How to Split the Dinner Bill: Should Millionaires Pay More?

Recently I was listening to an episode of the Slate Money podcast where the hosts had an argument that really caught my attention. It was about who pays for dinner in a mixed income group, and it went something like this (very paraphrased):

Felix Salmon: You expect your friend to pay for dinner because she’s rich?

Emily Peck: Yeah, she has like 500 million dollars! Of course she pays. I offer to pay if she’s OK with going some place more affordable.

As I listened, at first I was a little surprised at Emily’s confidence in flouting what is an unspoken taboo at most dinner tables. Yet Slate Money’s extreme example of millionaires with thousandaires was actually one I have found myself in, and so it seemed worth taking a second look at my thinking and the beliefs underlying it.

In New York City, proximity creates cross-class interactions in every-day life. With Section 8 government housing opposite million-dollar mansions, and millionaires taking the subway with working Joes, we are organically a part of each other’s day-to-day. I’ve met every kind and class of person in the City, and have had the pleasure of meeting a few people in the “Two Commas Club” that have become good friends. And when I go to dinner with them, I want to pay for myself. Why is that?

Splitting the bill equally vs. equitably

On an interpersonal level, I don’t want wealthy friends to feel imposed upon or used. But Emily has forced me to ask, is a friendship really about equality, i.e. everyone paying the same, or equity, where each person contributes what they uniquely have to offer? If the latter, then in the dinner scenario that is purely about dollars and cents, shouldn’t the wealthier person pay more in proportion to their income? I’m surprised to find myself uneasy with the idea that my rich friends should pay more of the dinner bill when I have no problem with the idea of them paying more in taxes.

Source: Interaction Institute for Social Change

Dinner bill math as a microcosm of economic policy

Our current unease with wealthy friends picking up more of the dinner tab translates directly into the Republican line of thinking: that each person should look after themselves, and if they can’t afford to eat out, they should go without. Simply put, everyone should pay for their own dinner. This argument ignores context: it’s easier to pick yourself up by your own bootstraps if everyone has similar incomes and similar access to opportunities. Thus, it’s easier in single-class circles for each person to pay their own dinner bill. But that’s not the scenario many people find themselves in in New York City.

Getting comfortable with the idea of the wealthy paying more for dinner requires a more liberal paradigm. From a liberal perspective, there are different levels of economic responsibility for public goods, depending on your wealth. And sharing a meal with friends is, arguably, a public good, a microcosm of pro-social economic policy. At the dinner table level, the wealthy paying more for meals would lead to more diverse life experiences through cross-class friendships. These benefits, one could argue, ultimately pay for themselves in the form of a more functional society.

The alternative for the wealthy is relative social isolation — which under our current paradigm is the path most often chosen. The rich feel more socially isolated today than ever before as income inequality has increased. On the flip side, the positive externalizes of the wealthy paying more for meals have actually already been measured: namely, through free school lunch policies. Free breakfast and lunch leads to stronger student performance and, thus, stronger long-term productivity for the economy.

Systemically better results

One might argue that there is a risk of creating reliance on the wealthy that undermines relationships and self-reliance. It’s why parents stop paying for their adult children, even while parent incomes are typically greater. Yet the liberal paradigm isn’t trying to put parental responsibilities on the wealthy. It’s simply trying to systemically produce the best result and best opportunities for the most people.

So this holiday season, as you catch up with friends over cozy meals, think about what norms you want to have. And share with me what you think: should rich people pay more for dinner the way we ask them to pay more for taxes? Tweet at me: @mbainthecity

Why Brazilians are burning the Amazon, and how policy has solved this problem before

 Satellite image 2019 Maxar Technologies
Satellite image 2019 Maxar Technologies

Nations across the world are lambasting Brazil for the rising rate of deforestation by forest fires. Images of the blazing infernos across the Amazon are viral on every media outlet. Surprisingly, most coverage frames the issue as a political one rather than an economic one. The focus remains on Bolsonaro’s right-wing politics, and the social injustice to indigenous communities being driven from their lands. Yet few ask why burning the rainforest seems to be the best economic option for so many farmers and ranchers. A candid look at Brazil’s economy and the nature of this classic policy problem point to both the central issue and some possible solutions.

One of the most unequal economies in the world

The Gini coefficient is the World Bank’s choice indicator of social progress. It measures income distribution, where 0 represents perfect equality (i.e., everyone has the same income), and 1 represents perfect inequality (where one person has all the income, and everyone else has no income). In May of this year, Brazil’s Gini coefficient rose to 0.627, just shy of it’s 1989 record of 0.633, when Brazil was the 2nd most unequal nation in the world. This marks a huge regression from their decade below 0.55, and it’s 2018 level of 0.51. In other words, more people are worse off this year than last.

 Brazil’s Gini coefficient, a measure of inequality, was declining over the past decade
Brazil’s Gini coefficient, a measure of inequality, was declining over the past decade

International pressure doesn’t put food on the table

The international community is doing its best to apply economic pressure rather than ease economic suffering as their chosen solution. And it doesn’t seem to be working. France threatened to scupper the EU – Brazil trade deal over the Amazon fires. Yet with the US – China trade war heating up, Brazil has another big market to sell its soybeans and cattle to.

So the EU tried offering a carrot with its stick: $20 million in aid to help fight the fires. To put that in context, the world’s richest nations just offered 1/6 of what Juicero raised to help combat the Amazon wildfires. It’s a literal drop in the bucket.

But none of this is surprising, because the benefits of burning the Amazon are concentrated and the cost are dispersed.

Concentrated benefits + dispersed costs = tragedy of the commons

Economic benefits and costs can be both concentrated to certain individuals and small groups, or dispersed to the public. Different archetypal social behaviors emerge with each combination of costs and benefits. The most challenging dynamic is the tragedy of the commons. The tragedy of the commons occurs when individual actors overuse a public resource. It’s what causes over-fishing or drinking water pollution by factories. All the benefits flow to the individual or company. But the costs are so dispersed that no individual baring just a fraction of the cost has enough incentive to take counter action. Hence the richest countries in the world offering Brazil only $20 million to fight Amazon wildfires. That’s their willingness to pay as individual countries for the global benefit of mitigating climate change.

 The tragedy of the commons occurs when individual actors overuse a public resource
The tragedy of the commons occurs when individual actors overuse a public resource

How tragedy of the commons is (usually) solved

To overcome the tragedy of the commons, most policy makers try to emulate a market place. Governments try to create concentrated costs to match the concentrated benefits. They typically do this via privatization or regulation.

1. Privatize

Privatizing public resources is thought to create a sense of ownership that incentivizes long-term maintenance of those resources. This has worked for U.S. forests: privatization has led to sustained growth for about 50 years. Because loggers never want to run out of trees on their allotted land, more than 90% of U.S. paper comes from high-yield, rejuvenated forests planted for harvest. Fisheries have also tried privatization in the last two decades, with notable successes. The Mid-Atlantic Fishery Management Council privatized harvests of two species. This led to sustaining yields while cutting the number of boats needed by 90%.

Yet few critics trust privatization writ large. Standard market dynamics often continue to motivate destruction of the commons.

“Privatizing the commons may not work in a lot of cases. The incentive to chase a quick buck may outweigh the financial and social rewards of long-term stewardship. Ownership is not necessarily stewardship.”
– David Brodwin, cofounder of American Sustainable Business Council

The Global Landscapes Forum further sites how public land ownership optimizes environmental benefits. For example, many national parks would not exist without federal ownership.

So let’s suppose that privatization is off the table. That leaves us with regulation as a second option.

2. Regulate

Governments protect the commons by restricting resource extraction, using quotas, permitting systems, and bans. Brazil historically implemented restrictions on rainforest abuse, but enforcement has decline. Further, Bolsonaro signaled through his campaign and his environment minister selection that it is open season in the Amazon. The downward trend in government spending further suggests that environmental regulation enforcement will continue to decline.

Money talks

The likelihood of the current Brazilian administration using policy tools to solve this tragedy of the commons is low. But it’s worth remembering why the Amazon is being burned in the first place – money. Perhaps the west’s $20 million pittance needs a few more zeros behind it, and needs to be directed at those actually starting the forest fires. Money is a blunt instrument, but it seems to work for organizations like Kiva, a microfinance match-maker that has distributed $1 billion in loans to 2.5 million recipients. They create an average of 1.2 jobs per loan. GiveDirectly is another example of cash donations changing lives. Sustainable livelihoods and sustainable environmental treatment do not have to be mutually exclusive. We need to be more targeted in our interventions, by directing funds to those who need it most.

Will hospital costs go the way of CEO pay?

Clearly legislators have been reading my blog and were touched by the story of my healthcare emergency this past 4th of July. My experience embodied the every-man and moved our government to action. The result? Mandated price transparency for hospital services. Yes, hospitals nationwide are now required by federal law to reveal their once-secret master price lists. However, while I know our Senators were trying to help a millennial out with out-of-pocket costs, there’s a real risk of unintended consequences. In fact, prices might just go up.

As a parallel, let’s take the case study of CEO pay in the 1990s. In 1993, the Democratic Congress under Bill Clinton passed a change to tax law that capped companies’ tax deductions for executives’ compensation to $1 million per executive per year. Concurrently, starting in 1992, The SEC began requiring standardized disclosure of compensation in proxy statements in hopes of making it more difficult to disguise pay that didn’t incentivize managers, or was excessive. Yet this move to transparency and incentives alignment backfired; by 2000, the average CEO pay had nearly quintupled to $19 million.

What explains this massive increase? In short, the practice of benchmarking CEO pay. CEO base pay was never cut, because CEO pay became increasingly based on benchmarked lists limited to top-paid CEOs in that field. This selection bias in comparison sets resulted in a rising tide for all CEO packages. At the same time, because the tax amendment did not penalize performance-based pay, compensation committees started offering a growing number of stock options as an incentive to CEOs. Options could only become valuable as the companies performed well. And in the late 90s, as the stock market rose and pushed all options “in the money”, total compensation rose in lockstep.

Will a similar comparison bias happen for medical costs? Or will payors temper rising costs with their buying power? Only time will tell.

The game theory take: why New York got taken by Amazon

Governor Cuomo came out swinging back against New Yorkers who have criticized the tax breaks associated with the Amazon HQ2 deal – which will bring half of a second headquarters to Long Island City, New York. Where The New Yorker calculated the tax break to equate to each New Yorker Venmoing Jeff Bezos $348, Cuomo compared the deal to getting 90% of the taxes we would have otherwise foregone. So which is it? Well, both. New York has won a battle but is losing a war, a war that it did not need to enter. More specifically, we have set a negative precedent in a repeated game, where states are shooting themselves in the foot with a tit-for-tat strategy, trying to out-discount each other to woo over corporations.

Planet Money framed the dynamic best in a case study of Kansas vs. Missouri. Kansas City sits squarely across both states. And year after year, one corporation or another has pit the two states against one another as they choose which side of the city to operate in. “The states want to keep these companies. So they’re slashing taxes. And they are digging themselves deeper into a hole. That tax revenue is going to pay for stuff like roads and schools and police.” King and Vanek Smith reported education budget cuts in Kansas in the order of magnitude of tax breaks offered to AMC Theaters, Applebees, and the like. This particular state rivalry has resulted in losses for both, consistent with tit for tat game theory. In a tit for tat game, participants always mirror the last actions of their counterpart. So if the state across the way holds their taxes stable, you can too, but if the rival state offers a tax cut, you automatically do as well. Cooperation results in the best outcome for everyone, and confrontation results in net loss over time for each player.

Another game that the Amazon HQ2 competition resembled is the dollar auction. By calling cities to compete for the second headquarters, it appeared to have triggered loss aversion as 238 municipalities invested monetarily and psychologically into the dog and pony show. The aforementioned Kansas City, Missouri’s Mayor wrote 1,000 Amazon product reviews to attract Amazon’s attention. Chicago hired William Shatner to voiceover their promo video. And tax incentive offers abounded. In short, it appears that cities across the nation were drawn into a version of the dollar auction, a type of auction where bidders are willing to pay more than a dollar to win…a dollar. This is because the consequence of not winning the auction is to pay the amount you bid (read: the amount you spent on marketing and political showboating). This potential loss triggers the sunk cost fallacy for many. Sufferers of the sunk cost fallacy continue playing a losing game because they have already invested time and money into the game, despite the lack of evidence that they will make a return on any additional investment.

Cuomo’s argument boils down to two points: every state gives incentives, so New York has to, too; and yet New York is so attractive a place to be that it did not have to offer incentives nearly so big as what others did. Well, there’s an obvious tension between those arguments. New York is indeed enticing enough to attract all the other west-coast tech giants to build big offices: Google, Facebook, and Microsoft. They didn’t get big tax breaks to come here. But we’ve certainly set the stage for them to come with the begging bowls in hand in the future. As a city of 8 million diverse and talented inhabitants, a bidding war is not a game New York has to play.

Has Amazon become eBay? The new normal for e-marketplaces

There’s a market place with real-time bidding, where all the suppliers with identical products vie to sell their goods to a group of buyers, all with varying willingness to pay. Which market am I speaking of? Is it the stylized market place from Econ 101, the modern financial markets, or today’s primary e-commerce model? In fact, it is all three.

We’ve heard of regression to the mean with stock prices. The past decade has witnessed a regression to the mean of economic models. The difference between the market places academics describe and the ones financiers and commercial platforms implement has rapidly evaporated. In sum, the world has become eBay. 

The great irony in this turn of events is that eBay is one of the few markets where the auction model failed. Although eBay was a classical market, with multiple people selling identical or equivalent items, buyers did not want auctions. So why did eBay’s core model fail where so many others have since succeeded? Two words: buyer experience.

The Wharton course selection process followed a similar arc to that of eBay. Selecting your lineup for the semester used to be the stuff of day traders’ dreams. Speculation and back door deals were required to accumulate enough points and make the right trades to get your dream class lineup. But with the time and energy vortex it created for students, professors decided to swap in a simple system of ranked preferences, that students could set and forget until their course schedule was determined. Both the old and the new systems were based on economic theories, but the new one worked for everyone at a dramatically reduced cost. The selection process went from weeks of game theory strategizing to days of just choosing which courses you were most interested in. Similarly, eBay’s Buy it Now option made it so that you could literally buy peace of mind, knowing that your item was on its way. Now that’s exactly what buyers do 80% of the time on eBay.

Where eBay failed to deploy a streamlined buyer experience to auctions, e-commerce giants and financial markets have succeeded. They ensured that just because they make their markets competitive, doesn’t mean they need to be a hassle. And all with one weird trick: making the sellers compete, not the buyers.

Jet.com was the first e-commerce player to dream the dream of emulating financial markets: one price to rule them all. Jet aggregated all sellers of a single item under one listing, hiding the buyer and just showing the best price. The computer does the comparison for the shopper, bringing them one step closer to a two-click purchase. Amazon quickly riffed on this, showing a list of other sellers for a given item alongside that seller’s user rating. And the bandwagon effect was unleashed. Specialized sellers like Newegg, which formerly focused on technology products, have deployed the same tech to sell across categories, aggregating sellers and drop shipping inventory for a seamless user experience. Other markets are not far behind the curve. Technology has made it so easy to adjust prices that the bidding for hotels and airlines on aggregators like Kayak and Priceline is continuous.

All fields of technology-based commerce appear to be converging to an economists dream: a series of real-time auctions. But is the economists’ dream everyone’s dream — do we want the whole world to be a real-time auction market place? No doubt there is a dark side to a system evaluating actors primarily on price competition. Amazon’s opening the floodgates of international vendors to the U.S. has created a whole underground economy of fake reviews for low quality knockoffs, for example. In other areas, considering price alone has resulted in a number of negative externalities, such as the rash of taxi driver suicides in markets Uber has taken over. As eBay has taught us, without keeping an eye on consumer experience, no market model is sustainable. And as Silicon Valley has taught us, forgetting that these systems affect real people can cause social dislocation. Time will tell how consumers vote with their clicks. 

 

Moving in and taking out – the demise of Seamless

It’s July, I’ve tossed my graduation cap up in the air, and into a crate. I’ll miss the NYU housing, just a stone’s throw away from Washington Square Park. Mamoun’s will no longer be my go-to dinner spot, and I finished my last Smith’s brunch for a while yesterday morning. 

The two movers from Queens that I found on Craig’s List arrived with their van, and we begin the elevator dance, squeezing what we can into the freight in our 3 hour reserved slot. I’d managed to find a new three bedroom in a hot new neighborhood. Well, just outside of a hot new neighborhood – Bushwick; it’s more affordable. It’s a walk-up, but I’m only on the second floor, and there’s three of us — we can handle.

Six hours later, with 30 minutes of coach maneuvering, we’ve arrived as a sweaty mess of cardboard boxes in the living room. I don’t know were my new work wardrobe ends and my pots and pans begin. I think to myself, If I can make it here, I can also get it delivered. Already salivating, I pull out my phone and open up Seamless, visions of chicken pad thai dancing through my mind. I scroll. And scroll. And scroll. Polish food. All Polish food. No thai food even touches the map of possibilities. Even if I pretend to be a few blocks closer to Manhattan, I seem to be just one block further east than any Thai restaurant is willing to go. And it fully dawns on me, I’ve made a horrible mistake — I have moved into a delivery desert.

I lived in a land with sushi as far as the eye can see only 6 hours ago. In the depths of my despair, I realize I need to pay the movers. As they open Venmo to make the request, I notice a *whole screen* of food apps. “Hey, which of those apps do delivery around here?” I ask, trying not to sound as desperate as I am. “All of them,” my mover says. I gape in disbelief. “Want a referral? I can send you all of them – DoorDash, Postmates, maybe Caviar because – treat yo-self”. Hell. Yes. “That would be awesome, I owe you a tip as well, add it to the Venmo.” 

My world had just contracted and expanded in the space of minutes, the Big Bang of delivery. Just because I don’t live in the Village, doesn’t mean I can’t eat like I do. The confines of my local neighborhood erased, the city is once again my bread basket.

Download #1 complete. Postmates. I open, and scroll, and scroll. It was there. It was all there. Restaurants that had mysteriously disappeared from Seamless months ago, now available to me, miles away. I now saw the shifting tides for what they were: the Great Unbundling. The restaurants no longer had to hire delivery people, or share a cut with Seamless. They could just outsource it.

Further down the list: Shake Shack. This explained the mysterious lines of this non-delivering burger power house. These delivery services will order for you, and wait in line! And after a day like mine, I am more than willing to pay the service and delivery costs. I upgrade from my #2 to my #1 Thai place, now that it’s back on the map, and place a double order of chicken pad thai. And while I’m at it, I delete the Seamless app. Goodbye peirogis, hello world.