Robin Hanson on the real multiplier

by on April 14, 2014 at 2:45 pm in Economics, Philosophy | Permalink

Yes doing things now can have good side effects, but unless something changes in the side-effect processes, doing things later should have exactly the same sort of side effects. And because of positive interest rates, you can do more later, and thus induce more of those good side effects. (Also, almost everyone can trade time for money, and so convert money or time now into more money or time later.)

For example, if you can earn 7% interest you can convert $1 now into $2 a decade from now. Yes, that $1 now might lend respectability now, induce others to copy your act soon, and induce learning by the charity and its observers. But that $2 in a decade should be able to induce twice as much of all those benefits, just delayed by a decade.

In math terms, good side effects are multipliers, which multiply the gains from your good act. But multipliers are just not good reasons to prefer $1 over $2, if both of them will get the same multiplier. If the multiplier is M, you’d just be preferring $1M to $2M.

…I think one should in general be rather suspicious of investing or donating to groups on the basis that they, or you, or now, is special. Better to just do what would be good even if you aren’t special. Because usually, you aren’t.

There is more here.

1 Adrian Ratnapala April 14, 2014 at 3:11 pm

A consistent theme with Hanson is his belief in the magic of compound interest. He seems to believe that if only the laws were more just, we would be able to create real gains by just passively putting money in a piggy bank. Does he explain where this free lunch comes from?

The best explanation I can think of is: saving money == lending money, and if everyone who doesn’t have a very good use for money is out lending it, then there is more money for borrowers who *do* have good use for it. But that seems to be the old crowding-out argument against the multiplier. And presumably Keynesians have an equally old counter-argument.

2 Doug April 14, 2014 at 4:29 pm

That’s not a bad point. Corporate profits rose precipitously in the past decade, but they don’t seem to be doing anything with the excess cash besides holding it in short-term treasuries or buying back stock. It may be the case that returns to aggregate investment quickly diminish. One could think of most investment on the margin as upgrading economic infrastructure to utilize new technologies. If fundamental technological innovation is mostly exogenous to investment levels, then there’s simply not that much to do with savings beyond a certain level.

3 Thomas April 14, 2014 at 8:17 pm

The free lunch comes from the exchange of goods which inherently increases wealth. Keynesians aren’t out there arguing against stimulus, and lending is just “stimulus with a price”.

4 Jeff R. April 14, 2014 at 3:28 pm

The assumption that interest rates modulo bank stability is going to consistently outpace inflation doesn’t seem obvious or risk-free here.

5 Jim Clay April 14, 2014 at 8:01 pm

Yes. It annoys me these days when I see the famous “7%” assumption. I tend to associate it with stock market pseudo-con men.

6 Robin Hanson April 15, 2014 at 5:12 am

7% was just an example number, not a prediction.

7 Millian April 14, 2014 at 3:33 pm

What useful lessons does the last paragraph teach us? Do good? We knew that. Who argues for donations from the position of “not good but special”? Is it just a pretty poor excuse to oppose a carbon tax?

8 Donald A. Coffin April 14, 2014 at 11:20 pm

Actually, you *can* interpret his argument to suggest that it’s *always* no worse, and may be better, to hold your donations until tomorrow…but, as CCR reminds us “…tomorrow never comes…”

9 Joe Smith April 14, 2014 at 3:35 pm

Lets see: the risk free rate of return is the market clearing rate taking into account everyone’s personal discount rate. Given the distribution of capital, and the low level of savings among 80% of the population we can safely assume that most people have a personal discount rate higher than the market rate of return.

I can invest my money at the market rate of return and spend it later doing good works. But given that most personal discount rates are higher than the market, I create more present value utility by spending the money now.

If we spend money on things like technology we advance not just the discovery of any individual technologies now but potentially permanently advance human progress by some amount for ever..

10 ummm April 14, 2014 at 3:38 pm

I don’t get the connection between the multiplier, donations, and being special

11 Doug April 14, 2014 at 4:32 pm

Assuming stable capital markets and a proper legal system, one can “choose” to spend their charitable efforts in 2014, 2030, 2114 or 3014. The only difference is between donating the money to charity now, or waiting investing the money for X years and donating it at a future date. Since almost all charitable donations are immediate, i.e. there are very few charitable trusts that are simply investing the money for a future date, that suggests that most people think the present time is special compared to the future.

12 byomtov April 14, 2014 at 4:43 pm


Doesn’t that imply that you should never donate, since you can always wait ten years for your money to double?

Also, the equilibrium rate being 7% does not mean that all projects, for-profit and philanthropic, return 7%. Some return more, else why would anyone pay 7%?

If there are donations that will return more than the current rate, measured in social benefits, why not donate now?

I don’t get the argument. Then, again, I seldom get Hanson’s “brilliancies.”

13 Thomas April 14, 2014 at 8:21 pm

“If there are donations that will return more than the current rate,”

Which ones are those, exactly? While you’re at it, could you hook me up with your guaranteed method to beat the stock market as well?

14 byomtov April 14, 2014 at 8:56 pm

Tell me something.

Why do companies ever borrow at the market rate of interest to finance various projects? Isn’t it because they think those projects will returm more than the interest cost? Of course they are wrong sometimes, but if they are wrong too often they go out of business. So it’s a metter of expectations and judgment.

Why shouldn’t the same thing apply to philanthropic activities? It should of course, and it does.

No one can be sure what the returns will be, but there is such a thing as reasonable expectations.

15 Willitts April 14, 2014 at 11:38 pm

The main benefit of donations is always tax alpha. Altruism is a side effect. It is a way to gain control over what would otherwise be a gift to government bureaucrats.

In many instances, a tax paid later is a tax reduced.

16 Joe Smith April 14, 2014 at 4:53 pm

“Since almost all charitable donations are immediate”

I think a lot of charitable money goes into long term trusts and endowments. The gift to the trust may be immediate but the expectation is that the money will be spent over a very long period of time.

17 Max Tower April 14, 2014 at 3:50 pm

What should we do if the inflation rate is higher than the risk free rate?
7% is a big assumption here.

18 Jim Bang April 14, 2014 at 4:27 pm

Whatever assumptions we might want to make about (real) interest rates, the only reason those rates of return exist is because there are projects out there for which undertaking them now have sufficiently great returns that the organizations undertaking those projects can profitably pay that rate of interest. Is this entire piece something of a fallacy of composition?

19 Adrian Ratnapala April 14, 2014 at 4:46 pm

Remember that spending now means giving to charity, spend for relief of poor people, which is a good thing in itself but uses up wealth. Saving means lending to someone who he assumes has a means of increasing the total capital of the human species. Hanson’s point long-running point seems to be that relieving poor people now does less good in the long run that the in total human capital which must be sacrificed to achieve it.

This particular post is then a response to some counterargument along the lines of “aahh, but because of the multiplier, you can relieve the poor now while still increasing the total capital of the species.”

20 Donald A. Coffin April 14, 2014 at 11:24 pm

Well, that depends on your definition of “charity.” What if I contribute to an “endowment* designed to provide tuition subsidies to post-secondary education for people from poor households? Is that “charitable”, or not? I think Hanson is arguing against charity, because he’s against charity, and any stick will work to beat it worth…even a rotten stick.

21 Robin Hanson April 15, 2014 at 5:17 am

If those poor households can’t obtain tuition loans, that education is probably a poor investment. How is my arguing for one way of spending on charity relative to another evidence that I’m against charity?

22 Alan April 14, 2014 at 4:51 pm

Keep the money. Poor people are poor either because they chose the wrong parents (am I supposed to fix that?) or because they deserve to be poor.

23 Marie April 15, 2014 at 10:26 am

Like the blind guy that was blind either through his own sin or that of his parents, I remember that one!

24 Jamie April 14, 2014 at 4:59 pm

1) As others have noted, there is no clear reason to wait a decade. Why not 5?

2) I’d also like to see where he’s earning a risk-free 7%.

3) I am now convinced that I should hold off eating for a decade, because just think of how much more I’ll be able to eat then!

25 byomtov April 14, 2014 at 8:57 pm


26 rayward April 14, 2014 at 5:02 pm

Robin Hanson is Chauncey Gardiner.

27 Ian Maitland April 14, 2014 at 5:12 pm

Here is a related case for those who like ethical puzzles: “Paul is not well off, but he dedicates his life to relieving the suffering of those worse off than himself. He enjoys few luxuries. Richard is vastly wealthy. He enjoys many luxuries, and does almost nothing for the poor, except that he makes a donation each year to OXFAM [or UNICEF]. This donation is much more effective than Paul’s work in relieving the suffering of the poor” (Roger Crisp, “Teachers in an age of transition: Peter Singer and J.S. Mill,” in Dale Jamieson (ed.) Singer and His Critics (Blackwell, 1999)).

28 KLO April 14, 2014 at 5:56 pm

Let me add to your example. Paul does not believe in God, but goes to church regularly because he thinks it serves as a good example to those around him. Richard never goes to church, but believes in God with his whole heart. Richard makes his donation to OXFAM under the mistaken belief that OXFAM is an organization dedicated to promoting prostitution and recreational heroine use among children. Paul dies and goes to hell. Richard dies and finds himself graciously accepted into heaven.

29 KLO April 14, 2014 at 5:57 pm

Autocorrect: Heroin.

30 byomtov April 14, 2014 at 8:58 pm

What is the puzzle?

31 Tracy W April 15, 2014 at 4:40 am

I’m with byomtov

32 Marie April 14, 2014 at 9:59 pm

Oh, who doesn’t love an ethical puzzle from Peter Singer?!

How about, Paul is not well off, but he takes half his breakfast and gives it to the homeless guy on the corner every morning.

Richard is vastly wealthy, and he makes no personal sacrifices in standard of living but he takes a million a year that is an excess he can’t give to an heir (since Richard is responsible and doesn’t believe in procreating) and donates it to PETA.

The people who write these things define Richard’s donation as much, much, much more effective than Paul’s work. Because they say so.

The question is, why can’t we all be more like Richard? And should we just socially disapprove of Paul, or do we need to write some new anti-Paul laws?

33 Dr. D April 14, 2014 at 11:44 pm

In the case stated above I think I would stick to the teaching of Jesus in the parable of the widow’ smite.

34 dan1111 April 15, 2014 at 6:31 am

There is no ethical puzzle here. Paul is making the most of his available opportunities to help people, while Richard is not. Thus, society rightly thinks more highly of Paul.

We hold people in high regard for their character, not a simple quantification of the total good done. This is not illogical, even in a purely utilitarian sense, because character is a better predictor of what people will do in the future.

35 Joe Smith April 14, 2014 at 5:35 pm

As a side note: A lot of the stuff that is getting passed off as considered commentary makes me want to cry – or shout.

36 DC April 14, 2014 at 5:55 pm

This analysis is fundamentally flawed because it does not take into account the compounding effects of the charitable donation. The benefit from the donation still grows even though it is not monetary. For example, if the money is used to expand a school, all the people educated are out working more effectively, better supporting their families and maybe even donating from their increased earnings to “pay it forward” 7 years earlier if you give today instead of investing.

37 Bill April 14, 2014 at 6:13 pm

Agree. You can’t go backwards in time to give the kid, eight years from now, the education they should have received today. It may even be cheaper, in human capital terms, to do it today rather than rehabilitate tomorrow.

38 Thomas April 14, 2014 at 8:27 pm

Sure, and in sometimes this may be the case.

It’s hard to argue that investing in something like Vanguard Total Stock Market isn’t going to have a higher rate risk-adjusted rate of return than investing in a single charity. Two reasons: VTSM wins on diversification, and VTSM wins on self-interest, which as some people should pause to reflect on occasionally, drives wealth creation.

(wealth being that thing that we’d like to have in order to donate)

39 JFA April 14, 2014 at 6:44 pm

I’ve seen Robin say this many, many times. It seems that this is just an optimal timing problem, but he’s only considering the benefits of waiting while ignoring the costs of waiting. Robin’s a smart guy, so maybe I’m the one missing something. But I’ve never seen him discuss the costs of waiting.

40 ezra abrams April 14, 2014 at 8:41 pm

A humanities major looks at this and says, Sokal Affair in reverse

41 ricardo April 14, 2014 at 10:10 pm

Nice one (says an econ major).

42 Donald A. Coffin April 14, 2014 at 11:19 pm

Not having read all the comments…

So it makes sense to apply that 7% (or you-pick-it) rate of return to the hypothetical benefits that might be generated by *not* acting now (presumably we are applying that rate of return to the real assets used, not to the money not spent?). But we don’t discount the value of the hypothetical future benefits back to the present (using the same 7%–or, again, what interest rate you will)? Am I the only one who finds this to be a curious procedure?

43 prior_approval April 15, 2014 at 12:09 am

So, if this is true, it would benefit those that contribute to the Mercatus Center to not donate any money to it at all for the next decade.

To think I can finally agree with something proposed by a member of the Mercatus Center without any reservation at all.

Though it is also likely that the current donors to the Mercatus consider their donation’s ROI considerably higher than a mere doubling in a decade, meaning that no one connected to the Mercatus Center need fear a drop in their income.

44 dan1111 April 15, 2014 at 6:35 am

Why comment now? Why not ten years from now?

45 Yancey Ward April 15, 2014 at 11:43 am


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47 prior_approval April 15, 2014 at 5:05 am

Nice site for nice spam – but leave the SEO self-linking to the experts.

48 Lindsay April 16, 2014 at 9:49 pm

Isn’t this an argument for never doing anything, ever, at all?

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