Yearly Archives: 2008

Dear Economist: Should I take down last year’s Xmas tree?

December 6, 2008 2:25 am

Dear Economist,
Due to multiple disruptions to my schedule since the first of the year I have not had the opportunity to take down my Christmas tree. At this point, should I leave the tree up for the remainder of the year or take it down now?
D. Seattle

Dear D. Seattle,

We all procrastinate from time to time. I, for example, received your e-mail in the spring of 2007. Forgive me if in the interim you have solved your dilemma, but it is possible that my answer will still be useful.

I think we can postulate a utility function along the following lines: having a Christmas tree up during the Christmas season brings positive utility, but diminishing marginal utility over time. After a while, the marginal utility is negative: the tree becomes an irritation, offering neither use nor ornament.

Given that parsimony is a virtue in economic modelling, let us assume that if the tree (presumably plastic) survives the year, its presence at the following Christmas will not seem like old news, but will be as welcome as ever. Assume also that putting up the tree and taking it down bring disutility, although in my experience this is not necessarily the case.

All these simplifying assumptions create a bias towards leaving the tree up; despite that, working through a few numerical examples suggests to me that in almost all cases you are better off taking the tree down. Even now, in early December, I would advise you to dismantle your festive foliage and enjoy the thrill of renewing it on Christmas Eve.

If the tree is still up, I would suggest that your problem is deeper than poor cost-benefit analysis: it is a profound tendency to put off action that is troublesome in the short term. We have developed an institution to deal with this. It is called the New Year’s resolution.

Questions to economist@ft.com

Posted in Dear Economist | Permalink

More or Less

December 5, 2008 1:41 pm

A brand new series of More or Less starts today – in fact, in less than an hour. We’re now on the air (Radio 4) at Fridays at 1.30pm GMT and Sundays at 8pm GMT. You can also listen online, subscribe to a podcast, and read more at the More or Less website here.

This episode: how statistics on child abuse have been mis-reported; is fishing really more dangerous than boxing?; the simple mathematics of the credit crunch; and the psychological error that may be undermining one of the UK’s most prestigious business awards.

Posted in Everyday economics | Permalink

A free lunch with a very high price

November 29, 2008 10:06 am

The New York Times reports on a sale at Wal-Mart – and an awful way to die:

One worker, Jdimytai Damour, 34, was thrown back onto the black linoleum tiles and trampled in the stampede that streamed over and around him. Others who had stood alongside Mr. Damour trying to hold the doors were also hurled back and run over, witnesses said.

Some workers who saw what was happening fought their way through the surge to get to Mr. Damour, but he had been fatally injured, the police said. Emergency workers tried to revive Mr. Damour, a temporary worker hired for the holiday season, at the scene, but he was pronounced dead an hour later at Franklin Hospital Medical Center in Valley Stream.

Four other people, including a 28-year-old woman who was described as eight months pregnant, were treated at the hospital for minor injuries.

Detective Lt. Michael Fleming, who is in charge of the investigation for the Nassau police, said the store lacked adequate security. He called the scene “utter chaos” and said the “crowd was out of control.” As for those who had run over the victim, criminal charges were possible, the lieutenant said. “I’ve heard other people call this an accident, but it is not,” he said. “Certainly it was a foreseeable act.”

…Ugly shopping scenes, a few involving injuries, have become commonplace during the bargain-hunting ritual known as Black Friday, the day after Thanksgiving. The nation’s largest retail group, the National Retail Federation, said it had never heard of a worker being killed on Black Friday.

Not in the US, that is – this horrible incident took place in New York state – but such things have happened elsewere. And there is a broader economic lesson from such tragedies, as I once explained:

The more attractive the gift, the more damage people will do to themselves, and each other, trying to get hold of it.
If that idea seems counterintuitive, it is nevertheless true, as the managers of Ikea, the furniture giant, can testify. They opened a new London store recently, offering opening night discounts of nearly 90 per cent on a limited number of leather sofas. The store closed 40 minutes later after 6,000 people tried to force their way through the doors; several had to be taken to hospital.
The press immediately blamed either the boorish stupidity of the British public or the hypnotic influence of the wily Swedes. But the ill-tempered scenes are not unique to Britain: at the grand opening of Jeddah’s Ikea last summer, two people died in the crowds queuing to get hold of $150 vouchers. Nor are these incidents the result of some quasi-religious shopping frenzy. The curse of the free lunch is at work…

The full article is here.

Posted in Everyday economics | Permalink

What will we buy to help us through hard times?

November 29, 2008 1:25 am

Anyone wondering how consumers behave in a recession need simply trawl the tabloids for inspiration. According to The Sun, sales of aphrodisiacs are up and so are sales of maternity dresses: not everything turns down in tough times, it seems. Elle Macpherson’s underwear is said to be doing well; so too is the budget store Poundland. Some stories seem contradictory: one newspaper claims that Ryanair is set to make a profit, while another reports that weekend breaks to European cities are no longer in demand. Other stories are frankly bizarre: the crunch is alleged to have given a fillip to sales of cake, wooden “gravestones”, West End musicals and tickets to see the film Mamma Mia!

The quality press has not resisted the temptation to join in the guessing game: The Economist imagined the return of the nutritious fish snoek, while this paper found evidence that physiotherapists were in demand to perk up stressed City workers.

All this speculation is an engaging diversion, but tells us little. Even the more solid reports are often based on anecdotes; many are simply spin or wishful thinking. I’ve heard a food retailer muse that Fairtrade-branded goods are recession-proof, because once people have seen the light about the importance of fair trade, they never turn back. A travel industry expert told me that the worse things get, the more people feel in need of a holiday. Perhaps he is right. I wouldn’t bet on it.

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

Posted in Undercover Economist | Permalink

Dear Economist: Another chance for another ‘workaholic’?

November 29, 2008 1:21 am

I was recently stood up on a first date. The guy sent me a message four hours after we were supposed to meet, saying he hadn’t made it because he’d had to work and had been unable to call because his phone battery was dead. I was disappointed and angry. When he apologised and proposed meeting up later that week, I said no.

I found these excuses all too familiar. Using “working” as an excuse without respecting my time was exactly what my ex-boyfriend did to me. I always forgave him, and tried to be understanding. But he did this repeatedly and each time he knew that I was going to forgive him. Never again!

However, maybe everyone needs a chance to make things right. Am I punishing this guy for my ex’s behaviour?

Dear BC,

This is an experimentation problem: how much do you need to see of a man’s behaviour before deciding you’d be better off without him? It is also a signalling problem: you need to ensure you don’t appear to be a doormat.

With your ex-boyfriend, you made both mistakes: ignoring plentiful evidence of his selfishness, while encouraging him to walk all over you by forgiving his abuse. (Economists call this latter problem “moral hazard”.)

Yet I think you have been harsh on the new chap. Admittedly, he got off to a poor start. If you have a queue of suitors, by all means move on. If not, it would be wise to allow him one chance. Your “no second chances” policy gives him the right incentives in future, but that is irrelevant unless you give him another try.

You should make the price of a second date high but not infinite. Insist on lobster and champagne. If he complies, he has made it worth your while. He will also have learned to keep his phone charged in future.

Questions to economist@ft.com

Posted in Dear Economist | Permalink

Africa’s route to prosperity is not just a rocky road

November 22, 2008 2:20 am

Any first-time visitor to Africa is faced with a whirl of new experiences, but the awful roads are guaranteed to make an impression. That is true even in many cities – when I visited Douala, the commercial hub of Cameroon, I was appalled to realise that a four-wheel-drive vehicle was all but a necessity.

Cameroon’s roads also made an impression on Robert Guest, author of The Shackled Continent. Guest once hitched a ride on a Cameroonian beer truck travelling the equivalent of London to Newcastle upon Tyne – about 300 miles. The journey, detouring around a collapsed bridge on unpaved rainforest roads, took four days.

More rigorous studies have also found that the cost of transporting goods around west Africa is astonishingly high. One, albeit 15 years old, went so far as to conclude that road transport in Francophone Africa was six times more expensive even than in Pakistan.

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

Posted in Undercover Economist | Permalink

Dear Economist: Should we take a pay cut?

November 22, 2008 1:23 am

Should my co-workers and I accept a pay cut to preserve our jobs?
David A, London

Dear David A,

In principle, of course you should: this is so obvious that I’m not even sure why you bothered to ask. Another way of phrasing this question is to ask whether you would rather have most of your old salary or none of it.

You might object that unemployment has one big advantage over a pay cut: it means that you don’t have to work. For most people, however, this is not an advantage. The economist Andrew Oswald, one of a growing clan of “happiness economists”, has found that unemployment is extremely distressing, far more than could be explained by mere financial loss. If he is right, jobs bring happiness and self-respect, and even a severe pay cut is worth taking on the chin if that’s what it takes to stay in work.

It is true that taking a pay cut may result in a lower salary for many years, but losing your job, especially in a recession, is worse: your skills depreciate rapidly and you are quite likely to be worse off for the rest of your life.

You might reasonably ask why it isn’t more common to see swingeing pay cuts in place of redundancies. They are preferable for employees and probably preferable for employers, too. After all, sacking people is costly, as is going short-staffed and re-hiring people when things pick up. Far better just to squeeze salaries.

But that’s too easy. I suspect that there is a strong bias against salary cuts because otherwise employers would be demanding them every couple of weeks, with the flimsiest of excuses. Sacking somebody, in contrast, is not something an employer will tend to do lightly.

That is why “either pay me properly or sack me” is a good negotiating position. But, like many good negotiating positions, it may occasionally backfire.

Questions to economist@ft.com

Posted in Dear Economist, Everyday economics | Permalink

When did the UK’s national debt hit record levels?

November 18, 2008 5:34 pm

Michael Blastland explains:

1946,

1947,

1952,

1953,

1954,

1955,

1956,

1957,

1958,

1959,

1960,

1964,

1965,

1966,

1967,

1968,

1972,

1973,

1974,

1975,

1976,

1977,

1978,

1979,

1980,

1981,

1982,

1983,

1984,

1985,

1986,

1987,

1992,

1993,

1994,

1995,

1996,

1997,

1998,

2004,

2005,

2006,

2007 and…

2008.

This is what happens when we write about records while ignoring inflation and economic growth. The full piece is well worth a read.

Posted in Everyday economics | Permalink

Dear Economist: How do I calculate an appropriate salary?

November 15, 2008 2:10 am

I have worked full time for six years and presently earn £40K. I am also about to attain chartered engineer status, which sounds good. However, I stumbled on an old letter the other day that confirmed my admission into nursery aged four, 29 years ago! Looking back at all the money invested in my more than 20 years of formal education, I feel short-changed by my income and quality of life.

Do you know how I can calculate a “fair” figure that will reflect my master’s degree and international experience? I want to use this as the minimum salary for my next job.
G

Dear G,

I’m not going to attempt to calculate your “fair” figure: it would do you no good. Employers care very little about what salary would be a fair reward for your background; instead, they want the best possible people for the lowest possible cost. Competition from other employers typically leads them to compromise on both counts.

Your fair figure might eat away still further at your fading happiness. It seems that you were satisfied until you reflected on your education and inflated your aspirations. This is sad but typical, if the economist Andrew Oswald is to be believed.

Oswald has compared people’s circumstances with their happiness. He finds that, other things being equal, happiness rises with money, good health and a successful marriage, but falls as a person’s “expected income” rises. Expected income is the income that another person of the same age, sex and education level would typically earn. In other words, more educated people have richer peers and so tend to be less satisfied.

What is especially sad is that your income would comfortably put you in the richest 10 per cent of UK citizens, who are themselves relatively rich. As for being short-changed, I doubt that you personally paid for your nursery education. Put away your admission letter, and forget about it.

Questions to economist@ft.com

Posted in Dear Economist | Permalink

How to win the Nobel prize by a whisker

November 15, 2008 2:00 am

The Nobel memorial prize in economics is typically awarded to researchers who have jointly advanced some important method or idea. When the 2008 prize was awarded to Paul Krugman alone, for his contributions to trade theory and economic geography, other candidates who might have shared the prize – but didn’t – must have counted themselves one small step further away from receiving the call from Stockholm.

Among them are Jagdish Bhagwati, Krugman’s teacher and champion, and a giant in the field of international trade; and Elhanan Helpman, who wrote an influential book with Krugman on the new trade theory.

But I thought in particular of Avinash Dixit, without whom Krugman might have abandoned economics 30 years ago and so never formulated his new trade theory. Krugman has said he left graduate school “directionless … I was not even sure whether I really liked research.”

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

Posted in Undercover Economist | Permalink