Monthly Archives: November 2009

My sunny disposition is wavering as the Copenhagen summit on climate change approaches. I believe that the governments of the world have taken the wrong approach to the problem – and if they had taken a different tack 12 years ago in Kyoto, we would be much closer to dealing credibly with climate change.

The complexities are dizzying, so it may help to be reductive for a moment. The governments of the world are focusing on reducing the quantity of greenhouse gases emitted, through cap-and-trade programmes; they should instead be focusing on increasing the price polluters must pay for emissions. The incentives provided by the two approaches are similar. Both will lead to a higher carbon price and lower emissions, and both could be tweaked over time to produce much the same trajectory of lower emissions. Either system would work well from an economic perspective.

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

I’m a 32-year-old American woman; I moved to Italy about five years ago and later applied for a master’s programme at an Italian university. Average earnings for my BA in political science are low, so I wasn’t missing out on much.
My problems are two-fold: first, dating. Italy has the second-oldest population in the world. Seeing a single thirtysomething is like finding a unicorn. Eliminate men who live with their mothers, are chain-smokers, or are shorter than me, and I’m in a convent.
Second, my Italian university has decided to reverse its previous decision to accept my American degree. I am being forced to re-earn an Italian BA, which could take a further year.
I’d hate to turn down another degree, but can I handle another year’s worth of pasta and enforced singledom?
My current plan includes going to San Francisco upon my return, though I do have the choice of a semi-permanent job with Nike in the middle of nowhere. Or I could stay in Italy; but if I spend another year single, according to my mother, I will die alone.
Crying in my cappuccino

Dear Crying,

You appear to be committed to staying in a country whose food, bureaucracy and dating scene do not suit you. Your judgment has been clouded by the sunk-cost fallacy: you hoped to get a master’s degree, great food and an Italian paramour. Things didn’t work out and you have wasted five years. You’re only human if you want to waste another year or two, but you’re making a mistake. Go home.

As for your career, forget cash: the happiness literature suggests that a happy relationship and secure job are far more important. San Francisco is not famed for its excess of single straight men, but the demographics of the middle of nowhere are excellent, with many eligible bachelors. Your new life awaits.

Questions to

Lord help me, I am now on Twitter. So is everyone else. I knew that already, honestly.

Nobody has done more to damage relations between the joyous commercial festival that is Christmas and the economics profession than Joel Waldfogel. Long-term readers of this column will be well aware of Professor Waldfogel’s research paper, “The Deadweight Loss of Christmas”. Ever since it was published in 1993 it has been taken out by economic journalists and displayed like last year’s decorations. Waldfogel – a witty writer himself – has evidently decided that if everyone is going to discuss the idea, he may as well get in on the act, so has published Scroogenomics, a book that – dare I say it – looks like it would make a terrific stocking-filler.

Waldfogel’s central insight is that if I give you a £50 shirt for Christmas, and you hate the shirt, that is £50 wasted. This is the “deadweight loss” of Christmas, and Waldfogel’s original research suggested that the typical £50 gift is worth no more than £35-£43 to the lucky recipient, a deadweight loss of about 15 to 30 per cent.

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

My newlywed wife and I are deeply in love. There is, however, one issue that threatens the blissful fabric of our marriage. I absolutely insist upon shopping at Walmart. My wife, meanwhile, would rather avoid Walmart at all costs.
I have recently tried to convince her that not only does Walmart offer the lowest prices known to man, but that the chain is also a force for good – lower prices mean better standards of living for all consumers, increased global trade means a tighter-knit international community, and efficient operations translate into higher productivity growth for the economy. My wife complains about poor labour policies, the “fact” that Walmart squeezes suppliers, and that it puts local shops out of business.
Who is right? Will our marriage survive?
Brian Gee

Dear Brian,

I have to agree with you about Walmart. Jason Furman, then an economist at New York University, now an adviser to President Obama, famously argued in 2005 that Walmart was (unwittingly) a progressive success story. The chain’s prices don’t much affect me (I prefer Whole Foods) but Furman reckoned that they benefited low- and middle-income Americans to the tune of around $250bn a year.

Walmart does not pay much, so it may depress wages. Then again, it may boost wages by offering jobs to the otherwise-unemployed. Either way, the benefits of low prices to Walmart shoppers far outweigh any plausible costs to Walmart employees. And while it is true that Walmart employees tend to be poor, the same is true of Walmart shoppers.

Armed with this information you can confront your wife with confidence. You are sure to win the conversation. The divorce is likely to be more keenly contested.

Questions to

Is more choice better? Ten years ago the answer seemed obvious: Yes. Now the conventional wisdom is the opposite: lots of choice makes people less likely to choose anything, and less happy when they do choose.

The most famous supporting evidence is an experiment conducted by two psychologists, Mark Lepper and Sheena Iyengar. They set up a jam-tasting stall in a posh supermarket in California. Sometimes they offered six varieties of jam, at other times 24; jam tasters were then offered a voucher to buy jam at a discount.

The bigger display attracted more customers but very few of them actually bought jam. The display that offered less choice made many more sales – in fact, only 3 per cent of jam tasters at the 24-flavour stand used their discount voucher, versus 30 per cent at the six-flavour stand. This is an astonishingly strong effect – and utterly counter to mainstream economic theory.

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

My son has two children and my daughter four. I propose to give £5,000 to each grandchild in my will. Would this be equitable, given that £20,000 would go to my daughter’s side of the family and only £10,000 to my son’s?
Mr Robinson

Dear Mr Robinson,

Let me be frank: at first glance I thought your dilemma was idiotic. If you want to hand out equal shares, that’s fine – but make your mind up. Given your daughter’s fecundity and some basic arithmetic it is quite clear that you cannot simultaneously give equal shares to grandchildren and to children.

Why, then, would you hand out £5,000 to each grandchild and still fret about fairness between your children? Your children don’t get the money; your grandchildren do. Similarly, it would make no sense to hand out £15,000 to each child and then start worrying that your grandchildren had been unequally treated.

Yet arch-rationalists such as Gary Becker or Robert Barro might leap to your defence. Assume your children are Becker-Barro altruists. This means that they care not about how much cash they give, but about the total sum their children receive from all sources.

If you give your grandchildren £5,000 each, that is simply £5,000 that their parents don’t have to give. They will adjust their bequests in the light of yours. Viewed in this way, your attempts to give money to your grandchildren are really hidden transfers to your children – and you would be quite right to worry that your daughter was getting more than your son.

But before you pat yourself on the back (Becker has a Nobel prize; Barro may get one too), ask yourself if your children are Becker-Barro altruists. Most people focus narrowly on their bequests, not on the total receipts of their offspring. I doubt your children are Becker-Barro altruists. After all, you aren’t.

Questions to

I do not count myself as one of Jamie Oliver’s army of fans, but after looking at the chirpy chef’s antics through the eyes of an economist, I am starting to acquire a grudging respect for him. Yes, the recipe books are all but unreadable, but his “school dinners” campaign has been surprisingly successful.

Oliver’s mission to persuade schools to serve healthier lunches – and get children to eat them, and stubborn mothers not to stuff chips through the school railings – became a national phenomenon in 2005. Tony Blair and David Cameron fell over themselves to jump on the Naked Chef’s bandwagon, and soon everyone in the country had an opinion on the campaign.

What caught the attention of Michele Belot and Jonathan James, though, was the way Oliver’s project had been implemented. Belot and James – economists at Nuffield College, Oxford, and at the University of Essex respectively – noted that the campaign had created a near-perfect experiment. The chef had convinced Greenwich’s council and schools to change menus to fit his scheme; he mobilised resources, provided equipment and trained dinner ladies. Other London boroughs with similar demographics received none of these advantages – and indeed, because the programme wasn’t broadcast until after the project was well under way, probably knew little about it. The result was a credible pilot project. It wasn’t quite up to the gold standard of a randomised trial, but it wasn’t far off.

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

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

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.

Tim Harford’s blog

This blog is no longer updated but it remains open as an archive.

Tim, also known as the Undercover Economist, writes about the economics of everyday life.