Congress is on the verge of passing and the President of signing a major overhaul of the Bankruptcy Code. (See Summary and Changes). The new bankruptcy law, popularly termed the “Bankruptcy Reform Act,” has engendered passionate debate inside and outside Congress. The criticisms of the Act bespeak a failure to analyze it in economic terms.
The Act is complex, but the thrust is to make it more difficult for individuals to declare bankruptcy under Chapter 7 of the Bankruptcy Code. Under Chapter 7, the bankrupt’s assets, minus exempt assets such as a home and work tools, are sold to repay creditors. When the bankrupt is an individual rather than a corporation, his assets often are too limited to enable the creditors to be paid in full what they are owed; often the creditors receive just a few cents on the dollar. However much or little they recover, at the conclusion of the bankruptcy proceeding the bankrupt (save in exceptional cases, as where the debt consists of a fine, or of damages owed because of a fraud committed by the debtor) receives a “discharge,” meaning that the creditors cannot go against him for the unpaid balance of his debts. His debts are wiped out even if he has a high enough income to be able to repay them in full over a period of years.
An alternative procedure that individuals (and their creditors) can avail themselves of is Chapter 13 bankruptcy: instead of surrendering his nonexempt assets, the debtor agrees to make periodic payments to his creditors for as long as five years after the bankruptcy. Although Chapter 13 is attractive to some individuals, especially those who have substantial assets, Chapter 7 is more attractive to individuals who have few nonexempt assets but some income, and there are many such individuals. These individuals can run up huge credit card debts for purchases that do not create durable assets (such as food, travel, and entertainment), declare bankruptcy, wipe out their debts, and then start over. The Bankruptcy Reform Act will force many debtors who have annual incomes in excess of the median income in their state of residence to go the Chapter 13 route and thus make periodic payments out of their income for a period of years. The Act also increases the length of time that a bankrupt must wait, after receiving his discharge from his existing debts, before he can declare bankruptcy again and wipe out a new round of debts. The Act contains still other provisions also intended to make it more difficult for individuals to wipe out their debts by declaring bankruptcy under Chapter 7.
Critics have derided the Act as mean-spirited and hard on the poor, but they overlook the most important effect that the bill is likely to have, and that is to reduce interest rates. One component of an interest rate is compensation for the risk of default. The higher that risk, the higher the interest rate. This assumes of course that a creditor cannot, in the event of default, collect the debt owed him quickly, fully, and with little expense. If bankruptcy were very cheap and the typical individual bankrupt had assets sufficient to cover his debts, or had no right to discharge his debts and could repay them, with interest, out of future income, default would not impose a substantial cost on creditors and so the risk of default would not have a substantial effect on interest rates. But bankruptcy is costly and most individual bankrupts do not have assets sufficient to cover their debts, yet under existing law they have a right to a discharge of their debts no matter how far short of repaying their creditors their assets fall. So default is costly and this is bound to be reflected in interest rates.
Note the irony of the critics’ complaint that credit-card interest rates are “exorbitant”; the so-called exorbitance is, to an extent anyway, an artifact of a bankruptcy law that by making bankruptcy inviting to credit-card debtors increases the risk of default and therefore the interest rate. Notice moreover the vicious cycle created by the present system. The greater the risk of default, the higher interest rates are; but the higher interest rates are, the greater is the risk of default, since interest rates represent a fixed cost to the debtor: if he loses his job and his income plummets, he still owes whatever he borrowed when he was flush. Of course, an alternative possibility is that the high rates will discourage borrowing; this is a paternalistic goal of some opponents of the Act. But the high rate of personal bankruptcies that the critics stress is evidence that the vicious cycle dominates the effect of high interest rates in discouraging borrowing.
I conclude that the new Act, by increasing the rights of creditors in bankruptcy (for remember that Chapter 13 enables a creditor to obtain repayment out of the debtor’s post-bankruptcy income, not just out of what may be his very limited nonexempt assets at the time of bankruptcy, as under Chapter 7), should reduce interest rates and thus make borrowers better off. The most reckless borrowers—those most prone to file repeated Chapter 7 bankruptcies—will be made worse off. But there will be fewer of these, precisely because they will be worse off than under the existing system. If bankruptcy is more costly, there will be less of it.
Critics say that more than half of all individual bankrupts are not reckless borrowers but rather are unfortunate people who have been hit by unexpected medical expenses. But this ignores the fact that whether one is forced into bankruptcy by a medical expense (or by an interruption of employment as a result of a medical problem) depends on one’s other borrowing. If one is already borrowed to the hilt, an unexpected medical expense may indeed force one over the edge. But knowing that medical expenses are a risk in our society, prudent people avoid loading themselves to the hilt with nonmedical debt.
At a more fundamental level, one might ask why voluntary bankruptcy is ever permitted. It is easy to understand involuntary bankruptcy—that is, bankruptcy forced upon a debtor by his creditors. Such bankruptcy overcomes the free-rider problem that would exist if multiple creditors were allowed to race each other to be first to seize the assets of a defaulting debtor, when the creditors as a whole might be better off with a more orderly liquidation. But why should a debtor ever be permitted to write off his debts? One answer is that, assuming people are risk averse, voluntary bankruptcy operates as a kind of social insurance. One cannot buy private insurance against going broke (for then people would indeed borrow recklessly), but even a prudent borrower could find himself broke as a result of an unforeseeable streak of bad luck. However, the Bankruptcy Reform Act does not eliminate voluntary bankruptcy. The social-insurance role is fulfilled by Chapter 13 as well as by Chapter 7, since after five years of partial payments the Chapter 13 bankrupt is entitled to a full discharge of the unpaid balance of his debts.
Behind the Bankruptcy Reform Act, as behind the President’s proposal for social security reform, is an ideology of giving nonwealthy people greater responsibility for their own economic welfare, which entails subjecting them to additional financial risk. Under the present system, the prudent and the imprudent consumer pay the same high interest rates, assuming creditors can’t readily determine which consumers are prudent and which are imprudent. By lowering interest rates on credit-card and other consumer debt while at the same time discouraging default, the Bankruptcy Reform Act will encourage consumers to exercise greater care in borrowing—yet at the same time, because interest rates will be lower, the Act will enable prudent consumers (who do not face a high risk of bankruptcy) to borrow more and by doing so will increase their consumption options. The Act will not redistribute wealth from the poor to the rich, but from the imprudent borrower to the prudent borrower.
Posner has very good comments, which I mainly agree with. I will try to discuss a little the foundation of bankruptcy, a topic that Posner discusses only briefly.
In previous blog entries, we discussed student loans and the difficulty of using human capital, such as education or earning power, as collateral to get loans. People with significant assets can offer these assets as collateral, although as Posner indicates, various bankruptcy laws exempt the housing and certain other assets of debtors from being possessed by creditors. But still it is much harder to borrow on the basis of human capital alone because there is no collateral. This is why the poor are most vulnerable in the credit market since if they get into difficulties, they have few assets to sell to cover their consumption and also payments on credit card and other loans.
Lacking collateral, the poor would pay higher interest rates even without bankruptcy protection because managing their loans is more costly, and collection via garnishment and the like is expensive. The possibility of discharging debts through bankruptcy may add significantly to the rates they pay. Posner shows that a vicious cycle is created because higher interest payments are more of a burden if unemployment or other difficulties strike.
One approach to breaking this circle is to make human capital loans not dischargeable through bankruptcy-except in extreme cases. I suggested in an earlier entry that loans to finance the purchase of the right to immigrate should also not be dischargeable. Creditors would have the right to garnish wages for a certain period of time, as under Chapter 13 of the Bankruptcy Code. The new reform of bankruptcy laws moves in this direction, the same direction already used for student and other loans when governments, not the private sector, are the creditors.
Another approach that helps provide insurance is to encourage “equity” loans when human capital is the main collateral available. By equity loans I mean a system where creditors share in both the higher and lower earnings of debtors. So when earnings of a debtor are higher, the amount he or she pays back is greater than when their earnings are lower. This system is quite common in financing agricultural loans in poorer countries, as demonstrated by the research on loans in developing nations by Robert Townsend and others.
Since these type of loans already exist in poor nations with limited bookkeeping techniques and primitive commercial credit markets, there is no reason why they could not become more common in the richer nations, whether the US, Europe, or Japan. Debtors might have to submit tax forms that verify their incomes, the same way that these are required in obtaining student aid, Medicaid, and some other assistance.
The law might have to be written to encourage such equity loans. They may not always be feasible, but they are a more attractive method of “social” insurance than the bankruptcy system. They avoid a lot of litigation over assets, garnishment, and the like. In addition, those debtors doing better than expected automatically back pay more, while those doing badly automatically pay back less, possibly nothing until they do better. This to me seems to be a much better way than tinkering with bankruptcy laws in meeting the legitimate needs of both creditors and debtors in an uncertain economic world.
Some excellent comments, and extremely interesting discussion among the commentors. Clearly, too many and too varied for me to do justice to all of them. Let me give a few reactions.
It is true that long run elasticities of demand, especially for habitual and addictive goods like drugs, exceed short run elasticities. The estimates I refer to are in fact long run elasticities in the few cases where they are estimated, and are the actual estimated elasticities in the other cases where no distinction is drawn. While one or two estimates exceed one, the vast majority of the estimates are significantly below one, including the estimated long run elasticities. One half is a good indicator of their central tendency.
Someone suggested that elasticities are different for price increases than for decreases. If utility functions are continuous with continuous first derivatives-sorry to be technical- this cannot be true for small price changes. Of course, they might differ for large price changes, so that the elasticity is not necessarily constant along a demand curve. Perhaps the elasticity increases as prices decline, although the usual assumption is that it tends to decrease as prices fall, at least eventually.
I obviously do agree that legalization would likely increase drug use if it lowered prices of drugs- the quantity demanded of drugs also tends to decline as their price falls. That is why I did not assume a zero price elasticity, but used 1/2 as my estimate. However, whether legalization would increase quantity demanded at a given price is far less clear. Forces go in both directions, such as the desire to obey the law versus the desire to oppose authority.
A couple of comments claimed legalization would be a tax on the poor, especially with the market price held constant. I do agree that the demand for drugs by the poor would be more responsive than demand by others to a fall in price produced by legalization. But can anyone doubt that the war on drugs has primarily hurt the poor? They are the ones mainly sentenced to prison on drug charges, their neighborhoods are often destroyed by drugs, and so forth.
I did not suggest that the legal excise tax on drugs should keep the market price of drugs constant – I allowed the possibility that the tax could be high enough to lead to higher prices, or low enough to produce lower prices than at present. My instincts as an economist are to favor giving individuals free choice as long as they do not harm others. But as a parent I also understand the desire to keep drugs away from young persons so that they do not get started along that path, although the prohibitionists have to realize that little is known about what behaviors would substitute for drug use.
Legalization would give the government additional tax revenue if they do not cut other taxes. I have sympathy with the comments that are skeptical of whether the government would use that revenue wisely. But it would still be much better than the present system that involves, among other things, a drain on taxpayers’ resources, and hits the poor especially hard.
There were some denials of whether the black market with legalized drugs would be any smaller than present levels if the tax on drugs either kept the market price the same as present street prices, or if it raised the market price even higher. However, the crucial point is that there is no alternative to illegal production and distribution under the present system. With legalization, many producers-I believe the vast majority of them- would choose to produce legally, and consumers would prefer to buy from them. This is because of several important reasons, including that the legal quality would be more certain, and legal producers could use the courts and arbitrators to help enforce contracts. Then the police and legal system could concentrate fewer resources on combating more effectively a smaller underground sector.
The fact that the price of illegal drugs is not only low but falling, and indeed has fallen to quite low levels, is often treated as compelling evidence that the war on drugs has failed. That is true if the war metaphor is taken literally. But if the “war” is redescribed realistically as a campaign to reduce the consumption of illegal drugs, it could be thought at least a partial success even if the price of illegal drugs is extremely low. The reason lies in the distinction that economists draw between the full price of a good and its nominal price. The nominal price is the dollar amount charged by the seller; the full price includes any additional costs borne by the buyer, such as search costs (the costs involved in finding and negotiating with the seller—in other words, shopping costs) and any health risks associated with the consumption of the good. The war on drugs has had a significant effect on these additional costs. As a result of the drugs’ illegality, it takes some effort to find a seller, there is a risk of arrest and prosecution, and there is a risk of an accidental overdose resulting from lack of quality control in the manufacture of the product. (There is also a stigma to using illegal drugs, but this might remain if the drugs were legalized; heavy drinking, though legal, is stigmatized.) These costs would be eliminated if drugs were legal. It might seem that with the drugs worth more to consumers, price would rise, but this is unlikely; price would be constrained to cost by competition, and the additional benefits of the drugs—that is, the benefits generated by removing the costs resulting from criminalization—would be realized by consumers as consumer surplus (the difference between what a consumer would pay for a good and the price of the good). With the good more valuable to consumers but the nominal price no higher, consumption would increase.
This point is potentially very important empirically, because the effect of criminalizing drugs on the full price of the drugs may be much greater than the effect on the nominal price. Suppose criminalization raises the nominal price of a dose of cocaine from $1 to $1.l0, a 10 percent increase; then using Becker’s elasticity estimate, legalizing cocaine would result in a 5 percent increase in demand. But now suppose that the war on drugs has increased the full price of cocaine from $1 a dose to $2.10 a dose (the 10¢ increase in nominal price plus a $1 increase in other costs of consumption); then legalizing cocaine could be expected to have a much more dramatic effect on consumption. However, as Becker points out, this effect could be offset by a tax (in the example, a $1.10 tax), though some incentive to smuggling would be created by so stiff a tax, as in the case of cigarettes. The important thing is that because of the difference between full and nominal price, the tax might have to be very stiff.
Regarding performance-enhancing drugs, such as steroids, one comment points out that sports fans appreciate better performance, and notes that professional football is more popular than college football (alumni loyalties to one side). But there is a difference between skill and strength; if the principal effect of steroids is to increase strength rather than skill, it is not clear that entertainment value is enhanced. But suppose it is. Then what must be considered is the tradeoff between the increased income that steroid-consuming athletes can expect to obtain and the risks to their health. The tradeoff is complicated because some athletes will prefer the higher income and others will prefer to have better health and, being thus at a competitive disadvantage, will drop out of the sport. It is unclear whether there will be a net increase in performance, since some killed athletes will be lost to the sport, though those that remain will be better performers.
Let me make clear that I have no ethical objection to performance-enhancing drugs. Suppose there’s a drug that adds 10 IQ points to everyone who takes it, and it has no adverse health consequences. Once some people start taking the drug, this will put pressure on others to follow suit. But I don’t see any difference between this effect and that resulting from an effort by a young business person to gain a competitive edge by getting an MBA, which will place pressure on his competitors to do likewise. That kind of competition improves economic welfare.
Every American president since Nixon has engaged in a “war” on illegal drugs: cocaine, heroin, hashish, and the like. And every president without exception has lost this war. The explanation lies not in a lack of effort- indeed, I believe there has been too much effort- but rather in a basic property of the demand for drugs, and the effects of trying to reduce consumption of a good like drugs by punishing persons involved in its trade.
The war on drugs is fought by trying to apprehend producers and distributors of drugs, and then to punish them rather severely if convicted. The expected punishment raises the price that suppliers of drugs need to receive in order for them to be willing to take the considerable risks involved in the drug trade. The higher price discourages purchase and consumption of illegal drugs, as with legal goods and services. The harder the war is fought, the greater the expected punishment, the higher is the street price of drugs, and generally the smaller is the consumption of drugs.
Those suppliers who are caught and punished do not do very well, which is the typical result for the many small fry involved in distributing drugs. On the other hand, those who manage to avoid punishment- sometimes through bribes and other corrupting behavior-often make large profits because the price is raised so high.
This approach can be effective if say every 10% increase in drug prices has a large negative effect on the use of drugs. This is called an elastic demand. However, the evidence from more than a dozen studies strongly indicates that the demand for drugs is generally quite inelastic; that is, a 10% rise in their prices reduces demand only by about 5%, which means an elasticity of about ½. This implies that as drug prices rise, real spending on drugs increases, in this case, by about 5% for every 10% increase in price. So if the war on drugs increased the price of drugs by at least 200%- estimates suggest this increase is about right- spending on drugs would have increased enormously, which it did.
This increased spending is related to increased real costs of suppliers in the form of avoidance of detection, bribery payments, murder of competitors and drug agents, primitive and dnagerous production methods, and the like. In addition, the country pays directly in the form of the many police shifted toward fighting drugs, court time and effort spent on drug offenders, and the cost of imprisonment. The US spends about $40,000 per year per prisoner, and in recent years a sizeable fraction of both federal and state prisoners have been convicted on drug-related charges.
After totaling all spending, a study by Kevin Murphy, Steve Cicala, and myself estimates that the war on drugs is costing the US one way or another well over $100 billion per year. These estimates do not include important intangible costs, such as the destructive effects on many inner city neighborhoods, the use of the American military to fight drug lords and farmers in Colombia and other nations, or the corrupting influence of drugs on many governments.
Assuming an interest in reducing drug consumption- I will pay little attention here to whether that is a good goal- is there a better way to do that than by these unsuccessful wars? Our study suggests that legalization of drugs combined with an excise tax on consumption would be a far cheaper and more effective way to reduce drug use. Instead of a war, one could have, for example, a 200% tax on the legal use of drugs by all adults-consumption by say persons under age 18 would still be illegal. That would reduce consumption in the same way as the present war, and would also increase total spending on drugs, as in the current system.
But the similarities end at that point. The tax revenue from drugs would accrue to state and federal authorities, rather than being dissipated into the real cost involving police, imprisonment, dangerous qualities, and the like. Instead of drug cartels, there would be legal companies involved in production and distribution of drugs of reliable quality, as happened after the prohibition of alcohol ended. There would be no destruction of poor neighborhoods- so no material for “the Wire” HBO series, or the movie “Traffic”- no corruption of Afghani or Columbian governments, and no large scale imprisonment of African-American and other drug suppliers. The tax revenue to various governments hopefully would substitute for other taxes, or would be used for educating young people about any dangersous effects of drugs.
To be sure, there would be some effort by suppliers of drugs to avoid taxes by going underground with their production and distribution. But since there would then be a option to produce legally-there is no such option now- the movement underground would be much less than under the present system. As a result, the police could concentrate its efforts more effectively on a greatly reduced underground drug sector. We have seen how huge taxes on cigarettes in New York and elsewhere have been implemented without massive movement of production and distribution underground in order to avoid the taxes.
So legalization could have a greater effect in reducing drug use than a war on drug without all the large and disturbing system costs. How high the tax rate should be would be determined by social policy. This approach could accommodate a libertarian policy with legalization and low excise taxes, a socially “conservative” position that wants to greatly reduce drug use with very high tax rates, and most positions in between these two extremes. So if drug consumption was not considered so bad once it became legal, perhaps the tax would be small, as with alcoholic beverages in the US. Or perhaps the pressure would be great for very high taxes, as with cigarettes. But whatever the approach, it could be implemented far more successfully by legalizing drugs than by further efforts to heat up the failing war on illegal drugs.
I am in broad agreement with Becker. But I am somewhat hesitant to describe the war against drugs as having been “lost.” By that token, so has the war against bank robbery, or any other crime, been lost, because there is a positive rate of these crimes as well. As Becker explains, law enforcement activity raises the cost and hence price of illegal drugs and as a result of the price increase reduces their consumption. If the object of the “war on drugs” is to reduce rather than completely eliminate the consumption of illegal drugs, then the war has been partially won. Which is not to say that the partial “victory” has been worth the considerable costs. If the resources used to wage the war were reallocated to other social projects, such as reducing violent crime, there would probably be a net social gain. For one thing, it is particularly costly to enforce the law against a “victimless” crime, more precisely a crime that consists of a transaction between a willing seller and a willing buyer. The low probability of apprehending such criminals has to be offset by very stiff sentences in order to maintain deterrence. Yet if potential criminals have high discount rates, an increase in sentence length may have little incremental deterrent effect because the increase is tacked on at the end of the sentence. The present disutility of an increase in sentence length from 20 to 30 years may, given discounting, be trivial. Still another consideration is that if the principal effect of illegal drugs is to impair the health and productivity of the consumer of the drugs, then it is just another species of self-destructive behavior and we normally allow people to engage in such behavior if they want; it is an aspect of liberty.
Drug crimes are often thought to be inherently violent because of their association with guns, gangs, turf wars, and fatal overdoses. Those characteristics are, however, merely artifacts of the fact that the sale of the drugs in question has been criminalized, so that the suppliers cannot use the usual, peaceable means of enforcing property rights and contracts and are not regulated in the interest of consumer safety, as legal drugs are.
To determine the full social effect of the war on drugs, we would have to know precisely how drug users respond to higher prices of drugs, since, from a consumer standpoint, higher prices are what the war on drugs achieves. One possibility is that the user spends the same amount of money on drugs, but, because the price is higher, consumes less. Another possibility is that he reduces his consumption so much that he has money left over, and he uses that to buy a harmless product. A third possibility, however, is that he reduces his consumption enough to have money left over but he uses it to buy a legal mind-altering drug, such as liquor. This seems in fact the likeliest response of someone who desires a certain level of mood alteration and faces a higher price for his drug of choice; he switches to a substitute that now costs him less because it is not burdened by costs imposed by law enforcement. If that is the principal consequence of the war on drugs, it is hard to see what is gained even if one embraces the paternalistic rationale of the war.
The political source of the war on drugs is mysterious if, as I am inclined to believe, there is a legal substitute for every one of the illegal drugs: selective serotonin uptake reinhibitors (e.g., Prozac, Paxil, Zoloft) and other antidepressive drugs for cocaine, liquor and tranquillizers for heroin, cigarettes for marijuana, caffeine and steroids for “uppers.” Obviously these are not perfect substitutes; and some of the illegal drugs may be more potent or addictive or physically or psychologically injurious than the legal ones. But it is apparent that our society has no general policy against the consumption of mind-altering substances, and there seems to be a certain arbitrariness in the choice of the subset to prohibit. If these drugs were regulated instead of being prohibited, their content could be made less potent and addictive and consumers could be warned more systematically about their dangers, as they are about the dangers of cigarettes and prescription drugs.
As a judge sworn to enforce the law, I will continue as I always have to adjudicate drug cases without any hesitations based on my reservations about the wisdom of the war on drugs. That is a legislative issue.
Oddly, one of the strongest cases for prohibiting drugs is the use of steroids by athletes. The reason is the arms-race character of such use, or in economic terms the existence of an externality. Ordinarily if a person uses a drug that injures his health, he bears the full costs, or at least most of the costs, of the injury. But if an athlete uses steroids to increase his competitive performance, he imposes a cost on his competitors, which in turn may induce them to follow suit and use steroids themselves, provided the expected costs, including health costs, are lower than the expected benefits of being able to compete more effectively. There is no offsetting social benefit from an across-the-board increase in athletes’ strength. Football games are no more exciting when linesmen weigh 500 pounds than when they weigh 200 pounds; and baseball would be totally unmanageable if every player could hit every other pitch 1000 feet.
Some good knowledge about judicial history displayed in the discussion. Let me comment on a few of the issues-much of the discussion is among you that may continue.
The two law professors I refer too- Carrington and Cramton- believe that a change to term limits for Supreme Court Justices would not require a constitutional amendment. They and others believe that it would be constitutional for Justices after their terms are finished to become sort of roving judges at lower federal courts. I accept that conclusion.
It should be rather obvious that there would be less incentive to appoint young judges since they would have limited tenures, largely regardless of their ages. Under the present lifetime system, their expected length of service would be positively related to how young they are. Term limits are better than fixed retirement ages for several reasons. One being that even with a fixed retirement age, the incentive to appoint young Justices is still strong.
There is a concern that political jockeying by candidates would become more important than at present, but I believe the opposite would be true. There is now enormous and various kinds of jockeying among judges and other potential appointees, such as avoiding a paper trial, writing less controversial opinions, and in other ways. The prize now is a term at the highest level of 30 or more years for the typical appointee. Term limits reduces the size of the prize. The scrutiny by the Senate of every single opinion also should decline because the duration of each appointment would be much shorter.
When the Constitution was adopted, life expectancy at age 25 was more than 25 years lower than it is now. So life-time tenure for Justices appointed at age 40 meant an expected tenure of about 20 years, while now it means about 45 years. If the Founders had anticipated such a huge change, I believe they would have imposed either a retirement age or a maximum term.
At least one of you asks quite properly about the evidence indicating that we need a change toward term limits? I did present what evidence is available on the increase in average length of terms actually served by Justices, the growing infrequency of appointments, and the increasing controversy of appointments. All this means that Justices have become much more important, and less subject to natural forces of death or retirement.
It would be great to also have a detailed evaluation of the nature of their opinions, any changes in the degree of partisanship, the controversy generated by appointments and opinions, etc. I do not know of anyone who has done that kind of study. But the huge growth in legislation and litigation surely indicate that the importance of Supreme Court decisions has grown enormously, while the age and tenure of those making the decisions has also greatly increased. This evidence to me is highly suggestive (but it is not, I agree, ironclad proof) that a change is desirable
I realize from the comments that I should have said more about the specific issue of term limits for Supreme Court Justices.
The case for term limits for the lower federal judges (circuit and district judges) is weak. As I said in my original posting, the institution of "senior status" largely takes care of the senility problem. (Also, contrary to one of the commenters, incapacity is a recognized basis for removing a federal official by the impeachment process; the first federal judge impeached and removed from office was a drunkard and a lunatic, but had not engaged in wrongful conduct, such as taking a bribe.) There is shirking, chiefly in the form of excessive delegation of judicial functions to law clerks and other staff and excessive indulgence in leisure activities, such as travel, and the more serious form of misbehavior that consists of willful decision-making. However, these problems are not serious enough to warrant a fundamental change that would reduce legal certainty by increasing judicial turnover and would make a federal judicial career less attractive and so reduce the field of selection, though the latter effect could be offset by salary increases--but that, of course, would be a cost also. In addition, as I said, candidates for federal judgeships are carefully screened, and at an age when most people either have, or have not, established habits of work that will persist even if sticks and carrots are removed.
The issue of term limits for Supreme Court Justices is more challenging, first because the Court is, to a great extent, a political court, that is, a court the decisions of which are guided by the policy preferences of the judges, and second because Justices have less incentive to retire than the lower-court judges.
Let me start with the political issue. The contrast with the lower federal courts, especially the courts of appeals, should not be overdrawn. Plenty of cases that never get to the Supreme Court are political in the sense just indicated, but fewer, and they are the less politically fraught cases--otherwise the Court would take them up. The best index to the political component of a court is the amount and character of controversy regarding appointments: controversy is greatest for Supreme Court Justices, less for court of appeals judges, and least for district (trial-level) judges; and the focus of controversy is most likely to be ideology rather than politics at the Supreme Court level, less likely at the court of appeals level, and least likely at the district court level.
But I don't think the political argument for imposing terms limits at the Supreme Court level is persuasive, despite the anomaly in a democratic system of having a corps of powerful political officials who serve for life, as in a monarchy. A lesser objection is that by increasing turnover of Supreme Court Justices, term limits (depending of course on their length) would operate as a tremendous political distraction, since it would be known with certainty when a vacancy would occur. So the political struggle over a successor would start sooner, and there would be more such struggles because there would be more vacancies.
More important, when we contrast democracy with dictatorship we aren't just comparing term lengths; we are also comparing incentives. Officials who are elected for short, fixed terms and can be reelected have a strong incentive to conform their behavior to the preferences of the electorate, interest groups, public opinion, and other more or less democratic sources of influence on policy. An official appointed (not elected) for a long fixed term, and ineligible for reappointment, is a tyrant, in the sense of being (largely) insulated from the normal political constraints on official behavior.
We may want that insulation; we may want a court to be an independent power base; but the premise of the movement for judicial term limits is that courts are too independent, too powerful. The imposition of term limits would not reduce that power. It would merely increase the number of power holders. And as they would be holding power successively rather than simultaneously, there would be no competitive check on their exercise of power. So I don't see how term limits would actually limit judicial power.
But there is still the retirement question. People can get stale from serving in the same job for a great many years and most elderly people, before diagnosable senility sets in, experience a diminution in mental acuity and, especially, adaptability to novelty. The combination of very long service in the same age with very great age is likely to produce a decline in performance. And while long experience in a job can make one more efficient at it, beyond a point additional experience adds nothing.
This is certainly a problem for the Supreme Court, but perhaps not a terribly serious one. There are four reasons. First, if one's performance declines from a very high level, it may remain quite adequate; Holmes, Brandeis, Learned Hand, and other illustrious oldsters were not as sharp in their eighties as they had been, but they were sharp enough. Second, the Supreme Court's workload is very light, with a long summer recess. Third, the Justices have terrific staffs. And fourth, the most important skills in law are verbal and rhetorical, and they tend to decline with age less rapidly than logical, theoretical, and mathematical skills. On all these counts, Supreme Court judging is the quintessential geriatric profession.
Many interesting comments, but I cannot do justice to them all- I am busy giving a series of lectures in Paris. Still, a few quick reactions.
Some of you argued that economic freedom is more important than political freedom. I have some sympathy with that view, although it depends a lot on circumstances. Very poor individuals do put much greater emphasis on economic freedoms. But that weight tends to change as people get richer. That is one main reason why political freedoms tend to follow economic development.
Are economic freedoms really easier to grant, as some of you argued? That is not clear to me since the world has been dominated historically by restrictions on both. Both are difficult, and yet both are in a technical sense easy to grant. In many cases, political calculation of gains and costs determine which comes first. But it is still true that economic freedoms are more likely to be followed by political freedoms than the reverse.
There is ambiguity in defining both economic and political freedom, and indexes of both are imperfect. I associate democracy not with voting-as one of you claimed- but with competition among interest groups and parties for political office. The right to vote may be necessary, but is surely far from sufficient in producing political freedom-competition politically is the crucial test of democracy.
Similarly, there is no single definition of economic freedom. But I believe all relevant definitions include private property and its protection, the freedom to change jobs, to be fired, to buy different goods and services, to save, and so forth. It is not difficult to classify some nations are much freer economically, and others as much less free. Some intermediate cases give greater difficulty.
I am willing to be called a “Marxist” if that fits, but I do not believe the views I put forward are congenial to Marxists. They consider economic freedom to be a temporary situation on the way to socialism, where the people in some sense rule, and the state withers away. That has turned out to be an erroneous prophesy. I believe the right, although, imperfect causation is from economic to political freedom. As far as I know, Marx did not consider political freedom important.
In examining the issue of judicial term limits (a perennial proposal but one being urged with renewed vigor these days), we are continuing the examination of governance that we undertook recently with reference to the Larry Summers controversy. The judiciary, especially the federal judiciary, the judges of which are appointed, not elected, and appointed for life and removable only for serious misconduct or complete incapacity (due for example to senility), is another oddly structured institution, like a university, with which it shares the institution of life tenure now that mandatory retirement has been abolished for professors.
One can imagine a much more conventional organization of the judiciary. New graduates from law schools would be appointed to the judiciary, beginning as junior judges in traffic or domestic-relations or misdemeanor courts. Their performance would be evaluated by the administrators of the judicial system and if their performance was good they would be promoted through the ranks of the judges. This in fact is the system prevailing in most countries of the world, including the European nations (except the United Kingdom), and Japan. In contrast, in the U.S. federal judiciary, as in the English judiciary, judgeships are lateral-entry positions and promotion is rare and there is no systematic, official evaluation of performance. Most federal judges are appointed in their 40s or 50s after a career in legal practice, prosecution, or law teaching. If they are appointed as district judges (i.e., trial judges), they will usually remain in that rank; promotion to circuit judge (i.e., to the court of appeals) is not wholly uncommon, but most district judges remain such for their career on the bench. Promotion of circuit judges to the Supreme Court is even less frequent. I was appointed a federal circuit judge from teaching in 1981, at the relatively young age of 42. I have thus been a circuit judge for 23 years and will remain in that job until I die or retire. And I am very difficult to remove from office!
At first glance, the U.S. federal system, in contrast to the European and Japanese, seems hopelessly devoid of incentives to good performance. Apart from the very limited promotion opportunities and the difficulty of removing federal judges, all judges at the same level (i.e., all district judges, all circuit judges, and all Supreme Court Justices except the Chief Justice) are paid exactly the same salary and have only very limited opportunities to supplement their salaries with teaching or writing.
Nevertheless, the performance of federal judges (most state judges are elected, and for a variety of reasons this is an unsatisfactory method of judicial appointment, used nowhere else, as far as I know, in the world) is generally thought to be on a par with that of judges in Europe, Japan, and other countries that have a career judiciary. One reason is that when a person is appointed to the bench after another career, there is a good deal of information about his competence and work ethic; moreover, appointees are carefully screened by the FBI, the White House, and the Senate Judiciary Committee. It is commonplace when output is difficult to measure to monitor inputs instead. The output of the federal judiciary is difficult to measure because the complex and ambiguous character of much federal law makes it very difficult to determine when a judicial decision is erroneous. Nations that have career judiciaries generally have simpler, more cut-and-tried legal doctrines; that makes it easier to monitor judicial performance and so create a career ladder in which judges are evaluated for promotion by their superiors.
Whether in the academy or in the judiciary, life tenure is a formula for abuse. Basically, it eliminates any penalty for shirking; the salary structure of federal judges, noted above, eliminates the carrot along with the stick. This suggests the possible desirability of imposing term limits on judges—say, 10 years (a common term for judges of constitutional courts in foreign countries). This would limit the length of service of the shirkers and also create an incentive for good performance because the judge would want to secure a good job after his judicial term expired. The downside (illuminated by the literature on term limits for legislators) is that judges would be distracted by having to make arrangements for another job at the expiration of their term; their decisions might be distorted by desire to curry favor with potential future employers; and more rapid turnover of judges would reduce legal stability. These might not be compelling arguments were it not for the careful screening of judges, which eliminates from the appointment pool the candidates most likely to shirk. (I am assuming that judges would not be eligible for reappointment when their terms expired, as that would result in rampant politicization of the judiciary.)
An ingenious compromise is the institution of “senior status” whereby judges who reach the age of (voluntary) retirement, normally 65, can continue to work, at no reduction in pay, as “senior” judges—provided they are willing to assume at least one-third of the normal workload. This is an attractive offer, which most eligible judges accept—but part of the deal is that a senior judge can be removed (though with no diminution of pay) from judging by the chief judge of his court or the court’s judicial council; in effect, he no longer has tenure. This is a variant of the “buy out” schemes by which universities and other employers try to induce retirement.
The case for term limits for Supreme Court Justices, as urged by Becker, is stronger. The Supreme Court is largely though not entirely a political court—almost a third branch of the legislature—and life tenure for politicians is profoundly undemocratic. The Justices are ineligible for senior status, moreover, though if they retire they can sit in the lower federal courts if they want. With increased longevity, Justices are likely to be serving very long terms into very old age. This strengthens the argument for Supreme Court term limits.