When the Chancellor of the Exchequer reduced value-added tax from 17.5 per cent to 15 per cent as an incentive for consumers to spend, there was a widespread view that the reduction was too small to be of use. Now that we are approaching the time when VAT returns to 17.5 per cent, some retailers say that the increase will have a negative impact. This doesn’t sound logical, but is it true?
Andrew Hewett, Hertford

Dear Andrew,

I remember the complaints well: how is a 2.5 per cent cut in the price of goods going to boost spending? (Let us leave aside the facts that while the cut was 2.5 percentage points, it was actually only 2.1 per cent; that not all goods are liable for the tax; and that some retailers decided to increase pre-tax prices rather than reduce post-tax prices.) And in truth, the VAT cut, while billed as a “stimulus”, was tiny compared with the vast government deficit.

My own view is that people are price-sensitive, so the modest VAT cut probably had a modest effect, the increase will reverse that effect, and the details will be so small that we will never know for sure.

Is it logical to claim that the cut was pointless but the rise is significant? The motive for the claim is obvious enough. And it may be justified. The switch each way caused a fixed cost: menus had to be printed, staff trained, accounts re-counted and tills reprogrammed. It is reasonable, and perhaps true, to say that the benefits for businesses of the VAT cut were swallowed by the costs of adjustment. The VAT rise, and a second round of adjustment costs, simply adds injury to the insult.

Psychology may be at work too. Behavioural economists believe in “the endowment effect”, a tendency for people to overvalue the status quo. The VAT cut seemed trivial until retailers got used to it. Now they regard it as indispensable.

Questions to economist@ft.com

Grant Thornton did a photo-shoot and audio interview with me a few months ago about “My Big Decision”. I told them I don’t believe in big decisions, but for all three die-hard Tim Harford fans out there, here’s the interview.

Marketplace worked with me to produce this video about the economics of signalling in the workplace. They did a fantastic job, and you even get to hear my David Attenborough impression. The video is loosely based on one of the Dear Economist letters. Enjoy!

Joel Waldfogel, author of “The Deadweight Loss of Christmas”, has a book on the subject, “Scroogenomics“. Appropriately, it is a quintessential gift: beautifully presented but under the glorious exterior there’s not that much there: it’s about the size of a pocket diary. I’d guess it’s 20,000 words, tops…

I like it, though, having read the first half over breakfast. I’ll try to deliver a proper response in an appropriately-seasonal column.

If you want to see Waldfogel defend his thesis, go to the LSE on 3 December. I’ll be giving my own take on Waldfogel courtesy of the School of Life on 13 December - and I think Joel has it wrong. (But I’ll read on: he has thought about this a lot.) Here is my earlier take on Joel Waldfogel; here is the man himself.

Do waiters in mid-priced restaurants work less than those at high-end ones? If not, shouldn’t their tips be the same (in absolute terms)?
Manoj

Dear Manoj,

I can see where you’re coming from: a 10 per cent tip on a £20 meal is less than a 10 per cent tip on a £100 meal. If it’s the same waiter doing the same job, shouldn’t the tip be, say, £5 for each meal – a 25 per cent tip in one case and a 5 per cent tip in the other?

This is not what happens. According to a survey by the economist Ofer Azar, the absolute size of tips in the US is overwhelmingly dependent on the size of the bill. In Europe, formal service charges often replace tips and the FT’s restaurant insider, Nicholas Lander, tells me that such charges tend to be proportionate to the bill – or if anything, to be a higher percentage in the fanciest restaurants.

I am not sure the puzzle is quite as perplexing as you think, though. First, the connection between what the customer tips and what the waiter gets is far from straightforward. Waiters are not slaves: if tips are too low to attract them, then the restaurant owner will have to add a wage. And if a waiter can earn hundreds of pounds in tips at a top restaurant, the owner will be able to demand a share without running short of staff.

Second, high-priced restaurants tend to have fewer customers per waiter, to ensure attentive service. They receive higher tips, but fewer of them.

Despite these points, it is of course possible that waiters are paid more in better restaurants. But in a capitalist society, skilled workers expect to earn more. I suggest you sample the quality of service at El Bulli or the Fat Duck, and pop into Pizza Hut on the way home. Then tell me again that the waiters should earn the same at each place.

Questions to economist@ft.com

Should managers be giving more frequent performance appraisals? Do “customer feedback” questionnaires serve any useful purpose? The answers are not obvious. A feedback-free environment is not conducive to learning new skills, but then again, feedback itself can be confusing or demoralising.

I suffered from both too little and too much feedback in my last year of school. That was when I decided to stop going to piano lessons, having been coasting lazily at a mediocre level for years. My piano teacher, who had maintained a tactful silence, wistfully remarked that I had a beautiful touch on the keyboard – better than any of her hard-working, virtuosic prodigies. I was not impressed. Had she said that five years earlier, I might have worked harder. (Or so I told myself.)

It was also the year that I decided to spend less time with my A-level Further Maths exercises and more time with my girlfriend. I judged that my modest mathematical skills would not deliver a grade I needed to get into university, which would have to come from some other subject. Getting a C was no more useful than getting an E. So I stopped working, duly got the E, and did indeed get into university by other means.

The remainder of the article can be read here. Please post comments below.

Alex Ritson of Cass Business School interviews me about Dear Undercover Economist.

Steven Landsburg, author of the original pop-econ book, the wonderful “The Armchair Economist”, is blogging in support of a new book, “The Big Questions: Tackling the problems of of philosophy with ideas from mathematics, economics and physics”. I expect he will infuriate everyone because that’s his style.

The blog is here. The first two posts are on healthcare reform (insurance is part of the problem: well said!) and on why Richard Dawkins is wrong about God.