What good does a dollar in the bank do vs. a dollar given to charity?

August 23, 2017 2:07 PM

Is there any quantitative analysis in existence comparing different allocation of a single dollar and the differing amounts of good those allocations would make? There are many ways to put a dollar to work, but what is the best one?

I'd be curious to know if anyone's tried to quantify the difference between:

1. Burning a dollar
2. Saving it under a mattress
3. Saving it in a bank
4. Investing it in stocks
5. Spending it on a luxury
6. Donating it to charity

etc.

Is there any sort of quantitative analysis that attempts to answer that question in sort of way?

I know that this is something that's impossible to quantify. People have tried to do this with charitable dollars via organizations like Give Well, but I'm looking for something that's more general.

I'm curious if its more moral, for instance, to have money in a bank account than invested in a stock index, and then how both of those compare to giving that dollar to a good charity, or a bad one.

posted by sp160n to Work & Money (9 answers total)

'Differing amounts of good' is a utilitarian concept, and it's pretty much the Achilles heel of that particular world view. Utility appears to be subjective, and quantifying it relies on people trying to put concrete values on things that cannot be known or are uncertain.

And even if you could objectively quantify utility (Bentham thought you could do this - google 'felicific calculus' for the quantitative analysis approach you might be seeking), you're now open to the spectre of the utility monster (like the sadist who'd get 20 units of utility watching you burn a dollar note that would give a homeless person just 10 units), and other quandaries like the mere addition paradox that has you getting different answers about what's best from the same set of numbers.

So I think this is a pointless exercise, until you've defined what 'good' is, or 'work' is, and how much uncertainty you're willing to tolerate, and once you're happy to accept that pretty much nobody will agree with any definitions you choose to use.
posted by obiwanwasabi at 6:05 PM on August 23, 2017 [4 favorites]

A few general dimensions to consider:
How would your actions affect overall consumption of resources?
How would they affect production of resources?
How would they affect distribution of resources?

It's pretty clear that (in general) donating it to charity would be the best (assuming that the charity would increase consumption by people poorer than you), and spending it on a luxury would be the worst. By definition, a luxury is something purchased after all less useful goods, which means that the extra benefit to you is relatively small.

The other options are more complicated, because you'd have to think about how the effects would flow through the economy.

I hesitate to recommend this, because it's a gross oversimplification, but on net I think it's helpful (in particular if you consider how much more good Scrooge could have done if he had spending little on himself but given more to others):

What I Like About Scrooge: "Scrooge has been called ungenerous. I say that's a bum rap. What could be more generous than keeping your lamps unlit and your plate unfilled, leaving more fuel for others to burn and more food for others to eat? Who is a more benevolent neighbor than the man who employs no servants, freeing them to wait on someone else?"
posted by Mr.Know-it-some at 7:10 AM on August 24, 2017

I know you used a dollar for an example, but it's such a small quantity that, frankly, who cares? But let's assume you meant X, a quantity large enough for you to care. Then:

1. Burn it: 100% loss
2. Mattress: small loss due to inflation over time, could be a bigger loss if inflation looms.
3. Bank: small cumulative gain over time, probably break-even or a tiny bit more with regard to inflation.
4. Stocks: Chosen at random, you'll do as well (well, almost as well, because fees) as the market. But which way will it go?
5. Luxury: You'll always have Paris (or whatever).
6. Donation: If you like the charity, this is a big win, because not only do you get to give, you get a tax deduction too.

From my point of view, you seem to have listed them in order of utility, unless you have a sure-fire way of beating (4). You don't mention real estate, but many markets have come back now, so in the right area this might be the most remunerative.

This would have been a much less depressing question in financially happier times.
posted by ubiquity at 8:04 AM on August 24, 2017

1. Burning a dollar
Dumb and polluting

2. Saving it under a mattress
To what end?

3. Saving it in a bank
Well, that's a start....

4. Investing it in stocks
No.

5. Spending it on a luxury
You probably have enough luxuries already.

6. Donating it to charity
Nice! Now add $99 to it and donate to Planned Parenthood or Doctors Without Borders.
posted by BostonTerrier at 8:32 AM on August 24, 2017

Is there any quantitative analysis in existence comparing different allocation of a single dollar and the differing amounts of good those allocations would make?

Quantitative analyses that attempt to provide definitive answers to moral questions are on incredibly shaky ground to begin with. If the analysis in question involves money, the ground does not so much shake as disappear altogether, Wile E Coyote style; if a dollar had an objective value, money simply wouldn't work.

If you and I freely arrange for me to pay you a dollar for an ice cream, I do that because I want the ice cream more than I want the dollar, and I can do it because you want the dollar more than you want the ice cream. The only way the transaction can happen is if you and I do not agree on the value of the dollar relative to that of the goods it's exchanged for.

The fact that people are known to pay for things is therefore a nonexistence proof for any absolute value inherent in the money used to facilitate those transactions.
posted by flabdablet at 9:33 AM on August 24, 2017 [1 favorite]

Response by poster: Thanks for the great responses! To clarify the question, by $1 I meant an arbitrary quantity of money, not a literal dollar.

I guess what I was trying to figure out was how things things fit in relative to each other.

I think it's pretty obvious that a dollar of my surplus income donated to the Schistosomiasis Control Initiative probably goes a lot farther than putting that dollar to work in any other way.

That being said, obviously having a dollar in a bank helps people take out loans from said bank. Burning the dollar (outside of its carbon cost, so lets say burying it), causes a tiny amount of deflation. Depending on your perspective maybe that could do more good than any of the other things.

I get all the reasons why quantifying it is impossible, but even knowing that, I'd love to have some sort of feel for how these things compare and what the different arguments are. Specifically, I think it gets muddy around savings. Saving is a good thing, but most advice is around how to optimally save for your own purposes (and the answer is almost always an asset allocation based portfolio). I do think its an interesting question comparing whether having money in a bank account or invested in an S&P500 index fund, or in the bond market might do more good for the world.

I understand that there is no one right answer to this question, and that it is intractable, but I'd be curious to hear what different ways of looking at the problem people would take.

At the end of the day almost all of us must make spending choices!
posted by sp160n at 10:08 AM on August 24, 2017

Best answer: I'd expect that using any widely available savings or investing mechanism would be functionally equivalent for any reasonable amount of money (by which I mean up to many billions). When you choose how to invest, whether in a bank account or by buying stock, you're selecting a risk/reward tradeoff. Simultaneously, millions of others are doing the same, and they will counterbalance any choice you make to bring the market back to equilibrium.

Consider the choice of selling $1 million in government bonds and then trying to buy $1 million in the S&P500. You will (very slightly) bid down bond prices and bid up stock prices. Then some people who own stocks will react to those price changes by selling stocks and buying bonds - the mirror of your decision. Since you are such a tiny part of the market, the prices of those will be unchanged. You will have a different risk profile, and so will the people who switched with you. By trading, they showed that they were basically indifferent between those two positions, so they are essentially neither better nor worse off, and the rest of the world is unaffected.

Note that I qualified it as making widely available investments. What if you invested in a small start-up company that, say, constructed wells in rural villages (and did so purely because you thought it was a good investment, not out of charitable impulses)? That might make the users better off. Finance 101 says that if you hadn't made that investment, someone else would have, but that's clearly not always true, especially for a small company.

But if you start looking for investments that are going to be helpful, then you're really making a combined investment and charitable donation (equal to your expectation of the lower returns from that investment relative to the most financially beneficial investment you could find).
posted by Mr.Know-it-some at 11:09 AM on August 24, 2017 [1 favorite]

I know you used a dollar for an example, but it's such a small quantity that, frankly, who cares?

People who don't have a dollar care.
People who can stretch that dollar into food for a week care.
People who could use that dollar for a gallon of water so they don't die of dehydration care.

People who have been in all of those situations at one time or another care a whole hell of a lot.

“Most human beings strongly believe that money is way less important than the life of a human being, but in reality five hundred, fifty, or even five dollars are way more important to the lives of most human beings than the lives of most human beings.”
― Mokokoma Mokhonoana
posted by The Almighty Mommy Goddess at 8:56 AM on August 25, 2017

I'm sure I've seen MeFites talk about this very thing on other threads, so I'm surprised you haven't gotten more specific cites here.

I know basically nothing about this except that I've heard about multiplier effects, mostly related to government spending - the idea that $1 in taxes actually produces more than $1 in value within the economy. So this is just my inexpert attempt to help you find answers that I'm pretty sure are out there.

Here's a quick introduction to the multiplier effect of government spending:

Decoder: The Multiplier Effect

and here's a longer one from The Economist:

What is the Keynesian multiplier?

Here's something I found by searching "multiplier effect saving spending donating".

Keynesian Theory: Fiscal Policy and “Crowding Out”

Here's a snippet of Eyebrows McGee talking about the multiplier effect of tax dollars:

But the other bit that gets elided, that I want to talk about, is tax dollars. These are taxpayer-paid jobs, typically paid for by local property taxes. In general government spending is about the best thing you can do with a dollar -- I pay a dollar on property taxes, the city hires my neighbor to repave the road in front of my house, I get a shiny new road upon which commerce can be conducted and my neighbor gets paid and that $1 does, say, $1.17 of direct work locally plus contributes to economic development overall. Whereas I spend a dollar at Target, maybe 60 cents of that stay local, 20 cents goes to Target HQ, and 20 cents goes to suppliers. (I have wholly invented these numbers but tax dollars are generally your highest-value local multiplier.)

Here's Paul Krugman on the multiplier effect of government spending:

Multipliers and Reality

Here's a paper on the size of fiscal multipliers in various circumstances:

How big are fiscal multipliers? New evidence from new data

Here's an article from the Brookings Institute claiming that creating tech jobs has a significant multiplier effect of creating additional service jobs:

Multiplier Effects: Connecting the Innovation and Opportunity Agendas

I'm seeing mostly info about tax dollars, but I'd bet $1 (heh) that people have studied this specifically in terms of saving vs. spending vs. donating. It seems common-sensical to me that a dollar donated to, say, the Carter Center, which has worked to eliminate Guinea worm disease (with the quantifiable ripple effects of parents not dying and therefore being able to continue caring for their kids; not wasting money on treating disease that's preventable; not losing productive work days to disease, etc. etc.), produces more good than that same dollar invested in a Wells Fargo savings account, where it is producing very, very minimal good in terms of investment (creating jobs, building innovation) or providing financial security for myself. I'm sure there are some more specific studies out there, and I hope some other more knowledgeable MeFites can help point you to them.
posted by kristi at 1:16 PM on August 26, 2017 [1 favorite]