Tim Harford's Blog, page 130

Are you saying John Lewis isn't perfect?

I hear that Nick Clegg has called for a "John Lewis economy". Who could be against a John Lewis economy?

Indeed! All right-thinking people love John Lewis. It all starts with your wedding list and the love affair just goes on and on. My daughter told me she wanted to be the little boy from the adverts who can't wait to give his parents their Christmas gifts.

How did she see the advert? You don't even have a television.

Her primary school showed it to her. That's how blandly all-conquering John Lewis has become: their advertisements are used in school assemblies. And don't get me started on Waitrose!

I know – I discovered that those nice Padrón peppers are also available from Ocado. Amazing!

It is. Nick Clegg is clearly on to a winning policy here.

Quite so. What is there to dislike about a vision of Britain that awoke from sweet dreams under crisp Egyptian cotton sheets to sweep aside Tesco, Ikea and Primark, replacing them with John Lewis and Waitrose?

Nothing. But I suspect that Mr Clegg is more taken by the idea of widespread profit-sharing and share ownership.

That makes sense. John Lewis is owned by a trust for the benefit of its employees, John Lewis is profitable and John Lewis shops sell nice things.

Yes, but what we have here is an "n of 1" problem: just because these things are true about John Lewis does not mean they always go hand in hand. ExxonMobil is profitable but it is not owned by an employee trust and it is not usually regarded as a purveyor of nice things.

But surely it's a good thing for employees to own shares in the companies they work for.

You might want to ask the former staff of Lehman Brothers and Enron about that. I'm sure it's great if you get in on the ground floor of Microsoft or Apple, but the logic of employee share ownership is not so clear. The more shares an employee owns in a company, the more risk she is exposed to: she already accepts the risk that in hard times the company may sack her, cancel her perks or cut her salary. On top of that she is supposed to pin the value of her savings to the company share price?



Yes, if it will motivate her to work hard for the company.

If it does it will not be because of any financial logic. If you were exposed to just 0.1 per cent of the risk and reward of a £1bn company, you'd be facing a £1m risk – a 10 per cent drop in the share price would hit you by £100,000. And yet you would still enjoy only 0.1 per cent of any gains you created for the company, which is surely not enough to discourage you from stealing paper clips. There is a trade-off between providing proper incentives and exposing workers to excessive risks. I don't think shares or share options provide a happy medium between the two.

Are you saying that employee-owned companies perform poorly?

No, I'm not aware of any evidence for that. A study by Alec Bryson and Richard Freeman of the Centre for Economic Performance at the London School of Economics found that employee ownership was positively correlated with productivity; it was also positively correlated with other measures of performance-pay and worker autonomy. What exactly causes what is a nice question, but there's certainly little evidence of harm. Mr Bryson and Mr Freeman also surveyed other studies and conclude that none found any negative impacts of employee share ownership and some found positive effects. In any case, the theoretical case for the popular alternative – companies with highly dispersed shareholders – is also rather troubling. Adam Smith predicted that "negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company". None of these things works in theory; whether they work in practice is another question.

So what's wrong with supporting employee share ownership?

Nothing. The government already does with various tax incentives, and more than 60 per cent of workers have access to share-ownership or other profit-sharing schemes. Mr Clegg might consider whether it could be easier to convert existing companies into employee-owned co-operatives, because the economy is unlikely to be damaged by greater diversity of organisational forms.

Sounds sensible but bland.

What do you expect from a man who has just invented a very British version of motherhood and apple pie?

Also published at ft.com.

Why have house prices stayed so high?

The reluctance for prices to slump may have as much to do with psychology as with conventional economics

My forecasting record on housing prices leaves something to be desired. It's not that I missed the slump in prices: on the contrary, when making a series about economics for BBC 2 in early 2006, I tried and failed to persuade my producer and director that a house price crash was pretty much inevitable. (They disagreed and we tore up the script for that episode.)

The problem is rather that the boom was so extreme that I was sure the bust would come far sooner and be much deeper. One way to see this is to look at "real" house prices, adjusted for inflation by Nationwide. They peaked at £128,000 in 1989 (measured in today's money); the following slump ended only six years later, after prices had fallen by almost 40 per cent. The more recent boom makes that one look puny: as early as 2002, real house prices had topped £150,000 in today's money and I was anticipating the mother of all crashes in 2003. And 2004. And 2005, 2006 and 2007.

Real house prices are still only 20 per cent down from their peak in late 2007 despite a ridiculous boom and an economic shock almost impossible to imagine when I first started my Cassandra act.

Why have house prices stayed so stubbornly high? Partly this reflects a genuine lack of supply in a country whose dense centre of economic gravity is made yet denser by the planning restrictions of the green belt. But the reluctance to slump may have as much to do with psychology as with conventional economics.

One of the key ideas in behavioural economics is "prospect theory". Prospect theory assumes that individuals view risky choices relative to a baseline, framing them as losses and gains. Furthermore, they care more about avoiding losses than banking gains. This is odd, because the baseline is arbitrarily defined; yet it seems to be true.

What would this mean for house prices? It would mean that people are very reluctant to sell at a loss. This means more than just trying to get as much money as possible – most sellers want that. It means being unwilling to compromise, and being willing to lose the sale, if the proposed sale price is below the not-very-meaningful level of "what I paid for it".

If sellers do behave like this, it would mean house prices would fall only with great reluctance. In particular it would mean that sales would dry up when prices fall below a previous peak. That's certainly true: less than half as many mortgages are being approved now than before the crisis began. There is an economic reason why volumes should dry up as prices fall: a lack of access to finance could hit both price and volume simultaneously. But the psychological explanation may be even more important.

A study conducted by the economists David Genesove and Christopher Mayer provides clear evidence for this. Genesove and Mayer looked at a housing crash in Boston in the early 1990s, and they found that sellers facing the risk of a loss priced their condominiums more aggressively, winning somewhat higher sale prices but far higher risks of not selling at all. (Genesove and Mayer also present evidence that it is nominal losses rather than real losses that matter.) The researchers also argue that liquidity constraints – it's harder to get a mortgage in tough times – do not fully explain the patterns they discovered. Prospect theory does.

What this means for the future of the housing market is, I'm sad to say, not clear to me. My reading of the economic fundamentals is still that housing is overpriced in the UK. With housing stagnating and inflation rates likely to fall to low levels again, it may be a long time before nominal house prices exceed the peaks of 2007. And it may be a long time before homeowners make peace with their losses.

Also published at ft.com.

The unlikely boons of longer train journeys

'The benefits to passengers from the high-speed link are overstated … there is an assumption that all the time that business travellers spend on a train is wasted … this is a somewhat questionable proposition.'

Financial Times, January 11

So the High Speed Two rail link was approved?

It was indeed. The London-Birmingham link will be ready as early as 2026. Then there may be an extension linking Birmingham to Manchester and Leeds. We'll only have to wait until 2033 for that.

The cost-benefit analysis says the project is good value for money.

Yes, according to HS2 Ltd, a company that was established to make the business case for high-speed rail. Of course, other things might be better value for money. HS2 Ltd, using Treasury assumptions, discounts future costs and benefits at a discount rate of 3.5 per cent for 30 years, and then 3 per cent. If the government borrowed £10bn at the current 10-year interest rate of about 2.1 per cent and kept rolling it over before paying it back in 60 years, the eventual repayment would be almost £35bn. But the present discounted cost would be just £150m – a massive benefit/cost ratio. If playing by the cost-benefit analysis rules, just borrowing cash and doing nothing is a winning strategy.

You're just messing around with the numbers.

I am, and you can mess around with a lot of numbers if you are making these calculations over a 60-year timescale. I wouldn't pay too much attention to HS2 Ltd's forecasts, or those of their opponents.

But it's not just about forecasts – it's about the value of time saved because of a faster journey, right?

That's true. The high-speed link would save about 40 minutes on a journey from London to Birmingham. How much that is worth is an interesting question.

If you have a morning meeting it might mean an extra 40 minutes in bed.

It might indeed, which is priceless. HS2 Ltd told me that they use numbers from the Department for Transport. The DfT apparently values leisure time at about £6 an hour – this, intriguingly, implies that the UK government's official position is that anyone under the age of 21 is wasting their time earning the young person's minimum wage and would be wise to chillax in front of the Nintendo.

What about business travel?

Well, business travel is valued at £50 an hour. Unless the business travel in question is commuting, in which case it's £7 an hour.

What?

Doesn't make a bit of sense to me, either. Perhaps the idea is that commuting is eating into your leisure time, which is almost valueless apparently, whereas business travel is eating into your employer's time, which is precious indeed. Complain to the DfT if you don't like it.

And surely business travellers will often be able to work on trains, with laptops and smartphones.

Personally I find I often get more done on the train than anywhere else – bar an aeroplane, of course – because I'm not distracted by Twitter or videos of amusing cat antics.



That rather implies that you don't otherwise make good use of your time.

It's not clear any of us are that good at managing our time. Economist Alan Krueger and psychologist Daniel Kahneman studied people's emotions while participating in various activities. Their subjects – women in Texas, in this case – most enjoyed praying and "intimate relations", but these activities were not chiefly how they spent their days.

I'm confused. Are you implying that users of High Speed Two should be having sex on the train?

Who is to say what social mores will govern our behaviour by the time the line is finished? But I think we can agree that if rail travellers occupied themselves in this fashion then shorter journey times would not necessarily be a tremendous boon.

I'm not sure this is a helpful line of inquiry. What did Kahneman and Krueger discover about how people feel while on business travel?

Business travel wasn't a category that was reported, but the morning commute, it turns out, is the most miserable of all commonly reported uses of time. You might think that shortening commutes would be very valuable, then – but the DfT hasn't received that memo.



And how much of this column did you write on the train?

All of it.

Also published at ft.com.

Can the minimum wage create jobs?

If one cannot produce enough of value to justify being paid a living wage, nothing we do to the minimum wage will help

One million unemployed young people. It had been coming for a while, but when the news broke in November that the number of 16- to 24-year-olds looking for work had reached seven figures, the number retained its power to shock.

Almost 300,000 students seeking part-time work are included in the total, and although directly comparable data are not available, the situation was almost certainly worse in the 1980s. Nevertheless, given the evidence that graduating during a recession can affect one's earnings for far longer than the recession itself, the case for doing something looks urgent. But what?

To some, such as the Institute for Economic Affairs, the answer is simple: abolish the minimum wage. This is unlikely. Minimum wages gradually fell into disuse after Winston Churchill introduced a minimum wage system in 1909. Yet after Labour introduced a national minimum wage in 1999, grumblers have kept a low profile. David Cameron said in 2005 that it had been a success, while in 2008 George Osborne said that "Modern Conservatives acknowledge the fairness of a minimum wage."

But that is an odd comment, because the case against the minimum wage was always that the law itself was unfair. A minimum wage forbids workers to sell their labour below a certain price, and therefore would be expected to create unemployment for low-productivity workers. Employers use machines instead.

The theoretical argument is simple and compelling. But is it true? Back in 1994 a remarkable article was published by economists David Card and Alan Krueger. They performed a statistical analysis and concluded that not only did the minimum wage not cost jobs – it might even create them. Amazing.

Extraordinary claims demand extraordinary evidence, and while many economists casually dismissed Card and Krueger, commentators on the left also seized uncritically on the results. Both attitudes are a shame because the research paper is too interesting to ignore. Card and Krueger were pioneers in using what economists call a "natural experiment": the rise of minimum wages in New Jersey, while in neighbouring Pennsylvania they did not move. They surveyed more than 400 fast-food restaurants in New Jersey and east Pennsylvania and found no great difference between employment trends. Nor did higher-wage establishments display different employment trends to those who had to raise wages relative to the minimum. These methods broke new ground and have been much emulated.

It's fair to say that not every statistical study has come to the same conclusion. But why might Card and Krueger be right in some cases? If employers have market power in the labour market then they might actually offer a lower wage than the balance of competitive supply and demand would produce. Some workers would rather keep looking or sign up for welfare payments, and so employment is lower at this level. Introduce a minimum wage and both wages and employment increase, while profits fall.

Of course this analysis is time and place specific. Since its introduction in the UK, the minimum wage has outpaced consumer price inflation by about 20 per cent. Even if a minimum wage can offer income for the poor without destroying jobs, it would be complacent to assume this will remain true regardless of economic conditions. The Low Pay Commission has been allowing the minimum wage for younger workers to lag behind. No wonder.

But if a young adult cannot produce enough of value to justify being paid a living wage, nothing we do to the minimum wage will help. He, the institutions which trained him and the society in which he lives, have far bigger problems.

Also published at ft.com.

To tweet or not to tweet?

Economist Justin Wolfers runs a controlled experiment to test how Twitter is affecting his productivity

I don't normally hold with the traditional New Year's resolution of quitting some objectionable habit – even though my favourite economist, Thomas Schelling, has written very thoughtfully on the subject. (Schelling, a brilliant game theorist and long-time smoker, used a variety of game theoretic tricks to outwit a formidable opponent – his addicted self.)

But as 2011 drew to a close, I had been wondering about my addiction to Twitter, the service that allows users to publish online short messages – grumbles, aphorisms and most often, links to recommended articles. Other users can choose to whose messages they will subscribe and unlike on fully-fledged social networks, such as Facebook, this is not necessarily a reciprocal relationship. (Facebook users have friends; Twitter users follow and have followers.) My Twitter habit has the pernicious consequence of being rather time-consuming – but it has plenty of benefits too. Should I quit? Cut down? Or should I resolve only to stop feeling guilty?

Part of the problem, I realised, is the difficulty of measuring the costs and benefits of the habit. Imagine my curiosity, then, when I noticed that the economist Justin Wolfers – a self-described Twitter cynic – had joined the club and was running an experiment to test how Twitter was affecting his productivity.

"Every morning I would flip a coin," he explained to me. "Heads, I would sign on to Twitter, tails, I would simply tweet 'Tails: goodbye for another day Twitter.'" It might seem strange to run an experiment with a single subject, but that all depends. If the aim is to discover the effect of Twitter on the productivity of Justin Wolfers, the experimental design looks just fine.

The challenge, of course, is to interpret the results. "I tried to be scientific," said Wolfers, who installed software on his computer to record his use of different programmes and websites, while also using Google alerts to track whether his tweets were having much impact on web chatter. "I'm not sure I succeeded."

Wolfers rated his productivity levels at the end of each day – revealing, and "also a total bummer" – rarely topping six out of 10. But that's not unusual: a persistent anxiety that each day has been poorly spent is, I feel, the sign of many a productive person.

Ultimately the formal experiment broke down: "After a while, I got tired of flipping coins." Wolfers has his data; he has never bothered to analyse it. He has decided that Twitter works for him. The informal experiment of giving Twitter a try to see how it worked out was, it seems, of far more practical use than the formal experiment of randomising days on and days off.

This makes some sense. I've become convinced that most of us do not experiment enough with new experiences. (The first 20 years or so of life are an exhausting but stimulating exception to this rule.) Yet few of the experiments we could be trying are conducive to a proper randomised trial.

Somehow this is a great disappointment to my inner nerd. Both Justin and I like the idea of running controlled experiments in everyday life – gut feelings can be so misleading – but he warns that to do it right takes more discipline and time than many of us might want to deploy.

Yet Justin Wolfers's experiment has inspired an unexpected insight. The toss of a coin might not have generated data that anyone cared to use, but it had the obvious consequence of reducing the days spent on Twitter by about half.

Of course one could simply decide to spend less time on Twitter, but the arbitrary dictates of the coin have a curious power. (Yes, I have read The Dice Man.) So I do not think I'll be quitting Twitter this year; I will be using the toss of a coin to help me cut back a little.

Also published at ft.com.

Pocket money will endure even in 2012

"Families with children are shouldering a disproportionate burden." – Katherine Rake, chief executive of the Family and Parenting Institute

"Dad"

"Yes, my dear?"

"I heard that austerity was affecting families with children more severely than other groups."

"I didn't see much evidence of that over Christmas. You ate your own weight in Toblerone. I must have words with Father Christmas about all that sugar and fat."

"Dad stop joking around, this is serious! It's the Institute for Fiscal Studies. You always say they're very serious people."

"So they are, my love, although I always find them slightly less serious when they get tangled up in macroeconomic forecasts. The trouble is that the Today programme can't get enough of forecast stories. 'Central bank makes forecast! Financial institution makes forecast!' But these forecasts never pan out because the macro-forecasting business is a mug's game. The BBC might as well report Mystic Meg's forecast and have done with it."

"Dad. Have you actually read this report?"

"I have indeed. Very worrying. Relative child poverty rates to rise to 26.6 per cent by 2015. That's for a family with three children; for a family with two children, relative child poverty rates will rise to just 18.5 per cent. If only we'd had this forecast earlier, your mother and I could have been more careful – but it's too late to send your baby brother back now."

"I don't even want to think about that, Dad. Is a relative child poverty rate of 26.6 per cent bad?"

"I am not sure. It shows the percentage of households living on less than 60 per cent of the income of the household in the middle of the income distribution, so it's a measure of inequality. I don't think many people think it's good news that the number is rising."

"What about absolute poverty rates?"

"Well, the report shows something it calls absolute poverty rates. They're rising too, although as far as I can see they're really relative relative poverty rates."

"What?"

"They're poverty rates relative to what the relative poverty line was in 2010-11, rather than relative to what the relative poverty line will be in 2015-16 – according to the macroeconomic forecast, which will be wrong as all such forecasts are."

"But don't larger families need higher incomes?"

"Aha, all these numbers have adjusted for that. The IFS assumes that £100 for a childless couple is like £67 for a single adult, or £120 for a couple with a young child, or £186 for a couple with two teenagers and a toddler. It's called equivilisation."

"That makes my head spin, Dad."

"It is complicated, isn't it? That won't stop politicians and media pundits confidently citing the numbers as though they were inescapable and simple truths about the universe."

"But Dad, you're still ducking the key issue – are families bearing the brunt of austerity?"

"You make it sound so harsh. In fact, we're getting off lightly. Between the start of 2011 and the spring of 2014, the IFS reckons that a typical household will lose a little less than 4 per cent of net income thanks to tax and benefit changes. Those losses are concentrated among the poorest third and the richest 10 per cent, so I'm not sure why everyone keeps banging on about the squeezed middle."

"Median voter theorem, Dad, you explained it to me on New Year's Eve."

"Of course. Now, where was I? Ah yes: an average loss of 4 per cent, but less than 2 per cent for pensioners and just under 6 per cent for families with children."

"But that means families are losing more than anyone else!"

"I guess it does. But on the bright side: one day you'll be a pensioner and you can get the Conservative party to fight to preserve every privilege you've got."

"Somehow I don't think it will work out that way."

"Hmm, you may be right. But anyway, things aren't so bad: the government has been running a deficit of 12 per cent of national income. Surely the obvious base case is that everyone ends up 12 per cent poorer after that particular gravy train runs out of steam."

"You're oversimplifying."

"You were complaining that I was making your head spin a minute ago. But yes, I am oversimplifying. And you're right: most people will pay more tax and take home stingier benefits, and families with children will suffer most of all. Happy now?"



"Yes, thanks. By the way, isn't Saturday morning time for pocket money?"

Also published at ft.com.

Of foxes, hedgehogs and the art of financial forecasting

The fantastic Mr Fox is on course for another famous victory. FT Money has a tradition of holding a year-end competition to forecast some key financial indicator, and easily the most distinctive competitor is a fox in the garden of the columnist Kevin Goldstein-Jackson, who gives his forecasts by consuming one of a variety of appropriately labelled pieces of chicken. (I refer not to Mr Goldstein-Jackson but to the fox.)

If the method is quirky, there's no arguing with the results: the fox was the most accurate forecaster in 2008 and 2009 and, barring a year-end rally, the fox will win again in 2011. Such repeated success is an outstanding achievement against fields of about a dozen rivals.

Since the fox is a taciturn competitor, we cannot directly ask it for forecasting tips. A few lessons do, however, suggest themselves. The first is that extreme forecasts have an excellent chance of winning such contests because professional forecasters will huddle together for protection and the eventual outcome is rarely close to the cosy consensus.

Most competitors predicted a bloodbath in UK housing for 2009, for example. The fox predicted a modest fall and scooped the plaudits when house prices actually rose. This year, the fox predicted a 19 per cent fall in the FTSE 100. That looks far too pessimistic, but since every single professional pundit predicted a rise of at least 3 per cent, the fox may well win again. Intriguingly, when a new fox cub took up the challenge and lost in 2010, it made the rookie error of plumping for a forecast in the middle of the field.

The second lesson follows from the first. Professional pundits are not usually paid to make correct forecasts. They are paid to sound convincing, whether they are columnists or figureheads for asset managers. An extreme-sounding forecast can occasionally pay off – those who predicted disaster in the mid-2000s will be set up for the next few years at least – but there is safety in the consensus, especially when coupled with slick patter.

"The fox eschews the consensus and peddles no patter. Its results speak for themselves"

The fox eschews consensus and peddles no patter. Its results speak for themselves. Yet has the fox been offered any prestigious City jobs? Exactly.

The fox has, perhaps, been lucky, but nobody who studies the subject of forecasting will be surprised. The psychologist Philip Tetlock, author of the modern classic Expert Political Judgement, conducted a two-decade investigation into the accuracy of expert forecasts in social sciences. He discovered that regardless of academic field, practical experience, gender or political persuasion, experts make very poor forecasts. By some measures, the "chimp strategy" of randomly predicting that things will get better, or get worse, or stay much the same, matches the best the experts can do. Mr Goldstein-Jackson's fox is in good company.

Mr Tetlock did find one way of dividing up his experts in a way that correlated with less-awful forecasting ability: that of "cognitive style". Harking back to an essay by Isaiah Berlin, and before him to the Greek poet Archilochus, Mr Tetlock points to the "hedgehogs", people who view the world through the lens of a single, powerful, logical idea. They make hopeless forecasters. Less hopeless are intellectually promiscuous, self-doubting dabblers. They are called, of course, "foxes".

Also published at ft.com.

Can Spam ever be better than gold?

"Can you eat gold? No. You can eat and barter Spam"

– Nouriel Roubini, economist, Dec 14 2011

An intriguing remark, that.

It calls to mind one of the jokes that was circulating during the post-Lehman panic of 2008: "Normally the pessimists buy gold; these days, the optimists are buying gold and the pessimists are buying bottled water and bullets."

Prof Roubini is one of the pessimists?

He is famous for his apocalyptic economic forecasts, the gist of which has been borne out in the past four years. This isn't the first time he's pointed to the logic of canned goods in the worst of economic times.

Well, he's right: you can't eat gold.

That was a problem for King Midas, but I think that's a distraction. You can't eat bank statements or share certificates. I think what Prof Roubini is really suggesting is that gold isn't necessarily the best financial investment.

And is it?

Forecasting is for the likes of Prof Roubini. All I can do is point you to past performance and make the observation that it's no guarantee of future performance. Over the past 40 years or so, the value of gold has been negatively correlated with the value of other assets, making it useful for diversification. Gold was subject to a speculative bubble in the late 1970s and, after adjusting for US inflation, reached a long-standing peak in 1980. Gold proceeded to be an abysmal investment for the rest of the century, but has been booming again more recently. Despite a recent slump, gold has still outperformed the US stock market over the past decade. But what does that tell you, unless you have a time machine?



Surely you can say something about fundamentals?

Not really. When it comes to bonds you can make judgments about inflation and the probability of the money being repaid; with shares, it's helpful to look at corporate profits. Gold has some industrial and cosmetic uses, but its value to gold investors is that there will always be another investor willing to buy. Because the value of gold is almost entirely tied to future investors' willingness to buy it, strictly speaking, gold has been in an investment bubble for the past 3,000 or 4,000 years. But there's the rub: if the bubble has lasted as long as civilisation itself, "bubble" is hardly a derogatory term.



Why do people get so excited about gold?

There's a particular economic philosophy at work here – the view that government-issued paper money cannot be trustworthy and that currencies should be firmly backed by gold. Presumably the gold enthusiasts have never encountered the Bundesbank. Philip Coggan, author of Paper Promises, points out that there has long been a conflict of interest between creditors, who like their money as sound as possible – making a gold standard attractive – and debtors, who prefer more flexibility. A bit of inflation makes debts less burdensome; what you feel about that depends on whether you're a borrower or a lender.

So the gold standard helps prevent inflation?

It does. But it also has serious disadvantages. In the early 20th century, currencies were tied to the gold standard, which brought some price stability at the cost of making it impossible to prevent the Great Depression. Now most economists argue that it's an advantage to have a flexible currency – after all, if tying the lira to the euro has caused so much trouble, imagine if the euro itself was tied to the dollar and the dollar was still pegged to the contents of Fort Knox.

So gold is sometimes a good investment but rarely a good macroeconomic foundation?

That's my view, and I think I'm in the majority of economists – for what that's worth these days.

And what about Spam?

Well, Spam is an intriguing prospect. A good currency is fungible, homogenous, non-perishable and easy to carry around. Spam ranks high on the non-perishability stakes, and it's also homogenous. Notwithstanding the existence of "Spam Hot And Spicy", most people are likely to take the view that Spam is Spam. It's not to everyone's taste, though. Have you considered Mars Bars instead?



Mars Bars?

Nico Colchester, the great Financial Times journalist, once studied the remarkable price stability of Mars Bars. Cocoa, sugar, vegetable fats and milk solids are all valuable commodities and a Mars Bar offers you diversification in a handy ingot form. Prof Roubini might wish to investigate.

Also published at ft.com.

Christmas on credit

Presents for one's children do not seem like an optional extra though many families may struggle during this holiday

One dark December evening, sometime in the early 1980s, my father sat down to have a serious chat with me. That Lego spaceship I was dreaming about for Christmas? It might never arrive. Our boiler had broken; fixing it was going to be expensive. I should not hope for too much.

Perhaps this was just a bit of smart parenting on my father's part: perhaps I had taken to viewing a substantial Christmas present as a basic human right and he was just putting a shot across my bows. After all, I did get the Lego. (It was the Space Cruiser, set number 487, a classic that gave me many hours of pleasure. Thanks, Dad.)

Then again, perhaps we really were financially embarrassed, and perhaps my parents were not sure that an alternative source of finance would materialise. Plenty of families will be in a similar situation this Christmas. The Joseph Rowntree Foundation, which uses a thoughtful and innovative methodology to estimate the minimum income necessary to achieve a "socially acceptable" standard of living, reckons that a family of five with one breadwinner – my situation today and my father's at the time – needs £690 a week before tax. Since 80 per cent of employees earn less than that, it is easy to see why many families require two incomes, and why many struggle at Christmas.

Yet the conversation still feels extraordinary by today's standards. Christmas presents for your own children do not seem like an optional extra. Is this because Christmas itself has become more of a consumerist blowout than once it was? Surprisingly, the answer is no: Joel Waldfogel, author of Scroogenomics , estimates that in the US the December bulge in retail spending was far larger in the 1930s than it is today, relative to the size of the economy. The modern Christmas is not especially extravagant.

What, then, has changed during the past 30 years? The answer, surely, is the availability of credit. If I was wondering how to buy Christmas presents and fix a broken boiler – actually, both issues are on my list of things to do today – and if I lacked savings to address the issue, I would instinctively reach for a credit card. That is not the way things used to be. Waldfogel – again, using US data – estimates that in the 1930s, about a 10th of Christmas spending was financed through "Christmas clubs", savings accounts that were easily accessible only in the run-up to Christmas.

Christmas is now financed in arrears, not in advance. Waldfogel reckons, looking at seasonally fluctuating data about credit card balances, that a third of Christmas spending has not been paid off by the end of February. This is a change in spending patterns that has developed rapidly since 1980, and, at an interest rate of 20 per cent or so, it does not come cheap.

What seems so archaic about that fatherly chat, then, is not a change in household incomes or in Christmas bingeing but in the availability of credit.

Over the past three decades we have drawn ever closer to the highly convenient world, assumed to exist in many simple economic models, in which we can effortlessly shift our spending backwards and forwards to whenever suits us. As long as total lifetime spending plus interest equals total lifetime income plus interest, no boy need ever lose out on a Lego space cruiser because of a pesky boiler repair.

Whether you are an ambitious mortgage provider, a European nation state, a first-time house buyer or just a parent without rainy-day savings, the past four years have delivered a tough lesson: access to credit is not a right, conveyed by a disinterested, omnipotent and benevolent free market. It is a privilege, granted by flesh-and-blood creditors. And it is a privilege that is both bestowed and withdrawn on a whim.

Also published at ft.com.

Is payday lending really wrong?

"About half of US states have clamped down on payday loans by capping interest rates, or restricting them in ways that make them less profitable… Faced with a hostile home market, several US companies have hit upon the same solution: to set up shop in Britain."

That doesn't sound good.

Oh, I don't know. Haven't we been wringing our hands about a "credit crunch" for the past four years? At least somebody has stepped into the market. Payday lending is said by one analyst to be up from £100m in 2004 to £1.7bn in 2010. But that's modest compared with over £55bn of outstanding credit card debt or more than £200bn of consumer credit – which includes everything from a credit card to paying in instalments for a new sofa. Bank lending is down sharply; consumer credit is up slightly after a big dip; only payday loans are showing strong growth.

You're being facetious: payday loans are offered at extortionate rates.

I am being facetious – mostly. And yes, payday loans are at extortionate rates. Say you borrow £100 for a month and have to pay £125 at the end of the month. That's an interest rate of 25 per cent a month, which compounds to about 1350 per cent a year.

This sort of thing is disgusting. Payday loans should just be banned.

Many people think that. An alternative is to cap the interest rate at something like 30 per cent, which would allow most store cards and credit cards but destroy the business model of payday loans. But aren't we being a little bit hasty? This product tends to be discussed as though it's something like heroin: profitable but corrosive. Isn't it worth considering that payday loans are a valuable service, used by people in full control of their senses?

That's ridiculous.

It's not ridiculous at all. Consider the fuss that people now make about microcredit – small loans, often at interest rates well above 50 per cent a year that are said to help the very poorest families manage their finances and even become entrepreneurs. That's a story that many people are happy to accept without examining the evidence, while at the same time condemning payday loans, which appear to be a similar product. Are you sure you're not just reflecting a prejudice that credit-starved Bangladeshis are heroic would-be entrepreneurs while credit-starved westerners must be trailer trash?



Are you claiming that it is rational to take an interest rate of 1350 per cent?

Of course it could be, the question is whether it is rational in practice. Consider the founding story of microcredit – the moment in 1976 when Muhammad Yunus lent less than a dollar each to 42 rural craftswomen. Those women had previously made baskets and chairs, funded by a village moneylender at a rate of 10 per cent a day, which by my calculations is an annual rate of over 100,000 trillion per cent. I am not aware that anybody argues the women were irrational: until Mr Yunus came along they had no options but to take out the loan each morning to buy materials.

So what's the evidence?

It's mixed. For example, the economists Dean Karlan and Jonathan Zinman persuaded a South African consumer finance company providing loans for a few months at an interest rate of 200 per cent, to run an experiment randomising loan approvals for marginal applicants who would otherwise have been rejected. To Mr Karlan's surprise, the borrowers who were randomly approved for loans did better than those who didn't get the cash. The reason seems to be that those borrowers used the loans to pay essential bills – fixing a bike, buying clothes – that helped them keep their jobs. But another study by Mr Zinman and Scott Carrell, which paid a lot of attention to disentangling correlation and causation, found that in states where US Air Force personnel had access to payday loans, the combat-readiness of the Air Force suffered. There are reasons to be concerned about these loans, but we shouldn't assume that they are never put to good use.

Why don't banks enter this market? Surely competition would drive down rates.

The banks do compete in this market, albeit indirectly, by allowing people "unauthorised" overdrafts and charging them through the nose for them. The truth is that an unauthorised overdraft can be even more expensive than a payday loan. I am not sure that the banks would like to compete in this market more overtly: the current situation seems to suit them rather well.



Also published at ft.com.