October 31, 2005

Response on Price Gouging-BECKER

Although I am a little late, I would like to respond to a few comments on my discussion of price gouging. Judge Posner's and my discussion of our new topic on childcare and paid leaves follows after this response.

Two of the comments questioned my assertion that President Carter introduced price controls on gasoline that produced long lines. I am right, as shown by the following entry from Wikepedia on the 1979 energy crisis: "In the United States, the Carter administration instituted price controls. This resulted in long lines appearing at the gas stations as they had six years earlier. As the average vehicle of the time consumed between 2-3 liters of gas an hour while idling, it was estimated at the time that Americans wasted up to 150,000 barrels of oil per day idling their engines in the lines at gas stations."

To be sure, Nixon introduced various inefficient controls over energy prices that Carter began to dismantle. However, Carter introduced controls over gasoline prices that produced I believe longer lines at gasoline stations than those under Nixon. Of course, I agree that Nixon had terrible policies on energy prices, especially his misguided efforts at price controls over oil, natural gas, and some of their products.

Although search is required to discover prices at different gasoline stations, in any major city or suburban area, search costs are small relative to the gain from sizeable differences in gasoline prices. This is why the retail gasoline market is on the whole very competitive, as indicated by the strong central gasoline price tendencies in major cities and other extensive markets. In such competitive markets with rather constant costs per unit of output, the effect of a rise in input prices on retail prices is largely independent of the elasticity of demand for the retail good.

Unfortunately, many Indians, Chinese, and others in poor countries live on the equivalent of less than a few dollars a day, and many of these suffer from malnutrition. But this has nothing to do with price gouging during crises since most of these persons live in rural areas and work on farms. It is the result of their very low productivity. As India and China have progressed rapidly during the past decade and half, the fraction of their populations living at such low levels has declined dramatically, and so has the degree of malnutrition.

Gasoline prices have returned close to pre-Katrina levels because most of the damaged refineries have been repaired, and the undamaged ones have increased their production. Both effects are in part responses to the (temporary) high gas prices. So my conclusion is that these high prices served a very useful purpose in increasing gasoline supplies more quickly that would have been the case if price controls on gasoline had been introduced again.

Posted by becker at 9:16 AM | Comments (17) | TrackBack

October 30, 2005

Should Governments Subsidize Child Care and Work Leaves? BECKER

Germany and the United States, among many other countries, have been criticized for not having the extensive system of benefits to parents who have children found throughout Scandinavia and some other countries. For example, the Swedish government not only heavily subsidizes day care activities for young children with working mothers, but also allows up to eighteen months of paid leave to care for a newborn child. These benefits are open to both mothers and fathers, but mothers take practically all leaves. Benefits almost fully compensate for the loss in earnings during the first 12 months of leave, while they offset more than half of earnings during the next 6 months of leave. Also companies have to take their employees back at comparable jobs when they decide to return to work from a child leave.

The many advocates of a Swedish-type childcare system believe it permits mothers of young children to work while guaranteeing that their children have adequate childcare at government-run facilities. At the same time, it allows mothers to care for their young children without losing their jobs. In addition, these subsidies tend to encourage families to have more children since they reduce the cost of having and raising children.

Despite these claims, I believe it would be a mistake for the US, Germany, or other countries to emulate the Swedish approach. For starters, middle class and rich families can pay for their own childcare services for young children, such as preschool programs, whether or not the mothers are working. In fact, the majority of such families in the United States do send their young children to day care programs. It is much more efficient to have better off families buy childcare services in a private competitive market than to spend tax revenue on preschool government-run programs for the children of these families. The Swedish childcare system was insightfully criticized along these lines in a controversial but I believe correct analysis by my late colleague Sherwin Rosen (see "Public Employment, Taxes and the Welfare State in Sweden", NBER Working Papers 5003, 1995).

It could make sense to subsidize the preschool activities of children of poor families since these children may well receive inadequate care without such subsidies. The US takes this approach by only subsidizing preschool care of low-income families. These subsides appropriately take the form of a voucher system rather than government-run pre-school programs. Poor families are in essence given vouchers each month that they can spend on any approved private day care program for young children. The market is highly competitive and I believe works well, although there are few careful evaluations of this system. Still, I believe it provides an example of how a voucher system might work for older children in school.

The case is also weak for following Sweden by providing all women who work with generous and lengthy government-financed paid leaves. The US does not have this system, yet many working women leave their jobs at least temporarily, or work part time, in order to care for their children. The vast majority of parents are very concerned about the wellbeing of their children, and give that a lot of weight when deciding whether to care for them rather than using preschool programs and other outside help.

Government –financed payments to working mothers who take a leave of absence to care for their young children subsidizes women who work compared to women who decide to stay home fulltime to care for children and engage in other activities. It is still controversial whether there is a significant benefit to children from having mothers who stay home to care for them instead of having mothers who work, and care for their children (perhaps more intensely) only before and after work and on weekends. On the whole, I believe that work decisions are best left to parents without government subsidies or other government involvement.

Generous government childcare and work benefits for families with young children are advocated sometimes because they promote larger families. European and some Asian countries are particularly receptive to this argument since their birth rates are so low that their populations would begin to decline soon unless births increased a lot, or they accepted large numbers of immigrants. Yet while the Swedish total fertility rate is quite a bit above that of Germany, Italy, and some other European nations, it is still too low to prevent its population from declining in the near future, despite the world's most generous system of work and child care benefits for families with young children.

This may be because the Swedish-type system promotes larger families in an indirect and inefficient manner. The most direct and best way to encourage births, if that is the goal, is to provide monthly allowances to families that have an additional child. Subsidizing births directly encourages larger families without mainly targeting women who work, or women who value childcare services a lot. Moreover, since the vast majority of families even in Europe have at least one child without government subsidies, an efficient family allowance program should concentrate subsidies on the marginal fertility decision; that is, on second, third, or higher order births that may not happen without subsidies.

France has an extensive and complicated system of direct allowances mainly to families that have more than one child. The best study of the effects of this program (see Laroque, Guy & Salanié, Bernard, 2005, "Does Fertility Respond to Financial Incentives?" CEPR Discussion Papers, 5007) shows that it has had a significant effect in raising French birth rate to among the highest in Western Europe, although other factors are also important. However, the system is expensive, and the French total fertility rate is still considerably below its replacement level.

The US does not apparently need any stimulation to family size since its total fertility rate is the highest of any developed country, and it is even above that of many much poorer countries, like China or South Korea. The case for general subsidies to childcare and for work leaves to employees with young children is also weak. So I believe that present American policy in these areas is much better than the Swedish approach, and does not need drastic changes.

Posted by becker at 7:33 PM | Comments (22) | TrackBack

Subsidizing Child Care and Work Leave--Posner's Comment

I agree with almost everything that Becker says in his post. For example, I agree that whether or not the government should subsidize day care, it should not provide day care facilities; the subsidy should take the form of vouchers, so that the private sector would provide the facilities. Subsidization and provision should normally be separated, since the government is an inefficient service provider compared to private firms.

I also agree that when the purpose of subsidizing child care and work leave is to increase the birth rate, the emphasis should be on subsidizing the second and third child (to prevent population from declining, there must be an average of 2.1 births per woman), since, as Becker points out, most couples have at least one child.

And I agree that there is no good reason to encourage a higher birth rate in the United States. Not because our fertility rate is higher than that of the other rich (and even many poor) countries (the point emphasized by Becker), though it is, but rather because it is close to the replacement rate, and, more important, because the United States is uniquely attractive to high-quality, easily assimilated immigrants, who are good substitutes for native-born citizens.

One thing that puzzles me is the suggestion that child care and work leave subsidies are intended to encourage women to stay home and take care of their children. I had thought the opposite--that the purpose of child care subsidies, when they take the form of subsidies for day care, and compensated work leaves, was to encourage women who want to have children to work. After all, women who don't work don't need day care or work leave.

From an economic standpoint, women should not be encouraged to enter the labor market unless the social value of their output in that market is greater than the social value of their household production, importantly including their contribution as mothers to their children's human capital (broadly defined). I do not know whether it is. Of course if women want to work and do not receive any child care or work leave benefits, they may decide to have no or fewer children, but as Becker points out, if a higher birth rate is the goal, child care and work leave subsidies are not effective means to it.

I do not agree that if women are better mothers if they stay home with their children, the government should require one parent (who as Becker points out will usually be the mother) to stay home. That would put some women to an unnecessarily hard, and socially suboptimal, choice--women who would be far more productive in the labor market, but who also would be, on balance, superior mothers (maybe just because of a superior genetic endowment!).

I do think fertility has to be a major concern for countries, such as most European countries plus Japan, that have at once a birth rate far below the replacement rate and a difficulty in assimilating immigrants. The ideal solution might be simply for these countries to grow smaller in population terms; the problem is that this would place unbearable strains on social services, and so countries faced with a declining population are under irresistible political pressure to admit immigrants, whether or not they can be assimilated. Europe has a large and growing Muslim immigrant population that is not only poorly assimilated, but, to some extent, a danger to their host countries and the world; and that population is growing rapidly not only through immigration but also because of early marriage and large families. These nations might be well advised to pay women to have a second and third child.

It is doubtful that subsidization, however well designed, will raise the birth rate of the European nations that have birth rates far below the replacement level to that level. Children in such nations are extremely expensive, especially in opportunity costs of parents' time (which is why birth rates are so low), and the tax rates necessary to offset those costs enough to have a significant rate on the birth rate might be infeasible. (Another factor in declining birth rates I believe is reduced gains from marriage, the reduction being related to women's opportunity costs of time but to other factors as well.) However, modest subsidies that reduced the rate of population decline might be worthwhile in moderating the demand for immigrants.

Posted by posner at 4:28 PM | Comments (13) | TrackBack

Price Gouging in the Wake of Hurricanes--Posner's Response to Comments

There were many excellent comments. One asked who actually benefited from the shortage of gasoline resulting from Katrina and Rita--the gasoline dealers or the refiners? I had mentioned the first, Becker the second. Both gained, but the refiners more. The reason is, as one commenter noted, that once the gasoline station has sold all the gasoline stored on his premises and has to buy more from a refiner, he will have to pay the high price necessary to ration the limited output of the refiners, unless he has negotiated a fixed-price supply contract.

I was surprised by how many comments took issue with the basic proposition that price controls are inefficient. A number of questionable propositions, theoretical and empirical, were offered. For example, it was suggested that charging the market-clearing price in a shortage is inefficient because it is not the "equilibrium" price. I think what the commenter meant is that if the shortage is temporary, the price that clears the market will soon fall. But the point is that it is the market-clearing price. If a lower price is charged, supply will exceed demand and will have to be allocated by some nonprice method, such as queuing. It is quite right, as I had suggested in my post, that for people with low time costs, queuing may be preferable to paying a high (money) price. But the poorest people don't have cars, so they are not affected by a gasoline shortage. Above them are people of modest incomes, who can afford cars but are highly sensitive to gasoline prices; nevertheless, the number of people who would incur extreme hardship from having to pay an extra $2 or $3 a gallon for a few weeks is, I would guess, small (I would invite submission of evidence that it is large). Moreover, while their time costs may be low, they will not be zero. Queuing in a shortage situation can become extreme, because not knowing whether there will be any supply available people tend to queue when their need is not urgent, for example when they have a half-full gas tank but are unsure when, if they do not fill it now, they will be able to do so when the tank is almost empty. Fear of shortages also makes shortages worse and queuing longer by increasing hoarding. The worse that shortages are expected to be because of price controls, the more hoarding the expectation of shortages will induce--and so the shortages will be worse.

As I said in my post, in situations of extreme hardship, which I illustrated with the case of a shortage of human growth hormone and that one of the comments illustrated with the case of scarcity of organs for transplantation, the welfare effects of rationing by price may justify either nonprice rationing or a government subsidy to enable people of limited means to obtain a product much more likely to increase their welfare than that of affluent purchasers.

It should be noted also that some of the effects of shortages on the distribution of income and wealth are automatically corrected by the tax system: windfall profits of gasoline dealers and retailers are taxable as income, and so a part of them is in effect returned to the general public. More would be returned if an "excess profits" tax were imposed, as in World War II, in recognition of the enormous profits that shortages created by the nation's all-out war effect had generated for defense contractors.

One comment blamed the refiners for not having hardened their Gulf Coast refineries against catastrophic hurricanes. If they were negligent in failing to do so, this might conceivably support a tort suit to recover the refiners' windfall profits. (They would not be negligent if the expected benefits from such hardening did not exceed the costs.) For then there would be a sense in which the shortage was artifically induced. But the point does not support a general policy of imposing price controls during shortages.

One comment reported a rumor that Starbucks had charged $10 per bottle of water to firemen and police officers who responded to the 9/11 attacks in New York City, even though--the commenter said--there was no shortage of water. But the rumor, if true, describes a situation similar to that in the admiralty salvage case. The responders appear unexpectedly and need water; they don't have time to shop for it and anyway there are many more of them than are usually trying to buy water from a Starbucks store, and so its supply would quickly be depleted if it charged its normal price--so there would have been a shortage at that price. And, as one comment pointed out, price controls in shortage situations, for example in the form of fines for "price gouging," discourage merchants from stocking up with extra supplies for future emergencies. Keeping an inventory of items that will be demanded only in emergencies is extremely costly, and may be cost justifiable only if the merchant knows that should there be an emergency the items can be sold at a higher than normal price. This is an objection to a general windfall-profits tax.

Some of the comments challenge the most basic assumptions of a free-market society, such as that markets generally yield much more satisfactory allocative results than bureaucrats. One would think that the experience of communism would have disabused people of belief in the superior efficiency of "central planning." The issue is not philosophical--whether a market system of resource allocation is "just" or whether democracy should be used to allocate resources instead of markets because it is more--democratic. It is whether you like the consequences that "price gouging" laws would produce. The major consequences would be shortages, leading to nonprice rationing that would impose enormous costs, and thus augment and shift, rather than reduce, the price of the shortage item. I think the experience of queuing would change the minds of most intellectuals who think that resources should be allocated by nonprice methods.

Let me try finally to be more precise about the nature of the market failure in the admiralty salvage case. One comment suggested that the problem there is not monopoly at all, in the sense of an artifical scarcity, but transaction costs. In fact both monopoly and high transaction costs are present and they are related. The would-be rescuer creates an artifical scarcity by threatening to withhold supply (that is, refuse to rescue) unless the ship in distress agrees to the rescuer's exorbitant price--a monopoly price because it is based on the purchaser's lack of alternatives. However, the situation is actually one of bilateral monopoly because while the purchaser lacks alternatives, so does the seller; he has (at present) no other market for his rescue services than this particular ship in distress. Because price under bilateral monopoly is indeterminate within a broad range, negotiation (transaction) costs are high, which creates a particularly acute problem in a rescue situation in which time is of the essence. The case is completely different from that of the hurricane-induced gasoline shortage.

Posted by posner at 10:59 AM | Comments (11) | TrackBack

October 23, 2005

Should Price Gouging in the Aftermath of Catastrophes Be Punished?--Posner

Hurricane Katrina has produced a mass of interesting revelations. One is that more than half the states have laws forbidding "price gouging," often defined with unpardonable vagueness as charging "unconscionably" high prices. These laws are rarely enforced. But the sharp runup in gasoline prices as a result of Katrina (and also Hurricane Rita, which followed almost immediately), impeding imports of crude oil and causing a number of refineries in the path of the hurricanes to shut down temporarily, prompted a flurry of enforcement threats and even a few fines. It also prompted denunciation by politicians of greedy refiners and gasoline dealers, and proposals for federal legislation prohibiting "unconscionably excessive" gasoline price increases.

What prompts such reactions besides sheer ignorance of basic economics (a failure of our educational system) and demagogic appeals by politicians to that ignorance is the fact that an unanticipated curtailment of supply is likely to produce abnormal profits. The curtailment reduces output, which results in an increase in price as consumers bid against each other for the reduced output. In addition, the reduction in output is likely to reduce the sellers' unit costs; the reason is that sellers normally sell in a region in which their costs are increasing--if they were decreasing, the sellers would have an incentive to expand output further. With both price rising and cost falling, profits are likely to zoom upward. (Some gas stations are reported to have seen their profits increase by 400 percent shortly after Hurricane Katrina struck.) In times of catastrophe, with consumers hurting, the spectacle of sellers benefiting from consumers' distress, while (it seems) deepening that distress by charging them high prices, is a source of profound resentment, and in a democratic society profound resentments trigger government intervention.

Such intervention is nevertheless a profound mistake, and not only from some narrow "economic" perspective that disregards human suffering and distributive justice. If "price gouging" laws or even merely public opinion deters refiners and dealers from charging the high prices necessary to equilibrate demand and (reduced) supply, there will be shortages. Consumers will still be paying a higher price than before the shortage, but they will be paying the higher "price" in the cost of time spent waiting on line at gasoline stations, or (if they drive less because of the shortage) in the form of restricted mobility. And those who need the gasoline the most, not being able to express their need by outbidding other consumers for the limited supply, will suffer the most from the shortages. The only beneficiaries will be people with low costs of time and nonurgent demand.

But here is an interesting wrinkle. Admiralty law and common law (both are systems of judge-made law, but they are classified separately by lawyers because they used to be administered by separate courts) alike forbid certain practices that might be described as "price gouging." Suppose a ship is sinking, and another ship comes along in time to save the cargo and passengers of the first. The second ship demands, as its price for saving the cargo and passengers of the first ship, that the owner of the ship give it the ship and two-thirds of the rescued cargo, and the captain of the first ship, on behalf of the owner, being desperate agrees. The contract would not be legally enforceable; under the admiralty doctrine of "salvage," the second ship would be entitled to a "fair" price for rescuing the first, but to no more.

In a parallel case, also maritime but governed by common law rather than admiralty law (the Alaska Packers case, well known to law students), seamen on board a ship that was fishing for salmon in Alaska waters went on strike, demanding higher wages. The captain of the ship agreed because, the fishing season in these waters being very short, he could not have hired a replacement crew in time to make his quota. Again, however, the court refused to enforce the contract, in essence because it had been obtained under duress.

These cases, it turns out, are subtly but critically different from the "price gouging" alleged in the wake of Katrina and Rita. The refiners and dealers who raised prices after the hurricanes disrupted gasoline refining had not created the situation that resulted in a reduction in supply. If they had, say by agreeing to increase price above the existing level, they would have been punishable for violating the antitrust laws. (There were some accusations of price fixing, but as far as I know they have not been substantiated.) Similarly, in the salvage case, the rescue ship is not being asked to ration a limited supply by raising price; there is no one else competing for the rescue service--there is just the one ship in distress. And in Alaska Packers, there was no labor shortage, which would have justified seamen in demanding higher wages; the seamen created the shortage by refusing to work. From an economic standpoint, their workers' cartel was symmetrical with my hypothetical refiners' or dealers' cartel. Both are examples of opportunistic behavior--behavior designed to take advantage of an unforeseen opportunity to charge a monopoly price by threatening to withhold output. The hurricane-induced scarcity of gasoline that pushed up prices was not an artificial scarcity, but a natural one. The price increases generated by a natural scarcity (or indeed any scarcity not created by the person or firm imposing the increase), while they may generate "windfall profits," are unavoidable in a way that price increases due to a shortage created by a cartel are not.

A further exception to taking a hard line against responding to a natural scarcity by imposing price controls, some would argue, is the rare situation in which the consequence would be an intolerable gap between wealth and welfare. Suppose there is a highly limited supply of human growth hormone, so that if price is allowed to ration demand, all the hormone will be purchased by rich people who would want their sons and daughters of average height to be taller, and no hormone will be purchasable by poor people, or even people of average income, who have children who will be dwarfs unless they get the hormone; they simply are outbid by the rich. In such a case, there may well be a compelling moral argument for allocation of the limited supply on a basis other than price, presumably some utilitarian concept of welfare: aggregate happiness would be promoted by allocating the hormone on the basis of need rather than ability to pay. This was not a factor in the market's response to the incipient gasoline shortage caused by the hurricane.

Not only are the duress and welfare objections to price allocation inapplicable to the run up in gasoline prices but higher prices for gasoline are a source of substantial external benefits (that is, benefits not conferred on the parties to the transaction, so that the parties do not have an incentive to consider them in deciding on the price and other terms of the contract). By reducing the amount of driving and (if the higher prices persist) a switch to more fuel-efficient cars, higher gasoline prices cause a reduction in the amount of carbon dioxide emitted into the atmosphere--a major cause of global warming--while also reducing more conventional forms of automobile air pollution. A reduction in driving also reduces traffic congestion, which imposes costs in the form of delay on all drivers in congested areas. Finally, a reduction in the amount of oil consumed in the United States would make the nation more secure by reducing the wealth and economic leverage of the vulnerable, unstable, or hostile nations, such as Saudi Arabia, Iran, and Venezuela, that control so much of the world’s oil supply.

In short, the social benefits of gasoline "price gouging" appear to exceed the social costs by a large margin.

Posted by posner at 5:30 PM | Comments (60) | TrackBack

Comment on Price Gouging-BECKER

Protests against "price-gouging"in times of shortfalls in food supplies and other goods go back thousands of years. Alleged gougers and speculators have been hanged, assaulted, and ostracized. The recent energy bill passed by the House of Representatives has many good provisions, but also requires the Federal Trade Commission to set standards for "price gouging", and to punish offenders. Price controls emerged in virtually all countries, including the US, during World War II and other wars, when many products were in reduced supply. It might seem "where there is smoke there is fire", but I fully agree that prices should be allowed to rise to their equilibrium levels when supply is reduced due to natural and other catastrophes.

As Posner indicates, attempts to suppress prices of gasoline or other goods that experience a great reduction in supply will require using less efficient ways to allocate the limited supply. The main alternative to higher prices is rationing in some form of another, such as selling on a first come first served basis, selling to persons willing to bribe the suppliers, and so forth. All these ways are inefficient, and discourage production instead of solving the problem of reduced availability of certain goods. Anyone who remembers the long lines and waits of an hour or more to get 10 gallons of gasoline after President Carter imposed gasoline rationing can appreciate the wasteful costs created by non-price methods of allocating a limited supply.

Another example is the rent controls that many nations imposed during and after World War II. Most have since removed their rent controls, but certain cities like New York have kept them, although in a modified form. Most serious studies of the effects of rent controls in NY and elsewhere show that they speed up the deterioration of housing quality, they cause an inefficient allocation of the limited housing stock, and usually they harm rather than benefit the poor and the young who more frequently have to find housing in the rental market. Rent controls generally benefit middle class and older renters who often stay in large apartments at ridiculously low rents because it is too expensive to move to smaller apartments available on the open market.

The angry reaction of consumers to high prices caused by a major catastrophe usually is not directed at the persons or companies that profit. For example, customers are now very upset at owners of gasoline stations as they have posted continual increases in prices due to reduced supplies of gasoline resulting from Katrina, and the rising price of oil. But the profits of most gas station owners went down, not up, after Katrina. They have to pay more for the gas they buy, and the higher prices cut back on the demand for their gasoline. It ishould be pretty obvious that a rise in the price of a major input in production, such as gasoline is to retail gas stations, lowers rather than raises their profits since costs of production have risen.

On the other hand, profits have increased to operators of refineries that were not damaged by Katrina because the damage to Gulf oil refineries raised the wholesale price of gasoline, the main product of refineries. However, the higher prices and greater profits induced undamaged refineries to squeeze greater production out of their limited capacity, and companies hastened to repair the refineries that were damaged to cash in on the high prices. In fact, many were repaired in a remarkably short time. If price were not allowed to rise, profits of undamaged refineries would have been reduced, but the supply of gasoline would have increased at a slower, probably much slower, rate.

Faced with cutbacks in supply, companies often voluntarily sell at lower prices to their regular and best customers to increase the goodwill of these customers, and also because there may be an implicit long-term contract with these customers to keep prices relatively stable. They sometimes combine low prices to favored customers with rationing of the quantities they give them, while raising prices sharply to their customers who buy less, or more irregularly.

I have no problem with Posner’s two examples of legitimate use of controls over prices. In the salvage at sea case, controls are warranted because there is not time during a rescue effort to work out what would be the appropriate sharing rule. The attempt of the Alaskan seamen to hold up the owners for higher wages while at sea presumably broke an implicit contract that wages are fixed for the duration of the fishing trip.

But shouldn’t price controls also be used in poor countries when they experience a catastrophic shortfall in the supply of a food staple, such as rice or potatoes (the Irish potato famine is the best-known example)? The poorest families may be unable to pay the higher prices, and they could face starvation. Still, I do not believe price controls are a good solution, for they discourage greater production and imports of the scarce food, and they encourage farmers to hoard their food crops. Governments of these countries, and richer countries too through humanitarian aid, should instead become active in buying rice or whatever crop is involved, and reselling that to poor families at lower prices. Or these governments should increase income transfers to the poor that would enable them to pay the high market prices.

In the modern world, famines are caused not be high prices, but by bad governmental policies. Famines are virtually unknown in modern democratic societies. Yet famines and large-scale starvation are still sometimes found in dictatorships, such as in China during Mao’s Great Leap Forward. The problem there was not high prices, but Mao’s foolish policies. He first caused farm output to fall by his misguided attempt to leap forward,. He then forcibly took much of the limited supply of food from farmers, so that many of them starved to death, in order to feed city populations. In addition, he sold some of the reduced crop of grains abroad for hard currencies rather than importing grains to ease the food crisis.

Posted by becker at 5:06 PM | Comments (12) | TrackBack

Response on Immigration of Skilled Workers-BECKER

Let me try to respond to some of the good comments, and clarify my position on others.

I tried to be clear that I would prefer the H-1B program be folded into a program that allows many more skilled immigrants to enter permanently. I do not believe workers under H-1B program are "exploited"-they do quite well economically- but they would have more commitment to this country if they were allowed in permanently.

Whatever are all the forces that determine earnings, immigration of many skilled workers will lower the wages of native-born skilled workers. There is no way around this fundamental proposition. Whether such immigration lowers these wages by a lot, however, does depend on the degree of substitutability of different classes of workers, how many fewer Americans train for these skilled jobs, and other factors. The other side of the story is that a larger number of skilled immigrants tend to raise, not lower, the wages of unskilled American workers.

It should have been clearer that I am not advocating eliminating unskilled immigrants, or even reducing the number of legal unskilled immigrants. I believe that many of them make important contributions to this country either directly or through their children and grandchildren. Perhaps even their numbers should increase-I am very pro-immigration. But I do believe that if for various reasons we are limited to taking a certain number of immigrants, then strong preference should be given to skilled immigrants for the reasons I cited, and for reasons given in several comments.

The story is told that the Premier of China was approached by one of his staff during the mid 1980’s who asked whether China should allow so many young persons to study abroad since they would not come back. His answer supposedly was China does not deserve to get them back if the environment cannot be made attractive enough for them to return. This is my view on the effects of so-called brain drains. Skilled workers do not return to Africa because economic and other conditions there are so dismal. As soon as China began to free its economy, and a little bit other freedoms, a much larger fraction of their students abroad decided to return. That is also the experience of South Korea, Taiwan, and many other countries.

But even without a large number of returnees, countries benefit on the whole from sending their students and skilled workers abroad. It is not only the remittances, but also the knowledge gained by those remaining from interactions with relatives and friends working and studying in more advanced countries. Moreover, greater pressure develops in a country to reform in order to attract more of their students and others back from abroad. All these reasons might explain why studies show that countries that send more students abroad experience more rapid rates of economic growth.

Some worried about immigrants bringing in diseases in this interconnected world with possible pandemics. I agree they have to be cleared medically, but that is no more a problem for immigrants than persons who enter the US on tourist visas, or Americans who return abroad after visiting countries where the disease burden is high. And certainly we can control the health of skilled immigrants better than the health of the mainly unskilled workers who enter the country illegally.

Posted by becker at 11:31 AM | Comments (4) | TrackBack

Skilled Immigrants--Posner's Response to Comments

As usual, a number of excellent comments.

Several express concern that an Indian "brain drain" will hurt India by depleting its supply of high-IQ individuals. This is unlikely. As I said in my post, the "drain" is self-correcting because a reduction in the supply of (say) software engineers in India will result in higher wages for those workers there, which will not only slow the drain but also increase the supply by improving the job prospects. Since India has a population in excess of 1 billion, the number of high-IQ individuals is undoubtedly so great that a limited brain drain will not significantly weaken the nation's long-term prospects.

Several comments discuss my puzzlement concerning the political opposition to larger quotas for skilled immigrants. I can understand why the skilled American workers with whom those immigrants would be competing might favor keeping the quotas low, but my impression is that for the most part they do not, perhaps because in knowledge industries like software skilled workers add more value than they capture in their wages, creating a virtuous cycle that benefits the entire workforce in the industry. (This would be consistent with opposition to expanding quotas for women and minorities--such quotas favor the less skilled and so do not produce value that benefits competing workers.) The main opposition to relaxing the quotas seems to come from unions; maybe they fear that any relaxation would spread to less skilled workers. The universities, moreover, have an additional stake in limiting the quotas besides the one I mentioned in my post; as one commenter points out, foreign students, forbidden by their student visas to work at regular jobs, provide valuable research assistance to university faculty.

A comment about the cultural benefits conferred by immigrants suggests a partial answer to the security concerns that I expressed in my post. Our intelligence system is in desperate need of more people fluent in Asian (including Middle Eastern) languages and intimately familiar with the cultures of those regions, and the need cannot be met by training Americans.

Several comments emphasize quite properly the defective structure and administration of the quotas. One comment points out that as the temporary skilled-worker visas (H1B) expire, the holders often join the queue for permanent-residence visas, and so the queue lengthens--it is now several years for India and China. (The quotas are on a country basis--another mistake.) Visas are granted in the order in which they are applied for, and thus to the people who have been in the queue the longest. They tend to be the less qualified workers; the more qualified will have had better opportunities in their home country and the longer the queue, the more incentive they will have to exploit those opportunities rather than wait in immigration limbo. In addition, we lose some of the best immigration prospects by delay in the processing of visa applications, which is due to a shortage of visa personnel against a background of increased scrutiny of those applications for security reasons. The relatively low costs of expanding the number of such personnel would probably generate more than offsetting benefits in a higher quality and quantity of highly skilled immigrants.

Posted by posner at 11:08 AM | Comments (2) | TrackBack

October 16, 2005

Many More Skilled Immigrants-BECKER

Scientists, engineers, and other highly skilled workers often must wait years before receiving a green card that allows them to stay permanently in the US. Only 140,000 green cards are specifically allocated annually to mainly skilled workers. An alternate route for highly skilled professionals, especially IT workers, has been to seek temporary H-1B visas that allow them to come for specific jobs for three years, with the possibility of one renewal. But Congress foolishly cut the annual quota under that program in 2003 from almost 200,000 workers to well under 100,000. The small quota of just 65,000 persons for the current fiscal year that began October 1 is already exhausted!

The right approach is to go in the exact opposite direction: to greatly increase the number of entry permits to highly skilled professionals, and eliminate the H-1B program, so that all such visas became permanent. Skilled immigrant workers like engineers and scientists are in fields that are not attracting many Americans. They also work in IT industries, such as computers and biotech, which have become the backbone of the well-performing American economy. Over one-quarter of the entrepreneurs and higher--evel employees in Silicon Valley were born overseas. These immigrants create jobs and opportunities for native-born Americans of all types and levels of skills.

Since they earn more than average, highly skilled professional immigrants contribute disproportionately to tax revenue. They are also considerably younger than average, so they are net contributors to social security revenue. In addition, they and their children have low crime rates and make few demands on the public purse. They have low levels of unemployment, seldom go on welfare, generally have above average health, have relatively small families, and their children do well at school and cause few disciplinary problems.

To me it seems like a win-win situation for the US to admit annually a million or more skilled professionals with permanent green cards that allow them eventually to become American citizens. Permanent rather than temporary admissions of the H-1B type have many advantages to the US as well as to the foreign professionals. With permanent admission, these professionals would make a much greater commitment to becoming part of American culture rather than forming separate enclaves in the expectation they are here only temporarily. They would also be more concerned with advancing in the American economy rather than with the skills and knowledge they could bring back to India, China, or wherever else they came from. In particular, they would become less concerned with absconding with the intellectual property of American companies, property that could help them advance in their countries of origin, perhaps through starting their own companies.

Basically, I am proposing that the H-1B program and the explicit admission of foreign workers be folded into a much larger employment-based green card program for foreign workers. With the emphasis on skilled workers, the annual quota should be multiplied many times from present limits. Unlike the present admission program, there should be no upper bound on the numbers from any single country. Such upper bounds, either in absolute numbers or as percentages, place large countries like India and China with many highly qualified professionals at a considerable and unfair disadvantage.

To be sure, the annual admission of a million or more highly skilled workers, such as engineers and scientists, would lower the earnings of American workers they compete against. The effect on earnings from this greater competition would discourage some Americans from becoming engineers or other professionals. The opposition from competing American workers is probably the main reason for the sharp restrictions on the number admitted. But doesn't the US benefit if, for example, India spends a lot on its highly esteemed Institutes of Technology to train many scientists and engineers who leave to work in America?

Many of the sending countries protest against this emigration by calling it a "brain drain". Yet migration of workers, like free trade in goods, is not a zero sum game, but one with a positive sum that usually, although not always, benefits both the sending country and the receiving country. In the case of migration of highly skilled workers to the US, I believe that it is a winning situation both for the US and for the nations that trained them because these emigrants send back remittances, and some of them return to start businesses based on the experiences they gained in the US.

If America does not accept greatly increased numbers of highly skilled professionals, they might go elsewhere-Canada and Australia, to take two examples, are actively recruiting IT professionals. Or they will remain at home and compete against the US through the outsourcing of highly skilled engineering, research, and other such activities. The growth of outsourcing has created an entirely new case for more generous admissions of skilled immigrants. Since earnings are much higher in the US, many of these workers would still prefer to come here or to other rich countries, but if they cannot, they can now compete more effectively than in the past through outsourcing and similar forms of international trade in services. The US would be much better off by having such skilled workers become residents and citizens, and in this way contribute to American productivity, culture, tax revenues, and education than by having them compete from their origin nations.

I do, however, advocate being careful about admitting students and skilled workers from countries that have produced many terrorists, such as Saudi Arabia and Pakistan. My attitude may be dismissed as religious "profiling", but intelligent and fact-based profiling is essential in the war against terror.

Other countries too should liberalize their policies toward immigration of skilled workers. I particularly think of Japan and Germany that have rapidly aging and soon to be declining populations that are not sympathetic (especially Japan) to absorbing many immigrants. But America still has a major advantage in attracting skilled workers since this is the preferred destination of the vast majority of them. Why not take advantage of the preference to come here rather than forcing highly desirable immigrants to look elsewhere?

My first preference is to admit many immigrants through a sale of the right to immigrate (see the discussion in our blog entry of February 21, 2005). Since skilled immigrants would tend to bid the most, that policy too would favor skilled immigrants. But in this discussion I have set aside my preference for a market in entry rights in order to concentrate on the importance of getting more highly skilled immigrants, with or without charging for admission.

Posted by becker at 7:25 PM | Comments (28) | TrackBack

Skilled Immigrants--Posner Comment

I agree wholeheartedly with Becker about the desirability of our accepting more skilled immigrants for permanent residence. Of course, the more that are accepted, the lower the average quality. The qualities of skilled immigrants that Becker rightly praises are a function of the size of the skilled-immigrant quotas; the lower the quotas, the more outstanding the successful applicant is likely to be. But it is a safe bet that the quotas would have to be much higher before a discernible fall in average quality was detectable.

The most difficult issue relates to the security concerns that Becker touches on, which I discuss at the end of this comment.

I think there is a simple answer to the "brain drain" problem. For concreteness, consider immigration to the United States of Indian software engineers. The more who immigrate, reducing the supply of Indian software engineers to Indian software producers, the higher the wages of those engineers in India. This will tend both to reduce the numbers immigrating to the United States and to elicit a greater supply of engineers for the Indian market.

I am puzzled by the political opposition to increasing the quotas for highly skilled immigrants. The average worker is benefited by immigrants who have skills much greater than his own, because they increase U.S. productivity (so the average worker benefits as a consumer and he may even benefit as a worker if his employer's greater productivity increases the employer's demand for workers) and he does not compete with them; they are in different job categories. And as Becker points out, restricting immigration of highly skilled workers increases the incentive of U.S. firms to outsource production to countries containing such workers; and outsourcing, by exporting jobs, harms the employees of those firms. So I would not expect unions, or average Americans, to oppose the immigration of the highly skilled. Maybe firms that compete with employers that utilize skilled immigrant workers most efficiently oppose such immigration; maybe universities as well, because, as Becker mentions, the more skilled immigrants there are, the weaker the demand of nonimmigrant Americans for scientific and technical education. Hiring skilled immigrants is a way of outsourcing such education.

One way to reduce opposition to such immigration would be to insist on a somewhat higher skill level of applicants for skilled-worker visas. The higher the required level, the fewer nonimmigrant Americans will be affected by the immigration of skilled workers. There are three principal employment-based immigration categories for greencard applicants (as opposed to the H1B program for temporary employment). The top two, EB1 and 2, set very high standards, but the third, EB3, is very loose: it "is for aliens with bachelor's degrees, but who do not qualify for the EB2 category, skilled workers with at least two years of training or experience, and unskilled workers. An alien in the bachelor's degrees category must demonstrate that he or she has a bachelor's degree or equivalent, that a bachelor's degree is required for the position, and that he or she is a member of the profession." Oddly the same annual quota--40,000 visas--is fixed for each of the three categories. If the first two quotas were increased, and the criteria for the third tightened up, perhaps by specifying particular industries, such as high-tech, in which the applicant could work, the impact on nonimmigrant American workers would be reduced.

I would not describe as "profiling" a system of screening would-be immigrants that, without fixing quotas on a national basis, screens more carefully applicants from nations that are breeding grounds of terrorists. The efficacy of such screening is another matter; the less effective it is, the stronger is the argument for reducing skilled-worker immigration from countries in which terrorists are admired and recruited. Besides terrorists, we have to worry about spies from potentially hostile nations; this implies a need for careful screening of Chinese immigrants as well.

Posted by posner at 6:57 PM | Comments (20) | TrackBack

Response to Comments on Comment on Federalism and Katrina-BECKER

Lots of discussion, but mainly about capitalism, trade, and socialism. The fact is that the economic advantage of college graduates in the US over high school graduates and those with lesser education has risen sharply, not fallen, for the past 30 years or so. There is no evidence that the growth of China in international trade has reduced that advantage, nor has its growth increased the unemployment rate for the less skilled or more skilled.

But the main contentious issue I raised in my Comment is that the poor of New Orleans especially suffered in part because they have become too dependent on the government for support, and the government failed them. Several commentators and Posner in his response questioned that interpretation (I was even called a "racist" by a person obviously completely ignorant of my past writings and behavior). Someone asked for the evidence--a very appropriate question--and I wish we had more evidence on this question. However, evidence on something like a "culture of dependency" is mainly acquired from analyzing behavior, and I tried to do in an admittedly loose way in my Comment.

I do believe that the limited evidence and analysis do support my contention. Clearly, some people were too sick or weak to leave, but I do not believe they were anywhere near the majority, despite the many newspaper photos that highlighted them. One of the comments mentioned a poll that claims only about 25% of those who did not leave lacked a car or money. Since a car is not necessary--public transportation operated prior to the storm-and since the amount of money needed was minimal, these data, if accurate, hardly suggest that most of those who stayed could not leave.

The rest of those who stayed either underestimated the severity of the storm, despite various warnings on television and elsewhere- most owned television sets--or they believed they would be rescued by government actions. Both these groups fit under my criticism that an excessive dependence has developed among the poor (of all races and religions) on government help in emergencies that has replaced reliance on own initiatives. The Welfare Reform Act of the mid-1990's only slightly weakened this dependence on government.

It would take only a few dollars to have boarded a bus and rode out of the most vulnerable areas. To be sure, the very sick and mentally disturbed could not do that, but why did the vast majority of those who stayed not leave, if only in the expectation of being gone for a day or do if they did not fully believe the public warnings? There are several alternative ways to answer that question, but eventually I believe we will be forced to emphasize the government dependency interpretation.

Posted by becker at 11:16 AM | Comments (5) | TrackBack

October 15, 2005

Katrina and Federalism--Posner's Response to Comments

Several comments echo Becker's attribution of partial responsibility for the casualties caused by Hurricane Katrina to the creation of a "culture of dependency" by modern social welfare legislation. That such legislation can create a culture of dependency is true, and is one of the reasons behind President Clinton's welfare reform--a measure that conservatives applaud; I certainly do. But that it was a factor in the botched evacuation and resulting deaths in New Orleans is speculative. Many of the casualties were to residents of hospitals and nursing homes; such casualties were not attributable to a culture of dependency. Nor, it seems to me, were the casualties to people who did not own cars, unless one believes that there would be no poor people if there were no social safety net. That seems unlikely. The fact that the social safety net is weaker in the United States than it is in Western Europe is one of the reasons that the poverty rate is higher in the United States than it is there. It is also one of the reasons that the United States has a more dynamic economy and lower unemployment, and is more attractive to immmigrants. But one must take the bad with the good, and the bad of a society such as ours in which there is real economic risk is a higher rate of poverty.

Another frequent comment was that there is no need for a federal role even in disasters that spill across state lines because, in the absence of such a role, states would form compacts to cooperate in providing emergency assistance; they would stock supplies, create a standby command staff, etc. Suppose all the states joined the compact; then we are speaking of another federal government, in effect, so what would have been gained? The nation experimented in the Articles of Confederation with government by agreement among the states, and the experiment failed. In economic terms, the transaction costs of contracts between states appear to be very high, judging from the infrequency of such contracts. I am curious whether these commenters think there is any role for a federal government.

What is a legitimate concern is the danger, if any level of government undertakes to provide emergency assistance, of subsidizing risky behavior, such as building in flood plains. That danger could be minimized by requiring that all such assistance be repaid by the recipient, unless indigent. This would encourage nonpoor people to buy insurance, avoid building in flood plains, and take other measures to protect themselves from catastrophic risks. More broadly, I believe that government assistance should always be based on need; the fact that a rich person sustains damage to his home in a catastrophic flood rather than in a flood caused by a stopped-up toilet is no reason for the government to compensate him.

Posted by posner at 11:18 PM | Comments (7) | TrackBack

October 9, 2005

Federalism, Economics, and Katrina--Posner

Much of the debate over the response to Hurricane Katrina has centered on the question of the division of responsibilities among the different levels of government--federal, state, and local. Concern has been expressed that for the federal government to have played a more aggressive role, for example by taking command of all response efforts and perhaps placing them in the hands of the regular army (as distinct from the National Guard, which is state rather than federal although the President is authorized to "federalize" it in situations of war, insurrection, or civil disturbance and thereby place it under federal military command), would have violated the tenets of federalism and perhaps specific provisions of the Constitution allocating powers between federal and state (including local) government, and specific statutes such as the Posse Comitatus Act of 1878, which limits military participation in law enforcement.

Issues of federalism cannot be resolved solely by reference to economic criteria. The reason is that, the Revolution having been waged by states (the former British colonies) linked in a loose confederation, the Constitution, while tightening the federation, recognizes the states as quasi-sovereign entities. Even if it would be efficient to do without states and have as centralized a government as France has, this could not be done without amending the Constitution, and indeed perhaps without replacing it with a completely new Constitution adopted in a constitutional convention.

Nevertheless, it is of course possible to analyze the economizing principles of federalism, and that is what I shall try to do in this posting.

From an economic standpoint, federalism is a scheme of decentralized governance, designed to optimize the provision of government services. In the governmental as in the private business setting, there are disadvantages to a strictly hierarchical ("U-form"--unified or unitary), as distinct from a more loosely coupled or "horizontal," method of organization ("M-form"--multidivisional). With strict hierarchy, information flows from the bottom of the enterprise up to the top echelon of management, and commands flow back down based on decisions made at the top. Inevitably, information will be filtered and otherwise lost or garbled on its way up, and as a result the top managers will perforce base their decisions on information that is frequently incomplete or inaccurate; and likewise commands will tend to be misunderstood on their way down the successive links in the chain of command. The centralizing of decisionmaking power will reduce competition, diversity, and flexibility; mistaken decisions will be more costly because they will bind the entire enterprise; and mistakes will be frequent because the top managers will not be given a full array of alternatives to choose among because their subordinates will filter out most of the alternatives on the way up in order to spare the top managers from being overwhelmed by information.

The other side of this coin, which is illustrated by the regime that preceded the Constitution--namely the Articles of Confederation, which created a very loose-knit federation of the states to conduct the Revolutionary War, and the inadequacies of which led directly to the Constitution--is that the lack of a central authority can result in suboptimal performance. Each division of the firm (or state or other regional or local government in a federal system) will tend to ignore the effects of its actions on the other divisions; each will be reluctant both to incur costs that benefit the other divisions (external benefits) or to avoid imposing costs on the others (external costs). Centralization is a way of internalizing costs and benefits throughout the enterprise by coordinating the divisions and making sure they are pulling together.

Since there are both costs and benefits to centralization, we can expect that usually the best organization will be one that has elements of both central control and divisional autonomy--one that has some hierarchy but not too much, and divisions that are only semi-autonomous. And so we observe in our federal system as a result of the provisions of the Constitution and, in particular, their (loose) interpretation by the Supreme Court. The states are allowed a considerable degree of autonomy in matters of taxation and regulation (including licensure), administration of schools and prisons, highways and other infrastructure, criminal law enforcement, etc., but Congress, the Supreme Court, and the President have a considerable override power. Congress is empowered to regulate interstate and foreign commerce; and the Supreme Court, by interpretation of the commerce power, has forbidden the states to impose tariffs and other impediments to interstate trade and travel, even if Congress fails to act. Because the states have a degree of autonomy, they function, much as the divisions of a software or pharmaceutical firm would, as laboratories for (social) experimentation. Policies invented in one state, if successful, can be copied by others. Also, people can sort themselves between states in accordance with their preferences; the right to move to a different state supplements voting power in controlling the action of government officials.

In the case of response to emergencies, one of the factors I discussed earlier--the effect of hierarchy on information flows and command responses--figures prominently, along with (depending on the scale of the emergency) externalities. The officials closest to a problem have the best information and also can act most quickly on it. We wouldn't be well served by having (only) a Federal Fire Department, so that in the event of a local two-alarm blaze the local fire chief would have to inform Washington and get permission to fight the fire. This is the point made by those who believe that the Federal Emergency Management Agency, even under competent leadership, should not be in charge of emergency responses to catastrophes.

But not all catastrophes are local. What is more, given mobility of responders, it does not make sense for every locality to invest in achieving self-sufficiency in responding to an emergency, regardless of the scale of the emergency. Suppose, as in the case of Hurricane Katrina, that the catastrophe simultaneously engulfs a large number of cities and towns in several states. Insofar as a coordinated response is optimal, and given transaction costs, which are especially high in an emergency situation, it doesn't make much sense to leave the response to state and local governments. Each state will seek to optimize its response to the damage caused it, and each locality to the damage caused that locality, disregarding the costs and benefits of its actions to the other states and localities. Moreover, as in a military situation in which one doesn't know where the enemy will attack, an effective response to an emergency requires the maintenance of reserves that can be deployed to the threatened spot, and those reserves have to be held and controlled centrally.

I conclude that while state and local government can and should be given exclusive responsibility for responding to run-of-the-mill local emergencies, the federal government should have standby responsibility for regional and (of course) national emergencies, as well as for emergencies that, as in the case of the flooding of New Orleans as a result of Katrina, wreak destruction on a scale that it would not have been efficient for the local government to prepare to meet. If you tell a city that it will receive no assistance in the event of a disaster, however great, it will overinvest in preparing to respond to disaster. Suppose for the sake of simplicity that the country has only two cities, that the cost of responding to an average disaster is 1 and to a cataclysm is 20, but that the probability that there would be two cataclysms at the same time is close to zero. Then if the federal government refuses to assist in local disasters, no matter how destructive, the two cities may incur a total cost of prevention of 40, whereas if the government invests in providing the necessary backup capability, the total cost of prevention will fall to 22 (1 + 1 + 20).

If this analysis is correct, then it was the federal government's responsibility to prepare to assist in an emergency of the scale of Hurricane Katrina. Such preparations would have been consistent with an optimal allocation of responsibilities between central and local government.

Posted by posner at 7:30 PM | Comments (41) | TrackBack

Comment on Federalism, Economics, and Katrina-BECKER

Posner gives good arguments why the federal government has important advantages in fighting emergencies, like the recent devastating hurricanes, that wreak havoc over a broad area that involves several cities and states. But bigger and centralized governments are also more bureaucratic, and respond slowly and erratically. Surely, the local government of New York City responded faster to the 9/11 terrorist attack than did the Federal government, even though New York’s response could also be criticized.

None of the governments responded quickly or effectively during the Katrina emergency, even ignoring the lack of preparation for the overwhelming of the New Orleans levee system by a powerful hurricane. Fortunately, since there was advance notice of Katrina’s destructive path, most of the vulnerable population evacuated their homes and businesses, and took other protective measures.

While I agree with Posner's general discussion of the different advantages and disadvantages of local and centralized authority, I still have a strong preference toward decentralized authority whenever that is possible. One reason is that local governments have a better feel for the special needs of its own population than a distant central authority can ever have.

A second important consideration is that individuals can move from one locality or state to another in search of better schools and other public services. This is an enormous advantage that can never be duplicated when power and decision-making are centralized. Competition among states and cities within a country puts considerable pressure on lagging state and local governments because people vote with their feet. They move where there are education and other services that better meet their needs.

Unfortunately, this type of competition works well only for individuals and families that are reasonably well informed about alternatives elsewhere, and who have the resources and inner energy to take the large and risky step of moving to a possibly better and often distant location. Most richer and better-educated persons can do this, but many studies demonstrate that poorly educated persons are far less likely to move across cities and states than are the more highly educated.

The population that remained in New Orleans during Katrina and who suffered the most had low incomes and education. This is not surprising since the low educated, as I just indicated, are usually less likely to move to take advantage of better opportunities elsewhere. Many do not own cars, and have to take public transportation, and they must find places to go. But without minimizing the importance of these considerations I want to emphasize another factor at work in the Katrina episode that contributed to the particularly heavy suffering of persons at the bottom end of the income and education distribution.

Governments at all levels-federal, state, and local-simply failed to take decisive and appropriate actions to meet the emergency brought on by Katrina. So families were mainly left to their own devices, and most of them had enough initiative to take as effective action as was possible. Of course, they could not do everything since their homes and shops were in place and often had to be abandoned.

The poor were hurt most by the government's failure partly for the reasons just indicated, and partly because they have become heavily dependent on governments to take care of them. This "dependency culture" created and nurtured perhaps unintentionally by welfare, Medicaid, and other government programs saps initiative and energy, and greatly weakens the habit of making one's own decisions. Dependency on government is especially devastating in serious emergencies, such as that caused by Katrina, when governments fail to take quick and appropriate actions.

It may be best to give the Federal government responsibility for meeting emergencies that cast a wide net over a large area encompassing many localities and states. But each emergency is somewhat different, and it is hard to believe that even after large and numerous investigations of each failure, a large bureaucracy like the Federal government is likely to take fast, effective, and decisive actions.

This is one important and usually overlooked reason to reform transfer programs and legislation to help the poor so that they have much greater responsibility in organizing and managing their lives. They need to be induced to look for private housing as well as jobs, and to be held responsible for bad decisions rather than being excused because they are "victims". Such changes in these programs for the poor will probably not make governmental responses to emergencies any better. Yet they could significantly reduce the enormous damage done from catastrophic events to families who can least afford further losses. These families will respond quicker and more successfully to catastrophes if they are more accustomed to taking care of themselves.

Posted by becker at 6:55 PM | Comments (27) | TrackBack

October 8, 2005

Response on Population-BECKER

I agree that population density is an important variable. I did not single density out because population level and density are necessarily strongly correlated in an overall sense. But to be sure, cities have been more productive than rural areas in part because they are more densely populated. In a human capital specialization model, density reduces the cost of coordinating different specialists.

Obviously, fossil fuels have been used up during the past 100 years as population and industrialization have grown rapidly in the world. But new sources of old fuels and new fuels continued to be discovered, so that known reserves of fossil fuels are far greater now than 60 years ago. So given this history, why is it prudent to assume that such progress will not continue in the future? On the contrary, for the reasons I gave, I believe the prudent assumption is that progress will continue, although the precise directions of the progress cannot be foresee at present. But the numerous possibilities include harnessing solar power, hydrogen fuel cells, greater use of nuclear power, more efficient wind power, and so on. A larger population gives greater incentives to innovate along these and other lines, which is one of the main points of my disucssion.

I certainly do not believe that poor countries have been held back from progress because of low IQ’s. This belief is not based on political correctness but evidence. Prior to 1980, an IQ interpretation applied to the poverty of India and China-now 37 % of world’s population-would have been totally wrong about their prospects from introducing more sensible economic policies. The same is true of Africa, and other countries that continue poor: bad policies are by far the overwhelming determinant of their poverty. I do not believe that any country-wide differences in ability- still not documented--are important explanations of country differences in poverty.

I know Smith's chapters on specialization very well and I do not believe the reader who claims I misquoted Smith can back up that claim. Can you?

India did begin its progress in the late 1980's because economic reforms began at that time. But India's economy really began to take off after the more significant reforms introduced in the early 1990's by Dr. Singh, the former Finance Minister, and the present Prime Minister.

I did not explicitly mention the Solow growth model, although it is an important achievement. But implicitly I am criticizing the population assumption in that model because it does not distinguish mortality from fertility, and especially because it assumes constant returns to population. Solow growth theory does not recognize the increasing returns to population that more modern growth analysis considers to be important.

Of course, I do believe that medical research and education are important in understanding growth and increased life expectancy. I have worked on both these questions for a long time. However, I am not convinced that 90-100 years is an upper limit to human populations. All the genetic and other evidence of the past 20 years suggests, although it does not prove, that within several decades a significant number of persons may be living reasonably healthy lives when they are past 100 years old.

Posted by becker at 6:50 PM | Comments (9) | TrackBack

October 3, 2005

Is Population Growth Good or Bad?BECKER

In a previous entry I gave an optimistic view about the possibilities of sustainable growth, while Posner was more pessimistic. He argued in part that continuing population growth in the world might make economic progress not sustainable for many nations. Since I am positive about the effects of larger population, we decided to return to population for this week’s discussion.

Japan is a good starting point since its population fell in 2004 as a result of several decades of low birth rates and almost no net immigration. Is Japan or the rest of the world better off because its population fell rather than continued to increase? Without large net immigration, countries with about half the world's population, including essentially all of Europe, China, Japan, and many other Asian nations, will experience declines in population during the next decade or so because they have birth rates that are substantially below replacement levels. Will these countries be better off with lower population, and would the world benefit if their populations declined? I believe the answer is no, that particularly in modern knowledge-based economies, on balance population growth helps rather than hurts income growth and general welfare.

Most of the worry about negative effects of population growth is based directly or indirectly on the ideas of Thomas Malthus that were first expressed in a pamphlet published in 1798. What is ignored in the modern neoMalthusian discussions is that there is an enormous difference between the effects of larger population on income per person in the traditional rural economy of Malthus' time, and its effects in a modern knowledge-based economy exemplified by the United States, Western Europe, and Japan. Higher population may reduce per capita income in traditional agriculture because of diminishing returns to more farm workers (although see my discussion of Africa at the end), but it has the opposite effect in a modern economy. The reason for this reversal from the Malthusian fear of population is that the production of knowledge is generally subject to increasing, not decreasing, returns; that is, larger populations stimulate greater investments in knowledge that tend to raise per capita welfare.

For example in the case of new drugs, manufacturers have greater incentive to invest in discovering treatments for common rather than rare diseases since by definition common diseases have larger markets. More generally, expenditures on innovations tend to be more profitable as population and the total demand for new products rises since it is then more possible to recoup the often very large initial costs of developing the products. Drug producers and other innovators charge much more than the cost of producing each unit in order to recoup these development costs.

Adam Smith starts out his great book The Wealth of Nations with a discussion of why the division of labor, and hence economic progress, is limited by the extent of the market. By this he meant that the incentive to specialize on more narrow skills is larger when the market for these skills is bigger. He develops this theme with a famous discussion of specialization in a pin factory. Since the number of sellers and buyers who interact together determines market size, the Smith analysis would also say that economic progress is greater, given per capita incomes, when population is larger.

In a world with six billion people, there might seem to be little room for additional specialization as population rises further. But great possibilities are still available for further gains from international specialization when population grows, as illustrated by the large and generally beneficial effects on the world economy as the large populations of China and India have entered into the world trading system. As world population grows further, the degree of international specialization across nations will increase further in ways that are hard to predict in advance.

Another frequently claimed benefit of larger populations is that they produce geniuses like Einstein and Darwin, and other imaginative innovators, and that the discoveries of these rare individuals benefit everyone. I will not stress this effect since I agree with Posner in his comment on sustainable development that the number of evil geniuses, such as Hitler and Stalin, is also greater in larger populations, and their evil deeds also affect more or less everyone.

Neo-Malthusians who fear larger populations typically stress the effects on pollution and on the demand for non-renewable resources, like oil and natural gas. Clearly, the demand for fossil fuels and other non--enewable resources grows with population as well as with economic development. However, during the past 150 years, the real price of fossil fuels like coal and oil fell rather than increased as world population exploded, and more and more economies prospered. More efficient use of fossil fuels and discoveries of new reserves of these fuels, and innovations that produce alternate sources of energy, like nuclear power, explain why prices of fossil fuels did not rise along with population and industrialization. Larger populations stimulated the search for new resources and new sources of energy because they increased the market for these discoveries (for the reasons I gave earlier about the positive effect of larger populations on incentives to innovate). That is, while larger populations may use more fossil fuels, they also stimulate the effective supply of these fuels and of substitutes.

Obviously, given per capita incomes, larger populations also tend to produce greater pollution both locally and globally as more cars are driven, industrial output rises, and more homes burn fuels. It is well documented that local pollution eventually begins to fall rapidly as countries develop and their populations increase because of new discoveries that reduce pollution, and also because more of the incomes of richer countries is spent on controlling the output of pollutants.

I believe the same will happen to the risk from global warming. Not only will countries impose greater restrictions on output of greenhouse gases, as in the emission trading system of the European Union, but probably even more important will be the development of new ways to absorb C02 and other gases from the atmosphere. For example, Wally Broecker, Professor of Geochemistry at Columbia University and a major researcher on the oceans and abrupt climate change, believes that it will be possible before long to effectively capture and store the CO2 in the atmosphere in cost-effective ways. If that happens the growth of CO2 in the atmosphere can be greatly slowed down and possibly even reversed.

Posner also worries in his comment on development about the possible negative effects of an aging population. I am concerned about that too, but a growing share of the elderly population is a consequence mainly not of population growth, but of low birth rates that produce a slowing down, not speeding up, of population growth. The countries with the largest share of the elderly, countries like Japan and Germany, have very low birth rates that are not offset by enough immigration of young people. So the most effective way to reduce the share of the elderly while still having increases in life expectancy is to encourage rather than discourage greater population growth either through greater immigration or higher fertility.

More traditional economies, like those found in sub-Sahara Africa, may still be subject to diminishing returns from greater population, although even here I have real doubts about the applicability of traditional Malthusian analysis. African populations have increased greatly during the past 25 years mainly because mortality has fallen substantially. This continent's population is expected to continue to grow rapidly even though fertility will continue to fall, especially as Aids is brought under greater control. If lower death rates mean better nutrition and better health, the productivity of each worker improves because they have more energy and stamina. The greater productivity of each worker could easily swamp any diminishing returns from greater labor input, so that per income per worker is likely to rise rather than fall as the number of workers increases due to better health.

Of course, the poorer nations of Africa and elsewhere need to have governments that pursue sensible and generally pro-growth policies rather than their tragic catering to various special interest groups at the expense of growth. As India dramatically has demonstrated, the main obstacle to economic progress is not population growth, but bad economic policies. Once India began to get its economic house in order- this started with the reforms of the early 1990’s- India's economy took off while its population was growing rapidly and birth rates were high. Africa’s growing population will not be an obstacle to greater economic progress if it moves more quickly to having freer economies, greater competition, and lower levels of corruption. Indeed, with greater economic development, a growing population becomes an asset to a region and to the world for all the reasons I have given.

Of course, it is possible that vast increases in the world's population to many times the present six billion persons may create serious problems. However, the forecasts are for no more than nine or ten billion persons by the year 2050, mainly because fertility falls sharply with economic development and increased education of women. I do believe that such an increase in population is far more likely to be a positive stimulus to the world's economic progress broadly defined than it is to retard such progress.

Posted by becker at 11:36 AM | Comments (17) | TrackBack

October 2, 2005

Is Population Growth Good or Bad? Posner's Comment

There is much in Becker's posting with which I agree, in particular that population growth will not cause us to run out of natural resources. I also agree that a combination of preventing carbon dioxide emissions from reaching the atmosphere and removing carbon dioxide from the atmosphere may eventually (though possibly at enormous cost, and possibly too late) solve the global-warming problem; this is an issue that I have addressed in my book on catastrophe.

And yes, increasing the extent of the market does permit greater specialization (hence lower costs and prices) and tends to increase the innovation rate by enabling the fixed costs of innovation to be spread further, although the extent of the market depends on incomes and not just on population. But innovation is a mixed blessing. It is like evolution (which in fact it resembles) in having no necessary relation to social welfare. The technologies of warfare are merely the most obvious example. The benefits of (for example) medical technology accrue mainly to the elderly, and by extending the life of the elderly advances in that technology increase their political heft, resulting in still more redistribution from young to old. Although historically the net social benefits of technological progress have been positive, there is no compelling theoretical reason to expect this always to be the case. The smallpox virus will be synthesized within five years, at which point the destructive capabilities of terrorists will jump by orders of magnitude.

Becker argues that the effect of medical technology in keeping people alive longer can be offset by population growth. That is true if the growth results from a high birthrate. But there are no prospects for even a replacement-level birthrate in Europe and Japan, and I do not think Becker would support efforts to subsidize births in order to offset the growth in the relative size of the elderly population. It seems that the only way in which these countries can sustain a youthful population is by immigration, which seems no longer to be an attractive option for Europe and has never been one for the insular Japanese.

I think Becker himself is at least slightly ambivalent about the effects of an ever-growing world population, because he seems to approve of the effect of female education in lowering the birth rate. And I wonder whether he actually thinks that it's a mistake for China to limit the growth of its population. I do not mean that the "one child" policy is sensible; but I do think it is plausible that the net effect on social welfare of a greater population in that country would be negative (why else is the Chinese government enforcing such an unpopular policy?). Finally, as I discuss in my book and mentioned in passing in my posting on sustainable growth, there is much cause to worry that depletion of species--a consequence in large part of human population growth--will have long-term negative effects on human welfare.

A neglected negative effect of population growth is on political governance. There seem to be strong diseconomies of scale in government. Increases in population, and concomitant increases in economic activity, crime, demand for medical services, and so forth make the job of government more difficult. What seems to be an incipient crisis of competence in the U.S. government may be at least distantly related to the doubling of the U.S. population since 1948.

Posted by posner at 10:25 PM | Comments (8) | TrackBack

Response on Careers of Educated women-BECKER

Let me respond briefly to some interesting comments. The main point of my comment on Posner was that I would leave the decisions about admission of men and women to universities and professional schools. If they want to take many women even though they are more likely to drop out, I do not believe we know enough to challenge that decision. I suggested that schools may be taking into account the advantages of co-education, the contribution of female alumni, and other considerations. So the critic who said I only looked at earnings did not get my main point-I do not feel enough is known about the total contributions of men and women, monetary and non-monetary, to be able to tell professional schools what criteria they should use.

I only suggested the use of "profiling" through using sex as a relevant variable. Perhaps one can analyze within the group of say female applicants and try to figure out which ones would drop out. But that is I agree too difficult, and in my approach not even necessary.

On the mainly different issue raised by one commentator, I do believe that colleges and schools should try to "max out"in their admission policies. But by that I do not mean they should try to maximize tuition revenue since they are clearly interested in the quality of students, their subsequent achievements, etc. However, they should engage in even greater price discrimination than they do, and not have a "needs blind" admissions policy since tuition revenue is one of the relevant variables, especially for private universities. After all, most of them, alas including the University of Chicago, do not have an endowment that is anywhere near Harvard's.

Posted by becker at 7:36 PM | Comments (0) | TrackBack

Elite Universities and Women's Careers--Posner's Response to Comments

I cannot do justice to 135 comments! I have learned a great deal from them, but I will have to be highly selective in responding.

Let me make clear at the outset that it was not my intention to "lash out at women (or men) who take time off to raise their kids," or to turn men or women into wage slaves, discourage women from working or having children, or, for that matter, dictate admissions policies. Some comments suggest that I want women to stay home, others that I want them to work. I merely want them to make an unbiased choice. The point of my posting was to make the economic point that rationing scarce places in elite professional schools on the basis of grade point average and performance on standardized tests may result in turning away applicants who might be more productive because they would have longer working careers.

One comment adds a reason for my concern that I had not thought of, which is that admission to public professional schools, some of them elite (such as the law schools of Berkeley, Virginia, and the University of Michigan), is subsidized by state taxpayers. It is odd to subsidize the professional education of people who are not going to make a full commitment to the profession at the expense of people who would. Do taxpayers know that this is how their tax dollars are being spent?

The point to be emphasized is that, given scarcity of places, admitting X means rejecting Y; if Y, though a slightly worse student than X, is going to spend much more time in the workforce, what exactly is the good reason for admitting X rather than Y?

Now one interesting answer suggested by a commenter is that there is a market demand, on the part of law firms and other employers of lawyers (and other professionals), for more women; and if there is a high drop-out rate of women, law schools may have to adopt admission policies that assure that half or more of the students are female so that after drop-out there will be enough women left in the professional workforce to satisfy the market demand.

Similarly, if public interest law is assumed to confer net social benefits, and women are disproportionately drawn to public interest work (as several comments suggested), then, again given the drop-out factor, there is an argument for admissions policies that attract women.

A number of the comments complain about working conditions in law and other professions--about employer demands that make it difficult for women to work and have children. But there are many law jobs, for example in government, but also in many corporate legal departments, that are not as demanding as jobs in high-pressure law firms; my guess (and it is only a guess) is that even in those lighter jobs, there is a higher female than male drop-out rate.

One of my female former law clerks suggested that the logic of my position requires me to institute a system of penalties and rewards to make sure that I just hire women who are going to devote their lives to the law. But I am too selfish for that. I want to hire the very best applicants, regardless of the likely duration of their legal careers, and, therefore, regardless of whether they are male or female. But I have made a contract with this former clerk whereby I will buy her dinner once a year for as long as she remains in the profession, and if she leaves she will then buy me dinner once a year unless and until she returns to full-time legal work. Because of the difference in our life expectancies, this is a very disadvantageous contract from my standpoint. I hope that those commenters who took sharp exception to my posting will feel that I have been adequately as well as justly punished.

Posted by posner at 4:57 PM | Comments (9) | TrackBack