EXTRACT FROM JLA SPEAKERS BREAKFAST
by Tim Harford

How do people behave in a recession?

There is a lot of guesswork in the newspapers. The Sun has a theory that sales of maternity dresses have risen - as a result of people indulging in a low-cost enjoyable activity.

Economists believe that above all, people's behaviour is shaped by incentives. Benjamin Franklin famously said that nothing is certain but death and taxes. It turns out he was wrong.

In 1979 the Australian government announced the abolishment of inheritance tax with effect 1st July. Very curiously the death rate began to fall sharply in late June, kicking up in early July.

Then they announced that any baby born after 1st July would be eligible for a bonus of $3000. The birth rate on 1st July was the highest in Australian history, double the birth rate on 30th June. So whether you are entering the world or leaving it, people respond to incentives.

Disposable income has not yet fallen, but spending has. This is caused by fear. Consumers will cut back - but what on? In one word - socks.

The obvious choice would be luxuries - but this will have an immediate impact on your quality of life. In the end you might have to cut out the holidays and restaurants, but what would you do first? You have a virtual savings account - the things around your house which you would like to replace but don't have to. The hard durables like your washing machine, your car, and the soft durables, such as socks.

Whether you are dealing with suppliers, business customers or consumers, if you don't recognise that everyone is having a different experience, you are in trouble. We forget that some people are having an OK time, because the mainstream media is focussed on the average and on average in a recession people are poorer. But many people are doing very well. At the end of the last recession half the country was substantially richer than at the beginning.

The message is that individual experience completely swamps the average. What happens to you in a recession is much more to do with whether you decide to go to university, have a baby, take time off work, get lucky, have a promotion. This is what is most important for the individual.