Blame, Reward, and Help: Crisis of Meritocracy

The comments on this Newsvine story about portions of the bailout packages going to distressed homeowners I think illustrate one of the conflicts that is at the center of America's domestic agenda, and one that has been there for quite some time.

It seems quite evident to many people that those currently experiencing distress probably are at least partly to blame. Some resisted offers of variable rate loans that might have gotten them better houses because they were uncomfortable with the potential consequences, and the mortgage bubble they see as vindicating their choice.

As such, they see assistance for distressed homeowners as positive reinforcement for bad choices. It is hard to argue against the possibility that this might be so. Belief, or at least hope for belief, in a transparent meritocracy is very strong in the States, and I think social assistance programs of any kind run against this grain. It conflicts with the "pull yourself up from your own bootstraps" myth so successfully promoted by President Reagan and others.

Although religious faith is not an active portion of my life, these comments remind me of nothing so much as the parable of the talents, where some workers are hired as day laborers for a vineyard. Some are hired in the morning, some at noon, and some in the evening. At the end of the day, they are all paid the same wage by the master of the vineyard.

The workers hired at midday get together with the workers hired in the morning to form a kind of biblical laborers union, where they both complain loudly about how unfair it is that people hired at the end of the day, who did far less work, got paid the same wage, which devalues the work done by the rest. Equal pay for equal work is what they want, and it's hard not to sympathize.

What does the master of the vineyard tell them? In essence, to politely go fuck yourselves. It's my vineyard and my money, and if you don't like it, you can bugger off.

There's no overt discussion of the idea of social assistance in the parable. The master doesn't kindly explain that sometimes everybody needs a helping hand; that his accountant prefers to handle day laborers on a daily wage, rather than an hourly one because it simplifies bookkeeping. He doesn't tell them that someday they might be glad to get a full day's pay for a few hours work someday, because after all, it might not have been their fault that they weren't hired earlier. (Perhaps it was. The issue doesn't come up.)

What did come across to me, though, is the idea that what looks like rational arguments for fair and equal treatment was really just personal selfishness; the kind of greed exhibited by the famous dog with a bone, who sees his own reflection with its own bone and loses his own in an attempt to double his gains.

Theoretically the complaining workers could have been appeased either by paying the workers hired later less, or by extrapolating the hourly rate paid to those workers hired latest, and paying the earlier workers a higher rate commensurate with the hours worked. That's what they really wanted, of course. They had agreed to a daily wage for a day of work, and then got greedy when they saw that someone else got the same for doing less. They have nothing to gain from seeing those workers other workers get paid less (unless we think they were all economists and they were arguing for a fair and transparent labor market).

That's what I think of when I see the homeowners who took fixed rate mortgages, who are fiscally conservative, and have reactions ranging from puzzlement to unbridled rage at the thought of those who did not resist those temptations (or perhaps sought them out specifically for the advantages they thought they could be afforded) being given government assistance of some sort in order to keep their homes. This assistance, to them, seems more like a reward than help. It reinforces incorrect behavior (potentially leading to its repetition). Those in distress are also seen as bearing part, perhaps the greater part, of the blame not only for their own personal situations, but for the crisis in general. If nobody ever took those kinds of loans, this line of thinking goes-- loans with variable rates, loans that were too large compared to income-- then banks couldn't have gotten themselves in trouble.

There are several problems with each of these lines of thinking when evaluating what to do about the current economic situation.


The first is that the assignation of blame is sometimes, but not always, useful when deciding what future action to take. A lot of this has to do with which side of an asymmetric relationship you're talking about. The relation between a bank offering a mortgage and an individual taking out a loan is asymmetric in two important ways: one is that the numeric ratio of borrowers to banks is many to one (there are many borrowers for each bank or bank management) and that the ratio of power and influence also lies with the bank (since the bank has the power to disapprove the loan over the wishes of the borrower, while the borrower does not have the power to approve the loan over the objection of the bank.)

This relationship ebbs and shifts with the markets, of course. Sometimes it's a buyer's market, where there are many banks willing to offer mortgages and they compete with each other, generally leading to better terms for borrowers. At other times, credit is scarce, terms are hard, and finding credit is difficult. However, in all situations there are more borrowers than there are banks.

The decision making criteria applied by a borrower taking out a loan is applied only once by the borrower for each mortgage they take. Those criteria, and how they inform that individual decision, have a lot to say about what will happen to the borrower in the future, but because of the asymmetric nature of the relationship with the bank, it has much less to say about what will happen to the bank in the future.

The decision making criteria applied by the bank giving out the loan has a great deal to say not only about what happens to the bank, but also what happens to the borrower. This is an expression of the asymmetric nature of the relationship between borrower and bank. In short, when assinging blame or credit for the decision making process, assigning blame (even where it exists) on the side of the borrower is not useful. Influencing individual borrowers is not an effective method of managing the situation. Influencing banks and bank managers, however, is-- because there are fewer of them, and because their decisions have greater impact on both parties, as opposed to individual borrower decisions, which have less impact, mostly on themselves (when taken individually). Even when taken as a whole, again since the banks' decisions trump the borrowers', while it may be possible to apportion blame for bad loans between the two parties, only the blame assigned to the banks is useful because only it has predicative power and only it provides a method for managing how those processes change in the future-- by, say, requiring banks who get bailout money to either change their policies, change their managements, or both.

This flies in the face of the gut reactions of most Americans, many of whom feel distressed borrowers are just as much to blame for their problems as the banks are, and who feel that assisting them at best sends the wrong message and at worst encourages the same kind of behavior in the future, thus perpetuating the problem.


The second problem ties in closely with the parable of the talents: the perception that wages are a reward. Bailouts, whether they be in the form of cash to banks or reevaluations of home values that allow distressed borrowers to keep the homes they purchased with ill-advised loans, are also perceived as rewards, mostly because they take the same form (cash or assets) that rewards do.

This is the other side of the coin. Many commenters at the Newsvine site wanted to know why someone who at best made a mistake, and took a loan they could not afford, should be given a reward for that mistake, whereas people who avoided the mistake get nothing.

This is exactly the complaint of the morning laborers in the parable, except a more extreme form. Those laborers at least were getting paid; all the haggling is really just about the rate. In this case, distressed borrowers are getting something, while nondistressed borrowers (or indeed homeowners who have no debt) are getting nothing. It's hard not to see that in the light of a reward or prize, similar to winning the lottery, and to perceive it as deeply unfair.

Again the problem is a problem of scale and asymmetric relationships. One can look at the problem as a question to the government like this: You have $X to give out in times of crisis, and you have two citizens. One did everything right, the other did everything wrong. Arbitrarily, we say that you cannot divide $X; you must assign the entire amount to one citizen or the other. This is the light in which the distressed homeowner assistance is viewed; it is seen as equivalent to giving $X to the citizen who did things wrong, and that feels like compounding one mistake with another. On an individual basis, it is.

The problem with doing what feels right on an individual basis-- giving $X not as assistance to the citizen who messed up, but as a reward to the citizen who did not, is that this method doesn't scale. Giving everyone who is doing all right, despite the crisis, while giving nothing to those in distress, does nothing to help the economy at large. An equivalent amount of assistance to those in no particular dire straits will not give the same benefit to the economy as it does when given to people who have less, or to people who have nothing. And the goals of government in this case need to be focused on what produces the best macroeconomic effect, not what produces the best moral effect or the best psychological effects.

In the example above, for instance, the family that is doing all right might receive a cash payment. In the current climate, are they apt to run out and spend it, putting that money to work in the economy, either to buy goods or to invest? Probably not. The better off they are, the less any given arbitrary amount of cash is worth to them, and proportionally the less likely they are to make any changes in their spending habits as a result of receiving the windfall. As economic stimulus, such a payment is wasted.

For those in dire straits, it could well be the difference between having a home and a car, and thus being able to have a job, and clothe and feed themselves and their family, or finding themselves unable to do those things. Most people I think generally look upon living from hand to mouth as a bad thing (regardless of how many people actually do it) but in this case, the financial assistance is best used as given to those who are living that way-- who are closer to the threshold of making it or not making it, even if that situation is a direct result of their own flawed decision making-- because they have little choice but to put that money right back into the economy because they don't have the luxury of stuffing it into the mattress. Its best use is put towards making sure those people don't become a burden on the system somewhere else-- by needing food stamps, collecting unemployment, or going on welfare.


Finally we come down to semantics. The words used to define these programs are words like "assistance" and the even simpler "help".

The word used by those who are puzzled or enraged by such programs is "reward".

A reward is something you get when you've done something laudable-- when you've done what is right, what is expected (or more than that).

Help is something you get when you need it. It is not meritocratic, by design and definition. To judge it from a meritocratic perspective is to miss the point.

Of course, some people don't believe in such assistance at all, and many of them live in the United States. Compared to many other advanced nations, the US has one of the most conservative natures towards giving assistance, and it's not hard to see why many people feel that this is a critical component of the country's success to date.

To illustrate to me the necessity and moral responsibility to give help, I'll invent a parable of my own. It was inspired by that old joke about two campers in the woods. Before they went to sleep, the first camper wanted to show his brand new running shoes to his friend. The second camper asked what was the point of expensive running shoes out in the woods. "Because of bears," the first replied. "How are running shoes going to help you if we get attacked by a bear," the second wanted to know. "You can't outrun a bear," he said. "I don't have to outrun the bear, the first replied. I just have to outrun you."

With friends like that, who needs bears? The story that occurred to me though, is a little bit different. Imagine two hunters out in the woods, looking for bears to shoot. Suddenly, they come upon one, a huge monster of a bear, who rears up in front of them, and looks ready to attack.

The first hunter, closer to the bear, aims and fires his rifle, only to discover, to his shock and dismay, that he has forgotten to load it. The chamber is empty.

The second hunter is further back, in cover. The bear doesn't see him. His rifle is loaded and ready, and he has the bear in his sights. The bear is far enough away that he could easily wait until the bear takes a swipe at the first hunter before firing. He is, essentially, in no danger.

Hopefully you're appalled. Firing now is what the hunter should do. The fact that the first hunter has made a mistake, and that the bear is poised to punish him for making this mistake-- is not relevant to the decision. Certainly he can chide his friend for his greivous error after the bear is dead, and if the first hunter is capable, he will learn from his mistake. Both hunters will return home alive.

(To make this a fairer comparison, let's make bullets very, very expensive-- to help give our second hunter more incentive to be stingy with the trigger.)

There are doubtless cultures in the world that say it's fine to let individuals, especially adults, suffer the consequences of their own actions. It is morally correct, encourages good behavior while punishing bad, and moves society in the proper direction. I am not sure that is the kind of society I want to have. There has to be a way to give people help while at the same time making it clear what kind of behavior is acceptable and expected-- both on the part of borrowers and banks. The system itself should be designed to do that-- which means that markets are like a game, and games should have rules, and that the idea of completely free, unfettered, unregulated markets being an unqualified good is a load of hogwash, because it's quite apparent that players in markets are in asymmetric relationships and left to their own devices function more like casinos where over time the house always wins (and when the house loses, it gets a bailout and then keeps the assistance, rather than splitting it with patrons, and goes back to business as usual).