The Becker-Posner Blog

Should Marijuana Be Decriminalized Nationwide?—Posner

With 20 states having now legalized medical marijuana use, and two (Washington and Colorado) having legalized recreational use of marijuana, the days of legal prohibition of use of marijuana for recreational as well as for medical purposes seem numbered. 

The case for prohibiting marijuana was never strong. It is a mind-altering drug, but no more so than alcohol, and it is considered less likely to induce violent behavior, and in general to have less destructive effects on the heavy user, the “addict.” There is little evidence that it is a “gateway” drug, in the sense that use of it induces the user to “progress” to more harmful drugs, such as cocaine, methamphetamine, Ecstasy, LSD, heroin, or, for that matter, alcohol; in fact there is evidence that marijuana is largely a substitute for alcohol. While prohibition doubtless deters many young people from using marijuana, it seems unlikely that young people with strong addictive propensities, for whom consumption of an addictive drug might be destructive, are deterred. Legalization would undoubtedly increase the use of marijuana unless very heavy taxes were imposed (which would in turn give rise to a black market, thus largely undoing the effects of legalization), but probably not the number of addicts. Actually, the emergence of a black market would be unlikely unless very heavy taxes were imposed on the sale of marijuana, given the natural consumer preference for a legal, FDA-regulated drug over an illegal one. 

Although some 58 percent of Americans believe that recreational use of marijuana should be made legal, law enforcement activity aimed at discouraging marijuana use continues at a high level, with some 750,000 persons being arrested every year on marijuana charges, almost 90 percent for possession rather than for production or distribution. Despite the threat of criminal punishment (though punishment for mere possession, other than possession with intent to distribute, is largely nominal), the American market for marijuana is very large—some $36 billion a year (that’s the conservative estimate: estimates range as high as $113 billion). There is no doubt that the use of marijuana would increase if it were legalized, because many people are unwilling to violate criminal laws even if the expected punishment cost (the gravity of the punishment discounted by the probability that it will be imposed) is slight. But if the increased use decreased the use of substitute drugs (including alcohol), there might well be no net increase in the use of mind-altering drugs. Furthermore, legalization would undoubtedly be accompanied by the imposition of sales taxes comparable to those for cigarettes and alcohol (indeed the desire for tax revenue was apparently a major factor in Colorado’s decision to decriminalize marijuana), which would both generate needed tax revenues and limit the increase in use. Suppose marijuana were legalized and a 33 percent sales tax imposed. And suppose total sales remained at $36 billion because the effect of the higher price resulting from the sales tax was offset by greater demand for the drug and by the efficiencies in production and distribution that would be obtained making it a legal product. Then the sales tax would generate $12 billion in annual tax revenues. Along with tax revenues would come the further benefit to government finances of eliminating an estimated $7.6 billion in annual police and prison costs of marijuana prosecutions and convictions. 

Although my analysis strongly suggests that there would be net benefits from decriminalizing the sale of marijuana throughout the United States, it does not follow that enacting a federal law that would do that would be a good idea—not only because opposition to legalization remains strong in a number of states, but also because the steps that the liberalizing states have already taken—20 to legalize medical use of marijuana and 2 of them to legalize recreational use as well—are likely to make enforcement of marijuana laws in other states ineffectual. In all 20 states there will be increased availability of marijuana, production will be cheaper because it will be done openly, and it will be difficult to prevent exportation to the prohibitionist states, overwhelming law enforcement resources in those states. The death knell of prohibition would be a decision by the Department of Justice to reduce prosecution of producers and distributors of marijuana, because federal criminal penalties of drug crimes are far more severe than state penalties and so have greater deterrent effect, though neither deterrence nor incapacitation seems to have much effect on the supply of illegal drugs, since the elasticity of supply of drug dealers is very high. Dealers make good incomes relative to alternative employment opportunities and expected punishment costs are low.

Why Marijuana Should be Decriminalized- Becker

Decriminalizing a drug like marijuana means that it no longer is a crime to possess marijuana for personal use, The advantages of decriminalizing marijuana are so numerous and powerful that it is difficult to understand the intense opposition.

The movement at the state level of the United States to decriminalize various uses of marijuana-especially for “ medical” purposes- has accelerated in recent years. It will not be long before marijuana use for many purposes will be decriminalized in the great majority of states, and I also expect rapid expansion in the number of states that legalize marijuana for all recreational uses. It is much better for states rather than the federal government to decide about the legality of drug use since that would allow some states to continue to treat marijuana use as a criminal offense if they so wish. However, as Posner points out, it becomes harder for some states to criminalize marijuana use when the great majority of states have decriminalized it.

Decriminalizing consumption and some production of marijuana would have large beneficial effects on Mexico. Traditionally, Mexico has produced the majority of marijuana consumed in the US. The distribution of marijuana from Mexico to the US is controlled by powerful drug cartels that have made enormous profits from their trafficking in drugs.  The Mexican government’s battles with these cartels have caused tens of thousands of deaths, and wholesale corruption of Mexican police and government officials. The trend toward legalization of marijuana in America is lowering the profitability of Mexican cartels and weakening their hold over the Mexican population.

Many people are unhappy when they are addicted to drugs, be it alcohol, nicotine, cocaine, or marijuana. They would like to free themselves from their addictions, but that is not easy to do by the definition of what an addiction means. This is especially difficult for addictions to illegal substances. Clinics are reluctant to treat individuals who are addicted to substances that are illegal to consume, groups like AA are more difficult to form and thrive, and informal support group also face many obstacles.

Critics rightly claim that decriminalizing marijuana is likely to encourage experimentation with marijuana use, and probably will increase total consumption (although see our discussion of taxes in the following paragraph). However, what is more important, decriminalization will tend to reduce the rate of addiction to marijuana. The reason is that decriminalization will encourage the development of more clinics that treat this addiction, will help spread the growth of Marijuana Anonymous organizations that help addicts break their addictions, and will produce other efforts to combat severe addictions to marijuana. As a result, while marijuana use may go up, the number of addicts is likely to go down. This should allay the fears of many opponents of decriminalization that it would lead to a large expansion in the number of addicts.

Decriminalizing marijuana paves the way for taxing its use, in the same way that alcoholic consumption became rather heavily taxed after the end of Prohibition. The higher the tax rate, the higher the retail price of marijuana, and hence the lower would be its consumption. So replacing the present situation with significant taxes on the legal consumption of marijuana could end up lowering the demand for marijuana, despite the effects of decriminalization on experimentation with marijuana.

The present spending of substantial resources on trying to combat marijuana use would be replaced by considerable revenue from taxing its use. That potential revenue is a temptation of many strapped state governments to decriminalize marijuana. Of course, if the tax rate were too high, some of the marketing of marijuana would move underground to try to escape the tax. However, experience with other goods that are heavily taxed, including alcohol, shows that the advantages of legal sale and purchase of a substance like marijuana are so large that the tax rate could be rather high without a large fraction of the sales going underground.

A good use of the tax revenue would be on education and other efforts to point out the harm from becoming addicted to drugs. Some of the revenue could also be used to support drug clinics and other private groups that are trying to both treat addictions and to discourage individuals from becoming addicts. These are far better uses of government revenues than are the expenditures on police, courts, and prisons to apprehend and punish individuals who consume marijuana.

 

 

The War on Drugs

Thursday Northwestern Law School is holding a conference on the war on drugs. The announcement is below. I am chairing a panel at 4 p.m. to 5:30 of three economists on the topic "costs and benefits of the war on drugs." It should be an interesting session, and indeed the entire conference should be interesting.

Rethinking the War on Drugs

 

A Symposium Sponsored by:

Seventh Circuit Bar Association Foundation

and Co-Sponsored by:
Northwestern University School of Law and

The Harvard Club of Chicago

February 20-21, 2014

 

Thorne Auditorium

Northwestern University School of Law

 375 East Chicago Avenue, Chicago IL 60611

The Myth of Excess Enrollments in College-Becker

 The print media and the blogosphere have many discussions of the high and rising cost of attending college, the debt burden weighing on college students, the fact that the average real earnings of college graduates have risen only slowly during the past 40 years, and the difficulty young college students are having in getting good jobs. The conclusion frequently reached is that too many high school graduates seek a college degree, and that these graduates have been sold a bill of goods about the value of a college education.

 The facts cited are generally correct, but the conclusion about the low value of going to college is completely wrong. The fallacy stems from believing that earnings from a college education determine the benefit of a college education. The truth is that the benefit is determined by the earnings from a college education relative to what earnings would be if a person stopped her education after high school. A first approximation to this gain in earnings for the typical person is given by the difference between the average earnings of college and high school graduates.

 A recent study by the Pew Research Center conveniently brings out some facts that have been known, but are worth repeating. The study looks at changes over time in the ratio of the earnings of the average college graduate aged 25-32 relative to the average earnings of high school graduates of the same ages. They divide successive cohorts into Millennials (born after 1980), Generation Xers, Baby Boomers, and older Silents (b orn between 1928 and 1945). The study finds that young college graduates earned on average about 24% more than young high school graduates in the Silents generation, but this percent difference increased to about 47% in the Boomers generation, and now young Millennial college graduates are earning more than 60% than young Millennial high school graduates.

The study understates the trend in the earnings of high school graduates by including persons with a graduate equivalence degree (GED), whose numbers have grown in importance over time. Studies by Heckman and others show that the GEDers should be treated as high school dropouts, not high school graduates, since their earnings are similar to those of dropouts.

 The recession hit the earnings and employment of college graduates, but it hit even worse the earnings and employment prospects of high school graduates. As a result, the recession actually increased the gain from graduating from college.

 While the price level adjusted average earnings of college graduate grew slowly over the 45-year period of the Pew study, the average real earnings of high school graduates and dropouts actually fell over this long time period. This is why the gap between earnings of college and high school graduates grew by so much. Graduating from college paid off very well not in absolute terms but relative to the alternative, which is the only way to measure the gain from college.

 Of course, the change in the cost of attending college also has to be considered before one can conclude that college is a good investment. And college tuition has grown at an unusually rapid rate over the past 35 years. Nevertheless, college remains a good investment after netting out the cost of tuition from the higher relative earnings of college graduates. The Pew study also asked young Millennial college graduates whether they felt college was worth the significant financial cost. About 90% of these young graduates said college had either already paid off (83%) or will pay off in the future (8%). Such confidence in the value of their college degree even holds for the two-third of these Millennials who borrowed money to help pay for their schooling.

 Over the past 45 years the fraction of young persons who graduate from college has greatly increased, although the rate of increase slowed during past 20 years. That the returns from college increased even though many more young persons are completing college implies a powerful growth in demand for college graduates over this time period.  The growth in demand for college graduates is related to the development of the Internet and other technologies, the growth of the service sector, and globalization. High school graduates can no long count on getting good jobs in manufacturing.

 The study also shows that the fraction of college graduates with student loans grew quite rapidly over time as tuition rose rapidly and as government-supported loans became more readily available- 66% of Millennials took out loans vs. 43% for Baby Boomers. The burden of these loans is usually exaggerated since most graduates can easily finance their loans from the higher earnings they receive. Graduates who borrowed a lot and are earning relatively little are the ones who face a loan burden. The best way to help such college graduates is to have a repayment system whereby individuals who earn more pay back more, while those who earn less pay back less.

Such an income-contingent loan program works best when graduates face risk to their future earnings that they cannot predict very well. As a way of dealing with risk it works not so well when future earnings are more predictable. In particular, it favors graduates in low paying fields, like K-12 teaching- and hurts graduates in  well-paying fields, like business or finance. On the whole, an income-contingent system is probably better than the present fixed repayment system, but it is not a panacea.

Excess Enrollments in College? Could Be. Posner

Becker’s data are solid, but I am not what inferences can be confidently drawn from them. 

In particular, I doubt whether it’s possible to infer the value of a college education from a comparison of earnings of college graduates to earnings of persons who do not graduate from college (I’ll ignore the intermediate category—persons with some college but not a bachelor’s degree or better). The reason is that kids are not randomly assigned to go, or not to go, to college. The noncollege graduates are therefore not a valid control group. I am not aware of whether there have been efforts to control for IQ differences in assessing the effect of a college education on earnings. 

Suppose returns to IQ have risen because of the increasingly technological character of economic activity (including finance), increased automation of work tasks (including many service jobs), and increased outsourcing of low-skill jobs in manufacturing. This does in fact seem to have happened. Such increased returns would increase the college enrollment and graduation rates because of the complementarity between IQ and college (and graduate-level) training. But the driver of the increased earnings of college graduates would be IQ and the college and graduate education of high-IQ kids, rather than the demand for college graduates as such. And there would be no basis for inferring benefits of college for kids who did not have high IQs. 

Such a pattern would be consistent with excess college enrollments, if many college students were insufficiently intelligent, motivated, energetic, etc. to benefit from a college education, but were enticed by low-cost government loans and by skillful marketing into attending college. 

I am merely questioning whether the difference between the average earnings of college graduates and of high school graduates (I am ignoring the average earnings of kids who don’t graduate from high school) necessarily represents the return to a college education. If the earnings of high school graduates are dropping because of reduced demand for such graduates owing to a shrinkage of the kind of jobs for which they are suited, the gap between earnings of college graduates and non-college graduates will expand even if there is no increase in the average earnings of college graduates. And there might not be an increase if a large number of high school graduates are enrolling in college who do not have the qualities that enable them to benefit from a college education. 

Because as Becker points out the cost (the tuition cost rather than the opportunity cost) of college has been growing rapidly, attending college is a particularly bad choice for kids unlikely to benefit from a college education. It is then pretty much all cost and no benefit. 

This leads me to question the proposal that debt on federal loans for college education be made inverse to incomes. That would mean that the lower the college graduate’s income, the lower his debt; but if his income is low, how likely is it that he benefited from college? 

A better idea might be to borrow from the German model of providing technical education in lieu of college. There are many high-skilled jobs (though fewer than there used to be) that require careful training but not a college education, such as being a crane operator or an air traffic controller or a mortician. I don’t know why people who are aiming for such jobs, or who cannot realistically aspire to upper-middle-class jobs, should be attending college, other than for the prestige and social opportunities of being a college student and especially a college graduate—not that those are negligible dividends from a college education, but they will often not to be worth the cost, both direct and opportunity, of college. 

I wonder what role high school guidance counselors do play or should play in helping high school students decide whether to apply for college admission. It would not surprise me if good counseling resulted in fewer applications. 

And a final point: I think the “general education” that colleges traditionally impart is less important than it used to be because of the rise of the Internet. The Internet provides kids from early childhood on with immense informational (including cultural) resources, as a result of which I believe young adults today are better informed and more intellectually sophisticated than used to be the case. They may not need college as much, unless they are aiming for and have the aptitudes for an upper-middle-class career.

Has the United States, by Virtue of Its Size and Complexity, Become Ungovernable?—Posner

There are, especially in Europe and East Asia, and to a limited extent in the Western Hemisphere, small countries that are well governed. But among large, populous countries, there appears to be only one well-governed country: Germany. The United States is the third largest country by land mass (after Russia and Canada) and population (after India and China), the wealthiest, the militarily most powerful, and generally regarded as the leading nation in the world—its geopolitical center. But all these are negatives from the standpoint of governance, as are the nation’s ethnic and cultural diversity, political divisiveness, high crime rates, and highly unequal distribution of income. Another major negative is the difficulty of changing the U.S. Constitution. Although there have been a number of amendments, the basic structure, set by the original Constitution of 1789, has not been changed significantly.

A serious problem of governance, or management, that all but the smallest organizations, whether private or governmental, encounter is the tension between the goals of the organization and the personal goals, which typically differ, of the individuals who comprise the organization. Stated differently, the individuals have personal utility functions that differ from the organization’s utility function. The larger the organization, the greater the divergence is likely to be and the more difficult to minimize. The organization that is the federal government of the United States has more than 4 million employees. 

Competition between organizations is an important control on the divergence (which economists refer to as “agency costs”—the costs created by the fact that the employees of an organization have their own goals that often conflict with those of their employer). But nations do not feel the same competitive pressures as corporations. Even a small, miserable, effectively bankrupt nation like Greece does not disappear, as large corporations not infrequently do, because of its inefficiency. Because corporations are simpler and smaller and also more constrained by competition than nations, we can expect them to be managed more efficiently, and specifically to adopt an organizational structure that minimizes agency costs. So let’s glance at the structure of the typical large corporation and compare it to our federal government structure. There will be a board of directors to exercise a general but loose supervision over the corporation (and in turn subject to very loose control by the shareholders), intervening decisively only in crisis situations or where there is vacancy in the office of the Chief Executive Officer. The CEO will be the dominant figure in the corporation, exercising something close to dictatorial power, assisted by a small personal staff. Often he will overshadow the chairman of the board of directors—he may even double as chairman and CEO. There will be a Chief Operating Officer, exercising day to day management, while the CEO, as the public face of the corporation, will formulate policy, provide overall guidance, inspiration, and “vision,” appoint the major subordinate corporate officials (general counsel, chief information officer, chief financial officer, etc.), and maintain personal relations with important investors, customers, competitors, and regulatory officials. The corporation will have several or many operating divisions, reporting to the COO or CEO, each headed by a vice president or equivalent. The employees in each division will serve at the pleasure of their superiors; no one will have fixed tenure. 

Compare the federal government. The closest to a board of directors is the Congress, but it differs mainly in having a good deal of policy responsibility, and, since it does not appoint and is not appointed by the President (corresponding to a corporate CEO), there is no presumption that its policy preferences will coincide with the President’s. The President’s exercise of his own policymaking powers will often work at cross-purposes with Congress’s exercise of its powers; nor can he appoint senior officials without the concurrence of a division of the Congress, namely the Senate. A further dilution of presidential power results form the existence of an independent federal judiciary, headed by the Supreme Court. Federal judges and Justices have lifetime tenure, can invalidate legislative and executive action both federal and state, and rarely (because of that tenure) will a President be able to appoint a majority of the Supreme Court Justices or other federal judges. 

The President has a personal staff (officially the “Executive Office of the President”) that numbers more than 2000. The staff assists him in overseeing the large number of “divisions” (executive departments, such as State and Defense and free-standing agencies such as the Environmental Protection Agency) into which the federal government is divided. The heads of these divisions, however, do not have hiring or firing authority, as a practical matter, over most of the employees, who are tenured civil servants. The heads serve short terms, and often are appointed for political reasons unrelated to experience or competence. The brevity of their terms and frequent lack of relevant skills or knowledge create tense relations with the tenured bureaucrats. As a result, the President’s control over the more than 4 million federal employees (of whom about 40 percent are military) is as a practical matter quite limited. 

A further division of government is brought about by federalism: the division of the nation into 50 states, each with quasi-sovereign powers. The federal government has considerable power over the states, but far less than a CEO or COO would have over the operating divisions of their corporation. 

The structure of the federal government reflects the state of the nation in the eighteenth century. The population was roughly 1 percent of what it is today, there were only 13 states and as a result the Congress was small, and the federal government was tiny. It is doubtful that starting over in today’s circumstances a constitutional convention would create a similar system. 

The most glaring deficiency is the limited authority of the President and the absence of an official corresponding to the Chief Operating Officer of a private corporation. From an efficiency standpoint the President should be able to promulgate laws (not just regulations), subject to override by supermajorities of Congress; appoint subordinate officials without the concurrence of the Senate; and create a position analogous to that of a COO; this would result in a structure analogous to that of France, which has both a President and a prime minister, the latter being in charge of day to day governmental operations (though France is not an example of a well-governed country). The President should also be authorized to control the finances of the states, alter their boundaries, appoint their principal officials, and veto their laws. And no civil servants should have tenure. The result of all these changes would be to conform American government to the “government” of a large private corporation. 

Maybe the President would become the “outside” partner and his Chief Operating Officer the “inside” partner, the former dealing with relations with foreign countries (in the broadest sense, comprehending not only foreign relations in the conventional sense, but also immigration, trade, and military assistance and intervention), the latter with the formulation and implementation of domestic policies. 

Of course these are not feasible reforms. Anything that strengthens the President weakens other sources of power, not only in the government itself (legislators, civil servants) but also in the private sector, which through campaign donations and other forms of political activity exert a powerful and self-interested influence on governmental action, resulting in enormous waste and perversity. 

In an interesting and ominous book by Joseph A. Tainter called The Collapse of Complex Societies (1988), the author points to historical episodes of collapse of societies that had become too complex to manage effectively, such as the Mayan civilization of Central American and the Western Roman Empire. Successful societies, such as Britain, the United States, and Germany, in the nineteenth century, and Japan and the Soviet Union in roughly the first half of the twentieth century, tend, like successful companies, to expand. Expansion makes governance more complex, which can lead to ungovernability and eventual collapse. Companies that become ungovernable can shrink to a manageable size by selling off parts of themselves; or they can simply liquidate, in which event their assets are sold to other companies. There are examples in the government sphere, as in the peaceful division of Czechoslovakia into Slovakia and the Czech Republic, or the peaceful dissolution of the Soviet Union, but more often such fragmentation is involuntary, often indeed violent.

Are Government Bureaucracies Too Big? Becker

Governments, even in small countries, are vast bureaucracies that manage thousands of activities. The federal government of the United States, for example, runs a vast and complicated healthcare system, levies taxes on individuals and corporations, pays benefits to retirees, runs a large and highly mechanized military, decides whether pipelines can be built and oil exported out of the US, manages a vast payment system for the unemployed, and enforces complex regulations of banks. I could go on endlessly. A smaller government like Argentina’s does about as many things, but on a much smaller scale.

As Posner indicates, large corporations also have extensive bureaucracies, but several differences between public and private bureaucracies work against the relative efficiency of governments. The most basic is that government bureaucracies are just too big to perform most of their activities effectively. Governments undertake too many and too complicated activities to expect effective oversight from presidents, prime ministers, and legislators. Private corporations would also be much less efficient if they grew to the size of large governments, which explains why corporate bureaucracies are far more limited in size, and especially in scope.

Further raising the efficiency of corporate bureaucracies relative to public bureaucracies is that corporations typically face much stronger competition. Corporate competition is from other firms, non-corporate as well as corporate, and from firms that form when a corporation faltered in its efficiency. Also, a badly performing corporation often faces a battle from ”corporate raiders” for control of the corporation. Although such private competition is not always effective in disciplining the corporations who are too bureaucratic to be efficient, many formerly powerful corporations have vanished after they no longer performed well. These include Lehman brothers, A&P Groceries, Wong computers, Bethlehem Steel, and Woolworth.

Government bureaucracies also face some competition, but it is much weaker and less immediate. In democracies, elections occur at regular intervals, but the complexity of governments makes it extremely difficult for voters to judge whether the incumbents are performing well. Profit statements are usually a good guide to corporate performance, but there is nothing comparable for governments. Interested voters can look at a few things to judge, for example, whether government-financed health care is effective, but  nothing for government performance is as simple and as inclusive as a balance sheet report on how profitable a corporation is. In addition, powerful special interests often spend considerable resources to insure that voters hear their point of view far more often and more effectively than opposing views.

Another difference between corporate and government bureaucracies is that corporations use the price system far more than do governments. For example, government pay scales are much more compressed than are those of corporations. A head of a major government agency, such as the SEC or the EPA, has at least as much responsibility as the heads of major corporate divisions, but government heads earn only a fraction of what corporate heads do. Of course, heads of government agencies often leave after several years to take lucrative private sector positions, but they would do that much less frequently if they were better paid in their government jobs.

Another example is from the immigration authority (USCIS) that allocates visas on a first-come-first-served- basis that often takes weeks and even months. A corporation handling this issue would have a system of fees that would be higher for those who need a quicker decision.

So my answer to the question posed in the title of my discussion of whether government bureaucracies are too big and inefficient is a strong “yes”. Government should do much less so they can concentrate on and do better with the tasks they are most needed for, such as police and military, infrastructure, safety nets, and regulation of activities with big externalities. Regrettably, I am not optimistic that much can be achieved quickly in slimming down governments, given the strong self-interests and special interests that benefit from the present situation.

Generational Mobility in the United States-Becker

The degree of mobility over time measures how the income and education of children of parents with relatively low education and income compares to the income and education of children from more successful families. President Obama along with many others, has claimed that the degree of mobility in the US declined over time. Yet the limited available evidence does not support these claims about declining mobility during past 20-30 years (see the recent study by Chetty, et al, “Is the United States Still a Land of Opportunity?” January, 2014).

Some of the claims about declining mobility appear to depend on the large increase in income inequality since 1980. Not only have the incomes of the top 1% increased much faster than other incomes, but also incomes of college graduates have grown substantially relative to the incomes of persons who did not graduate from college. Nevertheless, an increase in the spread of incomes at a moment in time does not necessarily imply a change in the degree of mobility of their children. For example, income inequality in the parents’ generation could increase, and that higher inequality could be maintained into the children’s generation, and yet the upward mobility of children from poorer families (or the downward mobility of richer children) could be increasing over time.

Although there is no necessary connection between inequality and mobility, one should expect some causation from lower mobility to greater inequality in succeeding generations. For lower mobility means that children from poorer families tend not to do as well as they formerly did, and children from richer families do better than formerly. Over time, this stretches out the income distribution and produces greater inequality. In this case, the causation runs from mobility to inequality, not from inequality to mobility.

A few economists have produced evidence that countries with greater inequality tend to have lower mobility (see Corak, Journal of Economic Perspectives, 2013). For example, Scandinavian countries tend to have both relatively low inequality and high mobility. The causation in their analysis usually runs from greater inequality to lower mobility. Nevertheless, a close examination of the empirical basis for this claim suggests that the relation between inequality and mobility across countries may actually be quite weak (see the preliminary work by the Chicago graduate student Bradley Setzler).

Just as many forces determine the degree of income inequality, so too does the degree of mobility in income and education between parents and children have many determinants. The most important ones are 1) the investment of time and money by parents with different levels of education and income in improving the human capital of their children, 2) the degree of transmission of various types of abilities from parents to children, 3) the magnitude of government spending on the human capital formation of children, and 4) whether this government spending is relatively greater or smaller for children from disadvantaged backgrounds.

The nature of these influences on the degree of mobility implies that greater mobility is not necessarily “better”, at least as judged by the degree of efficiency of the human capital investment process and the market for earnings. For example, if the parent-children transmission of abilities is high or parental education is highly productive in raising the human capital of their children, one would expect an efficient investment process to have a low degree of parent-child mobility in education or earnings. On the other hand, low mobility may be a sign of inefficiency if say able children of poorer parents are unable to obtain the education consistent with their abilities.

These reflections are relevant in trying to evaluate the degree of mobility in the US compared to other countries. The intergeneration elasticity (IGE) measures the effect of an increase or decrease in the income of parents relative to the mean income of their generation on the incomes of their children. An IGE of say 0.4- about the IGE for the US- means that a 10% increase in parental income raises their children’s income on average by 4% relative to the mean income of the children’s generation.

The IGE for the US is higher than those for Japan and many Western European countries, and is below those for many Latin American countries. Even though mobility in the US may not have fallen over time, does the relatively high IGE for the US compared to other developed countries indicate that American mobility is too low?

A major reason why the answer to this question may be in the affirmative is the high and relatively stable American dropout rate from high school of poorer African Americans and Hispanic Americans. I believe much of the blame rests with the fact that many children from minority families are raised with a single and not very educated parent, and that the quality of the schools attended by minority children is deficient. The interaction of these two forces produces a deadly mixture holding back the progress of minority children. The degree of mobility would increase significantly if ways could be found to efficiently lower the high school dropout rate.

 

Social Mobility and Income Inequality—Posner

As Becker notes, recent research indicates that social mobility (how much a person rises or falls in the income distribution relative to his or her parents) in the United States has remained constant, albeit at a low level by comparison with other wealthy countries (for a partial summary of this research, see Raj Chetty et al., “The Equality of Opportunity Project,” www.equality-of-opportunity.org/) at the same time that inequality of income in the United States has risen, and now far exceeds that in the other wealthy countries. 

A striking finding by the researchers is the high geographical variance in mobility. The probability that a person whose parents were in the bottom fifth of the income distribution will rise to the top fifth is roughly twice that for persons living in the northeast or on the west coast than for for persons living in the south and the midwest—about 10 percent versus 5 percent. This is probably related to the pattern of immigration, the quality of schools, and the fact that educated and ambitious people tend to find the northeast and far west culturally more congenial than the south, the border states, and the midwest, with their religiosity, conservatism, gun mania, Confederate nostalgia, higher crime rates, and greater poverty. 

The fact that mobility has not declined during a period in which inequality of incomes has grown may seem paradoxical, but is not. Imagine that all incomes were close to being equal. Then social mobility would be close to zero because there would be so little to gain from getting a better job or working harder. And by the same token social mobility might be very great in a society yet income inequality also be very great. For suppose that whether one had a high or a low income was almost entirely a matter of luck. Then the children of rich and of poor families would be quite likely to changes places in the income distribution, regardless of how skewed that distribution was. 

But while social mobility and income inequality can thus move together, I am surprised that social mobility does not decrease as income inequality rises. The wealthier a family is, the more likely its children are to be secure against dropping significantly below their parents’ rank in the income distribution. One reason is that wealthy people (unless they are sports or entertainment figures) are apt to have high IQs, especially now that, with the decline of discrimination, there is more assortative mating than there used to be. Another reason is that the children of wealthy people have a better shot at admission to the best schools and colleges. This is partly because the kids tend to be smart, partly because the parents provide positive role models for the children and also can invest heavily in tutoring and other aids to their children’s education, and partly because colleges and universities tend to favor the admission of rich kids, who can be expected to become generous donors. And finally the children of the rich receive excellent nutrition and medical care, hence tend to be healthier than the average child. 

One reason social mobility seems not to have been significantly affected by the rising inequality of income in the United States is that much of the growth in inequality is a result of increased incomes of the wealthiest 1 percent of the population, whose share of national income has grown from 13 percent in 1982 to 22 percent today, and whose after-tax income has increased almost threefold in that period. Even if one percent of the population can immunize itself from downward mobility, overall mobility should not be greatly affected. This is so even though if the top 1 percent have become richer, the bottom 99 percent have become poorer. But becoming poorer needn’t make a person likelier to climb out of poverty, since the poorer one is, the harder the climb. 

There are several reasons for encouraging social mobility, and this should make us resist complacency about the fact that it hasn’t changed much despite the increased inequality of incomes, and focus rather on the fact that it’s much lower than in our peer countries. One reason for trying to increase mobility is to stimulate ambition and effort. If people born into families who are low on the income distribution sense few opportunities to rise, they will have little incentive to try to better their lot. A related reason is that many highly successful people had humble beginnings; and we would like our educational and social welfare systems to discover and assist and encourage these people when young. A further reason for trying to increase mobility is to discourage people from seeking betterment of their lot through crime or gambling, activities that can be attractive to people who despair of improving their lot by lawful work rather than crime and by effort rather than luck. 

And finally, although the fact that social mobility has not fallen as income inequality has risen may seem to imply that reducing inequality would not increase mobility, that may not be correct. Social mobility may not have fallen, I have suggested, only because the rise in inequality has been so skewed in favor of a small fraction of the population. A significant redistribution of wealth to the poorer part of the population might, by improving nutrition and family stability, generate increased upward mobility.