An excellent learning exercise for students of economics is to take a journal article that uses data to model the economy and then try to replicate the authors’ results. You may well be given an assignment like this in future years of your degree.

One such exercise is used on the University of Massachusetts Amherst’s doctoral programme in economics. Thomas Herndon is a student on that degree and chose to examine a well-known and highly influential paper, Growth in a Time of Debt by Carmen Reinhart then of the University of Maryland and Kenneth Rogoff of Harvard University and former chief economist of the IMF. Professors Reinhart and Rogoff used new data on 44 countries spanning about 200 years.

A key finding of their paper, published in 2010 in the American Economic Review Papers and Proceedings, is that once a country’s government debt exceeds 90% of GDP, growth rates fall considerably: the median across countries by about 1% and the mean considerably more.

The paper has been hugely influential. It has been used to justify the austerity programmes being pursued in many countries, including the UK and the eurozone. Cutting the government deficit to GDP ratio, and ultimately the government debt to GDP ratio, has been seen as a way of achieving higher growth over the longer term, and justifies the adverse effect on short-term growth from the dampening of aggregate demand.

Well, this seemed an interesting paper for Thomas Herndon to examine, and he was keen to show just how Reinhart and Rogoff’s data led to their conclusions. But try as he might, he could not replicate their results. His initial reaction was to think he had made an error, but each time he checked he came back with the same conclusion: they must have made errors in their calculations.

His supervisor at Amherst, Professor Michael Ash, after Thomas had checked and checked again, realised that something was wrong. He encouraged Thomas to write to Reinhart and Rogoff to request sight of their dataset. They duly obliged and it was then that Thomas spotted various errors. These are explained in the articles below, but the overall effect was to alter the conclusion. Although high debt may undermine growth to some extent, the effect is much less than Reinhart and Rogoff concluded, and there are several exceptions to this rule.

On 15 April 2013, Thomas, along with his supervisor, Michael Ash and his colleague, Robert Pollin, published a response to the Reinhart and Rogoff paper. In the abstract to their paper, Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff they state that:

… coding errors, selective exclusion of available data, and unconventional weighting of summary statistics lead to serious errors that inaccurately represent the relationship between public debt and GDP growth among 20 advanced economies in the post-war period. They find that when properly calculated, the average real GDP growth rate for countries carrying a public-debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not –0:1 percent as published in Reinhart and Rogoff. That is, contrary to RR, average GDP growth at public debt/GDP ratios over 90 percent is not dramatically different than when debt/GDP ratios are lower.

The authors also show how the relationship between public debt and GDP growth varies significantly by time period and country. Overall, the evidence we review contradicts Reinhart and Rogoff’s claim to have identified an important stylized fact, that public debt loads greater than 90 percent of GDP consistently reduce GDP growth.

So could this be you in the future? Will you take a famous paper and, by re-examining and reworking the data, find that its conclusions are wrong? Could you end up changing the world? Exciting stuff!

Podcasts
Austerity: A Spreadsheet Error? BBC, More or Less, Tim Harford (20/4/13)
Austerity justification study ‘inaccurate’ BBC Today Programme, Robert Pollin (18/4/13)

Articles
UMass Student Exposes Serious Flaws in Harvard Economists’ Influential Study The Atlantic Wire, J.K. Trotter (18/4/13)
Shocking Paper Claims That Microsoft Excel Coding Error Is Behind The Reinhart-Rogoff Study On Debt Business Insider, Mike Konczal (16/4/13)
How a student took on eminent economists on debt issue – and won Economic Times of India (19/4/13)
Meet the 28-Year-Old Grad Student Who Just Shook the Global Austerity Movement New York Magazine, Kevin Roose (19/4/13)
An economist’s mea culpa: I relied on Reinhart and Rogoff Confessions of a Supply-Side Liberal blog, Miles Kimball (22/4/13)
The Rogoff-Reinhart data scandal reminds us economists aren’t gods The Guardian, Heidi Moore (18/4/13)
Reinhart, Rogoff… and Herndon: The student who caught out the profs BBC News Magazine, Ruth Alexander (20/4/13)
George Osborne’s case for austerity has just started to wobble The Guardian, Polly Toynbee (18/4/13)
The error that could subvert George Osborne’s austerity programme The Guardian, Charles Arthur and Phillip Inman (18/4/13)
The Excel depression Sydney Morning Herald, Paul Krugman (19/4/13)
Europe: Retreat from austerity BBC News, Gavin Hewitt (23/4/13)

Guest post by Thomas Herndon
The Grad Student Who Took Down Reinhart And Rogoff Explains Why They’re Fundamentally Wrong Business Insider, Thomas Herndon (22/4/13)

Papers
Growth in a Time of Debt NBER working paper, Carmen M. Reinhart and Kenneth S. Rogoff (January 2010)
Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff PERI Working Paper 322, Thomas Herndon, Michael Ash and Robert Pollin (April 2013)

Unemployment is a key macroeconomic objective for governments across the world. The unemployment rate for the UK now stands at 7.9% according to the ONS, which recorded 2.56 million people out of work. But why is unemployment of such importance? What are the costs?

The economy is already in a vulnerable state and with unemployment rising by 70,000 people between December and February 2013, the state of the economic recovery has been questioned. Indeed, following the news of the worsening unemployment data, the pound fell significantly against the dollar, suggesting a lack of confidence in the British economy.

Although the increase in the number of people out of work is concerning, perhaps of more concern should be the number of long-term unemployed. The ONS suggests that more than 900,000 have now been out of work for more than a year. Not only does this pose costs for the individual in terms of lost earnings and skills, but it also imposes costs on friends and family and the wider economy. (Click here for a PowerPoint of the first chart, which shows the percentage of unemployed people out for work longer than 12 months.)

The chief executive of the Prince’s Trust focused on the costs of youth unemployment in particular, saying:

Thousands of these young people are long-term unemployed, often facing further challenges such as poverty and homelessness. We must act now to support these young people into work and give them the chance of a better future.

(Click here for a PowerPoint of the second chart, which shows how much higher the unemployment rate is for young people aged 18 to 24 than it is for the working age population as a whole.)

Furthermore, with so many people unemployed, we are operating below full-employment and thus below our potential output. Furthermore, the longer people are out of work, the more likely it is that they will lose their skills and thus require re-training in the future or find that there are now fewer jobs available to them based on their lower skill level.

In addition to this there are monetary costs for the government through lower tax receipts, in terms of income tax, national insurance contributions and even VAT receipts. With more people unemployed, the numbers claiming various unemployment-related benefits will rise, thus imposing a further cost on the government and the taxpayer. Another cost to the government of this latest data is likely to be the expectations of the future course of the economy. Numerous factors affect business confidence and unemployment data is certainly one of them. The concern is that business confidence affects many other variables as well and until we receive more positive data, the economy recovery is likely to remain uncertain. The following articles consider this topic.

UK unemployment rise adds to pressure on Osborne’s austerity strategy The Guardian, Phillip Inman (18/4/13)
Unemployment figures are ‘worrying’, David Cameron’s spokesman says The Telegraph, Peter Dominiczak (17/4/13)
UK unemployment rises to 2.56 million BBC News (17/4/13)
Unemployment jumps to 7.9% as rise in the number of young people out of work takes figure ‘dangerously’ close to a million Mail Online, Leon Watson (17/4/13)
Unemployment up as stay-at-home mothers head back to the job-centre Independent, Ben Chu (17/4/13)
Jobs data points to finely balanced market Financial Times, Brian Groom (18/4/13)
Hugh’s review: making sense of the stats BBC News (19/4/13)

Much has been written on Margaret Thatcher following her death at the age of 87 on April 8. But getting a calm assessment of both her time in office and her legacy is not easy. And it’s clear why: she created both stronger loyalty and stronger opposition than any other UK Prime Minister.

As economists, however, we should try to be as dispassionate as possible in assessing the effects of policies. There is always a normative question of the relative desirability of different economic outcomes – and you will have your own views on the relative importance of objectives such as economic growth, greater equality and greater social cohesion – but to determine cause and effect, or at least correlation, requires a careful examination of the evidence. Also, drawing lessons for future policy requires a careful modelling of the economy and the effects of changing economic variables.

The following articles have been selected from the hundreds that have appeared in the press in the past few days. Whilst they cannot be claimed to be totally ‘objective’, taken together they give a good overview of her economic policies and her economic legacy.

You may well have been surprised by the amount of coverage of her death and at the fervour of her supporters and critics. But this bears witness to the huge effect she had on both the political scene and on the UK economy – for good or bad.

Articles
Margaret Thatcher’s timeline: From Grantham to the House of Lords, via Arthur Scargill and the Falklands War Independent (8/4/13)
Overhauls Are Still Felt, Debated Decades Later Wall Street Journal, Charles Forelle (9/4/13)
Margaret Thatcher’s Four Ages of Monetary Policy EconoMonitor, David Smith (10/4/13)
How Mrs Thatcher smashed the Keynesian consensus The Economist (9/4/13)
Margaret Thatcher: The economy now and then BBC News, Stephanie Flanders (10/4/13)
Did Margaret Thatcher transform Britain’s economy for better or worse? The Guardian, Larry Elliott (8/4/13)
A look back at Margaret Thatcher’s economic record Washington Post, Dylan Matthews (8/4/13)
Margaret Thatcher’s legacy for business and economics—the world weighs in Quartz, Gwynn Guilford (8/4/13)

Data
Economic Data freely available online The Economics Network, see especially sites 1, 2, 3, 6 and 9

Australia is a rich country. It is one of the few to have avoided a recession. This has been the result partly of successful macroeconomic policies, but largely of the huge mining boom, with Australia exporting minerals to China and other fast growing Asian economies.

But has this growth brought happiness? Are Australians having to work harder and harder to pay for their high standard of living? Indeed, do higher incomes generally result in greater happiness? The following articles explore this issue, both in an Australian context and more broadly. They look at some recent evidence.

For example, in one study, Canadian, Chinese, Indian, and Japanese university students were asked what they held to be most important for assessing the worth of their lives. The crucial finding was that although higher incomes may be a contributing factor to increased happiness and well-being, especially for poorer people, other factors are more important. These include developing fulfilling personal relationships, whether with partners, family members or friends; gaining knowledge and wisdom; having enjoyable hobbies; having financial security (as opposed to higher incomes); having a worthwhile career; living a moral life; helping other people.

The question then arises whether our economic systems and incentives are geared towards achieving these outcomes. Or are we encouraged to consume more and more and to seek higher and higher incomes to feed our addiction to consumption?

Is there an information problem here? Do many individuals perceive that money will buy them happiness, whereas, in reality, money can’t buy them love?

Articles
Australia: Where the good life comes at a price BBC News Magazine, Madeleine Morris (24/2/13)
Australia has the know-how to boost wellbeing Sydney Morning Herald, Matt Wade (8/9/12)
Money can’t buy you the good life Independent, Roger Dobson (24/2/13)
The 10 Things Economics Can Tell Us About Happiness The Atlantic, Derek Thompson (31/5/12)
Yes, Money Does Buy Happiness: 6 Lessons from the Newest Research on Income and Well-Being The Atlantic, Derek Thompson (10/1/13)
The fact is, the richer you are, the happier you are The Telegraph, Allister Heath (5/2/13)
Money buys happiness? I wouldn’t bank on it The Telegraph, Christopher Howse (6/2/13)
Who Says Wealth Doesn’t Buy Happiness? The Wealthy Do CNBC, Robert Frank (4/2/13)
More Proof That Money Can’t Buy Happiness Business Insider, Aimee Groth (28/1/13)
Money Changes Everything The New York Times, Adam Davidson (5/2/13)
Why are the Chinese so sad? Maclean’s (Canada), Mitch Moxley (4/2/13)

Reports
First World Happiness Report Launched at the United Nations The Earth Institute, Columbia University (2/4/12)
World Happiness Report The Earth Institute, Columbia University, John Helliwell, Richard Layard and Jeffrey Sachs (eds.) (2/4/12)
Well-being evidence for policy: A review New Economics Foundation, Laura Stoll, Juliet Michaelson and Charles Seaford (3/4/12)

Previous posts on this blog have discussed key principles of thinking like an economist and also whether this always makes sense. Highly relevant for this question, on her excellent Economists do it with models blog, Jodi Beggs has recently highlighted the fact that the cognitive costs of obtaining the information required to make decisions in this way can sometimes be excessive.

As an example she cites this scenario from the Cheap talk blog:

“You are planning a nice dinner and are shopping for the necessary groceries. After having already passed the green onions you are reminded that you actually need green onions upon discovering exactly that vegetable, in a bunch, bagged, and apparently abandoned by another shopper. Do you grab the bag before you or turn around and go out of your way to select your own bunch?”

I won’t go through the details of the 12 steps (see the above link) taken to infer from where the onions were abandoned that they were either:

“the best onions in the store and therefore poisoned, or they are worse than some onions back in the big pile but then those are poisoned.”

Based on this inference, the conclusion is that you should go for a take-away instead! As Beggs suggests, the level of effort undertaken to make a decision should depend upon the likelihood that this results in a more informed choice. In the above example this is highly questionable! She then provides the following example suggesting that when you obtain cash back in a store it is much better to ask for the money in small denomination notes. Whilst on face value this again seems like a strange conclusion, the economic logic provided suggests that it may be a much more rational decision than in the onion example.

Just for fun: reasons not to data an economist (thanks guys)…Economists do it with models, Jodi Beggs (25/10/12)

As resources become scarce, the price mechanism works to push up the price (see, for example, Box 9.11 in Economics 8th ed). If you look at the price of petrol over the past few decades, there has been a general upward trend – part of this is due to growth in demand, but part is due to oil being a scarce resource. Many millions have been spent on trying to find alternative fuels and perhaps things are now looking up!

Air Fuel Synthesis, a small British company, has allegedly managed to make ‘petrol from air’. Following this, the company has unsurprisingly received finance and investment offers from across the world. However, the entrepreneur Professor Marmont has said that he does not want any company from the oil industry to get a stake in this firm. This doesn’t mean that investment is not needed or on the cards, as in order to increase production of petrol from thin air financing is needed. Professors Marmont said:

We’ve had calls offering us money from all over the world. We’ve never had that before. We’ve made the first petrol with our demonstration plant but the next stage is to build a bigger plant capable of producing 1 tonne of petrol a day, which means we need between £5m and £6m

Whilst the process appears to be a reality, Air Fuel Synthesis is a long way from being able to produce en masse. However, it does offer an exciting prospect for the future of petrol and renewable energy resources in the UK. At the moment oil companies appear to be uninterested, but if this breakthrough receives the financing it needs and progress continues to be made, it will be interesting to see how the big oil companies respond. The following articles consider this break-through.

Company that made ‘petrol from air’ breakthrough would refuse investment from big oil Independent, Steve Connor (19/10/12)
British engineers create petrol from air and water Reuters, Alice Baghdijan (19/10/12)
Petrol from air: will it make a difference? BBC News, Jason Palmer (19/10/12)
British engineers produce amazing ‘petrol from air’ technology The Telegraph , Andrew Hough (18/10/12)

EU environmental legislation is beginning to cause problems in the UK. As it prohibits coal-fired power plants from generating power, they will be forced to close. This means that the UK will be forced to rely more on imported energy, which could lead to price rises, as energy shortages emerge.

Ofgem, the energy regulator has said that the risk of a gas shortage is likely to be at its highest in about 3 years time, as the amount of spare capacity is expected to fall from its current 14% to just 4%. Energy shortages have been a concern for some time, but the report from Ofgem indicates that the predicted time frame for these energy shortages will now be sooner than expected. Ofgem has said that the probability of a black-out has increased from 1 in 3,300 years now to 1 in 12 years by 2015.

The government, however, has said that its Energy Bill soon to be published will set out plans that will secure power supply for the UK. Part of this will be through investment, leading to new methods of generating energy. The Chief Executive of Ofgem, Alistair Buchanan said:

‘The unprecedented challenges in facing Britain’s energy industry … to attract the investment to deliver secure, sustainable and affordable energy supplies for consumers, still remain.’

One particular area that will see growth is wind-farms: a controversial method of power supply, due to the eye-sore they present (to some eyes, at least) and the noise pollution they generate. But with spare capacity predicted to fall to 4%, they will be a much needed investment.

Perhaps of more concern for the everyday household will be the impact on energy prices. As we know, when anything is scarce, the price begins to rise. As energy shortages become more of a concern, the market mechanism will begin to push up prices. With other bills already at record highs and incomes remaining low, the average household is likely to feel the squeeze. The following articles and the Ofgem report considers this issue.

Report
Electricity Capacity Assessment Ofgem Report to Government, Ofgem (5/12/12)

Articles
Power shortage risks by 2015, Ofgem warns BBC News (5/10/12)
Britain faces risk of blackout The Telegraph (5/10/12)
Ofgem estimates tightening margins for electricity generation Reuters (5/10/12)
Electricity shortages are ‘risk’ by 2015 Sky News (5/10/12)
Future energy bills could give customers a nasty shock ITV News, Chris Choi (5/10/12)

Original post
As a resident of Bristol it is with considerable interest that I’m following the development of the Bristol pound, due for launch in September 2012. One Bristol pound will be worth one pound sterling.

The new currency will be issued in denominations of £1, £5, £10 and £20 and there is a local competition to design the notes. Participating local traders will open accounts with Bristol Credit Union, which will administer the scheme. It has FSA backing and so all deposits will be guaranteed up to £85,000.

The idea of a local currency is not new. There are already local currencies in Stroud in Gloucestershire, Totnes in Devon, Lewes in East Sussex and Brixton in south London. The Bristol scheme, however, is the first to be introduced on a city-wide scale. The administrators are keen that use of the currency should be as easy as possible; people will be able to open accounts with Bristol Credit Union, pay bills online and pay shopkeepers by mobile phone text message (a system used in many countries, but not in the UK).

As the money has to be spent locally, the aim is to help local business, of which more han 100 have already signed up to the scheme. Bristol has a large number of independent traders – in fact, the road where I live is off the Gloucester Road, which has the largest number of independent traders on one street in the UK. The organisers of the Bristol pound are determined to preserve the diversity of shops and prevent Bristol from becoming a ‘clone town’, with high streets full of chain stores.

But how likely is the scheme to encourage people to shop in independent shops and deal with local traders? Will the scheme take off, or will it fizzle out? What are its downsides?

Update
The Bristol pound was duly launched on September 19 and there has been much local interest. The later videos and articles below look at reactions to the new currency and at its chances of success in driving local business.

Videos and webcasts
The town printing its own currency [Stroud] BBC News, Tim Muffett (22/3/10)
Brixton launches its own currency BBC News (17/9/09)
Local currency BBC Politics Show (30/3/09)
Local currency for Lewes BBC News, Rob Pittam (13/5/08)
The Totnes Pound transitionculture.org on YouTube, Clive Ardagh (21/1/09)
Local Currencies – Replacing Scarcity with Trust Peak Moment on YouTube, Francis Ayley (8/2/07)

Videos and webcasts: update
Bristol Pound Launches ITV News, West, Tanya Mercer (19/9/12)
Can Bristol Pound boost local trade? BBC News, West, Jon Kay (19/9/12)
The Bristol Pound BristolPound on YouTube, Chris Sunderland (11/6/12)
Bristol Pound feature on BBC1 Inside Out BBC One in the West on YouTube, Dave Harvey (30/6/12)
Bristol Pound launched to keep trade in the city BBC News, Dave Harvey (19/9/12)
Bristol pound launched to boost local businesses BBC Radio 5 Live, Ciaran Mundy (19/9/12)

Articles
The Bristol Pound set to become a flagship for local enterprise The Random Fact, Thomas Foss (7/2/12)
What is the point of local currency? The Telegraph, Rosie Murray-West (7/2/12)
The Bristol pound: will it save the (local) economy? Management Today, Emma Haslett (6/2/12)
‘Bristol Pound’ currency to boost independent traders BBC News Bristol, Dave Harvey (6/2/12)
We don’t want to be part of ‘clone town Britain’: City launches its own currency to keep money local Mail Online, Tom Kelly (6/2/12)
British Town Prepares To Launch Its Own Currency — Here’s How That’s Going To End Business Insider, Macro Man (7/2/12)
They don’t just shop local in Totnes – they have their very own currency Independent, Rob Sharp (1/5/08)

Articles: update
Bristol banks on alternative pound to safeguard independent retailers Guardian, Steven Morris (21/9/12)
Bristol launches city’s local currency The Telegraph, Rachel Cooper (19/9/12)
The Bristol Pound is launched to help independent retailers Independent, Rob Hastings (20/9/12)

Bristol Pound official site
Bristol Pound: Our City, Our Money Bristol Pound

Many of you reading this will be embarking on an economics degree. During your studies you’ll be developing the skills that economists bring to observing and analysing the world around us and considering the policy options to achieve various social and economic objectives. You’ll be learning how to become an ‘economic detective’ and to do ‘forensic economics’.

Identifying the nature of economic problems; collecting and examining the evidence; using the economist’s ‘toolkit’ of concepts and ideas to make sense of the evidence; looking for explanations; constructing hypotheses and theories; considering what can be done to tackle the problems and prevent them occurring in the future – these are the sorts of things you will be doing; and they involve detective work.

The podcast below looks at the methods of Sherlock Holmes. These are the sorts of methods successful economists use. John Gray identifies three types of reasoning. The first two are probably familiar to you, or soon will be.

1. Induction involves looking at evidence and then using it to construct general theories. So, for example, if you observe on many occasions that when the prices of various goods rise, the quantity demanded falls, you can then hypothesise that whenever the price of a good rises, the quantity demanded will fall; in other words, you induce that price and quantity demanded are inversely related – that demand curves are downward sloping. This is known as the ‘Law of demand’. Induction, of course, is only as good as the evidence. Nevertheless, inductive methods are logical and it can be demonstrated how the theories follow from the evidence.

2. Deduction involves using theories to draw conclusions about specific cases. So, for example, you could use the law of demand to deduce that when the price of a specific good rises, the quantity demanded of that good will fall. You would also assume that nothing else had changed that could influence the demand for the good. In other words, you assume ‘ceteris paribus‘ or ‘other things being equal’. As long as you have not made any logical errors, deduction is foolproof. As John Gray puts it:

Deduction is infallible as long as the premises are true, while induction yields probabilities that can always be falsified by events

But there is a third type of reasoning and this is where the true economic detective comes in. This is known as ‘abduction’. This is the type of logic that is used when evidence is thin or where there are lots of scraps of seemingly contradictory evidence. And this is the type of logic employed so successfully by Sherlock Holmes.

3. Abduction involves making informed guesses or estimates from limited evidence. It is using the scraps of evidence as clues as to what might be really going on. It is how many initial hypotheses are formed. Then the researcher (or detective) will use the clues to search for more evidence that can be used for induction that will yield a more robust theory. The clues may lead to a false trail, but sometimes they may allow the researcher to develop a new theory or amend an existing one. A good researcher will be alert to clues; to seeing patterns in details that might previously have been dismissed or gone unnoticed.

Before the banking crisis of 2007/8 and the subsequent credit crunch and recession in the developed world, many economists were picking up clues and trying to use them to develop a theory of systemic risk in financial markets. They were using the skills of an economic detective to try to discover not only what was currently going on but also what might be the consequences for the future. Some used abduction successfully to predict the impending crisis; most did not.

If you are embarking on an economics degree and will possibly go on to a career as an economist, then part of your training will be as a detective. With good detective skills – looking for clues, seeing connections, identifying what more evidence is required and where to find it, and then using it to provide explanations and policy prescriptions – you could make a very successful and sought-after economist. Being a good economist is not just about learning theories and techniques, although this is vitally important; it’s also about being imaginative and thinking ‘outside the box’. Good luck!

Podcast
Sherlock Holmes and the Romance of Reason BBC: A Point of View, John Gray (17/8/12) (Click here for a transcript.)

Articles and information
Detective work: forensic economics Business:Life, Tim Harford (2/5/12)
The Search for 100 Million Missing Women Slate, Stephen J. Dubner and Steven D. Levitt (24/5/05)
Abduction Stanford Encyclopedia of Philosophy, Igor Douven (9/2/11)
Abductive reasoning Wikipedia

A recent article on this blog discussed the likelihood that we will soon move to a cashless society. It is therefore interesting to consider the implications that this might have for consumer behaviour. We might expect the form of payment to make no difference to a rational consumer. However, there is considerable evidence to suggest that this is not the case.

One reason why people appear to spend more freely on credit cards is payment decoupling – you get utility from the item purchased before you pay the cost. However, more recent evidence suggests that this is not the only relevant factor. It appears that the degree of transparency of the payment method also has an effect. Psychologists quoted in the above article conclude from their experimental evidence that:

Payment modes differ in the transparency with which individuals can feel the outflow of money. ….with cash being the most transparent payment mode.

This effect also appears to make people spend cash less freely.

The author of the above article spent some time experimenting with trying to make all his purchases using cash. He found that by doing so, he was able to reduce his spending by about 10%. However, this seems likely to become harder to do in the future and, as the article concludes, it is already difficult to purchase some items with cash.

Why does foreign money seem like play money? Science Codex (04/06/07)