Daylight savings time is like inflation. The analogy helps to understand both.
If we abandon time changes, should we use standard or daylight saving time all year round? Media and x were batting that question around last week. Daylight saving time seems to mean kids to standing out in the dark for the school bus in the winter. Standard time misses a lot of pleasant summer evenings.
The answer is: it doesn’t matter. If we move to permanent daylight saving time, and people think that’s too early to get to school or work, they will adjust business or store hours to be an hour later.
Imagine that we eliminated time zones, and switched to UTC (GMT). That’s (currently) 7 hours ahead of Palo Alto. Heavens, do you want all the schoolchildren to have to show up at 1 AM (8:00 AM UTC?) Of course not. The schools would just change their opening hour to 15:00.
Prices too are just a set of units. Whether we measure value in dollars, euros, pounds, or yen, everything real — how much you can buy with your salary — is unchanged. When Italy joined the euro, all prices changed instantly.
So why do we have daylight saving time at all? A simplistic supply and demand economist would answer that too is pointless. If people want to get to work earlier in the summer, then schools and businesses will move their opening hours forward in the spring and back in the fall. And maybe they’d do it in smaller steps. “Summer hours” would be a universal thing.
By and large, that doesn’t happen, even in states that don’t have daylight saving time. Why not?
The obvious answer is that moving hours is a “coordination failure.” The school wants to start earlier in summer, but it doesn’t want to start before businesses start. Businesses don’t want to start before schools start so people can drop off their kids before work. Most businesses work with other businesses, so if you start before other businesses, you’re just waiting time. (People who work in finance on the West Coast get up at 4 AM to be at work when markets open in New York, an example of voluntary coordination.) Nobody wants to move first, and there isn’t a central place where we can all say “let’s start work an hour earlier.”
Well, there is: government. Setting weights and measures, including time; deciding if we drive on the left or right hand side of the street are pretty basic government functions that even pretty die-hard libertarians agree on in the presence of coordination failures.
The government could say “everyone move business hours to one hour earlier starting March 1.” But it’s easier and clearer to say “everyone move the clocks forward one hour.”
Now maybe people don’t change on their own because they don’t want to change. I like to get up at dawn and I love long sunlit summer evenings, but maybe I’m unusual.
Evidence for coordination failure is that people don’t voluntarily move business hours 1 hour back every spring. If you don’t like daylight saving, avoiding it is really easy after all. There is no law stopping you from chaining your hours to 8-4 rather than 9-5 when the clocks change. Nobody does that.
Also, we do see changes in places where it really matters, and where coordination is less important. Self-employed people likely start work earlier in the summer. Farmers and construction workers, whose businesses depend a lot on daylight, seem to move on their own to earlier hours in the summer.
Inflation works the same way. Prices are puzzlingly “sticky.” Forces that should raise the level of prices sometime seem to take forever to take effect. Exchange rates are one of the most potent examples. When the Canadian dollar depreciates 10% relative to the US dollar, you would expect the price of a hamburger in Windsor, ON to go up 10% relative to the price of a hamburger in Detroit, so that the real price remains the same. It doesn’t happen, at least for years. Michael Mussa pointed out this puzzle a long time ago: When countries like US and Canada changed from fixed to surprisingly volatile exchange rates, prices didn’t get any more volatile. The real price differences between goods in US and Canada got more volatile. It’s as if Canada changed the clock, and nobody moved their opening hours.
Economists have puzzled a long time at just what the nature of this price stickiness is. A main theory posits that there are small costs of changing prices or opening hours, and not huge benefits. I find the “strategic complementarity” story more plausible in both cases. (We stick with sticky price models because they are more analytically tractable. Economics often needs simple equations more than exactly right equations. The standard Calvo Phillips curve is much easier to use than current strategic complementarity models.)
I think it was clear that if the US moves to UTC, everyone would change their opening hours, instantly, though nobody does it for daylight savings time. This is the time equivalent of a monetary reform, changing from lira to euro. A good theory should encompass both cases, rather than treat currency reforms as a special case.
The strategic complementarity view suggests some interesting and unexplored possibilities. In macroeconomic thinking since Keynes, sticky prices have been the main, and sometimes the only “friction” making recessions less than optimal. (Some models have financial frictions too, but that’s a subfield rather than the central case.) Well, rather than devote billions to fiscal and monetary stimulus, rather than construct elaborate Fed strategies and stabilizers, why don’t we make prices and wages less sticky? In turn, if stickiness is a coordination failure, successfully getting everyone to change at once could work. On March 1 at 2 AM, everyone reduce every price, wage, and nominal contract by 10%. If that is, in fact, adjustment to a better equilibrium, only held back by nobody wants to move first, it will stick and eliminate the recession.
Similarly, small countries in recession are often advised to devalue their currency. Their wages and prices are “uncompetitive.” Lowering wages and/or prices through “internal devaluation” is thought to take too long and cause a recession because nobody wants to move first. Rather than devalue the currency (again), the country could just, effectively, reset the clock by a similar policy.
Of course, we have to be careful. I am not advocating wage and price controls, and the policy would look temptingly like price controls. People are free to move prices and wages back one day later. The messaging is crucial. We’re just here to break the logjam so nobody has to move first. It’s not a panacea, because the real shocks that cause the recession will remain. But at least they will not be amplified by sticky prices.
When prices are sticky, playing with units is tempting. A government that wants people to work harder might decree that clocks stop for an hour in the middle of the day, so everyone works 9 hours, counting on it taking a while for businesses to adjust with shorter posted working hours. That’s what governments are doing when they try to goose the economy with monetary policy.
Next up: efficient markets and trading are like switching lanes to get ahead on the freeway in heavy traffic. The market equilibrates when all lanes move at the same speed. But with costs of changing lanes, smart arbitrageurs can make some money.
Update:
The analogy is not original, of course. A colleague passes on this gem from Milton Friedman’s 1953 paper, “The Case for Flexible Exchange Rates:”
“The argument for flexible exchange rates is, strange to say, very nearly identical with the argument for daylight savings time. Isn’t it absurd to change the clock in summer when exactly the same result could be achieved by having each individual change his habits? All that is required is that everyone decide to come to his office an hour earlier, have lunch an hour earlier, etc. But obviously it is much simpler to change the clock that guides all than to have each individual change his pattern of reaction to the clock, even though all want to do so. The situation is exactly the same in the exchange market. It is far simpler to allow one price to change, namely, the price of foreign exchange, than to rely upon changes in the multitude of prices that together constitute the internal price structure” (published in Essays in Positive Economics, p. 173).
“if the US moves to UTC, everyone would change their opining hours,…”
People opine on the Internet at all hours, regardless.
[sic] 😏
The clock change is meant to track the body change which follows the sun. It is not meant to be a dislocation, except that now most of us are tied to the clock (for starting work and school) rather than the sun.
My pets know when it is time to change the clocks - they get up earlier and earlier as the days get longer.
If we didn’t change the clocks then we’d spend more morning sunshine hours sleeping and have less time after work to enjoy summer evenings. Sure, we could change work and schools hours twice a year- but that sounds a lot like daylight savings time! I suppose choice is better than forced change- good point.
The beauty of being retired is it no longer matters- I get up with the sun (and my pets) and go to sleep when I’m tired. Who cares what the clock says?