The Becker-Posner Blog

Public-Employee Unions—Posner

A union is a workers’ cartel. Its goal is, by threatening to shut down the employer’s production by the workers’ refusing to work, to increase the workers’ full income, where “full” signifies that a worker’s income in economic terms consists not just of wages and benefits but also of the length of the workday, how dangerous and strenuous the work is, and job security. Unions in the private sector are most effective in industries in which competition is weak and in industries that do not produce a storable commodity. A good example of the latter is the airline industry; an airline cannot continue operating by selling from inventory produced before its workers went on strike. A union can sometimes be of benefit to an employer by providing a check on abuse of power by supervisors, but the net effect of unionization on most employers is negative: unionization raises labor costs both directly and, by reducing the employer’s control over working conditions and job tenure, indirectly. Unionization reduces, in short, the efficiency of labor markets, and exists only because of political pressures. Between 1945 and 2009, the rate of unionization in the private sector fell from 45 percent to 7 percent, which is telling evidence of the inefficiency of unionization. 

Historically, government employees were not permitted to unionize. No more than any other employer did governments want their employees to be unionized, especially because governments provide mainly services rather than goods and so are highly vulnerable to work stoppages, particularly where essential services such as police protection are concerned. When government was small, its employees were not numerous enough to obtain through the political process the right to unionize, but as the government sector grew, public employees became a more powerful interest group (they are a key constituency of the Democratic Party) and were able to obtain in many states and cities, and in many parts of the federal government, the right to unionize. From very low levels in the 1950s, public-sector unionization grew by 2011 to encompass 36 percent of all public workers in the United States, prominently including teachers, police officers, firefighters, and postal workers. 

Some public employees, such as police officers and firefighters, do not have the right to strike, and some states forbid strikes by other public employees as well, such as teachers, although in states that recognize teachers’ unions teachers generally do have the right to strike. Even when public employees have no right to strike, the employer is required to bargain over wages and other terms and working conditions with the public employees’ union if there is one, and the employer’s duty to bargain provides some leverage to the unions in extracting favorable terms. 

The net effect of public employee unions is difficult to gauge, however, because most public employees have considerable economic leverage, even without unionization, simply as a result of their status as voters—imagine if the workers in a private company could vote in elections for the board of directors. And, partly to minimize political considerations in government staffing, government workers have long enjoyed a high degree of job security—more than most private-sector unions are able to negotiate for their constituents. 

Nevertheless the recent political turmoil in Indiana, Ohio, and Wisconsin concerning the rights of public-employee unions suggests that such unions do make a difference: that they are a factor in the extraordinarily generous health and pension benefits that public employees receive, which are placing an immense debt burden on states and cities. Moreover, the combination of the virtual disppearance of unions in the private sector with their attaining in the private sector a rate of unionization comparable to that of the heyday of unionization during the New Deal and World War II poses a political threat to public-sector unionization: workers in the private sector, who are the vast majority of all workers, ask themselves why their taxes should be supporting unionized public workers in jobs that confer job security, health benefits, and pension benefits unavailable in most private-sector jobs. There is no good answer to that question except the raw political power of public employees magnified by their union rights. 

The public-sector unions have overreached in much the same way that the United Auto Workers overreached in its dealings with the Detroit automakers. The UAW concentrated on negotiating for generous health and pension benefits, which the automakers preferred to big wage increases because the benefits were deferred. When the Detroit auto industry got into serious economic trouble because of foreign competition and the economic crisis that began in 2008, its benefits obligations became unsustainable and crushed the industry—and the union, which has become a mere shadow of its former self. History may be repeating itself in the public sector, as taxpayers wake up to the fact that state and local governments are raising taxes and reducing services to pay for union-exacted benefits for public employees.

Government Sector Unions-Becker

 

The main story of unions during the past half-century in the United States is the sharp decline in union membership to only 7% of private sector workers, and the equally sharp growth of union membership to 36% of all government employees. Nor are these trends unique to America; for example, union members declined to about 15% of all British private sector workers, and unions are much more important among public-sector workers.

Unions declined over time in the private sector in most developed countries partly because of the shift from manufacturing with large plants, where unions have been strong, to the service sector with small establishments, where unions have been weak. Other factors reducing unionization include the growth of competition from imports, and the sharp expansion over time of the welfare state. The latter has meant that governments are providing medical benefits and other services that had been provided by unions. As Posner indicates, an important reason for the growth of unions among government employees has been the expansion of government. This expansion increased the number of government employees, and gave them a more powerful voice as voters, and as contributors to political campaigns.

Employees in companies should be able to bargain collectively with employers if they so wish. However, employees should not have the right to monopoly power when they bargain, no more than employers should have this right. Yet while employers are subject to anti-trust laws that forbid collusions and other monopolistic practices, unions were exempt from the anti-trust laws by the Clayton Anti-Trust Act of 1914, reinforced by the National Labor Relations Act of 1935. This exemption meant that unions had the legal right to organize workers in whole industries or occupations, which would give unions some monopoly control over hiring, and the supply of workers to industries and occupations. Unions exercise this power by threatening to strike and to withhold the labor of their members.

The right to bargain collectively should also be available to government workers. Yet since these workers face only limited competition from the private sector and from other governments, they should not have the monopoly power that comes with the right to strike. Regrettably, many government unions do have this option. Strikes give government unions significant monopoly power over the public purse because they can use a strike to shut down transportation services, garbage collection, and other vital public services.

Even without the strike threat- indeed, possibly even without unions- public employees can often extract considerable benefits from local, state, and the federal government in the form of higher earnings and generous pensions and health benefits. Public employees form a sizable voting bloc with formidable resources of money and the time of members to spend on supporting political candidates who they expect will be generous when it comes time to bargain over compensation.

Whatever the source of their power, unions have managed to obtain better compensation than is available to comparable workers in the private sector. The best evidence supporting this is the much lower turnover of most public employees compared to that of private sector employees. For example, in January 2011, turnover rates among private sector workers were about 2 1/2 times those among government workers. Clearly, workers in any sector are less likely to quit if they are doing better than what they expect to get in alternative jobs. Also reducing turnover is that public employees cannot be laid off easily because they usually receive tenure after only one or two years of employment.

The higher compensation of public employees is heavily weighted toward deferred benefits in the form of favorable medical plans, and especially early retirement ages with generous retirement incomes. Retirement income is usually calculated not as a function of lifetime earnings, but of earnings during the last few years before retirement. Employees can artificially raise these earning by concentrating most of their overtime hours during the pre retirement years. Early retirement ages and generous benefits when retired are found not only at various governmental levels in the United States, but also among public employees in Europe and many other countries as well.

Presumably, in setting this form of compensation, politicians all over the world have responded to their (apparently correct) belief that voters and the media pay greater attention to earnings of government employees than to their deferred benefits. There is so much public attention to earnings that it is difficult to pay high-level government employees anything close to what they might earn in the private sector. This explains why turnover is much greater among top government employees than among the average government worker. Deferred compensation has sometimes been excessive in the private sector as well- demonstrated by General Motors’ financial difficulties- but for the most part the private sector has avoided very early retirements and other extremes of deferred compensation received by public employees.

Unfunded retirement liabilities of many state and local governments are so large that it is highly unlikely that they will ever be paid. For example, according to Joshua Rauh’s calculations in the Milken Institute Review, First Quarter, 2011, unfunded retirement liabilities of the state of Illinois are more than 5 times the state’s annual tax revenue, while the unfunded liabilities of Chicago are more than 7 times that city’s own annual revenue. This explains the recent efforts by governors and mayors of many states and cities to confront government unions and force a change in the system of retirement for state and local workers. The city of Los Angeles recently reached an agreement with its unions to increase significantly the contributions of union members to their retirement benefits. I anticipate that other cities and states will force similar, and sometimes more drastic, changes in their retirement systems.

 

The Economic Implications of the Japanese Earthquake Disaster and its Aftermath-Becker

Japan has certainly been unfortunate during the past couple of decades. It has had almost twenty years of confidence-destroying slow economic growth, a series of humiliating confrontations with a rising and more aggressive China, and finally the biggest earthquake ever recorded in Japan. And this earthquake not only directly caused great damage, but it also set off a tsunami with huge destructive power. As if this were not enough, the combined earthquake-tsunami badly damaged two nuclear energy plants located on the fault lines and by the sea, damage that led to the release of as yet undetermined amounts of radiation. Still, I do not expect this disaster, despite its severity, to have major effects on the Japanese economy, but it will have a big impact on the nuclear power industry, and may help different countries better prepare for very rare but destructive natural events.

The fundamental loss to the Japanese people from this earthquake-tsunami-nuclear disaster is the destruction and damage to people and property. Perhaps in the end about 20,000 people would have been killed, and many others would be severely injured, including the unfortunates who were exposed to high levels of radiation. Twenty thousands deaths are a terrible loss, but they are only a small subtraction from the economy since they constitute about 0.016% of the Japanese population of some 127 million people. Studies of what people in a country like Japan would be willing to pay to avoid highly rare destructive events like that of a magnitude 9.0 Richter scale earthquake combined with a major tsunami suggest that these 20,000 deaths would be valued by about $3 million per death (many of those who died are older and have shorter remaining lives). The total cost of 20,000 deaths would then be $60 billion, a large sum to be sure, but again very small relative to Japan’s GDP of about $5 trillion.

The loss of property is even more difficult to calculate at this point. Since the earthquake hit a depressed region of Japan dependent on declining industries like farming and fishing, it could not have caused a major loss in buildings, equipment, and consumer durables relative to Japan’s total stock of assets. The output produced by the worst affected parts of this region are no more than about 4% of Japan’s GDP, so that percent would be a gross upper bound to the economy’s loss of buildings and equipment.

Even if the leaks from the nuclear reactors are contained without major public exposure to radiation, the combined loss of people and property are sizable in an absolute sense, and of course are disastrous to the people who lost their lives and property, or the lives of their loved ones. Still, it is not a major economic loss to Japan as a whole, and per se these losses should not result in more than a small decline in the per capita standard of living of the Japanese people.

Further economic consequences always follow from major disasters. Production by some businesses has been temporarily reduced since supply chains were disrupted. Since the earthquake hit a depressed and declining region, out migration of young men and women will accelerate, as will the decline of fishing and farming in that region. Construction will increase to replace some of the destroyed homes, businesses, and infrastructure. Presumably also, substantial amounts will be spent on repairing the damaged nuclear plants. These increased activities might give the appearance of an economic boom in the region, but it is a fake “boom” since they will mainly replace or repair destroyed and damaged buildings and equipment. I do not expect it to take very long before the region replaces most of its damaged property. A year after the powerful Kobe earthquake in 1995 that destroyed or damaged about 100,000 homes, GDP of the Kobe region of Japan surpassed its level prior to the earthquake.

The growing worldwide boom for nuclear energy will surely end. Nuclear power does not use fossil fuels and does not cause environmental harm if the radioactive waste is disposed of properly. However, these major advantages now have to be weighed against the different events that can damage nuclear reactors, and release large amounts of radiation into the atmosphere. At the minimum there will be a justified reluctance to locate new reactors on earthquake fault lines and close by seas that may have major tsunami action. Some reactors already in these vulnerable locations may be closed or relocated. Yet I hope that this does not also lead to a sustained moratorium on construction of new nuclear energy plants, but rather mainly induces even closer attention to safeguards against the release of high radiation levels, whether due to natural disasters or terrorist attacks.

It is difficult for people, no matter what their intelligence, to factor into their behavior the consequences of exposure to events that are both very rare, such as a major earthquake, and cause major damage when they do occur. It often takes decades that encompass most or all of a typical lifetime before another such event occurs. In addition, it is not always clear about how much protective action should be taken against such events. The expected damage from such events, which is the product of a small number (the probability of the event), and a large number (the damage inflicted when the event occurs), may itself be only moderate in size. Such moderate expected damages would not justify very expensive protective measures.

Governments have important roles to play in providing the latest information in readily accessible form on the location and likelihood of major, if rare, potential disasters. They also have the responsibility to prevent the building of plants, such as nuclear reactors, in places that would greatly harm people and property in the event of catastrophic events. At the same time, governments need to allow housing and other markets the flexibility so that individual choices can price into different locations their vulnerability to various rare but catastrophic events. An important World Bank study on disasters (see the important book ”Natural Hazards, UnNatural Disasters”, staff of the International Bank for Reconstruction and Development/ World Bank, 2010) shows, for example, that in flexible housing markets property values often are lower in areas more vulnerable to earthquakes and other disasters.

 

 

 

The Japanese Catastrophe—Posner

The earthquake-triggered disaster that has engulfed Japan is a textbook example of the public policy dilemmas posed by catastrophic risk (on which see my 2004 book Catastrophe: Risk and Response). A catastrophic risk, in the policy-relevant sense, is a very low (or unknown but believed to be low) probability of a very large loss. If the probability of loss is high, strenuous efforts will be made to avert it or mitigate its consequences. But if the probability is believed to be very low, the proper course to take will be difficult, both as a matter of sound policy and as a political matter (to which I return in the last paragraph of this comment), to determine and implement. The relevant cost is the catastrophic loss if it occurs discounted (multiplied) by the probability of its occurring. If that probability is believed to be very low, the expected cost may be reckoned to be low even if, should the loss occur, it would be catastrophic. And if the expected cost is low but the cost of prevention is high, then doing nothing to prevent the risk from materializing may be the optimal course of (in)action. Furthermore, even if the expected cost of catastrophe is high, the scale of the catastrophe—the loss that it inflicts—may be reducible to moderate proportions by responsive measures. For example, while one way to deal with the risk of an epidemic is to vaccinate everyone, another is to quarantine the persons first infected, so that the epidemic is limited. 

With these thoughts in mind, one can attempt a preliminary analysis of the Japanese response to the risk of the kind of disaster that occurred. Earthquakes cannot be prevented or predicted, though they can be detected as soon as they occur and if they occur in the floor of an ocean, and as a result trigger a tsunami (a tidal wave), people in the path of the tsunami can receive a warning of minutes or hours, depending on the distance between the earthquake and populated areas. Unlike the countries that border the Indian Ocean, whose populations suffered more than 200,000 deaths from a tsunami in 2004, Japan appears to have had a good early-warning system, as a result of which the number of deaths from the recent tsunami is in the tens of thousands rather than the hundreds of thousands. 

The catastrophic effects of a major tsunami cannot be prevented by building seawalls; nor, in all likelihood, could the vulnerability of nuclear reactors to catastrophic damage from an earthquake or tsunami be reduced by moving the reactors inland, because they require access to large bodies of water for their normal operation, and it appears that the only large bodies of water available to Japan are the seas surrounding it. But catastrophic damage to nuclear reactions could be reduced by building stronger containment vessels for the reactors. 

The loss of life and the radiation hazards from damaged reactors could be minimized by creating a rapid response capability that could be mobilized as soon as an earthquake or tsunami struck. Japan failed to create such a capability. 

At considerable but not astronomical cost, Japan could have reduced the losses caused by the tsunami substantially by strengthening the containment vessels for its reactors and by creating a rapid response capability. I do not know why it did not do so, considering that it is a wealthy, technologically highly sophisticated, and risk-averse society. One possibility is that the probability of an earthquake within several hundred miles of Japan that would be as violent as the earthquake that triggered the tsunami turned out to be (9.0 on the Richter scale) was thought too slight to justify the cost of the protective measures that would have been necessary to minimize the consequences of such an earthquake. Suppose the expected cost of a 9.0 earthquake was $100 billion, but there was believed to be only a 1 percent annual probability that it would occur; then preventive measures that cost $1 billion or more per year would not be cost justified. The 1 percent figure is arbitrary; but considering that Japan had a 9.0 earthquake in 2011 that triggered a tsunami comparable to the recent one, that the Indian Ocean tsunami occurred only seven years ago, that on average a 9.0—or greater—earthquake occurs somewhere in the world every 20 years, and that Japan is in a region that is highly prone to earthquakes and tsunamis, 1 percent seems as good a guess as to its probability as any. 

Strengthening the ability of its nuclear reactors to withstand a tsunami triggered by a 9.0 earthquake (or greater? 9.0 is not the ceiling—the Indian Ocean earthquake was 9.1 on the Richter scale) would be very expensive—Japan has more than 50 nuclear power plants, all on its coasts. But how much would it have cost to have built them slightly inland, connected to the seas by canals? And the creation of a rapid-reaction capability would probably not be very expensive, although I have not seen cost figures. 

It would not be surprising, however, if as seems to be the case Japan failed to take cost-justified measures to minimize the damage from a 9.0 or greater earthquake. Politicians have limited time horizons. If the annual probability of some catastrophe is 1 percent, and a politician’s horizon is 5 years, he will be reluctant to support significant expenditures to reduce the likelihood or magnitude of the catastrophe, because to do so would involve supporting either higher taxes or a reallocation of government expenditures from services that provide immediate benefits to constituents. In principle, it is true, politicians would take a long view if their constituents did out of concern for their children and grandchildren. But considering how the elderly cling to their social benefits, paid for by the young including their own young, I doubt the strength of that factor, although I do not know enough about Japanese politics to venture a guess on whether politicians’ truncated policy horizons was indeed a factor in Japan’s surprising lack of preparations for responding promptly and effectively to the kind of disaster that has occurred. 

A final factor may be that Japan, unlike the United States, does not have an independent nuclear regulatory agency.

What Is a College Degree Really Worth?—Posner

The March 6 issue of the New York Times contains an interesting article by the economist Paul Krugman entitled “Degrees and Dollars,” available online at http://www.nytimes.com/2011/03/07/opinion/07krugman.html. In it Krugman challenges the conventional view that we need to invest more in education because “everyone knows that the jobs of the future will require ever higher levels of skill.” Krugman argues that since about 1990 “the U.S. job market has been characterized not by a general rise in the demand for skill, but by ‘hollowing out’: both high-wage and low-wage employment have grown rapidly, but medium-wage jobs—the kinds of jobs we count on to support a strong middle class—have lagged behind.” He expects the trend to continue, noting a recent newspaper article about the growing use of software to do legal research, potentially replacing hordes of lawyers and paralegals engaged in document review in big cases. He argues that computers are good at doing both cognitive and manual work that can be performed effectively by following rules, whereas work involving a high degree of discretion or imagination, ranging from writing poetry to inventing a new social network to running a corporation (not his examples—he doesn’t give any examples of the type of nonmanual work that he thinks will resist automation successfully), along with some manual labor (he instances truck drivers and janitors, but could add waiters and retail sales personnel), cannot be. He argues that demand will grow for jobs in the categories in which work cannot be automated, and will decline for jobs in the categories that can be. 

Hence, Krugman concludes, it would be “wishful thinking” to believe that “putting more kids through college can restore the middle-class society we used to have.” Instead, the focus should be on “restor[ing] the bargaining power that labor has lost over the last 30 years” and “guarantee[ing] the essentials, above all health care, to every citizen.” These are pathetic prescriptions. Unionization spurs automation by making labor more costly relative to capital, and providing health care to every citizen will increase the tax burden on persons with middle-class incomes, and not just on wealthy persons, because the costs of universal health care are too staggering to be borne entirely by the wealthy. 

But the more interesting question is whether Krugman is right to be pessimistic about the future returns to a college education. The market disagrees. If the market agreed with him, college enrollments would be plummeting because college is expensive, not only in tuition but also in opportunity costs—the income forgone by being in school. College enrollments continue to increase relative to population, and, more important from a market perspective, more and more high-school students express a desire to go to college, even though if Krugman is right their college education will not produce lifetime earnings increments sufficient to offset the cost of tuition and the cost of their forgone earnings during their college years. (Of course a high unemployment rate, by reducing the opportunity costs of college, reduces overall college costs and so helps to sustain high enrollments, but this is not a major factor driving demand for college education.) 

The market could be wrong, or (though this is unlikely) the nonpecuniary benefits of college could be increasing faster than the pecuniary benefits are falling. A high school student, and his parents, are hardly in a good position to predict the structure of the labor market in ten or twenty years. Most people base most of their expectations for the future on simple extrapolation from the recent past. Often that’s the best one can do in the presence of profound uncertainty. But the economic crash that began in 2008 has made us more alert for discontinuities in economic trends. The future doesn't always repeat the past. Krugman may be right that computers will replace many midlevel jobs—the current example is employment by bookstores, which is being killed by Amazon.com. Income inequaltiy has been growing in America (illustrating that there are negative as well as positive trends) and may continue to grow. One can even imagine the emergence of a large servant class, as in nineteenth-century England. Technological advance continues at a dizzying rate; no one can be sure where it is leading us. 

One reason for skepticism, though, is that Krugman may have too limited a conception of the benefits of a college education. He may think that what a college education does is impart knowledge that the graduate needs either for his career or for the next stage in his education, such as law school or medical school. But it may be that the greater value of college lies elsewhere: in providing association with people of above-average intelligence, in imbuing young people with general work skills (discipline, working under supervision, following directions, being evaluated, basic writing and speaking skills, some foreign language proficiency), in fostering ambition, and in providing information to future employers about job applicants that enables better matching of workers with jobs. It is plausible that these noninformational benefits of a college education are valuable across a vast range of jobs and will enable the holders of those jobs to obtain good middle-class incomes. Police officers, prison guards, firemen, noncommissioned officers in the military, sales personnel, nannies, tour guides, secretaries, hotel receptionists, IT staff, medical technicians, store managers, auto mechanics, and many other workers who do not require a college education for their jobs may nevertheless be of significantly greater value to their employer if they have such an education and may be compensated accordingly. Finally, a college education may not only increase incomes in ways different from building up a stock of knowledge but also may reduce people’s living costs by making them more adept at household management. 

But even if this is right (and Krugman wrong), it doesn’t follow that there should be massive increases in public expenditures on education with a view toward increasing the number of people who obtain a college education. The number of people who have the IQ and character traits that would enable them to benefit, in the ways described above, from a college education is inherently limited, and maybe all or most of them will obtain a college education under existing conditions for financing such an education.

Are Too Many Young People Going to College? Becker

 

During the past 30 years, higher education has boomed worldwide. Virtually every country has significantly increased the fraction of its young men and women who go on for a college or university degree. The higher education boom is just as large in developing countries as it is in developed countries, although naturally poorer countries still lag behind in the fractions of young persons with college degrees. China is an extreme example of what has been happening in developing countries, as enrollments in Chinese universities increased several fold during past 15 years. The United States also increased its enrollments, but at a slower rate than many other rich countries. When measured by the fraction of young people with a college education, the US ranking has dropped from among the top three countries several decades ago to somewhere between 10^th and 15^th.

A worldwide trend suggests that universal forces lie behind it. In the case of the higher education boom, one major force is the introduction of computer and other technologies that give an advantage in labor markets to individuals who command information and knowledge. The rapid transfer of technologies from richer to poorer countries, partly the result of foreign direct investments, is also raising the demand for educated persons in many less developed nations.

 If the value of higher education in the modern information-oriented economy has been overrated, the sizable growth in the number of educated persons should have lowered the earnings premiums for college graduates, and raised the unemployment rates of these graduates. In fact, these earnings premiums have generally risen, not fallen, and often the growth has been large. Moreover, unemployment rates of the college-educated have remained much below those of high school graduates and high school dropouts.

In the United States, for example, the average earning of persons with four year of college increased from about 35% above the average earnings of high school graduates in 1980 to about 55% higher in 2009, despite a growth during this period in the fraction of the American labor force with a college education. The earnings premiums for persons with a post-graduate education have increased even faster over this 30 year-period. Moreover, the unemployment rates of lower educated persons have remained much higher than the unemployment rates of persons with higher education.

The rise in the earnings premiums in the United States since 1980 for college-educated persons, is consistent with growth over this period in the demand for college graduates that dominated the increases in their supply. A rise in the earnings premiums for persons with a higher education in found in most countries, except sometimes where the growth in the supply of college-educated persons has been unusually rapid, as shown by developments in China. Starting in the mid-1990s China had an extremely fast increase in the supply of persons with a college education. Since so many young college graduates entered the labor force, the earnings of young graduates dipped a little below those of young high school graduates. But the earnings of college graduates with considerable work experience continued to grow sharply, suggesting a sizable increase in the demand for college graduates with much job experience (this is based on research by James Liang of Stanford University).

This brings me to Paul Krugman’s analysis that Posner commented on. I agree with Krugman that not everyone in the United States or elsewhere will benefit from a college education, but the United States and pretty much all other countries are very far from that extreme. However, if Krugman were correct that software was replacing college educated persons on a large scale, that high wage jobs have been more “offshorable” than jobs done by the low-paid, and that college education is becoming less helpful in finding good jobs, then surely during recent years the earnings gains of college graduates should already have begun to fall behind the gains of less educated persons.

Yet since the early 1990s and even during the last decade, the facts are the opposite: the average earnings premiums of college graduates in the US, and especially the premiums of persons with a post-graduate education, have continued to increase, despite the growth in the numbers of educated persons in the labor force (this evidence can be found in “Explaining the Worldwide Boom in the Higher Education of Women” by Gary Becker, William Hubbard, and Kevin Murphy, The Journal of Human Capital, Fall 2010). So the most recent trends in the earnings of college graduates do not support the view that the US is overeducating its labor force.

All this indicates that President Obama is correct, and that America has to make greater efforts to increase the number of persons qualified to enter and finish colleges and universities. This is mainly a male problem since the fraction of American women who complete college has grown rapidly: women now receive about 60% of all four-year college and masters degrees, while men receive only 40%, whereas in 1970 women received about 40% of these degrees.

Part of the American problem results from the high dropout rates from high school, including in the dropout rate students who only get a High School Equivalency Degree (GED). These dropout rates have remained stable at about 25% of all high school students, a depressing figure relative to those in other developed countries, where dropout rates are usually below 10%. The students who are dropping out do not get good jobs since the evidence is overwhelming that the pay of dropouts is very low, and their unemployment rates are very high. Not much support in these data for any “hollowing out” of job opportunities alluded to by Krugman. Especially disturbing is that African-Americans and other minorities are vastly over represented among those dropping out of high school.

So my conclusion is that America will benefit greatly from increasing the numbers of young men and women who go to and graduate from colleges and universities. To do that, however, will require improving the preparation received at K-12 levels, including the education at the very earliest school levels for young children poorly prepared for school. The challenges are enormous, but the potential gains are worth considerable effort from public and private bodies.

 

 

 

 

 

The Middle East Uprisings, their Economies, and the World Economy-Becker

 

The revolutions and protests in Tunisia, Egypt, Libya, Bahrain, and other parts of the MENA region (Middle East and North Africa) are the most important world development in the past 20 years, even though it is still highly uncertain about the types of governments that will emerge, the effects on their economic and political freedoms, and their production of oil. I expect, however, that these economies will become more competitive and less government-controlled, and that world oil prices would tend to be higher in both the short and long runs.

The larger MENA countries are mainly autocratic, and their governments tend to dominate their economies. Corruption is common, and political connections are usually needed to start and grow businesses, to gain access to raw materials and other inputs, to obtain protected positions in telecommunications and other sectors, and to get credit from government banks.  The Heritage Foundation and The Wall Street Journal prepare annual indexes of overall economic freedom for many countries, including those from the MENA region, that can be roughly compared across countries. Studies have shown that the degree of economic freedom in different countries in any year is positively related to their subsequent economic growth.

Saudi Arabia and Turkey have the highest index of overall economic freedom of any of the larger MENA countries. Their levels of economic freedom place them in the “moderately free” category. Then come Morocco, Egypt, and Tunisia, with indexes in the “mostly unfree” category.  Syria and Yemen have even less freedom, while Iran and Libya are close to the bottom of all 179 countries considered, with indexes of economic freedom in the “economically repressed” category.

None of the major oil producers of the MENA region are democratic, with the exception of Iraq that has a fledgling democracy. They have a mixed record on economic freedom. Qatar, The United Arab Emirates, Kuwait, and Saudi Arabia are in the moderately free category, while the others have much less economic freedom.

Countries that become much more democratic as a result of the upheaval rocking the MENA region are likely to become far more transparent about how they spend their oil and other public revenues since information flow is much greater in democratic than autocratic countries. They would also become less corrupt since the greatest amounts of corruption are generally found in more authoritarian countries. Information flows about all aspects of life would increase, so that citizens would become much better informed about what is happening in their own countries and in the world.

If, as I expect, the shift away from autocratic regimes in the MENA region would increase the role of competition, and increase the private sector, that should speed up the rate of economic growth in these countries. However, the evidence is very mixed on whether democracies in general spur economic growth. Probably the most significant difference is that the variation in growth rates among democratic governments tends to be less than that among autocratic governments. Enlightened dictators can accomplish a lot for their economies, but misguided ones can cause disasters-as in China’s “Great Leap Forward” under Mao. The much greater information flow in democracies and the relatively free elections tend to prevent democracies from engaging in terrible and unpopular policies for prolonged periods.

The world is especially interested in what will happen to world oil production if many of the major oil producers from the MENA region become much more democratic. I say “if” because large oil reserves tend to discourage the growth of democracy (see, for example, Michael L. Ross, “Does Oil Hinder Democracy?” World Politics, 2001). One reason for this is that sizable oil production gives military leaders and autocrats a strong incentive to gain control of these governments and their large revenue base because that does not require trying to collect high taxes on earnings and profits.

However, if large oil producers did become much more democratic, the effects on their oil production is unclear. Would they encourage production and refinery of oil by international companies with much expertise at these activities, or would they, as in democratic Mexico and Brazil, reserve oil production and refinery for less efficient government-owned companies? Their oil production might well decline if government enterprises ran the oil industry. Democratic regimes might have a longer time horizon than the replaced autocratic regimes, especially if the latter governments feared being overthrown. Such governments tend to pump out oil (and other natural resources) at a faster pace since they would not expect to collect the oil revenues in the more distant future.

MENA country regimes that become much more democratic as a result of the current unrest would tend to produce less oil than the autocratic regimes they replaced if they use government-run oil companies, and have a long horizon. This would mean higher oil prices in the near and long term. On the other hand, if these democratic governments used efficient international companies to produce and refine their oil, and if they did not have a particularly long time horizon because they needed larger revenues, they might increase their oil production compared to the autocratic regimes they replace. Although it is uncertain which scenario will prevail, I lean toward expecting reductions in oil production from the MENA region, and higher world oil prices.

 

 

 

The Middle East Uprisings and the Economy—Posner

 I agree with Becker that the current uprisings are a momentous development in world affairs, but I have no idea how they are going to turn out and thus what their ultimate effects will be. This may be another 1848: a wave of revolts swept over Europe, yet when the dust cleared everything was pretty much as it had been. A populist revolt in a country without democratic traditions, even if it is successful in overturning the existing autocratic government, may be succeeded, as in the French, Russian, and Iranian revolutions, by simply a new form of autocracy. 

Suppose, though, that whether or not the uprisings bring to power stable democratic regimes, the new governments will be more democratic than the old ones; then the question will be the effect of quasi-democracy on a nation’s economy. It is possible to have democracy without economic freedom: India illustrated this combination for decades after it became an independent nation democratic from the outset. Britain was democratic and socialist. Economic freedom varies widely across democratic nations, and across autocratic ones, producing some strange rankings of economic freedom. The 2011 Index of Economic Freedom jointly sponsored by the Heritage Foundation and the Wall Street Journal ranks Singapore second and Bahrain tenth, Norway thirtieth, Oman ahead of South Korea, the United Arab Emirates ahead of France and Hungary, Tunisia and Egypt ahead of Serbia and India, and Syria ahead of Ukraine. It’s a crazy quilt from the standpoint of correlating democracy with economic freedom. The wealthy countries tend to be democratic (with the principal exception of some of the small oil-producing countries), but are they wealthy because they are democratic or democratic because they are wealthy? In wealthy countries in which there is a reasonable equality of incomes across persons, people are self-confident and independent and so don’t like to be told what to do or say by government, and so there is strong pressure for liberty and democracy. Poor countries are much less likely to be democratic, though there are exceptions, of which the most important is India. 

It is doubtful that the masses that have revolted in the Middle East will be content with democracy or understand the benefits of economic freedom. Most likely there will be a strong demand for redistibution of wealth, which in turn will foment strife with business interests, impair economic progress, and undermine the new governments, democratic or otherwise, of these nations. Discontent may grow and may result in the installation of Islamist governments that will curtail such economic freedom as these nations have. Or maybe not—I may be too pessimistic; the future of these countries is highly uncertain. 

However, given the enormous pressure these countries will be under to maximize their revenues, if forced to guess I would guess that they will continue to rely on the international oil companies to produce and market their oil rather than imitate Mexico’s example and try to manage their oil industry themselves. The Mexican expropriation took place in 1938 and was a distinctly (and defiantly) socialistic measure, whereas the current Middle East revolutionaries do not appear to be old-fashioned socialists eager to nationalize the means of production. But it is perilous to make predictions when we do not yet know what elements of these societies will become politically dominant.