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David Brodwin's blog

No Bootstraps in Sight

Sendhil Mullainathan, a behavioral economist at Harvard, studies how scarcity affects people’s intelligence, will-power and decision-making. He wants to change your mind about poverty and inequality by studying what makes people poor, why people have a hard time escaping poverty and what programs can help get people out of poverty.

Liberals and conservatives see poverty in starkly different terms. Conservatives see poverty mostly as a problem of individual behavior: People become poor because they make bad decisions. They lack the will-power to stay in school, or to get to work on time, or to save for a rainy day and so on. Liberals see poverty as a social problem: Poverty results from a lack of opportunity, a tilted playing field or the lack of a safety net when people suffer one of life’s random blows.

Mullainathan’s research ( recently profiled in Harvard Magazine) explored the impact of poverty on intelligence. He put people into hypothetical situations where they were faced with spending money on urgently-needed auto repairs. After priming his subjects to consider a major unplanned expense, Mullainathan administered an IQ test. As the cost of the hypothetical repairs went up, people’s performance on the IQ test went down sharply. When the price of the repairs jumped from $300 to $3,000 dollars, people’s IQ dropped 14 points. That’s more than you would lose after pulling an all-nighter.

What is crucial about this and similar research is that the subjects in it are randomly assigned to either feeling poor or feeling rich. We are not comparing poor people against non-poor and speculating about the differences. Instead, we are taking non-poor people and randomly placing half of them in a situation that makes them ­­­feel poor, and the other half in a situation that makes them feel adequately resourced. Even among Stanford students, if you put them in a situation in which they feel under-supplied, cognitive performance declines.

This research adds to extensive prior research on brain exhaustion. It turns out that various brain functions are highly interrelated, and if you tax one part of a person’s mental and emotional capacity, you degrade the other parts. For example, if you exhaust people mentally by making them do challenging puzzles, they are less able to resist fresh-baked chocolate cookies. Conversely, if you make people go hungry, they don’t think as clearly as they do when they are adequately fed.

All of this raises profound questions about what precedes what in the cycle of poverty. Are poor people poor because they make bad decisions? Or is it that, as Mullainathan said, “people make bad decisions because they are poor.” Both intellectual capacity and emotional self-regulation are compromised by being poor, and the longer the poverty continues, the greater the damage. Thus, the emotional and intellectual burden of poverty adds to the immediate and practical problems of not having enough money. This cycle of causation magnifies poverty across generations.

Mullainathan’s research has important implications for policy. Anti-poverty programs need to be realistically designed to fit the actual life circumstances of poor people. All too often, the policymakers designing the programs – and opposition politicians criticizing them – have no experience of poverty and little understanding of the actual burdens it brings. For example, those who oppose regulation of payday lending argue that the market should be allowed to work unimpeded, and that payday lending customers simply need to show the will-power not to borrow more than they can pay back. Such criticism is unrealistic given the actual desperate circumstances in which people find themselves.

It’s not easy to design programs that give people some relief from scarcity so they can begin to rebuild their lives. Programs must find the elusive sweet spot between providing meaningful and necessary support on one hand, and not creating ongoing dependency and disincentive on the other.

In our hypercompetitive economy, bootstrap-pulling alone doesn’t work for most. Most of today’s poor need all of their strength to keep the roof from falling on their heads. With their hands stretched upwards, they can hardly reach their bootstraps.

David Brodwin is a co-founder and board member of American Sustainable Business Council. This article appeared in U.S. News & World Report May 6, 2015.

What Price Is Right?

One of the most basic ideas in economics is that when you charge more for something, people generally use less of it. So when we find ourselves short of something essential – say, water – it makes sense to let prices rise enough to encourage conservation.

Many communities in dry parts of the country use a system called tiered pricing to encourage residents and businesses to save water. Under tiered pricing, the first few gallons of water are relatively cheap; the next few gallons cost more and so on. Homeowners who use water responsibly can keep themselves within the lowest, cheapest tier on the rate structure. But the neighbor across the street who leaves the hose running while he washes the car gets pushed into a higher tier and pays more for his extra gallons.

Tiered pricing systems save water while giving each user the freedom to use as much as he or she wants. Tiered pricing works: One study found that it led to a 15 percent reduction in average household water usage. Tiered pricing is popular; about two-thirds of California water systems use them. And tiered pricing is a market-based approach, not a regulation-based approach, and it generally draws support from conservatives as well as liberals.

The only problem is that tiered pricing now seems to be illegal, at least in California. An appeals court in Orange County ruled last week that tiered pricing violates the California Constitution. It turns out that California’s voters, who can’t resist mucking up their constitution through the initiative process, passed an amendment in 1996 called Proposition 218. This amendment says that municipalities can’t charge fees for services that exceed what it costs to deliver the service in question.

But what does it really cost to deliver water?

The court’s ruling implicitly reinforces an obsolete and misguided idea that there is a single, fixed cost to deliver water. Of course there is an average cost for water for any district; you could figure that out simply by dividing the total amount of water delivered by the total cost to operate all the wells, dams, purification plants and so forth.

But that is pretty much irrelevant in the real world. What matters is the marginal cost of water: the price for the very last gallon of water that a community needs. In San Diego County, for example, a massive desalination plant is being built to deliver 7 percent of the county's drinking water by taking the salt out of sea water. This plant is going to cost more than a billion dollars to build, and it needs 38 megawatts of electricity continuously to operate. On the whole, desalinated water costs about twice the cost of recycled wastewater, and recycled water in turn costs much more than water drawn from a clean lake or river.

Even if you don’t build a big new desalination plant, the marginal gallon of water is way more expensive than the average gallon. In California’s Central Valley, which grows much of America’s fresh produce, farmers have been sinking their wells deeper and deeper to make up for the lack of rainfall and snow melt. Three wells now being drilled will go down 2,000 feet. They will be deeper than the highest U.S. skyscraper is tall. You can imagine how much electricity is needed to haul water up 2,000 feet, and what that adds to the price of water.

Although it is obvious that the marginal gallon of water is quite expensive, it’s much less obvious which user should pay the higher marginal cost. Is it the family that has six kids instead of two? The couple with no kids that have a swimming pool? The family that irrigates a hundred acres and sells produce at the local farmers market? You can make the case many different ways, pitting neighbor against neighbor. You can even argue that the family that moved in 30 years ago uses the cheap water whereas the family that bought the newly connected home last month is using the expensive water.

Any attempt to nail down exactly who is using that expensive marginal gallon of water will inevitably be arbitrary. That’s the problem with the court’s ruling. The court asks that water providers justify their rates in rigorous cost analysis on a parcel-by-parcel and gallon-by-gallon basis. This request is fundamentally infeasible. It will lead to endless litigation and acrimony as neighbor fights neighbor over who is using the scarce and expensive incremental gallons and who is using the cheap stuff. This ruling may make lawyers rich, but it won’t get Californians to save.

David Brodwin is a co-founder and board member of American Sustainable Business Council. This article appeared in U.S. News & World Report April 28, 2015.

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