The freakonomics of McDonalds vs. drugs | Steven Levitt

You'll be happy to know that I'll be talking not about my own tragedy, but other people's tragedy. It's a lot easier to be lighthearted about other people's tragedy than your own. And I want to keep in the spirit of the conference. So if you believe the media accounts, being a drug dealer in the height of the crack cocaine epidemic was a very glamorous life. In the words of Virginia Pastrell, there was money, there was drugs, guns, women, you name it, jewelry, bling, bling, it had it all. What I'm here to tell you today is that, in fact, based on 10 years of research, a unique opportunity to go inside a gang, to see the actual books, the financial records of the gang. That the answer turns out not to be that being in the gang was a glamorous life, but I think more realistically that being a gang, saying selling drugs for a gang is perhaps the worst job in all of America. And that's what I'd like to convince you of today. Okay, so there are three things I want to do. First, I want to explain how and why crack cocaine had such a profound influence on inner city gangs. Secondly, I want to tell you how somebody like me came to be able to see the inner workings of. Of a gang. It's an interesting story, I think. And then third, I want to tell you in a very superficial way about some of the things we found when we actually got to look at the financial records, the books of the gang. Okay, so before I do that, just one warning, which is that this presentation has been rated R by the Motion Picture association of America. It contains adult themes, adult language. Given who's up on the stage, you'll be delighted to know that, in fact, there'll be no nudity, barring an unexpected wardrobe malfunctions aside. Ok, ok, So let me start by talking about crack cocaine and how it transformed the gang. And to do that, you have to actually go back to a time before crack cocaine in the early 80s, and look at it from the perspective of a gang leader. So being a gang leader in the inner city wasn't such a bad deal in the mid-80s, the early 80s, let me say now, you had a lot of power. You got to beat people up. You got a lot of prestige, a lot of respect. But the thing is, there was no money in it. The gang had no way to make money. You couldn't charge dues to the people in the gang because the people in the gang didn't have any money. You couldn't really make Any money selling marijuana? Marijuana's too cheap. It turns out there's just no market for being. You can't get rich selling marijuana. You couldn't sell cocaine. Cocaine's a great product, powder cocaine. But you got to know rich white people and most of the inner city gang members didn't know any rich white people. They couldn't sell to that market. You couldn't really do petty crime either. It turns out petty crime is a terrible way to make a living. So as a result, as a gang leader, you had power. It's a pretty good life. But the thing was, in the end, you were living at home with your mother and so it wasn't really a career. There was something that there were limits to how powerful and important you could be if you had to live at home with your mother. Then along comes crack cocaine. And in the words of Malcolm Gladwell, crack cocaine was the extra chunky version of tomato sauce for the inner city. Because crack cocaine was an unbelievable innovation. I don't have time to talk about it today, but if you think about it, I would say that in the last 25 years, of every invention or innovation that's occurred in this country, the biggest one in terms of impact on the well being of people who live in the inner city was crack cocaine. It's for the worse, not for the better, but for the worse. Had a huge impact on life. So what was it about crack cocaine? It was a brilliant way of getting the brain high because you could smoke crack cane and you can smoke crack cocaine, you can't smoke pot or cocaine. And smoking is a much more efficient mechanism delivering a high than is snorting it. And it turned out there was this audience that didn't know it wanted crack cocaine, but when it came, it really did. And it was a perfect drug. You could sell for, buy the cocaine that went in for a dollar, sell it for $5. Highly addictive. The high was very short. So for 15 minutes you get this great high and then when you come down, all you want to do is get high again. Created a wonderful market and, and for the people who were there running the gang, it was a great way seemingly to make a lot of money, at least for the people on the top. Ok, so this is where we enter the picture. Not really me, I'm really a bit player in all of this. My co author, Siddhir Venkatesh is the main character. So he was a math major in college who had a good heart and decided he wanted to get a sociology PhD, came to the University of Chicago. The three months before he came to Chicago, he had spent following the Grateful Dead. And in his own words, he looked like a freak. Okay, he's a South Asian, very dark skinned South Asian, big man, and he had hair, in his words, down to his ass. Defied all kinds of boundaries. Was he black or white? Was he man or woman? It was really a curious sight to be seen. So he showed up at the University of Chicago, and the famous sociologist William Julius Wilson was doing a book that involved surveying people all across Chicago. And he took one look at Sidir, who was going to go do some surveys for him, and decided he knew exactly the place to send him, which was to one of the toughest, most notorious housing projects, not just in Chicago, but in the entire United States. So Sidir, the suburban boy who'd never really been in the inner city, dutifully took his clipboard and walked down to this housing project, gets to the first building, first building. Well, there's nobody there, but he hears some voices up in the stairwell. So he climbs up the stairwell and he comes around the corner, finds a group of young African American men playing dice. Okay, this is about 1990, peak of the crack epidemic. This is a very dangerous job, being in a gang. You don't like to be surprised. You don't like to be surprised by people coming around the corner. And the mantra was, shoot first, ask questions later. Now, Sedir was lucky he was such a freak. And that clipboard probably saved his life because they figured no other rival gang member would be coming up to shoot at them with a clipboard. So his greeting was not particularly warm. But they did say, well, ok, let's hear your questions on your survey. So I kid you not, the first question on the survey that he was sent to ask was, was, how do you feel about being born black and American? Makes you wonder about academics. Okay? So the choices of answers were very good, good, bad, and very bad. What Sudhir found out is, in fact, that the real answer was the following. The survey was not, in the end, going to be what got Sudir off the hook. He was held hostage overnight in the stairwell. There was a lot of gunfire. There were a lot of philosophical discussions he had with the gang members. By morning, the gang leader arrived, checked out, Sidir decided he wasn't no threat, and they'd let him go home. So Sidir went home, took a shower, took a nap, and you and I, probably faced with this situation, would think, well, I guess I'm going to write my dissertation on the Grateful Dead. I've been following him for the last three months, sir. Deer, on the other hand, got right back, walked down to the housing project, went up to the floor, the second floor, and said, hey, guys, I had so much fun hanging out with you last night, I wonder if I could do it again tonight. And that was the beginning. What turned out to be a beautiful relationship that involved Sadir living in the housing project on and off for 10 years, hanging out in crack houses, going to jail with the gang members, having the car window shot out of his car, having the police break into his apartment, steal his computer disks, you name it. But ultimately, the story has a happy ending for Sadir, who became one of the most respected sociologists in the country. And especially for me, as I sat in my office with my Excel spreadsheet open, waiting for Sidir to come and deliver to me the latest load of data that he would get from the Gap. It was one of the most unequal co authoring relationships ever, but I was glad to be the beneficiary of it. Okay, so what do we find? What do we find in the gang? Well, let me say one thing. So what we got, we really got access to everybody in the gang. We got an inside look at the gang from the very bottom up to the very top. They trusted Sedir in ways that really no academic has ever or really anybody, any outsider has ever earned the trust of these gangs to the point where they actually opened up. What was most interesting for me is their books, their financial records that they kept, and they made them available to us, and we not only could study them, but we could ask them questions about what was in them. So if I have to kind of summarize very quickly in the short time I have what the sort of the bottom line of what I take away from the gang is that if I had to draw a parallel between the gang and any other organization, it would be that the gang is just like McDonald's in a lot of different respects. The restaurant McDonald's. Okay, so first, in one way, which isn't maybe the most interesting way, but it's a good way to start, is in the way it's organized, the hierarchy of game, the way it looks. So here's what the org chart of the gang looks like. I don't know if any of you know very much about org charts, but if you were to strip down and simplify McDonald's org chart, this is exactly what the org chart would look like. Now, it's amazing, but the top level of the gang, they Actually call themselves the board of directors. And Sudhir says it's not like these guys had a very sophisticated kind of view of what happened in American corporate life, but they had seen movies like Wall street, and they kind of had learned a little bit about what it was like to be in the real world. Now, below that board of directors, you've got essentially what are regional VPs, people who control, say, the south side of Chicago or the west side of Chicago. Now, Sudhir got to know very well the guy who had the unfortunate assignment of trying to take the Iowa franchise, which it turned out for this black gang, was not one of the more brilliant financial endeavors that they undertook. But the thing that really makes a gang seem like McDonald's, it's its franchisees that the guys who are running the local gangs, the four square block by four square block areas, they're just like the guys in some sense who are running the McDonald's. They are the entrepreneurs. They get the exclusive property rights to control the drug selling. They get the name of the gang behind them for merchandising and marketing, and they're the ones who basically make the profit or lose the profit, depending on how good they are at running the business. Now, the group I really want you to think about though, are the ones at the bottom, the foot soldiers. These are the teenagers typically who'd be standing out on the street corners selling the drugs. Extremely dangerous work. And important to note that almost all of the weight, all of the people in this organization are at the bottom, just like McDonald's. So in some sense, the foot soldiers are a lot like the people who are taking your order at McDonald's. And indeed, it's not just by chance they're like them. In fact, in these neighborhoods, they'd be the same people. So the same kids who were working in the gang were actually at the very same time. They would typically be working part time at a place like McDonald's, which already, I think, foreshadows the main result that I've talked about, about what a crappy job it was being in the gang. Because obviously if being in the gang was such a wonderful lucrative job, why in the world were these guys moonlight at McDonald's? So what do the wages look like? So you might be surprised. But based on the actual being able to talk to them and to see their records, this is what it looks like in terms of the wages. The hourly wage the foot soldiers were earning was $3.50 an hour. It was below the minimum wage. And this is well documented. It's easy to see by the patterns of consumption they have. It really is not fiction, it's fact. There was very little money in the gang, especially at the bottom. Now, if you manage to rise up saying, be that local leader, the guy who's equivalent of the McDonald's franchisee, you, you'd be making $100,000 a year. And that in some ways was the best job you could hope to get if you were growing up in one of these neighborhoods as a young black male. If you managed to rise to the very top, $200,000 or $400,000 a year is what you'd hope to make. Truly, you would be a great success story. And one of the sad parts of this is that indeed, among the many other ramifications of crack cocaine is that the most talented individuals in these communities, this is what they were striving for. They weren't trying to make it in legitimate ways because there were no legitimate channels out. This was the best way out. And it actually was the right choice probably to try to make it out this way. You look at this, the relationship with McDonald's breaks down here. The money looks about the same. Why is it such a bad job? Well, the reason it's such a bad job is that there's somebody shooting at you a lot of the time. Okay, so we're shooting at you. What are the death rates? Okay, we found in our gang, and admittedly this was not really sort of a standard situation. This was a game of a time of intense violence, of a lot of gang wars as this gang actually became quite successful. But there were costs. And so the death rate, not to mention the rate of being arrested, sent to prison, being wounded, the death rate in our sample was 7% per person per year. You're in the gang for four years, you expect to die with about a 25% likelihood. That is about as high as you can get. So just for comparison's purposes, let's think about some other walk of life where you may expect might be extremely risky. Like let's say that you were a murderer and you were convicted of murder and you're sent to death row. Turns out the death rates on death row from all causes, including the execution, 2% a year. Okay? So it's a lot safer being on death row than it is selling drugs out on the street. Okay, that makes you pause. Gives you some pause for those of you who believe that the death penalty is going to have an enormous deterrent effect on crime. Now, to give you a sense of just how bad the inner city was during crack. And I'm not really talking about, I'm not really focusing on the negatives, but really there's another story to tell you. There's. If you look at the death rates just of random young black males growing up in the inner city in the United States, the death rates during crack were about 1%. That's extremely high. This is violent death. It's just, it's unbelievable in some sense. To put it into perspective, if you compare this to the soldiers in Iraq, for instance, right now, fighting the war, 0.5%. So in some very literal way, the young black men who were growing up in this country were living in a war zone, very much in the sense of the way that the soldiers over in Iraq are fighting in war. So why in the world, you might ask, would anybody be willing to stand out on the street corner selling drugs for $3.50 an hour with a 25% chance of dying over the next four years? Why would they do that? And I think there are a couple answers. I think the first one is that they got fooled by history. It used to be the gang was a rite of passage that the young people controlled the gang, that as you got older, you dropped out of the gang. So what happened was the people who happened to be in the right place at the right time, the people who happened to be leading the gang in the mid to late 80s became very, very wealthy. And so the logical thing to think was that, well, the next generation, so they're going to age out of the game like everybody always has, and the next generation is going to take over and get the wealth. So there are striking similarities, I think, to the Internet boom. The first set of people in Silicon Valley got very, very rich. And then all my friends said, maybe I should go do that too. And they were willing to work very cheap for stock options that never came. In some sense, that's what happened exactly to the set of people we were looking at is that they were willing to start at the bottom. Just like say a lawyer at a law firm, a first year lawyer is willing to start at the bottom, work 80 hour weeks for not that much money because they think they're going to make partner. But what happened was the rules changed and they never got to make partner. Indeed, the same people who were running all of the major gangs in the late 1980s are still running the major gangs in Chicago today. They never passed on any of the wealth. So everybody got stuck at that $3.50 an hour job. And it turned out to Be a disaster. The other thing the gang was very, very good at was marketing and trickery. And so, for instance, one thing the gang would do is the gang leaders would have big entourages and they'd drive fancy cars and have fancy jewelry. So what Sedira eventually realized as he hung out with them more, is that really they didn't own those cars. They just leased them because they couldn't afford to own the fancy cars. And they didn't really have gold jewelry, they had gold plated jewelry. Goes back to the real real versus the fake real. And really, they did all sorts of things to trick the young people into thinking what a great deal the gang was going to be. So for instance, they would give a 14 year old kid, they'd give him a whole roll of bills to hold. That 14 year old kid would say, oh, well. He would say to his friends, hey, look at all the money I got in the gang. Well, it wasn't his money until he spent it. And then essentially he was in debt to the gang and was sort of an indentured servant for a while. Okay, so I have a couple minutes. Let me do one last thing I hadn't thought I'd have time to do, which is to talk about what we learn more generally about economics from the study of the gang. So economists tend to talk in technical words. Often our theories fail quite miserably when we go to the data. But actually, what's kind of interesting is that in this setting, it turned out that some of the economic theories that worked not so well in the real economy worked very well in the drug economy in some sense, because it's unfettered capitalism. Here's an economic principle. This is one of the basic ideas in labor economics called a compensating differential. It's the idea that basically the incremental wages that a worker requires to leave him indifferent between performing two tasks, one which is more unpleasant than the other. That's what you call a compensating differential. That's why we think garbage men might be paid more than people who work in parks. So in the words of the gang, one of the members of the gang, I think makes this clear. So it turns out I'm sort of getting ahead of myself. It turns out in the gang, when there's a war going on, that they actually pay the foot soldiers twice as much money. It's exactly this concept, because they're not willing to be at risk. So here's in the words of the gang member captures it quite nicely. He says, would you Stand around here when all this shit, that means shooting. If all this shit's going on, no, Right. So if I'm going to be asked to put my life on the line, then front me the cash, man. So essentially, I think the gang member says it much more articulately than does the economist about what's going on. Here's another one. So economists talk about game theory, that every two person game has a Nash equilibrium. Here's the translation you get from the gang member. They're talking about the decision of why they don't go shooting. One thing that turns out to be a great business tactic in the gang, if you go and just shoot in the air, just shoot guns in the other gang's territory. All the people are afraid to go by the guns there. They're going to come into your neighborhood. But here's what he says about why they don't do that. He says if we start shooting around there in the other gang's territory, nobody, and I mean you dig it, nobody going to step on their turf. But we got to be careful because they can shoot around here too. And then we all fucked. So that's exactly the same cosmic concept. But then again, sometimes economists get it wrong. So one thing we observed in the data is that it looked like in terms of the gang leader always got paid. He always, no matter how bad it was economically, he always got himself paid. So we had some theories relating to cash flow and lack of access to capital markets and things like that. But then we asked the gang member, well, why is it you always get paid and your workers don't always get paid? His response is, you got all these niggers below you who want your job, you dig? If you start taking losses, they see you as weak in shit. I thought about it. I said, CEOs often pay themselves million dollar bonuses, even when companies are losing a lot of money. And it never would really occur to economists that this idea of weakened shit could really be important. But maybe weaken shit, maybe weaken shit is an important hypothesis that needs to remember. Thank you very much. What if great ideas weren't cherished? What if they carried no importance or held no value? 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