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The Distributional Games

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Posted on Apr 1, 2014

By Robert Reich

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This post originally ran on Robert Reich’s Web page.

Every year I ask my class on “Wealth and Poverty” to play a simple game. I have them split up into pairs, and imagine I’m giving one of them $1,000. They can keep some of the money only on condition they reach a deal with their partner on how it’s to be divided up between them. I explain they’re strangers who will never see one other again, can only make one offer and respond with one acceptance (or decline), and can only communicate by the initial recipient writing on a piece of paper how much he’ll share with the other, who must then either accept (writing “deal” on the paper) or decline (“no deal”).

You might think many initial recipients of the imaginary $1,000 would offer $1 or even less, which their partner would gladly accept. After all, even one dollar is better than ending up with nothing at all.

But that’s not what happens. Most of the $1,000 recipients are far more generous, offering their partners at least $250. And most of partners decline any offer under $250, even though “no deal” means neither of them will get to keep anything.

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This game, or variations of it, have been played by social scientists thousands of times with different groups and pairings, with surprisingly similar results.

A far bigger version of the game is now being played on the national stage. But it’s for real — as a relative handful of Americans receive ever bigger slices of the total national income while most average Americans, working harder than ever, receive smaller ones. And just as in the simulations, the losers are starting to say “no deal.”

According to polls, they’ve said no deal to the pending Trans Pacific Trade Agreement, for example, and Congress is on the way to killing it.

It’s true that history and policy point to overall benefits from expanded trade because all of us gain access to cheaper goods and services. But in recent years the biggest gains from trade have gone to investors and executives while the burdens have fallen disproportionately on those in the middle and below who have lost good-paying jobs.

By the same token, most Americans are saying “no deal” to further tax cuts for the wealthy and corporations. In fact, some are now voting to raise taxes on the rich in order to pay for such things as better schools, as evidenced by the election of Bill de Blasio as mayor of New York.

Conservatives say higher taxes on the rich will slow economic growth. But even if this argument contains a grain of truth, it’s a non-starter as long as 95 percent of the gains from growth continue to go to the top 1 percent – as they have since the start of the recovery in 2009.

Why would people turn down a deal that made them better off simply because it made someone else far, far better off?

Some might call this attitude envy or spite. That’s the conclusion of Arthur Brooks, president of the American Enterprise Institute, in a recent oped column for the New York Times. But he’s dead wrong.

It’s true that people sometimes feel worse off when others do better. There’s an old Russian story about a suffering peasant whose neighbor is rich and well-connected. In time, the rich neighbor obtains a cow, something the peasant could never afford. The peasant prays to God for help. When God asks the peasant what he wants God to do, the peasant replies, “Kill the cow.”

But Americans have never been prone to “kill the cow” type envy. When our neighbor gets the equivalent of new cow (or new car), we want one, too.

Yet we are sensitive to perceived unfairness. When I ask those of my students who refuse to accept even $200 in the distribution game why they did so, they rarely mention feelings of envy or spite. They talk instead about unfairness. “Why should she get so much?” they ask. “It’s unfair.”

Remember, I gave out the $1,000 arbitrarily. The initial recipients didn’t have to work for it or be outstanding in any way.

When a game seems rigged, losers may be willing to sacrifice some gains in order to prevent winners from walking away with far more — a result that might feel fundamentally unfair. 

To many Americans, the U.S. economy of recent years has become a vast casino in which too many decks are stacked and too many dice are loaded. I hear it all the time: The titans of Wall Street made unfathomable amounts gambling with our money, and when their bets went bad in 2008 we had to bail them out. Yet although millions of Americans are still underwater and many remain unemployed, not a single top Wall Street banker has been indicted. In fact, they’re making more money now than ever before.

Top hedge-fund managers pocketed more than a billion dollars each last year, and the stock market is higher than it was before the crash. But the typical American home is worth less than before, and most Americans can’t save a thing. CEOs are now earning more than 300 times the pay of the typical worker yet the most workers are earning less, and many are barely holding on.

In 2001, a Gallup poll found 76 percent of Americans satisfied with opportunities to get ahead by working hard, and only 22 percent were dissatisfied. But since then, the apparent arbitrariness and unfairness of the economy have taken a toll. Satisfaction has steadily declined and dissatisfaction increased. Only 54 percent are now satisfied, 45 percent dissatisfied.

According to Pew, the percentage of Americans who feel most people who want to get ahead can do so through hard work has dropped by 14 points since about 2000.

Another related explanation I get from students who refuse $200 or more in the distribution game: They worry that if the other guy ends up with most of the money, he’ll also end up with most of the power. That will rig the game even more. So they’re willing to sacrifice some gain in order to avoid a steadily more lopsided and ever more corrupt politics.

Here again, the evidence is all around us. Big money had already started inundating our democracy before “Citizens United vs. Federal Election Commission” opened the sluice gates, but now our democracy is drowning. Only the terminally naive would believe this money is intended to foster the public interest.

What to do? Improving our schools is critically important. Making work pay by raising the minimum wage and expanding the Earned Income Tax Credit would also be helpful.

But these are only a start. In order to ensure that future productivity gains don’t go overwhelmingly to a small sliver at the top, we’ll need a mechanism to give the middle class and the poor a share in future growth.

One possibility: A trust fund for every child at birth, composed of an index of stocks and bonds whose value is inversely related to family income, which becomes available to them when they turn eighteen. Through the magic of compounded interest, this could be a considerable sum. The funds would be financed by a small surtax on capital gains and a tax on all financial transactions.

We must also get big money out of politics — reversing “Citizens United” by constitutional amendment if necessary, financing campaigns by matching the contributions of small donors with public dollars, and requiring full disclosure of everyone and every corporation contributing to (or against) a candidate.

If America’s distributional game continues to create a few big winners and many who consider themselves losers by comparison, the losers will try to stop the game — not out of envy but out of a deep-seated sense of unfairness and a fear of unchecked power and privilege. Then we all lose.

         


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