November 26, 2006
Should Congress Raise the Federal Minimum Wage?--Posner
Increasing the federal minimum wage, currently $5.15 an hour, is a priority of the new Democratic Congress. Democratic leaders want to raise it by 40 percent, to $7.25 an hour. From an economic standpoint, even from an egalitarian standpoint, raising the minimum wage, especially by such a large amount (roughly 10 percent of the American workforce makes less than $7.25 an hour, which is double the percentage of the workforce that is paid the current minimum wage), would be a grave mistake. As a matter of economic theory, increasing the price of an input into production, such as labor, has two effects: an increase in the price of the product, because the producer's costs have risen (provided the increased input cost affects his competitors as well) and a reduction in the demand for the input, both because the higher price of the product reduces demand for it and because substitute inputs will now be more attractive. Any such substitution will be inefficient because it is motivated not by an increase in the real cost of labor but by a government-mandated increase in the price of the input, which has the same misallocative effect as monopoly pricing.
If the input is labor, forcing employers to pay employees an above-market wage will result in (1) higher prices for the goods or services produced by the employers, which will have the same effect as a tax on the consumers of those goods or services, (2) higher wages for those minimum-wage employees whose employers decide to retain them and pay the mandated new wage, and (3) less employment of marginal workers, that is, of workers paid less than the imposed minimum. Any interference with the market-determined wage level is prima facie inefficient; and to the extent that marginal workers are poorer than workers unaffected by a minimum wage, and the consumers of goods and services produced by employers of marginal workers are also below average in income, a minimum-wage law is inegalitarian as well as inefficient. Its effect on income equality, however, depends not only on the relative incomes of the groups affected by the law but also on the balance between the effect on employment and the effect on the wages of those who are retained. The lower the percentage drop in employment relative to the size of the minimum wage, the less likely the net effect of the mininum-wage law will be to make marginal workers worse off. Some economists, notably David Card and Alan Krueger, deny that the minimum wage has any disemployment effect. See their book Myth and Measurement: The New Economics of the Minimum Wage (1995), but their work has been heavily criticized. See, e.g., David Neumark & William Wascher, "Minimum Wages and Employment: A Case Study of the Fast Food Industry in New Jersey and Pennsylvania: Comment," 90 Am. Econ. Rev. 1362 (2000), and Richard V. Burkhauser, Kenneth A. Couch & David C. Wittenburg, "A Reassessment of the New Economics of the Minimum Wage Literature with Monthly Data from the Current Population Survey," 18 J. Lab. Econ. 653 (2000). It is unlikely that a 40 percent increase in the minimum wage would have no effect on employment.
Although working full time at $5.15 an hour yields an annual income (slightly more than $10,000) barely above the poverty line, most minimum-wage workers are part time, and for the majority of them their minimum-wage employment supplements an income derived from other sources. Examples of such workers are retirees living on social security or private pensions who want to get out of the house part of the day and earn some pin money, stay-at-home spouses who want to supplement their full-time spouse's earnings, teenagers working after school, and other students. An increase in the minimum wage--depending critically of course on how great the increase is--will provide a windfall to some minimum-wage workers, many of whom are not poor, and disemploy some others, also not poor. The effect on wage equality is likely to be slight, but consumer prices will be higher (which may reduce overall equality) and the efficiency with which goods and services are produced by low-wage workers will be reduced.
As a means of raising people from poverty or near poverty, the minimum wage is distinctly inferior to the Earned Income Tax Credit, which compensates for low wages without interfering with the labor market. EITC is of course not devoid of allocative effect, because like any other government spending it is defrayed out of taxes; but it is probably a less inefficient tax than the minimum wage. And it is a more efficient device for spreading the wealth, since many, perhaps most, minimum-wage workers are not poor.
So why are the Democrats pushing to increase the minimum wage rather than to make EITC more generous? Three reasons can be conjectured. First, unions, which are an important part of the Democratic Party's coalition, favor the minimum wage because it reduces competition from low-wage workers and thus enhances the unions' bargaining power and so their appeal to workers. This would not be as serious a problem for unions if minimum-wage workers were organized. But the fact that most minimum-wage workers are part time makes them uninterested in joining unions. Second, increasing the EITC would mean an increase in government spending and hence in pressure to increase taxes, and the Democrats wish to avoid being labeled tax-and-spend liberals. And third, genuinely poor people vote little. The number of nonpoor who would be benefited by an increase in the minimum wage, when combined with the number of nonpoor workers whose incomes will rise as a result of reducing competition from minimum-wage workers, probably exceeds the number of nonpoor who will be laid off as a result of an increase in the minimum wage. Teenagers, moreover, will be among the groups hardest hit, and most of them do not vote.
Posted by Richard Posner at 5:09 PM | Comments (87) | TrackBack
On Raising the Federal Minimum Wage--BECKER
An increase in the minimum wage has several distinctive negative effects on the economy. While the wages of some low skilled workers would improve, it would reduce employment opportunities for teenagers and other lower skilled workers. They are pushed either into unemployment or the underground economy. A bigger minimum also raises prices of fast foods and other goods produced with large inputs of unskilled labor. Workers who receive on the job training must accept lower wages in return. A higher floor on wages prevents the wages of lower skilled workers from being reduced much, and hence discourages firms from providing much training to these employees.
A rise in the minimum wage increases the demand for workers with greater skills because it reduces competition from low-skilled workers. This is an important reason why unions have always been strong supporters of high minimum wages because these reduce the competition faced by union members from the largely non-union workers who receive low wages.
Most knowledgeable supporters of a higher minimum wage do not believe it is an effective way to reduce the poverty rate. Poorer workers who are lucky enough to retain their jobs at a higher wage obviously do better, but the poorer workers who are priced out of the above ground economy are made worse off. Moreover, many of those who receive higher wages are not poor, but are teenagers and other secondary workers in middle class and rather rich families. Poor families are also disproportionately hurt by the rise in the cost of fast foods and other goods produced with the higher priced low-skilled labor since these families spend a relatively large fraction of their incomes on such goods.
A recent petition by over 600 economists, including 5 Nobel Laureates in Economics, advocated a phased-in rise in the federal minimum wage to a much higher $7.25 per hour from the present $5.15 per hour. This petition received much attention, and the number of economists signing is impressive (and depressing). Still, the American Economic Association has over 20,000 members, and I suspect that a clear majority of these members would have refused to sign that petition if they had been asked. They believe, as I do, that the negative effects of a higher minimum wage would outweigh any positive effects. That is one reason I would surmise why only a fraction of the 35 living economists who received the Nobel Prize signed on to the petition--I believe all were asked to sign.
Controversy remains in the United States (and elsewhere) over the effects of the minimum wage mainly because past changes in the U.S. minimum wage have usually been too small to have large and easily detectable general effects on employment and unemployment. The effects of an increase to $7.25 per hour in the federal minimum wage that many Democrats in Congress are proposing would be large enough to be easily seen in the data. It would be a nice experiment from a strictly scientific point of view, for it would help resolve the controversy over whether the effects of large increases in the minimum wage would be clearly visible in data on employment, training, and some prices. Presumably, even the economists and others who are proposing this much higher minimum must believe that at some point a still higher minimum would cause too much harm. Otherwise, why not propose $10 or $15 per hour, or an even higher figure? I am confident that for this and other reasons, the actual immediate increase in the federal minimum wage is likely to be significantly lower than $2.10 per hour.
A number of countries, including France, have already initiated this experiment, for the ratio of the minimum wage to the average wage in these countries is much higher than in the United States. The effects of the French minimum have been carefully studied by two excellent economists, Guy Laroque and Bernard Salanie, in a series of articles, such as " Labor Market Institutions and Employment in France," Journal of Applied Econometrics, 2002. They find that the relatively high minimum in France explains a significant part of the low employment rate of married women in France. Salanie has also argued that the high French minimum wage is important in explaining the dismal employment prospects of young persons in France, and the huge unemployment rate of Muslim youths there, estimated to be about 40 per cent.
Posted by Richard Posner at 5:04 PM | Comments (48) | TrackBack
November 19, 2006
On Milton Friedman's Ideas--BECKER
Milton Friedman died this past week. He was the most influential economist of the 20th century when one combines his contributions to both economic science and to public policy. I knew him for many decades starting first when I was a graduate student at Chicago, and then as a colleague, mentor, and very close friend.
I will not dwell here on what a remarkable colleague he was. However, I do want to describe my first exposure to him as a teacher since he enormously changed my approach to economics, and to life itself. After my first class with him a half-century ago, I recognized that I was fortunate to have an extraordinary economist as a teacher. During that class he asked a question, and I shot up my hand and was called on to provide an answer. I still remember what he said, "That is no answer, for you are only restating the question in other words." I sat down humiliated, but I knew he was right. I decided on my way home after a very stimulating class that despite all the economics I had studied at Princeton, and the two economics articles I was in the process of publishing, I had to relearn economics from the ground up. I sat at Friedman's feet for the next six years-- three as an Assistant Professor at Chicago-- learning economics from a fresh perspective. It was the most exciting intellectual period of my life. Further reflections on Friedman as a teacher can be found in my essay on him in the collection edited by Edward Shils, Remembering the University of Chicago: Teachers, Scientists, and Scholars, 1991, University of Chicago Press.
In considering his many contributions to economics I will pass over his major innovations in scientific economics. These include his emphasis on permanent income in explaining aggregate consumption and savings, his study of the monetary history of the United States, his explanation of the stagflation of the 1970's, his analysis of the value of a stable and predictable monetary framework to help stabilize the economy, his early contributions to the theory and measurement of human capital, his discussion of choice under uncertainty, and his famous essay on methodology in economics.
I will discuss instead several ideas in his remarkable book, Capitalism and Freedom, published in 1962, that contains almost all his well-known proposals on how to improve public policy in different fields. These proposals on based on just two fundamental principles. The first is that in the vast majority of situations, individuals know their own interests and what is good for them much better than government officials and intellectuals do. The second is that competition among providers of goods and services, including among producers of ideas and seekers of political office, is the most effective way to serve the interests of individuals and families, especially of the poorer members of society.
The famous education voucher system found in this book, and based on an article published in the 1950's, embodies both principles: that parents generally know the interests of their children better than teachers unions and school boards do, and that competition among schools is the best way to serve the educational interests of children. He added the further insight that one can and should separate government financing of education from government running of schools. The voucher system retains government financing, but forces public schools to compete for funds against private for-profit and non-profit schools. The voucher proposal has I believe won the intellectual battle over the value of competition among schools at the k-12 school level as well as at the college level, but so far vouchers have won only limited political victories in terms of actual implementation. This is mainly due to the dedicated opposition of public school teachers unions who fear competition from private schools.
Both individual choice and competition are the foundation of Friedman's 1962 radical proposal to privatize the social security system. He argued, correctly in my judgment, that the vast majority of families could be trusted to provide for their retirement if given appropriate incentives, and that they should be allowed to invest in retirement funds provided by competitive investment companies. The government-run social security systems then in effect in the United States and all other countries with retirement systems taxed earnings in ways that discouraged effort and encouraged underground activities. These tax receipts were then paid out to retirees according to politically determined criteria. Chile started the first private system of personal accounts modeled along the lines laid out in Capitalism and Freedom, and Chile has since been followed to some degree by many other countries, such as Mexico, Singapore, and Great Britain. The United States has its tax-free IRA's and Sep savings accounts, but this country has not yet implemented privatization of its basic social security system, even though an enormous financial deficit on this system will occur in about 15 years unless the system is significantly reformed.
Friedman also proposed a flat income tax rate in Capitalism and Freedom, and showed that a rate of about 20% in the United States could raise the same revenue and in a much simpler and far less costly way than the quite progressive income tax system in effect in the early 1960's. Further theoretical analysis of what is called optimal tax rates has generally concluded that a rather flat tax would be best at combining efficiency with redistribution of income to poorer families. The appeal to Friedman of the flat tax was based again on his confidence that individuals react to incentives, and that they take steps to further their interests. In this case, he argued that highly progressive taxes induce taxpayers to find and exploit tax loopholes, so that legally, and at times illegally, taxpayers cut their tax payments by hiding income or converting income into other forms. A flat income tax was early introduced by Hong Kong, and has in recent years been followed by many countries, including Russia and eight other Eastern European countries. The United States significantly flattened its income tax structure since the time Friedman wrote this book, especially as a result of the tax reform act of 1986. Unfortunately, a more progressive structure has crept back since that reform.
The voluntary army was not discussed in Capitalism and Freedom, but Friedman did propose to replace the military draft in several articles published about the same time as the book was published. He argued that a voluntary army would attract at reasonable cost a dedicated military force of men and women who volunteered due to a combination of patriotism and economic opportunities. A voluntary system is especially effective in situations where full-scale mobilization of available manpower is not required. His advocacy of the voluntary army induced President Nixon to put Friedman on a committee to consider whether the United States should replace its military draft by a fully voluntary armed force. Many persons on the committee initially opposed this idea, especially General William Westmoreland, head of military operations in Vietnam. Friedman's persuasiveness eventually won over the vast majority of the members to this position, and in 1973 the United States changed to a voluntary armed force. Seeing how well this system has operated, very few military leaders now want to return to a draft.
Friedman proposed in Capitalism and Freedom, and earlier in an article in the 1950's, to abolish the Bretton Woods System of fixed exchange rates, and move to fully flexible exchange rates. Under a flexible exchange system, rates are determined by the competitive supply and demand for different currencies by individuals and businesses. The prevailing view had been that such a system of flexible exchange rates would be unstable, so he argued at length why flexible exchange rates would be not constant but stable--unstable rates implied, he argued, that speculators on the average would lose money, which he did not believe was likely. This view of the behavior of speculators was challenged, but I believe Friedman was basically right. In any case, the issue was decisively settled after Nixon took the United States off the gold standard in 1972, and replaced it with a system of flexible rates in 1973. The Chicago Mercantile Exchange led by Leo Melamed then saw the opportunity to set up futures markets in currencies, which it did with Friedman's help. These markets were enormously successful, and put to rest forever the belief that one could not have an effective system of flexible exchange rates. They provide an opportunity for businesses to hedge their currency risks by trading on currency futures.
The first chapter of Capitalism and Freedom considers the link between economic and political freedom. He argues there that economic freedom promotes political freedom, and that political freedom is not likely to persist without economic freedom. "The kind of economic organization that provides economic freedom directly, namely, competitive capitalism, also promotes political freedom because it separates economic power from political power and in this way enables the one to offset the other." Findings since then suggest that while economic freedom can begin under totalitarian regimes, such as under General Pinochet in Chile and General Chiang Kai-Shek in Taiwan, economic freedom produces economic growth and other changes that usually eventually lead to much greater democracy, as in Taiwan, South Korea, and Chile. The important implication is that China would become more democratic if it continues on its path of greater economic freedom and greater growth.
On whether one can have democracy without economic freedom, Friedman said, "I know of no example in time or place of a society that has been marked by a large measure of political freedom, and that has not also used something comparable to a free market to organize the bulk of economic activity." Sweden and other Scandinavian countries have been vibrant democracies, and yet governments in these countries tax away more than half the income. However, the majority of these taxes are transferred back to individuals in the form of retirement incomes, medical care, and in other ways. Although these countries mainly rely on private enterprise, not government enterprises, to organize their economies, is that "enough" freedom to qualify as economically free? That depends on the definition of economic freedom, yet I believe Friedman is right that thoroughgoing restrictions on economic freedom would turn out to be inconsistent with democracy.
To conclude on a more personal level, I was most impressed by Milton Friedman's sterling character--he would never soften his views to curry favor--his perennial optimism, his loyalty to those he liked, his love of a good argument without any personal attacks on his opponents, and his courage in the face of prolonged and virulent attacks on him by others. I cannot count the number of times I participated with him in seminars, nor how many visits my wife and I shared with Milton and Rose, his wife of almost 70 years. Rose, a fine economist, would not hesitate to differ with her husband when she believed his arguments were wrong or too loose.
When I spoke on the phone with him last Monday, he sounded strong and a bit optimistic about his health, even though he had just returned from a one-week hospital stay with a severe illness, an illness that a few days later took his life. Although his ideas live on stronger than ever, it is hard to believe that he is not here. I can no longer seek his opinions on my papers, but I will continue to ask myself about any ideas I have: would my teacher and dear friend Milton Friedman believe they are any good?
Posted by Richard Posner at 9:09 PM | Comments (20) | TrackBack
Milton Friedman--Posner's Comment
I knew Milton Friedman, but not well; and I am not competent to express an informed opinion on his major academic work, which was in macroeconomics. The economists of his generation with whom I principally associated were George Stigler, Ronald Coase, and Aaron Director (Friedman's brother-in-law)--microeconomists who had a major impact on the law and economics movement.
I did, however, read a few of Friedman's essays. Two in particular struck me around the time I came to Chicago. One was his essay on the methodology of positive economics, in which he argued that the way to test a theory was not by assessing the realism of its assumptions, but by assessing the accuracy of its predictions. Economics makes heavy use of unrealistic assumptions, primarily concerning rationality, and yet the predictions generated by models based on those assumptions are often accurate. Where they are inaccurate, this is a spur to reexamining the assumptions and perhaps modifying them, as is occurring in such fields as finance, where assuming a more complex human psychology than finance theorists traditionally assumed has helped to explain anomalies (from a rational-choice perspective) in the behavior of financial markets.
The emphasis on predictions connects Friedman's essay to Karl Popper's philosophy of science, in which the scientific method is viewed as a matter of making bold hypotheses, confronting them with data, and ascribing tentative (always tentative) validity to the hypotheses that survive the confrontation. Popper's methodology of fallibilism has strong affinities with Friedman's methodology. Both are strongly empiricist. Stigler in conversation merged these two closely related approaches, and I was very struck by the melded approach.
The other essay of Friedman's that struck me was an essay on taxation in which he argued, contrary to the conventional view at the time (though I gather the argument was not original with him), that there was no theoretical reason for supposing income taxes superior in point of efficient resource allocation to excise taxes. An excise tax--say, a 10 percent tax on yachts--drives a wedge between cost and price and so deflects buyers to substitutes that may cost more to produce but look cheaper because they are not taxed at so high a rate. (The effect is the same as monopoly pricing.) But Friedman argued that income taxes have the same effect, by driving a wedge between the cost of work and the wage (price) received by the worker, thus deflecting him to untaxed substitutes, such as leisure, or to jobs that generate untaxed benefits, including leisure in the case of teaching (for example), but also prestige, amenities, tax-favored fringe benefits, and job security. This idea of the parity of excise and income taxes has wide-ranging implications for public policy, since the tendency (still) is to neglect the misallocative effects of income taxation--a neglect of which I think even Friedman was sometimes guilty, as I am about to argue.
Perhaps his most important general contribution to economic policy was the simple, but when he first propounded it largely ignored or rejected, point that people have a better sense of their interests than third parties, including government officials, do. Friedman argued this point with reference to a host of issues, including the choice between a volunteer and a conscript army. With conscription, government officials determine the most productive use of an individual: should he be a soldier, or a worker in an essential industry, or a student, and if a soldier should he be an infantryman, a medic, etc.? In a volunteer army, in contrast, the determination is made by the individual--he chooses whether to be a soldier or not, and (within limits) if he decides to be a soldier what branch, specialty, etc., to work in. A volunteer army should provide a better matching of person to job than conscription, and in addition should create a more efficient balance between labor and capital inputs into military activity by pricing labor at its civilian opportunity costs.
But this is in general rather than in every case. The smaller the armed forces and the less risk of death or serious injury in military service, the more efficient a volunteer army is relative to a conscript one. These conditions are not satisfied in a general war in which a significant fraction of the young adult population is needed for the proper conduct of the war and the risk of death or serious injury is substantial--the situation in World War II. For then the government's heavy demand for military labor, coupled with the high cost of military service to soldiers at significant risk, would drive the market wage rate for such service through the roof. Very heavy taxes would be required to defray the expense of a volunteer army in these circumstances and those taxes would have misallocative effects that might well exceed the misallocative effects of conscription.
I mention this example because I find slightly off-putting what I sensed to be a dogmatic streak in Milton Friedman. I think his belief in the superior efficiency of free markets to government as a means of resource allocation, though fruitful and largely correct, was embraced by him as an article of faith and not merely as a hypothesis. I think he considered it almost a personal affront that the Scandinavian nations, particularly Sweden, could achieve and maintain very high levels of economic output despite very high rates of taxation, an enormous public sector, and extensive wealth redistribution resulting in much greater economic equality than in the United States. I don't think his analytic apparatus could explain such an anomaly.
I also think that Friedman, again more as a matter of faith than of science, exaggerated the correlation between economic and political freedom. A country can be highly productive though it has an authoritarian political system, as in China, or democratic and impoverished, as was true for the first half century or so of India's democracy and remains true to a considerable extent, since India remains extremely poor though it has a large and thriving middle class--an expanding island in the sea of misery. What is true is that commercial values are in tension with aristocratic and militaristic values that support authoritarian government, and also that as people become economically independent they are less subservient, and so less willing to submit to control by politicians; and also that they become more concerned with the protection of property rights, which authoritarian government threatens. But Friedman seemed to share Friedrich Hayek's extreme and inaccurate view that socialism of the sort that Britain embraced under the old Labour Party was incompatible with democracy, and I don't think that there is a good theoretical or empirical basis for that view. The Road to Serfdom flunks the test of accuracy of prediction!
I imagine that without the element of faith that I have been stressing, Friedman might have lacked the moral courage to propound his libertarian views in the chilly intellectual and political climate in which he first advanced them. So it should probably be reckoned on balance a good thing, though not to my personal taste. His advocacy of school vouchers, the volunteer army (in the era in which he advocated it--which we are still in), and the negative income tax demonstrates the fruitfulness of his master micreconomic insight that, in general, people know better than government how to manage their lives. But perhaps not always.
Posted by Richard Posner at 8:54 PM | Comments (43) | TrackBack
November 12, 2006
What the Election Proves--Posner
Critics of the American electoral process have long complained that the process was poisoned as the combined result of (1) gerrymandering, (2) inadequate limitations on donations to political campaigns, (3) barriers to third parties, (4) barriers to voting (such as registration requirements and conducting elections on workdays rather than weekends or holidays), (5) public ignorance of policy issues and the consequent ability of political advisers, consultants, media specialists, pollsters, etc., to manipulate the public’s voting behavior, and (6) mistake-prone voting equipment, such as the notorious punchcards that cast a shadow over the 2000 presidential election in Florida. But the outcome of Tuesday's midterm election suggests that these problems are less serious than the critics believe. A Newsweek poll taken days after the election reported that 51 percent of those polled thought the Democrats' election victory a good thing; the election gave the Democrats approximately 51 percent of the seats in both the House of Representatives and the Senate (counting the two independent Senators as Democrats, though technically they are independents).
Gerrymandering poses the issue of the democratic legitimacy of our electoral system in its starkest form, as the avowed purpose is to reduce the number of legislators elected by the party not in control of the gerrymandering process. But this, it turns out, is easier said that done. For one thing, there is an inherent tension between incumbents and challengers in the same party running in different districts. An incumbent wants his district so configured that it will be dominated by members of his own party. But challengers belonging to the same party do not want the incumbent'’ districts to be packed with members of the party because that reduces the number of party members in the challengers' districts. So if incumbents prevail in districting, and in the next election the electorate proves to be hostile to incumbents, the gerrymander may boomerang, because challengers from the same party to incumbents of the other party will have fewer supporters in their districts.
The idea that without strict limitations on campaign finance the wealthy will dominate campaigns and tug the nation rightward also turns out to be questionable. There are many wealthy liberals and the Internet has made it much easier than it used to be to obtain modest campaign donations from the nonwealthy. Moreover, the effect of political advertising (which is where most campaign donations go) is diluted by the fact that voters are exposed to vast amounts of information and opinion that derive from sources other than advertising--not ony the mainstream media but, increasingly, blogs and other informal media. As usual in this election, Republicans outspent Democrats but were badly beaten anyway.
The states are permitted by the courts to establish barriers to third parties, mainly by requiring that a party have a large number of signatures from registered voters in order to get a place on the ballot. Yet despite this requirement, third parties are on the ballot in many states and the fact that they usually obtain only a handful of votes (though sometimes they play a spoiler role, as the Reform Party did in both the 1992 and 2000 elections--and in last week's election Joseph Lieberman was reelected to the Senate, running as an independent) is due more to the inherent difficulty of third parties in a presidential (as distinct from parliamentary) political system (for example, because a third party is so unlikely to produce a president it has difficulty attracting ambitious candidates) than to the barrier to entry that ballot-access rules create.
Although voter turnout is lower in the United States than in other countries, the consequences again are slight because those persons who are eligible to vote but don't bother to do so tend to have the same political opinions as those who do vote. Nor is it obviously wrong as a matter of democratic theory to discourage from voting those people whose interest in the political process is so attenuated that they are unwilling to incur the modest inconvenience that the American system imposes on would-be voters.
The poor voting equipment in many precincts throughout the country undoubtedly disfranchises a number of voters; but as with other barriers to voting this one affects outcomes only if the people disfranchised have systematically different political preferences from others. This is rare although it may have happened in Florida in the 2000 election. It wasn't a factor in the recent election.
Finally, although surveys reveal that most Americans are indeed political ignoramuses, even the significance of this fact for the healthy functioning of the democratic process can be doubted. Issues of public policy, especially at the federal level, and issues of the competence and leadership qualities of officials at that level, are so difficult for outsiders to government to assess that it is unrealistic to think that the electorate could become well informed--unless the American population reallocated a substantial amount of its time from work, family, and cultural and other leisure activities to the study of politics and policy. That might not be an efficient reallocation of time, especially if its principal product was confusion.
If the electorate can be expected to focus only on highly salient issues of policy and leadership, it may not need to be well informed. Maybe all it needs to know is that things are going badly or well and that the party in power bears some responsibility for the situation. Expert commentators on the recent election results, regardless of their politics, are virtually unanimous in the view that the Republicans deserved the severe rebuke that they received from the electorate. These experts may be right or wrong--a question on which I would be uncomfortable, being a judge, to offer an opinion. What is pertinent to the present discussion is only that if the franchise were confined to experts, the results of the election would have been the same or very similar. If the electorate comes to the same conclusion as the experts, the implication is that democracy can work quite well even when the electorate lacks expertise.
Posted by Richard Posner at 7:21 PM | Comments (21) | TrackBack
What the Election Proves? Not Much---BECKER
I do not believe the election proves much other than that corruption scandals and the Iraq war hurt Republicans. Posner gives a very good discussion of some of the criticisms made about the American system. I will comment on a couple of the issues.
I have seen no convincing evidence that past limits on campaign contributions have improved the political process, or weakened the significance of interest groups. A major problem is that campaign limits have been difficult to enforce. Also, as Posner indicates, the Internet has opened up the possibilities of raising large sums in small individual contributions. I have doubts too about whether it is better or fairer when some groups use lots of time of young people and others to help in campaigning rather than money.
In addition, some of the most powerful interest groups have not mainly had rich members, such as farmers, the teachers union, craft unions (at the local level), and groups in favor of sharp restrictions on immigration. Very rich Americans and large American corporations have political power to be sure. Yet the tax on corporate profits in the United States is much higher than in most Western European nations, and the American tax on inheritances is far from the lowest among rich nations.
The United States does have greater earnings inequality and proportionately more rich businessmen than European countries or Japan. This is partly because the United States has higher before-tax returns to education and other skills than these other economies, even though a larger fraction of Americans get a college education than in most European nations. The main explanation for the difference is that the United States has a much more flexible economy than most other nations. In a knowledge economy, this produces bigger benefits to greater education and other skills. It is also easier to become an entrepreneur in this country than in most other countries.
Political scientists have long wondered why anyone votes in a democracy since any individual's vote is very likely to have a minuscule effect on the outcome of a political race. The same logic implies that voters have little incentive to be informed about the issues, even aside from the fact mentioned by Posner that many of these issues are highly complex and difficult to understand--such as the effects of a federal budget deficit on the economy. This means that many votes, particular those least committed to voting, are likely to be swayed by political advertising and emotional appeals. Under these circumstances, it is not obviously advantageous to have large turnout rates.
International comparisons of political outcomes in Europe vs. American suggest that Europeans put more emphasis on equality than Americans do, and less emphasis on efficiency. These and other differences might be attributed, although causation as usual is tricky, to the fact that European nations have much sharper restrictions on campaign contributions, less opportunity for gerrymandering, generally greater voting participation rates, and apparently better "informed" voters than in the United States.
Although the Europeans have less inequality typically, they tolerate much higher rates of long-term unemployment than America has. All studies show that long-term unemployment is the most destructive of self-confidence and measures of "happiness". European countries protect agriculture against imports from poor nations more strongly than America does, has a poorer environment to start businesses by individuals with limited resources, and generally have policies that are less tolerant of immigrants from the third world. The European social security system that provides retirement income and unemployment benefits is much more generous than the American one. However, Europe spends a lot less on health, including the health of the elderly and the poor, than America does.
Which system is better: the American political system, or the European model with lower campaign contributions, few opportunities for gerrymandering, larger voter turnouts, and apparently a politically better informed population? One can differ on the answer, but it is far from obvious to me that the European approach works out better in practice.
Posted by Richard Posner at 7:18 PM | Comments (3) | TrackBack
Reply on Polygamy--BECKER
I am sorry for this late reply to the many interesting posts on polygamy. I will not be able to consider all the issues raised, but I discuss a few. I come back to the comments on crime next week.
Someone asked about how polygamy would affect the incentives of men to invest in more skills, etc in order to be more competitive in marriage markets? We do know from historical data that men tend to marry later in polygynous societies in order to have enough income and wealth to be sufficiently attractive as mates. However, if sharing of resources in a marriage is determined by supply and demand considerations, one can show that the investments in skills and other ways to be more attractive are efficient (see the discussion in the chapter on marriage in the book, Social Economics, by Kevin M. Murphy and me). However, if sharing is based on rigid rules, such as 50/50 split, investments in skills may be either excessive or insufficient from an efficiency perspective.
Clearly, polygyny has sometimes been encouraged when there is a shortage of men, as when many men have been killed in war. As William Julius Wilson and others have emphasized, there is now a significant shortage of eligible men in black communities. Perhaps that would lead to a little polygyny if it were allowed, but as I said in my post, polygyny is quite rare in modern societies even when permitted. I explained this by a substitution of quality of children for quantity. I agree with one comment that it also involves a substitution of one higher educated wife for two or more less educated ones.
I do not believe there is much of a biological argument against polygyny. For most non-human species are polygynous, not monogamous. I believe polygyny has also been more common among mammals than monogamy. Probably, a majority of humans in the more distant past also lived in polygamous, not monogamous, societies. So if anything, monogamy has evolved due to culture and against biology.
Do girls need protection against polygamy? Not if it were openly allowed rather than an illegal activity in some remote rural area of Utah. I repeat what I said in my post: I have considerably more confidence than some of the posters that young women can make at least as considered decisions with respect to marriage as young men. If, however, there is a belief that young girls will be taken advantage of, have a law that raises the minimum age before girls can enter into polygynous marriages.
Some completely erroneous statements were made in one of the comments about the relative commitment to marriage of men and women. These were well answered by other posters, so I will only add that I assume this view also implies that women are less interested in having custody of children than men?
My comments on gays having children were made only to point out how many marital practices that were forbidden in the past are now allowed. Perhaps I am wrong in my view that there tends to be negative effects on children raised by gays. I do not strongly hold this view, and look forward to the time when we have more convincing evidence, one way or the other.
Posted by Richard Posner at 7:15 PM | Comments (2) | TrackBack
November 5, 2006
Crime Epidemics-BECKER
Chicago, where I have lived for the past 35 years, is not the safest city, but it seems like a paradise of safety compared to Mexico City, where I just spent a few days. On first arriving I was told that since robbery and kidnapping are so rampant, it is not safe to go for walks, even in the best neighborhoods. I spent three otherwise delightful days at various meetings where I did not walk more than a few feet in the streets of this enormous and highly attractive city.
As one illustration, we were on our way by car to a luncheon meeting in the middle of the city with an important government official, but were caught in extremely heavy traffic due to a political demonstration. As the time of the trip increased from an expected 20 minutes to over an hour, I suggested we walk the remaining distance, which was less than half a mile. The driver, and my host, a native of this city now teaching in U.S., both said it was too dangerous-although some persons were walking the streets in a neighborhood of small shops selling simple and cheap goods. My companions argued we had a good chance of being robbed or kidnapped since we would stick out in our suits and conversation in English.
I am not trying to single out Mexico City, a city that I am extremely fond of. The same experience could be repeated in major cities in all parts of the developing world, although I will concentrate in this discussion on Latin America. It has been unsafe to walk in Bogotá, Colombia, and Brazil's Rio de Janeiro for decades. Buenos Aires is a graceful European style city, but it has experienced such a rapid growth in crime during the past decade of economic instability that it too is now considered quite unsafe. To develop solutions to this growing crime problem, a Center on Crime is being created in Argentina at the Di Tella University that has the top economics program in that country.
Not just the rich and middle classes are victims when crime rates are high. Poorer victims lose a few pesos and cheap watches, and may get knifed or beaten in the process, while very small shopkeepers have their take for the day stolen as they close up shop, or even in the middle of business hours. The poor are victimized disproportionately even though they have little money and other possessions because the rich and middle classes take costly precautions to protect against crimes. They drive rather than walk or take public transportation, they install burglary systems and live in gated communities, and they hire security protection.
Crime festers and grows in countries where unemployment is high and economic opportunities low for a large enough fraction of the population. Also essential in encouraging crime is that criminals are not likely to get caught and punished. In Mexico and many other countries, conviction rates are low partly because the police are corrupt and often commit crimes themselves, and they have no time or incentive to go after other criminals.
Statistics reported by the police indicate that robberies and other felonies are much higher per 100,000 persons in the United States than in Mexico. Yet anyone who has lived in or visited regularly both countries would recognize that something is fishy about these statistics. The explanation is found in looking not at police reports, but at crimes as reported by households from Victimization Surveys that ask households if they have experienced various crimes.
These victimization reports indicate that robberies, for example, are far more common per person in Mexico than in the US. However, a much larger fraction of Mexicans do not bother to report burglaries, assaults, and most other crimes to the police (they do report car thefts since they want to collect the insurance on their cars) because they do not expect the police to do anything about it. In fact, the police may hassle them, or otherwise take much of their time, and show no results.
The consequences of high crime rates are serious and far-reaching. A general disrespect for laws often follows when felonies are committed with impunity. In addition, about 2-3 per cent of employed Mexicans are used to provide private security to protect against crimes rather than being engaged in what would be more productive employment if crime rates were much lower. High crime rates add to the difficulty of getting skilled and other natives who are working abroad to return to their home countries. Foreign companies are reluctant to set up businesses because foreign employees do not want to raise families in high crime environments.
Perhaps most costly to welfare is the pervasive fear of crime when children go to and from school, when going to visit friends, to work, or to shop, especially with children. A long time ago Jeremy Bentham, the great English utilitarian, emphasized the importance of the "alarm" created by crime. Over time I have come to appreciate more the significance to welfare of the fear and alarm from the possibility of being robbed or assaulted.
The problems stemming from the high crime rates in Latin America (and elsewhere) are clear, and so too are many solutions. Unfortunately, solutions are not easy to implement in the present political and economic environments. In fact, many persons throughout this region are resigned to high crime rates as if that is inevitable in modern economies and societies. But the US experience shows the contrary. Crime rates grew sharply in this country from 1960 to the early 1980's. Many commentators attributed that to the growing alienation of the poor from the rest of society, or to declines in "social capital" that reduced private group protection activities against criminals. Yet for the past 25 years, crimes against property and against people have fallen greatly, despite a sharp growth in the degree of earnings inequality that might be expected to cause greater alienation by the less educated and less skilled.
The explanation for the fall in American crime rates during the past 20 years is in good part that many more criminals began to be caught and sent to prison. Another part is due to the legalization of abortion in the 1970's, as analyzed by my colleague, Steve Levitt. Politicians like former Mayor Rudolph Giuliani of New York discovered that fighting crime is not only socially useful but also is good politics.
I believe that the President-elect of Mexico, Felipe Calderon, and many other new political leaders in Latin America, are aware that crime is an important deterrent to greater economic and social progress in their nations. I would recommend that they use both the "stick" and the "carrot" to fight crime. The "stick" included apprehending more criminals, punishing severely criminals who commit major crimes, and not punishing severely those who commit minor crimes. To apprehend more criminals, it is necessary to reform their corrupt-ridden police forces, partly through the creation of Internal Police Review Boards that focus on police corruption. The purpose of such Boards would be to punish police who engage in serious crimes, and penalize or dismiss police who do not try to catch criminals and protect against crimes.
The "carrot" partly means much higher pay for police. Their pay is now abysmally low in Mexico and many other countries, so that men and women attracted to becoming policemen expect to supplement their incomes by bribes and other corrupt acts. Good pay would attract more honest men and women to the police force. It would also raise the cost of dismissal to policemen for malfeasance since their best employment alternatives would then be far inferior to police earnings.
Following Argentina's example, universities and think tanks in other countries should create Centers that are dedicated to analyzing the causes of their high crime rates. They should work on solutions that fit best their particular political, economic, and social circumstances.
It is critical also to improve earnings from and availability of legal jobs, especially for persons at the lower end of the job spectrum. Crimes tend to rise sharply when unemployment is high and good jobs are scarce. Significant improvements in the education of young persons from poorer families would greatly increase their earnings prospects. Improved education is an essential part of the longer run solution to both high crime rates and pervasive poverty, but large reductions in crime rates during the next few years must depend on the other changes I have proposed. For they would work much faster.
Posted by Gary Becker at 7:57 PM | Comments (20) | TrackBack
Mexico's Crime Problem--Posner's Comment
I have been in Mexico only twice, in 1969 and in 2002, and the increased fear of crime in my second visit was palpable. On my first visit, I felt as safe as in the United States; on my second visit, although I did not feel quite as constrained as Becker describes his recent visit (maybe the crime situation has worsened in the last four year), there were constant reminders of the crime menace (such as the metal detectors at the entrance to the Four Seasons Hotel in Mexico City) and my hosts insisted on driving my wife and me everywhere. As Becker points out, despite the absence of good statistics there is no doubt that the Mexican crime rate is very high. Moreover, an increase in a crime rate greatly understates the increase in the demand for crime that generates the increased rate. The reason is that a rising crime rate induces defensive measures (alarm systems, private guards, gated communities, etc.) that, though they nominally reduce crime, actually just transform the costs of crime to crime victims into costs of crime avoidance by potential crime victims.
The increase in the Mexican crime rate is mysterious. It is true that income inequality in Mexico has increased, in major part it seems because of liberal economic policies that, as in the United States, have increased the demand for skilled workers by subjecting employers to greater competition, both foreign and domestic. And increased income inequality, even when it is not associated with an increase in poverty, increases the gains from crime by increasing the number and wealth of people worth robbing, kidnapping, and defrauding. Yet it seems unlikely that the increase in income inequality in Mexico has been great enough to explain the increase in crime, especially since poverty in Mexico has declined dramatically since the mid-1990s, though the crime rate seems to have continued to grow--at least it has not declined.
Becker rightly stresses the corruption and incompetence of the Mexican police as an important factor in the crime rate. This too is mysterious. Mexico is not a poor country by international standards. Its per capita GDP calculated on a purchasing power parity basis is slightly over $10,000, which places it in the upper third of the world's nations and ahead of such countries as Bulgaria, Romania, Turkey, and China, and within spitting distance of placid Costa Rica. Furthermore, because Mexico has a large population, that per capita figure translates into a total Gross Domestic Product of more than $750 billion. Mexico can afford an efficient police force in its capital!
In 2003 Rudoph Giuliani was hired by Mexico City to advise on how to reduce the crime rate. He made 146 recommendations, based in part on his successful campaign to reduce crime in New York City when he had been mayor and in part on the obvious need to increase the salaries of Mexico City's police. Mexico City's police chief announced that he had accepted all of Giuliani's recommendations. But there was no implementation. I find that baffling.
Although the underlying cause of Mexico's astronomical crime rate may be income inequality, it doesn't follow that reducing inequality is the the most efficient way to reduce the crime rate. It is a fallacy to think that the only sound solutions to social problems are those that remove the underlying causes of the problems. If crime can be repressed by improved law enforcement at lower cost than by attacking inequality, then improving law enforcement is the superior strategy. Efforts to reduce Mexican income inequality would probably either be totally ineffectual or stifle economic growth. Certainly the reform of law enforcement is the place to start.
So the task for the think tanks is not to study the Mexican (or broader Latin American) crime problem as such; for the problem is obvious, and so is the solution (better law enforcement). What they should study is why the Mexican government and other Latin American governments are incapable of implementing the obvious solution.
Posted by Richard Posner at 7:18 PM | Comments (15) | TrackBack
