Tim Harford The Undercover Economist

Articles published in 2012

An insatiable desire to peer into the future

The wonderful thing about forecasts is that they all sound very profound

It’s that time of year again. Time for you to make your predictions for 2013.

You’re kidding, right? You’re asking an economist for predictions?

Just my little joke. But surely you’re not a proper economist if you can’t make a few predictions. Isn’t that the whole point of the economic profession – to make dozens of mutually contradictory forecasts with impunity?

Well, the impunity is a topic worth discussing. But the economics profession could do with a few more disagreements, I think. In 1995, FT columnist John Kay examined the record of British economic forecasters from 1987 to 1994. He discovered that they tended to all say much the same thing. The only dissenter was reality: economic growth often fell outside the range of all 34 forecasts.

So economists are terrible forecasters. What else is new?

It isn’t just economists who are terrible forecasters. Take the quantitative analysts responsible for Goldman Sachs’s notorious “25 standard deviation” episode – presumably physicists or mathematicians.

25 standard deviation?

At the beginning of the financial crisis, the chief financial officer of Goldman Sachs explained that the firm was seeing “25 standard deviation moves, several days in a row” – a statement that, translated into English, means “according to our models, what we’re seeing is very unlucky”.

How unlucky?

Oh, the sort of bad luck you see once every 28, 900, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000 years, given certain assumptions about what Goldman might have meant. For reference the universe is about 14,000,000,000 years old. The alternative to the “very unlucky” hypothesis, of course, is that the quantitative models didn’t produce very good forecasts.

Well, that’s a forecast so bad that I can’t believe an economist wasn’t involved somewhere.

You may be right. But I can give you another example: the 300-odd experts recruited by Philip Tetlock, the psychologist, for his epic study of forecasting in political science. Prof Tetlock’s conclusions are wide-ranging and painstaking, but if I can be forgiven an excessively brief summary, he finds that all sorts of people with plausible claims to expertise – diplomats, political advisers, journalists and academics – produce lame forecasts of political and economic events.

Nate Silver seems to be able to forecast just fine.

Well, yes, notwithstanding the politically motivated “Nate Silver can’t add up” school of criticism, Mr Silver, and other statisticians such as Drew Linzer and Sam Wang, successfully forecast the outcome of the US elections in some detail. Contrasted against a background of bloviation, it was impressive. But if psephology is Exhibit A in the Museum of Successful Social Science Forecasts, let’s reflect on how modest our ambitions must have become: US elections are frequently repeated, with behaviour that shows considerable historical persistence, and an astonishing amount of detailed quantitative data are available. The elections take place at a fixed date, according to well-understood rules, and with a narrowly defined space of possible outcomes. It’s easy to see that forecasting a win for Barack Obama, while better than forecasting a win for Mitt Romney, is not quite as hard as successfully predicting if and when Greece will leave the eurozone.

You’re pretty quick with the excuses.

No excuses. We just can’t see into the future. I don’t think that’s any surprise, nor an embarrassment. The question is why there’s such a hunger for social science predictions, when the practice is so transparently pointless.

It’s a test of expertise.

If so, then monkeys are as expert as professors of political economy. I wouldn’t want to be quite so cynical. I think forecasting in a complex world is a poor test of expertise because luck is the overwhelming success factor.

So why do we love predictions?

No idea. Here’s one guess: saying “the UK economy will recover strongly in 2012” or “President Assad will be out of office by June” compresses a vast amount of expertise and analysis into a few words.

But the words are probably meaningless.

Yes. But it’s Christmas. Actually studying the situation in detail is far too much like hard work. The wonderful thing about a forecast is that both the forecaster and his audience feel that something profound has been expressed. And nobody will remember the forecast anyway.

Also published at ft.com.

We’re all couch potatoes now

Pushing a button is just too much trouble. We’ll watch anything, as long as we don’t have to think or move

When I was a boy, there wasn’t a great deal of children’s television: the BBC children’s slot ended at 6pm, which meant that my parents didn’t have much trouble restricting my consumption of the “goggle-box”. The exception was Christmas, when cold weather and wall-to-wall festive specials offered the Harford children infinite temptation. My parents developed a strategy for dealing with this: they bought the TV listings (if you can believe it, the Radio Times and the TV Times had a legal monopoly over this then-lucrative business). Then they invited each child to peruse the listings and identify in advance their desired programmes.

This worked rather well. Our collective choices served as a basis for negotiating awkward clashes in a one-television household. A request for excessive TV rations could be vetoed, but the simple act of asking us to write down what we wanted to watch did most of the work.

I didn’t realise it at the time, but there was an additional touch of genius to the idea.

The brilliance involves a concept known to behavioural economists as “hyperbolic discounting”, although it has a perfectly recognisable signature in everyday experience. Many of us have a tendency to avoid activities with long-term benefits and short-term costs, such as exercise, and conversely we love instant gratification.

What makes this behaviour more noteworthy than mere impatience is that hyperbolic discounters are inconsistent. We will intend to exercise tomorrow, eat salads instead of cake tomorrow, and save for our pension tomorrow. As long as the cake is not too imminent, we regard the joys of cake as less important than the risks of blocked arteries thereafter. The trouble is that once “cake tomorrow” becomes “cake today”, the calculus changes – forget the blocked arteries, there’s cake to be had, right now. If only we could commit ourselves today we might make more sensible choices. There is a pension plan called “Save More Tomorrow”, designed with that tactic in mind, and it seems to work.

Might this also apply to TV watching? Amazingly, there is some research on this. The behavioural economists Daniel Read, George Loewenstein and Shobana Kalyanaraman asked experiment participants to choose films from a list that contained both highbrow films – the likes of Rashomon, Three Colours Blue and Schindler’s List – and less challenging fare along the lines of Mrs Doubtfire or Die Hard. When asked to name films to watch immediately, choices tended towards the lowbrow, but when asked to pick films in advance, participants were guided by the better angels of their nature (or, at least, by their inner film critics).

And as with all truly hyperbolic discounting, people often reversed their choices at the last minute if offered the chance to do so. “Yes, I know that Rashomon reinvented the grammar of cinema, but I have had a hard day, and right now I’d like to see Robin Williams in a dress.”

Add to this one of the most depressing findings I have encountered in economics this year, courtesy of Constança Esteves-Sorenson and Fabrizio Perretti in the Economic Journal. The researchers, ingeniously interrogating data from Italian TV’s audience-tracking system, conclude that despite their vast TV-watching experience and almost zero cost of changing the channel, what people watch on television depends on whether it happens to be on the same channel as what they were already watching. One explanation is that all television channels are equally appealing. But the data suggest otherwise. The culprit, instead, seems to be hyperbolic discounting. A world of televisual possibility is only the push of a button away, but pushing is just too much trouble. We’ll watch anything, as long as we don’t have to think or move.

My parents knew what they were doing.

Also published at ft.com.

A gift for the season that keeps on giving

Even for an economist, it is the act of giving that matters, writes Tim Harford

Merry Christmas!

And Merry Christmas to you.

I was expecting a bit of “bah, humbug” from an economist, to be quite honest.

I am not sure why that is. Economics is all about the allocation of resources, and so is Christmas. Is it any wonder that economists give such excellent Christmas advice?

Have you been drinking?

Just a small sherry. But I’m quite serious. Economists are totally with the programme at Christmas. For instance, you know this infuriating problem of the Christmas decorations going up in November?

We’ve all noticed that.

Obviously that has something to do with making money, and I had assumed it was a zero-sum game between stores, each worried that its rivals might grab a slice of Christmas shopping before it had its own decorations up. In fact there’s more to it than that: the economist Emek Basker has discovered that the longer the Christmas season lasts, the more people will spend – about a fiver a day.

How did she figure that out?

In the US, the Christmas season can be as short as 26 or as long as 32 days, depending on Thanksgiving. Compare the date of Thanksgiving with data on Christmas spending, and there you have it.

Well, that’s not really advice, it’s more an explanation of why Christmas is so exhausting.

True enough. But there is good advice to be had, in particular about the perennial problem of what sort of Christmas presents to buy.

This isn’t that “deadweight loss of Christmas” thing again, is it?

Yes it is – all thanks to the economist Joel Waldfogel, who conducted surveys of the Christmas and Hanukkah gifts his students had received, and discovered that the gifts were poorly chosen.

And the conclusion is, give cash instead. Very Christmassy.

I don’t think that’s the right conclusion at all, although it beats the usual cop-out, which is to give vouchers. These are a truly dreadful idea. Quite apart from the seasonal risk of being an unsecured creditor to the latest high-street bankruptcy, these vouchers very frequently end up thrown in a desk drawer and expire unused. Jennifer Pate Offenburg, yet another economist, tracked the resale value of gift cards on eBay. Unsurprisingly they trade at a discount that tells a sad tale of Christmas waste. And the most wasteful cards – the ones that trade at a discount of 20 per cent or 25 per cent – are the most apparently romantic ones, for jewellery or lingerie. Gift cards for Home Depot and Starbucks fare better.

You’re not helping.

Of course I am helping. The message is clear: don’t give gift vouchers, because they manage to be both sterile and inefficient at the same time. But you should also be realistic about your gift-giving prowess. If you don’t know the recipient terribly well then you are unlikely to do a good job. Waldfogel finds that gifts from boyfriends and girlfriends tend to be well chosen. It’s the gift from grandma that tends to be hopeless – and that’s because grandma doesn’t see you very much. And whose fault is that, eh? Grandparents should give cash. It’s entirely appropriate under the circumstances.

But hardly in line with the Christmas spirit.

I don’t think it’s particularly out of line with the Christmas spirit, either. And we economists are totally in tune with many people’s anti-consumerist queasiness about Christmas. If you buy a present and the present is unwanted, those are real resources that have been wasted – energy, hard work, time and materials. That’s best avoided. (And incidentally, Christmas consumerism is not a new phenomenon – relative to the size of the economy it has been remarkably constant for the past hundred years or so.)

But you are missing the entire point of these gifts – their sentimental value.

Fine. Let’s talk about sentimental value. Do you think the joy of giving and receiving is correlated with the sum of money that is spent?

Of course not. What a crass suggestion.

I agree with you. But then the conclusion is clear: your gifts should be as inexpensive as possible, because the waste from poorly chosen gifts is far smaller if the gift itself is small. But the sentimental value can be just as large – especially if the gift itself is chosen with the specific aim of reminding friends and family of that emotional bond. In short, it is not the gift but the act of giving that matters. The Ghost of Christmas Present would surely concur. God bless us, every one!

Also published at ft.com.

Correction: Emek Basker is a “she”, contrary to an earlier version of this article. Apologies, and thanks to commenter SU below.

Going, going, wrong: JPMorgan’s auction

One of those clever manoeuvres so beloved of banks has started to unravel, writes Tim Harford

‘JPMorgan is nearing a settlement with the UK government in which the US bank and its employees could pay close to £500m in back taxes . . .  The Wall Street bank . . . has asked more than 2,000 current and former employees to contribute to the settlement. Individuals who choose not to participate voluntarily could face a more expensive tax bill . . .  Participants in the scheme said JPMorgan had given them until Friday to volunteer to pay tax at a rate of their choosing in a “blind auction” that would be used to establish an average contribution rate.’

Financial Times, December 8

Sorry – what?

It’s delicious, I know. In a nutshell: JPMorgan Chase has been using a tax shelter scheme which now turns out to be ineffective. The bank has reached a settlement with HM Revenue & Customs to pay some back taxes, but in principle it is the employees who are liable for much of the tax bill.

And now JPMorgan has turned round and asked the employees involved to cough up.

Exactly. For some reason they’re doing this with some sort of auction, rather than simply telling the employees involved how much to pay.


One can only guess, since JPMorgan did not care to elaborate either on the reasoning or the details of the auction. Perhaps the basic problem is that JPMorgan has been trying to solve a collective bargaining problem by negotiating on behalf of all the employees concerned – but it lacks the legal power to enforce that bargain. I don’t really know.

Maybe more companies should run auctions for their staff?

Maybe they should. Or vice versa. More than a decade ago, in a fit of futurological fervour, I imagined that the workforce of the future would wander around, proudly displaying on their lapels a little digital screen with a constantly changing hourly rate. The screen would indicate the best alternative bid for the employee’s time and if the alternative bid ever exceeded what they were actually being paid, they’d stroll off the job to accept the more lucrative offer.

Science fiction, basically.

If you like, although you can already hire labour for very small tasks through sites such as TaskRabbit and Amazon’s Mechanical Turk. A fellow by the name of Wingham Rowan has been arguing that ultra-flexible, by-the-hour labour markets could be a huge help to people who – perhaps because they have poor health or unpredictable family commitments – cannot keep regular hours. Mr Rowan argues that the government needs to support the idea, for instance by making it easy to establish that people have the appropriate qualifications or criminal record checks.

Won’t such auctions just drive wages down to the bare minimum?

It’s really hard to say what they would do. In principle it depends what is in shorter supply – decent workers or decent work. Wages could rise sharply or fall sharply, or probably both in different sectors of the economy. But the sheer loss of friction in the workplace – the fact that it would be easy for companies to quickly find workers and easy for workers to quickly find work – should be a very good thing.

This all sounds far too reasonable. I was enjoying the schadenfreude of a bunch of highly paid bankers being forced into some kind of corporate devilry.

Auctions can be a little devilish. There’s this fascinating idea of “the winner’s curse”. Imagine an auction for the right to drill for oil. This is worth much the same to any oil company – it depends on the oil price and how much oil turns out to be down there. Unless the bidders are particularly savvy, the auction will simply be won by whoever has the most optimistic geologists on that particular lease. Auctions select optimists, which is one reason why it seems to be so hard to find someone to run an auctioned railway franchise sustainably.

Is that what’s going on at JPMorgan?

I rather suspect that “blind auction” may be a misnomer. I really don’t know. Auctions are wonderful at revealing hidden and dispersed information. They are best used when a seller has little idea of an item’s value, but does have access to lots of interested bidders. Quite what information JPMorgan is hoping to elicit from its staff is unclear to me.

Also published at ft.com.

Working out the job market

All of us are born unemployed and single, and if we want that to change, we will have to start looking for a suitable match

Supply and demand is a fundamental economic concept, and unemployment is a totemic economic problem. But apply the concept to the problem, and you will not get very far. The logic of supply and demand says that if wages are high, lots of people will want to work, but few people will want to employ them; if wages are low, employers will be hungry to go hiring, but few people will want to work. At equilibrium, the number of hours available equals the number of hours people are willing to work. Unemployment is impossible, unless there is a minimum wage – this suggests, for instance, that unemployment was unknown in the UK before April 1 1999, which is not my recollection. The supply-and-demand approach offers little insight into job-market recessions, or why different countries have such different experiences of employment.

In this year’s Royal Economic Society public lecture, Christopher Pissarides, winner of the Nobel memorial prize in economics in 2010, set out to resolve the mystery. Pissarides, along with Peter Diamond and Dale Mortensen, has developed a model of job-matching that has become the standard way macroeconomists think about labour markets.

The basic insight is nothing staggering. There are job-seekers in the world, and there are job vacancies in the world, and the aim is to match seekers to vacancies to create actual “jobs”, which are matched pairs of former vacancies and former job-seekers. Searching for suitable vacancies, or suitable employees, is costly, and neither jobseeker nor employer knows whether any match will work out.

In such “search models”, unemployment isn’t a puzzle; it’s the natural state of economic existence, just as being single is the natural state of romantic existence. All of us are born unemployed and single, and if we want that to change, sooner or later we will have to start looking for a suitable match.

Once Pissarides, Diamond and Mortensen began to write models that encapsulated some of these commonsense observations, they discovered a natural explanation for the “Beveridge curve”.

The Beveridge curve is a simple downward-sloping relationship between the vacancy rate in an economy, and the unemployment rate. In good times, vacancies are plentiful and unemployment is low; in a recession, the economy slides down the Beveridge curve to a place where vacancies are scarce and unemployment is high. More interesting is the fact that the curve itself sits in different positions for different economies, and it can shift. The Beveridge curve in much of the EU is higher than that in the US, for instance – for any given level of vacancies, there will be less unemployment in the US.

This fits a search-and-matching explanation. If the curve shifts outwards, with both vacancies and unemployment rising simultaneously, that is a sign of some kind of structural failure to match: there are potential jobs but for some reason, the match between vacancy and jobseeker is not occurring as quickly as usual. The US is showing signs of this structural stress: vacancies are on the rise but unemployment is falling more slowly than we would expect based on past experience.

Meanwhile, Germany, whose labour market has been defying the financial crisis, has enjoyed structural gains: unemployment has been falling even when vacancies have not been buoyant. Pissarides credits the delayed effects of Gerhard Schroeder’s labour market reforms, with more flexibility and plenty of incentives to match young people with jobs.

The question, of course, is what feature of Germany’s labour market has proved decisive in this – and what we can transplant into other countries. Even a Nobel laureate was not able to give a convincing answer to that question.

Also published at ft.com.

A question of identity

Anti-poverty programmes in India have benefited from an iris-scanning ID system that dramatically reduced fraudulent duplicate payouts

Imagine you’re a government minister in a developing country, with responsibility for improving the lives of the poorest 20 per cent of the population. Given a blank slate, it’s not hard to make a list: get everybody a basic bank account; pay a small cash sum to the poorest households; enrol every poor child in primary school, using sticks or carrots to make sure the children show up; provide handouts of cash or food to those hit by natural disasters; provide free basic healthcare and vaccinations. Such a list is ambitious, but not because it’s too expensive. The real constraint is that to implement any of these policies, you need to be able to identify your own citizens.

In spy thrillers, the ability to disappear from official databases is rare and highly prized. In most poor countries, the reverse is true: it’s useful but hard to acquire an official identity. A state that can cheaply and reliably identify individual citizens can also provide services that would be hard to imagine without a universal identification (UID) system.

Lacking UID, well-meaning governments are forced to resort to cruder approaches to poverty reduction: grain handouts that are hijacked by well-connected middlemen; subsidised fuel that’s expensive and ill-targeted and distorts the economy. According to a World Bank report last year, Social Protection for a Changing India, the country has hundreds of official anti-poverty programmes, and many of those who enjoy the benefits are not poor.

You can get a sense of the opportunities available from the iris-scanning ID system introduced by the state of Andhra Pradesh in 2008 after a botched effort in 2005. The system dramatically reduced fraudulent duplicate payouts. Frances Zelazny of the Center for Global Development estimates that the system paid for itself within one month.

ID systems have proved their worth elsewhere. In the Democratic Republic of Congo, 180,000 former soldiers have received cash pensions as an incentive to demobilise. The system uses mobile ATMs, smart cards and iris-scanning technology.

Alan Gelb and Julia Clark, also researchers at the Center for Global Development, draw a distinction between “functional” and “foundational” ID systems. Functional systems are set up to support a particular policy – child benefit, perhaps, or flood relief. Foundational systems are designed to support any and all policies requiring unique identification.

My personal prejudice is towards the functional. I fear foundational systems will become unwieldy and bureaucratic failures. It seems better, if messier, to get something up and running with a particular policy in mind, learn as you go along, and extend the system later.

But I may be in the process of being proved wrong in India, where a fantastically ambitious UID scheme is taking shape under the gaze of Nandan Nilekani, who made his fortune running Infosys and now holds cabinet rank. The scheme aims to give everyone in the country a number and to be able to identify them through fingerprints and iris scanning, using remote systems that consult a central database over the internet. If it works, it will open the way for well-targeted government handouts and for incentive payments to encourage parents to take their children to schools and clinics. It can underpin other systems such as crop insurance, bank accounts and driving licences. The growing system already holds more than the combined population of the UK, France and Germany. Nilekani hopes to enrol 600 million of India’s 1.2 billion people by the end of 2014.

Despite glitches, the system mostly seems to be working well: cheap and flexible, it accommodates those with damaged eyes or fingers, and has a tolerably low error rate. A great deal is riding on its success. No wonder development geeks are watching.

Also published at ft.com.

Stop banging the vending machine

‘Starbucks has caved in to public pressure and pledged to pay £10m in UK corporate tax in each of the next two years even if it makes a loss following calls to boycott the coffee chain over its “immoral” tax practices.’

Financial Times

Seems like the “tax shaming” campaign worked, then.

I suppose so, if you think that the amount of tax the government collects should be determined by public relations campaigns on all sides. I’m not sure how sustainable that is likely to be – or indeed how well public protest is likely to work against, say, a multinational provider of industrial detergents or rat poison. Not everybody has a consumer-facing business to worry about.

“Tax shaming” has worked. Don’t deny it.

Has it really worked? It’s worked for the politicians and campaigners who have described the low corporation tax paid by some multinationals as an “insult”. But while politics deals in insults and shame, corporations don’t, by and large. And I have no idea why anyone goes to Starbucks, but I can assure you it isn’t because of their noble decision to bung the taxman a few extra quid. These campaigns may chivvy a few companies for a few years but this is no way to run a tax system.

Fine. What’s your alternative?

Why not just abolish corporation tax? We could collect the same revenue using other taxes. Closing the loophole that lets Amazon and others ship free of value added tax from the Channel Islands will be a good start.

You’re just going to let the fat cats have their way, then?

Hang on. Which fat cats? All tax is ultimately paid by individuals. You can tax individuals by taking a slice of their income. Or you can tax them more indirectly, and one way to do that is to tax the corporations whose shares individuals ultimately own. The question is this: do we have any reason to believe that taxing the individuals who own pieces of profitable corporations is a particularly sensible way to raise money?

It’s progressive.

It’s hard to be sure of that, but let’s assume you are right. We could also be progressive using income tax, and that would include taxing dividend income as though it was any other kind of income.

Isn’t it easier to tax profits and dividends separately, rather than load the whole bill on to dividends?

I think that Starbucks and all the other companies accused of perfectly legal corporate tax avoidance are rather proving the point there. Profit is a really slippery concept. Remember the old saying from Hollywood, advising people not to work in exchange for a slice of a film’s ultimate profits: “A percentage of net profits is a percentage of nothing.” Profits are easily manipulated by multinational companies and a number that is easily manipulated is probably not the kind of number we should be trying to tax much. There are easier ways to tax the rich.

But corporation tax has an advantage: some of the people who pay it are foreigners who own shares in British companies.

Oh, OK. I see. Is it a good idea to tax foreigners now? I thought we gave up on taxing Americans in 1783.

This is different. We’re not trying to tax all Americans.

No, only the ones who invest in the UK. I get it, I get it.

So you’re saying that tax simply shouldn’t be a moral issue. It’s all about the letter of the law?

No, although getting the law right wouldn’t hurt. Tax is, in part, a moral issue. It’s just that morality is something that tugs at individuals, not companies. We all need to do our bit and pay our taxes, and one reason that the moral component is important is that many individuals with modest means would find it easy to cheat on their taxes by the simple technique of lying. HM Revenue & Customs is too busy to find many of them, and so a big weapon against small-scale tax cheating is moral persuasion.

One rule for the companies, one rule for the little people?

I’m one of the little people, too. I think it’s important that we pay our taxes and I think it’s important that the rich pay a larger share than others. But that’s nothing to do with Starbucks. And to think that a multinational corporation has insulted you is a category error. It’s like thinking a coin-operated machine has stolen money from you. We need to stop banging the vending machine in fury and figure out a better way.

Also published at ft.com.

Clarification: “Closing the loophole that lets Amazon and others ship free of value added tax from the Channel Islands will be a good start.” – that’s clumsy phrasing. As I explained here, the loophole closed earlier this year. I was conflating “was a good start and will have good results”. Sorry for spreading confusion. – TH

My verdict on the Autumn Statement

It may be called the Autumn Statement, but there was snow on the ground on Wednesday morning and the chancellor’s political theatre is beginning to impinge on Christmas. Before long, George Osborne will be vying for screen time with Her Majesty’s Christmas message. Instead of fighting over whether to watch an old Bond movie or a rerun of The Snowman, families will be able to argue over which of two joyless perorations to endure.
Budget speeches, and the mini-budgets that Autumn Statements have become, once involved the dispensing of little treats. No longer. Instead of stocking fillers, the chancellor is handing out the political equivalent of coal and wrinkled satsumas.The statement itself was not the only thing that was pushed back: so, too, was the date at which debt will no longer be an increasing proportion of gross domestic product. In this respect, at least, Mr Osborne is outperforming Gordon Brown. Mr Brown’s fiscal rules would simply have been stretched to accommodate changing circumstances. At least Mr Osborne has the decency to admit that he is about to break one of his fiscal rules. You can guess which one: the debt/GDP target involved a measurable quantity and a firm deadline, so of course it was vulnerable. The other fiscal rule invokes an endlessly postponed and never verifiable forecast of things to come, and you may not be surprised to hear that Mr Osborne is still “on course” to achieve it, whatever that is supposed to mean.

I would like to make a modest proposal: that the next Autumn Statement should also be endlessly postponed – or perhaps, like the 3p rise in fuel duty, endlessly postponed and then eventually cancelled. It is hard to say what the current arrangements are supposed to achieve. Two budget statements per parliament would be enough. Now we must endure something very like two budget statements per year.
Mr Osborne, walking in the footsteps of Mr Brown, has realised that you can bludgeon most audiences into depressed acquiescence if you simply intone numbers relentlessly. The deficit was falling, he assured us: 7.9 per cent last year; 6.9 per cent this year; 6.1 per cent next year. The percentages rolled on and on. Your correspondent scribbled frantically. Perhaps percentages were unhelpful? Perhaps we’d like to hear it all again expressed in billions of pounds?
The numbers continued, metronomic, merciless. He had given us numbers “with the asset purchase facility cash transfer included. When the transfer is excluded … ” Watching this was like being strapped to a comfortable chair and flogged gently with a wet sock.
“7.9 per cent” Splotch.
“7.7 per cent” Splatch.
“6.9 per cent” Splotch.
Confusion was beginning to set in. Ed Balls, who had connived in a decade of Mr Brown’s Budget speeches, was being subjected to his own medicine and flipped agitatedly through his papers. A colleague turned to me: “was that per year or across a three-year period”? I didn’t know. Nobody knew. Splotch.
Were the numbers millions or were they billions? Did anybody believe a word the chancellor was saying? Could anything make it stop? The wet sock continued. Splatch.
Mr Osborne, alas, has realised that numbers are weapons. His numbers are not very good ones but as the saying goes, quantity has a quality of its own.
When the sock-slapped fog lifted, was there anything of substance to report? Not much. The overall fiscal stance is unchanged. Mr Osborne revealed that both those who thought we should borrow more and those who thought we should borrow less were wrong. As far as the global economy was concerned, everything had changed. The only fixed point in the hurricane were the chancellor’s fiscal plans, which miraculously turned out to be perfectly judged after all.
At least, we were assured, growth is projected to be stronger in the UK than in France or Germany. Without pausing to draw breath after this boast, Mr Osborne invoked his fiscal credibility. Never mind the fact that according to the OECD’s latest forecasts, the UK government deficit next year will be twice that of France, and many times that of Germany. Growth. Fiscal credibility. Don’t think too hard about any of this.
Splotch. Splatch.

First published at FT.com

On the subject of flood insurance…

A loyal reader emails:

In the seminal Kydland and Prescott (1977) paper on time-inconsistency, they give this flood-related example:


The issues are obvious in many well-known problems of public policy. For example, suppose the socially desirable outcome is not to have houses built in a particular flood plain but, given that they are there, to take certain costly flood-control measures. If the government’s policy were not to build the dams and levees needed for flood protection and agents knew this was the case, even if houses were built there, rational agents would not live in the flood plains. But the rational agent knows that, if he and others build houses there, the government will take the necessary flood-control measures. Consequently. in the absence of a law prohibiting the construction of houses in the flood plain, houses are built there, and the army corps of engineers subsequently builds the dams and levees.

Dreaming of a tight Christmas

The holiday is good for the economy during a recession. But in more normal conditions, it is a troublesome waste of money

Is Christmas good for the economy? I feel grimy just asking the question, since so many campaigns now try to justify as “good for the economy” reduced obesity, equal rights for gay couples, an end to racism or a cure for dementia. These things are good, full stop. Any attempt to justify them as being good for economic reasons is well-meaning nonsense. The economy is a means to an end: human flourishing. It’s not an end in itself.

So let’s be clearer, and ask two totally separate questions: is gross domestic product (GDP) higher because of Christmas? And are the Christmas festivities a good thing?

The GDP question is the simpler. Obviously, we spend more in December because of Christmas. It is less obvious whether or not total consumer spending is higher across the year because of Christmas. To put it another way – without Christmas, would we still eat large roast dinners and buy gifts for ourselves and others, and just spread the spending over 12 months? Probably, but it seems plausible that Christmas does encourage more consumption overall.

If that conjecture is right, Christmas is good for the economy in depression conditions – a category that includes every Christmas for the past four or five years – because it raises consumer spending and employs idle resources. But in more normal conditions, Christmas is a troublesome waste of money that simply sucks resources away from productive investments, so that instead of broadband and high-speed rail, we spend money on fripperies that don’t much matter. Who would have thought that Christmas and Keynesianism had so much in common?

What about the deeper question – is Christmas good for us as people? At Christmas we give and receive gifts. This has a positive effect: it feels good for giver and receiver. It also has a negative one: lots of those presents are poorly chosen, and that means a vast waste of labour, energy and raw materials that could have been far more wisely employed. This is a subject on which I’ve written many times, following the economist Joel “Scroogenomics” Waldfogel. My conclusions are surprisingly soft-focus: keep giving gifts, but make them small and inexpensive, and try hard to make them of real emotional value.

But Christmas is more than gift giving and gluttony. It’s co-ordinated gift giving and gluttony. That co-ordination brings mixed blessings. The Olympic and Paralympic Games were much more fun because almost everybody got into the spirit of things; it’s hard to say the same thing about the M25 at rush hour, or Stansted airport on the first day of the summer holidays. I like an empty train carriage, but not an empty restaurant or nightclub.

For young children and those who share their excitement, the positive externalities of Christmas probably far outweigh the negative ones – the decorations on the High Street, the excitement of Father Christmas and the long holiday all spring to mind. For everyone else, the Christmas crush is less fun.

It is possible for individuals to swim against that particular tide. There’s a lot to be said for idiosyncratically shifting some of the key Christmas activities to other parts of the calendar. I’m not talking about buying next year’s gifts in the January sales. I’m thinking about writing letters or cards to old friends in April or October, and surprising friends and family with the occasional gift for no reason whatsoever, rather than letting gifts and cards be buried under the Christmas avalanche. When Lewis Carroll invented the “un-birthday”, he knew what he was doing.

And of course, we should all try to keep the generous and jovial Christmas spirit with us all year round. But now I’m becoming sentimental; it’s an attitude quite unsuited to an economist.

Also published at ft.com.



  • 1 Twitter
  • 3 RSS
  • 5 Podcasts
  • 6 Facebook


  • Fifty Inventions That Shaped the Modern Economy
  • Messy
  • The Undercover Economist Strikes Back
  • Adapt
  • Dear Undercover Economist
  • The Logic of Life
  • The Undercover Economist

Free Email Updates

Enter your email address to receive notifications of new articles by email (you can unsubscribe at any time).

Join 188,412 other subscribers.