Spend the Money

One of the more surprising publishing phenomena of recent years was Thomas Piketty’s Capital in the 21st Century, which surged to the top of the best-seller lists on the strength of a cool-looking cover, an impressively large page count, and the ominous warning that if we did not do more to combat the increase in inequality, we would be returned to the dystopian nightmare of Jane Austen novels.

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Deirdre McCloskey wrote a long and interesting review that argued that tolerance of inequality has been, historically, an indispensable part of the incentive structure of successful capitalism- the rich get rich first, then someone shows up to outcompete the rich guys, and in the end the little guy benefits from the variety and innovation that competition provides. If there’s a problem in contemporary developed societies, it is that competition is penalized (through regulation and barriers to entry that favor incumbent firms) not that rich people have too much money per se.

All of which is fine and good- largely convincing to me, though not to others. But it does, I think, make complex what could be simple and try to untangle the Gordian Knot rather than cut it. That is…

If rich people have too much money, get them to spend it.

Given that r>g only leads to an increase in inequality if the marginal propensity to consume out of wealth is sufficiently small, isn’t it more plausible to convince the rich to spend their money than to find (probably doomed) ways of taking it from them? This is what our society is best at, convincing people to spend too much money. Many people who become quite rich do, in fact, spend it all and end up broke. You don’t have to go back very far to find persistent downward mobility among the rich precisely because they had large families, hired personal servants, and generally had a social mandate to “act rich.” If every billionaire thought they needed Cornelius Vanderbilt’s mansion, they wouldn’t be billionaires very long.

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A simpler solution to inequality

 

Our current cultural environment- including Piketty’s book- encourages the rich to hide their wealth rather than spend it, and to direct their spending to status goods like housing,art, and education where it is likely to stay with other rich people. This directly contributes to the problem.

4d7b35156992d623f1d3949aec211d79I’m no macroeconomist, but a quite similar issue comes up again and again in education and educational philanthropy. The first classic blunder in educational philanthropy is rich people’s determination to give their money over and over again to the same already-rich universities, rather than somewhere it might do some good. But the second classic blunder is using huge bequests to go head to head against existing institutions rather than giving it away free of charge. The robber barons of the late 19th century, for all their faults, spent their money on things people could see: grand buildings, libraries, museums, new schools and universities and hospitals. Our billionaires instead try to use money as an end-run around democratic process. In the case of education, they use bequests as a carrot to entice school systems, teachers and parents to adopt their favored reforms- mostly changes in teacher evaluation, expansions of charter schools, and adoption of more challenging curriculum. Putting aside the value of these individual approaches, this is quite naturally derided as an abrogation of democracy and an attempt to outwit parents and teachers who may or may not want the carrot but can definitely see the trap. This is why Zuckerberg’s $200 million gift to the Newark schools failed.

I don’t really expect Zuckerberg, who seems to have modest tastes in consumption and imperial ambitions for his work, to spend his money on palaces for himself. But if he wants to spend money on giving kids nice places to go to school or read a book, have at it. Newark would not be my first choice for this- thanks to New Jersey being a wealthy state and the Abbott school redistribution decision, low income schools in New Jersey have more money than pretty much anywhere else in the world.

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If you billionaires must give money for educational bequests, make it something like this.

 

But even so, there is some good you can do, if you just Spend the Money. Princeton, down the road from Newark, has an amazing, palatial, much-used public library, that I think cost Princeton $50 million to build. In a slightly dysfunctional city like Newark, it might cost twice as much, leaving $100 million as an endowment to keep the library going forever. Would it boost test scores? Of course not, it would just be a nice place for kids to go to storytime or play on the internet or read a book.

But that’s just about the best we can do.

 

9 thoughts on “Spend the Money

  1. Why do you think “that’s just about the best we can do”? Giving that amount to the Against Malaria Foundation or to GiveDirectly would seem *extremely* more beneficial to me than building grand library buildings. I like the idea of trying to “hack” elite status competitions to make them have positive effects on society at large, but cultural philantropy as it has been in the US for the last two hundred years seems a very poor way to do good.
    I also don’t find it obvious that we should want rich people to spend their money instead of saving it. The more people save money, the less it costs to borrow, which is essential to the sort of investment that increases productivity and income, and makes countries richer. High savings rates are generally listed as one important reason why Eastern Asian countries got rich, for example.

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    1. I’m somewhat skeptical about the against Malaria foundation- it can’t scale easily (Give Well keeps adding and then subtracting it from its recommended list as a result) and it’s not clear to me if it is distracting from our ability to use insecticides and GMOs more systematically to eliminate malaria. At our current margin, it’s possible, maybe likely, but not assured that global health would benefit from more philanthropy (Gates has a hard time spending effectively the money it has.)

      In any case, I do think international development would benefit from more robber baron style egotism that would produce more universities and lasting non-state institutions, rather than just relatively random cash transfers and the failed attempt to replicate and finance public services through private means. But that’s another story.

      Interest rates are very low in any case, suggesting there isn’t much crowding out if any from increasing rich people’s marginal propensity to consume; and remember that if they spend the money, other people get it and can spend more.

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      1. On the AMF:
        GiveWell removed it from its charity list in 2013 due to “room for more funding issues”, but the AMF was back on that list in 2014 — and that was it. “Give Well keeps adding and then subtracting it” doesn’t seem an accurate description of what happened. (BTW, I’m not affiliated with the AMF in any way) GiveWell staff’s personal donations in 2015 were basically to AMF (see http://blog.givewell.org/2015/12/09/staff-members-personal-donations-for-giving-season-2015/), and these days they seem pretty confident there’s still a large funding gap, and that the AMF is very cost-effective.
        In any case, yours can be an argument over whether donating to the AMF is the best way to spend your charity money — which is extremely different from whether it’s better than building a huge library in Newark. I’d be very surprised if the main effective altruism groups suddenly decided financing culture and the arts in developed countries was an efficient way to do good (whether funding global health organizations is better than, say, financing research on existential risks is of course another matter).

        On rich people spending money instead of saving it:
        I agree interest rates are already very low in developed countries and therefore don’t seem to be a serious obstacle to economic growth. However, those rates being low or high is not what ultimately matters, is it? Rather, what we care about in our discussion is their “elasticity” (I mean derivative) in respect to savings rates. But I also evidently agree that a person consuming stuff is good for those producing stuff (and for those producing stuff those people in turn consume, and so on). Anyway, mine is not a very strong objection to what you said — it’s just that what you suggest is far from being surely, or universally (think developing countries with high interest rates and low savings), good.

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