Tim Harford The Undercover Economist

Since You AskedSince You Asked

My column ran in the Financial Times comment section on Saturdays between 2011 and 2014.

Since You Asked

Sorry decline of English social housing

We are getting rid of homes that are compact, cheap, fully used and warm, writes Tim Harford

‘In 2012-13, the private rented sector overtook the social rented sector to become the second largest tenure in England.’ English Housing Survey Headline Report 2012-13, Department for Communities and Local Government, February 26

What on earth does it mean to be the ‘second largest tenure’?

You know you’re reading a government report when the top line of the “key findings” section is incomprehensible without an explanatory note. What they mean is that there are more English households renting private housing than renting social housing. Social housing is provided at a discount by local authorities or housing associations, and the number of households renting social housing has been in slow but steady decline for three decades despite a rising population.

And as traditional social housing has been in decline, privately rented housing has been rising to take up the slack?

Over 15 years, yes – the private rental sector has boomed. But the longer-term story is that home ownership is on the rise, from about 55 per cent to about 65 per cent. The private bit of the rental sector has a much larger slice of a smaller pie.

Well, that’s good. Private markets deliver prosperity.

Sometimes. But there are reasons to mourn the decline of social housing. A quarter of the people now privately renting are receiving a government handout in the form of housing benefit, so this isn’t an argument about needing help from the taxpayer – it’s an argument about which form of help might work best. Social housing is smaller, cheaper and less likely to be “under-occupied” than private housing. Yet social housing is also the best insulated by some measures – and private rentals are the worst insulated no matter how you look at them. There’s also a thing called the “decent homes” standard, meant to eliminate the worst damp, drafts and hazards. Social housing is the most likely to pass that standard, and is improving quickest. Private housing is the most likely to fail, and is improving slowest. Social housing is compact, cheap, fully used, fast-improving, safe and warm – and we’re getting rid of it.

But at least homes in general are more likely to pass safety and energy efficiency standards. That’s surprising: I keep hearing we’re in a housing crisis.

The crisis is that we’re not building enough houses. The quality of the ones we have is indeed improving.

You seem grouchy about social housing, but the big ‘right to buy’ sell-off did have one positive consequence: far more people now own their own homes.

I hadn’t realised that counted as a positive consequence.

Isn’t it? Isn’t owning your own home what prosperous people do?

You’re getting confused. It’s true that many people want to own their own homes, and that these days you need a good sock of cash to do so. But that doesn’t mean that it’s a good idea for a society as a whole to have very few rented properties. Have you heard of Oswald’s Hypothesis?

Didn’t they just put out a second album?

Oswald’s Hypothesis is that home ownership is a cause of unemployment. The idea was put forward by Andrew Oswald of Warwick University in the mid-1990s after he observed some worrying correlations. First, home ownership and unemployment had been on the rise across the OECD for many years. Second, countries such as Spain had high home-ownership rates and high unemployment, while countries such as Switzerland had low home ownership rates and low unemployment. There are similar correlations across US states.

It must be a coincidence. Surely you’re not saying that home ownership is hazardous to your job?

In the social sciences, who really knows anything for sure? But Mr Oswald’s story has some plausibility. If you own your house it’s not easy to move, so home ownership reduces the number of jobs you can consider.

So maybe the rise of owner-occupation isn’t good news at all?

It has its risks, for sure. But consider something that Mr Oswald wrote in 1999: “A key part of the problem is young unemployed people living at home, unable to move out because the rental sector hardly exists.” That’s no longer the reason young people live at home; the private rental sector has boomed. Maybe that helps explain why – despite all the economic woes of the past six years – unemployment in the UK was never as bad as economists feared.

Also published at ft.com.

Since You Asked

Low inflation can be a disease not a cure

Deflation seems unlikely – but even a low risk is worth losing sleep over, writes Tim Harford

‘UK consumer inflation has fallen below the Bank of England’s 2 per cent target for the first time in four years.’ Financial Times, February 19


Well, perhaps.

Why are you so grumpy again? What wrong with low inflation?

Nothing, so far – but you can have too much of a good thing. Inflation is also low and edging downwards in the US, Japan and the eurozone. Correction: Inflation is also low in Japan, and low and edging downwards in the US and the eurozone. Yet in all these places, interest rates are low and central bankers have printed enough money to get the tinfoil hat brigade screaming about hyperinflation. Such low inflation might be an indication of trouble ahead.

Are you saying that low inflation is a bad thing, or are you saying that low inflation is merely a harbinger of doom?

A bit of both – but mostly I am concerned that low inflation is a bad thing in itself. One issue is that unexpectedly low inflation redistributes from borrowers to creditors.

About time too, most savers will be thinking.

I hear you. Still, borrowers are more likely to be cash-constrained (that’s why they are borrowers) and are more at risk of bankruptcy. That means lower-than-expected inflation may damage the economy as a whole rather than just moving money from one person’s pocket to another’s. And there’s another problem with deflation: the “lower-bound” problem.

What’s that?

It’s a fancy way of saying that nominal interest rates can’t fall below zero. If inflation is, say, 4 per cent then a central bank can give an economy a shot of adrenalin by cutting interest rates after inflation to minus 3 or minus 4 per cent. If inflation is 0.7 per cent – as it’s currently estimated to be in the eurozone – then that’s impossible.

Why would anyone want real interest rates of minus 4 per cent?

Usually we wouldn’t. But, against the backdrop of a slack economy, such rates would be a strong incentive to spend. And if outright deflation took hold, effective interest rates would rise: people would earn money simply by sitting on their cash and waiting for prices to fall. Sounds great but for an economy it’s a disaster. If nobody buys anything there will be a recession and more deflation – a vicious spiral.

But that isn’t going to happen. Is it?

Don’t ask me, I’m an economist. We never know what’s going to happen to the economy. But it is a serious enough problem that even a low risk is worth losing sleep over.

Is there a constructive response?

In the case of the US and the UK, there’s always “hope for the best”. Both economies have been growing in a more-or-less encouraging fashion. One could try cutting taxes and raising government spending but it may be too late.

What about this forward guidance business?

Yes, an awkward affair. In principle forward guidance makes sense: the idea is to promise to keep interest rates very low until some condition is met, even if the economy might benefit from higher rates down the track.

Why make such a promise?

Because promising low rates for a long time is the next best thing to cutting rates below zero. Imagine buying a house: a mortgage rate of minus 3 per cent might be nice; but a promise that interest rates will be held artificially low for a while is almost as good, if you believe the promise.

That all makes sense.

Yes, but recent experiments with forward guidance haven’t been a huge success. Bank of England governor Mark Carney tied his forward guidance to unemployment rates, and unemployment rates promptly plummeted, so his attempt to commit to low interest rates ended up meaning very little. Still, it was worth a try.

This all seems flimsy. Are there any other approaches?

Most of these central banks are targeting inflation of 2 per cent, or something along those lines. But four years ago IMF chief economist Olivier Blanchard proposed a sharp break with that tradition. He floated the idea of a 4 per cent inflation target next time round. The thinking makes some sense: as long as interest rates and salaries tend to adjust, a higher target should cause little harm in good times and provide a great deal more room for manoeuvre in severe recessions.

That sounds radical.

Agreed. It’s never going to happen, which is a shame. But from the standpoint of today’s sluggish growth all Mr Blanchard’s advice would amount to is: “Next time let’s start from somewhere else.”

Also published at ft.com.

Since You Asked

The seductive appeal of cultural stereotypes

Is it obvious that Jewish or Chinese Americans have superior willpower? asks Tim Harford

‘It may be taboo to say it, but some cultural groups starkly outperform others.’ Jacket blurb of ‘The Triple Package’ by Amy Chua and Jed Rubenfeld

Which cultural groups are they talking about? I vote for the baby boomers. They run the world and retire early on fat pensions; the rest of us are still listening to their idea of good music. They are outperforming the stuffing out of the rest of us.

I don’t think the boomers are a cultural group as far as this new book is concerned.

Why not?

I’m not sure. The authors take it as obvious that the logical way to divide up the US is on ethnic and religious lines: Nigerians, Iranians, Jews, Mormons and others. Hipsters don’t seem to count. Neither do punks, lesbians, hackers or hippies.

So by ‘cultural groups’ they mean ‘racial groups’?

Draw your own conclusions. We find it very tempting to carve the human race at those particular joints. Such generalisations have a seductive power: they have tempted otherwise humane and sophisticated individuals into the grossest racism.

You don’t think Chua and Rubenfeld are guilty of the grossest racism, do you?

No, I do not. And it must be legitimate to ask questions about ethnic and cultural differences – with care. The Triple Package is sold alongside titles claiming the secret to success is focus, or salesmanship, or psychoanalysis, or finding your own element, or being a psychopath. Or even that the secret is luck and we’re all being fooled by random patterns we interpret as causal. The book should be held to a higher standard of evidence, though: it says the secret to success is being raised by Jewish, Chinese, Indian or Nigerian parents. Chua and Rubenfeld don’t meet that higher standard. They offer heaps of anecdote with carefully selected academic evidence.

Everyone argues by anecdote. Is it really a particular problem here?

Yes. In a rare instance where they cite research from experimental psychology, they describe studies about the power of “stereotype threat”. For example, you can put women off their chess game by reminding them that the top players are all men. White kids struggle with a mathematics test if told it is research into the mathematical prowess of Asians. These stereotypes can cause real psychological, social and political damage. They should not be casually slung about to sell books. Insisting on care isn’t mere political correctness.

Are the authors careful?

They’re tactful but that’s not the same thing. One part of their “triple package” of cultural traits, for instance, is that insecurity breeds success. We are told this flouts the entire orthodoxy of contemporary psychology; then, in contrast, that it is supported by “a well substantiated and relatively uncontroversial body of empirical evidence”. If they cited any of that evidence I missed it in a flood of references to biographies, cultural histories, pop science and newspaper articles.

And the other claims?

They do cite scholarly research linking willpower to success in life but that doesn’t seal the deal. Is it so obvious Jewish or Chinese Americans have superior willpower? It’s far from clear that pushy parenting builds willpower, and I can cherry-pick my own research suggesting the opposite.

The third part of the triple package is?

A sense of cultural superiority. But is that particularly Indian or Iranian? Russians are proud to be Russian; Ethiopians to be Ethiopian. It didn’t seem to occur to the authors to look for disconfirmation by examining less successful religious or immigrant groups.

The whole story still sounds plausible to me.

We always find stereotyping plausible. That is why it is treacherous. But there are three big holes. The first is selection bias. If Indian doctors and engineers are given US visas, and they and their children are successful, is that because of Indian culture, or because the children of doctors and engineers also do well? The second is social networks. Chua and Rubenfeld may not emphasise psychological research but their worldview is ultimately about psychology rather than the contacts an immigrant network might bring. Most fundamentally, they fail to justify their basic premise: that the way to understand success is as a phenomenon that applies to religious or ethnic groups. They say that if we couldn’t generalise about Jews or Chinese Americans, “we wouldn’t be able to understand the world we live in”. Treating people as individuals is, apparently, just too much like hard work.

Also published at ft.com.

Since You Asked

Don’t bet the house on price rises persisting

Supply constraints are not the only cause of the UK’s property inflation, writes Tim Harford

‘George Osborne has admitted that UK housing supply will struggle to keep up with demand for the next decade . . . ’, Financial Times, February 5

I saw the headlines: George Osborne predicts that house prices will keep rising for the next 10 years.

That’s the erroneous conclusion that seems to have emerged but it’s not what Mr Osborne said when giving evidence to the House of Lords economic affairs select committee. His only gesture towards a house-price forecast was to mention the view of the Office for Budget Responsibility. The OBR does forecast price rises but not with nearly the same gusto of private sector forecasters – often estate agents. So it’s strange to see the chancellor of the exchequer being linked with a bullish view on the price of houses.

But Mr Osborne predicts a continued shortfall of supply – and that can only mean that prices go up.

That rather assumes that the key reason for high house prices is a shortage of new homes. It’s far from clear that this is true.

Are you repealing the laws of supply and demand? Didn’t a Financial Times poll of economists say that the best response to high housing prices was to build more houses? What sort of economist are you anyway?

I quite agree that the UK needs more housebuilding – it would help provide jobs and cheaper, more environmentally friendly and more comfortable homes. And it’s true that all other things being equal, house prices will be lower in a scenario where lots of homes are built than in one where very few are built. But none of that means the chief cause of high house prices now is constrained supply – nor that continued supply constraints mean that the high prices will continue too.

I’m still confused.

OK. What is the single most reliable indicator that housing is scarce?

High house prices.

I disagree. It’s high rents. Rents can change more quickly, are affected less by the state of the UK mortgage market and don’t have a speculative component. People sometimes buy houses simply in the hope of reselling at a profit; not many people rent a house in the hope of a profitable sublet.

But aren’t rents high too?

Yes. But not nearly as high as house prices are, which is the point. A government review of the rental market in 2010 found that rents had increased by 40 per cent in the decade running up to the 2008 recession, almost exactly tracking the increase in what people earned. House prices, in contrast, had increased by more than 100 per cent.

A report last spring from the OECD also used rents as a benchmark to assess UK house prices and concluded that they were overvalued. Buy-to-let investment looks like an expensive proposition in many parts of the country unless rents rise sharply.

So you think it’s a bubble rather than supply and demand.

Scarce supply and robust demand is pushing rents up in many places, and that’s a good reason for public policy to encourage more housebuilding. But the additional house-price margin over and above what rents explain may indeed indicate a bubble.

Are there other explanations?

Certainly. It’s possible that investors have taken a far-sighted view of the prospects for future rents, and are buying houses in expectation that rents will leap in due course. Time will tell.

Or low interest rates?

I was coming to that. Real interest rates are very low and the government’s help-to-buy policies are also making it easier to buy houses. And houses are expensive because other assets are expensive, too. But real interest rates won’t stay low for ever.

Returning to the subject of building houses, has Mr Osborne done enough?

He has thrown money at banks and housebuyers and tried to liberalise the planning system but he admitted himself that the problem hasn’t been solved. There is colossal economic value to granting more planning permission – it can increase the value of agricultural land roughly a hundred times over.

So why don’t local authorities grant more permission?

Because they have little to gain but angry voters. If local authorities could reap some of the value of the planning permission they granted, they could use the cash to compensate existing residents and to provide services. That could be a vote-winner. But they can’t – so it isn’t.

Also published at ft.com.

Since You Asked

A cap on bonuses is of little benefit

Rewards must be aligned with credible performance measures, says Tim Harford

‘George Osborne will face more pressure over bank bonuses on Wednesday, as Labour demands that he blocks state-backed Royal Bank of Scotland (RBS) from paying bonuses to senior staff worth twice their salaries’, Financial Times, January 14

What are the chances that this is going to work out well?

Pretty slim. First, it’s about bankers, so you know for sure that there is going to be a lot of yelling and not a lot of thinking about the subject. Second, this rule about bank bonuses comes from the EU. So as far as George Osborne and his Conservative allies are concerned, that means even more yelling and even less thinking. And finally there is the Ed Miliband factor – he somehow thinks that this issue is all to do with what he keeps calling the “cost of living crisis”.

He talks about that a lot, doesn’t he?

Everything reminds Ed Miliband about the cost of living crisis. And everything reminds me of hamburgers but I try not to bore people about the topic in public. (Apologies to Robert Solow.)

But what exactly is the argument about?

The EU has ruled that if a bank wants to pay senior staff a bonus larger than the basic salary – that is, more than doubling pay – then explicit shareholder permission must be granted. Regardless of permission, the rule also states that a bonus cannot be more than twice the basic salary. Mr Osborne is challenging this in the courts. But Mr Miliband wants to raise a separate but connected issue: whether Mr Osborne’s Treasury, in its role as majority shareholder at RBS, will approve these larger bonuses.

So the question is whether Osborne will give permission for RBS to squeeze through a loophole in a rule he opposes anyway. How big are the bonuses that RBS proposes to pay, then?

This is it: officially RBS has not asked the Treasury for permission, so the entire discussion is political theatre.

It’s not entirely political theatre: there is the question of whether bonus caps are a good idea.

They aren’t.

That’s surprisingly decisive for an economist.

Trust me, I’ll sit on the fence shortly. But the crude EU cap is pretty daft – and when I say “crude” I have the support of Mark Carney, governor of the Bank of England. It is the equivalent of trying to limit alcohol consumption by saying your consumption of beers cannot exceed the number of tequila shots you downed at the beginning of the evening. For a committed binge drinker, that sort of rule is not going to help. And wanting to abolish it would not make one an irresponsible puppet of the drinks lobby.

So the EU rule is just as likely to jack up salaries as to reduce bonuses?

Quite. And just because the Conservative party unthinkingly lashes out at anything that comes from Europe does not mean that the EU is always right. In this case, the EU rule is crazy and Mr Osborne is right to challenge it. By the way, it seems quite plausible that of the bankers paid well enough for the rule to apply, more work in London than in rest of the EU put together.

So Miliband is wrong?

Here’s where I climb back on the fence, because while Mr Miliband is engaging in ridiculous posturing, there is a serious point to consider. Banks like paying bonuses rather than salaries because bonuses carry fewer side perks and can more easily be cut in tough times. So, as Mr Carney says, a crude cap is counterproductive. It is in any case being sidestepped by “cash allowances”– which seem to be like bonuses except, you know, they are not called that. But one of the contributing factors to the financial crisis – one that was so clear that even we economists spotted it – was that bonuses were encouraging bankers to take risks on a “heads I win, tails the shareholders, and taxpayer, lose” basis.

So the government should mess around with RBS bonuses after all.

In principle, yes. The issue is whether bonuses are really well aligned with credible, long-term measures of performance. This seems much easier to achieve with a single large shareholder, able to pay attention to the details. Research by the economists Marianne Bertrand and Sendhil Mullainathan shows that the pay of chief executives is linked much more tightly to sensible performance measures when at least one substantial shareholder exists to act as policeman.

Do you think the Treasury will play that policing role well with politicians yelling in their ears?

I think that is a question that answers itself.

Also published at ft.com.

Since You Asked

Life on a flood plain – home and dry

The state has been interfering in protection against floods since 1531

“The Environment Agency, the quango responsible for Britain’s flood defences, is set for 1,700 job losses in the next 12 months even as swaths of the country struggle to recover from the new year deluge.”, Financial Times, January 7

Awkward timing.

Yes. Although Owen Paterson, the environment secretary, insists that spending on flood defences is higher than it used to be.

Is it?

Doubtless there is some way to chop the numbers that makes Mr Paterson’s statement correct. But there’s a trap in this argument that we should avoid. Governments like to cut vague things: “finding efficiencies”, “making tough choices”. Oppositions like to point to specific things that have been cut. This week, that means flood defences. During the 2011 riots, the complaint was that the government had cut funding for youth centres. When a West End theatre roof collapsed, the story was about London fire stations being closed. And the government will always try to scrape together some story saying that, no, this particular thing was not cut, the cuts were instead something rather less tangible. It is not an illuminating discourse.

But there is a specific problem about flooding. Isn’t there?

Experts expect more of it – blame climate change. But let’s back up a bit. What causes flood damage?

Water, silly.

Not just water. Nobody complains about flood damage in the middle of Loch Ness, and there’s plenty of water there. Flood damage is caused when water meets valuable property. This isn’t just splitting hairs: one of the reasons that more flood damage is expected in future isn’t just that more downpours are expected, but that we’re building homes in vulnerable places. It’s nice to be near water, after all – as long as the water doesn’t come too near you.

I get all that – but why are we building homes where they’ll be flooded?

Part of the problem is the way we think about important but unlikely risks. Consider a flood that is expected to occur roughly every 30 years, and to cost £30,000 pounds if it does occur. The expected cost of that is £1,000 a year, or £3 a day. But to a homeowner, or a local council granting planning permission, the subjective perception of the risk is likely to fluctuate between the odd sleepless night and utter unconcern.

That’s a rather psychological take from an economist.

There’s a straightforward economic explanation, too. The government has been interfering in flood protection since Henry VIII’s Statute of Sewers in 1531, and that interference has had malign effects. Until recently, the arrangement has been that homeowners in high-risk areas have received subsidised flood insurance, which naturally makes people more willing to buy houses in such areas, and to build houses in such areas. The quid pro quo for the insurers was that, if they agreed to provide this cross-subsidy, the government would spend money on flood defences to enable people to continue to live near the beach, or with gardens backing on to the Thames. These are people of quality, after all – people whose opinions should be respected. People are quite good at making sure their choices are subsidised by others.

I get the picture. But you’re speaking in the past tense.

Things have changed. There’s a new accord between the insurance industry and the government. The cross-subsidy is going to be made more transparent, with a levy on all home insurance policies going into a non-profit fund called Flood Re.

If everyone is going to pay into Flood Re, why not just fund it from general taxation?

Because politically speaking it is convenient to be able to outsource some tax collection to insurance companies, and pretend it isn’t a tax, even if it amounts to the same thing. But that’s not the only change. Many houses – including the priciest ones, and those built in the past five years – are excluded. Others that end up flooding too often will also be thrown out of the scheme.

Is that an improvement?

Possibly, if the scheme is solvent; that remains to be seen. There is something to be said for withdrawing the insurance subsidy for new-build homes, although it hardly seems fair to make it retroactive to 2009. But we need to hope that the government makes wise choices about flood defences – and our planning system needs to allow homes to be built on dry land.

Also published at ft.com.

Since You Asked

The young will inherit wealth or poverty

Inheritance is a demeaning way for a 50-year-old finally to establish a pension, writes Tim Harford

‘Securing a juicy inheritance may prove the best bet for the generation that came of age under Margaret Thatcher, with their prospects for decent retirement incomes looking increasingly bleak.’ – Financial Times, December 17

Is that news? I thought we knew that our pensions were worth nothing.

Some pensions are worth plenty – including those for many people now on the brink of retirement. This story was based on a report from the Institute for Fiscal Studies, examining the broader question of how today’s 40-year-olds are doing compared with 40-year-olds 10, 20 and 30 years ago.

In other words, are we richer than our parents?

To be precise, are we richer than our parents were when they were our age, judging by income, savings, debt, pensions and housing.

And the baby boomers took all the money?

The boomer generation did roll like a gigantic steamroller through the past 60 years and did pretty well. Take real equivalised household income.

Take what?

A measure of income corrected to take account both of inflation and different family sizes. What the IFS finds is that the generation born in the 1940s – currently about 70 – was richer at the age of 60 than the 1950s generation is today, now aged about 60. And the 1950s generation was richer at the age of 50 than the 1960s generation is today, just as the 1960s generation was richer at the age of 40 than the 1970s generation is today.

So we’re all getting poorer. But the economy hasn’t been shrinking for 40 years, has it?

No. It shrank a lot five years ago and has hardly recovered. That is largely why each generation now is doing badly relative to the previous cohort 10 years ago. But there’s more to the story than the recession. What we see is that the 1970s generation had more money when they were young than their parents did. But they spent it.

They really only have themselves to blame, then.

Well – perhaps, perhaps not. Nobody knew quite how generous – or expensive – today’s pensions were going to be. Even if the younger generation were far-sighted it’s not clear they would want to pay for quite such gold-plated retirements. But anyway, they were short-sighted, as we all are, and will pay the price. Their parents may have been equally myopic but typically had automatic pensions and didn’t have the same freedom to mess up.

So today’s thirty and fortysomethings have been screwed on pensions.

Well, yes, they have. But they’ve also hurt themselves. At the age of 30, the 1970s generation was spending almost twice as much as the 1940s generation and, unlike all previous cohorts, they were net borrowers rather than net savers.

What about house prices?

That’s another part of the story, in which everything seems to be conspiring to favour the boomer generation. House prices are near record levels, which of course helps homeowners – who tend to be older. Younger people have struggled not only to buy a home, but also to upgrade the homes they have. According to estimates cited by the IFS, the average age of first-time buyers has risen by five years since the 1960s – but the average age of second-time buyers has risen by an astonishing 15 years. Even people who can get on the housing ladder have only grabbed the bottom rung and are digging their fingernails into the wood.

No wonder the IFS sees salvation in inheritance . . .

But inheritance is unevenly distributed, as well as a slightly demeaning way for a 50-year-old finally to establish a pension pot. This is a social mobility issue: young people can’t get ahead without receiving money from mum and dad.

So what is to be done?

A spot of strong economic growth would do no harm: although this issue has long been brewing, it has been worsened by the recession. Building more houses would help young people to find jobs and buy homes – as well as deflating house prices and thus shrinking those inheritances. A property tax might nudge a few empty-nesters into downsizing their homes. And it is absurd that as austerity is hitting schools, university, services and working-age benefits, the state pension is sacrosanct for current pensioners. The problem is becoming too acute not to be addressed – too late for today’s thirtysomethings, but not too late, perhaps, for their offspring. If they can ever scrape together the cash to afford children.

Also published at ft.com.

Since You Asked

Of Bitcoins, bubbles and B&Q vouchers

The object of anarcho-utopian fantasies is of little value if you want a pizza, writes Tim Harford

‘The tiny Channel Island of Alderney is launching an audacious bid to become the first jurisdiction to mint physical Bitcoins.’
Financial Times, November 29

Surely that’s the ultimate sell signal?

Absolutely. It’s like Grandad getting a Facebook account.

I meant to suggest that Bitcoins are in a bubble.

Who can say? One definition of a bubble is that an asset’s price becomes separated from its fundamental value, and driven only by the expectation of the ability to sell the asset to somebody else. But by that definition, gold has been in a bubble for thousands of years – so saying “Bitcoins are in a bubble” is true but not especially useful investment advice.

You think they might go even higher?

If journalists like me keep publishing columns like this, perhaps. It’s never quite clear whether the media buzz drives the price or the price drives the media buzz. There was a moment, recently, when a Bitcoin was worth more than an ounce of gold. Given that, two years ago, gold was worth about $1,800 an ounce – and three years ago Bitcoins were trading at about 20 cents – that’s quite something. Hence the sudden run of stories about millions of dollars of Bitcoins accidentally left on a hard drive dumped in a landfill in Wales; the companies offering discounts on “Bitcoin Black Friday”; and this ludicrous idea from Alderney.

You sound grumpy. You didn’t actually buy any Bitcoins, did you?

No. And if I had, of course I would be desperate to sell, and yet hesitating in case the price leapt up again. And since nobody wants to sell them, nobody wants to use them to buy pizza either – which is a bit of a blow for an idea with pretensions at being a currency.

You’ve got to concede, though, that Bitcoin has arrived on the map.

As a venue for speculation, yes. The total value of Bitcoins is about $13bn – give or take a billion or two per day, because it’s impossibly volatile. The total value of pound sterling notes and coins outstanding is about £65bn – almost 10 times as much. That’s not a huge gap, given that Bitcoin is less than five years old and is a pseudonymous hacker’s anarcho-utopian dream, while the UK is a top 10 economy and sterling is one of the world’s best established currencies. But while Bitcoin is an impressible speculative asset, as usable money, it’s a joke – a unit of account so volatile that nobody can remember what it’s worth, and so prone to sudden price spikes that nobody wants to spend the stuff.

Sounds like the perfect Christmas gift.

Funny you should say that – gift vouchers seem irrepressibly popular every Christmas, and they, too, are awful currencies.

Surely you’re not telling me there’s a speculative bubble in B&Q vouchers?

I doubt that. Most gift vouchers expire after a while, and B&Q vouchers are no exception, so the long-term value of these vouchers is definitely zero – unlike the long-term value of Bitcoins, which is only probably zero.

And regular money is bad?

Not as far as I’m concerned. But true Bitcoin believers love the fact that it has no central bank behind it to mess things up. And gift-givers tend to regard real cash as rather grubby and unimaginative, whereas – for reasons that escape me – they think of vouchers as a more honourable alternative. In both cases, although for very different reasons, plain old pounds or dollars are stigmatised. We humble economists can only scratch our heads at such sentimentality.

I think you’re being a bit harsh.

Hardly. Vouchers are subject to “breakage” rates of about 10 per cent – that’s the euphemism that companies use to describe the vouchers that expire in a desk drawer somewhere. They are also resold at a loss on eBay, which does not say much for their effectiveness as gifts. If you can’t think of a plausible present, just give cash.

Or Bitcoins.

If you must. Just be aware that you have absolutely no idea what Bitcoins will be worth by the time Christmas arrives. That means Bitcoins fail the most fundamental test of any useful currency: stability in comparison to the sort of things you might want to buy. The irony about Bitcoins is that they were initially embraced by people with a fear that traditional currencies were about to suffer hyperinflation. They haven’t. Bitcoins have suffered hyperdeflation, though. Nice for those who bought in early. But, in a real currency, that isn’t a feature: it’s a deadly bug.

Also published at ft.com.

Since You Asked

A minute is a long time in economics

High-frequency traders need high-frequency data, writes Tim Harford

‘Market-sensitive data on economic growth, inflation and employment could be “drip-fed” into the public domain because the Office for National Statistics website regularly fails to publish them at 9.30am.’
Financial Times, November 25

What’s so bad about drip-feeding?

We drip-feed delicate flowers and patients in intensive care – not economic statistics.

I thought the UK economy was no longer a delicate flower?

Recent economic data have looked pretty good – if you could get hold of them. That may have been hard. The business investment data, due to be published on Wednesday at 9.30am, were two quarters out of date for most of the morning. By itself, not such a big thing but this sort of glitch seems to happen too often. It does seem not all is well with the ONS website.

Hence its proposal to drip-feed data?

Careful: it’s not an ONS idea. It was put forward by the UK Statistics Authority, which oversees the ONS.

And why did it propose the idea?

Hard to say, especially since I couldn’t work out how to download the UKSA report at first. (Its website is a little tricky to navigate, too.) But in a nutshell, some data are sensitive: they can move markets, and a trader with early access to the latest figures would have a big advantage. The ONS is finding it hard to publish these data on time – half the sensitive releases in the first quarter of 2013 were more than a minute late.

A minute late doesn’t sound much. Have you tried to catch a train recently?

High-frequency traders are making investments to shave a millisecond or two off the time it takes to send and receive data. Usain Bolt’s reaction time in the 2012 Olympic 100 metres final was 165 milliseconds; a minute is 60,000 milliseconds. In context, a minute is a long time.

Why is it hard to publish on time?

Leaving aside the question of what “on time” even means in a world of superfast algorithmic traders, the obvious way to publish promptly is to upload the data to the servers in advance, then reveal them at 9.30am. But the servers aren’t secure enough for this, and it would apparently cost several million pounds to fix that. So the ONS begins manually uploading the most sensitive data four seconds before 9.30am and hopes it will go live at about the right time. That process is prone to delay, especially when the data sets are large and eagerly anticipated.

Hence the embarrassing idea of releasing the headlines first and the details later. But does it matter if the market-sensitive stuff goes on the site a few minutes late?

Perhaps not. Serious players probably don’t care – they get the data through proprietary trading platforms such as Bloomberg and Reuters.

And the rest of us have to wait.

Yes. Which looks bad. But prompt publication of statistics on the ONS site is more of a matter of pride than of practical significance. Most ONS watchers are complaining about other things; Mark Carney, the Bank of England governor, for example.

ONS watchers are complaining about Carney?

No, Carney is complaining about the ONS. He said this week that he wasn’t happy with the quality of its data on investment, didn’t put much weight on it and was much more comfortable with the data quality back in his native Canada.


The other complaint is the usability of the website. Big beasts of economics journalism, such as Evan Davis of the BBC, and the FT’s own Chris Giles, have complained that the site is hard to use, especially for casual users asking relatively simple questions.

Sounds like a shambles.

The ONS has my sympathy. It has a thankless task: nobody ever notices when things go right. The data sets were crafted and categorised for a pre-web age, and it is no simple matter to preserve the continuity and integrity of the data while making the site swift and simple to use. The problems with the website have been frankly acknowledged, and the ONS is trying to deal with them. But the ONS and UKSA are under severe budgetary pressure: they’re heading towards a budget of £150m a year, or £2.50 per person. Not such a lot of money to spend on figuring out the state of the nation.

And UKSA’s new idea is bound to embarrass the ONS even more.

Well, perhaps by accident, UKSA’s idea has achieved something: it’s been a loud, clear cry for help.

Also published at ft.com.

Since You Asked

A universal income is not such a silly idea

The concept of paying people to sit around has an upside, writes Tim Harford

‘Swiss to vote on 2,500 franc basic income for every adult.” Reuters, 4 October 2013

How much is that?

It’s about £1,700 a month – over £20,000 a year.

Payable to whom?

Everybody, or at least, every adult citizen. It’s called a “basic income” and everyone gets it, no strings attached.

You have to be joking.

We’ll have to see whether the Swiss think it’s funny or not – they are holding a referendum, which is something they do quite a lot. But the idea of a basic income suddenly seems to be back on the radar after many years of being out of fashion. The New York Times announced recently that at the cocktail parties of Berlin there is talk of little else; US policy wonks are getting excited about it too.

This sounds like some communist plot. How can anyone take seriously the idea of paying people to sit around on their backsides?

The idea is endorsed not only by experts on inequality such as Oxford’s Sir Tony Atkinson, but by the late Milton Friedman, an unlikely communist. The idea of a basic income is one that unites many left- and rightwingers while commanding very little support in the mainstream.

What on earth did Friedman see in the idea?

He saw an alternative to the current welfare state. We pay money to certain people of working age, but often only on the condition that they’re not working. Then, in an attempt to overcome the obvious problem that we’re paying people not to work, we chivvy them to get a job. Our efforts are demeaning and bureaucratic without being particularly effective. A basic income goes to all, whether they work or not.

And nobody would.

Well, maybe. If the basic income was something more modest than the Swiss campaigners have in mind – say, £75 a week, roughly the level at which the UK’s Income Support is paid – then I think most people would want to supplement that. There wouldn’t be a sudden withdrawal of benefits, so seeking part- or full-time work would be straightforward. Some advocates of a basic income see the prospect of voting with your backside as an advantage of the proposal: it would encourage employers to make low-paid jobs less uncomfortable and degrading.

Your strategy appears to be “try it and hope”.

I’m not entirely convinced of the idea myself, but I do think it should be taken more seriously than it currently is in the UK. Unlike many utopian policies, this has been tried with a set of rigorous experiments in the US in the late 1960s and 1970s. It turns out that people do work less if offered a basic income – but the effect is not dramatic by any means.

This can’t be affordable.

That depends on whether people withdraw en masse from the labour force. If most people keep working, as I would expect, the idea is less expensive than it might seem. The basic income could replace all sorts of benefits, and would also presumably replace the personal allowance for income tax. In some ways the size of the state would have to rise: some tax, such as VAT, income tax, or both, would have to raise more money. In other ways the size of the state would shrink. This is what appeals to some conservatives: Friedman believed that with a reasonable basic income for all, the welfare state as we know it would wither.

What about special cases – people with severe and expensive disabilities?

Friedman argued in Free to Choose, a book published in 1980, that such cases would be few enough that private charities would deal with them. I am not sure the modern world would accept that answer. And this does point to a general concern about basic income schemes: they look efficient and neat on paper but in reality one suspects that the complexities of the modern welfare state would fail to disappear. We would probably have exemptions for immigrants, housing allowances for Londoners, and all the rest.

I still think we’d get a country full of layabouts.

That’s the risk, I suppose. There is an alternative way to look at all this: an increasing number of economists are beginning to worry that technological change may make large numbers of people completely unemployable. In short, the robots are coming to take our jobs. These concerns have been wrong before, but perhaps this time really is different. If so, we’ll need an economic system that can cope when lots of people have no way to making a living. I wonder if everyone has a basic income in Star Trek.

Also published at ft.com.



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