Home > Economics - General > A lot or a little?

## A lot or a little?

December 21st, 2007

A dollar is not very much money. A billion dollars is a lot of money. Twenty billion dollars is an awful lot of money.

For most people reading this (though not for Bill Gates or for the billion or so people living on a dollar a day or less), these statements should seem pretty obvious.

But all of these can be (and have been used as) different ways of measuring the same thing. If every Australian receives, or pays, a dollar a week, the total amount is very close to a billion dollars a year. And if you have a cash flow of a billion dollars a year, and your interest rate is 5 per cent, the present value of that cash flow (the amount of extra wealth you would need to generate the flow) is twenty billion dollars.

It’s easy to stretch this gap even further. A dollar a week is about fourteen cents a day. And, if we looked at the US (about 300 million people), or the entire developed world (around a billion people, depending on your definition), the total would be that much larger. Fourteen cents a day for everyone in the developed world has a present value of one trillion dollars.

The fact that the same flow of money can be presented in such radically different ways, and that each of them is appropriate in certain contexts, is one reason public policy debates get confused.

Having posed the problem, I’ll leave it for discussion, and hope to come back with some relevant examples and suggestions on how to improve our understanding of these things.

I’ll start with one illustration. It’s commonly observed that despite receiving over \$500 billion in aid in the 50 years since the shift to independence, Africa is still poor and, on the whole getting poorer. The implication is that the aid must have been wasted or stolen, and of course, quite a bit of it has been. But an aggregate number over 50 years isn’t very helpful.

Much more useful in thinking about the likely impact of aid is the amount per person per week. With (very roughly) a billion people in Africa and a billion in the developed world, the aid that’s been given amounts to about \$10 per person per year, or 20 cents per person per week on each side of the transfer. So, the implied complaint of the average Northerner to the average African can be translated “I’ve been giving you 20 cents a week for years now, and you’re still poor – you must have squandered my generous help”.

This doesn’t answer the question of why Africa has remained poor while so many in Asia have grown rich, or at least much better off. But unless you impute truly magical rates of return to aid, the question “why hasn’t aid made Africans rich” can be answered very simply “there’s never been enough to make a difference”.

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1. December 21st, 2007 at 09:36 | #1

I think you are dealing with decision framing theory here. It has been an area of study for some time now. It recognises the human beingâ€™s have a number of weaknesses in their ability to make rational decisions. For example:
â€¢ We donâ€™t deal well with small probabilities. (That is why such a large percentage of the economy is related to law enforcement and more recently anti-terrorism activities. Even Marx commented on this).
â€¢ We will forgo huge potential gains to avoid small losses. Etc.

Research seem to be showing that this is because the way our brains are wired. See
â€œFrames, Biases, and Rational Decision-Making in the Human Brainâ€?. For example see
Benedetto De Martino,* Dharshan Kumaran, Ben Seymour, Raymond J. Dolan, Science 4 August 2006:,Vol. 313. no. 5787, pp. 684 â€“ 687.

I know this strikes at the heart of classical economics but it all about marketing. How you frame a problem will determine the decisions made to resolve it.

2. December 21st, 2007 at 10:27 | #2

Spending big money to avoid small problems reminds me about much of government and how needlessly wasteful it all is. However much that passes for insurance these days is not much better. The main merit of private insurance is that it is not compulsory (or wouldn’t be except for government). I paid \$175 in cash this morning for some minor dentistry. If I had dental insurance it would have been free (notionally). However the recurring cost of dental insurance would be quite a bit higher and whilst MBF would cover all the little dental expences (if I signed up) they have expence limits that mean expensive dentistry isn’t covered at all. Rather than provide a low cost service that deals with the high risk events they seem to offer elaborate and expensive savings schemes. Personally I like paying my dentist in cash. It feels right. It reminds me to brush my teeth better. It involves no paperwork. It is simple. And I know that I’m helping her have a better Christmas.

Several years ago I took out private hospital insurance for the family because the government imposed an extra tax (how typical) if I didn’t. Having found a plan that complied with the governments rules I asked how much the excess was. It turned out that the insurance cover cut in if my out of pocket medical expences were above \$500 per person per year. This is ridiculous so I asked for a higher excess (with a lower cost). \$25000 would have been a more more useful excess because I have a redraw fascility on the morgage and other options. That way we could have paid our way with no paperwork unless things got dire. As it was they would only get an excess of \$1000 which I took. But a year later I found that I’d made my policy non-compliant with the tax rules so it was all a crock anyway.

JQ – I doubt people living on one dollar a day will read any of this. Those with Internet connections are rich people. I also doubt Bill Gates will read this.

3. December 21st, 2007 at 12:02 | #3

Yes, there are plenty of problems in presenting a national government’s budget in terms the lay person understands. I’ll try to list in the simplest terms the problems that occur to me straight off.

1. The numbers are big.
2. Relative amounts, absolute amounts, rates etc are all important (or unimportant) in different contexts.
3. Politicians are by trade accomplished liars. (The rest of us are liars but in the main unaccomplished at it.)
4. There are many ways to lie outright, be economical with the truth or obfuscate the truth.
5. Citizens are not properly eduacated to understand at least basic economics and issues surrounding govt expenditure.

I would tackle the problem at point 5. Educating the citizenry has to be the key.

4. December 21st, 2007 at 14:17 | #4

“I’ve been giving you twenty cents a week and you’re still poor….”.
Reminds of Tony Abbott and the Dolies a few years ago, and fits in nicely with Terge’s coment involving Marx.
Yep. Am a tight-fisted b….. d myself, and I’m one of the nicer ones. Others are so mean they hide it in a process of debt-accrual- negative savings?
Seriously, to think so little could have such an impact. On the other hand, perhaps the expense for the entertainment of the multi-trillion Iraq war was just a spit in the pond. Starting to feel beter already.
In a sense was saddened by the tone of some Terje’s posts, therefore. Reminded me of a spin off from “Grumpy Old Women” the other night, where the yuppies spent the waking balance of their greed and status-obsession-constrained lives obsessing about how to get their kids into private schools, kindes and the like. Probably a good state school just up the road, but they have to be “so special”.
Ken Davidson once explained it terms of “situational goods”, which is to say the sated dog with the bone who still won’t yield it up to a starving compatriot.
Commentators like Hugh Mackay have also noted on this propensity for wealth to paradoxically enslave rather than liberate. It seems to come down down to the natural constituency, involving both nature and nurture, to the stage we’re at in evolution. No guarantee we’ll ever get beyond the Morlock stage, either.

5. December 21st, 2007 at 15:43 | #5

I get at the rank dishonesty used to arrive at the offical inflation statistics and the official unemployment statistics.

If only there were some internationally recognised measurement methods. Perhaps there are? Or perhaps every OECD nation just makes up methods to suit itself? But when 1hr of work puts a person in the official employed numbers you know it’s a con. And when various prices can be moved in and out of the inflation measure at the whim of the government then again you know it’s a con.

How about a multi-measure for certain purposes called an “apparent inflation measures framework”? For example for the latter, we could measure the typical fortnightly basket of goods, services and utilties bought by aged pensioners on a full rate pension. This would measure the apparent inflation for that group. Then index the aged pension based on that measure.

6. December 21st, 2007 at 20:07 | #6

This was precisely the topic of a debate I heard on Radio Netherlands last week. On one side William Easterly quoted \$2.3 trillion as the sum paid to developing countries in half a century – it works out to a very similar tiny amount per person and also compares unfavourably to the amount spent on killing Iraqis in the past 4 years. Imagine that sum multiplied by a factor of 12 to get half a century’s worth!

While the current thinking (exemplified by Easterly) is to blame corrupt local governments, for mis-spending the aid, there is also the push factor. A blogger I read was talking about how during his time as an intern at the World Bank a certain department was in crisis because the governments of 3 African countries had not taken up the amount budgeted for them. Banks cannot make money if they cannot lend.

I think the WB is a particularly bad example of how to do aid – given that its accountability structure is basically a board of donor states. Easterly’s larger point, that we seriously need to rethink *how* we give aid, is a valid one.

7. December 22nd, 2007 at 13:05 | #7

Very nice post JQ.

8. December 22nd, 2007 at 18:30 | #8

JQ, you should know better than to do an apples and oranges thing like that. Nobody can live on \$1 per day, even in the third world. What can and does happen a lot is, people with almost adequate subsistence resources can survive with a top up of \$1 per day (it’s still poverty).

The significance of this is, if they were truly receiving a further 20 cents per person per week, as an addition, it would by now have made a truly substantial difference; it only appears negligible if you approach it with the unstated assumption that it would be swallowed up by subsistence needs (which always cost more in a cash economy, and even in those economies anyone buying subsistence bids up prices far more than increasing supply of staples).

So you are drawing the wrong lesson. The aid would indeed have made a huge difference if it could only have been applied properly. It would have come in on top of subsistence, not as something applied towards it. Since it hasn’t, we can’t simply dismiss it as understandable; that’s what it would be if they had had our subsistence cash leaks all along. If they are developing them now, why, that too is a part of doing things wrong (possibly western “help” doing it wrong, of course).

9. December 22nd, 2007 at 23:03 | #9

Education. I went to school – all of it – but never once was I instructed on even the most basic characteristics of the economy. I’d be puttin’ it ahead of history and literature in importance.

I have literate, numerate friend who are lawyers, doctors and the like – they usually don’t know the first thing about economics. Had to explain tax brackets to a well-paid friend the other day. (Not to mention the definition furnished to a barrister for the meaning and calculation of “two party preferred vote”!)

Ban TV. It makes people very stupid.

10. December 22nd, 2007 at 23:29 | #10

“JQ, you should know better than to do an apples and oranges thing like that. Nobody can live on \$1 per day, even in the third world. What can and does happen a lot is, people with almost adequate subsistence resources can survive with a top up of \$1 per day (itâ€™s still poverty).”

The (subsidised) price of a loaf of bread in Egypt and various other developing counties is around 5 cents.

Sleep in the gutter and wear rags picked out of the trash and you can indeed live on US\$1 per day.

But I guess not being charged rent on the gutter is a top-up.

Similarly, guess what you’re living on if your one of four children and your widowed mother earns \$5 a day?

11. December 23rd, 2007 at 16:51 | #11

IG, now you are doing the apples and oranges thing. The people you are talking about aren’t the ones in the typical developing country, i.e. moving away from having subsistence resources of their own. Likewise the widowed mother with four children is impossible in anything but the very short term unless there is something of a subsistence nature around for them to tap into as well…

Because (a) even subsidised bread isn’t enough to sustain life by itself indefinitely, and (b) the poor can’t all get clothes by scavenging – a non-cash subsistence activity, incidentally – since someone has to be generating the clothes to scavenge (which means that the average \$1 per head per day cannot apply in that hypothetical country; if it did, clothes would mostly be home made, not scavenged). Widows with four children cannot live on bread alone but need wider sources of protein, fats, vitamins etc.

You’ve also got it back to front in writing “But I guess not being charged rent on the gutter is a top-up”; that’s not the top up, it’s a non-cash subsistence activity that’s being topped up.

As it happens, I do know a little about supplies of free and/or cheap bread in Egypt, from my former Arabic language instructor and from seeing how the Coptic Church does things from a field trip he gave (there are muslim analogues, too). It helps a lot, but it’s not enough for long term survival, and it requires that most people are better off (ironically, the old pagans two millennia ago had a much better side effect diet for the poor, from animal sacrifices; only the Armenians still practise those).

So it comes down to, countries with average \$1 per head per day do need non-cash subsistence activities. What you were describing was something short term that can only be made available to a proportion of people in a country that mostly has more per head per day.

12. December 27th, 2007 at 07:05 | #12

There are two sides to this arguement. You cannot talk about people, money and survival without talking about decision making as well. Under the right circumstances it takes no dollars a day to live well. I hold in memory images of the raft people of the one time marshlands between Iran and Iraq. These people lived healthy lives with little need for the outside world. Until. Saddam Hussein decided to drain the marshlands so that he could make a ground invasion of Iran. This was and act of utter stupidity in every possible way.

The simplest way to solve world poverty is for all developed countries to apply a 1% world poverty tax and provide those funds to the United Nations for distribution.

Now think about the mess of human decision making that would ensue. Jane Austen wrote “a single man in possession of a good fortune must be in want of a wife”. Put another way, “a good fortune must be in want of a single man to possess it, the wife will follow”. Create a big enough pot of money to resolve the needs of the poor, and the poor will never see a penny of it.

13. December 27th, 2007 at 08:46 | #13

Many of the world’s poor are poor because of chronically bad desision making by their overlords. Solving world poverty on an intergovernmental basis requires dealing with those very chronically bad descision makers.

In Sense and Sensibility Jane Austen depicts the young Mr John Dashwood considering his obligation, promised to his now deceased father, as regards his father’s second family. “A sum of 3000 pound a year” becomes wittled down with involuted logic to “they will be much more able to give you something”.

It is not hard to find such sentiments in todays world. “Human nature”….its been with us for a very long time.

14. December 27th, 2007 at 14:04 | #14

“This was and act of utter stupidity in every possible way” – not from Saddam Hussein’s point of view. It reduced their autonomy, which helped him.

Personal aside: when I was a child in Iraq in the late ’50s, before British interests were squeezed out after the fall of the monarchy, my father ran a date ranch there (Lion of Babylon dates) with the help of Marsh Arabs.

BilB, a poverty tax channelled through the UN wouldn’t do much good for much the reasons you cite in post 13.

15. December 27th, 2007 at 15:06 | #15

Is there any evidence that distributing money solves poverty? Actually given the shifting defintion of poverty I don’t think any measure can actually solve it. Although the following slide show is interesting:-