Taxes Needn’t Discourage Philanthropy

HOW high can taxes go? In 1944, the federal personal income tax rate reached 94 percent.

You might expect that such a high rate would lead to economic disaster or class warfare — or both. But it didn’t. Despite it, people prospered back then, and at least in some respects, American society was harmonious.

World War II was raging, and perhaps because of it, people seemed to be more giving, while the government more actively encouraged altruistic acts. There are important lessons to be learned from that time.

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Bubbles without Markets

A speculative bubble is a social epidemic whose contagion is mediated by price movements. News of price increase enriches the early investors, creating word-of-mouth stories about their successes, which stir envy and interest. The excitement then lures more and more people into the market, which causes prices to increase further, attracting yet more people and fueling “new era” stories, and so on, in successive feedback loops as the bubble grows. After the bubble bursts, the same contagion fuels a precipitous collapse, as falling prices cause more and more people to exit the market, and to magnify negative stories about the economy.

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Reviving Real Estate Requires Collective Action

IMAGINE that you are watching an outdoor theater production while sitting on the grass. You have difficulty seeing, so you prop yourself up on your knees. Soon everyone behind you does the same. Eventually, most people are kneeling or standing, yet they are less comfortable than they were before and have no better view. Everyone should sit down, and everyone knows it, but no one does.

This is a collective action problem, a phenomenon that is, unfortunately, all too common. At the moment, the trouble in our real estate markets and the drag these markets are placing on our entire economy may be understood as a collective action problem. In a nutshell, mortgage lenders need to write down the amounts owed by individual homeowners — that is, let everyone sit down and relax — but the different stakeholders have been unable to reach an agreement, even if it is in their common interest.

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Speech to Finance Graduates

NEW HAVEN – At this time of year, at graduation ceremonies in America and elsewhere, those about to leave university often hear some final words of advice before receiving their diplomas. To those interested in pursuing careers in finance – or related careers in insurance, accounting, auditing, law, or corporate management – I submit the following address:

Best of luck to you as you leave the academy for your chosen professions in finance. Over the course of your careers, Wall Street and its kindred institutions will need you. Your training in financial theory, economics, mathematics, and statistics will serve you well. But your lessons in history, philosophy, and literature will be just as important, because it is vital not only that you have the right tools, but also that you never lose sight of the purposes and overriding social goals of finance.

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How National Belt-Tightening Goes Awry

WHY is there such strong political support for fiscal austerity, for government cuts and layoffs, at a time of widespread unemployment?

Maybe it’s because we have the wrong metaphor stuck in our minds, and it’s framing policy choices in a misleading way.

Clearly, metaphors and other symbols carry real weight in our thinking, as has been shown by George Lakoff, a cognitive linguist at the University of California, Berkeley, and Mark Johnson, a philosopher at the University of Oregon. In their 1980 book, “Metaphors We Live By,” they argue, “Our ordinary conceptual system, in terms of which we both think and act, is fundamentally metaphorical in nature.”

Our metaphors are like the icons on our computer screen, little pictures by which we condense complexities into manageable packets to refer to in our decision-making. Our brains may be hard-wired for them.

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The Property Predicament

What would happen if, as so many people are hoping, home prices were to go up dramatically again as they did in the early 2000s? Would such a change really benefit society?

People who most ardently desire this are homeowners who are underwater on their mortgages, who took out mortgages at the peak of the boom and now find that their homes are worth less than they owe on them. They would just feel relieved to get out of the red as soon as possible.

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Democratize Wall Street, for Social Good

MANY finance students and members of the Occupy Wall Street movement have a great deal in common: a deep interest in democratizing Wall Street.

At Yale, where I have been teaching for 25 years, I’ve been hearing a great deal lately from my students about financial innovations linked to social media. One such innovation, called crowdfunding, is embedded in the jobs bill signed into law by President Obama on Thursday. The idea involves Web sites that help many investors contribute small amounts of capital to projects that they read about online, and that might otherwise be starved for money.

Though the concept is being tried, in different ways, on sites like Kickstarter.com and Kiva.org, it is still very much an experiment, and its real-world benefits for small investors are still uncertain.

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