The Becker-Posner Blog

Why Are Americans More Religious than Europeans? Posner

There is no question that Americans are on average considerably more religious than Europeans; the only major exception is Poland, which remains a bastion of Catholicism. Other major Catholic countries in Europe, such as Ireland, Spain, Italy, and Austria, have low levels of church attendance and adherence to church doctrines. Countries like the United Kingdom, France, and Germany, and (above all) the Scandinavian countries, rank very low on the scale of religiosity. There is some suspicion, however, that the differences in religious observance between the United States and Europe are smaller than public opinion polls reveal, because Americans are reluctant to acknowledge that they don’t attend church regularly—but of course this is a clue to the hold that religion has over the American mind. No one could be elected President of the United States who did not profess to believe in God, whereas the question of religious belief does not arise for aspirants to become European heads of state. 

The United States has a much higher level of religious belief than Europe as well as of church attendance and religious observance. More than 50 percent of Americans consider religion very important to their lives, a figure more than twice that in most European countries. Furthermore, while in general the religiosity of a country is inverse to its per capita income, the United States has a level of religiosity similar to that in much less prosperous countries. Finally, religious observance and belief have been declining in Europe since at least the 1960s but increasing in the United States during the same period, though recently there have been signs of reduced observance and belief in the United States as well. A loosening of the grip of religion in America is suggested by the rapidly increasing tolerance for cohabitation outside of marriage, of births out of wedlock, and of same-sex relationships and even same-sex marriage. 

The prevalent economic explanation for American religiosity, which derives from eighteenth-century writings by David Hume and Adam Smith, is that established churches, like other monopolists, reduce output, though by a somewhat different route from business monopolists. An established church normally is supported in significant part by taxes, enabling church leaders and other church personnel to spend less time in proselytizing because they have a pecuniary advantage in competing with other churches. The “quiet life” theory of monopoly (John Hicks) is not widely accepted in regard to commercial markets because a monopolist that does not strive to minimize its costs is sacrificing profits, just like a competitive firm though with less dire consequences for survival. But because most churches, and certainly established churches, are not for-profit enterprises, profit maximization is not feasible and church leaders may take rents in the form of luxurious buildings and art, elaborate staff, and leisure, instead of in money. 

Furthermore, whereas a commercial monopoly can offer a diversity of products or services, that is difficult for a religious organization to do—it can hardly offer one set of religious beliefs that allow parishioners’ pets to go to heaven and another set that reserves heaven for the souls of human beings, or a set that includes Satan and Hell and a set that eliminates those unpleasant features of conventional religion. Committed to a single set of rituals and beliefs, an established church is bound to lose the support of many people, who however may find only limited alternatives if competing churches are at a significant competitive disadvantage because of the established church’s governmental backing. 

Although the United States had quasi-established churches in New England at the founding of the nation, the First Amendment to the Constitution (1787) forbade the federal government to establish a church, and the state establishments soon crumbled as well. The Fourteenth Amendment (1868) was eventually interpreted to forbid states to establish churches, and the Supreme Court continues to enforce a high degree of “separation” between church(es) and state even today, despite the nation’s increased religiosity. As a result, there is vigorous competition among religious sects in the United States, notably including competition in observances and doctrines. As a result of this greatly increased religious variety (compared to Europe, which has long had, and continues to have, established churches in most of its countries), there is a much greater likelihood of a given individual’s finding a religious sect that is to his liking in the United States than in Europe. 

It does seem also that Americans are more credulous on average than Europeans—less matter of fact, less inclined to accept the authority of science (notably in regard to evolution, and geological phenomena related to evolution, such as the age of the earth), more superstitious. But it is unclear whether this is cause or consequence of the greater religiosity of Americans compared to Europeans. What seems more clearly causal is Americans’ individualism and spirit of independence. The vast majority of American Catholics reject Catholic doctrine on contraception (that only the unreliable “rhythm” method is permissible) while considering themselves good Catholics and continuing to attend church and make donations. And Americans are continually breaking away from existing sects and joining or founding new ones. 

Another plausible causal factor in American religiosity is the size of the United States and the mobility of its population. A church provides a locus for forming community ties in a new city or suburb to which a family has moved. There is less population mobility within European countries, let alone among those countries, so less need to be a member of a community that exists everywhere that one might move to. 

Finally, an interesting and at first sight paradoxical aspect of American religiosity is the very high level of tolerance for other people’s religions. There are two major exceptions. There is limited tolerance for Islam because of the strongly Muslim character of al Qaeda and related terrorist movements. And there is a surprisingly strong antipathy to Mormonism—public opinion polls show that while only a few percent of respondents would be reluctant to vote for a Jewish candidate for President, 20 percent would be reluctant to vote for a Mormon. This reluctance appears to be attributable in part to a lingering association in many people’s minds of Mormonism with polygamy, and in part to Mormon beliefs that other Christians consider deeply heretical, such as the belief that Jesus Christ visited North America during his lifetime and that human beings after death eventually become gods, and the rejection of the Trinity. Indeed some Mormons while venerating Christ do not consider themselves Christians.

Why are Americans More Religious than Western Europeans? Becker

This is a difficult question since even within Europe there are big differences in religiosity; for example, Catholic Ireland is considerably more religious than either Catholic France or Catholic Spain, and Spain is more religious than its neighbor France. Still, I do believe we can partly explain why Americans are much more religious than Europeans.

I am confident about the importance of competition among denominations- also emphasized by Posner. America has several thousand denominations competing fiercely for members among each other and against Catholicism. Fierce competition always induces competitors to try to better satisfy the wants of their customers. This is why the many American denominations offer a large variety of religious services and doctrines that enable families to match their religious desires to different denominations.

Lawrence Iannaccone of Chapman University followed up Adam Smith’s observations on religious competition with an interesting empirical investigation in 1991 of the relation between competition among different religions within a country and the religiosity of its population. He finds a significant positive relation across countries between competition and religiosity, although one cannot be certain that the causation is mainly from competition to religiosity rather than from religiosity to competition.

The growth of evangelical religions in many Latin American countries is an example of causation from religiosity to competition. In 1900, evangelicals numbered about 1% of the population of Latin America, while by 2010, they reached 17% of this population-the rest being mainly Catholics. Latin American countries with the highest concentration of evangelicals are Brazil, Chile, and Guatemala. The Catholic Church in Latin America has often received both direct and indirect support from the governments of this region. As a result, many priests and bishops became more interested in politics and advocacy than in attending to the spiritual needs of their congregations.

This created a religious vacuum that provided an opportunity for evangelical Protestant denominations to try to convert individuals by offering the religious experiences they wanted, and that were less readily available in their local Catholic churches. This helps explain the  growth of evangelical religions in this region, especially in recent decades.

 Two other important contributions to the difference in religiosity between Americans and Europeans are social interactions with respect to religious beliefs, and the transmission of religions from parents to children. The religious beliefs of individuals are a prime example of beliefs that are very much affected by the beliefs of neighbors, relatives, and co-workers. An individual is more confident about his religious beliefs when the persons he interacts with hold similar beliefs.

The importance of such social interactions with regard to religiosity is that even small initial differences in religiosity between Europeans and Americans would get magnified over time into possibly very large ultimate differences between them in religiosity. Perhaps the initial differences were due to the greater competition among denominations in America, or to forces that we do not understand fully. The powerful reinforcement effects of social interactions among individuals with related beliefs would over time widen the religious gulf between Americans and Europeans. As a result, large differences in religiosity between Americans and Europeans would eventually emerge from relatively small starting differences.

Differences in religiosity between Americans and Europeans are also reinforced and maintained by the strong transmission of religious beliefs from parents to children. This transmission is much more powerful when both parents have similar religious beliefs. Men and women with similar religious beliefs are more likely to find and marry each other when a sufficient number of men and women in the marriage market have similar beliefs. Therefore, as the gap in religiosity between Americans and Europeans increases over time, due at least in part to social interactions, it becomes much easier for religious Americans than for religious Europeans to marry each other, and transmit their religiosity to their children. That difference in the intergenerational transmission of religious beliefs further widens the gap between the religiosity of Americans and Europeans.

In summary, I believe that greater competition among religious denominations in America than Europe, social interactions among religious beliefs, and the transmission of religions from parents to children go a long way in explaining the large differences in religious beliefs between America and Western Europe, even though America and Western Europe are similar in many other respects.

Controls Over consumer Choices- Becker

New York Mayor Michael Bloomberg’s proposal to ban sugary drinks larger than 16 ounces from restaurants, street carts, movie theatres, and stadiums would seem to be a joke for hosts of late night shows were he not completely serious. Although the proposal makes little sense, and could even increase the consumption of these drinks, (see my later discussion), it does raise once again the question of how far governments should go in interfering with consumer choices?

On one side of the question are the libertarians who argue that individuals, in particular consumers, should have the freedom to make their own choices unless they hurt others. According to this view, consumers have the right to drink and eat what they prefer, but driving while drunk should be punished because drunk drivers are more likely to get into accidents that hurt others. One qualification is that when consumers do not have enough information to make good decisions, governments may help in providing that information. An example is the requirement that packaged foods show the amount of fat and certain other ingredients they contain.

On the other side are those who claim that many consumers are not able to make decisions in their self-interest. These consumers, according to this argument, can be fooled by the way choices are presented, may have limited self-control, may rely on inefficient rules of thumb, or for other reasons make bad choices. There is even a literature on “libertarian paternalism”, which argues that governments “ … should attempt to steer people’s choices in welfare-promoting directions without eliminating freedom of choice.” (Cass Sunstein and Richard Thaler, “Libertarian Paternalism is not an Oxymoron” University of Chicago Law Review, fall, 2003)

I agree that consumers do not always make choices in their own interest (even aside from having insufficient information). However, I question how pervasive such decisions are, especially for important decisions, but I leave that discussion for another day. Now I concentrate on concerns I have about using the government to try to improve consumer choices.

It is not clear that government bureaucrats generally understand why consumers make defective decisions, and even less likely that governments policies will help improve these decisions. As is well known, government officials, including regulators, legislators, and executives, are subject to powerful pressures from interest groups that often greatly affect public policies to the detriment of consumers.

To illustrate, consider subprime borrowers in the housing boom (or bubble) that came crashing down with the financial crisis. It is frequently argued that subprime borrowers were ignorant of the risks they were taking, and were fooled by lenders and others into buying houses with mortgages that they would be unable to handle financially.

Yet the decisions by subprime borrowers made a lot of sense in light of the very low, and sometimes non-existent, down payments that lenders required, and the low mortgage interest rates available. These borrowers had perhaps a once in a lifetime opportunity to be owners rather than renters. Sure, some families may not have bought their homes if they had known a crash would be coming, especially families that took out mortgages a year or two prior to the crash. But how could they reasonably be expected to know that when few housing market experts were predicting a crash? One should fault far more the banks that bought subprime and other mortgage-backed securities. They presumably were much more knowledgeable about housing markets than poor and first time homebuyers, yet along with homeowners, most banks suffered badly from the financial crisis.

Nor did the federal government, including the Federal Reserve, take actions that helped subprime and other homeowners. Leading members of Congress and other government officials pressured banks to offer mortgages on generous terms to consumers with bad credit histories and poor job prospects. The Fed contributed to the housing bubble through helping to keep interest rates low. Consumers made their housing decisions in an environment where both banks and governments actively promoted the purchase of homes with low interest rates and low down payment requirements.

Another example concerns the growing obesity of adults and teenagers that presumably encouraged Mayor Bloomberg’s proposal on sugary drinks, and related proposals by others. One argument behind these proposals is that many adults and teenagers do not know the health consequences of their diets and lifestyles. That may well be true for some consumers, but most consumers may be rationally trading off the negative long run effects on their health for more immediate enjoyment from French fries, cheeseburgers, and other weight-raising foods. One should require evidence that the great majority of obese adult individuals do not make the connection with health before trying to restrict their consumption.

This is even aside from the fact that many of the proposed restrictions, such as Bloomberg’s, would not reduce obesity by much, if at all. His proposal might even increase the use of sugary drinks. Suppose that drinks come only in 10 and 16-ounce sizes. If the 16-ounce size were banned, enough consumers might substitute 2 10-ounce drinks for 1 16-ounce drink to increase total consumption of these drinks. Of course, the drink market might respond with offering other sized drinks, but the main point would still hold that the ban could raise consumption of sugary drinks.

Children are less likely than adults to make an effective trade off between current pleasures and future costs. This is a traditional reason for distinguishing between children and adults in formulating policies. The implication in the case of sugary drinks would be to restrict access by children to these drinks. For example, these drinks could be banned from schools and other places where children congregate, or young persons might not be allowed to purchase these drinks. However, concern about children’s consumption does not justify restricting the choices of adults as well.

A different reason sometimes used to justify government policies to reduce obesity is that obese adults are less healthy, and thereby make greater use of a health care system financed mainly by taxpayers. There is merit to this argument, but it is tricky because no one would reverse this argument and say obesity should be encouraged if obese individuals spent less on health care over their lifetimes because they died sufficiently earlier. Note that the mortality effect does not per se enter into externality calculations since (rational) individuals consider the effects of their behavior on their own life expectancy.

In summary, even when consumer decisions are not in their self-interest, it is questionable whether that provides sufficient grounding for government efforts to regulate and tax these decisions.

 

Bloomberg, Sugar, and Obesity—Posner

I agree with Becker that one must be hesitant to recommend governmental intervention in personal choice. Government lacks good information about consumer preferences in a country as vast and diverse as the United States, and government is buffetted by interest groups. But the case for some government intervention in the obesity epidemic (and it is an epidemic—obesity begets obesity, as I’ll suggest) seems to me compelling. 

I am not particularly interested in saving the obese from themselves. I am concerned about the negative externalities of obesity—the costs that the obese impose on others. Some of the others are the purchasers of health insurance and the taxpayers who pay for Medicaid and Medicare and social security disability benefits. Though the obese die on average earlier than the non-obese, which reduces their average health costs somewhat, the reduction is more than offset by the higher health costs that they incur (and by incurring impose, to a considerable extent, on others) because of the effect of obesity on chronic health conditions such as diabetes, heart disease, and joint problems, on mobility generally, and, because of these conditions, on ability to work (and hence on social security disability costs) and on employability (and hence on unemployment insurance costs). Obesity kills, but slowly, and en route to dying the obese run up heavy bills that, to a great extent, others pay. 

Even more serious are the harmful effects of obesity, and of the food habits that contribute to it, on children. Obesity is sometimes a consequence of genetic factors but more often of gluttony, eating the wrong foods, eating between meals, drinking large quantities of sugared soft drinks (the straightest path to obesity), failing to exercise or even to move around, lack of self-discipline. These qualities “nourish” obesity and are in turn nourished by it, in a vicious cycle. Children who grow up in a household of obese parents (often there is just one parent, and she is obese) very often acquire the same bad habits. 

One might think that since most parents are altruistic toward their children, parents would strive to prevent their children from acquiring their bad habits. But if they don’t know how to avoid becoming obese themselves, it is unlikely that they know how to prevent their children from becoming obese. 

Then too, the more people in one’s family or circle of friends or coworkers who are obese, the more obesity seems normal. This is an implication of the fact that homo sapiens is a social animal. We want to blend in with our social peers. The more obese people there are, the likelier they are to think thin people scrawny, unattractive, even unhealthy. (That is why I called obesity an epidemic—it’s contagious, though as a result of social factors rather than of pathogens.) What lends impetus to New York Mayor Michael Bloomberg’s proposal to limit the size of containers in which sugared beverages may be sold is that two-thirds of the population of the Bronx is overweight and almost one-third is obese. There must be communities in the Bronx in which a majority of adults are obese. It must be very difficult for children growing up in such communities to avoid becoming obese themselves.

Bloomberg’s proposal is widely criticized, not only on the shallow ground that it interferes with freedom of choice, but on the more substantial ground that it can’t have much effect, since the same sugared drinks can be sold in smaller containers. But this misses two important points. The first is that the only reason for selling a product in different-size containers is that there are consumer preferences for the different container sizes; for it would be cheaper to sell all one’s product in identical containers. This suggests that if the sale of sugared drinks in big containers is forbidden, there will be at least a slight drop in the purchase of those drinks and hence in their consumption; there will not be perfect substitution of smaller containers; and this could be significant because sugared soft drinks are as I said the straightest path to obesity. 

More important is the symbolic significance of Bloomberg’s proposal (if it is adopted and enforced). It is an attention getter! It tells New Yorkers that obesity is a social problem warranting government intervention, and not just a personal choice. 

Think of the history of cigarette regulation. That smoking is unhealthful was discovered early on. (Oddly enough, the pioneers in discovering the link between smoking and lung cancer were doctors in Nazi Germany, and the Nazi government actually campaigned to discourage smoking.) But the initial steps to discourage it in this country were tepid—polite warning labels on cigarettes. Later, warnings were required in ads as well. Then the warnings in both labels and ads became scarier. Cigarette companies were sued for concealing the dangers of smoking. Zoning ordinances imposed increasingly tight restrictions on where one could smoke. The federal government banned smoking in federal buildings. Cigarette smoking fell, from an average of 40 percent of the adult population in the 1970s to 19 percent today. There is some grumbling about this massive governmental intrusion into consumer choice, but very little. I certainly am not grumbling about it. 

If there is to be a parallel movement to reduce obesity, it has to start somewhere. Maybe it will start with Bloomberg’s container proposal—an attention getter. Maybe it will grow. Maybe someday it will be as effective, and receive as much public approbation, as the anti-smoking movement.

Correction--Posner

There is a mistake in my blog post of today. I wrote:

"At 2 percent, the annual cost of borrowing $1 trillion is only $200 billion. That is a large number, obviously, but only about half would be borrowed abroad, and $100 billion is a small fraction of the annual federal budget."

 This should read: "At 2 percent interest, the annual interest cost of borrowing $1 trillion is only $20 billion. That is a large number, obviously, but only about half would be borrowed abroad, and $10 billion is a tiny fraction of the annual federal budget."

I apologize for the error.

 

 

 

 

 

 

 

The Federal Reserve and the World Economic Crisis—Posner

It may be an overstatement to say that the world’s economy is in crisis, but if so it is only a slight overstatement. Unemployment in the United States is abnormally high, and it is substantially higher in much of Europe. Europe’s finances are in a terrible state, and its output is falling, contributing to economic slowdowns in China and other expanding economies, such as India and Brazil, and harming U.S. exports. 

The Federal Reserve is under some pressure, both internal and external, to reduce interest rates in an effort to stimulate U.S. output and employment. The Fed can do this by buying securities, whether short-term Treasury notes—the traditional method of stimulating the economy—or longer-term obligations, including 30-year mortgages. By buying short-term securities for cash, the Fed increases the supply of money, which in turn reduces interest rates. There is an indirect effect, because of substitutability, on long-term interest rates as well. But by buying long-term securities, the Fed can reduce long-term interest rates slightly more. A reduction in long-term interest rates will reduce mortgage interest rates, which, since houses are bought mainly with debt, should increase the demand for housing, and hence home prices. At the same time, lower short-term interest rates will make credit card debt and other forms of consumer debt and by thus stimulating consumer borrowing will stimulate consumption. The lower long-term rates will increase personal wealth by raising housing values (a house being the most valuable asset owned by most families), reducing the savings rate and thus further stimulating consumption. The higher consumer spending is, the higher the production of consumer goods will be, as well as of capital goods to enable that higher production; and the higher production, the greater the demand for labor, so unemployment will fall. 

In this way monetary policy can, in principle anyway, raise an economy from the doldrums, and in the current setting protect the U.S. economy against fallout  from Europe’s economic crisis and from the downward global economic spiral that that crisis may be inducing. 

But there are three reasons for doubting that the Federal Reserve’s using its monetary authority to reduce interest rates at this time is a good idea. The obvious ones seem to me weak: that the necessary measures would create serious inflation risk and that they would increase the already enormous federal debt. The rate of inflation is at present very low, and, judging from the interest rate (less than 2 percent) on long-term Treasury securities (for example, 10-year Treasury bonds), is expected to remain low for some years. This expectation is influenced by beliefs about whether the Fed will try to reduce interest rates; but since no one thinks the probability zero, it seems unlikely that the 10-year interest rate would be so low if action by the Fed to reduce interest rates were expected to cause inflation, which of course would raise interest rates. Moreover, as long as interest rates are low, increasing the federal debt is a low-cost proposition. At 2 percent, the annual cost of borrowing $1 trillion is only $200 billion. That is a large number, obviously, but only about half would be borrowed abroad, and $100 billion is a small fraction of the annual federal budget. The half borrowed from Americans would be an internal money transfer rather than a transfer of money abroad. 

The more serious objection to the Fed’s pushing down interest rates is that it probably would have little effect on borrowing, consumption, production, and employment. The reason is that interest rates are already very low, yet borrowing is lackluster. One reason is that, in part because of pressure from regulators, banks have raised their credit standards, so that many individuals and firms, though they would like to borrow and would be willing to pay the current interest rates, cannot persuade banks to lend to them. Another reason is that household savings are still below historic standards because of the depression in housing prices (and as I said a house is the most valuable asset that most households have) and because of continued economic anxiety people want to increase their savings—and savings are the obverse of borrowing. And finally concerns with bank solvency and new federal regulations are inducing banks to increase their cash reserves, which is an example of hoarding rather than spending. 

If banks are reluctant to lend and consumers to borrow, increasing the supply of money will not lead to a big increase in borrowing. Instead the banks will use the money to buy Treasury securities, which are riskless assets. The money will go in a circle: the Treasury will buy securities from banks, and banks will use the money to buy securities from the Treasury. Or the Treasury will buy securities from nonbank owners of them, who will deposit the proceeds in banks, which will use the additional cash to buy Treasury securities or increase cash reserves. This is an exaggeration, but can help one to see why increasing the money supply need not increase productive activity. 

The idea that increasing the supply of money must stimulate economic activity, though mistakenly thought to be an idea of Keynes’s, is actually an echo of “Say’s Law,” which Keynes famously attacked, though he was not the first economist to do so. Say’s Law, rather confusingly paraphrased as supply creates its own demand, treats money as a medium of exchange and a standard of value, but nothing more. This is essentially a barter theory of the economy. But modern economies are not barter economists. In a modern economy, receiving money in exchange for some good or service doesn’t dictate that you exchange the money forthwith for some other good or service. You can save the money indefinitely. If you put it under your mattress, it makes no contribution to productive activity. Similarly, money can pile up in Federal Reserve Banks if people are disinclined to spend, without contributing to economic activity. 

Largely for political reasons, there is no possibility of a different kind of attack on our sluggish activity, which would be for the Treasury to borrow a large amount of money at the current low interest rates and lend it to enterprises that would use it to increase production and with it employment. By raising wages such lending might increase incomes and economic confidence, leading to increased tax revenues and an eventual reduction in the federal deficit. But since that kind of economic stimulus spending is not in the cards and an increase in the money supply seems unlikely to have a significant stimulative effect, it seems that we shall have to be patient and let the economy recover under its own steam.

Is Further Quantitative Easing by the Fed Warranted? Becker

The slow recovery of the US economy, and the much worse situation in Europe, is putting great pressure on the Fed to try to provide another monetary “stimulus”. I urge the Fed to resist this pressure mainly because further Fed easing under present circumstance will do little stimulating.

The Fed tries to stimulate economic activity through open market operations; that is, by buying assets, such as treasury bills, US government bonds, and debt issued by the private sector. These actions directly lower interest rates, and a little more indirectly also raise the reserves of banks. Through a variety of aggressive open market operations since the financial crisis began in 2008, the Fed has accumulated several trillion dollars of assets. In part due to these actions, interest rates on treasury bills are close to zero, and the excess reserves of American banks have increased to a mind-boggling level of almost $1.5 trillion.

The Fed cannot do much more to lower interest rates. Not only are short term rates close to zero, but long term rates are also quite low-interest rates on 5 year US government bonds are currently only a few percent. The Fed in what is called “Operation Twist” could try to further lower long term interest rates relative to the negligible rate on treasury bills by buying long term bonds. This might reduce further the spread in interest rates (that is, flatten the interest yield curve), but this effect is limited by a fundamental economic equilibrium condition. Long term interest rates tend to be an average of current and expected short term rates since more investors would shift into short term rates when long term rates are below this average; conversely, investors shift into long term rates when these are above the average of current and expected future short term rates.

Even with zero interest rates, advocates of a further “quantitative easing” (QE3) argue that the Fed’s purchase of government bonds and other assets would still increase reserves of banks, and that increased reserves will encourage further bank lending to businesses and households. The problem with this argument in the present situation is that, as indicated earlier, banks already hold huge levels of excess reserves. If banks are not lending more when they already have so many excess reserves, why would a further growth in these reserves increase lending by much, especially when interest rates are very low and the Fed pays interest on bank reserves- the current interest rate on reserves is 0.25%.

Even supporters of further Fed easing admit that QE2 had little effect on the economy (see, for example, the article in today’s New York Times by Christina Romer, former Chair of the Council of Economic Advisers). I submit that the reason for this is that QE2 mainly raised already large bank reserves to still larger levels without giving banks much incentive to increase their lending. For this reason, additional quantitative easing will likely also do little to help the economy.

Some advocates of further easing admit this, but claim there is virtually no downside, and that even a small gain is valuable in an economy that is doing poorly. I disagree with this argument because there is a downside to further easing, and this downside would more than negate the small gains to the economy.

I am not arguing that additional easing and the growth of bank reserves will pose a significant short-term inflation risk. The economy still has a lot of slack, and inflation is low.  However, once banks start lending at the scale necessary to pull the American economy out of its doldrums, the money supply is likely to grow rapidly, which will increase the rate of inflation, perhaps to dangerously high levels.

Of course, in principle, the Fed has the tools to combat serious inflationary pressures. These include selling back to the private sector the assets accumulated by the Fed’s various easing actions. These sales would reduce bank reserves and reduce the ability of banks to add rapidly to the money supply. The other tool available to the Fed that became available during the past several years is to raise interest rates paid on bank reserves. That would encourage banks to hold on to more reserves rather than lend or buy other assets.

The major question is as much a political as economic one: will the Fed adopt these policies when that would risk slowing the recovery, and possibly create another recession? Congress and the President, no matter which political party controls these branches of government, would exert powerful political pressure on the Fed to use these weapons sparingly. Perhaps a strong Fed chairman would act, despite this pressure not to rock the boat. However, I do not believe this is a risk worth taking, particularly when further monetary easing would have at best small positive effects on the economy.

 

Profits, Competition, and Social Welfare-Becker

 

The financial crisis and the resulting recession have led to a strong reaction in many countries against the profit motive and private enterprise. Left of center political parties are gaining office and power in France, Mexico, Greece, and elsewhere with the promise of much greater regulation of banks and other businesses, renationalizing some companies, and constraining profits through higher taxes and other ways.

It is easy to sympathize with the hostility to the many banks that behaved (in retrospect) so foolishly in ways that damaged everyone else as they took on excessive risk in their quests for greater profits. One can understand also the general reaction against capitalism and “market failures” since commercial and investment banks were in the past a leading example of capitalism at work. Yet anyone concerned about the welfare of the poor and middle classes should resist the temptation to attack competitive private enterprise and capitalism- monopoly or crony capitalism should be deplored. This is only partly because “government failure” also contributed in an important way to the financial crisis as regulators did not rein in the asset explosion of banks and households. Indeed, regulators often encouraged lending to lower income families to buy houses with low down payments, large mortgages and ballooning interest payments.

The main reason to be concerned about the attacks on competitive capitalism is that it has delivered during the past 150 years so much to all strata’s of society, including the poor. I will try to demonstrate this not with a general analysis, but with several rather impressive examples.

China in 1980 was among the poorest countries in the world. It had just gone through the Cultural Revolution and the Great Leap Forward that contributed to the deaths of tens of millions of rural and other Chinese. In desperation, a few farsighted Chinese leaders decided to allow private enterprise and capitalism to gain a toehold in its agricultural sector. To the great surprise of many Chinese political leaders, the result was an explosion in farm output, even though farmers had only tiny plots of land to work with. Seeing the success of the liberalization of farm output, China extended the incentive system to industry by encouraging the growth of private enterprises in some sectors. Again, the results far exceeded expectations as these private companies, many owned by Taiwanese and Hong Kong residents, were not only far more efficient than state owned enterprises, but they also became the leaders in the rapid expansion of exports from China to the US and other countries.

The most significant result of this radical shift of China toward a more market oriented economy has been the lifting of hundreds of millions of Chinese out of dire poverty-living on the equivalent of only a couple dollars per day- to having decent and growing standards of living. Many critics attack globalization as the source of the world’s economic problems. Yet the opposite is much closer to the truth as competitive private enterprise and the profit motive acting through a globalized economy has eliminated the most abject of poverty for over a billion persons just in China, India, and other parts of Asia alone.

My second example deals with the interaction between capitalism and discrimination against groups based on their race, gender, religion, or other characteristics. Capitalism and the profit motive help to erode discrimination because companies in their quest for greater profits try to hire minority group members who are getting paid less than their productivity. In addition, the successful growth in incomes and productivity induced by private enterprise raises the standard of living of minorities even when they continue to suffer from substantial discrimination.

A prime example is South Africa under apartheid that was maintained by government laws but was opposed by many private companies. South African blacks suffered immensely under apartheid, and its overthrow is one of the great events of the past several decades. Nevertheless, one main problem during the apartheid period was not to prevent many blacks from leaving South Africa, but rather to control the in migration of blacks from other parts of Africa. The explanation is obviously not that the incoming blacks liked apartheid, but rather that the private enterprise system in South Africa had raised substantially the incomes of blacks there -despite the widespread government-orchestrated discrimination against them-and blacks from other countries in Africa wanted to benefit from the higher incomes available to them in South Africa.

Something similar happened in the United States. African-Americans suffered greatly from discrimination until recent decades. Nevertheless, black incomes continued to grow along with white incomes as the US experienced sizeable and continuing economic growth after the end of the Civil War in 1865 (see my book The Economics of Discrimination, 1971).

My final example deals with this growth of US GDP. America has been recognized as the country during the past 150 years that has had the most open and vigorous competitive profit-oriented private enterprise system. And for the almost 140 years from1870 to 2007, per capita American incomes grew rather constantly at the rate of about 2% per year, despite vast changes in many institutions and regulations. The result was a several fold increase in per capita income that raised the incomes of the poor by about as large a percentage as the incomes of the upper middle class and even the rich. To be sure, GDP suffered a serious shortfall during the Great Depression of the 1930s. Yet even that was made up for by the 1940s as US GDP then joined its long-term growth line. The Great Recession once again pushed US GDP below this line, although by a lot less than during the Great Depression. Unless government policy messes things up badly enough, and that is a real possibility, I would expect before very long that US GDP would join up with its long-term growth potential.

I do not claim that the profit motive under competitive capitalism always produces ideal results. Aside from the need for greater capital requirements for banks, there is concern about inequalities, and pollution and other “externalities” that often require government regulations and controls, although the limits of what government can do also have to be recognized as well. However, over the long haul capitalism has delivered big time. In the anger at banks and the financial crisis, voters and governments have to be careful that they do not kill the goose that has laid so many golden eggs.

 

Capitalism—Posner

I agree wholeheartedly with Becker that capitalism is a superior economic system to any other that has been tried, the others being mainly socialism and communism. The best evidence for this is that out of the 194 countries in the world, I can think of only two that are not capitalist—Cuba, which however is moving slowly in the capitalist direction, and North Korea, the greatest economic failure on the planet. 

But this statistic indicates that capitalism is a necessary condition of economic success rather than a sufficient condition. Many of the world’s countries, though capitalist, are basket cases—not as badly off as North Korea, but plenty badly off. Per capita incomes in rich capitalist countries such as the United States, Canada, Germany, Britain, and Japan greatly exceed per capita incomes in poor capitalist countries, which are the majority of countries. 

So the big question is, given capitalism, what else does a country need in order to prosper? We know that it doesn’t need abundant natural resources or a large population. But it needs a legal and political system that protects property rights, allows a large degree of economic freedom, minimizes corruption, controls harmful externalities (like pollution) and subsidizes beneficial ones (like education), distinguishes between equality of opportunity (which it promotes) and equality of incomes (which it promotes only to the extent of combating poverty), welcomes and assimilates skilled and wealthy immigrants, and (related to protecting economic freedom) avoids public ownership or control of economic enterprises. To create and maintain such a legal and political system a country also requires a culture of respect for business success, of competition and risk-taking, and of consumerism—since, as Keynes argued, consumption drives production. 

Such a combination is difficult to achieve; no nation has achieved it. The variance across nations in culture and in institutional structure is very great, and determines the relative economic success of the different nations. 

Since there is so much variance across capitalist countries—so much that can go wrong with a capitalist system because of the complex institutional structure and social culture that capitalism requires if it is to be maximally successful in contributing to social welfare—we need to avoid complacency. Complacency was a major factor in the surprising economic collapse that began in September 2008, a collapse the consequences of which are still very much with us. 

When I started teaching in the late 1960s, the economist Harold Demsetz was talking about the “Nirvana Fallacy.” He defined that as the belief of many economists that any market failure, such as monopolization or pollution or underproduction of public goods, could be rectified at little cost by government intervention. If that were true, it would indeed enable “Nirvana” (in the sense of heaven—which isn’t actually what the word means; it’s nearer to “oblivion”) to be attained. But as Demsetz pointed out, it isn’t true. There are government failures as well as market failures, and they have to be taken into account in deciding whether and what the government should be asked to do about market failures. 

Over time, however, a reverse Nirvana Fallacy took hold of many economists, most famously Alan Greenspan. This was the idea that capitalism was a self-regulating system; market failures were, with few exceptions, either self-correcting, or less harmful than regulation aimed at eliminating them. Such thinking influenced the regulatory laxity that contributed (decisively in my view) to the financial collapse of September 2008 and the ensuing worldwide depression, and to the disbelief until then of many economists that there would ever again be a major depression. Greenspan and other like-minded economists and political leaders were wrong to think capitalism self-regulating; they neglected the need for an institutional structure, and a culture, that differentiate successful from unsuccessful capitalist economies. 

The institutional structure of the United States is under stress. We might be in dangerous economic straits if the dollar were not the principal international reserve currency and the eurozone in deep fiscal trouble. We have a huge public debt, dangerously neglected infrastructure, a greatly overextended system of criminal punishment, a seeming inability to come to grips with grave environmental problems such as global warming, a very costly but inadequate educational system, unsound immigration policies, an embarrassing obesity epidemic, an excessively costly health care system, a possible rise in structural unemployment, fiscal crises in state and local governments, a screwed-up tax system, a dysfunctional patent system, and growing economic inequality that may soon create serious social tensions. Our capitalist system needs a lot of work to achieve proper capitalist goals.