One Utah

Okay, here’s the deal.  I have ten dollars ($10).  I’m going to pair you with someone you don’t know - call you Ike and Mike for lack of a better name.  I’m going to give the other person the $10 and tell them they have to share it with you but . . . They will write the amount they’ll give you on a piece of paper and hand it to you.  You can accept or reject the amount.  If you reject it, neither of you gets anything.  If you accept it, the money is yours.  But they can only make one offer, there’s no negotiating, not give and take.

Your partner writes $1.

Do you accept or reject it?

Your partner writes $2. 

Do you accept or reject it?

Your partner writes $3.

Do you accept or reject it?

Your partner writes $4.

Do you accept or reject it?

Now your partner writes $5

Do you accept or reject it?

Robert Reich recorded this experiment and his admittedly unscientific findings in Reason.  The results he reported were amazingly consistent across time -

. . . . almost without exception, the person receiving the offer rejected any amount less than $4, and often rejected even the $4  deal.  It doesn’t matter how much you get you’re getting something you didn’t have before (even if it is a dollar it’s a dollar you didn’t have before and didn’t have to earn).  But, among Reich’s participants (students in his classes) the outcome has been consistent.

From this experiment, Reich concluded that fairness is as much about perception as anything else.  Reich reflects on the economics implications of the experiment, especially with regard to tax policies.

As we head into the orgy of consumerism known as the holiday season, as we find ourselves confronted with depressingly cheerful red and green and white sweaters emblazoned with santas, and trees and snowmen, the issue of fairness seems distant.  Years ago, I read a report saying the average American household would run up something like $2000 in debt during December.  I’m confident the amount of debt incurred has increased in the intervening years.

The end of year purchases many people make are rooted, I think, in a lack of perceived fairness, the lack of equal distribution of goods.  I know it sounds whacked, but follow me if you can.

Many parents will buy their children presents so their children can at least appear to have the same objects as their peers.  These objects may include toys, phones, iPods and clothing.  The hope is that their children will not stand out in a negative way from the crowd.  Notice, that no one shies away from having more and better than their peers, they do shy away from having less than or worse than their peers.  Such social pressures will drive many parents into debt they probably cannot afford at this time. 

The concept of price and cost are separate.  A price is the dollar value affixed to an item; cost is actual economic cost of purchasing and owning and item.  A car has a price; but it’s cost includes things like gas, insurance, maintenance and parking.  The real cost of Christmas isn’t the price of toys, it is the price of carrying debt, of fitting or not fitting in, of perceiving one’s self to be equal or less than equal to one’s peers.  In our consumer society, objects signify wealth and worth.  If we have good stuff, we’re more worthy.  People will struggle financially to appear wealthy and therefore worthy.

The success of WalMart lies not in its ability to strong arm its suppliers into selling goods for far less, but in its ability to provide many people with the objects necessary to affirm worth.  A $29 DVD player (a few Christmases ago on Black Friday people were trampled trying to buy such objects) isn’t a good deal because its $29 dollars; it’s perceived as a good deal because it allows someone who cannot afford a $290 dvd player to appear as if they can, to have the same as those who are wealthier and thus who are perceived as more worthy.

A friend of mine likes to say “Live simply, that others may simply live.”  I don’t disagree with that but I think it represents a conclusion to a conversation we as a society have not yet had. 

Let me put it a hypothetic.  Would you accept a cap on incomes, say $500,000 per year, in exchange for a guaranteed minimum income of say $50,000 a year?  In other words, anyone who made more than $500,000 per year would turn over any excess to the government in the form of taxes.  Anyone who made less than $50,000 would receive the difference in the form of assistance.  Would you agree to a 10% tax increase to provide a guaranteed minimum level of health care? 

The issue of fairness is complicated.  Many of us imagine that some day we’ll be millionaires and we’re afraid a cap on incomes would negatively affect us at that time.  However, most of us would definitely benefit from a guaranteed minimum income at some point in our lives.  The same goes for health care.  Some of us (for instance me) pay less in insurance premiums than a 10%  in my taxes (I get a good deal because I’m single, exercise regularly, don’t smoke and so forth).  But, my employer would benefit from such a system - if their portion of taxes on my income were to increase 10%, but they didn’t have to pay their portion of my insurance, they would be better off.  My coworkers with families would definitely benefit as their tax increase would be less than what they pay for insurance premiums.  The fairness outcome, however, is located not in the amount paid but in the guarantee of health care.  Removing uncertainty about health care for everyone reduces overall unfairness and it’s something I think most Americans support.  The price is paid in tax increases, but the cost is actually quite low.

The conversation we as a society are not having is a conversation about fairness.  Paris Hilton’s ability to make millions by being Paris Hilton is an outcome of a society which unfairly allocates economic resources and has supporting rising and radical economic inequality.  It benefits the Paris Hiltons while putting an increasing squeeze on the middle and working class.  Paris Hilton would still be richer than 99% of Americans if she had to pay a 50% inheritance tax and 70% income tax and would still be guaranteed better access to health care and so forth.  Fairness isn’t located in the percent of income one pays in taxes, but in ones ability to pay those taxes.  A 70% income tax on millionaires sounds unfair until you consider, a million dollar income with a 70% tax rate still leaves that person with $300,000 in disposable after tax income - something like 5 times the median household income in Utah.  And yet one of our major political parties wants to guarantee Paris Hilton pays the same in tax rate as the median household in Utah.  And to give you a hint, the name of that party starts with “R”.

This entry was posted Monday, November 19th, 2007 at 9:20 am and is filed under Economic Exploitation, Economy, Equality, Healthcare, Political Corruption, Tax Policy, This Blog. You can leave a response, or trackback from your own site.