The Becker-Posner Blog

Are Newspapers Doomed?--Posner

A newspaper is a bundled product. A bundled product is one that combines a number of products the demands for which may be quite different--some consumers may want some of the products in the bundle, other consumers may want other products in the bundle. (Another good example is the Windows operating system, a bundle of a number of different programs.) Bundling is efficient if the cost to the consumer of the bundled products that he doesn't want is less than the cost saving from bundling. A particular newspaper reader might want just the sports section and the classified ads, but if for example delivery costs are high, the price of separate sports and classified-ad "newspapers" might exceed that of a newspaper that contained both those and other sections as well, even though this reader was not interested in the other sections. Bundling also facilitates price discrimination by snagging consumers who place a high value on particular products in the bundle. It also increases the risk of entry by single-product competitors because the marginal cost to the consumer of the bundle of any component of it is zero. He gets the sports section for "free" (in the sense that the newspaper costs him no less if he throws the sports section away without reading it) but would have to pay a positive price for a free-standing sports newspaper. Like other intellectual products, a newspaper has high fixed costs (the newsroom, etc.) but low marginal costs (the cost of printing and selling one more copy), and so there is a tendency to natural monopoly in local newspaper markets. It is offset, however, to an extent, by differences in content, outlook, and so forth among different newspapers, which limits substitutability and therefore makes some degree of competition viable. Nevertheless newspapers tend to be quite profitable (as recently as 2006, the average ratio of profit to revenue was 17 percent, which is high relative to industry as a whole), because competition is limited. High newspaper profits sometimes are attributed to the fact that most information comes free from public sources and that newspapers deal directly with their customers and so economize on distribution costs. But low costs are not a reason for high profits, since competition tends to push revenues down to costs. High profits may seem inconsistent with declining revenues, but are not if the firm, seeing no future for itself, ceases investing in the its future and instead cuts costs to the bone (thus treating the firm's product or service as a "cash cow"). Many newspapers are doing that. Still, newspaper profits are plummeting, and with them the value of the companies. The reason is declining ad revenues (an inflation-adjusted decline of 20 percent between 2000 and 2007, and a further decline this year). This is a function in part of declining newspaper circulation but more profoundly of unbundling, as unbundling is the cause both of the declining ad revenues and of declining circulation. The Web provides a virtually costless method of distributing the products that are bundled in a newspaper. The distribution is not only cheaper, but better, because it avoids the time and space constraints of hard copy delivered on a daily (rather than instantaneous) basis and space-constrained by the cost of paper. The unbundling goes deeper than the section level (classified ads, the sports section, etc.), for every section of a newspaper is itself a bundle. The news section bundles a variety of news stories that different readers value differently; readers who have no interest in foreign policy nevertheless pay for a newspaper that may maintain costly foreign bureaus in order to produce good stories on foreign policy. The Web provides a customized news service that enables the tastes of particular readers to be identified and then satisfied by instantaneous and often costless delivery of a product laser-focused on those tastes. The bother associated with the physical bulk of the newspaper is also eliminated. A study by comScore, Inc. in March of this year found that persons 65 and older are almost six times as likely to read a newspaper six days a week than persons aged 25 to 34 (and almost ten times as likely as those aged 18 to 24). The principal reason for the difference is not I think that older people have more leisure, because people in the 45 to 54 year old bracket, who do not have more leisure than the young, are more than twice as likely to read a newspaper six days a week than the young cohort. The reason, rather, is that younger people are much more comfortable getting information online than older people are; they have grown up in the electronic revolution. This will not change as they get older. It appears that the only hope for the newspapers is to go online, and they have done this and have attracted many viewers to their Web sites. But they have not been able to charge for online ads anything like what they can charge for ads in their hard-copy editions. The reason I think is that there is much more competition in online advertising than in print advertising, especially for advertising, such as classified advertising, that is primarily informational; for the information in the ads is often available online at no or nominal cost from other sources, such as Craigslist. Moreover, the online newspaper is still a bundled product, and the Web provides close substitutes for all the sticks in the bundle. The blogs are a big factor here; in the aggregate, they not only are nimbler, but contain a vastly greater body of specialized knowledge, than the newspapers or other conventional media (as Dan Rather learned to his sorrow). Suppose, then, that the newspapers are doomed, or, more realistically, that they are likely to continue to shrink, eventually becoming a retirement service, like Elderhostel. Are there social consequences that should trouble us? A common argument is that if news is customized to the tastes and interests of every individual in the society, people will not be exposed to conflicting views and as a result will become incapable of active civic engagement, for example as voters. That is implausible. It is important to distinguish between opinion and fact. Most people do not want their opinions challenged. So if they are liberal they read the New York Times and if they are conservative they read the Wall Street Journal. But people are both interested in, and influenced by, facts, such as the fall of communism or the rise in gasoline prices, and they will learn these facts (and more quickly) on the Web even if they do not read newspapers. The few people who actually read, compare, and take seriously opposing views on matters of public policy will continue to do so after they stop subscribing to print newspapers. With the rise of the blogs, moreover, the amount of information and opinion reaching the public is far greater than in the heyday of the print newspapers. A second concern, to which the rise of the blogs may be only a partial answer, is that Internet news services (such as Google News) are parasitic on the print newspapers' large staffs of reporters, so that if they drive the newspapers out of business the Internet news services will lose much of their content. The copyright law cannot prevent this, because a newspaper can prevent the copying only of its articles--that is, of the verbal form in which the information in an article is expressed--and not the information itself. And it cannot prevent a news service from simply sending the viewer to the newspaper article via a Web link. The concern, in short, is that the Internet will kill the goose that lays the golden egg. But this is unlikely. If online viewers want the level of news and opinion that print reporters generate, the Internet news services will hire reporters, defraying the cost out of their online advertising revenues, which will be greater for an Internet news service that attracts additional viewers by offering them richer, newspaper-type fare. Indeed, long after newspapers like the New York Times and the Washington Post have ceased print publication, their Web sites may be among the leading Internet news services. The aggregate amount of news and opinion may be less, however, because unbundling will eliminate internal subsidies, for example of the news and op-ed pages by revenues from classified ads.

Yes, Newspapers are Doomed-Becker The number of general-purpose newspapers has been declining in cities ever since the growth of television, and the decline accelerated after the Internet was developed. The trend downward will continue, and perhaps even accelerate. I do not see much of a future for the general-purpose hard copy newspaper that combines opinions, sports, advertisements, comics, and information. A telling fact is that young people today do not read general newspapers, whereas they did in the past. When I was a boy my father bought at least five newspapers every day, and I "read" (that is, looked mainly at sports and comics) three or four of them. It is now rare to see anyone under age 30 reading the New York Times, Chicago Tribune, or any other major newspaper. A teacher used to be bothered when bored students starting reading newspapers in class. That is no longer a problem since they now turn to their computers and play video games or email friends. I find it hard to reconcile the rapid decline in the number of newspapers with Posner's data suggesting that newspapers are quite profitable. Declining industries, such as the American automobile industry, have always been associated not with profits but with substantial losses, as is happening to Ford, General Motors, and Chrysler. There is no doubt that the many newspapers which went out of business did so because they were losing money. Of course, the surviving newspapers tend to be the ones that are more profitable, but they too are experiencing financial problems. They are cutting staffs, long-term owners are selling their papers to others- as with the Wall Street Journal and Chicago Tribune- and they are trying various approaches to deal with the tough competition from online advertisements and other online services. The Internet has gravely wounded the newspaper industry because it provides information, opinion, and entertainment more frequently and effectively than newspapers do. The Web offers as much sports news as desired, and presents the progress of baseball and other sporting in real time. The weather is updated every hour, or more frequently, and so are stock market quotes. Online ads give pictures and personal information about individuals looking for jobs, and prices and other characteristics of products offered for sale. Major as well as minor news stories, local and general news, and opinions on numerous issues are continually being presented. A case still made for good newspapers and magazines is that they separate facts from opinions, and do enough checking to stand behind the materials presented as facts. I do not know of anything comparable on the Internet, although the reputations of better-known bloggers do rise and fall with changing perceptions about their insights and accuracy. Yet it is not apparent that the demand is very strong for this dimension of what newspapers have traditionally provided. Newspapers are trying to strengthen their survival prospects by expanding online presentations, and combining these with print editions. In the short run this may help them, which explains why all the major newspapers are moving aggressively to expand online materials, and widen their online customer base. However, I do not believe this approach will succeed in the long run. The reason is that the way newspapers bundle different services is not the right approach to online presentations that usually provide information about the weather on websites that are different from those used to discuss sports or present ads for cars. Some online sites specialize in opinions about domestic politics, others discuss religion, some present pornographic pictures and films, while others focus on economic issues. The traditional newspaper does not readily fit into this format, and so they are generally losing money in their online efforts. This does not imply that online presentations in the future will continue to be organized in the same way as at present. Perhaps the growing tendency for some websites to link to other sites will coalesce into organized multi-site presentations that deal with many different topics. Already some subscriber-based sites collect and present the best blogs on different topics. How that will evolve is not clear to me, but it is unlikely to develop into anything that looks like the conventional newspaper that has bundled news, information, and advertisements for hundreds of years. The rapid and continuing decline in the number of major newspapers will be regretted mainly by older persons who are accustomed to reading several newspapers daily-my wife and I still subscribe to four and read others online. However, by voting with how they use their time, the great majority of consumers clearly have shown that they prefer to get their information, entertainment, and opinions from television, and especially from the Internet, than from newspapers.

Energy Prices, Offshore Drilling, and an "Excess" Profits Tax-Becker

Increases in energy prices sharply accelerated during the past year, as the price of oil more than doubled, and gasoline prices in United States rose by 25 percent. Responding to these price increases, Senator McCain and President Bush have called for an end to the 27-year old federal moratorium on offshore drilling for oil and gas in US waters, while Senator Obama supports a continuation of the ban. McCain has also indicated that he is reconsidering his opposition to drilling in the Artic region of Alaska. In another response to the energy price boom, Obama has proposed an excess profits tax on oil companies, while McCain has come out against such a tax. What does economic analysis contribute to an evaluation of these proposals? Supporters of a continuation of the moratorium worry that offshore drilling and oil leakages will kill many fish, and damage beaches and other coastal areas. These are potential risks, but whether to continue the moratorium involves a balancing of the advantages of drilling against environmental and other risks. These risks have not been affected by the rise in energy prices, but the benefits from drilling clearly have increased. Additional oil (and gas) from offshore drilling would lower US spending on imported oil, and thereby reduce the transfer of wealth from Americans to other oil and gas producers. Larger domestic energy supplies would also improve energy security in the event of a disruption in the supplies of oil and gas from major producers located in places like the Middle East and Nigeria that have had terrorist attacks on oil production facilities. Even if offshore drilling started tomorrow, it would take several years before actual production began since construction of platforms in deep water and installation of equipment take time. The value of ending the moratorium now would depend not on energy prices and risks of disruption this year or the next, but on the situation beginning in several years and extending over the following decade. Some oil specialists are predicting a rise in the price of oil to $200 a barrel during the next few years. I have argued previously why such a large price increase is unlikely (see my post on May 11); indeed, oil may very well retreat from its present level of over $130 a barrel. Still, as long as world GDP continues to grow over the next decade at a sizable pace-which is likely- the price of oil will remain far above what it was in the 1990's. This means that the financial and other benefits from offshore drilling are likely to greatly exceed the benefits at the time the moratorium was imposed, for oil was then much cheaper even in inflation-adjusted terms. The increasing share of imports in the oil consumed by the United States, and the rise in oil prices, explain why the value of imported oil rose more than five fold since the 1980s. This is why cost-benefit calculations of whether to end the moratorium and allow offshore drilling have shifted in the direction of allowing drilling. Although the risks of offshore drilling are much harder to quantify than the benefits, I believe the shift in the benefit-cost ratio has been large enough so that the time has come to allow drilling. Norway and Great Britain, to take two examples, have allowed drilling in the North Sea for many years without suffering major environmental damage. To be sure, in the end oil companies are the ones who have to decide whether the gains from drilling are worth the risks, including lawsuits if there are damaging oil spills, but these companies seem eager to start drilling offshore. The proposed excess profits tax on the earnings of oil companies would discourage the search for additional oil, and hence would have the opposite effects on this search from a relaxation of the moratorium on offshore drilling. An excess profits tax that is expected to persist for many years discourages further exploration for oil simply because much of the profits on new oil production would be taxed away. In 1980, President Jimmy Carter introduced a windfall tax on oil companies to prevent them from profiting a lot from the high price of oil due to the Iran-Iraq war. An evaluation by the Congressional Research Service, a think tank that provides reports to Congress, concluded that the tax significantly reduced domestic oil production and raised oil imports. Disillusionment with the tax led to its abandonment in 1987. Yet the lessons from this fiasco have been forgotten, for since the post-Katrina rise in gasoline prices in 2005, members of Congress have made regular attempts to introduce legislation with a sizable excess profits tax on oil companies. Even those Americans who worry a lot about global warming and other global pollution form the use of oil should be reluctant to discourage oil production offshore or elsewhere by American oil companies. Lower production by American companies would cause a rise in the world price of oil. Moreover, increased production by other countries would tend to offset reduced production by the United States, so that the effect on global warming and global pollution is likely to be modest. However, the increase in wealth transferred from the United States to the Middle East, Russia, Venezuela, and other oil-producing countries could be substantial.

Oil Prices, Offshore and Alaska Drilling, and Excess Profits Taxes--Posner's Comment

Although I worry more than Becker does about the environmental consequences of the production and consumption of oil, and although I want oil prices to remain high--indeed to continue rising--I largely agree with his analysis of the rival proposals for dealing with the present "crisis": allowing more drilling for oil on the outer continental shelf and in Alaska versus imposing an excess profits tax on the oil companies. I agree with him that the former is a good idea and the latter a bad one. But I will qualify my agreement by suggesting policy adjustments to minimize the adverse effects of allowing more drilling or of imposing an excess profits tax. Expanded drilling in U.S. territory (including our territorial waters) will reduce both U.S. dependence on foreign oil and the wealth of foreign oil-producing countries, many of which are hostile or potentially hostile to the United States. These are important benefits. But there are also significant costs. Any increase in the production of oil from the seabed and from the fragile Alaskan tundra will create environmental damage, both directly, because of the environmental damage caused by the drilling itself (such as, in the case of offshore drilling, the dumping into the ocean of "drill cuttings"—the solids that are brought to the surface in drilling an oil well), and indirectly, as a consequence of increased production of oil, because of oil spills by tankers, traffic congestion and highway wear and tear, and, most ominously, increased carbon emissions from the burning of oil as a fuel. Becker notes correctly that the less oil we produce, the more that foreign nations will produce. But given the high price of oil, increasing out oil production will increase total world production rather than just substitute for foreign production. So there will be more tanker spills and more carbon emissions if offshore and Alaska drilling is allowed, since the supply of oil will be greater. The problems created by an increased supply of oil can be minimized by an increase in the federal gasoline tax (better still would be imposing a tax on carbon emissions, since such a tax would create an incentive to reduce the amount of emissions per unit of gasoline consumed) calibrated to prevent gasoline prices from declining as a consequence of increased production of oil and hence increased supply. Already the shock of $4 a gallon gasoline has caused a modest decline in U.S. consumption of oil, yet $4 is little more than half the retail price of a gallon of gasoline in most European countries. Distances are shorter in Europe, and so U.S. gasoline prices would not have to double in order to make substantial inroads into our oil consumption. But they should not be allowed to fall as a result of increased world supply due to offshore and Alaska drilling. A gasoline or carbon-emissions tax must not be confused with a tax on the profits of oil companies, which, because of the uncertainties involved in exploring for oil, will, as Becker points out, reduce the incentive to find and exploit new domestic oil fields. (In contrast, a heavy tax on gasoline will increase the incentive to find energy substitutes for oil.) In addition, imposing excess profits taxes sends a bad signal to the business community: that success will be penalized. And there is a danger that the proceeds of the tax would be used to subsidize the purchase of gasoline in order to reduce gasoline prices. The demand would rise without stimulating domestic production, so we would have the worst of all possible worlds: high consumption of oil and increased dependence on foreign production. But in the unhappy event that an excess profits tax is imposed, at least it should be limited to profits from existing oil fields, to minimize the dampening effect on the incentive to develop new fields. Because the environmental risks of offshore and Alaska drilling are greater than those of drilling for oil on land in the lower 48 states, an environmental excise tax should be placed on the oil produced from offshore and Alaska wells. It is not enough to rely on the tort system to provide sanctions for oil spills. Many of the environmental effects of drilling for oil are individually too small to invite tort suits, yet the cumulative effects can be very large. That is true with respect to effects on fisheries and on the frequency of tanker spills. The more oil that is transported by sea, the more spills there will be, but it will rarely if ever be possible to ascribe a particular spill to a particular producer of the oil that was spilled. An environmental tax is therefore necessary to induce the oil companies to internalize the environmental costs that their activities impose.

Have We Lost the Moral Values That Undergird a Commercial Society?--Posner

David Brooks is one of the most thoughtful newspaper columnists. In a recent op-ed ("The Great Seduction," New York Times, June 10, 2008, p. A 23), he argues that the founders of the nation "built a moral structure around money. The Puritan legacy inhibited luxury and self-indulgence. Benjamin Franklin spread a practical gospel that emphasized hard work, temperance and frugality…For centuries, [the nation] remained industrious, ambitious and frugal." But, Brooks continues, over the past 30 years much of that legacy "has been shredded," while "the institutions that encourage debt and living for the moment have been strengthened.”"And here he mentions "an explosion of debt that inhibits social mobility and ruins lives," because of "people with little access to 401(k)'s or financial planning but plenty of access to payday lenders, credit cards and lottery agents." Among other "agents of destruction" are state lotteries--"a tax on stupidity," which tells people "they don't have to work to build for the future. They can strike it rich for nothing." Other culprits are the astronomical interest rates charged by payday lenders; and the aggressive marketing of credit cards by banks and other financial institutions, as a result of which by the time college students are in their senior year more than half of them have at least four different credit cards. The cures that Brooks offers include "rais[ing] consciousness about debt," encouraging foundations and churches to offer short-term loans in competition with payday lenders, strengthening usury laws, and taxing consumption rather than income, thus encouraging saving. All this is very interesting, but is it correct? I have my doubts, except about the desirability of eliminating double taxation of savings, a problem with our income tax. Max Weber argued convincingly in his famous book The Protestant Ethic and the Spirit of Capitalism that the frugality and industriousness promoted by the early Protestants in opposition to the opulence of the Roman Catholic Church were values conducive to and perhaps critical in the rise of commercial society. Protestants who believed in predestination wanted to show by their modesty, austerity, and avoidance of lavish display that they were predestined for salvation. But saving plays a less important role in economic progress today than it did in the sixteenth century. Its role in powering economic growth has been taken over, to a large extent, by technology. The great rise in standards of living worldwide is due far more to technological progress than to high rates of savings, that is, to deferring consumption. At the same time, now that we have efficient debt instruments that in former times did not exist or were extremely costly, the role of personal debt (Brooks does not criticize corporate or government debt) in human welfare is more apparent than it was. Apart from its role in solving short-term liquidity problems resulting from delay in the receipt of income, debt enables consumption to be smoothed over the life cycle. Without debt, a family might have to wait 20 years before it could afford to buy a house. Of course, debt creates risk for both lender and borrower, as the subprime mortgage crisis has dramatically illustrated. But if the risks are understood, it is unclear why the assumption of them should be thought harmful to personal or social welfare. At worst, debt leads to bankruptcy, but bankruptcy is not the end of the world either for the borrower or for the lender. In situations of desperate poverty, one can expect a heavy debt load; but such a load can also be positively correlated with prosperity, which cushions the risks that debt creates. It is especially odd to suggest as Brooks does that taking on debt is antithetical to hard work; on the contrary, it increases the incentive to work hard by making it at easier for people to obtain the goods and services they want by borrowing the money they need to pay for them, yet at the same time increasing the risk of bankruptcy should they slack off on their work and so let their income fall. The very high interest rates for payday loans tell us that many people will pay a very high premium to shift consumption from future to present. As long as they understand what interest rates are and what interest rates they are paying, it is hard to see why their preference for present over future consumption, and hence for spending and borrowing rather than saving, should have social implications. People who take out payday loans are unlikely to be potential savers (i.e., lenders); and by taking on heavy debt they force themselves to work very hard; and I have suggested that saving is not as important as it once was. I particularly do not understand how, if high interest rates for payday loans are a problem, loans by foundations and churches are a solution. If, as I assume Brooks must mean, these loans are to made be at lower interest rates than payday loans, the former payday borrowers will borrow more. If to try to prevent this the charitable lenders ration their credit tightly, the payday borrowers will borrow what they can from those lenders and top off with a payday loan; their total debt burden is unlikely to fall. As for the "tax on stupidity," it is of course irresistible to finance as much as government as possible by a system of voluntary taxation, which is what a state lottery is. And I don’t think "stupid" is the right word to describe all or even most of the people who buy lottery tickets. I do think that some of them consider themselves "lucky" and so in effect recalculate the odds in their favor. That is stupid; in a game of chance, "luck" is randomly distributed. Some people, though, simply enjoy risk. Others like to daydream, and a daydream is more realistic if there is some chance it may come true, even if a very small chance. And finally and most interestingly, there are people whose marginal utility of income is U-shaped rather than everywhere declining. Usually we think of it as declining: my second million dollars confers less utility on me than my first million, and that is why I would not pay a million dollars for a lottery ticket that gave me a 50.1 percent or probably even an 80 percent probability of winning $2 million. But maybe I lead a rather drab life, and this might make such a gamble rational even if it were not actuarially fair. Suppose that for a $2 lottery ticket I obtain a one in a million chance of winning $1 million. It is not a fair gamble because the expected value of $1 million discounted by .000001 is $1, not $2. But if having $1 million would transform my life, the expected utility of the gamble may exceed $2, and then it is rationally attractive. Brooks complains that government sponsorship of lotteries sends an official and therefore authoritative message that a person can strike it rich for nothing. But of course that is true, even when there are no lotteries. (And he gives no indication of wanting to forbid private lotteries.) You can inherit great wealth. More commonly, you may be able to leverage modest talents into great wealth by the luck of being in the right job at the right time. Brooks himself complains in his op-ed about the message sent by the fact that hedge fund managers often make more money than people who "build a socially useful product." Only the latter, he believes, should earn fortunes. But he doesn't propose an excess-profits tax on hedge fund managers; he accepts the legitimacy of their fortunes at the same time that he attributes those fortunes to luck. There is also an echo of the traditional but erroneous suspicion of speculation as an activity that does not create social wealth but merely shifts it around. That is incorrect. Speculation aligns prices (whether commodity prices or the prices of companies) with values and so creates more accurate signals for production and investment. It is a vital economic service. That is not to say that speculators "deserve" higher incomes than ditch diggers. Desert doesn't enter. Incomes are determined by supply and demand. What is true is that easy credit facilitates bubbles, such as the housing bubble and the related mortgage-financing bubble, and the bursting of a bubble can, as we have been relearning recently, cause economic dislocations. This may require some regulatory adjustments; it does not require a return to Calvinism.

Borrowing and Consumption over the Life Cycle-Becker

The types of loans available to consumers have grown at unprecedented rates during the past 40 years. These include credit card debt, expanded availability of mortgages, student loans, payday loans, reverse mortgages, and many other types. The provocative social commentator and columnist David Brooks, in the article referred to by Posner, laments this development- he calls his column "The Great Seduction". He believes that one of its main consequences is that individuals use credit to consume too much when they are younger instead of saving at these ages so that they can consume more at later ages. Obviously, some individuals borrow too much, and get caught in a spiral of high interest rate payments, bankruptcy, and insufficient assets as they age. Nevertheless, on the whole the growth of credit instruments available to consumers has been a positive development that helps finance investments in education and other human capital, and produces a more optimal consumption profile over the lifecycle. In the earlier times mentioned by Brooks, many families were farmers with incomes that fluctuated greatly because of changes in the weather, and because of pests and diseases. Urban workers also faced severe risks due to the threat of unemployment and other difficulties in labor markets. Families had little opportunity to get commercial credit to help tide them over the bad times. They had either to borrow from relatives, accumulate assets that could protect them against future risks, or suffer much during the bad times. They would have saved less and welcomed credit cards, mortgages, and harvest loans as more effective ways to adjust to these risks. Until the past 50 years, children from well off families had a large advantage in going to college because their studies were in large measure financed by their parents. The great boom in college education (that we wrote about last week) has seen many more students from modest income backgrounds entering and often completing college. They typically finance their education by working while in school and by borrowing with student loans and credit card debt, or their parents borrow in various ways to help them out. Without such credit, many of these students would be unable to get the college education that is so crucial to success in modern economies. The debt of college students does not simply pay for tuition, but also helps cover living expenses while in school. College students earn little then and in the first decade or so after they enter the labor force, while they earn much more when they are older. For this reason, the most forward looking and least impulsive college educated individuals want to borrow, not save, when they are young in order to raise their consumption then, and thereby help smooth out their consumption as they age. In addition, most men and women have greater consumption pressures when they are in their thirties and early forties because they raise their children then, and often provide financial support to elderly parents. Most young people who do not go to college are high school graduates, and they too have lower earnings and greater family responsibilities during their thirties and forties. They also would like to borrow at younger ages to raise their consumption at these ages to more appropriate levels compared to their consumption when they are older. Studies by my colleague Erik Hurst show that consumption of Americans beyond age 65 is generally not low relative to consumption at younger ages; apparently, they save enough when younger to enable them to consume generously when retired. In earlier time, families had to save to provide for their old age consumption since social security and company pensions were non-existent. A few other factors have contributed to the borrowing boom in recent decades. The decline in family stability has reduced the access to credit from relatives during bad times. Commercial credit has substituted for the family credit that was formerly available. Improvements in the capacity of lenders to track and monitor their loans, and to compensate restaurants and other businesses for their short term loans to credit card users, has reduced effective interest rates to consumers on small loans much below what they were in the past. Household Finance and other lenders of small amounts to consumers used to charge over 30 percent annual interest, and more when that was legal. In a rational world, much lower interest rates on consumer debt would induce considerable additional borrowing, and it has. Every new form of credit brings with it abuse from some borrowers and lenders. This has clearly been the case with the expansion in consumer credit instruments, but the benefits from this expansion seem to have far outweighed the costs.

The Boom in College Education-Becker

The worldwide boom in college education during past several decades has been as remarkable as it was unexpected. Many economists in the United States were claiming in the 1970s that college education was overrated, at least as far as its effects on earnings. Yet starting in the late 1970s, the number of American high school graduates who went on for higher education began to grow at a reasonably fast rate. Were these college students disappointed by the effects of their education on their subsequent earnings and other aspects of their life, or did the nay-saying economists just get it wrong? The evidence is now crystal clear that in fact college education turned out to be an excellent investment for the vast majority of these students. Despite books like "The Overeducated Americans", published in the late 1970s, that argued that the earnings gains from a college education were in serious decline, the gains from attending and graduating college actually increased rapidly after 1980. A natural interpretation of the increased enrollments in college is that expectations of improvement in their earnings, health, and other determinants of welfare attracted large numbers of Americans into higher education. Supporting evidence for this interpretation is that the same trends in earnings and enrollments took place in the rest of the world. The earnings gap between persons with university and high school education increased in the great majority of countries, more or less regardless of their level of economic development. And as in the United States, the higher benefits from college stimulated sizable increases in the fraction of high school graduates who went on for further education. For example, in the top half of countries as measured by per capita incomes, the average percent of 30-34 year olds with a higher education increased between 1970 and 2000 from about 12 percent to over 20 percent. Lower income countries had similar increases, although poorer nations have much smaller fractions of persons with higher education. In the great majority of countries, women increased their propensity to go to college much more rapidly than men. This sharply reduced the gender gap in college education. In fact, more women than men are getting higher education in virtually all the rich countries, and also in many middle -income countries. In the United States, a little under 60 percent of younger college graduates are now women, whereas in 1970 men were far more likely than women to start and especially to finish college. Higher returns to college are an important immediate cause of this boom in the number of persons going to college in countries all over the globe and at different stages of economic development, but why did returns to college increase so universally? The answer must relate to general causes that were widely applicable. One factor that immediately comes to mind is the sharp expansion during the past several decades in the amount of international trade, including a rapid growth in foreign direct investment (FDI). The classical theory of international trade implies that in poorer countries with cheap low skilled labor, a growth in trade of goods and services should increase the demand for goods using relatively much of the low skilled labor, and trade should lower the demand for goods using the relatively expensive skilled labor. Increased trade has the opposite effects in rich countries. As a result, increased trade should raise the earnings of skilled workers relative to other labor in richer countries, but lower the relative earnings of skilled workers in poorer countries. Yet the gap between the earnings of skilled and less skilled workers has tended to rise in poorer countries as well. The growth in FDI helps explain this apparent contradiction to classical trade theory, for FDI tends to raise the demand for educated and other skilled workers in recipient countries. Educated and other skilled workers become more valuable in developing countries when they import capital from the technologically advanced nations. The newer technologies that have been developed during past three decades, such as the computer and the Internet, biotech, the mapping of the genome and other advances in medicine, and cell phones and social networking, also increased the overall demand for educated persons. Since the United States is the most important innovator in the world, and has one of the most efficient economies, it has experienced a particularly rapid widening of the college earnings premium. Under the right circumstances, these newer technologies flow from the rich innovating countries, such as the United States and Japan, to developing and other countries. Technologies may be embodied in internationally traded goods and services, or in capital transfers, or brought back by students who study in the innovating nations. Since the international transfer of technologies is expedited by having a larger number of well -educated persons, the transfer of technologies also raises the demand for persons with higher education. Many articles have complained that the increased benefits from higher education have contributed to widening inequality, not only in the United States, but in many other countries as well, including major developing countries like China and India. The larger education earnings premiums certainly helped widen income inequality, but these larger premiums also raised the efficiency of investments in capital by raising rates of return on human capital. Higher returns on capital obviously raise the efficiency of an economy. The challenge to public and private policies is to increase the number of persons who manage to go to and benefit from college, for that would reduce inequality while raising the number of persons who benefit from the higher returns to a college education. How to accomplish this is too large a topic to be considered in this discussion, but improving the preparation of disadvantaged children so that they can benefit more from schooling should probably have high priority. Also important would be to increase the quality of schools available to these children by raising the degree of competition among schools.

The Boom in College Education--Posner

The increased percentage of persons who go to college is not surprising. Advances in technology have reduced the demand for brawn and increased the demand for brains. But several significant questions (concerning college education in the United States, to which I confine this comment) remain: The first is why female college enrollment has increased so much faster than male college enrollment, and why female college students do much better, as measured by grades and graduation rate, than male. If college is more valuable to a woman in the labor market than to a housewife, then as more women work relative to engaging in full-time household production, women's demand for a college education will rise; apparently this factor has dominated the effect of advances in technology on both sexes, for otherwise their rates of enrollment would be growing at the same rate. Of course technology, in the form of labor-saving household appliances, more reliable contraception (including abortion), the higher ratio of light to heavy work, and reductions in infant mortality (a factor in limiting the size of families) may underlie the increase in women’s participation in the labor market. But only the increase in the ratio of light to heavy work is a change in the technology of work that favors women by reducing the demand for brawn and hence for male labor relative to female. But why are proportionately more women going to college and, once there, outperforming the male students? One answer may be that they get more out of college than men do. Maybe they gravitate to fields in which college learning is more valuable than it is in the fields that men gravitate to. Suppose that men have a comparative advantage (as they probably do) in jobs that involve danger, disagreeable working conditions, upper-body strength (of course), and financial risk. Those are jobs to which going to college, or in some instances (such as financial risk taking) concentrating once there on academic performance, may not contribute a great deal. Another question is whether college attendance or graduation is the right variable for estimating the returns to education. Suppose that high schools deteriorate; that would increase the demand for college, especially for community colleges that may offer a level of teaching no different from that of a good high school. Most high schools are public and do not compete for students. The college market is far more competitive. A community college may offer a superior high school education. And finally, how much more will college attendance increase? Will it go to 100 percent (currently, about 60 percent of high school graduates go on to college--of course many kids drop out of high school)? That depends on two factors: the brain/brawn tradeoff, and IQ (or some alternative measure of intellectual aptitude). If the intellectual demands of work relative to the physical demands continue to increase, the demand for college will also increase. IQ is, though, a limiting factor. But it is less of a limiting factor than one might think. The reason is that a frequent byproduct of technological advance is deskilling. Fifty years ago, a driver had to know how to change a tire and put chains on a tire, how to check the engine's oil level and the water level in the radiator, and how to start a car in freezing weather. These skills are no longer required. Most cashiers no longer need to know how to make change; the cash register tells them how much change to give the customer. Printers no longer need to know how to set type upside down. With advances in neuroscience, artificial intelligence, computer science, robotics, and nanotechnology, many jobs that require a college education today will require little in the way of education tomorrow. Many people may then defer college until retirement, in order to increase the returns to leisure by widening their cultural horizons.

The Cost of Infrastructure Deterioration--Posner

The term "infrastructure" is much used but lacks a clear definition. I shall use it to mean inputs, often provided by government rather than private enterprise, into a very large variety of products and services. Good examples are transportation, communications (including the Internet), education, the environment (including water resources), public health (in the sense of prevention of communicable diseases), and law enforcement (including the judiciary). Current concerns with our allegedly deteriorating infrastructure focus on road and air transportation and on primary and secondary education, and I shall confine my discussion to them. I am going to bracket road transportation and education because the problems of both could probably be solved satisfactorily by privatization or, in the case of education, semi-privatization. Air transportation I discuss separately because its problems almost certainly require a governmental solution. America's roads (including bridges, which carry mainly roads) have been deteriorating, as is obvious to any user of the interstate highway system. The reason for the deterioration is that the system is carrying vastly more traffic than it was designed for in the 1950s. The result is not only rough surfaces which wear out tires and slow down traffic, but also delays due both to construction and to the sheer increase in traffic volume. Congestion and therefore potholes and delay have also increased on local and commuter roads. Wear and tear, and delay, are real costs, but the costs of road building and road improving to reduce the costs of wear and tear and of delay are real too, and the challenge is to spend only up to the point where the last dollar spent yields a dollar in benefit. Government seems incapable of doing that. Privatization should be able to. This is obvious in the case of toll roads, where in fact a privatization movement is under way, as we have discussed in a prior post. The toll can be set equal to the cost that a vehicle imposes on the road in congestion and wear and tear. (That cost varies with the size and weight of the vehicle, but the toll can be made to vary with these factors as well.) There is a concern about monopoly; there are not always good alternatives to a particular route. If the state or other public owner of the toll road auctions the road to the highest bidder, the winning bid will capitalize monopoly rents, and the tolls will therefore contain a monopoly markup. That is inefficient, but the revenue that the state obtains from the auction is a tax substitute, and taxes have the same general misallocative effects as monopoly prices. The state can if it wish avoid the monopoly problem by specifying a minimum quality of service and then auctioning the road to the lowest bidder who agrees to provide that quality. Not all roads are toll roads, but given modern technology all can be made toll roads. Electronic toll systems are available that do not require vehicles to slow down, and these can be adapted even to local roads, so that the entire street system of a city or an entire metropolitan area could be privatized. This may seem a bizarre suggestion, but it is no more bizarre that allowing a private company to own the telephone or cable grid of a city. The street system is just another grid, and the potential monopoly problems can be dealt with in the same way that cities deal with telephone or cable monopolies, where auctioning franchises may again be the most efficient approach. The American system of public education is heavily criticized. Costs per pupil are high relative both to private education and to public education in foreign countries that turn out better students. Many parents are voting with their feet, as it were, by putting their kids in private (including parochial) schools, home schooling the kids, or moving to communities that have better public schools. These are alternatives are costly to parents. It is not clear why government is in the business of operating any educational facilities. It is appropriate for government to require that children attend school up to a specified age, to fix minimum educational standards with regard both to curriculum and to performance, and to finance the costs of education for impecunious parents. None of these things requires that government own and operate schools. But public education is not about to be abandoned, and it could be semi-privatized by adoption of a voucher system, which by permitting parents to choose among public schools would force public schools to compete with each other. Air transportation presents a baffling problem in infrastructure deterioration. The deterioration in airline service in the last five years has been dramatic, involving as it does not only extraordinary delays but also horribly crowded airplanes and crummy airports. The delays are masked by the fact that the airlines have increased the scheduled time of flights and by the difficulty of measuring delay resulting from canceled flights and missed connecting flights. A study this past month by the majority staff of the Joint Economic Committee of Congress entitled "Your Flight Has Been Delayed Again" estimates the annual cost of airline delay at some $41 billion. Of this amount $12 billion is attributed to traveler time costs. That estimate strikes me as too low. It includes the delay due to schedule change, but excludes delays due to missing connecting flights, to canceled flights, and to lost time when in order to avoid missing an appointment one has to take an earlier flight and hence if it is not delayed has dead time on arrival. The uncertainties of air travel also cause some potential travelers to substitute, at some cost, another activity (maybe even another job, requiring less travel). On the other hand, the $41 billion figure is misleading because it is the cost of total air transportation delay, not avoidable delay; optimal delay is not zero, because of unavoidable weather conditions and equipment failures. The deterioration in airline service is puzzling because the high cost of aviation fuel has virtually bankrupted much of the industry, and so one would expect a contraction; this is beginning yet there is no expectation that flight delays will diminish. The reason is that the airline industry has very heavy fixed costs, so that even when high fuel prices push up its marginal costs, each flight, provided the revenue from the flight exceeds the marginal cost of the flight, will contribute something to the airline's fixed costs, and so airlines are reluctant to reduce the number of their flights. This explains, moreover, why airline service has deteriorated. When demand grows, as it has done rapidly in recent years, the industry responds by adding flights. No airline has an incentive to balance the revenue from additional flights against the costs in additional delay, because one airline's reducing the number of its flights would have little effect on delay, but a dramatic negative effect on its revenues. One culprit in the deterioration of airline service is Congress, and another is the Administration; between them, they have failed to create a modern air traffic control system that would reduce delay by reducing the safety-required spacing of planes both on the runway and in the air. But that would not solve the basic problem, which as I have said arises from the fact that no individual airline bears the full costs of the delays it creates. The airways are like a highway of fixed size with no tolls, facing an increase in traffic. Another apparent culprit is the airports, but they are in much the same position as the airlines. They are locally owned and in principle (but not in practice) can control congestion by limiting the number of takeoffs and landings either directly or by fees. If every city had two airports, if most airline traffic were between just two cities, and if two companies each owned one airport in each city, then the competitive situation would be identical to that of two competing toll roads, and, assuming a modern air traffic control system, the optimal amount of delay would be achieved. But these conditions are not satisfied. No single airport can optimize congestion, because it does not control the traffic to and from, and hence delay at, other airports, and that delay will in turn cause delay at its airport. The best solution might be a federal airplane congestion tax that would vary from route to route depending on delays, which vary considerable across regions and specific airports. The revenues could be used to update the air traffic control system. An alternative might be to allow some limited collusion among the airlines, enabling each airline to reduce the number of flights without losing business to its competitors. But that would be in essence a return to the system of airline regulation prior to the abolition of the Civil Aeronautics Board, and that was a thoroughly unsatisfactory system.

Infrastructure and the Value of Time-Becker

Time is the most precious resource of men and women, and even older children. This is why it is disturbing that so much time is wasted through bad policies of the public authorities that manage infrastructure. I have been bothered for many years by the tendency of local and state authorities to repair roads only during weekday daylight hours. Presumably, that saved money through the avoidance of overtime and double time pay for night and weekend work, but it usually added many hours to travel times because of the huge traffic jams that were created during the most congested times. Even modest estimate of the value of the time of those caught in traffic holdups would have easily exceeded the extra pay required to have work at night and during weekends when traffic is much slower. Fortunately, recognition of the importance of the value of time has apparently increased in recent years since much more repair work now takes place at night and on weekends. Yet few other efforts are being made to reduce the time lost due to heavy traffic on roads in major, and many smaller, metropolitan areas. Traffic has grown in virtually all cities, with consequent greatly increased delays during commuting and other times. Moreover, heavy delays are no longer found only while entering the central city in the morning and leaving it in the evening, as delays are also common while exiting a city in the morning and returning in the evening during the increasingly common reverse commuting. The solution is not mainly new urban highways, which are expensive to construct and disturb the functioning of local communities, but through pricing traveling on roads that already exist in order to economize on the time of commuters and other travelers. One important way to price roads and reduce the time of those caught in traffic delay is to introduce "congestion tolls" that vary with time of day and extent of the traffic. London, England has been using congestion tolls for several years to reduce the heavy traffic during weekdays into and out of the center of London. Despite some grumbling, this toll system has been successful, and is being extended to other parts of London where congestion is also a serious problem. Mayor Bloomberg of New York has proposed similar tolls for entry into the busiest parts of Manhattan, but so far his proposal has been blocked by the state. The opposition to traffic congestion charges is not based on concerns about the feasibility of such a toll system since London and several other cities have successfully demonstrated that modern electronic transponders make congestion charges easy enough to use and enforce. Much of the reluctance comes instead from opposition to higher taxes in cities already burdened with heavy taxes. Reductions in other taxes could offset a congestion tax to keep total city tax revenue unchanged, but experience shows that every new tax is usually only partially offset by reductions in other taxes, and that total tax revenue in fact increases. Perhaps such opposition could be blunted if New York explicitly offered to combine a road congestion tax with compensating reductions in its local gasoline taxes to keep unchanged the total tax revenue collected from drivers. Congestion tolls are more effective than gasoline taxes in reducing traffic during periods of heavy traffic since gasoline taxes do not raise the cost of driving by more during periods of heavy traffic. Congestion tolls are probably also more effective in reducing local, although not climate-damaging global, pollution. Similar reluctance to price the time of travelers appropriately is seen in the growing delays in air travel. The Joint Economic Committee has estimated that the total cost of United States air traffic delays in 2007 may have been as large as $41 billion. Almost a third ($12 billion) of that is due to the value the Committee places on the 320 million hours spent by air travelers during these delays. As Posner indicates, $12 billion may underestimate the true time cost since it neglects factors like the cost of missing connecting flights. On the other hand, it may overstate the true cost of the time involved since the Committee values this time on the average at about $38 per hour, or almost $80,000 per year for persons working 2000 hours. That valuation would be too high if persons caught in traffic delays use their time to work on their computers or read for pleasure. A new airport runway is almost finished at O’Hare airport. However, before building new runways, busy airports, such as O’Hare, Kennedy and LaGuardia, and Los Angeles International, should start charging much more for the use of existing runways, and for take off slots during the busiest hours of travel. This would cut delays, and the time and other costs caused by delays, by inducing airlines to shift some of their departure and arrival times away from the busiest and most expensive times. To be sure, as Posner indicates, there is a coordination problem among the different airports connected by air travel. Still, a city would encourage more travelers to use their airports if they priced takeoffs and landings better, so that travelers would spend less time in delays, and airlines would spend less on fuel, and the personnel used during delays.