Fairness as Bipartisan Impulse
I watched the Super Bowl Sunday evening with two of my best and most conservative friends. Four-plus years ago, I would have agreed with 90 percent or more of what they said. Now, our consensus-ratio is closer to 50 percent, although Sunday night, that 50 percent became 51 percent as we voiced our collective outrage at Wall Street’s use of taxpayer bailout funds to pay its executives $18.4 billion in bonuses.
I doubt anyone in the room except me voted for Democratic Sen. Claire McCaskill in November 2006, but we unanimously agreed with her immoderate four-word summation Friday (amplifed today by the WaPo’s Eugene Robinson) regarding the Wall Street fat cats: “These people are idiots.”
What’s behind this Kumbaya moment between conservatives and progressives and independents regarding $18.4 billion in bonuses?
In his ode to groupthink, James Surowiecki offers one answer — recounting the story of Richard Grasso, the former chief of the New York Stock Exchange, who (in Surowiecki’s words) “became the first CEO in American history to get fired for making too much money.”
Surowiecki asks:
“Why was the public so outraged? After all, they did not have to foot the bill for Grasso’s millions. The NYSE was spending its own money. And complaining about Grasso’s windfall didn’t make anyone else any better off. He had already been paid, and the NYSE wasn’t going to take the money it promised him and give it to charity or invest it more wisely.”
The author goes on to point out how “deeply irrational” the public reaction to Grasso’s $140 million windfall seemed when it was viewed through the lens of economists who believe people generally act in their own self-interest — i.e., if there’s nothing in it for them, people don’t care. But they did care about the largesse the NYSE handed Grasso. Surowiecki suggests the answer might lie in a behavioral economics experiment called the “ultimatum game.”
The rules of the game are simple. The experimenter pairs two people. (They can communicate with each other, but otherwise they’re anonymous to each other.) They’re given $10 to divide between them, according to this rule: One person (the proposer) decides, on his own, what the split should be (fifty-fifty, seventy-thirty, or whatever). He then makes a take-it-or-leave-it offer to the other person (the responder). The responder can either accept the offer, in which case both players pocket their respective shares of the cash, or reject it, in which case both players walk away empty-handed.
If both players are rational, the proposer will keep $9 for himself and offer the responder $1, and the responder will take it. After all, whatever the offer, the responder should accept it, since if he accepts he gets some money and if he rejects, he gets none. A rational proposer will realize this and therefore make a lowball offer.
In practice, though, this rarely happens. Instead, lowball offers — anything below $2 — are routinely rejected. Think for a moment about what this means. People would rather have nothing than let their “partners” walk away with too much of the loot. They will give up free money to punish what they perceive as greedy or selfish behavior. And the interesting thing is that the proposers anticipate this — presumably because they know they would act the same way if they were in the responder’s shoes. As a result, the proposers don’t make many low offers in the first place. The most common offer in the ultimatum game, in fact, is $5.
… Obviously, if the proposer were given the chance to divide $1 million, the responder wouldn’t turn down $100,000 just to prove a point. But the game has been played in countries, like Indonesia, where the possible playoff was equal to three days’ work, and responders still rejected lowball offers.”
Surowiecki’s conclusion: Rational or not, in our own self interest or not, we do “seem to care whether rewards are, in some sense, ‘fair,’” adding:
“Does this mean people think that, in an ideal world, everyone would have the same amount of money? No. It means people think that, in an ideal world, everyone would end up with the amount of money they deserved.”
And there’s the crux of the current matter. What bailed-out Wall Street execs “deserve” is the junction where fairness becomes a bipartisan impulse. Progressives might argue that Wall Street execs never deserve large payouts. Conservatives might counter that these execs deserve large payouts when their firms perform exceedingly well. However, individuals on both ends of the political spectrum — and every point in between — can agree that these execs do not deserve large payouts when their firms flirt with failure and avoid it only by going on the taxpayers’ dole.
My final thought on this subject could be a by-product of naivete, but I’ll expresss it anyway: Members of Congress should seize this moment, this shared sense of fairness, and use it as a bridge to other potential points of agreement, while they continue to wrangle over the stimulus bill.
(To be clear, I’m not suggesting the stimulus bill is a wonderful piece of legislation. In fact, I’m in the Gallup Poll camp of those who think the bill should pass but with major changes, siding with the skepticism and debate encouraged by both Megan McArdle and Andrew Sullivan. And no, I don’t think Joe the Plumber will help us get there.)
17 Responses to “Fairness as Bipartisan Impulse”
CS and I are discussing this on another thread. I am arguing that a lot of failed policies are because our society has become fundamentally unfair and so people are opting out and expecting government intervention…she is more of the opinion that government programs are responsible for having them opt out in the first place.
The results of the experiment are something that I have long pondered and increasingly anticipate happening on a full scale level. He says that people won't turn down $100k out of $1 million to punish their partners…but that's not really our system. Our system would be more like one person getting 70% and then 90 people splitting the other 30%…with the total payout determined by the number of “yes” votes for the deal, where it decreases slowly with a few no votes but then collapses quickly with a moderate amount of no votes. Right now everyone is worried about their own futures but as things get increasingly worse and more and more people give up on their dreams, they will vote no and want to take down the whole system in hopes it will be better on the other end. I think we are very close to the point where people are going to get angry and demand actions that hurt themselves in order to make sure that the people in charge lose everything too. That's what the elites don't get…that this has been building for decades.
I wrote that comment and the very next site I went to had this. As BJ notes, he hopes things improve because otherwise it'll be horrific….for many people it already is and for many more it will become horrific in the next couple of years. They'll lose incentive to participate and hope then.
Mikkel — I think you make some good points. I'm especially intrigued (and more than a little frightened) by the prospect of people voting against everyone's interests to make sure the “top dogs” suffer, too.
Pete, the other thing is that we are focusing on domestic dynamics. While it is a problem here, in developing countries they have literally sacrificed hundreds of thousands of lives and hundreds of millions basically have no life other than to wander and work…all because they were told that things would eventually be better for their children. Now that they are finding out that the industrialized countries have squandered all their hard work, they are getting righteously angry. Twenty million Chinese migrant workers have lost their jobs in the past couple of months and will see years of back breaking labor go for naught. Nearly every south east Asian country is experiencing depression declines in production (30%+) and they all blame the West (especially us) because they know that the contract was that they fund our consumption and we would give them money to develop and improve. Now they feel that we have broken our contract and they know if they refuse to stop supporting our debt we will have a terrible time. I've read reports that some Chinese officials feel that the United States purposefully duped them into taking on “worthless” debt that there is no way we could repay, in order to steal from them.
Right now the status quo remains because those countries will be hit harder than us if it was broken…however the longer they decline the more tempting it'll be to throw in the towel and take us down. There are also numerous reports that Germany feels the same towards its EU partners and increasing speculation that the EU will break up.
So the same dynamic is also a global one.
Actually Mikkel my point wasn't that the government programs are responsible and the unfairness impulse is not. Instead, what I'm arguing is that regardless of whether or not the feeling of unfairness motivates some behaviors, that shouldn't be part of the consideration when looking at whether or not a govt policy will act as a reinforcer of negative behavior. That doesn't mean that the perception of unfairness is unimportant, it just means that it is a separate phenomenon that has to be addressed differently. If you do something to address the perception of fairness but neglect to deal with policies which create reinforcements for negative choices and behaviors, then you won't be successful (and I assume you'd agree that the converse is true, which is what you seem to be arguing, that you can't focus only on how the policies reinforce without considering the fairness issues.)
The reason I think this is so important is that I think it would be completely wrong and ineffective if we adjust policy to add MORE reinforcers for negative behavior as a means of addressing fairness. And yet that seems to be exactly what a lot of people seek to do right now. In the parenting analogy that I brought up earlier (yes, I know you had some objections to it, but take it as an imperfect analogy if you will), that would be like a parent who feels guilty that he hasn't been providing good nutrition and sleep for the tot and starts giving the child what he wants all the time because it doesn't seem fair to punish him. It's true that the parent needs to address whether or not the situation really is fair or conducive to a cooperative and positive attitude from the kid, but adjusting the behaviors' consequences is about the worst way to handle that.
OK I got that point but I guess I extrapolated incorrectly about your main focus. The thing is that I completely agree with you that adding more negative reinforcers is awful and that's my driving concern (which I think comes out in that I think we agree nearly completely in our views when talking about the proposed policies). i'm not sure we really disagree at all and all this writing was just maybe that you think 60% of the focus should be on policies and 40% on root perception, and I'm the other way around. Which is a lot of text for such a small difference…but the devil is in the details as they say.
LOL, yeah, that was a lot of typing for us to realize we pretty much agree after all.
What are the negative reinforcers being referred to?
Unintended consequences of social policy that either rewards unproductive behavior or removes the negative consequences that would have naturally occurred as a result of the behavior. I'm not a pure libertarian who would advocate against those kinds of policies altogether, but I think it's harmful to ignore the unintended side effects (and what I was trying to say above is that sometimes if we feel the other side of the equation is unfair, instead of actually working on solutions for that we tend to want to remedy it (or assuage our guilt) by implementing more of the kinds of policies that produce the negative reinforcers, and that ends up making things worse for everyone.
Mikkel, you might want to look into the work I've read by Layard, which goes beyond traditional kinds of poverty definition and research (a topic I've enjoyed from time to time) and discusses happiness, if you are concerned about how people feel about the economy and about society, and to what extent it's “fair” or “right,” that evaluation of one's situation is relative rather than absolute — the public continues to be in the business of “keeping up with the Joneses” and yes, succumbing to envy and class warfare at times. (The work by Layard is also a handy rationale for inhibition of “excess” work effort as well as for income and even wealth redistribution, in theory.)
Also, to the extent you consider “fairness” in our economy to involve one or more forms of equity, while I don't believe you'd realistically be expecting a single-vertical-line income distribution, not even the normal distribution (the Gaussian “bell curve”) is suitable here, but more like what other things in the real world are like (and I'm surprised people haven't viewed relative, local home prices in this way, to name an additional example). Namely, what we need to look at is not the normal distribution (much less worry about esoterica that are also not suitable, like the Gini coefficient), but rather the log-normal distribution. The different choices we make and events we experience in life are not merely additive, but multiplicative. While there is abuse in the system as it exists today, inequality described by the log-normal distribution is probably inevitable (barring unacceptable forms of intervention and coersion).
http://stat.ethz.ch/~stahel/lognormal/bioscienc…
http://www.inf.ethz.ch/personal/gut/lognormal/b…
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“Right now everyone is worried about their own futures but as things get increasingly worse and more and more people give up on their dreams, they will vote no and want to take down the whole system in hopes it will be better on the other end. I think we are very close to the point where people are going to get angry and demand actions that hurt themselves in order to make sure that the people in charge lose everything too.”
The class warfare, I can see, but short of the UAW playing Samson in the temple of the Detroit Philistines by striking, I don't see people in large numbers freely choosing to act very badly against their own interests. To me it's limited to favoring redistributionism that's coupled with poor (debilitating) tax policy. Only extremists want punitive, truly harmful taxes not only on “elites” but on investment in general, or to make not working pay more than working, or to demand wage levels that only accelerate any trend toward automation of the jobs at issue.
“I think it's harmful to ignore the unintended side effects”
A book by a Democrat, “Tragedies of Our Own Making,” by James Neely, that I read and bought years ago describes this, and he goes even farther to say that a number of government programs, intended to help people, have acted as the equivalent of fire insurance that actually pays people to leave pots of oil boiling on stoves.
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Mikkel, more on “public mood” (and private mood) from Layard himself — also includes managerial performance (think “banks”), taxes…
http://www.prospect-magazine.co.uk/article_deta…
Here's Neely's book on Google Books. (I got a real copy in the 1990s at Powell's in Portland.) Enjoy what you're able to read here.
http://books.google.com/books?hl=en&id=gxYdofJn…
“I completely agree with you that adding more negative reinforcers is awful and that's my driving concern “
(Mikkel, sorry for the name switch on Richard Neely earlier; I was thinking ahead about someone else at the time.)
A negative reinforcer that's in the current “stimulus” bill is the “buy American” protectionist (trade barrier) measure.
The Neely book looks interesting, DLS…thanks.
While I think that absolute inequality does play some role, I don't think it is the primary one. I think a bigger issue is whether people's lives are getting progressively better. Considering that median income hasn't risen in the last 30 years but that the top 1% has seen an explosion of wealth, I'd say that answer is “no.”
As to your point about the mathematical nature, I said on the other thread:
“Unfortunately, tax policy is primarily effective only at decreasing the rate of wealth disparity increases. The basic nature of our current economic system pretty much guarantees that it will eventually become top heavy and unstable. This is a fundamental mathematical characteristic of compounding growth and there is no way around it. The only current alternatives are systems that tend to become top heavy because of corruption due to concentrated power or are very stagnant.
At the end of the day, major economic crashes and depressions are inevitable…”
I don't believe that the government can effectively prevent inequality from occurring. Instead I think it means that responsibility falls on the people with money (and those that influence them) to use their wealth wisely and even give it up voluntarily in the form of charity when need be.
Acting badly against their own interests doesn't necessarily mean it has to be an active hunt, it could be as simple as being against the bailout of the financial system or cutting back on working hours to get more “happiness” like the article you linked pointed out. That would have a very huge effect on the economy.
If you're going to talk about unintended consequences consider this one. Insisting that outright grants to cover college education, which has become a virtual necessity for a decent job should be considered a bad thing and loans a good thing distorts the job market. There are jobs that need a college education that don't pay a really high salary. But if you have to cover the costs of massive loans to cover the cost of education over the course of 4 years you can't afford to look at those jobs. What other unintended consequences might there be of placing a crushing burden of debt on young people just getting out of college? What boost to the economy might they be providing if they weren't under the shadow of that level of debt as soon as they begin their careers? How does it affect their ability to start families? I haven't seen one conservative who hates helping with education costs by any means other than loans address those questions.
I'm not altogether against grants, especially if they're merit based. I would have been in that situation of having crushing debt (disproportionate to my earning capabilities) if I hadn't had scholarship money, and to whatever extent that government money needs to be increased to increase the availability of scholarship money, that would be a good public investment IMO.
I don't think though, that it's wise to say that everyone should go to college (there are trades that can have pretty high earning potential, and some people have talents and skills that lean more in that direction) and this is in fact another area where we have to consider unintended consequences. Artificially raising the number of college graduates and flooding the labor pool for certain professions or fields doesn't help anyone in the long run.