October 28, 2007
Rising Food Prices and What That Means-Becker
Malthus and the many neo-Malthusians of modern times assume that the threat from world overpopulation would show up first in rising food prices. The biologist Paul Ehrlich even predicted in 1968 in the book "The Population Bomb" that hundreds of millions persons in the world would be starving by the mid-1970's because of food shortages. Of course, that absurd forecast never materialized because during the past 40 years worldwide prices for grains and most other basic foods fell relative to non-food consumer prices. This has reversed during the past couple of years, especially in 2007, as food price inflation has greatly exceeded the price increases of other consumer prices. Are the Malthusian fears finally being realized, or is this rise in food prices due to other forces?
Little evidence supports the role of population growth as an important factor behind the recent spurt in food prices since the growth in world population has slowed in each subsequent decade during the past 30 years. A more significant force behind the rise in food prices is the rapid growth in the per capita incomes of developing countries, especially China and India, which has raised world demand for proteins found in grains, dairy, and meat. Subsidies to corn and other crops to produce biofuels have also reallocated substantial acreage away from food production, and toward the production of substitutes for oil and other fossil fuels. Ethanol production will consume almost 30 percent of corn production in the United States next year, which mainly explains the rapid rise in world corn prices. In addition, droughts and animal disease in major food producers like Australia and China contributed also to recent food price increases.
Many countries were panicked by the sharp rise in food prices during the past couple of years into imposing price controls on basic foods, export restrictions on food production, subsidies to food imports, and various other measures. This is reminiscent of Richard Nixon's 1973 ban on the export of soybeans from the United States because of rising soybean and other food prices. Russia, faced with parliamentary elections in December, has imposed export duties on some grains, while Putin pressured major food retailers to freeze prices on various foods until the election. The Moroccan government forced bakers there to hold the price of bread steady during the holy month of Ramadan. The European Union has suspended, unfortunately not rescinded, its rules that prevent farmers from planting cereals on a specified fraction of their land. Many other countries are also considering controls, subsidies, and regulations to prevent food prices from rising so rapidly.
Most of these policies are counterproductive because they discourage rather than encourage food production. This is especially true of price controls since farmers will grow less of the foods that have artificially low price ceilings. For example, if price controls were placed on wheat, farmers will shift some land from wheat to other products whose prices are allowed to rise faster. Subsides to food production generally lead to greater supplies of food, but at the expense of distorting the allocation of resources between foods and other goods that consumers want. On the other hand, removing tariffs on food imports, removing subsidies on food exports, and easing restrictions on how farmers can allocate their land among different uses do contribute to greater efficiency in worldwide food production and consumption.
Food prices declined relative to other prices during the past 40 years, and in fact for most of the 20th century, because of remarkable advances in food production technologies. These include the development of better fertilizers, new crop rotation methods, control of diseases to plants and animals, better breeding techniques, genetic modifications of crops, and other innovations. There is little reason to expect any slowdown in the rate of innovation during the next several decades, especially if governments reduce their restrictions on genetically modified crops, and if farmers are allowed to respond freely to market prices and other signals.
Rapid increases in the cost of foods hurt consumers in poorer countries more than those in richer countries because households in poorer countries spend a much bigger fraction of their incomes on food. Food accounts for about 10 percent of total consumer sending in the United States and other rich countries compared to over 60 per cent in very poor countries like Afghanistan, Nigeria, and Bangladesh. This means that say a thirty percent rise in food prices over a 5 year period, with other prices and money incomes held fixed, would reduce the standard of living in rich nations only by about 3 per cent, but it would lower living standards in poor nations by 21 per cent. The nutrition of Afghanis and consumers in other poor countries who are already close to the minimal subsistence margin would be severely affected.
Similarly, poorer consumers within a country spend larger fractions of their budgets on food than do rich consumers. Hence, the poor would be hurt more by rises in prices of basic foods. This is a main reason why governments are so sensitive to price increases of grains and other stables of the poor. If they forget, political leaders would be reminded of the 1977 Egyptian riots after that government raised bread prices, or the Mexican unrest at the beginning of this year when the price of the flat corn bread used to make tortilla, a staple of the diets of poorer Mexican households, rose by several hundred percent.
My conclusion is that putting aside two major uncertainties, the Malthusian fears about rising food prices will not materialize. Food production will adapt to the growing demands from developing countries, and food prices in the future should continue their downward trend of the past century. One uncertainty that could upset this optimistic forecast relates to global warming, for food prices might rise steeply if global warming had sizable negative effects on the worldwide productivity of agricultural land. The second concerns biofuels, since food prices would also increase if sizable amounts of additional acreage continue to be diverted to production of ethanol and other biofuels in the attempt to cut down the use of fossil fuels.
Posted by becker at 07:56 PM | Comments (13) | TrackBack
Food Prices and Ethanol--Posner's Comment
Thomas Malthus, though like the rest of us not very good at predicting the future, was a brilliant economist. He was wrong that the human population would increase geometrically (he did not consider contraception as a means of voluntarily limiting population) and the supply of food only arithmetically (he did not foresee advances in the technology of food production). But he was right that achieving an equilibrium between population and food could require starvation, war, or other unattractive methods of limiting population. In this he foreshadowed natural selection, as Darwin acknowledged. Rising food prices are doubtless causing malnutrition and even starvation in some backward countries today, and if they continue to rise, more people will starve. Becker is correct that sensible policies can moderate the price increases, and perhaps restore the trend toward lower food prices, but who can be confident about the adoption of sensible policies?
An important factor in recent food price increases is the ethanol subsidies. Ethanol is a "clean fuel" in the sense that unlike gasoline its burning as a fuel does not produce the conventional pollutants, including carbon monoxide. It does produce carbon dioxide, the principal culprit in global warming, but this effect is said to be offset by the fact that the corn from which ethanol is manufactured absorbs carbon dioxide, as trees do. However, the manufacture of ethanol requires a great deal of energy (more energy, some critics believe, than the ethanol itself produces), and in China for example that energy is supplied mainly by coal-burning plants, a fertile generator of carbon dioxide. Moreover, deforestation by fire, common in the Third World, is increasing in order to provide more cropland for the production of ethanol, and deforestation by fire is a major source of atmospheric carbon dioxide.
So it is doubtful that ethanol is a significant part of the solution to the problem global warming--indeed it may be part of the problem--and in any event the subsidy is more often defended as an answer neither to conventional air pollution nor to global warming, but instead as a means toward making the United States self-sufficient in energy.
The federal subsidy alone is currently running at a level of $7 or $8 billion a year. There are state subsidies as well, and, more important than either type of direct subsidy, there are indirect subsidies in the form of legal requirements that gasoline producers purchase a specified amount of ethanol to mix in with their gasoline. A federal law enacted in 2005 doubled those requirements and is believed to have been a big factor in the ethanol boom and resulting recent increase in corn prices.
Ethanol could be bought cheaply from Brazil, but high tariffs prevent the Brazilian and other foreign producers from competing with our farmers and producers. We could not achieve energy self-sufficiency from our own production of ethanol. Even if all the corn produced in the United States were used to produce ethanol, which is unthinkable, the amount of gasoline consumed would fall by only 12 percent. (This is a little misleading; an enormous increase in the demand for ethanol would lead to more cropland being switched to corn from other crops. But that could result in much higher food prices.) Moreover, the amount of other fossil fuels consumed would rise because of the energy requirements for the production of ethanol.
We could as I said increase the percentage of our total fuel consumption that is supplied by ethanol by buying ethanol from abroad, and while that would make us dependent on other countries for an important part of our fuel supply, it would not be dependence on other oil-producing countries. That would be a benefit. Because of the instability of many of those countries (such as Iraq and Nigeria), and the hostility to the United States of some of them (such as Iran and Venezuela), there would be value in achieving energy independence, or at least a good deal more independence than we have today. But we cannot achieve it through the ethanol subsidy. We can achieve it (at least insofar as ethanol can contribution to the solution) only by relaxing the tariff on imported ethanol. But this sensible measure seems blocked by one of the absurdities of our political system--the Iowa caucuses, which extract pledges from all plausible presidential candidates to preserve and indeed expand our home-grown ethanol industry--and, more broadly, by the excessive influence of our tiny farm population on U.S. policy. As a result of these factors, ethanol subsidies are bipartisan.
Most ethanol is manufactured from corn. The United States is the world's largest exporter of grains, and exports of our corn account for one-fourth of total worldwide grain exports. As a result of the increasing diversion of U.S. corn to the production of ethanol, food prices in the United States and the world have soared. It is estimated that by the end of this year, food prices in the United States will have grown in real terms by almost 5 percent (a 7.5 percent nominal increase in price minus a 2.6 percent inflation rate).
Technology is more likely to bail us out before our political system does. What is called cellulosic, as distinct from corn, ethanol--the production of ethanol from a variety of plants, other than corn--holds promise for enabling ethanol to be produced without forcing up the price of corn, but is not yet commercially feasible.
Posted by Richard Posner at 07:49 PM | Comments (34) | TrackBack
October 21, 2007
Should Hosts Be Liable for Serving Liquor to Guests Who Cause Accidents While Driving under the Influence?--And Other Issues of Third-Party Liability--Posner
Some 40 percent of the roughly 40,000 fatal traffic accidents a year in the United States involve a drunk driver, but this figure is down from almost 60 percent 25 years ago, although the number of fatalities has not declined (unsurprisingly, since there are more drivers). I do not know what contribution if any "social host liability" has made to the decline. The term refers to laws (statutes or, less commonly, common-law--that is, judge-made--doctrines), now in force in a majority of states, that make an employer, a bar or restaurant or liquor store, or a purely social host, liable in tort for a guest's (employee's, customer's, etc.) injuring someone while driving under the influence of alcohol (or it might be drugs), if the host knew or should have known that the guest was drunk and would drive, yet served or continued serving him liquor. Actually, the liability of commercial establishments that sell liquor to obviously drunk patrons is nothing new; it has long been imposed by state "dram shop" laws. The extension to other hosts is novel.
Social host liability raises the interesting general question of when someone who has not inflicted an injury should be punished for having failed to prevent it. In general, such liability is not imposed. For example, it is not a tort to fail to rescue a stranger in distress even if you could do so without incurring any danger, or other significant cost, to yourself. I am not my brother's keeper. Or, as the courts say, there is no "good Samaritan" duty enforced by the law (it is different of course if one has agreed by contract to undertake a duty of rescue). One reason not to impose such liability is that it might induce potential rescuers to steer clear of any situation in which they might be punished for failing to attempt a rescue; so strong swimmers might avoid beaches at which poor swimmers congregate. In addition, adjudicating cases of third-party liability for failing to prevent an injury would often be plagued by uncertainty--who was actually in a position to attempt a rescue, what would the risk to him (or to them) have been, and how likely is it that the attempt if made would have succeeded?
These do not seem serious problems with regard to social host liability, even when the host is an individual rather than a bar. Of course, there may be tricky questions regarding whether the host should have known that the guest was drunk and would drive, but these are not much more difficult than other factual questions in tort cases. Still, it might seem superfluous to impose liability on a third party when there is a clearly liable second party (as often there will not be in a rescue case)--the drunk driver. (The victim is the first party.) If he is punished whether civilly or criminally (or both) should he cause an injury because of his drinking, why should a third party be liable too? It is only a partial answer that the injurer may be judgment proof (even if he carries liability insurance, as he may be required by law to do, his insurance may not cover the full extent of the harm that he causes), because criminal law enables severe punishment to be inflicted on judgment-proof wrongdoers. It is true that criminal punishment does not compensate the wrongdoer's victim, but people can protect themselves by first-party insurance from the financial consequences of being injured in a traffic accident. The focus of policy should be on deterrence and other means of prevention.
A possible explanation for social host liability is that the combination of tort and criminal sanctions for dangerous behavior is not thought an adequate deterrent. More than a million drivers are arrested every year for driving under the influence, and there are those 16,000 or so annual deaths in accidents involving a driver who is driving under the influence. These figures in themselves do not prove anything, because it is necessary to weigh any benefits of an activity that causes potential harms, even potential fatalities, against those costs. But there is skepticism that people who drink so heavily and uncontrollably as to become a menace to other drivers and court arrest and prosecution for drunk driving are making utility-maximizing judgments. Suppose we think they are more like children than competent adults, and agree that parents should be liable for their children's vandalism if knowing their children's propensity to vandalize they fail to take reasonable steps to control them. Then there would be a strong argument for social host liability, provided the costs are not excessive. It would be akin to accomplice liability for selling a gun to a person who one had reason to think would use it to commit a crime. One would not want in a case such as that to rely on the existence of heavy criminal penalties to deter the buyer from using the gun to commit a crime.
Another way to think about social host liability is to imagine that an off-duty policeman is at a bar and sees an obviously drunk person leave and get it into a car and start to drive off. The policeman could arrest him. In effect, social host liability makes bars and other hosts a kind of auxiliary police force, though conscripted, rather than hired, to prevent criminal activity.
Third-party liability is so common that it is hard to believe it has no economizing features. The doctrine of respondeat superior, which makes an employer liable for the torts committed by his employees in the course of their employment for him, is the most common example. It is more extreme than social host liability, because it does not depend on the employer's knowing or having reason to know that the employee was careless or irresponsible. The economic rationale is that we want the employer not only to be careful in selecting, training, and monitoring his employees, but also to consider substituting capital for labor inputs and making other adjustments that might reduce the incidence of employee torts; in other words, we want him to consider making changes in activity (his use of inputs, perhaps the scale of his production) and not just changes in his care.
All these are examples of collective punishment, a term that simply means threatening to punish those who fail to prevent a harm that cannot be as efficiently prevented directly. It is a question of fact rather than (I think) of principle whether in particular circumstances collective punishment is an efficient method of minimizing harm.
Posted by Richard Posner at 05:35 PM | Comments (28) | TrackBack
Third-Party Liability? Becker
I agree with Posner that third party liability is desirable in some cases, but that class is narrow. One appropriate case is where a firm makes a device whose only purpose is to steal satellite signals. The firm should be held liable when one of its devices is purchased and used for that illegal, and only, purpose. In addition to the obvious advantages of discouraging the production of goods that have no or few legitimate purposes, there are gains from holding a manufacturer liable rather than having to find and sue the many users of his good.
A little more complicated case is whether parents should be held responsible for the harmful acts of their teenage children. Surely, parents should be responsible for a sixteen-year old son who gets into an automobile accident while drunk at 2AM. Parents should be able to exert enough control over their teenage children to prevent them from driving at that hour while drunk. Less apparent is whether parents should be responsible for their son's actions if he gets into an accident while drunk at 8pm while driving a friend's car without his own parents knowing. The son should surely be responsible, but even parents who exercise significant and sensible discipline over their children may not be able to prevent such accidents, although of course they can punish him afterwards.
Consider now the case mainly discussed by Posner, of liability by bars for the drunk driving accidents of their patrons after leaving a bar. Accidents due to drunk driving are a very serious problem in many countries, and the United States in particular does not do enough to deter these accidents. Yet I am skeptical whether holding bars, restaurants, or party-givers responsible is the right approach. The rationale behind holding say bar owners liable is that they would then control drinking by patrons who are obviously drunk, and that this would limit the number of automobile accidents by patrons after they have left a bar.
I am dubious about this approach because of the difficulty of effectively enforcing such third-party liability. Only a small fraction of patrons of most bars both drink heavily and then drive afterwards. Waiters and other bar employees would have to keep track not only of how many drinks patrons have had, but also of how drunk they are, and whether they would be driving afterwards. I do not see how many bars could ever hope to have accurate information about all three stages involved in producing drunk drivers, especially whether patrons would be driving afterwards, particularly when they do not know their patrons well.
To be sure, if they were liable, bars might have rules that no patron may have more than I or 2 drinks, which would be the limit in most states before most drinkers would fail the usual sobriety tests. The problem with such a rule is that it does not focus on the behavior of patrons who are potential drunk drivers. It punishes patrons who want to drink more than that and have no intention of driving while under the influence. Moreover, such a rule is ineffective against patrons who go from bar to bar and only have one or two drinks at each one. It is also ineffective against patrons who drink at home first and then add a few drinks at a bar or restaurant. The same considerations apply if bars get insurance to cover these liabilities, and then raise the cost of drinking to everyone to cover the additional costs.
It could be claimed that while holding bars liable would not work perfectly, such third-party liability would cut down on the number of drunk drivers. It probably would, but would the effect be large, and how much costly and inefficient litigation would be stimulated against bars and others held liable who are not in any important way responsible for the drunk driving of persons who been at their establishments? Why not also hold friends liable who did not stop a drunk driver from drinking so much, or did not force him to take a taxi home? The ultimate question is whether the general and specific harms from imposing liability on bars to innocent patrons, friends, and others exceed the gain from cutting down drunk driving? I believe it does, especially because better approaches are available.
A far more effective way for states to deter drunk driving is to target drunk drivers more closely and punish them more severely. Posner is doubtful that people who drink heavily and become a menace to others make rational decisions. Yet Scandinavian countries have found that imposing severe punishments on drunk driving, including roadblocks to detect drunk drivers before they get into accidents, has induced heavy drinkers generally to avoid driving. When individuals in these countries go out to party, they either designate someone in their group to drive without drinking, or they take public transportation to get home. Such policies may not work as well in other countries, but certainly much more can be done in the United States to discourage drunk driving. I believe that the evidence cited by Posner on the substantial decline during the past 25 years in the fraction of fatal accidents in the United States that involve drunk drivers in a significant way is in fact due to tougher policies toward drunk drivers themselves. Still, the punishments are generally not yet tough enough.
I began thinking about third-party liability after the recent Chicago marathon race on a day that was unusually hot and humid. About 10,000 registered runners did not show up, presumably mainly because they knew how uncomfortable and possibly dangerous running on that day would be. The organizers added more water and medical facilities than usual in recognition of the toll running under such conditions would take. After about some 17 miles they also stopped the race for about 10,000 of the slowest runners. Nevertheless, several hundred runners had to be hospitalized, and many others became severely dehydrated.
I am confident that some of those who became ill will bring lawsuits against the organizers for allowing the race to proceed, and/or for not supplying enough water and medical help. This would be a kind of third party liability by the organizers for the harm done by runners to themselves. Surely, however, the runners could know as easily as organizers what the weather would be, and know better than the organizers about their physical condition, their tendency to dehydrate, and other relevant considerations. For these reasons, individuals themselves should be responsible for whether it is wise to run under these conditions. "Third-party" liability in this case would be a mistake, and in the litigation atmosphere in the US, it is likely that some of the lawsuits could result in judgments against the marathon organizers or sponsors.
Posted by becker at 04:35 PM | Comments (24) | TrackBack
October 14, 2007
Globalization and Inequality-Becker
A report to be issued this coming week by the IMF (the technical analysis was released early) shows that greater globalization during the past two decades contributed significantly to rising inequality during this period in most developing as well as developed countries. The media greeted this conclusion about the connection between inequality and globalization with claims that the new report is "handing critics of globalization a powerful weapon" and "The report is an unusual admission by the IMF of the downsides of globalization" (Wall Street Journal, October 10, p.9). Yet a careful evaluation of the report's findings on income and inequality provides in most respects an optimistic assessment of the effects of globalization on developing nations.
The report analyzes what happened to incomes and inequality in over 50 countries. It finds that essentially all these countries had large increases in per capita incomes since the early 1980's. While the growth was positive at different income levels, including those at the very bottom, income growth was not uniform among different skills, or at different parts of the income distribution. Incomes grew faster for the more skilled and in higher income quintiles, which implies that various measures of inequality typically increased in developing nations.
To explain these results, the IMF authors divide the effects of greater globalization into expanded world trade, greater foreign investment, and increased transfers of modern technologies. They find that all three dimensions of globalization tended to increase per capita incomes of both developing as well as developed countries. International trade theory implies that trade by a poorer country would increase the relative earnings of its lower skilled workers because richer countries want products from poorer countries that use relatively large quantities of unskilled workers, such as textiles. The report's evidence quite strongly supports this building block of trade theory: greater trade alone would have lowered earnings inequality within developing countries.
However, the most powerful effect on inequality from globalization is due to transfers of modern technologies. The evidence from developed economies has been that modern technologies, like the computer and Internet, favor more educated and other skilled workers; in economic parlance, that these technologies are skill biased. This effect of technological progress has been used to explain the sharply rising gap in earnings between college graduates and others during the past three decades in the United States (see my discussion of inequality in the blog entries for April 23 and December 10, 2006). Not surprisingly, the IMF's study finds that a similar skill bias applies to international technology transfers, that they raised the earnings gap between more skilled and less skilled workers in developing countries. In other words, foreign direct investment has a skill bias too, so that its sharp growth over the past 25 years raised inequality in developing countries. Better capital markets had a similar effect on inequality. However, the evidence in this report indicates that the effects on inequality due to foreign investment and capital market liberalization, while not minor, were much smaller than the effects of technology transfers.
Is this greater gap between the earnings of more and less skilled workers a good or bad result of globalization? Let us accept that greater inequality is not good, other things the same, but other things are different in the IMF results on inequality. The increased earnings gap between persons with more and less education in developing countries reflects that the earnings of more educated individuals rose faster than the earnings of the less educated. The IMF report clearly shows that generally the poorer and less educated in developing nations also became better off in that they have more to spend on food, shelter, health, automobiles, and the other goods that they desire. This improvement in wellbeing at the lower end of the income distribution surely should count as a benefit of globalization.
The larger earnings gap by education essentially means that the returns on investments in schooling increased. Few critics of globalization would claim that its effects were bad if globalization significantly raised the returns to financial or physical capital owned by local investors in developing countries. So how can one complain that globalization is bad because it raises the returns on the education of local human capital investors? Higher returns to human capital investments as well as greater returns to plant and equipment mean that the economy is more productive, which should be a welcome development to poorer as well as richer countries.
Yet intellectuals and politicians in many countries of Latin America, Africa, and even parts of Asia have heavily criticized globalization and its effects. I believe that developing countries in which the criticisms are strongest are generally countries that have done a bad job of educating its population. Higher returns on investments in education and other human capital are small comfort to the children of poor families who often do not have easy access to secondary schools, let alone to universities and other forms of advanced investments in human capital. The lesson of the IMF report and other studies is that globalization is not the source of these serious problems. Rather, the lesson is that many developing countries have to do much more to open up access to better and greater education for children coming from lower income families. Only then would these families be able to take advantage of the higher returns to education produced by greater trade and the inflow into their economies of modern technologies and foreign capital.
Posted by becker at 07:44 PM | Comments (35) | TrackBack
Globalization and Inequality--Posner's Comment
Becker has accurately summarized the International Monetary Fund’s recent report on the effect of globalization (meaning increased integration of the world’s economy) on inequality. (It is chapter 4 of the IMF's "World Economic Outlook" published this month and available online at http://www.imf.org/external/pubs/ft/weo/2007/02/pdf/c4.pdf.) In essence, the report, while acknowledging serious data limitations, finds that average incomes have increased significantly in most nations in recent decades, but that income inequality has also increased in most nations, mainly because of disproportionate increases in the incomes of the top fifth of the populations. The incomes of the other quintiles have increased too, but not as fast, so that overall the gap between rich and poor has increased although the poor are better off--just not as better off. Both the increase in average incomes, and especially the increase in inequality, are driven mainly, the report finds, by increased utilization of advanced technology, which increases the returns to high-skilled workers relative to the returns to low-skilled or unskilled ones. The report suggests that greater investment in education would tend to reduce inequality by increasing the proportion of high-skilled workers.
I want to question three assumptions of the IMF report. The first is that increased income inequality is a bad thing, the second is that an increase in world average incomes is a good thing, and the third is that greater investments in education are bound to reduce inequality.
I do not think that increased income inequality is bad (regrettable, unfortunate, deplorable, etc.), in general (an important qualification, relaxed below), when it does not involve any reduction in the incomes of a substantial fraction of the population. Suppose that over some period the average income of people in the bottom four quintiles of a nation's income distribution increases by 2 percent and the average income of people in the top quintile increases by 10 percent. The result is increased income inequality, but so what? Everyone is better off, and why should the fact that the rich are better off by a larger percentage concern anyone? What is true is that if the baseline is extreme inequality and many people are below the poverty level, a further increase in inequality can be politically destabilizing. Suppose 99 percent of a nation's people live in poverty and the other 1 percent are rich and over some period the average income of the 99 percent rises barely at all, lifting few above the poverty level, while the average income of the 1 percent who are already rich doubles. Such a pattern would exacerbate what would doubtless already be a high degree of social unrest. I argued in my blog post of December 10, 2006, that the continuing enrichment of the already superrich stratum of the American population is a potential source of political problems too. But concern with the impact of particular forms and degrees of inequality in particular countries at particular junctures in their history does not justify concern with a rise in inequality in the world as a whole, an approach that while natural for the IMF to take treats the entire world as if it were a single nation, thus abstracting from particular circumstances of particular nations, though it is the particulars that determine whether inequality is a serious problem.
It might be argued that, given diminishing marginal utility of income, average and total human happiness would be increased if the incomes of the poor grew more rapidly than those of the rich, because presumably an extra dollar confers less utility on a rich person than on a poor one. But this observation would be pertinent only if rising inequality were a product of unsound policies, whereas the IMF report attributes it to economic factors, such as technological progress and absence of barriers to foreign investment, that are vital to continued growth in average incomes. The poor, unless consumed by envy, are not made better off by policies that leave them as poor (or make them even poorer) but reduce the incomes of the rich.
Concern with inequality, it should be noted, is distinct from concern with poverty. It would be possible to alleviate poverty without reducing the share of income going to the wealthiest quintile of the population. Focusing on quintiles tends to break the link between equality and welfare. Suppose some adjustment in the tax code resulted in reducing the average income of persons earning $100,000 a year by 2 percent and increasing the average income of persons earning $50,000 a year by 1 percent (the difference reflecting the much larger number of persons in the lower income bracket and the deadweight cost of the tax increase on the higher-income taxpayers); would that increase average happiness? I doubt it.
My second proposition is that, while again it is natural for an international organization like the IMF to consider increased global wealth a very good thing, there is no reason for any given individual to think that. None of us is a citizen of the world. We are citizens of particular countries, and our personal welfare is bound up with the welfare of our country rather than with that of the world as a whole. Do Americans benefit from the rapidly increasing wealth of China? Some do, of course, both as consumers and as suppliers. But there many losers (besides the obvious ones--those who make products that compete with imports to the United States from China), since China's rapid growth has increased the price of commodities such as oil, severely aggravated the problem of global warming, and contributed to the rapid growth of Chinese military power, which is a potential danger to the United States. Russia's increasing wealth has made Russia more bellicose and less friendly to the United States; and, in general, nations such as Russia that are rich in natural resources, especially oil, are not dependable allies of the United States--and they are all growing richer. And the technological progress that is such a big factor in increased world wealth makes international terrorism more dangerous than it would otherwise be. Where would terrorists be without cellphones, the internet and web, and cheap international air fares?
Third, it is not certain that increased investments in education would result in less inequality. There is the cost of such investments to consider, and who within a society would bear that cost. (Taxpayer-subsidized tuition for students at Berkeley does not increase income equality in the United States.) One must also consider who would benefit the most from education. Suppose everyone in a nation had the identical opportunity to obtain as much education as he or she could benefit from. The abler students would receive a better education than the less able, and the preexisting inequality of human capital might persist or even increase. For notice that in the United States income inequality has been growing even though educational opportunities are abundant, with more than a third of the population obtaining some college education; most of the rest could obtain it as well if they thought they would benefit from it. Presumably, then, the countries that ought to be considering greater investment in education for the sake of reducing income inequality are those in which that inequality is greater than it is in the United States. In countries in which it is less, a greater investment in education would increase average incomes but might leave inequality unchanged--or even increase it to the U.S. level.
Posted by Richard Posner at 07:27 PM | Comments (37) | TrackBack
Free Speech--Posner's Reply to Comments
I have no view on SCHIP; the commenter who assumes I oppose it because I am a reactionary beast does not have an accurate fix on my political views. I am not familiar with the particulars of SCHIP, but I would be inclined to favor free health insurance for all children (up to age 18), financed by means-testing Medicare and social security, because careful attention to the health of children will reduce their health problems and health expense in later life. Government spends much too much on the elderly relative to the young, presumably because children don't vote.
Also, my blog post did not mention Rumsfeld or the Hoover Institution, which has appointed him to a temporary visiting lectureship. I am far more critical of Rumsfeld than my fellow blogger Becker is. The Iraq war has been a fiasco, and much of the responsibility must be borne by Rumsfeld as Secretary of Defense throughout most of the war. But should that disqualify him from a quasi-academic appointment, if he is otherwise qualified, as he surely is? I shouldn't think so.
I accept correction for having described Larry Summers's controversial talk as stating that female IQs are "flatter" than male IQs. What I meant and I hope the context made clearer than the term I used is that there is more variance in male IQs than in female ones--the distribution of male IQs has longer tails than the distribution of female IQs. So assuming the same mean IQ for the two genders, there are more male geniuses and male morons than there are female geniuses and female morons. That is an arguable proposition with some support in evolutionary biology.
It is important though highly controversial to explore the genetic causes of differences in human achievement or behavior in order to avoid an inaccurate sense of how much discrimination is responsible for differences across races, genders, etc., in behavior and achievement. For example, the female crime rate is grossly lower than the male crime rate. Is it plausible that the difference is wholly unrelated to genetic differences between men and women?
One commenter asks: could it not be that the reason that university faculties are disproportionately left leaning is that leftist policies are more intelligent than conservative policies, so that university faculty, being of above-average intelligence, are naturally more likely to support leftist policies? There are two objections to this suggestion. The first is that political opinion in faculties is not uniform across disciplines. Economists, for example, are more conservative on average than teachers in the humanities, but they are not less intelligent. Second, while today there is a widespread feeling that conservatives have lost their way, in the past the left has frequently supported policies that we know in retrospect were mistaken, such as communism, socialism, highly progressive taxation, urban renewal, rent control, populist theories of antitrust, heavy-handed public utility and common carrier regulation, progressive education, unilateral disarmament, pacifism, syndicalism, and anarchism. Both Left and Right have much to be embarrassed about.
Posted by Richard Posner at 03:33 PM | Comments (9) | TrackBack
October 07, 2007
Free Speech in American Universities--Posner
At about the same time that Iran's president, Mahmoud Ahmadinejad, was speaking at Columbia University and being insulted by his introducer, the university's president, liberal law professor Lee Bollinger, former Harvard president and former Secretary of the Treasurer under Clinton, Larry Summers, was being disinvited to address the University of California Board of Regents after being denounced by University of California faculty as a symbol of gender and racial prejudice, and Erwin Chemerinsky, a left-leaning constitutional law professor, was being reinvited to be dean of the law school of the University of California at Irvine after being disinvited, apparently because of concern about his politics.
What can we learn about American universities todayf rom this confluence of bizarre events ? We can learn that the nation's elite universities are well to the left of the population as a whole. Not that "left" is quite the precise term for Ahmadinejad, a Holocaust denier who would like to see Israel wiped off the face of the earth and may well be seeking nuclear weaponry in violation of the Nuclear Non-Proliferation Treaty of which Iran is a signatory. But his status as an enemy of the United States and a leader of a revolutionary Third World state that overthrew a monarch (the Shah of Iran) allied with the United States makes him more acceptable to the left than the Democratic Jewish ex-president of Harvard who dared to raise the question whether there might be a genetic explanation for the fact that the female distribution of IQ is flatter than the male, although the means are the same, the distributions largely overlap, and thus there are plenty of women in the scientific and other professions who are more brilliant than many of their male colleagues.
Throughout most of the history of higher education in the United States, colleges and universities were on the same political wavelength as the nation as a whole. When I was a student at Yale College in the 1950s, the politics of the student body was revealed by the fact that when during the 1956 presidential campaign Adlai Stevenson gave a talk at Yale (which I attended), he was roundly booed, though not by me, and of course Eisenhower went on to win a landslide reelection.
The faculty and students of the colleges and universities moved to the left in the 1960s, along with much of the intelligentsia--journalists, pundits, young lawyers, teachers, congressional staffers, and the like. But, curiously, when beginning in the late 1970s, and accelerating with the election of Reagan in 1980, the country as a whole moved right, the colleges and universities stayed where they were--not the students, who had moved with the times, but the faculty and the administrators. And there they remain, not all of them of course; but the humanities, and the social sciences except economics, and the law schools (but of course not the business schools), and the admissions offices (with their zeal for affirmative action), are well to the left of the population as a whole, and to the left of their students. This is especially true of the elite private and public universities and the leading liberal arts colleges, apart from Catholic institutions.
The reasons are mysterious. One may be the attraction--also mysterious--of Jews for left-wing causes, an attraction that the embourgeoisement of American Jews and the virtual disappearance in America of Christian anti-Semitism has not eliminated. Jews occupy a disproportionate number of faculty positions at elite colleges and universities.
Probably another reason for the left's influence in higher education is that Americans who came of age during the late 1960s, a portion of whom were radicalized then, are today in senior positions in many faculties. (A man or woman who was 18 in 1968 is 57 today.) A third reason may be the dearth of other outlets, besides faculty politics, for political activism today. There is no serious left-wing movement in the United States. There is a strident Republican right influential in the Republican Party, but the strident Democratic left exerts little influence on the Democratic Party. You can post an angry comment on MoveOn.org, but that cannot be a very satisfactory mode of political expression compared to frightening the University of California's Board of Regents into embarrassing itself by disinviting a Democrat of Larry Summer’s stature and distinction, or épater-ing the bourgeoisie by inviting Ahmadinejad to thunder against Bush and the West from a perch on Morningside Heights.
An ironic counterpoint to university leftism is the increasing, and increasingly successful, imitation of business firms by America's colleges and universities. The leading universities are becoming giant corporations with multi-hundred-million dollar (or even billion dollar) budgets. As they grow, they need and so they hire professional management. Professional university management, in turn, takes its cues from its peers in the business sector. So we have universities deeply involved in hedge funds, greedy for supracompetitive investment returns, engaged in the commercialization of scientific research, angling for applications for admission by the children of the rich, manipulating their statistics in order to move up in U.S. News & World Report’s college rankings (for example by fuzzing up their admissions criteria, so that they get more applicants and therefore turn down more and so appear more selective), exaggerating the job prospects of their advanced-degree graduates, bidding for academic stars by offering high salaries and low teaching loads, and, related to the bidding wars, creating a two-tier employment system with tenured and tenure-track faculty on top and tenure-less, benefit-less graduate students and temporaries on the bottom to do the bulk of the teaching. And so the modern American university system allows its faculty and administrators to live right, while thinking left.
Posted by Richard Posner at 11:04 PM | Comments (38) | TrackBack
Intellectuals, Free speech, and Capitalism-Becker
Posner's examples offer strong support for the sharp limits on free speech in American universities. Another indication is the recent petition signed by hundreds of Stanford faculty against the appointment of Donald Rumsfield to a very part-time position as a Distinguished Fellow of the Hoover Institution, a think tank that is part of Stanford (I am a Fellow of Hoover). According to this petition, Rumsfield is not worthy of Stanford, despite his having served his country twice as Secretary of Defense, as a Congressman, and at several other important government positions. He was also a very successful head of two companies, and he has an intellect that is far superior to many professors at top universities.
Although there are numerous exceptions in economics and political science departments, business and medical schools, and elsewhere, the majority of faculty is considerably to the left of the general population. They are at the forefront of the politically correct movement. This is why Larry Summers ran into the problems that led to his resignation as president of Harvard. However, college faculties are not the only promoters of political correctness. Many print and TV journalists, actors and movie directors, and others involved in more intellectual and creative pursuits have the same views. Why is this so?
I wish I had the answer; I don’t, so I will speculate about possible reasons. In his 1950 book, Capitalism, Socialism, and Democracy, the great economist, Joseph Schumpeter, discussed exactly this question when asking why intellectuals were so opposed to capitalism during his time? His answer mainly was that businessmen do better under capitalism, whereas intellectuals believe they would have a more influential position under socialism and communism. In essence, Schumpeter's explanation is based on intellectuals' feeling envious of the success of others under capitalism combined with their desire to be more important.
I do believe that Schumpeter put his finger on one of the important factors behind the skepticism of intellectuals toward markets, and their continuing support of what governments do. Neither the unsuccessful performance of the US government first in Vietnam and now in Iraq, which they so strongly condemn, nor even the colossal failures of socialism and communism during the past half century, succeeded in weakening the faith of intellectuals in governmental solutions to problems rather than private market solutions. Since their basic hostility to capitalism is largely unabated, but they are embarrassed to openly advocate socialism and very large governments, given the history of the 20th century, intellectuals have shifted their attacks to criticisms of the way they believe private enterprise systems treat women and minorities, the environment, and various other issues. They also promote political correctness in what one can say about causes of differences in performance among different groups, health care systems, and other issues.
I believe considerations in addition to simple jealousy and envy are behind the opposition of intellectuals to capitalism. A belief in free markets requires confidence in the view that both sides to a trade generally gain from it, that a person's or a company's gain is not usually at the expense of those they trade with, even when everyone is motivated solely by their own selfish interests. This is highly counter-intuitive, which is why great intellectuals like the 16th century French essayist, Marquis de Montaigne, even had a short essay with the revealing title "That the Profit of One Man is the Damage of Another ". It is much easier to believe that governments are more likely than private individuals and enterprises to further the general interest.
Of course, the evidence that has been accumulated since Schumpeter's book gives good marks to free market systems in promoting the interests of the poor and middle classes, including minorities. And examples abound of corrupt and incompetent government officials who either mess things up for everyone, or promote these officials' interests. This evidence has impressed the man and woman in the street, but intellectuals are more removed from the real world, and tend to rely on and trust ideas and intellectual arguments.
This would be my primary explanation for the questions raised by Posner about why faculty (and I add other intellectuals too) have become further to the left of their students and the general population. In effect, intellectuals have changed their views far less than other groups in response to the evidence. While intellectual opinions have stood rather still, the general population has moved their thinking against government solutions and toward solutions that use markets and other private transactions and relations.
Posted by becker at 10:51 PM | Comments (55) | TrackBack
October 01, 2007
The Decline of Unions-Becker
The recent two-day strike by the United Automobile Workers (UAW) against General Motors (GM) illustrates clearly the steep decline of the importance of unions in the United States economy. Once perhaps the most powerful union in America, UAW membership among the big three auto companies has fallen by 40 per cent since the last national contract in 2003, and by much more since the 1980's. This union represented about one quarter of a million workers at GM as recently as 1994, but its active membership there has shrunk to under 75,000. As a result of this latest contract, GM will unload its present and future health care liabilities into a trust fund run by the union. Apparently, GM reduced its liabilities for health care by over $15 billions, and eliminated the uncertainty over its future liabilities toward the medical care of its active and retired employees. In return GM committed to keeping a number of plants operating in North America, and made a few other concessions. Perhaps I do not appreciate some subtleties of the contract, but it seems to me GM, once known as "Generous" Motors for its softness in dealing with the UAW (it provided, for example, health benefits without any deductibles), won the confrontation, and came out in better financial shape.
The decline in power of the UAW mirrors more generally the steep fall in American unions. The fraction of workers that are union members peaked in the United States at about 35 per cent in the early 1950's, and declined since then to only 7 1/2 per cent of the non-governmental labor force. The only bright spot for unions is its strength among government employees, fueled by considerable relaxation of laws outlawing strikes by government employees. All developed countries have has some decline in union strength, but generally unions still cover much larger fractions of the labor forces in these countries.
Some of the factors helping to erode union strength are straightforward. The decline in manufacturing has been important since union power has traditionally been strongest in large industrial companies, such as in the steel, aluminum, and auto industries. Globalization has increased the competition from production located outside the control of the unions in any particular country, including production by employees abroad of the same company. Government provisions of unemployment, retirement, and health benefits, and various regulatory controls on layoffs have substituted for similar services provided by unions in the past. Yet these considerations do not seem to be the full story since globalization, the growth of the welfare state, and declines of manufacturing were at work also in other countries, such as Germany and Sweden, and they had much smaller falls in unionism. Presumably, the difference is that laws and attitudes toward unions are much less favorable in the US than in many other nations.
Not that long ago, there was strong support for unions in American academia and among American intellectuals, as well as among blue-collar workers. Scholars who emphasized the negative side of unions, such as Chicago economists Henry Simons, H. Gregg Lewis, and Milton Friedman, were looked upon as crackpot reactionaries. Academics and intellectuals are still generally pro-union, but with little enthusiasm. They have seen that strong unions promote the earnings, and health and retirement benefits of their members who tend to be well paid-production workers at GM start at close to $30 per hour- without doing anything for workers who earn much less. As a result, no current union leader has the prestige, name recognition, or media attention that Walter Reuther, John L. Lewis, and Jimmy Hoffa did several decades ago.
Unions could have an important place in a competitive market economy, but their organization would look different than that of present day industrial and craft unions. Men and women working for large, impersonal corporations may prefer to bargain over wages, work rules, and health and retirement benefits collectively through company unions rather than individually. In particular, workers who have spent many years with the same company may find a union helpful in protecting against management that tries to take advantage of the difficulties older workers face finding good jobs. Other workers in the same industry may elect to not have a union and prefer to bargain individually for wages and benefits. Companies with unions of their employees would compete for profits and employees against companies with other unions, and also against non-unionized companies. This type of union structure is called "competitive unionism".
Actual unions in most countries, however, are not company unions, but organize workers in different companies, often in the same industry, into one union, as with the UAW, or the United Steelworkers of America. By organizing across companies in the same industry, unions hope to exercise greater economic power since they can bargain for similar benefits in competing companies, and can call industry-wide work stoppages. These unions, in effect, try to get monopoly power in labor markets that enable them to boost their wages and other benefits above competitive levels. The Clayton Act of 1914 generally exempted trade union negotiations from anti-trust laws, which enable unions to openly seek what amounts to monopoly gains.
In the past I opposed this exemption as making no economic sense because it allowed a minority of unionized workers to raise their benefits at the expense of consumers and other workers. But with the steep decline of unionism, it no longer matters much, at least in the US and UK, whether unions are exempt or not from the anti-trust laws that apply to companies. Union attempts at monopoly power cannot be important (outside the government sector) in economies where under 10 per cent of non-governmental employees are unionized, and where companies, and indirectly workers, must compete on world markets. The cost in litigation and regulatory burden of applying anti-trust laws to unions would exceed any gain from eliminating the union exemption from anti-trust actions.
Posted by becker at 07:36 PM | Comments (17) | TrackBack
The Decline of Unions--Posner's Comment
I agree with Becker that the settlement between GM and the UAW was a major victory for GM; I suspect that the strike was a face-saving gesture for the union's leadership--a pretense that the strike, that symbol of union power, had wrested important concessions from the company. What is significant about the health trust fund is not that it will remove a large contingent liability from GM's books--a matter simply of accounting--but that it will enable GM to cap that liability by paying a lump sum to create the trust, which then becomes responsible for the employees' (including retired employees') health costs. The risk of soaring health costs is shifted from the company to the workers. If the trust grows faster, through investment of its assets, than the health costs of the trust’s beneficiaries, the workers will do fine. If not, they, rather than GM, will be the losers. So a cloud of uncertainty over the company's future will be lifted.
The purpose of unions is simple: it is to increase unionized workers' incomes above the competitive level, where "income" includes not only wages and fringe benefits but also safety and other aspects of working conditions. The unions do this by cartelizing the sale of labor services. A union that organizes the work force of the major competitors in a market obtains monopoly power over the supply of labor to those firms, and that power enables it to negotiate better terms for its members than they could obtain in a competitive labor market. (The union cannot force the workers in the collective bargaining unit to join the union, but it can charge them an "agency fee" for negotiating on their behalf as well as on behalf of the union members.) The union takes a share of the monopoly gain in the form of union dues.
As with any monopoly, union cartelization causes inefficient substitution, whether of capital for labor or of production by nonunionized competitors, and it also generates rent-seeking costs--the costs to unions of organizing an employer's work force and the costs to employers of fighting union organizing efforts. Not only are union cartels inefficient, but they penalize the least productive workers, workers not worth the union wage to employers.
What has wrecked the unions, outside of the public employment sector, is the rise of competition in the product markets that used to provide the most favorable conditions for unionization. When thousands of workers are doing essentially the same work in the same plant in an oligopolistic industry, the cost of organizing is minimized. The existence of a large homogeneous work force reduces the cost of communicating the union’s message and reduces conflicts of interest among workers that would make it difficult to agree to a common package of wages, benefits, and improved working conditions. With few producers, the cost of organizing the entire industry's work force is reduced and the benefits to the workers and to the union (in union dues and agency fees) increased. These conditions are most likely to be found in traditional assembly-line manufacturing, which as Becker notes has declined, in significant part because of the pressure of foreign competition. (That is why unions oppose free trade.) The more competitive an industry, the more difficult it is for unions to extract significant concessions from an employer: higher labor costs will simply deflect an employer's customers to his competitors. Unionization accelerates its own decline.
But the particular pickle that GM and the other American auto manufacturers, together with the UMW, find themselves in is also due partly to the U.S. tax code, which makes health benefits deductible to the employer and nontaxable to the employee. This unsound tax policy creates an incentive for the employer and the union to negotiate generous health benefits in lieu of generous wage increases--and without careful controls the employer’s obligations can skyrocket. "Lifetime" benefits can be a highly attractive perk if health costs rise only gradually, but if they rise rapidly (in part because of increasing longevity, in part because of better but more costly therapies) the employer may find himself saddled with labor costs that make his product noncompetitive. So GM and the other automakers took a big risk in agreeing to extremely generous health benefits, but so did the UMW. For it is difficult for a union to agree to retract concessions that it has obtained from the employers with whom it bargains; it signals weakness. But by hesitating to backpedal, the union has jeopardized the automakers' survival and by doing so has jeopardized its own survival--and guaranteed its decline.
Another factor in the decline of unions may, paradoxically, be the National Labor Relations Act, an important New Deal measure that has long been thought pro-union. Before the Act was passed, there was plenty of union activity (the percentage of the work force that was unionized was larger before the Act was passed than it is today), but because of the absence of a tight legal framework for union organizing, labor-management struggles were more like war than like political campaigning. There was a good deal of violence and the organizers, as underdogs, earned a large measure of public sympathy. The NLRA created a detailed legal regime of government-supervised electoral competition and negotiation; violence ceased to be a significant factor in labor relations--and the labor heroes disappeared, and with them unionization as a burning political issue.
As Becker notes, the area in which unions have made gains in recent decades is that of public employment. Public employment would always have been a fertile field for union organizing had it not been for laws forbidding strikes by public employees. Public employers provide services rather than products, and service interruptions due to strikes impose greater costs than interruptions in the production of goods because service cannot be produced for inventory or stored; public employees are voters and so government is reluctant to take tough measures against strikers; and public employers are generally monopolists. On all these counts, unionization today poses greater risks to efficiency in the public than in the private sector. In the private sector, the decline in unionization has greatly reduced the power of unions to extract supracompetitive wages and benefits--to the point where, the continued exemption of most union activities from the antitrust laws probably makes good sense. The benefits of antitrust enforcement against practices that nowadays have probably only a small effect on the efficiency of labor markets might well fall short of the costs in enforcement.
Posted by Richard Posner at 07:13 PM | Comments (29) | TrackBack
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