An article in the New York Times of September 20 by Louise Story, entitled "Many Women at Elite Colleges Set Career Path to Motherhood," reports the results of surveys and interviews concerning career plans of women at the nation's most prestigious colleges, law schools, and business schools. Although not rigorously empirical, the article confirms--what everyone associated with such institutions has long known--that a vastly higher percentage of female than of male students will drop out of the work force to take care of their children. Some will resume full-time work at some point in the children's maturation; some will work part time; some will not work at all after their children are born, instead devoting their time to family and to civic activities. One survey of Yale alumni found that 90 percent of the male alumni in their 40s were still working, but only 56 percent of the female. A survey of Harvard Business School alumni found that 31 percent of the women who had graduated between 10 and 20 years earlier were no longer working at all, and another 31 percent were working part time.
What appears to be new is that these earlier vintages did not expect to drop out of the workforce at such a high rate (though they did), whereas current students do expect this. That is not surprising, since the current students observe the career paths of their predecessors. So, contrary to the implication of the article, there is no evidence that the drop-out rate will rise.
The article does not discuss the interesting policy issues presented by the disproportionate rate of exit of elite women from the workforce. Nor does it have much to say about why women drop out at the rate they do. The answer to the latter question seems pretty straightforward, however. Since like tend to marry like ("assortative mating"), women who attend elite educational institutions tend to marry men who attend such institutions (and for the further reason that marital search costs are at their minimum when the search is conducted within the same, coeducational institution). Those men have on average high expected incomes, probably higher than the expected incomes even of equally able women who have a full working career. Given diminishing marginal utility of income, a second, smaller income will often increase the welfare of a couple less than will the added household production if the person with the smaller income allocates all or most of her time to household production, freeing up more time for her spouse to work in the market. The reason that in most cases it is indeed the wife (hence my choice of pronoun) rather than the husband who gives up full-time work in favor of household production is not only that the husband is likely to have the higher expected earnings; it is also because, for reasons probably both biological and social, women on average have a greater taste and aptitude for taking care of children, and indeed for nonmarket activities generally, than men do.
But it is at this point that policy questions arise. Even at the current very high tuition rates, there is excess demand for places at the elite colleges and professional schools, as shown by the high ratio of applications to acceptances at those schools. Demand is excess--supply and demand are not in balance--because the colleges and professional schools do not raise tuition to the market-clearing level but instead ration places in their entering classes on the basis (largely) of ability, as proxied by grades, performance on standardized tests, and extracurricular activities. Since women do as well on these measures as men, the student body of an elite educational institution is usually about 50 percent female. Suppose for simplicity that in an entering class at an elite law school of 100 students, split evenly among men and women, 45 of the men but only 30 of the women will have full-time careers in law. Then 5 of the men and 20 of the women will be taking places that would otherwise be occupied by men (and a few women) who would have more productive careers, assuming realistically that the difference in ability between those admitted and those just below the cut off for admission is small. While well-educated mothers contribute more to the human capital of their offspring than mothers who are not well educated, it is doubtful that a woman who graduates from Harvard College and goes on to get a law degree from Yale will be a better mother than one who stopped after graduating from Harvard.
But I have to try to be precise about the meaning of "more productive" in this context. I mean only that if a man and woman of similar ability were competing for a place in the entering class of an elite professional school, the man would (on average) pay more for the place than the woman would; admission would create more "value added" for him than for her.
The principal effect of professional education of women who are not going to have full working careers is to reduce the contribution of professional schools to the output of professional services. Not that the professional education the women who drop out of the workforce receive is worthless; if it were, such women would not enroll. Whether the benefit these women derive consists of satisfying their intellectual curiosity, reducing marital search costs, obtaining an expected income from part-time work, or obtaining a hedge against divorce or other economic misfortune, it will be on average a smaller benefit than the person (usually a man) whose place she took who would have a full working career would obtain from the same education.
The professional schools worry about this phenomenon because the lower the aggregate lifetime incomes of their graduates, the lower the level of alumni donations the schools can expect to receive. (This is one reason medical schools are reluctant to admit applicants who are in their 40s or 50s.) The colleges worry for the same reason. But these particular worries have no significance for the welfare of society as a whole. In contrast, the fact that a significant percentage of places in the best professional schools are being occupied by individuals who are not going to obtain the maximum possible value from such an education is troubling from an overall economic standpoint. Education tends to confer external benefits, that is, benefits that the recipient of the education cannot fully capture in the higher income that the education enables him to obtain after graduation. This is true even of professional education, for while successful lawyers and businessmen command high incomes, those incomes often fall short of the contribution to economic welfare that such professionals make. This is clearest when the lawyer or businessman is an innovator, because producers of intellectual property are rarely able to appropriate the entire social gain from their production. Yet even noninnovative lawyers and businessmen, if successful--perhaps by virtue of the education they received at a top-flight professional school--do not capture their full social product in their income, at least if the income taxes they pay exceed the benefits they receive from government.
Suppose a professional school wanted to correct the labor-market distortion that I have been discussing. (For I am not suggesting that the distortion is so serious as to warrant government intervention.) It would be unlawful discrimination to refuse admission to these schools to all women, for many women will have full working careers and some men will not. It would be rational but impracticable to impose a monetary penalty on the drop-outs (regardless of gender)--making them pay, say, additional tuition retroactively at the very moment that they were giving up a market income. It would also be infeasible to base admission on an individualized determination of whether the applicant was likely to have a full working career.
A better idea, though counterintuitive, might be to raise tuition to all students but couple the raise with a program of rebates for graduates who work full time. For example, they might be rebated 1 percent of their tuition for each year they worked full time. Probably the graduates working full time at good jobs would not take the rebate but instead would convert it into a donation. The real significance of the plan would be the higher tuition, which would discourage applicants who were not planning to have full working careers (including applicants of advanced age and professional graduate students). This would open up places to applicants who will use their professional education more productively; they are the more deserving applicants.
Although women continue to complain about discrimination, sometimes quite justly, the gender-neutral policies that govern admission to the elite professional schools illustrate discrimination in favor of women. Were admission to such schools based on a prediction of the social value of the education offered, fewer women would be admitted.
Up to the early 1960's, less educated women were more likely to work than highly educated women. The trend sharply reversed during the past several decades, so that now propensity to work and education are positively related for women (as well as men). This is partly because highly educated women have a lower tendency to marry, but the labor force trend by education achievement holds also for married women. The Times article gives the impression that this education-work trend has reversed again in recent years, but although the trend has flattened, there is no evidence of reversal (I had the input of Casey Mulligan and Kevin Murphy, two colleagues who have worked extensively on labor force participation rates of women).
Highly educated men continue to work full time much more than highly educated women, although the difference between these propensities has declined during the past several decades. The Times article and Posner concentrate on different work propensities of male and female graduates of elite professional schools, but the difference between the sexes also holds for graduates of other professional schools. Indeed, the gap in the propensities to work of men and women are probably greater for the lesser schools since female graduates of elite colleges and professional schools are less likely to marry than female graduates of lesser institutions.
As Posner indicates, the main reason for this difference is that women drop out of the labor force, or work only part time, in order to care for their young children. Women rather than men do most of the child-care for various reasons, including biological ones, but I will not go over the different explanations. The division of labor between men and women is discussed systematically in my A Treatise on the Family.
Posner goes on to ask: should admission policies of schools take into account the fact that female graduates of elite (and I would add other professional schools) work full time much less than male graduates? That question was openly discussed at departmental meetings when I was a young faculty member at Columbia University. Even though female students did at least as well in the economics program as male students, the issue was whether graduate fellowships should be less readily given to women since they were then so much less likely to work full time later on. I am proud that many of our female students went on to distinguished careers in economics, but the overall female labor force drop out rate was higher than that of male graduates.
In discussing what professional schools should do with respect to admissions of female applicants, Posner claims a difference between the private interests of professional schools, and the social benefits from graduates-an externality in the language of economists. However, I believe that differences between private and social benefits are small in the two types of professional schools he highlights: business and law schools. They generally get almost no direct support from the federal government, and relatively little from state governments.
Moreover, the private gain to a working lawyer or MBA graduate seems to capture pretty much all the social gain from their work. Posner stresses the potential innovations produced by these graduates, and the taxes they pay. But major innovations from graduates of these schools are surely rare, and taxes affect the incentives of everyone, not only professional school graduates. Moreover, taxes would generally have little affect on the incentive to get additional schooling if say the income tax rate is pretty flat. I believe it is partly because externalities from graduates of law and business schools are so small that little taxpayer money goes into subsidizing these programs, although I should add that economists have had difficulty finding major externalities from most types of education.
Since the market for applicants to professional schools is highly competitive, and since external benefits from the work of their graduates are probably not important (except possibly in medicine), the best policy would seem to be to allow the market to continue to work in determining admissions of male and female applicants. Schools might be recognizing that even though female graduates work less, male students prefer having many female classmates, and visa versa, that female graduates who do not work in the labor force are still active in fund-raising activities for their alma maters, or there may be other gains from having smart female students along with smart males.
To be sure, the market in admissions is regulated since affirmative action pressures in the guise of anti-discrimination policies prevent schools from taking male applicants in preference to female applicants with equal or even better school records. Posner recognizes that the logic of his position implies that a relevant measure of discrimination might also include their propensity to work after graduation.
He takes an anti-"profiling" stance by claiming that using potential work experience along with the school records of male and female applicants in determining admissions would be "offensive‚Äù"since many women graduates work full time, and some men do not. Yet not all top students at Harvard College do well at Yale Law School, while some students with poor grades would do well if given the opportunity, but surely he would not want to abandon using grades and performance at Harvard or other schools as one of the predictors of their performance at professional schools, and hence as an important determinant of admissions?
Posner would like professional schools to give female graduates (and men too presumably) a bonus if they work and earn a lot. That is hardly more practical than penalizing women and men who drop-out of the labor force. Would graduates who succeed in another field also merit a bonus (or penalty)? Should female graduates who do not work full time in order to care for their children get a bonus if the children do unusually well in school? For these and other reasons I cannot get excited about this proposal.
Given the strong competition among law and business schools, and the absence of significant external benefits, I do not believe we can do better than allowing these professional schools to decide on admissions using college records and special exams as the major guide. For various reasons, even without current anti-discrimination laws, I doubt whether the fraction of female applicants who are admitted to elite and other professional schools would change very much.
Thanks for correcting two errors: the name of the energy consulting company I referred to is Cambridge Energy Research Associates (my friend, Dan Yergin, the head of this company, will be unhappy I made this mistake). BRCA1 AND BRCA2 are the correct names of the gene mutations that induce breast cancer.
I do not know where the calculations came from about the enormous number of nuclear plants necessary to replace oil, but I believe they are way off. I mentioned nuclear power as replacing oil in the context of hydrogen fuel cells becoming a substitute for the internal combustion engine. No work in this area that I have seen provides any detailed estimates yet of the nuclear power needed, but those given are far below the ones stated in the comment. Nuclear electric power would mainly replace coal and natural gas, and already 20% of the power in US is from nuclear plants, and about 70% in France.
I do not fully exclude catastrophes from my analysis since I mention that nuclear power would reduce emissions of the greenhouse gases that appear to be causing global warming. I exclude terrorism and wars since I admit I do not know how to link their likelihood to economic development and medical advances. Medical advances reduce the consequences of pandemics and probably biological warfare, but economic development probably raises the spread of nuclear and other destructive weaponry.
I certainly do not believe nor did I state that economic development of Africa and other terribly poor regions is unimportant because of medical advances. Of course, economic development is also important, but it remains very possible if poor countries follow India and China and begin to adopt the right economic policies. However, bad health is terrible too, and also a cause of limited economic development, so it is worth emphasizing that the health of the populations of most poor nations has greatly advanced during the past several decades.
A few brief responses (Becker and I are planning to discuss population issues further next week) to a characteristically interesting set of comments.
The most frequent comment is that I am worrying too much about population growth because the vast population growth that the world has experienced in past centuries has not resulted in a net diminution of human welfare. But we do not live in history; we live in the present and the future. To suppose that an established trend is bound to continue is to be guilty of na√Øve extrapolation. I do wish to emphasize, however, in light of one of the comments, that I have never suggested and do not believe that the world is going to run out of food any more than it is going to run out of energy sources.
Refusal to recognize developments that may make the future differ from the past is illustrated by a comment which states that only the United States has the technology necessary to create devastatingly effective bioweaponry. That is a dangerous error. Several years ago, Australian plant scientists, by injecting mousepox virus with commercially available genetic material, increased the lethality of the virus and at the same time made it immune to the mousepox vaccine. Mousepox is biologically similar to smallpox. Those same scientists could if they wanted to, and if they could get hold of smallpox virus, make the virus immune to existing vaccines and even more lethal than it is in nature, where the death rate is 30 percent. Because smallpox is highly contagious even before symptoms appear, and its initial symptoms are ambiguous, hundreds of millions of people could be infected before the epidemic was even discovered, and there would no vaccinated health workers or security personnel to enforce a quarantine. Although all smallpox virus is supposed to be under lock and key in two laboratories, one in the United States and one in Russia, this is not certain and in any event it is expected that the smallpox virus will be synthesized within five years; the polio virus has already been synthesized.
That is our future.
One comment accuses me of putting environmental welfare ahead of human welfare and even of "deifying" the environment. That is not a correct characterization of my view. I am not a Green. Environmental and human welfare are interrelated; otherwise there would be no antipollution policies. Global warming is a profound danger to human welfare. Granted, there is still some scientific debate over global warming, but increasingly it resembles the scientific debate over the health consequences of cigarette smoking. There is never complete certainty in scientific matters, but the efforts of a minority of scientists to debunk global warming are beginning to resemble the efforts of a minority of scientists to debunk evolution.
For further discussion of the matters touched on in this response, see my book Catastrophe: Risk and Response (Oxford University Press, 2004).
The very large increase in oil and natural gas prices in the past couple of years has led to renewed concern about whether world economic development is "sustainable". This term is typically not defined carefully, but sustainability requires that improvements in the living standards of the present generation should also be attainable by future generations. The concern is usually that because fossil fuels and other non-renewable resources are used to produce current economic development, future generations will have much greater difficulty in achieving equally high living standards. A related concern is that environmental damage due to global warming and other types of pollution will create major economic and some health problems for future generations.
In a simple arithmetical sense, the use of some non-renewable resources in current production clearly reduces the stock remaining for future generations. But the relevant concept for development purposes is not the physical supply of fossil fuels and other non-renewable resources, but the economic cost of gaining access to them. Over most of the past 100 years, fossil fuel prices relative to other prices declined rather than increased, even though significant amounts of these fuels were used to help develop many nations. The reason for the decline in relative prices is that new discoveries and better methods of getting at known sources of oil, gas, and coal led to growing rather than falling stocks of economically accessible reserves.
Exactly 140 years ago a great British economist, W. Stanley Jevons, argued (see The Coal Question, 1865) that the world was running out of coal, which he claimed in a few decades would make further economic progress impossible for England and other nations. The book is a high quality statistical study, but even Jevons failed to anticipate the use of oil, natural gas, and nuclear power, the discovery of additional sources of coal, and the extent of improvements in methods of extracting coal and other fuels from the ground.
Of course, what happened in the past is no certain guide to the future. But a 2005 study by Cambridge Economic Research Associates, a prestigious consulting company in the energy field, estimates that known reserves of liquid fuels (oil and gas) will continue to increase at least in the near term future, especially if the high prices of these fuels during the past year continue. Their report discusses the growing importance of drilling for oil in deep rather than shallow water, and other technological advances in extracting more cheaply the world‚Äôs stock of oil and natural gas both under land and under water.
Even if one discounts this and other studies, and believes that the relevant reserves of fossil fuels will decline in the future, the supply of energy sources would greatly increase if nuclear power were more extensively used. That power too is based on a limited resource, uranium, but the supply of uranium is vast relative to its use in generating nuclear power. Nuclear power cannot only generate electricity, but it can also be used instead of oil or gas to produce the hydrogen used in hydrogen fuel cells. Although it is too early to tell, hydrogen cells could replace the internal combustion engine in cars, trucks, and busses sometime in the next few decades. Nuclear power would also help reduce greenhouse gases, such as CO2, and other types of pollution since it is a "clean" fuel (see the May 2005 discussion of nuclear power in our blog).
However, I believe that the most serious deficiency in the usually discussions of "sustainability" is that it should refer to total wellbeing, not simply to what is measured by national income statistics. Even if fossil fuels become increasingly scarce and expensive, and even with further declines in the environment, improvements in health will continue to advance overall measures of wellbeing. Life expectancy has grown enormously during the past half century in virtually all countries, including the poorest ones. Indeed, the typical length of life has generally grown faster in poorer than richer countries as they benefited from medical and other advances in health knowledge produced by the rich nations. The Aids epidemic has set back several African nations, but the increase in life expectancy has been impressive even in most of Africa.
A recent study (see Becker, Philipson, and Soares, "The Quantity and Quality of Life and the Evolution of World Inequality‚Äù" American Economic Review, March 2005) shows how to combine improvement in life expectancy with traditional measures of the growth in GDP to measure what we call the growth in "full" income. We demonstrate that the growth in full income since 1965 has been much faster than the growth in material income in essentially all countries, but especially in less developed nations. A better measure of full income that adjusts not only for the growth in life expectancy, but also for changes in the environment, and for the great advance in the mental and physical health of those living, especially of the elderly, almost surely grew at an even faster rate.
It is highly unlikely that the pace of medical progress will slow down in the coming decades. Indeed, I believe just the opposite is true, that medical progress is likely to accelerate. My belief is based on the magnificent advances in knowledge of the genetic structure of humans and other mammals, and the development of biomarkers, such as the PSA test for prostate cancer, and the blood test for BRAC 1 and BRAC2 gene mutations that greatly raise the risk of breast cancer. Experts on mortality are predicting huge increases during the next 50 years in the number of people who live beyond seventy, eighty, and even ninety in reasonably good health.
Slowing down and reversing global warming may require reductions in the world's use of fossil fuels, and economically relevant reserves of non-renewable resources could decline in the future rather than increase. These forces combined might lower GDP per capita in many countries-although I doubt it- but progress in medical knowledge will produce substantial advances in the world's full income. So just as the per capita wellbeing of present generations is much higher than that of our parents and grandparents, so the wellbeing of the generations of our children and grandchildren are very likely to be much higher than ours (setting aside the damage from possible highly destructive wars and terrorism).
This is why I believe that while the sustainable development literature asks important questions, the analysis has been inadequate and overly alarmist. Most of the discussion takes a mechanical view of changes in the stock of the stock of non-renewable resources, pays insufficient attention to technological advances in the economy, and gives much too little weight to the enormous advances in health that are highly likely to continue in the future, and possibly even accelerate.
I am more pessimistic than Becker that the world in general or the United States in particular can sustain its current rate of economic growth even when economic welfare is defined to include, as I agree it should be, utility or well-being. My pessimism is not rooted in any concern about running out of fossil fuels, however. As the quantity of reserves of such fuels (mainly coal, oil, and natural gas) fall or the cost of extraction rises (or, more likely, both), prices of the fuels will rise and the rise will both moderate demand and accelerate the search for substitutes. There will be effects on the distribution of income (the owners of the reserves will be enriched at the expense of many consumers), but this will not affect average per capita income worldwide. Indeed, I think average income ("full" income, including nonpecuniary components, consistent with my earlier remark about the definition of economic welfare) will rise as a result of increased prices of fossil fuels, because of the negative externalities associated with the use of fossil (i.e., carbon-based) resources for generating energy. These externalities include traffic congestion and, what is much more serious, increased atmospheric concentration of carbon dioxide, a major factor in global warming--which I take very seriously. (The New Orleans flood may be the first disaster to which global warming has contributed; it is unlikely to be the last.) The higher the price of coal, oil, and natural gas, the better, as far I am concerned.
However, a distinction should be made between long-run and short-run effects. A very large unforeseen change in the price of an important input such as energy could precipitate a national or global recession because the economy could not adapt instantaneously to such a change.
My reason for pessimism about the future is connected to Becker's reason for being optimistic! I fear population growth. The combination of increased longevity as a result of medical advances and healthier life styles, reduced infant mortality, and a continued high demand for large families in much of the world seems likely to overcome the "demographic transition," that is, the well-documented negative effect on birth rates of increases in average income to middle-class levels. World population, currently somewhat more than 6 billion, may well rise to 10 billion by 2050. If average output rises as well, the total amount of economic activity several decades from now may be a significant multiple of the present level. That higher level portends a big increase in carbon dioxide emissions even if fossil-fuel prices rise sharply, and an ominous reduction in biodiversity (with potentially very harmful effects on agriculture) as a result of more land being cleared for human habitation. It may well be possible to offset these effects by investments in various ameliorative technologies, but investments that merely offset the bad effects of population growth do not increase net well-being.
Supporters of population growth point out correctly that given a more or less fixed percentage of geniuses, the greater the aggregate population the more geniuses there are, and geniuses can confer benefits on society as a whole that greatly exceed what they take out of society in their own consumption. A related point is that the larger the market for a good, the lower its price is likely to be because the fixed costs of producing it are spread over a larger output. But this effect may be offset by the higher prices of scarce inputs as demand increases. More important, if there is a fixed percentage of geniuses, there may also be a fixed percentage of evil geniuses, including potential terrorists. In the age of weapons of mass destruction--which are becoming ever cheaper, more accessible, and (in the case of bioweaponry) more lethal--the harm that a terrorist can do may outweigh the good that a benign genius can do.
I am also concerned about negative externalities that result from an increased percentage of elderly people in a nation's population. Judging by Medicare, the elderly are already able to use their voting power to extract vast subsidies for their medical care that would be more productive in other uses. This misallocation is likely to grow as the elderly become a larger and larger fraction of the voting population.
Even if net well-being is likely to decrease rather than increase in the years ahead, it can be argued that the effect on total well-being will be offset by population growth. Suppose average utility for 6 billion people is 2, and for 10 billion is 1.5; then total utility is greater in the second stage (15 billion versus 12 billion). But very few people think that total well-being is a proper maximand, as such a view would lead to grotesque results; if population grew enough, total utility might increase even if average utility fell to Third World levels.
The first comment I would like to respond to is Professor Becker's. It flags an issue that I did not discuss adequately in my posting. He argues that the fact that an individual loses property or for that matter life in conjunction with similar losses of other individuals in an event reasonably classified as a disaster or catastrophe is no reason to stretch the social safety net beyond its usual dimensions; the individual should be treated identically to a person who sustained the identical loss in a noncatastrophic setting--say as a result of a pipe's bursting while the owner of the house was away for several weeks and when he returned the house was so flooded as to be completely ruined.
I think Becker is basically right, and indeed I made a similar point in my posting but then wandered away from it. But I also think that there are some differences between the disaster and nondisaster settings. In my hypothetical bursting-pipe case, there would be no occasion to evacuate the owner to another city. As in this illustration, the disaster setting is likely to involve costs that would not be incurred in the nondisaster case, and the social safety net may not have been designed with that possibility in mind. Of course it would be better to alter the net to take account of the possibility, rather than, as we are doing in the aftermath of Katrina, responding ad hoc, excessively, and probably wastefully.
My posting distinguished between insurance against loss and damages for a wrongful act; damages are more generous, including for example monetary compensation for pain and suffering. Several comments question the distinction. Let me offer two responses. First, if there was culpable negligence in the handling of the catastrophe by officials or public employees, it is conceivable--no stronger word is possible--that victims of the hurricane and of the ensuing flood may have a legal claim. I say "conceivable" rather than "possible" because there are a number of limitations on suits against public officials, especially suits based on their discretionary acts or their policies, as distinct from execution (usually by lower-level officers such as policemen). Second, the demand for insurance and the (social) demand for legal liability are quite different. The demand for insurance is based on risk aversion, which is based in turn on the declining marginal utility of money. Ask yourself whether you would pay $10 to avoid a one in ten thousand chance of having to pay $100,000. These are actuarial equivalents ($10 = $100,000 x .0001). So if you would prefer the riskless alternative (pay $10), you're risk averse and a potential customer for insurance.
So if, as in the usual case, pain and suffering would not reduce your money income, there would be no point in your buying insurance. But since pain and suffering are a real loss, optimal deterrence of acts that cause such a loss require the courts to try to put a price tag on the loss and include it in damages.
I was intrigued by the suggestion in several comments to make the purchase of flood insurance mandatory in areas where the risk of flooding is significant. It sounds like a good idea, provided those areas can be defined (the alternative of making flood insurance mandatory for everyone, even in deserts where the premium presumably would be close to zero, is objectionable as being administratively cumbersome) and that the insurance is not subsidized by the government. If it is not subsidized and therefore represents the insurance industry's best estimate of the expected financial losses from flooding, then requiring it will discourage construction in flood-prone areas (by making it more costly to live in such areas) and by doing so will reduce losses from floods and reduce demands for government bailouts--demands that appear to be leading to extravagant federal programs for compensating victims of Katrina.
Compulsory insurance is a second-best solution from an economic standpoint; first best would be letting people choose whether to insure or "go bare" but not compensate them if they chose not to insure and then suffered a big loss. But it is unrealistic to expect government to take such a hard line in the disaster setting, where the number of victims is so large as to place the government under irresistible pressure to compensate--unless the victims are privately compensated through insurance.
Now that the immediate crisis is over, the question arises of the amount and form of compensation of the victims. My answer to the question is twofold. First, there should be no compensation to affluent people who could have insured against their loss, whether or not they actually bought insurance. Second, in determining compensation for uninsurable losses (or losses by people who cannot afford insurance), the amount should be determined by reference to the practices of insurance companies.
Just because a person loses his house in a flood that destroys hundreds of thousands of other houses, rather than in a fire that destroys just his house, is no reason for the taxpayer to reimburse him for the loss. The fact that most people do not buy flood insurance, just like the fact that most Californians don't buy earthquake insurance, is no reason for me to insure them. Only if they can't afford insurance, or if the insurance industry refuses to insure against a particular risk (generally these are cases in which either the risk is impossible to quantify, so that an insurance premium cannot be calculated, or the aggregate risk is so great that the entire insurance industry does not have the resources to insure it), is there a compelling case for government intervention.
Flood insurance is federally subsidized, and as a result the annual premium is quite low. The average premium in 2000 was $353, and it started at only $112, though coverage is limited to $250,000 per house plus $100,000 for the contents of the house. It's a puzzle why so few people buy flood insurance even in areas of the country that are prone to flooding. People may feel--and they may be right!--that the government will pick up the tab if there is serious flooding. If so, that is a compelling reason why federal disaster relief should be limited to people who can't afford insurance. (Most people too poor to afford flood insurance don't own homes or have many possessions, but they need compensation for the loss of what they do have.)
I grant that there may be a considerable degree of readily understandable thoughtlessness in failing to buy flood insurance; it is not part of the standard homeowner's policy, so people may just overlook it. But this negligence is difficult to understand in flood-prone regions such as southern Louisiana. Nor should we be subsidizing carelessness. It appears that total losses from Hurricane Katrina may reach $200 billion, of which insurance is expected to cover only 10 to 25 percent. Obviously the other 75 to 90 percent of the losses are not losses suffered by individuals too poor to afford flood insurance. Hard questions need to be asked before the taxpayer is asked to pay the difference between insurable losses and losses actually insured.
It might seem that flood insurance would not cover the indirect costs of a flood, such as having to find another place to live while the flood damage is being restored. But such costs are routinely covered by fire-insurance policies and I assume (without knowing) by flood-insurance policies as well.
I have no objection to government's compensating the losses of those too poor or otherwise unable to obtain insurance (to repeat, not all losses are insured by the private insurance industry), including life insurance for persons killed in the New Olreans flood. Social insurance is a legitimate utilitarian device. But the form and limits of this compensation should be similar to those of the insurance industry. People do not buy insurance against the emotional distress caused when their house or other possessions are destroyed by fire, and neither, therefore, should the government "insure" against such losses by means of its disaster-relief programs.
There have been suggestions to create a victims' compensation fund that would be similar to the fund created for the victims of the 9/11 attacks--a fund that, unlike insurance, would pay large amounts to cover the human suffering inflicted by the disaster, for example paying the survivors of people killed in the New Orleans flood amounts vastly greater than the typical life insurance policy would pay--in fact amounts calculated the way damages are calculated in personal injury and other tort suits.
Such funds make no economic sense even though a harmful action, whether of man or by nature, can inflict a loss greatly in excess of any insurance that the victim may have had. A person who has no family may see no point in buying life insurance, but that doesn't mean he doesn‚Äôt value his life; current estimates by economists of the value of the life of an average American, as I mentioned in last week‚Äôs posting, are in the neighborhood of $7 million. So if the victims of the 9/11 attacks could sue Osama bin Laden, they would be entitled to claim their full losses, irrespective of insurance (insurance just shifts part of the loss to the insurance company--it doesn't reduce the loss). By making the full losses a cost to the injurer, the law charges a "price" for the harmful activity that operates as a deterrent. This rationale for full compensation has no application to social insurance, which is intended as a substitute for private insurance rather than as a substitute for the tort system. To the extent that losses caused by nature or the public enemy are aggravated by venal or incompetent officials, those officials can in some instances be sued (and the full losses traceable to their misconduct recovered as damages) and in others punished by humiliation or loss of office.
Let me in closing give some examples to illustrate how my proposal would operate. In case number 1, an affluent couple loses its house to the flood; the house was not insured against flood damage. The couple would receive no government compensation. In case number 2, the same thing happens, except because the couple had all its money tied up in the house, the loss of the house, without insurance, renders the couple destitute. The couple would be eligible for Medicaid and other welfare benefits, as well as for private charity, including assistance from family members, but would not (under my proposal) be entitled to any special government compensation. In case number 3, a poor family, which already receives welfare benefits, owns a modest home, which is destroyed in the flood and, again, is not insured. I would favor the government's compensating the family for the value of the home. In case number 4, an affluent couple would like to buy flood insurance, but it is not available. Whether compensation for the loss of their home should be paid by the government should depend on why the insurance is unavailable. If it is unavailable simply because the risk of a flood is so great that there is an insufficient market for insurance to interest any insurance company, compensation should be denied so that people aren't encouraged to build in flood-prone areas. But if insurance is unavailable because of a genuine market failure, I would favor government compensation (i.e., social insurance); an example would be if no insurance company offered such insurance because the industry incorrectly believed that there was zero probability of a flood in the area of the couple's home and concluded that therefore there would be no demand for insurance.
It is useful to discuss public policies both when one assumes no political constraints on the policies, and also when some political constraints are accepted, but policies are proposed to make these constraints less damaging. In his essay Posner mainly takes the former approach, and reaches conclusions about optimal government compensation to victims of disasters. I believe there is a more direct way to discuss what is the optimal way to compensate without political limitations on what is possible, such as the likelihood of large-scale emergency relief. My conclusions are generally similar to Posner's, but the approach is different, and some of the implications may also differ.
I believe it is best in deciding who merits compensation from disaster to apply to victims the same criteria used to determine who is eligible for welfare, Medicaid, and other government transfer programs. For example, families that because of Katrina lost most of their assets, became unemployed, or became sick would qualify for one or more of these programs, regardless of their circumstances before Katrina hit. Using the usual criteria that determines eligibility for welfare, medical, and other assistance, these families would automatically be helped without the need to have any special relief program.
To be sure, some of these families may have a severe short-term liquidity problem, and they might need immediate access to cash, as in the debit program that was started and then stopped. But that is often true too of recipients of welfare and other government aid.
The advantage of using the usual criteria for government entitlement programs is that it avoids some of the issues Posner confronts: could victims have afforded insurance, was insurance available, and so forth. Since we do not ask these or similar questions of persons eligible for welfare or Medicaid (perhaps these questions should be asked), I do not see why they should be asked only of victims of major disasters like Katrina. Moreover, applying the usual criteria would meet the legitimate needs of persons greatly hurt by Katrina, and would automatically exclude individuals who remain sufficiently well off from federal assistance.
Posner's approach and mine would often help the same people but not always. Consider, for example, a New Orleans couple with modest income whose only asset was a home that was not insured against flood damage, even though it could have been for modest premiums within their means. If Katrina destroys their home, under my criteria they might well qualify for several entitlement programs, including Medicaid, and possibly welfare, regardless of whether or not they had insurance, and the reasons why they did not. It seems that they would also qualify for entitlements under Posner's standard, but he also wants to get into the functioning of the insurance market. I do not believe that is wise since generally I believe insurance would be forthcoming if demand were sufficient, and if government controls not too burdensome. Moreover, why should the government only compensate persons for loss of assets due to disasters--perhaps the insurance market did not work so well in insuring against other risks as well that do not arise from disasters. Should all these persons be compensated? This seems contrary to Posner's efforts, which I agree with, to try to treat disaster victims like others who suffer losses.
In my posting on the Good Samaritan paradox, I accepted that the government would continue to provide aid to persons and businesses affected by natural and man-made disasters, and discussed how the consequences of doing that could be made less harmful. I suggested compulsory insurance for persons and businesses in high-risk areas, and various restrictions on building materials and zoning. There may be better ways than these to anticipate governmental and private responses to disasters, and try to reduce their consequences. So while I believe it would be best to apply the usual entitlement standards to disaster victims, I also believe it is valuable to recognize that is not politically possible at this time. It is then valuable to try to find ways to implement policies that worsen the efficiency and equity effects of the inevitable large-scale government assistance to disaster victims.