Tim Harford The Undercover Economist

Undercover EconomistUndercover Economist

My weekly column in the Financial Times on Saturdays, explaining the economic ideas around us every day. This column was inspired by my book and began in 2005.

Undercover Economist

A guide to having an actually happy Christmas

Is Christmas a time of magic, generosity and conviviality? Or of overconsumption, stress, and social anxiety? It is easy to make a case either way: listen to Paul McCartney’s “Wonderful Christmas Time”, followed immediately by Tom McRae’s slow sighing cover of the song and hear the same lyrics convey backslapping cheer and solitary despair.

Messrs McCartney and McRae illustrate the dilemma, but they do not resolve it. For that, we need data, so I consulted some academics on the slippery subject of “subjective wellbeing”, or as you or I would call it, “happiness”.

Two years ago, wellbeing researchers at the London School of Economics surveyed a panel of experts, asking them: “Do you think that populations on average have higher wellbeing during major festive periods like Christmas?” None of the respondents was particularly confident, but the verdict was that Christmas is a time for good cheer: 54 per cent thought that Christmas increased average wellbeing, with 18 per cent disagreeing and the rest sitting on the fence.

Fence-sitting is perhaps the wise choice here: the topic has been rather sparsely researched, and what studies do exist provide viewpoints as contradictory as Messrs McCartney and McRae. One recent piece of research by Michael Mutz found that “the Christmas period is related to a decrease in life satisfaction and emotional wellbeing”. An older study by Tim Kasser and Kennon Sheldon found instead that “subjects are on the whole reasonably satisfied with their holiday experience” and that while many people found Christmas a bit stressful, the majority did not. One thing we can say with confidence is that, contrary to the popular myth, suicide rates don’t spike at Christmas; they fall.

It may be more fruitful to ask about how different people experience Christmas — and whether we can suggest ways to enhance the joy and reduce the anxiety. One plausible hypothesis is that Christmas is an amplifier of existing inequalities. Those who are relaxed, have no money worries and a good relationship with friends and family should find plenty to enjoy in Christmas; those who are anxious, isolated or financially stretched may find Christmas makes everything worse.

An alternative view is that how we feel about the festival depends on how we approach it. Mr Mutz found that Christians felt happier at Christmas, while others felt less happy. Similarly Messrs Kasser and Sheldon found that people who spent more time with their families or engaging in religious practices tended to have a better time of things. Consumerism fared less well, according to Messrs Kasser and Sheldon; for all the money and effort buying and wrapping gifts, the activity “apparently contributes little to holiday joy”.

I am not sure atheists would feel better if they headed to church, nor that people who dislike their relatives should seek them out anyway. But these findings do suggest that the syrupy advice of a thousand moralising television specials — that the true spirit of Christmas is friends, family and the little baby Jesus — has something going for it.

What, then, is an undercover economist to advise for a truly merry Christmas?

First, keep the crass spending under control. It is pointless to lament the commercialisation of Christmas, which is not new. Santa Claus appears in advertisements from the 1840s, Macy’s was open until midnight on Christmas Eve in 1867, and Rudolf the Red Nosed Reindeer was invented in 1939 by an advertising copywriter at Montgomery Ward who needed a free gift for shoppers.

So don’t get mad with the marketing men: get even. Commercial spaces such as shopping centres and Christmas markets lay on the sights, sounds and smells of Christmas free of charge. If you like that sort of thing, savour the atmosphere, and don’t bother with the flashily-packaged trash nobody really wants.

You can cite economist Joel Waldfogel, author of Scroogenomics (UK) (US) if you like: he has convincingly demonstrated that many Christmas presents are poorly chosen. Or you can quote Harriet Beecher Stowe, if you prefer: “There are worlds of money wasted, at this time of year, in getting things that nobody wants, and nobody cares for after they are got.” In any case, if it is the thought that counts, then think.

Second, make your own social rituals, whether it is a regular reunion with old friends, carol singing, or church on Christmas morning. There is plenty of evidence that both religious and secular Christmas rituals can improve your enjoyment of the holiday. The difficulty comes in wading through the coagulated expectations of everyone else in your social circle. Take the time to think about what you really value, discuss it with your family, and make it happen.

Third: share the chores. Women have tended to spend considerably more time on the task of shopping for and wrapping Christmas gifts, while men seem to enjoy Christmas more than women do. This may not be a coincidence.

Fourth: be grateful, and write your thank-you letters. More on this next week. Finally, don’t listen to too much Tom McRae. Merry Christmas.

Written for and first published in the Financial Times on 21 Dec 2018.

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Undercover Economist

How to survive an election with your sanity intact

A week to go — or eleven months, if you’re a US voter — and the time has come to share with you my handy guide to surviving an election.

Step one: think about your goals. Mine are to keep my cool, keep my friends, learn a little about the world and cast my vote wisely. You might well share these goals — but bear in mind that most of the people you will encounter on the news or on social media have very different aims in mind: they would like you to be excited, if not downright angry. Therein lie the clicks, the views and sometimes the votes, too.

It follows that we need to be thoughtful about what sort of political news we watch and read. There is plenty of excellent analysis out there, but one needs to seek it out. Twitter has its merits as well as its faults, but it has been a while since I saw a really good explainer go viral on Twitter.

Step two: find out about the issues. I can think of a good newspaper that provides detailed analysis of policies, but it is not the only source. There is a rich seam of blogs run by academics, while think-tanks such as the Institute for Fiscal Studies, the Resolution Foundation, The King’s Fund and many others have claim — justifiably — to provide unbiased and dispassionate analysis. Others clearly lean to the political left or right, but even those are far more likely to educate you about a given policy issue than watching the television news or reading your Facebook feed.

I realise that nobody is going to plough through all those policy papers. Instead, pick a topic that matters to you — maybe climate change, maybe Brexit, maybe healthcare — and read a few pages of wonkery. I’d be surprised if you don’t learn something both interesting and valuable within five minutes.

Step three: don’t obsess about all the lies. The use of the lie in politics is mutating. Once politicians made questionable claims in the hope that the deceit would pass unchallenged. These days, one of the weapons of political warfare is to make a false claim in the full expectation that it will be rebutted, and the outrage about the lie will crowd out other stories. (See also: “£350m a week for the National Health Service”.) By all means shoot down the lie — but then move on.

There are people whose heroic task is to fact-check all the important claims made in media interviews, debates, election leaflets and on social media. Given that some fairly dark propaganda can be quietly circulated on social media, this is not an easy task. As Joseph O’Leary, senior fact-checker at the UK charity Full Fact observes: “fact checkers are only as good as the claims they notice”. There is also the “bullshit asymmetry” principle: it takes 10 times as much effort to refute bullshit as it does to produce it.

Professional fact-checkers could be forgiven for being outraged at the task our political discourse has handed them. Yet the best of them are rigorous, fair, transparent — and careful not to amplify false claims by endlessly repeating them as part of a fact-check.

Step four: vote tactically. Yes, it would be nice to have a rational electoral system, but we don’t. So check out how the votes went in your local area in 2017 and 2015. (For goodness’ sake, don’t trust the bar graphs on any election leaflets shoved through your door.) In most cases, the choice is simple: pick whichever you prefer of the two leading candidates in your area. For extra credit, you might try to find out whether the incumbent lies on the sane or insane wing of their own party — although many of the sane incumbents seem to be quitting politics, which is not encouraging.

I realise it might be tempting to exercise a protest vote, and that is every voter’s right. But bear in mind that the smug glow of ideological purity had better feel pretty good to make it worthwhile, because some of those protest votes are going to prove awfully counterproductive.

Step five: if you’re having a conversation about politics, try to learn something. There is no point in having a shouting match with friends and neighbours, and it is equally fruitless to sit around with like-minded people commiserating with each other about how terrible the other lot are. Why not, instead, ask what people have found most noteworthy about the campaign? An intriguing person, maybe, or a weird policy, a columnist or a podcast they’d recommend? When someone expresses an opinion, whether you agree or disagree, ask them to elaborate.

Be curious. You might learn something — and the psychological research suggests that they might learn something, too. In my own fond recollection — which is, no doubt, a nostalgic delusion — politics used to take the form of an argument between reasonable people about the best way to solve the country’s problems. If it is now evidence-free rather than evidence-based, insulting rather than respectful, destructive rather than constructive, then that’s something we need to change.

And since I can’t control what everyone else does, I suppose I’ll have to start by changing myself.

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

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Undercover Economist

Why we should all be playing games

“British politics is full of people who think they’re playing mah-jong but they’re actually playing Ludo.” Wise words from Robert Shrimsley on the Financial Times’s politics podcast — but I fear the situation is even worse. British politics may be full of people who aren’t playing any good games at all. That would be a shame for them, and for us. Games are wonderful; we should all be playing more of them.

In truth, any sort of serious hobby seems to be valuable. Many of the smartest people have at least one: Albert Michelson, the physicist who measured the speed of light and won a Nobel Prize, painted well, played the violin, and was a seriously good billiards player.

Billiards is a good game,” he once announced. But it was not as good as painting. Painting was not as good as music. “But then music is not as good a game as physics.” Michelson was not alone. One long-running study of scientists, begun by the psychologist Bernice Eiduson in 1958, found that the most successful scientists tended to pursue arts, sports or music to a high level. In contrast, the less successful scientists “had no comments on hobbies or artistic proclivities either because they had none or found them irrelevant to their work”.

But of all the deep pastimes one might embrace there’s nothing quite like a tabletop game to sharpen the mind, strengthen friendships and ease the soul. A quick internet search will produce countless explanations of why boardgames are good for children — they get them away from screens and social media, subvert family hierarchies, allow them to experience success and failure in a safe environment, and teach social and cognitive skills.

I have no argument with any of that, but games should not just be for children. All those benefits accrue to adults, too.

Almost a decade ago I interviewed Klaus Teuber, creator of The Settlers of Catan, one of the best and most successful modern boardgames. “You can know someone for 10 years,” Mr Teuber told me, “and the first time you play a game with them you see a side you never saw before.”

It’s true. A good game is a refreshing change of tone from gossip or dinner party chit-chat about politics or house prices, yet it remains a convivial activity for consenting adults.

Games can be a serious matter, of course. War games have been used by the military since the early 1800s, when the Prussian army’s love of Kriegsspiel was widely thought to be one of the secrets of their military success. A tabletop war game uses models to represent troops, dice to represent the vicissitudes of war, and an umpire to introduce the possibility of miscommunication. It teaches deeper lessons than simply thinking and planning, while being just as safe.

Thomas Schelling — a cold war strategist and winner of the Nobel Prize in economics — once wrote: “One thing a person cannot do, no matter how rigorous his analysis or heroic his imagination, is to draw up a list of things that would never occur to him.” War games offer a solution to that conundrum: the experience of trying to outwit a gaming opponent makes the unimaginable start to seem familiar.

More elaborate field exercises can produce a great deal of understanding. Steven Johnson, author of Farsighted, argues that a major US Navy war game exercise in 1932, “Fleet Problem XIII”, highlighted the vulnerability of US naval bases to attack from Japan. The game produced the insight, if anyone cared to use it.

But the highest form of gaming is, of course, the role-playing game, of which Dungeons & Dragons is the most famous example. Role-playing games are notoriously difficult to describe, but they combine the dice-rolling rules of a war game with the long-running characters of a soap opera, and a healthy dose of improvised theatre and “let’s pretend”.

Martin Lloyd, the creator of the children’s role-playing game Amazing Tales, argues that such games have all sorts of benefits: they bring friends together, inspire individual and collective creativity and require problem-solving. They have sometimes been used with more ambitious therapeutic goals in mind — for example, to help people on the autism spectrum develop social skills, and as an alternative to group therapy for military veterans. But for most gamers the point of games is that they are enjoyable in a deeper way than most mere entertainments. They create moments of enchantment to rival the finest music or theatre. A good game has you solving puzzles, throwing yourself into improvised acting, and then helpless with tears of laughter. The friendships I’ve forged over the gaming table have been the ones that have lasted.

But Mr Teuber put it best. “Every day we work hard and we make mistakes and we are punished for those mistakes. Games take us to another role where you can make mistakes and you don’t get punished for them. You can always start another game.”


Written for and first published in the Financial Times on 1 November 2019.

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Undercover Economist

What exactly is so bad about uncertainty, anyway?

The one certainty in politics at the moment is that it is uncertain. From a British point of view, there is the apparently endless game-playing over Brexit — coupled with the looming prospect of an unpredictable and highly consequential general election. I’m sure I don’t need to elaborate on the situation in the US.

The received wisdom is that political uncertainty is bad news, at least for the economy. Is that really true? And, if so, why? If we understand the problem a little better we may also have a sense of whether there is any chance of improvement.

The evidence from the research of various economists suggests that uncertainty is indeed a brake on economic activity. Nuno Limão and colleagues have shown that uncertainty over trade policy is itself a kind of barrier to trade. Meredith Crowley and colleagues have found that UK companies were less likely to enter EU markets, and more likely to exit, if those markets were more exposed to the risk of a breakdown in Brexit negotiations. And Nicholas Bloom has found that uncertainty — measured in various ways — tends to be a cause of recessions as well as a consequence. So the problem is real, but what exactly is causing it?

One theory is that there is something deeply unsettling about ambiguity. Back in 1961, a promising young economist named Daniel Ellsberg explored this issue in the Quarterly Journal of Economics. (Mr Ellsberg later became far better known as the whistleblower who leaked the Pentagon Papers.)

Mr Ellsberg imagined a gamble involving two urns, each known to contain a hundred red or black balls in total. The first urn contains 50 red and 50 black balls. The second has an unknown mix. Let’s say I offer to pay you $100 if the ball you draw out of an urn is red. From which urn would you prefer to pick — the first or the second? Most people prefer the first. But people also prefer the first urn if they are paid $100 for a black ball instead. It’s not that they feel their chances are better — logically, the first urn cannot possibly be a better choice for both red and black. It’s just that . . . well, the known risk feels less uncomfortable than the ambiguous risk.

That aversion to the unknown may explain part of why uncertainty seems to corrode the foundations of the economy. But I suspect that the main problem is something far less ethereal.

Imagine you are an entrepreneur with plans and permits to build, say, a cardboard recycling facility in Peterborough. If there is a fairly soft Brexit, or no Brexit at all, you think that a large plant would be profitable. If there is a hard Brexit, or even no deal, you still think you can make money with a smaller installation. What do you do?

Simple: you wait. You wait even though you would want to build some kind of factory under any circumstances. You wait because you will make a better decision if the Brexit uncertainty resolves itself. The uncertainty makes it more profitable to delay.

That’s the theory. What do the data suggest? In the UK, private sector investment is remarkably weak, given that the UK has not been in a recession. In fact, it is hard to find a parallel where a growing UK economy has been accompanied by such feeble investment. This weakness has persisted since about the time of the 2016 referendum. It is weak both historically and compared with the situation in the US and Germany. Perhaps that is all a coincidence, but I rather doubt it.

In the face of uncertainty, companies will value flexibility. The economists Benjamin Nabarro and Christian Schulz, contributing to the Green Budget of the Institute for Fiscal Studies, make an intriguing argument. They speculate that given persistent Brexit uncertainty, this desire for flexibility is being satisfied by hiring workers instead of making large investments in capital. That is a way to expand output without doing anything irreversible. It’s good news for jobs, and bad news for investment and productivity.

My example of the cardboard recycling plant implied that uncertainty will tend to depress investment, but uncertainty is not always an obstacle in that way. If the building permit for that recycling facility was about to expire, making this a now-or-never decision, you would find yourself making your best guess and building something. If the uncertainty would not be resolved until 2025, you might also decide the costs of delay were too great, and build immediately.

There are even cases where uncertainty encourages exploratory investments: not knowing what will happen, you try to ensure that you have a toehold in every possible future. For example, the mere possibility that a large country’s government might get serious about climate change encourages research into low-carbon technologies.

Not all uncertainty depresses investment, then. But if there is a scenario guaranteed to put everyone’s plans on ice, it is this: a major decision with weighty consequences that is forever being postponed. If that reminds you of anything, you are not alone.

Written for and first published in the Financial Times on 25 October 2019.

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Undercover Economist

The weakest link theory that explains our economic woes


I was delighted to see Abhijit Banerjee, Esther Duflo and Michael Kremer announced as winners of the Nobel memorial prize in economics. By championing the use of randomised controlled trials in development projects, they have added large and useful doses of rigorous evidence to a discipline that can be overfond of reasoning from a comfortable armchair.

The spotlight this week has understandably been on Prof Duflo. She is a superb economist, highly charismatic and the youngest winner by far. She is also only the second woman to win the prize, after Lin Ostrom in 2009. Since Prof Ostrom was a political scientist, and not as well known in the economics profession as she should have been, Prof Duflo is arguably the first female economist to win the prize. That has huge symbolic importance for a profession that continues to struggle with diversity.

All three winners have made major contributions beyond the championing of randomised trials that won them the prize. Prof Kremer, in particular, has made an unusual series of insights. With Seema Jayachandran, he proposed a way to constrict funding to oppressive or corrupt regimes. An international court could declare that their borrowing was “odious” and need not be repaid by a successor government. This declaration would dissuade banks from lending in the first place.

With his wife, Rachel Glennerster, now chief economist of the UK’s Department for International Development, he set out the case for an “advanced market commitment” to fund the development of vaccines and medicines that the market would otherwise be unlikely to provide. That proposal later took shape as a $1.5bn fund to pay for a pneumococcal meningitis vaccine that did not yet exist. Several hundred million children have since received the vaccine.

Then there’s Prof Kremer’s O-ring Theory of Development, which demonstrates just how far one can see from that comfortable armchair. The failure of vulnerable rubber “O-rings” destroyed the Challenger space shuttle in 1986; Kremer borrowed that image for his theory, which — simply summarised — is that for many production processes, the weakest link matters.

Consider a meal at a fancy restaurant. If the ingredients are stale, or the sous-chef has the norovirus, or the chef is drunk and burns the food, or the waiter drops the meal in the diner’s lap, or the lavatories are backing up and the entire restaurant smells of sewage, it doesn’t matter what else goes right. The meal is only satisfactory if none of these things go wrong.

Once you start to think about O-ring problems, you see them everywhere. A bank is useless if you can’t trust it to keep your money safe from hackers. The most stylish and comfortable car is worth nothing without reliable brakes. You can build a sophisticated factory in a jungle but your efforts will be in vain if you can’t keep the road to it open.

What’s less obvious is that the logic of O-ring problems dramatically changes the way an organisation — or an entire economy — works. Because a single failure can doom an entire project, several things follow. The first is that like attracts like: the best chef does his or her best work with the best suppliers and the best waiters in the best kitchen. It is pointless to ask the best waiter to serve poisonous slop made by an incompetent chef, and pointless to ask the best chef to prepare meals into which an incompetent waiter will sneeze. To spread out the talent is to squander it.

(Prof Kremer’s own career offers an example: he was a research assistant for a paper co-authored by Larry Summers, future US Treasury Secretary. Another assistant was Sheryl Sandberg, future Facebook chief operating officer. High performers seek out high performers.)

The second implication is that inequality is endemic. Since the most skilled workers have the most skilled colleagues and the best equipment, they are vastly more productive than others who are only fractionally less skilled. A modest variation in skills leads to a huge variation in wages. This is why blue-chip companies recruit only from elite colleges and universities. Why take a chance on someone whose face doesn’t fit? Policymakers trying to create a more equal society must find some way to swim against this tide.

Third, O-ring economies are self-perpetuating. If an economy has undrivable roads, unreliable electricity, impassable queues at customs, corrupt courts, and untrained workers . . . well, where is progress to come from? Improve the roads and you’ll still be foiled by the electricity; train the workers and the crooked legal system will still take you down.

For an individual, the question is how much education should I try to acquire? It depends on how much skill others have. If I can’t reach a job market full of highly competent people, there is little point in wasting time and effort developing skills that will be wasted.

The O-ring model is merely a simple way of thinking about how an economy might work — albeit one that seems packed with insight. Prof Kremer didn’t stay in his armchair for long. He and this year’s other winners have been demonstrating just how much economics, wisely used, can deliver.


Written for and first published in the Financial Times on 18 October 2019.

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Undercover Economist

Hug your enemy rather than wrestling the pig

Brexit has already taken quite a toll on the British economy, and worse may be lying in wait. But the political damage seems graver. Lies, threats and insults have become ubiquitous. So has open contempt both for the opposite side and for once-respected institutions. As for the situation in Northern Ireland, or diplomatic relations between the UK and the rest of the EU, let’s not even think about it. (The English usually don’t.)

It’s tempting to obsess about the tone of politics, but that is a trap. If we spend our time wringing our hands over the form of the political conversation, it leaves little space to think about the content. Remember the lesson of the lie on the bus: a fact-checking dispute about the UK’s contributions to the EU successfully consumed all the oxygen in the 2016 referendum, leaving no breathing space for a discussion of the issues involved. The exact claim didn’t matter: what mattered was that in order to dominate attention it had to be palpably false.

This season’s versions of the lie on the bus are the insult and the threat. Boris Johnson specialises in the insult. A freshly coined one this week was “uncooperative crusties”, although his crass responses to MPs reminding him of Jo Cox’s murder will live longer in the memory. The prime minister’s adviser Dominic Cummings prefers the threat — recall his infamous clash with the MP Karl Turner, who complained, “I’ve had death threats overnight”, to which Mr Cummings retorted, indefensibly, “Get Brexit done”.

Yet it was Mr Turner who started the altercation, with camera in tow. It added to the bitter circus, while distracting from the absurdity of demanding that anyone “get Brexit done” — which makes as much sense as telling a pregnant woman “get the child done”. Mr Cummings will have been pleased enough with that distraction.

A no-deal Brexit would be the beginning of a bitter negotiation about what comes next. Agreeing on a deal would require previously undiscovered capacity for compromise and, again, would begin further discussion. Even revoking Article 50 and calling the whole thing off, presumably after a bitterly fought referendum, would hardly end the matter. There is no “done” here — just a long journey ahead.

Wherever that journey may lead, we need to find a way to get along with each other along the way. So here are three ideas. First, we should do ourselves and each other the favour of engaging with the issues. From the Irish border to the sense of hopelessness in some British towns, there are problems to solve. Next time you’re faced with someone whose politics who dislike, you may get along better if you discuss what can be done to help Blackpool or Merthyr Tydfil rather than which politician is the most despicable.

Second, we should try to avoid scorning people who seem — to us — underinformed. That’s partly because it behoves us to show humility: most of us know less than we think about how the world around us really works. How many of us can honestly say we’d thought through the difference between the single market and the customs union until after the referendum? How many can honestly say we fully understand it now? But it’s also because sneering at someone’s ignorance is a missed opportunity to explore an issue together. Most people we meet have something to teach us, and we have something to teach them.

Third, and most important, we need to remember that the people on the other side of the debate are still people — and usually people who, like us, want the best for themselves and the country. In response to the times we live in, my wife, a portrait photographer, has taken to asking people if they’re willing to be photographed hugging somebody who disagrees with them. Of course, the politicians refuse: Andrew Adonis and Nigel Farage had no interest in cuddling for her camera.

But what has been striking is that nobody else wants to hug across the political divide either. The request is not to hug Messrs Farage or Corbyn or Trump, but to hug an ordinary acquaintance with whom you disagree. As a Remainer, would you be willing to hug a Leaver, or vice versa? People hate the idea. Hugs are nice. But hug one of them? Never.

Fine. Perhaps the hug is too much for we emotionally reserved Brits. But if not a hug, might we at least hope for a handshake and a respectful conversation, rather than ostracism or shouting?

At the moment, everyone seems to agree that half the people in the country are ignorant, wicked or both. The only disagreement is over which half. A few people — some in politics, some in the media — find fertile ground in this outrage. It’s barren for the rest of us. We can do better.

One starting point is the old proverb, “Don’t wrestle with a pig. You get dirty and the pig enjoys it.” There’s truth in that. We just need to find a version that doesn’t dismiss our opponents as pigs.

Written for and first published in the Financial Times on 11 October 2019.

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Undercover Economist

The risks in raising the minimum wage

You can have too much of a good thing. Somebody should mention this to Sajid Javid, the UK’s new chancellor of the exchequer. This week he announced an increase in the minimum wage to two-thirds of the median wage, bringing it to around £10.50 per hour. His plans are to come to fruition in 2024, assuming there are no unforeseen events in British politics in the interim.

The US House of Representatives has the same deadline in mind for a plan to raise the federal minimum wage from $7.25 to $15. After the 2020 election, they may get their way.

I fear that we are creeping towards a serious mistake — maybe not now, but soon. And it isn’t too late to correct it. There are three elements to the mistake. The first is the scale of the changes afoot. When the minimum wage was first introduced in the UK in the late 1990s, only a few hundred thousand workers were paid it. Last year, 2m workers received the minimum wage. And according to the Resolution Foundation, a think-tank that has been strongly supportive of increases in the minimum wage, if it had been at two-thirds of median income last year, nearly 5m workers would have been covered — rather than 2m. Mr Javid’s proposal is a dramatic expansion in the number of people whose wages are set by the government rather than by supply and demand. The proposals in the US are even more seismic. This is a bigger idea than most people realise; let us hope it is also a good one.

The second element of the mistake is to politicise the minimum wage. That is old news in the US, where it see-saws up and down according to the whims of Congress. Over the decades it has been as low as $4.17 and as high as $11.55 in today’s money. The last sharp increase was in 2007-2009 — that is, in the teeth of the great recession. Most countries use a formula or a technocratic committee to set the minimum wage. The UK was among them, until 2015, when one of Mr Javid’s predecessors, George Osborne, decided there might be some fleeting political advantage in sidelining the committee and claiming credit for raising the minimum wage. Mr Javid has done likewise. British politics, after all, has had enough of experts.

This is unwise because the judgment of where to set the minimum wage is essentially a technocratic one. There is a trade-off. When we forbid an employer to pay less, we hope that low-paid workers will get a pay rise, but fear that they will simply get the sack. The trade-off requires evidence to assess. What’s more, the trade-off is asymmetric. Any rise in the minimum wage earns immediate praise, while the jobs lost are lost gradually, as firms ponder new hires or buy labour-saving machines. When benefits are immediate and costs are delayed and hidden, it is best for everyone’s sake to delegate the decision to someone who isn’t running for re-election.

Nor is it easy to undo a mistake. Once a minimum wage rises too far, and the new machine is installed or the factory is moved offshore, reversing the policy will not easily bring the old jobs back.

The third element of this potential mistake is the rebranding of the minimum wage as a “national living wage”. This is a serious conceptual error. A minimum wage should be set with reference to the trade-off between better pay and fewer jobs. That is true whether it is half what anyone could live on, or 10 times as much.

I’m all in favour of everyone having enough income to live on — and in a rich country such as the UK or the US, “enough to live on” should mean much more than just food, clothes and shelter. But if a decent living wage is higher than a minimum wage that would destroy jobs by the million, that is not a problem that minimum-wage legislation can solve. Instead, it requires the government to provide some kind of basic income or tax credit. Mr Osborne’s rebranding of the minimum wage was coupled with reductions in tax credits; it was the perfect smokescreen. In the longer term, a minimum wage needs to be bolstered by investment in education, infrastructure and other productivity measures that allow every worker a chance to earn a good wage. If workers don’t have an environment in which they can be productive, higher pay cannot simply be wished into existence.

I don’t mean to strike a tone that is too apocalyptic. In the UK, increases in the minimum wage have eaten into the problem of low pay with no apparent impact on employment and only a small sign of an impact on hours worked. The international evidence is mixed: on balance it suggests that minimum wages can and do destroy jobs for the low-skilled, but perhaps not as dramatically as we economists once feared.

It’s possible, but not certain, that further rises will bring further benefits. Yet it is dangerous to view the minimum wage as a free lunch, something to be dished out by politicians without pondering either the evidence or the risks. It is more like a strong medicine with serious side effects. It should be prescribed with caution and under expert supervision — not mixed with sugar and downed in one gulp.


Written for and first published in the Financial Times on 4 Oct 2019.

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Undercover Economist

Beware of simple ideas that become serious pains

“An act of economic vandalism,” said the trade union Unite. What did they have in mind? There are all too many candidates. Apparently the vandalism was a failure to prop up a package holiday company, which suggests the bored kids in my neighbourhood are missing a trick.

The collapse of the UK tour operator Thomas Cook is a big blow: 150,000 British residents have been stranded overseas, others have seen long-anticipated holidays evaporate and many thousands of jobs are at risk. The prospect of well-paid executives strolling off into the sunset adds to the stink.

Something must be done! But what? Unite has called for the government to “stand behind” Thomas Cook, which doesn’t sound like a big ask — until you realise that even the temporary survival of the tour operator would cost £100m or more. I often stand behind things — yellow lines, pot plants, the kitchen sink. I hadn’t realised it could be such an expensive business.

Whenever something goes awry — and Thomas Cook is not the only thing going awry in the world — it is tempting to believe that government should roll up one sleeve and plunge its arm in up to the elbow. That is not inevitably a bad idea, but one must always reflect on whether the effort will do more to harm than to help.

The Labour party has no patience for such reflection. For example, rightly worried that houses are too expensive, they propose that anyone who rents a property would gain the right to buy it at a price set by the government. John McDonnell, the shadow chancellor, described this idea to the FT, adding: “I don’t think it’s complicated.”

He should think harder. Who would be a landlord, if the act of letting out a house incurred the obligation to sell it? The entire private rental market would collapse. Some landlords would reject tenants to sell at a price of their own choosing; others would grit their teeth and keep the house empty. Just because the idea would hurt landlords does not mean it would help tenants.

The grand plans don’t stop there. A fringe meeting of the Labour party conference — attended by Mr McDonnell — was even joking about nationalising Greggs, supplier of Cornish pasties and steak bakes to a hungry public. This hilarity aside, there is a slippery slope in action here: the more a government feels it needs to take action when anything in a complex modern economy goes wrong, the closer we are to appointing a Minister for Sausage Rolls.

The left is particularly susceptible to this sort of foolishness, but the right is not immune. One Twitter troll complained to me that an interview with equal pay campaigner Carrie Gracie was “fake news” because unequal pay was illegal — so of course it could not exist. I’m sure Mr McDonnell would find that view as absurd as I do — and yet he and the troll do seem to share a touching faith that when you change the law, problems simply vanish.

Meanwhile, US president Donald Trump has found his government buying dairy products to shield farmers from his own trade war. We’ve been here before, and the story ended with the US administration renting vast underground caves and filling them with government cheese. A simple idea turns into a serious headache.

Then there is “take back control”, the Brexit slogan that sounds good until you think about it. Who exactly is going to get this much-vaunted control, and how do they propose to use it? British citizens already had control over some valuable things — notably the right to travel to, work in or trade with any part the EU. Exactly what sort of “control” will replace those freedoms remains unclear. Instead, Prime Minister Boris Johnson announces “let’s get Brexit done”, as though he were planning to mow the lawn.

It is, of course, possible for governments to develop well-designed interventions. But a £2tn economy with 67m unruly residents is not a toy. The actions of both those in power in the UK, and those who wish to be in power, show no understanding of this. Both sides want radical change but have no deep interest in what it is they would like to change.

The government’s response to the risks of a no-deal Brexit are a good example: after being warned of severe disruption, the minister in charge, Michael Gove, announced that preparations had been stepped up over the previous few weeks — as though protecting the UK’s fragile supply lines from being shredded by the government’s own recklessness was no more complex a task than writing an essay overnight before an Oxford tutorial.

The worst thing about foolish ideas is that draconian policies are needed to make them stick. Theresa May’s policy when home secretary of creating a “hostile environment” for immigrants sounded brutally simple, but turned into the national disgrace of the Windrush scandal. Those on the left who rightly deplore the policy should reflect on how many of the things on their economic wishlist will also require heavy-handed policing if they are to be delivered.

“I don’t think it’s complicated,” says Mr McDonnell. But it is. It really is.


Written for and first published in the Financial Times on 27 September 2019.

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Why we’re thinking about worst-case scenarios in the wrong way

Such excitement this week. I was about to stand up to give a talk, when I received a text message: I’d been hoping for a lift back from London to Oxford, but the motorway had been closed by an accident. Normally, I’d have cycled on my folding bike to the station, then hopped on the train. But I had not expected to need my lights and cycling after dark without them seemed ill-advised.

So I flagged down a black cab, first checking that it took credit cards because I didn’t have cash. Alas, the card machine went on the blink. I sat outside the station as the minutes ticked away while the cabbie kept turning the thing off and on again. Sprinting the length of Marylebone station in a suit and tie, with a Brompton bike under one arm, was not how I had envisaged the evening unfolding.

This brings me to a question some of us ask all too often, and some of us not often enough: what if it all goes wrong? The motorway, the bike lights, the card machine — when the fates seem stacked against me. Some friends of mine are prone to anxiety over the most unlikely contingencies. Others, particularly the Antipodeans, shrug off risks with a “she’ll be right”.

But I’ve become convinced that we don’t think about worst-case scenarios in the right way.

The first problem is that our sense of risk is pretty crude. The great psychologist Amos Tversky joked that most of us have three categories when thinking about probabilities: “gonna happen”, “not gonna happen” and “maybe”. Much of our intuitive thinking about worst-case scenarios seems to revolve around anxious people upgrading “maybe” to “gonna happen”, while the careless downgrade “maybe” to “not gonna happen”.

Tversky, alas, died before witnessing the UK prime minister Boris Johnson adjust his estimate of the probability of failing to agree a deal with the EU from “a million to one” to “touch and go”. I suspect the probabilistic acrobatics would have made him chuckle.

It would be helpful if our sense of risk was a little more refined; intuitively, it is hard to grasp the difference between a risk of one in a billion and that of one in a thousand. Yet, for a gambler — or someone in the closely related business of insurance — there is all the difference in the world.

And research by Barbara Mellers, Philip Tetlock and Hal Arkes suggests that making a serious attempt to put probabilities on uncertain future events might help us in other ways: the process makes us more humble, more moderate and better able to discern shades of grey. Trying to forecast is about more than a successful prediction.

But there’s another trap here: we can become sidetracked by the question of whether the worst case is likely. Rather than asking “will this happen?”, we should ask “what would we do if it did?” The phrase “worst-case scenario” probably leads us astray: anyone can dream up nightmare scenarios.

On my journey home this week, I could have been killed in the crash that closed the motorway. Oxford could have been hit by a nuclear strike. Neither is a helpful scenario for the purpose of travel planning.

Instead, I should have thought: what if the lift does not work out? What if small change and a card won’t do? Neither contingency was likely, but both were possible and easily dealt with. Worrying about nuclear strikes would not have helped me — but neither would shrugging and assuming nothing could go wrong.

To help us think sensibly about these worst-case possibilities, Gary Klein, psychologist and author of Seeing What Others Don’t, has argued for conducting “pre-mortems” — or hypothetical postmortems. Before embarking on a project, imagine receiving a message from the future: the project failed, and spectacularly. Now ask yourself: why? Risks and snares will quickly suggest themselves — often risks that can be anticipated and prevented.

Contingency planning is not always easy. The UK is currently wrestling with the prospect that the government will fail to agree terms for leaving the EU, triggering disruption in the short-term. The government’s own Operation Yellowhammer planning documents have described the woes that would result both as the “base case” (the truth) and a “worst-case scenario” (the government sucking in its stomach while posing for a selfie).

For a rational policymaker, the difference between base case and worst case is irrelevant: since there are few benefits to the back-to-square-one quagmire of negotiations that no-deal would bring, the short-term disruption is something to be avoided, whether or not it is likely. But since our government set rational policymaking aside some time ago, the rest of us must contemplate the risks and do what we can to prepare. That is true whether the chance of a Halloween horror is 5 per cent or 50 per cent.

In a febrile political atmosphere, it is hard to step back and ask: what if this all goes wrong? But we must try. And we can only regret that David Cameron didn’t perform a pre-mortem before calling a referendum in the first place.

Written for and first published in the Financial Times on 20 September 2019.

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How this climate change economist changed my world

I read a lot of economics papers, but I don’t often read economics papers that make me think, “this changes everything”. But Martin Weitzman wrote one. I still remember exactly where I was when I read it. Even for a nerd like me, that’s not normal.

Professor Weitzman took his own life in late August. He was 77 and had reportedly been worried that he was losing his mental sharpness.

Weitzman’s sad death prompted me to reflect on what it was about his essay that so struck me. It was a commentary on Lord Nicholas Stern’s Review on the Economics of Climate Change. Weitzman gently pulled the Stern Review apart — “right for the wrong reasons” — and offered an alternative view of the problem.

For those of us who think climate change requires bold, urgent action, there are two awkward facts to contend with. The first is that its most worrying impacts — including floods, crop failures and diseases — are unlikely to manifest at full strength for decades or even centuries. The second is that because the world has been getting dramatically richer, future generations are likely to be much wealthier than we are.

Both these awkward facts militate against doing anything too expensive in the short term.

Here’s an analogy: imagine that I discover an incipient damp problem in my house. A surveyor tells me that if I spend £1,000 now, that will spare my great-grandchildren £5,000 of repair works in a century. At first glance it seems that I should fix the damp.

On reflection, though, spending money now would be foolish. Investing £1,000 in the stock market on their behalf would be better. At a modest 3 per cent real rate of return, it should be worth about £20,000; at 5 per cent it will be worth £130,000.

In any case, won’t my great-grandchildren be vastly richer than I am, just as I am vastly richer than my great-grandparents? Why worry? They’ll cope.

This oversimplification of the complexities of climate change gets at something important. Lord Stern’s case for action depended on arguing that our super-rich descendants living in the far future should weigh very heavily in our calculations. It is hard — not impossible, but hard — to square that with how we behave in respect to any other issue, personal or social. We simply do not set aside nine-tenths of our income to benefit future generations.

Weitzman was among several prominent economists to raise this concern. But he then asked us to contemplate the risk of runaway effects. An example: as arctic permafrost thaws, a huge volume of methane, a powerful greenhouse gas, may be released. Other economists have recognised the issue of “tail risks”, well outside the most likely scenarios. None have thought more deeply about it than Weitzman.

Central estimates can lead us astray. The most likely scenario is that climate change will cause real but manageable suffering to future generations. For example, the World Health Organization estimates that between 2030 and 2050, climate change may cause an extra 250,000 deaths a year because of threats such as malaria, heat exposure and malnutrition — a less serious problem than local and indoor air pollution, which kill 8m people a year. If we focus on the central forecast, it is local air pollution that should get most of our attention.

It is only when we ponder the tail risk that we realise how dangerous climate change might be. Local air pollution isn’t going to wipe out the human race. Climate change probably won’t, either. But it might. When we buy insurance, it isn’t because we expect the worst, but because we recognise that the worst might happen.

The truly eye-opening contribution — for me, at least — was Weitzman’s explanation that the worst-case scenarios should rightly loom large in rational calculations. If there’s a modest chance that the damp problem will give all my great-grandchildren fatal pneumonia, I shouldn’t ignore that. And my great-grandchildren wouldn’t want me to: the probably rich great-grandchildren would happily sacrifice some trivial amount of income to avoid being the possibly dead great-grandchildren. But they won’t have the choice. It’s up to me.

Weitzman was a stupendously creative man. Other celebrated contributions studied the trade-off between pollution taxes and pollution permits, the “Noah’s Ark” problem of what to focus on when preserving biodiversity, and an early argument in favour of companies sharing profits with their employees.

“If you don’t think an idea might be worthy of the Nobel Prize, you shouldn’t be working on it,” he told one colleague. Some economists would say that he reached that impossibly high standard more than once — and were surprised that he was not named as a joint Nobel Prize winner last year, when William Nordhaus was recognised for his work on climate change economics.

Nevertheless, the message of Weitzman’s recent work has influenced the policy debates on climate change: the extreme scenarios matter. What we don’t know about climate change is more important, and more dangerous, than what we do.

Written for and first published in the Financial Times on 13 Sep 2019.

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