer per 100 people.

Thinking about base rates is particularly important when we’re considering screening programmes or other diagnostic tests, including DNA tests for criminal cases.

Imagine a blood test for a dangerous disease that is 75 per cent accurate: if an infected person takes the test, it will detect the infection 75 per cent of the time but it will also give a false positive 25 per cent of the time for an uninfected person. Now, let’s say that a random person takes the test and seems to be infected. What is the chance that he really does have the disease? The intuitive answer is 75 per cent. But the correct answer is: we don’t know, because we don’t know the base rate.

Once we know the base rate we can express the problem intuitively and solve it. Let’s say 100 people are tested and four of them are actually infected. Then three will have a (correct) positive test, but of the 96 uninfected people, 24 (25 per cent) will have a false positive test. Most of the positive test results, then, are false.

It’s easy to leap to conclusions about probability, but we should all form the habit of taking a step back instead. We should try to find out the base rate, or at least to guess what it might be. Without it, we’re building our analysis on empty foundations.

Written for and first published at ft.com.

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The consequences of cheap oil

‘When oil prices are high, people may get out of their cars and walk, cycle or get public transport’

After years in which $100 oil was the norm, the price of Brent crude is now around a third of that. Assume for a moment that Russia and Saudi Arabia fail in their efforts to get the price back up. Will $30 oil change the world? The answer is yes, of course. Everything is connected to everything else in economics, and that is particularly true when it comes to oil. For all the talk of the weightless economy, we’re not quite so post-industrial as to be able to ignore the cost of energy. Because oil is versatile and easy to transport, it remains the lubricant for the world’s energy system.

The rule of thumb has always been that while low oil prices are bad for the planet, they’re good for the economy. Last year a report from PwC estimated that a permanent fall in the price of oil by $50 would boost the size of the UK economy by about 1 per cent over five years, since the benefits — to most sectors but particularly to heavy industry, agriculture and air travel — would outweigh the costs to the oil production industry itself.

That represents the conventional wisdom, as well as historical experience. Oil was cheap throughout America’s halcyon years of the 1950s and 1960s; the oil shocks of the 1970s came alongside serious economic pain. The boom of the 1990s was usually credited to the world wide web but oil prices were very low and they soared to record levels in the run-up to the great recession. We can debate how important the oil price fluctuations were but the link between good times and cheap oil is not a coincidence.

Here’s a piece of back-of-the-envelope economics. The world consumes nearly 100 million barrels a day of oil, which is $10bn a day — or $3.5tn a year — at the $100 price to which we’ve become accustomed. A sustained collapse in the oil price would slice more than $2tn off that bill — set against a world economic output of around $80tn, that’s far from trivial. It is a huge transfer from the wallets of oil producers to those of oil consumers.

Such large swings in purchasing power always used to boost economic growth, because while producers were saving the profits from high prices, consumers tended to spend the windfall from low ones. One of the concerns about today’s low prices is that the positions may be reversing: the big winners, American consumers, are using the spare cash to pay off debts; meanwhile, losers such as Russia and Saudi Arabia are cutting back sharply on investment and public spending. If carried to extremes, that would mean a good old-fashioned Keynesian slowdown in a world economy trying to spend less and save more; the more likely result of which is that lower oil prices fail to give us the boost we hope for.

It is intriguing to contemplate some of the less obvious effects. Charles Courtemanche, a health economist at Georgia State University, has found a correlation between low gasoline prices and high obesity rates in the United States. That is partly because, when oil prices are high, people may get out of their cars and walk, cycle or get public transport. Cheap gasoline, on the other hand, puts disposable income into the pockets of families who are likely to spend it on eating out. Low oil prices may make us fat.

Another depressing possibility is that low oil prices will slow down the rate of innovation in the clean energy sector. The cheaper the oil, the less incentive there is to invent ways of saving it. There is clear evidence for this over the very long run. As recently as the late 1700s, British potters were using wasteful Bronze Age technology for their kilns. The reason? Energy was cheap. Wages, in contrast, were expensive — which is why the industrial revolution was all about saving labour, not saving energy.

More recently, David Popp, an economist at Syracuse University, looked at the impact of the oil price shocks of the 1970s. He found that inventors emerged from the woodwork to file oil-saving patents in fields from heat pumps to solar panels.

It is always possible that the oil price collapse will do little to affect some of the big technological shifts in the energy market. The scale of oil production from hydraulic fracturing (fracking) in the US may be curtailed but a huge technological leap has already happened. As the chief economist of BP, Spencer Dale, recently commented, fracking is starting to look less like the huge, long-term oil-drilling projects of the past, and more like manufacturing: cheap, lean, replicable and scalable. Low oil prices cannot undo that and the efficiencies may well continue. We can hope for ever-cheaper solar power too: photovoltaic cells do not compete closely with oil, and we may continue to see more and more installations and lower and lower prices.

That said, when fossil fuels are cheap, people will find ways to burn them, and that’s gloomy news for our prospects of curtailing climate change. We can’t rely on high oil and coal prices to discourage consumption: the world needs — as it has needed for decades — a credible, internationally co-ordinated tax on carbon.

Written for and first published at ft.com.

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Undercover Economist

Online dating? Swipe left

‘It is crazy to believe someone’s eye colour, height, hobbies and musical tastes are a basis for a lasting relationship’

Online dating promised so much. “This is one of the biggest problems that humans face and one of the first times in human history there was some innovation,” says Michael Norton, a psychologist at Harvard Business School.

Finding the right partner, whether for life or for Saturday night, is so important to so many people that you would think we might have cracked it by now. By assembling a vast array of date-worthy people in a searchable format, online dating seems like it should be a huge improvement on the old-fashioned methods of meeting people at work, through friends, or in bars and nightclubs. But it’s not clear that the innovation of online dating is helping very much.

A simple survey that Norton conducted with two other behavioural scientists, Jeana Frost and Dan Ariely, revealed that people were unhappy with their online dating experience in three obvious ways. The first was that the “online” bit of the dating was about as much fun as booking a dentist’s appointment. The second was that it took for ever — the typical survey respondent spent 12 hours a week browsing through profiles and sending and receiving messages, yielding less than two hours of offline interaction. Now, 106 minutes are plenty for certain kinds of offline interaction but, however people were spending their time together, they didn’t seem satisfied. This was the third problem: people tended to have high expectations before the dates they had arranged online but felt disenchanted afterwards. To adapt a Woody Allen joke: not only are the dates terrible but there are so few of them.

Given that online dating tends to be tedious, time-consuming and fruitless, it is no surprise that we seem hungry for a better way. Most approaches to online dating have tried to exploit one of the two obvious advantages of computers: speed and data-processing power. Apps such as Grindr and Tinder allow people to skim quickly through profiles based on some very simple criteria. (Are they hot? Are they available right now?) That is, of course, fine for a one-night stand but less promising for a more committed relationship.

The alternative, embraced by more traditional matchmaking sites such as Match.com and OkCupid, is to use the power of data to find the perfect partner. We badly want to believe that after giving a website a list of our preferences, hobbies and answers to questions such as, “Do you prefer the people in your life to be simple or complex?”, a clever algorithm will produce a pleasing result.

Because these pleasing results seem elusive, wishful thinking has gone into overdrive. We hold out hope that if only we could be cleverer, the algorithms would deliver the desired effect. For example, Amy Webb’s TED talk “How I Hacked Online Dating” has been watched more than four million times since it was posted in 2013.

In a similar vein, Wired magazine introduced us to Chris McKinlay, “the math genius who hacked OkCupid” and managed to meet the woman of his dreams after cleverly reverse-engineering the website’s algorithms. The brilliance of McKinlay’s achievement is somewhat diminished by the revelation that he had to work his way through unsuccessful dates with 87 women before his “genius” paid dividends.

This should hardly be a surprise. Imagine looking at the anonymised dating profiles of 10 close friends and comparing them with the profiles of 10 mere acquaintances. Using the profile descriptions alone, could you pick out the people you really like? The answer, says Dan Ariely, is no. “It’s terrible. It’s basically random.”

It is crazy to believe that someone’s eye colour and height, or even hobbies and musical tastes, are a basis for a lasting relationship. But that is the belief that algorithmic matching encourages. Online dating is built on a Google-esque trawl through a database because that’s the obvious and easy way to make it work.

Is there a better way? Perhaps. Jeana Frost’s PhD research explored an alternative approach to online dating. Why not, she asked, make online dating a bit less like searching and a bit more like an actual date? She created a virtual image gallery in which people had a virtual date, represented by simple geometric avatars with speech bubbles. The images — from Lisa and Jessica Simpson to George Bush and John Kerry — were conversation starters. People enjoyed these virtual dates and, when they later met in person, the virtual date seems to have worked well as an icebreaker.

Virtual dating has not taken off commercially, says Norton, in part because companies have tried too hard to make it realistic, and have fallen into the “uncanny valley” of the not-quite-human. I suspect, but cannot prove, that virtual spaces such as World of Warcraft are perfectly good places to meet a soulmate, assuming your soulmate happens to like orc-bashing. Perhaps mainstream virtual dating is just waiting for the right design to emerge.

Or perhaps the problem is deeper: online dating services prosper if they keep us coming back for more. Setting someone up with a romantic partner for life is no way to win a repeat customer.

Written for and first published at ft.com.

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How to keep your gym habit

‘Might a commitment strategy allow you to pay yourself to go to the gym?’

How are those resolutions going? Still going to the gym? If not, you’re not alone.

Let’s think about incentives. If some benevolent patron had paid you a modest sum — a few pounds a day, perhaps — for keeping your resolution throughout January, would that have helped you keep fit now that January is behind us?

The answer is far from clear. An optimistic view is that by paying you to look after yourself in January, your mysterious patron would have encouraged you to form good habits for the rest of the year. The most obvious case would be if you were trying to give up cigarettes; paying you to get through the worst of the withdrawal period might help a lot. Perhaps diet and exercise would be similarly habit-forming.

Yet some psychologists would argue that the payment is worse than useless, because payments can chip away at our intrinsic motivation to exercise. Once we start paying people to go to the gym or to lose weight, the theory goes, their inbuilt desire to do such things will be corroded. When the payments stop, things will be worse than if they had never started.

The idea that external rewards might crowd out intrinsic motivation is called overjustification. In a celebrated study in 1973 conducted by Mark Lepper, David Greene and Richard Nisbett, some pre-school children were promised sparkly certificates as a reward for drawing with special felt-tip pens. Others were given no such promise. When the special pens were reintroduced to the nursery classrooms a week or so later, without any reward on offer, the researchers found that the children who had previously been promised certificates for their earlier drawing now spent half as much time with the pens as their peers. Only suckers draw for free.

There’s a big difference between exercising and colouring, however: while many children like felt-tips, many adults do not like exercising. A payment can hardly crowd out your intrinsic motivation if you don’t have any intrinsic motivation in the first place. Systematic reviews of the overjustification effect suggest that incentives do no harm for activities that people find unappealing anyway.

So perhaps the idea of paying people to exercise is worth thinking about after all. In 2009, two behavioural economists, Gary Charness and Uri Gneezy, published the results of a pair of experiments in which they tried it. Some of their experimental subjects were paid $100 to go to the gym eight times in a month, while those in two alternative treatment groups were either paid $25 for going just once, or weren’t asked to go to the gym at all.

The results were a triumph for the habit-formation view. The payments worked even after they had stopped. In one study, the subjects were exercising twice as often seven weeks after the bonus payments stopped than before they started; in the other, the increase was threefold 13 weeks after payments had stopped. People who were already regular gym-goers didn’t change their behaviour — so there was no crowding-out — but there was a surge in exercise from people who hadn’t previously done much. A later study by Dan Acland and Matthew Levy found a similar habit-forming effect among students, although, alas, the good habits often failed to survive the winter vacation. In other experiments, incentive payments have been shown to be modestly successful at helping smokers to give up.

There is much to be said for a benign patron who pays you to stay healthy while you form good habits. But where might such a person be found? Take a look in the mirror — your patron might be you.

Inspired by the ideas of Nobel laureate Thomas Schelling, economists have become fascinated by the idea of commitment strategies, where your virtuous self takes steps to outmanoeuvre your weaker self before temptation strikes. A simple commitment strategy is to hand £500 to a trusted friend, with instructions that they are only to return the cash if you keep your resolution.

Might a commitment strategy allow you to pay yourself to go to the gym? It might indeed. Economists Heather Bower, Mark Stehr and Justin Sydnor recently published the results of a long-term experiment conducted with 1,000 employees of a Fortune 500 company. In this experiment, some employees were initially paid $10 for each visit to the company gym over a month. Some of them were then offered the opportunity to put money into a commitment savings account: if they kept exercising, the money would be returned; otherwise it would go to charity. The approach was no panacea: most people did not take up the option, and not everyone who did managed to stick to their goals. But even three years later, those who had been offered commitment accounts were 20 per cent more likely to be exercising than the control group.

That chimes with my experience. I once wrote a column about sending $1,000 to a company called Stickk, which promised to give it away if I didn’t exercise regularly. The contract was for a mere three months — and I succeeded. Eight years after my money was returned, I’m still sticking to the habit.

Written for and first published at ft.com.

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Marginalia

The five best economics podcasts of 2016

It’s been a while since I revisited my list of the best economics podcasts. Here are my current top five.

  1. NPR’s Planet Money remains the very best economics podcast out there. Great production values, very creative, serious economics topics treated with a light touch. The team also produced the superb economics documentary, The Invention of Money.
  2. A new entrant on my list, the FT’s Alphachat podcast is a smart, well-informed and economically literate discussion of the economics and finance news of the week. (Disclosure: I’m employed by the FT so have a clear bias. But I don’t know the Alphachat crew, who are based in New York.)
  3. Freakonomics Radio remains a firm favourite. Stephen Dubner’s relentless curiosity keeps us rolling along, with a variety of serious topics (how can we fix education, or close the gender pay gap?) and the lighter stuff (can economics help us understand what makes a suspenseful screenplay?).
  4. If you like Alphachat, you’ll love Slate Money, presented by Felix Salmon with Cathy O’Neil and Jordan Weissmann. Imagine Alphachat, but everyone’s had a glass of pinot noir before they started, and you get the idea. Feisty yet highly intelligent.
  5.  If you’re more of a behavioural economics fan, try The Hidden Brain with Shankar Vedantam, featuring Daniel Pink. Recent episodes included a live show with Richard Thaler.

 

 

I’m a big podcast fan so let me give a shout out to a few others, including my own program More or Less, a weekly guide to the numbers that surround us – and the thirteen short episodes of Pop Up Economics, mostly by me but also featuring guests including Gillian Tett and Malcolm Gladwell.

 

Russ Roberts’s EconTalk is pure economics: Russ, a professor at George Mason University, has strong views of his own – he’s a Hayek man through and through – but brings on a wide range of guests and gives them a sympathetic hearing. Some great recent conversations with the excellent young blowhard Noah Smith and with Nobel laureate Jim Heckman.

Radio 4’s Analysis often covers economics topics, as does Peter Day’s World of Business (in depth, on location) and Evan Davis’s The Bottom Line (studio discussion with business leaders).

The London School of Economics has a stellar collection of speakers and releases many events as podcasts.

The FT produces a range of podcasts but I particularly enjoy the FT Money Show and World Weekly.

Finally, in the hidden gems category, check out No Such Thing As A Fish, and Futility Closet – both addictive podcasts that have nothing whatsoever to do with economics.

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2nd of February, 2016MarginaliaRadioComments off
Undercover Economist

Hidden truths behind China’s smokescreen

‘When countries become richer, do they pollute their environment more or less?’

The pictures from Beijing tell their own story: pollution there is catastrophic. Bad news for residents, and awkward for me too. Just over a decade ago, I wrote a book, The Undercover Economist, which among many other things cheerfully asserted that particulate air pollution in urban China was sharply falling as the country grew richer. It’s a claim I believed at the time (based on well-regarded research in the 2002 Journal of Economic Perspectives) but with each new report of smog over China, I felt a nagging sense that I had led readers astray. I figured it was time to do some more research and to set the record straight.

There is a broader question here. When countries become richer, do they pollute their environment more or less? For a while it seemed obvious that pollution and riches went hand in hand: industrialised nations spewed out more of everything.

But then the leading countries began to crack down on pollution. London no longer suffers from smog. The European Union reduced sulphur dioxide emissions by more than 80 per cent between 1990 and 2011. At the same time, the United States has reduced atmospheric lead by 98 per cent.

In the early 1990s, Princeton economists Gene Grossman and Alan Krueger coined the phrase “environmental Kuznets curve” to stand for the idea that as countries become richer, their emissions first rise but then fall, as richer citizens demand cleaner air from the governments they elect and the companies from whom they buy. There’s some evidence that this is true but it’s hard to interpret that evidence. An optimistic view is that countries reduce pollution with or without economic growth because they can use clean technologies developed elsewhere. If true, China may be able to clean up its air faster than we’d expect.

A grimmer possibility is that the richer countries aren’t really reducing pollution — they are exporting it, by banning dirty factories at home while happily buying from dirty factories abroad. On this view, China is unlikely to be able to clean its air any time soon.

How serious a problem is offshoring pollution? It’s not trivial. In 2007, Joseph Aldy of Harvard’s Kennedy School published research showing clear evidence of this pollution-export effect within the US. Richer states seemed to be emitting less carbon dioxide per person as their economies grew. Alas, Aldy concluded that the effect could be explained entirely by the rich having bought their electricity from poorer states rather than generating it at home. A more recent study (Peters, Minx, Weber and Edenhofer 2011) estimated that by 2008, developed countries were net importers from developing countries of goods whose production represented about 1.6 billion tonnes of carbon dioxide emissions, roughly 5 per cent of the global emissions total. No prizes for guessing that much of this energy-intensive manufacturing is taking place in China, alongside the production of steel, cement and coal-fired electricity for domestic use.

The dreadful air quality in Beijing, then, is no mystery. First, China is not yet rich, so it may be on the wrong side of the environmental Kuznets curve anyway, the side where pollution has not yet begun to fall. Second, China is not a democracy, and that will partially dampen the power of its citizens to demand cleaner air. Third, China is a major exporter of manufactured goods.

But as I stood ready to pen my correction, I realised something: I didn’t actually have a time series for air pollution in urban China. I could see that things were bad but not what the trend was.

“The challenge with particulates is that we keep changing what we want to measure and regulate,” Aldy told me. Researchers now track PM2.5, very fine particles thought to be particularly hazardous to health; but, in 1985, when my original data series began, nobody was collecting PM2.5 data.

So how much worse have things got in China? I called Jostein Nygard of the World Bank, who has been working on Chinese air pollution issues for more than two decades, and I was surprised at his response: in many ways, China’s urban air quality has improved.

Sulphur dioxide is down and coarser particulate matter is also down since good records began in 2000 — a fact that is explained by Chinese efforts to install sulphur scrubbers and to move large pollution sources away from the cities. “You could see the air quality improving through the 1980s and 1990s and to the 2000s,” says Nygard. PM2.5 is very bad, he says — but not necessarily worse than 10 years ago, and serious efforts are now under way to track it and reduce it.

To my surprise, not quite a correction at all, then. But if local air pollution in China is actually on an improving track, how come we see so many stories about pollution in China? One reason, of course, is that the situation remains serious. Another is that the Chinese government itself seems to be using smog alerts as a way to send a message to local power brokers that clean air is a priority. But there is also the question of what counts as news: sudden outbreaks of smog are newsworthy. Slow, steady progress is not.

Written for and first published at ft.com.

Undercover Economist

How fighting for a prize knocks down its value

‘If many people have patience to queue for scarce (and underpriced) tickets, the value on offer will be consumed by the race to grab it’

I was recently told about an airstrip near a banknote-printing facility. Every day, planes take off, bursting with cash. It used to be that if you stood in a certain field near the airstrip, you could catch the dollars as they drifted gently to the ground, or scoop armfuls of them up from the soil. On average, $1m a day fluttered down.

Word soon got around. Before long, the field was packed with bill-catchers, racing and shoulder-charging each other to get the cash. People started to bring butterfly nets. The skies were thick with quadcopters darting around to snatch the money at altitude.

If you’re wondering where this field might be, don’t. It exists only in the imagination of Stanford economist Mike Ostrovsky, reported in Al Roth’s book Who Gets What and Why. But if the field did exist, you’d have to be a hardy soul to venture there. If $1m a day was known to be at stake, the ferocious quadcopter scramble would escalate until it cost almost $1m a day to run. If it didn’t, then people would have a strong incentive to keep buying drones until it did.

Economists call such arms races the “dissipation of economic rents”. They’re frustrating, because value is being frittered away in the competition to secure them. Think of the queue around the block for scarce (and evidently underpriced) concert tickets or the riots over cheap merchandise that occasionally break out during discount sales. If a few people are particularly patient, or muscular, or skilled at piloting drones, then they will keep at least some of the value; if many people have similar patience, strength or skill then the entire value on offer will be consumed by the race to grab it.

(The airfield tussle is particularly wasteful because real resources are being devoted to grabbing banknotes that could easily and cheaply be replaced. But even if the planes were dropping something valuable, such as saffron or USB drives, the process would mean that value was wasted.)

Another example is the business of high-frequency trading in financial markets, in which algorithms try to outwit or outpace each other as they scramble for trades in a contest that is over in less than an eye-blink. Some traders have invested in microwave networks, which are faster than fibre optics, to gain edges of less than a thousandth of a second as they respond in New York to news from Chicago. The parallel with the money-field is clear enough — and, unlike the field, high-frequency traders do exist.

A microwave link to save a few microseconds is in much the same category as a faster dollar-grabbing drone, or turning up earlier for a better place in the queue at an Oxford Street store. There is a value to having a liquid market for financial assets, one in which you can quickly find some buyers to compete for whatever you might be selling. But high-frequency trading adds little to market liquidity in times of crisis; the microwave link, like the drone, adds no value to society as a whole.

Can anything be done about such rent-dissipating behaviour? One approach is to tax it. We could levy a fee on standing in queues, or on microwave transmitters, or on stock market transactions themselves. If people who queue for scarce concert tickets are all taxed $5 an hour while they queue, then the lines will be shorter. The cost of the tax should roughly be offset by the reduced waiting time, so the queueing crowd is no worse off; the government, on the other hand, has acquired revenue from nowhere. This is a rare free lunch.

Taxing transactions is also a possibility, although a more problematic one. Much of the difficulty comes not from transactions themselves but from “quote stuffing”, where high-frequency traders make and withdraw thousands of bids, probing for information without actually making transactions. And charging for quote-stuffing might not help either. Three Canadian researchers (Katya Malinova, Andreas Park and Ryan Riordan) studied the impact of a regulatory change where traders were charged for quotes, not just trades; they found that quote volume fell sharply. But the bid-ask spread, a measure of market inefficiency, rose nearly 10 per cent. And while a transaction tax or quote tax would discourage some forms of high-frequency trading, it seems to me that the incentive to build microwave links between Chicago and New York would still exist.

So an alternative is to redesign the market to make it work better. In the case of queues for tickets, charging more for the original tickets would help, and the seller could hold an auction to set the perfect price. Financial markets could also be improved by introducing an auction once a second, batching together all the offers that have been submitted during that second. That would be fast enough for any reasonable purpose — and would remove the need to spend all this money on microwave relays.

Auctions are no more of a panacea than markets themselves, but they can help. Markets do not always organise themselves. A well-designed auction can mean less effort wasted in the fight to get to the front of the queue.

Written for and first published at ft.com.

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Tim Harford is an author, columnist for the Financial Times and presenter of Radio 4's "More or Less".
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