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Economics comes on-line

This article was written in August 1996. A revised version appeared in the Economic Review magazine for September 1997.
If all the computers on the Internet were laid end-to-end, they would reach from London to Aberdeen, a distance of roughly 420 miles. Of these 1.7 million machines, those on the World-Wide Web, the newest and most popular face of the Internet, would stretch only as far as Northampton, a mere 55 miles. However, these 0.23 million Web machines would have doubled in number by December, and at the present rate of growth, will continue doubling every six months.

This picture assumes all the computers to be average-size PCs. While that's an underestimate - many are bigger and more powerful - the actual numbers of machines connected, taken from statistics published by Network Wizards and Matthew Gray of the Massachussets Institute of Technology, are fairly reliable. The Internet, and particularly the Web, have grown enormously. In mid-1993, there were 103 Web sites: now there are almost a quarter of a million. In this article, we examine some of the information resources out there, ending up with the new educational economic models being developed by the IFS.

What is the Internet?

When we talk about the Internet, we refer to a world-wide network of computers, connected by a variety of satellite links, fibre-optic cables, and other communication methods. Nobody owns the Internet: it is a loose assemblage of various interlinked national networks, some state-owned, some private. Most of the world's universities are on the net, as are a huge variety of commercial and other sites - Labour, the Tories and the Liberal Democrats; Sainsburys; the Guardian newspaper - to mention only a few of the sites in this country.

To go further, I shall focus on the five main ways to use the Internet, known technically as email, news, telnet, FTP, and the World-Wide Web. Email, or electronic mail, is the most popular and the easiest to explain, so I'll start there.

Every computer user on the Internet has a unique "email address": like a phone number, but with letters instead of numbers. Part of the address indicates country and organisation; others give the user's account name. If John Smith worked at the IFS, his address would be john.smith@ifs.org.uk; Bill Clinton is president@whitehouse.gov. To send an email message, you write it using a word-processor, and then pass it to an email program together with the recipient's address. This program wil send it out onto the Internet, and it will eventually arrive at the other end - usually within five minutes, even if the destination is in Australia.

Instead of writing to an individual, you can pin messages up on the electronic equivalent of a notice board for anyone to read and comment on. There are probably around 13,000 of these boards, properly called "newsgroups". Each newsgroup is devoted to a specific subject area and has its own name, similar to an email address. Some are serious: the groups sci.econ and sci.econ.research concern economics, and as I write, have postings about Bob Dole's tax plans, help needed with matrix algebra, and entry barriers to South Korean trade. Others are social or recreational: soc.culture.romania, rec.games.chess and alt.fan.douglas-adams speak for themselves. If you need information, newsgroups can be a wonderful resource: a vast number of readers will see any question you post, and some will be experts who are willing to take the time to answer with a carefully considered reply. But beware! Anyone is allowed to answer a question, and some readers have more enthusiasm than expertise. There are also certain rules of "netiquette" to be obeyed: in particular, you should not post homework questions, advertising, or messages unrelated to the group's subject area.

Telnet lets you log in to one computer from another: it is much used by scholars who are away from their department but who need to access a machine there. FTP stands for "file transfer protocol", and enables users to create libraries of computer files which anyone with Internet access can copy to their own machine. These files can contain computer programs or data - amongst those of interest to economists, there are a number of large datasets on exchange rates and commodity prices, for example. Some are maintained by research organisations; some by companies such as the foreign exchange traders Olsen and Associates. Details of FTP resources get posted regularly to the sci.econ.research newsgroup.

The World-Wide Web

FTP is a route to a vast amount of information, but requires a little prior experience. This is the motivation behind the Web, developed by Tim Berners-Lee during 1989 at CERN, the European Laboratory for Particle Physics, as a way for computer-naive physicists to share research papers and data. It is the ease of use of this gateway to the Internet that partly explains the Web's explosive growth.

Any Internet-connected computer can become a Web site, given suitable software. Once this is installed, the site can publish any number of documents - "pages" as they are called - for other Internet users to read. Pages are as varied as newsgroups. Many academics write pages describing their research. Universities generally provide free Internet access and excellent computing facilities, thus giving members the freedom to create personal-interest pages too. Some are extremely ambitious - exhaustive information on the Oscar-winning films, or photographic records of tours around Russia. Outside academia, companies advertise on the Web, as do museums, political parties, charities and other non-commercial organisations, plus an increasing number of private individuals. There are numerous pages of economic interest: the World Bank, World Trade Centre, JP Morgan, and of course the IFS, to mention only four. The resource guide posted to sci.econ.research also includes information on these pages.

To read a Web page, you need its address. This resembles an email address, but always begins http://. One address you might recognise is that of the BBC's home page, http://www.bbc.co.uk/. You must also have a piece of software called a "browser". There are several of these, Netscape Navigator being the most popular. Typing the address into your browser will cause it to send a request to the site, and the page will come back within a few seconds or minutes, depending on how busy the Internet is.

As an example, the IFS home page has the address http://www.ifs.org.uk/, and looks like this:

Hypertext

Looking at this page, there are some words that look different from the rest (if the picture were in colour, they'd appear in blue where the rest are black). These "hyperlinks" contain the address of another page - on the same site or a different one - and if you click on them with the mouse, the browser will find that page for you. It's like a live bibliography: rub your finger on the entry for Dixon's paper The Economic Influence of Developments in Shipbuilding Techniques 1450-1485, and it appears in a puff of smoke in front of you. A hyperlinked page can itself contain hyperlinks, which point to pages with yet more links: we end up with one huge world-spanning network of documents. This is "hypertext", and is a key idea behind the Web. Links can point not only at normal pages, but also at data you can download to disc, or - as we shall see - to runnable programs.

Animated pages

Fairy stories tell of animated books whose pictures move and talk: wouldn't it be nice if real textbooks were like this? Reading an anatomy text, you see the diagram of a skeleton: imagine zooming in to view the bone structure of the ear in detail; animating the skeleton to see how the joints move when walking; or superimposing a load diagram to show the causes of backache. In fact, a similar book exists on the Web, albeit for frogs rather than humans. A student using the Virtual Frog Dissection Kit can view a frog from different angles, and with anatomical features like nerves and muscles either visible or invisible. For example, I can start by looking at a complete frog from the side, then press a button to remove the skin; click on the yellow blob this reveals under the skull to ask what it is; and on being told it's an eye, click on an "attitude control" bar to rotate the frog and bring it more fully into view from above.

Of course, the techniques to generate such animations have existed for years, as games designers know. The problem is that there are many different varieties of computer - Macintosh, IBM PC, Amiga, to name but a few - and they all have different hardware. It's not possible to write one program that runs on them all; instead, a a different program is needed for each kind, which means more work for the programmer. The Web bypasses this because the program only ever needs to run on one computer, the one at the Web site, with the results being delivered by Internet to your Web browser. (The advent of a new Web language called Java has changed this somewhat, but we shall ignore that here.)

Chancellor on the Internet

How is the IFS applying these ideas? One of Parliament's great theatrical traditions is the annual Budget Day Speech. The Chancellor of the Exchequer stands before a packed House of Commons and surveys the state of the economy and government finances, before announcing the changes he intends to make to income tax, Value Added Tax, and other taxes. Many of his changes must undergo a period of Parliamentary scrutiny before becoming law. Some, however, notably those to indirect taxes on tobacco, alcohol and petrol, take effect immediately, and gain wide publicity - Beer up 5p a pint, Extra 10p on a packet of twenty. Everyone knows about these and has strong views on them, so they were a suitable starting point for Be Your Own Chancellor, our first Web model.

This program can be reached via the hyperlinks on the IFS home page. A session starts with a Web page which contains a data entry form for parameters such as income tax thresholds and rates; indirect taxes on spirits and other goods; and Family Credit and other benefits. (In real life, benefit changes are the responsibility of the Social Security Secretary, not the Chancellor, and are not announced during the Budget speech.) Two portions of the form are shown:

After entering this data, you press a "Submit" button and your data is sent to the IFS Web site. There, our program calculates the effect of your taxes and benefits on a sample of nine families and on Government revenue, compares it with that of the actual tax system, and sends the results back to your browser:

Instead of varying the tax system, one could vary the families. That's the idea behind our Budget 95 model which went live on Budget Day 1995. (The models are updated yearly, and will be configured for the 1996-1997 tax system by the time this is published.) Budget 95 allows you to enter your own financial details, and then compares the effects of the pre- and post-Budget systems, thus showing how the Budget would change your circumstances.

The next stage in the on-line models project will explore the graphical possibilities described earlier. As a first step, we have extended Be Your Own Chancellor so that it produces "budget constraint" plots. These show how a family's income changes as its earnings increase (i.e. with increasing hours worked). Some of these results can be surprising: at low values of earnings, benefit withdrawals can cause net income to decrease as the family earns slightly more, the so-called "poverty trap".

The IFS Tax and Benefit model

In computing, a "model" is a program that simulates some aspect of reality in order to make predictions. Ship designers use programs that model how their vessels behave in heavy winds and seas: if the model predicts a ferry will roll dangerously far in a storm, then the designer has learnt something rather important. We could say the ferry model is a "what-if" program: we're using it to answer the question "what happens to this ship if its environment changes in this way?"

Be Your Own Chancellor uses an economic model called Taxben, a program that answers "what-if" questions about the effect of tax and benefit changes. What if I were to lower the standard tax rate by 1p, or impose VAT on books? The forthcoming 1996 Budget will be the last before the Election, and it seems likely that the Chancellor will try to gain electoral advantage by cutting income taxes. There are various ways to do this: a cut of £3 billion (something in this region seems likely) could be achieved by lowering the basic tax rate by 1.5p, raising personal allowances by £450, or widening the lower-rate band by £4250. Each of these would redistribute income differently, as shown in these graphs [picture: graphs from Green Budget p37] from the IFS Green Budget. We use Taxben to assess both such distributional effects and the effects on Government revenue.

Models and their limitations

Taxben is a "microsimulation" model, based on a representative sample of 7,000 UK households collected by the Government's Family Expenditure Survey. Each household's data includes a detailed expenditure breakdown and some information on incomes. Taxbwn uses this to simulate the effect of tax changes. In the main, this is a straightforward accounting exercise: the household's income is assumed to be fixed, and Taxben calculates how much tax the household would pay and what benefits it would receive under the stipulated tax and benefit rules. Detailed expenditure information is essential here: it would be impossible to calculate the effect of indirect taxation without a breakdown of expenditure by type of good.

There are many other economic models in existence. HM Treasury, for example, has a model of the UK economy which allows one to change a variable such as interest rate and examine the effect on consumer price inflation, unemployment and other indicators. Unlike Taxben, this is a macroeconomic model: it is based on a large set of equations relating different macroeconomic variables, the coefficients in these equations being derived by fitting to appropriate economic data. It and Taxben are only two out of hundreds or thousands of models in use by governments and academics here and abroad.

When using a model, however it works, you must beware of its limitations. If you triple the duty on spirits, Be Your Own Chancellor predicts an increase in Government revenue of £1,300 million In reality, the increase would be less, since people would switch to other drinks. However, the model is not designed to take such behavioural effects into account. The need for care in interpretation is covered in our commentary, and is an important lesson we hope our readers will learn.

Conclusions

The Internet is invaluable not only for email, but as an information source. Its newsgroups carry discussions on many topics, economics included. By using the Web and its older cousin FTP, you have access to a plethora of datasets and publications, as well as programs like Budget 95 and Be Your Own Chancellor. But whether a model is connected to the Web or run some other way, remember that its results are only as good as the data and assumptions built into it.

References

28th May 1997, pictures of Web pages added 11th January 1998.

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