Monthly Archives: January 2009

Although Christmas in the company of various members of the extended family was fun, it was interrupted and spoiled by family rows over who got to watch what television programme, who got the best seat, who did the washing up, and so on. Can economics prevent such rows spoiling next Christmas?
Penny Belton, Gloucester

Dear Penny,

I am all in favour of assigning clear property rights in such cases. Someone can “own” the right to the remote control; the best seat can also go up for grabs, as can exemption from the washing-up rota.

One can get pretty fancy about these auctions, but I wouldn’t advise doing so unless you’re going to buy bespoke software and hire a team of specialist economists. A simple set of auctions for temporary use of selected scarce resources should do the trick.

I have made this sort of recommendation before on the basis of sound economic theory. This year, I am delighted to report that I have empirical support. Bev Stewart, a grandmother from Yorkshire, auctioned the right to spend Boxing day in the comfy armchair in front of the telly. All family members were eligible to bid; she was expecting a “rabble of Stewarts” to descend upon her the day after Christmas.

The winner, after 17 bids from a range of bidders, was her daughter-in-law for the sum of £13.50. The ingenious Grandma Stewart not only raised money for a good cause, but prevented the annual arguments over what she is quoted as saying is the “perfect seat … straight in front of the TV and has got the coffee table at the side for you to rest your drink on and the TV remote, so everybody wants to sit there”.

Twenty-five family members and no arguments. If auctions can work for Bev Stewart, they can work for us all.

Questions to economist@ft.com

More or Less airs on Radio 4 this Friday at 1.30pm GMT and Sunday at 8pm GMT. You can also listen online, subscribe to a podcast, and read more at the More or Less website here.

This program is a politics special, featuring Lib-Dem chief treasury spokesman Vince Cable, former Home Secretary Charles Clark and Fraser Nelson, the Spectator’s political editor. We’ll be talking about the use of numbers to shape policy – and their abuse in politics.

I wrote this for the Today program; scroll down and you can hear an interview with me on the subject from this morning’s show.

“I’m backing Britain…”, crooned Bruce Forsyth in 1968. “Yes I’m backing Britain/We’re all backing Britain.”
Despite Brucie’s support, the “I’m Backing Britain” campaign did not last long. The campaign’s T-shirts were even produced in Portugal. Typical, perhaps, of the difficulty of building up a head of steam in support of the national economy.
Economic patriotism was never really Britain’s thing, but it seems to be enjoying a comeback.
Dr John Sentamu, Archbishop of York, told an audience of farmers last October that he wanted a return to the “Buy British” mindset, with government support.
Last week, the environment secretary Hilary Benn also called for consumers to buy British food, also at a farming conference.
No doubt it was crowd-pleasing stuff, but it is puzzling.
After all, every time we deliberately Buy British we are also deliberately “Not Buying From Foreigners”.
In a world where racism is rightly viewed with disgust and contempt, it is a strange thing that discrimination against foreigners is regarded as acceptable, even laudable.
It is also not very smart, because there are so many more foreigners than us.
The economist Gary Becker has tried to calculate the economic costs of discrimination. What he found was common sense. When a large group and a small group discriminate against each other, it is the small group that suffers. The rest of the world could happily do without British products, but Britain cannot happily do without the rest of the world.
It is true that if a “Buy British” campaign persuaded many of us to seek out British products and turn away from imports, that would be a shot in the arm for the workers and companies who produced those products.
But here is the bad news. If foreigners find they cannot sell us their products, foreigners would also find that they had no sterling to buy exports.
For every local product that beat off foreign competition, there would be a British exporter struggling to find customers. We cannot have a world where we sell lots of products to foreigners, but we never buy anything from them.

Granted… such a world would, at least, cut down on food miles and you might think that would be good for the planet.
But not necessarily. Buying foreign products may add to food miles but it can also cut down on the need for heated greenhouses or intensive farming. In any case, international freight is very efficiently done. (No, those cut flowers from Kenya do not fly first class.)
When Hilary Benn had a different job – development secretary – he agreed with me, calling for people to buy Kenyan flowers for Valentine’s Day in 2007. He must have forgotten.
The biggest environmental cost of food transport comes, not from international shipping, but driving to and from the supermarket, often with just a couple of carrier bags in the back of the car.
Having looked closely at the evidence, I have concluded that what really reduces carbon emissions is making sure you walk or cycle to the shops.
Do not get me wrong. I am backing Britain. I am just not backing the British at the expense of foreigners, or national producers at the expense of British exporters.
But if I have not convinced you, please wait a moment before getting on the phone to Portugal to order your T-shirts.
There is already a hugely effective policy in place that will help support British firms and British workers: the collapse in the value of the pound, which makes it harder for foreigners to find buyers here and easier for British exporters to expand. It will have more impact than 1,000 “Backing Britain” campaigns.
Perhaps Brucie could sing us a song about it.

Diane Coyle – now Diane Coyle OBE – the author of the “The Soulful Science” (recommended) has a new blog, about economics books. I would expect it to be very good; early days yet.

The More or Less team have put together a compilation of all the pieces we’ve done on the credit crunch, including the first broadcast of Libor being calculated, and interviews with Paul Wilmott and the FT’s very own Gillian Tett. Why not check it out?

Imagine an auction in a looking-glass world, with the auctioneer offering cash to the highest bidder and the participants frantically outbidding each other with a jumble of assorted assets. Should a million dollars be sold to the man in the front row for his bundle of 2006-vintage toxic mortgage securities? Or the lady behind him, for her 2005-vintage offering?

That was the auction the US Treasury was hoping to hold until it abruptly changed its plans in November. It was going to spend up to $700bn – the “Tarp” (toxic asset relief programme) fund – buying a variety of toxic assets from banks. The idea made sense: by establishing a market price for these dubious assets, the auction would have improved transparency and helped solvent banks to prove that they really were solvent.

The Tarp fund was then cannibalised to recapitalise banks (probably a good idea) and then dole out suitcases of cash to all-comers (a less good idea). But the original auction concept should be resurrected, because it solves a problem that has not gone away.

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

Here in Michigan we have a problem: the automobile industry. Thanks to foreign competition and the doubtful management of the Big Three, the state’s economy is in serious trouble. Should we just sell the state to the Chinese? There is a history of this in Michigan – we once traded the city of Toledo to Ohio in exchange for the upper peninsula. So perhaps it would be a good idea. But what would be a good price?
Mrs J, Michigan

Dear Mrs J.,

Make sure you don’t sell yourselves cheap. According to the US Bureau of Economic Analysis, Michigan’s GDP was $382bn in 2007. This is an attempt to measure the value added to all goods and services in Michigan, which includes anything from haircuts to assembling a car – but not, for instance, any components imported from out of state.

The $382bn figure is impressive. It would sneak Michigan into the top 25 economies in the world. Even China’s GDP is less than nine times greater.

So how much would it cost to buy $382bn of productive power? No corporation adds nearly as much value; the economist Paul de Grauwe reckoned that in 2000, value added was $67bn for Wal-Mart and $53bn for Exxon, the two largest companies. Their market value at the time was about five times their value added.

If the same ratio applies, buying Michigan would cost the Chinese almost $2 trillion –roughly what China’s State Administration of Foreign Exchange has to spend. All this assumes that Michigan’s residents, like Wal-Mart’s employees, would be free to leave if they didn’t like the new management.

Still, don’t hold out too long: even before the credit crunch hit, Michigan’s GDP per head was falling in real terms. This may be the right time to sell.

Questions to economist@ft.com

Should I associate with happy people because they make me feel good by association, or unhappy people because they make me feel good by comparison? Or do economists claim that I should be indifferent?
D.K., New York

Dear D.K.,

Economic theory makes no such claim: it insists merely that your preferences be consistent and complete because that makes the mathematics easier. Although many economic models concentrate on your demand for physical goods, that is merely to keep things simple. There is no theoretical reason to insist that your happiness cannot depend on the happiness of others.

Your question, then, should be addressed empirically, and a fascinating new paper in the British Medical Journal tries to do just that. The authors, James Fowler and Nicholas Christakis, find that happiness is contagious.

If just a single nearby friend becomes happy, your chances of being happy rise by a quarter. Physical proximity seems to be important, and happiness is far more contagious among people of the same sex.

This has a ring of plausibility, yet there are some curious results – for instance, that a happy next-door neighbour seems to affect your mood more than a happy spouse. Meanwhile, in another BMJ study, Jason Fletcher and the economist Ethan Cohen-Cole use a similar data set and methodology to demonstrate that height also seems to be contagious, which seems rather unlikely.

The trouble is that it is hard to separate genuine contagion from other effects – such as a shared physical environment, or people befriending others who seem similar to them. My recommendation: by all means seek out happy people, but do not expect miracles.

Questions to economist@ft.com

Monday is a big day in the Harford household: my oldest daughter will start school. That is a cue for the full spectrum of middle-class parental emotions: nostalgia for the toddler she once was; pride at seeing her reach a new stage of independence; and, of course, anxiety that the school will not be good enough for our little darling.

We have been given few reasons to fret about the quality of the teaching, but like many parents we’re nervous about the impact our daughter’s peers may have on her, many of whom are from deprived backgrounds or homes where nobody speaks English. Will the teacher be distracted by the need to teach the class skills she already has?

I have written before about “peer effects” in education, which are the influences, positive and negative, that classmates and school friends have on each other. They are hard to identify with much certainty. Bright children might make friends with each other without actually improving each other’s test scores. Or pushy middle-class parents might all flock to the same popular school. Or a class of smart kids might attract a good teacher. All these situations would produce clusters of high and low achievement, yet no true peer effects need be at play.

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

More or Less airs on Radio 4 this Friday at 1.30pm GMT and Sunday at 8pm GMT. You can also listen online, subscribe to a podcast, and read more at the More or Less website here.

This program, we talk about the Lake Woebegon effect – why we all think we’re above average. And I interview the hugely-impressive Philip Tetlock, who has devoted two decades to studying what kind of person – if anyone – tends to make good forecasts.

Happy new year!

The Undercover Economist: a guide

Publishing schedule: Excerpts from "The Undercover Economist" and "Dear Economist", Tim's weekly columns for the FT Magazine, are published on this blog on Saturday mornings.
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