May 31, 2012

WHAT'S IN IT FOR ME?:

THE FAIRNESS TRAP (James Surowiecki, JUNE 4, 2012, The New Yorker)

Rationally, then, this standoff should end with a compromise--relaxing some austerity measures, and giving Greece a little more aid and time to reform. And we may still end up there. But the catch is that Europe isn't arguing just about what the most sensible economic policy is. It's arguing about what is fair. German voters and politicians think it's unfair to ask Germany to continue to foot the bill for countries that lived beyond their means and piled up huge debts they can't repay. They think it's unfair to expect Germany to make an open-ended commitment to support these countries in the absence of meaningful reform. But Greek voters are equally certain that it's unfair for them to suffer years of slim government budgets and high unemployment in order to repay foreign banks and richer northern neighbors, which have reaped outsized benefits from closer European integration. The grievances aren't unreasonable, on either side, but the focus on fairness, by making it harder to reach any kind of agreement at all, could prove disastrous.

The basic problem is that we care so much about fairness that we are often willing to sacrifice economic well-being to enforce it. Behavioral economists have shown that a sizable percentage of people are willing to pay real money to punish people who are taking from a common pot but not contributing to it. Just to insure that shirkers get what they deserve, we are prepared to make ourselves poorer. Similarly, a famous experiment known as the ultimatum game--one person offers another a cut of a sum of money and the second person decides whether or not to accept--shows that people will walk away from free money if they feel that an offer is unfair. Thus, even when there's a solution that would leave everyone better off, a fixation on fairness can make agreement impossible.

You can see this in the way the U.S. has dealt with the foreclosure crisis. Plenty of economists recommended giving mortgage relief to underwater homeowners, but that has not happened on any meaningful scale, in part because so many voters see it as unfair to those who are still obediently paying their mortgages. Mortgage relief would almost certainly have helped all homeowners, not just underwater ones--by limiting the spillover impact of foreclosures on house prices--but, still, the idea that some people would be getting something for nothing irritated voters.

The problem is, of course, exacerbated by ethnicity.  Germans might accept an unfair solution that benefits Germans, but not one that helps Greeks, while Americans perceive the mortgage problem as being caused by lending to the undeserving black and Hispanic poor, rather than as a function of fraud by white bankers.

Posted by at May 31, 2012 6:02 AM
  

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