income from house property xls

you'll be happy to know thati'll be talking not about my own tragedy, but other people's tragedy. it's a lot easier to be lightheartedabout other people's tragedy than your own, and i want to keep itin the spirit of the conference. so, if you believe the media accounts, being a drug dealer in the heightof the crack cocaine epidemic was a very glamorous life,in the words of virginia postrel. there was money,there was drugs, guns, women,

you know, you name it -- jewelry,bling-bling -- it had it all. what i'm going to tell you today is that,in fact, based on 10 years of research, a unique opportunityto 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 gangwas a glamorous life. but i think, more realistically,that being in a gang -- selling drugs for a gang -- is perhapsthe worst job in all of america. and that's what i'd liketo convince you of today.

so there are three things i want to do. first, i want to explainhow and why crack cocaine had such a profound influenceon inner-city gangs. secondly, i want to tell you how somebody like mecame to be able to see the inner workings of a gang --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 lookat the financial records,

the books, of the gang. so before i do that, just one warning, which is that this presentationhas been rated 'r' by the motion pictureassociation of america. it contains adult themes, adult language. given who is up on the stage,you'll be delighted to know that, in fact, there'll be no nudity -- (laughter) unexpected wardrobe malfunctions aside.

so let me start by talkingabout crack cocaine, and how it transformed the gang. to do that, you have to actually goback to a time before crack cocaine, in the early '80s, and look at itfrom the perspective of a gang leader. being a gang leader in the inner citywasn't such a bad deal in the mid-'80s -- the early '80s, let me say. now, you had a lot of power,and 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 duesto the people in the gang, because the people in the gangdidn't have any money. you couldn't really make any moneyselling marijuana -- marijuana's too cheap, it turns out. you can't get rich selling marijuana. you couldn't sell cocaine; cocaine's a great product --powdered cocaine -- but you've got to know rich white people.

and most of the inner-city gang membersdidn't know any rich white people, so couldn't sell to that market. you couldn't really dopetty crime, either. turns out, petty crime'sa terrible way to make a living. as a result, as a gang leader,you had, you know, 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 were limits to how powerfuland important you could be

if you had to live at homewith your mother. then along comes crack cocaine. and in the words of malcolm gladwell, crack cocaine was the extra-chunkyversion of tomato sauce for the inner city. because crack cocainewas 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 innovationthat's occurred in this country,

the biggest one in terms of impact on the well-being of peoplewho live in the inner city, was crack cocaine. and for the worse --not for the better, but for the worse. it had a huge impact on life. so what was it about crack cocaine? it was a brilliant wayof getting the brain high. because you could smoke crack cocaine --you can't smoke powdered cocaine -- and smoking is a much more efficientmechanism of delivering a high

than snorting it. and it turned out there was this audiencethat didn't know it wanted crack cocaine, but when it came, it really did. and it was a perfect drug; you could buy the cocainethat went into it for a dollar, sell it for five dollars. highly addictive --the high was very short. so for fifteen minutes,you get this great high, and then when you come down,

all you want to do is get high again. it created a wonderful market. and for the people who were thererunning the gang, it was a great way, seemingly,to make a lot of money. at least for the people on the top. so this is where we enter the picture. not really me -- i'm reallya bit player in all this. my co-author, sudhir venkatesh,is the main character. he was a math major in collegewho had a good heart,

and decided he wantedto get a sociology phd, came to the university of chicago. now, the three monthsbefore he came to chicago, he had spent following the grateful dead. and in his own words,he "looked like a freak." 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?

he was really a curious sight to be seen. so he showed upat the university of chicago, and the famous sociologistwilliam julius wilson was doing a book that involvedsurveying people all across chicago. he took one look at sudhir, who was goingto go do some surveys for him, and decided he knew exactlythe 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 sudhir, the suburban boy who had neverreally been in the inner city,

dutifully took his clipboardand walked down to this housing project, gets to the first building. the first building?well, there's nobody there. but he hears some voicesup in the stairwell, so he climbs up the stairwell,comes around the corner, and finds a group of youngafrican-american men playing dice. 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 surprisedby people who come around the corner. and the mantra was:shoot first; ask questions later. now, sudhir was lucky --he was such a freak, and that clipboardprobably saved his life, because they figured no otherrival gang member would be coming up to shootat them with a clipboard. so his greeting was not particularlywarm, but they did say, well, ok -- let's hearyour questions on your survey. so -- i kid you not --

the first question on the surveythat he was sent to ask was: "how do you feel about beingpoor and black in america?" makes you wonder about academics. so the choice of answers were: [a) very good b) good c) bad d) very bad] what sudhir found out is, in fact,that the real answer was the following: [a) very good b) good c) badd) very bad e) fuck you] the survey was not, in the end, goingto be what got sudhir off the hook. he was held hostageovernight in the stairwell.

there was a lot of gunfire, there were a lot of philosophicaldiscussions he had with the gang members. by morning, the gang leader arrived, checked out sudhir,decided he was no threat, and they let him go home. so sudhir went home,took a shower, took a nap. and you and i, probably, facedwith the situation, would think, "i guess i'm going to writemy dissertation on the grateful dead, i've been following themfor the last three months."

sudhir, on the other hand, got right back, walkeddown to the housing project, went up to the second floor, and said: "hey, guys, i had so much funhanging out with you last night, i wonder if i could do it again tonight." and that was the beginning of what turnedout to be a beautiful relationship that involved sudhir living in the housingproject on and off for 10 years, hanging out in crack houses,going to jail with the gang members, having the windows shot out of his car,

having the police break into his apartmentand steal his computer disks -- you name it. but ultimately, the storyhas a happy ending for sudhir, who became one of the mostrespected sociologists in the country. and especially for me, as i sat in my officewith my excel spreadsheet open, waiting for sudhir to come and deliverto me the latest load of data that he would get from the gang. it was one of the most unequalco-authoring relationships ever --

but i was glad to bethe beneficiary of it. so what did we find? what did we find in the gang? well, let me say one thing: we really got accessto everybody in the gang. we got an inside look at the gang,from the very bottom up to the very top. they trusted sudhir, in waysthat 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 interestingfor me -- their books, the financial records they kept. they made them available to us,and we not only could study them, but we could ask them questionsabout what was in them. so if i have to kind of summarizevery quickly in the short time i have what the bottom line of whati take away from the gang is, it's that, if i had to drawa parallel between the gang and any other organization, it would be that the gangis just like mcdonald's,

in a lot of different respects --the restaurant mcdonald's. so first, in one way, which isn't maybe the most interestingway, but it's a good way to start -- is in the way it's organized,the hierarchy of the gang, the way it looks. so here's what the org chartof the gang looks like. i don't know if you know muchabout org charts, but if you were to assign a stripped-downand simplified mcdonald's org chart, this is exactly what it would look like.

it's amazing, but the toplevel of the gang, they actually call themselvesthe "board of directors." and sudhir says it's not like these guyshad a very sophisticated view of what happenedin american corporate life, but they had seen movieslike "wall street," and they had learned a little bitabout what it was like to be in the real world. now, below that board of directors,

you've got essentiallywhat are regional vps -- people who control, say, the south sideof chicago, or the west side of chicago. sudhir got to know very well the guywho 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 brilliantfinancial endeavors they undertook. but the thing that really makes the gangseem like mcdonald's is its franchisees. the guys who are runningthe local gangs -- the four-square-blockby 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 rightsto control the drug-selling. they get the name of the gang behind them,for merchandising and marketing. and they're the ones who basicallymake the profit or lose a profit, depending on how goodthey are at running the business. now, the group i really want youto think about, though, are the ones at the bottom --the foot soldiers. these are the teenagers, typically,

who'd be standing out on the streetcorner, selling the drugs. extremely dangerous work. and important to note is that almost allof the weight, all of the people in this organization are at the bottom --just like mcdonald's. so in some sense, the foot soldiersare a lot like the people who are taking your order at mcdonald's, and it's not just by chancethat they're like them. in fact, in these neighborhoods,they'd be the same people. so the same kids who are workingin the gang were actually,

at the very same time,typically working part-time at a place like mcdonald's. which already foreshadowsthe main result that i've talked about, about what a crappy jobit was, being in the gang. because obviously, if being in the gangwere such a wonderful, lucrative job, why in the world would these guysmoonlight at mcdonald's? so what do the wages look like?you might be surprised. but based on being able to talk to themand to see their records, this is what it lookslike in terms of the wages.

the hourly wage the foot soldierswere earning was $3.50 an hour. it was below the minimum wage.and this is well-documented. it's easy to see by the patternsof 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 managed to rise up, say,and be that local leader, the guy who's the equivalentof the mcdonald's franchisee, you'd be making 100,000 dollars a year. and that, in some ways,was the best job you could hope to get

if you were growing up in one of theseneighborhoods as a young black male. if you managed to rise to the very top, 200,000 or 400,000 dollars a yearis what you'd hope to make. truly, you would be a great success story. and one of the sad partsof this is that, indeed, among the many otherramifications of crack cocaine is that the most talented individualsin these communities -- this is what they were striving for. they weren't trying to make itin legitimate ways,

because there wereno legitimate channels out. this was the best way out. and it actually wasthe right choice, probably, to try to make it out this way. you look at this, the relationship to mcdonald'sbreaks down here. the money looks about the same. why is it such a bad job? well, the reason it's such a bad jobis that there's somebody shooting at you

a lot of the time. so, with shooting at you,what are the death rates? we found, in our gang -- and admittedly, this was not reallya standard situation; this was a time of intense violence,of a lot of gang wars, as this gang actuallybecame 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 samplewas seven percent per person per year. you're in the gang for four years, you expect to diewith about a 25 percent likelihood. that is about as high as you can get. so for comparison's purposes, let's think about some other walk of lifeyou may expect might be extremely risky. let's say that you were a murderer and you were convicted of murder,and you're sent to death row. it turns out, the death rates on death rowfrom all causes, including execution:

two percent a year. so it's a lot safer being on death row than it is selling drugsout on the street. that gives you some pause,for those of you who believe that a death penalty's going to havean enormous deterrent effect on crime. to give you a sense of just how badthe inner city was during crack -- and i'm not really focusingon the negatives, but really, there's another storyto tell you there -- if you look at the death ratesjust of random, young black males

growing up in the inner cityin the united states, the death rates during crackwere about one percent. that's extremely high. and this is violent death --it's unbelievable, in some sense. to put it into perspective: if you comparethis to the soldiers in iraq, for instance, right nowfighting the war: 0.5 percent. so in some very literal way, the young black men who weregrowing up in this country were living in a war zone,

very much in the sense that the soldiersover in iraq are fighting in a war. so why in the world, you might ask, would anybody be willingto stand out on a street corner selling drugs for $3.50 an hour, with a 25 percent chance of dyingover the next four years? why would they do that? and i think there are a couple answers. i think the first oneis that they got fooled by history. it used to be the gangwas 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 bein the right place at the right time -- the people who happened to be leadingthe gang in the mid-to-late-'80s -- became very, very wealthy. and so the logical thing to think was that they are goingto age out of the gang like everybody else has,

and the next generation is goingto take over and get the wealth. there are striking similarities,i think, to the internet boom. the first set of people in silicon valleygot very, very rich. and then all of my friends said,"maybe i should go do that, too." and they were willing to work very cheapfor stock options that never came. in some sense,that's what happened, exactly, to the set of people we were looking at. they were willing to start at the bottom, just like, say, a first-yearlawyer at a law firm

is willing to start at the bottom, work 80-hour weeksfor not that much money, because they thinkthey're going to make partner. but the rules changed,and they never got to make partner. indeed, the same people who were runningall of the major gangs in the late 1980s are still running the major gangsin chicago today. they never passed on any of the wealth, so everybody got stuckat that $3.50-an-hour job, and it turned out to be a disaster.

the other thing the gang wasvery good at was marketing and trickery. and so for instance,one thing the gang would do is -- the gang leaders would havebig entourages, and they'd drive fancy carsand have fancy jewelry. so what sudhir eventually realizedas he hung out with them more, is that, really, they didn't ownthose cars -- they just leased them, because they couldn't affordto own the fancy cars. and they didn't really have gold jewelry,they had gold-plated jewelry. it goes back to, you know,the real-real versus the fake-real.

and really, they did all sortsof things to trick the young people into thinking what a great dealthe gang was going to be. so for instance, they would givea 14-year-old kid a whole roll of bills to hold. that 14-year-old kidwould say to his friends, "hey, look at all the moneyi got in the gang." it wasn't his money -- until he spent it, and then he was in debt to the gang, and was sort of an indenturedservant for a while.

so i have a couple minutes. let me do one last thingi hadn't thought i'd have time to do, which is to talk about what we learnedmore generally about economics, from the study of the gang. so, economists tend to talkin technical words. often, our theories fail quite miserablywhen we over the data, but what's kind of interestingis that in this setting, it turned out thatsome of the economic theories that worked not so wellin the real economy

worked very well in the drug economy, in some sense, becauseit's unfettered capitalism. here's an economic principle. this is one of the basic ideasin labor economics, called a "compensating differential." it's the idea that the increment to wagesthat a worker requires to leave him indifferentbetween performing two tasks, one which is more unpleasantthan the other. compensating differential -- it's whywe think garbagemen might be paid more

than people who work in parks. the words of one of the membersof the gang, i think, make this clear. so it turns out -- i'm sortof getting ahead of myself -- it turns out, in the gang,when there's a war going on, they actually pay the foot soldierstwice as much money. it's exactly this concept. because they're not willing to be at risk. and the words of a gang membercapture it quite nicely, he says: "would you stand around here when allthis shit ..." -- the shooting --

"... if all this shit'sgoing on? no, right? so if i gonna be asked to put my lifeon the line, then front me the cash, man." i think the gang member says itmuch more articulately than the economist, about what's going on. here's another one. economists talk about game theory, that every two-person gamehas a nash equilibrium. here's the translationyou get from the gang member. they're talking about the decisionof why they don't go shoot --

one thing that turns out to be a greatbusiness tactic in the gang: if you go and just shoot guns in the airin the other gang's territory -- people are afraid to go buy drugs there, they're going to comeinto your neighborhood. here's what he saysabout why they don't do that: "if we start shooting around there,the other gang's territory, nobody, i mean, you dig it,nobody gonna step on their turf. but we gotta be careful, 'cause they can shoot around here tooand then we all fucked."

so that's the same concept. then again, sometimeseconomists get it wrong. one thing we observed in the datais that it looked like -- the gang leader always got paid. no matter how bad it was economically,he always got himself paid. we had some theories related to cash flow, and lack of access to capital markets,and things like that. then we asked the gang member, "why is it you always get paidand your workers don't always get paid?"

his response is, "you got all these niggers below youwho want your job, you dig? if you start taking losses,they see you as weak and shit." and i thought about it and said, "ceos often pay themselvesmillion-dollar bonuses, even when companiesare losing a lot of money. and it never would really occurto an economist that this idea of 'weak and shit'could really be important." maybe "weak and shit" is an importanthypothesis that needs more analysis.

thank you very much. (applause)