Freakonomics Revised and Expanded Edition

by Steven D. Levitt

  Ben Green, despite months spent immersed in Kennedy’s archives, could not identify the man once known as John Brown. Green did manage to interview Dan Duke, a former state prosecutor who, as rendered in The Klan Unmasked, worked closely with Kennedy. Duke agreed that Kennedy “got inside of some [Klan] meetings” but openly disputed Kennedy’s dramatized account of their relationship. “None of that happened,” he told Green. In 1999, when Green finally published his Harry T. Moore book, Before His Time, it contained a footnote labeling The Klan Unmasked “a novelization.”

  Green is not the only person to have concluded that Kennedy has bent the truth. Jim Clark, who teaches history at the University of Central Florida, says that Kennedy “built a national reputation on many things that didn’t happen.” Meredith Babb, director of the University Press of Florida, which has published four of Kennedy’s books, now calls Kennedy “an entrepreneurial folklorist.” But except for Green’s footnote, they all kept quiet until the retelling of Kennedy’s exploits in Freakonomics produced a new round of attention. Why? “It would be like killing Santa Claus,” Green says. “To me, the saddest part of this story is that what he actually did wasn’t enough for him, and he has felt compelled to make up, embellish or take credit for things he didn’t do.”

  When presented with documents from his own archives and asked outright, several weeks ago over lunch near his Florida home, if The Klan Unmasked was “somewhat conflated or fictionalized,” Kennedy said no. “There may have been a bit of dialogue that was not as I remembered it,” he answered. “But beyond that, no.” When pressed, Kennedy did concede that “in some cases I took the reports and actions of this other guy and incorporated them into one narrative.” As it turns out, Kennedy has made such an admission at least once before. Peggy Bulger, director of the American Folklife Center in the Library of Congress, wrote a 1992 dissertation called “Stetson Kennedy: Applied Folklore and Cultural Advocacy,” based in part on extensive interviews with her subject. In an endnote, Bulger writes that “Kennedy combined his personal experiences undercover with the narratives provided by John Brown in writing ‘I Rode with the Ku Klux Klan’ in 1954.”

  We weren’t very happy, of course, to learn that a story we included in Freakonomics was built on such shaky foundations—especially since the book is devoted to upending conventional wisdoms rather than reinforcing them, and concerning Stetson Kennedy, the most conventional wisdom of all is his reputation as a Klan infiltrator.

  There is also the fact that in our work we make a point of depending less on anecdote in favor of data, the idea being that numbers tend to lie less baldly than people do. But the story of Stetson Kennedy was one long series of anecdotes—which, no matter how many times they were cited over the decades, were nearly all generated by the same self-interested source.

  Perhaps Kennedy’s long life of fighting the good fight is all that matters. Perhaps, to borrow Peggy Bulger’s phraseology, a goal of “cultural advocacy” calls for the use of “applied folklore” rather than the sort of forthrightness that should be more typical of history or journalism. One thing that does remain true is that Kennedy was certainly a master of information asymmetry. Until, that is, the data caught up with him.

  FILLING IN THE TAX GAP

  Why Americans should be clamoring for the I.R.S. to do more audits, not fewer

  April 2, 2006

  This is the time of year when American citizens inevitably think about the Internal Revenue Service and, also inevitably, about how deeply they hate it. But most people who hate the I.R.S. probably do so for the wrong reasons. They think it is a tough and cruel agency, but in fact it is not nearly as tough and cruel as it should be.

  The first thing to remember is that the I.R.S. doesn’t write the tax code. The agency is quick to point its finger at the true villain: “In the United States, the Congress passes tax laws and requires taxpayers to comply,” its mission statement says. “The I.R.S. role is to help the large majority of compliant taxpayers with the tax law, while ensuring that the minority who are unwilling to comply pay their fair share.”

  So the I.R.S. is like a street cop or, more precisely, the biggest fleet of street cops in the world, who are asked to enforce laws written by a few hundred people on behalf of a few hundred million people, a great many of whom find these laws too complex, too expensive and unfair.

  And yet most Americans say they are proud to pay their taxes. In an independent poll conducted last year for the I.R.S. Oversight Board, 96 percent of the respondents agreed with the statement “It is every American’s civic duty to pay their fair share of taxes,” while 93 percent agreed that everyone “who cheats on their taxes should be held accountable.” On the other hand, when asked what influences their decision to report and pay taxes honestly, 62 percent answered “fear of an audit,” while 68 percent said it was the fact that their income was already being reported to the I.R.S. by third parties. For all the civic duty floating around, it would seem that most compliance is determined by good old-fashioned incentives.

  So which of these incentives work and which do not? To find out, the I.R.S. conducted the National Research Program, a three-year study during which 46,000 randomly selected 2001 tax returns were intensively reviewed. (The I.R.S. doesn’t specify what these 46,000 people were subjected to, but it may well have been the kind of inquisition that has earned the agency its horrid reputation.) Using this sample, the study found a tax gap—the difference between taxes owed and taxes actually paid—of $345 billion, or nearly one-fifth of all taxes collected by the I.R.S. This sum happens to be just a few billion dollars less than the projected federal budget deficit for 2007; it also amounts to more than $1,000 worth of cheating by every man, woman and child in the United States.

  But most people aren’t cheating. And when you take a look at who does cheat and who doesn’t, it becomes pretty clear just why people pay their taxes at all. The key statistic in the I.R.S.’s study is called the Net Misreporting Percentage. It measures the amount that was misreported on every major line item on those 46,000 returns. In the “wages, salaries, tips” category, for instance, Americans are underreporting only 1 percent of their actual income. Meanwhile, in the “nonfarm proprietor income” category—think of self-employed workers like a restaurateur or the boss of a small construction crew—57 percent of the income goes unreported. That’s $68 billion in unpaid taxes right there.

  Why such a huge difference between the wage earner and a restaurateur? Simple: The only person reporting the restaurateur’s income to the I.R.S. is the restaurateur himself; for the wage earner, his employer is generating a W2 to let the I.R.S. know exactly how much he has been paid. And the wage earner’s taxes are automatically withheld from his every check, while the restaurateur has all year to decide if, and how much, he will pay.

  Does this mean that the average self-employed worker is less honest than the average wage earner? Not necessarily. It’s just that he has much more incentive to cheat. He knows that the only chance the I.R.S. has of learning his true income and expenditures is to audit him. And all he has to do is look at the I.R.S.’s infinitesimal audit rate—last year, the agency conducted face-to-face audits on just 0.19 percent of all individual taxpayers—to feel pretty confident to go ahead and cheat.

  So why do people really pay their taxes: because it is the right thing to do, or because they fear getting caught if they don’t? It sure seems to be the latter. A combination of good technology (employer reporting and withholding) and poor logic (most people who don’t cheat radically overestimate their chances of being audited) makes the system work. And while it sounds bad to hear that Americans underpay their taxes by nearly one-fifth, the tax economist Joel Slemrod estimates that the U.S. is easily within the upper tier of worldwide compliance rates.

  Still, unless you are personally cheating by one-fifth or more, you should be mad at the I.R.S.—not because it’s too vigilant, but because it’s not nearly vigilant enough. Why should you pay your fair share
when the agency lets a few hundred billion dollars of other people’s money go uncollected every year?

  The I.R.S. itself would love to change this dynamic. In the past few years, it has significantly increased its enforcement revenue and its audit rate, despite a budget that is only fractionally larger. A main task of any I.R.S. commissioner (the current one is Mark Everson) is to beg Congress and the White House for resources. For all the obvious appeal of having the I.R.S. collect every dollar owed to the government, it is just as obviously unappealing for most politicians to advocate a more vigorous I.R.S. Michael Dukakis tried this during his 1988 presidential campaign, and—well, it didn’t work.

  Left to enforce a tax code no one likes upon a public that knows it can practically cheat at will, the I.R.S. does its best to fiddle around the edges. Once in a while, it hits pay dirt.

  In the early 1980s, an I.R.S. research officer in Washington named John Szilagyi had seen enough random audits to know that some taxpayers were incorrectly claiming dependents for the sake of an exemption. Sometimes it was a genuine mistake (a divorced wife and husband making duplicate claims on their children), and sometimes the claims were comically fraudulent (Szilagyi recalls at least one dependent’s name listed as Fluffy, who was quite obviously a pet rather than a child).

  Szilagyi decided that the most efficient way to clean up this mess was to simply require taxpayers to list their children’s Social Security numbers. “Initially, there was a lot of resistance to the idea,” says Szilagyi, now 66 and retired to Florida. “The answer I got was that it was too much like ‘1984.’” The idea never made its way out of the agency.

  A few years later, however, with Congress clamoring for more tax revenue, Szilagyi’s idea was dug up, rushed forward and put into law for tax year 1986. When the returns started coming in the following April, Szilagyi recalls, he and his bosses were shocked: seven million dependents had suddenly vanished from the tax rolls, some incalculable combination of real pets and phantom children. Szilagyi’s clever twist generated nearly $3 billion in revenues in a single year.

  Szilagyi’s immediate bosses felt he should get some kind of reward for his idea, but their superiors weren’t convinced. So Szilagyi called his congressman, who got the reward process back on track. Finally, five years after his brainstorm became the law, Szilagyi, who earned about $80,000 annually at the time, was given a check for $25,000. By this point, his idea had generated roughly $14 billion.

  Which suggests at least one legitimate reason to dislike the I.R.S.: if the agency hadn’t been so stingy with Szilagyi’s reward back then, it probably would have attracted a lot more of the anti-cheating wizards it really needs today.

  From the Freakonomics Blog

  The following excerpts are inevitably pockmarked with incomplete thoughts (at the very least), since blog writing is by nature more impetuous, more colloquial, even more random than what one would write in a book or a newspaper. But hopefully such casual discourse provides its own sort of value. The excerpts here have been slightly edited, mostly to compensate for the fact that, unlike a website, a book that is printed on paper, cannot (yet) allow you to click here to read further. The excerpts are divided into four categories:

  Ruminations on Freakonomics itself, and its aftermath

  A continuation of the abortion/crime discussion presented in Freakonomics

  Random reflections on random subjects, most of them related to Freakonomics in some loose way—in the way, perhaps, that “kosher style” food isn’t quite kosher but also isn’t shrimp

  Rants and raves of a more personal nature

  These postings represent perhaps 3 percent of what we’ve written on our blog since it began, and we haven’t included any readers’ comments, which are often far more involved (and entertaining) than our own posts. The entire blog can be found at www.freakonomics.com/ blog/.

  Another major difference between the blog and our book is that all but the first two excerpts that follow were written by one of us, not both of us, and are accordingly notated with a signoff of either “SDL” (Levitt) or “SJD” (Dubner).

  1. ON FREAKONOMICS ITSELF

  A brief compendium of thoughts about how the book was written, published, and received.

  “Unleashing Our Baby”

  Every parent thinks he has the most beautiful baby in the world. Evolution, it seems, has molded our brains so that if you stare at your own baby’s face day after day after day, it starts to look beautiful. When other people’s children have food clotted on their faces, it looks disgusting; with your own kid, it’s somehow endearing.

  Well, we’ve been staring at the Freakonomics manuscript so much that it now looks beautiful to us—warts, clotted food, and all. So we started to think that maybe some people would actually want to read it, and after reading it, might even want to express their opinions about it. Thus, the birth of this website. We hope it’s a happy (or at least happily contentious) home for some time to come.

  —SDL & SJD (March 30, 2005)

  “Does Freakonomics Suck?”

  Our publisher has been busily promoting and selling Freakonomics—which, of course, is its job, and which we, not surprisingly, applaud. When something good happens—a nice review in the Wall Street Journal, for instance, or an upcoming appearance on The Daily Show with Jon Stewart—the publisher assiduously spreads the word. But we think it’s worth considering some alternative views. That, after all, is the spirit of Freakonomics—examining the data, whatever it may be, and following it through, wherever that may lead. So here are some people who think that Freakonomics is, in part or in sum, a big fat stink bomb:

  Felix Salmon, a journalist and blogger, wrote a lengthy and exasperated review calling Freakonomics “a series of disjointed chapters” in which “Levitt and Dubner like to get holier-than-thou” and “lap up the conventional wisdom” Steve Sailer, who has vigorously argued against the link between Roe v. Wade and falling crime (a Google search of “Sailer” and “Freakonomics” will turn up a wide variety of comments); a Newsday review (Apr. 24, 2005), by Scott McLemee, which chided the book’s “style of evasive lucidity” a review in Time magazine (May 2, 2005), by Amanda Ripley, who writes that the “unfortunately titled Freakonomics” has “no unifying theory … which is a shame.” In fairness to ourselves, we should note that both the Time and Newsday reviews were largely positive. But we should also note that one well-known American writer of non-fiction, when sent an early copy of Freakonomics for a blurb, refused to endorse it on the grounds that “the one thing missing from the section on crime is a sense of humility.”

  Do these comments make us unhappy? On a personal level, sure. But on a Freakonomics level, no. Years ago, the Harvard law professor Alan Dershowitz opened a kosher deli in Harvard Square, which came under protest on various grounds. Dershowitz, known as much for his embrace of free speech as his legal acumen, said—and here we are paraphrasing loosely at best—that nothing was more precious to him than the right of people to protest his deli.

  So please don’t take our word that Freakonomics is a good book. Don’t believe the good reviews either. Feel free to make up your own mind—you can poke around a good bit here, on this very website. Maybe you will decide that Freakonomics is, after all, a piece of trash. We cherish your right to think so.

  —SDL & SJD (April 26, 2005)

  “A Freakonomics Roundtable”

  There has been a lot written about Freakonomics, but in terms of thoughtfulness, nothing matches the collection of essays assembled at the blog Crooked Timber (http://crookedtimber.org/2005/05/23/ steven-levitt-seminar-introduction/). There you will find five discussions of Freakonomics done by academics from a range of disciplines, along with my response to these essays.

  I’ve also cut and pasted my response here, which basically makes sense even if you haven’t read the original essays.

  Let’s start with the title. Freakonomics. We debated endlessly over the title. From a naming perspective, the difficulty with this
book is that it doesn’t have a theme. We thought about a question title (“What Do Sumo Wrestlers and Schoolteachers Have in Common?”), some non-threatening titles (“The Hidden Side of Everything” or “Ain’t Necessarily So”), and some loopy titles (“E-Ray Vision,” with the “E” standing for economics).

  In the end, though, Freakonomics became the obvious choice, for reasons anchored in the contrast between my own research on first names and that of others. Let’s just assume that my research is right and it is really true that a name on a résumé does matter for getting a job callback, but not for long-term life outcomes. This probably implies that names matter a little for first impressions, but then quickly get swept aside in importance once we gain some familiarity. When’s the last time you thought to yourself, Oprah is a ridiculous name, I certainly won’t watch her show? Or, The Beatles…what a ridiculous name for a band. No one would ever buy their records.

  In naming a book, you need something attention-grabbing to cut through the clutter of the thousands of competing books, but as shocking as Freakonomics sounds the first time you hear it, by the twentieth time it becomes familiar, like Oprah. My guess is that the Crooked Timber commenters were already softening their hatred for the title by the time they finished writing. And a year from now, they may even forget that they ever hated the title. At least, that is what happened with our publisher, which initially dismissed the title out of hand, only allowed it at the eleventh hour, and now are telling us we need to sign up with them for a second book because no one else can market our books as well as they do. And if there is a second book, we have a title in mind that is so outrageous it will have to be loved.