The Intelligence Squared Economic Outlook, with Tim Harford, Part One
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Welcome to Intelligence Squared, where great minds meet. I'm producer Mia Sorrenti.

On the show today, Tim Harford, the Financial Times columnist and best-selling author. He presents the BBC radio series, More or Less, and his writing has appeared in Esquire, Forbes, New York Magazine, The Washington Post, and The New York Times. His latest book is How to Make the World Add Up, and his previous books include The Undercover Economist, The Logic of Life, and Adapt.

Tim joined us recently at London's Tabernacle Theatre for the final instalment of our 2024 Intelligence Squared Economic Outlook series in partnership with Guinness Global Investors. For those who don't know, Guinness Global Investors is an independent British fund manager that helps both individuals and institutions harness the drivers of future growth to achieve their investment goals.

Tim Harford sat down with BBC broadcaster Johnny Diamond to interrogate what the numbers are really telling us about the economy and what those numbers tell us about what lies ahead.

Thank you.

Thank you very much and welcome to this Intelligence Squared Economic Outlook in partnership with Guinness Global Investors. I am Jonny Diamond and I am thrilled to both meet and to introduce our guest tonight, Tim Harford, senior columnist, as I'm sure you know, at the Financial Times, where he is the undercover economist revealing the economic ideas behind everyday life. He is also the author of a number of books,

one of which is here, as you can see, which he will be signing after the event this evening. But most importantly, of course, he is the host of the BBC Radio 4 series More or Less, which debunks the statistics come up with by idiots like myself when we're presenting the programme. So thank you very much for that, Tim. It's like that already, is it, Jonny? LAUGHTER

It's getting a bit chippy already. OK. Not at all. Not at all. If you are not a listener, I can recommend it heartily. It's superb. Rather low-key, but brilliant debunking of statistics used all around the country and all around the globe. The format for this evening is... I will...

pepper Tim with questions for about 45 minutes and then we'll open the floor to you, both those people here in the audience and people watching on the live stream. Please do put your questions in on the live stream. They come handily to the iPad in front of me and I will mix those in with the questions from those who've actually bothered to make it out tonight.

So, do put your questions in. We'll see how long we want to have Tim and myself talking. I'd prefer, frankly, to hear from you than I would from me. I'm sure you would as well. So, we'll see where it goes. But first of all, I want to ask about the economy, if I may, for Tim. Not so much where you think it is going...

but more, I suppose, what you think the big forces are that are shaping the economy at the moment. Well, I mean, the big picture for the UK economy, as we've been discussing for...

15, 16 years now. I mean, it's getting on for 20 years. This is just an economy that's not performing. It's growing very slowly. Pick whichever prime minister you want to blame for it. You can blame Liz Truss, you can blame Gordon Brown, blame David Cameron, blame any of them. They've all played their role. They've all been in charge of various important moments all the way back to

the financial crisis of 2007-2008. And I think the cumulative effect of the slow growth is often just underrated. So we're now, I think, about 25-30% below where we would be if we'd continued that growth trajectory. By the way, those of you who are environmentalists and who are fans of degrowth, this is what it looks like. It's not actually that much fun. And so...

The result of that fundamentally is you get a situation where simultaneously we keep hearing about how the tax burden is the highest it's been since the 1940s, which is true and it keeps going up. We can't seem to get the public services together. So that's what's going on. Why is it growing so slowly?

It's a combination of mysterious forces, bad luck and self-inflicted injuries. So if you want to go for the bad luck, I mean look at for example global energy prices and the fact that we're unusually exposed to them because of the way our gas market is structured, raises energy costs. If you want to look at the self-inflicted injuries,

Brexit has caused a tremendous amount of uncertainty, it's really hit business investment and just made it more difficult to trade with this huge economy on our doorstep at a time when the other two options, which is trade with China and trade with America, are also looking rather dodgy. And then there's this mysterious stuff. I mean, to some extent, it's not clear, for example, why productivity is quite so disappointing.

Every major economy has had slow productivity growth. But what exactly is wrong with the UK? Why our performance has been so disappointing? I see various explanations. There's an awful lot of different things you could put together. We could talk longer about productivity and how to possibly increase it. But there's no one big thing you can point to and go, that's the thing. If we were only able to fix that, then we'd be sorted. Are you convinced that...

given the mysterious forces, given the bad luck, are you convinced that governments can effect real change?

They could certainly make things worse. LAUGHTER No, yeah, I think governments can make change. So you can have a well-designed tax system or you can have a messy tax system. You can invest in sensible public infrastructure or you can squander the money. You can have rules that get in the way, for example, of planning and development, or you can have rules that permit it.

So there are various things that you can do to make things worse or better. But I don't think anybody should expect that it's this magical process where under good government,

The economy grows at 4% a year, and under bad government, it shrinks at 4% a year, and it's just like flicking a switch. You can have truly appalling governments. Thankfully, we haven't had any of those. I mean, like, really, just fire up the printing presses, just print money, produce hyperinflation, start a few wars. I mean, you can destroy an economy if you really try. But generally, it's shades of grey. You're dealing with more or less...

degrees of incompetence. I guess this is a roundabout way of saying if the new government under Keir Starmer just did brilliantly and got everything right,

which it shows no particular signs of doing, I don't think anybody should expect that suddenly with a leap and a bound the British economy is free. There's a lot going on in a £2 trillion economy like ours and government only moves around the margins.

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You spend a lot of time both analyzing data, thinking about data, talking about data. Do you have general advice on how to think clearly about data? Yeah, I kind of do.

But should you not wish to buy a copy of "How to Make the World Up," which is ten easy rules to make sense of statistics, let me give... Let me boil it down. Okay, no one wants to buy a book these days with Christmas coming up. Who would want a signed, personalized copy of a book for one of their neodym... No, it's a ridiculous idea. So let me instead just give you the kind of the bullet point summary. Three easy rules then instead of ten.

And to make it simple, they all begin with C. So number one is to be calm when you are faced with a statistical claim. Follow the advice of my great statistical hero, Darth Vader. Search your feelings. And the reason I advise this is because

preconceptions, our emotions, whether we're angry, sad, frightened. Remember thinking back to the early stages of COVID, how frightening it was. That does not help you think more clearly. And I'm not saying don't have emotions. I mean, I'm not advising you to all become economists, but

But I am saying notice your emotions. If you notice your emotional reaction to a claim, you're more likely to parse it in a sensible way. And it's worth bearing in mind that most of the claims you see, you will see because...

they arouse emotions. That's why they went viral on social media. That's why the editor of the Today program said, "Let's start with this because it's the exciting story." So number one, be calm. Number two is to get context.

I mean, what do I mean by context? Well, I mean, like many nerdy people, and, you know, maybe I'm among fellow nerds, like many nerdy people, I suffer from premature enumeration, which I'm not embarrassed to say it. I think we should be able to talk about these things. Premature enumeration is this point, this sort of moment where you...

You see a number or you see a set of numbers and you just grab the numbers and you start analysing. Let's take a ratio, let's plot a graph, let's just calculate percentages because that feels comfortable to a certain kind of person, including me. Whereas actually, the first thing you should be doing is going, what's the definition of that number, actually? Are we talking about GDP or GDP per capita? Could we just be clear about that? Is that...

When you say, oh, the number of nurses in the NHS has increased, is that two part-time nurses? Is that two nurses or is it one nurse? I mean, there's no right or wrong answer, but can we just understand where that number came from and who produced it, what it means, is it going up or down? What would it look like if you went over to France? What's their number? All of these different comparisons, definitions...

None of this is technical. None of this involves high-level mathematics. It's just basic descriptions of the numbers. So calm context. The last one, last piece of advice, is curiosity. And curiosity means using numbers to illustrate the world around us. Like an astronomer might use a telescope.

or a radiographer might... Is it radiographer or radiologist? I always get confused. Radiographer might use an x-ray machine. You're using statistics to show you things, to show you patterns you couldn't possibly see in any other way.

And it might seem obvious, like, oh yeah, obviously statistics are things that we use to understand the world, but generally they're not things we use to understand the world. They're things we use to sell toothpaste or to win some argument. You know, we throw these statistics around like weapons, and they shouldn't be used like weapons. They should be used like telescopes or x-ray machines. They should be used to tell us something about the world. And if that is the way you approach statistics, with a spirit of curiosity rather than, oh, I'm going to...

I'm really going to land a killer blow with this stat. That's a much healthier way

to view statistics. Calm, context, curiosity. And never trust things that come in threes, presumably. Never, absolutely not. Anybody who uses the rhetorical rule of three cannot possibly be trusted. We recently, as I'm sure you noticed, had a budget in the UK. Of course, one of the big issues that came out of it, always does, is tax, who to tax, how much to tax, different groups.

Is there a good tax system? I mean, there are rules and ideas that make for a good tax system. And did you recognise that in the recent budget? No, not as much as I would have liked. I mean, there are rules for a good tax system. They were laid out by a...

a report commissioned by and conducted under the auspices of the Institute for Fiscal Studies 15 years ago. It was called the Murleys Review. Tax by Design is the final report. James Murleys, Nobel Prize winner in economics. Led a great team, and you can just go and read it if you like. It's 300 pages of nerdy stuff about tax. But they lay out the basic principles so that you might want a good tax system to...

you need to adhere to. For example, you don't want something to be treated differently for tax reasons just because you kind of changed the label on it. It's the same kind of activity taxed different ways if you can stick a different label on it. So, for example, oh, instead of calling this income, maybe we could call it a capital gain. And instead of paying income tax, we could pay capital gains tax. This is the

the carried interest loophole people get very upset about. Or, oh, you're doing a job for somebody. Are you employed by them or are you self-employed by them? Every now and then I have to fill in a questionnaire for the BBC because HMRC has asked them to fill in a questionnaire to prove that I'm self-employed. I mean, I'm actually employed by somebody else. I'm employed by the FT. And I need to fill in all these sort of questions to prove that I'm not employed by the BBC, that I'm instead self-employed. And why do I have to prove this? Because...

self-employment incurs less tax. There's no reason why it really should incur less tax. They would have to fill in fewer questionnaires if they hadn't created this wedge. There are many, many other things you could say, but I think above all, a tax system is a system. So it's very, very common for people to fixate on a particular feature of the system to say, well, this tax is not

Think about how unreasonable... This particular part of the tax system disadvantages the poor, disadvantages some vulnerable group, or is unfair in this way or that way. And actually you have to look at the whole system put together. The whole system put together might be very progressive, or not, even if an individual tax isn't.

So, I mean, there are all kinds of things that you might hope to see in the tax system, and successive governments, including this one, but basically every government going back 30, 40 years, has tended to complicate the tax system, introduce new rates, introduce new exemptions. Very, very good if you're an accountant or a tax lawyer, but not great for raising the maximum amount of revenue while imposing the minimum tax.

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Do you want to know what cheers me up, though? No, please. What cheers me up is weird taxes. So, I mean, I love looking at weird taxes. There's the flapjack tax. The flapjack tax. So, as you know, Johnny, I'm sure, and I'm sure everyone in this room knows, cakes are tax-exempt, VAT-exempt, whereas biscuits are subject to VAT, which created a big debate over the Jaffa cake. It was a big Jaffa, famous Jaffa cake debate.

By the way, my favourite pub quiz round that I've ever seen is they brought out, the quiz master brought out a plate of different things for each table and you had to eat the things that were VAT exempt. It's brilliant. Anyway, so Jaffa Cakes, the Jaffa Cake company, McVitie's, they baked an enormous Jaffa Cake for the judge to demonstrate that it was a cake and I think they won their case. Anyway, there was a more recent case

about flapjack. Because as you all know, for logical reasons, flapjack counts as a cake, not a biscuit. And the reason seems to be, well, it's flapjack, isn't it? It's kind of bake sales and tea with grandma at four o'clock, flapjack. But if it's chocolate-coated...

That then becomes biscuit territory. Cereal bars, I think, also biscuit. So, this is a very difficult case where this company was making protein-enhanced... These twin packs of flapjacks. So, one had carbs and one had protein. And you have the carbs before the exercise and protein afterwards. I think... I don't know. You're swolled, John. Sounds disgusting. Yeah. Well, this was the question. Because the judges...

in the middle of this court case, started eating these things. And basically the idea was, well, is this good enough to be a flapjack? Is this the kind of thing you would serve with cucumber sandwiches at four o'clock in the afternoon? Or not? Because if it was, it's a cake and it's VAT exempt. And anyway, these judges are like, no, I don't think it's got the right mouthfeel at all. And so they had to pay VAT. And so this is not...

what I would call a good tax system, but it is extremely calming to me to contemplate such cases. When you contemplate the expansion of the complexity of the tax system, obviously good news for accountants, do you ever believe that that will become simplified? Or do you think that there are so many different interests

that would be affected by any simplification that it is simply too hard for governments to tackle. I mean, the tax system does periodically get simplified. Every now and then someone comes and sort of sweeps away all kinds of complexities. I think these complexities are like barnacles. They tend to kind of grow on a tax system. And the reason they grow is because, you know, you can...

Everyone's looking for the rabbit that the Chancellor's going to pull out of the hat. Everyone's going to look for the little trick. And usually it's quite difficult to have a trick that's like, well, we're just going to cut income tax by 5%. I mean, that's hard to do. So you're looking for little favours to do here or there, or you're looking for ways, if you need to raise revenue, you're looking for ways to raise revenue around the back door, kind of withdraw this allowance here or tax this little thing there. And so those pressures, the budgetary process, the whole process,

pantomime around the budget with a red suitcase. All of that pushes you towards more complexity. And then every now and then, and it hasn't happened for a while in the UK, someone has to come along and say, you know what, we're going to clear all of this away and the process of simplification is going to be this...

big vision that a government has. Maybe one day we'll get that and then the complexities will slowly come back. It's worth scraping the barnacles off the hull, even if the barnacles do eventually come back. But yes, it's tricky. I'm going to point out, just to give you an example, all this stuff about VAT. In Denmark, anybody ever been to Denmark?

It's nice in Denmark, it's very nice. They seem to be fine. No one thinks of Denmark as being this kind of libertarian Mad Max hellhole. It's perfectly fine. In Denmark, VAT is 25% just on everything.

Just on everything. And no one's going, "Well, what about VAT?" You can't have VAT on period pants. You can't have VAT on children's shoes. You can't have VAT on sandwiches, unless they're toasted sandwiches. Obviously, you can have VAT on toasted sandwiches. The Danes are like, "You know what? We just have VAT on everything. It raises a lot of money. It's a very efficient tax. It really minimizes distortion."

And then you can go, "If we're worried about low-income families finding it difficult to afford period products and children's shoes, maybe we should improve the benefits system. Maybe we should give people more sources of higher paying work."

rather than messing around with weird VAT loopholes. So that's how they do it in Denmark. It can be done. I just hope that we do it at some stage. Let's talk about America, if we could, because there was an extraordinary example there, it seemed, in the recent election, where it was not the economy, stupid. That great line that was said back in the '90s. -James Carmel. -Exactly. You have one focus on a campaign and it's the economy, stupid.

In this case, you had an economy that to most economists was doing very well, certainly compared with its international peers, and yet the incumbents were thrown out effectively. And there's continuing discussion and debate over how that happened. What is your understanding? What do you look at?

So I think there are two things going on. One is it's obviously not just the economy. And James Carville never said it's only the economy. He actually had three messages he was trying to remind people in the Clinton campaign of. And one of the messages he wanted Clinton to drive home was, it's the economy, stupid. It's not that the economy is the only thing that matters, but this is a thing that Clinton can win an election by emphasizing. So it isn't just the economy. And there are all kinds of cultural issues, all sorts of things.

But one of the ways in which you can see it's not just the economy is if you look at how people think the economy is doing. And the answer is, it depends who's president. If a Republican is in the White House, Republicans think the economy is doing fine. And if a Democrat's in the White House, Democrats think the economy is doing fine. And you can see this, Gallup collect this time series, and you can see this time series, and they just flip every time the White House flips. It's astonishing. And I was looking recently at the scale of the flip, like...

how much of a collapse in... So, Democrats now think the economy is doing very badly, or they're about to think the economy is doing very badly because Trump's in the White House. How big is that shift? And the answer is, well, it's of similar size or maybe bigger than COVID, the financial crisis, the dot-com crash. I mean, it's bigger than the impact of real economic events. Some of these economic events, you know, very, very serious.

So it's clearly not just the economy. It's perceived through the lens of politics. That said, it does seem surprising that... I mean, the economy does matter to people. It does seem surprising. The US has enjoyed about, I think, about 10% economic growth since COVID. Yeah. And France, 3%. The UK, less than 3%. Germany, zero%.

I think the nearest Canada and Italy have had about 5 or 6%. So the US has basically done twice as well as any other G7 economy, and three or four times as well as France or the UK. So you might think, "Look, that's a good performance." And yes, there was inflation, but the inflation's largely gone away, and real wages, wages of outpaced inflation, so people are better off. You look at all of that and you think,

The economy's done great under Biden. What are voters worried about? I think it's worth just looking at other things and not just inflation. So, for example, you look at the trajectory of real wages. Yes, they've gone up, but they haven't gone up anywhere near at the trajectory that they went up

in the years before COVID, when Trump was in the White House. The employment population ratio, the employment prime age population ratio has not recovered. It's recovered in Europe. That's basically the number of people aged, I think it's 25 to 55, if I remember. The proportion of those people who have jobs, that's not increased over the last five years.

So, although the unemployment rate is low, that suggests there's some kind of disconnection from the labour market. And there are other things, so, for example,

inflation is higher for poorer households. - This is cheapflation. - Cheapflation. Basically, the cheaper goods... Pastas increase by this much, but if you look at the cheapest pastas, they've increased by more. Which makes sense because the more expensive pastas, they've got more room. They're not so influenced by the cost of raw materials. They can adjust a bit.

So there are lots of reasons why you would go, you know, the economy is doing well. I mean, the economy did well under Biden. But maybe just because it did well in general doesn't mean it did well for everybody. And in particular, it doesn't mean it did well for swing voters. And that's a political message, but there's a broader message as well, which is generally...

As economists, we tend to think in terms of aggregates, we tend to think in terms of averages. So, you know, what's the unemployment rate for the economy? What's the inflation rate for the economy? What's GDP growth for the economy? And some of those measures, you know, are flawed and some of those measures I think are pretty good, but they're all averages. And, you know, a rainbow is on average white. There's a lot going on under the surface of the average.

Thanks for listening to Intelligence Squared. This episode was created in partnership with Guinness Global Investors. It was produced by myself, Mia Sorrenti, and it was edited by Bea Duncan. For more information on Guinness, head to guinnessgi.com or see the link in the episode description.

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