The Becker-Posner Blog

The Latest French Riots--Posner

There is a considerable irony in the latest French riots, which are mainly by high school, college, and university students protesting a new law that allows employers to fire employees (without cause) during their first two years of employment, if the employee is under 26 years of age. The law, which has not yet gone into effect and will not if the government caves in to the rioters and their supporters (including public-employee unions, especially in transportation), is a response in part to a previous round of more serious riots, by French Muslims of mainly North African origin protesting their economic situation, which includes an astronomical unemployment rate particularly among the young. (Becker and I blogged about those riots on November 13 of last year.) The overall unemployment rate of the under-26 population in France is in excess of 20 percent, which is greater than that of the adult population as a whole (the corresponding rate for the United States is about 10 percent). The reason is that once hired, an employee can be fired only with great difficulty. Employers are naturally reluctant to hire people, mainly young, many of whom haven’t worked before (or if they have, it can only have been for a short time), because the likelihood that they will do a good job is difficult to assess unless they have a record of prior employment. The youth unemployment rate is even higher among Muslims in France, and they are among the rioters, which makes no sense in terms of their economic self-interest. That ethnic French youth should be rioting against a law that would help the Muslims is perhaps surprising given the liberal ideology of most young people in France, yet may be, I will suggest, an expression of rational self-interest. The youth unemployment rate is largely an artefact of French law. If employers were free to fire employees without cause, as under "employment at will," the most common form of employment contract in the U.S. private sector, they would be much more willing to take a chance on hiring workers without a record of satisfactory performance. Tenuring just-hired workers may be good for those people lucky enough to land a job (though average wages will decline because the expected productivity of a worker will be lower than if he could be fired easily), but like other labor protections it is bad for the marginal workers, such as the Muslims who rioted the last time, and for the economy as a whole. It is part of a complex of unwise laws in Europe that are contributing to Europe’s economic stagnation. The rioting by the non-Muslim students may be rational. For if they are the most likely to land jobs under a legal regime in which a newly hired worker cannot be fired in his or her first two years of employment, they may be harmed by the new law. This cost-benefit analysis of rioting assumes that the cost to the students of rioting is low, but it does appear to be, since apparently they are not being expelled or suspended from school. Even the widespread public support of the students may be rational, if that support is concentrated among workers who have tenured jobs and fear that if the new law, though limited to the under-26 work force, goes into effect and is successful in reducing unemployment, it will be the start of a slippery slope leading eventually to free labor markets on the U.S. and British model. What is particularly difficult to explain from a rational-choice perspective is the widespread public condonation of riots and strikes as methods of forestalling legislative changes. If the public strongly opposes a law, it is much more efficent for that opposition to be expressed in a parliamentary vote to rescind the law than in riots and work stoppages that cause widespread inconvenience and other costs. The inference, assuming the French people are as rational and well informed as other European peoples--which seems the sensible assumption when one consider the high level of education in France, the nation’s wealth, and the many French contributions to science and culture--is that their political system is not functioning properly; and indeed that seems to be the case. Although the new law is, according to public opinion polls, opposed by 68 percent of the population, it was, of course, duly enacted by the French legislature. Although representative democracy does not automatically translate popular majorities into laws, because of the operation of interest groups and the fact that intensity of preference or aversion is not captured in simple majoritarianism, it would be unusual in the United States for a law opposed by more than two-thirds of the population to pass, though a counterexample is the impeachment of President Clinton by a Republican-dominated House of Representatives. It was opposed by about two-thirds of the U.S. population--but of course Clinton was acquitted by the Senate. A great country can have a lousy government. (Our government is not doing so well these days.) The design of the French government may be unsound. Ordinarily in a parliamentary system, the head of the government is a member of parliament, that is, an elected official; in a presidential system, too, the head of the government is an elected official. But in France, the president, who is elected, appoints the prime minister. The current prime minister, de Villepin, has never held elective office, and this is a considerable weakness from the standpoint of ability to gauge public opinion and assuage public anxieties, and more broadly from the standpoint of perceived legitimacy in a democratic society. France has a long history of rioting, but so do many other countries (including the United States), which have outgrown it as their governments stabilized. It seems more likely that the French propensity to riot is rooted in problems of government design than in a peculiarly French proclivity for rioting. But this is a tentative suggestion. For there do appear to be French cultural peculiarities, such as the effort to prevent changes in the French language and resistance to the use of English at academic and other conferences, and to foreign takeovers of French companies, that may be related not to the riots as such but to the intensity with which the French resist globalization and its concomitants, which include competition. The new law that has provoked the riots is designed to make labor markets slightly more competitive.

Comment on the French Employment Law Riots-BECKER

The riots by students and union members against the new French labor law can be understood better if the law is placed in the context of the French labor market for the past couple of decades. France has had low rates of employment, and unemployment rates of about 10 per cent for the past fifteen years. Some economists outside of France have blamed this to a significant degree on its rigid labor market. I wrote an Op Ed piece in the early 1990's for Le Monde, the prominent left wing French newspaper, arguing that regulations which made it costly to hire and discharge workers, and high taxes on labor, helped to explain both the low employment and high unemployment. French politicians, the middle and upper classes, and for a while most of their economists (one French economist replied in Le Monde to my article) rejected this explanation. They claimed that the proposed remedies were too Anglo-Saxon, and that the bad labor market situation was temporary, perhaps due to insufficient aggregate demand for labor. As sluggish employment continued throughout that decade and into the 21st century not only in France but also in Germany, Italy, and Spain, European economists and some politicians began to change their views. They concluded that lower taxes on labor, greater flexibility in hiring and firing, and other changes were necessary to produce the growth in employment that had occurred in both Great Britain and the United States. Germany under the Social Democratic leadership of Gerhard Shroeder significantly shortened the duration of unemployment compensation, and introduced other incentives for workers to look for jobs and for companies to hire them. In France, however, the resistance to change has been greater, and the Socialists while they were in power even went backwards by introduced a 35 hours workweek that was supposed to spread a limited number of jobs among more workers. Instead, it appears to have reduced employment. The Conservatives under President Jacques Chirac and Prime Minister Dominique de VIllepin have been slightly better. They modified the 35-hours law, allowed a two-year probationary period for employees at firms with less than 20 employees, followed Spain by introducing short-term employment contracts, and made a few other changes. Unemployment of young persons in most countries tends to be about twice the overall unemployment rate, and so it is for France. Youth unemployment rate is about 22 per cent, and fewer than 30 per cent of French youth between ages 15-24 have jobs, which is half the rate in Great Britain. Unemployment rates of educated persons are generally much below those of the less educated, which explains why the low educated Muslim youth have unemployment rates well in excess of 30 per cent. In order to improve economic opportunities for young persons, the law that led to these riots extends the more generous employment rules for small firms to young workers. Under this new law (not yet in effect), workers under age 26 could be discharged within the first two years of their employment without employers having to give any cause. It might seem strange that these riots have been led by students and union members, groups that are well treated by the French system. University students are favored both because they pay only token tuition, and they have relatively good job prospects after they graduate. Nevertheless, among other acts, students occupied the Sorbonne for three days until they were forcibly evicted. Posner and I had indicated in our earlier discussion of the riots by young French Muslims that riots are not easy to predict by economic and social variables like unemployment, economic progress, or the degree of discrimination. Still, one line of analysis may explain the heavy participation of both university students and unionists in the current riots. Employment by small companies and of young workers constitutes only a fraction of total employment. Therefore, to make a large dent on the economy's performance, the greater flexibility given to small companies and for employment of young workers has to be followed by other laws that apply to all employees. These include much greater overall flexibility in hiring and firing, lower minimum wages, and reduced taxes on employment. Therefore, if this law is allowed to be implemented, it is likely to be followed by laws that reduce the employment advantages between the better educated and unionized "insiders" who have good pay and stable employment, and the less educated younger and immigrant workers who tend to be unemployed and have uncertain job tenure. This is why the conflict between employment insiders and employment outsiders can help explain why college students, who are future insiders, and unionists, who are current insiders, make up the bulk of those rioting. Since insiders make up a majority of all employees, it is not surprising that apparently most of the French people want the government to withdraw this law. Although this explanation might be accepted for union involvement in these protests, does it help understand the participation of students since university students all over the world feel a responsibility to protest and sometimes riot? But consider that students have not taken over the Sorbonne since the famous 1968 student riots that brought down the de Gaulle government. I agree that students like an occasional riot, but usually a cause celebre is needed to galvanize them into action. The new youth labor law was the catalyst this time. That the riots may help university graduates and other insiders by discouraging politicians from taking away some of their advantages is surely an important added bonus.

Reply on the Economics of the Iraqi War-BECKER

Thanks for the interested and interesting comments. Let me add a few reactions to the discussion. I agree that terrorist attacks sometimes (but not always) take time. I presented only a very mild statement that maybe the War reduced the probability of attack since there has been none for five years. Surely, if attacks had come, as in Spain-where it took hardly more than one year to generate a very deadly attack- the War would have been blamed, at least in part. The Spanish attack helped to defeat the government that sent troops to Iraq, and hastened a withdrawal afterwards by the newly elected government. Why Spain and not here? I do not see how anyone can claim that Iraqis are no better off, despite the continuing number of horrible Iraqi deaths. It can hardly be doubted that the vast majority of Iraqis supported the overthrow of Saddam. I suspect that a similar majority would oppose the quick withdrawal of U.S. troops. That should not be the reason for keeping them, but we should be clear on where Iraqis stand. William Nordhaus is an outstanding economist, and I have learned a lot from his many original writings. But an estimate of the war's cost of between $100 billion and $2 trillion is hardly a sharply defined basis for decision-making. The $7 million estimate for a statistical value of life is for young persons taking various risky decisions. Of course, soldiers are volunteers, but so too are men and women who take risky construction jobs, or join the police force. Estimates of the statistical value of life are trying to measure the amount of compensation people require in order to induce them to take on additional life-threatening risks. I should add that different studies come up with different number, and I consider $7 million on the high side. Posner and I have no NBER paper on the cost of the war- one commentator is confused on this. I assume he means the paper by Davis, Murphy, and Topel that we refer to. They are the ones who consider continuing containment as one alternative to going to war-they also discuss other possibilities. Perhaps as claimed in the comment, they overstate the cost of containment, but surely considering the cost of alternatives is better than concluding about the desirability of the War without discussing any alternatives? There can be only one Muppy, my former student. The suggestion of insurance on a war is original, but I do not see how a country can take out insurance on fighting a war that runs into hundreds of billions of dollars. There would have to be a large and reliable market where people can bet in aggregate large sums against the government. But various internet betting markets could have wagers on the costs in any year, the number of casualties, whether any WMD would be found, etc. That may be a bit macabre, but it does encourage many alternatives to official estimates of the costs and benefits of fighting a war. Recall that there was a betting market on whether Larry Summers would resign as President of Harvard. Unfortunately, for Harvard and other universities, those betting that he would resign won.

The Cost of the War in Iraq--Posner's Response to Comments

There were as usual a number of interesting comments. I respond to just a few. First, on the numbers front, Steven Davis notes that I was wrong to say that the Davis, Murphy, and Topel updated study estimates the cost of the war at $323 billion; their updated estimate is $480-$630 billion. Leigh, Wolfers, and Zitzewitz remind me that they made a prewar estimate of $1.1 trillion. Second, I was too cryptic in saying that 9/11 increased the risk to be anticipated from Saddam Hussein's possessing weapons of mass destruction. The thinking behind the statement was partly that 9/11 demonstrated a degree of danger to the United States from the Arab world that had not been fully understood, and partly that Saddam Hussein might feel "one-upped" by the demonstration of al Qaeda's ability to hit the United States hard, something Saddam had never succeeded in doing. He might have been spurred by the example to more aggressive action or even to cooperating with al Qaeda. Third, I never suggested that the United States feared a direct attack by Saddam Hussein on the continental United States. The danger to the United States would be that Saddam Hussein's possession of atom bombs or other weapons of mass destruction would give him a freer hand in the Middle East, where of course the United States has significant economic and other interests. A re-invasion of Kuwait by Iraq would not have been out of the question had Saddam been allowed to obtain nuclear weapons and the missiles to deliver them long distances. There is the further question of what would happen to Iraq after Saddam Hussein died or became incapacitated or was assassinated or otherwise overthrown. If Iraq at that point had weapons of mass destruction, they might well fall into terrorist hands

The Economics of the Iraq War--BECKER

The third anniversary of the start of the Iraqi war has brought forth several assessments of how it was conducted, what its cost has been, and what the costs will be in the future. These include analyses of whether American military leaders adequately prepared for a war of insurrection, whether economic costs were grossly underestimated, and whether the American people were prepared for the protracted nature of and heavy casualties during the insurrection period. I will concentrate mainly on attempts to measure economic costs, but these estimates include assigning costs to deaths and injuries of American military personnel. Clearly, aggregate costs to the United States have been considerable, and they will continue to rise as the insurrection persists and additional lives are lost. These costs include the military equipment lost during the war and subsequent fighting, the value placed on deaths and injuries, increased depreciation of military equipment, higher cost of attracting enlistments to the military, and reconstruction aid to Iraq. Davis, Murphy, and Topel of the University of Chicago Graduate School of Business in "War in Iraq versus Containment", unpublished, February 15, 2006 make various estimates of the aggregate cost under different scenarios about how long the insurrection continues, the number of American lives that will be lost in the future, etc. They assume a statistical value of life of about $7 million per each military death, and about seven injuries per fatality. Their median estimate of the total cost discounted back to 2003 at a 2 per cent interest rate is about $450 billion, while their "high" estimates are between $650 and $850 billion. One can quarrel with their estimates--such calculations are extremely difficult-- but they are carefully made. In any case, their results show that the cost of the war is large in some absolute sense. Estimates of the war’s cost by Bilmes and Stiglitz in "The Economic Costs of the Iraq War", have received much more publicity. Stiglitz very briefly summarizes these estimates in a short piece this month called "The High Cost of the Iraq War", in the online forum Economists' Voice. In many respects their numbers are similar to those by Davis, Murphy, and Topel, but they are larger. Their "conservative" estimate of budgetary costs that does not include additional interest on the larger federal debt due to the war is $650 billion when discounted at 4 per cent. They also have "conservative" estimates that include additional interest on government debt, but I do not understand why this should be counted since they already count military spending as a cost. They adjust the $650 billion figure to account for increased depreciation of military equipment, the value of lives lost, and additional costs due to the many injuries of military personnel. Mainly due to the assumption about increased depreciation and additional losses due to injuries, they raise their estimate to $840 billion. I believe they exaggerate how large these costs are, but the calculations are difficult to make. Even so, their total is consistent with the high end of the Davis, et al. estimates. I am much more doubtful about the additions that Bilmes and Stiglitz make to reach total costs of between $1 and $2 trillion, the numbers that have received the greatest publicity, and are cited in Stiglitz;’ Economic Voice paper. They assume that the war increased the price of oil from $5 and $10 a barrel for between 5 and 10 years. These are sheer guesses that are far from obvious. This would depend on the net reduction in Iraqi oil production, the increase in the oil supplied by other producers, and the effects of the war on demand for oil. It is not clear that there was even a net reduction when one considers the alternative of continuing containment. Assuming the scandals in the UN administered oil for food program would have been discovered anyway, might not Iraqi exports under containment been considerably reduced? About half of the increase in their estimate of costs from $1 to $2 trillion is due to their most generous assumption about the magnitude and duration of the oil price increase. The other half is due to what strikes me as highly dubious assumptions about other macroeconomic effects of the war. Since they count government spending on the war as a cost, it is a bit of a stretch (and even double counting under reasonable assumptions) to count also some of the reduced spending on other government programs. This requires assumptions about private versus public returns on spending that have little basis in hard evidence. I have similar doubts about their adjustment ($250 billion) for the effects of the war on economic growth. I tentatively conclude from these two studies that the cost of the war will amount to somewhere between $500 and $850 billion, taking account of the loss in life and injuries. These are certainly high numbers, and generally much larger than initially estimated by the administration and many outsiders. Has the war been worth its cost? The American people are increasingly expressing grave doubts about that. I do not know the answer to this question, but whether the war was justified depends on how the Iraqi situation plays out, and what would have happened had we not gone to war. The Bilmes-Stiglitz paper, along with other papers on the cost of the war, do not compare these costs with the costs of alternative policies. Davis, et al do estimate the cost of various alternative scenarios, including continuing the containment of Saddam Hussein that had been in place before the war. Their middle range scenario concludes that the present value of the cost of continuing containment would have been about $400 billion. This is lower than their estimates of the cost of the war, but how much lower depends on which war estimate is used. With their middle range estimate of war costs, the difference is not large, but the difference is considerable with the $840 billion estimate of Bilmes-Stiglitz. It is not a justification for the war but neither is it totally irrelevant to put the war's cost in perspective. The over 2000 young American men and women killed are a minor fraction of the almost 60,000 soldiers killed, and 350,000 casualties, during the Vietnam war. It is also a fraction of the 40,000 mainly young persons killed annually in automobile accidents. Consider the magnitude of the cost of the Vietnam War if it had been (and should have been!) calculated the correct way. I have not mentioned anything about the costs or benefits to the Iraqi people. Much property has been destroyed and many Iraqis killed during the insurgency, but can anyone doubt that practically all Kurds and Shiites (about 75 per cent of the total population), and some Sunnis, consider themselves better off now than under the brutal regime of Saddam? This brutality includes not only the enormous devastation to the Iraqi economy, but also the many thousands of deaths that he caused, a number that would be well in the hundreds of thousands if deaths due to the Iran invasion are included. Since Democrats as well as Republicans often mention spreading democracy, I do not see how the effects on Iraqis can be ignored. No terrorist attack has taken place in the U.S. since 9/11, including the three years after the war started. Maybe that would have happened anyway, and maybe the war even raised the probability of such attacks. Still, the circumstantial evidence would suggest that the war might have decreased the probability of attacks in the U.S. This could be because terrorists have been busy concentrating on Iraq, or because we have killed many who might have been involved in such attacks. Still, I believe the war should be assessed a bad failure if Iraq degenerates into civil war that leads before very long to another brutal dictatorial regime. On the other hand, if Iraq stabilizes reasonably soon, has a decent government, and starts to progress economically, the war would have been a success. I say this not only because the war got rid of a cruel and dangerous dictator who inflicted immense harm on his own people, and who would have used highly destructive weapons on others if he ever obtained them. In addition, a stable and progressive Iraq is likely to have beneficial effects on Syria, Saudi Arabia, and other bad regimes in the Middle East that will directly benefit the whole free world, possibly including creating a background for a peace between Israel and its Arab neighbors. It could be a decade or more before the ultimate verdict about the war is available.The future looks precarious at present, but it is too early to throw in the towel and conclude that the war was a costly failure.

The Cost of the War in Iraq--Posner's Comment

One of the major questions that I asked in my book Catastrophe: Risk and Response (Oxford University Press, 2004) is what can be salvaged of cost-benefit analysis in situations of enormous uncertainty. I think a lot, and refer the reader of this blog to chapter 3 of my book for explanation. The war in Iraq (not discussed in my book) provides a test case for this proposition. Apparently the Administration did not conduct a cost-benefit analysis before deciding for war. Maybe it thought the benefits so obviously great that no reasonable estimate of cost would exceed them. I believe that the Administration's only public estimate was that the war would cost no more than $60 billion and that some of this expense would be defrayed (as in the 1991 war with Iraq) by other countries. The estimate seems to have assumed that the probability of a short, cheap (i.e., $60 billion maximum), victorious war was 1. A responsible cost-benefit analysis would have costed alternative scenarios (such as short-victorious war, long-victorious war, long-losing war, and long-breakeven war), attached a probability or, more plausibly, a range of probabilities to each, and summed the expected costs generated by multiplying each cost estimate by its associated probability or range of probabilities. Benefits to be valued would include (1) elimination of Iraq's weapons of mass destruction, (2) a demonstration of U.S. military prowess that would intimidate hostile nations such as Iran and North Korea, (3) cost savings from eliminating the containment regime (the no-fly zones and sanctions enforcement designed to box in Saddam Hussein), and (4) improvement in our military capabilities as a result of wartime experience. (1), (3), and (4) seem susceptible of quantification, though (1) would have been overestimated by virtually everyone because of the widespread and highly plausible, but erroneous, belief that Iraq had an active WMD program. (2) could probably be ignored on the ground that it was likely to be offset by adverse reactions to our embracing a doctrine of preventive war. I would have given no weight to the Wolfowitz project of promoting democracy in the Arab region, as it is completely uncertain whether democracy in that region is in the interests of the United States. We have certainly not been pleased with the result of the democratic election in Palestine that has brought Hamas to power. We would not like to see the Muslim Brotherhood take power in Egypt, though it may be the most popular political group there. We were distinctly displeased with the result of the Iranian presidential election. I would also ignore the effect of the Iraq war on our struggle against international terrorism. I imagine the effect is negative, but there is too much uncertainty to try to quantify it. In a paper first published in March 2003, very shortly before the war began, the economists Steven Davis, Kevin Murphy, and Robert Topel conducted a limited cost-benefit analysis. It was basically just a comparison between the cost of going to war and the cost of continuing the containment policy. They estimated the former as $125 billion maximum and the latter as between $380 billion and $630 billion. The gravest weakness of their analysis was the failure to consider war alternatives to the short, cheap, victorious war that the Administration assumed. They recently updated their paper and raised their estimate of the cost of the war to $323 billion, while allowing (no doubt chastened by their original underestimate) for the possibility that it might go higher. This seems too low since the budgetary cost of the war is already $250 billion and increasing at the rate of $6 billion a month. The costs can of course be capped at any time by U.S. withdrawal from Iraq, but then the benefits of the war would have to be written down to zero except for the important and curiously ignored benefit that consists of having one’s armed forces engaged in a recent war. The lessons of war cannot be duplicated by peacetime training, planning, and analysis. Linda Bilmes and Joseph Stiglitz in a recent paper estimate the cost of the Iraq war as being between $1 trillion and $1.2 trillion. As Becker points out, the estimate is based in part on entirely speculative estimates concerning the impact of the war on the price of oil. My own view, moreover, is that higher oil prices are a very good thing from the standpoint of combating global warming, though I would prefer to see them brought about by high taxes on fossil fuels, which would have the additional benefit of reducing the wealth of oil-producing nations. The Bilmes and Stiglitz paper usefully emphasizes, however, the costs resulting from the unexpectedly long deployments of our troops. Apparently, as they point out, these were not anticipated and thus impounded in military salaries and benefits, and as a result the nation is having to incur increased recruitment and other personnel costs in order to maintain the armed forces at the desired level. With the dubious (as Becker notes) cost items subtracted from the Bilmes-Stiglitz estimate, the total is still a sizable $840 billion, which as Becker points out approaches the high end of the Davis-Murphy-Topel current estimate. I have two disagreements with Becker. First, I do not think that a comparison of U.S. military deaths in Iraq and Vietnam is meaningful. Partly because of increased media coverage, there is much greater sensitivity to casualties today than there was in the Vietnam era (or think back to the Civil War--twice as many deaths as in World War II, in a population less than one-fourth as large). Apparently the Administration has decided that it is imperative to reduce the number of U.S. military deaths in Iraq, even though the total for 2005 was only 846, compared to 14,000 in 1968, the critical year of the Vietnam war. Second, I would not count the welfare of Iraqis in a cost-benefit analysis of U.S. warmaking. I do not think most Americans want to sacrifice American lives and resources for the sake of foreigners. There is some American altruism toward Iraqis, and to that extent increasing the welfare of Iraqis is a benefit to Americans, but, in my view, only to that extent. And I think it is quite slight. All this said, I do not think a decision to go to war should be based on cost-benefit analysis. It would terrify the world if powerful nations conducted cost-benefit analyses of whether to go to war. There are 192 nations besides the United States; should we ask the Defense Department to advise us which ones we should invade because the expected benefits would exceed the expected costs? Might a conquest of Canada produce net benefits for the United States? Rather, our policy should be to wage only defensive wars, though that would include aiding allies that have been attacked, which was a reasonable basis for our entry into the Vietnam war, though the results were deeply disappointing. I also do not think a nation threatened with attack should base a decision whether to defend or surrender on cost-benefit analysis. Rather, it should commit itself to fight regardless, as such a commitment will in most instances greatly increase the expected cost of the attack. That is the economic logic of revenge and the basis of our policy of massive retaliation during the Cold War. I said that the Administration did not conduct a cost-benefit analysis of the war in Iraq, and I have also said that I do not think a decision to go to war should be based on such an analysis. But in the case of a war that though in a broad sense defensive is also optional because there is no immediate threat of attack by the enemy, cost-benefit analysis has an important role to play. After 9/11, the danger to be anticipated from Saddam Hussein's possessing weapons of mass destruction, though uncertain, had to be reckoned greater than before. And by virtue of the no-fly zones and the sanctions, the United States was already in a quasi-war with Iraq. Against the background, the decision of the Administration to obtain a United National resolution demanding that Iraq re-admit the inspectors whom it had ousted in 1998 was reasonable and had the support of most nations. Enforcing the demand required the United States to station large forces in Kuwait and elsewhere in attack range of Iraq. In March 2003 the United States had the choice of permitting Saddam's cat-and-mouse game with the inspectors to continue, or invading. That was the point at which a careful cost-benefit analysis might have indicated the desirability of holding off on invading for a month or two, although a significant cost would have been that it would have given Saddam more time to prepare and that having to fight in hot months would have impeded the invasion to a degree. In addition, once the decision for war was taken, cost-benefit analysis of alternative scenarios--in particular of the possibility of a long war that we would lose or draw--might have indicated net benefits from committing more troops to the invasion and its immediate aftermath in order to prevent the rise of an insurgency.

Dubai--Becker's Response to Comments

I can be very brief since most of the many comments involved a battle between posters over free trade. My position on that issue is well known, and I will leave it for others to continue the discussion. I do not even mind being included among the "people with academic jobs" since I do have one. I should point out, however, that as I have written on this blog, I oppose tenure for academics, including myself, and that I earn much of my income from the "cut throat" competitive markets of writing books and giving lectures. As someone pointed out, what is relevant is the unconditional probability, not the conditional probability, of the increase in terrorism due to the port deal. For example, if the probability of terrorism was minuscule, it would hardly matter if the conditional probability of a terrorism act, given that one occurred, was greatly increased by the Dubai operation of a few ports. As I indicated in my column on illegal immigration, I would favor much more immigration, perhaps even free immigration, if governments played a small role, as they did in the nineteenth century. But given the welfare state, and the importance of votes, it is no longer sensible to be a free trader on immigration.

Dubai Ports Controversy--Posner's Response to Comments

A number of good comments, as usual. I will respond very briefly. One comment points out that since only 5 percent of incoming containers are inspected, the real danger of lethal cargo is created is in the foreign ports (operated by foreign companies) in which the containers are loaded into ships bound for the United States. However, U.S. port security can be thought of as a second line of defense should dangerous cargo not be detected in the originating port. A second, very pessimistic comment considers port security basically hopeless--if terrorists obtain weapons of mass destruction, they will find a way to slip them into the United States. That is certainly true with respect to bioweaponry: smallpox virus sprayed in any international airport would create an epidemic in the United States. But probably the greater danger is a nuclear or radioactive ("dirty") bomb, which would probably come in by ship. I would like to know how much it would cost to inspect 100 percent of the cargoes that enter the United States. I don't agree, by the way, that it is "protectionist" to trade off foreign investment benefits against security costs. I don't think it would be protectionist to forbid Iran to buy Boeing or provide janitorial services at the Pentagon. Finally, I do think that an excellent point made in one of the ccomments is that had the deal gone through, Dubai would have had a real stake in enhancing port security, since if a terrorist attack occurred at a port operated by Dubai Ports World, it would be a disaster for Dubai. In retrospect, the Administration could have made a better case for the deal. But I suspect that the political opposition would still have precluded acceptance of the deal.

The Dubai Ports World Fiasco--Posner

Last August, Becker and I blogged about the effort of a Chinese oil company to buy the American oil company Unocal. That effort failed because of fears that China would use control of the company to the detriment of the United States. Becker and I thought those fears chimerical. In effect, by purchasing Unocal, the Chinese would have been giving us a hostage. Moreover, if as feared (groundlessly) they ordered Unocal to sell all its oil to China, the only consequence would be that whatever supplier of oil to China Unocal would be replacing would now have unsold oil to sell to the United States. Our oil supply, and oil prices, would not be affected. Defenders of the thwarted transaction by which Dubai Ports World, a company owned by the government of Dubai, one of the United Arab Emirates, would (through its purchase of the British port operating company Peninsula & Oriental Steam Navigation Company (P&O)) have obtained control over loading and unloading ships at a half-dozen major U.S. ports argued that the opposition to the transaction was as blatant and misguided a display of xenophobia as the opposition to China’s acquiring Unocal. But the two cases are not symmetrical. The opposition to the Dubai deal had nothing to do with fears that Dubai Ports World would deprive the United States of access to an essential raw material or otherwise harm the United States economically. Nor, I think, had the opposition much to do with fears of foreign investment in general, since the transaction was between two foreign companies (P&O and DP World). Protectionism is not a compelling explanation for opposition to the sale of assets by one foreign company to another even if some of the assets are located in the United States. Toyota has factories in the United States, but if BMW bought Toyota, who would care? The defeat of the DP World transaction was the result of a groundswell of American popular opinion (though egged on by politicians and the media) that is more plausibly interpreted as anti-Muslim and anti-terrorist than as protectionist. Dubai is an Arab nation with pre-9/11 links to al Qaeda, and U.S. port security is notoriously lax. No serious person thinks that Dubai would actually connive in a terrorist attack on the United States. The fear is rather that an Arab company is more easily penetrated by Islamic terrorists than a non-Arab one. The fear may be exaggerated, but many of the arguments made in defense of the Dubai deal seem dubious. For example, it was argued that since British, Singapore, Chinese, and other foreign companies already control some port operations in the United States (P&O being one), the cat is out of the bag. But the companies of non-Islamic nations are no more likely to be penetrated by terrorists than a U.S. company is. It is not, as some defenders argue, "racist" for Americans to differentiate Islamic nations and peoples from other nations and peoples with regard to security precautions. It is merely realistic. (Many of those defenders in fact support racial and ethnic profiling as a rational police and counterterrorism practice.) Nor is it a complete answer to the opposition to point out that the employees at the ports that Dubai Ports World would have operated are Americans and would be unlikely to be replaced by Arabs or other foreigners, or that the security of U.S. ports is the responsibility of the Coast Guard and of U.S. Customs and Border Protection (both components of the Department of Homeland Security) rather than of the port operator. The local managers of DP World doubtless provide a stream of information to the company's headquarters in Dubai concerning various aspects of their port operations (including personnel), and this information might be valuable to anyone contemplating a terrorist attack on the United States who might have access to the company’s files. And doubtless personnel from headquarters visit the ports from time to time on business. Apparently the investigation made by the U.S. government before approving the transaction was superficial. I would have to know a lot more than I do about port security to be able to evaluate the risk that allowing DP World to control U.S. port operations would create to national security. The risk may be slight; but even so, running a slight risk of catastrophic loss is worthwhile only if the benefits of the risk-taking are considerable. The benefits would have been slight had the government handled the matter more adroitly. Apparently DP World, in buying P&O, was not particularly interested in the latter's U.S. operations. So when the proposed acquisition was first submitted to the U.S. government for approval, our government might quietly have suggested (maybe it did, though there is no indication of this) that DP World spin off the U.S. operations that it was acquiring to an American company. Because this was not done, and DP World is being depicted as having backed off from acquiring the U.S. port operations because of fierce grass-roots American opposition, concern has been expressed that we are poisoning our relations with the Islamic world in general and Dubai in particular, and even discouraging foreign investment in the United States by non-Islamic countries. This concern seems overblown. Take the last point first. Because of our large budget deficit, the world is awash in dollars. The companies holding those dollars are avid to invest in the United States, either by helping to finance our deficit or by acquiring U.S. assets. They are not likely to be deterred by a security concern focused on an Islamic nation. Some Islamic nations may be angry with us; but those nations do not invest heavily in the United States. Tiny Dubai can hardly afford to retaliate against the United States, to which it looks for protection against the stronger nations in its region, such as Iran. Nor for that matter can Saudi Arabia. Between us and the Islamic world (outside of frankly hostile nations such as Iran and Syria) the economic and security dependence is mutual. Moreover, the ruling and business classes in these nations understand that the United States is a democracy, that our government must therefore be responsive to public opinion, and that Islamic terrorism and fanaticism, the French riots, and the riots over the Danish cartoons, have increased the hostility of Western populations to Muslims. Demonstrations of the indignation of the American people over Muslim misconduct may even cause some Muslim leaders to rein in their followers. Western hostility to radical Islam was one of several factors that made the government's defense of the DP World acquisition a distinctly uphill struggle quite apart from legitimate security concerns. Another such "extraneeous" factor was our government’s surprising neglect of port security, which has made our ports seem the weakest link in our defense against terrorist attack by means of weapons of mass destruction, weapons that could probably be brought to the United States only by sea. Another factor was the poor reputation of the Department of Homeland Security, which is responsible for port security; the Department's assurances that the DP World acquisition would not undermine national security were bound to fall on deaf ears. Then too there is suspicion, based on our lucrative commerce with Dubai and on our failure to require strong counterterrorist measures by our chemical industry, that our government trades off terrorist risks against business interests on terms too favorable to the latter. I have expressed concern before in this blog and in other media about what seems a crisis of competence in U.S. government. For reasons probably rooted in the sheer complexity of modern society, to which our governmental structure may not be well adapted, we have experienced in recent years a series of policy fiascoes, many of which seem to reflect an inability to plan ahead. In the case of the DP World deal, this inability was expressed in the failure to foresee the public reaction to the deal.

Comment on the Dubai Ports World Fiasco--BECKER

Posner rightly distinguishes the attempted purchase last year of the American oil company Unocal by the Chinese government-owned company, CNOOC, from the proposed operation of six American ports by Dubai Ports World, a company owned by the Dubai government. The case against the takeover of Unical by SNOOC was extremely weak for the various reasons we gave in our blog discussion last August. The case against allowing this Dubai company to be in charge of loading and unloading ships at several ports is stronger, perhaps much stronger, but in my judgment not strong enough. So I do support the decision of the Bush administration to allow the transaction to go through, and regret the Congressional and media opposition that torpedoed it. Posner too readily dismisses the degree of opposition in some American circles to the takeover by foreign companies of certain types of American assets. Such protectionism not only blocked the Unocal takeover, for reasons he agrees are flimsy, but also prevents foreign airlines, even those as innocent as British Airways, from owning American airlines, and from flying from one American city to another. Protectionism is the only reason for the pressure on China to control the rate of increase in its textile exports to the United States. American protectionist sentiment arises whenever it can be disguised as concern over national security, terrorism, health, and other legitimate issues. Protectionism was also manifest when Japanese companies in the 1980's and 1990's took ownership of certain assets, like Rockefeller Center, considered to be American jewels. Anti-Japanese attitudes allowed protectionists to create opposition to these transactions that would not have been possible if British or say Italian companies were involved. In the same way, although the operation of these ports was being simply transferred from one foreign company (British) to another one, dislike of Muslims by many Americans enabled protectionism to be disguised under the cloak of concern over Islamic terrorism. I instinctively am dubious about the legitimacy of the opposition to the Dubai Ports World transaction when it is led by the new Lou Dobbs, the CNN business commentator, who saved his sinking ratings by discovering that he never met any imports to the United States that he likes, whether of goods, services, or people. He may by accident be right in the Dubai ports situation, but his opposition makes me suspicious of the motives behind much of the more vocal opposition. How serious is the risk that this government-owned Dubai company, headed by an American, would either intentionally or through lax management of the ports, have allowed terrorists or major weapons to enter America through the ports they would have operated? This risk is not zero, but I do not believe it is strong enough to justify blocking the transaction. It is doubtful that any information provided to headquarters of the company by American dockworkers, or even by any of the very few Muslim managers of the company, would be of greater value to terrorists than information about port security that can be picked up from media reports, surveillance, and the internet. Furthermore, the major terrorist attacks in recent years, such as 9/11 and those in other countries, did not (as far as I know) depend on information passed to the terrorists by sympathetic companies operating trains, ports, airports, airlines, or other vital sectors. I have expressed my support of appropriate ethnic and other profiling in prior blog discussions and elsewhere, but the risk has to be sufficiently large to justify taking actions that inevitably arouse antagonism. Several airlines from Muslim nations, such as Kuwait Airlines, Biman Bangladesh Airlines, Emirates Airlines, and Saudi Arabian Airlines, fly into the United States every day. Should they be banned because someone in these companies might connive to allow terrorists on board who plan to hijack a plane and then fly it into a major building in New York, Washington, or elsewhere? Should all citizens from Saudi Arabia be banned from entering this country because a few might turn out to be dangerous terrorists? Terrorist profiling means that extra attention is paid to members of groups that are likely to commit terrorist acts, not in most cases that they are completely excluded from entering. For this reason, applicants from a country like Saudi Arabia who want to enter this country to study or as tourists should be scrutinized much more carefully than applicants from say Sweden. Extra scrutiny should be given to the activities of airlines with access to American air space that may pose greater risks than airlines like BA. Extra scrutiny should have been the way to handle any terrorist risk posed by the Dubai Ports World management of the ports under their control. The extra cost of an intensive inspection of cargoes entering these ports would have been worth furthering the belief that the US does not simply plead the case for globalization when confronted by restrictions placed by other nations on American exports. Such an action would have sent a message that while the US takes terrorism very seriously, it would not use that concern as a cover for opposition to foreign ownership of American assets. As Posner indicates, part of the concern arises from the apparent laxity in protecting against terrorist threats entering through ports. That has been noted many times as a defect that deserves high priority. I am no expert on this, but I would be easily convinced that this country is not doing a good job of inspecting containers entering American ports, and personnel on ships that dock at these ports. These concerns should be addressed, and exposure and correction of lax port enforcement should have high priority. However, blocking the operation of several ports by this Dubai company at best trivially help overall enforcement. Worse still, it could create complacency about protection of entry of terrorists and weapons through American ports that would be far more damaging to US security that allowing the Dubai transaction to go through. Perhaps as Posner argues, not much harm will result from opposing the Dubai Ports World management of a few American ports. Yet it gives still another signal to the world that when conditions are ripe, protectionist sentiment in the US will gain the upper hand. This is presented as anti-Islam or anti-terrorist, but is I believe at heart anti-free trade and anti-globalization. To me that is the main cost of the Dubai Ports World fiasco.