I like talking about highlights more then I do lowlights, however I found a minor detail in Mr. Cowen’s book to be so off base that I have to deviate from the assignment and include it at the end of this blog so I’ll have both a highlight and a lowlight. I know we’re supposed to do one or the other but the lowlight isn’t enough to constitute an entire page of material, however I can’t ignore it.
So let’s talk about what else struck me about the 2nd half of Cowen’s book. Actually my friends and I discussed this tonight at dinner (if nothing else, this class is great for dinner conversation that’s really only interesting to me but I force on others!). The dead loss of Christmas Presents and even more so the bigger concept it reflects, that of the difference in perception of value as well as net value of any transaction. I believe this chapter is a direct reference to the economic concept we learn in 101 regarding economic cost vs. accounting cost. You give a present to a relative and they value it less then you , but you value the gift giving so the total economic value is greater, or you don’t’ value the giving at all and the total economic value is less then the cash/time spent so there is a loss. You give money to a charity but by only giving a small amount and not taking your name off the list for mailing you cost them more to keep in touch with you then you have contributed to the cause.
Where else does Cowen go with this? Begging; it’s a very interesting approach he takes on this subject and I find it along with Cowen’s analysis of the low income market places in developing countries to offer a new perspective on something I hadn’t really put a lot of thought into. I relate this to our current welfare and unemployment systems. We give unemployment benefits to those who identify themselves as needing them. The system attempts to correct this in the case of unemployment by only distributing full benefits to those who are actively seeking work, we give value to the fact that they are seeking employment and reward them with incentives as such, hopefully gaining a greater gain then just the money distributed. The unemployed are using some of their resources to collect the unemployment, and report in and government employs spend a lot of time tracking and verifying all this, the net value of the unemployment benefits is much less then the dollar for dollar we distribute. We likewise limit benefits over time, so much so that they can’t be seen as a way of life for the unemployed (although there are those which attempt to abuse the system to make unemployment a form of employment.) Also unemployment benefits are limited by the type of unemployment (were you fired, or did you quit or was it a layoff? It all affects your total allowable benefits). So let’s try and apply Cowen’s ideas regarding the low income beggars of Calcutta to our current unemployment system.
Reading Cowen’s book you might think to not distribute benefits to the unemployed but to pass the benefits onto those who recently lost their job and either aren’t looking for unemployment to gain 100% of the total effect of the benefits given or with my idea distribute the benefits to those who have just become employed again.
Here’s my idea and it’s a crazy idea but hear it out and then please tear it to shreds. During the time you’re employed you accrue future unemployment benefits (let’s say as part of what employers pay into already for unemployment scenarios and/or a portion of the taxes that currently go to the unemployment system.) You then lose or quit your job; you do not garner your benefits right away. You only gain them when you become employed once again. Now there will most likely be an issue with being able to maintain an individual’s livelihood so in order to maintain your household your benefits start at a nominal distribution which decreases every period that you’re unemployed, and lowers your total amount of received benefits by a greater amount then what you receive weekly (every week you receive x dollars and this reduces your total benefits, weekley + lump sum, by twice the amount of x). The benefits are earned for the longer you’re employed so the benefits don’t become enough to quit and restart jobs but enough to provide an incentive to find work quickly. Perhaps a lump sum bonus is paid for the quicker you find work (the lump sum being part of what you accrued from your last job) the amount of this lump sum lessens the longer you take to find work. For example, if you’re only unemployed for 1 week and then find a job you gain full benefits, and for every week there after the benefits you receive weekly as well as what you receive upon employment lessen. You can’t start and stop employment because you haven’t accrued the minimum amount of time to receive unemployment benefits again. You give the benefits to those who are employed, which means the benefits not only gain the full value of the benefits given but also the value of what the recipients are producing from work. And to provide full efficiency the value of the benefits if never collected gain a vested interest overtime plus interest for retirement and can be collected upon retirement by the individual.
It’s not a full or perfect policy, it’s an application of some of Cowen’s ideas to certain public systems. I think it captures the concept of trying to get more your dollar instead of less. Which is what I believe chapter 9 is all about, the true value of incentives.
Okay for the part I had a problem with, which is part of the same chapter. Tipping; now I know that he doesn’t disdain tipping but he implies that increasing tips is a bad form of charity (and how is tipping charity?). Now he may only be talking about raising the expected tip percentage as a whole but if that’s the only aspect of tipping that he’s talking about he doesn’t clearly define this. The first problem with Cowen’s view on tipping is that tipping isn’t a form of charity, nor is increasing your tip, and if someone even views it as charity they’re off base as to its purpose, and if they are just increasing the tip to feel good then again they’re missing the purpose of tipping. Tipping is one of the most direct forms of incentives in the marketplace; you tip more for good service, less for bad service. It’s this concept that drives performance and quality of service personal, if you’ve ever been a service professional then it’s easy to see this isn’t even an exaggeration. Are tips expected in American society? Yes they are for certain jobs/positions, they are a variable cost of whatever you’re purchasing were you can directly give and get value for the transaction, you get $1 worth of service you give $1 tip, true efficiency, in a restaurant situation it’s part of the total cost of the experience (as I had mentioned in a previous blog). And by not tipping or tipping very low you send a very strong signal, hopefully if that trend continues the signal is sent not because you and others don’t want to participate in the market place but because the service professional doesn’t have comparative advantage in this area. Now Cowen mentions that the effect of the tipping is that the employer pays less as they receive more tips, which would be great if it was even possible, the majority of service personal are paid minimum wage or in the case of restaurant personal less then minimum wage ($2.13/hout last time I checked, it may have increased recently but you get the idea). Well not only will employment law not allow the wage to go lower, there wouldn’t be much to take away as it is. Anyhow, maybe I could go for a full page on this but it’s a very narrow part of an otherwise good and broad concept he talks about. I just felt that it had to be mentioned.