Wednesday, June 20, 2007

What Happens When Money Disappears

In London, people are fretting over $2 billion a defense contractor paid to a senior official of a foreign government. Were these payments bribes, or just a very strange kind of commission, as the contractor insists — and just as important, what became of the money? There are also questions about what happened to an estimated $80 billion in alleged overpayments in connection with the same contract. In Washington, people are looking into even larger sums of money. Money was dedicated to the cleanup from Hurricane Katrina, but it is hard to prove that more than a tiny fraction of it was really spent on that. Similar questions are being asked about spending on the war and the supposed reconstruction in Iraq.

Money disappears. One day, you see it. It is being spent or paid from one person to another. Weeks later, it is nowhere to be seen. No one can tell you exactly where the money is or what happened to it. The money went from being visible to being invisible, from being boasted about to being hushed up. The suspicion always is that the silence is covering up something dishonest or incompetent, but whether that is true or not, something is lost when sums of money, which ordinarily should be a matter of pride, turn into a matter of shame that no one involved wants to talk about.

There is something particularly terrible about the people’s money being spent with nothing to show for it, yet much larger sums of money disappear in private business and in our private lives, and the economic effects are the same.

The big pharmaceutical companies are proud of their armies of research scientists, but they do not want you to think about the armies of models they hire as marketing representatives to promote their prescription drugs to physicians and other medical decision-makers. Marketing is so critical to the success of a drug maker that they may spend more than half of their “research” budget on marketing, but they would rather not talk about that. Nor do they want you to hear about the billions of dollars they have paid to compensate victims of drugs that they failed to notice were not safe to release to the public — perhaps the result of the marketing function having too much influence on the research function. At the end of the day, a pharmaceutical company budget is so distorted that they would rather not talk about the budget at all, which means all the money that goes through their hands effectively disappears.

The same thing can happen in an individual life when a person’s spending is distorted by something they are ashamed of, whether it is an alcohol addiction, banking costs caused by irresponsible spending, an illicit love affair, or just the cost of repairing the damage from a stupid mistake. No one in this situation wants anyone to add up all their money, because anyone who did so would see that something was wrong.

Add it all up across the economy, and huge sums of money disappear every day — money spent not with a feeling of pride and an air of sincerity, but in shame and silence, or accompanied by the rehearsal of the talking points of a cover story. And the money that disappears is a huge economic problem. The spirit that surrounds the money we spend has a great deal to do with its effectiveness. Money spent in shame has only a tiny amount of power compared to money that is held and spent with pride, or even compared to money that is spent without any emotion at all. When money disappears, its effectiveness can disappear too.

Lawyers see this routinely in litigation. A defendant may pay two or three times as much money to settle a case in order to get the plaintiff to promise not to discuss the terms of the settlement. That kind of silence is costly. Returning to the pharmaceutical budget example, marketing can be disguised as research only by hiring lots of extra people at considerable expense, reducing the efficiency of all the spending. Looking next at one especially ironic case, Enron spent billions of dollars for the services of investment bankers and others to create dummy companies just so it could disguise the fact that it was losing money! Shame can be just as devastating to an individual’s spending. People who are disgusted with themselves because of their bad habits and bad decisions tend to make one bad spending decision after another and end up getting very little for their money. The pattern cannot be changed very much as long as the shame is present when the spending decisions are being made. Money spent in shame or in secret does not have the same power behind it that you normally expect money to have.

If you were keeping economic statistics, you would want to exclude money when it disappears from being counted in measures of well-being such as gross domestic product (GDP), because this spending provides precious little well-being. It is similar to the way, if you were counting the workers in a company, you would not necessarily want to count those employees who were on the payroll but who were not actually doing any work. Yet most such money is counted, and the result is that measures of economic well-being are dramatically inflated. For example, economists count the Katrina cleanup money as if it were actually spent on Katrina cleanup, yet residents of that area do not receive the economic benefit because the cleanup, for the most part, was not actually done. In a similar way, economists count the money spent on addictive drugs whenever they can, even though no one ever actually benefits from feeding an addiction.

If we want to improve the economy, it is important to reduce the amount of money that disappears. We want to spend money that has spiritual power behind it so that we get the benefit we should be getting from it.

If money disappears because of shame, deception, and secrecy, then keeping money from disappearing starts with integrity. On a personal level, you know you have to keep track of your money, but it is just as important to keep track of your priorities. If you fully know your priorities and are prepared to explain and defend them to anyone you might discuss your life or your money with, then you are prepared to spend money with power, and not much of your money will disappear.

Looking at it another way, your money disappears because of discrepancies between your word and your spending. If the way you spend your money does not match what you say you want for yourself, then there is something wrong with the way you are spending or what you are saying, or probably both. Eliminate these discrepancies and you will find yourself getting more for your money.

On a larger scale, when you look at money that disappears in the operations of a business or government, it happens mostly because of trust that is misplaced. People who are entrusted to work toward a particular shared priority can never embody that priority perfectly, but it is important to see that they are at least held accountable for taking their assigned priorities seriously. Thousands must have known that Enron as a company was only making a show of conducting business, and the White House stated publicly that it would be rejecting qualified contractors for Iraq-related work in order to send the contracts to “friends,” but where was the accountability? Part of the problem is that many people see integrity as a luxury that we cannot afford. But when you see that integrity is the source of the power in all the money we spend, you realize that integrity is a necessity that we cannot afford to do without.