Tim Harford The Undercover Economist

Articles published in April, 2019

Political change can feel elusive, until the dam bursts

Deus ex machina was the ancient Greek theatrical convention of resolving the unresolvable by crane-lifting a god on to the stage to make everything better again through divine fiat. Right now, a bit of deus ex machina sounds pretty sweet.

Many people hoped that special counsel Robert Mueller’s Russia probe would play that role in the US. Its conclusions would be so damning as to sweep away the knotty problem of Donald Trump without the grinding task of finding support for a different president next year. But it was never likely that congressional mathematics would allow impeachment, nor even that Mr Mueller’s report (assuming we ever get to see it) would contain anything to sway anyone either way. We all, surely, know what we think about Mr Trump by now.

In the UK, some Remainers have been hoping the divine plot twist would be supplied by a record-breaking petition. Almost 6m people have demanded that the UK revoke Article 50 and walk out of the Brexit tragedy before the final act. On Tuesday, the government gave its response: get lost, Citizens of Nowhere. (I paraphrase.) Perhaps the following day’s “indicative votes” in parliament would resolve things? They were indicative of something, at least: gridlock.

Still, change can happen, and sometimes with astonishing speed. A few years ago, the project of Brexit was the pipe-dream of a few obsessives. The percentage of Britons naming EU membership as the most important issue was in the low single digits. Now Brexit is the official goal of the two largest political parties, albeit one they are finding it rather hard to hit.

Similarly, the changes that Mr Trump has wrought upon American and global politics are too numerous to list. True, most of them are changes for the worse — but it is hard to make the claim that stasis is inevitable.

What explains this curious sense that we are somehow dealing with chaotic change and futile stasis all at once? One explanation — offered in Cass Sunstein’s recent book, How Change Happens (UK) (US) — is what he calls “partyism”. The name deliberately echoes vices such as racism and sexism; Professor Sunstein argues convincingly that many of us now dismiss entire groups of people on the basis of their political affiliation.

For example, views of interracial marriage have become dramatically more tolerant. Yet cross-party marriage is now beyond the pale for many. Prof Sunstein reports that in 2010, about 49 per cent of Republicans and 33 per cent of Democrats would feel displeased if their children married outside their political party — up from about 5 per cent in 1960. A similar trend has taken place in the UK.

Political scientists Shanto Iyengar and Sean Westwood used a common (if controversial) measure of subconscious bias, the “implicit association test”, to examine partyism. They found party affiliation produced stronger measures of implicit bias than did race.

One might argue that there is nothing intrinsically wrong with partyism. Rather than unjustifiably judging people based on their gender or ethnicity, we justifiably judge them for the choices they have made. Still, an environment where parties command unswerving support from their own base and unswerving loathing from the opposition is not one conducive to rational discussion. That, perhaps, accounts for the feeling of stasis: we feel that nobody is listening and nobody wants to compromise.

Despite the sense of gridlock, it is clear that dramatic change is possible. A hostile takeover of an existing party structure can turn partyism from a force for inaction into a force for radical change. The Brexiters have managed it, as has Jeremy Corbyn, the leader of the Labour party, and, most spectacularly, Mr Trump.

Existing political parties aren’t the only agents of change. In countries where the voting system permits it, new parties have surged forward. Even in the UK, where the electoral system gives an enormous advantage to large established parties, Leave and Remain have become stronger sources of political identity than traditional parties.

Outside the realm of traditional politics, consider the #MeToo movement — a catalyst for a dramatic and overdue reassessment of what behaviour society will tolerate from powerful men.

These changes are so sudden because we are social beings. We often don’t know how we feel until we see that other people are taking a stand. It seems that nothing is changing and nothing will ever change until a critical threshold is reached, and the dam bursts. Issues that were ignored become salient. We go from shrugging our shoulders to marching in the streets. These changes are unpredictable, and we often mislead ourselves after the fact into thinking that they were inevitable all along.

This, then, is the process of political change: long periods of stasis, sudden bursts of activity, and a good deal of luck. Behind it all, a long slog of persuasion, mobilisation and frustration — less a glorious pilgrimage than an endless treadmill. No wonder most of us would prefer divine intervention.

 

Written for and first published in the Financial Times on 29 March 2019.

My book “Fifty Things That Made the Modern Economy” (UK) / “Fifty Inventions That Shaped The Modern Economy” (US) is out now in paperback – feel free to order online or through your local bookshop.

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Alan Krueger, a master-economist for our age

Written for and first published in the Financial Times on 22 March 2019.

At the start of John Maynard Keynes’s obituary of Alfred Marshall comes a question: why is it so hard to be a good economist? Keynes’s answer was that “the master-economist must possess a rare combination of gifts . . . no part of man’s nature or his institutions must lie entirely outside his regard.”

This week the profession is mourning another great economist. Alan Krueger killed himself last weekend at the age of 58. What would be a bewildering blow under any circumstances is heavier still because the professor was an authority on happiness and pain.

He discovered, for example, that prime-age men who had quit the labour force were twice as likely as employed men to take painkillers. He studied how unemployed people spend their hours, and showed that actively searching for work was an intensely sad task.

With Nobel laureate Daniel Kahneman, he collected evidence on happiness that remains my benchmark for social scientists’ ability to shed light on wellbeing. Prof Kahneman once warned me that expert advice can go only so far. Much happiness and sadness is genetically determined: “We shouldn’t expect a depressive person to suddenly become extroverted and leaping with joy.” Those words are much on my mind this week.

Yet Krueger’s life invites us to reflect on what economists at their best can achieve. The most obvious fact to note about his career is its breadth. He studied pollution, inequality, social mobility, terrorism, the gig economy, and the music industry.

This is a vivid illustration of the versatility of the economist’s tools, but Krueger used them to make a lasting mark. The most famous example, with his colleague David Card, was a study of the impact of minimum wages on jobs. It stands to reason that every increase in a minimum wage will destroy marginal jobs, hurting some of the most vulnerable people in the workforce.

Profs Card and Krueger, however, weren’t content to stick with the theory. They wanted to know how big the effect was. This is a tough problem. While minimum wages might cause unemployment, a booming job market might influence politicians to raise the minimum wage, so cause and effect are tangled together. Their research, therefore, looked at fast-food industry jobs in two neighbouring states: New Jersey and Pennsylvania, only one of which had raised the wage floor. They found the rise hadn’t dented employment at all.

Not every economist was convinced, and by itself that result might have been a fluke. But the pair had developed a powerful method that could — and would — be repeated. Economists are now far more willing to allow that minimum wage increases can make sense.

Perhaps just as important, economists now believe that evidence can complement or even overturn theory. Economics was once theory-driven for a reason: the data was patchy and controlled experiments were rare. It was almost unheard of to produce evidence that was credible enough to outweigh theory.

Krueger was at the heart of what became known as the credibility revolution in economics: the idea that evidence could be powerful enough to make a difference — and that economists should gather and analyse it with that aim in mind. In a tweet last year, he declared: “The idea of turning economics into a true empirical science, where core theories can be rejected, is a BIG, revolutionary idea.”

However, while voraciously curious, Krueger had no interest in clever studies for their own sake. (Even his whimsical investigation of the music business, fuelled by personal enthusiasm, teaches broader economic lessons. “I think Taylor Swift is an economic genius”, he said.) In general, he wanted to answer the big questions about human wellbeing.

His work on the gig economy is a case in point. With the rise of companies such as Uber it became clear that many workers were putting in highly irregular hours. He promptly started surveying workers about whether they relished the flexibility or suffered from the insecurity. He showed that these contingent work arrangements weren’t new — the Uber workforce was the new tip of a long-hidden iceberg. He chased down the answers to questions other people were only beginning to ask.

“He wouldn’t speculate,” says Betsey Stevenson, who, like Krueger, is a labour economist who held senior positions in the Obama administration. “He would gather the data.”

That data could then be used to influence policy, as he showed during three stints working for the US government, including as the chairman of President Obama’s Council of Economic Advisers. He was also admired as a generous mentor of other economists: his influence goes well beyond his publications.

Were Keynes to be writing about the “master-economist” today, his list of requirements might have changed little: intensely curious about the human experience; energetic in gathering the data; willing to let the evidence change his or her views; a persuasive writer; determined to influence policy to improve the world. Nobody could have matched up better than Alan Krueger.

 

My book “Fifty Things That Made the Modern Economy” (UK) / “Fifty Inventions That Shaped The Modern Economy” (US) is out now in paperback – feel free to order online or through your local bookshop.

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Superstar companies lose their lustre

Everyone seems to agree that we live in a “superstar economy” — one in which the leading companies (the likes of Apple, Amazon and Alphabet) are making dramatic strides both in productivity and in profitability. In response to this conventional wisdom the only question is: how should regulators respond?

There is a case that we should let the superstars keep doing what they do. Enjoy the fruits of their creativity. The smartphone! Internet search that works! Next-day delivery of next week’s landfill! For now, the superstars are innovative and efficient. In due course new monopolists will arise, motivated to seize the crown.

This case is not absurd, although my own instincts point the other way. Profit-minded monopolists can be innovative, but all too often they fail to adapt. More often markets deliver because they support a messy, pluralistic process of trial and error.

If that view is right, government intervention may be necessary to prevent the monopolies of today choking off the innovations of the future. One possibility is to break up the largest companies. Regulators might rule that a company cannot simultaneously own a platform while also offering products on it. This is the position taken in an artful argument published last week by US presidential hopeful Elizabeth Warren.

An alternative approach, set out this week by the UK’s Digital Competition Expert Panel, is to regulate the behaviour of the big digital groups rather than to change their structure. Regulators could insist on standards for data sharing and interconnection with established players, allowing smaller competitors to grow on or around the existing platforms.

I’m sympathetic to both approaches, although worry that it is easy for regulators to do more harm than good. Ms Warren’s rousing call to arms might easily lead to fruitless antitrust trench warfare. But set aside for a moment the argument about how to respond to the superstars and ask a different question. What if they are actually economic white dwarfs, dense but dim and fading?

That seems a strange conjecture. It appears to contradict the problem of laggard companies: research from the OECD suggests that many companies are far less productive than those at the frontier of their industrial sector, and that this gap is getting bigger. This suggests that superstars are blazing hot and the problem lies with the rest of the economy.

But much depends on what we mean by superstar companies. The OECD research focuses on highly productive concerns. Many of them are surprisingly small, with revenues in the tens of millions rather than the tens of billions.

Another alternative is to look at the most valuable 20 companies in the US economy, and the most valuable four in each of 60 or so different sectors, whether or not they are digital and whether or not they are highly productive. This is the approach taken by Germán Gutiérrez and Thomas Philippon, economists at New York University, in a new working paper. This perspective casts doubt on the very idea that the superstars of the US economy are particularly large or productive by postwar standards.

Compared with their forebears, these companies are unremarkable in both their sales and their employee numbers. They have a larger economic footprint than the leaders of 20 years ago, but smaller than 40 years ago. Alphabet, Amazon and Apple are impressive companies, but so were Intel, Microsoft and Walmart 20 years ago, or General Electric, General Motors and IBM before them.

Any large group contributes to the productivity of the economy as a whole in two ways: directly, by producing output, and indirectly, by drawing in resources from less productive players. Messrs Gutiérrez and Philippon reckon that the direct contribution of the leading companies is smaller than it used to be, while the indirect contribution has not increased by enough to compensate. Overall, they calculate that the contribution of the star companies to labour productivity growth in the US has fallen by 40 per cent since the year 2000.

This is a surprising result. Part of the explanation may lie in measurement: it is never easy to measure productivity, particularly in services and even more so in services provided free of charge in exchange for data and attention. But the “fading star” result may well be real, and surprising only because we often let the big digital groups stand as symbols of scale and market power. There is more to the US economy than Silicon Valley.

The US economy does seem to have a monopoly problem: concentration is increasing in most industries. Companies make money less by becoming more efficient, and more by exploiting their pricing power.

There is plenty for US antitrust authorities to get their teeth into. Perhaps they should take a look at Europe, where competition policy is more robust and politically independent, while EU markets have become more competitive and less profitable than those in the US. That may not be a coincidence.

Written for and first published in the Financial Times on 15 March 2019.

My book “Fifty Things That Made the Modern Economy” (UK) / “Fifty Inventions That Shaped The Modern Economy” (US) is out now in paperback – feel free to order online or through your local bookshop.

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Fifty Things That Made The Modern Economy Season Two

I’m delighted to announce that Season Two of “Fifty Things That Made the Modern Economy” is up and running. Our first episodes included our Christmas special, followed by the Langstroth Beehive, Cellophane, and the Gyroscope – with more appearing on the feed on a weekly basis. If you want listen to the episode about bricks and you just can’t wait, hop over to 99% Invisible – one of the best podcasts on the planet and an inspiration for Fifty Things – where the brilliant Roman Mars presents three of his favourites, including the brick in all its glory.

If you like the series and fancy reading the book – all the nerdy detail in one handy package, plus a few extra thoughts we couldn’t squeeze onto the radio – then in the UK it’s called Fifty Things That Made The Modern Economy while in the US, it’s Fifty Inventions That Shaped The Modern Economy

And if you want to delve deeper, try Bee Wilson’s book The Hive or the magisterial Brick: A World History  – or my history of technology reading list. I love my job.

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9th of April, 2019MarginaliaRadioResourcesComments off

Black holes in data affect health and wealth

Nearly seven decades ago, the noted psychologist Solomon Asch gave a simple task to 123 experimental subjects: to pick which one of three quite different lines was the same length as a “reference” line. Asch had a trick up his sleeve: he surrounded each subject with stooges who would unanimously pick the wrong line. Confused, the experimental subjects were often — not always — swayed by the error of those around them.

I’ve written before about these experiments, but there’s something I neglected to mention: not a single one of the stooges nor the experimental subjects was female.

If Asch had conducted all-women experiments, he would have discovered that women tend to conform to the group more often than men. Perhaps this omission doesn’t matter. Retellings of the Asch experiment have tended to exaggerate the conformity that was demonstrated, while glossing over the fact that it was an all-male study. The two biases may cancel each other out.

Still, it is a lesson in how easy it is to ignore important data — or to assume that they are comprehensive, when in fact they omit half the planet.

Invisible Women (US) (UK) a new book by Caroline Criado Perez, explores countless cases in which everything from the height of the top shelf to the functionality of an iPhone is predicated on the assumption that the user will be male. (Apple once released a “comprehensive” health app that could track your selenium intake but not menstruation.)

Much of this imbalance has nothing to do with data, but some of it does — and this “gender data gap” is particularly important because good statistics are one of the only windows we have into the lives of an entire population, rather than just a handful of friends.

Consider the UN Sustainable Development Goals, admirable targets to improve the lives of 7.5bn people. Yet as development economists Mayra Buvinic and Ruth Levine have pointed out, while one of these goals is gender equality, we lack much of the data on whether that goal is being achieved.

Some missing numbers — for instance, on sex-trafficking — are obvious. Others are more subtle, such as the ubiquitous choice to measure the income not of individuals but of households. Does that household income come from a man, a woman or both?

We shouldn’t assume that the balance between “wallet and purse” is irrelevant. Economist Shelly Lundberg and colleagues studied what happened when in 1977, child benefit in the UK was switched from being a tax credit (usually to the father) to a cash payment to the mother. That measurably increased spending on women’s and children’s clothes relative to men’s. The UK’s new universal credit is payable to a single “head of household”; that curious decision may well favour men. Given the data we have, it will be hard to tell.

The story is often told of the accidental discovery of sildenafil (Viagra). Intended as a treatment for angina, the clinical trial revealed a side-effect: magnificent erections. Had the original trial included women, we might have fortuitously discovered a treatment for severe period pain. As it was, men got their miracle drug but women are still waiting. We can’t confidently prescribe sildenafil as a safe and effective treatment for period pain because, as Ms Criado Perez reports, only a small and suggestive trial has yet been funded.

There are many data gaps out there — statistician David Hand calls them “dark data”. There are the unpublished studies that produce less interesting or lucrative results than published ones. There are the voters who are coy about confessing their voting intentions to pollsters — the “shy Tory” effect. There are the psychology experiments that study only “WEIRD” subjects — Western, Educated and from Industrialised Rich Democracies.

We have plenty of statistics on shares and currencies, but not much on debt and derivatives. What Gillian Tett called the submerged iceberg of financial markets got less attention, until it turned out to have holed the entire financial system below the waterline in 2007.

There is no simple way to shine a light on all this dark data. There is a reason why it is easier to collect statistics in a rich country than a poor one, and why fluent speakers of English are more likely to fill in the UK census form. Collecting data on who bears the burden of “life admin” is harder than collecting that on primary paid occupations. But what we count and what we fail to count is often the result of an unexamined choice. We can make better choices, both by involving ordinary citizens in survey design, and by trying to get more women and minority groups into economics and statistics.

It is hardly encouraging that the Office for National Statistics has just been found wanting in a sexual discrimination case, but there is hope. The president of the Royal Statistical Society, the managing director of the International Monetary Fund and both heads of the UK Government Economic Service are all women. Still, plugging data gaps takes time, and considerably more thought than I once gave to Solomon Asch’s curious experimental line-up.

 

Written for and first published in the Financial Times on 8 March 2019.

My book “Fifty Things That Made the Modern Economy” (UK) / “Fifty Inventions That Shaped The Modern Economy” (US) is out now in paperback – feel free to order online or through your local bookshop.

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