Thursday, February 15, 2007

Helping People Help Themselves

February 14, 2007
Talking Points

Helping People Help Themselves

From “lather, rinse, repeat,” to how you invest for retirement, the way you do most things now is the way you’ll continue to do them. That all-too-human tendency to favor the familiar and resist change, called “status quo bias,” is a central finding of behavioral economics — a discipline that fuses psychology and economics. Behavioral economics has demonstrated that in money matters (as in life), people are motivated by impulses that are measurable and predictable — and often irrational. That won’t surprise anyone who ever threw good money after bad, succumbed to a fad or ate the whole thing. One of the founding fathers of behavioral economics, the late Amos Tversky of Stanford University, once quipped that the scientific exploration of human behavior illuminated what was already obvious to “advertisers and used car salesmen.”

And yet most economic models and the public policies they inspire still assume that human beings behave like Mr. Spock of “Star Trek.” According to the models, people are guided in their decision making by a consistently rational and highly reliable sense of their own best interest.

That notion is finally changing.

Behavioral economics first emerged some 30 years ago, most prominently with the research of Mr. Tversky and Daniel Kahneman of Princeton University. By the 1990s, the field was being popularized. In 1990 and again in 1997, for example, Money magazine used behavioral economics to create features and quizzes designed to explain why smart people make dumb money moves. In 2002, Mr. Kahneman won the Nobel Prize in economics for his contributions to behavioral economics. Increasingly, the field is attracting some of the brightest minds in economics, involving the nation’s major universities and think tanks, publications and conferences.

But it wasn’t until last year that behavioral economics first shaped public policy in a big way, via the pension reform law of 2006.

That breakthrough — and its implications — were largely hidden in the sausage-making process of passing the bill through Congress. But by applying behavioral economics to Americans’ well-known lack of savings for retirement, the new law serves as a primer on the discipline and how it may be used to shape various public policies.

I. Paving the Road to Riches

A key provision of the 2006 pension reform law allows an employer to automatically enroll employees in the company’s 401(k) retirement plan, rather than requiring them to sign up.

The idea for “auto-enrollment” came from research in behavioral economics showing that status quo bias is prominent among the factors that keep non-savers from participating fully in 401(k)s. The tendency to continue doing what one has always done — such as spending one’s paycheck rather than saving a portion of it — is often stronger than the rational arguments in favor of joining the 401(k). Procrastination only magnifies status quo bias.

Automatically enrolling all employees circumvents status quo bias — but not, it’s important to note, by usurping choice. Employees are free to opt out if they don’t want to participate. Once enrolled, however, status quo bias works for — not against — the goal of bigger nest eggs, because saving a part of each paycheck becomes the new norm, helping to ensure that workers stick with the savings program.

The 2006 pension law also contains a mechanism to help employees overcome “loss aversion” — a psychological phenomenon whereby people feel the pain of a loss more acutely than the joy of a gain. Loss aversion is one of the reasons that most employees are loath to ever increase the amount of money they contribute to their 401(k) once it is set: A bolstered payroll deduction may be perceived as a loss. So the new pension law provides for automatic escalation — employers who automatically enroll their employees are also allowed to regularly boost employees’ contribution levels, up to 6 percent of a worker’s pay.

Loss aversion is related to another common foible, dubbed the “endowment effect”: People “endow” their possessions, including their paychecks, with an inordinately high value, simply because they possess them. When it comes to savings behavior, the endowment effect predisposes people to value every dollar currently in their pocket far more than the opportunity to save some of those dollars for the future — a psychic recipe for coming up short in old age. By automatically escalating 401(k) contributions, say, when an employee gets a raise, loss aversion and the endowment effect are averted — and savings are increased.

Still another behavior addressed by the new pension law is “decision paralysis,” people’s tendency, when faced with too many choices, to decide not to decide. If choosing is unavoidable and the stakes are high — as is the case with 401(k) investing — many people will opt to play it safe by putting their money in low-yielding, low-risk accounts. That’s the best way for them to ease their troubled minds, but it probably won’t get them to a financially secure retirement.

So the pension law instructed the Department of Labor to issue guidance to employers on how to craft a standard investment option for employees who don’t want to choose among various funds. Offering automatic investment in a balanced, diversified fund ameliorates decision paralysis and, in the bargain, advances the public policy goal of making a financially-secure retirement attainable for workers.

II. Other Paths and Protections

Behavioral economics could enhance public policy in other areas as well. One example is labor relations, where ample research has underscored the importance of fairness in setting wages.

Another is the law. In situations involving monetary rewards, juries often have no way of arriving at a correct figure. They may be hindered by their abilities or by the novelty of a situation: How do you put a dollar amount on pain and suffering? A common response to such unknowns is what behavioral economists call “anchoring,” the inclination to seize on any given number as meaningful. Thus, the mere mention of a plaintiff’s potential award — say, $10 million — has been shown to influence juries’ ultimate decisions.

Consumer protection is an area where psychological phenomena have been largely overlooked, though that also may be changing. Behavioral economists have been invited to participate in a conference this spring at the Federal Trade Commission, which oversees consumer protection, on the implications of their research for government policy.

Behavioral economics has made strides in showing how consumers respond when faced with conditions that make it difficult to perceive the true price of a product or service. Those conditions, detailed in a recent paper by Jeffrey B. Liebman and Richard J. Zeckhauser, both of Harvard, include complexity (roaming rates on cell phones, for example), a disconnect between consumption and payment (as with water and electricity usage) or situations in which rules change frequently (as in a policy arena like taxes).

In such cases, the human mind naturally resorts to shortcuts, like averaging. Such use of elementary math, mental tricks and rules of thumb can be useful in coping with demands on one’s time and abilities. But it often leaves consumers with the sense of having made a more-or-less correct decision, when in reality it often leads to computational mistakes and other errors that work to their disadvantage.

Knowing this, might it be useful to require companies to show the full estimated cost of owning a product, rather than the cost of buying it? Take the Hewlett-Packard Deskjet 3747 Color Inkjet printer, for example, which retails for $29.99, The Harvard economist, David Laibson, recently calculated that the printer’s four-year cost is $2,400, when you include ink for about 20 black and white copies a day. Should that information be prominently disclosed?

III. Improving Public Policy

Behavioral economics could also be deployed to enhance public goals that we already are striving to meet. We tax cigarettes, for example, in part because we want to discourage consumption. High prices may deter young people from picking up the habit or give smokers an added incentive to stop. Many economists assume there is a limit to how high such taxes can go before they spawn a black market or impoverish low-income smokers who cannot quit, concerns which lead most tax authorities to limit tobacco taxes. But if there were no brakes on the enforceable level of cigarette taxes, it would be possible to compute a tax that would be adequate to snuff out most smoking.

Another antismoking tack explored by some behavioral economists picks up where “sin taxes” leave off.

Unlike standard economic models, which assume that smokers make a rational decision to smoke, behavioral economic models account for the irrational human tendency, known as “hyperbolic discounting,” to give too little weight to the future effects of current decisions. Hyperbolic discounting is akin to the biases that lead people not to save for retirement, but in the case of smoking it is intensified by an addictive short-term impulse (“I want a cigarette now”) that overwhelms most smokers’ desire to quit.

The distinction between the rational economic model and behavioral one is crucial, because if smoking is rational, there’s little justification for government intervention beyond preventing harm to others. Indeed, the need to protect nonsmokers has been the rationale for most anti-smoking rules.

But what about the harm to the people who would like to quit, but can’t? Clearly, most people know that they should quit (as they know they should save for retirement, or pursue any number of other long-term goals). Behavioral economics shows us that successful incentives must take into account biases that defeat rational commitments.

Working from that insight, behavioral economists at Harvard and Yale have recently proposed interventions designed to help smokers to self-regulate, in effect allowing them to choose in advance the legal restrictions on their cigarette purchases.

For example, the government could require special identification cards to buy cigarettes. The cards would be free of charge, so as to impose minimal inconvenience on people who want to smoke. But the need to apply, to carry the card and to present it when buying cigarettes imposes delays and other opportunities for would-be quitters to restrict their purchases. By choosing not to apply for a card or not to carry one, a smoker would be making a decision in the present that binds his or her options in the future. The aim is to tame the self-defeating tendency to discount the distant effects of today’s decisions and activities.

IV. The Politics of Behavioral Economics

Arguments against taxes, social safety nets and government regulation are generally premised on the notion that they distort the market by impeding the pursuit of rational self-interest, the presumed driver of economic activity.

In 2001, for example, President Bush’s rationale for massive tax cuts was to refund the budget surplus to the people, who, he said, would make better decisions on spending the money than the government would. The reasoning has a cocky appeal that meshes well with human beings’ intrinsic overconfidence, a trait that has been amply demonstrated in behavioral economics. But was Mr. Bush’s assertion true? Did it lead to the best policy? An alternative use of the surplus would have been to pay down federal debt, thereby reducing the government’s interest payments and freeing up money to pay the nation’s Social Security obligations to baby boom retirees. Did the spending of tax refunds do more good than strengthening Social Security would have?

Mr. Bush’s similar argument in favor of privatizing Social Security is that individuals, investing on their own, could amass more money for retirement than they would get from a government-run system. Again, this sounds appealing. But is it realistic? Is it wise?

By deflating arguments that are based on the primacy of rational self-interest, behavioral economics’ biggest impact may ultimately be on the terms of economic debate.

“The presumption that individual choices should be free from interference is usually based on the assumption that people do a good job of making choices, or at least that they do a far better job than third parties could do,” wrote Richard H. Thaler — another presumptive candidate for the Nobel Prize — and Cass R. Sunstein, both of the University of Chicago, in a recent essay. “As far as we can tell, there is little empirical support for this claim."

The question for policy makers is not whether people can be counted on to consistently make rational decisions that maximize their welfare — demonstrably, they cannot. The question is whether corporations or government or can do a better job.

And the challenge is to answer the question based on evidence, not unexamined beliefs.

At times, market solutions to market problems have clearly been effective, such as reducing acid rain by developing a system to trade pollution credits.

But if typical human biases undermine a policy goal, and those same biases present a profit opportunity — selling cigarettes, for example — it’s silly to pretend that the market will act as a corrective. “There’s no reason to think that markets always drive people to do what’s good for them,” Mr. Thaler was quoted saying in a University of Chicago Magazine feature on behavioral economics. “Markets also drive people to do what’s good for the people selling.”

Questions of if and when the government should decide are also loaded.

Most any government intervention seems objectionable if you assume that people usually make the best choices for themselves. That anti-government sentiment is intensified if you also believe that markets are impersonal, leading by some inexorable logic to optimal outcomes for society-at-large.

Behavioral economists reject those assumptions. But it doesn’t automatically follow that government solutions are inevitable or even desirable: Excessive regulation of economic activity would lead to a nanny state.

In their articles and in a forthcoming book, titled “Nudge,” Mr. Thaler and Mr. Sunstein suggest a middle ground. First, they point out the importance of acknowledging that in many situations, some person or entity must make choices that affect others.

Think back, for example, to the pension reform law. Before automatic enrollment, employers chose to require employees to enroll in a 401(k) plan. Because of the employer’s choice, an employee who did not enroll would contribute zero percent of salary to the plan. In other words, zero was the default contribution. Mr. Thaler and Mr. Sunstein point out that in situations where it seems that no one is making a controlling decision, it is usually because “the starting point appears so natural and obvious,” it is taken as a given. Automatic enrollment, however, is a different choice that establishes a different default position. Is steering the employee in the direction of participating objectionable? No, especially since the employee is free to opt out.

Which leads to their second point in the search for a middle way between hands-off government and the nanny state. If no coercion is involved, there is no justification for rejecting government interventions out of hand.

Policies that do involve coercion — taxation, for one — obviously require public support to be sustained. If the support dries up, the policy presumably will, too.

But it is a mistake to oppose tax-supported programs like Social Security or universal health care on the faulty assumption that everyone does better when individuals take their best shots in the marketplace.

Critics of behavioral economics are quick to point out that government officials are also human, subject to the same biases that trip up the rest of, and thus would be no better at making decisions than anyone else. That’s an oversimplification. Expertise, professionalism and experience work to mitigate biases, as do debate, discussion, deliberation and oversight. In a functioning democracy, we have a right to expect and demand those traits and processes in government, in which case, we could rely on government decisions, at times, more than our own.

This being a democracy, we could rely, but verify.

Lela Moore contributed research for this article.

Sunday, February 4, 2007

Being a good person

December 17, 2006

What Should a Billionaire Give - and What Should You?

What is a human life worth? You may not want to put a price tag on a it. But if we really had to, most of us would agree that the value of a human life would be in the millions. Consistent with the foundations of our democracy and our frequently professed belief in the inherent dignity of human beings, we would also agree that all humans are created equal, at least to the extent of denying that differences of sex, ethnicity, nationality and place of residence change the value of a human life.

With Christmas approaching, and Americans writing checks to their favorite charities, it's a good time to ask how these two beliefs -- that a human life, if it can be priced at all, is worth millions, and that the factors I have mentioned do not alter the value of a human life -- square with our actions. Perhaps this year such questions lurk beneath the surface of more family discussions than usual, for it has been an extraordinary year for philanthropy, especially philanthropy to fight global poverty.

For Bill Gates, the founder of Microsoft, the ideal of valuing all human life equally began to jar against reality some years ago, when he read an article about diseases in the developing world and came across the statistic that half a million children die every year from rotavirus, the most common cause of severe diarrhea in children. He had never heard of rotavirus. ''How could I never have heard of something that kills half a million children every year?'' he asked himself. He then learned that in developing countries, millions of children die from diseases that have been eliminated, or virtually eliminated, in the United States. That shocked him because he assumed that, if there are vaccines and treatments that could save lives, governments would be doing everything possible to get them to the people who need them. As Gates told a meeting of the World Health Assembly in Geneva last year, he and his wife, Melinda, ''couldn't escape the brutal conclusion that -- in our world today -- some lives are seen as worth saving and others are not.'' They said to themselves, ''This can't be true.'' But they knew it was.

Gates's speech to the World Health Assembly concluded on an optimistic note, looking forward to the next decade when ''people will finally accept that the death of a child in the developing world is just as tragic as the death of a child in the developed world.'' That belief in the equal value of all human life is also prominent on the Web site of the Bill and Melinda Gates Foundation, where under Our Values we read: ''All lives -- no matter where they are being led -- have equal value.''

We are very far from acting in accordance with that belief. In the same world in which more than a billion people live at a level of affluence never previously known, roughly a billion other people struggle to survive on the purchasing power equivalent of less than one U.S. dollar per day. Most of the world's poorest people are undernourished, lack access to safe drinking water or even the most basic health services and cannot send their children to school. According to Unicef, more than 10 million children die every year -- about 30,000 per day -- from avoidable, poverty-related causes.

Last June the investor Warren Buffett took a significant step toward reducing those deaths when he pledged $31 billion to the Gates Foundation, and another $6 billion to other charitable foundations. Buffett's pledge, set alongside the nearly $30 billion given by Bill and Melinda Gates to their foundation, has made it clear that the first decade of the 21st century is a new ''golden age of philanthropy.'' On an inflation-adjusted basis, Buffett has pledged to give more than double the lifetime total given away by two of the philanthropic giants of the past, Andrew Carnegie and John D. Rockefeller, put together. Bill and Melinda Gates's gifts are not far behind.

Gates's and Buffett's donations will now be put to work primarily to reduce poverty, disease and premature death in the developing world. According to the Global Forum for Health Research, less than 10 percent of the world's health research budget is spent on combating conditions that account for 90 percent of the global burden of disease. In the past, diseases that affect only the poor have been of no commercial interest to pharmaceutical manufacturers, because the poor cannot afford to buy their products. The Global Alliance for Vaccines and Immunization (GAVI), heavily supported by the Gates Foundation, seeks to change this by guaranteeing to purchase millions of doses of vaccines, when they are developed, that can prevent diseases like malaria. GAVI has also assisted developing countries to immunize more people with existing vaccines: 99 million additional children have been reached to date. By doing this, GAVI claims to have already averted nearly 1.7 million future deaths.

Philanthropy on this scale raises many ethical questions: Why are the people who are giving doing so? Does it do any good? Should we praise them for giving so much or criticize them for not giving still more? Is it troubling that such momentous decisions are made by a few extremely wealthy individuals? And how do our judgments about them reflect on our own way of living?

Let's start with the question of motives. The rich must -- or so some of us with less money like to assume -- suffer sleepless nights because of their ruthlessness in squeezing out competitors, firing workers, shutting down plants or whatever else they have to do to acquire their wealth. When wealthy people give away money, we can always say that they are doing it to ease their consciences or generate favorable publicity. It has been suggested -- by, for example, David Kirkpatrick, a senior editor at Fortune magazine -- that Bill Gates's turn to philanthropy was linked to the antitrust problems Microsoft had in the U.S. and the European Union. Was Gates, consciously or subconsciously, trying to improve his own image and that of his company?

This kind of sniping tells us more about the attackers than the attacked. Giving away large sums, rather than spending the money on corporate advertising or developing new products, is not a sensible strategy for increasing personal wealth. When we read that someone has given away a lot of their money, or time, to help others, it challenges us to think about our own behavior. Should we be following their example, in our own modest way? But if the rich just give their money away to improve their image, or to make up for past misdeeds -- misdeeds quite unlike any we have committed, of course -- then, conveniently, what they are doing has no relevance to what we ought to do.

A famous story is told about Thomas Hobbes, the 17th-century English philosopher, who argued that we all act in our own interests. On seeing him give alms to a beggar, a cleric asked Hobbes if he would have done this if Christ had not commanded us to do so. Yes, Hobbes replied, he was in pain to see the miserable condition of the old man, and his gift, by providing the man with some relief from that misery, also eased Hobbes's pain. That reply reconciles Hobbes's charity with his egoistic theory of human motivation, but at the cost of emptying egoism of much of its bite. If egoists suffer when they see a stranger in distress, they are capable of being as charitable as any altruist.

Followers of the 18th-century German philosopher Immanuel Kant would disagree. They think an act has moral worth only if it is done out of a sense of duty. Doing something merely because you enjoy doing it, or enjoy seeing its consequences, they say, has no moral worth, because if you happened not to enjoy doing it, then you wouldn't do it, and you are not responsible for your likes and dislikes, whereas you are responsible for your obedience to the demands of duty.

Perhaps some philanthropists are motivated by their sense of duty. Apart from the equal value of all human life, the other ''simple value'' that lies at the core of the work of the Gates Foundation, according to its Web site, is ''To whom much has been given, much is expected.'' That suggests the view that those who have great wealth have a duty to use it for a larger purpose than their own interests. But while such questions of motive may be relevant to our assessment of Gates's or Buffett's character, they pale into insignificance when we consider the effect of what Gates and Buffett are doing. The parents whose children could die from rotavirus care more about getting the help that will save their children's lives than about the motivations of those who make that possible.

Interestingly, neither Gates nor Buffett seems motivated by the possibility of being rewarded in heaven for his good deeds on earth. Gates told a Time interviewer, ''There's a lot more I could be doing on a Sunday morning'' than going to church. Put them together with Andrew Carnegie, famous for his freethinking, and three of the four greatest American philanthropists have been atheists or agnostics. (The exception is John D. Rockefeller.) In a country in which 96 percent of the population say they believe in a supreme being, that's a striking fact. It means that in one sense, Gates and Buffett are probably less self-interested in their charity than someone like Mother Teresa, who as a pious Roman Catholic believed in reward and punishment in the afterlife.

More important than questions about motives are questions about whether there is an obligation for the rich to give, and if so, how much they should give. A few years ago, an African-American cabdriver taking me to the Inter-American Development Bank in Washington asked me if I worked at the bank. I told him I did not but was speaking at a conference on development and aid. He then assumed that I was an economist, but when I said no, my training was in philosophy, he asked me if I thought the U.S. should give foreign aid. When I answered affirmatively, he replied that the government shouldn't tax people in order to give their money to others. That, he thought, was robbery. When I asked if he believed that the rich should voluntarily donate some of what they earn to the poor, he said that if someone had worked for his money, he wasn't going to tell him what to do with it.

At that point we reached our destination. Had the journey continued, I might have tried to persuade him that people can earn large amounts only when they live under favorable social circumstances, and that they don't create those circumstances by themselves. I could have quoted Warren Buffett's acknowledgment that society is responsible for much of his wealth. ''If you stick me down in the middle of Bangladesh or Peru,'' he said, ''you'll find out how much this talent is going to produce in the wrong kind of soil.'' The Nobel Prize-winning economist and social scientist Herbert Simon estimated that ''social capital'' is responsible for at least 90 percent of what people earn in wealthy societies like those of the United States or northwestern Europe. By social capital Simon meant not only natural resources but, more important, the technology and organizational skills in the community, and the presence of good government. These are the foundation on which the rich can begin their work. ''On moral grounds,'' Simon added, ''we could argue for a flat income tax of 90 percent.'' Simon was not, of course, advocating so steep a rate of tax, for he was well aware of disincentive effects. But his estimate does undermine the argument that the rich are entitled to keep their wealth because it is all a result of their hard work. If Simon is right, that is true of at most 10 percent of it.

In any case, even if we were to grant that people deserve every dollar they earn, that doesn't answer the question of what they should do with it. We might say that they have a right to spend it on lavish parties, private jets and luxury yachts, or, for that matter, to flush it down the toilet. But we could still think that for them to do these things while others die from easily preventable diseases is wrong. In an article I wrote more than three decades ago, at the time of a humanitarian emergency in what is now Bangladesh, I used the example of walking by a shallow pond and seeing a small child who has fallen in and appears to be in danger of drowning. Even though we did nothing to cause the child to fall into the pond, almost everyone agrees that if we can save the child at minimal inconvenience or trouble to ourselves, we ought to do so. Anything else would be callous, indecent and, in a word, wrong. The fact that in rescuing the child we may, for example, ruin a new pair of shoes is not a good reason for allowing the child to drown. Similarly if for the cost of a pair of shoes we can contribute to a health program in a developing country that stands a good chance of saving the life of a child, we ought to do so.

Perhaps, though, our obligation to help the poor is even stronger than this example implies, for we are less innocent than the passer-by who did nothing to cause the child to fall into the pond. Thomas Pogge, a philosopher at Columbia University, has argued that at least some of our affluence comes at the expense of the poor. He bases this claim not simply on the usual critique of the barriers that Europe and the United States maintain against agricultural imports from developing countries but also on less familiar aspects of our trade with developing countries. For example, he points out that international corporations are willing to make deals to buy natural resources from any government, no matter how it has come to power. This provides a huge financial incentive for groups to try to overthrow the existing government. Successful rebels are rewarded by being able to sell off the nation's oil, minerals or timber.

In their dealings with corrupt dictators in developing countries, Pogge asserts, international corporations are morally no better than someone who knowingly buys stolen goods -- with the difference that the international legal and political order recognizes the corporations, not as criminals in possession of stolen goods but as the legal owners of the goods they have bought. This situation is, of course, beneficial for the industrial nations, because it enables us to obtain the raw materials we need to maintain our prosperity, but it is a disaster for resource-rich developing countries, turning the wealth that should benefit them into a curse that leads to a cycle of coups, civil wars and corruption and is of little benefit to the people as a whole.

In this light, our obligation to the poor is not just one of providing assistance to strangers but one of compensation for harms that we have caused and are still causing them. It might be argued that we do not owe the poor compensation, because our affluence actually benefits them. Living luxuriously, it is said, provides employment, and so wealth trickles down, helping the poor more effectively than aid does. But the rich in industrialized nations buy virtually nothing that is made by the very poor. During the past 20 years of economic globalization, although expanding trade has helped lift many of the world's poor out of poverty, it has failed to benefit the poorest 10 percent of the world's population. Some of the extremely poor, most of whom live in sub-Saharan Africa, have nothing to sell that rich people want, while others lack the infrastructure to get their goods to market. If they can get their crops to a port, European and U.S. subsidies often mean that they cannot sell them, despite -- as for example in the case of West African cotton growers who compete with vastly larger and richer U.S. cotton producers -- having a lower production cost than the subsidized producers in the rich nations.

The remedy to these problems, it might reasonably be suggested, should come from the state, not from private philanthropy. When aid comes through the government, everyone who earns above the tax-free threshold contributes something, with more collected from those with greater ability to pay. Much as we may applaud what Gates and Buffett are doing, we can also be troubled by a system that leaves the fate of hundreds of millions of people hanging on the decisions of two or three private citizens. But the amount of foreign development aid given by the U.S. government is, at 22 cents for every $100 the nation earns, about the same, as a percentage of gross national income, as Portugal gives and about half that of the U.K. Worse still, much of it is directed where it best suits U.S. strategic interests -- Iraq is now by far the largest recipient of U.S. development aid, and Egypt, Jordan, Pakistan and Afghanistan all rank in the Top 10. Less than a quarter of official U.S. development aid -- barely a nickel in every $100 of our G.N.I. -- goes to the world's poorest nations.

Adding private philanthropy to U.S. government aid improves this picture, because Americans privately give more per capita to international philanthropic causes than the citizens of almost any other nation. Even when private donations are included, however, countries like Norway, Denmark, Sweden and the Netherlands give three or four times as much foreign aid, in proportion to the size of their economies, as the U.S. gives -- with a much larger percentage going to the poorest nations. At least as things now stand, the case for philanthropic efforts to relieve global poverty is not susceptible to the argument that the government has taken care of the problem. And even if official U.S. aid were better-directed and comparable, relative to our gross domestic product, with that of the most generous nations, there would still be a role for private philanthropy. Unconstrained by diplomatic considerations or the desire to swing votes at the United Nations, private donors can more easily avoid dealing with corrupt or wasteful governments. They can go directly into the field, working with local villages and grass-roots organizations.

Nor are philanthropists beholden to lobbyists. As The New York Times reported recently, billions of dollars of U.S. aid is tied to domestic goods. Wheat for Africa must be grown in America, although aid experts say this often depresses local African markets, reducing the incentive for farmers there to produce more. In a decision that surely costs lives, hundreds of millions of condoms intended to stop the spread of AIDS in Africa and around the world must be manufactured in the U.S., although they cost twice as much as similar products made in Asia.

In other ways, too, private philanthropists are free to venture where governments fear to tread. Through a foundation named for his wife, Susan Thompson Buffett, Warren Buffett has supported reproductive rights, including family planning and pro-choice organizations. In another unusual initiative, he has pledged $50 million for the International Atomic Energy Agency's plan to establish a ''fuel bank'' to supply nuclear-reactor fuel to countries that meet their nuclear-nonproliferation commitments. The idea, which has been talked about for many years, is widely agreed to be a useful step toward discouraging countries from building their own facilities for producing nuclear fuel, which could then be diverted to weapons production. It is, Buffett said, ''an investment in a safer world.'' Though it is something that governments could and should be doing, no government had taken the first step.

Aid has always had its critics. Carefully planned and intelligently directed private philanthropy may be the best answer to the claim that aid doesn't work. Of course, as in any large-scale human enterprise, some aid can be ineffective. But provided that aid isn't actually counterproductive, even relatively inefficient assistance is likely to do more to advance human wellbeing than luxury spending by the wealthy.

The rich, then, should give. But how much should they give? Gates may have given away nearly $30 billion, but that still leaves him sitting at the top of the Forbes list of the richest Americans, with $53 billion. His 66,000-square-foot high-tech lakeside estate near Seattle is reportedly worth more than $100 million. Property taxes are about $1 million. Among his possessions is the Leicester Codex, the only handwritten book by Leonardo da Vinci still in private hands, for which he paid $30.8 million in 1994. Has Bill Gates done enough? More pointedly, you might ask: if he really believes that all lives have equal value, what is he doing living in such an expensive house and owning a Leonardo Codex? Are there no more lives that could be saved by living more modestly and adding the money thus saved to the amount he has already given?

Yet we should recognize that, if judged by the proportion of his wealth that he has given away, Gates compares very well with most of the other people on the Forbes 400 list, including his former colleague and Microsoft co-founder, Paul Allen. Allen, who left the company in 1983, has given, over his lifetime, more than $800 million to philanthropic causes. That is far more than nearly any of us will ever be able to give. But Forbes lists Allen as the fifth-richest American, with a net worth of $16 billion. He owns the Seattle Seahawks, the Portland Trailblazers, a 413-foot oceangoing yacht that carries two helicopters and a 60-foot submarine. He has given only about 5 percent of his total wealth.

Is there a line of moral adequacy that falls between the 5 percent that Allen has given away and the roughly 35 percent that Gates has donated? Few people have set a personal example that would allow them to tell Gates that he has not given enough, but one who could is Zell Kravinsky. A few years ago, when he was in his mid-40s, Kravinsky gave almost all of his $45 million real estate fortune to health-related charities, retaining only his modest family home in Jenkintown, near Philadelphia, and enough to meet his family's ordinary expenses. After learning that thousands of people with failing kidneys die each year while waiting for a transplant, he contacted a Philadelphia hospital and donated one of his kidneys to a complete stranger.

After reading about Kravinsky in The New Yorker, I invited him to speak to my classes at Princeton. He comes across as anguished by the failure of others to see the simple logic that lies behind his altruism. Kravinsky has a mathematical mind -- a talent that obviously helped him in deciding what investments would prove profitable -- and he says that the chances of dying as a result of donating a kidney are about 1 in 4,000. For him this implies that to withhold a kidney from someone who would otherwise die means valuing one's own life at 4,000 times that of a stranger, a ratio Kravinsky considers ''obscene.''

What marks Kravinsky from the rest of us is that he takes the equal value of all human life as a guide to life, not just as a nice piece of rhetoric. He acknowledges that some people think he is crazy, and even his wife says she believes that he goes too far. One of her arguments against the kidney donation was that one of their children may one day need a kidney, and Zell could be the only compatible donor. Kravinsky's love for his children is, as far as I can tell, as strong as that of any normal parent. Such attachments are part of our nature, no doubt the product of our evolution as mammals who give birth to children, who for an unusually long time require our assistance in order to survive. But that does not, in Kravinsky's view, justify our placing a value on the lives of our children that is thousands of times greater than the value we place on the lives of the children of strangers. Asked if he would allow his child to die if it would enable a thousand children to live, Kravinsky said yes. Indeed, he has said he would permit his child to die even if this enabled only two other children to live. Nevertheless, to appease his wife, he recently went back into real estate, made some money and bought the family a larger home. But he still remains committed to giving away as much as possible, subject only to keeping his domestic life reasonably tranquil.

Buffett says he believes in giving his children ''enough so they feel they could do anything, but not so much that they could do nothing.'' That means, in his judgment, ''a few hundred thousand'' each. In absolute terms, that is far more than most Americans are able to leave their children and, by Kravinsky's standard, certainly too much. (Kravinsky says that the hard part is not giving away the first $45 million but the last $10,000, when you have to live so cheaply that you can't function in the business world.) But even if Buffett left each of his three children a million dollars each, he would still have given away more than 99.99 percent of his wealth. When someone does that much -- especially in a society in which the norm is to leave most of your wealth to your children -- it is better to praise them than to cavil about the extra few hundred thousand dollars they might have given.

Philosophers like Liam Murphy of New York University and my colleague Kwame Anthony Appiah at Princeton contend that our obligations are limited to carrying our fair share of the burden of relieving global poverty. They would have us calculate how much would be required to ensure that the world's poorest people have a chance at a decent life, and then divide this sum among the affluent. That would give us each an amount to donate, and having given that, we would have fulfilled our obligations to the poor.

What might that fair amount be? One way of calculating it would be to take as our target, at least for the next nine years, the Millennium Development Goals, set by the United Nations Millennium Summit in 2000. On that occasion, the largest gathering of world leaders in history jointly pledged to meet, by 2015, a list of goals that include:

Reducing by half the proportion of the world's people in extreme poverty (defined as living on less than the purchasing-power equivalent of one U.S. dollar per day).

Reducing by half the proportion of people who suffer from hunger.

Ensuring that children everywhere are able to take a full course of primary schooling.

Ending sex disparity in education.

Reducing by two-thirds the mortality rate among children under 5.

Reducing by three-quarters the rate of maternal mortality.

Halting and beginning to reverse the spread of H.I.V./AIDS and halting and beginning to reduce the incidence of malaria and other major diseases.

Reducing by half the proportion of people without sustainable access to safe drinking water.

Last year a United Nations task force, led by the Columbia University economist Jeffrey Sachs, estimated the annual cost of meeting these goals to be $121 billion in 2006, rising to $189 billion by 2015. When we take account of existing official development aid promises, the additional amount needed each year to meet the goals is only $48 billion for 2006 and $74 billion for 2015.

Now let's look at the incomes of America's rich and superrich, and ask how much they could reasonably give. The task is made easier by statistics recently provided by Thomas Piketty and Emmanuel Saez, economists at the École Normale Supérieure, Paris-Jourdan, and the University of California, Berkeley, respectively, based on U.S. tax data for 2004. Their figures are for pretax income, excluding income from capital gains, which for the very rich are nearly always substantial. For simplicity I have rounded the figures, generally downward. Note too that the numbers refer to ''tax units,'' that is, in many cases, families rather than individuals.

Piketty and Saez's top bracket comprises 0.01 percent of U.S. taxpayers. There are 14,400 of them, earning an average of $12,775,000, with total earnings of $184 billion. The minimum annual income in this group is more than $5 million, so it seems reasonable to suppose that they could, without much hardship, give away a third of their annual income, an average of $4.3 million each, for a total of around $61 billion. That would still leave each of them with an annual income of at least $3.3 million.

Next comes the rest of the top 0.1 percent (excluding the category just described, as I shall do henceforth). There are 129,600 in this group, with an average income of just over $2 million and a minimum income of $1.1 million. If they were each to give a quarter of their income, that would yield about $65 billion, and leave each of them with at least $846,000 annually.

The top 0.5 percent consists of 575,900 taxpayers, with an average income of $623,000 and a minimum of $407,000. If they were to give one-fifth of their income, they would still have at least $325,000 each, and they would be giving a total of $72 billion.

Coming down to the level of those in the top 1 percent, we find 719,900 taxpayers with an average income of $327,000 and a minimum of $276,000. They could comfortably afford to give 15 percent of their income. That would yield $35 billion and leave them with at least $234,000.

Finally, the remainder of the nation's top 10 percent earn at least $92,000 annually, with an average of $132,000. There are nearly 13 million in this group. If they gave the traditional tithe -- 10 percent of their income, or an average of $13,200 each -- this would yield about $171 billion and leave them a minimum of $83,000.

You could spend a long time debating whether the fractions of income I have suggested for donation constitute the fairest possible scheme. Perhaps the sliding scale should be steeper, so that the superrich give more and the merely comfortable give less. And it could be extended beyond the Top 10 percent of American families, so that everyone able to afford more than the basic necessities of life gives something, even if it is as little as 1 percent. Be that as it may, the remarkable thing about these calculations is that a scale of donations that is unlikely to impose significant hardship on anyone yields a total of $404 billion -- from just 10 percent of American families.

Obviously, the rich in other nations should share the burden of relieving global poverty. The U.S. is responsible for 36 percent of the gross domestic product of all Organization for Economic Cooperation and Development nations. Arguably, because the U.S. is richer than all other major nations, and its wealth is more unevenly distributed than wealth in almost any other industrialized country, the rich in the U.S. should contribute more than 36 percent of total global donations. So somewhat more than 36 percent of all aid to relieve global poverty should come from the U.S. For simplicity, let's take half as a fair share for the U.S. On that basis, extending the scheme I have suggested worldwide would provide $808 billion annually for development aid. That's more than six times what the task force chaired by Sachs estimated would be required for 2006 in order to be on track to meet the Millennium Development Goals, and more than 16 times the shortfall between that sum and existing official development aid commitments.

If we are obliged to do no more than our fair share of eliminating global poverty, the burden will not be great. But is that really all we ought to do? Since we all agree that fairness is a good thing, and none of us like doing more because others don't pull their weight, the fair-share view is attractive. In the end, however, I think we should reject it. Let's return to the drowning child in the shallow pond. Imagine it is not 1 small child who has fallen in, but 50 children. We are among 50 adults, unrelated to the children, picnicking on the lawn around the pond. We can easily wade into the pond and rescue the children, and the fact that we would find it cold and unpleasant sloshing around in the knee-deep muddy water is no justification for failing to do so. The ''fair share'' theorists would say that if we each rescue one child, all the children will be saved, and so none of us have an obligation to save more than one. But what if half the picnickers prefer staying clean and dry to rescuing any children at all? Is it acceptable if the rest of us stop after we have rescued just one child, knowing that we have done our fair share, but that half the children will drown? We might justifiably be furious with those who are not doing their fair share, but our anger with them is not a reason for letting the children die. In terms of praise and blame, we are clearly right to condemn, in the strongest terms, those who do nothing. In contrast, we may withhold such condemnation from those who stop when they have done their fair share. Even so, they have let children drown when they could easily have saved them, and that is wrong.

Similarly, in the real world, it should be seen as a serious moral failure when those with ample income do not do their fair share toward relieving global poverty. It isn't so easy, however, to decide on the proper approach to take to those who limit their contribution to their fair share when they could easily do more and when, because others are not playing their part, a further donation would assist many in desperate need. In the privacy of our own judgment, we should believe that it is wrong not to do more. But whether we should actually criticize people who are doing their fair share, but no more than that, depends on the psychological impact that such criticism will have on them, and on others. This in turn may depend on social practices. If the majority are doing little or nothing, setting a standard higher than the fair-share level may seem so demanding that it discourages people who are willing to make an equitable contribution from doing even that. So it may be best to refrain from criticizing those who achieve the fair-share level. In moving our society's standards forward, we may have to progress one step at a time.

For more than 30 years, I've been reading, writing and teaching about the ethical issue posed by the juxtaposition, on our planet, of great abundance and life-threatening poverty. Yet it was not until, in preparing this article, I calculated how much America's Top 10 percent of income earners actually make that I fully understood how easy it would be for the world's rich to eliminate, or virtually eliminate, global poverty. (It has actually become much easier over the last 30 years, as the rich have grown significantly richer.) I found the result astonishing. I double-checked the figures and asked a research assistant to check them as well. But they were right. Measured against our capacity, the Millennium Development Goals are indecently, shockingly modest. If we fail to achieve them -- as on present indications we well might -- we have no excuses. The target we should be setting for ourselves is not halving the proportion of people living in extreme poverty, and without enough to eat, but ensuring that no one, or virtually no one, needs to live in such degrading conditions. That is a worthy goal, and it is well within our reach.

Peter Singer is the Ira W. DeCamp professor of bioethics at the Center for Human Values at Princeton University. He is the author of many books, including most recently ''The Way We Eat: Why Our Food Choices Matter.''