The Becker-Posner Blog

Has Capitalism Revived/Survived? Posner

Capitalism is the economic system in which the assets used to produce goods and services are privately owned, and the owners determine the price at which to sell those goods and services. Private markets, because they organize and direct production and consumption, are the basic institutions of a capitalist system. Government regulation of markets is (in capitalist theory) limited to correcting situations in which externalities (positive or negative) distort output and therefore reduce value. Sometimes correction of the failings of free markets requires governmental proprietary rather than merely regulatory activities (the standard example is national defense), and government levies taxes to finance those activities. Taxes can also be regulatory devices (taxes on emissions of pollutants, for example) or redistributive; if they are made redistributive in order to correct an externality (for example, underinvestment in human capital of poor children), they are also consistent with the aims of a capitalist organization of the economy. 

There are libertarians who believe that the only true capitalism is a system in which there is no government at all; this is “anarcho-capitalism”; a prominent spokesman is the economist David Friedman, who teaches at Santa Clara University. Most defenders of capitalism stop well short of anarcho-capitalism, and admit a substantial regulatory and proprietary role for government. The Scandinavian nations admit the largest such role; yet they are still capitalist countries—and more prosperous than most even more capitalistic countries. 

I agree with Becker that there was a journalistic overreaction to the latest economic crisis, as to previous ones. Journalism thrives on exaggeration and fear-mongering. But capitalism has survived intact a long, long history of economic crises, including the Great Depression of the 1930s. The major modern challenges to capitalism came not from that or any other depression, but from the two world wars of the twentieth century, without which it is hard to believe that the European nations would have lost their colonies, experienced a great depression (in the 1930s), or (in central and eastern Europe) become communist. Without World War I, it is very doubtful that Russia would have become communist; and without the Soviet conquests in eastern and central Europe in World War II, neither would Poland, Rumania, etc. have become communist.  

The recent (actually current, though diminishing) depression kicked off by the worldwide financial crisis of September 2008 has not created any new communist or socialist countries. What it has done is give rise in almost all countries to a demand for more stringent regulation of banks and other financial institutions, and of some of their financial instruments, and to large public deficits; but neither of these developments is a harbinger of socialism. It’s no longer even clear what “socialism” means, or who has a coherent program of socialist administration of a modern economy. 

One reason that capitalism has easily survived the economic crisis that began in 2008 is the collapse of communism in the Soviet Union, its satellites, and China, in or around 1990, and the continuing dreadful performance of the communist economies of countries like Cuba and Vietnam, and of socialist economies of countries like Venezuela and until recently India. The issue today is not communism or socialism versus capitalism; it's how much regulation of capitalism is optimal. Clearly, financial regulation was too lax in the late 1990s and early 2000s (pursuant to Alan Greenspan‘s mistaken dictum that banks and other financial institutions are “self-regulating,” to the “Greenspan put,” to the incompetence of the SEC, and to not a little outright fraud), and this laxity played a significant role in the 2008 collapse and ensuing depression (as I regard it). So we'll have—we need—more regulation. If we get it, that won’t be communism or socialism. 

In the last half century the United  States has experienced substantial deregulation and privatization movements, coupled with lower taxes, but at the same time has experienced increased regulation in areas such as employment discrimination, job safety, welfare benefits, and environmental protection, and increased economic inequality. Whether on balance the country is more capitalist or less capitalist than it was in 1953 is unclear, but I think it is more capitalist—notwithstanding the post-2008 movement for tighter regulation of financial markets.

When Should We Interfere in Another Country’s Internal Affairs? Posner

The Peace of Westphalia was a series of treaties among the European states that ended the Thirty Years’ War, with its enormous carnage, and established the principle of national sovereignty—that a nation is sovereign over its population. This meant that a Protestant nation, for example, had no right to make war against a Catholic nation merely because the Protestant nation very much wanted the citizens of the Catholic nation to become Protestants. 

The results of the Peace of Westphalia have not always been pretty. After Hitler took power and before World War II broke out, Germany’s persecution of its Jewish population was implicitly acknowledged by the United States, and (as far as I know) by all other nations as well, to be Germany’s business, and not a casus belli. The most dramatic post-World War II example of that kind of hands-offness was the refusal by the United States to intervene in the Rwandan genocide of 1994, when, in the midst of a civil war between Hutus and Tutsis, the dominant ethnic groups in Rwanda, the Hutu population in a period of about 100 days killed between 500,00 and 1 million Tutsis, before being decisively defeated by the Tutsis. The Hutus were armed mainly with machetes, and the United States could have prevented the genocide with modest military means and little risk, but, in keeping with the Peace of Westphalia (though I don’t think that was ever mentioned), did nothing. 

Five years later, however, the United States intervened in a civil war in Yugoslavia between the Serbian majority and the people (mainly of Albanian ethnicity) of the province of Kosovo. We sided with the Kosovans, and as a result Kosovo became an independent country. Our intervention flouted the Peace of Westphalia, though again I don’t recall the Peace having been mentioned. 

We flouted it again when we intervened in the Libyan civil war in 2011, on the side of the rebels against Muammar Gaddafi. And we violated the spirit though not the letter of the Peace of Westphalia just months ago in threatening withdrawal of aid from Egypt in the wake of the Egyptian Army’s ouster of the elected Muslim Brotherhood government. The threat was contrary not only to the spirit of the Peace of Westphalia but also to U.S. national interests; for the Muslim Brotherhood spells trouble for the United States, and the Egyptian Army does not. Moreover, it is naïve to criticize the Egyptian Army for ousting a democratically elected president (Mohamed Morsi of the Muslim Brotherhood), as if it were any business of ours whether a foreign country is a democracy or an autocracy or something in between. We have friendly relations with a number of nondemocratic countries, and indeed such countries frequently are our allies; think of Saudi Arabia, the other Arab monarchies, and a number of autocratic African and Central Asian nations. We never tried to dislodge Franco, for example, or for that matter the Cambodian nut government (the Khmer Rouge) that killed 2 million Cambodians without cause. We became friendly with Mao’s China. We even had good relations with Saddam Hussein before he invaded Kuwait (relations unperturbed by his poison gas attack on the Kurds in 1983, which killed two or three times as many persons as Assad’s recent attack killed). We had excellent relations with the successive Egyptian military dictators Sadat and Mubarak, relations that I imagine we will soon re-establish with the new Egyptian military dictatorship. 

Which brings me to Syria, which the President wants to bomb as punishment for the Syrian military’s use of poison gas against civilians believed to support the rebels in the civil war that has been raging for more than two years and that has caused some 100,000 deaths and a flood of refugees. It is something of a puzzle that poison gas should be considered a weapon of mass destruction that no nation should be permitted to have, because it is not a very effective weapon—except against civilians. Be that as it may, the Peace of Westphalia was intended to eliminate a nation’s mistreatment of its population as a ground for war against that nation, and thus to reduce the frequency of war, certainly a laudable aim. 

Syria is a dictatorship, but it is not a threat to the United States. On the contrary, it will become a threat to us only if Al Qaeda, which is prominent in the rebellion, takes over the country, or a significant chunk of it (for Syria may fragment). An irony of our threatened bombing of Syria is that it may strengthen Assad’s position by doing little damage and thus making it look as if he’s successfully defied the United  States, and by inducing Russia, China, and Iran to increase their aid to him in order to make us look ineffectual. Conceivably our government secretly desires survival of the Assad regime in a weakened state; even a Syria divided on ethnic lines. We were not troubled by the Syrian dictatorship before the rebellion broke out—we will be troubled if Al Qaeda takes over the country. Al Qaeda and affiliated extremist Sunni groups endeavor to commit terrorist acts inside the United   States; Assad and his Shiite allies do not. 

Partly because of the information revolution, which brings vivid images of war into our cell phones and laptops, it has become difficult from an emotional standpoint for the mighty United States to be seen as standing aloof from grave abuses of human rights in foreign countries, though we managed to do that in the Rwandan and Cambodian genocides, and in other genocidal episodes as well, and Assad doesn’t need poison gas to kill civilians. It doesn’t help that the consequences of our bombing Syria are not easy to foresee, and that wars develop their own momentum. 

I would prefer that we refrain from military activities that do not hold substantial promise of advancing at reasonable cost policies reasonably deemed essential to the security and well-being of this country. In other words, we need to prioritize—cold-bloodedly.

Bombing Syria? Becker

A major issue splitting America and world opinion is whether the US should bomb Syria because of the apparent use of chemical weapons by the Syrian government.  My answer is “no”, despite the colossal blunder by President Obama in promising retaliation if Syria crossed the “red line” by using chemical weapons.

I say blunder for two reasons. The president clearly is not enthusiastic about ordering a cruise missile or other strikes on Syria.  If he were, he would already have ordered the attack since he admits he has the power to do this without getting congressional approval. By seeking their approval before he goes ahead, the president is demonstrating a reluctance to do this on his own.

It would also be unwise to get involved in the civil war raging in Syria (I am indebted to very informative discussions with Guity Nashat Becker). Although the Assad government is clearly authoritarian and has not allowed any opposition to speak openly, it is no more repressive than American allies like Saudi Arabia. Moreover, Syria has not caused much trouble in the explosive Middle East or elsewhere. In addition, the rebels are split between radical Sunni Islamists, and other groups that appear to be pro democracy. The Islamists seem to be the better-organized and stronger fighters, with many of them coming from other countries. US intervention would increase the likelihood that they would come to power if the Assad government fell.

Of course, chemical weapons are awful and kill civilians. But without chemical weapons, 100,000 or so deaths have occurred during the civil war in Syria, many of them in cruel and painful ways. Although chemical weapons are a violation of international law, the US and other countries stood by while Iraq apparently used chemical weapons on a large scale in its protracted war against Iran in the 1980s. Indeed, the US supplied arms to and remained an ally of Iraq throughout this war.

There was some limited support within the United States for intervention in Syria on the side of the non-Islamic rebels even before the apparent use of chemical weapons by the Syrian government. However, our experience in Iraq and Afghanistan should caution against doing this. Vast uncertainty about how the future unfolds, and the “law of unintended consequences”, make it is extremely difficult to predict the eventual outcome of any intervention in another country’s battles, especially in as confused and volatile a region as the Middle East.  One can hardly argue that the intervention in Afghanistan has been successful, and it is also dubious whether the Iraq intervention has been worth the cost to both the Iraqi and American people.

I originally supported the 2^nd Iraqi invasion as necessary to bring down a cruel and dangerous dictator. Cruel and dangerous Saddam Hussein was, but he was also in retrospect a self-inflated rather minor figure. More importantly, one should have appreciated that the longer-term outcomes of such a disorganized and destructive activity as war are disturbingly uncertain.

My conclusion is that except under extreme circumstances, it is not worth intervening in another country’s squabbles, even when the government is undemocratic and cruel. The extreme circumstances would include that American interests are very seriously threatened by the outcome, or that killing of non-fighters is on such a large scale that humanitarian reasons justify intervention to put an end to these killings.

Neither of these criteria applies to the Syrian civil war. Many deaths have occurred, but the rebels presumably are responsible for many of these. Further, even an Islamists win probably would not seriously threaten American interests. The president’s red line is very worrisome because the US does not want to appear like a paper tiger. Obama could launch a few missiles to combat this perception, but overall I think it best if we punt on military action, and blame our inaction on a divided Congress.

Dynamic Competition and Anti Trust Policy-Becker

The recent surprise resignation of Microsoft’s chief executive, Steve Ballmer, only made official what has long been obvious; namely, that Microsoft is in decline, and is no longer the great and dominating company it once was. Microsoft’s rapid decline may be inevitable in industries with rapid technological change, which should influence anti-trust policy in the United States and other countries concerned about monopolies.

Microsoft’s Windows has been by far the dominant operating system for personal computers during the past 3 decades, as it was installed in some years in more than 95% of all personal computers, and is still installed in over 90% of all computers worldwide. What economists call “network economies” gave Windows a major advantage over Apple’s operating system and that of potential entrants. Since computers have to communicate with each other, it has been advantageous to buy a computer with Windows when most other computers also used Windows.

Microsoft had monopoly power as measured not only by its dominant share of all computer operating systems, but also by the very large profits it continues to make year after year. These profits led to an elevated price of Microsoft’s stock- it has since fallen significantly- and to enormous wealth not only for Bill Gates, but also for many other employees of the company.  Microsoft attracted topnotch employees, and was generally considered the leading company in the world.

Complaints by competitors against so-called unfair tactics by Microsoft attracted the attention of the Department of Justices. It began an anti trust case against Microsoft that accused the company of abusing its monopoly power. This resulted in an expensive and bruising battle between the company and the government, including the attorney generals of many state governments. The final settlement did not force many changes in what Microsoft did, but the case may have distracted Microsoft’s leaders from the goal of continuing to innovate in the computer industry.

We will probably never know if the lawsuit damaged Microsoft’s subsequent performance, but forces were gathering even prior to the lawsuit that greatly undermined Microsoft’s dominance. The growth of the Internet was a major force, and was itself sparked by major network economies. Gathering information from, and communicating via email through, the Internet became the primary interest of many consumers, and did not require word processing and other tools at the heart of Windows. Microsoft’s Explorer system that provided access to the Internet rapidly declined in importance.

Apple soon became the most important innovator in the high tech industry, with its iphone, iPod and IPad. Smart phones and Tablets provided easy access to the Internet, and simple communication among users through email, texting, Facebook, and Twitter without the need to own a computer, and certainly without having to rely on Microsoft. This company tried to compete with its own tablets and other Internet devices, but it could never regain the attractive products it had when first introducing Windows. Perhaps a reluctance to “cannibalize” the market for its computer software made Microsoft drag its feet in getting into new products that allowed direct access to the Internet. In any case, Ballmer and other Microsoft leaders downplayed the importance of smart phones and other such Internet devices.

Google is in turn replacing Apple as innovation leader in the industry, with its dominance of the market for gathering information from the Internet, its Android operating system for smart phones, its driverless car, and Google glasses.  This process whereby new entrants erode over time the market position of dominant companies is part of “dynamic competition”, as opposed to the static competition discuss in economic textbooks. The large profits made by dominant companies encourage entry of new competitors who try to appropriate some of those profits for themselves. These new entrants may not be able to compete effectively by offering the same products and services as dominant firms do because these firms benefit from network economies and other advantages of scale. Instead, they innovate with different products that take away some of the market held by dominant firms. Unlike Microsoft, Apple did not mind, and probably enjoyed, cannibalizing Microsoft’s market.

Anti trust policy should recognize that dynamic competition is often a powerful force when static competition is weak. The big policy question then is whether it is worthwhile to bring expensive and time consuming anti trust cases against still innovating firms that have considerable profits and monopoly power, given the significant probability that new competitors will before long greatly erode this power through different products? I believe the answer to that is no, and that policy should often rely on dynamic competition, even when that allows dominant firms only temporarily to enjoy economic power.

Microsoft’s Dilemma—Posner

I do not think the puzzling conjunction of Microsoft’s rising profits and declining stock price reflect investor pessimism about its principal products—the Windows operating system, the Office Suite (Word, Power Point, and Excel), and servers for large users. There will continue to be a heavy worldwide demand for them. The laptop and desk computer are not going away; they will continue to be indispensable in enterprises of all sort, public and private, individual and corporate, all over the world. And there is no compelling objective reason why Microsoft should lag in improving these products sufficiently to maintain its market share. 

No reason, and yet the decline in its stock price suggests that investors are dubious. The problem is not that Microsoft has failed to achieve success in the hot new areas of mobile devices and of search, but that the failure strikes many investors as symptomatic of a more general problem, identified by organization economists such as Clayton Christensen of Harvard. And that is the difficulty that large, established, successful enterprises have in adapting to rapid changes in their markets. The number of large successful computer companies that have failed or (like Hewlett Packard) are struggling is quite
markable. The list includes (among the better known) Atari, Burroughs, Compaq, Control Data, Data General, DEC, NBI, Netscape, Prime Computer, Remington Rand, Sperry, and Wang. 

What makes the computer industry so unstable from a producer standpoint is not only or even mainly the rapidity of technological change, which characterizes a number of other industries as well, but the rapidity with which a start-up can become a major producer because start-up costs in software and other computer-related business innovations are so cheap. Teenagers attuned more sharply to emerging tastes than adults, let alone middle-aged business leaders, can become formidable competitors of established businesses, seemingly in minutes. Smart teenagers become proficient in computer programming, are instinctively knowledgeable about the tastes and need of their contemporaries, and are able to raise the modest amount of money necessary to demonstrate the feasibility of their innovations. 

What makes the young computer entrepreneurs so formidable is that established firms, especially successful established firms, such as Microsoft, which made Bill Gates the wealthiest person in the world, cannot adapt rapidly to market changes in the computer-Internet-social media world. It’s a bird in the hand, two birds in the bush, problem. Microsoft is very successful with a certain type of product, namely software designed to meet the work needs of professionals and businesspersons. Microsoft’s corporate culture, organization, leadership, and personnel are all optimized to improving,
producing, marketing, price, and servicing that type of product. It a huge organization. It has 100,000 employees. What is it to do with them, who are the successful core of its successful business, if it tries to transform itself an Apple, a Google, a Facebook? Erect a new business beside it—a start-up staffed by brilliant unruly college drop-outs? Can one see a Bill Gates type or a Steve Jobs type as Microsoft employee number 100,001? What kind of fit would that kimd of employee make with the company’s existing staff?  

Large firms are organized hierarchically; it is the only way top management can exercise effective control. New ideas move slowly up a ladder of successively more senior supervisors. Because they are senior, older, experienced, they resist change, espcially change that may diminish their value to the company, or provoke turf battles with other divisions of the firm. They suffer from bureaucracy. 

Yet the problem of adaptation to change is not limited to large companies. Small companies are nimbler, but also more fragile, and so equally or more reluctant to cannibalize themselves in order to move into a more promising business. It is start-ups that are most likely to embrace new, disruptive technologies—they have little to lose. 

The tendency in economics is to think of corporate costs in opportunity-cost terms. A forgone opportunity is a cost measured by the profit that the opportunity would have yielded. Failure to exploit a promising business opportunity is like failing to pick up a $10 bill that you see lying in the gutter. But the individuals who make up a large organization tend not to think in opportunity-cost terms. They are not worker ants. They are individuals with their own utility functions. And one of the arguments in their utility functions is risk aversion. They weight a loss more heavily than an equivalent gain. They’d rather go with the office consensus, even if they think it wrong, because if everyone is wrong no one is blamed, than go out on a limb. Not all business people are risk averse. Entrepreneurs are not. But middle managers in large, established, successful firms are risk. They are doing well. They don’t want to rock the boat. Bureaucracy and the bureaucratic mentality are not limited to government agencies. 

It would take a remarkable person to change Microsoft’s business culture. Investors apparently think it unlikely that CEO Ballmer will be succeeded by such a person. And apparently they fear that Microsoft’s established products, profitable as they are, might someday soon be subject to the same wave of creative destruction that has challenged so many computer companies and destroyed not a few of them.

President Obama’s Plan for College Reform—Posner

Several days ago the President proposed that the federal government create a rating system ("scorecards”) beginning in 2015 to rank colleges by such metrics as tuition, percentage of low-income
students, graduation rates, alumni earnings, and debt of graduates. Federal financial aid to students, currently running at $150 billion a year, would be allocated on the basis of the ratings, though this part of the proposal would require legislation; the other parts the President can effectuate without congressional action. For a good summary of the program, see Dylan Matthews, “Everything You Need to Know About Obama’s Higher Ed Plan,” Wonkblog, Aug. 22, 2013, www.washingtonpost.com/blogs/wonkblog/wp/2013/08/22/everything-you-need-to-know-about-obamas-higher-ed-plan/. 

There are of course college rating systems already, such as that of U.S. News & World Report. A federal rating system would probably have somewhat greater credibility; and if it became the basis for allocation of federal financial aid, the system would have far greater effect on college choice, given that more than 80 percent of college students receive federal financial aid. 

Multi-factor rating systems have an obvious, and very serious, problem: weighting. It is almost certainly the case that the factors in the proposed “scorecard” don’t have the same importance to an intelligent choice of which colleges to apply to. Worse, there is unlikely to be agreement on which factors are the most important and so should be given the greatest weight—and how much more weight than the other factors. That won’t matter a great deal as long as the ratings just guide college
choice, for then parents and their kids will give whatever weight they want to the various factors. But the ratings will matter greatly—and influence that choice—if Congress allows them to be used to govern the allocation of federal financial aid to students. 

To evaluate the President’s proposal, we need to step back and consider what ails our higher-education system. It is helpful to note the affinity between its rather doleful situation and that of our health care system. The top institutions in both systems provide world-class quality of service, mainly to children of the affluent and nearaffluent—the top tier of American universities and colleges is generally considered tops in the world. Both systems provide indifferent quality at the bottom, the bottom-tier universities and colleges being worse than the bottom-tier hospitals and clinics. Both systems are very expensive, with much of the tab picked up by the taxpayer—both are very expensive in part because of poor quality control by the federal government. The government is not a very competent financier, in major part because it is buffeted by interest groups wielding formidable political power. 

The Administration’s Affordable Care Act (“Obamacare”) is an enormously ambitious, almost incomprehensibly complex, effort to improve medical care and at the same time reduce the rate of growth of the nation’s medical expenditures. The President’s new higher-education proposal is much less ambitious, especially if one sets to one side the part that requires congressional approval—the part about keying federal financial aid to universities and colleges to how well they perform on the “scorecard.” It is worth analysis, of course, but can be relegated to secondary concern on the pragmatic ground that congressional approval appears to lie far in the future. 

The Presidente’s proposed ratings do identify characteristics of colleges and universities that parents and their high-school children should consider in deciding whether (and where) to apply to college. True, most of the information is available already, but not (so far as I know) in a compact, readily readable and comprehensible form, amd of course missing the imprimatur of the federal government. The Wall Street Journal in an editorial yesterday (August 24) scoffed at the supposition that the government can pick “winners.” But that isn’t the purpose of the ratings. The purpose is to provide accurate, readable information for the relevant consuming public, and so understood seems perfectly appropriate. The “picking winners” criticism will become more apt if and when Congress authorizes the allocation of federal financial aid on the basis of the ratings. 

But I do think the scorecard even when viewed purely as an information device can be criticized. For example, while I can see why the percentage of low-income students in a college would be an appropriate factor to consider in allocating federal aid, I don’t see its relevance to the choice of a college by would-be applicants. Tuition, on the other hand, is a relevant factor, obviously, but is disclosed up front by any college or university to which one applies. Alumni earnings sound relevant, but the problem is that they necessarily are backward looking. They are the record of experiences of previous students, and may reflect characteristics of the college or of the job market that have changed since those generations of students graduated. The amount of debt of graduates is similarly an ambiguous signal to a prospective applicant. If the debt of graduates of a particular institution is above average, this may reflect career choices or excessive optimism, things for which the college may bear only limited, if any, responsibility. The factor is included in the scorecard I assume because of a belief that some colleges lure students by obfuscating the financial obligations that a student who applies for financial aid will be taking on. I think this belief is correct but I don’t know how much
of the indebtedness of graduates it is responsible for. 

Most American colleges and universities are nonprofit, but that just means that are don’t have shareholders; profit residuals are dissipated in generous salaries for administrators and faculty, student amenities designed to attract rich kids and thus increase (along with high-powered sports programs) future donations, and lavish building programs. The colleges compete with each other with Darwinian ferocity. Federal financial aid has them to increase tuition at an astonishing rate, which has funded the competitive extravagances. The nonprofit colleges and universities seem just a tad less avaricious than the profit-making ones. 

The competition has greatly increased the number of college graduates—to the point where many cannot find a job requiring a college education. IQ is a limiting factor in the value of a college education in the job market. 

So below the very top tier of institutions, the picture of American higher education has become rather depressing. The President’s newly announced program seems unikely to work any significant improvement.

Information About Colleges and Student Loans-Becker

Colleges in the United States, and in most other countries as well, vary enormously in the quality of education provided, their cost, and their overall efficiency. The over 3000 American colleges compete fiercely for students in terms of tuition, quality of faculty and student bodies, athletic programs, student loans, student grants, and in many other ways. Even though many academics complain about the distortions of business advertisements, the catalogues and other “information” provided by many colleges and universities make lots of advertising look like models of accuracy and probity.

Therefore, to better assess different colleges, high school students, especially those from more educated and financially better off families, spend considerable time and effort in gathering information about colleges. All potential college students can use good information about courses offered, performance of the student body on standardized tests and other information about the students who have attended, the availability of student aid, and the earnings of graduates.

The market has responded to this interest in knowing about colleges by providing guides, rating system, and other school information. These include the well-known US News and Washington Monthly’s rankings, and many lesser known surveys and rankings that range from the frivolous to the informative.

The federal government has a role to play in making readily available many kinds of information useful to students applying to colleges. The government also could help, at least up to a point, by requiring colleges to release relevant information that they may try to keep hidden, such as default rates on student loans, earnings of graduates, dropout rates, and the like. This and other information would be particularly valuable to students from poorer families since recent studies show that these students, even those with very good school records and high scores on achievement tests, are not well informed about different colleges, partly because they put relatively little time into their college choices.

I do not see any good role for the federal government in providing rankings of colleges, as proposed by President Obama, and discussed by Posner. Competition among private market providers of ranking and other college information is far more likely to give students what they want in making their choices. To be sure, market-driven information tends to neglect information that students are not interested in knowing, even when the information might be helpful in their college choices.  But the federal government is unlikely to be efficient in discovering this information, and presumably students will give it little weight in making their school decisions.

Student debt has grown rapidly during the past 25 years, due to the rapid increase in school tuition during this time period, the significant subsidy to most loans, and the growth in high school graduates who attend college. Even though many in the media and elsewhere are complaining about this expansion in student loans, the average student loan of about $26,000 is not large relative to the average income of college graduates of about $70,000. Young families often take on mortgage debt that is twice or even a larger fraction of their earnings.

There is a legitimate concern about those persons with much larger student debt, and about those who make much less than the average college graduate, such as students who drop out of college, or who attended proprietary schools. The federal law that excludes student loans from personal bankruptcies makes the burden for these students still much harder to manage.

The president addresses this problem by proposed various changes in the student loan program, including a move toward a more universal income-contingent repayment system. I have supported income contingent loan programs because returns on investments in a college education are risky. Risky business investments are generally financed by equities rather than debt, and an income-contingent repayment system is more like equity than debt financing of student investments.

Income contingent loans appeal least to students who expect to earn a good income, such as graduates of medical, business, or engineering schools, because the repayment “taxes” on their earnings would be higher. This is why in order to get a balanced demand for such loans from both high and low earners, repayment rates should begin to decline after earnings exceed a certain level.

College is still a very good economic deal relative to their alternatives for the great majority of college graduates, including most of those with sizable loans. The returns from college are not so good for some students with lower abilities and poorer college preparation who come from poorer backgrounds, who do not attend colleges that help them much, and who take on too many loans. These students would benefit from better information about what different colleges have to offer, and from student loan systems that tie repayments to earnings.

Low Birth Rates: Causes, Consequences, and Remedies-Becker

Not long ago a vocal concern was about high fertility in the world and a rapidly growing population. Remember the currently quiet zero population growth (ZPG) movement? The tide has turned since the worry now is about too few births and a falling population.

The reason for this shift in attitude is that over 80 countries have fewer births than required to replace the number of individuals who die each year. They need a large flow of immigrants each year just to prevent their populations from peaking and then declining. These low birth countries contain over 40% of the world’s population, including every country in Western Europe, China, Japan, Russia, Poland, and Canada, to name just a few. Birth rates in many other countries, including the United States, Mexico, and Iran, are only a little above the level necessary to replace the number of deaths.

Scholars measure the level of fertility by the total fertility rate (TFR), which equals the average number of children born to women over their lifetimes. Countries with TFRs below the replacement level of about 2.1 fall into the low fertility camp. Essentially no countries were in this camp in 1970, but in each succeeding decade many additional countries fell below replacement levels. Moreover, and this is important, in not a single country has the TFR ever risen above replacement once it fell below.

As late as the beginning of this century, demographers and others were predicting a rapid growth in world population to over 11 billion by the year 2050. The rapid emergence of low fertility in so many countries has already made these forecasts obsolete. Populations forecasts now assume much lower future fertility levels, but even the present consensus that world population will be about 9 1/2 billion by mid-century may be too high as fertility continues to fall rapidly in poorer countries.

There is growing discussion in many low fertility countries about the negative consequences of having fewer young persons, and the prospects, already a reality in Germany, Japan, Russia, and a few other countries with low immigration levels, of declining populations. In richer countries, retirement incomes and medical care of the elderly are largely financed by taxes on the younger working population. Low birth rates eventually lead to fewer men and women of working ages, and hence a smaller tax base to finance social security payments, unless the fewer children born have sufficiently greater amounts invested in their education and other human capital.

Although potential difficulties in financing social security benefits are receiving the most attention, other negative effects of low birth rates may be of equal or greater importance. Low fertility reduces the rate of scientific and other innovations since innovations mainly come from younger individuals. Younger individuals are also generally more adaptable, which is why new industries, like high tech startups, generally attract younger workers who are not yet committed to older and declining industries.

The great majority of countries have had growing populations during the past 250 years as world population grew at unprecedented rates. Yet ever since Malthus wrote his great work on the harmful effects of population growth on incomes, group after group have opposed high fertility and growing populations as bad for the world’s food supply, standard of living, and environment, including local and global pollution.

However, these possible negative effects of larger populations have to be weighed against the sizable benefits from more people. These benefits include a larger number of young persons who, as mentioned earlier, are more likely to innovate, such as coming up with more efficient ways to grow food, and pay for the benefits to retired men and women. A bigger population also increases the demand for new drugs, software, social networking, and other innovations that have increasing returns to the scale of demand.

To be sure, if higher birth rates lead to lesser education and other human capital investments in each child, they may result in lower, not higher, per capita incomes. Malthus fear of lower per capita incomes explains his strong opposition to high birth rates. However, the rapid growth in world population during past 250 years has been accompanied by unprecedented high per capita incomes all over the world. Whatever the Malthusian negative effects of greater population, they have been dominated by factors that raised per capita incomes, including the benefits of increasing returns and other advantages from having a larger population.

China is seriously considering either greatly modifying or completely abandoning its “one child” policy because of its effects on the number of young persons, and population decline. France a while back instituted a generous and expensive system of financial support to families that have 2 or more births. Germany, Japan, South Korea, Russia, and other countries are discussing and sometimes implementing similar child support programs.

Whether a subsidy is justified depends on whether the benefits from more births and a larger population, including the benefits to the families having children, exceed the cost of encouraging births, such as the budgetary costs to governments of a child support program, potentially greater environmental damage, and the like. Even if, as I firmly believe, that on the whole greater population in the modern world has more benefits than costs, one has to recognize that programs to stimulate births are expensive, aside from simply ending birth suppression policies, as in China’s one child regulatory policy,

For example, to cut the gap in half between Germany’s actual TFR of about 1.4 and a replacement level of fertility of 2.1 requires a 25% increase in the number of births. Yet such a large increase in fertility has not been achieved by any past fertility subsidy programs, even expensive ones, presumably because children are so costly to raise in the money, time, and energy of parents. A more modest 10-15 percent growth in fertility might be achievable with generous and expensive programs, as in France. Perhaps a full benefit cost analysis would show that such a program is warranted, but the jury on this is still out.

Does the World Need More People? Posner

To answer my own question: I am dubious. 

It is true that a country can get into economic trouble if the number of elderly people, who invariably impose heavy costs on a country’s health care system, becomes very large relative to the number of persons of working age, because then the financial burden on the working population can become extremely heavy. The reverse, however, is also true: too high a ratio of young to old can be destabilizing. The experience of many of the poor nations of the world has been that a large youth population creates severe unemployment problems and can lead to violent unrest, as in a number of Middle Eastern countries in the last few years—the naively heralded “Arab Spring” having quickly become a nightmare of violence, political disorder, and regional instability. 

It’s amazing that a poor, largely arid country like Egypt should have a population of 84 million. That cannot be a good thing. Much of Egypt’s current problems stem from inability to grow enough food to feed its population, and insufficient productivity to buy abroad all the food its huge population needs.

A growing population implies a growing number of children—not just persons of working age—and children impose heavy opportunity costs on parents (unless child labor is permitted, which however is likely to prevent children from becoming educated) and are costly to educate. A fast-rising population can not only create heavy youth unemployment but also strain public services (such as public educational institutions). And all this is in addition to the environmental impact of increased population, for example on global warming, species extinctions, and traffic congestion. 

If children were a “superior” good in the economist’s sense—that is, a good that is purchased in greater quantity when people’s incomes rise—one would expect the birthrate in wealthy countries to be high and rising, but the opposite in most such countries is true. Maybe children are actually an “inferior” good, valued most by poor people either because the children of the poor work to augment family income or because the family lacks the resources for such child substitutes as expensive cars, clothes, homes, entertainment, and travel. Increasingly in the wealthy countries both spouses work, increasing the opportunity costs to both parents of raising children. 

A better and certainly cheaper answer to the problem of declining population in countries like Germany and Japan—wealthy countries (though not all countries with declining populations are wealthy—Russia is not, for example)—is immigration. There are some two and a half billion people in China, India, and South Korea alone. Their average IQ seems similar to (maybe even higher than) that of the inhabitants of the United States and the other wealthy countries, including those wealthy countries whose populations are declining (a category that excludes the United States). This implies a very large number of East Asians with IQs well above 100. (Assuming that IQ is normally distributed, an average IQ of 100 means that 2.5 percent of the population has an IQ of at least 130—and 2.5 percent of 2.5 billion is 62.5 million.)  Obviously not all want to emigrate, but many are quite open to the possibility. The problem is that few wealthy countries, other than the United States and the other English-speaking countries, are welcoming to immigrants. They have immigrants—Germany for example has many citizens of Turkish origin; Japan has many Koreans. But these countries tend to be insular, ethnocentric, downright hostile to immigrants, and their immigrant populations—not just the first generation, either—have difficulty assimilating, unlike immigrants to the United States, which still really is a melting pot. If those countries can’t solve the assimilation problem, thereby making themselves more attractive to high-quality immigrants, their populations will continue to decline, because the countries probably can’t afford the subsidies necessary to halt the decline. 

There is no necessary connection between population and economic growth. The sharp decline of Europe’s population because of the Black Death is thought to have increased per capita incomes significantly by reducing the ratio of people to arable land, resulting in improved nutrition. A larger population can, as Becker points out, increase the rate of technological progress by increasing the number of geniuses and other very creative people. But so can assortative mating, which has become much more common in the advanced countries as a result of falling discrimination and Internet dating search. At some point there may be diminishing returns to the increasing number of computer engineers.  

Paying people to have children sounds odd though it can be defended on economic grounds if the additional children yield a net economic benefit. (So for that matter could paying elderly people to forgo end of life medical expenses likewise be defended on economic grounds, depending on how large the subsidy would have to be and how it would be financed.) I am skeptical that such a defense can be established. Too little is known about the economic effects of continued growth of a world population that has now surpassed seven billion.

Poverty and Near-Poverty in the United States--Posner

Two recent articles—Hope Yen, “80 Percent of U.S. Adults Face Near Poverty, Unemployment: Survey,” July 2, 2013, www.huffingtonpost.com/2013/07/28/poverty-unemployment-rates_n_3666594.html, and Ron Nixon, “House Plan on Food Stamps Would Cut 5 Million From Program,” NY Times, July 31, 2013www.nytimes.com/2013/07/31/us/politics/house-plan-on-food-stamps-would-cut-5-million-from-program.html?_r=013----invite attention to the problem of poverty in the United States today. 

Yen’s article points out that while “only” 15 percent of American households have annual incomes below the poverty line (actually the figure is 16 percent)—$23,000 for a family of four—a much larger number can expect to be poor at some time during their lives; many fear sinking into poverty; and many people above the poverty level struggle to make ends meet. 

I believe the poverty line is a useless statistic. For one thing it omits government benefits such as food stamps, social security retirement and disability benefits, Medicare, and Medicaid, along with private charity. For another, “poverty” is not well defined. And for another, the notion of a “line” that separates poverty from non-poverty is ridiculous. If $23,000 is the line for a family of four, does that mean that a family of four with an income of $23,500 is not poor? 

A very small percentage of Americans is actually destitute; but a very large percentage do not have a sufficient income to be comfortable. In fact I am guessing that half the population is in that fix. The median household income in the United States is only $50,000. That is, half the households have less. These households have very little in the way of savings, often cannot afford to live in school districts that have good schools, and cannot afford health insurance (for which Medicaid is a poor substitute). Because of their meager savings, they are highly subject to economic vicissitudes, and are often dependent on usurious loans and often on—or over—the brink of bankruptcy. Partly as a consequence and partly as a cause of low income, they often are in poor health. They cannot pay for their children’s college tuition; the children must go deeply into debt to attend college. 

The number of Americans in households with income below the median must be close to 150 million (the exact number would depend on the average number of persons per household having less than the median household income). Obviously the significance of the number depends on the median income. But that income is modest, an important fact that has to be assessed. One question that needs to be examined is the cause; another is the effect; and a third is what if anything could be done to raise the median income significantly. 

I accept that the main cause of economic inequality in the United States, and thus of poverty and near poverty, is that the United States uses a more or less free market to allocate resources, and hence household income is mainly the result of the demand for and supply of labor. In recent decades, rapid advances in technology have increased the demand for highly educated, high IQ persons and (along with increased imports of manufactured goods from low-wage countries) reduced the demand for persons who do manual labor, notably in factories, or more generally for persons whose jobs can be done more cheaply by machines. At the top of the income distribution, the growth of global markets, notably in finance, has enabled successful entrepreneurs and investors to obtain unprecedently large profits. Low tax rates have been a factor as well.  

There is nothing, or very little, that is sinister or pernicious in the growth of inequality of income and wealth under pressure of market forces. But the consequences are not altogether desirable. They include reduced upward mobility (upward mobility has declined in the United States and is now below that in most European and English-speaking countries; see Vasia Panousi et al., “Rising Inequality,” Brookings, March 13, 2013, www.brookings.edu/~/media/Projects/BPEA/Spring%202013/2013a_panousi.pdf; Scott Winship, “Mobility Impaired,” National Review Online, Nov. 14, 2011, http://www.nationalreview.com/articles/282292/mobility-impaired-scott-winship), as the wealthy use their wealth to assure the prosperity of their children and grandchildren, in part by buying the best education for them; greater distance between the income classes, so that the wealthy have diminished contact with lower-income people (some of Mitt Romney’s comments during the 2008 Presidential election campaign suggested little familiarity with the lives and problems of lower-income people); and increased dependence of politicians on campaign donations by wealthy companies and individuals. 

Americans seem singularly lacking in envy, and to be uniquely imbued with a culture of self-reliance, and as a result the growing inequality of income does not portend political instability. But it seems wasteful. Those 150 million or so members of households that have incomes below the median include
a very large actual and potential labor force that is not being utilized very productively. People who are poorly educated, unhealthy, brought up in broken families, exploited by unscrupulous sellers of goods and services, preoccupied with making ends meet, unable to afford labor-saving devices, in and out of bankruptcy, and constantly worrying about the household budget are unlikely to be productive workers; and the entire society suffers. They are also unlikely to be competent participants in the political process, as voters, because they lack both the leisure and the education to become even minimally informed about public matters. 

But what is to be done? Some conservatives believe that the social safety net—the food stamps, Medicaid, etc.—should be removed (see, for example, Ron Nixon’s article that I cited at the beginning of this post) in order to increase the incentives of the poor to work hard and improve themselves, and
that the near poor, ineligible for the safety net, should simply be left to struggle. Neither seems a realistic suggestion for improving the productivity and political sophistication of either group. 

More promising I think would be a large investment in early childhood education and nutrition, a shift in medical resources from the diseases of old people to the medical needs of children and pregnant women, a substantial expansion in Medicaid, and a modest expansion in public work projects involving services. A restructuring of the federal tax code and a modest increase in income tax rates in the higher brackets could finance such programs.