August 17, 2008
Determinants of the Olympic Success of Different Countries-Becker
Hundreds of millions of men and women all over the world have been tuned to their television sets and clued to their computer screens as they followed the Olympic extravaganza in Beijing. The pride taken by people of different countries in their own athletes as they compete against the best from other countries is truly remarkable. To Americans, the main interest this year has been Michael Phelps' pursuit of a record setting 8 gold medals in swimming-which he accomplished- the gold and silver medals won by two young American girls in the all around gymnastic finals, and the new basketball "dream team" that so far has easily won against China, Spain, and elsewhere. The Chinese have been thrilled by their successes in gymnastics and diving, the Australians by their swimmers, and the Rumanian's by the victory of their 38 year old mother in the women’s marathon. Pictures were shown of how in 2004 the almost all black country of Zimbabwe with a history of significant racial conflict gave a wildly enthusiastic parade to a white Zimbabwe swimmer who won a gold medal during the Athens Olympics. And so it goes in other countries whose athletes have won medals.
All the accolades given to Olympic medal winners-especially to those who get gold- provides plenty of incentive for young and talented athletes to train hard for the Olympics in the hope of becoming a medal winner. When practically all participants in the Olympics are working hard in their training regimes, and since various random factors, such as illness, injuries, and psychological state are extremely important, it becomes difficult to predict individual winners in many of the competitions. Yet it is rather easy to predict quite well the total number of medals won by different nations.
The article "A Tale of Two Seasons: Participation and Medal Counts at the Summer and Winter Olympic Games", published in 2004 in the Social Science Quarterly by Professor Daniel Johnson of Colorado College and a co-author, examines the determinants of how many medals were won by different countries in the summer and winter Olympics since the end of World War II. Their regression analysis shows that two very important variables are the total population and per capita incomes of different countries. Also important are whether a country has an authoritarian government-such as communism- a country's climate, and whether a country is the host country for a particular Olympics. These five variables taken together predict closely the total number of medals won by different countries in the winter as well as summer Games.
It is surely no surprise that population matters a lot since there are many more athletes to choose from in large countries. This is why the breakup of a big country, such as the Soviet Union, had a large effect on the number of medals won by Russia, if Russia is identified with the Soviet Union. Climate is also no surprise since, for instance, the warm climates of African nations makes it highly unlikely that they will be contenders during the winter Olympics in skiing and other cold weather sports. Yet countries with colder climates, such as Russia and Scandinavian countries, do well, given the other variables, in summer as well as the winter Games. Host country effects are somewhat more surprising, but they might be explained by greater familiarity of host athletes with the weather and other conditions of the Games, by the extra incentives provided by the cheers of their fans in attendance, and possibly by the greater preparation efforts of host country athletes.
It is further entirely reasonable that countries with higher per capita incomes, other things the same, do better in Olympic and other international competitions. Parents of promising athletes have more resources to hire coaches, buy equipment, and get other help in their quest to improve the performances of their children. High schools and colleges have more resources to spend on their athletic programs. Private groups establish Olympic and other committees with generous resources to help in the training of the most promising athletes. Companies sponsor athletic programs and offer other incentives- such as the $1 million that Speedo promised Michael Phelps if he succeeded in winning 8 gold medals at the Beijing Olympics.
The importance of communist and other single party countries on the surface is more surprising. It is not that these countries send more athletes to the Olympics than other countries with similar populations, etc- they do not- but authoritarian countries do better per athlete that they send. The reason appears to be that governments of these countries spend considerable resources and energies in finding young promising athletes, and in providing systematic training and equipment in centralized facilities. According to the NY Times' editorial of August 17th, China has spent billions of dollars on its state sports program since the 2000 Sydney Games. These countries also can sometimes use their authoritarian structure to force parents to let their children be taken to centralized facilities, and have refu'ed to allow athletes who win medals to retire. Such activities clearly help explain China’s rapid rise to athletic prominence, but the same considerations were behind East Germany's success in earlier Olympics, and in the great success of the Soviet Union prior to its breakup.
Democratic governments would not be able to employ some of the techniques used by authoritarian governments, but still must decide on the proper role of their governments in preparing athletes for Olympic and other international athletic competitions. The strong interest of countrymen in cheering on athletes representing their countries seems like a positive "externality", especially from Olympic success. However, in private market economies, these so-called externalities from Olympic and some other international athletic achievements are internalized to a considerable extent by endorsements, requests for well-paid speeches, job offers, and other private advantages given to successful athletes. Many of these private advantages are not possible in government-controlled economies, which might explain why their governments are much more active in financing and training athletes.
Perhaps some externalities remain that justify considerable government involvement in democratic countries. Indeed, recently countries, such as Germany, have indicated that they plan to spend more in preparing their athletes for future Olympics. The Times' editorial opposes further government spending on the US Olympic program mainly because the government budget is in deficit and the economy has slowed down. I believe there are much better reasons for opposition to a much larger government involvement. The highly decentralized, mainly but far from entirely, privately financed approach to athletics found in countries like the United States and Great Britain is the right way to attract and train Olympic and other athletes in democratic countries with strong decentralized private economic and philanthropic sectors.
Posted by becker at 09:36 PM | Comments (15) | TrackBack (0)
Financing the Olympic Games--Posner's Comment
When a sport or other game is played all over the world (chess for example, or soccer), it is natural that there should be international competition. The oddity of the Olympics is that they are presented as athletic competitions between nations, rather than between teams each of which presumably would have a permanent residence in one nation yet might recruit team members from other nations as well. Nations in the grip of nationalist emotion or wanting to advertise their power to the world (nations such as Hitler's Germany, which made the 1936 summer Olympics, held in Berlin, a major propaganda event; East Germany and other communist countries; and now China) invest heavily in training their Olympic athletes. China is estimated to have spent as much as half a billion dollars to train their athletes for the Olympic games now underway in Beijing. The heavy investments that nations that regard Olympic competition as a propaganda opportunity in turn spur other nations to invest heavily in training their own Olympic athletes.
The nationalistic fervor and great-power aspirations that Olympic competition stimulates seem to me a negative externality. In addition, some unknown but doubtless large fraction of the expenditures on training athletes have no social product, but are in the nature of "arms race" expenditures. If one nation spends very heavily on training its Olympic athletes, other nations, if they want to win a respectable number of medals, have to spend heavily as well. The expenditures are offsetting to the extent that the objective of competition is to win rather than to produce an intrinsically better performance. Economic competition produces better products at lower quality-adjusted prices, and this effect dominates the costs of competition in duplication of facilities and offsetting advertising. The balance in athletic competition is different, because the main product (as in war) is winning, and it makes little difference to the consumer whether the winner ran a mile in 3.05 minutes or in 3.01 minutes. Moreover, Olympic competition is inherently lopsided since, as Becker explains, success is largely determined by a nation's population, per capita income, and (in the winter Olympics) climate. Why should Americans feel good if an American team beats a team from Costa Rica?
Since the United States is acknowledged to be the world's most powerful nation, it has nothing to prove by doing well in the Olympics, and so we are sensible not to allot any tax revenues to financing the training of our Olympic athletes. Doubtless we would were it not for the private donations that generously support the United States Olympic Committee. Since other countries do not have the same tradition of charitable giving as the United States, and so rely on tax revenues to finance activities that in the United States are financed by private charity, our charitable support of Olympic competition actually places pressure on other nations to support their Olympic teams out of tax revenues.
Becker raises an interesting point by asking whether Olympic competition creates a positive externality that might warrant public subsidy, though he recommends against subsidization. The Olympic games are immensely popular, but, given advertising-supported television, it is apparently impossible to finance them (and in particular the training of the Olympic athletes) out of television-advertising revenues. There are, however, as he notes, other (private) sources of revenue of Olympic participants, such as endorsements by champion athletes. Moreover, were there no public subsidies of Olympic competition, this would not doom the Olympic games; it would just reduce the amount of training that Olympic athletes received (the arms-race effect). This would reduce the number of new world records set, and marginally reduce the quality of play and hence the pleasure that the audience for the Olympic games derives, but would actually tend to sharpen Olympic competition by reducing the effect of a nation's per capita income on its Olympic prospects.
Posted by Richard Posner at 07:43 PM | Comments (9) | TrackBack (0)
August 10, 2008
The Economics of Gay Marriage--Posner
In 1989, Denmark began allowing homosexual couples to form "registered partnerships," which gives a couple most of the legal rights of married persons; the other Scandinavian countries followed suit. In 2001 the Netherlands began allowing homosexual couples to marry. Spain followed, despite the fierce opposition of the Catholic Church. Canada too, and it is plain that most North Atlantic nations will soon recognize gay marriage. In the United States, Massachusetts and California, by virtue of state court constitutional rulings, now allow gay marriage. Several other states recognize "civil unions" or "domestic partnerships," the equivalent of Denmark's registered partnerships. (All these laws, except the Scandinavian ones, are recent, and there have been few studies of their effects.) The federal Defense of Marriage Act (1996), however, not only denies the federal benefits of marriage to gay marriages, but also empowers states to refuse to recognize such marriages, and a majority of states have enacted laws (usually as part of the state's constitution) refusing to recognize such marriages.
The gay-marriage movement raises a number of interesting questions, which I approach from an economic perspective: why do homosexuals want to marry? What are the consequences of gay marriage likely to be? Why is there opposition to gay marriage?
All sentimental and religious considerations to one side, marriage is a source of benefits. One, which is a genuine social benefit, is a saving of transaction costs. If you want to leave money to someone to whom you are not married, you will need a will; but if you are married, upon your death your spouse (if you have no will) will automatically receive a share of your estate. Nor do you have to have a contract specifying the financial or other consequences of an abandonment or other dissolution of the relationship; the law of divorce supplies the necessary machinery. In other words, the law provides a kind of standard contract that enables the costs of negotiating and drafting a private contract to be avoided. In this respect it is very much like partnership law, so that the term "domestic partnership" to describe a marriage-like law for homosexuals is apt.
There are also private benefits (in the sense that there does not seem to be an efficiency justification for them), such as survivors' social security benefits and rights under the Family and Medical Leave Act, but most of these benefits (offset, but for most couples not fully, by the "marriage tax"--the higher incomes taxes paid by a couple each of whom has a good income than they would have to pay if they were not married) are federal, and the Defense of Marriage Act denies federal marriage benefits to the parties to gay marriage. There are also, however, state-law evidentiary privileges that enable one to prevent his or her spouse (or sometimes even ex-spouse) to testify against one in a criminal case.
Employers often provide health and other benefits to the spouses of their employees as well as to the employees themselves, but there is nothing to prevent employers from offering those benefits to a same-sex partner of the employee, whether or not married.
Given the Defense of Marriage Act (and no-fault divorce, which enables each spouse to dissolve the marriage unilaterally), the net benefits of gay marriage to homosexuals are small, and indeed no greater than those conferred by domestic-partnership laws. Nevertheless, most homosexuals are very strong supporters of gay marriage even on the assumption that the Defense of Marriage Act will not be repealed and even though it appears that relatively few homosexuals have taken advantage of the Massachusetts law, though this may be because of its newness; it was created by the state's highest court by an interpretation of the state's constitution in 2004, and there was initial uncertainty whether it would stand, or be nullified by constitutional amendment. But probably the main reason for homosexuals' support of gay marriage is simply their desire to be treated equally with heterosexuals, which probably is also the principal reason for homosexuals' opposition to the armed forces' discrimination against them, rather than a great desire for either marriage or military service.
What are likely to be the consequences of gay marriage? If few homosexual couples take advantage of the right to undertake such a marriage, the consequences, at least in the short run, will be slight, especially since the right will be recognized in only a few states for the foreseeable future. But even if all states recognized gay marriage and the Defense of Marriage Act were repealed, the consequences would be small simply because the homosexual population is small and many homosexual couples will not bother to marry; many heterosexual couples nowadays do not bother to marry, especially if they don’t plan to have children, and a higher percentage of heterosexual than homosexual couples do not plan to have children. The much-bandied-about figure that 10 percent of the population is homosexual is false; it is based on a misinterpretation of Kinsey's data. The true figure is about 2 to 3 percent for men and 1 percent for women.
My qualification "in the short run" was intended to leave open the question whether widespread recognition of gay marriage, and thus the legitimating of homosexual relationships, might either increase the number of homosexuals or undermine heterosexual marriage. I do not think either consequences is likely. Sexual preference seems pretty clearly to be genetic or otherwise innate rather than chosen on the basis of social attitudes toward particular sexual practices. Despite greatly increased tolerance of homosexual behavior in many countries (including the United States) in recent decades, there is no evidence that I am aware of that the number of people who prefer homosexual to heterosexual sex has grown. Homosexuals are more open about their sexual identity and this creates an impression that there is more homosexuality than there used to be--and there may indeed be more homosexual behavior. But the preference appears to be unchanged. So parents probably need not worry that recognizing gay marriage will increase the likelihood of their child's turning out to be homosexual.
Although some of the opposition to gay marriage is religiously motivated, I believe the main opposition comes from the feeling of many (heterosexually) married people that allowing gay marriage degrades or depreciates the concept of marriage, much as if polygamous marriage were permitted or people were permitted to marry their dogs or their automobiles. Apart from the weight that widespread public opinion is entitled to be given in a democratic society, there is the danger that if people respect the institution of marriage less, the marriage rate, already low, will fall still lower, with adverse social consequences. Again, the danger seems small. The people who worry about the effect of gay marriage on the institution of marriage are those most committed to the institution, and they are unlikely to desert it. And if they did? If what marriage mainly is is simply a standard contract, it is not obvious that its decline, and replacement by private contracts (in other words, the privatization of marriage), would have serious social consequences, given the ease with which under modern law marriages can be dissolved by either party.
Marriage retains and will probably long retain tremendous symbolic significance in our society as a symbol of love and commitment (that is why cheating on a spouse attracts greater opprobrium than cheating on a person with whom one has a long-term, but not marital, sexual relationship), and it is likely to retain that significance even as gay marriage becomes more widespread, as it seems bound to do.
Posted by Richard Posner at 05:01 PM | Comments (62) | TrackBack (1)
Should Gay Marriages be Allowed? Becker
Many gay couples want to be allowed to call their union "marriage" mainly because they believe this will give their relation a degree of acceptance that is closer to that given to heterosexual unions. They also believe that marriage connotes a more stable long-term relation, although gay unions have a well-known tendency to dissolve at even higher rates than heterosexual marriages, and that very likely would continue even if their unions are called marriages. The narrowly economic gains from being married are a decidedly minor part of the desire by gays to have their matches called marriages.
For the reasons just stated, one can understand why many gay couples want to be allowed to marry. What I find difficult to understand is why there is so much opposition; for example, I doubt if a referendum legalizing gay marriage would pass in many states. As Posner indicates, allowing gay couples to marry will have little effect on either the attraction or stability of marriages between heterosexuals. I believe this opposition reflects hostility to gays and their unions that can no longer be expressed in other more traditional forms, such as calling them names or harassing them. As a result, the marriage issue has become a rallying point that allows hostility to gays to be hidden behind other reasons.
To be sure, it is a strange way to express that hostility in light of other options that have been allowed to gays that are far more radical. I am mainly thinking of the recent practices of allowing gay couples, married or not, to adopt children, allowing lesbian couples to bear children through sperm supplied by sperm banks, or allowing male gay couples to use their sperm to impregnate women who bear children that a gay couple raises. Although rather few gay couples have children as yet, that practice is a far bigger venture into the unknown than is permitting gay couples to be married. It is still too early to have reliable evidence on the effects on children of being raised by gay parents, but I suspect these effects will be more negative than positive, in part because even married gay couples are likely to dissolve their match at relatively high rates.
I also find it strange that gays having and raising children arouses much less opposition than does polygamy, where several women voluntarily agree to be married to the same man (a far rarer form of polygamy is when several men agree to be married to the same woman). Why should society care if two (or more) women are willing to be married to the same man, especially in an environment where men and women rather than their parents generally make their choices about who to marry? We trust women to make many other decisions that seem strange to others-such as when a twenty year old woman marries a 65 year old man- so what logical grounds are there to disallow several woman voluntarily accepting marriage to the same man? Moreover, since polygamy would increase the demand for women as marital partners-however slightly since polygamy would be very uncommon- the argument that it is a form of exploitation of women is also without foundation.
I have proposed for many years that marriage should be basically a private contract between the men and women involved-they can add a religious ceremony if they so desire. There is no reason why the standard contract should be supplied by the government rather than by market forces. An explicit contract would be compulsory, even if it only has a minimum number of stipulations and rules. Most persons marrying might use such a standard contract, but others would have special provisions, such as the allocation of assets in event of dissolution, responsibilities for housework and other activities, and obligations toward children. The state would set minimum obligations toward children since society has an interest in how children are treated.
Such contracts would be equally available to homosexuals, as they are already in some countries and many states of the United States. These contracts would reduce the role of governments in marital arrangements where they have no special competence or interests- again, aside from the protection of children. It would also eliminate the gay marriage issue since gays would have access to contracts as fully as heterosexuals. It would also allow couples to stipulate in writing any special arrangements they want to see enforced in their unions.
Such contracts are unlikely to replace government determined marital terms in the foreseeable future. So until then, it would be wise to expand the concept of marriage to include homosexual relations, and perhaps polygamy as well.
Posted by becker at 04:15 PM | Comments (35) | TrackBack (0)
August 03, 2008
Is America in Decline? Becker
Articles about whether America is in decline is a cyclical industry that rises and falls over about a twenty-year cycle. The previous cycle started with Paul Kennedy's bestseller of 1986 "The Rise and Fall of the Great Powers", and was vigorously discussed during the next decade. It was finally dismissed after starting in the early years of the Reagan presidency there was more than twenty-five years of vigorous growth in GDP-much faster than in Western Europe- declines in unemployment to very low levels, and the complete absence of any inflationary pressure.
This gloom and doom industry has begun to grow again during the past few years. Kennedy had attributed his projected decline of the United States to its role as the world's policeman, and the resulting spending on defense and military manpower and equipment, Yet, defense spending did not account for more than six percent of GDP, and some of the military spending went for military R&D and training that had carryover to civilian products and services, such as the development of the Internet, and the training of pilots. The new pessimists continue to blame America's role as policeman, and in particular its protracted involvement in Iraq and Afghanistan. They also see possible doom in the debacle in the US housing market, the high price of oil, and the current economic slowdown in income growth, and declines in employment. Much emphasis too is placed on the growth of China and India, and also Brazil, and the shift of the world's attention toward these large rapidly developing nations. Some members of the doom school claim in addition that the United States is getting "old", like old Europe, and is suffering from ailments that afflict old nations.
Readers of our blog will realize that I generally do not subscribe to this gloom and doom school concerning America. I do agree that being the world's policeman does take resources that could be producing civilian output, and countries in Europe and elsewhere free ride off of America's efforts, but when done right this policeman's role also makes the world a safer place in the future. However, the resources spent on military manpower and equipment is not large enough to have a serious effect on the growth of US civilian output. The economy and housing market will before long recover from their current difficulties. The rapid expansion of China, India, and a few other large nations does mean that the share of world GDP produced by the United States has begun to decline, and is likely to continue to decline over the next decade and longer. After all, these two huge nations, along with Brazil, comprise over forty percent of the world's population, so their rapid growth must lead to a decline in America's share of world GDP. But the success of other nations should not be taken per se an indication that America is in decline.
Moreover, and on the whole, the growth of these other nations will help US growth prospects. The United States has been for several decades the world's leader in technological innovation, so that other nations have been able to free ride to some extent over US investments in new ideas and technologies. With the rapid growth of China and others, they too will begin to make considerable innovations, and the US will now be able to take advantage of their technological advances. In other words, in the future, America will become more of an importer as well as continuing to be an exporter of new ideas and innovations.
The expansion of exports from China and other poorer nations has not benefited all nations, especially those that compete with exports of similar products. However, it has greatly benefited the US and other developed countries because the rich countries can import amazingly cheap consumer goods, and these developing countries provide a market for the industrial goods and advanced services of richer nations. As the rapidly developing countries get richer, the mix of their products and services will change, and some of them will compete directly with those of richer nations. Yet the evidence is strong that trade is stronger in general between countries of similar levels rather than different levels of economic development, but is mutually beneficial to both sides. I see no reason why this should not continue as China's, India's, and Brazil's economic development become much closer to that of the US, Japan, and Western Europe.
Another argument made by the America is declining camp is that as countries continue to get richer, individuals lose their motivation and begin to sharply cut their hours of work and ambitions regarding further accumulation of wealth and income. In a celebrated article published in 1931 called, "Economic Possibilities for our Grandchildren", the great economist John Maynard Keynes predicted that as incomes continued to grow, then adults in Europe and the United States would by the year 2030 be working about 15 hours per week, and they would spent most of their time in leisure pursuits. Keynes’ predictions about the long-term rates of growth of income were surprisingly quite accurate, despite the worldwide depression then in effect, but his predictions about how people would spend their growing wealth were way off the mark. He did not appreciate that higher hourly earnings could lead people to work more hours even though their incomes were higher, and that the continuing development of new products, such as computers and television, would increase people's desire for more spending power. These effects were magnified by the interest in relative economic position since that induces men and women to strive for higher incomes in order to move ahead of their peers (on all this, see the article by Luis Rayo and me "Why Keynes Underestimated Consumption and Overestimated Leisure for the Long Run", in the recent collection of essays, "Revisiting Keynes".
I am an optimist about the future prospects of America; that is, I believe the individuality, entrepreneurship, and drive in this country will continue to propel the economy and society forward at a good pace. The biggest risk to America's continuing success lies not in the considerations already discussed, but in the expansion of government regulations and controls that can throttle the dynamic energies of its competitive private sector. Clearly, various forms of government spending and regulation, such as spending on police and the military, on schools and other infrastructure, are crucial to any prosperous society. However, the tendency during the past half-century has been to go further than is warranted as different interest groups look to the government for help. Governments now often decide what consumer goods can be produced (see our blog discussion last week), subsidize housing and other goods, and regulate who can be fired and hired (especially in many European countries but also increasingly in the US). Governments also are placing greater stress on equality as opposed to opportunity and efficiency, and pay for medical spending, provide retirement incomes, and often impose heavy taxes on persons who earn more than average.
So far, this expansion of the role of government has not been a crucial deterrent to entrepreneurship and private energies in the United States-a much greater expansion of government has had much more harmful effects in countries like Italy and France. Although I remain optimistic, I do fear that interest group pressures toward a much larger role of government in the United States may become much harder to resist in the future, and that this could eventually kill, or at least badly wound, the free market-entrepreneurial goose that has been laying the golden eggs.
Posted by becker at 08:23 PM | Comments (44) | TrackBack (2)
Is America in Decline? Posner's Comment
I agree that there is no reason to expect the rate of growth of per capita income in the United States to decline in the foreseeable future. Of course it may decline; the future is uncertain; a particular uncertainty concerns the ever-present possibility of catastrophe (see my book Catastrophe: Risk and Response [2004]). Abrupt global warming, nuclear terrorism, a pandemic, an asteroid strike—all are possible events that could have cataclysmic effects on economic growth. Also, it is important to distinguish between monetary income and economic welfare. Increases in leisure and in the quality and variety of products and services can increase welfare without increasing per capita income; conversely, expenditures on security, while they may be cost-justified because of the risk of terrorist or other attacks, reduce consumption; and service deteriorations, for example due to congestion, can reduce welfare; but in neither case would the welfare loss show up in lower per capita incomes. A related example is wasteful expenditures on health care, all of which show up as income to providers, though it is possible that as much as a third of all expenditures on health care in the United States either yield no benefits in greater longevity or better health or exceed what it would cost to achieve the same benefits more cheaply (for example, by exercise and healthy eating).
I do not share Becker's pessimism about the rise of regulation. The deregulation and privatization movements have, since their beginning in the late 1970s, freed large parts of the economy from government control; income tax rates have fallen; unions have continued to decline; and the courts have become more conservative with respect to economic issues. (The Supreme Court's "liberal" Justices are liberal mainly concerning issues, such as abortion, capital punishment, and homosexual rights, that have little economic significance.) There will now be some re-regulation, but I would be surprised if it went far, given the political power of business.
Environmental regulation has increased, but it deals with real externalities. The increased regulation of labor markets, however, mainly as a result of antidiscrimination laws, is difficult to justify on economic grounds, though its economic effects may be largely offset by the decline of unions. Even after the recent increase in the federal minimum wage, that wage in real (i.e., inflation-adjusted) terms is no higher than it was in 1960.
Social conservatives believe that the nation is in free fall because of the decline of traditional social values, a decline reflected in low marriage and high divorce rates, a high rate of births out of wedlock, increases in pornography and vulgarity, the flaunting of homosexual relations, and abortion on demand. Becker does not cite any of these factors as inimical to economic growth; nor would I.
But there is a crucial ambiguity in the word "decline" when applied to a nation, and I will devote the rest of my comment to that. To begin with, the word might denote not a reduction in the rate of growth of per capita income but a reduction in that rate relative to the rate in other countries. Small differences in growth rates cumulate over time, like compound interest. Some nations will grow faster than the United States, but I do not see the growth rate of the United States dropping below the world average.
The idea of national decline might even refer to a decline in a nation's share of world income. The U.S. share peaked in 1951 at 28 percent, fell to 21 percent by 1975, and is about 20 percent today. The percentage will continue to fall as incomes in China, India, Brazil, and other rapidly developing countries rise. This almost certain "decline" has, however, no significance for the welfare of Americans--except insofar as a nation's share of world income is correlated with the nation’s political (and ultimately military) power--"geopolitical power." And when one speaks of a nation in "decline," it usually is to the nation's geopolitical power that one is referring.
Although China's military expenditures are far smaller than those of the United States, they are increasing more rapidly and eventually may surpass ours; and their increase is driving Japan to become once again a major world military power. Russia's military expenditures are increasing as well. India's too. And these are all countries that have potential enemies and so take military preparedness seriously (unlike Western Europe). What is more, the power of large countries such as the United States (and before that, notably, Great Britain) to coerce small ones has declined. When early in World War II Iraq and Iran began leaning toward the Axis powers, Britain (aided in Iran by the Soviet Union) quickly intervened and, more or less effortlessly, changed the governments in those countries. Britain of course for centuries controlled a vast empire with slight military forces. Tiny Holland ruled what is now Indonesia. France ruled what is now Vietnam, Cambodia, and Laos. Japan ruled Korea and Taiwan. The Western nations, including the United States, are vastly less powerful than they were half a century ago. The U.S., despite a military budget roughly equal to that of all other nations combined, has its hands full trying to control two militarily third-rate countries, Iraq and Afghanistan, and is incapable of preventing Iran from becoming a nuclear power.
From a political rather than an economic standpoint, the United States today may be in a position comparable to that of the Roman Empire in the fourth century A.D. or the British Empire in the 1930s: the world's leading "empire" (in the sense not of having colonies, but of having the most influence over other countries), but, as an empire, in decline.
Posted by Richard Posner at 07:36 PM | Comments (32) | TrackBack (0)
July 27, 2008
Compelled Disclosure of Food Characteristics--Posner
Last week New York City began enforcing an ordinance that requires fast-food chains to post on menus and menu boards the number of calories in each menu item, in the same type size as the item itself. (The ordinance is rather complicated, see www.nyc.gov/html/doh/downloads/pdf/cdp/calorie_compliance_guide.pdf, visited July 24, 2008; my summary is a simplification.) The stated purpose of the ordinance is to reduce obesity.
The ordinance will be criticized as being at once unnecessary, because information about calorie content can be conveyed without requiring that it be printed in large type on the menu (an alternative would be publication on the chain’s website, or the posting of a separate notice in the restaurant), and paternalistic, because people concerned about their weight have the incentive and ability to inform themselves about the number of calories that they consume. The ordinance may also be ineffectual, because most people eat most of their food at home rather than in fast-food outlets; anticompetitive, because small chains will incur the same costs as large ones to certify the caloric content of their offerings; blind to the effect of competition in forcing retail firms, including restaurants, to disclose whatever information will give them an advantage in competing for calorie-conscious consumers; unhelpful, because it will contribute to information overload on consumers bombarded with all sorts of warnings; and not based on a responsible cost-benefit analysis.
These are legitimate criticisms, but they may not be conclusive. A law aimed at reducing obesity would be paternalistic if obesity did not produce external costs, but it does, because obese people consume a disproportionate amount of medical resources, and there is extensive public and private subsidization of medical expenses (private through insurance pools that are unable or forbidden to identify and reject high-risk insureds). However, the size of the externality is in question, because obese people die on average at a younger age than thin people, and so consume medical resources for fewer years on average than thin people do.
While some obesity has strictly physical causes, most is due to poor eating habits and lack of exercise and is therefore treatable by changes in behavior. If the necessary changes can be induced by low-cost informational warnings, the result is likely to be a reduction in the external costs of obesity. However, government programs designed to educate consumers in the causes and consequences of obesity have not been effective.
Fast food is one of the factors that is responsible for the obesity "epidemic" in the United States and other wealthy countries. Economic studies find that weight rises with lower relative prices of fast-food and full-service restaurants and the wider availability of such restaurants and hence the lower full price of eating at them.
Partly because some of the costs of obesity are external, competition among restaurants or other food providers cannot be counted upon to optimize caloric intake. An obese person will not eat less in order to reduce the social costs of medical subsidies. It is not even clear that competition will produce the caloric intake desired by consumers for purely selfish reasons of health, medical expense, and appearance. Firms are reluctant to advertise relative safety, because it alerts the consumer to the existence of danger. Cigarette and auto companies were traditionally reluctant to advertise safer cigarettes and safer cars, as that might get consumers thinking and as a result induce substitution away from the product. Prominent display of calorie numbers might persuade consumers to avoid fast-food chains rather than to look for the chain with the lowest calorie numbers. This is especially likely because the high-calorie items on the menu tend to be the tastiest. Inexpensive food rich in butter, cream, sugar, and egg yolk generally tastes better than inexpensive food low in those ingredients; low-calorie foods that taste good tend to use expensive ingredients.
For people who want to be thin, there is an abundance of information that enables them to adopt a healthful diet. Neither ignorance nor externalities seem to be the important forces in the growth of obesity. More important may be exploitation by food sellers of people's addictive tendencies, which have biological roots. In the "ancestral environment," to which human beings are biologically adapted, a taste for high-calorie foods had great survival value. As Becker has emphasized in academic work, the choice of an addictive life style may be freely chosen and the life style itself may be socially productive and personally satisfying; Becker and I, for example, are addicted to work. But many obese persons became addicted to high-calorie foods as children, and a child's choice of an addictive life style is not an authentic choice, to which society need defer. Nor can parents be assumed to be the perfect agents of their children, protecting them from unwise choices; it takes a lot of parental work to keep children physically active in the era of the video game, and away from rich foods. So there is a case to be made for public efforts to reduce obesity.
The significance of the New York City ordinance lies in its requiring that calorie numbers be printed next to the food items on menus and menu boards and in large type. The purpose is less to inform than to frighten. Psychologists have shown (what is anyway pretty obvious) that people respond more to information that is presented to them in a dramatic, memorable form than to information that is presented as an abstraction or is merely remembered rather than being pushed in one's face; that is the theory beyond requiring reckless drivers to watch videotapes of accidents and requiring cigarette ads to contain fearsome threats. It is one thing to know that a Big Mac has a lot of calories, and another thing to have the number emblazoned on the menu board, next to a mouth-watering picture. The warnings--for that is what the display of high calorie numbers amounts to--may create fear of high-calorie foods, not only in fast-food chains but generally. If so, and if as a result there is less obesity, there will be a reduction in medical expense and possibly a gain in happiness if, as one suspects, thin people are on average happier than fat people.
No one can know in advance the net effects of the ordinance. Its effect on obesity may be small, and it will impose costs of compliance on the fast-food chains subject to them and as a result cause the price of fast food to rise, though perhaps by a trivial amount--and the increase in price will contribute, albeit modestly, to efforts to reduce obesity. An increase in general education, by tending to reduce people’s discount rates, may have a greater effect than the ordinance in checking obesity, because the ill effects of obesity are greater in the long term than in the short term and education tends to reduce discount rates.
The argument for the New York City ordinance thus comes down to the argument for social experimentation generally: that it will yield valuable information about the effects of public interventions designed to alter life styles. I therefore favor the ordinance, though without great optimism that it will contribute significantly to a reduction in obesity.
Posted by Richard Posner at 08:11 PM | Comments (36) | TrackBack (0)
Is Government Intervention in the Fast Food Industry Justified? Becker
New York City's ban on the use of trans fats in restaurants is the first of many efforts to restrict not only trans fats, but also the whole fast food industry. Boston has approved a similar ban, while on Friday California became the first state not only to ban trans fats in restaurants, but also to ban trans fats in all retail baked goods-packaged goods are so far exempt. San Francisco as well as New York City has approved bills that require fast food chains to post on menus the calorie content of the food they serve. Los Angeles is considering a bill that would prevent fast food restaurants like McDonald's from adding any outlets in a 32 square mile part of the city that already has many such restaurants. The concern behind these and similar ordinances is that trans fats and fast food restaurants have contributed in a significant way to the rapid growth in obesity among Americans.
Several arguments have been advanced to support these and even more onerous bans and restrictions on fast foods, but I believe they are of dubious merit. One claim is that consumption of trans fats, and of fast foods more generally, creates an "externality" because this helps produce obese teenagers and adults. The so-called externality results from the fact that greater obesity raises taxes on others because the medical bills of the obese are partly paid by general taxpayers due to subsidized medical care. As Posner points out, this argument may be weak because obese adults die earlier than others and in this way obesity saves medical costs. However, even if true, I am uneasy about such externality arguments. Typical true externalities occur when actions by one individual or firm directly harm others, as when pollution by a company worsens the health of inhabitants, or when a drunk driver crashes into another car and injuries or kills the driver and passengers of that car.
But the alleged "externality" with regard to obesity is due only to the government's subsidy of medical expenditures, so that it is a case of one government intervention- justified or not- causing another intervention-control of eating. It is not a path of intervention causation that most people would be comfortable with in many situations. For example, since the government subsidizes the medical care of children of poorer parents, a mechanical application of this type of externality argument would say that this justifies governmental control over the number of children that poor parents can have. Additional children of these families create an "externality" by raising taxes on others to pay for the medical costs of these children. Many similar examples can be given where government regulations and other government programs cause certain types of behavior that raise taxes or subsidies and adversely affect taxpayers, even though there would be no externality from this behavior in the absence of the government programs.
Another argument made for interventions in the fast food industry and sales of other foods is that individuals are somehow duped into eating too much, and into eating unhealthy foods. As a result, they gain weight, and become vulnerable to diabetes, heart disease, cancer, and other ailments. Yet it is hard to justify the word "duped" when studies show that much of the growth in obesity has been due to the development of cheap fast foods that consumers find tasty, and also to the growth of television, computer games, the Internet, and other attractive activities that are sedentary. Increased consumption of low priced tasty foods and changed time allocation toward more sedentary leisure and work activities would be optimal responses according to any model of human behavior where individuals are trying to increase their well being, as they, rather than outsiders, interpret their well being. Economic analysis would predict that the lower priced high caloric goods and sedentary technologies that are found throughout the world would lead to weight gain and growing obesity not only in the United States but also in other richer countries. And so they have. Special theories about consumers being duped, misled by advertising, etc are not needed to explain what are normal responses to low prices and new technologies.
To better understand this movement against fast foods, one has to appreciate first of all that many individuals do not like fat persons. This might be called an externality from obesity because overweight people lower the utility of others, but few people, even including most economists, would want to take government actions to try to correct eating that has such (prejudicial) effects on others. A second crucial point is that most of the gain in obesity is concentrated among children and adults in low income, low educated families, especially African-American families and other minorities. Educated people find it easy to claim that less educated individuals are often misled into choices that the more educated do not like, and often do not understand.
Yet it is no surprise that poorer individuals- poor whites as well as African-Americans-find fast foods particularly attractive. Fast food outlets are so common in poorer neighborhoods partly because they are cheap. In addition, since working single parents (mothers), and working dual parents, predominate in minority families, fast foods are a time saving way to consume tasty foods when free time is scarce. Any possible longer term adverse health consequences of these foods are put on the back burner when immediate needs to feed children and parents are much more pressing.
Requiring restaurants to post calorie content of foods will have a negligible effect on demand for these foods because, as I argue above, consumers are buying these foods not mainly because they are ignorant of the effects on weight, but because of cheapness, convenience, and taste. Banning fast food restaurants would have an effect by eliminating their convenience. Still, substitutes would develop, such as prepared foods in supermarkets, or fast foods served not in chains but in individually owned restaurants (hostility to food chains is also partly responsible for the growth of legislation against them). Maybe eventually some of these substitutes would be banned too. Such continuing extensions of the power of government are a very unattractive prospect. Given all the ineptitude in government regulation, as reflected for example in the regulation of Freddie Mac and Freddie Mae, and in other housing problems, I believe it is better to tolerate some mistakes by consumers in their choice of foods. Such additional regulation of fast foods will make people worse off in the long run as well as in the short run.
Posted by becker at 05:23 PM | Comments (15) | TrackBack (1)
July 21, 2008
Should US Taxes on Gasoline be Higher? Becker
Gasoline prices have increased rapidly during the past several years, pushed up mainly by the sharply rising price of oil. A gallon of gasoline in the US rose from $1.50 in 2002 to $2 in 2004 to $2.50 in 2006 to over $4 at present. Gasoline prices almost trebled during these 6 years compared to very little change in nominal gas prices during the prior fifteen years. The US federal tax on gasoline has remained at 18.4 cents per gallon during this period of rapid growth in gasoline prices, while state excise taxes add another 21.5 cents per gallon. In addition, many local governments levy additional sales and other taxes on gasoline. Gasoline taxes have not risen much as the price of gasoline exploded upward.
The price of gasoline is much lower than in other rich countries mainly because American taxes are far smaller. For example, gasoline taxes in Germany and the United Kingdom amount to about $3 per gallon. Some economists and environmentalists have called for large increases in federal, state, and local taxes to make them more comparable to gasoline taxes in other countries. Others want these taxes to rise by enough so that at least they would have kept pace with the sharply rising pre-tax fuel prices. At the same time two presidential candidates, Hillary Clinton and John McCain, proposed a temporary repeal during this summer of the federal tax in order to give consumers a little relief from the higher gas prices. We discuss the optimal tax on gasoline, and how the sharp increase in gas prices affected its magnitude.
Taxes on gasoline are a way to induce consumers to incorporate the "external" damages to others into their decision of how much to drive and where to drive. These externalities include the effects of driving on local and global pollution, such as the contribution to global warming from the carbon emitted into the atmosphere by burnt gasoline. One other important externality is the contribution of additional driving to road congestion that slows the driving speeds of everyone and increases the time it takes to go a given distance. Others include automobile accidents that injure drivers and pedestrians, and the effect of using additional gasoline on the degree of dependence on imported oil from the Middle East and other not very stable parts of the world.
A careful 2007 study by authors from Resources for the Future evaluates the magnitudes of all these externalities from driving in the US (see Harrington, Parry, and Walls, "Automobile Externalities and Policies", Journal of Economic Literature, 2007, pp 374-400). They estimate the total external costs of driving at 228 cents per gallon of gas used, or at 10.9 cents per mile driven, with the typical car owned by American drivers. Their breakdown of this total among different sources is interesting and a little surprising. They attribute only 6 cents of the total external cost to the effects of gasoline consumption on global warming through the emission of carbon into the atmosphere from the burning of gasoline, and 12 cents from the increased dependency on imported oil. Perhaps their estimate of only 6 cents per gallon is a large underestimate of the harmful effects of gasoline use on global warming. Yet even if we treble their estimate, that only raises total costs of gasoline use due to the effects on global warming by 12 cents per gallon. That still leaves the vast majority of the external costs of driving to other factors.
They figure that local pollution effects amount to 42 cents per gallon, which makes these costs much more important than even the trebled cost of global warming. According to their estimates, still more important costs are those due to congestion and accidents, since these are 105 cents and 63 cents per gallon, respectively. Their figure for the cost of traffic accidents is likely too high –as the authors' recognize- because it includes the cost in damages to property and person of single vehicle accidents, as when a car hits a tree. Presumably, single vehicle accidents are not true externalities because drivers and their passengers would consider their possibility and internalize them into their driving decisions. Moreover, the large effect of drunk driving on the likelihood of accidents should be treated separately from a gasoline tax by directly punishing drunk drivers rather than punishing also sober drivers who are far less likely to get into accidents.
On the surface, these calculations suggest that American taxes on gasoline, totaling across all levels of government to about 45 cents per gallon, are much too low. However, the federal tax of 18.4 cents per gallon is almost exactly equal to their figure of 18 cents per gallon as the external costs of global warming and oil dependency. To be sure, a trebled estimate for global warming would bring theirs up to 30 cents per gallon. However, the federal government also taxes driving through its mandated fuel efficiency standards for cars, although this is an inefficient way to tax driving since it taxes the type of car rather than driving. Still, the overall level of federal taxes does not fall much short, if at all, from the adjusted estimate of 30 cents per gallon of damages due to the effects of gasoline use on global warming and oil dependency.
Any shortfall in taxes would be at the state and local levels in combating externalities due to local pollution effects, and to auto accidents and congestion on mainly local roads. Here too, however, the discrepancy between actual and optimal gasoline taxes is far smaller than it may seem, and not only because single vehicle accidents are included in their estimate of the cost of car accidents, and accidents due to drunk driving should be discouraged through punishments to drunk drivers. One important reason is that congestion should be reduced not by general gasoline taxes, but by special congestion taxes- as used in London and a few other cities- that vary in amount with degree of congestion (see our discussion of congestion taxes on February 12, 2006). Congestion taxes are a far more efficient way to reduce congestion than are general taxes on gasoline that apply also when congestion is slight.
In addition and often overlooked, the sharp rise in pre-tax gasoline prices has partly accomplished the local pollution and auto accident goals that would be achieved by higher gas taxes. For higher prices have cut driving, just as taxes would, and will cut driving further in the future as consumers continue to adjust the amount and time of their driving to gasoline that costs more than $4 a gallon. Reduced driving will lower pollution and auto accidents by reducing the number of cars on the road during any time period, especially during heavily traveled times when pollution and accidents are more common.
The effects of high gas prices in reducing congestion, local pollution, and accident externalities could be substantial. These authors estimate the size of local driving externalities, aside from congestion costs, at 105 cents per gallon. Even after the sharp run up in gas prices, this may still exceed the 28 cents per gallon of actual state and local taxes, but the gap probably is small. It surely is a lot smaller than it was before gas prices exploded on the back of the climb in the cost of oil. In effect, by reducing driving, higher gasoline prices have already done much of the work in reducing externalities that bigger gas taxes would have done when prices were lower.
Posted by becker at 08:07 AM | Comments (32) | TrackBack (1)
Should Gasoline Taxes Be Raised or Lowered? Posner's Comment
The economic study that Becker discusses treats gasoline taxes as a form of regulatory taxation, that is, taxation aimed at altering behavior rather than at collecting revenue. A gasoline tax is an excise tax, and excise taxes are a common method of raising revenue to pay for government. The best excise tax from a revenue-raising standpoint is one that causes minimum substitution against the taxed good or service, since (in the absence of externalities) such substitution distorts the efficient allocation of resources and reduces the revenues that the tax was supposed to generate. A regulatory tax aims at substitution because of the externalities caused by the taxed good or service, but complete substitution is rarely achieved (and indeed would usually be inefficient), and so a regulatory tax raises revenue as well as altering behavior. My guess is that the very high gasoline taxes in Europe, which are primarily responsible for the fact that the price of gasoline in Europe is on average almost twice the U.S. price, are intended and effective as revenue-raising devices, since those taxes antedate the current concerns with global warming, dependence on oil supplies from hostile or unstable nations, pollution, and acute traffic congestion. Whether from a revenue standpoint a stiff gasoline tax is an efficient tax, I do not know. But my guess is that it is. Since distances are shorter in Europe and public transportation far more extensive, Europeans can substitute against gasoline more easily than Americans can; nevertheless the very high price of gasoline in Europe, though for years it has been higher than U.S. prices are now, has not prevented demand for gasoline from growing, though in part this is due to extensive European construction of new non-toll highways and roads. An excise tax on a single commodity will not generate a great deal of revenue, because of its narrow base, but can be justified as part of a comprehensive system of excise taxes.
It is likely, judging from U.S. consumers' reaction to the recent increase in the price of gasoline, that a steep hike in the gasoline tax (I am treating the state and federal gasoline taxes as a single tax) would cause a further reduction in demand. Consumers would drive less (some of them by moving closer to work--and telecommuting would increase) and would switch at a higher rate to vehicles with better gas mileage. At some point, however, the fall in demand might cause the price of oil to decline. The reason is that the supply curve for oil is upward-sloping, meaning that a reduction in demand and hence in supply will reduce price. I say "might" cause the price of oil to decline because world demand for oil might continue to rise even if U.S. demand fell, in which event the world price would not decline.
I wonder, too, whether the recent decline in U.S. gasoline consumption doesn't represent to some degree an irrational panic reaction. To take a huge loss on the sale of your SUV in a market that is depressed because so many other people are doing the same thing at the same time is unlikely to be justified by the gains from the improved gas mileage of the car you buy with the modest proceeds of the sale. Likewise, driving a substantial distance to save a few cents a gallon on the gas you buy is unlikely to be worthwhile. A recent article suggests that people fixate on the price of gasoline because unlike most regularly purchased items, such as food, gasoline is purchased separately from other items so that its price is not buried in a bill for multiple items.
The economic study that Becker cites finds only modest externalities from gasoline consumption, and this argues for keeping our gasoline taxes low if we think of such taxes as primarily regulatory rather than revenue-raising. But except for its effect in reducing highway accidents by reducing the amount of driving, a gasoline tax is not an efficient regulatory tax. Congestion should be taxed directly, since people who travel on uncongested roads do not contribute to congestion. And the carbon emissions from the burning of fossil fuels (including gasoline) should be taxed, not gasoline, because a tax on gasoline does not create an incentive to produce lower emissions per gallon. Furthermore, taxing gasoline but not aviation fuel will increase the demand for air transportation, a potent source of both congestion and carbon emissions. Even the conventional pollutants produced by the internal-combustion engine do not argue strongly for a regulatory gasoline tax, because these pollutants, in the form of smog for example, reduce global warming by blocking sunlight. And from the standpoint of reducing our dangerous dependence on foreign oil, the proper tax is one on oil, rather than one on just one oil product.
Hence the case for higher gasoline taxes should rest primarily on the efficiency of such taxes as revenue-raising devices. Even if as I suspect they are efficient revenue-raising taxes, the time to impose this is when gasoline prices fall, not now when consumers are screaming. Once people adjust to a price of $4.50 per gallon of gasoline, any fall in that price can be offset by an increase in gasoline taxes. A complication is that a tax on carbon emissions will, depending on how stiff it is, retard any natural, market-drive reduction in the price of gasoline. A further complication is that the calculation of an optimal carbon-emissions tax is impossible because the costs of global warming and the benefits (in reducing those costs) from a tax on carbon emissions cannot at present be estimated with even minimal confidence.
Posted by Richard Posner at 07:50 AM | Comments (23) | TrackBack (1)
