2012 February 25 Saturday
Will Higher Taxes Provide Cost Effective Services?

Reason Magazine editor in chief Matt Welch points out Warren Buffett thinks he can spend his money better on philanthropy than the government can. Yet Buffett advocates taking money from rich people to give it to the US federal government.

I'm not one who thinks that Warren Buffett needs to write a $10 billion check to the government in order to prove his policy sincerity. But it is worth noting that his big 2006 media breakthrough came not by pledging his fortune to the U.S. Treasury, but to private charity. It's clear which vehicle he finds the most effective use of his personal money.

Money spent on charity has the potential to be more productive than money spent by national governments. But this is by no means assured. Charity giving and philanthropy are by no means assured to deliver a net benefit to society as a whole.

As I argued in my post Gates And Buffett Quest Will Lower Investment Quality, most philanthropy is wealth-destroying because it shifts money away from productive investment toward unproductive activities, shifts talented people away from useful work, and even in some cases encourages activities that are destructive of self or others. Poorly done philanthropy has effects similar to those of the social welfare state in that it lowers the costs and increases the benefits of bad life choices.

As an example of wealth-destroying philanthropy, Bill Gates (and likely with some of Warren Buffett's money) spent billions of dollars to discover smaller class size does not improve educational quality. It was not hard to know in advance that lowering class size was a waste of money. As Virginia Postrel wrote in the New York Times in February 2001 economist Edward Lazear showed as long as disruptive students are separated from quiet and attentive students the sizes of classes for attentive students can be quite large.

To find out how much of the time learning is actually taking place in a given class, you multiply the probability a student is not disrupting by the probability for each other student. In his model, Professor Lazear uses the same probability for every student, which means he can simply raise the probability to the power of whatever the class size is.

The results are striking. If each student behaves well 99 percent of the time, learning takes place 78 percent of the time in a class of 25; if good behavior drops to 98 percent, learning takes place only 60 percent of the time; at 97 percent, learning drops to a mere 47 percent of the time.

So any value of smaller class size is mostly for the more disruptive students so that they do not disrupt the learning of each other.

Money spent to pull larger numbers of people into teaching careers to make class sizes smaller pulls people away from better uses of their time. In his book Thinking, Fast And Slow Daniel Kahnemann points out the Gates Foundation was lured into making a billion dollar mistake by looking at schools with small classes that had great student performance. What the Gates Foundation's advisers missed: with smaller classes comes larger variation. Some of the schools with terrible student performance also had small class sizes. With smaller groups comes greater odds that a small group will deviate from the average of all students.

Philanthropy is very hard to do well. Even with expensive advisors the Gates Foundation still made a very expensive (and therefore wealth-destroying) mistake. On the bright side, at the end of the mistake Bill Gates admitted the mistake and supporters of wasteful educational spending thru smaller class sizes found a powerful person switched against their position. If Gates used those same dollars to fund the IRS he and quite a few observers would not have learned this lesson.

Share |      By Randall Parker at 2012 February 25 03:18 PM  Economics Philanthropy


Comments
Aurelius said at February 26, 2012 9:43 AM:

The problem with giving to education in general is that it seems far too focussed on boosting the bottom 20%, while ignoring the kids in the middle. There are kids who will do well under almost any circumstances, kids who will do poorly under almost any circumstances, and kids who could easily go either way. But philanthropy is obsessed with helping the bottom 20% who really don't have much intellectually to offer, and who would be better directed towards learning a trade. Even if they do learn that trade there is a good chance that a poor work ethic and the disincentives provided by the government towards useful labor will keep them from ever using those skills.

And no matter how much they improve instruction, you have to fight the culture (especially the legal one). As George Will once wrote, "In the 1940s a survey listed the top seven discipline problems in public schools talking, chewing gum, making noise, running in the halls, getting out of turn in line, wearing improper clothes, not putting paper in wastebaskets. A 1980s survey lists these top seven drug abuse, alcohol abuse, pregnancy, suicide, rape, robbery, assault. (Arson, gang warfare and venereal disease are also-rans.)"

Civil rights laws keep schools from dealing effectively with any of that.

Michael L said at February 27, 2012 8:15 AM:

in other words Buffet wants to spend his money (wealth) according to his own agenda while having the government take money (income) from poorer and less connected millionaires (who might also be his competitors) and spend it according to government agenda. Needless to say, Buffet might have quite a bit of influence on what the government agenda happens to be as well.

This is class warfare at its most transparent. The government and political connections based elite class is fighting to destroy the private business based elite, whatever is left of it. Some of the latter try to resist (think Koch brothers) but for now seem to be getting nowhere.

RNoble said at March 1, 2012 8:34 PM:

During the Second Punic war in Rome, the females were freaking out because their "stability" was threatened. The war had a psychological effect, and caused Rome to shift to using Gold money. Prior to that they used bronze nomisa that had the stamped legal value of their money, similar to what the U.S. does today. This was the beginning of the end, and ultimately lead to the dark ages. Please think carefully about the desire to NOT tax land and accrued wealth, it has long term consequences.

The usury error in money allows something inherently sterile to grow exponentially. Only legal money can have debt cancelation. Spreading debt is a function of usury mechanism over time.

The movement to gold money allowed the holders of Gold (the Eastern temples of the middle east were the main source of gold) to gain a measure of control over Rome. At the same time, Oligarchs charged usurious rates for supplies to the Roman army. After the second punic war, Rome remained in a state of war, further shifting wealth to the new Oligarchs due to law and monopoly rights.

Eventually Roman society stratified into the superwealthy and commoners. Several rebellions were put down by the Senate, because by then the Senate was "paid off." Debts spread, especially as Rome would make conquered countries pay for the cost of their war. Oligiarchs continued to consolidate land and wealth, and pass said wealth down through family lineages. Eventually the land consolidated into large areas, with slaves imported from the conquered lands. The original Roman population was diluted away with the massive immigration of slave foreigners.

Rome moved toward the source of Gold, which was Byzantium in modern day Istanbul (Constantiople). From there the Eastern Roman's could control the flow of Gold from the East and silver from the west, siphoning off the exchange difference for themselves and other insiders.

When land and all the wealth is held by a very few, the country enters into a feudal state. This is entirely a function of spreading debt and consolidation of wealth production means.

By NOT having a death tax, then philanthropy you mention will not be as prevalent. For example, Buffet for all his platitudes will give away his wealth, rather than let the government tax it. Yes, the wrong people can hold the gifted money and not use it well. But, the ill effects of growing wealth concentration into a few hands is society destroying, and every time it leads to great suffering.

It is better to allow fiscal policy to tax accumulated wealth, thus preventing hereditary oligarchies. Bad spending of philantrhopic money is a very small price to pay considering the alternatives. Accumulated wealth should pass to philanthropy rather than go to government through taxes. Proper taxation in turn, allows the wealth to be dispersed philanthropically rather than pass on and enable plutocratic destruction.

Our colleges are a good example of philanthropy in action. Most of the big gifts to colleges are the wealthy trying to avoid the death tax.

Randall Parker said at March 6, 2012 8:44 PM:

Aurelius,

Yes, the smartest kids don't get the high speed learning lane they deserve. But I expect technology will provide it. Kids will be able to watch the highest quality lectures online and take tests online. Question and Answer sessions will remain a problem. But for some topics they aren't necessary.


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