Scarcity: Why Having Too Little Means So Much (22 page)

And even when we do decide that educating is the right thing, there can be ways to do so and still economize on bandwidth, as illustrated in a study by the economist Antoinette Schoar and her coauthors. They had been working with
a microfinance institution in the Dominican Republic called ADOPEM
, whose clients run small enterprises—general stores, beauty salons, food services—usually with no employees. ADOPEM felt that its clients were making mistakes in their accounting books and generally didn’t understand finance as well as they should. The solution seemed simple: financial literacy education. So Schoar procured a standard financial literacy training module, of the kind typically given to microentrepreneurs worldwide. Her reaction upon seeing the material: Wow, how tedious! (And she’s a finance professor at MIT.) The course was several weeks long and focused on traditional accounting techniques, teaching daily recordkeeping of cash and expenses, inventory management, accounts receivable and payable, and calculating profits and investment.

In
a world of unlimited bandwidth, all this would be worth knowing. But in the real world, Schoar believed that she could do better for her clients. She gathered together a group of the best local entrepreneurs to look at how they managed their finances. They, too, were not engaged in complex accounting, but they did what the less successful entrepreneurs did not do: they followed good rules of thumb. For example, several would put the cash from their store in one register and pay themselves a fixed salary. This prevented the commingling of home money and business money that makes it difficult to determine how much they were spending at home versus how much the business was earning. (Some of the women kept one wad of cash in their bra’s left cup, and the other in the right cup.) This is not quite double-entry bookkeeping, but it was effective and simple. It economized on bandwidth and preserved most of the benefits.

Schoar collected the best rules of thumb and designed a different “financial education” class based on them. Her class was shorter and much easier to grasp. It used a lot less bandwidth, and this showed up in the data. Attendance was much higher, and at the end of the rules-of-thumb class, clients were ecstatic and asking for more; many even said they would
pay for another class themselves
. Normally, you have to cajole people to come back to a class on financial education.

The reduced bandwidth also made the class easier to absorb and more effective. In follow-up surveys, students were more likely to implement the rules of thumb than the complex rules of accounting. And this showed up in the bottom line. Revenues—actual business sales—went up for the rules-of-thumb graduates, especially in bad weeks when improved practices can matter most: they had 25 percent higher revenues in those bad weeks. Traditional financial literacy training, in contrast, had no impact. The lesson is clear: economizing on bandwidth can yield high returns.

Whether it is in the trade-offs that people are led to make, the way education is structured, the incentives that are created, or how
we handle failure, understanding the psychology of scarcity can dramatically alter the way social programs are designed. Of course, none of this provides a magic bullet to end poverty. The problems are deep. But an awareness of the psychology of scarcity and the behavioral challenges it yields can go some way toward improving the modest returns of anti-poverty interventions.

You are a working single mother who holds down two jobs. You have a lot to juggle. Besides the financial juggling we talked about already, you must also juggle daycare for your kids, which is expensive. You know of one program that is highly subsidized, but it will accept only one of your kids, and it closes much too early to help with your second job. So you use a patchwork of solutions. You arrange for your younger child to stay with your grandmother. You must also arrange transportation from school to your grandmother’s for one child and from daycare for the other. And because you work in the service sector, your child care needs depend on the hours your staff supervisor gives you. She is nice and tries to help, but there is inevitable volatility.

Now imagine that we offer you a highly subsidized daycare program. What exactly are you getting for it? Surely we are saving you time shuttling your kids back and forth. We might be saving you money as well, either explicitly (this program is cheaper than your previous one) or implicitly (if we account for your grandmother’s time). But we would be giving you something else, even more precious. Something you could spend on many things. We would be giving you back all that mental bandwidth that you currently use to fret, worry, and juggle these arrangements. We’d be taking a cognitive load off. As we’ve seen, this would help your executive control, your self-control more broadly, even your parenting. It would increase your general cognitive capacity, your ability to focus, the
quality of your work, or whatever else you chose to turn your mind to. From this perspective, help with child care is much more than that. It is a way to build human capital of the deepest kind: it creates bandwidth.

Typically, when experts evaluate this child-care program, they will look at narrow outcomes: Was the mother able to work more hours; was she less tardy? This, however, may be far too narrow a perspective. What the program produces is freedom of mind, greater bandwidth, not something that’s easy to measure. If the program is successful, its benefits should show up in many contexts. All else being equal, one ought to be able to look directly and see the mental impact of this program. Does working memory improve? Do impulse control and self-control improve? Some of our pessimism about existing programs might come from a failure to appreciate and therefore measure such impact. If we look too narrowly at this childcare program, we will miss many of its broader benefits. Taken together, a successful intervention may yield much more than a modest return. But if we fail to look where the deepest needs are and where the benefits accrue, we are bound to underestimate its impact.

There are, besides child care, many examples from around the world of how bandwidth might be built. The first comes from finance. Recall that a great deal of juggling among the poor comes from fighting everyday fires. If we can help people fight these fires, we will create new bandwidth. What is inherent to these fires is that they are acute—there is an immediate need for cash. The need is not for big investments; it is for small amounts—to buy a school uniform, for example. Put differently, the poor most want what the moneylender can easily offer: a small amount of money, provided quickly and repaid quickly to help out with an urgent need. Instead, the kind of finance that is offered to the poor is often built on the opposite principle: modest to large amounts of money provided judiciously and slowly. Such loans can be helpful for investing. But if people are busy fighting fires, they will not have the bandwidth for investments. Is it any surprise then that despite the presence of
respectable microfinance institutions, people still prefer to go to moneylenders? In India, we tested one very short-term small loan product with KGFS, a full-service financial institution that serves the rural poor. And we were amazed by
the high demand for loans that averaged less than $10
. The product does not help build wealth; it does not turn people into entrepreneurs. On the surface, it does not look like the kind of sum that can transform a life. Yet it might do just that. The scarcity trap begins with firefighting and with tunneling, doing things that have tremendous costs lurking outside the tunnel. Change that and we can change the very logic of poverty.

We can also go back to the source. Income flows are often lumpy and volatile in the developing world, because workers lack formal, steady employment. Even in developed nations, many low-income individuals who are employed face a great deal of volatility in incomes and earnings. As we saw earlier, income volatility is a major source of the eventual need to juggle. Why not try to mitigate it? A greater focus on the creation of dependable jobs and stable incomes for the poor across the world could be psychologically transformative.

But we can go further. We tend to focus on big shocks, such as medical emergencies or rainfall insurance. Surely these are important. Yet when one is juggling, small shocks can have equally large effects. For a poor farmer, a sick cow can reduce daily income enough to cause a slide into a scarcity trap. We should therefore look to insure the poor against these apparently “small” shocks. In the United States, something as simple as inconsistent work hours (this week you work fifty hours, but next week you get only thirty) can cause juggling and perpetuate scarcity. A solution would be to create the equivalent of unemployment insurance against such fluctuations in work hours, which to the poor can be even more pernicious than job loss.

We have seen how most of the shocks that come from juggling and induce tunneling are generally quite predictable. On the one hand, suddenly needing money for fertilizer counts as a shock. On the other hand, it is entirely predictable. It happens every year, but
when you are busy juggling, you do not see it coming. This points to the great potential value in finding ways to buffer against such shocks. One way is to create financial products that help the poor build savings slack. We could do that using some of the techniques for managing scarcity we discussed earlier. For example, we can use tunneling to our advantage. Offer high-fee loans to deal with current fires. These loans will be attractive in the tunnel, and we can use the high fees to build a savings account.

Better yet, create products that prevent the firefighting. We saw how scarcity traps and juggling often follow lax management during times of relative abundance. Why not help then? Build a financial product that takes a farmer’s harvest payment and smooths it out, effectively yielding a monthly income. This is but one example. More broadly, we spend enormous resources on financial planning for retirement. Helping the poor escape a continuous life of juggling and firefighting could be similarly transformative.

All this reflects a deeper, and somewhat different, perspective on poverty. It focuses not just on the poor’s obvious scarce resource, income, but on that other, less palpable but equally critical resource, bandwidth. Considerations of bandwidth suggest that something as simple as giving cash
at the right time
can have big benefits. If done correctly, giving someone $100 can serve to purchase peace of mind. And that peace of mind allows the person to do many more things well and to avoid costly mistakes.
One cash transfer program in Malawi
showed a 40 percent reduction in the psychological distress of low-income participants. Understanding how to provide transfers at the right time and measuring these broader impacts are more ways to move toward bandwidth-sensitive policies.

All this is a radical reconceptualization of poverty policy. It forces us to recognize the many ways in which different behaviors are linked. We understand that rent and food and school fees all form part of a household’s budget. Now, rather than looking at education, health, finance, and child care as separate problems, we must recognize that they all form part of a person’s bandwidth capacity. And
just as a financial tax can wreak havoc in one’s budget, so can a bandwidth tax create failure in any of several domains to which a person must attend. Conversely, fixing some of those bottlenecks can have far-reaching consequences. Child care provides more than just child care, and the right financial product does much more than just create savings for a rainy day. Each of these can liberate bandwidth, boost IQ, firm up self-control, enhance clarity of thinking, and even improve sleep. Far-fetched? The data suggest not.

The fight against poverty has been an uphill struggle. Program after program has proved either unsuccessful or at best modestly successful. Social safety nets tend to be sticky. In the United States, once a person has fallen into the social safety net, she is
bound to return to it again and again
. And training programs appear to be only moderately effective. Researchers who have sought to estimate their impact have found some benefits: they are worth the investment, but they are not able to alter the course of poverty. Changing neighborhoods also only helps a bit. One experiment in the United States moved thousands of families
from low-income to higher-income neighborhoods
, and found modest impacts, primarily on stress and quality of life, but the underlying patterns of poverty did not change.

Internationally, the results are similar. Microfinance—providing small loans to help start small businesses—has been touted as highly transformative. While the impact of microfinance is likely positive, several studies now suggest that it is
unlikely to change the fundamental logic of poverty
. Feeding programs show some impact on children’s learning. Education has a robust but quite limited return. For years, nonprofit organizations have tried to provide a variety of holistic packages to address the varied needs of the poor. Surely they are doing good work. But they, too, have observed only modest returns.

This
is certainly not intended as a critique of current programs. Poverty is a difficult problem. Even modest returns can make for worthy social investments. This is, however, a suggestion for how we might do better. When we encounter programs that have had limited success, we may be tempted to infer that they deliver something people do not want or do not consider important. But perhaps the problem is not in what these programs are trying to deliver but with the actual delivery. Like the bomber cockpits of World War II, these programs might achieve greater success through better design. And a better design will have to incorporate fundamental insights about focusing and bandwidth that emerge from the psychology of scarcity.

St. John’s Regional Health Center
, an acute care hospital in Missouri, had a problem with its operating rooms. Some thirty thousand surgical procedures were performed annually in thirty-two operating rooms, and scheduling the rooms was proving difficult; they were always fully booked. In 2002, the hospital’s operating rooms were at 100 percent capacity. So when emergency cases arose—and they were often 20 percent of the full load—the hospital was forced to bump long-scheduled surgeries. “As a result, hospital staff sometimes performed surgery at 2 a.m., physicians often waited several hours to perform two-hour procedures, and staff members regularly worked unplanned overtime,” according to a study summarizing the remarkable events that happened next.

This was a classic case of scarcity: more surgeries than operating rooms. St. John’s was stuck in a scarcity trap. The hospital was constantly behind, and because it was behind, it had to reshuffle surgeries, struggled with sleep and work regulations, and became even less efficient. Rearranging in circumstances like this can be costly. And,
at least in the short run, these efforts can exacerbate scarcity because a portion of the already insufficient budget is “wasted” on the rearranging. The hospital was like the overcommitted person who finds that tasks take too long, in part because the person is overcommitted and cannot imagine taking on the additional—and time-consuming—task of stepping back and reorganizing.

But St. John’s had to figure out what to do. The hospital administration brought in an adviser from the Institute for Healthcare Improvement who studied the problem analytically, with the luxury of not having to tunnel on the hospital’s daily pressures. He came up with a rather surprising solution: leave one room unused. Dr. Kenneth Larson, a general and trauma surgeon at St. John’s, responded as you might expect: “We are already too busy, and they want to take something away from us. This is crazy,” he remembered thinking.

Yet there was a profound logic to this recommendation, a logic that is instructive for the management of scarcity. On the surface, what St. John’s was lacking were operating rooms. No amount of reshuffling could solve that problem. But if you looked deeper, the lack was of a slightly different sort. Surgeries come in two varieties: planned and unplanned. Right now the planned surgeries took up all the rooms. Unplanned surgeries, when they showed up (and they did!), required rearranging the schedule. Having to move a planned surgery to accommodate an emergency came at a cost. Some of it was financial—overtime—and some may have been medical—more errors. But part of it was a cost in efficiency. Having people work unexpectedly late is less efficient. They are less proficient at their tasks, and each surgery takes longer.

Without the reshuffling imposed by emergencies—with everybody working the scheduled hours and taking less time—there were enough operating rooms to handle all the cases. The scarcity in rooms was not really a lack of surgery space; it was an inability to accommodate emergencies. There is a close analogy here to the indebted poor, whose money might often suffice to live a bit better if it were spent smoothly and without shocks. But much of that money goes to
paying off debts. It is not just the tight budget. It is that a chunk of the money goes toward financing the need to catch up. In the St. John’s case, it was not that the hospital was too “poor” in operating rooms. It’s that when emergencies arrived, the tight space went toward accommodating them and then catching up again.

“Everyone assumed that because the flow of unscheduled surgeries can’t be predicted, setting aside an OR just for ‘add-ons’ would be a very inefficient use of the space,” said Christy Dempsey, vice president of the Emergency Trauma Center, who led the initiative. As it turns out, the terms “unplanned” or “unanticipated” surgery are a bit misleading: they imply that these emergency surgeries are unpredictable. Of course, while each individual surgery is not known in advance, the fact that there will be such surgeries, much like the shocks that hit the poor or the busy, is quite predictable. There is always a steady flow of “unanticipated” cases. Why not set aside an operating room to be used specifically for unscheduled cases? That way, all the other operating rooms could be packed well and proceed unencumbered by surprises, and all the unplanned surgeries would go into the one specially designated room.

It worked. Once one operating room was dedicated to emergency surgeries alone, the hospital was able to accommodate 5.1 percent more surgical cases. The number of surgeries performed after 3 p.m. fell by 45 percent, and revenue increased. The trial had lasted only a month before the hospital made the change permanent. In the two years that followed, the hospital experienced a 7 to 11 percent increase in surgical volume each year.

In fact, once the hospital began to appreciate the benefits of change, other insights followed. Surgeons had tended to schedule surgeries earlier in the week to ensure that postoperative rounds would not fall on weekends, a practice that had led to an uneven distribution of elective surgeries. This imbalance became transparent once there weren’t emergency surgeries to hide it. Before long, St. John’s started scheduling elective surgeries evenly over the entire week, and
further improvement followed
.

The
St. John’s case illustrates something fundamental to the scarcity trap. The lack of rooms the hospital had experienced was really a lack of slack.
Many systems require slack
in order to work well. Old reel-to-reel tape recorders needed an extra bit of tape fed into the mechanism to ensure that the tape wouldn’t rip. Your coffee grinder won’t grind if you overstuff it. Roadways operate best below 70 percent capacity; traffic jams are caused by lack of slack. In principle, if a road is 85 percent full and everybody goes at the same speed, all cars can easily fit with some room between them. But if one driver speeds up just a bit and then needs to brake, those behind her must brake as well. Now they’ve slowed down too much, and, as it turns out, it’s easier to reduce a car’s speed than to increase it again. This small shock—someone lightly deviating from the right speed and then touching her brakes—has caused the traffic to slow substantially. A few more shocks, and traffic grinds to a halt. At 85 percent there is enough road but not enough slack to absorb the small shocks.

And yet, even those who should know better routinely undervalue slack.

You used to have an amazing assistant always ready to do the tasks you needed, on short notice, happily, and well. But then a management consultant discovered that your assistant had a lot of free time on his hands. The department was reorganized, and now you share the assistant with two other people. The office’s time-use data show that this is much more efficient; now the assistant’s schedule is packed as tight as yours. But now your last-minute short-notice requests can no longer be handled immediately. This means that, with your heavy schedule, even the smallest shock sets you behind. And as you fall behind, you start to juggle and fall behind further and further. The assistant was an important source of slack. He allowed for the handling of “emergencies” when all your regular venues were fully scheduled. The very fact that the assistant was
“underused,” like that room at St. John’s, is what made the assistant valuable.

A standard impulse when there is a lot to do is to pack tightly—as tightly as possible, to fit everything in. And when you are not tightly packed, there’s a feeling that perhaps you are not doing enough. In fact, when efficiency experts find workers with “unused” time on their hands, they often embark on making those workers
use their time “more efficiently.”
But the result is that slack will have been lost. When you are tightly packed, getting stuck in the occasional traffic jam, which for others is only mildly annoying, throws your schedule into total disarray. You are late to meeting number one, and with no time in between, that pushes into meeting number two, which pushes into obligation number three. You finally have no choice but to defer one of today’s tightly packed obligations to the next day, except, of course, that tomorrow’s schedule is “efficiently” packed, too, and the cost of that deferral ends up being high. Sounds familiar? Of course it does. You have undervalued slack. The slightest glitch imposes an obligation you can no longer afford, and borrowing from tomorrow’s budget comes at high interest.

We fail to build slack because we focus on what must be done now and do not think enough about all the things that can arise in the future. The present is imminently clear whereas future contingences are less pressing and harder to imagine. When the intangible future comes face to face with the palpable present, slack feels like a luxury. It is, after all, exactly what you do not feel you have enough to spare. What should you do? Should you leave spaces open in your schedule, say, 3–4 p.m. Monday and Wednesday, just in case something unexpected comes up, despite the fact that there is so much you’d like to do for which you have so little time? In effect, yes. That’s what you do when you allocate forty minutes to drive somewhere a half hour away, or when you salt away some money from your monthly household budget to save for a rainy day. When you face scarcity, slack is a necessity. And yet we so often fail to plan for it. Largely, of course, because scarcity makes it hard to do.

The mishandling of slack is not only about individuals; it applies to organizations as well. During the 1970s and the early 1980s, there was
a perception that many corporations were “bloated.”
Some industries were so awash with cash that the executives spent carelessly. They would overpay for real estate and business acquisitions, fail to bargain, and be unconcerned with the bottom line. Cash was spent so badly that some oil companies were worth less than the value of the oil they owned; the market anticipated they would simply waste their assets. The leveraged buyout wave in the 1980s was an attempt to solve this problem. The logic was simple: buy these companies and impose pressure by placing them in debt. Move them from abundance to scarcity. The discipline of debt—in our parlance, the focus that comes from scarcity—would improve performance. The executives would start paying attention, spend more prudently, and produce greater profits.

In fact, a raft of empirical studies showed that, whatever their other consequences,
leveraged buyouts did improve corporate performance
. One reason is that the “corporate fat” exacerbates the incentive problem of managers. They spend poorly because they are spending someone else’s money. Fat, which is effectively free money, is spent on luxuries that management enjoys but are useless from the shareholders’ perspective. By increasing leverage and reducing fat, managers spend more wisely.

Leverage also had an effect because of the psychology of scarcity. Companies became “lean and mean” in part for the same reason deadlines produce greater productivity, and low-income passengers know the price of cabs. Being a hypervigilant manager who keeps costs low can require a great deal of cognitive effort. You must negotiate diligently with suppliers and scrutinize every line item to decide if an expense is necessary. This kind of focus is easier to come by under scarcity and harder to come by under abundance. Even private companies, where managers are spending their own money, start acting “fat” when awash in cash.

But
as we have seen, slack is both wasteful and beneficial. When cutting, it can be hard to separate out true waste from useful slack, and indeed, many of the leveraged companies were
left at the brink of bankruptcy
. Faced with that reality, they tunneled. If the 1980s were a lesson in the power of cutting fat, the 2000s were a lesson in the danger of managerial myopia. Perhaps these two were related. Cut too much fat, remove too much slack, and you are left with managers who will mortgage the future to make ends meet today.

In December 1998,
NASA launched the Mars Orbiter
. Missions to Mars are fueled by centuries of human fascination with a planet so close, so similar in size to Earth (it even has a similar length of day) and with a tiny but tantalizing possibility of life. Orbiter was unlikely to make major findings by itself. But it was a spearhead. It would provide valuable data for future missions, perhaps even a manned landing on Mars. Its launch was the culmination of a $125 million project involving tens of thousands of hours of effort. As per its name, Orbiter was designed to enter a stable orbit close to Mars from which it would collect data.

Entering a stable orbit around a planet is tricky business. As the satellite approaches, gravity pulls it in. If the satellite approaches too slowly, gravity’s pull is strong enough to crash it on the surface. If the satellite is traveling too fast, gravity does too little: the satellite skates by the planet and proceeds in a different direction. At just the right speed (and the right angle, of course) the pull of gravity is just enough to pull the satellite into a stable orbit. Needless to say, determining the proper speed requires complex and precise calculation. As Orbiter approached Mars, it would have to fire its reverse thrusters to slow down just enough to get caught in Mars’s orbit. Since it takes about ten minutes for a signal to reach from Earth, this was all pre-programmed. All ground control could do was sit and listen (with a delay). Luckily, there are not too many surprises in the dead
of space. Astrophysical calculations can be made with a precision that is the envy of earthbound engineers.

Nine and a half months after launch, on September 23, 1999, Orbiter reached Mars and began to execute its entry procedure. This would take it behind Mars, preventing any contact for several minutes. But then came the sign of trouble: no transmissions from the spacecraft at all, even though Orbiter was to have reemerged. With every tense second, a bit of hope dissipated. Eventually, the ground crew gave up. Orbiter was presumed to have crashed.

In the aftermath of such a public failure, scrutiny would follow. What happened? Why a crash? What could have been done to prevent it? Who was to blame? Failures, especially of complex systems, typically have many causes. In this case, however, the culprit was both newsworthy and obvious. The reverse thrusters had fired too strongly. But what was particularly intriguing was the degree to which the firing was off. NASA calculated that the ratio of desired firing to actual firing was a curiously familiar number, 4.45. This is the number used to convert between the metric and British measures of force. The embarrassing error quickly became apparent.