Primate principles

The first version of the bill from the Treasury Department was a measly three pages. What has been passed by the Senate is a voluminous 450 pages. Did the lawmakers just want more trees to be chopped in order to pass the bill? Obviously not. Strangely enough, the answer might well lie in our primate past. The human species yearns for fairness when cooperative effort and rewards are at stake.

A team led by Frans de Waal, a primatologist at Emory University in Atlanta, Georgia, made some thought-provoking observations in their studies of primate behaviour with regard to cooperation, effort and reward. It went something like this; two monkeys, in separate enclosures, had to press a lever in order for both of them to receive a reward, say grapes. If one of them did not depress the lever, neither of them got anything. Turned out that as the rewards became more and more unequal there came a point when the monkey receiving the lesser share would stop cooperating. Hence, if they began with a 5-5 split out of 10 grapes and moved towards 10-0, at some point in that progression the monkey receiving less would stop cooperating.

This in a sense is irrational behaviour on the part of the monkey that doesn’t depress the lever: after all, it is undeniable that one grape is better than no grapes. But, the monkey receiving less would not cooperate simply because the sharing of the spoils was unfair, when the effort put in was identical.

This explains the brinkmanship over and expanding size of the bailout bill too. It was perceived as being extremely unfair from the beginning and has been getting fairer — and larger — as it has been getting approval from more folks. As an example, in order for the bill to get approval from the floor leaders in the US Congress, Bernanke and Paulson relented and included measures that capped unreasonably high executive salaries.

When the bill failed to pass the House, it was a bipartisan rejection. In the couple of days preceding the tabling of the bill in the US Congress, there was enormous campaigning in the media and the blogosphere against the bill. As The Wall Street Journal put it: “ it followed an intense outpouring of voter anger, fanned by politicians, interest groups and media on the left and right…. Voters opposed to the deal deluged Capitol Hill with letters, emails, phone calls and faxes over the past week. Fierce resistance from both ends of the political spectrum drove lawmakers to vote against the economic-rescue plan.” It went on to quote Darell Issa, a congressman from California saying that “the vast majority of my voters looked at this as a bailout for Wall Street.”

Further tinkering of the bill in favour of Main Street led to some sweeteners being added that may be responsible for the bill having been passed by the senate. These include sweeping changes in language; the limit of FDIC insured bank deposits from $100,000 to $250,000 to counter the impression gaining ground among depositors that you better have your money in big banks that are “too big to fail”. Smaller banks were nervous that their deposits might experience a flight. Modifying troubled mortgages, tax breaks for a much larger section of individuals and businesses being the prominent ones were the other changes. Finally, the whole bill is tied to insurance regulations changes in favour of those with mental health disorders, a long pending demand. This is Step 2 in the relenting process, which as The New York Times said, allowed lawmaker to “say they voted for increased protection for deposits at the neighborhood bank, income tax relief for middle-class taxpayers and aid for schools in rural areas.”

As can be seen, the whole process was an exercise in increasing the perceived fairness of the bailout bill. What is interesting is that many vociferous opponents in Main Street were well aware that the bill not being passed implied immense stress to the financial arteries, leading to a seizure of the financial system. Common citizens’ retirement money was at stake if the bill did not pass. Despite that, they preferred that possibility to the very real and apparently “unfair” bailing out of Wall Street. It is irrational behaviour to deliberately hurt one’s self-interest, but that is precisely why Homo Economicus is now under question. Humans don’t always place self interest above fairness.

Bernanke, Paulson, Pelosi and the rest could have done better for themselves had they consulted de Waal and his monkeys.

The writer is a Hyderabad based economist and oil-watcher expressexpressindia.com