Chapter 8

Author Commentary

The case for looting
Is your life worth $10 million?
Phony Generosity: economics Nobelist Vernon Smith's alarming discovery about human nature
Flying pork barrels: the airline bailout enriches stockholders at the expense of taxpayers
Making your tax rebate pay
The first one now will later be last: a foolproof method to shorten queues

The case for Looting

In Iraq, the main looting ended when the coalition troops arrived. Sure, there's been some pilfering of food, appliances, medical supplies, and historical relics. But by the standards of a country whose rulers have routinely expropriated billions in oil revenue and seized whatever property struck their fancy, walking off with a jar of peanut butter and a fridge is more petty mischief than looting.

Even if you insist on calling it "looting"—in which case, I have no idea what word you'd use for the depredations of the old regime—the question remains: What, exactly, is wrong with it?

Objections to looting—or more generally to theft—fall into two categories: the economic and the moral. The fundamental economic objection is that looting diminishes wealth; the fundamental moral objection is that people shouldn't take things that don't belong to them. Let's consider these separately.

Start with the economics. It's not immediately obvious that theft does diminish wealth. If you steal my bicycle, I'm one bicycle poorer, but you're one bicycle richer. Average wealth hasn't changed. No resources have been lost; they've just changed hands. The economic objection to theft doesn't kick in until your thievery starts distracting you from productive activities. If I've already got a bicycle, and you spend a day building a bicycle, we end up with two bicycles between us. If instead you spend your day plotting to steal my bicycle, we end up with just one bicycle between us. That's a bad outcome.

But does that objection apply in present-day Iraq? Does anybody want to argue that if only they hadn't been out stealing, the citizens of Baghdad would have been reporting to work, producing goods and services for distribution in smoothly functioning markets? The fact is that in the (hopefully brief) chaos of liberation, there probably aren't a whole lot of useful tasks for Iraqis to do. From an economic point of view, that means their time has very little value—so they might as well spend it stealing.

Another economic objection to theft is that it inspires potential victims to take costly precautions to protect themselves. Instead of hiring someone to build you a patio, you hire someone to install iron gates and a burglar alarm. The world ends up one patio poorer.

But again, this hardly seems relevant to a society that has been suddenly and temporarily plunged into chaos. Nobody in Baghdad is building patios right now anyway. (Of course, there might be some patios that went unbuilt a few months ago, as people installed iron gates in anticipation of today's looting. But that harm's already been done, whether the looting occurs or not.)

The final economic objection to theft is that people will not work and save to accumulate assets that are liable to be stolen. But this objection applies equally well to assets that are liable to be appropriated by the state. I'll bet you a dollar that the net effect of the liberation—inclusive of all the looting—will be more productivity and saving, not less.

Turning now to the moral issue, most civilized people (my ex-wife and her attorney excluded) instinctively recognize the fundamental human right to retain one's earnings, and therefore react with abhorrence to unrestrained thievery (and, if they are intellectually consistent, to marital property laws and the taxation of income). But I wonder how much of the property in Baghdad was legitimately earned in the first place. Iraq, for at least two decades, has been a society where many rewards have flowed not to those who served the needs of the marketplace, but to those who served the needs of the tyrant. If those rewards are redistributed to the tyrant's victims, that's fine with me.

That's not to say that the crowds' exuberance has been harmless; I'm sure that a lot of glass and more than a few noses have been needlessly broken, and I'm sure that some goods have been transferred to people who won't fully appreciate their value. (On the other hand, I'm also sure that some goods have been transferred from people who didn't fully appreciate their value.) But in the scheme of things, this is small potatoes. Iraq has been systematically looted for two decades. This is, one dares to believe, the beginning of the end.

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Is your life worth $10 million?

While touring the magnificent old Dupont estate, I overheard an awestruck gardener mutter, "You can see why these people would have hated to die worse than anybody." I know what he meant. Life is dear, but life is dearer when you're rich.

You're richer than your grandparents, so your life is worth more than theirs. That's why you live in a safer world than they did: As life gets more valuable, we strive harder to protect it.

What does it mean to say that one life is "worth more" than another? Aren't all lives infinitely precious? Well, no, at least not in any sense that's at all useful for making hard policy decisions about things like job safety and access to medical care.

Economists measure the value of a life by people's willingness to pay for safety. Suppose you'd willingly cough up $50,000—but no more—to shave one percentage point off your chance of being killed in an accident. Then (except for some technical adjustments I won't go into) we infer that the value of your life is 100 times $50,000, or $5 million.

That's a useful measure because it bears directly on policy decisions. Take the decision of how much to spend on fire safety. Should a town of 100 people spend $6 million on a piece of equipment that is likely, over the long run, to save one life? Not if a life is worth only $5 million. Buying the equipment means forcing the average taxpayer to spend $60,000 for a level of safety that's worth only $50,000 to her.

Economists summarize that reasoning by saying, "It makes no sense to spend $6 million to save a life that's worth only $5 million." What we really mean by that is: "Let's not force people to buy more safety than they want to."

So, how do we find out how much a life is really worth? One of the best ways is to measure how much extra you have to pay someone to take a dangerous job. If lion tamers and elephant tamers have comparable skills and comparable working conditions, but lion tamers earn $20,000 a year more than elephant tamers, it's probably because that's what it takes to compensate someone for the risk of being eaten by a lion. And if that risk amounts to, say, an extra half-percent probability of dying on the job, then you figure that the value of a life must be $20,000 per half-percent, or $40,000 per percentage point, or $4 million.

So, once you carry out that experiment, how much does a typical life turn out to be worth? Professors Dora Costa of MIT and Matthew Kahn of Tufts point out that it depends on exactly when you asked the question. As incomes have risen, so has the value of life. The increase is more than proportional: A 10 percent rise in income is generally associated with about a 15 percent rise in the value of a life. Between 1940 and 1980, according to Costa and Kahn, the value of a life increased from about $1 million 1990 dollars to between $4 million and $5 million 1990 dollars.

(Other researchers, notably Harvard's Kip Viscusi, have found higher numbers. Viscusi estimates that the value of a life in 1970 might already have been as high as $8 million 1990 dollars.)

The upward trend is hardly surprising. For one thing, the mere fact that we're richer now means that we can afford to pay more for just about everything, including our own safety (and by implication our own lives). But beyond that, there are a lot of reasons to value life more now than in the past. There's a lot more to live for in a world with central air-conditioning, high-speed Internet access, and advanced medical care. Besides, life expectancies have increased by about 10 years since 1940. Today's 50-year-old, with perhaps 30 good years ahead of him, will value the remainder of his life more than yesterday's 50-year-old, who already heard time's winged chariot drawing near.

Here's what's most important about these observations: Just as your life is more valuable than your grandfather's, so your grandchildren's lives will probably be more valuable than your own. So, when we make decisions about, say, how much to spend on medical research, we should account for the fact that future lives will be worth more than present ones. Even if it's not worth spending $7 million to save your own paltry life, it might be worth spending it to save your grandson's.

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Phony Generosity: economics Nobelist Vernon Smith's alarming discovery about human nature

Let me tell you about two people I'll call A and B. No, on second thought, let me tell you nothing about them at all, beyond the fact that they are strangers to you and to each other, and that none of you will ever meet or learn any more about each other than you know right now.

I have three questions: Would you like to give some money to A? Would you like me to force B to give some money to A? And would you be willing to pay me to force B to give some money to A?

I'd like to think the answers are no, no, and no. Giving money to A seems at first blush like a nice thing to do, but why give money to a total stranger, who might already be very rich or very lucky, or for that matter very nasty, when you could give it to your favorite charity?

As for forcing B to give money to A—what would be the point? After all, if you knew anything at all about these people, you'd be just as likely to think that A should give money to B. And as for paying me to move money from B's pocket into A's—would you also pay me to move money from A's pocket into B's? And then pay me again to move it back to where it came from? Can I make a career out of this?

Which brings me to this week's Nobel Memorial Prize in Economic Sciences. One of the winners, Vernon Smith of George Mason University, was honored for his pioneering work in experimental economics. In one series of experiments conducted by Smith and his former colleague James Cox, the subjects effectively answer my original three questions not with the expected "no, no, no" but instead with a "no, yes, yes." No, I do not want to give money to A. (Understandable.) Yes, I want B to be forced to give money to A. (Weird.) Yes, I am willing to pay someone to force B to give money to A. (Very weird.)

Smith, for the record, does not agree with my interpretation of his experiments (as I learned after I first wrote about this topic in Reason magazine), so let me tell you what the experiments show and you can decide for yourself.

In one experiment, you (assuming you're the subject) are placed in a room and given 10 dollars. You're invited to put some of those dollars in an envelope that is passed to the stranger in the next room. Whatever doesn't go in the envelope is yours to keep.

The result? About two-thirds of the subjects keep all the money for themselves. In other words, people don't like giving money to total strangers. That's the part I understand.

In the next experiment, you're placed in a room and given 10 dollars. Once again, you're invited to put some of those dollars in an envelope that is passed to the stranger in the next room. But this time, your gift is automatically tripled: If you put two dollars in the envelope, the experimenter adds another four to make it six. All the extra cash goes to the stranger, and once again whatever doesn't go in the envelope is yours to keep.

In other words, the experimenter is offering, for a fee (i.e., whatever you put in the envelope) to take money from B (the taxpayer who's funding this experiment) and give it to A (the stranger in the next room). You have no reason to think that A is any poorer or richer than B, no reason to think that A is any more or less deserving than B, and no reason that I can think of to care more about A than about B. Nevertheless, now a lot of money goes into the envelopes—the average envelope contains $3.63, so that A gets $10.89 of B's money. And you, the subject, have paid $3.63 to make it happen.

Now I wonder what would happen if the experimenter offered to reverse the flow of funds—inviting you to pass dollars to B (the taxpayer), all of which would be tripled out of the pocket of the hapless subject A, the stranger next door. (Of course, this experiment would be difficult to conduct in practice since A would probably call the police. But let's consider the hypothetical.) Since A and B are interchangeable to you, this seems like exactly as desirable a proposition as the original experiment. Would you spend your life passing money back and forth between strangers, coughing up your own funds at each step along the way?

You might object that subjects are unaware—or at least potentially unaware—that these experiments are funded by tax dollars. Fine, but I don't think that changes anything. Surely the subjects must be aware that these experiments are funded by someone, and that every dollar comes out of someone's pocket. Even if you think the experimenter is determined to keep going till he's spent, say $1,000, it's still true that every dollar you give to A is a dollar that won't be available to some future experimental subject. And why should you care more about A than about his future counterpart?

There are only three explanations I can see for all this. One is that people just really enjoy moving other people's money around, independent of who those people are. Another is that people simply forget that there are no free lunches, and you can't give something away without making someone pay for it. Yet another is that people somehow care less about anonymous faceless taxpayers than about other anonymous faceless strangers. I'm not sure which of these explanations is right, but none of them does much to improve my faith in democracy.

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Flying pork barrels: the airline bailout enriches stockholders at the expense of taxpayers

In the past few weeks, politicians have been transformed into statesmen, and George W. Bush has perhaps had greatness thrust upon him. But you can't escape your origins. Congress and the president have pulled off the neat trick of rising to the occasion while simultaneously stooping to pork-barrel politics as usual.

I refer to the airline bailout—$5 billion in cash and an additional $10 billion in loan guarantees. You might think that in times like these our leaders would be too busy for everyday pursuits like handing out giant dollops of corporate welfare. You'd be wrong.

In the past few weeks, politicians have been transformed into statesmen, and George W. Bush has perhaps had greatness thrust upon him. But you can't escape your origins. Congress and the president have pulled off the neat trick of rising to the occasion while simultaneously stooping to pork-barrel politics as usual.

I refer to the airline bailout—$5 billion in cash and an additional $10 billion in loan guarantees. You might think that in times like these our leaders would be too busy for everyday pursuits like handing out giant dollops of corporate welfare. You'd be wrong.

Let's be clear about what this bailout will do for the flying public: exactly nothing. It won't keep any planes in the air that wouldn't have been there anyway. Airplanes are flown when it's profitable to fly them, and they're not flown when it's not profitable to fly them. Giving cash to the airlines doesn't change the profitability of any given flight, so it doesn't affect any decision about which flights to offer.

If a given route can generate $100,000 in fares in exchange for $80,000 worth of fuel, labor, and maintenance, somebody will fly that route. If the same route can generate only $60,000 in fares, nobody will fly it. That's equally true whether the owners of the airlines are rich or poor.

What if the airlines go bankrupt? So what if they do? They'll be reorganized, and the profitable flights will continue to be flown—if not by existing carriers, then by new carriers who will step in to fill any breach. All those jumbo jets will still be out there, and as long as enough people want to fly, someone will be flying them.

So, what does the airline bailout accomplish? One thing and one thing only—it enriches the millions of people who own airline stocks at the expense of the millions of others who don't. And in the process, it undermines the very principles that we uphold and our enemies want to destroy.

There has always been some small risk that an unforeseen disaster—whether natural or man-made—would dramatically reduce the demand for air travel. It is one of the glories of our capitalist system that such risks are borne by precisely those people who are willing to bear them. If you want to participate in this particular risk, you buy airline stocks. If not, you buy stock in something else. That's called freedom of choice, and it's part of what we're fighting to preserve.

The bailout is tantamount to canceling everyone's bets after the wheel of fortune has already been spun. That's unfair to taxpayers who will foot the bill (and don't get to share in the bounty when the airlines have a year of windfall profits). It's also unfair to everyone else. Here's why: Risky investments usually yield high returns; that package is frightening to some investors and attractive to others. But if you start bailing out troubled industries, you reduce both the risk of stock market investing and the high returns that go along with that risk. That limits the range of options available to everyone. The risk-averse are forced (through the tax system) to bear the very risks they were averse to, and the risk-preferring are prevented from shouldering other people's risk burdens and earning a fair reward for their courage.

So, if it won't affect air traffic and it's patently unfair, what's the argument for bailing out the airlines? It's the same as the argument for agricultural subsidies—these guys have a lot of political clout, and they're exploiting it. Period. It's not like they're the only ones who are suffering these days. I'll wager that the average airline investor is hurting a whole lot less than, say, the average New York City taxi driver.

In Afghanistan, you can't choose your reading material, your occupation, or the length of your beard. In the United States of America, it just got marginally harder to choose your risk portfolio. The gap between our systems is immense, but we've just taken one tiny step toward closing it. Chalk up a small but disconcerting victory for the bad guys.

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Making your tax rebate pay

My quirky Uncle Sam—the one with the scraggly beard and the multicolored top hats—has taken it into his head to send each member of the family a check for $300, or $600 for married couples. As is so often the case with Sam, his rationale is kind of murky. At first he kept chanting the mantra, "It's not my money; it's your money!" But lately he's been muttering something about stimulating the family's economy. As far as we can make out, he's latched on to some notion that if we all buy things from each other, we can all end up richer.

There's been some discussion around the dinner table about how best to use this money. Some of us are saying, "I'll use it however I want to, thank you very much; after all, didn't Sam say it was my money?" But in the more socially conscious branch of the family, people have been looking for a way to promote some broader communal good.

So: If your quirky uncle sends you a check for $300, what should you do with it to promote the general welfare?

You could always "stimulate the economy" by blowing your check on, say, a new suit. Doing so would (ever so slightly) bid up the price of fabric and the wages of textile workers. That's good news for anyone who sells fabric or works in the textile industry, which is (as far as anyone can tell) what Sam means by an economic stimulus. But those same price and wage increases are bad news for anyone else who's shopping for a suit. The good and the bad news wash out, so the moral, even from a broad social point of view, is: Buy the suit if you like the suit. Otherwise, don't.

Hardly a satisfying conclusion if you're looking to flaunt your social conscience. So maybe you should just take that $300 and put it in the bank, making it available for other people to borrow. That way, you (ever so slightly) bid down the interest rate, which is good news for anyone who's looking to buy a house or a car. Unfortunately, it's also bad news for anyone who's saving for retirement. Again, the good and the bad news wash out, and the moral is: Save the money if you'd rather have the savings than the suit; spend the money if you'd rather have the suit than the savings; all the other effects are safe to ignore.

If you want to help others with your money, you can't spend or save it. You've got to give it away. But to whom? Use it to feed a starving child, and you'll (ever so slightly) bid up the price of food, which is good for farmers and bad for everyone who shops at a grocery store. Those effects wash out, leaving exactly one thing that matters: You've fed a starving child. If you'd rather feed the child, feed the child. If you'd rather buy the suit, buy the suit. It really is that simple. The secondary effects of your actions are always half-good and half-bad and neither bad nor good on balance.

You could, of course, refuse to cash your check. There's been some controversy in the family about that. Nobody's sure what Sam would do with the money if we declined it. Would he eventually send out another round of checks? Would he buy us presents we'd cherish more than the cash? Or would he just go on a wasteful spending spree? We don't know.

If you're looking to give away your money, and if you want to spread the wealth as far and wide as possible, your best bet is probably to cash the check and then burn the cash. That reduces the money supply, which (ever so slightly) reduces the price level, which is good news for everyone who owns money, with no offsetting bad news. In fact, if you burn $300, you're relinquishing your claim to $300 worth of goods, which then become available to others—so you must be conferring $300 worth of net benefit on the community.

For a long time, we were all so busy sorting through our options—spending, saving, giving away, returning, or burning—that nobody thought to ask where Sam had gotten all this money in the first place. It's not like he works for a living. Eventually we realized he'd gotten it the same place he always gets it—by taking cash advances on our credit cards. Come to think of it, Sam is a lot like the national government, which gets a lot of its money by running up (or failing to run down) the national debt.

Once we'd figured out where the money was coming from, we saw our choices in a different light. After all, if we'd wanted to borrow money to buy a suit or feed a child, we didn't have to wait for Sam to borrow it for us; we could have borrowed it ourselves. It's not like these cash advances have made us any richer. After all, we're going to have to pay them back some day. (Well, to be more precise, they've made us slightly richer since Sam always seems to be able to borrow for us at a better interest rate than we can get for ourselves. But that's very far from saying that taking a $300 cash advance makes you $300 richer.)

When someone borrows $300 on your credit card and hands you a $300 check, the prudent thing to do is to save the money in an interest-bearing account so you'll have it when the loan comes due. That makes the choice pretty simple. Sam just managed to confuse us for a little while.

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The first one now will later be last: a foolproof method to shorten queues

You spend too much time waiting in lines. "Too much" isn't some vague value judgment—it's a precise economic calculation. A good place in line is a valuable commodity, but it's not ordinarily traded in the marketplace. And this "missing market" inevitably produces inefficient outcomes.

If a line-placement market existed, you could pay the guy in front of you to leave, or take up a collection among the people behind you and then pay the guy in front to leave. But you don't because 1) social conventions make paying for a place in line awkward; 2) negotiating a price is a hassle; and 3) you're worried about the "free riders" behind you mooching off your investment. Because there is no market, you and the guy up front miss out on a mutually beneficial exchange, which is the precise economic definition of inefficiency.

Under the current rules, line formation suffers from economic inefficiencies because we enter lines without regard to the interests of later arrivals who queue behind us. How to make line formation more efficient? Change the rules so that new arrivals go to the front of the line instead of the back. Then the addition of a new person in line would impose no costs at all on those who come later. With that simple reform, lines would be a lot shorter. People who got pushed back beyond a certain point would give up and go home. (Well, actually they'd leave the line and try to re-enter as newcomers, but let's suppose for the moment that we can effectively prohibit that behavior.) On average, we'd spend less time waiting, and we'd be happier.

Before you start objecting, let me work through a stylized example. Imagine a water fountain in a city park where a steady gaggle of equally thirsty joggers run by. Under the current go-to-the-back-of-the-line system, each new jogger observes the line length and decides whether to join the line or run on. Because they're all equally thirsty, there's some maximum line length they're all willing to tolerate; say they're willing to wait in lines of up to 12 people. Whenever the line length falls below 12, some newcomer instantly joins and restores the length to 12.

That's disastrous. It means the line is always at the maximum length anyone's willing to tolerate. As a result, those who join the line can be no happier than those who jog on past—if they were happier, the line would grow even longer. Since the water fountain makes no one any happier, it might as well not be there in the first place.

But what if we sent newcomers to the front of the line? Because we've assumed a steady stream of arrivals, you'd never get in line while someone's still drinking. If you did, someone else would be sure to get in front of you, and then someone else would get in front of him, and you'd never get your drink. But if you're lucky enough to arrive just as someone else is finishing, you immediately take his place.

This system has the advantage that nobody ever wastes time in line. You might think it has the offsetting disadvantage that a lot of people never get to drink. But that disadvantage is illusory. Under the current system there are also a lot of people who never get to drink—namely the ones who choose not to join the line because it's too long. Under either system the fountain is in constant use, so either system serves exactly the same number of drinkers.

OK, now let's tweak the example to make it a little more realistic: Suppose newcomers arrive not in a steady stream but sporadically and unpredictably. (Note to the terminally nerdy: To make this argument precise, assume that both the arrival times and the time it takes to drink are both Poisson distributed.) Then if the line is short enough, you'll enter it, at least provisionally. But if a flood of new arrivals pushes you far enough back, you'll give up and go home.

That's exactly the behavior a benevolent social planner would prescribe. If the line is short, there's a chance it will clear out altogether, in which case your willingness to wait is socially valuable—it's insurance against the fountain's sitting idle. That's when the planner wants you to stick around, and that's when you do stick around. If the line is long, the fountain's almost sure to be in constant use anyway, so your presence serves no social purpose. That's when the planner wants you to leave, and that's when you do leave. Your private incentives lead you to act as the planner would dictate, and therefore render the planner unnecessary. That's a recipe not just for a better outcome, but for the best possible outcome. (For this wonderfully clever argument, I am indebted to Professor Rafael Hassin of Tel Aviv University.)

There's a nice analogy here with the textbook argument for free markets. The reason markets (usually) work so well is that private incentives (e.g., the profit motive) lead individuals to behave in socially valuable ways (e.g., producing products that consumers want). Letting people go to the front of the water fountain line does not create a market, but it still creates a private incentive that's directly in line with the greater social good.

There are a lot of hidden assumptions here. For example I've assumed that people have enough information to make informed decisions about when to bail out. That means they have to know both the average frequency of new arrivals and the current line length. The conclusion that the go-to-the-front system is the best possible also requires everyone to be equally thirsty; otherwise we'd still get bad outcomes when less-thirsty newcomers displace their thirstier counterparts. If some are thirstier than others, the go-to-the-front system is inferior to a full-fledged market in line placement, but probably still superior to the go-to-the-back custom that pretty much everybody uses now.

The go-to-the-front system also requires an enforcement mechanism to prevent people from leaving the end of the line and re-entering at the beginning—just as the current system requires a mechanism to prevent people from cutting in. At the water fountain, social disapproval seems like a reasonably effective enforcement mechanism. For telephone queues, caller ID might work: If you hang up and call back, you're automatically disconnected.

So, here's my proposal to reform telephone customer service: An initial recording announces the average frequency of calls and explains that each new call will be placed in front of yours. Every minute or so, a new recording tells you how far back in line you've been pushed. If you hang up and call back, you can't get through. And for those with true emergencies (like the desperately thirsty customers at the water fountain), there can be a separate queue that you pay to join.

If that system strikes you as terrible, it's partly because you're not thinking about how much shorter the waiting time would be on average. Surely it's worth an experiment. I'm waiting for someone to try it.

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