University at Buffalo - The State University of New York

Published: November 29, 2007

By KEVIN FRYLING
Reporter Staff Writer

A self-described “rogue economist” who has made a career tackling unconventional problems using a unique analytical approach came to UB recently to tell students, faculty, staff and members of the community that there is great power in creative thinking and having the courage to go against the grain.

Steven Levitt, best-selling co-author of “Freakonomics: A Rogue Economist Explores the Hidden Side of Everything,” spoke on Nov. 14 before a crowd estimated at 3,000 in Alumni Area—including about 1,000 students from nearly 40 high schools—as part of the 2007-08 Distinguished Speakers Series. Far from being a stereotypical “boring economist,” Levitt leavened his nearly two-hour presentation—featuring stories about applying economic-style logic to questions traditionally considered outside the realm of finance to reveal new and interesting truths—with crowd-pleasing humor and a generous dose of self-deprecation.

“I’m not a real economist,” Levitt joked in his opening remarks. “I take all these questions that ‘real economists’ would be embarrassed to have their names associated with but still many people find interesting.”

Levitt’s first anecdote, illustrating the power of seeing things from a new perspective, told the story of IRS agent John Szilagyi, who suggested in the early-1980s that U.S. tax forms should require taxpayers to list their dependents’ Social Security numbers after becoming suspicious of so many children with unusual names, such as “Fido.” Levitt said it took about half a decade before Szilagyi’s superiors chose to tough out the difficult process of changing the U.S. tax code, but once the idea was put into effect, 10 percent of America’s children “disappeared” overnight, saving the government $2 billion a year in fraudulent claims, including taxpayers listing pets as dependents or simply lying about how many children they were raising.

“What I like about John Szilagyi’s story is it all comes down to an idea,” Levitt said. “Once I explain it to you, it’s obvious—it’s not brilliant, it’s simple—and yet somehow humans have this incredibly hard time generating new ideas. John Szilagyi was one of thousands of auditors looking at tax returns for 50 or 60 years and nobody else saw it.”

The anecdote also illustrated the powerful role incentives play in people’s personal and professional lives, he said, noting that taxpayers had little incentive to tell the truth on their tax returns because there was little risk in cheating, Szilagyi’s bosses had little incentive to implement cost-saving ideas because changing tax forms involved a lot of work and Szilagyi’s co-workers were given little incentive to make further suggestions because for many years Szilagyi received no personal recognition or financial reward for his idea.

Incentives also are the key to one of the most famous questions in Levitt’s best-selling book: “Why do drug dealers live with their mothers?” The answer is because 90-95 percent of drug dealers earn minimum wage, said Levitt, who with his co-author, Stephen Dubner, studied financial records obtained from a Chicago gang leader in order to gain insight into the organization’s financial workings and debunk the popular myth that drug dealers are getting rich off the streets. He explained that gangs operate as franchise organizations—“Strip away the titles and it’s just like McDonald's,” he said—meaning the only gang members earning significant money buying and selling drugs are those in charge. Although death rates were 7 percent a year for gang members in Chicago at the time of his research, Levitt said he found those who were at the bottom rungs of the gang—known as “foot soldiers”—were willing to take significant risks for a chance to earn top wages, ranging from $100,000 to $500,000 a year.

“It’s not really that different from high school quarterbacks doing steroids because they think someday they’re going to make it to the NFL, or someone leaving Buffalo to go to Hollywood, thinking they’re going to be a movie star,” Levitt said, pointing out that “9,999 out of 10,000 people who go to Hollywood end up waiting tables,” not starring in movies. “But for the ones who make it,” he added, “there’s a huge, huge reward.”

Levitt’s presentation also touched on the controversy generated by his research on such topics as suggesting that legalizing abortion lowers crime rates by reducing the number of unwanted children and claiming that car seats do little to protect children from accidents. “I’m not political,” he insisted, calling himself and Dubner, his co-author, “equal opportunity offenders.”

“Earlier generations of economists, such as Milton Friedman, embraced politics, and political and ideological stances,” said Levitt. “Many in my generation of economists have very self-consciously tried to avoid that. Once you care a lot about what you find in your research, it really becomes dangerous.”

Being an empirical economist means being willing to be influenced by data, he added, noting that answers often are best found by tossing out preconceived notions and conventional wisdom in favor of the facts.

“When you start going out in the real world and collecting hard data,” he said, “you learn things you don’t expect to learn.”