In the US people tip waiters almost 20% while in Argentina this number is reduced to 10%. In other countries like Japan, tipping is insulting. And then in Spain, the customer might even be considered to be tipped: if you are with a big group and brought enough business, you will probably get some digestive "chupitos" (drink shots) for free at the end of your meal. Secondly, why are servers tipped, but not doctors nor salesmen? (Actually, in Japan doctors are tipped, but not servers...) These and many other questions were very well posed by Mr. Pink in Reservoir Dogs.
This begs the first question: why tip at all? History suggests that originally 16th century Europeans tipped in advance to obtain faster service. If you were in a hurry, you would put a few coins up front, making sure you are noticed so that you get better service. Some suggest there was a sign saying T.I.P., "To insure promptitude," which originated the word "tip". Others suggest it was actually a slang word that spread around. According to Michael Lynn, a professor at the Cornell University with over 50 academic papers on the topic, tipping in the US began in the late 1800’s, when wealthy Americans traveling abroad to Europe witnessed tipping and brought the aristocratic custom back with them to “show off.”
But nowadays the social norm is that we tip afterwards. Waiters are supposed to provide good service in advance with the hope of getting tip as a reward. Nevertheless, it seems that people tip almost automatically, a rather fixed percentage (which might depend on the country). A study by Cornell University found that quality of service did not correlate much with service. So it seems we do not tip for good service. One thing that did correlate with tips was how attractive the waitress was (not for waiters though). Touching the patron's shoulder when delivering the check also seems to increase tips. So beware of touchy good-looking waitresses next time you are in a restaurant.
Second, why do you tip servers but not dry-cleaners? Why tip the hotel doorman, but not the person behind the reception desk? Why tip a baggage handler at the airport, but not the flight attendant? There really seems to be no logical explanation for this. The U.S. is empirically tip-addicted, with 31 different services being tipped. On the other hand, Canada has around 26, Scandinavian countries between 5 and 10, Japan 4 and Iceland 0. Most of the world operates on the simple premise of a service charge or a fixed price, no tip expected. But not the US.
Being now in Japan, I can see that servers deliver food promptly even without a tip. The restaurant business does not run into chaos without tips. It seems that tipping is more of a social norm nowadays, rather unrelated to service, where some countries tip and some do not. Some services are tipped and others are not. But this social norm also seems to depend to the racial group of the customer. How much is enough for a tip? How much is too much? In the US, only about a third of blacks say they tip in 15-20% range, compared to two-thirds of white. This might be mediated by their socioeconomic status (lower average education and income), but it does not explain it completely.
Let me end with an open question I recently read. Suppose tipping had never been invented and you were starting a restaurant, would you use tipping as the way to compensate your best employees? Or all your employees? Would that be the system that you would pick in a vacuum to compensate your team? I guess not. But this rather odd system can become gigantic. For example, tips have been estimated to account for around for 40 billion dollars in the US, bigger than the GDP of almost half the countries in the world.
Last week I wrote about the beauty of the most common measurement system in the world. In the Economics world there is also one measure that dominates all discussions: the Gross Domestic Product (GDP). Before the Great Depression this measure of "how the economy is doing" did not exist. People at the time felt things were going really bad, but no one could agree on how much. Back then they had numbers on how the production of some important industrial or agricultural sector was doing. Presidents Hoover and Roosevelt had to fight the Great Depression on the basis of sketchy data as stock price indices, freight car loadings or incomplete indices of industrial production. But there was no general number for the question "How bad are things?". Hence, similarly to the metric system, the base measure of "the Economy" was born during a crisis.
So the GDP was going to try to add up everything made in the country: houses constructed, beers sold, visits to doctors, etc. (In case you are picky, back then it was actually the Gross National Product, GNP, but I will avoid this difference here). And they needed someone willing to crunch all the reports and summarize them in one number. And so came an economist described by his best friends as "extremely dry": Simon Kuznets. He first needed to figure out what to count which is not as easy as it sounds since it should potentially include everything. For example, shall we include the Mafia? The US does not but some countries do. In 1987, after “black,” untaxed transactions were included, Italy showed a brilliant 18% growth and became bigger than the UK (il sorpasso ragazzi!). (I believe this was later undone) And the Italians might do it once again, given EU regulation from 2013 that requires all transactions, regardless of their legal status, to be accounted for. And another big jump forward for Italy might be ahead of us.
Another case of productive activity not usually included in GDP is unpaid work. As the IMF explains, for example a baker who produces a loaf of bread for a customer would contribute to GDP, but would not contribute to GDP if he baked the same loaf for his family (although the ingredients he purchased would be counted).
Well, suppose you have figured what to count out. Now, how do you count it? If it is produced and sold in the US but some of the inputs come from abroad you need to subtract that part (Tough job that requires some sort of input-output tables). Then you have all the goods produced in your country that you want to add up. If you were ever told you cannot add apples and oranges, Kuznets would tell you are wrong. That part was easy. You just need to transform them into a common unit, money, and add that up.
After 6 years of work (almost too late for the Crisis?), Kuznets published his best seller: National Income, 1929–35. Believe it or not, it sold out. And every country then joined the party and started putting numbers to the health of their economies. A first quantitative picture of the economies around the world was made. And the figure below shows how bad the situation was back then and how things have improved. Economists tend to look at GDP per person as a better measure of life standards (otherwise all big countries are going to be better than smaller ones). This chart shows the terrible effect of the Great Depression and the wars in Germany, USA and UK (PPP is to put everything in a common scale of prices).
Figure: GDP per capita (PPP, log scale)
Note: Scale gives the equivalent GDP value in 2012 US dollars.
Source: Maddison Tables and World Development Indicators.
But even if the GDP measure was too late for the Great Depression, it would come useful later on. The biggest test for this measure came in the 1940's with World War II. They needed to know how many planes and bullets could be made before prices would go up and goods in the cities would become scarce. The army thought they could make a lot. Roosevelt himself gave a speech in 1942 saying they would make 60 thousand planes and 45 thousand tanks. But Kuznets picked up his calculator and told the president it was not possible given the number of factories and steel mills. Of course the economist was right and Roosevelt backtracked. Did the confidence of the US on how to use its resources help win the war? Very likely. And all thanks to a very dry data-cruncher economist.
After this experience many economists thought that if they could measure it, they could control it. They thought it was like physics. If they understood which variables were moving the economy, they could manage them and drive us to the right place. After a century of several bad worldwide crisis experiences, it is probably safer to say if you can't measure it, you can't control it. But I guess that if they had been able to really control it, all us economists would be unemployed. Any mistakes done may just be for the well-being of me and my fellow colleagues.
(In the 17th century William Petty made some progress on some of the concepts behind the national accounts but his estimates did not allow to identify the magnitude of a crisis, the yearly growth nor the size of some particular product in a country's production, which are the main use of GDP estimations nowadays. Petty's objective was mainly to show that landlords did not make as much income as thought. He claimed labor was the source of 3/5 of national income and so if tax revenue was the objective, consumption and labor income taxes should be taken into account.
GDP is still a very messy object to calculate. Next week I will write on how GDP is actually calculated. Hang tight!)
How do you know how much a kilogram of coffee is? You probably use a scale. But how do you know all scales are the same? How do you know my scale and the scale used by Colombian sellers are the same? Fortunately there is a list of standard measures (including for example how long, heavy or hot something is) that keep all of us under the same standard. In this new post I will talk about the story behind the measures we all use nowadays. You may think I have gone way out of my field and you are probably right. But I just can't imagine any form of Economics without measurement. And I can't imagine measurement without thinking about the beautiful metric system.
Most definitions of these measures are actually quite complicated. For example, what is a second? The Bureau International des Poids et Measures defines is as:
Before then measures were based on Charlemagne’s ideas. Many were simply borrowed from human body, like the pied du roi (or king’s foot) or the toise (the distance across a man's outstretched arms). But what if men were bigger in one part of the world than in another? Hence measure were quite uncertain and clearly not fixed: they varied from town to town, between occupations as well on the type of object to be measured. So agreements on measures were hard.
What gave room to the Metric System we have today? An economic crisis of course. The famine of 1780s meant that food should get more expensive. But bakers were worried about increasing prices (lots of revolts were happening), so they started baking smaller loaves. People started noticing loaves were smaller, but no one could universally check their weight! And the French revolution set the reform environment which started with a new standard. They wanted a system based on nature, that avoided national vanities and could be used by all nations.
And so first came the meter: They took a quarter of the circumference of the Earth and divided it by 10 million. That's a meter. And this gave birth to the kilogram. To define the unit of mass they preferred water to other bodies (such as gold) because it was easy to get anywhere in the world. They divided the meter in 10, formed cubes of that size, filled them with water and voila! The kilogram. And from the kilo they defined other 4 base units...
This object in France makes sure that whenever I buy one kilo of bread from a shop, we can all agree how much that is. Well, unless you go to typical corner store where a kilo of bread may be less than a kilo. But even in that case we can actually determine the real weight and formally complain about it. This is supposedly the story of Poincare (also in France but in the 1900s). From Allen Downy's Think Stats book:
Let me finish with the story of the first kilogram. This "perfect" object has been used as a prototype to build a few other kilogram sub-prototypes (called sisters) over the world. And these have themselves being used to build others, all the way to our day to day scales. Every time each one of us checks his own weight, this can be traced back to this little object in Paris from the 18th century. And the most interesting thing is that recently it was found that (comparing it to its sisters) the perfect kilogram was losing weight! The funny thing is that even though it lost weight - since itself defines weight - the object is actually still one kilogram! Which brings us to the bummer conclusion that we have all gained weight in the meantime. As the definition of a kilogram got lighter, we all got heavier.
Most people (and particularly my mother) think that economics is only about money. That we economists are basically counting money and telling people where to invest. This post will be the first evidence that there is no boundary to economics. Today I will go as far as to fertility. Yes, we economists have a lot to say about fertility.
Fertility has interested economists for a long time. At least since Malthus' theory on population growth in 1798 economists have been interested in fertility. Malthus basically thought that as people became richer they would have more kids, which would mean less resources for everyone (he expected technological growth to be quite small), leading distress to knock on everyone's doors (though louder on the poorer doors). Fortunately, this is also an example of economists failure at predicting the future.
On top of human capacity to increase resources, which Malthus undervalued, the other assumption that does not hold in Malthus idea is that the higher your income, the more kids you have. But we will get to that later. Let's see the broad picture first. How has fertility evolved in the US in the last 200 years? Here is a plot of number of kids for (married) women born in different years (cohorts in the figure):
The dark blue line shows that the overall average of children born has decreased from a high 5.5. to an average of just below 2. More impressive is the fact that initial differences between groups (black vs. white, urban vs. rural) have narrowed substantially. Differences that used to be as high as 1.5 kids are now smaller than one-fifth of a child. Notice that this data is for married women, so hypothesis that are based on the reduction of marriage as a cause for the reduction in the number of kids are in trouble. It is also interesting to note that most of this compression is coming from the reduction of women having lots of children.
The number of women having either none or one kid has been quite stable around 10-20%, but the number of women having 4 or more children has diminished from almost 70% to below 10%. What seems to be behind this? There are many theories out there (see the paper cited below if interested), but I will stick here to the one of the most popular among economists: money, money, money...Here is a plot of number of kids for different levels of income for all the different cohorts.
The shocking thing about this picture is that all the women born from 1828 to 1958 seem to be gravitating around a constant relation between (real) income and number of kids had. In other words, in either century, women with incomes of around X apples (real income) would have in average a very similar number of kids. More impressively, there seems to be no difference in this relationship for either urban or rural areas. (Caveats aside) This suggests that the main difference between the average number of kids women have in the 1800s versus the 1900s (or in rural compared to urban areas) is mainly income. People are richer today and, for some reason, richer people tend to have less kids. The question is then why?
Charging taxes on income is hard. Worldwide experiences show that less developed countries have difficulties raising revenue from income taxes. Below I have plotted GDP per capita and Income (and capital) tax share of total government revenue for 2005. It is reasonable that most countries have a hard time making people and firms pay income taxes, but richer countries clearly tend to do it more.
Source: World Development Indicators.
The income tax has not been common throughout history. For example, a century ago the income tax almost did not exist in the US. Most government revenue was from trade tariffs and consumption taxes. These are much easier to collect. You just need someone at the port of trade, or some random controls at shops. Look at the sale value and take a share. But income tax is harder. You need people to be capable of keeping track of their income and sum it. And then you also need them to be honest and report it. Finally you need to enforce it, with a system potentially capable of checking every person. However, in spite of all these difficulties, income tax now account for over 55%. How did this happen?
Well, as usual, first came a government in financial trouble: wars are the starting point of most taxes. The idea first floated during the 1812 war with the UK, but it was unsuccessful. Later, the civil war was bad enough to ensure the introduction of the income tax (and the beloved IRS!), focusing on rich individuals. How did they enforce people to pay? By encouraging people to report their neighbors to the IRS if they were driving a Ferrari (or the horse equivalent of the time). Some people even claim that the income tax was key for the victory of the north. So the income tax might have even stopped slavery!
But this was not enough. The war ended and so did many of the pressing needs. You may think it would have been reasonable to keep the tax to build a safety fund? Wrong. As soon as the war ended, rich people didn't want to keep paying. Moreover, they could afford the lawyers and the Supreme Court agreed with them. Surprising, ha? But you can always count on new government deficits. They currency and stock market crisis of 1907 meant funds were needed. So just before the First World War the constitution was changed, allowing the government to collect income tax. But it was still focused just on the rich. Less than 2% of the people paid taxes.
Once the Second World War arrives to the American coast, more money is needed. So they decided to expand the income tax to the middle class. They needed someone beloved, with credibility, charming to promote the tax: Donald the Duck. Yes, you read correctly. Here is the video:
And this is how the income tax came to be in the US. With an approval rate usually above 80%, it surpasses any politician I know. As Walt Disney appropriately said: "If you can dream it, you can do it."
70 years ago this wasn't the case. How did the US become the printer of the currency of choice? While (almost) every other country needs a foreign currency to trade, the US can just press a button and this beautiful green paper comes out. And then they can give us these pieces of paper and we all give them real goods. Quite a privilege. Luckily, they don't take as much advantage of this privilege as some of my fellow countrymen would.
How did this happen? Let me set the environment first. It all started at the end of the 2nd World War. A beautiful hotel in Bretton Woods (New Hampshire, USA). 44 countries got together to restore the economy. The gold standard was out, and every country was trying to protect its own industries (in other words, no trade). Currency values were flying around (well, not as much as some future post-Soviet or Latin American countries would experience, but a lot for the time). How can you trade when you don't know what the other currency will be worth tomorrow? Well, as any person with an "Argentinean survivor" degree knows, the answer is "you can't." So a tiny group of people were trying to put an end to this by deciding on the exclusive right to create money out of nothing. But lots of alcohol and cigars, a beautiful Peruvian singer and not much sleep may have interfered...
There were really just two sides: England vs US. Keynes vs a John Doe. (All the rest seem to have been just drinking and partying). But you can imagine by now who won: This John Doe, a number cruncher, timid, antisocial, actually named Harry White. But forgotten by history.
Both wanted an international currency for trade. Keynes wanted a new currency created by a worldwide global bank (named "bancor" from the French "banc d'or" to please the Frenchmen, but based in London of course to cheer the Royal pockets...Tricky John Maynard). White of course wanted another universal currency, the US dollar. How did he win? He started writing in all the documents "gold convertible currency." But who had all the gold? The US (80% of it). And finally, after all that drinking, the people got confused about what "gold convertible currency" meant. Keynes was at another meeting, and his British replacement - either not very bright or quite hangover - suggested that for "clarity" they could simply call it "US dollar." He thought this was just a technicality. Bollocks. Keynes was ill (he even collapsed and some journals even reported he was dead), so he was never able to check the document he finally signed (nor kill his second man). And, hence, after a seemingly irrelevant "clarification", every country now uses dollars to do business.
In 1999, Time magazine included Keynes in their list of the 100 most important and influential people of the 20th century. Well, I feel the role of the US dollar has been quite relevant, so shouldn't Harry be on that list? Maybe this absence has to do with what later happened to Harry White. Accused (and later convicted) by FBI Director Hoover for being a spy for the Soviet Union, he was also questioned for passing Treasury plates to print Allied money, sparking a black market and serious inflation throughout Germany. Quite a turnaround for the American hero (a real life Walter White?). If all this shouldn't be a movie, I don't know what should.
Based on another great episode from Planet Money.
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