The Becker-Posner Blog

Education and the Growth of Poverty in United States-Becker

Inequality in the US has grown substantially since 1980. As a result, “poverty”, often defined as the fraction of families with incomes less than half the average income, has increased greatly. Similarly, “near poverty”, defined say as families with incomes between a half and three quarters of average income, has also grown by a lot. It is no surprise that greater income and wealth inequality has a big effect on the degree of poverty since it is a property of all distributions that more variability especially raises the fraction of observations at the tails of the distribution. In the income and wealth case, this means particularly rapid increases in the fractions of the poor and very wealthy as inequality increases.

The main causes of the growth in US earnings inequality are in order of importance: the large increase in returns to education and other skills, the rapid growth in households headed by unmarried mothers, the financial crisis and the resulting large expansion of unemployment, especially of lower income workers, and the big growth in some income maintenance programs that have induced some workers to leave the labor force.

Previous discussions on our blog and elsewhere have documented the rapid growth during past 40 years in the returns to college education, and to a lesser extent to high school graduation. The large expansion in the fraction of children living in households headed by a single parent increased to about 28% due to the boom in divorce rates and in the tendency of women to have children without being married. The recession that accompanied the financial crisis raised unemployment rates of high school dropouts from 7% in 2007 to more than 13% at its peak. This is still at a highly elevated rate. Finally, the recession lowered eligibility requirements for food stamps, Medicaid, mortgage reduction, and other welfare programs. This led to a decline in labor force participation among lower income workers in order to increase their prospects of qualifying for these benefits (see the evidence and discussion in Casey Mulligan’s “The Redistribution Recession”).

Many separate approaches are available to attack each of these causes of greater poverty rates, but improved education would significantly reduce the incidence of each one. The crucial education improvement would be in much lower dropout rates from high school and from four-year college programs. Lower dropout rates starting soon would take years to affect a large fraction of labor force, but the benefits would be enormous. First of all, the fraction of persons with very low incomes would decline greatly since high school dropouts and some high school graduates make up the bulk of the low-income population, although a boost in the fraction of the labor force who graduated high school and finished college would also lower the returns to education.

Educated persons have more stable marriages and are less likely to have children out of wedlock or out of stable non-married relations. This means that reducing high school and college dropouts would also reduce the incidence of the family structures that lead to low household incomes. Greater education may not reduce the incidence of serious recessions, but it would reduce the vulnerability of the labor force to these recessions. Finally, a more educated population would be less tempted to leave the labor force to take advantage of food stamps and other welfare programs because they would then have to give up too much in the way of earnings.

There is no magic way to improve the education of younger persons, especially given the vicious cycle between less educated and low-income parents, broken households, and low education and other poor performance of children. However, as argued in more detail in earlier blogs (see for example Sept. 2012 on “Good and Bad Teachers”), more charter schools and a greater use of school vouchers, teacher evaluations based on objective measures of their performance, much better pay for good teachers (such as teachers whose students perform better), and weaker tenure for bad teachers would go a considerable way toward reducing school dropouts and improving the overall education performance of American students.

Technological Change and Natural Resource Prices-Becker

Natural resource prices increased rapidly during the first decade of this century, mainly propelled by rapid increases in world GDP, especially of the US, China, Brazil, and other fast developing countries. These prices then stabilized and many declined due to the world recession brought on by the financial crisis in 2008.

Some examples illustrate the magnitude of the price movements. Nominal copper prices quadrupled from 2001, despite a sharp fall in 2008, peaked around 2010, and declined by about 25% since that peak. Oil prices increased from $20 a barrel in 2002 to more than $140 a barrel in 2008, and have been in the range $100-$120 since then. Natural gas prices in most of the world increased several fold since 2000, and have been flat for the past couple of years. At the same time, natural gas prices in the US have fallen by more than 2/3 since their peak a few years ago.

These higher prices encouraged companies and consumers to economize on resource use. In the short run, however, both the demand and supply of oil and many other natural resources are only mildly responsive to higher or lower prices.

The long run picture is very different, for then opportunities to substitute away from the resources rising most in price are much greater because users have more time to adjust. For example, more permanent higher prices of gasoline induce consumers eventually to shift toward smaller more fuel-efficient cars, and drive less with the cars they have. They carpool more, make greater use of public transportation, or even take jobs nearer their homes. Cars are smaller and more efficient in Europe and Japan than in the US in good part because gasoline prices have been much lower in US.

Longer run adjustments on the supply side are also much larger, and some of them are game-changers. Although the world stocks of natural resources in the ground cannot be augmented since they were created by millions of years of evolution on the earth, the cost of getting these stocks out of the ground vary enormously: from the cheap and easily accessible oil just below the surface in Saudi Arabia to the difficult to access resources very far below ocean surfaces. Higher prices of a natural resource encourage extraction of more costly deposits, which increases the supply of that resource.

High prices also encourage investments in technologies to lower the costs of accessing various deposits that make them worthwhile to develop commercially. The most important example in recent years is the improvement in fracking methods used to extract oil and natural gas hidden in shale rocks. Wildcatters in the United States, like the recently deceased George Mitchell, spent years and much money, sometimes assisted by government support, in developing fracking to the point where it became commercially viable at the oil and gas prices prevailing during recent decades.

The success of fracking has resulted in a huge increase in American oil and especially natural gas production that greatly increased the American supply of these fossil fuels to produce gasoline, substitute for coal in electric power plants, and for many other purposes. Due to this revolutionary technology, American oil imports are at their lowest level in more than a decade, and natural gas prices in the US are now a fraction of what they are in Europe, Japan, and other gas importing countries.

The price of oil in the US remains close to the world price since oil continues to be imported. American oil commands the world price because it competes against imported oil at that price. Natural gas prices differ greatly among regions of the world because these prices depend on whether pipelines and liquefied gas facilities allow gas to be imported or exported. As I mentioned earlier, the widespread use of fracking techniques in the US has produced a huge fall in the domestic price of gas in this country.

Of course, companies that extract natural gas from shale would like to export some of their production to other countries to take advantage of higher prices there. Since such exports would raise gas prices in the US and lower them in the recipient countries, domestic users of cheap natural gas have organized to oppose its export elsewhere. Restrictions on gas exports would be unwise because the value received from the higher prices in other countries would exceed the value created by the artificially induced increase in American industrial output. It is poor policy to encourage domestic American industry through costly and inefficient methods like export restrictions.

 

 

 

 

Commodity Price Fluctuations—Posner

Becker’s discussion of natural resource price fluctuations presents a compelling picture of the role of demand and technology in the price of oil and natural gas. Similar fluctuations, with varied causes (though reducible generally to demand and supply changes), affect other natural resources as well. The fluctuations in the natural resources that Becker describes are relatively benign, and though often steep, are kept within tolerable levels by the competing effects of increased demand, which pushes prices up, and technological advances, which pushes them down by increasing the practical availability of the resources. 

The fluctuations can however be socially or politically destabilizing, sometimes in unusual ways. A striking example is the rapid rise in gasoline prices (gasoline being itself a manufactured good, but the major component of its cost is of course oil) in the summer of 2008, peaking at $4.11 a gallon. The rise helped to blind the Federal Reserve to the impending financial crisis. Minutes of the Board’s open market committee that summer reveal a preoccupation with the threat of inflation, of which the gasoline price rise was thought symptomatic, when in fact the danger to the economy was a nascent financial crisis having nothing to do with commodity prices. 

But to understand the real danger to economic and political stability (and the economy and politics are closely entwined of course) that fluctuations in commodity prices can cause, we need to turn from natural resource commodities such as oil to agricultural commodities such as wheat. For the current instability in the Arab world, which has engulfed Tunisia, Egypt, Jordan, Lebanon, and Syria, appears to be traceable mainly to increases in the price of wheat and corn, though it is possible that those increases were triggers, affecting the timing of the political instability of those countries, rather than basic causes. 

The Middle Eastern countries are large importers of wheat and corn, and to a lesser extent other grains. The prices of those commodities fluctuate a great deal. Between 2006 and 2008, the prices of these two grains rose by 136 percent and 125 percent respectively; the price of rice rose by more than 200 percent and the price of soybeans by more than 100 percent. The prices dipped in 2009 and 2010, as a result of the global depression touched off by the financial collapse of September 2008, but they spiked again in 2010; and the “Arab Spring” (an odd term for what seems unmitigated region-wide political disaster) ensued. 

The cause of the price spikes that began in 2006 appears to have been a confluence of increased world population, increased per capita incomes in consuming nations, diversion of corn to the manufacture of ethanol, increased oil prices, and droughts. The effect on the Middle Eastern countries, where bread (made of course from grains) is the basic foodstuff, was dramatic. The governments of these countries subsidize bread, and had to increase the subsidies as the price of grains rose. But the governments have limited resources, so could not prevent the price to the consumer from rising, or shortgages if imports were reduced to save money. 

The price increase was the last straw for the citizens of these countries. They had much to complain of anyway. But the idea that the protests that led to riots and the overthrow of governments and the civil war in Syria resulted from a yearning for democracy or from religious antipathies appears to be incorrect; or in any event the spark that triggered the conflagration was not political or religious discord but economic desperation. (There is by the way considerable grounds for doubting that these countries are ready for democracy.) 

The irony is that agriculture is generally regarded as the poster child for the market allocation of goods, since agricultural commodities tend to be homogeneous and to be produced by very numerous independent producers, so that cartelization is infeasible and deception or confusion of consumers unlikely. Of course governments will not let well enough alone, so there is a great deal of regulation of agriculture; nevertheless the international market in agricultural commodities is highly competitive. But there does not seem to be any mechanism for smoothing price changes at the international level. In principle futures and forward contracts should enable prices of agricultural commodities to be smoothed over time, but these, though common in economically advanced countries, seem not to be employed by the nations that are most susceptible to political challenge—even to political disaster—as a result of fluctuations in the prices of agricultural commodities.

Patent Trolls—Posner

The term “patent trolls” is a colloquialism that denotes what the trolls themselves prefer to call “patent-assertion entities.” A patent troll buys patents (sometimes thousands) with the aim not of making the patented product or process or licensing it to others to make but of finding companies or individual inventors that the troll can claim with more or less plausibility are infringing one or more of his inventory of patents. The troll demands a license fee from every such allegedly infringing company or inventor. If the target of the demand refuses, the troll may drop the matter or may sue the refuser for patent infringement, hoping that if the threat is plausible this will induce a favorable settlement. If the target refuses to settle, the troll, to maintain the credibility of its threats, may litigate the suit to judgment. The troll does not practice the patent; but, in its own terminology, “asserts” it. 

Two recent articles in the New York Times (July 14, Sunday Business section, p. 1; July 17, Business Day section, p. B1) report the crescendo of criticism that the trolls are attracting, as the magnitude and consequences and visibility of their activities grow. Last year 61 percent of the patent suits filed were filed by trolls. Trolldom is becoming increasingly profitable—one of the articles is about a troll who earns $25 million a year from trolling—and is therefore growing. There is little if anything that will stop their growth except saturation of the market (which will put a ceiling on troll activity, but at a very high level) or action by Congress. 

It is extremely difficult to discern any possible social benefit from trolls, and extremely easy to discern substantial social costs. The purpose of patent protection is to encourage innovation by giving the creative inventor temporary insulation from competition, to enable him to recover his upfront costs. In the the case of phamaceutical drugs, the testing on animal and human subjects for safety and efficacy, testing required for approval of a pharmaceutical drug for sale, may cost hundreds of millions of dollars incurred a decade or more before the drug is approved, goes on sale, and thus begins to earn money for the manufacturer. Yet the cost of making the drug once it is approved may be modest. As a result, the inventor could not hope to recover its upfront costs if competitors were allowed to duplicate and sell the drug as soon as it appeared on the market; and to forbid them it needs a patent. Actually few markets have the characteristics of the pharmaceutical drug market. It seems to be the lone poster child for the patent system. There is a widespread belief among economists, scientists, and business people that the patent system is vastly overextended—patents granted too casually, patent terms too long, patent litigation too expensive and unreliable. 

The patent system has serious problems; the troll problem is among the serious problems and happens to be the one easiest to solve (were it for the usual political obstacles—like class action lawyers, patent trolls have deep pockets that they can draw from to influence Congress). All that would be required is a rule that barred enforcement of a patent that was not reduced to practice within a specified time after the patent was granted, with extensions allowed for inventions that required an unusual amount of post-patent development to reduce to practice. There is no reason to allow the enforcement of a patent that was obtained by its current owner for the sole purpose of shaking down alleged infringers. Remember that the purpose of patent protection is to encourage invention by enabling the inventor to recover his upfront costs of invention, which he might not be able to do if anyone could copy the invention and, not having incurred any upfront costs, undersell the patentee. There are no upfront costs if the patented invention is never produced, but serves merely as an excuse for a threat to sue. 

It’s not just that patent trolls don’t do anything that encourages innovation; they impair innovation. Trolldom requires inventors to invest more resources in searching the files of the patent office before
applying for a patent (and for safety’s sake again after they begin making the patented product or process), to avoid being hit by a license demand from a troll. This makes trade secrecy a more attractive alternative to patent protection than it would otherwise be. And trade secrecy not only is often a costly or even infeasible alternative to a patent; it also conceals information that a patent is required to disclose. The patent must disclose enough information to enable a person with the relevant technical skills to duplicate the patented invention. Not that he is permitted to duplicate it without the patentee’s permission. But the disclosure fosters innovation by adding to the stock of technical information. It enables “inventing around,” the lawful practice of using information in a patent to create a substitute for the patented invention that is different enough not to be deemed infringing. 

The problem of patent trolls is a function in part of the promiscuity with which the patent office has issued patents in recent years, and the encouragement that such issuance has received from the U.S. Court of Appeals for the Federal Circuit, the federal appellate court that has exclusive appellate jurisdiction over patent cases. The court has long played a promotional role in the patent system, having been created at a time (the early 1980s) when there were fears that the United States was being overtaken on the technological front by Japan. Those fears of course proved groundless. But the idea that American inventors needed more encouragement and therefore that the standard of patentability should be relaxed persisted. The result today is a vast number of patents in force—some 2 million—providing a rich source of inputs for the patent troll industry. 

President Obama criticized patent trolls last month and promised action to curb them. Such action is overdue.

On Reforming the Patent System -Becker

The patent system as practiced in the United States is too broad, too loose, and too expensive. As Posner shows, excessive trolling is an excellent illustration of some of these weaknesses. Yet most of the largest patent disputes, such as that between Apple and Motorola, do not involve trolls, but rather expensive and time-consuming litigation between producing companies in the same industry who differ over patent priority (although Google and other producing companies collect patents too). Reforms of the system are needed that greatly narrow the granting of patents in order to cut down such costly and unproductive litigation.

Many individuals and small companies do not have enough resources to either develop their inventions into products and services, or to litigate against bigger companies that infringe their patents. As a result, they might sell their patents to bigger companies that use them, or to intermediaries that may in turn sell or license their patents. “Patent assertion entities”, less flatteringly called  “patent trolls”, are intermediaries that sometimes litigate against companies they claim infringed on the patents they bought. With a well designed and functioning patent system, this type of intermediary would be valuable in the patent market, as they are in the housing and stock markets. The problem arises because a defective patent system creates opportunities for hold ups and excessive litigation by these intermediaries and by others that hold patents.

Major reforms to reduce these unproductive opportunities would include lowering typical patent length and the scope of innovations that are eligible for patents. The current patent length of 20 years (longer for drug companies) from the date of filing for a patent can be cut in half without greatly discouraging innovation. One obvious advantage of cutting patent length in half is that the economic cost from the temporary monopoly power given to patent holders would be made much more temporary. In addition, a shorter patent length gives patent holders less of an effective head start in developing follow on patents that can greatly extend the effective length of an original patent.

Even pharmaceutical and biotech companies, the main examples where patents are clearly necessary to encourage innovation, usually do not need more than about a decade of monopoly power to encourage their very large investments in new drugs. This is the case in many actual examples where after about ten years molecularly similar drugs often are patented and compete against drugs with the original patents.

Narrowing the type of innovations that can be patented is a more challenging task than reducing patent length. The first step is to recognize that many innovations presently cannot be patented.  A major example is the inability to patent scientific theories and concepts, such as Einstein’s theory of relativity, Darwin’s theory of evolution, or Keynes’ model of the macro economy. The presumption in excluding basic scientific knowledge from the patent system is that the cost of restricting open access to such discoveries far exceeds any gains in encouraging the development of scientific concepts through granting temporary monopolies to the creators. To offset the effect of this exclusion from patent protection on the incentive to discover, individuals and governments have created prizes and awards, like the Fields Medal and Nobel Prizes, for mathematical and scientific discoveries.

In narrowing the type of innovations that are patentable, one can start by eliminating the patenting of software. Disputes over software patents are among the most common, expensive, and counterproductive. Their exclusion from the patent system would discourage some software innovations, but the saving from litigation costs over disputed patent rights would more than compensate the economy for that cost. Moreover, some software innovations would be encouraged because the inability to patent software will eliminate uncertainty over whether someone else with a similar patent will sue and do battle in the courts.

Instead of relying on the legal system, creators of new software may then try to protect their innovations through secrecy. Even when their secrets might be learned and sold by employees, companies that innovate could gain because they then would pay less to employees in a position to profit from learning about these innovations by selling the information to competitors.

In addition to eliminating patents on software, no patents should be allowed on DNA, such as identification of genes that appear to cause particular diseases. Instead, they should be treated as other scientific discoveries, and be in the public domain. The Supreme Court recently considered a dispute over whether the genes that cause BRCA1 and BRCA2 deviations and greatly raises the risk of breast cancer is patentable. Their ruling banned patenting of human DNA, and this is an important step in the right direction.

Other categories of innovations should also be excluded from the patent system. Essentially, patents should be considered a last resort, not a first resort, to be used only when market-based methods of encouraging innovations are likely to be insufficient, and when litigation costs will be manageable. With such a “minimalist” patent system, patent intermediaries would have a legitimate and possibly important role to play in helping innovators get and protect their patent rights.

The Sequester Is a Failure—Posner

Becker is certainly correct that the sequester has had less of an adverse effect on the economy than was predicted. But it has failed, thus far, because the object was to frighten Congress and the President into agreeing to sensible fiscal reforms that would keep the federal deficit within tolerable limits. Because the sequester has had only modest economic effects (in part because some of its most onerous provisions were quickly modified), the pressure on the politicians that it was supposed to exert has lifted. 

So it hasn’t had the good effect that was predicted, but it has had bad effects. It has slowed the economic recovery, even if not dramatically (yet it may be too soon to tell). It is true as Becker points out that employment has continued to grow, despite the sequester, but it would have grown faster without it. The sequester has caused substantial layoffs both of federal employees and of employees of companies in the defense industry, which are dependent on federal financing that the sequester has slashed. Not all the laid-off employees have found equivalent jobs in state or local government or the private sector. (It is not like the aftermath of World War II, where the millions of soldiers released back into the civilian sector quickly found jobs—they were returning to the jobs they had held before being drafted, or to jobs opened up by massive conversion of military to civilian production.) Moreover, many federal employees not laid off have been furloughed without pay for several days a month, reducing their income and hence their spending. And slashes in a number of programs intended to assist the poor and semi-poor, programs such as Head Start and Meals on Wheels, have to have reduced consumer spending. As Keynes pointed out, consumption drives production, which drives employment. And to the extent the sequester had further increased the marked and growing inequality of income and wealth in America, it has done further harm to the country. 

And the sequester is only in its fifth month. Pursuant to the Biblical injunction “sufficient unto the day is the evil thereof,” federal agencies have been ingenious in delaying the full effects of the sequester by drawing on reserve funds. As these funds become exhausted, layoffs and furloughs will increase. 

I am also troubled by the potential effect on the military of the reduction in its funding decreed by the sequester statute. Of course we shall continue to have by far the world’s largest military budget even after the full effect of the sequester has been experienced, and no doubt that budget contains plenty of waste. But cutting the budget of a government agency is not an effective method of cutting waste, because agencies are not in competitive markets, where failure to achieve efficiency invites takeover or bankruptcy. Politics determines what programs are terminated or shrunk in response to a reduction in the agency’s budget. 

Because of the extreme instability of much of the world, the threat to the United States posed by hostile countries such as Iran and North Korea, the incipient threat posed by China’s chauvinistic foreign policy, the extraordinarily rapid technological advances in menacing domains such as cyber warfare, and the continued threat of international terrorism, the United States confronts a formidable array of national security problems. Arbitrary cuts in overall national security spending, at such a time, are reckless. 

The Administration seems not to have managed the sequester intelligently. The only possible benefit of the sequester was as I said to frighten Congress into addressing the federal deficit intelligently. For that benefit to be realized the sequester had to hurt. But the Administration quickly backed off from sequester measures that would have hurt, such as laying off air controllers. By making the sequester seem innocuous, the Administration played into the hands of Republicans who want to shrink the federal government regardless of adverse consequences and now are crowing that federal expenditures can be significantly reduced, even by meat-ax methods, without visible adverse consequences. There are adverse consequences to the sequester, and they will probably increase as agency reserve funds are depleted, but they are as yet invisible to most Americans. 

One sees a repetition here of one of the biggest blunders in the early days of the Obama Administration (in fact a few weeks before Obama’s inauguration), when Christina Romer, the incoming chairman of the Council of Economic Advisers, predicted that the stimulus the Administration intended to request Congress to enact would reduce the unemployment rate from 8.2 percent to 7 percent by the fourth quarter of 2009. The stimulus was enacted but the unemployment rose to 10 percent by the end of the year, allowing Republicans to argue that the stimulus had had no effect on unemployment, though most economists believe that it kept the unemployment rate from rising even farther. At least the Administration that time did not take affirmative steps to falsify its own predictions, as it did this time by weakening the sequester’s bite, thus making cuts in federal spending seem costless to society.

Has the Government Spending Sequestration Hurt the Economy? Becker

The so-called “sequester” cuts in federal spending mandated by the Budget Control Act of 2011 went into effect March 1. In the print media, the blogosphere, and even among respectable analysts, there was widespread apprehension and even alarm about the effects of these cuts on the poor, on government services, and perhaps especially on the economy. Although 4 1/2 months after the start of these cuts is still too early to give a full or authoritative evaluation of their effects, it is not apparent that the cuts implemented so far have had a noticeable effect on the overall performance of the economy.

The mandated cuts amount to only $85 billion in fiscal 2013, but similar cuts are supposed to occur in 2014 and every future year until 2021. The cuts are split evenly in dollar amounts between defense and non-defense sectors, and Medicaid, Social Security, and a few small categories are exempt. The cuts are supposed to be equal in percentage terms in the various categories of federal spending that are affected. The cuts in 2013 are only about 2.3% of total federal spending in this year, although they are much bigger percentages of some discretionary spending categories.  

Most of the concern about the effects of the cuts in federal spending and employment on the performance of the American economy stems from an implicit assumption that there would be no offsetting adjustments in the rest of the economy, particularly in the private sector. Yet federal government employees laid off due to the sequester will naturally seek jobs in the private sector, or in state and local government. Although it is still early to detect with confidence the effects on private employment, the changes in both government and private employment since January 2008 are telling. According to data from the Bureau of Labor Statistics published in The New York Times this week, overall government employment, including state and local as well as federal employment, rose by about 3% during the heart of the financial crisis from 2008 to 2010. Since then, it has fallen by 5%, so that government employment is 2,4% below its level at the beginning of 2008. The reason for the fall in employment since 2010 is cutbacks in federal and state and local spending due to tighter budget restrictions on hiring.

Changes in private sector employment are almost the mirror image of what happened in the public sector. Private employment fell by 10% for men and 5% for women until the beginning of 2010, and it has risen by about 7% for men and a little over 5% for women since then. The growth in private employment much more than compensated for the fall in government employment in the last 2 1/2 years, with the result that total employment grew and total unemployment fell, despite the sharp fall in government employment.

Similar changes have taken place during the past several months after the sequester cuts began to affect government employment. Private employment has been growing by about 200,000 workers per month. This is high enough to nudge the unemployment rate down and the employment rate up, although unemployment is still much too high and employment much too low relative to what full employment would look like. During this recent period, federal government employment has been falling by about 5,000 workers per month, so clearly the growth in private employment has swamped the decline in federal government employment. The result has been that total employment has been growing by an amount close to the growth in private employment.

The prestigious Congressional Budget Office predicted that the sequester cuts would reduce overall employment by about 750,000 jobs in 2013, and lower the growth rate of GDP by 0.6 percentage points, which is about equal to the $85 billion cuts mandated by the sequester act.  Clearly, this forecast and others in the media are implicitly assuming no offsetting growth in private output and employment.

More detailed studies of separate sectors with longer time series are necessary to determine the causative relation, if any, between the actual growth in private sector and the decline in public sector employment during this year, and since 2010. Nevertheless, one can definitely conclude that the predicted large effects on the overall performance of the economy from the sequester cuts in federal spending have not happened.  The evidence available is suggestive that compensating changes in private employment more than offset the effects of the sequester on federal government employment.

Should There Be a Carbon Emissions Tax? Posner

In my book Catastrophe: Risk and Response, published in 2005, I discussed at some length man-made global warming and what might be done about it. Although atmospheric global warming has slowed in the last few years, ocean temperatures have become warmer at a rate that has resulted in the globe as a whole continuing to warm; and ocean warming is no less ominous than land warming—it can melt
methane sheets in the oceans (and atmospheric methane is a considerably more potent greenhouse gas than carbon dioxide, the principal agent thus far of global warming) and it melts arctic and antarctic ice, which raises ocean levels. The consensus of scientific opinion is that unless effective remedial measures are taken, global warming will continue, eventually (quite possibly within this century) reaching levels at which, largely because of rising ocean levels, the cumulative effects on human society, mainly through inundation of coastal regions (where about a third of the world’s human population lives) and destruction of agriculture and plant and animal species, will be catastrophic. 

There is some scientific dissent from the scientific consensus on the catastrophic effects of continued global warming, but most of the dissent is not scientific; it is by businesses that burn fossil fuels and by rightwingers who believe that global warming is a myth propagated by liberals. 

As long as global warming is gradual, and catastrophic effects are not felt for the next 50 to 100 years, there is room for hope that geoengineering will limit or even reverse global warming. Ways of trapping the carbon dioxide produced by burning oil, coal, natural gas, and forests may be developed or sunlight may be blocked by injecting sulfur compounds into the atmosphere, which would reduce the amount of sunlight that reaches the earth (though could create other forms of pollution—sulfur dioxide, for example, creates acid rain). Or safe means of piping carbon dioxide emitted from electrical generating plants underground might be developed. There are even suggestions for “whitening” roofs (on a very large scale) to increase earth’s reflection of the sun’s rays. 

But there is no guaranty that global warming will be gradual. It may turn abrupt; there are a number of examples in earth’s geological history when this happened. For example, a period called the “Younger Dryas” at the end of the last ice age is believed to have seen an increase in the average global temperature by 7 degrees centigrade, which is 12.6 degrees fahrenheit, in only 10 years. Were that to happen again, it would be an unbelievable catastrophe. The probability of abrupt global warming cannot be estimated; but heading off even catastrophic events that are uncertain can make good economic sense if the resources required to do so are modest. 

The President in just the last month has proposed an ambitious program of limiting carbon emissions from coal-burning electric plants and other sources of carbon dioxide. The hope is that the program if successful will inspire other countries, especially rapidly industrializing ones (notably China), to follow suit. The hope seems quite unrealistic. 

A more efficient method of limiting global warming than regulatory controls such as proposed by the President (and that as described promise to be a bureaucratic nightmare) would be a tax on carbon emissions, which I advocated in my 2005 book and which a number of countries have adopted. This would be a regulatory tax, aimed at reducing output, in this instance carbon dioxide as a byproduct of electric power generation in power plants that use coal, oil, or natural gas as their fuel; vehicles or vehicle makers could be subject to a carbon emissions tax as well. But like most regulatory taxes, a tax on carbon emissions would also produce tax revenues, because some emitters of carbon dioxide would be unable or unwilling (because of cost) to reduce their emissions to the level at which they would owe zero tax. Even if the revenues from a carbon emissions tax were modest, they probably would be sufficient to fund the entire tax program, and in that respect would be less costly to the government than a regulatory program. They would be less costly to the entire society in fact, because the administration of a tax levied on, say, vehicle manufacturers and electrical power plants would be much less costly than the administration of a regulatory program. 

Moreover, a serious weakness of a program of setting limits on carbon emissions is that once the limit is reached, the carbon emitter has no further incentive to reduce its emissions, while if regulation takes the form of a tax on emissions there is an incentive to reduce those emissions all the way to zero, to eliminate the tax burden entirely, provided that this can be done at a cost less than the tax.

It is important, by the way, that the tax be on the carbon, not just on the coal, gasoline, natural gas, or other products (or activities, such as deforestation by fire) that when burned release carbon into the atmosphere. With a tax on carbon, the emitter is given an incentive not only to reduce the burning of fuels that contain carbon but also to produce less carbon per quantity of fuel burned. If the tax is just on, say, tons of coal burned, the producer will be indifferent to the amount of carbon that each ton of coal that is burned emits, rather than having an incentive to minimize that amount. 

I am sure all this is obvious to the President and his advisors. The reason for his proposing a cumbersome, bureaucratic, costly regulatory program rather than a regulatory tax may be that the imposition of any new tax triggers a hysterical reaction on the part of business and conservatives. It is the fear of such a reaction that led the President to call the regulatory tax in his health care plan a “penalty,” which jeopardized the constitutionality of the plan, though the plan managed to avoid invalidation by one vote in the Supreme Court. The fear could have been overcome in health care and could be overcome in carbon control by making an offsetting cut in some other federal tax, such as the corporate or estate tax, neither of which is an efficient tax. 

 

What Should a Carbon Tax Look Like? Becker

I agree with Posner that the evidence for global warming is serious enough to warrant actions, and that a carbon tax is much more effective than regulations of carbon emissions, such as those recently proposed by President Obama. Yet even if the case for a carbon tax was accepted, and there is powerful opposition in the United States, many issues remain about how carbon taxes should be implemented. My discussion deals with a few of these issues.

Although I believe that the evidence on global warming is sufficiently strong to warrant a carbon tax, the magnitude and timing of the threat from warming is still an open question. For this reason it is wise to start with a low tax rate that can be ramped up over time if the evidence on the damages from warming becomes clearer. Economic theory also implies that the tax should start relatively low and rise over time even if one knew for certain that a catastrophe would occur when the amount of CO₂ in the atmosphere exceeded a certain concentration level. The reason is that with a positive interest rate, equalization in the present value of a tax on present and future emissions requires a rising tax rate over time. This is an application of the so-called Hotelling Rule for optimal exploitation over time of depletable resources, such as oil (see the extensive discussion of the application of this Rule and other economic policies to combat global warming in Becker, Murphy, and Topel, “On the Economics of Climate Policy”, The B. E. Journal of Economic Analysis and Policy, May, 2011). As it were, the remaining space in the atmosphere for CO₂ before disaster strikes is the stock of an exhaustible resource.

In addition, research should be supported on the development of methods and techniques to sequester and mitigate emissions into the atmosphere of CO₂ and other greenhouse gases if a major disaster from global warming appears likely. It might even be possible to develop ways to extract some of these gases out of the atmosphere. Expensive methods of carbon removal and extraction would be implemented only when the damage from greenhouse gases looked to be sufficiently serious and imminent.

A carbon tax should not be an addition to but rather a replacement for other subsidies and taxes on different fuels. For example, the United States along with many other developed countries has a vast array of special subsidies to sources of power that emit less carbon than coal, oil, and other fossil fuels. These include subsidies for electric-powered cars, and for wind and solar energy to generate power for electricity generation. These and other special subsidies, regulations, and taxes designed to reduce carbon emissions would be undesirable with appropriate carbon taxes. For these taxes would create an incentive to find other sources of power for cars, electric plants, and other users of fossil fuels in order to reduce their carbon footprint, and hence the size of the overall tax bill.

Some groups support a carbon tax mainly because it raises tax revenue that would be especially welcome in these times of budget deficits. It is tempting to impose a carbon tax because of the revenue yielded beyond the level justified by the need to cut carbon emissions, even when such a carbon tax might have large undesirable effects on the output of gasoline, electricity, and other goods. That is why the justification for a carbon tax because of the threat of global warming should be sharply separated from the desire to have such a tax to raise revenue.

 In order to separate the case for a carbon tax because of global warming, George Shultz and I proposed that the revenue from such a tax be distributed annually back to the American population a s a carbon “dividend”(see Shultz and Becker, “Why We Support a Revenue-Neutral Carbon Tax”, Wall Street Journal, April 7, 2013). There are several possible ways to distribute this dividend, such as through a lump sum payment to each person with a social security number, or through a per capita rebate. Alaska and several countries have in the past distributed to their populations the revenues from taxes on fossil fuels. A distribution of the revenue to the public might help blunt the strong opposition to a carbon tax because of a belief that it would be used primarily to raise tax revenue to finance additional government spending.

A tax on carbon emissions would be appropriate in light of the real threat from global warming. However, it is important to implement taxes at appropriate levels, and that these taxes are supplemented with the development of mitigation and sequestering methods to reduce the emissions of greenhouse gases if they appear to be on their way to causing major damages. It is also important that the effect of carbon taxes in mitigating global warming be sharply separated from the value of these taxes in raising government tax revenue.

The Senate Bill on Immigration Reform-Becker

The Senate immigration bill before the House of Representatives is the most thorough overhaul of the approach to illegal immigrants in a long time. That is a major step mainly in the right direction. The bill also expands the number of skilled immigrants who can enter if they have enough “points” in a new merit-based system for admitting 250,000 immigrants annually. Although the bill on the whole should be applauded, it misses the opportunity to truly ease the entry of legal immigrants.

The number admitted as temporary skilled immigrants under the H-1B programs would be modestly increased from 65,000 a year to 115,000 per year, and eventually up to a possible 180,000 per year. This program allows companies to apply for particular skilled workers who can stay for three years, with the possibility of renewing for another 3 years. The new upper limit is still considerably less than the number of skilled employees that companies want to have, and it is even less than the numbers admitted during the boom years that preceded the recession.

In addition to relaxing the H-1B quota, the Senate bill introduces a new special quota that allows 25, 000 engineering and other scientific graduates with advanced degrees from American universities to gain admission annually. This is welcome, but it is a small number compared to the annual number of foreign graduates in these fields, or to the ability of the American economy to productively employ these graduates.

Skilled immigrants add a lot to the American economy not only in high tech fields, but also in sectors throughout the economy. They become entrepreneurs who employ other workers, they make scientific and other discoveries, and they provide many other valuable skills wanted by companies. The bill allows for the easy entry of entrepreneurs who want to start businesses in the United States. That is only of modest value since while immigrants are more likely to start businesses than the native born population, they usually do this only after being here for a number of years.

The expansion in the number of skilled immigrants who can enter under the point system and other provisions of the bill is definitely welcome, but it still does not do justice to the large value added to the American economy by skilled immigrants. The new quotas reflect not the demand for skilled workers by the American economy, but the opposition of professional associations of American skilled workers that want to limit the competition from immigrants.

I have argued in previous blog posts (see, e.g., my discussion on 11/14/2012) that the American economy can usefully employ many more skilled workers than are allowed to enter under current law (or under the Senate’s changes in the law).  This is why I have proposed a very different approach to legal immigration that sells the right to immigrate to anyone (aside from terrorists, etc.) who wants to immigrate (see my “The Challenge of Immigration: A Radical Solution”, 2011). I show that skilled, young, and ambitious workers would be the ones who most want to come when immigrants must buy entry.

Most of the media discussion of the Senate bill revolves around its treatment of illegal (i.e. undocumented) immigrants since these are the most controversial provisions. The bill proposes a long overdue pathway to citizenship for many of the estimated 11 million or so illegal immigrants living in the United States. It requires them to have provisional status for at least 13 years before they can apply for citizenship. One may not be happy about giving favorable treatment to immigrants who came here illegally compared to individuals who are waiting their turn to be admitted legally, but no one can reasonably propose to send millions of illegal immigrants back to Mexico or other countries.

To satisfy some of the Senate opposition to allowing illegal residents to gain citizenship, the bill also proposes to make it much difficult to gain access to this country from Mexico by crossing the border illegally. It doubles the number of Border Patrol agents, and doubles the length of the pedestrian fence along the border.

These steps to police further the borders with Mexico may be politically necessary, but they are likely to be largely redundant because of two major changes in Mexico that are reducing the supply of would-be immigrants to the United States. One is the good economic performance of the Mexican economy in recent years that increased the number of decent jobs there. The second is the rapid decline in Mexican birth rates that is greatly reducing the number of young Mexicans, the group most likely to try to cross the border illegally.

If the Mexican economy continues to grow at a good clip, which is likely for the foreseeable future, the number of immigrants that want to come here illegally will be much lower than in the past. Although the recession in the US is the major reason why illegal immigration has dried up during the past 4 years, a contributing factor has been the decrease in the desire of many Mexicans to come to this country illegally. That decreased desire should continue, and even grow, during the next few years as the number of young Mexicans continues to decline.

The Senate immigration bill is a major overhaul of America’s policy toward illegal and immigrants. It also encourages legal immigration of skilled workers, although it does not go far enough. And it is ironical that the bill includes tough measures on border fences and border enforcement just when the desire of Mexicans to immigrate is declining rapidly.