The Becker-Posner Blog

The United Kingdom’s Dramatic Response to the Economic Crisis—Posner

The new coalition government in England is embarking on an ambitious austerity program.  One goal is to eliminate 490,000 jobs in the public sector; a related goal is to slash government expenditures by 19 percent over the next four years. Administrative budgets—overhead—of government agencies are to be slashed by 34 percent. (The U.S. population is five times as great as the U.K.’s—so imagine our eliminating 2,450,000 public sector jobs!) By a combination of tax increases and spending cuts, the U.K. government hopes to eliminate the annual national budget deficit, currently more than 11 percent of GDP (similar to ours), by 2015. Among popular programs to be trimmed or eliminated are housing subsidies for middle-class persons. Defense expenditures are to be reduced by 8 percent, education spending by 3.6 percent, and the teaching budgets of public universities by 40 percent. Since spending on technical subjects is to be protected, other disciplines, such as the humanities, will face especially steep cuts and tuition will rise. 

England can make dramatic changes in policy overnight because its government is extremely centralized. The Cabinet dominates the House of Commons, thus fusing the executive and legislative branches (the legislative branch is effectively unicameral—the House of Lords counts for little), and except in Scotland and Wales, there is no regional autonomy, as there is in the United States by virtue of our federal system. Except in wartime, we cannot make major policy changes in a hurry, though the Obama Administration managed in two years to make more changes than any President, in a comparable period, since Lyndon Johnson (and much of the groundwork for his “Great Society” legislation had been laid in the Kennedy Administration and gained momentum from Kennedy’s assassination). 

England’s economic crisis is a great deal like ours; its response has been dramatically different. England, Keynes’s homeland, has rejected the Keynesian solution to depression or recession, which is to stimulate consumption by deficit spending aimed at increasing the incomes and confidence of the public; the Obama Administration has embraced the Keynesian approach (which Americans call “stimulus’), though its implementation has been erratic, in part because of deficiencies of timing, design, and execution, and in part because of political resistance. 

But the two nations’ diametrically opposed approaches have this in common: both proceed, in part, from a desire to use an economic crisis as an occasion for long-term economic reform. Both administrations are looking beyond the crisis. Both believe that the crisis has made the public receptive to reforms that they would resist in times of prosperity. The English government, being dominantly although not entirely conservative (for it is a coalition government and the Liberal Democratic Party is the junior member of the coalition), wants reform in the form of a leaner government. Our government, being dominated by liberals (at this writing, though perhaps not for long, both Houses of Congress, as well as the Presidency, are Democratic), wants a larger government, which will expand public subsidies of health care, increase regulation (and not only of financial institutions), and combat global warming with taxes and subsidies. 

Both approaches risk making the economic crisis, which as I said is similar in both countries, worse in the short run, though long-term benefits of the attempted reforms may outweigh present costs. England is slashing public payrolls and subsidies at a time of high unemployment and economic anxiety, and this may reduce economic growth in the near term. The U.S. government is frightening business by its regulatory measures, the health reforms that may well increase the labor costs of business, the prospect of higher taxes, anti-business rhetoric, and a general ambition to make government larger and more aggressive, which is unsettling the politico-economic environment of business. There is a sense too that in their impatience to bring down the unemployment rate, the Federal Reserve and the Treasury may soon embrace policies that sow the seeds of future inflation. Uncertainty causes businesses and consumers alike to tend to freeze—to save (in “safe” forms that don’t promote productive investment) rather than spend—and the Obama Administration has increased the level of economic uncertainty in the United States. 

Unfortunately, as we have learned in the last two years, the economics of the business cycle, and in particular of the business cycle when it enters a deep trough, are not well understood. It is possible to tell a “story” about how the English program will stimulate investment and consumption by convincing businesses and consumers that a leaner government will conduce to faster economic growth. But there is an equally plausible “story” about how the English program will reduce growth by reducing employment and incomes, and that what both England and America need is further deficit spending to increase incomes and employment. There is too much uncertainty, compounded by the dramatic economic changes occurring in major trading partners of England the United States, to be confident that one “story” is true and the other false.

What may make the prospects for England brighter than those for the United States regardless of which story is true is that the English people are famously patient and stoic, and the English government as I said unusually centralized, and this combination may give the government flexibility in adjusting its policies to changing economic conditions. If anti-Keynesian policies don’t work, the government can switch to Keynesian policies. 

We don’t have that flexibility. Not only is our government highly decentralized, but our politics appear to be approaching gridlock, in which neither political party will either raises taxes significantly nor cut public spending significantly nor even resist new spending programs. The Keynesian approach has been discredited, whether rightly or (as I think) wrongly in this country, but fiscal rectitude (as one might call the English approach) seems unattainable here as a political matter.

Contrasts Between the US’s and UK’s Post-Recession Policies-Becker

 

 

 Many economists and others in the US are advocating a second fiscal stimulus program, believing that the close to $1 trillion in the Obama stimulus package was too modest. This call for another round of government spending is taking place despite the fact that about one third of the original package has not yet been spent, even though it is more than one and one half years since the package was signed by President Obama. Moreover, skeptics (including myself) about whether the US needs another spending package point out that leading economists in the President’s Council of Economic Advisers were far too optimistic about the effects of a big stimulus on unemployment rates. Instead of a predicted decline in unemployment due to the stimulus of more than 1½ percentage points, the total fall in seasonally adjusted unemployment has been only ½ of a percentage point from its peak of 10.2 percent.

Of course, perhaps other factors, such as the uncertainty about the business environment that Congress and the President created through their rhetoric, and also through their actual and proposed legislation, offset powerful effects of the fiscal stimulus itself in reducing unemployment. The unpleasant fact we economists have to face is that there is not strong evidence on the actual effects of governmental spending on employment and GDP. The usual claimed effects are generally based on predictions from highly imperfect theoretical models of the economy rather than from strong direct and clear evidence on the employment consequences of different fiscal stimuli.

This is why the UK’s experiment in reducing rather than raising government spending while Britain is still coming out of its serious recession is not only daring in the present economic climate, but it is also of great value in determining whether growing government spending is a valuable way to speed an economy out of a serious recession. In order to bring under control the large fiscal deficit of Great Britain that is well over 10% of the UK’s GDP, the Tory (coalition) government of David Cameron has proposed a fiscal tightening that amount to about 1.5 percent of GDP during each of the next four years. This will be accomplished by some increase in taxes, but mainly by cuts in spending on public services, public investments, and various benefits to families.

It is informative to contrast this British approach with that of the US. Federal government spending during the past few years increased to about 25 percent of GDP from a level that had been rather stable for a couple of decades, under both Democratic and Republican administrations, at close to20 percent of GDP. The federal fiscal deficit in 2009 was about 12% of GDP, and is expected (or hoped!) to decline in 2010 to about 8%. These are two of the highest deficit ratios in many decades. Essentially nothing is being done in Washington about these enormous deficits, aside from some proposals to raise taxes on the rich that will bring in very little additional tax revenue. Moreover, these proposals have been opposed by many Democrats in Congress as well as by most Republicans.

So which approach will be more successful: the British one that will sharply reduce government spending and fiscal deficits, or the American one that believes these deficits are necessary, and perhaps even too small, to get this country out of the recession? No one knows for sure about the short run effects on their respective economies of these very different approaches. Perhaps, and this is only a “perhaps” that I am by no means persuaded of, the British approach will cause more short-run harm to employment and GDP than will the American approach.

However, I am convinced that the British way is a far better way to improve the long-term growth prospects of an economy. That is, reductions in the bloated levels of government spending and fiscal deficits will do much more to stimulate the longer-term growth of the British economy, mainly by encouraging private investment and innovation, than will the present American approach. Perhaps in good part due to the gridlock in Washington that Posner discusses, this approach shows little desire to cut back on federal government spending, or on actual and projected fiscal deficits.

Will the Earnings of Women Overtake Those of Men? Becker

 

 

During the past two decades the education of women has been booming in practically all countries. Larger fractions of young women than young men are enrolled in universities in countries as culturally and economically diverse as Brazil, China, and Iran. In the United States, about 57% of the current graduates of four year colleges are women, while women receive 60% of all the master’s degrees. Note the radical change since 1970 when women received only 40 % of the degrees from four-year colleges. A recent report shows that American women are now even getting more PHD degrees than men, although the proportion varies a lot by field. Women receive only about one fifth of all engineering doctorates, and one quarter of all doctorates in computer science and mathematics, but they are getting a majority of the doctorates even in health sciences and biology.

Since earnings are on average strongly related to education levels, a natural issue to consider is the current and future effects of these trends in college enrollment and graduation rates on the earnings of women compared to men. In particular, will the average earnings of women beginbefore long to exceed that of men after being so far behind in the past?

In fact, most countries have experienced sharp reductions in the gender gap in hourly earnings during the past several decades. Again, to use the United States as an example, in 1980 the median weekly earnings of women who worked full time was a little over 60% of the median weekly earnings of full-time men. By 2009, that ratio was just slightly below 80 percent. For younger women, the trends are larger and more dramatic. The ratio of the weekly earnings of fulltime women aged 25-34 to that of men of the same age was only 69% in 1980, but this ratio rose to almost 89% in 2009. The change in the gender earnings gap was also quite large for men and women aged 35-44 years old. The gender gap in earnings at ages 25-44 are relevant for predicting future trends in this gap since these ages incorporate the effects on earnings of the growth in recent years in the education of women relative to men, and these age groups also incorporate the effects of the greater education of women on their commitment to working. 

Some simple, although rough, calculations provide an indication of the possible magnitude of the effect of the growth in the education of women on the gender gap in earnings. Assume that men and women are only either college graduates or high school graduates, and that the average college graduate who is working full time earns on average about 60 percent more than the average full time high school graduate of the same sex. To incorporate the gender gap in education, I assume that about 40% of women graduate a four-year college compared to only 26% of men.

If men and women of the same education received the same earnings, the assumed greater propensity of women to receive a college education would imply that the average earnings of women would exceed the average earnings of men by about 8%. This is a sizable reversal of the usual gender gap in earnings. Of course, a more realistic calculation would recognize that even full time working women of a given number of years of schooling typically earn less than that of full time working men with the same years of schooling. If the gender gap in earnings of men and women with the same schooling years were 15%, than the average woman would earn about 11% less than the average man; on the other hand, if this earnings gender gap were 10%, than the gender gap in average earnings would only be 4%.

Of course, many other factors in addition to years of schooling affect the earnings of women and men. Some women do not work in order to stay home to take care of their children, although the fraction of women who are full time homemakers has sharply declined during the past several decades, and college educated women are more likely to work than are less educated women. In addition, even full time women work fewer hours per week and fewer weeks per year than full time men, again mainly because women typically try to combine work with spending time caring for their children. These considerations help explain why the average earnings of women are below the average earnings of men with the same years of schooling.

On the other side of the ledger, teen age girls are less likely to drop out of high school than are teen age boys, and the earnings of high school dropouts are quite low. Moreover, as I showed at the beginning of this discussion, American women are also more likely to receive post-graduate degrees, and persons with advanced degrees tend to earn a lot more than persons with just four years of college.

Although the average earnings of full time women have not yet overtaken that of full time men, as we ahve shown the gender earnings gap has narrowed substantially. Indeed, in about 30% of all American households with two earners, wives are already earnings more than their husbands. Moreover, if the gender gap in education continues to widen, it may not be long before the average earnings of fulltime women does exceed that of men. This would mark a culmination of a remarkable reversal of the gender gap not only in education but also in earnings.

 

 

Male and Female Earnings Trends—Posner

The statistics on education and earnings presented by Becker are dramatic, but also puzzling, at least superfically. Why should the sex ratio of either education or earnings change over a relatively short period of time (30 or 40 years)? It is fairly easy to explain the growth over this period in the percentage of women who work full time in the market rather than in the household—improvements in contraception, a fall in the marriage rate (though that is a function in part of women’s higher market earnings potential), a reduction in the demand for children (also, however, in part a function of that higher potential), the shift from a manufacturing to a service economy (and the growing automation of manufacturing), and the growth in household labor saving appliances—all these things have contributed to increased female participation in the labor force, but it is not obvious that they would increase the ratio of full-time female earnings to full-time male earnings. 

It’s not as if there’s been a relative increase in the number of jobs for which women are better suited than men. Women are not as well suited to perform jobs requiring upper-body strength as men are, but men can perform virtually all service jobs as well as women can. So an increase in demand for service workers should draw men as well as women into such jobs, leaving the gender wage ratio unchanged. Similarly, one would expect an increase in the returns to education to affect men the same way it would affect women, so that relative graduation rates would not change and therefore would not affect relative earnings. 

One factor in the increased ratio of female to male earnings is undoubtedly that until quite recently most women who worked full time were unable, unless they were unmarried, or married but childless, to spend as many years working full time as they are able to do today. They would have to take years off from full-time employment to take care of their children, and so would be investing less in their human capital than male workers and therefore earning less. And they would tend to cluster in full-time jobs that involve short work days, notably teaching, and so more of their compensation (relative to men’s) would take the form of leisure, as distinct from pecuniary income, than men’s compensation would. Law, and especially medicine, fields that require protracted education and long hours—and are compensated accordingly—would be unattractive professions for most women. 

Another factor is discrimination. Women were largely excluded from the major professions until the 1960s (in part at least because of expectations that they would become full-time practitioners), and their educational opportunities were limited until then as well—many elite colleges and professional schools did not admit women. Beginning in the 1970s, antidiscrimination laws corrected but also overcorrected sex discrimination, by placing pressure on employers to hire and compensate women at higher rates than justified by labor costs. For, in order to avoid accusations of discrimination, employers began bending over backwards to hire and retain women, even ones who were slightly less qualified than men. And the laws forbade employers to charge higher health insurance or life insurance premiums to female employees, even though they tend to use more medical services than men, and live longer, and so cost more to health and life insurers. 

But all this leaves unexplained why women would be graduating at higher rates from colleges and from graduate and professional schools than men. One possibility is differences between men and women in variance in IQ—the issue that got Larry Summers into trouble when he was president of Harvard. Suppose as he conjectured (with some evidence) that men and women have the same IQ but the distribution of male IQs is flatter than that of women—a higher proportion of men than of women have very high and very low IQs. As graduation from most college and most graduate or professional programs requires a normal or high but not very high IQ, the greater male variance in IQ would tend to truncate male but not female graduation (and hence enrollment) rates: low-IQ males would be underrepresented in higher education, but high-IQ males would be overrepresented in just a few programs, such as high-energy physics, and so would not balance the males who were not admitted or dropped out at high rates. Males would continue to be overrepresented in jobs involving upper-body strength, but these tend not to require a high level of education. 

Cultural factors may also be at work, especially in the black community, where academic performance is disparaged among young men but not young women. For example, 42 percent of black women who graduate from high school go on to college, compared to only 37 percent of black males; and just 35 percent of black male college students graduate within six years, compared to 45 percent of black female college students. This implies that 19 percent of black women who graduate from high school are graduating from college within six years compared to only 13 percent of black males. The overall situation is actually worse, because only 48 percent of black males graduate from high school, compared to 59 percent of black females (implying that the college graduation rate for black females is almost twice that for black males); and the disparity is almost as great for Hispanics. Blacks and Hispanics constitute a sizable fraction of the U.S. population. Nevertheless, there is a gap between white male and white female graduation rates as well; the high school graduation rate for white males, for example, is 74 percent, compared to 79 percent for white females, and the college graduation rate is 43 percent for white males compared to 57 percent for white females.

 

 

 

The Controversy over Birthright Citizenship—Posner

Recently, as an aspect of growing hostility to immigrants to the United States fueled by our continuing economic crisis, questions have been raised concerning the desirability of what is called “birthright citizenship.” The term refers to awarding citizenship to everyone born in the United States (with a few very minor exceptions, such as the children of accredited foreign diplomats and of foreign heads of state on official visits to the U.S.), including the children of illegal immigrants whose sole motive in immigrating may have been to confer U.S. citizenship on their as yet unborn children. This rule—though thought by some (not by all) to be compelled by section 1 of the Fourteenth Amendment, which provides that “all persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the State wherein they reside,” but which in any event is codified in a federal statute which provides that “the following shall be nationals and citizens of the United States at birth: (a) a person born in the United States, and subject to the jurisdiction thereof”—can indeed be criticized. “The Federation for American Immigration Reform estimates that 165,000 babies are born each year in the United States to illegal immigrants and others who come here to give birth so their children will be American citizens.” Kelley Bouchard, “An Open-Door Refugee Policy Has Its Critics,” Maine Sunday Telegram, June 30, 2002, p. 11A. There is said to be “a huge and growing industry in Asia that arranges tourist visas for pregnant women so they can fly to the United States and give birth to an American. Obviously, this was not the intent of the 14th Amendment; it makes a mockery of citizenship.’” John McCaslin, “Inside the Beltway: Rotund Tourists,” Wash. Times, Aug. 27, 2002, p. A7.

We should not be encouraging foreigners to come to the United States solely to enable them to confer U.S. citizenship on their future children. That abuse provides an argument for abolishing birthright citizenship. A constitutional amendment may be required to change the rule, thoiugh maybe not, see Peter H. Schuck & Rogers M. Smith, Citizenship Without Consent: Illegal Aliens in the American Polity 116–17 (1985); Dan Stein & John Bauer, “Interpreting the 14th Amendment: Automatic Citizenship for Children of Illegal Immigrants,” 7 Stanford L. & Policy Rev. 127, 130 (1996), since the purpose of the rule was to grant citizenship to the recently freed slaves and the exception for children of foreign diplomats and heads of state shows that Congress does not read the citizenship clause of the Fourteenth Amendment literally. If birthright citizenship is not commanded by the Constitution, it can be eliminated by amending the statutory provision that I mentioned.

But closing the loophole that encourages foreigners to come to the United States solely to make their future children U.S. citizens would not address the larger question of birthright citizenship. For undoubtedly most children born in the United States to illegal immigrants are not born to persons whose motive for immigrating was based in whole or significant part on a desire to have U.S. citizen children.

Most countries outside the Western Hemisphere do not recognize birthright citizenship; instead they base citizenship of children on the citizenship of their parents or other lawful connections between the parents and the country (ethnicity or religion, for example). Should we adopt that approach, by constitutional amendment if necessary? (It may not be necessary, as I have suggested, but I take no position on that question.) The problem is that though it would discourage people from coming to the United States for the sole or main purpose of having children who would be U.S. citizens, it would probably on balance increase the size of the illegal immigrant population. The United States, at least when the economy is healthy, is a magnet for illegal immigrants, most of whom manage to avoid being deported. Their children born here are U.S. citizens despite the parents’ illegal status. If birthright citizenship were abolished, these children would not be U.S. citizens, at least not automatically as at present. Nor would their children. One would have, as in some European countries, generations of illegals—persons who had never lived anywhere else, who could not feasibly be deported (and to where?—the country of origin of their grandparents, a country with which they had no connection, and the language of which they did not speak?). If many illegal immigrants do not become well assimilated in the United States (many do, however), at least their children born here probably do. And that is a considerable benefit to the nation that eliminating birthright citizenship would undermine, perhaps eliminate.

If most illegal immigrants were deported within a few years of their arrival in the United States, the problems created by birthright citizenship would largely disappear; if the parents had children born here, still they would be young children and the parents would bring them back home with them when they were deported and most of these children, grown to adults, would not come to live in the United States though entitled to do because they were U.S. citizens. But illegal immigration to the United States has overwhelmed the resources that the political process is willing to allocate to exclusion and deportation (given demand by U.S. employers for immigrant labor, legal or not), and as a result many illegal immigrants have children who grow to maturity in the United States and know no other country. For to be illegals would create what in Europe is called a “helot” population, helots in ancient Greece having had an ill-defined intermediate status between slaves and free citizens.

Concern with birthright citizenship is probably misplaced, because the most serious problem of U.S. immigration policy is not who should be excluded but who should be admitted, and that problem should be tackled first. We are handicapping our growth by refusing to allow easy admission of those immigrants who are most likely to foster economic growth by virtue of their IQ, skills, or wealth. Instead we continue to emphasize lotteries and family-reuniting as the principal criteria of lawful immigration.

Should Children Born in the United States Automatically Become Citizens? Becker

 

 

The provision of the Fourteenth Amendment to the American Constitution that appears to (see Posner’s discussion for why I say “appears to”) guarantee all children born in the United States automatic citizenship applies not only to children born to parents who are in this country illegally, but also to students, tourists, and others who are in the country on temporary visas. Yet most of the anger felt about giving citizenship to all children born here is directed at children of illegal immigrants.

This is partly due to the illegality of the presence of their parents in the US, and partly to the evidence that some women cross the Mexico-US border, or come from other countries, just to have their children become Americans. The hostility is also fueled by the apparently correct belief that children born of illegal parents are a significant contributor to the total number of births in the United States. The Pew Hispanic Center estimates that about 8% of all children born in the US in 2008 have parents who are in the country illegally. This is about double the estimated percent of the US population that are here illegally. Although it is not possible to know how accurate these estimates are, one would expect Mexican immigrants to have relatively many children, even if the children did not automatically become citizens, since these immigrants tend to be younger and less educated than the typical American. Extensive studies would be necessary before one could know how many of the children of illegal immigrants were born here because of the guarantee of American citizenship.

Some members of Congress and others have proposed a constitutional amendment to eliminate the granting of citizenship to children born in the United States without at least one parent who is a citizen or has a green card. Clearly, they are mainly concerned about excluding from citizenship children born to illegal immigrants. Yet since their ultimate concern is the level of illegal immigration, denying citizenship to the children of these immigrants would be a roundabout and very imperfect way of discouraging illegal immigration.

It is highly unlikely that most of the approximately 11 million illegal immigrants in the United States will ever be forced to return to Mexico, or wherever else they came from. Most likely is that they will either eventually be given amnesty, and hence citizenship, or they will become permanent residents without citizenship, but with many of the rights of citizens. These include the right to receive medical care in hospitals, and to send their children to American public schools. Under either of these scenarios, it will not make a big difference whether children of illegal immigrants born in the US did or did not automatically become citizens since they would de facto have most of the rights of citizens.

I favor generous legal immigration since legal immigrants of different skill levels add a lot to a country’s human capital (see my proposal to sell the right to immigrate discussed in the June 25 issue of The Economist). However, I oppose illegal immigration because it corrupts the whole immigration system, and it is unfair to the millions of persons who wait for years to immigrate to this country legally. Probably, little can, or should, be done to greatly reduce the number of illegal immigrants already here. However, it is very feasible to reduce the inflow of additional illegal immigrants, while at the same time increasing the number of legal immigrants.

Finding an effective way to curtail the inflow of illegal immigrants seems to be a far better way to deal with the issue of illegal immigrants than concentrating a lot of effort and opposition on trying to obtain a constitutional amendment that eliminates the right to citizenship of children born in America to parents who are not American citizens.

Democracy or Autocracy: Which is Better for Economic Growth? Becker

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The Economist in its October 2-8 issue has a cover page with the title: “How India’s growth will outpace China’s”. One of the main reasons they give for this claim in their leader on this topic is that India is democratic while China is autocratic. The other is that India has higher birth rates, and hence a younger population. Both arguments can be questioned, although I concentrate my discussion on whether democracies favor economic growth.

Visionary leaders can accomplish more in autocratic than democratic governments because they need not heed legislative, judicial, or media constraints in promoting their agenda. In the late 1970s, Deng Xiaoping made the decision to open communist China to private incentives in agriculture, and in a remarkably short time farm output increased dramatically. Autocratic rulers in Taiwan, South Korea, Singapore, and Chile produced similar quick turnabouts in their economies by making radical changes that usually involved a greater role for the private sector and private business.

Of course, the other side of autocratic rule is that badly misguided strong leaders can cause major damage. Mao’s Great Leap Forward is one prominent and terrible example, but so too are Castro’s forcing Cuba into a centrally planned government-controlled inefficient economy, or Iran’s mullah-led government that created monopolies controlled by religious foundations and other groups.  The overall effect of autocratic governments is some average of the good results produced by visionaries, and the bad results produced by deluded leaders.

Democracies help control the range of outcomes. Visionaries in democracies can accomplish much sometimes, as did Manmohan Singh when Finance Minister of India from 1991-1996, Margaret Thatcher after she became Prime Minister of Britain in 1979, Ronald Reagan as US president during the 1980s, and Japan’s leaders after World War II. However, their accomplishments are usually constrained by due process that includes legislative, judicial, and interest group constraints. On the other hand, bad leaders in democracies are also constrained, not only by due process, but also in addition by the reporting of a free competitive press and television, and nowadays too by a competitive Internet.

Whether on average democracies are more conducive than autocracies to economic growth is far from well established. What is clearer is that democracies produce less variable results: not as many great successes, but also fewer prolonged disasters. Since the bad outcomes tend to produce more damage than the good ones, less variable outcomes would be an attractive feature of democracies compared to autocracies, even if democracies on average did not produce greater economic growth.

Comparisons between the effects of these different systems of government on economic growth are muddied by the fact that personal freedoms usually increase substantially under autocracies that have been growing at a fast pace. China is an excellent example. Although China has remained a one party autocratic system since it started growing rapidly 30 years ago, the degree of personal freedom has expanded enormously. Personal freedoms in China did not exist when I first visited there in 1981 shortly after the economic reforms had begun. Changing domiciles was virtually impossible, and Chinese men and women could not even enter Western style hotels and shops.

I have returned a few times since then- most recently a few weeks ago- and the contrast is simply amazing. Students and many others criticize economic and social policies of the government, including the one child policy, although they cannot openly criticize the one party government, as jailed dissidents show. Many Chinese have traveled abroad and have seen first hand the freedoms in other countries, and the Internet provides access to opinions and facts on many thousands of subjects. The government does try to censor out opinions and information from the Internet that are considered damaging to the government, but cheap software has enabled many to bypass the government censors by connecting directly to Hong Kong, which is free of government censorship.

Other examples of growing freedoms under autocracies include Taiwan, South Korea, and Chile. They all started their economic booms under single party dictatorships, but after a period of quite rapid growth, fierce opposition to the dictatorships emerged. Before long all these countries did become democratic, with competing political parties.

To return to the comparison of China vs. India, the analysis I have given indicates that it is far from obvious whether democratic India has an advantage in the economic growth race over autocratic China. Each has its own strengths and weaknesses from a growth perspective, although India clearly dominates in political and social freedoms. Yet if, and this is a big if, China continues to have effective leaders, I would give China the edge in terms of future economic growth. This edge is partly because of the enormous enthusiasm to regain its former great country position among all strata in China’s population: entrepreneurs, professionals, and workers. On the other hand, a dismal leader could come to power in China and cause considerable damage to the economy. Overall, I expect India’s growth rate to be lower but more stable, and that stability might be worth a lot.

 

Autocracy, Democracy, and Economic Welfare—Posner

Becker makes the essential point about the difference between the quality of government under autocracy (dictatorship, or nonconstitutional monarchy) and under representative democracy: there is more quality variance under the former. Dictatorship tends to extremes of bad and good, representative democracy to mediocrity because the institutions of representative democracy are designed to diffuse rather than to concentrate political power.

 

Dictatorship and democracy are not dichotomies; they are points on a spectrum. At the left end of the spectrum is direct democracy (the people vote on policies rather than representatives, as in a California referendum) in ancient Athens; it is susceptible to being destabilized by sharp swings in public opinion. Moving a step to the right we come to modern American democracy: public opinion is mediated by popularly elected representatives and the power of government is limited by an independent judiciary. A step to the right of that brings us to the original U.S. constitutional democracy, that of 1787, in which, of the five major arms of government—the Presidency, the Senate, the House of Representatives, the federal judiciary, and the federal bureaucracy (consisting of all executive branch officials and employees except the President and Vice President)—only one was popularly elected, the House. The President and the Senate were indirectly elected (via the Electoral College in the case of the President and the state legislatures in the case of the Senate), and the judges and bureaucrats were not elected at all. Today the Senators are elected directly, and likewise (in effect) the President. Take a big step to the right, and we encounter quasi-democratic polities, such as England in the eighteenth century and the German Empire (1871 to 1918). Take another big step to the right and we encounter oligarchy—the rule of the few—illustrated by the collective dictatorships of the Soviet Union after the death of Stalin, and of China today. A final step to the right bring us to the one-man dictatorships, for example of Hitler, Stalin, Mao, and Castro.

 

This spectrum has a parallel in the variety of managerial structures found in business. At the right end is the highly centralized, “U” (unitary) form of organization. At the left end is the decentralized, “M” (multidivision) form of organization illustrated by the high-tech firms of Silicon Valley. The centralized form minimizes redundancy, maximizes top-down control, and is optimal for relatively simple, mature production processes that do not require constant innovation and flexible adaptation to a rapidly changing economic environment. The decentralized form of management accepts redundancy and loss of tight control as the price for fostering innovation and adaptation by granting a considerable measure of autonomy to employees. The Soviet Union’s command and control economy worked well in World War II because it enabled vast quantities of a limited number of weapons to be rapidly produced and distributed and millions of soldiers to be rapidly trained and deployed, but the system proved to be fatally maladapted to the complexities of a civilian economy.

 

In general, then, the simpler the economy (all-out low-tech war is the limiting case: there is only one demander, and for a limited range of goods and services, thus making supply simple), the more adaptive a dictatorial political system; the more complex the economy, the more adaptive democracy is. A dictatorship is apt to limit information flows and business autonomy, and by doing so to reduce flexibility and innovation, fearing the private sector as a potential power rival to the dictator. At the same time, the dictatorship wants the population to be content, for then it is more easily controlled. The competing aims of limiting private freedoms and producing contentment may lead the dictator to relax control over the economy as increasing complexity makes a command and control economy increasingly inefficient. As that happens and people become wealthier, they also become more self-confident and assertive, creating pressure for self-government and therefore democracy.

 

Dictatorship will often by optimal for very poor countries. Such countries tend not only to have simple economies but also to lack the cultural and institutional preconditions to democracy. Dictatorship is much less likely to be optimal for advanced economies. This pattern seems to be broadly observed.

 

China and India present an interesting contrast and case study of theories of politico-economic development. Both are huge Asian nations with rich cultures, limited natural resources, serious minority problems, perceived military challenges, great poverty, many very intelligent people (mainly as a function of their large populations), a belated and incomplete but meaningful embrace of free-market economics, and (related to the previous point) a booming modern sector. So they have much in common. But India is a democracy and China a collective dictatorship. What does that portend for their future relative economic growth?

 

I am very reluctant to make predictions. I shall go no further than to say that China seems to me to have more serious problems than India, problems rooted in part, though only in part, in dictatorship. China is historically unstable and extremely corrupt, nationalistic, militaristic, and aggressive; like Wilhelmine Germany, which it resembles in other ways as well, it has a paranoid fear of encirclement by hostile powers (Japan, Taiwan, the United States, Vietnam, India). It is also fearful of and hostile toward its numerous minorities, reactions that feed and are fed by nationalism. Nationalism fosters loyalty to the state and thus serves the political purpose of the dictatorship and so is encouraged by it. The dictatorship has further augmented its power by not only retaining but also expanding public ownership and control of much of the nation’s industry. In this and other ways China has an unbalanced economy. It has pursued a policy, sensible for a poor country with low wage rates, of producing mainly for export. But as incomes rise, the pressure to move toward a consumer economy will increase, and it may be difficult for China to achieve this transition in a timely fashion because it is just beginning to develop a robust consumer infrastructure—a strong retail sector, product warranties, effective regulation of food and drugs, anti-fraud policies, health insurance, etc.—in short a modern service sector, which cannot be created overnight.

 

Perception of China’s problems has been obscured by its spectacular growth statistics (though it’s unclear how accurate they are) and by the nimbleness of its response to the global economic crisis, compared to most democratic nations, including the United States. It is not an accident. An economic emergency is like a war: it requires a rapid and concentrated response, which is easier to organize and implement in a dictatorship than in a democracy. Keynes pointed this out in his foreword to the German translation of the General Theory, published in Germany during the Nazi period. He wrote that “the theory of aggregated production, which is the point of the General Theory,…can be much easier adapted to the conditions of a totalitarian state [eines totalen Staates] than the theory of production and distribution of a given production put forth under conditions of free competition and a large degree of laissez-faire.” By “aggregated production,” he seems to have meant private plus government production, the latter being particularly important in a depression to take up the slack created by the drop in private demand for goods and services.

 

All true; but we know what happened to Nazi Germany.

 

 

The Value-Added Teacher Reform Program—Posner

There is widespread concern that elementary and secondary school education in the United States is deteriorating and is now inferior to that of many other countries, as measured for example by high-school graduation rates and college attendance rates. Proposals for reform fall into two main classes: increasing competition in the provision of educational services; improving the quality of public school teachers.

 

A reform aimed at improving the quality of public school teachers that has received a good deal of attention lately is the “value added” method of evaluating teachers’ performance, now being used in the public schools of Los Angeles. See “Grading the Teachers: Value-Added Analysis,” www.latimes.com/news/local/teachers-investigation/. The evaluation begins with determining the average improvement of a student, say between the end of third grade and the end of fourth grade, and then comparing the student’s actual improvement, all as measured by performance on standardized tests. If his or her improvement is above the average improvements, the teacher is rewarded, for example with a bonus; if below, the teacher can be counseled in an effort to improve the teacher’s performance. The Secretary of Education, Arne Duncan, supports value-added teacher evaluations (and informing parents of the teachers’ scores); the teachers’ unions oppose it as a step toward merit-based pay of public school teachers or even elimination of tenure.

 

The main objection to the program is that the value added by a teacher can’t really be measured. The reason is that much may influence a student’s performance (including his year-to-year improvement) besides the teacher, including fellow students, conditions at home, and the student’s intelligence and application. These other factors could in principle be controlled for, but actually to do so would probably strain the ability of public school bureaucracies to devise and administer sophisticated statistical measurements. The alternative would be to assume that differences across students average out. But unless classes are very large and students are assigned to teachers randomly, differences in average performance are unlikely to be statistically robust.

 

The value-added methodology is, moreover, very difficult to apply beyond elementary school. When students have more than one teacher at a time their progression from year to year is the result of a team effort, and it is difficult to identify the contribution of each teacher. Even if improvement (or lack thereof) is measured on a subject-by-subject basis, the existence of complementarities between subjects (math and science, for example, or history and social studies) means that a teacher in one subject can influence student performance in another. And the complementaries can be subtle: an excellent English teacher may inspire her students with enthusiasm for school in general, stimulating them to improve their academic performance in unrelated courses.

 

Even with all these difficulties acknowledged, the granting of bonuses to teachers who receive above-average value-added evaluations would have some good effect on teachers’ motivation. But of course the money has to come from somewhere, and the benefit may not equal the cost. It is doubtful, moreover, that value-added evaluations, even when publicized (as the Los Angeles Times did recently with the L.A. public schoolteacher evaluations, causing a good deal of commotion and, it seems, the suicide of one teacher), have much effect on bad teachers, either by causing them to improve or by easing them out of the system. The methodology is too crude (and likely to remain so) to provide a solid basis for censure, self-criticism, instituting a system of merit pay, or ending teacher tenure. Tenure has of course bad effects, whether it’s tenure in public or private schools, in public or private universities, in the federal judiciary, or unionized workplaces: it encourages slacking off, selects for people who have a high degree of leisure preference, and leads to retention of poor performers. At the same time, however, it is a form of compensation valued by many; were it eliminated in public schools, the schools would have to pay higher, maybe much higher, salaries, which hardly seems feasible in today’s economic climate (which is likely to be tomorrow’s too).

 

So value-added evaluation of public schoolteachers, while ingenious (despite its limitations) and growing in popularity, does not seem to be the answer, or even a major part of the answer, to dissatisfaction with American education. Competition is more promising. Two forms should be distinguished: charter schools, which are public schools (that is, publicly financed and tuition free) that are however managed outside the normal public school system in order to enable and encourage experimentation; and means-tested vouchers, which are scholarships that a student can use to attend a private (including parochial) school. About a million students are enrolled in charter schools, and 200,000 other students receive vouchers enabling them to attend private schools. Home schooling is another alternative to public schools, and an important form of competitive education, but it is not feasible for students from poor homes because their parents (often just a mother) rarely have enough education for them to able to teach their children.

 

The charter schools have turned out to be a mixed bag. There is excess demand for them, which is some evidence that they are superior to public schools. But studies of drop-out rates and other measures of quality indicate that while some charter schools are indeed better than public schools, many are worse; there is as yet no convincing evidence that on balance they are superior to public schools. There is more evidence that vouchers improve educational performance, though it is not conclusive. See “Is School Choice Enough?” www.city-journal.org/2008/forum0124.html. Vouchers enable poor students to attend established schools with a proven record of quality (many of these are Catholic parochial schools), so it is not surprising that they are more effective in improving academic performance than conversion of existing public schools to quasi-private status, which is the character of the charter-school movement.

 

Teachers’ unions are more fiercely opposed to vouchers than to charter schools, which is a vote in favor of vouchers! Private schools have greater freedom from regulation and are less likely to be unionized than charter schools (although charter schools, too, are generally not required to bargain collectively with their teachers), and they are numerous and established and can expand to accommodate increased demand.

 

I favor vouchers, but they are no panacea. Obviously, basic education is an important social good. But even bad schools provide that. How much value good schools can add to the skills and knowledge of students who now attend bad schools is uncertain. Maybe most students who attend bad schools have limited aptitude and motivation because of low IQ, poor physical or mental health, peer-group pressures, a bad family environment, or effects of popular culture. How far such impediments to academic performance can be remedied by teachers, however skilled, and at what cost, is unclear to me.

Incentives to Teachers and Students-Becker

The traditional public school system had a very weak incentive structure. Since students automatically went to neighborhood schools, schools did not have to compete for students. The teachers unions long ago eliminated merit pay, and made teachers’ pay determined almost entirely by degrees and years spent teaching. Finally, in this traditional system, students had little incentive to work hard, especially when they did not expect to get much education, and could count on always getting promoted.

All this is beginning to change for the better, despite fierce opposition from teachers unions to virtually every important reform. School vouchers, and especially the charter school movement, is bringing competition to the traditional neighborhood school. No longer can public schools automatically have a captive audience of all the school age children in their neighborhood. Charter schools are expanding as rapidly as allowed by local and state restrictions that have been due mainly to lobbying of teachers unions.

Fortunately, restrictions on charter schools, and the even greater limits imposed on the scope of school vouchers, are breaking down, in large part because parents are becoming vocal, and are also voting with the feet of their children. In addition, careful evaluations of charter schools in randomized experiments that compare the performance on standardized tests of students in charter schools to performance by students in regular public schools generally show that charter school students do significantly better (see, for example, studies by Josh Angrist of MIT and co-authors of charter schools in and near Boston).

Some progress has also been made in finding ways to better motivate students, even in traditional public schools. A large and mainly well designed experiment of poor rural children in Mexico that began in the 1990s, originally called Progresa (now called Oportunidades), showed that even young children from uneducated families could be better motivated by financial incentives. Progresa gave monthly stipends to mothers of children in the program if they attended school regularly and did decently. School attendance did rise for families participating in this program, and students stayed in school longer.

Experiments are now ongoing in American public schools by my colleagues Steve Levitt and John List, along with Roland Fryer of Harvard, on motivating students by giving financial rewards directly to students rather than to parents. Although the studies are not yet completed, I would anticipate that students, especially older students, could be well motivated by monetary and other rewards for good performance.

Not surprisingly, teachers unions fight hardest against reforms that change the way teachers are paid, especially when they introduce incentives for teachers to perform more effectively. Teachers’ pay should tend to depend on education and experience, but it should also be sensitive to their revealed effectiveness as teachers. Teachers unions have for many decades fought merit pay that allows principals and other administrators to determine “merit” by their evaluations of how well teachers perform. The unions have claimed that this approach to merit would give higher pay not to teachers who do the best teaching, but to teachers who ingratiate themselves into the good graces of the administrators. Perhaps that argument has some merit in the traditional school system where administrators of neighborhood schools have some monopoly power, but it is far less compelling as administrators of public schools increasingly have to compete for students by offering better education.

In any case, the call now is for merit pay based on more objective criteria, such as students’ performance on standardized tests. Since students differ greatly in how well prepared they are for particular classes and subject matter, it is crucial to design a merit pay system that ties pay not to the absolute level of performance, but to the increment in performance added by different teachers. It may also be desirable to try to reduce “teaching to the test”, whereby teachers only emphasize materials that are included in the tests used to determine merit pay, although teaching to the test is valuable if doing well on the “test” requires knowledge of the important principles.

I do not want to minimize the difficulty of getting a well-designed system of merit pay, and Posner discusses many such difficulties. However, my colleague, Derek Neal, has proposed an attractive system of merit pay, where student performance at the end of the year is compared to that of students who perform about as well at the beginning of the year. Essentially, teachers then get a bonus that depends on the percentile ranking of their students at year-end compared with the performance of the comparable students. Other education specialists have different ways to determine merit pay that may be worth considering.

The disgraceful reaction of the LA teachers union to publication by the LA Times of the database that gives performance scores of the students of 6000 elementary school teachers is indicative of how teachers unions feel toward rewarding better teachers. The support by Arne Duncan, the US Secretary of Education, of the newspaper’s publication of this information is highly commendable. Not only should such information be published and publicized, but they should also be used to design a system where merit plays a sizable part in the monetary compensation of teachers.