July 27, 2008
Compelled Disclosure of Food Characteristics--Posner
Last week New York City began enforcing an ordinance that requires fast-food chains to post on menus and menu boards the number of calories in each menu item, in the same type size as the item itself. (The ordinance is rather complicated, see www.nyc.gov/html/doh/downloads/pdf/cdp/calorie_compliance_guide.pdf, visited July 24, 2008; my summary is a simplification.) The stated purpose of the ordinance is to reduce obesity.
The ordinance will be criticized as being at once unnecessary, because information about calorie content can be conveyed without requiring that it be printed in large type on the menu (an alternative would be publication on the chain’s website, or the posting of a separate notice in the restaurant), and paternalistic, because people concerned about their weight have the incentive and ability to inform themselves about the number of calories that they consume. The ordinance may also be ineffectual, because most people eat most of their food at home rather than in fast-food outlets; anticompetitive, because small chains will incur the same costs as large ones to certify the caloric content of their offerings; blind to the effect of competition in forcing retail firms, including restaurants, to disclose whatever information will give them an advantage in competing for calorie-conscious consumers; unhelpful, because it will contribute to information overload on consumers bombarded with all sorts of warnings; and not based on a responsible cost-benefit analysis.
These are legitimate criticisms, but they may not be conclusive. A law aimed at reducing obesity would be paternalistic if obesity did not produce external costs, but it does, because obese people consume a disproportionate amount of medical resources, and there is extensive public and private subsidization of medical expenses (private through insurance pools that are unable or forbidden to identify and reject high-risk insureds). However, the size of the externality is in question, because obese people die on average at a younger age than thin people, and so consume medical resources for fewer years on average than thin people do.
While some obesity has strictly physical causes, most is due to poor eating habits and lack of exercise and is therefore treatable by changes in behavior. If the necessary changes can be induced by low-cost informational warnings, the result is likely to be a reduction in the external costs of obesity. However, government programs designed to educate consumers in the causes and consequences of obesity have not been effective.
Fast food is one of the factors that is responsible for the obesity "epidemic" in the United States and other wealthy countries. Economic studies find that weight rises with lower relative prices of fast-food and full-service restaurants and the wider availability of such restaurants and hence the lower full price of eating at them.
Partly because some of the costs of obesity are external, competition among restaurants or other food providers cannot be counted upon to optimize caloric intake. An obese person will not eat less in order to reduce the social costs of medical subsidies. It is not even clear that competition will produce the caloric intake desired by consumers for purely selfish reasons of health, medical expense, and appearance. Firms are reluctant to advertise relative safety, because it alerts the consumer to the existence of danger. Cigarette and auto companies were traditionally reluctant to advertise safer cigarettes and safer cars, as that might get consumers thinking and as a result induce substitution away from the product. Prominent display of calorie numbers might persuade consumers to avoid fast-food chains rather than to look for the chain with the lowest calorie numbers. This is especially likely because the high-calorie items on the menu tend to be the tastiest. Inexpensive food rich in butter, cream, sugar, and egg yolk generally tastes better than inexpensive food low in those ingredients; low-calorie foods that taste good tend to use expensive ingredients.
For people who want to be thin, there is an abundance of information that enables them to adopt a healthful diet. Neither ignorance nor externalities seem to be the important forces in the growth of obesity. More important may be exploitation by food sellers of people's addictive tendencies, which have biological roots. In the "ancestral environment," to which human beings are biologically adapted, a taste for high-calorie foods had great survival value. As Becker has emphasized in academic work, the choice of an addictive life style may be freely chosen and the life style itself may be socially productive and personally satisfying; Becker and I, for example, are addicted to work. But many obese persons became addicted to high-calorie foods as children, and a child's choice of an addictive life style is not an authentic choice, to which society need defer. Nor can parents be assumed to be the perfect agents of their children, protecting them from unwise choices; it takes a lot of parental work to keep children physically active in the era of the video game, and away from rich foods. So there is a case to be made for public efforts to reduce obesity.
The significance of the New York City ordinance lies in its requiring that calorie numbers be printed next to the food items on menus and menu boards and in large type. The purpose is less to inform than to frighten. Psychologists have shown (what is anyway pretty obvious) that people respond more to information that is presented to them in a dramatic, memorable form than to information that is presented as an abstraction or is merely remembered rather than being pushed in one's face; that is the theory beyond requiring reckless drivers to watch videotapes of accidents and requiring cigarette ads to contain fearsome threats. It is one thing to know that a Big Mac has a lot of calories, and another thing to have the number emblazoned on the menu board, next to a mouth-watering picture. The warnings--for that is what the display of high calorie numbers amounts to--may create fear of high-calorie foods, not only in fast-food chains but generally. If so, and if as a result there is less obesity, there will be a reduction in medical expense and possibly a gain in happiness if, as one suspects, thin people are on average happier than fat people.
No one can know in advance the net effects of the ordinance. Its effect on obesity may be small, and it will impose costs of compliance on the fast-food chains subject to them and as a result cause the price of fast food to rise, though perhaps by a trivial amount--and the increase in price will contribute, albeit modestly, to efforts to reduce obesity. An increase in general education, by tending to reduce people’s discount rates, may have a greater effect than the ordinance in checking obesity, because the ill effects of obesity are greater in the long term than in the short term and education tends to reduce discount rates.
The argument for the New York City ordinance thus comes down to the argument for social experimentation generally: that it will yield valuable information about the effects of public interventions designed to alter life styles. I therefore favor the ordinance, though without great optimism that it will contribute significantly to a reduction in obesity.
Posted by Richard Posner at 08:11 PM | Comments (36) | TrackBack
Is Government Intervention in the Fast Food Industry Justified? Becker
New York City's ban on the use of trans fats in restaurants is the first of many efforts to restrict not only trans fats, but also the whole fast food industry. Boston has approved a similar ban, while on Friday California became the first state not only to ban trans fats in restaurants, but also to ban trans fats in all retail baked goods-packaged goods are so far exempt. San Francisco as well as New York City has approved bills that require fast food chains to post on menus the calorie content of the food they serve. Los Angeles is considering a bill that would prevent fast food restaurants like McDonald's from adding any outlets in a 32 square mile part of the city that already has many such restaurants. The concern behind these and similar ordinances is that trans fats and fast food restaurants have contributed in a significant way to the rapid growth in obesity among Americans.
Several arguments have been advanced to support these and even more onerous bans and restrictions on fast foods, but I believe they are of dubious merit. One claim is that consumption of trans fats, and of fast foods more generally, creates an "externality" because this helps produce obese teenagers and adults. The so-called externality results from the fact that greater obesity raises taxes on others because the medical bills of the obese are partly paid by general taxpayers due to subsidized medical care. As Posner points out, this argument may be weak because obese adults die earlier than others and in this way obesity saves medical costs. However, even if true, I am uneasy about such externality arguments. Typical true externalities occur when actions by one individual or firm directly harm others, as when pollution by a company worsens the health of inhabitants, or when a drunk driver crashes into another car and injuries or kills the driver and passengers of that car.
But the alleged "externality" with regard to obesity is due only to the government's subsidy of medical expenditures, so that it is a case of one government intervention- justified or not- causing another intervention-control of eating. It is not a path of intervention causation that most people would be comfortable with in many situations. For example, since the government subsidizes the medical care of children of poorer parents, a mechanical application of this type of externality argument would say that this justifies governmental control over the number of children that poor parents can have. Additional children of these families create an "externality" by raising taxes on others to pay for the medical costs of these children. Many similar examples can be given where government regulations and other government programs cause certain types of behavior that raise taxes or subsidies and adversely affect taxpayers, even though there would be no externality from this behavior in the absence of the government programs.
Another argument made for interventions in the fast food industry and sales of other foods is that individuals are somehow duped into eating too much, and into eating unhealthy foods. As a result, they gain weight, and become vulnerable to diabetes, heart disease, cancer, and other ailments. Yet it is hard to justify the word "duped" when studies show that much of the growth in obesity has been due to the development of cheap fast foods that consumers find tasty, and also to the growth of television, computer games, the Internet, and other attractive activities that are sedentary. Increased consumption of low priced tasty foods and changed time allocation toward more sedentary leisure and work activities would be optimal responses according to any model of human behavior where individuals are trying to increase their well being, as they, rather than outsiders, interpret their well being. Economic analysis would predict that the lower priced high caloric goods and sedentary technologies that are found throughout the world would lead to weight gain and growing obesity not only in the United States but also in other richer countries. And so they have. Special theories about consumers being duped, misled by advertising, etc are not needed to explain what are normal responses to low prices and new technologies.
To better understand this movement against fast foods, one has to appreciate first of all that many individuals do not like fat persons. This might be called an externality from obesity because overweight people lower the utility of others, but few people, even including most economists, would want to take government actions to try to correct eating that has such (prejudicial) effects on others. A second crucial point is that most of the gain in obesity is concentrated among children and adults in low income, low educated families, especially African-American families and other minorities. Educated people find it easy to claim that less educated individuals are often misled into choices that the more educated do not like, and often do not understand.
Yet it is no surprise that poorer individuals- poor whites as well as African-Americans-find fast foods particularly attractive. Fast food outlets are so common in poorer neighborhoods partly because they are cheap. In addition, since working single parents (mothers), and working dual parents, predominate in minority families, fast foods are a time saving way to consume tasty foods when free time is scarce. Any possible longer term adverse health consequences of these foods are put on the back burner when immediate needs to feed children and parents are much more pressing.
Requiring restaurants to post calorie content of foods will have a negligible effect on demand for these foods because, as I argue above, consumers are buying these foods not mainly because they are ignorant of the effects on weight, but because of cheapness, convenience, and taste. Banning fast food restaurants would have an effect by eliminating their convenience. Still, substitutes would develop, such as prepared foods in supermarkets, or fast foods served not in chains but in individually owned restaurants (hostility to food chains is also partly responsible for the growth of legislation against them). Maybe eventually some of these substitutes would be banned too. Such continuing extensions of the power of government are a very unattractive prospect. Given all the ineptitude in government regulation, as reflected for example in the regulation of Freddie Mac and Freddie Mae, and in other housing problems, I believe it is better to tolerate some mistakes by consumers in their choice of foods. Such additional regulation of fast foods will make people worse off in the long run as well as in the short run.
Posted by becker at 05:23 PM | Comments (15) | TrackBack
July 21, 2008
Should US Taxes on Gasoline be Higher? Becker
Gasoline prices have increased rapidly during the past several years, pushed up mainly by the sharply rising price of oil. A gallon of gasoline in the US rose from $1.50 in 2002 to $2 in 2004 to $2.50 in 2006 to over $4 at present. Gasoline prices almost trebled during these 6 years compared to very little change in nominal gas prices during the prior fifteen years. The US federal tax on gasoline has remained at 18.4 cents per gallon during this period of rapid growth in gasoline prices, while state excise taxes add another 21.5 cents per gallon. In addition, many local governments levy additional sales and other taxes on gasoline. Gasoline taxes have not risen much as the price of gasoline exploded upward.
The price of gasoline is much lower than in other rich countries mainly because American taxes are far smaller. For example, gasoline taxes in Germany and the United Kingdom amount to about $3 per gallon. Some economists and environmentalists have called for large increases in federal, state, and local taxes to make them more comparable to gasoline taxes in other countries. Others want these taxes to rise by enough so that at least they would have kept pace with the sharply rising pre-tax fuel prices. At the same time two presidential candidates, Hillary Clinton and John McCain, proposed a temporary repeal during this summer of the federal tax in order to give consumers a little relief from the higher gas prices. We discuss the optimal tax on gasoline, and how the sharp increase in gas prices affected its magnitude.
Taxes on gasoline are a way to induce consumers to incorporate the "external" damages to others into their decision of how much to drive and where to drive. These externalities include the effects of driving on local and global pollution, such as the contribution to global warming from the carbon emitted into the atmosphere by burnt gasoline. One other important externality is the contribution of additional driving to road congestion that slows the driving speeds of everyone and increases the time it takes to go a given distance. Others include automobile accidents that injure drivers and pedestrians, and the effect of using additional gasoline on the degree of dependence on imported oil from the Middle East and other not very stable parts of the world.
A careful 2007 study by authors from Resources for the Future evaluates the magnitudes of all these externalities from driving in the US (see Harrington, Parry, and Walls, "Automobile Externalities and Policies", Journal of Economic Literature, 2007, pp 374-400). They estimate the total external costs of driving at 228 cents per gallon of gas used, or at 10.9 cents per mile driven, with the typical car owned by American drivers. Their breakdown of this total among different sources is interesting and a little surprising. They attribute only 6 cents of the total external cost to the effects of gasoline consumption on global warming through the emission of carbon into the atmosphere from the burning of gasoline, and 12 cents from the increased dependency on imported oil. Perhaps their estimate of only 6 cents per gallon is a large underestimate of the harmful effects of gasoline use on global warming. Yet even if we treble their estimate, that only raises total costs of gasoline use due to the effects on global warming by 12 cents per gallon. That still leaves the vast majority of the external costs of driving to other factors.
They figure that local pollution effects amount to 42 cents per gallon, which makes these costs much more important than even the trebled cost of global warming. According to their estimates, still more important costs are those due to congestion and accidents, since these are 105 cents and 63 cents per gallon, respectively. Their figure for the cost of traffic accidents is likely too high –as the authors' recognize- because it includes the cost in damages to property and person of single vehicle accidents, as when a car hits a tree. Presumably, single vehicle accidents are not true externalities because drivers and their passengers would consider their possibility and internalize them into their driving decisions. Moreover, the large effect of drunk driving on the likelihood of accidents should be treated separately from a gasoline tax by directly punishing drunk drivers rather than punishing also sober drivers who are far less likely to get into accidents.
On the surface, these calculations suggest that American taxes on gasoline, totaling across all levels of government to about 45 cents per gallon, are much too low. However, the federal tax of 18.4 cents per gallon is almost exactly equal to their figure of 18 cents per gallon as the external costs of global warming and oil dependency. To be sure, a trebled estimate for global warming would bring theirs up to 30 cents per gallon. However, the federal government also taxes driving through its mandated fuel efficiency standards for cars, although this is an inefficient way to tax driving since it taxes the type of car rather than driving. Still, the overall level of federal taxes does not fall much short, if at all, from the adjusted estimate of 30 cents per gallon of damages due to the effects of gasoline use on global warming and oil dependency.
Any shortfall in taxes would be at the state and local levels in combating externalities due to local pollution effects, and to auto accidents and congestion on mainly local roads. Here too, however, the discrepancy between actual and optimal gasoline taxes is far smaller than it may seem, and not only because single vehicle accidents are included in their estimate of the cost of car accidents, and accidents due to drunk driving should be discouraged through punishments to drunk drivers. One important reason is that congestion should be reduced not by general gasoline taxes, but by special congestion taxes- as used in London and a few other cities- that vary in amount with degree of congestion (see our discussion of congestion taxes on February 12, 2006). Congestion taxes are a far more efficient way to reduce congestion than are general taxes on gasoline that apply also when congestion is slight.
In addition and often overlooked, the sharp rise in pre-tax gasoline prices has partly accomplished the local pollution and auto accident goals that would be achieved by higher gas taxes. For higher prices have cut driving, just as taxes would, and will cut driving further in the future as consumers continue to adjust the amount and time of their driving to gasoline that costs more than $4 a gallon. Reduced driving will lower pollution and auto accidents by reducing the number of cars on the road during any time period, especially during heavily traveled times when pollution and accidents are more common.
The effects of high gas prices in reducing congestion, local pollution, and accident externalities could be substantial. These authors estimate the size of local driving externalities, aside from congestion costs, at 105 cents per gallon. Even after the sharp run up in gas prices, this may still exceed the 28 cents per gallon of actual state and local taxes, but the gap probably is small. It surely is a lot smaller than it was before gas prices exploded on the back of the climb in the cost of oil. In effect, by reducing driving, higher gasoline prices have already done much of the work in reducing externalities that bigger gas taxes would have done when prices were lower.
Posted by becker at 08:07 AM | Comments (32) | TrackBack
Should Gasoline Taxes Be Raised or Lowered? Posner's Comment
The economic study that Becker discusses treats gasoline taxes as a form of regulatory taxation, that is, taxation aimed at altering behavior rather than at collecting revenue. A gasoline tax is an excise tax, and excise taxes are a common method of raising revenue to pay for government. The best excise tax from a revenue-raising standpoint is one that causes minimum substitution against the taxed good or service, since (in the absence of externalities) such substitution distorts the efficient allocation of resources and reduces the revenues that the tax was supposed to generate. A regulatory tax aims at substitution because of the externalities caused by the taxed good or service, but complete substitution is rarely achieved (and indeed would usually be inefficient), and so a regulatory tax raises revenue as well as altering behavior. My guess is that the very high gasoline taxes in Europe, which are primarily responsible for the fact that the price of gasoline in Europe is on average almost twice the U.S. price, are intended and effective as revenue-raising devices, since those taxes antedate the current concerns with global warming, dependence on oil supplies from hostile or unstable nations, pollution, and acute traffic congestion. Whether from a revenue standpoint a stiff gasoline tax is an efficient tax, I do not know. But my guess is that it is. Since distances are shorter in Europe and public transportation far more extensive, Europeans can substitute against gasoline more easily than Americans can; nevertheless the very high price of gasoline in Europe, though for years it has been higher than U.S. prices are now, has not prevented demand for gasoline from growing, though in part this is due to extensive European construction of new non-toll highways and roads. An excise tax on a single commodity will not generate a great deal of revenue, because of its narrow base, but can be justified as part of a comprehensive system of excise taxes.
It is likely, judging from U.S. consumers' reaction to the recent increase in the price of gasoline, that a steep hike in the gasoline tax (I am treating the state and federal gasoline taxes as a single tax) would cause a further reduction in demand. Consumers would drive less (some of them by moving closer to work--and telecommuting would increase) and would switch at a higher rate to vehicles with better gas mileage. At some point, however, the fall in demand might cause the price of oil to decline. The reason is that the supply curve for oil is upward-sloping, meaning that a reduction in demand and hence in supply will reduce price. I say "might" cause the price of oil to decline because world demand for oil might continue to rise even if U.S. demand fell, in which event the world price would not decline.
I wonder, too, whether the recent decline in U.S. gasoline consumption doesn't represent to some degree an irrational panic reaction. To take a huge loss on the sale of your SUV in a market that is depressed because so many other people are doing the same thing at the same time is unlikely to be justified by the gains from the improved gas mileage of the car you buy with the modest proceeds of the sale. Likewise, driving a substantial distance to save a few cents a gallon on the gas you buy is unlikely to be worthwhile. A recent article suggests that people fixate on the price of gasoline because unlike most regularly purchased items, such as food, gasoline is purchased separately from other items so that its price is not buried in a bill for multiple items.
The economic study that Becker cites finds only modest externalities from gasoline consumption, and this argues for keeping our gasoline taxes low if we think of such taxes as primarily regulatory rather than revenue-raising. But except for its effect in reducing highway accidents by reducing the amount of driving, a gasoline tax is not an efficient regulatory tax. Congestion should be taxed directly, since people who travel on uncongested roads do not contribute to congestion. And the carbon emissions from the burning of fossil fuels (including gasoline) should be taxed, not gasoline, because a tax on gasoline does not create an incentive to produce lower emissions per gallon. Furthermore, taxing gasoline but not aviation fuel will increase the demand for air transportation, a potent source of both congestion and carbon emissions. Even the conventional pollutants produced by the internal-combustion engine do not argue strongly for a regulatory gasoline tax, because these pollutants, in the form of smog for example, reduce global warming by blocking sunlight. And from the standpoint of reducing our dangerous dependence on foreign oil, the proper tax is one on oil, rather than one on just one oil product.
Hence the case for higher gasoline taxes should rest primarily on the efficiency of such taxes as revenue-raising devices. Even if as I suspect they are efficient revenue-raising taxes, the time to impose this is when gasoline prices fall, not now when consumers are screaming. Once people adjust to a price of $4.50 per gallon of gasoline, any fall in that price can be offset by an increase in gasoline taxes. A complication is that a tax on carbon emissions will, depending on how stiff it is, retard any natural, market-drive reduction in the price of gasoline. A further complication is that the calculation of an optimal carbon-emissions tax is impossible because the costs of global warming and the benefits (in reducing those costs) from a tax on carbon emissions cannot at present be estimated with even minimal confidence.
Posted by Richard Posner at 07:50 AM | Comments (23) | TrackBack
July 15, 2008
Trusts for Pets--Supplemental Comment--Posner
Professor Robert Sitkoff of Harvard Law School, an expert on trusts and estates, points out two errors in my post and also suggests a further point about trust governance. He writes that the uniform act is styled the "Uniform Trust Code," not "Act," and that section 408(c) authorizes the court--not the trustee, as stated in the second to last paragraph of the post--to reduce a bequest for the care of an animal. Limiting the power to reduce the gift to the court is critical especially when the trustee is the remainder beneficiary, as it is easier to reallocate a bequest to oneself than to undertake the distasteful act of killing the animal.
But notice the governance problem posed by a trust for a pet animal. Normally a trust must be for the benefit of an ascertainable beneficiary. This rule, which the English call the "beneficiary principle," ensures that there is someone with an economic incentive to police the trustee's conduct. Contrast the world of charitable trusts, where the absence of such a person leaves supervision (such as it is) in the hands of the distracted (at best) state attorneys general. For a pet trust, the UTC addresses the enforcement problem by authorizing the donor or the court to name an enforcer. In functional terms, therefore, the Code treats dogs and other pet animals as if they were children. Both children and pets are permissible beneficiaries, but both require an alternate enforcement mechanism (albeit one that creates another agency relationship) because neither can bring suit themselves.
Posted by Richard Posner at 04:28 PM | Comments (5) | TrackBack
July 13, 2008
Should Dogs Get $8 Billion from the Helmsley Estate? Posner
Eyebrows were raised when Leona Helmsley left $12 million to her dog in her will, and they were raised even farther when it was learned recently that she had signed a "mission statement" indicating her wish that the charitable trust created by her will, which has an estimated $5 to $8 billion in net assets, be devoted to the welfare of dogs. The judge supervising the implementation of her will cut the bequest to her dog from $12 to $2 million, and it is uncertain how much of the charitable trust will actually be devoted to dogs rather than to other objects of charity, since the mission statement is (according to news reports) not binding on the trustees who will be administering the trust.
Section 408 of the Uniform Trust Act makes trusts for pets enforceable (historically they were not--such trusts were called "honorary trusts" and it was up to the trustee to decide whether to enforce the trust even if commanded to do so by the document creating it, as was not the case with the Helmsley charitable trust), but only up to the amount actually required to maintain the pet in comfortable circumstances. This would not necessarily limit the amount left to dogs as a class; there are so many dogs that even $8 billion could be spent on them without any individual dog receiving more than necessary for its maintenance in comfortable circumstances.
The possibility that dogs will receive billions of dollars from a bequest presents three interesting questions: why would a person leave so much money to dogs; should such bequests be permitted by law; and should charitable bequests be subject to estate tax, rather than, as they are now, exempt from it?
Some pets are kept for essentially practical purposes, such as mousing in the case of cats and home protection in the case of dogs. But increasingly pets are child substitutes or personal companions and, as such, love objects, and hence natural objects of bequests, particularly for childless or wealthy people. And it is natural to extend one's affection to the entire species, just as, if you love any persons, even if just members of your family, it is natural to have at least an attenuated regard for the welfare of other people, even for the human species as a whole; and so with dogs and cats if you have a pet of one of those species. Therefore, odd as it may seem, Mrs. Helmsley's desire to spend billions of dollars on dogs is more easily understood than her desire to give her dog $12 million, since above a far lower amount (probably far below the $2 million allowed by the probate judge) it is inconceivable that the money could increase the dog's welfare; hence the size of the gift makes no sense as an altruistic measure. This may explain why the Uniform Trust Act authorizes the judge to cut down the amount of the bequest to a pet to the pet's maximum comfort level.
What makes a trust of $5 billion to $8 billion for dogs seem eccentric is that so much is spent on them already. A bequest of that amount for endangered animal species or other animal-protective purposes would be easy to understand as an environmental measure, but not a bequest for dogs or cats. However, a fundamental premise of normative economics is the subjectivity of values: value is determined by personal preference, and the preferences of adults who are compos mentis and back their preferences with money are not to be questioned by others unless the expression of those preferences would cause uncompensated harms to unconsenting third parties. Moreover, bequests will decline if judges pick and choose which to enforce; and to the extent that bequest motives are a significant force in motivating people to earn money, people may not work as hard to accumulate an estate if judges will not honor their bequests, or, even if they do work as hard, they may save less because consumption becomes more attractive relative to saving when the objects for which people save are not fully chosen by them.
As I said, a bequest for a specified animal that greatly exceeds any conceivable estimate of what the animal needs to be as happy as it can be cannot be rationally altruistic, so perhaps the authority that the Uniform Trust Act confers on trustees to cut back such bequests to reasonable limits is justifiable--and for the additional reason that excessive wealth actually endangers an animal, since once it dies the money will go to residuary legatees; and killing an animal is not considered murder (though it can be a lesser crime) and is easier to arrange and conceal than killing a human being. Expensive security precautions have in fact been taken for the protection of Mrs. Helmsley's dog. These concerns do not attend a bequest for a large class of animals.
The size of the Helmsley trust does suggest that it might be sensible to impose a ceiling on the charitable exemption from estate tax. For example, the law might exempt the first $1 billion of a person's charitable gifts (whether made during his or her lifetime or at death), but above that level such gifts would be taxed at the ordinary gift and estate tax rates. It is hard to believe that such a change in law would significantly affect work incentives, and it would therefore be an efficient tax. If it did not reduce people's effort level, it would not reduce aggregate personal income, but (because it would reduce the size of bequests and other charitable gifts), it would merely spread it about somewhat differently. Given that much charitable spending is wasteful because of the weak incentives for efficiency of the staffs of charitable enterprises, economic efficiency might be increased if there were fewer and smaller charitable trusts.
Posted by Richard Posner at 07:30 PM | Comments (29) | TrackBack
Cats and Dogs, and "Sensible" Bequests-Becker
Leona Helmsley's bequests of $12 million to her dog, and several billion dollars to the welfare of dogs in general, are highly unusual, eccentric, and strange. Should these and similar bequests be allowed? No doubt $12 million is far more than can be spent on a single dog in any reasonable way, but is that the right criterion to use?
An analogy with huge bequests to individuals is appropriate. The number of billionaires in the world has been growing rapidly rapidly, and a large fraction of these are in the United States. Most of them will leave hundreds of millions, and even billions, of dollars to their spouses, children, and grandchildren. Some of these recipients may recklessly go through these huge bequests in a short time, but is there any sensible way heirs can spend billions, or even hundreds of million, of dollars in their lifetimes? It is difficult for the rest of us to imagine how to spend that much, even with purchases of private planes, several expensive homes, and other luxuries. Spend these sums they may, but not in ways that would generally be considered useful or sensible. Similarly, I have no doubt that it is possible to spend $12 million on Helmsley's dog, but that would involve expenditures that most would consider at least as foolish and wasteful as the way some very wealthy heirs spend their much larger inheritances. This type of reasoning would explain why the Uniform Trust Act authorizes judges to reduce bequests to pets to a so-called maximum comfort level.
Yet, with a couple of exceptions, I do not believe that trustees or anyone else should have the power to decide whether the nature and amounts of bequests for particular purposes are excessive and inappropriate. Respecting individual preferences, no matter how idiosyncratic, is one important measure of a free society, even when those tastes relate to bequests and inheritances. As Posner said, peoples' tastes take many forms, and it is not possible to prove objectively that some preferences, such as the huge bequest to Helmsley's dog, are much worse than even larger bequests to worthless children?
One traditional exception to the principle of accepting bequests relates to those bequests made by persons judged to be incompetent, either because of demonstrated senility or mental illness. Such an exception, when used sparingly to avoid abuses, can be useful since bequests made by mentally incompetent individuals may well have no rational basis, not even eccentric ones. Another exception to the rule of allowing bequests, no matter how strange or eccentric, would concern bequests that violate laws. For example, a bequest to give guns to individuals would be disallowed if there were stringent gun ownership laws. Similarly, a bequest to promote white supremacy, or the employment only of males, would be judged to violate anti-discrimination laws.
Respect for individual preferences does allow bequests to be taxed. To reduce the importance of bequests that make little sense, Posner proposes to tax large bequests given to charitable organizations. Yet it is not bequests that raise questions about appropriateness, but inheritances. A large bequest divided among many recipients, including many individuals and charities, does not raise anywhere near the same ethical or other problems as the same large bequest given to a few children or charitable organizations. The United States' estate tax and that of many other countries is wrong-headed because they tax bequests rather than inheritances.
The case for making charitable organizations exempt from estate, inheritance, and other taxes that apply to individuals and for-profit businesses is that these charities decentralize giving to hospitals, universities, the poor, and for many other purposes that are not readily made self-financing. Absent private charities, the financial support of these purposes would be concentrated, that is monopolized, in the hands of governments, as it is in countries that do not exempt foundations and charities from estate and other taxes.
The major concern about private charities and foundations is not that they are too large, but that their leaders often perpetuate their organizations beyond any reasonable duration, partly by transforming their goals over time. I believe a case can be made for keeping the tax exemption in place, but changing present laws to require charities and foundations to have limited durations, perhaps 30 years. That is, to introduce a kind of sunset provision for private charities and foundations. If they stayed in business beyond that time period, they would then be subject to significant wealth and income taxes.
Posted by becker at 07:09 PM | Comments (13) | TrackBack
July 06, 2008
The Graying of College Faculties-Becker
A recent New York Times article indicated that the fraction of full-time faculty members in the United States older than age 50 more than doubled between 1969 and 2005, increasing from 23 percent to over 50 percent. We explore why this graying of American academia occurred, and some of its consequences.
Most of the professors who have been retiring in recent years took their first academic jobs in the late 1960s and early 1970s. Colleges and universities were expanding rapidly during those years, which meant that job opportunities were abundant and many young faculty members were added. New hiring slowed as the rate of growth of higher education slowed down in the 1990s and afterwards, which decreased the ratio of younger to older faculty.
Congress passed a law in the early 1990s that made it illegal for colleges to force faculty members to retire unless the schools clearly demonstrated that a professor could not teach or do research at a modestly high level. Prior to that law, colleges forced their faculties to retire at a given age, usually 65, and made exceptions for those members they considered special in their teaching, research, or other contributions. Two former colleagues of mine, the Nobel Prize-winning economists George Stigler and T. W. Schultz, were kept on for this reason- in Stigler's case until he died at age 81, while Schultz did not fully retire until he was in his mid-eighties.
This is a bad law because colleges now cannot force less competent or less energetic older faculty to retire while keeping the more productive faculty members since they are required by law to offer the same retirement terms to their entire faculty. The older system allowed schools to undo some of the harmful effects of the faculty tenure system by eventually retiring faculty that they should never have appointed. to be sure, given the strong competition among schools of higher education in the United States, the growing physical and mental health of older faculty might anyway have led colleges to raise the general retirement age.
Colleges have tried to cope with their inability to force retirement by offering a variety of bonuses to all faculty members who agree to retire voluntarily or go from full time to part time. However, if older members of a faculty like their jobs, optimal buyout plans that try to induce voluntary retirement would generally lead to later retirements than under a compulsory system that is flexible enough to allow for treating different faculty differently. As a result, these buyout plans have not prevented faculties from aging, although they have slowed that down since about a third of eligible older faculty members usually agree to be bought out. Unfortunately, these plans often have an adverse selection effect since the more capable faculty are the ones who frequently accept a buyout. They may not retire but instead take a job elsewhere, often outside of academia.
The sharply improved healthiness of older Americans has led many of them to continue working at later ages than did earlier generations. This is true for all types of jobs, but the effect is especially important in occupations requiring intellectual and other mental skills, such as teaching and research at colleges. These skills now usually last until men and women are in their seventies, whereas physical skills, say those required in masonry or assembly line work, tend to decline rapidly as workers get into their fifties.
It is more difficult to understand the consequences than the causes of the aging of academic faculties, although one obvious effect is that opportunities for young PhDs have deteriorated. The slowdown in the expansion of institutions of higher learning in the past couple of decades has increased the scarcity of academic positions for younger PhDs. As a result, young academics have to concentrate more on doing good enough teaching and producing enough research to merit tenure in this tougher environment. Adding to this job pressure for American academics is that the market for faculty, along with that of many other services, has gone global since students from all over the world come in large numbers to get their graduate education at American universities, especially in the sciences, economics, and a few of the more humanistic fields. Many of the best of the foreign students stay on to teach and do research. They compete against Americans looking for academic positions, and hence narrow the market for Americans. Indeed, their competition partly explains why in many fields fewer Americans are getting their PhDs, and instead are taking MBAs, law degrees, and other advanced degrees where competition from foreigners has so far been less severe.
One might think that aging faculties would tilt toward a more politically conservative faculty since older persons tend to be more conservative. However, as the Times article indicates, this does not appear to be true with regard to the faculty aging that is occurring now. Many older faculty members, especially in the humanities and social sciences, were active in the student and civil rights movements of the 1960s and '70s, and have maintained a radical, often Marxist, orientation toward events and history. The tough competition for academic jobs gives younger faculty much less time for radical and other political causes. Moreover, younger faculty went to school after many of these cultural wars were over, and they have more moderate views, although most still consider themselves Democrats, and are usually anti-markets and anti-business.
Important new ideas in different fields come disproportionately from younger persons, and academic research is no exception. Significant advances not only in mathematics, but also in biology (such as Crick and Watson), in economics, and even in the humanities have typically been made by younger rather than older persons. This means that while the aging of faculties at American universities adds greater experience, faculties have lost some freshness of approach that comes from having younger faculty. Of course, it is possible, and perhaps even probable, that growing life expectancy and healthiness of older persons will shift ages of peak creativity toward older ages as well.
The one recommendation from my analysis that would slow down the aging of college faculties is to abolish the federal law that prevents colleges from having compulsory retirement ages for most faculty members. The strong competition among these schools would lead to more effective utilization of older teachers and researchers than would result from legislation and regulations.
Posted by becker at 09:48 PM | Comments (21) | TrackBack
Aging Professors: Posner's Comment
I agree with Becker that it would be good if universities (if everybody) were permitted to impose a mandatory retirement age on their employees. As a matter of theory, however, the removal in 1994 of the professorial exemption from the Age Discrimination in Employment Act's ban on mandatory retirement ages need not have affected the average age of retirement of professors. In general, a law that affects only one term in a contract should have little effect on behavior, because its effect can usually be nullified by a change in another term. Eliminating mandatory retirement age is a good example. If a university wants professors to retire at, say, age 65, it can pay them to do so; that is, it can buy out their tenure contract. In the long run, the professoriat itself will pay for the buyouts, at least in part, because the opportunity for a buyout is a valuable option for which professors will be willing to pay by accepting a somewhat lower wage. (See the discussion of mandatory retirement in chapter 13 of my 1995 book Aging and Old Age.)
Even if the result of abolishing mandatory retirement age is higher costs for universities, to the extent that all competing universities are affected, they will be able to shift most of the cost to students in the form of higher tuition. And to the extent that even generous buyouts are refused, universities can offset the effect by increased hiring of young faculty, albeit at increased cost. For just as higher energy costs need not alter the age mix of the faculty, neither need the abolition of mandatory retirement do so. Of course, this assumes that universities want a youthful faculty. As Becker points out, and I below, there is a good reason for universities to want to have a youthful faculty: young faculty tend to be more innovative.
The average age of professors has increased, but the increase may largely have resulted from factors unrelated to the abolition of mandatory retirement ages: namely, continued rather dramatic increases in the health and energy--the youthfulness--of the elderly (which may narrow the productivity gap with young faculty); lighter workloads in elite universities; and delegation of teaching to teaching assistants and non-tenure-track teachers, reducing the demand for tenure-track faculty and hence increasing the average age of tenured faculty.
The political divergence between old and young faculty (the older being more leftwing) is at first glance odd. If the adoption of a political ideology is driven by information, then since the information available to young and old is the same there should be no age-related difference in ideology. It is plausible that the young would be drawn to more extreme positions, whether left or right, on the political spectrum because lack of experience would make them more susceptible to radical schemes. But in academia it seems that Marxist and other extreme positions are more commonly embraced by the old than by the young.
I doubt that the adoption of a political ideology is normally a result of a rational weighing of information. I think it is more commonly a matter of temperament interacting with aspects of personal identity (such as race and sex), life experiences, and nonrational beliefs, such as religious beliefs. (I argue this in my recently published book How Judges Think.) This makes ideology resistant to change based on new information. The expansion of the universities in the 1960s, together with the waning of antisemitism in university admissions and faculty appointments, resulted in a large influx of Jews, and Jews, for reasons never adequately explained, are disproportionately left-leaning. In addition, the expansion must have lowered the age of faculty, and for the further reason that teaching provided a refuge from the draft during the Vietnam War.
The extreme to which the youth of the 1960s was drawn was leftist, and the left in the 1960s was farther to the left than today's left. If, therefore, ideology is largely resistant to information, there will be a tendency for a person's ideological identity to persist notwithstanding events, such as the collapse of the Soviet Union and the rise of free-market ideology, that might be expected to move a "rational" ideologue rightward.
Becker rightly points to the danger that an increased age of university faculty members will result in reduced innovation. But this cannot be seen as an automatic or inevitable consequence of the age discrimination law even apart from the theoretical argument that I began with, because, assuming an inverse correlation between productivity and age, universities can lower the age profile of their faculty without violating the law and probably without even having to expand the faculty. The age-discrimination law applies equally to private businesses, but one does not hear it argued that there are too many old employees in private firms. Universities could abandon tenure and adopt performance-based compensation schemes. In addition, they could reduce the possibly too methodologically conservative influence of older faculty by reducing the role of faculty in appointing new faculty members.
Posted by Richard Posner at 09:33 PM | Comments (12) | TrackBack
