DFW on the Redistribution of Wealth

Opinion: The mistake here lies in both sides' assumption that the real motives for redistributing wealth are charitable or unselfish. The conservatives' mistake (if it is a mistake) is wholly conceptual, but for the Left the assumption is also a serious tactical error. Progressive liberals seem incapable of stating the obvious truth: that we who are well off should be willing to share more of what we have with poor people not for the poor people's sake but for our own; i.e., we should share what we have in order to become less narrow and frightened and lonely and self-centered people. No one ever seems willing to acknowledge aloud the thoroughgoing self-interest that underlies all impulses toward economic equality--especially not US progressives, who seem so invested in an image of themselves as Uniquely Generous and Compassionate and Not Like Those Selfish Conservatives Over There that they allow the conservatives to frame the debate in terms of charity and utility, terms under which redistribution seems far less obviously a good thing. (David Foster Wallace, "Authority and American Usage", Consider the Lobster)

An Explosion of Good Will

From David Bornstein's How to Change the World: "In the United States and Canada, for example, almost everyone has heard about the explosion of dot-coms--a much smaller phenomenon--but millions have still not heard the big story: the worldwide explosion of dot-orgs" (6). The book begins with an account of how the number of NGOs and nonprofits has ballooned over the last couple decades. Readers, I presume, are supposed to applaud what is taken as a proxy for an explosion of good will.

My training in economics has me asking a number of questions:

1) What is driving growth in what Bornstein calls "the citizen sector?" My economic intuition tells me it is something other than good will.

2) NGOs and nonprofits form to address social goods that are neglected by both private and public sectors. Why are these social goods being neglected? Government exists for the provision of public goods, or when possible, to enforce legislation (taxes and property rights) that helps internalize externalities. What role does that leave for the citizen sector?

3) From what are resources being diverted to fund newly formed NGOs and nonprofits? Does this represent an efficient allocation of resources?

4) If there is a loss in efficiency, can we count growth in the citizen sector as a boon to society? How might we begin to answer this question?

5) How do market forces and competition operate in the citizen sector?

The book doesn't answer many or any of these questions. Nonetheless, I found it a worthwhile read for its stories of ground-level, piecemeal change throughout the world. The Ashoka Foundation sounds fascinating and definitely seems to be onto something.

No doubt there is abundant literature to answer some of the questions that I have posed. Now if only I could find some of what is out there...

Fertile Ground

Unemployment is not a good thing. I don't think anyone will tell you otherwise. Certainly, as we hear consecutive updates about job losses and the unemployment rate creeping higher and higher, nobody is rejoicing.

Last week, though, The Economist Magazine published a special report on entrepreneurship that I found to be uplifting. With the kind of economy we have right now, a lot of people are losing their jobs through no fault of their own, and a lot of recent graduates are struggling to get their first jobs as well. Not only that, there are tons of people who find themselves underemployed, working at jobs that don't fully utilize their potential. A colleague of mine recently told me a story about a lawyer friend working shifts at a gas station. In economics-speak, we might call all this "labor displacement." It isn't that the growing hordes of the jobless are unemployable or lazy or stupid, it is just that the ground beneath the economy as we know it is shifting.

How to put a positive spin on this dismal reality? Well, with so much displaced labor, there has got to be something that is now in surplus. But what is it? For one thing, there is a lot of excess, underutilized talent floating around. And when you get a lot of free-floating, talented individuals from just about every industry, a likely byproduct is the creative recombination of skills into something novel, something innovative. All of the brainpower that has recently been laid off, after it has exhausted the thrill of severance pay and newfound freedom, well, it has to find something new to feed upon. I find this not only highly comforting but also greatly exciting. High unemployment rate = fertile ground for entrepreneurship! It's just like science! (That's why I used the "equal" sign.)

Incentives in the Classroom

In a recent TED Talk, Bill Gates talks about the importance of great teachers in shaping leaders. He discusses the incredible variability in quality between teachers and ultimately suggests that a new model needs to be adopted to encourage the professional development of teachers. With his business acumen and demonstrated success in the corporate world, he suggests tools that he is no doubt familiar with:

1) Employing better technology with the video monitoring of classrooms, both for the benefit of surveillance as well as for the benefit of distribution and study.
2) Smarter incentives for teachers.

I really don't like any of these two suggestions. Truth be told, I dislike them with some kind of intensity. The great teachers I've had in my life have always emphasized their respective decisions to become teachers as not being motivated by money. What happens in a classroom is a special thing that exists outside the logic of business operations. That for me is the big picture argument against both 1) and 2).

In theory, video monitoring promises great returns. How else could I have access to all the great lectures distributed for free on TED.com? But TED Talks are a peculiar case. They are lectures and not discussions. Invariably, they are not interactive with the audience. Great teachers respond to the different personalities of different classrooms spontaneously and organically. Great teachers engage the unique interests and backgrounds of their students. Videos do none of these things. Yes, videos can play a role in the dissemination of information, but great teachers do far more than engage in a one-way flow of information from teacher to student. A recorded lecture commodifies a lesson plan. I cannot be inspired by a commodity. In a video, I would never have experienced the palpable passion that Mr. Maggio demonstrated for literature. Any move towards the commodification of education goes against everything that I have learned both as a teacher and as a student.

As for its other purported purpose, surveillance, video monitoring seems to wage a silent war against accountability and trust. The trust and mutual respect in a successful classroom cannot be legislated from the outside. It has to be built from within the classroom, from the ground up. In my opinion, video monitoring would undermine teacher efforts on this moral dimension.

What about smarter incentives? For one thing, incentives require measurements. If teachers are incentivized by the measurable amount in which their students' scores improve on some standardized test, then teachers will begin to teach to the test. There are so many problems with this that I don't even know where to begin. So I won't.

Barry Schwarz says in his excellent talk that we have thus far responded to the financial crisis by trying to improve the regulatory environment and devise smarter incentives. Regulations and incentives are important, but they neglect, according to Barry Schwarz, practical wisdom. The exercise of practical wisdom takes place independently of regulations and incentives. In fact, Schwarz cites a psychological study that demonstrates how the presence of financial incentives can undermine basic goodwill and the exercise of moral wisdom. Interesting stuff. People should behave ethically because it is the right thing to do and not in order to receive some monetary reward.

Bill Gates' suggestions about how we can improve teacher quality are efforts to improve the efficiency of regulations and incentives. Something important is missing. I agree that great teachers should be rewarded and paid handsomely. The service done by great teachers is truly immeasurable. But treating education in a business manner undermines what education is all about.

Nicholas Negroponte, in his talk about One Laptop per Child, discusses his decision to make his organization nonprofit. He says one of the greatest advantages of being nonprofit is that you can attract the best people in the world. Why? Because the people that you attract by being nonprofit are attracted by the merits of the project at hand. Because people who are the absolute best at what they do are seldom motivated by money alone. In my mind, what goes for the nonprofit world goes for what happens in the classroom as well.

Deficit Spending

In November 2008, Thomas Friedman wrote a column urging young people to save more:

I go into restaurants these days, look around at the tables often still crowded with young people, and I have this urge to go from table to table and say: "You don't know me, but I have to tell you that you shouldn't be here. You should be saving your money. You should be home eating tuna fish. This financial crisis is far from over. We are just at the end of the beginning. Please, wrap up that steak in a doggy bag and go home.

Is Thomas Friedman offering sound economic advice here? Certainly, the importance of saving seems to be the new mantra these days. Lots of emphasis on "bargain meals" and such. But, really, should everybody be saving? Should we all be hoarding money in preparation for financial endtimes?

Steven Levitt puts the question nicely in his blog entry, titled, "When it Comes to Saving, Who Would You Listen to: My Wife or Milton Friedman?" (Note that Levitt is speaking of Milton Friedman, the Nobel Prize-winning economist, and not Thomas Friedman, economic layperson and obviously in cahoots with Levitt's wife.)

A lot of people blame today's economic crisis on excessive borrowing. Loans were too often extended to people not worthy of the credit. A fair assessment. But does this mean that borrowing is necessarily a bad thing? No.

Enter probabilistic thinking. The US government currently operates at a deficit and all signs point towards this deficit increasing dramatically during Obama's first years as president. This is not a bad thing. Economists are generally in consensus that large fiscal stimulus (read: deficit spending) is required to get the economy back on its feet. But there is an important distinction to be made when talking about the deficit, the difference between structural deficit and actual deficit. The structural deficit can be thought of as a probabilistic deficit: do spending programs exceed expected tax revenues (which can be calculated using the economy's long-run probabilistic unemployment rate). So Obama's challenge is this: to simultaneously increase current actual deficit spending while eliminating Bush-era structural deficits.

How does this all relate to the initial question about the prudence of saving? Well, the same principles that apply to government deficit spending apply to personal finance, especially for young people with long time horizons to consider. It is okay to borrow and to spend so long as you are probabilistically-structurally sound. In fact, your spending patterns need change from what they were a year ago only if there has been an underlying, probabilistic shift in your expected, life-time income stream. Consumption-smoothing, after all, is one of the primary functions of financial markets.

As for Thomas Friedman's advice? He with his words is single-handedly responsible for a statistically significant drop in consumer confidence, and we should blame him at least partially for our current woes.

Of course, probabilistic thinking sometimes or oftentimes runs counter to emotional thinking. Thus the conflict between the coldly rational Milton Friedman and the surely sentimental wife of Steven Levitt (why she must surely be sentimental I have no idea).

Maybe I am just trying to rationalize my current spending habits.

Is Wall Street One Big Casino?

If you are a student of economics, then conversations with other students of economics about the economy generally go relatively smoothly. But if you are a student of economics and you engage someone without a background in economics, then conversations about the economy can get messy very quickly. This is because economists take things for granted. And a lot of times, economists have a hard time explaining why they take certain things for granted.

A colleague of mine once told me that the stock market is like a casino and investing in the stock market is no different from gambling. This comment annoyed me, but I had trouble articulating why this perception was so misguided.

Well, now, as "Wall Street" is demonized in the press and described as being fundamentally separate and in opposition to "Main Street," I feel the need to go back and reconsider that statement about the stock market being like a casino. The relevant question is, Why do financial markets exist? It is a daunting question, and I won't pretend to answer it thoroughly. But off the top of my head, I come up with the following reasons:

1) To provide liquidity. What is this thing, "liquidity," and why is it important? Another daunting question, but I will try to answer it as simply as possible. Liquidity allows companies to raise funds for the expansion of their activities. Fundraising can take many forms, including but not limited to initial public offerings, issuance of bonds (debt), or borrowing from banks.

2) To allow for the smoothing of consumption. Nobody wants to have to save $500,000 before buying a $500,000 house. Mortgages and the credit market allow people to smooth their consumption and savings over time so that the $500,000 can be paid incrementally over time.

3) To allow public ownership of equity. When Karl Marx looked at the economy and its organization, he separated society into two broad categories: capitalists and laborers. The existence of Wall Street, in theory at least, fundamentally blurs this distinction as laborers can increasingly become owners of capital.

These reasons that I have listed, I am sure, are crude and full of holes. And I am sure that other reasons exist as well. But my hope is that they show at the very least that "Wall Street" and "Main Street" are not in antagonistic relation to one another. Also, despite what might appear in the press, Wall Street does not exist solely to feed the greed of super wealthy individuals and corporations. In fact, Robert Shiller, a Yale economist, argues that further expansion and democratization of financial infrastructure is required to prevent crises like the one that we find ourselves in today. To people who regard Wall Street as one big casino, that kind of proposal sounds particularly counterintuitive.

In the past, when I have been confronted with statements or questions about the economy from people without a background in economics, I have often felt frustrated over my inability to respond intelligently or intelligibly. I ascribed my failures to explain economic thinking to the failings of my own intelligence or alternatively to pitfalls in my education. I don't discount the former possibility, but I am as well increasingly convinced that more attention needs to be paid in education to the issue of communication. Economists must learn to communicate economic thinking. I think the political process in the United States would benefit at the very least as economics takes a more central role in the public conscious.

Language Barrier

During my freshman year, Richard Dawkins came to Swarthmore to lecture about his work on evolutionary psychology and his views on the apparent conflicts between science and religion. After his talk, I went up to him and, eager to use vocabulary and ideas I was picking up from my philosophy class, asked him if his ideas didn't represent a positivist and reductionist worldview. "I'm not a philosopher," he replied to my naive and inappropriately confrontational inquiry. Hearing such a curt reply, my facial muscles probably twitched awkwardly, and I probably looked down at the wrinkles in my t-shirt self-consciously before squriming my way out of the crowd that was growing around him.

In retrospect, this brief interaction represented my first encounter with the insularity that characterizes the academic world. If you are an established discipline, then you necessarily boast an esoteric vocabulary and specialized journals to boot. Unfortunately, these things set up walls between disciplines and inhibit communication. They essentially allow Richard Dawkins to rebuff inquiries such as mine by pleading ignorance. In Economics, there is the presitigious Journal of Economic Perspectives, but sometimes I wonder if a Journal of Perspectives on Economics and the Economy might not be more fruitful as an intellectually curious publication. It appears to me that a discipline often receives more fanfare for its methodology than the questions that it professes to answer. This is obviously a very short and perhaps a simplistically naive assessment of academia, but I think it merits consideration.

The problem of communication doesn't just exist in the academic world. I see evidence of a genuine language barrier in issues all around me. Let us take the issue of environmentalism as an example. There are those environmentalists that profess an eco-centric as opposed to an anthropocentric worldview. Such environmentalists condemn all environmentally hurtful activities and generally resist capitalism as an environmentally exploitative, earth-destroying, growth-bent, parasitic, soul-sucking system. Naturally, such environmentalists clash with traditional economists. In the context of Swarthmore, Crum-dwelling granola crunchers don't often fraternize on the halls of Kohlberg 2nd. Meanwhile, the concerns raised by such environmentalists fall deaf on the ears of the more pragmatically-minded economists and businessmen of the world. What happens? The 1999 WTO anti-globalization protests happen.

Thomas Friedman's new book, Hot, Flat, and Crowded, forges a path forward. He sums up the problem burdening the environmental movement, which I think has its roots in communication: "Too many environmentalists oppose any growth, a position that locks the poor into poverty. Too many critics of environmentalism characterize any conservation as some flaky anticapitalist ideological dalliance" (194). But, if I could assign TF an epitaph, it would be, "Speaker of many languages." He "pals around" with venture capitalists, environmental activists, politicians, academics, and manages to speak to all these different groups of people. In his book, he gives one example of successful communication between groups that I find particularly inspiring. Friedman describes the success of a conservation project in Indonesia and quotes the project's leader, Dr. Jatna Supriatna:

When you talk with the head of the government, your language is economic; when you talk to the communities, the language is welfare; when you talk to business, you talk about their future profits; when you talk to other NGOs, the language is environment. (311)

The answer seems rather simple. Just communicate across disciplines, across interest groups. But the forces of insularity are strong. Language barriers difficult to surmount. I think that it is a point, while simple, that we tend to overlook and fail to appreciate. In my view, a language barrier serves as the greatest source of frustration for young idealists intent upon effecting substantive change in the world. Friedman pokes fun a bit at the youthful naivette:

ExxonMobil, Peabody Energy, and General Motors know the difference between a Facebook group and a blocking coalition in Congress. They are not in Facebook, but they are in the faces of those lawmakers who stand in their way. (400)

Most of us, i.e. young and eager twenty-somethings, don't speak even a single language that resonates with groups that are in a position to effect change. I think this is the harsh reality that youthful idealism confronts. We may possess the soft tools, the critical thinking and the drive, but we lack the credibility, experience and language skills to communicate effectively. There doesn't seem to be an easy way around the language barrier, and I guess that is why Friedman ultimately counsels diligence, discipline and sacrifice.

Behavioral Economics

Taleb gets a shout-out here from NYTimes columnist David Brooks.

I wonder about the legitimacy of behavioral economics in Economics departments across the United States though. So far as I know, undergraduate programs pay it lip service at best. I suppose injecting psychology into the study of economics would detract from the discipline's increasingly mathematical orientation and scientific pretension.

I once expressed to a professor of mine an interest to pursue graduate studies in Economic History. He informed me that economic historians carry just about zero clout and hold just about zero sway over economic policy or the way that economics is taught/studied. Sad reality. The idea of studying models or econometric methodology strikes me as so damned ahistorical, though.

And of course: we should not assume. Because if you assume, then you make an "ass" out of "u" and "me." Take that Econ!