It is surely legitimate to raise the issue of biological differences in explaining the lower number of female than male scientists.
But the issues are more complicated and to some extent different than the ones that are frequently stressed.
The basic question in this regard is: how much of the difference in numbers and achievements of male and female scientists is explained by biological factors compared to other factors? We would have been greatly mistaken if we concluded 40 years ago that the very small representation of women in law, medicine, business, engineering, and many other professions was mainly due to any limited aptitudes for these fields.
For since then, the fraction of female students in medical, law, engineering, and business schools rose rapidly, and women are more represented than men in some very good graduate programs in these fields.
Their biology did not change, but birth rates declined, and womens education and labor force participation increased rapidly.
These forces, combined with an assault on discriminatory barriers to entry in these fields, were clearly the major ones involved in the very rapid growth of womens participation in these professions.
So what priority should be given to biological aptitude rather than time spent in child rearing, discrimination, social conditioning, and other non-biological factors in explaining the continuing under-representation of women among scientists, and even more among top scientists? No one knows for sure- which is why academic pressure against discussing possible biological difference in talents is disturbing.
However, my own belief is that we can get a lot of explanatory power out of factors that do not rely on intrinsic gender difference in talents, including high-level talents.
The reasons behind this conclusion are simple.
To be a top level scientist-indeed, to be tops in any challenging field- requires long hours of work and an intense commitment to discovery and the like.
Yet as long as women continue to have the major responsibilities for child-rearing and other household activities, they will have to combine professional activities with a mothers and other household duties.
Inevitably, that will force most women to reduce their professional commitment.
These women will adjust either by lowering their scientific ambitions, or by electing not to enter these fields in the first place.
Others will forego motherhood and even marriage to pursue their scientific careers, and some of these and a smaller fraction of the other women will become highly successful.
But even without discrimination against women, the attempt to combine several quite different activities will continue to lower the fraction of top women scientists (or top CEOs, lawyers, etc) compared to men.
The variance in the distributions of the required talents may well be greater among men than women-as suggested by Larry Summers and others- so that there are many more brilliant and very dumb men than women.
Even so, one does not want to overestimate the importance of brilliance in explaining the so-far low representation of women among outstanding achievers, as measured by Nobel and other major prizes.
For a large fraction of male high achievers are not brilliant-they are not an Einstein, Newton, Euler, or LaPlace, to name a few of the recognized geniuses in scientific accomplishment.
An outstanding Columbia University physicist, the late I.
Rabi, years ago was supposedly asked at a gathering of Nobelists and other high achievers about how most of those present had achieved so much since they did not seem particularly brilliant.
His brief answer: hard work.
That is also my belief after being at many similar gatherings.
Women are likely to be at a much greater disadvantage in this regard, due to their child-rearing and other responsibilities, than in biological aptitude.
While studies indicate that the total hours worked by women, including household work, are generally as high or even higher than the total hours worked by men, womens work is less specialized toward professional and other business achievement.
Moreover, they anticipate this lesser degree of specialization in determining their professional ambitions and time use at early ages.
For other reasons as well, it is difficult to infer biological differences from occupational choices.
For example, biological factors could entirely explain occupational choices, and yet the lower representation of women among scientists would not imply that they have less scientific aptitude.
The reason is that women could be better than men at all occupations, but would be underrepresented in science if any difference between men and women in scientific aptitudes were smaller than in non-scientific aptitudes.
In my book, A Treatise on the Family, I expressed a belief that the traditional gender division of labor between working in the marketplace and working in the household- that is, taking care of children, etc- is partly due to biological differences between men and women.
However, I also stressed that this gender division of labor is consistent with women being superior to men at market activities too.
Rather, it implies that differences in market abilities are less than at child rearing and the like.
In economic jargon, observed data on occupational choices only reflects comparative advantage, not absolute advantage.
My conclusion is that the sharp differences in scientific and similar accomplishments between men and women may be partly due to differences in high-level aptitudes, but that such differences are less important than other forces.
To be sure, scholarly studies of any biological differences between men and women should be welcomed.
Still, I believe that studies of other influences on male-female differences in scientific and related achievements are likely to be highly productive.
I agree with Richard Posner that the ability to sue against medical malpractice, drunk drivers, and sellers of defective and dangerous products induces doctors, producers, and others to pay closer attention to what they do.
I also agree that reforms are generally better left to the states than to the federal government in order to allow competition among state legal rules.
However, without reform of class action suits, Posners appropriate criticism of the right to bring class suits in more generous jurisdictions undermines the argument to leave legal reforms entirely to the states.
He is right too that a few foolish cases should not be the basis for policy.
Yet there is need for some tort reform because there is too much litigation, compensatory damages are often too low, and punitive damages have sometimes been grossly excessive.
Compensatory damages are supposed to compensate individuals for their losses from medical malpractice, and other careless or reckless behavior.
In practice, they commonly refer to the loss of earnings due to injury or death from such actions.
Yet the correct measure of compensatory damages should equal what individuals are willing to pay to avoid death or the injuries in question.
The value placed on loss of life, or on substantial disabilities, are usually many times greater than the loss in earnings.
Critics of the American tort system generally neglect this tendency to underestimate compensatory damages.
To be sure, this is not easily corrected by legislation, although it might be possible to have useful rules of thumb about the appropriate ratio of full damages to lost earnings.
And greater recognition that compensatory damages are often much too low would be helpful to juries and judges.
Punitive damages are often imposed in order to encourage doctors, drivers, and producers to be more careful and responsible.
The system would be working well if any underestimated compensatory damages were just about offset by inflated punitive damages.
But punitive damages have sometimes been huge multiples of compensatory damages -occasionally exceeding 50 or 100 times compensatory damages- and may only reflect a jurys or judges perception about how deep are the pockets of defendants.
 Although huge punitive damages tend to be reduced on appeal, they often remain much too large.
The rule of thumb in anti-trust litigation is that punitive damages equal to three times compensatory damages sufficiently recognizes that many anti-trust violators are undetected and are not punished.
A limited ratio of punitive to compensatory damages would also be appropriate in the great majority of other tort cases.
The Supreme Court in a couple of cases in recent years has in fact suggested that punitive damages should generally not exceed nine times (I would add correctly measured) compensatory damages, and their ruling applies to state as well as federal punitive damages.
I believe that as in anti-trust cases, the ratio should typically be much less than 9.
One exception, first articulated in an opinion by Judge Posner, is when compensatory damages to each person harmed are very low, while the total harm may be large because many persons suffer small loses.
In these cases, it would be desirable to raise the punitive-compensatory ratio to encourage lawsuits to discourage the behavior that produced these harms.
Excessive litigation in the United States creates inefficient defensive practices by doctors and others, and sometimes destroys good companies, as in the asbestos litigation, and perhaps now in the looming Vioxx class action suits against Merck.
Litigation against doctors and others is justified when they could have but did not take sufficient care to insure safety, if they lied, or if they withheld evidence about safety.
In these cases, doctors and producers should be responsible because they have much easier access to the relevant information than do patients and consumers.
On the other hand, consumers should bear responsibility for their actions when they could have easily prevented the damage.
The MacDonalds customer who drove with hot coffee on her lap should not have won her lawsuit, and perhaps should have been forced to pay at least some of MacDonalds legal expenses.
Similarly, parents who carelessly allow their children access to dangerous medicines should be responsible, not the manufacturer of medicine bottles.
In many cases there is reasonable doubt as to whether patients or doctors, consumers or producers, could more readily have avoided the harm.
I believe in these cases there should be a presumption toward caveat emptor- buyer beware.
A bias toward buyer beware when there is considerable doubt about who could have more readily avoided the damages would cut out much useless and costly litigation without discouraging the justified cases where there is negligence, fraud, or information suppression by doctors, drivers, producers, and others.
The value of using group membership in judging unobserved characteristics is uncontroversial most of the time, and so is hardly noticed.
For example, automobile insurance companies consider young unmarried males as a relevant group in determining driver insurance premiums because they tend to have more car accidents than older males or young women.
These higher insurance rates also help cut down the number of auto accidents by reducing driving by  accident-prone young males.
Yet given that group membership is almost always an imperfect predictor of unobserved characteristics, some individuals will be treated much worse (or better) than their true characteristics justifies.
In the driving case, young unmarried males who are careful and responsible drivers will pay more for insurance than they would in a world with better information.
They might be discouraged from driving because they suffer from the bad driving of other young unmarried males.
Still, limited information about individuals means that group identities is often useful in gaining information about them.
However, the use of religious, racial, or ethnic characteristics for national security protection and in fighting crime has been a political hot potato, and has led to accusations of discrimination on the basis of race and other characteristics.
For the use of group identities in order to treat different groups differently may be the result of a desire to discriminate against various minority groups instead of a desire to act effectively to prevent some undesirable actions.
On top of the current agenda is the effort by organizations fighting terrorism to treat Muslim with greater suspicion.
Is it justified to single out young Moslem males from the Middle East for much more careful searches at airports, or for tougher requirements to gain tourist visas and green cards? Or are employees at stores that are trying to prevent theft of their goods justified in watching minority customers more carefully than they watch others? Macys was recently fined for allegedly watching blacks and Hispanics more carefully, although the company denies that such profiling of customers is their policy.
Efficient actions would say minimize the amount of terrorist activities in the US, given a limited amount to be spent on preventing terrorism, or would minimize store theft, given a budget for security personnel.
Then security checks at airports would try to both catch terrorists before they board a plane, and to discourage future airport terrorism by raising the chances that they are caught at the airport.
Similarly, store security both tries to apprehend thieves, and to discourage future store theft.
If young Moslem Middle Eastern males were in fact much more likely to commit terrorism against U.S.
than were other groups, putting them through tighter security clearance would reduce current airport terrorism.
Whether such religious and ethnic profiling furthers the second goal, of deterring future terrorism, depends on the degree of responsiveness of different potential terrorists to a greater likelihood of being caught.
If the degree of response by different groups were proportional to their average propensity to engage in terrorism, then checking young Moslem Middle Eastern males more carefully would also help deter future terrorism at airports.
On the other hand, profiling by average propensities might be inefficient if the marginal propensity to reduce terrorism with more careful checks were smaller for groups like Moslems that might have higher average propensities.
That could well be true if these groups were more fanatical and less easily deterred by the prospects of being caught.
Then the deterrent effect on future terrorism would be opposite to and might be stronger than the apprehension effect on current terrorism.
The deterrent effect is less likely to dominate the apprehension effect when the difference in average behavior is greater.
This is why it is efficient to profile young male Middle Eastern Moslems for terrorist attacks at airports, and perhaps it is efficient also to watch minority shoppers more carefully at stores.
To be sure, such profiling is unfair to the many young male Moslems who are not terrorists, and to the many minority shoppers who are honest.
That could be made up in part by compensating groups who are forced to go through more careful airport screening through putting them in shorter security lines, or in other ways.
Similarly, innocent shoppers who are stopped and searched could be compensated for their embarrassment and time.
To be sure, some profiling by governments and the private sector has been due to prejudice against various groups, not as a way of achieving efficiency.
So it is crucial to be able to distinguish whether a profiling is efficient from whether it is evidence of discrimination.
This distinction can be made in the terrorist field (similar considerations apply to fighting crime) by keeping records on the fractions of young Moslem males and others who were searched and found with weapons or other evidence of intent to commit a terrorist act.
If the fraction were much greater among Moslems searched than among others, this would at least be consistent with an emphasis on efficiency rather than discrimination.
A further test would be to determine what happens to apprehension rates as the amount spent on airport security increased or decreased.
The profiling policy would again be consistent with efficiency if greater spending on airport security reduced the apprehension rates of young male Moslems who were searched about as much as the apprehension rates of others.
So it is possible to provide analytical criteria and guidelines to determine when particular types of profiling are explained by efficiency considerations rather than discrimination.
By using these guidelines to analyze data on apprehension rates, one can determine in an objective manner whether discrimination rather than efficiency is responsible for different treatment of members of ethnic, religious, or racial groups.
Let me reply briefly to the main comments.
One theme in the negative comments is that if one profiles terrorists, or groups believed to be more likely to commit other crimes, the terrorists or criminals simply change whom they use, or new criminals replace those who are profiled.
Sometimes that does defeat profiling, but not usually.
Terrorists cannot change that easily whom they use since the supply of types willing to give up their lives to kill Americans or others is highly limited.
Similarly, the supply of criminals typically has a limited elasticity of response.
These considerations explain why the police "profile" ex-convicts, young people congregating at various suspicious locations, and in other ways.
Are the critics saying the police should not be doing this? I doubt if they would carry that position through consistently.
Yes, we can spend more on various types of deterrence, but do we really want to search elderly women at airports as much as young men of Middle Eastern origin? (Let me add that my wife and her brothers  are of such origin, and accept that they do get profiled.).
I recognize that being singled out for extra attention can be embarrassing.
I suggested compensation for that.
Someone mentioned that Steve Landsburg has also suggested compensation-good for Steve! Such compensation may not be sufficient to offset fully the damage from being singled out, but along with courteous and respectful treatment, it can go a good ways toward reducing the distastefulness of the process.
One last point.
I work weekends in my university office when the doors are locked and few persons are in the building.
I "profile" in judging whether to call the campus police by whether I believe a person belongs in the building- in fact I have called the police on more than one occasion.
Do the critics of profiling suggest that instead of such profiling I call the police every time I see someone in the building-that is the purest example of no profiling- or every time I see someone in the building that I do not recognize, or when I judge they do not belong in the building, even though my judgment may depend on age, race, or other group characteristics?.
This is not only costly, but borders on the absurd.
I believe that the commentators who claim to oppose profiling do in fact profile in this and thousands of other situations.
I do not know if this is true, but the media reported a few years ago that Jesse Jackson profiled when he heard someone walking behind him, and turned around to determine what group they belonged to!.
As usual, I wish I had some of these comments before I wrote mine! Just a few reactions.
Yes, the Macdonald's case is more complicated, but no one made a convincing case that the customer could not have tasted the coffee first to determine how hot it was.
Macdonald's criteria in serving hot coffee are not the real issue if it were easy for customers to check the nature of the product they consume.
That surely was true in this case.
One can separate, at least to some extent, who gets punitive damages from who gets the compensatory damages.
But one also wants to give victims sufficiently strong incentives to sue.
I generally do support allowing customers and providers of medical care, other services, or goods, to reach contracts ahead of time about rights to sue, compulsory arbitration, and so forth.
Still, the same considerations that justify lawsuits-lies, withholding relevant information, and terrible service- would also be relevant in interpreting such contracts.
The election victory of Hamas sent a bombshell throughout the Middle East and the rest of the world.
I will comment briefly on its implications for democracy among the Palestinians, economic development, and relations with Israel.
I agree with Posner that it is hard to tell whether free elections will continue among the Palestinians.
One free election means very little in forecasting the future-even the Weimar Republic had several elections before Hitler destroyed Germany's young democracy.
Contested government, a free press, and other free institutions are far more likely to persist when they have been practiced for a long time.
James Madison argued against Thomas Jefferson's proposal to continually change the American Constitution, and in favor of a stable constitution because of "that veneration, which time bestows on everything, and without which perhaps the wisest and freest governments would not possess the requisite stability" (Federalist Paper no.
49).
Economically, the Palestinian Authority is a basket case: no foreign investment, little foreign trade, and emigration of the more talented, educated, and ambitious Palestinians to elsewhere in the Middle East, or to America.
The Authority is barely kept afloat by aid from Europe, other Arab nations, and the United States that amounts to about $1.5 billion per year.
Hamas now has to choose between two radically different paths.
In many respects the easiest one would be to maintain its charter that calls for the "obliteration" of Israel.
Surely, however, that would further discourage foreign investment, and is likely to speed up the out-migration of talented Palestinians.
In addition, it will mean the end of aid to the Palestinian Authority from America, and possibly also from much of Europe as well.
A sizable reduction in foreign aid may force Hamas to try to introduce economic reforms, but these cannot succeed as long as its goal is to eliminate Israel.
The wiser course would be for Hamas to become more flexible and greatly moderate its hostile actions and rhetoric toward Israel.
After all, Ariel Sharon while in power shifted from a hard-line policy toward the Palestinian Authority to a more moderate position, and the Israel economy is in far better shape than is the Palestinian economy.
Hamas showed that it could win an election by downplaying its hostility to Israel, and instead emphasizing its ability to run the government more efficiently and with less corruption than Fatah.
However, unless the new government can significantly improve the dismal Palestinian economic situation, Hamas' popularity is likely to erode.
Yet the only way to retain human capital, attract foreign direct investment, and widen foreign trade, all essential for significant economic progress, is to reach a stable settlement with Israel.
For these reasons, I am more optimistic than Posner and many others about the chances that Hamas' victory will improve rather than worsen relations with Israel.
Perhaps, as Posner argues, it will become easier for Israel to retaliate against Hamas leaders when they are physically more concentrated either in the Palestinian Parliament or in executive offices.
But I do not consider that a crucial consideration.
My cautious optimism is based on the economic pressures Hamas will face as it tries to govern the Palestinians.
Yet the Middle East is the most unpredictable region of the world.
So I would not bet a lot on my analysis, especially in the near-term, but I do disagree with the pessimistic views among the media and politicians about what Hamas will do after its astonishing political victory.
The traditional justification for academic tenure is that otherwise professors would be unwilling to express unpopular views for fear of being fired.
This argument for academic tenure is extremely weak in the United States where several thousand colleges and universities compete for professors.
In fact, tenure only became common at American universities in the 1920's.
It is possible for academics with extremely unpopular views to gain an appointment with tenure at different institutions, as seen from the tenure of faculty who deny the holocaust, or a Ward Churchill at The University of Colorado with outrageous views on terrorism and other issues.
The case for tenure is stronger in countries where governments control all universities, and can block academics with unpopular opinions from gaining and keeping appointments.
Yet even that argument has become weaker with the rapidly growing international market for good academics.
Are there other persuasive arguments for academic tenure? Some have been made in the economics literature, including the alleged difficulty in judging the quality of teaching and research, the non-profit nature of universities, and still others.
I have not found any of them persuasive- for example, there is rather widespread agreement in most departments about which are the good teachers, and also to a large extent about who has produced the more influential research.
The American Constitution gives Federal judges lifetime tenure so that they would be free to decide cases without fear of political reprisals for unpopular decisions.
In posts on March 12th and 19th of 2005 I argued against the lifetime tenure of judges as encouraging judges to remain too long, especially now when they are likely to live into their eighties and into their nineties within a couple of decades.
A single long term of between 14-20 years would entirely eliminate any political influence over their decisions due to any fear of losing their positions.
It would also weaken the opposition to the appointment of judges with strong views since they would not be deciding cases for thirty years or more.
Civil servants have tenure because of similar political considerations, but top-level government officials do not have tenure presently, and are selected by the administration in power.
It is hard to see why low-level government employees should have tenure either since they do not make any politically sensitive decisions.
Perhaps tenure would be justified at certain intermediate levels, but that would at best cover only a small fraction of all government officials.
Companies often give de facto tenure to employees who have worked for them for a long time, except when the companies get into financial difficulties.
This is readily explained since long-term employees usually have made significant investments in what is called firm-specific human capital.
This term means knowledge and skills of employees that are more valuable at the company where they have worked for many years than at other companies.
In order to encourage such investment, and to discourage inefficient quits, companies give a combination of implicit tenure and higher wages to their long-term employees.
Note that tenure alone would not be sufficient to encourage these investments and discourage quits.
It has to be combined with higher earnings to long-term employees.
Indeed, high enough earnings to employees with much firm-specific investment would be sufficient to discourage quits without tenure.
But bargaining between workers and employees should lead to at least de facto tenure because that is more efficient if employees are more productive at this firm than at other firms.
It is efficient because both workers and companies would be better off if workers with much relevant firm-specific investment stayed at the companies where they have worked for many years.
Firm-specific investment provides some of the "commitment" that Posner discusses since employees are obviously more committed to companies where they are more productive.
Similarly, the company would be more committed to these employees than to other employees.
Commitment is also related to loyalty to an organization and to employees.
Loyalty in any organization is extremely important, both loyalty from employees to the organization, and from the organization to its employees.
That can be encouraged by higher earning as performance improves, and by good and considerate treatment of employees.
It would be in the self-interest of organizations to keep their loyal employees, so no explicit tenure rule seems desirable to encourage the retention of loyal members of an organization, no matter what work or profession they engage in.
Since de facto tenure is in the self-interest of companies as well as workers, the value of tenure does not provide justification for laws against firing older workers, or laws that require costly severance pay to long-term employees.
Union contracts that make long-term employees less subject to layoffs may in some circumstances provide useful codifications of implicit tenure.
However, this could be inefficient when more senior union members have a disproportionate influence over union bargaining.
In any case, one would expect companies without unions to have an incentive when that is efficient to codify hiring and firing rules.
In fact, most large non-union companies already have these rules.
An article in the New York Times yesterday discussed the moratorium imposed last week by the New York State of Regents on new for‚Äìprofit or commercial colleges in that state.
Commercial colleges have been growing rapidly nationally, and the Times' article discusses problems that have been found with some of them in New York and elsewhere.
Despite various abuses, I believe that for-profit colleges and universities fill an important need, and the moratorium imposed by New York is unwise and should be lifted.
Government-run schools dominate higher education in most countries, including the U.S.
where some 70-75 per cent of undergraduates attend public colleges and universities.
To be sure, private non-profit colleges and universities make important contributions in some countries, such as the University of Chicago, Stanford University, and Swarthmore College among many others in the United States, Keio University and numerous little known other schools in Japan, and Insead in France.
During the past thirty years, the number of for-profit colleges and universities has grown rapidly from negligible numbers, especially in the United States but also in China and elsewhere in Asia.
 The Career College Association, an association of for-profit postsecondary institutions, lists over 2000 members, and that association does not even include the best-known for-profit colleges, The University of Phoenix and DeVry University.
Phoenix is the largest accredited private university, and among the oldest of the for-profit universities.
It was founded in 1976, enrolls 100,000 online student, even more students at 170 campuses in over 30 states, and it is publicly listed with a market capitalization of several billion dollars.
According to the Times' article, commercial colleges enroll about 7 per cent of students in higher education in NY State.
This is even without the University of Phoenix, which has not yet been allowed to enroll students in that state.
Other states also have rapidly growing enrollments in for-profit colleges, although I do not have figures on their enrollment shares.
What explains the boom in commercial colleges, given the difficulties in competing against highly subsidized taxpayer-financed institutions, and private non-profit institutions with considerable endowments, and exemption from property and income taxes? To me, the obvious answer is that commercial colleges are meeting a need not met by these other institutions.
For-profits generally enroll lower income and older students who are disproportionately African‚ÄìAmerican and from other minority backgrounds.
They offer specialized programs with classes that often meet in the evening and at other convenient times.
Such opportunities are usually less available at cheaper government-run colleges and non-profit institutions.
In addition, for-profit institutions have taken the lead in providing online education that offers the greatest flexibility for working students.
Students can take online courses in the evening, weekends, before they start working, or at other times that are convenient for them.
Online courses do not allow direct interaction among students and faculty available in classrooms, but virtual classrooms provide opportunities to chat with other students no matter where they are located.
In addition, they often provide direct and immediate access to faculty who answer questions and provide other information.
No wonder that hundreds of online for-profit institutions continue to operate even after the crash several years ago of internet-based companies.
Some of these online institutions offer degrees, including advanced degrees, while most offer specialized training in particular areas, or refresher courses for out-of-date professionals.
Students at certified for-profit colleges have long been eligible for federal-backed loan programs, and are also eligible for most state programs that provide financial assistance, such as New York State's extensive tuition-assistance program.
Since for-profits enroll relatively many students from poor backgrounds with modest earnings, it is no surprise that their students take a disproportionate share of federal-backed loans and state grants.
For example, according to the Times‚Äô article, they get 17 percent of the tuition assistance provided by New York while enrolling only 7 per cent of the students.
The Times concentrates on a few examples of corrupt practices uncovered in New York State and elsewhere.
In addition, it is well known that students who went to proprietary colleges have higher rates of default on federal-backed loans than students who went to state or non-profit institutions.
 For-profit institutions have been accused of false advertising about their programs, very low standards for admission, and even changing student answers to make them eligible for state aid.
However, no one to my knowledge has conducted a good study that analyzes the frequency of misleading advertising, or deceptive and dishonest practices, at commercial institutions of higher education compared with state and private non-profit institutions.
Many of the private and public non-profit colleges and universities are guilty of shoddy teaching, misleading claims in their handbooks and advertising about what students would learn at their institutions, taking students in PhD programs where jobs are almost impossible to find upon graduation, and other false, misleading, or immoral practices.
The late George Stigler, a Nobel Prize winning economist, wrote a humorous essay entitled ‚ÄúA Sketch of the History of Truth in Teaching‚Äù (reprinted in his collected essays The Intellectual and the Marketplace) where he basically argues that if traditional universities were held to the same standard of truth as private companies, they would be subject to large and numerous lawsuits.
Some economists have argued that non-profit organizations perform better from a social perspective than for-profit firms when customers have difficulty assessing various hidden qualities of the services provided.
But that argument does not seem important in comparing performances of non-profit and for-profit institutions of higher education.
Students can usually quickly evaluate the type of teaching they receive, and they can also learn whether graduates of their institution get good jobs.
Many students at commercial institutions may overestimate their abilities and the job market they would have upon graduation or finishing a program, but that is also likely with students who major at the most prestigious universities in subjects where few jobs are available, such as Icelandic Literature or Medieval European History.
Commercial colleges have grown rapidly in a highly competitive industry where other colleges are greatly subsidized.
This suggests that they generally are filling a useful niche inadequately covered by traditional colleges and universities.
Sure, lying and cheating by these institutions should be attacked by private and public lawsuits, but government moratoriums and other orchestrated attacks should not be the way non-profits are allowed to fight off new and tough competitors.
A set of varied comments, with some interesting and insightful.
I have a few reactions.
Some of you questioned whether for-profit colleges provide a useful education.
The only decisive way to get at this is to calculate how much earnings increased as a result of attending for-profit colleges, and then compare that to the cost of attending them in order to estimate rates of return on this investment.
Rates of return estimates can also take into account that relatively many individuals who attended commercial colleges default on government-backed loans.
Thousands of rate of return calculations have been made for traditional public and private non-profit colleges and universities, but I am not familiar with any for commercial colleges (that does not mean there are no such estimates; only that there are not many).
I do not believe signaling is an important factor in explaining returns to higher education in general, or to commercial colleges in particular.
The signaling interpretation of the benefits of going to college originated in the 1970's and had a run of a couple of decades, but is seldom mentioned any longer.
I believe it declined because economists began to realize that companies rather quickly discover the productivity of employees who went to college, whether a Harvard or a University of Phoenix.
Before long, their pay adjusts to their productivity rather than to their education credentials.
I agree with one of the comments that such credentialism is more likely to survive among public sector employees.
The federal government already punishes proprietary colleges and others whose graduates have high default rates on their loans.
As I understand the procedure, if default rates get above a certain level, students at these schools have trouble getting loans.
Of course, that makes it much more difficult to attract students.
Studies do show that retraining of adults over age 40 generally produce very little in the way of higher earnings.
But for-profit colleges mainly enroll students in the twenties and thirties, not much older than that.
Someone asked why States like New York oppose for-profit colleges? As someone pointed out, the University of Phoenix had to fight hard to get accredited in many states, and is still denied the opportunity to enroll student In New York and about fifteen other states.
I suggested in my post that the answer is opposition from public and private non-profit colleges that do not want the competition.
It is common for companies in many industries to restrict the entry of competitors if they can.
Why should traditional colleges be any different? They only express their opposition in more high-falutin and self-righteous language.
Overall high quality comments on my discussion of tenure.
A few responses.
Professors at the vast majority of colleges and universities do very little research, long-term or any other type.
Serious research is concentrated at 50-100 universities.
So it is hard to see the length of time it takes to complete major research as an argument for tenure at the remaining 3000 or so colleges and universities.
Moreover, Bell Labs in its heyday, and other corporate research centers have encouraged long-term research without giving tenure.
Good organizations, whether universities or corporations, will see the potential of original research, whereas bad ones will not, with or without tenure.
I do not know enough about what Boston University offered.
If they did offer both tenure and non-tenure options, the data would tell us something useful about the value placed on tenure, although more risk-averse professors will tend to choose the tenure route.
I agree with some of the comments that several year contracts that are renewable may well be the way to go in academia.
This would provide better incentives to professors during their prime years.
It would also help get around the foolish Federal law that prevents universities from forcing older professors to retire, except in extreme circumstance.
Perhaps university administrators desire tenure because their evaluation by higher ups is shortsighted.
But good colleges and universities would be better managed than that, given the competitiveness of the market for higher education in the United States.
In fact, the survival of tenure in such a competitive higher education market often makes me wonder if the arguments against tenure are overlooking some important reasons why tenure may improve performance and efficiency.
James Miller was a student of mine, and a very good student indeed.
He is also politically conservative in the sense that he believes in the advantages of free markets and a private enterprise system.
Unfortunately, most faculties, including many economics departments, do not appreciate such views.
That said, I must add that I do not know the situation at Smith, and why he was initially denied tenure, although it is interesting and relevant to the answer that he apparently won his appeal.
Sorry for this delay in responding about organ markets, but I have been tied up with other matters.
On the whole the comments led to a very sophisticated discussion, with a minimal number of personal attacks.
Let me respond briefly.
Barter arrangements like LifeSharers may well improve the present transplant system, but they have all the disadvantages of barter.
That is why money and markets have replaced barter throughout the world.
I indicated that opt out systems do not have a large effect on organ donations.
The reason is mainly that family members often overrule the implied wishes of their deceased relatives.
I suspect that many people do not take the effort to opt out because they expect their parents or children to have the ultimate say.
A common concern among the critics is that the poor will both give too many of their organs, and not have access to transplants.
I have more confidence than these critics do in the ability of the vast majority of poor people to make decisions in their self-interest.
Moreover, market forces rather than rich persons would determine the price of organs, in the same way that rich people do not presently set the price of maid services.
Most organ transplants are paid by private insurance, Medicaid, or Medicare.
Since that would continue, and since I indicated that market-determined organ prices are unlikely to add much to the total cost of transplants, the poor should not be at more of a disadvantage in getting transplants if organs were sold than they are under the present system.
Indeed, they are likely to be at less of a disadvantage when the supply of organs clears the demand for organs.
For the rich and famous sometimes can now use influence to get priority, and they can travel to countries where they are assured of getting a transplant.
Someone argued for a tax on people who do not agree to make their organs available rather than a price clearing market in organs.
Taxing is an alternative way to clear the organ market, and also the markets for steel, apples, and other products as well.
The rich would have far more influence over the setting of the magnitude and form of these taxes than they would in the determination of organ prices that raise supply to equal demand.
Minimizing the use of force and other government powers in determining supply is a general advantage of market determination of prices that fully applies to organs.
At least one of you claimed that the price of organs would be high because of the so-called "endowment" affect, while others thought it would be too "low" because the poor would be duped.
It cannot be both, and I believe it would be neither, partly for the reasons in the post and above.
Many decisions in life have important elements of irreversibility in the sense that the cost of reversing may be either infinite or very large.
These include going to law school, marrying a particular person, joining the armed forces for several years, etc.
The irreversibility of organ donation for a live transplant will make people consider that issue carefully.
The present system is in this regard worst since often family members are pressured into making quick decisions about providing organs for live transplants because their relatives would die if they did not get a transplant, and they cannot expect an organ soon, given their place on the queue.
I have been at several international conferences of transplant surgeons, and have argued there for markets in organs.
While I believe most but far from all of these surgeons oppose such a change, they all recognize the very serious problems with the present system.
Surgeons and hospitals fight sometimes over who has access to available organs, they see many patients die because they cannot get organs, and they often must perform a transplant surgery at a time that is not optimal for a person receiving the transplant because a matching organ becomes available at a particular moment.
So I believe much more of the concern expressed in some comments should relate to persons in need of transplants who either die because they cannot get them, or wait for years in ill-health before they receive suitable organs.
My answer is essentially "no", with a few small qualifications.
Posner gives the main arguments against aid, so I will not go over them.
William Easterly among others has written several articles that examine the empirical evidence on the relation between foreign aid and economic growth-see for example, chapter 2 of his book The Elusive Quest for Economic Growth.
He and others have discussed foreign government aid to countries in Africa, Pakistan and other Asian countries, and typically have not been able to find any noticeable positive effects of aid on a country's economic growth.
In this book Easterly discusses in detail aid to Ghana in the early 1960's that helped it build a huge dam and the largest man made lake in the world.
This project was at the time supported by some economists with extravagant claims about what it would accomplish: create a new fishing industry, generate electricity, encourage a new aluminum smelting plant, and other benefits.
At a huge cost, it accomplished few of these goals-there is a smelting plant run by a private multinational that has had slow growth in its output- but little else that is positive.
Indeed, the lake had some serious negative consequences, such as destruction of considerable agricultural land because of the wide area flooded, and the importing to those living near the lake of water-borne diseases, such as malaria, river blindness, and hookworm.
India is my favorite example to illustrate the failure of government foreign aid.
From the fifties until the end of the 1980's more private and government aid went to India than to any other country.
Yet during that same time period, India had a very modest growth in per capita income of about 1 percent per year-sometimes resignedly called in those days the "Hindu rate of growth".
I am not claiming that foreign aid was the main source of India's mediocre performance, but it clearly did not overcome the bad economic policies of its government.
In fact, aid may well have encouraged these policies as the India government could always count on foreign aid to help it out of the worst aspects of any mess caused by its restrictions on foreign trade, severe controls over private investment even by Indian companies, and neglect of basic education, roads, and agriculture.
Fortunately, in the early 1990's, the Indian government recognized that the real cause of its economic problems was not insufficient aid, but its own policies.
Reforms at that time include opening up more investments to the private sector, greatly lowering tariffs, quotas, and other barriers to foreign trade, and changes in its thinking about relying on rich countries to help its development.
Indeed, India can legitimately claim that now one important obstacle to its growth comes from the very same rich countries which had been important donors because of their import restrictions that hinder the access of Indian farmers and manufacturers to their markets.
Foreign aid programs other than of a humanitarian nature are destined to fail because they involve transfers of resources from one government to another.
No economist who has closely examined the evidence concludes that the reason why some poor countries fail to have significant economic growth is because their governments have insufficient resources.
The complaint is typically that governments do the wrong things with the resources they have, including their regulatory powers.
They discourage entrepreneurship, give cronies special advantages in investments or in rights to import and export, over-regulate labor markets, spend too much on public prestige projects, such as domestic airlines and large dams that of little use and yet drain valuable resources, neglect basic education in order to create expensive universities, and so on.
Foreign aid only makes it easier to continue to promote projects and policies that are not merely neutral with respect to growth, but hinder any take off into rapid growth.
Donor nations are also subject to political pressures that influence the form their aid takes.
They attach various strings to the aid that help powerful interest groups in their own countries at the expense sometimes of the aid having any chance of helping recipient countries grow faster.
Given the distortions away from effectiveness on both sides of the donor-recipient equation, it is no surprise then most foreign aid has been at best ineffective, and at worst negatively affects the growth prospects of recipients.
Does my discussion mean that I oppose all foreign aid except sometimes for military assistance, and for humanitarian purposes? My answer, to repeat, is yes.
However, I include in humanitarian assistance aid to combat some of the major diseases in poor countries, although I prefer such aid to be from private foundations and other groups since they tend to be more effective than governments -see my January 1 post on private charities.
However, if governments of rich countries do give resources to help fight diseases in poor countries, they should give to private groups in these countries.
If they have to give to government agencies, they should stipulate in the grants that recipient governments have to match their own tax revenues in specified proportions to the amounts received in aid.
Libertarians believe that individuals should be allowed to pursue their own interests, unless their behavior impacts the interests of others, especially if it negatively impacts others.
So individuals should be allowed, according to this view, to buy the food they want, whereas drunk drivers should be constrained because they harm others, and chemical producers should be prevented from polluting as much as they would choose because their pollution hurts children and adults.
Modern research argues that sometimes individuals may not have enough information to effectively pursue their interests.
In these cases, it may be suggested that government regulations and rules help guide individuals to the better pursuit of interests they would have if they had additional information.
A few weeks ago Posner and I debated the role of information in interpreting New York City's recently enacted ban on the use of trans fats in restaurants.
A libertarian paternalist is happy to accept information arguments for government regulation of behavior, but typically stresses other considerations.
One of the best statements of this view argues that "Equipped with an understanding of behavioral findings of bounded rationality and bounded self-control, libertarian paternalists should attempt to steer people's choices in welfare-promoting directions without eliminating freedom of choice.
It is also possible to show how a libertarian paternalist might select among the possible options and to assess how much choice to offer." Cass Sunstein and Richard Thaler, ‚ÄúLibertarian Paternalism is Not an Oxymoron‚Äù,   University of Chicago Law Review  , 70(4), Fall, 2003; for a strong response, see Daniel Klein, ‚ÄúStatus Quo Bias‚Äù,   Econ Journal Watch  , August 2004.
If not literally an oxymoron, the term "libertarian paternalism" is, I believe, awfully close to it.
Before trying to show why, let me illustrate what this expression might reasonably mean--Sunstein and Thaler give some innocuous examples like the placement of desserts in cafeterias that raise no significant issues.
Suppose a person smokes, but has an internal conflict between his stronger "self" who wants to quit, and his weaker "self" who continues to smoke whenever he feels under pressure, or in social situations.
In effect, the weaker self does not stop smoking because he has limited self-control.
The goal of paternalism in this case is to help the more dispassionate self obtain greater control over the choices made by the conflicted individual because of his dual selves.
Such paternalism may take the form of high cigarette taxes, so that even weaker selves would not want to smoke so much, or of ordinances to limit smoking in restaurants, bars, and other social situations to prevent weak selves from being tempted to smoke.
The argument is that individuals would be "happier" if they were given a helping hand to exercise self-control.
One study even claims to find that smokers are happier in states of the United States that heavily tax cigarettes than in seemingly comparable states that tax cigarettes more lightly because higher taxes help control the urge to smoke.
 If this evidence were valid, groups of smokers should lobby for higher cigarette taxes, yet to my knowledge there is not a single instance where this has happened.
Indeed, if anything, they lobby for lower taxes, but perhaps one can claim--most anything goes in such a world-- that they do not even know they have this conflict among their different selves!.
Classical arguments for libertarianism do not assume that adults never make mistakes, always know their interests, or even are able always to act on their interests when they know them.
Rather, it assumes that adults very typically know their own interests better than government officials, professors, or anyone else--I will come back to this.
In addition, the classical libertarian case partly rests on a presumption that being able to make mistakes through having the right to make one's own choices leads in the long run to more self-reliant, competent, and independent individuals.
It has been observed, for example, that prisoners often lose the ability to make choices for themselves after spending many years in prison where life is rigidly regulated.
In effect, the libertarian claim is that the "process" of making choices leads to individuals who are more capable of making good choices.
Strangely perhaps, libertarian paternalists emphasize process when claiming conflict among multiple selves within a person, but ignore the classical emphasis on decision-making process that helps individuals make better choices.
Two other serious limitations of the libertarian paternalist approach further weaken its appeal.
First, it is virtually impossible to distinguish such paternalism from plain unadulterated paternalism.
How does one decide with objective criteria where "bounded rationality and bounded self-control" are important, and areas of choice where they are not? For example, models of rational addiction appear to do as well if not better than models of bounded self-control when applied empirically to smoking behavior.
Why adopt models of bounded self-control in this case?.
Or to take another illustration, is the weight gain of teenagers and adults since 1980 in much of the developed world, particularly the United States, due to bounds on rationality and control? If so, why did it not happen earlier, or why is the gain in weight so much greater in the United States than in most other countries? Are Americans less able than say the Japanese or Germans to exercise self-control? Often libertarian paternalism simply involves substituting an intellectual's or bureaucrat's or politician‚Äôs beliefs about should be done with other peoples' time and money for the judgment of those choosing what to do with their own incomes and time.
It is in good part because libertarians recognize the temptation in all of us to control choices made by others that they end up in favor of allowing people to make their own choices, absent clear negative (or positive) effects on others.
A serious problem arises if libertarian paternalism is not just considered an intellectual exercise, but is supposed to be implemented in policies that control choices, such as how many calories people are allowed to consume, whether adults are allowed to use marijuana or smoke, or how much they can save.
Even best-intentioned government officials should be considered subject to the same bounds on rationality, limits on self-control, myopia in looking forward, and the other cognitive defects that are supposed to affect choices by us ordinary individuals.
Can one have the slightest degree of confidence that these officials will promote the interests of individuals better than these individuals do themselves?.
This is why classical libertarianism relies not on the assumption that individuals always make the right decisions, but rather that in the vast majority of situations they do better for themselves than government officials could do for them.
One does not have to be a classical libertarian--I differ on some issues from their position--to recognize that the case for classical libertarianism is not weakened by the literature motivating libertarian paternalism.
Indeed, when similar considerations are applied to government officials and intellectuals as well as to the rest of us, the case for classical libertarianism may even be strengthened!.
Health care reform in the United States is receiving lots of attention recently from politicians and the media, and major changes in federal as well as state health law are likely.
In thinking about reforms it is crucial to recognize that the American system has many strong features that should be preserved, such as the predominant role of private physicians, private hospitals, and private HMO's that compete against each other for patients and health care dollars.
I will not undermine these strengths in my discussion of how to correct a couple of problems.
President Bush's recent State of the Union Address tackled two defects: the tying of health insurance to employment, and the over 40 million persons who are not covered by insurance.
The President proposes a standard tax deduction for anyone with health insurance equal to $15,000 for families and $7,500 for individuals.
This means that families with health insurance will pay no income or social security taxes on the first $15,000 of their income, while individuals with health insurance will pay none on the first $7,500 of their income.
This would increase the tax benefits from health insurance to anyone who is not now covered by employer provided health insurance.
All health coverage provided by employers above the $15,000 family cap would be taxed as ordinary earnings.
Leveling the tax playing field between those with individual health insurance and persons with employer insurance is desirable, as is encouraging widespread insurance coverage of individuals and families.
The first could be achieved either by taking away the current tax benefits of employer based health insurance plans-which I would prefer, and the President proposes to do for the more expensive plans- or by extending the same benefits to individual health plans, as is in the President‚Äôs proposal.
The second is best achieved by making basic catastrophic health insurance compulsory for everyone, and concentrating government financing of health care on the poor who do not have sufficient resources to get their own insurance.
Under the present system, employed workers get tax benefits when their employers make contributions to employee health insurance plans because employees do not have to report employer contributions as part of their taxable income.
Since there are no limits on how much can be deducted, employers competing for employees have an incentive to take out more extensive and expensive coverage than employees would want if employees had to pay the full costs.
Wages paid do tend to adjust downward to take account of the value to workers of health benefits and other "fringe" benefits, which is less than the cost to society because of the tax advantages.
The President's proposal is designed to make the same tax benefits from health insurance available, regardless of whether or not employers provide the insurance.
The $15,000 family cap would save the federal government tax revenue, and also would discourage more elaborate insurance plans that often add little to healthiness, but are artificially cheaper because of tax benefits.
Since under present tax law, medical expenses has to exceed 71/2 % of a family‚Äôs taxable income before this spending begins to be tax deductible, it is very hard to get any tax benefits with individual health insurance.
This aspect of tax law helps explain why so many Americans do not have any health insurance.
The proposed tax deductibility for persons with their own health insurance plans would sharply reduce the net cost of getting private health insurance for many of the almost 47 million Americans who presently do not have such insurance, Medicaid, Medicare, or are under the 10 year old State Children's Health Insurance Program.
It would also contribute to leveling the playing field between persons who get health coverage through jobs, and those who must get insurance as individuals, perhaps because they have no job, or are self-employed, or their employers do not provide health insurance.
The proposed reform should therefore significantly reduce the number of Americans without health insurance.
The tying together of health insurance with employment is partly a legacy of World War II, when employers began to offer health insurance as a fringe benefit to help them compete better for workers whose wages were regulated by the wartime government.
Employer-provided health insurance expanded over time even after wage controls were abolished because income tax rates rose greatly over time.
This artificial incentive to combine health insurance with employment would be eliminated under the President's proposal.
Aside from humanitarian concerns about the wellbeing of others, why should it matter to the rest of us if individuals and families, many of who are young and healthy, do not have health insurance?  The main reason usually given is that since all persons must be accepted for treatment by hospital emergency rooms, regardless of whether they have insurance, taxpayers and other hospital patients who do have insurance bear the cost of treating persons without insurance.
Due to this "externality", persons without health insurance impose costs on others whenever they use emergency health care facilities.
The ability to avoid paying for medical care by going to an emergency room encourages some persons not to have their own medical insurance.
Yet this incentive is limited since emergency room care is neither the most effective nor the most pleasant.
A few studies indicate that emergency rooms are not used disproportionately by the uninsured, probably because they are mainly young and healthy, so the total cost imposed on others of emergency room visits by the uninsured is likely not large.
Moreover, the President's proposed tax savings for those with private insurance also hurts taxpayers by creating a tax advantage for persons with private insurance, although his proposal is supposed to be tax neutral by eliminating deductibility for insurance above the $15,000 cap.
Even if the uninsured did use emergency room care a lot and thereby raised the costs of others, a better way to handle that would be to mandate that everyone purchase basic health insurance that covers catastrophic health problems.
Several state governors, including Mitt Romney of Massachusetts and Arnold Schwarzenegger of California, have recently proposed that all of their state residents be required to get health insurance.
The State of the Union Address also contains a proposed federal subsidy to help states pay for the coverage of the poor and sick for states that require basic health insurance for all residents.
Making some coverage compulsory for all, and then subsidizing only the coverage of poor families, is the right way to go.
Face-to-face interviews of an apparently random sample of the Pakistani population were conducted in August 2007 for Terror Free Tomorrow, a non-partisan Washington policy organization (www.
TerrorFreeTomorrow.org).
Those interviewed were asked questions about Al Qaeda and other issues facing Pakistan.
The results indicate that more than a third of Pakistanis have a favorable view of Al Qaeda, the Taliban, and bin Laden, and that President Musharraf is the least popular political leader in Pakistan.
Respondents also have a decidedly unfavorable view of the US-led war on terror, for they believe that its real purpose is to kill Muslims, break Muslim countries, and achieve other related goals.
There are many causes of such attitudes, but I want to explore the effects of economic development on the degree of support for terrorism.
Many surveys of populations in poor nations give a distorted picture about attitudes in these countries toward controversial issues because they are confined to urban areas that are safer and more easily accessible, and where inhabitants tend to be more educated and better off economically.
By contrast, this survey of Pakistani opinions seems to be a reasonably representative sample of about 1,000 Pakistanis age 18 or older in urban and rural areas in all four provinces of Pakistan.
The vast majority of these respondents are married Sunni Muslims who live in towns and villages, and have 10 or less years of schooling.
A little less than half are women.
Unfortunately, the results so far published from this survey do not separate answers by years of schooling, income, urban-rural location, gender, or other useful personal characteristics.
Pakistan is a very poor nation that is low on international rankings of both per capita income and the extent of economic and political freedoms.
According to the World Development Report of the World Bank, Pakistan's purchasing-power-adjusted real per capita income is considerably below India's, and is less than one half of China's.
Evidence from changes in other countries that have developed indicates that if Pakistan experienced a prolonged period of rapid economic growth, behavior and attitudes on many issues would change radically, regardless of the fact that it is a Muslim nation in Asia.
Consider what happens to the family in response to economic development.
The family organization and structure that are the foundation of traditional societies evolved over hundreds, indeed thousands, of years.
Families are by no means the same in different cultures, but in all poorer nations, birth rates are high, and the extended family is usually close.
Yet regardless of culture, birth rates greatly decline, and extended families evolve into much greater reliance on the nuclear family, in every country that has experienced sizable economic development.
Examples of sharp declines in family size include the Chinese cultures of Taiwan, Hong Kong, and China (although birth rates in China were partially forced down by government pressures on families to have only one child).
Big declines in fertility also occurred in India, Turkey, and Malaysia ( Malaysian birth rates are still relatively high), Malaysia and Turkey being the main Muslim countries that experienced sizable economic development without having large resources of oil or natural gas.
What happened in Malaysia suggests that poor Muslim countries, like Pakistan, or Morocco, or Egypt, would also have rapid falls in birth rates if they managed to have serious economic development.
The power of economic development is also shown by the well-established finding that countries become more democratic when their economies undergo significant development.
This finding is illustrated by Taiwan, South Korea, and Chile, all countries that started growing rapidly under non-democratic governments, and evolved into vibrant democracies.
China has had significant expansion of civil and economic freedoms since it started developing rapidly in 1980 (about the time when I first visited there, and I was impressed by how restrictive conditions were).
I believe China will open up further, and will attain greater political freedom if it continues to grow rapidly.
Similar changes toward greater economic, political, and social freedom will take place in Pakistan, Egypt, and other Muslim countries if they too take off economically.
Terrorist groups rely on populations that are sympathetic to their cause to hide and protect their members.
They also recruit disaffected youth in significant numbers who are willing to commit suicide to destroy enemies.
Just as economic progress greatly affects family structure and the amount of freedom available, it also sharply reduces the willingness of people to hide or otherwise protect terrorists because they have more to lose if they are caught.
Although leaders of terrorist organizations usually come from more educated classes, these organizations rely on numerous foot soldiers to do a lot of the dirty work.
They are generally recruited from younger and less educated groups.
It becomes much harder to recruit many of these soldiers when good jobs are available, especially if these recruits are asked to commit suicide.
To be sure, Al Qaeda and other radical violent groups have attracted members from the richest nations: Great Britain, France, Germany, and even the United States.
Certainly in the US and Great Britain, Muslims have been rather well integrated into their economies, and both countries provide very good opportunities for advancement to younger Muslims.
For this reason, in both countries, and even in France and Germany, only tiny numbers of their Muslim populations have been recruited to active participation in radical causes.
If better opportunities reduce the attractiveness of suicidal terrorism, how does one explain that all the participants in the 9/11/01 suicide attacks were college-educated Muslims, and generally they were in their late twenties? Posner and I show in a paper on suicide why educated terrorists with good economic opportunities would be unwilling to engage in run of the mill terrorism or ordinary suicide attacks because the cost to them would be too great.
Such types can only be attracted to terrorist organizations by influential leadership roles, or by dramatic and exceptional missions, as the 9/11 terrorist mission.
That is why the education-age backgrounds of the 9/11 terrorists are the exceptions, not the rule, for the profiles of suicide terrorists.
A strong counterexample comes from the backgrounds of suicide bombers during the first Intifada against Israel: they were mainly young and unmarried (the mean age of male bombers was 20), and few had a college education.
As Posner indicates, American health care generally gets poor grades in international comparisons of health care systems.
Although major reforms are needed in the American approach, international comparisons underrate American health care.
This is partly because these comparisons give insufficient weight to the fact that most of the new drugs to treat major diseases originated in the US, along with many of the new surgical procedures, and insights about the importance of lifestyles in good health.
This helps explain why many Canadians and those from other countries come to the US to treat serious diseases rather than visa versa.
The US is also much more generous than other countries, such as Great Britain and France, in making expensive surgeries and drugs available to older persons through Medicare and private insurance.
This too significantly raises the cost of health care.
Moreover, the American health system is decentralized and "messy", and many health evaluators prefer a single payer (i.e., government) centralized approach to health care as opposed to any market-based approach.
This is not to deny that the American health care system has serious defects.
If I were running for president, and allowed only four reforms, I would emphasize the following (assuming I do not worry about getting enough votes to be elected!):.
1) Eliminate the link between employment and the tax advantage of private health insurance.
Since much of the spending on health are investments in human capital, there is good reason to exempt these expenditures, along with other investments, from income taxes.
However, this employment link is inequitable because it does not provide the same tax advantages to families without employment-based insurance.
It also encourages expensive employer health plans that have significant consumption components since the government picks up much of the cost of such coverage.
President Bush has proposed a reasonable alternative; give every family a flat $15,000 standard deduction (and half that amount for individuals), whether or not their health insurance is obtained through their employer.
They would still get this deduction if they spend less on their insurance, so they have incentives to economize on their health care (but by my reform number 4, everyone would have to take out catastrophic coverage).
Consumers would have to pay for any coverage in excess of $15,000, so they would only choose such coverage if they were willing to spend their own money, not taxpayers.
2) Encourage the spread of Health Savings Accounts (see my discussion on Feb.
5, 2006) that encourage consumers to economize on unnecessary medical expenditures.
Present law allows tax-free contributions to these Accounts of up to about $2700 for individuals and double that amount to $5450 for families, as long as these contributions are not greater than the deductibles on their health insurance.
Contributions to HSAs that are not spent in any year can be carried over to future years without any tax liabilities, and even into retirement income.
So HSAs are an efficient way to save as well as to spend on non-catastrophic medical care.
Health Savings Accounts have spread since they were introduced several years ago, but might need greater encouragement, such as higher limits.
3) Medicare spending amounts to about $350 billion a year, it constitutes about 12 percent of federal spending, and it is one of the most rapidly growing entitlements.
It is projected to continue to grow as a fraction of GDP from its present 2.7 percent level to over 11 percent in 2080.
The source of the growth is the continued aging of the population, and the increased per capita medical spending on older person as new medical technologies and drugs are developed.
Projections made by Medicare Actuaries indicate that the Medicare HI Trust Fund will be exhausted by the year 2018-only a decade away.
Reform of Medicare is probably among the most challenging not only because of the elderly's political clout, but also because Americans have come to expect access to expensive medical treatments as they age.
Still, the prescription drug coverage introduced into Medicare in 2003 was an important step in the right direction, despite the flaws in the program (see my discussion on February 3, 2005).
Drugs are not only increasingly available to fight many diseases of old age, but drugs, once developed, are relatively cheap to extend to large numbers of users.
Even when drugs provide only small benefits as they are extended to groups that can benefit less from the drugs, the costs are far less than would be required to provide expensive surgeries or hospitalizations to older persons with few years of life remaining.
This is why I would greatly increase the generosity of Medicare drug coverage, and compensate for the additional expense by cutting down on allowances for lengthy hospital stays, and raising other co-pays.
4) I do not believe the problem of the uninsured in the US is as serious as usually claimed since most of those without health insurance are young and do not have major medical expenses.
When they do, they can use emergency room service at major hospitals, although studies show that they do not even use emergency room care more often than others.
Still, it may be desirable to require that everyone must contract for private catastrophic health care since the uninsured tend to use taxpayer and philanthropic funded medical care facilities to pay for the costs of any major illnesses.
Medicaid should be extended to cover anyone who cannot afford such catastrophic insurance.
Compulsory coverage would integrate the 45 million or so uninsured Americans into an overall health care system while still preserving  the desirable decentralized private system of health care.
Black Americans have made considerable progress during the past two decades in reaching top positions in government, business, and the military.
Colin Powell was Chairman of the Joint Chiefs of Staff of the Armed Forces and also Secretary of State, the third highest position in government, and has been followed at State by Condoleezza Rice.
Richard Parsons is CEO of Time Warner, Kenneth Chenault is CEO of American Express, Stan O'Neal  until recently was CEO of Merrill Lynch, and black men and women are heads too of other major American corporations.
Barack Obama is making a credible run at becoming the presidential nominee of the Democratic Party, and he is appealing not only to black and other minority voters, but also to a wide cross section of independent voters.
Obama's successful pursuit of the American presidency has appeared to provide closure to "The American Dilemma": this country's unsatisfactory relations with African American descendants of slaves, even though Obama himself has a white mother and an African father.
Yet the political, governmental, and business success during the past few years of small numbers of blacks does not accurately measure the progress of typical African-American men and women.
Education, earnings, and health gaps between whites and blacks did significantly narrow during the 40-year period from the end of World War II until the late 1980's.
However, from then until the present, progress of blacks relative to whites has essentially stopped, leaving a still sizable distance between the circumstances of whites and blacks.
My colleague at the University of Chicago, Derek Neal, has documented many aspects of this slowdown in black progress (see his "Why has Black-White Skill Convergence Stopped?" in Handbook of the Economics of Education, Vol 1, 2006).
He shows that the racial gap in average years of schooling for men in their late twenties was about 2 1/4 years in 1965, declined to less than a year in the 1980's, and basically remained at that level into this century.
The schooling gap between young black and white women has been smaller than that for men, it also fell a lot until the mid-1980's, but if anything the gap has increased since then to become similar to the gap for young men.
Related trends of considerable progress and then stagnation are found in racial gaps for high school and college graduation rates, and in teenager reading and math tests scores.
Earnings of blacks and whites with the same years of schooling show similar patterns: convergence until the late 1980's, and mainly stable since then, although there are increased racial gaps in some education groups.
Differences in life expectancy and general health between blacks and whites followed similar trends.
Black life expectancy narrowed until about twenty years ago, and then remained constant at about 6 years below that of whites.
This means that life expectancy of blacks is comparable to mortality rates in the much poorer countries of Paraguay and Mexico.
A large fraction of the racial difference in average length of life is due to differences in the incidence of cardiovascular diseases, life styles, and violent deaths.
The economic literature on the statistical value of life shows that a typical white values a life year at over $120,000.
A comparable analysis for typical American blacks would suggest that they value an additional life year at less than the figure for whites because black earnings are lower.
If the value by blacks is about $100,000, the discounted value of the six-year lower life expectancy for blacks would be worth about $400,000.
Since the discounted value over a lifetime of the racial gap in average annual earnings would be worth no more than $300,000, this calculation suggests that the racial gap in life expectancy is as important as the still considerable earnings shortfall of blacks.
Why did the progress of blacks stop well short of achieving full equality with whites, and is the slowdown during the past 20 years in black progress only temporary, or is it an indication of what the racial situation will be during the next few decades? The sharp slowdown is surprising mainly because institutionalized and personal discrimination against African-Americans has continued to fall into this century.
Probably the most important offset to the decline in discrimination is the rapid growth since the 1960's in the fraction of black children raised in households with only one or no parents-these households also grew among whites, but at a much slower pace.
Moreover, white single parent households mainly arise from a divorce between parents who had their children while married (or while living together), whereas never-married and quite young mothers raise many black children.
In addition, there is social pressure on young blacks growing up in segregated neighborhoods to engage in crime, including selling drugs, and to not "act white", where acting white sometime is taken to mean studying hard and investing in one's human capital.
These pressures act more on black boys rather than girls, which help explain why the achievements of black women are much closer to those of white women than is the gap between black and white men.
It is too early to tell whether these and other forces that have prevented blacks from achieving full parity with whites are temporary or more long lasting.
A disturbing fact is that growing up in families that invest less in their children casts a long shadow since children brought up in these families tend also to invest less in their children.
This process gets to be repeated to some degree over subsequent generations.
Yet it may be possible to overcome to a considerable degree this intergenerational transmission of low status.
The most promising approaches in my opinion involve self-help programs that encourage better choices in black communities, the legalization of drugs, personalized medicine that recognizes differences in vulnerabilities to disease between blacks and whites, head start type school programs, and school vouchers and charter schools that widen school choice and stimulate education innovations, On the whole, I am optimistic that some of these changes will be made, and hence that the convergence between blacks and whites will resume after the hiatus during the past 20 years, although it will probably be many decades before blacks achieve anything close to full parity with whites.
The burden of taxes to a country depends not only on the fraction of its gross domestic product GDP that are collected as tax revenue ‚Äìthe data shown in Posner's chart- but on many other factors as well.
Since my comment is brief I will confine my discussion to the link between tax burdens, the level of government spending, and the structure and incidence of taxes.
It is not possible to separate tax burdens from government spending.
Obviously, as Posner makes clear, how governments spend their tax revenues makes an enormous difference to the functioning of an economy.
In addition, however, the level of government spending also affects the tax burden.
 If spending exceeds the amount collected in taxes, the excess spending must be financed by an increase in government debt (I ignore inflationary printing of money).
Interest payments on the higher government debt have to be financed by higher taxes in the future, so the full tax burden is determined not by tax revenues alone but also by government spending.
 Senator McCain has justified his initial opposition to the Bush tax cuts by indicating that they were not combined with cuts in government spending -in fact, just the opposite occurred.
The tax burden depends in addition on the type of taxes used and their structure.
What economists call the "excess burden" is measured by the difference between the cost to those paying taxes and the revenue collected by government.
The excess burden is zero for a head tax, which is an equal tax per person, since the amounts paid to governments from such a tax equals the cost to taxpayers.
Taxes on income do have an excess burden because they distort taxpayers' decisions toward greater leisure.
The higher the marginal tax rate, the greater are these and other distortions induced in labor supply, and hence the greater the excess burden of income taxes.
To reduce distortions, broader and flatter taxes are better because then marginal tax rates are lower.
 Rudy Giuliani has proposed a flat and rather broad income tax with a highest marginal tax rate of only 30 percent to complement the present complicated income tax system.
Consumption taxes, such as value added taxes, have lower excess burdens than income taxes.
Like an income tax, a general tax on consumption does discourage work in favor of leisure essentially because individuals can avoid both consumption and income taxes by taking additional leisure since leisure is not taxed.
However, an income tax has other distortions as well since income is both taxed when received, and also taxed again when the savings out of income produces additional income.
Income taxes in effect tax savings twice, while consumption taxes only tax savings once, when they are spent.
In order to reduce this double taxation of savings from income taxes, the US and other countries allow families to save in ways that are free of income taxes until the savings are spent, such as through saving with IRAs.
There is a natural tendency to assume that the burden of taxes falls on persons or companies that mail the tax checks into the government.
To show why this is generally false, consider a 10 percent tax on capital that initially reduces returns on capital from say 8 percent to 7.2 percent.
This initial impact is clearly on owners of this capital, who are generally wealthier than the average individual.
Over time, however, the capital stock would fall because companies reduce their investments in reaction to the lowering of after-tax returns on investments due to the capital tax.
As the capital stock falls, the after-tax return would begin to increase because the productivity of capital is higher when capital is scarcer relative to labor.
The capital stock would continue to fall essentially until after-tax returns climb back up to the 8 percent level they were at before the tax on capital was imposed.
Since studies confirm that in the long run owners of capital get about the same rate of return that they would have without any taxes on capital, who then pays the capital tax in the long run? The answer is not capital but labor because wages and earnings are lower when workers have less capital to work with.
Owners of capital continue to send in the checks to pay a capital tax, but the negative response of investments to a capital tax shifts the burden of a capital tax away from capital to labor.
That eventually labor pays a tax on capital even though it is placed on capital explains why economists generally oppose long-term taxes on capital even though in the short run capital taxes have many desirable properties.
Investment tax credits, accelerated depreciation, and low taxes on capital gains are some of the ways that the effective long run tax on capital is reduced toward zero.
Last week we blogged on how much stimulus to GDP and employment might be expected from a version of the Obama fiscal stimulus plan.
I concluded that the amount of stimulus from the spending package would be far less than estimated in a study by the incoming Chairperson of the Council of Economic Advisers ("The Job Impact of the American Recovery and Reinvestment Plan", by Christina Romer and Jared Bernstein, January 9, 2009).
The activities stimulated by the package to a large extent would draw labor and capital away from other productive activities.
In addition, the government programs were unlikely to be as well planned as the displaced private uses of these resources.
The stimulus package's plans for spending on "infrastructure" clearly illustrate both concerns.
I put this word in quotation marks because of the many definitions of what is included in the concept of infrastructure.
 Promoters of various stimulus packages- such as the just released House Committee on Appropriations $825 billion stimulus plan- include in infrastructure not only the traditional categories of roads, highways, harbors, and airports.
They also include spending on broadband, school buildings, computers for school children, modern technologies, research and development, converter boxes for the transition to digital TV, phone service to rural areas, sewage treatment plants, computerized medical records and other health expenditures, and many other activities as well.
Some of this infrastructure spending may be very worthwhile-I return to this issue a bit later- but however merited, it is difficult to believe that they would provide much of a stimulus to the economy.
Expansion of the health sector, for example, will add jobs to this sector, but it will do this mainly by drawing people into the health care sector who are presently employed in jobs outside this sector.
This is because unemployment rates among health care workers are quite low, and most of the unemployed who had worked in construction, finance, or manufacturing are unlikely to qualify as health care workers without considerable additional training.
This same conclusion applies to spending on expanding broadband, to make the energy used greener, to encourage new technologies and more research, and to improve teaching.
An analysis by Forbes publications of where most jobs will be created singles out engineering, accounting, nursing, and information technology, along with construction managers, computer-aided drafting specialists, and project managers.
Unemployment rates among most of these specialists are not high.
The rebuilding of "crumbling roads, bridges, and schools" highlighted by in various speeches by President Obama is likely to make greater use of unemployed workers in the construction sector.
However, such spending will be a small fraction of the total stimulus package, and it is not easy for workers who helped build residential housing to shift to building highways.
A second crucial issue relates not to the amount of new output and employment created by the stimulus, but to the efficiency of the government spending.
Efficiency is not likely to be high partly because of the fundamental conflict between the goal of stimulating employment and output in order to reduce the severity of the recession, and the goal of concentrating infrastructure spending on projects that add a lot of value to the economy.
Stimulating the economy when employment is falling requires rapid spending of this huge stimulus package, but it is impossible for either the private or public sectors to spend effectively a large amount in a short time period since good spending takes a lot of planning time.
Putting new infrastructure spending in depressed areas like Detroit might have a big stimulating effect since infrastructure building projects in these areas can utilize some of the considerable unemployed resources there.
However, many of these areas are also declining because they have been producing goods and services that are not in great demand, and will not be in demand in the future.
Therefore, the overall value added by improving their roads and other infrastructure is likely to be a lot less than if the new infrastructure were located in growing areas that might have relatively little unemployment, but do have great demand for more roads, schools, and other types of long-term infrastructure.
Of course, at some point new taxes in some form have to be collected to pay for infrastructure and other stimulus spending.
The sizable adverse effects on incentives of these taxes also have to be weighted against any value produced by the infrastructure (and other) stimulus spending.
The likelihood that such a rapid and large public spending program will be of low efficiency is compounded by political realities.
Groups that have lots of political clout with Congress will get a disproportionate amount of the spending with only limited regard for the merits of the spending they advocate compared to alternative ways to spend the stimulus.
The politically influential will also redefine various projects so that they can fall under the "infrastructure" rubric.
A report called Ready to Go by the U.S.
Conference of Mayors lists $73 billion worth of projects that they claim could be begun quickly.
These projects include senior citizen centers, recreation facilities, and much other expenditure that are really private consumption items, many of dubious value, that the mayors call infrastructure spending.
Recessions would be a good time to increase infrastructure spending only if these projects can mainly utilize unemployed resources.
This does not seem to be the case in most of the so-called infrastructure spending proposed under various stimulus plans.
Last week we blogged on how much stimulus to GDP and employment might be expected from a version of the Obama fiscal stimulus plan.
I concluded that the amount of stimulus from the spending package would be far less than estimated in a study by the incoming Chairperson of the Council of Economic Advisers ("The Job Impact of the American Recovery and Reinvestment Plan", by Christina Romer and Jared Bernstein, January 9, 2009).
The activities stimulated by the package to a large extent would draw labor and capital away from other productive activities.
In addition, the government programs were unlikely to be as well planned as the displaced private uses of these resources.
The stimulus package's plans for spending on "infrastructure" clearly illustrate both concerns.
I put this word in quotation marks because of the many definitions of what is included in the concept of infrastructure.
 Promoters of various stimulus packages- such as the just released House Committee on Appropriations $825 billion stimulus plan- include in infrastructure not only the traditional categories of roads, highways, harbors, and airports.
They also include spending on broadband, school buildings, computers for school children, modern technologies, research and development, converter boxes for the transition to digital TV, phone service to rural areas, sewage treatment plants, computerized medical records and other health expenditures, and many other activities as well.
Some of this infrastructure spending may be very worthwhile-I return to this issue a bit later- but however merited, it is difficult to believe that they would provide much of a stimulus to the economy.
Expansion of the health sector, for example, will add jobs to this sector, but it will do this mainly by drawing people into the health care sector who are presently employed in jobs outside this sector.
This is because unemployment rates among health care workers are quite low, and most of the unemployed who had worked in construction, finance, or manufacturing are unlikely to qualify as health care workers without considerable additional training.
This same conclusion applies to spending on expanding broadband, to make the energy used greener, to encourage new technologies and more research, and to improve teaching.
An analysis by Forbes publications of where most jobs will be created singles out engineering, accounting, nursing, and information technology, along with construction managers, computer-aided drafting specialists, and project managers.
Unemployment rates among most of these specialists are not high.
The rebuilding of "crumbling roads, bridges, and schools" highlighted by in various speeches by President Obama is likely to make greater use of unemployed workers in the construction sector.
However, such spending will be a small fraction of the total stimulus package, and it is not easy for workers who helped build residential housing to shift to building highways.
A second crucial issue relates not to the amount of new output and employment created by the stimulus, but to the efficiency of the government spending.
Efficiency is not likely to be high partly because of the fundamental conflict between the goal of stimulating employment and output in order to reduce the severity of the recession, and the goal of concentrating infrastructure spending on projects that add a lot of value to the economy.
Stimulating the economy when employment is falling requires rapid spending of this huge stimulus package, but it is impossible for either the private or public sectors to spend effectively a large amount in a short time period since good spending takes a lot of planning time.
Putting new infrastructure spending in depressed areas like Detroit might have a big stimulating effect since infrastructure building projects in these areas can utilize some of the considerable unemployed resources there.
However, many of these areas are also declining because they have been producing goods and services that are not in great demand, and will not be in demand in the future.
Therefore, the overall value added by improving their roads and other infrastructure is likely to be a lot less than if the new infrastructure were located in growing areas that might have relatively little unemployment, but do have great demand for more roads, schools, and other types of long-term infrastructure.
Of course, at some point new taxes in some form have to be collected to pay for infrastructure and other stimulus spending.
The sizable adverse effects on incentives of these taxes also have to be weighted against any value produced by the infrastructure (and other) stimulus spending.
The likelihood that such a rapid and large public spending program will be of low efficiency is compounded by political realities.
Groups that have lots of political clout with Congress will get a disproportionate amount of the spending with only limited regard for the merits of the spending they advocate compared to alternative ways to spend the stimulus.
The politically influential will also redefine various projects so that they can fall under the "infrastructure" rubric.
A report called Ready to Go by the U.S.
Conference of Mayors lists $73 billion worth of projects that they claim could be begun quickly.
These projects include senior citizen centers, recreation facilities, and much other expenditure that are really private consumption items, many of dubious value, that the mayors call infrastructure spending.
Recessions would be a good time to increase infrastructure spending only if these projects can mainly utilize unemployed resources.
This does not seem to be the case in most of the so-called infrastructure spending proposed under various stimulus plans.
When we blogged about gasoline taxes on July 21, 2008, the sharp rise in gasoline prices to over $4 a gallon reduced the gasoline consumption that contributes to global warming, local pollution, auto accidents, congestion, and other externalities from driving.
I suggested that if it were desirable to use gas taxes to reduce gasoline consumption, a better time would be when gasoline prices were much lower.
In the little over five months since that discussion, average gasoline prices in the United States have declined by more than 60 percent to about $1.50 a gallon.
In light of the July discussion, is this a good time for the federal government, perhaps particularly for local and state governments, to raise gasoline taxes? I believe that despite the free fall in gas prices, other events since that earlier posting have greatly weakened the case for higher gas taxes at this time.
I have opposed the bailout of GM, Ford, and Chrysler through federal loans and outright grants, and believe these companies should have been allowed to go into bankruptcy proceedings (see, e.g., my post on Dec.
16th, 2008).
However, given that President Bush started a bailout, and that the new Congress is likely to extend the bailout, this would be a bad time to raise gas taxes.
For higher gas prices will increase the financial difficulties of the American automakers by reducing driving and shifting demand away from the SUVs, minivans, and trucks that these companies have depended on for much of their revenues.
A further weakening of the financial position of American carmakers would increase the size of the bailout of the American auto industry needed to prevent it from going bankrupt.
This implies that higher gas taxes would have a multiplier effect on the tax burden facing American families and businesses- not only would they have to pay more for gas, but they also would at some point have to pay higher taxes to finance a larger bailout.
A related reason to avoid raising gas taxes now that was not so apparent when we blogged in July is that the world is in a serious recession that will get worse before it gets better.
Many lower and middle-income families have lost their jobs, and many more will suffer reduced incomes during the coming months.
Since increasing numbers of individuals are facing more difficult economic circumstances, this hardly is the time to raise taxes on cars used to commute to work and to shop, especially since higher gas taxes would lead to greater government spending on bailing out American carmakers.
Fiscal policy during a recession should, if anything, cut rather than raise taxes, be they taxes on gasoline, personal incomes, or business.
President-elect Obama has reached a similar conclusion.
The New York Times of Jan.
3 reported that when he was asked last month whether he would consider a much larger federal tax on gasoline, given the sharp fall in gas prices, Mr.
Obama replied that American families were hurting because of rising unemployment and falling home values.
They quote him as saying "So putting additional burdens on American families right now, I think, is a mistake".
Some proponents of the bailout to automakers want to make payments to GM, Ford, and Chrysler conditional on their making cars that are more friendly to the environment through getting greater miles per gallon of gasoline used.
One frequently suggested way to do that would be to raise the Corporate Average Fuel Economy (CAF√â) requirements at a more rapid rate than under present law.
CAF√â standards are presently at 27.5 mpg for cars, and 22.2 mpg for pickups, SUVs, and minivans, and they are scheduled to rise to much higher levels starting in 2011.
Since foreign carmakers are better at making fuel-efficient cars than are American companies, any sharp increase in CAF√â requirements would further weaken the competitive position of the American companies.
Hence, this too would defeat the alleged purpose of the auto bailout, which is to help American companies reduce their financial problems, so that they can compete more effectively against foreign automakers.
Although neither higher gas taxes nor tougher fuel-efficiency standards are desirable at this time, higher taxes would be preferable to tougher standards.
Both hurt GM and the other American car manufacturers, but bigger taxes are a more efficient way to economize on the use of gasoline.
Higher gas prices encourage consumers to drive fewer miles with the cars they already own, especially SUVs and other gas-guzzlers.
Higher gas prices also give consumers an incentive to shift purchases of new cars to more fuel-efficient cars.
Bigger gas taxes stimulate greater investments in R&D to produce better hybrids, battery-driven cars, and other types of cars that rely less on gasoline.
In essence, raising the tax on gasoline encourage consumers and businesses to economize on all their margins of adjustment.
Tougher fuel standards encourage economies in the use of gasoline only by mandating the production of cars that get more miles per gallon of gasoline used.
However, unlike what happens with higher gas prices, owners of more fuel-efficient cars will increase rather than decrease how much they drive precisely because these cars are more fuel-efficient.
That partly offsets the reduction in gas consumption from driving more efficient cars.
If the government increased its spending on infrastructure when the economy has full employment, its main impact would likely be to draw labor, capital, and raw materials away from various other activities.
In effect, increased government spending under these employment conditions would "crowd out" private spending.
Measured GDP would not be much affected, if at all.
To be sure, the efficiency of the economy would rise if too little had previously been invested in this infrastructure, while efficiency would fall if this government spending were more wasteful than the private spending that was crowded out.
This analysis is a useful starting point to consider the effects of stimulus packages, such as the one proposed by soon-to-be President Obama.
Of course, the present situation is not one of full employment but of underemployment and excess unemployment, and employment is still falling.
How does one adjust the full employment analysis in the first paragraph to account for the presence of unemployed labor and capital? One extreme assumes no crowding out of other private spending when governments increase their spending with significant underemployment in the economy.
Increased government spending through a stimulus package under these conditions might even have a "multiplier" effect that would greatly increase, not crowd out, other private spending.
The reason is that the recipients of the government spending in turn would increase their spending, and thereby stimulate other activities.
Intermediate assumptions assume partial crowding out of other private activities, so a stimulus package would still increase employment and GDP.
However, the value, if any, of the increase would depend on how effectively governments spend the stimulus compared to the private spending that is crowded out.
Various assumptions about multipliers and crowding out, some implicit, are found in a recent "official" evaluation ("The Job Impact of the American Recovery and Reinvestment Plan") of the effects on GDP and jobs of President Elect Obama's stimulus package.
The authors- Christina Romer (incoming Chair of the Council of Economic Advisers) and Jared Bernstein (of the incoming Vice-President's staff)- assume in their calculations a stimulus package that spends a little over $775 billion on energy, infrastructure, health care, tax cuts, and direct payments to the unemployed and other low income individuals.
This stimulus is about 7% of the real GDP of about $12 trillion that they estimate for the 4th quarter of 2010 without any stimulus.
After working through their analysis, they conclude that this stimulus package will raise real GDP by 3.7 percent in the 4th quarter of 2010 compared to the situation without a stimulus package (Table 1, p.4), so that there is some significant crowding out of private spending.
They also assume that this 3.7 % increase in GDP would raise jobs at that time by about 31/2 million.
According to their calculations, with the stimulus package, unemployment would be at about 7% in the 4th quarter of 2010 instead of about 9 % without the stimulus.
Are these estimates reasonable? Let me first admit that in recent years I have not followed either the academic macroeconomic literature that estimates multipliers of different kinds from various spending and tax programs, or the literature that explicitly estimates crowd out effects of increased government spending.
Moreover, Romer and Bernstein claim that they assume basically the same multipliers used in the Federal Reserve's FRB/US model, and by a leading private forecaster.
Nevertheless, I believe that they overestimate the effects of this stimulus package on the economy, and that the same techniques would similarly overestimate the employment effects of other types of government spending and tax reduction policies.
One strange assumption in the Romer and Bernstein analysis is their assumption that households treat temporary tax cuts as permanent, although they admit that temporary tax cuts are mainly saved and not spent (p.6).
However, even without any stimulus from tax cuts to households and from business tax incentives, they still get an increase in 2.7 million jobs from this stimulus package (Table 2, p.6).
This is because in their calculations direct spending programs, such as on infrastructure or education, have the biggest effects on jobs per dollar of stimulus.
Perhaps their estimates of the stimulus provided by direct government spending are in the right ballpark, but I tend to believe that they are excessive.
 For one thing, the true value of these government programs may be limited because they will be put together hastily, and are likely to contain a lot of political pork and other inefficiencies.
For another thing, with unemployment at 7% to 8% of the labor force, it is impossible to target effective spending programs that primarily utilize unemployed workers, or underemployed capital.
Spending on infrastructure, and especially on health, energy, and education, will mainly attract employed persons from other activities to the activities stimulated by the government spending.
The net job creation from these and related spending is likely to be rather small.
In addition, if the private activities crowded out are more valuable than the activities hastily stimulated by this plan, the value of the increase in employment and GDP could be very small, even negative.
As Posner and others have indicated, there appears to have been a huge conversion of economists toward Keynesian deficit spenders, but the evidence that produced such a "conversion" is not apparent (although maybe most economists were closet Keynesians all along).
This is a serious recession, but Romer and Bernstein project a peak unemployment rate without the stimulus of about 9%.
The 1981-82 recession had a peak unemployment rate of about 10.5%, but there was no apparent major "conversion" of economists at that time.
What is so different about the present recession compared to that one, and to other recessions since then, that would greatly raise the estimated stimulating effects of government spending on various types of goods and services?.
It is relevant in answering this question that the origins of this recession were in the financial sector, and especially in the excessive mortgage credit to sub prime and other borrowers.
The widespread collapse of the financial sector, and the wholesale retreat from risky assets, clearly has called for a highly pro-active Fed.
But it is not obvious why this should lead to greater confidence in the power of government spending stimulus packages.
Of course, perhaps the prior emphasis on crowding out, and skepticism toward the stimulating effects of government spending, were wrong, or that recessions were too short and mild after the 1981-82 recession to call for Keynesian-type stimulus packages.
Time will tell whether I am right that a spending and tax package of the type analyzed by Romer and Bernstein may stimulate the economy as measured by GDP and employment, but that the stimulus will be smaller then they estimate, and its value to consumers and taxpayers could be even smaller.
Unions strongly supported President Obama during the presidential race, and naturally they expect some pay back.
A first step would be passage of the so-called Employee Free Choice Act that was supported by both President Obama and Vice-President Biden when they were in the Senate.
This act would provide, among some other things discussed by Posner, public voting by employees on whether they want to form a union.
I do not like public voting since workers might then be intimidated into voting in favor (or against) a union.
Secret voting gives a truer picture of worker attitudes toward unions.
While public voting and other pro-union legislation would tend to increase the number of union members, the economic and social forces are aligned against any major comeback by unions.
Union membership has been declining ever since 1954 when it peaked at 28% of total employment -unions' share of nonagricultural employment was then 35 %.
During the subsequent half century the union share declined more or less continuously, and now is only about 11%.
A mere 7% of private sector employees are unionized.
The one bright spot in the union picture is the growth in their share of government employees to about 37%.
The overall decline in union membership is seen also from its sharp decline with the age of individuals: the union share of workers is highest among those aged 45-64 at almost 15%, which significantly exceeds the 11% for workers aged 25-44, and the only 5% union share for workers under age 25.
Older workers are more likely to be in declining more unionized industries,while younger workers are in the newer less unionized sectors.
The development of what is essentially a non-union private sector of the American economy is due to basic economic and social forces, not to the politics of Congress and the President, for union membership declined under Democratic as well as Republican administrations.
The decline of jobs in manufacturing and in heavy industries, like steel and autos, clearly contributed to the overall decline in unionization since large manufacturing companies have been more unionized than other companies.
The shift of jobs to smaller service-sector firms has also had a big impact since unions have been unimportant in these firms; also significant was the deregulation of the communications, transportation and utilities industries.
The degree of unionization within each private sector has also fallen greatly, as can be seen from the rapid growth of non-union workers in the automobile sector, particularly among foreign carmakers who produce in the South.
For example, membership in the United Automobile Workers union (the UAW) has declined by more than one-third since 1970 as a much larger number of cars were imported from Japan and other countries, and as foreign companies set up mainly non-union plants in the Southern part of the US.
The growth of imports and the shift of employment overseas also have adversely affected the power of unions since international competition from cheaper producers has eroded the ability of unions to raise earnings of their members.
In the early days of the unionization movement, unions sometimes increased worker security by providing health and retirement benefits and payments to unemployed union members, and often enforced fair and non-discriminatory rules about discharge and promotions.
Non-union companies and governments are also now offering health and retirement benefits, and they have codified their personnel relations, which also considerably reduced the advantages of being in a union.
These forces apply to other developed countries as well, and many of them, especially Anglo-Saxon countries like Great Britain and Canada, also have had large declines in union membership.
The declines in union numbers is much less in some countries, like Sweden and Norway, where governments enforce large scale bargaining between unions and employer confederations.
But even in these countries, globalization has severely constrained the economic power of unions.
From the 1930s to the 1960s, unions enjoyed considerable popularity in public opinion.
 I remember being surprised when a graduate student to hear the arguments by Milton Friedman and some of my other teachers that unions were often monopolies that benefited their members at the expense mainly of other workers.
As various arguments hostile to unions became more common during the past half-century, public opinion shifted against unions.
Unions are considered too selfish, sometimes corrupt, as with the well-publicized troubles of the teamsters union, and they are no longer believed considered necessary to protect employee interests.
Given this radical shift in public opinion, and the fundamental economic  and social forces that contributed to the decline of unions, it is unlikely that the new Congress and new President would push for radical pro-union legislation, despite the impressive victory in the past election of the Democratic Party, and the strong financial and other support the larger unions gave to this party.
The purpose of terrorism, wherever it occurs, is to create.
fear that is disproportionate to the size of any terrorist risk.
As Posner.
indicates, many people have considerable fear of flying even under the best of.
circumstances.
This fear is increased when there is an attempt by a suicide.
bomber to blow up a plane, as happened in December on a Northwest flight going.
from Amsterdam to Detroit.
The fear is multiplied several fold when attacks are.
successful.
Air travel within the US, and between other countries and the US,.
took a nosedive after the 9/11, 2001 successful multiple attacks on planes.
going to New York and Washington.
Yona Rubenstein of Brown University and I have studied in.
detail reactions to the terrorist attacks on Israeli buses and restaurants.
during the Intifada period.
We show that bus travel in Israel fell.
significantly after every suicide attack on a bus, while the use of taxes and.
private cars increased.
Similarly, eating in restaurants fell rather sharply.
after a suicide attack at a restaurant, and this was partially replaced by take.
out orders.
To attract business, restaurants began hiring private guards.
stationed in front of restaurants, and these guards thwarted several attempted.
suicide bombings.
Airlines have to give a similar reassurance to air travelers.
by providing a level of security that allays many of their often magnified fears.
The optimal level of security on air travel is much higher.
than would be the case if an exaggerated fear of air travel due to.
possible terrorism were not so prevalent.
For this reason, checking of shoes,.
laptops, liquids, and even body scanners may be often useful, even when they.
are not so effective.
In addition, greater profiling of passengers would be.
desirable.
After the December bombing attempt, President Obama did order a more.
careful check of individuals coming from higher risk countries, such as Yemen.
That is a step in the right direction, but it is not enough.
Young males of.
Moslem background have committed virtually all the terrorist attacks against.
airplanes traveling to, or within, the US.
They should have the most invasive.
security checks.
Since it is not always apparent who is a Moslem, this.
profiling would often have to be proxied by country of origin, name, and other.
such identifying features.
Many law-abiding young Moslem males would be.
offended by having to go through an especially intensive security check, so.
they should be treated with the utmost respect.
It might also be publicized.
that such intensive procedures would make it easier for young Moslem males to.
get American visas.
Terrorist organizations would react to such profiling of Moslem males by trying to find substitutes.
Perhaps the closest.
substitutes are religious young Moslem females, and young non-Moslem males who.
are sympathetic to the terrorist cause.
Therefore, these groups should face.
tougher security checks than other passengers, but not as tough as young Moslem.
males.
Probably the optimal approach would be to inspect a fraction of members of.
these groups as carefully as young Moslem males, while the other members would.
be given a less complete check.
Other passengers, such as old women and men,.
and young children, do not need to receive onerous checks.
Since the vast.
majority of passengers fall into low risk categories, extensive profiling of.
the high security risks would reduce the overall security effort while at the.
same time increasing the protection of air travelers from terrorist attacks.
I recognize that explicit profiling is unpopular in some.
quarters, in part because the profiling of African Americans with regard to.
crime detection and prevention was abused.
Nevertheless, making judgments about.
the likelihood of different tendencies in various groups is an inevitable part.
of personal as well as business decision-making.
For example, advertisers know.
that men are more likely to watch sporting events than women, and film.
producers know that women are more likely to watch love stories, and men are.
more attracted to pornographic films.
Vigilance is needed to make sure that profiling of.
passengers is not abused, and that it is conducted politely.
    Yet it is unwise to give in to political correctness, and.
require all passengers to go through the inconvenience and loss of time.
involved in extensive airport security checks, when only a very small fraction.
of passengers pose a terrorist threat.
Research on happiness entered the economics literature about.
40 years ago, and the number of articles and books on this subject by.
economists has exploded during the past 15 years.
Various surveys in countries.
all over the world have asked individuals to indicate how “happy” they are,.
where they are usually given 4-10 possibilities, ranging from very unhappy to.
very happy.
Then these answers are related in various ways to income level,.
age, gender, degree of health, and many other characteristics.
I will.
concentrate on the results by income.
The earliest studies had data only for a few mainly.
developed countries.
They found that richer individuals within a country were.
generally happier than poorer individuals, but that average degree of happiness.
was not greater in richer countries than in poorer ones.
This led to various.
attempted explanations, but the most common was the claim that happiness.
depends on how rich a person is relative to others in the same country or.
region.
This was supposed to be the reason why average happiness did not appear to be higher.
in richer than poorer countries since one’s peers also have higher incomes in.
richer countries.
Such a relative income hypothesis was not implausible, but.
like many other seemingly plausible theories based on limited data, it turned.
out to be wrong when happiness data became available for many.
countries at very different stages of economic development.
Stevenson and Wolfers’ “Economic Growth and Subjective.
Well-Being”, published in Brookings Papers, Spring 2008, is the best discussion.
I have seen of happiness data for a large number of countries (I comment on.
their paper in the same volume).
They reproduce the result found with the early.
data that high-income persons within a country are much happier on average than.
poor persons.
They also find, however, contrary to earlier findings, that.
average degree of happiness is higher in countries with higher average per.
capita incomes, and that the relation between income and happiness among.
countries appears to be about as strong as the relation within countries.
Happiness in the United States does not appear to be.
exceptional in these cross-country comparisons since Americans are much happier.
on average than are individuals in much poorer nations.
The US data show the.
high average degree of happiness that is appropriate to its high average.
incomes.
Technically, what I mean is that the US falls about on the curve that.
bests fits the relation between happiness measures and incomes –see Stevenson.
and Wolfers, Figures 4 and 5.
They argue, correctly I believe, that it is best,.
as in these figures, to compare the relation between changes in degree of.
happiness with percentage, not absolute, changes in levels of average incomes.
across countries.
A $1000 increase in per capita income means a lot more to.
persons in poor countries than to those in rich countries.
On the whole, the data also indicate that reported average.
happiness tends to rise over time within a country as per capita incomes rise,.
or falls when per capita incomes fall, as in countries after the fall of.
communism.
One apparent exception is the United States, where reported average.
happiness did not increase during the past three decades even though average.
incomes did.
Stevenson and Wolfers provide a number of possible reasons why this.
occurred, including non-comparable data over time, and increasing income.
inequality in the US during this period.
Still, this result remains something.
of a puzzle, given all the other evidence on the positive relation between.
reported happiness and income.
The big question that is not answered by their results, or.
by those of other economists who have used happiness data, is what happiness data tell us.
about wellbeing.
That is, about lifetime “utility” of persons who differ by.
income and other characteristics? Virtually all economists who have written on.
happiness automatically assume that it is a quantitative measure of utility,.
and that this provides a way to make interpersonal comparisons of utility and.
wellbeing.
But I argue in my comment on the Stevenson-Wolfers paper that.
“happiness”, even if accurately measured by these surveys, is not the same as.
utility or wellbeing.
Rather, happiness may be an important component of.
utility that often, but not always, moves in the same direction as utility.
I use health as an analogy to happiness.
Individuals.
generally get more utility when they expect to live longer and are in better.
health.
However, they do not try to simply maximize how long they live and the.
quality of their health since they may trade off lower life expectancy for.
higher income by taking jobs with greater risks to their lives, or for.
pleasures of food, drink, driving fast, and other activities.
The same is true.
for “happiness.
Yes, individuals generally prefer to be happier, but sometimes.
they are willing to trade off happiness for other behavior that gives them.
greater utility.
This distinction helps explain why so many persons want to.
immigrate, and many have immigrated, to the United States (and other richer.
countries).
Their lives are often very difficult for a number of years since.
they usually come with little money, do not have jobs, may not know English,.
encounter discrimination, and experience other obstacles and difficulties.
They.
may be quite unhappy for a number of years-I have not found happiness data for.
immigrants- but many of them stick it out, while the unhappiest immigrants may.
return to the countries they came from.
The immigrants who remain do not.
believe they made the wrong decision to immigrate, but anticipate that their.
lives will get better, and especially that their children will have much better.
opportunities in the United States than they could have had in their home.
countries.
I am also doubtful that the decline since 1970 in reported happiness.
of women compared to men in many countries is an indicator that the utility of.
women has declined, either absolutely or relatively.
Many women who work as.
well as do most of the housework and childcare do not report themselves as.
happy, but they reveal a preference for the higher income and status that comes.
from working compared to staying home full time.
My conclusion is that happiness data have been useful, and.
the relation with income is plausible.
Yet happiness data do not enable us to.
directly measure utility and wellbeing.
I admit I do not know why average.
degree of happiness has not risen in recent decades in the US as incomes rose.
Perhaps the considerations advanced by Stephenson and Wolfers explain why, or.
perhaps utility has in fact not improved over time, or perhaps more likely happiness.
statistics are deviating from unmeasured increases in utility.
President Obama, in his State of the Union Address last.
week, indicated that he would assist small business, particularly to encourage.
their hiring of additional workers.
Two days later he proposed a $33 billion.
tax credit to small businesses that increase their hiring.
I consider small and.
medium size business the backbone of any dynamic economy, so I sympathize with.
the President’s desire to encourage these businesses.
However, his proposal is.
not a good way to do this.
Obama’s aims are laudable: to.
simultaneously increase employment, reduce unemployment, and encourage the.
expansion of small and medium sized businesses.
Yet, as an.
employment-increasing plan, the President’s approach has many problems, and is.
likely to have only limited impact.
This is partly because while $33 billion is.
a lot of money, it is less than ¼ of one percent of American GDP.
Yet even a.
much larger sum would have a small impact on employment.
One reason is that the.
subsidy proposal gives small business some incentive to fire some employees,.
and then later to replace them with unemployed workers for whom they can.
collect the subsidy.
The unemployed hired under.
the subsidy program would likely receive higher pay than they would get.
otherwise because companies compete for these workers to qualify for the.
subsidy.
Some workers might then remain unemployed rather than accept jobs in.
order to get the higher pay after the program is implemented.
Employed workers.
at small (and even large) businesses might quite their jobs and become.
unemployed in order to become subsequently employed at other small companies in.
order to become eligible for any higher wages received by new hires.
The.
President is aware that efforts will be made to game the proposal, and he.
proposed various safeguards.
However, new ways will be discovered to.
get around the restrictions that would reduce the   net   job creating potential.
Further efforts to close loopholes.
would lead the government to become more and more involved in the employment.
decisions of companies.
Smaller businesses are an.
important source of innovation and progress.
Businesses like Microsoft,.
Wal-Mart, Apple, Google, and many others introduced game-changing innovations.
when they were very small that enabled them to grow very large, and they raised.
overall productivity.
This is why it is so important to promote startups and.
other smaller businesses in an efficient and effective way.
An effective.
approach has several components, and overall the US looks quite good compared.
to other countries.
According to World Bank estimates, the US ranks 8  th.
out of the more than 180 countries they consider on their overall index of the.
ease of starting a business, whereas, for example, Italy ranks 78  th  ,.
and China 89  th  .
On the other hand, the US ranks only 25  th.
on the ease of getting construction permits, and 61  st   on taxes.
The US is tied for first.
place on the ease of employing workers.
It is much easier for American small.
and medium size business to reduce their employment during bad times than it is.
for similar-sized companies in Europe, Latin America, or India.
This helps.
explain why employment fell, and unemployment rose, more sharply during this.
recent recession in the US than in say Germany, Italy, and many other countries.
that have much less flexible labor markets, even when other countries.
experienced larger recession-induced falls in GDP.
Unfortunately, several.
proposals in Congress, and others mentioned by the President, would make it.
less attractive to start a business, or expand a smaller business.
Although it.
is especially unclear after the election of a Republican senator from.
Massachusetts what any final health care bill will contain, some of the.
proposals would require all companies, with few exceptions, to provide health.
insurance for their employees.
The fact that many small businesses do not now.
give their employees health insurance indicates that such a requirement would.
raise their costs, and reduce their employment.
Small and medium sized.
business owners are sensitive to capital gains taxes, increased taxes on larger.
incomes, and high rates of taxation on estates.
Yet leading members.
of Congress have advocated increases in capital gains taxes, adding an.
additional tax on ”high” incomes, and a return to higher estate taxes.
These.
proposals would hurt all higher income persons, but might be particularly.
discouraging to startups,and to the expansion of smaller businesses.
I believe that smaller.
businesses can competes effectively against more sluggish larger and more.
established businesses without getting special privileges, such as the.
President’s additional proposal to subsidize bank loans to small businesses.
However,.
small business does thrive much better in an environment where success is not.
taxed at high rates, and where regulations and mandates do not have a.
disproportionately large effect on their costs and profits.
Invention of the telegraph and telephone in the nineteenth.
century had revolutionary impacts on the speed of communications among.
individuals separated sometimes by vast distances.
The Internet and wireless transmission.
has not only vastly extended the ease of communicating quickly, but also.
provides quick access to information on a scale far surpassing anything.
available before.
“Googling” is a new word not only in English but in many.
other languages as well that means using Internet search engines to discover.
information on an endless number of subjects.
These include finding.
the cheapest online price for tennis rackets, cars, hotels, and many other.
goods and services, finding a time series on GDP per capita for the United.
States, China, and other countries, discovering when a famous phrase was first.
used, finding out what is contained in the House of Representatives’ and the.
Senate’s versions of the health “reform” bills, reading criticisms of government.
policies, getting email addresses for particular individuals, and tens of.
thousands of other purposes.
I would find it virtually impossible to fit.
posting on our blog into a busy teaching, research, and speaking schedule.
without quick access through the Internet to generally reliable information.
Although newspapers have frequently been subject to various.
forms of censorship, Internet access is affected by hackers as well as by.
censors.
We were forced to change our website address and the technical manager.
of this blog because the old website was hacked so much that posting of.
commentary became impossible (we do not know who was doing this).
Of course,.
various governments try to deny their citizens access to websites that they.
consider too critical of government policies.
A few weeks ago I received an.
email from someone in China complaining that he and his friends no longer could.
access our website because it was being blocked by the government.
I was.
surprised by the claim, and yet a little flattered that we were considered.
important enough to be blocked.
I suggested he try our new website address, and.
he discovered it was available with no problems.
Access was prevented by.
hackers on our old website rather than by the government.
Google recently complained about Chinese censorship, and.
claimed that hackers from China gained access to gmail accounts of some persons.
critical of government policies.
As a result, Google threatened to shut down.
its Chinese website.
It is difficult to determine when the censorship goes so.
far that the benefits of making the Google search engine (or other online.
facilities) available to the Chinese population is no longer worth accepting.
the censorship.
My own view is that censorship has to be very extensive and.
destructive before the benefits of withdrawing Google exceed the costs to the.
population of losing access to an important information search engine.
This weighing of benefits and costs is especially pertinent.
since many Chinese Internet users, and presumably also those in other countries.
with extensive censorship of the Internet, have learned how to “scale the.
wall”.
That is, they discovered ways to get around Internet restrictions by.
using proxies, virtual private networks, and other tools that allow computers.
to access the Internet through remote servers located outside China.
The strong efforts of some countries to try to block.
Internet access to articles and discussions that their governments do not want.
their citizens to see indicates the scope of the knowledge and information the.
Internet makes available that was unavailable in the past.
This leads me to.
conclude that generally Google and other companies experiencing censorship.
should stick it out.
However, perhaps they should fund research on finding.
additional ways to “scale the wall”.
During this financial crisis, various financial markets have.
been criticized, some of them justifiably, as being much less efficient than.
had been claimed.
Nevertheless, search engines, social networks over the.
Internet, like Face Book and Twitter, apps, and other electronic forms of.
communication, have greatly improved the efficiency of many markets, including.
financial markets.
For example, the open outcry system on stock and futures.
exchanges to buy and sell securities, like the New York Stock Exchange or the.
Chicago Mercantile Exchange (CME), was made obsolete by much faster and more.
efficient electronic communication (see Leo Melamed’s book, “For.
Crying Out Loud” for a fascinating discussion of the battles to get the CME to.
go electronic).
Retail and other companies continue to expand their online.
presence and websites in recognition of the growing share of their business and.
sales that is conducted online.
Persons in small towns with only a few stores.
often now have access to the same variety of goods and to the price competition.
that used to be available only to residents of large cities, where many stores.
competed for their business.
Many persons lament the decline of newspapers and magazines.
due to the migration of help wanted ads and other advertisements to the.
Internet.
Some politicians and public intellectuals have even proposed greater.
subsidies to newspapers in order to slow down their decline.
Clearly, top.
papers like the New York Times, Wall Street Journal, Financial Times, and.
Washington Post often have in depth reporting on various subjects seldom found.
on television or radio.
However, the Internet has a greater variety of news.
presentations and articles on specialized subjects, and much more up to date reporting,.
than is available even in the best newspapers.
The Internet has been remarkable.
in being able to tap into the desire of people from all walks of life to write,.
through blogs, social networks, and other ways.
Hundreds of economists have blogs,.
although many are not very good, and the same is true for other fields.
Some blogs.
compile the scholarly citations of other individuals who are blogging, in order.
to give readers at least one measure of their authority and reliability.
I am old fashioned enough to read three newspapers in hard.
copy each day, but the overwhelming majority of young people seldom read any.
major newspapers.
This difference between the young and old in their reading.
habits predicts a continuing further decline in newspaper circulation, and a.
further migration of news reporting and opinion pieces to the Internet.
On the.
whole, this is a good development from the point of view of increasing.
competition among news and opinion sources, although it is sad to see the.
decline of an industry that has been so crucial historically in providing.
information and preserving political freedoms.
The current issue of the Economist recognizes that the.
dramatic change in labor force participation of women is one of the most.
important transformations in the economic and social worlds during the past.
generation.
I will discuss the main forces behind this change, and also.
consider whether the United States needs additional public policies to.
accommodate women at work.
Several crucial changes have contributed to transforming the.
position of women.
Perhaps the most fundamental during the past half century.
were technological advances, such as the computer, and the shift in richer.
countries away from manufacturing and toward services.
These developments put.
much greater emphasis on knowledge and information as opposed to physical.
strength and heavy work, which in turn greatly increased the importance of.
higher education.
Women have shown a greater capacity than men in completing.
universities and four-year colleges, largely because women have greater and.
less variable non-cognitive skills, such as study habits.
While the fraction of.
men with four-year college degrees in the United States has stagnated since.
1970, the fraction of women with these degrees has exploded, so that now women.
receive almost 60% of the four-year degrees in the United States compared to.
only 40% in 1970.
Similar shifts in higher education toward women have taken.
place in European countries.
Related trends are occurring also in developing.
countries, even in fundamentalist Iran.
The increased importance of skills and knowledge has greatly.
affected parental fertility and investment decision.
As parents have recognized.
the importance of a good education and other training to succeed in the modern.
world, they have opted for fewer children since giving extensive education to.
many children would be too expensive.
Therefore, modern parents have lower.
birth rates than parents did in the past, and instead invest much more in each.
child.
This has produced sharply declining birth rates almost everywhere, and.
below replacement fertility rates in about 90 countries that include all.
European nations, much of Asia, including China, Japan, and South Korea, and.
even a few mainly Moslem nations.
The declines in fertility and shift toward greater.
investment in children have been accelerated by the growing education of women,.
who tend to be particularly concerned about providing a good education to their.
children.
This helps explain why educated women have relatively few children.
and invest more in the schooling of each child.
In addition, the time spent by.
educated mothers in child rearing is more expensive since they can earn more in.
the labor force.
This too helps explain why women who graduate from college.
have always tended to have fewer children than other women did.
These trends toward greater emphasis on knowledge and.
information, low fertility, and much greater education of women, have all.
contributed to the large growth in the labor force participation of women.
during the past several decades.
For example, about 80% of American women with.
a college education are in the labor force compared to less than 50% for female.
high school dropouts.
Although women are more likely to work part time than.
men, the gap in their labor force participation rates has greatly narrowed.
The recession affected men much harder than women since men.
are more likely to work in construction and manufacturing, two sectors.
especially hit hard.
As a result, in recent months women have made.
up about half the labor force in the United States.
This fraction will fall as.
the economy recovers, but the trend is still strongly toward gender equality in.
labor force participation, and perhaps even toward a majority of participants.
being women.
This is partly because low skilled men have been withdrawing from.
the labor force.
Although women still lag by a lot in their representation in.
the top managerial positions, they have greatly narrowed the gap between their.
full time earnings and that of men.
Wives earn more than their husbands in perhaps 30% of all American families.
with two earners, and that percentage.
continues to grow.
American women are starting new businesses at a much faster.
rate than they did in the past, and the number of female heads of large.
companies, although small in number, has been growing.
Although the United States has instituted various policies.
to help working women, unlike Sweden and other Scandinavian countries it does.
not provide extensive public subsidies to childcare, does not have a system of.
legislated paid leaves to women that allow them to care for newborn children,.
and does not guarantee that they can get their jobs back when they return to.
work.
Yet, contrary to many claims, I believe that the less interventionist.
American approach may not have impeded, and may even have encouraged, women’s’.
progress in the labor force.
Despite all the subsidies to childcare in Scandinavian.
countries, the US still has higher fertility rates than Sweden, Norway, or.
Denmark, and also than other European countries.
Moreover, the labor force.
participation rates of women in the US are not much below those in Scandinavian.
countries, especially after considering that American birth rates are higher,.
and that some women in Scandinavian countries are counted as having jobs even.
when they are on paid child care leaves.
Married women in the United States with at least a high.
school education can “afford” to pay for childcare, and forego employment for.
months or even years after having children, since they are usually married to.
husbands who have decent to high earnings.
Many of these women do leave work.
for a while to care for their children, even when that means they reduce their.
opportunities to advance when they return to work.
I do not believe there is.
much of a case for the government to pay these married women to take leaves.
from work when they have children, or guarantee them their jobs when they.
return to work.
Government policies should be rather neutral about whether.
women leave work to care for children or continue to work.
On the other hand, public policies to help children of.
poorer women, including children of many unmarried women, may be justified since.
these women tend to under invest in their children because they have limited.
incomes and often low education levels.
Childcare assistance and other subsidies.
to investments in the young children of these women could well have a high social.
return.
The US does subsidize childcare programs for low-income families, and.
could increase the subsidies to various head start programs.
But such interventions would not justify the Scandinavian.
approach of generously subsidizing all women, including well off women, to take.
paid leaves when they have children.
Despite all their job guarantees after.
they return to work from childcare leaves, private sector opportunities for.
Scandinavian women, and women in several other European countries, are limited.
For example, about three-quarters of employed women in Sweden work for the.
government compared to one-quarter of employed men, and women comprise a much.
larger fraction of senior managers of American companies than of Swedish companies.
The Economist in its January 20  th   issue has an excellent discussion of many issues related to inequality within and between countries.
I believe the main issues related to judging inequality and its changes over time come down to deciding whether the inequality is of the good or bad kind.
Many people, especially academics and other intellectuals, find the phrase “good inequality” jarring because they can hardly think of any aspect of inequality as being “good”.
Yet a little thought makes clear that some types of economic inequality have great social value.
For example, it would be hard to motivate the vast majority of individuals to exert much effort, including creative effort, if everyone had the same earnings, status, prestige, and other types of rewards.
For example, many fewer individuals would engage in the hard work involved in finishing high school and going on to college if they did not expect their additional education to bring higher incomes, better health, more prestige, and better opportunities to marry.
On my first trip to China in 1981 I visited several factories in the Beijing area.
All the employees in each factory received more or less the same pay, and they could hardly ever be fired for bad work or absenteeism.
This was an extreme eqalitarian approach to compensation, and the result was that no one worked hard, even though Chinese workers have traditionally been known for their diligence and energy.
The picture was more or less the same in all of the factories I visited, and there was also little difference in pay between factories.
Urban China was then highly eqalitarian, but it was also extremely poor because of very low productivity.
China’s economic miracle has been in good measure based on allowing much greater inequality in pay and incomes to motivate greater productivity in both urban and rural areas.
Bad inequality is the other side of good inequality, for it is inequality that reduces efficiency, productivity, and utility.
About 80% of China’s vast population in 1981 lived in rural areas, yet it was then virtually impossible for anyone born in rural China to gain legal residence in a city, even though farm incomes averaged less than half of urban incomes.
The result was a large inequality between urban and rural areas that lowered overall efficiency and productivity.
Urban-rural inequality has if anything grown over time as China boomed during the past 30 years because of the rapid growth in urban incomes, and a slower growth in farm incomes.
People born on farms are still at an artificial disadvantage since rural schools tend to be of low quality, and it is still not easy, although much easier than in the past, to gain legal residency in cities.
Earnings inequality in the United States and many other countries has increased greatly since the late 1970s, due in large measure to globalization and technological progress that raised the productivity of more educated and more skilled individuals.
While the average American college graduate earned about a 40% premium over the average high school graduate in 1980, this premium increased to over 70% in 2000.
The good side of this higher education-based earnings inequality is that it induced more young men, and especially more young women, to go to and finish college.
The bad side is that many sufficiently able children could not take advantage of the greater returns from a college education because their parents did not prepare them to perform well in school, or they went to bad schools, or they lacked the financing to attend college.
As a result, the incomes of high school dropouts and of many high school graduates stagnated while incomes boomed for many persons who graduated college, and even more so for those with post graduate education.
Although inequality in many developing and developed countries grew a lot during the past 30 years, world income inequality actually greatly declined.
This is because the per capita incomes of developing countries with big populations, including Brazil, China, India, and Indonesia, grew much more rapidly than did the per capita incomes of the rich Western countries and Japan.
World poverty declined enormously, and so did the income gap between poorer and richer countries.
This meant a large decline in the bad kind of world inequality.
A sizable fraction of the increased income and wealth inequality since the mid 1990s in the United States and some other rich countries was due to the explosion of incomes in the financial sector prior to the financial crisis.
Most people are willing to accept huge incomes and vast amounts of wealth when they feel these are earned, such as with Steve Jobs, Bill Gates, and Warren Buffet.
However, they are justifiably unhappy about large pay to CEOS who badly manage their companies, huge bonuses and stock options to executives who took unreasonable risks and then were bailed out by the Fed and the Treasury, and other big paydays for work that (perhaps unjustly) does not appear to be particularly socially valuable.
Controversy over inequality arises mainly because some types of inequality are not easily classified as good or bad.
For example, would an increase in the marginal income tax rate from 35% to 45% on individuals earning over $500,000 have much of an effect on how hard and how long they work, and their efforts to legally (and illegally) reduce the income they report to tax authorities? Those who support this kind of tax increase deny that it would have a big effect; while opponents are just as certain that it would significantly discourage effort.
The evidence is far from conclusive, but studies by Edward Prescott, Richard Rogerson (see his “The Impact of Labor Taxes on Labor Supply”: an International Perspective”), and others of the relation among different countries between the amount of work and average tax rates on earnings is convincing that tax rates in general have strong negative effects on effort.
However, this evidence is silent on how much higher tax rates on individuals with very high incomes affect their effort and other behavior.
Some authors have claimed a sizable negative relation between social and economic inequality and the healthiness of a population (for an early influential work see MG Marmot’s, “Understanding Social Inequalities in Health”, 2003).
I have no doubt that individuals who try but fail to climb the income and prestige ladder may suffer stress and other causes of poor health.
On the other side, the stress and health of those who succeed tends to be improved by their success.
The data on happiness and on health show conclusively that higher income persons are both happier and in much better health than others.
Less clear is whether narrowing the degree of inequality in health and status, while maintaining the incomes and social ranking of the poor, would significantly improve overall health.
I am doubtful, but the evidence is not yet conclusive.
Results on standardized tests are becoming a common way to evaluate student performance in different school systems, such as in different states of the United States.
These tests are especially important in international comparisons of student performance since school systems differ so much across countries.
International tests in mathematics, science, and reading have been given to high school students in different countries every few years since about 50 years ago.
The well-know PISA tests started in 2000, and the number of countries included has been expanded by 2009 to over 60.
Scores on standardized tests have many well-discussed problems from the viewpoint of measuring how much students learn.
For example, teachers may concentrate on materials that are likely to be on a test rather than on other possibly more important knowledge- this is called “teaching to the test”.
Still, standardized tests are a much better way to compare achievements among students, and especially among students in different countries, than are various measures of average years of schooling- the most commonly used measures in international comparisons.
The US spends much more per student than any other country (with a few small exceptions).
Yet from the very beginning, American students have generally performed below average compared to students from the richer countries that comprise the OECD countries.
In 2009, the average American student did a little better on the PISA tests: they were much above students from the great majority of the 65 countries that participated, and were at, but no better than, the average level of OECD countries.
Another interesting case is that of Chile.
Some critics have used Chile’s below average performance on the PISA tests to oppose Chile’s extensive use of school vouchers.
Chile’s performance may be disappointing, but in 2009 Chile did the best of all Latin American countries (Chile was a little behind Uruguay in math), and much better than Brazil, Argentina, and Mexico (except again in math where Chile did about the same as Mexico), even though Argentina has a much longer tradition of emphasizing education.
Japan and other Asian countries typically place much greater emphasis on rote learning and memorization than does the United States and some European nations.
South Korea, Japan, and Hong Kong rank high on the PISA tests, much higher than the US.
However, America is the world leader in game-changing creativity and innovations, far above these other countries.
Perhaps America’s lead is related in part to the emphasis that the American education system places on creative thinking rather than memorizing what famous people have said.
Russia provides another interesting example.
Russia has produced many outstanding mathematicians and scientists, yet the Russian Federation ranks quite low on the PISA tests in mathematics and science.
Modern economies have enormous specialization by skill, type of industry, and various other characteristics.
This implies that an economy can perform at a high level even though not everyone is well educated in mathematics, science, reading, or other fields.
It is sufficient if enough young persons are prepared in these subjects to supply enough trained men and women for the jobs and other tasks that require specialized training.
Such specialization implies that not only are the average scores for different countries relevant, but so too are measures of the distribution of scores among students within a country.
Calculations by William Hubbard of the University of Chicago Law School for the 2003 PISA results do show that the US ranks somewhat higher relative to other countries when comparing the variances in scores among students in the same country than when comparing average scores.
That the distribution of scores is important does not deny that average scores may also matter a lot in modern economies that rely extensively on the labor force’s command of knowledge and information.
to test this hypothesis, a few economists have related average scores on various international tests in math and science, along with average years of schooling and other variables, to subsequent growth in per capita incomes.
Eric Hanushek of the Hoover Institution pioneered this approach, but the latest study I know of is by Appleton, Atherton, and Bleaney, “International Test Scores and Economic Growth”.
They show that higher scores by different countries are followed in later years by moderately higher growth rates in GDP, holding constant initial per capita incomes, average years of schooling, and some other variables.
Test scores are far more important than average years of schooling in predicting subsequent economic growth.
International comparisons are always somewhat suspect because differences across countries that are not observed by economists rather than the variables that are measured may be producing the results found.
For this reasons, Appleton, Atherton, and Bleaney also relate changes over time in test scores within countries to subsequent changes in their economic growth rates.
They find much weaker results in these within-country comparisons, which is not uncommon.
Despite all the qualifications, scores on standardized tests, like the PISA tests, are much more effective ways to compare student achievements in different countries than are average years of schooling and other measures of school years completed.
As I indicated earlier, the mediocre performance of the average American student on the PISA and other tests may indicate only that the US school system emphasizes creativity and independent.
However, I strongly believe that it is also evidence of the mediocre performance of many American schools.
International test scores have been used for decades to push for improvements in the schools available to the lower third of American students through the spread of charter schools, school vouchers, and stronger incentive to teachers, students, and parents.
The 2009 PISA test results indicate that some progress is being made in American schools, but considerable room for improvement still remains.
Some enthusiasts for microfinance have sold it as an important component of the solution to poverty in developing countries.
It often does help lower poverty, especially of poor women, but it cannot ever make more than a small contribution to overcoming poverty.
As I said on October 29  th   2006 when we posted on microfinance, “Economic growth requires secure property rights, encouragement of private enterprise, openness to international trade, stimulation of education, limited and sensible regulations, and reasonably honest government.
Microfinance makes only a small direct contribution to any of those variables”.
Others may subtract some of the variables I mention, and add different ones, but no serious development economist would suggest that microfinance would have a major role in the economic development of poor economies.
Nor did microfinance invent small-scale loans to poor farmers and others.
Local moneylenders in India and elsewhere have been doing that for centuries.
However, the Grameen Bank founded in 1983 by Muhammad Yunus discovered several rather new ways to lend to the poor.
This bank loaned primarily to poor women, usually Moslem women.
Local moneylenders generally ignored Moslem women, either out of prejudice against women managing their own (small) businesses, or for other reasons.
The Grameen Bank also encouraged the formation of credit groups of a few women, about five members typically, that guaranteed repayment of the loans made to each woman in the group.
Members of a group pressured other members to repay since they all might suffer if any member defaulted.
With these guarantees, a group did not have to put up any collateral for the loans made to its members, a big advantage to poor women.
Although microfinance has had only a small impact on overall poverty in any country or region, studies suggest it has helped the Moslem women who received small loans.
Families in which Moslem women have received microfinance improved the education of their children, especially the education of daughters, spent more on medicines, and accumulated more gold, which is usually the primary asset of Moslem women in Asia.
Yunus and many others have criticized the participation of for-profit lenders in microfinance.
Yet in fact, for-profit lenders have always participated, although on much smaller individual scales than the companies Posner mentions (Compartamos and SKS Microfinance) that have hundreds of millions of dollars of capital.
For-profit lenders have charged ”high” interest rates, but they have usually been flexible in allowing borrowers to take longer to repay if they were experiencing temporary financial difficulties.
One would expect these lenders to adapt some of the lending innovations pioneered by the Grameen Bank and other microfinance lenders if the innovations improved repayments or helped in other ways to raise profits.
Although examples have been given of excessively high interest rates and other questionable terms changed by some for-profit micro lenders, it is not apparent that such behavior has been common.
Poor farmers are accustomed to the borrowing process because they need to borrow in order to finance their outlays on seed and other farm inputs that occur months before they harvest rice or other crops to sell.
Unscrupulous lenders could not easily fool these borrowers.
Even with well-informed borrowers, commercial interest rates will be high to borrowers with poor collateral, and to borrowers whose incomes fluctuate greatly due to the weather and other factors.
Government-imposed ceilings on interest rates and other lending restrictions are likely to prevent such borrowers from gaining access to funds, unless governments or NGOs provide subsidized lending.
This is why ceilings on interest rates and most other lending restrictions recently introduced or proposed will end up doing more harm than good.
After the financial crisis began, similar claims about exploitation of ignorant consumers were levied against providers of credit cards and mortgages.
These claims motivated the consumer “protection” and other parts of The Dodd-Frank Wall Street Reform and Consumer Protection Act passed in July 2010.
Yet little evidence suggests that borrowers were widely fooled by small print on borrowing contracts, by how interest rates were calculated, or by other claims about consumer exploitation (see my post on July 11, 2010).
The consumer protection provisions of this Act will do little good, and will raise borrowing costs to the consumers who can least afford it.
Governments in countries with substantial microfinance should be mainly concerned about increasing the degree of competition among micro lenders in more remote rural areas.
For monopolies do charge excessively high interest rates, and require borrowers to satisfy other onerous terms.
Non-profits and other lenders should be encouraged to operate in localities where risk-adjusted interest rates are high, and anti-monopoly agencies should investigate possible collusion among lenders in these localities.
Such policies would be more effective than trying to discourage for-profit lenders from making microloans.
The fiscal crisis in many states of the United States has led these states to cut their funding of public colleges and universities.
The newly elected governor of California, Jerry Brown, has proposed to significantly cut state funding to California public colleges and universities, the most extensive and prestigious public system of higher education in the United States.
To compensate at least in part for the cuts in public funding, tuition at American public institutions of higher learning is increasing significantly.
Something similar is going on in countries where cash-strapped central governments finance most university expenses.
The newly elected British coalition government of Conservatives and Liberal Democrats last month approved a contentious bill that allows universities beginning in the fall of 2012 to raise tuition to a maximum of more than $14,000 a year compared to present levels of about $5000.
Note that the average tuition and fees at American four-year public institutions was about $7,500 for in-state students, and it was over $12,000 for out-of–state students.
Students at different British universities opposed the proposal to raise tuition by occupying university buildings, picketing the British Parliament building, and engaging in various acts of violence, but the bill passed anyway (by a close vote).
Tuition and other fees at public colleges and universities generally are much less than the cost of providing the education.
To be sure, tuition and fees at private nonprofit institutions are also generally considerably less than education costs.
The crucial difference, however, between public and private institutions is that the gap between costs and tuition revenue of private schools is mainly covered through voluntary contributions from alumni, private foundations, and others, whereas a sizable fraction of the gap at state-run schools is paid out of taxes imposed on state residents.
The case for higher tuition for students at state-run institutions of higher learning is powerful.
A compelling reason to raise tuition at the present time is that many states have serious fiscal problems because their overall spending increased during the past decade at unsustainable rates.
They are searching for various ways to cut their spending, and there is little reason why public spending on universities should be exempt from this fiscal pressure.
The average college graduate earns much more than the average individual who does not go to college.
As a result, college graduates earn a lot more on average than does the typical taxpayer.
It is a questionable system of regressive taxation when taxes are spent on subsidizing individuals who will earn more than those paying the taxes.
To be sure, without offsetting subsidies, high tuition discourages poorer students from attending college.
These students should not be priced out of higher education, but it is not sensible to insure that these students can attend by charging low tuition to everyone, including students from higher income backgrounds.
Rather, poor students alone should be directly subsidized with grants, and/or extensive loan programs could enable all students to borrow to finance their education.
They would then repay any loans from their higher earnings after they finish school.
Perhaps individuals who earn less would have to repay a smaller fraction of their loans.
The British bill that raised tuition does not require students to pay any tuition upfront since they could borrow all their tuition from the government, and then pay back gradually after they finish school.
The US federal government also has an extensive program that makes loans to students at both private and public colleges and universities.
Another argument commonly made against further increases in tuition is that tuition already rose substantially during the past decades, even after adjusting for increases in the price level.
For example, tuition and fees at the University of Illinois, Urbana increased from $4770 in the academic year 2000 to $13, 508 in the 2011 academic year.
However, the growth in tuition was mainly a response to the large increase in the earnings of college graduates compared to individuals who never went to college.
Salaries and other benefits paid to professors are the main cost of providing a college education, and these benefits went up by a lot because earnings of college graduates increased by so much since 1980.
The growth in earnings of college graduates, and of persons with a post-graduate education, made a college education a very good deal, despite the increases in tuition, because the gains from going to college increased by much more than the costs of going.
A quite different argument often made in support of subsidizing students is that individuals with higher education produce large benefits to others in their country or region (positive “externalities”) as well as to themselves.
Yet while individuals with advanced degrees who do research and development work sometimes produce important innovations that confer benefits on society as a whole, the US and many other governments already subsidize R&D spending.
Similarly, governments subsidize college-educated (and other) individuals who make films, write books, and produce artwork.
Perhaps these subsidies should be increased, but that is distinct from subsidizing all college students with low tuition.
For if society benefits from having college-educated persons engaged in particular activities, such as research, it is better directly to subsidize spending on these activities (perhaps more generously than at present) than to subsidize all college students, including, for example, salesmen, bankers, and lawyers.
The traditional bookstore is doomed by e-readers and online sales of hard copy books.
I use the word “doomed” in the same sense that online digital sales of movies and music have doomed movie rental stores, movie theatres, and stores that sell albums of music.
Doomed does not mean that these stores will quickly, or ever fully, disappear, but that they have received deadly blows from Internet competition.
Joseph Schumpeter, an outstanding economist in the first half of the 20  th   century, originated the term “creative destruction” to describe new technologies and other forms of new competition that wreak havoc on older and established industries.
The process is creative because it provides consumers and producers with more effective ways of satisfying their wants.
The process is at the same time destructive because it greatly reduces the value of services and products provided by older industries.
Extreme examples of creative destruction from the 20  th   century include the complete substitution of cars for horses and buggies, movies with speaking for silent movies, and computers for typewriters.
Less extreme are the large reduction in clerical and secretarial staffs caused by the development of computers and the Web, and the sizable reduction in demand for milk and eggs induced by better information on the health value of low cholesterol diets.
A similar creative destruction process began for bookstores with Amazon’s development of online book sales that offered huge inventories of books, convenience of purchase, speedy deliveries, online reviews of books, and various other services that made it more efficient and often cheaper to buy books online rather than in bookstores.
Sales of books online started slowly, but they have accelerated as consumers became more familiar with the process of buying books (and other goods) online.
I first started using Amazon at my summer home since it is not near any bookstore.
Discovering the convenience of buying books online, I now buy online all year, although I still enjoy visiting bookstores.
Effective online readers, like Amazon’s Kindle, and Apple’s iPad, are only a few years old, but they have become big hits since they can be used both to purchase books online, and to read books in digital form.
Hundreds of books can be stored digitally in a single Reader that weighs less than a couple of pounds.
They are especially valuable when traveling, but are useful when reading in bed or eating, and also with traditional reading when seated on a comfortable chair.
They are particularly useful for individuals with weak eyesight since print size can be easily adjusted.
This is why digital readers will appeal eventually even more to older persons than to others, although mainly younger persons are the ones who so far have bought digital readers because old persons are less familiar with digitalization.
I do not expect bookstores to rapidly disappear the way the production of silent movies virtually ceased once talking movies were created.
However, I do expect an accelerating decline in the number of bookstores as many close down due to bankruptcy and excessive losses.
Some bookstores will continue to exist to cater to men and women who like to browse among physical copies of books, and because some owners of bookstores get great pleasure out of selling and being surrounded by books.
Many bookstores that survive are likely to combine selling hard copy books with that of other products.
For example, university bookstores usually also sell clothing that have the university logo, computers, greeting cards, snacks and coffee, and other goods that cater to students and faculty.
Other surviving bookstores might combine selling of hard copy books in physical facilities with online sales of hard copy books, and online sales of digital books.
The decline of bookstores, theatres, laundries, and other retail industries with physical facilities illustrates a trend that runs counter to older ideas about the effects of economic development.
The process of development has been presumed to cause a substitution of market activities for home production.
For example, households in poor rural societies have not only grown their own food, but also made much of their clothing, washed their clothes, baked their bread, and cooked from scratch their other food.
As countries underwent economic growth, many of these productive activities left the home and migrated to the marketplace.
Factory-made clothing was substituted for clothing made at home, and bakeries and laundries developed to make bread and sweets, and to wash, clean, and dry clothes.
Further technological developments,however, such as small motors used in home washing and drying machines, and small machines that cooked bread easily at home, shifted many activities back into the home, and thereby saved on time and energy spent in the shopping process.
The online digital revolution is a further major step in this trend of returning activities to the home.
Time and effort are saved, for example, when instead of going to movie theatres, consumers both order and download films online to be viewed at “home”, either on television sets, or increasingly on computers.
From this perspective, what is happening to bookstores is not unusual.
“Books” are still read at “home”, but increasingly they are also purchased at home, and not only in hard copy form.
Digital books are a true revolution, but their effects on bookstores are only a small part of a broader technological development that has brought important activities into the home.
I discussed earlier the factors determining why far fewer women than men are highly successful in science and other fields.
At that time, Larry Summers controversial statement on this topic was not yet publicly available.
It is now, and it is an excellent and balanced statement that should not cause offense to any thinking person, even though some might legitimately disagree.
As in my blog discussion, he gives greatest priority to the time commitments necessary to be highly successful.
Since women with children have much less time available to concentrate intensely and for prolonged stretches on their work, a disproportionate number of highly successful women do not have children.
He also notes that universities and companies have a competitive advantage if they do not discriminate against able women.
As Harvards president, Summers has shown vision, enormous ability, and strength, qualities typically lacking in university presidents, with the exceptions of Edward Levi at Chicago, Gerhard Casper at Stanford, and a few others.
If allowed to persist in his endeavors, he will go down as one of the great university presidents of recent decades.
Although I wanted to get these comments off my chest, they are also relevant to university governance, our topic this week.
Posner argues against the view that faculties should be running universities.
He points out several problems with such a system, including that professors pursue their own narrow interests instead of the universities long-term goals, that professors are not selected for interpersonal skills, and that universities have become too complex to be run by a faculty collective.
Strangely, he comes down in favor of university trustees as having interests that are better aligned with those of universities.
Yet my experience is that trustees typically know little about, and generally do not have much interest in, the universities they oversee, they are intimidated by professors, are not very brave in their trustees role, generally go along with whatever is presented to them by university administrations, and very seldom force a university president to quit.
Still, I believe the only satisfactory way to evaluate how universities (or businesses) are run is by their success or lack of it in the long run.
Although there is no simple way, like profitability, to judge universities, there is an effective way to judge a university system.
The American college and university system is widely accepted as the strongest in the world.
This is why American universities are filled with students from abroad, including those from rich nations with a long history of higher education, like Germany and France.
I conclude from this that the American university system must be doing many things right, at least relative to the other systems.
And what is right about this system is rather obvious: several thousand public and private colleges and universities compete hard for faculty, students, and funds.
That the American system of higher education is the most competitive anywhere is the crucial ingredient in its success.
Competition tends to weed out the inefficient and the ineffective, regardless of whether competing enterprises are private profit maximizers, as are most business firms, private non-profits, as are many American universities, or public non-profits, as are the majority of universities.
In any industry, including the education industry, many different approaches are tried, as in the Robert Hutchins great books approach to undergraduate education at the University of Chicago.
Many of these approaches fail, as the great books approach failed because it turned out to be a poor way to teach science, economics, and many other subjects.
The basic effect of competition is that only the successes tend to survive in the long run.
What survives in a competitive environment is not perfect evidence, but it is much better evidence on what is effective than attempts to evaluate the internal structure of organizations.
This is true whether the competition applies to steel, education, or even the market for ideas.
In particular, this is the main reason why I favor education vouchers, for it is one significant way to bring greater competition into the k-12 education system.
Posner rightly notes that professors typically run American universities.
I may have told the story in an earlier comment about Dwight Eisenhower, then the newly installed president of Columbia University, who gathered its faculty together.
He indicated that he wanted to meet the employees of Columbia.
Isaac Rabi, the great Columbia University physicist, is said to have corrected Eisenhower: Mr.
President, we are not the employees of this university, we are Columbia University.
Given the effectiveness of the American higher education system, its governance, including the role of faculty, is probably on the whole along the right lines.
Some literature has even shown that an industry composed of workers cooperatives, Posners analogy to faculty-run universities, in a competitive environment tends toward efficiency because these cooperatives have to bid against each other, and against other industries, for labor and capital.
Much of that literature would apply to universities run by professors, and to other aspects of the structure of American universities.
Yet enterprises in even the most competitive industry often appear to be inefficient when looked at under a microscope.
This is why the many best sellers every year on how to improve the management of American companies before long pass into the market for shredded paper.
Similarly, the reaction of some faculty at Harvard to Summers remarks at the labor conference on women is foolish, but that should not be used to judge the efficiency of the system of American higher education.
I am dubious about proposals to improve a competitive system that is working.
The American university system is competitive and it is working well, at least judged by its ability to continue to attract the best students from abroad, that few Americans go abroad for advanced degrees, and by the current efforts to imitate the American system of higher education in many other countries.
We should not be complacent, but that is pretty effective evidence in its favor, including the approach to governance.
Total medical costs are about 15 per cent of GDP, and are continuing to rise.
Medicare is some 20 per cent of this total, and its share will grow significantly in the coming decades as the population ages, and as new medical technologies develop.
Many people are under the misperception that aging of the population is the main driver of the growth in medical expenses, but health economists have demonstrated that this is false.
The more important reason is greatly increased medical spending at each age, especially at older ages.
Expensive treatments and drugs have been developed to treat heart conditions, cancers, and other diseases, to replace and repair hips and other parts of the body, and simply to keep people alive.
A reasonable question would be why complain since the value placed on advances in both the quantity and quality of life at older (and younger) ages have far exceeded the increased spending on medical care- my colleagues Kevin Murphy and Robert Topel have demonstrated this in important studies.
But the system can be made much better, as long as changes bolster the weak parts of the American medical system, and do not tear down the many strong parts.
I concentrate these brief comments on one problem only, the excessive use of hospitalization and expensive surgeries under both private and public systems of payment.
 One major reason for this excessive use depends on political considerations, while the other depends on economic reasons.
Politically, it is very difficult to prevent expensive treatments from being used by persons who gain little.
 To take one of many examples, removal of the prostate after detection of prostate cancer may be the best treatment for a younger person, but makes little sense for someone in his late 70s or 80s.
Yet it is usually impossible to force patients who want that surgery to take instead much cheaper and more appropriate options, such as hormonal deprivation therapy, or doing nothing (watchful waiting).
Given that the U.S.
is unlikely to be able to prevent excessive use of expensive options, we should try to find more approaches that are relatively cheap to use to treat additional patients, even when those patients are better treated in other ways.
New drugs and improved understanding of the medical value of proper nutrition may both have high development costs, but they are cheap to extend to additional users, especially after patents expire and cheap generics enter.
By contrast, hospitals have relatively constant costs of adding additional patients.
So I agree with Posner for this reason mainly, but also for the reasons he gives, that medicare and other medical systems should include drug coverage.
The potential of drugs to reduce the total cost of treatment is provided by the evidence on costs of the antidepressants developed during the 1990s.
A recent study in the Journal of Clinical Psychiatry shows that spending on anti-depressants increased from about $400 per depressed person in 1990 to about $1399 in 2000, but total spending per depressed person declined because expensive hospital stays fell by a lot.
Moreover, antidepressants also allow many formerly depressed persons to lead reasonably normal lives.
Unfortunately, the 2003 Act that introduces drug coverage under medicare has serious flaws that needlessly increase its cost to the very high levels recently revealed by a government recalculation.
For persons who elect this coverage, it pays fully up to the first $250 per year of drug expenses, then has no coverage-the famous donut- for additional drug expenses in the middle range, and finally it has insufficient coverage at the very high end.
The total cost of this program could be significantly cut while eliminating the donut and raising high-end coverage by adding a sizeable deductible, perhaps as large as $1000.
Incidentally, a not very well understood puzzle is why both private and public systems of medical payments, and also other types of insurance, generally have foolishly low deductibles.
Another way to cut excessive use of medical care is to end the free riding by the approximately 40 million uninsured individuals who receive cheap care at emergency rooms of all hospitals, and as in-patients in public hospitals.
To prevent that, everyone should be required to buy at young ages private catastrophic medical insurance that can be automatically extended.
Medicaid would cover the poor who cannot afford to pay for this insurance (I cannot address the many problems of Medicaid here).
Catastrophic insurance provides people with protection against their greatest fear: diseases and disabilities that require expensive treatments which they cannot afford.
A third important change would be to encourage tax-free medical savings accounts that allow unused medical balances to be carried over from year to year.
The advantages of medical saving accounts with carry over provisions is that they encourage economizing on non-catastrophic medical expenses, which would help take further waste out of the present system.
Once these three reforms are in place, we can then start to privatize the medicare system for the elderly, except for those elderly who are poor enough to qualify for a government program like Medicaid that pays for their medical needs.
The privatization of medical coverage of the elderly would be the dual to my proposal last week to privatize retirement incomes.
While reform of pay as you go social security gathers most of the headlines, the value of the looming crisis in the medicare system for the elderly is much bigger.
Privatizing medicare would prevent that crisis from developing if combined with a system of compulsory catastrophic medical coverage, medical savings accounts, and greater emphasis on treatment by drugs and nutrition rather than by hospitalization and surgery.
A lot of comments, and many are of high quality, including some that disagreed.
I had expected the clear majority to be opposed, and on this at least I proved right! Once again some of the discussion cleared up various issues, but some points need to be highlighted.
We now have severe restrictions on the number of immigrants allowed in legally.
Although my $50,000 figure was just an illustration, I believe that more, not fewer, immigrants would be coming even with this price than under the present system since ALL applicants who met certain simple criteria would be accepted.
Economic analysis proves that there certainly exists a positive price (and I believe a significant one) that would have a larger number of immigrants than under the present quota system.
Some of you complained about the red-tape involved now in immigrating to the US.
I believe the immigration service is one of the most arrogant of all government agencies.
They have the power to say take it or leave it since they are rationing a valuable asset, entry permits.
Unlimited entry at a fixed price will not only raise the number of immigrants-if the price is not too high-but would drastically cut all the time-consuming and annoying hassle involved in immigrating.
And it might even make immigration agents a little pleasant since immigrants would be paying for the right to come.
Some of you missed my stress on overcoming the financial difficulties of paying a high fee by encouraging loans to immigrants from private banks.
They would be encouraged not by government insurance, but by giving them the many of the other privileges now available to those collecting on student loans, such as that immigration loans would not be dischargeable by bankruptcy, and that earnings could be garnished if some immigrants are in arrears.
With such loans available, the unskilled will not be priced out of the immigration market.
They would have to put together perhaps $5000 as a down payment, or about 1/3 of the gross earnings of an unskilled worker in the US.
Many unskilled individuals could pool family resources to do that, as they did in earlier times when transportation costs to the US were so much larger than they are now.
Recall that the cost of transportation in the 18th and 19th century to the US by boat from Europe was a significant fraction of the earnings during the first year in the US of the many low skilled immigrants who managed to come.
The term payback period is technical, and only is a way of describing how many years before the after-tax gain in earnings from immigrating covers the cost of immigrating.
It does not mean they would have to pay the loans back in a few years; I agree that would be very difficult for low skilled individuals.
My proposed loans would be longer term, as is the case with student loans.
I am confident that the absolute number of unskilled immigrants (as well as the total number of immigrants) who would enter under my fee system would exceed the number entering under the present system since unskilled applicants are discriminated against under the present quota system.
So it is erroneous to call my proposal anti-immigration, or even anti unskilled immigration.
I am certainly pro immigration, and I surely believe unskilled and other immigrants have contributed, and will continue to contribute, a lot to the American economy and society.
I also believe, however, that countries benefit more from having immigrants who make a commitment to stay, as 19th century immigrants to America did.
My proposal works toward selecting more committed immigrants.
Of course, they would still be free to return if they decide to do so, but the US gains more from their staying-if they are productive, etc- than it gains from whatever influence they bring back upon returning to the countries they come from.
Some of you complained that making immigrants pay is like bringing in indentured servants.
Do you believe they are better off if they are not allowed in at all, which is the present system? Or do you believe students are indentured because many of them have large loans when they finish school? They surely are a lot better off than if limited financial resources prevented them from going to college at all!.
Some of you doubt whether some immigrants come at least in good part to take advantage of medical, welfare, education, and other benefits.
Although we need more evidence on this, there are a few studies showing that these entitlement type benefits do affect immigration by poor individuals and families- see for example, an article by Terra McKinnish in the Winter 2005 issue of the Journal of Human Resources.
Auction or credit systems are in the same spirit as my proposal.
In all cases, it is necessary to decide either the price to be charged immigrants, or the quantity to be auctioned or credited off.
With full information about supply and demand curves, they are identical in terms of incidence, although credit systems allow other to capture the revenue.
Why is that desirable?.
Many of you raised a challenging question that I only briefly addressed: would my system increase or decrease the number of persons who would try to come illegally? On the one hand, they would escape paying the entry fee, so that would obviously be one force increasing the number entering illegally.
But there is much more to the answer than that.
Under the present system they do not have the right to come legally, so theyhave to  try to come illegally if they want to come.
I would give them a legal immigration alternative, and I believe many would choose that alternative since there are huge employment and other advantages of being here legally rather than working underground.
Moreover, we would have the additional resources to add to patrols and others who are policing the numbers trying to cross illegally, or who overstay their visas.
In addition, I believe attitudes toward illegals would harden since, unlike the present system where they are excluded from coming, they could be coming legally.
Some of you-not all!- confused the effect of charging an entry fee on the number of illegals in a system where they could have come freely, with the actual present system where the only way they can come is to come illegally.
So I am pretty sure the number coming illegally would go down, but I agree that is not certain.
Much more could be said, but I believe I responded to the main points.
My apologies that I did not have time to address all the relevant comments.
Perhaps we will return to this topic in a future blog since our pieces stimulated so many good responses.
Rich nations are facing enormous pressure to increase the number of immigrants because of their sharp limits on the number of legal immigrants accepted, and the huge numbers who try to cross borders illegally.
This immigration pressure stems in major part from the very large gap between the earnings of workers at all skill levels in the United States, Western Europe, and Japan compared to the rest of the world.
In addition, low birth rates in the developed world create excellent opportunities for young persons from poorer nations, and travel between nations has become much cheaper.
The United States, the leading destination for immigrants, uses quotas that give preference to family members of persons already here legally, to applicants with greater skills, to persons who applied earlier, and some other criteria.
Since I am a free-trader, readers might expect my preferred alternative to the present system to be 19th century-style unlimited immigration.
I would support that if we lived in the 19th century world where government spending was tiny.
But governments now spend huge amounts on medical care, retirement, education, and other benefits and entitlements.
Experience demonstrates that in our political system, it is impossible to prevent immigrants, even those here illegally, to gain access to these benefits.
I believe that with unlimited immigration, many would come mainly because they are attracted by these government benefits, and they would then be voting to influence future government spending and other public policies.
Given these realities of free immigration, the best alternative to the present quota system is an ancient way of allocating a scarce and popular good; namely, by charging a price that clears the market.
That is why I believe countries should sell the right to immigrate, especially the United States that has so many persons waiting to immigrate.
To illustrate how a price system would work, suppose the United States charges $50,000 for the right to immigrate, and agrees to accept all applicants willing to pay that price, subject to a few important qualifications.
These qualifications would require that those accepted not have any serious diseases, or terrorist backgrounds, or criminal records.
Immigrants who are willing to pay a sizeable entrance fee would automatically have various characteristics that countries seek in their entrants, without special programs, point systems, or lengthy hearings.
They would be younger since young adults would gain more from migrating because they would receive higher earnings over a relatively long time period.
Skilled persons would generally be more willing to pay high entrance fees since they would increase their earnings more than unskilled immigrants would.
More ambitious and hard working individuals would also be more eager to pay since the U.S.
provides better opportunities than most other countries for these types.
Persons more committed to staying in the United States would also be more likely to pay since individuals who expect to return home after a few years would not be willing to pay a significant fee.
Committed immigrants invest more in learning English, and American mores and customs, and become better-informed and more active citizens.
For obvious reasons, political refugees and those persecuted in their own countries would be willing to pay a sizeable fee to gain admission to a free nation.
So a fee system would automatically avoid time-consuming hearings about whether they are really in physical danger if they were forced to return home.
The pay-back period for most immigrants of a $50,000 or higher entrance fee would generally be short-less than the usual pay-back period of a typical university education.
 For example, if skilled individuals could earn $10 an hour in a country like India or China, and $40 an hour in the United States, by moving they would gain $60,000 a year (before taxes and assuming 2000 hours of work per year).
The higher earnings from immigrating would cover a fee of $50,000 in about a year! It would take not much more than four years to earn this fee even for an unskilled person who earns $1 an hour in his native country, and could earn $8 an hour in the U.S.
These calculations might only indicate that $50,000 is too low an entrance price, and that an appropriate fee would be considerably higher.
But with any significant fee, most potential immigrants would have great difficulty paying it from their own resources.
An attractive way to overcome these difficulties would be to adopt a loan program to suit the needs of immigrants who have to finance entry.
One could follow the present policy toward student loans, and have the federal government guarantee loans to immigrants made by private banks.
However, I objected to that program in a January 9th entry in this blog, and suggested instead removing the federal guarantees while retaining that education loans are not dischargeable through personal bankruptcy.
The same approach would work for immigration loans since these are also investments in human capital.
Of course, it would be difficult to collect from immigrants who return home, and that would lead to higher interest rates on these loans.
 But such forfeiture would be discouraged too if banks forced immigrants to make large enough down payments in order to get their loans.
Countries that charge a sizeable fee would have an incentive to raise the number of immigrants accepted because they would bring in tax revenue that cuts the tax burden on natives.
For example, one million immigrants per year who each paid $50,000 would contribute government revenue of $50 billion per year.
Moreover, immigrants who would enter under a fee system would generally make little use of welfare or unemployment benefits, would pay hefty taxes on their earnings, and would tend to be younger and healthier.
So the overall direct economic benefits from larger numbers of immigrants would be much greater than under the present admission system.
This would help quiet anti-immigration rhetoric as it induces countries to take more immigrants.
In addition, since anyone willing to pay the entry price could then legally immigrate, this approach should also cut down the number who enter illegally.
Still, some persons will continue to try, especially if they want to avoid paying the fee, or only want to work for a short time in the United States.
However, border and other immigration personnel would become more efficient in combating illegal entrants since they would have to deal with smaller numbers.
It should become easier also to expel and even punish illegal entrants because they would get less sympathy from the American public than under the present system.
After all, they usually could have entered legally, but tried to chisel out of paying.
In summary, charging a fee to immigrate would raise tax revenue, increase the number of immigrants accepted, and also raise the quality of those accepted.
It is a win-win situation for countries accepting immigrants, and for the vast majority of persons who would like to immigrate.
Posner has a very good discussion of many aspects of the controversy over the concessions to the Chinese government by Google, Yahoo, and a few other high-tech companies.
I generally will come to similar conclusions but from a little different perspective.
I do believe that it is reprehensible for Yahoo to disclose the names of Chinese citizens using its services, particularly when the information Yahoo gave about one of them led to his arrest and imprisonment.
Whatever one√¢‚Ç¨‚Ñ¢s beliefs about other rules of corporate behavior in China, disclosure of names of "dissidents" who face arrest and punishment is unacceptable.
During the remainder of my comment I will pretend that I am the CEO of Google (alas, I am slightly less rich) to discuss whether Google should accede to the demands by the Chinese government to prevent access to Google users in China to websites on democracy, the Tiananman Square uprising in 1989, the Falun Gong sect, and a few other subjects.
Presumably, it might be very profitable to make these concessions under the very likely assumption that the government would not agree to any significant compromise.
However, profits in the Chinese market are not the only consideration, even from the viewpoint of maximizing Google's (and mine as CEO) market value.
Google has a deserved reputation as a very independent as well as innovative company that does not cave in to unreasonable government demands.
From our vantage point the Chinese government's demands are not reasonable.
For this reason we did indicate on our website in China that we were excluding certain enumerated subjects from our search engine.
That said, under present conditions we are still providing millions of people in China, we hope that will climb to hundreds of millions, access to an unbelievable array of information.
The subjects covered are far too numerous to enumerate, but let me just mention information about DNA and its discovery, medical treatments for breast and prostate cancers, the determination of prices under different market conditions, riots in the U.S.
and elsewhere, the Becker-Posner blog, and many more.
Chinese Google users also have access to information that is highly informative about democratic institutions and processes.
This includes discussions of elections in Japan, Great Britain, the U.S., the turnover of parties in power in democracies, histories of countries that were transformed slowly, like Great Britain, or rapidly, like Japan, from powerful monarchies to lively democracies.
They also have some access to information on the overthrow of communism in East Germany, Poland, and the USSR, although that information is not as openly available as I would like.
In this way Google is still exposing millions of Chinese to information and knowledge that was unavailable to any one in the West even a decade ago.
Isn't this a priceless contribution to the welfare of the Chinese people, despite the restrictions placed on their access to certain subjects from using Google?.
Suppose we at Google had refused to go along with the Chinese demands and were excluded from the Chinese market.
It is very possible that our place would have been taken either by European or Japanese companies, or indigenous Chinese companies, only too willing to comply with the government's demands.
In this case, American stockholders, workers, and taxpayers would be (a little) worse off, and the Chinese people would also be also worse off since these other companies are not as good as Google.
The only gainer, aside from the company taking our place, would be the Chinese government since they would have a more docile search engine company to deal with.
A different scenario is that the Chinese people would have been deprived of a search engine for years.
Perhaps that would slightly weaken the government because of increased resentment among the population, but it would hurt the typical Chinese computer user much more.
Why should we be the instrument of making the Chinese people suffer any more than they already have during the past many centuries from isolation from Western technology and knowledge?.
Let us also not forget that not only has the Chinese economy been expanding for the past quarter century at a remarkable rate, but so too have freedom of expression, travel abroad, and some other freedoms that are important parts of the foundation of a true democracy.
The Chinese government supports strongly the economic progress, yet bemoans the increased freedom that naturally accompanies this progress.
Government controls over these freedoms cannot keep up with their pace of development as the economy charges forward.
Software is rapidly developing that would enable Chinese users of the internet to bypass their censors, and gain access to the information that they prevent us, Yahoo, and other companies from directly providing them.
Chinese censors and other Chinese restrictions on basic freedoms are engaged in a losing battle as long as the economy, including its human capital, continues to go global.
Even somewhat limited access to the vast information made possible by Google further pushes the battle in favor of freedom and against government restrictions.
Given these considerations, and admiting our concern as a company with maximizing the wealth of our stockholders and employees, does not the entry of Google into China even under these restrictive terms contribute to the tidal wave of freedom that is overwhelming the Chinese government?.
I (that is, GSB) agree with the CEO, for I would give an affirmative answer to that question.
Let me provide a very brief response to very good comments on Googling in China.
How much of an accommodation to make to governments with different values than our own is always a matter of degree.
I believe Google made the right compromise.
I agree  that it is important to keep Google-type servers out of China as long as possible.
That is a big advantage of Google's reaching an accommodation with the Chinese government.
Someone made the important comment that a Chinese search engine company would be far more subservient than Google or other foreign companies.
That is clearly right and important.
The website reference provided by Timba indicates that over 150 million persons with Chinese as their native language have access to the Internet.
Many of these, however are in Hong Kong, Taiwan, Singapore, etc.
I would guess that close to 100 million persons in China have Internet access.
A large fraction of these could read English, and that fraction is growing rapidly since English is by far the most important subject to study in China.
Moreover, many more young Chinese can read English than can members of the older generation.
Since the young are the most dissatisfied with censorship, they will be creating growing problems for Chinese internet-censors in the future.
Thanks Katherine for the sentiment.
Sorry that I did not have time today to respond to the comments on health care and HSAs.
I will do this on Monday.
Many good comments, but I can only address a few of them.
There is no reason why health savings accounts will reduce the interest in preventive medical care.
I give people more credit than that, and believe that they will spend some of the money in these accounts on psa tests and other blood tests, etc.
Indeed, these accounts are very likely to increase spending on prevention by encouraging some persons who now do not have medical insurance to set up accounts.
People are interested in insuring against bad health because of uncertainty about the incidence of various diseases.
Borrowing also offers insurance by redistributing spending over time, but borrowing is in most cases, and certainly in the health case, a very imperfect substitute for explicit insurance.
HSAs are basically flex-spending accounts with carry over possibilities, and with tax advantages.
In effect, health savings accounts combine the advantages of IRAs with the opportunity to withdraw money before age 65 if the withdrawals are spent on health care.
This combination is quite attractive.
Medical tourism provides global competition for American doctors and hospitals, and I am all for it.
However, medical tourism is still small compared to the numbers who come to the US for advanced treatments.
Some of you argued that individuals who take out health insurance are at a "power" disadvantage compared to insurance companies.
This is not true for car insurance, and I see no evidence that it holds for health insurance.
One of you asked why should companies offer portable HSAs if that would increase employee turnover? The reason is that they would then be able to hire employees more cheaply since potential employees would realize they would not be locked-in to the same employee.
For the same reason, companies offer training that is useful in other companies as well.
I was explicit that I would not discuss all aspects of health insurance because I wanted to concentrate on health savings accounts.
Some of you mentioned issues that I did not discuss, such as adverse selection into insurance plans, mandated coverage by states of predictable expenses, like normal child delivery expenses, state restrictions on out of state insurance coverage, the weaknesses of Medicare and Medicaid, and still others.
For the most part, extending HSAs would not make any of these problems worse, and would make some of them better.
For example, some healthy young persons who now form a good part of the uninsured pool would be induced to take out a health savings account since they would be able to save unused balances for retirement.
Some low -income families who now rely on Medicaid will also set up HSAs because of the tax credits and other advantages of having private insurance compared to the onerous restrictions imposed by Medicaid.
I will respond briefly to this rich set of comments.
Several of you raised the issue about whether potential drivers would have the information if a more complicated congestion pricing system were implemented.
But clearly, information is abundant that congestion is greater during peak hours, on Fridays, during snowstorms, etc.
so higher prices at these times would be an enormous improvement.
Note that in many cities, parking on certain streets is restricted during snowstorms, and that usually works since parkers anticipate when the no-parking rules go into effect.
The old adage "the best is the enemy of the good" is applicable.
I am not advocating a perfect system, but one that would greatly improve congestion and reduce the time wasted in traffic.
London pricing is based on its central city as a hub, but the principle of charging for traffic during peak times is applicable to suburbs, Los Angeles, and other areas without hubs.
Electronic pricing makes that relatively easy.
Parking fees are not a good substitute for congestion pricing because no parking lot owner incorporates all the costs imposed on others of driving into or in highly congested areas.
Delays caused by people looking for on-street parking raises additional issues.
These delays are created by parking fees.
It is not obvious that congestion fees are regressive since poorer persons are more likely to take buses or subways to work than to drive.
Moreover, labor force participation rates are generally lower at the bottom end of the income distribution.
So the regressive issue is more complex.
Moreover, avoiding congestion pricing because of income distribution effects is a bad way to deal with inequality issues.
It would not be effective to charge employers since that requires keeping track of which company each driver works for, and whether their employees drive to work.
It also ignores driving during congested times by shoppers.
Otherwise, as someone commented, it generally does not matter whether employees or employers "pay" congestion taxes since the incidence of a tax would be the same.
I do not know if downtown property would increase or decrease in value.
For example, the number of shoppers going downtown could increase if the reduction in travel times by car makes shopping in downtown areas more attractive.
I will follow Posner's example, and compare my present views with what I said a year ago in our discussion on February 27th about the opening controversy between Harvard President Larry Summers and his faculty critics.
 My views remain close to what they were, but some of my statements then need to be clarified and even changed somewhat.
As Harvard's president, Summers has shown vision, enormous ability, and strength, qualities typically lacking in university presidents‚Ä¶.
If allowed to persist in his endeavors, he will go down as one of the great university presidents of recent decades.."
Alas, he was not allowed to finish his agenda, although it was a breath of fresh air and long overdo not only at Harvard but also at many universities.
He made promising starts in revitalizing sciences at Harvard, recruiting a younger and more balanced faculty, holding faculty to higher responsibilities for teaching and research- the Cornell West episode is one good example of this- and beginning the process of giving Harvard undergraduates a better education.
It is not clear to an outsider how to weight different aspects of the faculty opposition that led to his resignation.
But I believe it is a combination of the inherent tendency of all faculties to resist changes in what they do, despite their radicalism on many political issues, a concern that he was usurping some of the authority that faculties claimed for themselves, and Summers blunt style.
Those overly sensitive faculty members at Harvard who consider his style blunt and confrontational should attend some of the seminars in the department of economics at the University of Chicago.
Summers would appear relatively mild in comparison.
Summers has an inquiring mind, and he ran up against faculty members with closed minds on issues like explanations for the differences in male and female achievements, or the contribution of some members of the African American Studies program.
Posner argues against the view that faculties should be running universities.
He points out several problems with such a system, including that professors pursue their own narrow interests instead of the universities long-term goals, that professors are not selected for interpersonal skills, and that universities have become too complex to be run by a faculty collective.
Strangely, he comes down in favor of university trustees as having interests that are better aligned with those of universities.
Yet my experience is that trustees typically know little about, and generally do not have much interest in, the universities they oversee, they are intimidated by professors, are not very brave in their trustees' role, generally go along with whatever is presented to them by university administrations, and very seldom force a university president to quit.."
The Harvard experience has strengthened my views on university trustees.
Perhaps one reason why university trustees are usually so ineffective is that they are mainly drawn from business, with an eye to fundraising and their own financial contributions, and have had little experience with university administration.
By contrast, corporate boards usually contain many members who do or have run companies, so they know a lot about corporate administration.
That said, I failed to mention last year my long-standing belief in greater power for presidents, deans, chairmen of departments, and other administrators than found at most American and foreign universities.
A faculty-run university is usually biased toward compromise and the status quo, while a president and his administrators will sometimes take bold actions when given the power.
Power and boldness can lead to major blunders and great variability in outcomes, but it can also lead to university greatness.
The great presidents of the past, such as James Conant of Harvard and Nicholas Murray Butler of Columbia, were not reluctant to use their power to transform the sluggish universities they headed.
Since it is so hard to be a really great university, that risk is well worth taking.
Still, I believe the only satisfactory way to evaluate how universities (or businesses) are run is by their success or lack of it in the long run.
Although there is no simple way, like profitability, to judge universities, there is an effective way to judge a university system.
The American college and university system is widely accepted as the strongest in the world.
This is why American universities are filled with students from abroad, including those from rich nations with a long history of higher education, like Germany and France.
I conclude from this that the American university system must be doing many things right, at least relative to the other systems.
And what is right about this system is rather obvious: several thousand public and private colleges and universities compete hard for faculty, students, and funds.
That the American system of higher education is the most competitive anywhere is the crucial ingredient in its success.
Competition tends to weed out the inefficient and the ineffective, regardless of whether competing enterprises are private profit ‚Äìmaximizers, as are most business firms, private non-profits, as are many American universities, or public non-profits, as are the majority of universities.
In any industry, including the education industry, many different approaches are tried, as in the Robert Hutchins great books approach to undergraduate education at the University of Chicago.
Many of these approaches fail, as the great books approach failed because it turned out to be a poor way to teach science, economics, and many other subjects.
The basic effect of competition is that only the successes tend to survive in the long run.
What survives in a competitive environment is not perfect evidence, but it is much better evidence on what is effective than attempts to evaluate the internal structure of organizations.
This is true whether the competition applies to steel, education, or even the market for ideas.
Given the effectiveness of the American higher education system, its governance, including the role of faculty, is probably on the whole along the right lines.
Some literature has even shown that an industry composed of workers cooperatives, Posner‚Äôs analogy to faculty-run universities, in a competitive environment tends toward efficiency because these cooperatives have to bid against each other, and against other industries, for labor and capital.
Much of that literature would apply to universities run by professors, and to other aspects of the structure of American universities.
Yet enterprises in even the most competitive industry often appear to be inefficient when looked at under a microscope.
This is why the many best sellers every year on how to improve the management of American companies before long pass into the market for shredded paper.
I am dubious about proposals to improve a competitive system that is working.
The American university system is competitive and it is working well, at least judged by its ability to continue to attract the best students from abroad, that few Americans go abroad for advanced degrees, and by the current efforts to imitate the American system of higher education in many other countries.
We should not be complacent, but that is pretty effective evidence in its favor, including the approach to governance.."
I still support these claims about the beneficial effects of competition, and that the American system is superior to other higher education systems.
But I should have been clear that this does not mean that every organization even in a highly competitive industry is doing well and cannot be improved.
Defective companies can continue to survive for quite a while even in competitive environments (look at General Motors).
This is especially true among universities.
Past reputations count for much more at universities than at say car companies, which is why the ranking of universities is much more stable over time than is the rankings of firms in various other industries (an observation on rankings that Summers once brought to my attention).
I support many of Posner's proposals for change that he lists at the end of his post, but I weight them somewhat differently.
The following are to me the most important:.
1
The Arts and Sciences faculty has too much power relative to professional schools at Harvard, as shown by what happened during the Summers controversy.
An overall University Senate would have helped Harvard during this crisis, as it would have helped Columbia during the student disturbances of the late 1960's (where I taught at that time).
It was crucial in the University of Chicago getting through those disturbances in much better shape than Columbia and many other universities.
2
Presidents should have more power and faculties less, for the reasons I gave.
Universities will continue to be run mainly by faculties, but their power is excessive at Harvard and many other universities.
3
In light especially of the Federal law of the 1990's that prevents universities from forcing faculty members to retire, and because of the great competition among universities for faculty, a competition that in many fields is becoming worldwide (see my post on tenure of January 15th of this year), academic tenure is excessively strong.
It should be greatly weakened, if not abolished.
An iron law of economics states that demand always expands beyond the supply of free goods to cause queues.
There is no better illustration of this law than the traffic congestion in virtually every major city and also in many smaller cities that has resulted from allowing city roads to be used without paying any fees.
During much of the day, traffic moves slowly not only in NY, Los Angeles, Chicago, and many other American cities, but also in Mexico City, San Paulo, Paris, Rome, London, Tokyo, Beijing, Shanghai, and Bombay.
Congestion has greatly increased over time, and traffic has become congested not only during morning and evening rush hours on commutes into and then out of cities, but also during rush hours in the opposite direction as well.
That is, traffic is heavy and progress is slow also going out of cities into suburbs during the morning rush hours, and back into a city during evenings.
The direct cause of the growth in road congestion in developing countries like Brazil, China India, and Mexico is the huge increase in the number of cars.
The number of cars also rose in the richer countries, partly due to the increase in the labor force activities of married women who drive to work.
Despite the greater traffic congestion on roads, most men and women still choose to drive since that gives them greater flexibility about the times to travel for leisure or working.
In addition, cars have become more comfortable, reliable, and safer with power steering, four wheel drive, improved tires, air conditioning, cell phones, and advanced audio equipment.
Opposition to the building of additional highways on environmental and other grounds slowed down the construction of highways in many countries to accommodate the growing number of cars on the road.
The Texas Transportation Institute estimated that the extra time and fuel spent in driving as a result of traffic congestion in 1994 was worth over $75 billion.
They assumed about one and one quarter persons per car, and that the average value of time per person was $11 per hour.
The increase in congestion and in the value of time since then would suggest that a comparable figure for 2005 would likely exceed $150 billion, or more than one per cent of American GDP.
Moreover, these estimates do not account for any pollution damage caused by the excessive driving that causes congestion.
Like the weather, everyone talks about traffic - Goggle lists over 11 million web sites that discuss traffic congestion- but aside from some new roads and public transportation system, little has been done to reduce this congestion.
Congestion is inevitable when people live in cities and in highly built up suburbs.
But there is a fundamental reason why the amount of traffic congestion is greater than the efficient amount.
When a person decides to drive to work during rush hours, he takes into account any extra time it will take because of congestion on the roads at those times.
But he generally does not take account of the effects of his driving on the congestion faced by others.
Economists call this increase in the congestion he causes others a negative externality.
Of course, each person that decides to drive during a congested period only imposes a very small harm on others since he only increases traffic times by a tiny amount.
But adding up all these small externalities over thousands of cars sums to a large aggregate externality, and a large increase in traffic congestion, that does not enter in any individual's decisions about whether to drive or not, or whether to avoid rush hour traffic.
The optimal way to induce drivers to take account of the congestion they cause to others is to charge them fees for driving during congested periods that would vary with the degree of the congestion.
So these fees would be higher during rush hours than during other hours of the day, and they would be lower on weekends when traffic is generally lighter than on weekdays.
Fees should be greater when it is raining or snowing since congestion is greater with bad weather, in part because driving is slowed down by the weather, and in part because more people decide to drive rather than walk or take public transportation when it rains.
No city has such a sophisticated form of congestion pricing.
But interestingly, it took a left-wing mayor of London, Kenneth Livingstone (sometimes called "Red Ken"), for London to become the first really large city to introduce an extensive congestion road tax, although Singapore pioneered this approach with a license system that began in 1975.
In 2003, Livingstone implemented a pricing system for cars entering the central part of London during business hours.
Owners of cars that cross the cordon around central  London were initially charged ¬£5 for each time their cars crossed; that fee was raised in 2005 to ¬£8.
 Cameras record the license plates of cars as they cross, and anyone who is caught trying to avoid paying their accumulated charges is fined.
This simple system has done much better than some analysts expected, although economists know from many other examples that people find ways to substitute for any good or activity that becomes more expensive.
This fundamental law of demand applies to driving during peak hours as well.
Car traffic in the central city of London has fallen by about 20 per cent, average traffic speed in the center has increased from about 8 to 11 miles per hour, and both car and bus delays during peak traffic periods have fallen by even larger percentages.
People adjusted by using public transportation, car-pooling, bicycling, or walking into central London instead of driving.
More people ended up switching to buses rather than trains because bus travel became a lot faster due to the reduced congestion on central city streets as the number of cars competing with buses for space on the central city streets dropped a lot.
In the long run, this toll would induce some companies and shops to move their offices and stores outside the central part of London.
The London system is rather effective, but it is still a crude pricing system since the amount charged for entering the central city does not vary during the business day, even though congestion does vary, due sometimes to changes in the weather.
The Deputy Mayor of London told me that they are contemplating introducing a more sophisticated system.
Anyone who enters the central city would need to have a device on his car, a tracking system, that would transmit information to electronic toll collectors on the locations of the car at different times.
The charge to an owner would then depend on the degree of congestion at the times his car was in the central city.
At the end of each month, car owners would be assessed the congestion charges accrued during the prior month.
Such a more sophisticated pricing system would have all the advantages of the present system plus some additional ones since it would raise the tax when traffic was moving more slowly, and lower it when traffic flowed more quickly.
Such congestion based tolls would, in addition, encourage some companies to stagger their opening and closing times to avoid the peak rush hours when fees were greater.
It would encourage weekday shoppers to wait until rush hours were over before going into the central city, and to leave before traffic became heavy at the end of the working day.
A toll on cars is more efficient than others ways of reducing congestion.
Some cities allow cars to enter the central part only on alternative days, an approach that takes no account of the different values placed by different drivers on the advantages of entering every day.
A tax on gasoline reduces driving and in this way helps to reduce congestion, but it takes little account of the greater effect on congestion of driving during heavy traffic periods than the effect of driving when traffic is light.
A few weeks ago Mayor Michael Bloomberg of New York rejected the imposition of a tax on cars that passed a cordon imposed around New York‚Äôs downtown area.
 Apparently, the city administration gave no attention at all to a more sophisticated form of congestion taxing.
New York's decision is not unusual since many other cities have considered and then rejected imposing tolls to help relieve the terrible congestion during business hours in order to speed up traffic.
Partly, the opposition comes from businesses and shops in the downtown area that might have fewer customers and have to pay more for employees.
The opposition comes also from car owners and some conservatives who see this as just another tax to raise government revenues.
I certainly have no desire to increase the already heavy tax burden in cities and elsewhere.
Ideally, I would like any increase in revenue from congestion tolls to be offset by reductions in other taxes-that is, to be revenue-neutral.
However, congestion is a tax too, but a hidden tax on the time of people rather than on their pocketbooks because it increases the amount of time wasted in heavy traffic.
This tax on time from congestion is a very inefficient tax because it is not paid to anyone, but in effect just throws away time, the most valuable resource that people have.
Unless the government would do great damage with the revenue collected from congestion tolls, these tolls are much more efficient than the current taxes on time that result from traffic congestion.
Genetic testing offers great hope for future progress in treating diseases since individuals can in many instances reduce the consequences of genetic defects if they find out about them sufficiently early.
For example, a woman who discovers through a simple blood that she has a BRCA1 or BRCA 2 defect has an extremely high chance of getting breast cancer if she does nothing about it.
However, she can greatly reduce her risk of breast cancer by having her ovaries removed, and by other more extreme surgeries.
On the other hand, if little can be done to combat the adverse health consequences from having serious genetic defects, individuals may not want to know about them.
This would explain why many persons with a high chance of having a genetic mutation that guarantees they will eventually get Huntington's Disease never take the simple test to determine whether they have this mutation since nothing is known yet about how to moderate the deadly consequences of Huntington's.
Particularly where successful health interventions can reduce the medical consequences of a genetic defect, individuals would like to have health insurance prior to taking a test to determine whether they carry that defect.
Insurance prior to testing is a viable form of insurance since persons with similar risks ex ante can be pooled in determining insurance rates.
Companies would be willing to offer insurance on genetic defects prior to testing since at that stage they would generally be at least as well informed, and often would be better informed, than individuals are about the chances of their having genetic defects.
The premium for coverage of any particular genetic defect would then be determined by the product of the probability of having that defect multiplied by the cost of treating it.
The premium would vary across different pools of individuals who have different probabilities of testing positive, and different treatment costs.
The added premium to cover this risk would be small if the defect was not common, or if treatment costs were not major.
One major problem arises when individuals get tested before seeking insurance, and only take the extra insurance coverage when they discover that they carry a serious genetic defect.
Of course, insurance companies would ask applicants if they have already been tested, but applicants for insurance conceal information about their HIV status and other diseases that would raise the cost of coverage if they revealed positive test results.
The fear of insurance companies that they would be less well informed about these risks than those applying for insurance because applicants conceal information about testing is what makes these companies want to test many applicants before offering them insurance.
Unfortunately, there is nothing to insure after testing since those individuals who test negative do not want coverage, while in the absence of controls over premiums, individuals who test positive would have to pay the full cost of any treatment.
The looming Congressional law on testing would try to handle this problem by forbidding insurance companies to raise premiums to individuals with genetic defects.
This only introduces one more regulation in insurance markets, and there are already too many of them.
A better way is to penalize individuals who withhold information from insurance companies about the outcomes of genetic tests.
If the penalties were set high enough to effectively deter lying about test outcomes on applications for insurance, individuals would then have an incentive to seek insurance against the risk of genetic defects prior to taking any genetic test.
Under these conditions, companies would offer insurance that would reflect the expected costs prior to testing of insuring individuals with different risks of genetic defects.
Companies might require testing of persons after they are insured if knowledge about whether they were carriers of defects would significantly reduce the cost of preventing or moderating the disease if it eventually occurred.
One major problem remains even if insurance companies tested everyone with a reasonable risk of having genetic defects after they had insurance.
Individuals who test negative afterwards would not want to continue to pay the extra premium they had been initially charged when they had a higher than average risk of having a genetic defect.
They would threaten to change insurance companies if their premiums were not lowered.
Insurance companies would then be left in the initially high-risk pool only with those who tested positive, and they would force these persons to pay the higher premiums appropriate for their high risk revealed ex post.
Companies would then again want to know prior to providing insurance whether individuals are positive or negative, and they would then adjust their premiums according to the results.
The fundamental problem here is the inability to write long-term individual health insurance contracts that commit both insurance companies and individuals to remain together for an extended time period.
This contractual limitation distorts other risks in the insurance market as well.
Individuals who are revealed to be healthier than average as they age will seek insurance rates that take account of this information even though initially they paid rates that were adjusted to their expected health status.
Individuals who are revealed over time to have worse health than expected will either lose their insurance coverage or face much higher premiums.
Health insurance coverage through large employee groups helps mitigate the problem caused by genetic testing.
Individuals who test negative are not likely to change employers in order to take advantage of this information to get lower premiums since this adjustment in premium would generally form a small part of their overall compensation.
Similarly, employees who are revealed to have genetic defects do not impose large costs on employers or other employees unless they are a large fraction of total employment.
Of course, employer based health insurance under present arrangements is defective because employees who change jobs may have trouble finding employment if they tested positive for a genetic defect.
The solution to this problem is to encourage a move toward a system that allows health coverage portability, so that coverage moves with employees when they change jobs.
Under present scientific calculations, environmental damage from global warming at current rates of CO2 emissions will be large, especially during the latter half of this century and throughout the next few centuries.
With such long delayed effects, uncertainty about magnitudes of the damages is enormous.
And it is obvious that the size of the rate at which future effects are discounted, if they are discounted at all, will make an enormous difference to estimates of the total value of the damages.
The main concern expressed about discounting of future utilities in evaluating public policies is that it would give the welfare of future generations much less weight than the welfare of present generations.
Even with the "small" discount rate typically used in policy analysis of 3 percent, the effects of global warming on the utility of generations fifty years from now will be weighted only a bit more than ¬º as much as the effects on the utility of the present generation.
Generations 100 years in the future would be weighted a mere 1/16th as much as the present generation.
With a 3 percent rate, the weights are cut in half every 24 years, or approximately every generation.
Is this fair to future generations? The well-publicized Stern Review on the Economics of Climate Change for the British government thinks not, which is why the calculations in the Report generally use a social discount rate close to zero.
William Nordhaus of Yale University who has done substantial research on evaluating the costs of greenhouse warming uses about a 3 percent social discount rate.
He shows that one should use a significant discount rate to match the discount rate to evidence on the long-term return on capital, the growth of consumption, and savings rates.
Suppose the utility damages from global warming to generations 50 years from now are equivalent to about $2 trillion of their welfare.
At a 3 percent discount rate, this major damage would be valued today at about $500 billion, while any spending today that reduces the harm to future generations would be valued dollar for dollar.
Then with a 3 percent discount rate it would not pay to eliminate these very harmful effects on future generations if the cost were $800 billion (or more generally at least $500 billion) to largely eliminate the future harm from greenhouse gas emissions through steep taxes on emission, carbon sequestration, and other methods.
To be sure, benefits would exceed the present value of costs of greenhouse warming if damages were discounted only at 0 percent, 1 percent, or as high as almost 2 percent discount rate.
When analyzing effects much further into the future, such as 150 years into the future, the discount rate used is even more crucial.
The overwhelming reason why the Stern Review gets so much larger estimates of damages than work by Nordhaus and other is the use of a negligible discount rate in the Review.
To illustrate the advantage of using a discount rate that reflects the return on capital, assume that the long-term return on investments in physical capital is 3 percent.
If instead of spending $800 billion on eliminating greenhouse gases, suppose it were invested by the present generation in physical capital, and that all the income yielded by the investment were also invested with a 3 percent return.
Then the value of this amount saved to generations 50 years from now would be $800 billion (1.03)50 , or more than $3 trillion.
Hence future generations would be better off if instead of the present generation investing the $800 billion in greenhouse gas-reducing technologies, they invested the same amount in  capital that would be available to future generations.
One criticism of this argument is that if the resources were not invested in greenhouse gases, they would not be invested in other capital that would accrue to future generations.
Perhaps not, but during the past 150 years, later generations in the United States and other developed and developing nations have been much better off than earlier generations when measured by income, health, education, and virtually all other important criteria.
 This rising standard of living across generations has been achieved mainly through advances in technology and generous savings and investments for children and grandchildren by parents and their elected representatives.
Why should this fundamental aspect of family and public behavior be changed as a result of the accumulation of very harmful greenhouse gases in the atmosphere?.
Put differently, later generations have benefited from large and continuing advances in technologies of all kinds during the past 150 years, including those related to the environment.
The rate of technological advance has not slowed down, and may even have speeded up, during the past 20 years.
Parents and governments have chosen not to offset the benefits to later generations of advances in technology by leaving descendants less education or capital than they have.
Of course, just the opposite has occurred.
Parental behavior toward their children and grandchildren illustrates the importance of discounting future benefits and costs.
Many parents like their children at least as much as they like themselves, and would be devastated if any serious harm came to their descendants.
Yet in evaluating how much they want to give to their children in the form of education, bequests, or education, they recognize that savings and education have positive rates of return.
If they invest say $40,000 in their children's education, the benefits to children would be much greater because of the high return on education-say it would be $80,000.
By recognizing this, however, parents are in effect discounting the benefits they provide children  since they would be costing the $80,000 benefit to children at $40,000.
Using a social discount rate of say 3 percent does not sweep away the greenhouse gas problem.
The latest climate report cited by Posner strongly suggests that the problem is quite serious, perhaps even starting 50 or fewer years from now.
However, it does imply that low weight be given to effects on the utility of generations 150 years from now, and even more so 400 years from now.
Common sense also dictates that one recognizes that technologies will be much improved in the future, including technologies related to improving health, income, and the environment.
A positive and non-negligible discount rate is the formal way to recognize the importance of these and related considerations.
The sharp rise in world population and income during the past five decades has stimulated greatly increased demand for clean water, and concern about whether the supply of water would be adequate to meet these needs.
Demand for usable water in the future will surely continue to grow at a significant pace unless steps are taken to reduce demand, while the supply of water could grow more slowly, especially if global warming reduced rainfall and increased evaporation of water.
The best way to bring demand into balance with supply is to introduce much more sensible pricing of water consumption than is common in most countries.
Many discussions of water conservation create the impression that households are large and inefficient users of clean water for drinking, eating, bathing, and toilet flushing.
That is a myth.
About 40 per cent of all the freshwater use in the United States is for irrigating land for agriculture, another 40 percent is used to produce power, and only 8 percent is used for domestic use; these percentages are similar in other countries.
Moreover, about a third of all the water used by households in rich countries goes to water lawns and for other out door purposes, so probably no more than about 5 per cent of the total demand for water is for personal use.
Water used is usually a poor measure of the net amount of water consumed since much water is returned either immediately, or after evaporation and condensation, to the source pool, where it can be used again.
Thermoelectric plants use a lot of water for cooling purposes, but typically have a very high reutilization rate (about 98 percent).
 Household use is also efficient, with a reutilization rate of about 75 percent.
As a result, neither power producers nor households are big net consumers of water.
Irrigation of farmland absorbs much water since most irrigation systems have low reutilization rates.
In California, the biggest water using state, irrigation systems have a reutilization rate of only about 40 percent.
Governments usually try to close the gap between the supply and demand of usable water by command and control policies that regulate water use, usually starting with households.
Many local governments have introduced requirements for low flow toilet flushes, bans on lawn watering except during certain hours or days, requirements for more efficient household outdoor watering systems, and other water conserving regulations.
None of these regulations do anything to economize on the water used by farmers and industry, the main demanders of water.
Water is wasted in many ways by all sectors, and regulations do nothing to affect the main source of wasteful use of water: the inefficient pricing of water.
Most irrigation systems in the world price water through annual flat fees, and not through charges that rise with the water consumed.
Often domestic water use is not priced at all, and when priced, flat fees are far more common than fees that depend on use.
As with any other scarce good, water is wasted when the cost of using more is negligible.
The obvious solution is to implement fees that rise with the amount of water demanded.
Such fees are especially important in the agricultural sector since farming is a heavy consumer of water.
 Consumption ideally would be defined as net use after reutilization is accounted for.
With this measure, the fee per gallon of water used would be low to power plants since they recover almost all the water they use.
Farmers would tend to pay a lot both because they typically use much water, and also because most agriculture irrigation systems do a poor job of recovering the water used.
Fees that rise with consumption would reduce the demand for water partly by cutting demand.
For example, households would water their lawns less frequently, and sometimes would replace natural grass with artificial grass, or with rock gardens and trees, Farmers would cut their demand for water by switching away from crops that require much water, such as rice, toward crops that need less, such as wheat.
They would also switch to more efficient irrigation systems, such as spraying and dripping rather than flooding (which is the cheapest), if the price of water took account of reutilization rates.
With proper water pricing, California and other regions that need expensive irrigation system to grow rice and other water-intensive crops would switch to other crops, or to other uses of their land, so that water-intensive crops would become more concentrated in areas with abundant water supplies.
More generally, with sensible water pricing in different countries, arid parts of the world would not grow food that absorbs much water, and would shift to other crops and activities that they would exchange for these foods.
Some opponents of effective metering of water demand claim that it would not reduce the use of water because of the mistaken belief that most of the water used goes to households for drinking and personal hygiene.
The demand for water for personal use may not be very responsive to price, but households in developed countries use lots of water for lawns and swimming pools that would be sensitive to the price of water.
Also public and private golf courses and some other recreational facilities require much water, and these uses too would respond to higher water costs.
Clearly, the use of water in agriculture and industry would be sensitive to its price.
Effective water pricing is even more important to poor countries since they cannot afford expensive methods of increasing the supply of usable water, such as desalinization, and since a large fraction of their water is used in agriculture with inefficient irrigation systems.
Yet most poor countries make little effort to price water sensibly.
Implementation of significant fees is not easy politically since households and farmers believe they have a right to as much water as they can get.
In particular, farmers in richer countries are well organized politically, and often resist efforts to raise the cost of water they use to irrigate their land.
Perhaps their opposition could be weakened if they received generous reductions in their water fees when they introduce irrigation systems with high reutilization rates.
In China in 2005, 118 boys were born for every 100 girls born.
This ratio is far above the normal biological ratio of about 106 boys to 100 girls.
The sexual disparity in China has resulted from a combination of low birth rates, a preference in China for boys when parents only have one or two children, and the spread of ultrasound techniques in that country that allow the sex of fetuses to be identified and then aborted if parents do not like the sex.
Similar trends have emerged in India and South Korea as well.
More sophisticated and expensive methods permit parents to raise their chances of a male baby even before a woman becomes pregnant.
Considered most reliable is a method that involves in vitro fertilization, drugs to stimulate the mother‚Äôs ovaries, surgery, and other steps.
The total cost can exceed $20,000, so this method clearly is only available to richer persons.
Are there good reasons to object to sex selection, either by abortion or more sophisticated methods? On Feb.
1 the Committee on Ethics of the American College of Obstetricians and Gynecologists (the ACOG) did issue an opinion objecting on the grounds that it is unethical for physicians to participate in sex selection by parents that was based not on potential for sex-linked genetic disorders, but solely on family balancing of personal preferences.
This opinion about the ethics of sexual selection applied "regardless of the timing of the selection (i.e., preconception or post conception) or the stage of development of the embryo or fetus".
Such an opinion seems strange in light of the general support by physicians and the Supreme Court of abortions by parents "solely" to satisfy their personal preferences about timing or number of children.
What is so different about sex-selected abortions that would lead the ACOG with its over 51,000 members who provide health care to women to oppose abortions to satisfy parental desires for additional boys or girls while supporting the general right to abortion? The ACOG tries to provide an answer by claiming that sex selection through any method may "ultimately support sexist practices.".
It is not clear what the ACOG means by sexist practices, but all the evidence on sexual preferences in the United States and other richer countries indicates an overwhelming desire for variety-boys and girls- rather than a strong preference for either sex.
So sex-selected abortions in these countries is unlikely to have much of an effect on the overall sex ratio, although it would affect the distribution of boys and girls in different families.
I concentrate my remaining discussion on the implications of sex-selected abortions in countries where it raises the number of boys relative to girls.
China, South Korea, and other countries have tried to implement control over sex selection by making it illegal to use ultrasound techniques to select the sex of children.
However, these regulations are notoriously difficult to implement since doctors may say "congratulations" when an ultrasound test reveals a boy, and remain silent when the fetus is a girl.
Abortions of girl fetuses would reduce average family size if parents who prefer boys would end up with larger families than they would like because they cannot control the sex of their offspring.
The effect on family size could go the other way, however, if the fear of having girls discourages parents from having additional children.
These effects on family size could be important, but I ignore them in the following discussion and concentrate on the effects of a lower number of girl babies relative to boys compared to the biological natural girl-boy ratio of a little below 50-50.
One might expect parents who abort fetuses of sexes they do not want to treat their children better than they would otherwise since they now are satisfied with the sexes of their children.
In such cases, sex-selected abortions against girls would improve rather than worsen the average treatment of girls since parents would be happier with the girls they have than if they had girls who were not really wanted.
It is no surprise, for example, that orphanages in China predominantly have girls (and some handicapped boys), given the preference for boys in the traditional Chinese culture.
What about the overall effects in a society of skewing the sex ratio of births toward boys? The fewer girls who are born presumably would be better off since they would be better educated, and in other ways better treated by parents who want them.
This would be reinforced if the effect of sex selected abortions is to lower the overall birth rate since it is well established that families with fewer children invest more in each one, girls as well as boys.
As children become adults in cohorts with a high ratio of boys, the advantage of girls and women increases since they are scarcer.
It is claimed that young women in China are already at a premium as potential mates because strong sex-selection has been going on ever since the one child policy was introduced in the early 1980's.
Prior to the spread of ultrasound techniques, sex selection occurred through sending girls to orphanages, neglect, and in some case even engaging in female infanticide.
To be sure, if the value of girls as wives and girlfriends, and in other ways, rises because they are scarcer, then the value of boys as husbands and boyfriends tends to fall.
However, it is not apparent why that should call for policies that prevent sex-selected techniques, unless the interests of men were motivating these policies.
To use an analogy, a shift of demand in an economy toward services and away from manufacturing because of a shift in "preferences" toward services- as has occurred in the United States and other rich countries- benefits women relative to men since women are more likely to work in services than are men.
Yet no one would claim that society should prevent such preferences because they help (indirectly) one sex over another.
The great statistician and biologist, R.
A.
Fisher, used a celebrated biological analysis to explain why the sex ratio remains close to 50-50 in non-human species.
An economic analysis based on incentives gives results that are related to Fisher's result.
An improvement in the position of women due to a decline in the number of girls relative to boys leads to some correction in the sex ratio as parental choices respond in the long run to the more favorable position of girls.
If women are in greater demand as wives and in the economy when they are in scarcer supply, some parents will decide that having girls has advantages, possibly through receiving generous bride prices when daughters marry.
This would shift "preferences" toward having girls.
The long run outcome would not necessarily be the biological natural ratio of a little more boy births than girl births, but it should be closer to that ratio than the current ratios in some Asian countries.
The shooting recently of 10 innocent persons at a retail store and a university in Illinois has highlighted once again the issue of gun control in the United States.
Five customers and employees were murdered at a Lane Bryant clothing store in a robbery attempt that got out of hand, while a former student killed other students at Northern Illinois University, and then killed himself.
The question raised by these shootings once again is how to control the use of guns?.
I will take for granted in this discussion that effective gun control laws are desirable, and mainly consider how to make them effective.
So I bypass the lively controversy among economists over whether gun control laws are desirable-for two strong and opposite conclusions drawn from limited empirical evidence, see Mark Duggan ("More Guns, More Crime", ,Journal of Political Economy, 2001), and John Lott ("More Guns, Less Crime", University of Chicago Press, 2000).
Effective gun control laws that prevent guns from getting into the hands of mentally unstable individuals and criminals are surely desirable, but present laws do not achieve that.
The main issues in gun control legislation are 1) many people, mainly men, want to own guns for self protection because they live in bad neighborhoods, or because they fear that criminals may invade their homes, or because they just like guns.
In addition, shopkeepers want guns to protect themselves if attempts are made to rob them, and criminals want guns in order to commit crimes more successfully.
2) The number of guns in the United States is huge, probably well over 100 million.
Many were purchased legally, but probably most were obtained in the active black market in guns.
Individuals who want to own guns but are prevented from acquiring them legally will often buy them illegally.
Clearly, the black market in guns is strong, even though many law-abiding persons do not know how to go about getting guns illegally.
Sellers of guns underground are generally criminals since they can function more effectively than honest sellers in illegal markets where contracts and other attributes of legal transactions are difficult, if not impossible, to enforce except by the use of force.
A close analogy is with drugs.
That drugs like cocaine are illegal shifts the market for drugs underground.
 The higher price in the underground market offsets the risk of punishment to traffickers, which attracts sellers who are willing to bear the many sizable risks in this market, including imprisonment.
 These traffickers engage in violence against competitors and others, and they corrupt police and other officials to protect the considerable profit they make when they can avoid being apprehended.
One criticism of many state gun control laws is that they are too lax in allowing some persons to purchase guns legally who should not be eligible to buy guns.
For example, the killer of the 5 students had a history of mental illness, yet he only recently had been able to legally buy a pistol and a shotgun.
He made these and some prior legal purchases of guns in Illinois, even though this state has a rather stringent gun control law that requires a background check for a criminal record, registration by gun owners, and a cooling off period before purchases can take place.
If gun laws were greatly tightened, individuals who badly want to have guns but cannot obtain them legally would  try to turn to the underground economy, just as those who badly want to consume drugs get their drugs underground.
Pretty much all men who want guns for criminal purposes now obtain their guns illegally in the underground economy.
That economy would become still more important if gun law were tightened.
Still, several steps can be taken to have much more effective gun control.
The first would be to impose a high tax on legal gun transactions, which would greatly raise the price of guns purchased legally.
Like the tax on gasoline, cigarettes, and some other goods, a gun tax should be several hundred percent of the untaxed price to discourage purchases of guns by those with less strong demands.
Individuals who strongly want guns for legitimate purposes might still prefer to get them legally, if they can, since they would then avoid the various punishments and other risks of buying guns illegally.
For this reason, gun control laws should allow persons with legitimate needs for guns to buy them legally at the very high prices caused by the high gun tax.
The second step is to punish substantially traffickers in the illegal gun market to discourage individuals who could get guns legally from buying them in the underground market.
A sizable punishment to illegal suppliers would raise the price of guns in the illegal market in order to compensate sellers for the risks of punishment.
One criticism of present gun laws is that sellers of guns in the underground economy are not punished enough when they are caught.
(Unfortunately, higher gun prices in the illegal market would attract sellers who would be good at avoiding apprehension since the profits could then be huge for sellers who can avoid punishment.).
Since a high tax on gun sales and substantial punishments to illegal seller of guns would greatly raise the price of guns in both the legal and illegal markets, the demand for guns would be reduced in both markets.
The magnitude of the fall in the number of guns purchased would depend on how responsive purchases are to higher gun prices-this response is what economists call the elasticity of demand.
I have come across little evidence on this elasticity for guns.
 Yet one would expect that the demand for guns by individuals is likely to be significantly higher when other persons have more guns, partly because of the desire to protect themselves, and partly because of the culture this creates to own guns.
As a result, the overall response of purchases to high gun prices might be quite large.
For under these conditions, a higher gun price lowers the demand for guns by some individuals, and that in turn reduces gun demand by others.
These ‚Äúsocial interaction‚Äù effects on gun demand would tend to greatly raise the overall price response of the demand for guns.
The illegal market would cater mainly to persons with criminal and other questionable backgrounds that could not readily buy guns legally.
Of course, even with active enforcement against sellers in the underground gun market, some individuals will be able to buy guns illegally.
Hence the third prong of the desirable approach to gun control would be to add a large extra sentence, larger than is common in many states, to the prison sentence of criminals who used guns to commit crimes.
Such greater punishment for using guns to commit crimes would encourage criminals to shift away from guns toward knives and other less lethal weapons.
The agitation about the fraction of endowment that colleges spend is driven in large measure by the rapid rise in tuition since the late 1970's.
The increase in tuition has been much faster than the rise in consumer prices over the same time period.
However, the benefits from a college education in the form of higher earnings, better health, better educated children, and many other aspects of life have grown much faster than tuition has.
The result is that benefits net of all college costs have increased at an unprecedented fast rate during the past 30 years.
College-educated persons increasingly have achieved elite status not only in the United States, but in other countries as well, including developing countries like China, India, and Mexico.
So it is hard to feel sorry for college students despite the rise in college tuition.
To be sure, high tuition makes it more difficult for students and their parents to finance a college education.
To make that easier, especially for students with few financial resources, colleges have been engaging in greater price discrimination by increasing financial aid to students with limited resources while they are sharply raising tuition to students from more well to do families.
This price discrimination policy has enabled many more students from poorer families with good high school records to go to colleges where they pay little tuition.
Students also can help finance their college costs with student loans when they do not receive sufficiently large support from their colleges.
The debts of students who borrow a lot by the standards of what the average student borrows is still usually not large relative to the earnings most students receive after working for several years.
I believe students in need of financial support often do not borrow enough.
By borrowing more, they would be able to work less, and thereby concentrate on their studies and finish school more rapidly.
I do not deny that colleges invite criticism when they increase tuition while their endowments are increasing by a lot.
Although it seems much more natural and appropriate for colleges to lower tuition when their endowments grow, there is a powerful reason why endowment growth is often accompanied by a growth in tuition.
 A rapid increase in endowments, even by schools that spend a small fraction of their endowments, enable schools to spend more resources on increasing the quality of the college education they offer.
They would tend to attract better teachers and researchers, provide smaller classes, enlarge their libraries and other information storage and dissemination facilities, and provide better athletic facilities and other amenities.
These improvements in what a college offers in turn helps attract students who are willing to pay higher tuitions.
Since American colleges are in a highly competitive environment, they tend to raise tuition when they can attract good students who are willing to pay more.
Although I disagree with Senator Grassley and other Congressmen about whether we should be concerned by the sharp increases in tuition, I do agree with him and other critics that colleges should spend a larger fraction of their endowments.
However, my reasons are very different from theirs, and I certainly do not believe that schools should be required by law to spend a larger fraction of endowments.
The problem I believe with the governance of many schools is that their boards of directors believe they are managing financial assets that should be maintained, and preferably increased, in perpetuity.
In my judgment the major goal of presidents and boards should be to improve teaching and research, and that may well mean spending much more than the income from endowments.
Of course, the persons in charge of a college's governance should be concerned about the effects of spending down endowment on the college's future financial strength.
However, colleges that compete well against their peer schools generally attract more generous private and public contributions.
As a result, schools that spend wisely higher percentages of their endowments may well increase, not decrease, future endowments.
Likewise, schools that refuse to spend more than a rigidly fixed percent of their endowments may experience a decline in their competitive position that will tend to reduce their ability to attract contributions in the future.
Therefore, boards of directors that do not allow greater spending because they want to maintain, or increase, their schools' endowments could be responsible for reductions in future endowments.
In arguing this I am partly influenced by the experience of the Olin Foundation.
This was a large foundation that explicitly decided to spend down its endowment in order to better accomplish its goals.
The Olin Foundation did spend all its endowment on law and economics and other programs, and has essentially now closed its doors.
During the relatively short time of its existence the Olin Foundation accomplished far more than most other large foundations do over many more years.
I am not suggesting that all colleges follow Olin's example and plan to go out of business- some of them should, however.
Rather, I suggest that they should copy Olin's example of trying to be successful now, even if that means spending more than their incomes on attracting and teaching good students, and in producing path-breaking research.
In the past few decades, economists have analyzed the competition from companies motivated solely by the desire for profits against companies truly motivated in part by other considerations.
These considerations include altruism toward consumers, discrimination against minority employees, and a desire to help the environment by using carbon offsets to own carbon emissions.
A main message from this analysis is that companies that forego some profits to pursue other goals have trouble competing against profit-maximizing firms.
An example is the competition between firms that hire workers solely on the basis of their productivity and cost, and companies that give up profits to avoid hiring African-Americans or other minorities because they are prejudiced against these types of workers.
Since firms only interested in profits will hire minority workers when that is profitable, and prejudiced firms will not, discriminating firms will be under a competitive disadvantage (for the details of the analysis, see my The Economics of Discrimination, 2nd Ed.,1973).
Companies that combine the profit motive with environmental and other concerns can thrive in a competitive environment only if they are able to attract employees and customers that also value these other corporate goals.
Then the added cost of pursuing non-profit goals would be partially, if not entirely offset, by having customers who pay more for their products, such as fair-traded coffees.
Or these companies may be able to attract high level employees relatively cheaply perhaps because the employees are excited by the prospects of spending some of their working time developing vaccines that can treat diseases common in poor countries.
These appear to be the types of companies that Bill Gates wants at the forefront of his "creative capitalism" since he is encouraging companies to pursue recognition as well as profits.
How successful can this form of capitalism become? Gates quotes with approval the opening discussion in Adam Smith's great 1759 book The Theory of Moral Sentiments on the importance of altruism in human motivation.
While this book does deal with motives like concern for others, and the desire for recognition and acclaim, Smith was skeptical not about the strength of altruism, but about its scope or reach.
For example, he uses an example in this book that is highly relevant to the present and to Gates' quest.
He asks "how a man of humanity in Europe: would respond to hearing " that the great empire of China‚Ä¶ was suddenly swallowed up by an earthquake‚Ä¶"? His answer was that "If he [this man] was to lose his little finger tomorrow, he would not sleep tonight; but, provided he never saw them [i.e, the people of China], he would snore with the most profound security over the ruin of a hundred million of his brethren, and the destruction of that immense multitude seems plainly an object less interesting to him than this paltry misfortune of his own" (Part III, Chapter 3).
Globalization has brought the situations in China, India, Africa, and other poor parts of the world much closer to the concerns of men and women in rich countries than they could ever have been in Smith's time.
Still, essentially for the reasons given by Smith, it would be quite difficult to get many companies in richer countries to be highly motivated by the desire to find cures for diseases that are not profitable because they only afflict persons living in Africa and other poor countries who cannot pay much for the cures.
It would not be any easier to get companies to spend significant resources to help lower carbon emissions, unless these expenditures were forced by governments, or compensated by governments and private philanthropies.
Nevertheless, unlike the well-known negative position on corporate responsibility taken by my great teacher and close friend, the late Milton Friedman, and apparently also by Posner, I do not see anything counterproductive with Gates and others giving encouragement to corporations to be more concerned with goals like distinction along with an interest in making profits.
The real test is how viable such motives are in a competitive market environment where the competition also includes companies motivated only by profits.
My own belief is that there are far more effective ways to help poor nations of Africa and elsewhere speed up their rates of economic development and reduce the impact of malaria, Aids, and other devastating diseases.
Probably the single most important step is to encourage much more market-friendly policies by African and other governments in poor countries.
In addition, it would help to reduce, better still eliminate, tariffs by rich countries on the agricultural and other exports from developing countries, encourage more widespread use of DDT and mosquito netting in combating malaria (see my post on deaths from malaria on Sept.
24, 2006), and provide private and perhaps public subsidies to the development of new drugs that help fight diseases mainly found in poor countries.
No one knows for sure how many illegal immigrants are in the United States, Europe, and other countries, but there are surely many millions.
Figures for the US, the country with the largest number, vary widely, but The Department of Homeland Security estimates that this country in 2006 had close to 12 million illegal residents.
There is even greater disagreement about what should be done about these residents.
This can be seen from the widely different stances taken by the presidential candidates and others.
At one extreme are those who call for the apprehension and eviction of as many illegal residents in the US as is possible.
Yet this seems a very unrealistic goal when there are so many illegal residents; the US will not apprehend and return millions of persons to Mexico, or wherever else illegal residents came from.
Nor is it desirable to go to the other extreme, and just give blanket amnesty to all illegal residents, for amnesty now would encourage future illegal immigration since they too would expect amnesty.
Complete amnesty just makes a mockery of immigration laws, and rewards those who came to the US illegally, as opposed to the many potential immigrants who wait years for the right to immigrate legally.
I argued earlier on this blog that selling the right to immigrate would be the best approach to legal immigration (see my post on May 28, 2007 for details of this proposal).
This approach would lead to acceptance of greater numbers of legal immigrants, perhaps by a lot, since the revenue from the payments by immigrants could replace other taxes.
Paying for the right to immigrate would also negate the argument that immigrants get a free ride because they gain access to health care and other benefits.
Moreover, making immigrants pay for to come attracts the type of immigrants who came much earlier in American history: younger men and women who are reasonably skilled, and who want to make a long-term commitment to the United States.
These types would be more willing to pay a perhaps sizable price for admission because they would stand to benefit significantly from migrating.
To prevent the price from excluding young and ambitious men and women who would like to immigrate but do not have the financial means, the US government could encourage a loan program to help finance the cost of immigrating that would be similar to the loans available to college students.
The analogy to college students is close since immigration is also an investment in human capital.
One great advantage of selling the right to immigrate is that the same approach can be used to deal with illegal residents, so that it also helps solve the vexing problem of illegal immigration.
Instead of offering free amnesty to illegal residents, this approach gives them an opportunity to legalize their status without giving them advantages over those who wait to come as legal immigrants.
Illegal residents would be able to come forward and pay to change their status to that of legal residents.
Many illegal residents would gladly pay for the right to become legal since that would open up enormously job and other opportunities available to them.
The ability to buy the right to stay would be especially attractive to immigrants who want to make a long term commitment to this country since gaining this right stabilizes the future not only for them, but also for their children.
Even though children of illegal immigrants born in this country are automatically citizens, younger children would tend to return with their parents if the parents are sent back.
Allowing illegal residents to convert their status to legal residents by paying the price to immigrate should satisfy both the hawks who do not want to give free amnesty to illegal residents, and the doves who do not want to force illegal immigrants to leave the country when they have been working and contributing to the economy.
Under this proposed system, illegal residents would not get free amnesty since they would have to pay for the right to stay.
Neither would they be forced to return to the countries they came from since they could buy the right to stay.
Illegal residents should be required to pay more than those coming legally to punish them for having come illegally.
To be sure, the problem of illegal immigration would not go away even if all illegal residents could convert their status by paying the immigrant price (plus something extra).
Some residents here illegally would try to avoid paying this price by remaining in the underground economy.
These would be mainly illegal residents who only plan to work for a short while, accumulate a nest egg, and return to their home countries.
If these immigrants were apprehended and want to stay, they should have to pay a higher penalty to stay than illegal residents who came forward voluntarily.
If they refuse, they should be returned to where they came from, with possibly other penalties as punishment.
If one of the present immigration quotas prevented a person from coming legally, he can then either wait possibly a long time for a chance to come legally, or he could try to enter immediately as an illegal immigrant.
A market for immigration gives these persons a legal alternative to immigrate when they want to because they can buy the right to immigrate legally.
For this reason, an approach that sells the right to immigrate should greatly reduce the numbers of persons who come illegally, or remain as illegal residents.
Effective policies have to be developed to cope with the remaining illegal residents and immigrants, but they will be a much smaller problem when many illegal residents would be able to legitimatize their status by paying for it.
I do not believe that the problem of illegal immigration when everyone can buy the right to immigrate legally will be much more serious than is the black market in cigarettes, alcohol, and gasoline that has emerged in order to avoid the high taxes on legal transactions of these products.
The proposal I have made to sell the right to immigrate has been criticized as "repugnant", and contrary to the tradition of free and unlimited immigration to this country in the 18th and 19th centuries.
But the immigration issues at present are also very different from those in earlier times.
Immigration is no longer unlimited, for it is severely constrained by various quotas.
Is selling the right to immigrate as repugnant as forcing millions of hardworking illegal immigrants to return home to countries they left possibly years ago? Or is a sale of immigration rights as repugnant as giving free amnesty to millions of persons who violated US laws by coming illegally? Selling the right to immigrate is a contemporary solution to a major contemporary immigration problem that has created deep divisions within the American population by pitting persons of different ethnic and skill backgrounds against each other.
Instead of mindlessly using the word "repugnant", critics should concentrate on whether selling immigration slots to illegal residents as well as to immigrants who enter legally is a good way to help resolve these immigration conflicts.
I believe it is.
Every recession, including those milder than the current recession, leads to pressure to reduce spending on foreign goods by raising tariffs and other import restrictions.
The avowed goal is to help domestic workers and businesses that are going through difficult times.
Hostility to imports when unemployment is high and rising is surely understandable.
Nevertheless, it is unwise to engage in seriously restrictive international trade policies even during a serious recession.
Unfortunately, in the recent stimulus bill passed by the Democratic members of the House of Representatives, the recession is used as an excuse to promote "buy American" policies.
The bill would, among other similar restrictions, ban the use of non-American steel in the many construction projects that are part of the stimulus package.
This provision was included even though it appears to violate US obligations under the rules of the World Trade Organization, and under the Nafta agreement with Canada and Mexico.
This buy American provision in the stimulus bill has already led to retaliatory threats by several European and Asian countries since many other countries are also eager to place greater restrictions on imports.
The economic case for higher tariffs and other trade restrictions during serious recessions is that the economic system does not function well during depressed times.
This malfunctioning of the economy creates higher unemployment of both labor and capital.
The protectionist argument is that under such abnormal conditions, various means of putting these resources to work, such as tariffs and buy American laws, may be desirable, even though during normal times these would clearly be inefficient and hurt consumers and the economy.
The merit in this argument is overwhelmed by several more powerful arguments against increased trade restrictions, even during serious recessions and depressions.
One obvious argument is that retaliation against American exports would surely follow if buy American restrictions remain in the version of the stimulus bill that will become law.
The most famous example of such a tariff war occurred during the Great Depression.
In 1930, during the early stages of that depression, Congress passed the Smoot-Hawley Tariff Act- named after the two Republican congressmen who promoted the bill.
It raised the US tariff on over 20,000 imported goods to unusually high levels.
Over 1000 economists of different political views signed a petition that urged President Herbert Hoover to veto the bill.
He did not, even though he had favored lower rather than higher tariff rates.
In addition to Smoot-Hawley, Congress and President Roosevelt in 1933 passed the first buy American law that required the federal government to prefer US products in its purchases.
After Smoot-Hawley passed, many countries retaliated with increased tariffs on American goods.
American-European trade crashed rather soon after these tariff increases, although the growing world depression may have been more important in this crash than the higher tariffs.
The Smoot-Hawley tariff played an uncertain role in worsening the world-wide depression of the 1930s, but it surely does not appear to have helped the US moderate the depression that began a year earlier in 1929.
By 1933, unemployment had climbed to 25% from only about 3% in 1929, and output had fallen by over 30%.
Retaliation from other countries is not the only negative effect of raising trade restrictions during a recession.
The primary determinant of which trade restrictions get imposed on foreign imports, such as the buy American steel clause of the House stimulus bill, is the level of political power different industries have in Congress.
The dominance of politics over economic benefits is a general weakness of so-called stimulus packages.
The House stimulus bill not only restricts imports of foreign steel, but its spending programs are only distantly related to any positive effects on unemployment.
For example, broadband access and alternative sources of energy, such as windmills and solar panels, are both generously subsidized by the House bill.
Spending on these and the many other programs in the bill may (or may not) be worthwhile, but such spending will have little effect on unemployment because it will mainly utilize high skilled workers and capital that would otherwise be employed at other activities.
Recessions generally concentrate unemployment among lower skilled workers, along with workers in industries that are particularly hard hit, such as residential housing and banking in this recession.
Trade restrictions can do only modest amounts to help either low skilled unemployed workers, or the unemployed in industries like banking and residential construction.
However, the retaliation from other countries induced by more restrictive policies would reduce the demand for exports of American goods, such as products of the high-tech industry and agricultural goods, and reduce profits and employment in these sectors.
One major reason why trade restrictions and other government "stimulus" programs may be politically attractive during a recession is that identifiable groups benefit, such as the steel industry, or the recipients of the government stimulus spending.
By contrast, the harm to workers in export industries who suffer because of the indirect effects of trade restrictions on exports, or the harm to workers in industries that are crowded out by government spending, is remote and not so apparent.
During his confirmation hearing before the United States Senate toward the end of January, Secretary of the Treasury Timothy Geithner accused China of "manipulating" its currency.
This is not a statement that helps to further China-US cooperation on trying to stimulate the depressed world economy and on other issues- Secretary of State Hillary Clinton is now in China trying to mend some fences.
Yet Geithner's statement is a correct evaluation of the Chinese policy of keeping the value of its currency, the yuan, low relative to the dollar and other currencies.
It is far less clear, however, whether this and related Chinese policies harm the US and other countries.
By keeping its currency cheap, China encourages greater exports since that policy makes Chinese goods cheaper on world markets.
This policy also discourages imports by Chinese consumers and producers since it raises the cost of foreign goods in terms of the yuan.
Partly due to its manipulation of the value of the yuan, China has run large surpluses on its current account in recent years because the value of its exports has been significantly above the value of its imports.
China has accumulated over $2 trillion of reserves.
The world recession has sharply reduced China's exports, but surprisingly the recession has reduced China's imports by much more, so that its foreign trade surpluses have grown greatly during recent months.
Some American producers have had trouble competing with cheap Chinese imports, and have either gone out of business, or shifted production overseas, mainly to China itself.
Since China mainly exports goods produced with low priced labor that is not available in richer countries, their exports have not had a major impact on production in the richer countries.
Far more significant to developed countries are the reductions in the cost of imported clothing and many other goods from China.
Consumers, especially low income consumers, now take for granted their ability to buy cheaply many everyday goods that would cost perhaps five times as much were they made in the US, Western Europe, or Japan.
The Chinese government holds most of its more than $2 trillion in official reserves in US Treasury securities.
China gets a bad deal from selling goods made by Chinese labor and capital in exchange for large amount of paper assets that yield low returns.
China has accumulated far more reserves in the form of these assets than can be justified as a buffer against fluctuations in its imports and exports, or than is wise given its low standard of living.
The US seems to have made the better bargain by exchanging low interest paper assets for a rich variety of consumer and producer goods.
Does China's ownership of large quantities of US government bonds give China the opportunity to "blackmail" the United States into more favorable policies toward China through threats to flood the international capital market with these assets? China has not made such threats, perhaps mainly because they would not be credible.
Since China owns only a rather small fraction of US Treasury obligations, and an even smaller fraction of total liquid assets traded on world capital markets, a threat to sell their US governments would give China only a little leverage on world interest rates, including those paid by the United States government.
Moreover, China, along with other governments, holds US Treasury assets because they are considered among the safest of all assets, especially during these turbulent times.
By selling their US Treasury bonds, China would have to take on riskier assets at a time when China is trying to cut its exposure to risk.
To be sure, the high savings rates of China and other Asian countries during the past decade are partly responsible for the low world interest rates that contributed to the housing bubbles in the United States and other countries.
To that degree, China bears some indirect responsibility for the financial crisis that is afflicting much of the world.
However, China too is being badly hurt by the world recession.
Moreover, excessive bank lending and borrowing, and government encouragement of sub prime loans, were much more important culprits in generating excesses in the housing market.
The extensive protectionist policies practiced by the Chinese government do hurt the United States and other countries, including China itself.
Chinese protectionism is especially common in the financial sector; while foreign banks are being allowed greater access to China markets, they are still subject to considerable discrimination.
The general trend in China (and other nations) toward less protectionism has been set back by the global recession, as China has recently introduced various "buy China" programs in its steel and other industries.
China bashing during past decade is reminiscent of the Japan bashing that occurred during the 1980s.
It turned out that Japan's substantial export surplus with the US, its extensive accumulation of US Treasury bonds, and its purchases of assets in teh US did not hurt the United States, but were for the most part foolish actions on the part of the Japanese government and businesses.
I believe that similar conclusions will be reached about the parallel Chinese practices.
Several big banks and other companies have badly fumbled their public relations during these difficult times, such as the big three auto makers who took their private jets to Washington to beg Congress for a bailout, or the board and CEO of Merrill Lynch that granted generous bonuses to their executives just as the company was avoiding bankruptcy through being taken over by Bank of America.
However, anger, even when justified, is not a good reason for ceilings on the pay of top executives at companies receiving assistance from the federal government.
The main problem with wage (and price) controls is that they never work, although governments have imposed them throughout history.
They will not work in this case either, where the plan includes a salary cap of $500,000 for top executives at companies taking "extraordinary assistance" from the federal government, restrictions on when these executives can cash in the stock they will receive, limits to their severance pay, and monitoring of fringe benefits, like company jets.
 There are no good guides to a priori setting of either the form or the level of compensation to employees in any occupation, including top executives.
Competition, with all its defects (which I discuss later), is still the best mechanism available for setting salaries and other prices.
Pay caps will encourage companies that take government aid to hire high priced lawyers and accountants to devote their expensive time trying to find loopholes in these caps.
Loopholes include reclassifying some employees to positions below top executives so that their pay would not be subject to any government pay caps.
Most loopholes center on various forms of deferred payments and non-monetary benefits.
For example, companies started to provide free medical coverage to its employees during World War II as a way to circumvent controls over wages.
This fringe benefit has persisted as a tax advantage that is usually not available to workers who pay for their own medical insurance.
The plan for executive pay caps already includes restrictions on several fringes, including the ownership of corporate jets by companies taking government assistance, even though company jets are often valuable savers of the expensive time of executives who do a lot of traveling.
Able lawyers and accountants will discover many other fringe benefits that can help circumvent the pay caps.
Companies that take government assistance do so because they fear going bankrupt.
Sometimes that is because they were badly managed by the CEOs and other executives in charge.
What many of these companies need are new executives who can take a fresh look at their problems.
Unfortunately, pay caps that leave total pay considerably below what able executives receive in other companies make it more difficult to attract these executives to companies in distress because they can earn more, and work with considerably less government interference, in companies that do not take or need aid.
Moreover, severe limits on severance pay help to lock in incompetent executives who then might refuse to leave voluntarily because they would not receive any significant financial incentives to leave.
Apropos of turnover of top executives, I believe many company boards, and also boards of universities and other non-profit institutions, fail in their most important responsibility: to determine when top management should be replaced.
This is partly because many board members spend very little time on board activities, and also because many members are friendly, or at least sympathetic, to the top executives.
As a result, they are either too ignorant of how the companies they oversee are really doing to overrule top management, or they are too close to management to make the hard decision to fire them when they perform badly.
Of course, one reason caps on the pay of bank top executives are popular is because of the general perception that boards of directors also overpaid these executives, and thereby failed in this duty to protect stockholders.
Perhaps they did, but even if the pay of top executives at many banks and funds were well above what they would receive in a well functioning competitive market for executives, that could not explain the devastating hit taken by stockholders of these companies during this crisis.
For example, even a 100% overpayment to bank executives would usually have only a small direct effect on bank profits since their pay, however large in an absolute sense, was rather small compared to the normal profits of these companies.
Another criticism of the compensation of the top executives of banks and other financial institutions is that it encouraged excessive risk-taking because their pay was excessively loaded toward stocks and bonuses.
In retrospect, obviously, top executives of many financial companies took risks that turned out to be catastrophic for stockholders and employees.
Yet, since the value of the stocks owned by these top executives also dropped sharply, and since their bonuses have been sharply reduced or eliminated, most top executives did suffer greatly along with stockholders when their risky decisions failed.
So any distortion in the pay structure toward risk taking was surely limited.
In January, Steve Jobs unveiled Apple’s iPad tablet that,.
among other things, digitally accesses and stores many books that can be read.
on a 9.7-inch screen.
The iPad follows the great success of Amazon’s e-reader,.
the Kindle, which can hold up to 1500 books.
This has led to speculation that.
these and subsequent e-readers mark the turning point in the market for hard.
copy books.
I do believe that e-readers foretell an enormous change in the book.
publishing industry.
I do not expect the market for hard copy books to decline.
rapidly at first, but decline it will, as e-books substitute increasingly for hard copy.
books.
The competition offered by e-books will increase as the prices of.
Kindles, iPads, and other e-readers fall from their present levels of over $250.
for Kindles, and $499 and up for iPad tablets (these tablets are far more than.
just e-readers).
Within a few years, the most basic e-reader models will sell.
for considerably under $100, and they will become much easier to use.
Mysteries, beach-reading books, biographies, and other books.
with a general appeal that are read while traveling or on holidays are most.
suitable for e-readers.
Why pay more to buy hard copies of such books when it.
is far more convenient to carry many books around in a digital form? Less.
attractive for e-readers are more technical books, such as books on economic.
theory or mathematics, where it is frequently necessary to go back and forth.
between earlier and later discussions.
These books are much less likely to be.
popular in e-book form than the less technical and quick-read books.
A good comparison is with the devastating effects of the.
Internet on the markets for newspapers and recorded music.
The Internet has.
permanently changed these industries.
Readers can more efficiently and quickly.
obtain updated news about sports, weather, movies, advertising, stock market.
performance, and political developments from the Internet rather than from hard.
copy newspapers and magazines.
Hardly any young people any longer read.
newspapers, certainly not general-purpose newspapers like the New York Times,.
Washington Post, or even The Daily News.
Owners of the major papers are still searching for ways to.
make a profit with their online editions.
The New York Times first gave away.
their content online, then tried to charge for some of it, and then went back.
to giving all of it away-the present state.
The Times recently announced that.
in a few months it would again start charging for some of its online content.
The Wall Street Journal has continued to charge for some online articles and.
opinion pieces, but it is unclear whether their online business is profitable.
The music recording business has been even more affected by.
the Internet than newspapers since unauthorized copying of online songs in the.
early days of the Internet greatly reduced sales of new albums.
Album sales.
were finally killed after Apple’s launch of the iPod in 2001 that allowed.
individuals to download single songs cheaply.
Total music recordings are down.
considerably due to the competition from digital sales.
Yet the great success.
of the iPod preserved a considerable demand for music, even though much of the.
revenue now goes to Apple rather than to either recording studios or musicians.
Cheap and efficient e-readers will have comparably huge.
effects on the book publishing industry.
The cost to publishers of selling.
e-books is much less than selling hard copy books since.
publishers save paper, printing, and shipping costs by selling books in digital.
form.
Amazon originally set the price of most books it sells for the Kindle.
at the same cheap level of $9.99, although it recently agreed with MacMillan to.
allow publishers greater say in pricing books sold for the Kindle.
Apple.
announced that it would allow publishers considerable discretion in setting prices.
of books sold for iPads.
Digital copying of e-books will become a problem for.
the e-book and hard copy book markets, as it has been for the music market.
Already available software will make.
copying easier, and hence more threatening to the entire market of published books.
Handbooks of essays on particular topics, and other.
collections, including articles by the same author, will be less popular on.
e-readers than they have been in hard copy form since individuals can use their.
e-readers to easily buy and store the particular articles that interest them.
The market for books may follow the film industry where publishers have an.
initial limited run of hard copy books, and then follow that rather quickly by.
making new books available for e-readers, where most of the sales will occur.
I have no doubt that e-readers will eventually enormously.
affect the types of books published, and the form they are published in.
    That does not mean quick and sharp.
declines in the book publishing industry, but it does mean that the industry.
will eventually be radically transformed.
I believe that a Consumer Financial Protection Agency will.
hurt rather than help consumers.
Despite the claim that ignorance induced many.
consumers with few resources to buy houses during the boom, consumers who.
bought a house then with almost no down payment and low interest rates were not.
displaying ignorance, but good sense.
They put little of their own resources at.
risk, and annual mortgage payments were cheap, especially in an environment.
where housing prices were expected to continue to rise at a rapid rate.
Lenders, the Fed, and others who made these loans, or helped keep interest.
rates low, made the mistakes and look foolish, not consumers who bought the.
houses.
In the vast majority of cases, consumers, even those with.
little education, know their own interests far better than government officials.
know them.
Still, I have no objections to governments giving consumers information in.
situations where information is difficult to acquire, as perhaps in the.
restaurant food safety case cited by Posner.
I can also accept putting.
information about the harmful effects of cigarettes on cigarette packages,.
although I doubt if that had much effect in reducing smoking.
Posner considers in most detail the issue of growing obesity.
that continues a discussion we have had in this blog and elsewhere.
Obesity in.
the United States and other countries has been increasing for the past 30 years.
due to much lower costs of calories, as in fast foods, and also due to more.
sedentary activities, mainly due to the large amount of time spent watching.
television, using the computer and Internet, and speaking on cell phones.
Giving consumers information about the adverse health consequences of obesity.
might be a useful government activity, but Posner wants to go much further by.
essentially taxing some of the sources of obesity, such as sodas and computer.
games.
I do not agree with him.
Posner supports aggressive actions against obesity partly.
because he believes that consumer ignorance of the adverse consequences of.
being obese helps explain its high rate of incidence.
He cites the fact that.
obesity is much more common among those with low income and low education.
People with low incomes and education differ in many respects from others, such.
as their greater tendency to buy older used cars that are more likely to break.
down.
No one would suggest they do this out of ignorance rather than from the.
constraints of low income.
Similarly, fast foods, and fewer visits to health.
clubs, would appeal to low income persons without any need to stress ignorance.
That ignorance is not the main factor in the high obesity.
rates among low income and low educated persons is supported by the fact that.
while the rate of obesity is much higher among African-American women than.
among white women, it is not so much higher among African American men than.
among white males.
It is hard to believe that African-American men are much.
better informed about the harmful effects of obesity than are African-American.
women.
This racial-gender difference in obesity rates is most likely related to.
differences in the life situations of African-American men and women rather.
than to differences in their knowledge of the health cost of obesity.
Posner’s second main argument for taxing obesity is that it.
imposes an externality on taxpayers because they pay much of the higher cost of.
medical care due to obesity.
The most frequently cited study of the extra.
medical spending due to obesity is by Finkelstein, et al.
in the July 27, 2009.
online issue of Health Affairs.
It is a careful analysis of data for 2006 that.
looks at the higher spending on medical care of the obese, after holding.
constant income category, years of schooling, age, and many other variables.
Overall, the authors find that about 25% of the population is obese, and that.
obesity increases medical spending by about 9%, which amounts to $147 billion.
(in 2008 dollars).
They also find that private payers, not taxpayers under.
Medicare and Medicaid, bear the majority of the additional medical costs due to.
obesity.
Since private insurance companies are not allowed to charge higher.
premiums to the obese because that is considered discrimination, largely under.
the Americans with Disabilities Act, the higher cost of obesity paid by.
privately insured persons can hardly be called an “externality”, unless it is.
considered an externality from government policy.
If we take away more than half the total increase in medical.
spending due to obesity because it is not borne by taxpayers, we are left with.
a much more modest increase in health spending “externalities” due to obesity.
Even that smaller percent is too large because it neglects the “savings” due to.
the fact that the obese die earlier than other persons.
On this externality.
logic, that saving should be subtracted to get a net “externality”.
Some.
analysts have even claimed that this net externality is negative, so that obese.
people actually reduce taxpayer spending on medical care.
If that were correct,.
should we subsidize obesity?.
I have not accepted such externality arguments related to.
medical care ever since several economists showed that smoking cuts down medical.
(and retirement) spending because heavy smokers usually die early, and do not.
collect much in the way of social security and Medicare benefits.
Surely that.
would be a foolish justification for subsidizing smoking.
Yet the same logic.
applies to attempts to justify taxes on obesity because of any medical costs.
obesity imposes on taxpayers.
Since even ignoring their earlier deaths, the obese raise.
government medical spending by rather modest amounts, that “externality”.
provides a weak case for taxing goods like soft drinks with sugar, fast foods,.
and ice cream, or taxing computer games, watching television, and other.
sedentary activities.
As Posner recognizes, taxes on these types of foods and.
time use activities would be a shot gun approach to reducing obesity since the.
great majority of these foods and activities are consumed by men and women who.
are of normal weight, or merely overweight (an earlier Rubenstein, et al study.
does not find increased medical spending for men and women who are simply.
overweight).
Higher taxes on these items would cause a reduction in the.
consumption of these items, and hence an unjustified loss in welfare, by the.
75% of the population who are not obese.
To the extent that obesity imposes costs on others, it would.
be far better to let private health insurers price coverage based on obesity.
and related risk factors.
    This.
would target the desired group, and not impose inefficient costs on.
non-obese persons by taxing the foods they eat or the activities they choose to.
engage in.
Providing information about the negative health consequences.
of obesity will do no harm, and might help prevent some persons from getting or.
staying obese.
Doing more than that, however, has little justification from.
externality arguments, and hence is a weak basis for public policy.
Posner shows, among other things, the basic impossibility of.
doubling US exports during the next five years.
I consider whether such a.
policy makes sense, even if it could be achieved.
My short answer is that it.
does not.
In economies that have full employment except during.
recessions, which describes the American economy, increased exports do not.
create jobs, any more than building football stadiums creates jobs, although.
many commentators and businessmen continue to lament the jobs lost to China.
What increased exports do under full employment conditions is transfer jobs.
from producing for domestic consumption and domestic investment to producing.
for export.
The share of American GDP devoted to exports has about doubled.
during the past 50 years without having any noticeable impact on either the.
employment or unemployment rates.
Part of the reason for this little impact is.
that imports increased even more rapidly than exports did, but the main answer.
is that some workers and capital shifted from producing for domestic uses.
to producing for foreign uses.
Many countries want to increase their exports in good part.
because of the continuing influence of the old mercantilist tradition that.
countries should try to accumulate more assets, such as gold.
In earlier times, increase in.
gold reserves equaled the difference between the values of exports and imports.
In present times, there is considerable envy of China’s accumulation of over $2.
trillion worth of reserves because China exports many more goods and services.
than it imports.
The US and other countries that import much more from China.
than they export to China have been pressuring China to appreciate its currency.
in order to encourage Chinese consumers and businesses to import more from.
other countries, and to reduce imports by other countries of Chinese goods.
I have argued earlier (see my post on our old website for.
Nov.
23, 2009) that China has been accumulating more reserves that the optimal.
amount that would promote its own interests.
Since China has far more than.
enough reserves to manage even large fluctuations in its trade balance, the.
Chinese people would have greater real wealth if its government allows the Yuan.
to appreciation.
An appreciation of its currency would reduce China’s exports.
and raise its imports.
While China has been hurt by its mercantilist policies, I.
believe that the US and other developed countries have gained rather than lost.
from China’s policy of undervaluing its currency.
China has exchanged goods.
produced by hard-working labor, and costly raw materials and capital for paper,.
like US Treasury bills and bonds, that yield low interest rates.
The financial.
assets that China is accumulating is not yielding much more in the way of.
income than the mercantilist goal of accumulating zero interest bearing gold in.
exchange for goods produced by labor, materials, and capital.
A common response to the analysis I just gave is that it is.
too “economic”.
It is claimed that from a geo-political view, China has the.
United States at its mercy due to its large accumulation of US debt.
According.
to this argument, China could threaten to sell these assets, thereby raising.
interest rates on American debt, and creating chaos in the market for American.
debt.
The truth is just the opposite, for, if anything, the US has China over.
the barrel.
For the US could threaten to inflate away much of the burden of its.
debt, and thereby greatly reduce the real value of China’s assets.
The US could.
also use the Fed to maintain relatively low interest rates, even though this.
would likely increase inflation as well.
In fact, while China has very large holdings of US debt, it.
does not have much leverage on the market for this debt.
For one thing, there.
is little debt of other governments that China would consider good substitutes.
for its US Treasury bills and bonds.
Particularly now, with the major fiscal.
problems of the PIIGS (Portugal, Ireland, Italy, Greece, and Spain), EU debt.
does not seem like an attractive alternative.
Moreover, China in fact has.
little monopoly power in the market for US government debt.
Despite its vast.
holdings, China has no more than about 10% of the US debt held by the American.
public or foreign governments.
A 10% share of the market for an asset does not.
provide much control over interest rates on that asset, especially when the.
asset is part of a much larger worldwide market for governments, private bonds,.
and equities.
China may be willing to take some losses in order to pressure the.
US in its military relations to Taiwan, and other geo-political areas of.
conflict.
But its threats in the government bond market have little credibility.
since China would suffer much more than the US would.
I am not claiming that the American government and American.
consumers have been saving enough.
Since the US’ deficit between imports and exports is the mirror image of.
its deficit on capital accounts with other countries, fiscal deficits have affected.
the trade balance.
for this reason and others, the huge federal deficits during.
the past couple of years, and also earlier in this decade, are very worrisome,.
especially if the American debt/GDP ratio continues to rise rapidly during the next few.
years.
However, the basic problem is not US exports, but it is.
getting the federal government to cut its spending, and to implement policies.
that increase the rate of growth of the US economy.
The Tunisian and Egyptian political eruptions were pretty much totally unexpected by the governments of the United States and of other countries, and by the vast majority of experts on Egypt and the Islamic world.
To be sure, experts were aware that the government of say Egypt was not popular among many segments of the population, including The Muslim Brotherhood, most intellectuals, and many members of the growing middle class.
However, the timing and speed of the uprising there (and in Tunisia) was rather a complete surprise since Mubarak and Ben Ali were in power for over 20 years, and seemingly in rather complete control.
I was first impressed by the unexpected and speedy nature of the overthrow of authoritarian regimes in 1979 when a combination of religious and leftwing groups forced the Shah of Iran from power.
Until very close to the end he looked invulnerable: he seemed to be in full control of a strong and well-equipped army, and had an active and dreaded secret police, the SAVAK, that imprisoned anyone who vocally attacked the government.
That the overthrow was unexpected is objectively measured by the stability of the international value of the Iranian currency, the rial, until just a few weeks before the Shah was ousted.
Had the overthrow been anticipated, the value of the currency would have plunged as Iranians and others tried to get out of rials into dollars and other hard currencies.
The rial did plunge in value shortly after the revolution appeared to be succeeding.
The rapid disintegration of the Soviet Union is another telling example.
In 1989 my wife and I took a train from West Berlin through East Germany to go to Warsaw.
The customs agents in East Germany were unpleasant, and the East German government headed by Erich Honecker seemed totally in charge.
Much to my surprise, less than six months later, close to one million younger men and women were demonstrating in the streets, and the government was soon quickly gone, along with most of the Russian empire.
The unexpected nature and the speed of the overthrow of these and other authoritarian regimes is what is so glaring and challenging to theories of authoritarian rule.
Analytically, what happens is that over time such a regime may be shifting in unnoticed ways from stable equilibrium positions, where the government is in rather complete control, to an unstable equilibrium where seemingly small events trigger massive changes, including the ouster of the government.
The overthrow of the government may be quick and without much violence, as in the East German and Tunisian cases, or involve considerable violence, as during and especially after, the Iranian revolution.
Such unstable equilibria are sometimes called “tipping points”.
This term was first used to describe rapid changes in housing neighborhoods from being mainly white and Christian to “tipping”, and then rapidly becoming mainly black or Jewish.
A neighborhood may remain basically say all white until a few black families move in.
If more black households move in over time, their fraction may become large enough that many white residents begin to panic, and put their houses up for sale.
After that the neighborhood quickly “tips” into becoming a mainly black neighborhood.
The basic underlying reason that authoritarian regimes fall quickly, with or without violence, is that, as Posner emphasizes, they do not have any natural succession process.
A strong man like Mubarak would be in power, but as he ages and gets weaker who is to succeed him? His son or confidants? Opposition groups may begin to see opportunities, or the unhappiness and frustration of young people and others may spontaneously erupt into mass demonstrations, as in Egypt, or in Iran after frustration over the outcome of the presidential elections two years ago.
Sometimes these demonstrations succeed, as in Tunisia and apparently now in Egypt, and sometimes they fail, as in Iran after those elections, and in the 1989 Tiananmen Square demonstrations in China.
Will similar demonstrations spread to the rest of the Arab world in North Africa and the Middle East that without exception have non-democratic regimes? Already the Jordanian government and a few others have started to make concessions to the opposition, including giving greater representation to various disaffected groups.
I do not know how many of these governments will change radically and speedily.
The theory offers little guidance on the timing of major political changes, but I do believe that large changes in this region toward freer elections and greater representation will occur before very long.
The Internet, Facebook and other online social networks, are changing the dynamics of the political landscape in all countries, including Islamic countries.
In addition, the middle classes are growing in importance throughout Middle East and North Africa.
As a result, these countries will experience the same aspirations for greater freedom of expression and greater representation in the government, as is found in other parts of the world.
Eventually, these aspirations will force a conversion of the political institutions of these Islamic countries into something that may not be the same as Western democracies, but will offer more contested elections, greater political and social freedoms, and probably also greater economic freedom.
The United States along with many other rich countries encourages widespread so-called preventive screening for various diseases, including breast, prostate, and other cancers, cardiovascular disease, diabetes, kidney functioning, and many other serious, and even not so serious, diseases.
It is often claimed that prevention of diseases should be given the highest priority in order to early detect treatable serious medical problems.
But these gains have to be balanced against the considerable cost of extensive preventive screening.
The US and other nations are very likely over-screening for various medical problems.
The benefits of screening depend on the seriousness of the disease, and the gain from early detection.
The latter in turn depend crucially on the treatment success when a disease is detected early compared to when it is detected at a later stage.
For example, treatments for both prostate and breast cancers seem to be more effective when these diseases are detected early, although that is disputed by reputable researchers and physicians.
However, it is clear that early detection of Alzheimer’s’ disease has little advantage since there are no effective treatments for this highly debilitating disease.
Early detection of this disease may have other advantages if that enables individuals to plan for their increasing mental feebleness, such as preparing or modifying wills, and takng other decisions that require some mental acuity.
On the other hand, it may reduce quality of life by causing great fear of the impending disease.
Along with the benefits often come major costs of widespread screening, costs that frequently outweigh the advantages.
For example, if only a very small fraction of the population were likely to have a disease, perhaps one chance in 500 or less, it may not make much sense to screen everyone.
Take, for example, Huntington’s disease, which affects a very small fraction of the population.
With such a low general risk of having the genes that cause this disease, it is much more cost efficient to screen only individuals with a much higher probability of having the disease.
These are persons who have family members with Huntington’s.
Even then, studies show that many potential carriers of the deadly genes prefer not to be tested since no treatments are available, and they fear living with the news that they will eventually get this disease.
More generally, worry about test results is sometimes a sizable cost of widespread screening.
This is partly because many medical tests frequently give false positives that may lead to unnecessary, worrisome, and sometimes risky additional tests and treatments before it is determined that nothing is really wrong.
The widely used PSA test to screen for prostate cancer is a good example.
Elevated or rapidly rising PSA levels are often indications of tumor in the prostate.
However, many individuals have relatively high PSA levels without any tumor presence, sometimes because they have enlarged prostates.
Others have rising PSA levels also for other reasons.
Annual PSA tests may be indicated for men over age 45 or so with family histories of prostate cancer, but they are less frequently needed for men who have little prostate cancer in their family.
Many tests sometimes lead to serious complications, and any complications should be balanced against the gains from early detection of medical problems.
Every blood test carries some risk of infection and contamination.
X-rays, MRIs, CT scans, ultrasounds and the like have radiation and other risks.
Probing for tumors with biopsies, colonoscopies, and other invasive tests carry a variety of risks.
The benefit-cost evaluation of any suggested widespread screening would depend on the net effect of the factors I discussed.
First of all, benefits depend on the size of the gain in treatment from early detection of a disease or other medical problems.
This gain has to be adjusted for the probability of finding a serious problem since the lower that probability, the less the expected gain from extensive screening.
Costs start with the cost of the methods used to screen, including the value of the time and inconvenience of individuals being screened.
The likelihood of various side effects from these methods also must be weighed.
The fear engendered by false positives can be important, although that has to be balanced against the peace of mind that comes from getting (true) negative results.
Preventive care is often considered the gold standard of good medical practice.
It is easy to get both doctors and patients to agree when either the government (i.e., taxpayers) or insurance companies (i.e., others who are insured) pay the vast majority of the costs.
A rethinking of this standard is warranted, and such a rethinking would be encouraged if individuals paid a much larger fraction of their out of pocket medical expenses.
The serious wounding of U.S.
Representative Giffords and killing of 6 others this January in Tucson, Arizona by a young man using a semi-automatic pistol naturally stimulated considerable anguish.
As in all other mass shooting rampages there were also immediate calls for greater gun control, so that guns could not get into the hands of individuals who might use them to kill many innocent victims.
In this piece I will consider how successful gun control can be, and the best ways to implement any controls.
This would probably be a safer and better world if no civilians had any guns, aside from policemen, and perhaps some sportsmen, since guns are involved in the majority of murders, at least in the United States.
I say “probably” because in such a world criminals would turn to knives, baseball bats, tire chains, even grenades on a very small-scale, and still other weapons.
Potential victims, such as shopkeepers and residents of crime-ridden neighborhoods, would in self-defense also acquire similar weapons in order to defend themselves.
Nevertheless, since guns are far more lethal than most other weapons, the number of deaths from crime and senseless violence would likely significantly decrease if neither criminals nor victims had access to guns.
The total amount of crime would also tend to decline.
Unfortunately, there is no feasible way, certainly not in the United States, to go from the present world to a world without guns.
It is estimated that some 60 million Americans own about 200 million guns.
This implies more than one gun per American household.
Naturally, such an average conceals enormous variation across households and communities.
Gun ownership is uncommon in suburbs like Scarsdale and Winnetka, while most households have guns in the inner cities of major cities, like Chicago, Detroit, or Los Angeles.
It is not simply the immense number of guns that makes gun control so difficult, but also the fact that the great majority is illegal and not officially registered.
Moreover, the supply of illegal guns is flexible and can be readily expanded as demand increases.
Well-organized criminal gangs own the greatest number and have the most sophisticated types of guns.
Indeed, drug dealer enterprises go far beyond guns to own explosives, rockets, and other weapons capable of large-scale killings.
It is said that the drug cartels of Mexico have weapons that are usually more lethal than those available to most of the local police forces that are fighting the cartels.
In trying to reduce the number of guns in circulation, American states and cities can continue to tighten up on the legal ownership of guns by making the permissible reasons more stringent, such as a shopkeeper in a dangerous neighborhood, by increasing the background checks on applicants for guns to discover whether they have been convicted of crimes or have a history of violence, by requiring longer cooling off period before applicants can take possession of guns, and in many other ways.
Undoubtedly, this would reduce the legal ownership of guns, and probably also total gun ownership.
However, despite some dramatic exceptions, the great majority of persons who own guns legally do not intend any criminal actions, nor are they likely to gun down innocent victims.
So tightening legal gun ownership will do little to reduce the number of guns in the hands of criminals and unstable individuals.
Indeed, it could increase the number held by would-be or actual criminals since the supply of guns available in the illegal market would increase, at least initially, as some of the guns that are pushed out of the legal market by more stringent controls would migrate to the illegal sector.
While some criminals may decide they no longer need guns since victims would be less likely to have them, others who would not have used guns before might now decide that guns would give them a greater advantage in attempted robberies.
The most effective way to reduce the number of guns in the hands of criminals without reducing the number of guns legally owned is to punish persons who own guns illegally and those who use guns when committing crimes.
Many jurisdictions already punish more heavily individuals who use guns while committing crimes, but it may be necessary to make that additional punishment more severe.
The expectation that punishments will be severe to apprehended criminals who had used guns in their crimes will induce some criminals either to use less lethal weapons, or to go out of the criminal business entirely.
Punishing illegal possession of guns is also common.
Here, however, a distinction should be (and is often) made between possessors who appear likely to either have committed or will commit crimes, and those who are clearly possessing guns illegally because they live in dangerous neighborhoods, or run shops that may be held up.
The former deserve serious punishments, while the latter groups should be lightly punished.
So overall I do not believe that making the legal ownership of guns more difficult is likely to do much good, and could be harmful.
I do see more promise in punishing illegal gun possession, and especially punishing severely persons who use guns to commit crimes.
Posner has very good comments, which I mainly agree with.
I will try to discuss a little the foundation of bankruptcy, a topic that Posner discusses only briefly.
In previous blog entries, we discussed student loans and the difficulty of using human capital, such as education or earning power, as collateral to get loans.
People with significant assets can offer these assets as collateral, although as Posner indicates, various bankruptcy laws exempt the housing and certain other assets of debtors from being possessed by creditors.
But still it is much harder to borrow on the basis of human capital alone because there is no collateral.
This is why the poor are most vulnerable in the credit market since if they get into difficulties, they have few assets to sell to cover their consumption and also payments on credit card and other loans.
Lacking collateral, the poor would pay higher interest rates even without bankruptcy protection because managing their loans is more costly, and collection via garnishment and the like is expensive.
The possibility of discharging debts through bankruptcy may add significantly to the rates they pay.
Posner shows that a vicious cycle is created because higher interest payments are more of a burden if unemployment or other difficulties strike.
One approach to breaking this circle is to make human capital loans not dischargeable through bankruptcy-except in extreme cases.
I suggested in an earlier entry that loans to finance the purchase of the right to immigrate should also not be dischargeable.
Creditors would have the right to garnish wages for a certain period of time, as under Chapter 13 of the Bankruptcy Code.
The new reform of bankruptcy laws moves in this direction, the same direction already used for student and other loans when governments, not the private sector, are the creditors.
Another approach that helps provide insurance is to encourage equity loans when human capital is the main collateral available.
By equity loans I mean a system where creditors share in both the higher and lower earnings of debtors.
So when earnings of a debtor are higher, the amount he or she pays back is greater than when their earnings are lower.
This system is quite common in financing agricultural loans in poorer countries, as demonstrated  by the research on loans in developing nations by Robert Townsend and others.
Since these type of loans already exist in poor nations with limited bookkeeping techniques and primitive commercial credit markets, there is no reason why they could not become more common in the richer nations, whether the US, Europe, or Japan.
Debtors might have to submit tax forms that verify their incomes, the same way that these are required in obtaining student aid, Medicaid, and some other assistance.
The law might have to be written to encourage such equity loans.
They may not always be feasible, but they are a more attractive method of social insurance than the bankruptcy system.
They avoid a lot of litigation over assets, garnishment, and the like.
In addition, those debtors doing better than expected automatically back pay more, while those doing badly automatically pay back less, possibly nothing until they do better.
This to me seems to be a much better way than tinkering with bankruptcy laws in meeting the legitimate needs of both creditors and debtors in an uncertain economic world.
Many interesting comments, but I cannot do justice to them all- I am busy giving a series of lectures in Paris.
Still, a few quick reactions.
Some of you argued that economic freedom is more important than political freedom.
I have some sympathy with that view, although it depends a lot on circumstances.
Very poor individuals do put much greater emphasis on economic freedoms.
But that weight tends to change as people get richer.
That is one main reason why political freedoms tend to follow economic development.
Are economic freedoms really easier to grant, as some of you argued? That is not clear to me since the world has been dominated historically by restrictions on both.
Both are difficult, and yet both are in a technical sense easy to grant.
In many cases, political calculation of gains and costs determine which comes first.
But it is still true that economic freedoms are more likely to be followed by political freedoms than the reverse.
There is ambiguity in defining both economic and political freedom, and indexes of both are imperfect.
I associate democracy not with voting-as one of you claimed- but with competition among interest groups and parties for political office.
The right to vote may be necessary, but is surely far from sufficient in producing political freedom-competition politically is the crucial test of democracy.
Similarly, there is no single definition of economic freedom.
But I believe all relevant definitions include private property and its protection, the freedom to change jobs, to be fired, to buy different goods and services, to save, and so forth.
It is not difficult to classify some nations are much freer economically, and others as much less free.
Some intermediate cases give greater difficulty.
I am willing to be called a Marxist if that fits, but I do not believe the views I put forward are congenial to Marxists.
They consider economic freedom to be a temporary situation on the way to socialism, where the people in some sense rule, and the state withers away.
That has turned out to be an erroneous prophesy.
I believe the right, although, imperfect causation is from economic to political freedom.
As far as I know,  Marx did not consider political freedom important.
Some good knowledge about judicial history displayed in the discussion.
Let me comment on a few of the issues-much of the discussion is among you that may continue.
The two law professors I refer too- Carrington and Cramton- believe that a change to term limits for Supreme Court Justices would not require a constitutional amendment.
They and others believe that it would be constitutional for Justices after their terms are finished to become sort of roving judges at lower federal courts.
I accept that conclusion.
It should be rather obvious that there would be less incentive to appoint young judges since they would have limited tenures, largely regardless of their ages.
Under the present lifetime system, their expected length of service would be positively related to how young they are.
Term limits are better than fixed retirement ages for several reasons.
One being that even with a fixed retirement age, the incentive to appoint young Justices is still strong.
There is a concern that political jockeying by candidates would become more important than at present, but I believe the opposite would be true.
There is now enormous and various kinds of jockeying among judges and other potential appointees, such as avoiding a paper trial, writing less controversial opinions, and in other ways.
The prize now is a term at the highest level of 30 or more years for the typical appointee.
Term limits reduces the size of the prize.
The scrutiny by the Senate of every single opinion also should decline because the duration of each appointment would be much shorter.
When the Constitution was adopted, life expectancy at age 25 was more than 25 years lower than it is now.
So life-time tenure for Justices appointed at age 40 meant an expected tenure of about 20 years, while now it means about 45 years.
If the Founders had anticipated such a huge change, I believe they would have imposed either a retirement age or a maximum term.
At least one of you asks quite properly about the evidence indicating that we need a change toward term limits? I did present what evidence is available on the increase in average length of terms actually served by Justices, the growing infrequency of appointments, and the increasing controversy of appointments.
All this means that Justices have become much more important, and less subject to natural forces of death or retirement.
It would be great to also have a detailed evaluation of the nature of their opinions, any changes in the degree of partisanship, the controversy generated by appointments and opinions, etc.
I do not know of anyone who has done that kind of study.
But the huge growth in legislation and litigation surely indicate that the importance of Supreme Court decisions has grown enormously, while the age and tenure of those making the decisions has also greatly increased.
This evidence to me is highly suggestive (but it is not, I agree, ironclad proof) that a change is desirable.
Some excellent comments, and extremely interesting discussion among the commentors.
Clearly, too many and too varied for me to do justice to all of them.
Let me give a few reactions.
It is true that long run elasticities of demand, especially for habitual and addictive goods like drugs, exceed short run elasticities.
The estimates I refer to are in fact long run elasticities in the few cases where they are estimated, and are the actual estimated elasticities in the other cases where no distinction is drawn.
While one or two estimates exceed one, the vast majority of the estimates are significantly below one, including the estimated long run elasticities.
One half is a good indicator of their central tendency.
Someone suggested that elasticities are different for price increases than for decreases.
If utility functions are continuous with continuous first derivatives-sorry to be technical- this cannot be true for small price changes.
Of course, they might differ for large price changes, so that the elasticity is not necessarily constant along a demand curve.
Perhaps the elasticity increases as prices decline, although the usual assumption is that it tends to decrease as prices fall, at least eventually.
I obviously do agree that legalization would likely increase drug use if it lowered prices of drugs- the quantity demanded of drugs also tends to decline as their price falls.
That is why I did not assume a zero price elasticity, but used 1/2 as my estimate.
However, whether legalization would increase quantity demanded at a given price is far less clear.
Forces go in both directions, such as the desire to obey the law versus the desire to oppose authority.
A couple of comments claimed legalization would be a tax on the poor, especially with the market price held constant.
I do agree that the demand for drugs by the poor would be more responsive than demand by others to a fall in price produced by legalization.
But can anyone doubt that the war on drugs has primarily hurt the poor? They are the ones mainly sentenced to prison on drug charges, their neighborhoods are often destroyed by drugs, and so forth.
I did not suggest that the legal excise tax on drugs should keep the market price of drugs constant  I allowed the possibility that the tax could be high enough to lead to higher prices, or low enough to produce lower prices than at present.
My instincts as an economist are to favor giving individuals free choice as long as they do not harm others.
But as a parent I also understand the desire to keep drugs away from young persons so that they do not get started along that path, although the prohibitionists have to realize that little is known about what behaviors would substitute for drug use.
Legalization would give the government additional tax revenue if they do not cut other taxes.
I have sympathy with the comments that are skeptical of whether the government would use that revenue wisely.
But it would still be much better than the present system that involves, among other things, a drain on taxpayers resources, and hits the poor especially hard.
There were some denials of whether the black market with legalized drugs would be any smaller than present levels if the tax on drugs either kept the market price the same as present street prices, or if it raised the market price even higher.
However, the crucial point is that there is no alternative to illegal production and distribution under the present system.
With legalization, many producers-I believe the vast majority of them- would choose to produce legally, and consumers would prefer to buy from them.
This is because of several important reasons, including that the legal quality would be more certain, and legal producers could use the courts and arbitrators to help enforce contracts.
Then the police and legal system could concentrate fewer resources on combating more effectively a smaller underground sector.
Every American president since Nixon has engaged in a war on illegal drugs: cocaine, heroin, hashish, and the like.
And every president without exception has lost this war.
The explanation lies not in a lack of effort- indeed, I believe there has been too much effort- but rather in a basic property of the demand for drugs, and the effects of trying to reduce consumption of a good like drugs by punishing persons involved in its trade.
The war on drugs is fought by trying to apprehend producers and distributors of drugs, and then to punish them rather severely if convicted.
The expected punishment raises the price that suppliers of drugs need to receive in order for them to be willing to take the considerable risks involved in the drug trade.
The higher price discourages purchase and consumption of illegal drugs, as with legal goods and services.
The harder the war is fought, the greater the expected punishment, the higher is the street price of drugs, and generally the smaller is the consumption of drugs.
Those suppliers who are caught and punished do not do very well, which is the typical result for the many small fry involved in distributing drugs.
On the other hand, those who manage to avoid punishment- sometimes through bribes and other corrupting behavior-often make large profits because the price is raised so high.
This approach can be effective if say every 10% increase in drug prices has a large negative effect on the use of drugs.
This is called an elastic demand.
However, the evidence from more than a dozen studies strongly indicates that the demand for drugs is generally quite inelastic; that is, a 10% rise in their prices reduces demand only by about 5%, which means an elasticity of about .
This implies that as drug prices rise, real spending on drugs increases, in this case, by about 5% for every 10% increase in price.
So if the war on drugs increased the price of drugs by at least 200%- estimates suggest this increase is about right- spending on drugs would have increased enormously, which it did.
This increased spending is related to increased real costs of suppliers in the form of avoidance of detection, bribery payments, murder of competitors and drug agents, primitive and dnagerous production methods, and the like.
In addition, the country pays directly in the form of the many police shifted toward fighting drugs, court time and effort spent on drug offenders, and the cost of imprisonment.
The US spends about $40,000 per year per prisoner, and in recent years a sizeable fraction of both federal and state prisoners have been convicted on drug-related charges.
After totaling all spending, a study by Kevin Murphy, Steve Cicala, and myself estimates that the war on drugs is costing the US one way or another well over $100 billion per year.
These estimates do not include important intangible costs, such as the destructive effects on many inner city neighborhoods, the use of the American military to fight drug lords and farmers in Colombia and other nations, or the corrupting influence of drugs on many governments.
Assuming an interest in reducing drug consumption- I will pay little attention here to whether that is a good goal- is there a better way to do that than by these unsuccessful wars? Our study suggests that legalization of drugs combined with an excise tax on consumption would be a far cheaper and more effective way to reduce drug use.
Instead of a war, one could have, for example, a 200% tax on the legal use of drugs by all adults-consumption by say persons under age 18 would still be illegal.
That would reduce consumption in the same way as the present war, and would also increase total spending on drugs, as in the current system.
But the similarities end at that point.
The tax revenue from drugs would accrue to state and federal authorities, rather than being dissipated into the real cost involving police, imprisonment, dangerous qualities, and the like.
Instead of drug cartels, there would be legal companies involved in production and distribution of drugs of reliable quality, as happened after the prohibition of alcohol ended.
There would be no destruction of poor neighborhoods- so no material for the Wire HBO series, or the movie Traffic- no corruption of Afghani or Columbian governments, and no large scale imprisonment of African-American and other drug suppliers.
The tax revenue to various governments hopefully would substitute for other taxes, or would be used for educating young people about any dangersous effects of drugs.
To be sure, there would be some effort by suppliers of drugs to avoid taxes by going underground with their production and distribution.
But since there would then be a option to produce legally-there is no such option now- the movement underground would be much less than under the present system.
As a result, the police could concentrate its efforts more effectively on a greatly reduced underground drug sector.
We have seen how huge taxes on cigarettes in New York and elsewhere have been implemented without massive movement of production and distribution underground in order to avoid the taxes.
So legalization could have a greater effect in reducing drug use than a war on drug without all the large and disturbing system costs.
How high the tax rate should be would be determined by social policy.
This approach could accommodate a libertarian policy with legalization and low excise taxes, a socially conservative position that wants to greatly reduce drug use with very high tax rates, and most positions in between these two extremes.
So if drug consumption was not considered so bad once it became legal, perhaps the tax would be small, as with alcoholic beverages in the US.
Or perhaps the pressure would be great for very high taxes, as with cigarettes.
But whatever the approach, it could be implemented far more successfully by legalizing drugs than by further efforts to heat up the failing war on illegal drugs.
Posner rightly distinguishes the attempted purchase last year of the American oil company Unocal by the Chinese government-owned company, CNOOC, from the proposed operation of six American ports by Dubai Ports World, a company owned by the Dubai government.
The case against the takeover of Unical by SNOOC was extremely weak for the various reasons we gave in our blog discussion last August.
The case against allowing this Dubai company to be in charge of loading and unloading ships at several ports is stronger, perhaps much stronger, but in my judgment not strong enough.
So I do support the decision of the Bush administration to allow the transaction to go through, and regret the Congressional and media opposition that torpedoed it.
Posner too readily dismisses the degree of opposition in some American circles to the takeover by foreign companies of certain types of American assets.
 Such protectionism not only blocked the Unocal takeover, for reasons he agrees are flimsy, but also prevents foreign airlines, even those as innocent as British Airways, from owning American airlines, and from flying from one American city to another.
Protectionism is the only reason for the pressure on China to control the rate of increase in its textile exports to the United States.
American protectionist sentiment arises whenever it can be disguised as concern over national security, terrorism, health, and other legitimate issues.
Protectionism was also manifest when Japanese companies in the 1980's and 1990's took ownership of certain assets, like Rockefeller Center, considered to be American jewels.
Anti-Japanese attitudes allowed protectionists to create opposition to these transactions that would not have been possible if British or say Italian companies were involved.
In the same way, although the operation of these ports was being simply transferred from one foreign company (British) to another one, dislike of Muslims by many Americans enabled protectionism to be disguised under the cloak of concern over Islamic terrorism.
I instinctively am dubious about the legitimacy of the opposition to the Dubai Ports World transaction when it is led by the new Lou Dobbs, the CNN business commentator, who saved his sinking ratings by discovering that he never met any imports to the United States that he likes, whether of goods, services, or people.
He may by accident be right in the Dubai ports situation, but his opposition makes me suspicious of the motives behind much of the more vocal opposition.
How serious is the risk that this government-owned Dubai company, headed by an American, would either intentionally or through lax management of the ports, have allowed terrorists or major weapons to enter America through the ports they would have operated? This risk is not zero, but I do not believe it is strong enough to justify blocking the transaction.
It is doubtful that any information provided to headquarters of the company by American dockworkers, or even by any of the very few Muslim managers of the company, would be of greater value to terrorists than information about port security that can be picked up from media reports, surveillance, and the internet.
Furthermore, the major terrorist attacks in recent years, such as 9/11 and those in other countries, did not (as far as I know) depend on information passed to the terrorists by sympathetic companies operating trains, ports, airports, airlines, or other vital sectors.
I have expressed my support of appropriate ethnic and other profiling in prior blog discussions and elsewhere, but the risk has to be sufficiently large to justify taking actions that inevitably arouse antagonism.
Several airlines from Muslim nations, such as Kuwait Airlines, Biman Bangladesh Airlines, Emirates Airlines, and Saudi Arabian Airlines, fly into the United States every day.
Should they be banned because someone in these companies might connive to allow terrorists on board who plan to hijack a plane and then fly it into a major building in New York, Washington, or elsewhere? Should all citizens from Saudi Arabia be banned from entering this country because a few might turn out to be dangerous terrorists?.
Terrorist profiling means that extra attention is paid to members of groups that are likely to commit terrorist acts, not in most cases that they are completely excluded from entering.
For this reason, applicants from a country like Saudi Arabia who want to enter this country to study or as tourists should be scrutinized much more carefully than applicants from say Sweden.
Extra scrutiny should be given to the activities of airlines with access to American air space that may pose greater risks than airlines like BA.
Extra scrutiny should have been the way to handle any terrorist risk posed by the Dubai Ports World management of the ports under their control.
The extra cost of an intensive inspection of cargoes entering these ports would have been worth furthering the belief that the US does not simply plead the case for globalization when confronted by restrictions placed by other nations on American exports.
Such an action would have sent a message that while the US takes terrorism very seriously, it would not use that concern as a cover for opposition to foreign ownership of American assets.
As Posner indicates, part of the concern arises from the apparent laxity in protecting against terrorist threats entering through ports.
That has been noted many times as a defect that deserves high priority.
 I am no expert on this, but I would be easily convinced that this country is not doing a good job of inspecting containers entering American ports, and personnel on ships that dock at these ports.
These concerns should be addressed, and exposure and correction of lax port enforcement should have high priority.
However, blocking the operation of several ports by this Dubai company at best trivially help overall enforcement.
Worse still, it could create complacency about protection of entry of terrorists and weapons through American ports that would be far more damaging to US security that allowing the Dubai transaction to go through.
Perhaps as Posner argues, not much harm will result from opposing the Dubai Ports World management of a few American ports.
Yet it gives still another signal to the world that when conditions are ripe, protectionist sentiment in the US will gain the upper hand.
 This is presented as anti-Islam or anti-terrorist, but is I believe at heart anti-free trade and anti-globalization.
To me that is the main cost of the Dubai Ports World fiasco.
The riots by students and union members against the new French labor law can be understood better if the law is placed in the context of the French labor market for the past couple of decades.
 France has had low rates of employment, and unemployment rates of about 10 per cent for the past fifteen years.
Some economists outside of France have blamed this to a significant degree on its rigid labor market.
I wrote an Op Ed piece in the early 1990's for Le Monde, the prominent left wing French newspaper, arguing that regulations which made it costly to hire and discharge workers, and high taxes on labor, helped to explain both the low employment and high unemployment.
French politicians, the middle and upper classes, and for a while most of their economists (one French economist replied in Le Monde to my article) rejected this explanation.
They claimed that the proposed remedies were too Anglo-Saxon, and that the bad labor market situation was temporary, perhaps due to insufficient aggregate demand for labor.
As sluggish employment continued throughout that decade and into the 21st century not only in France but also in Germany, Italy, and Spain, European economists and some politicians began to change their views.
They concluded that lower taxes on labor, greater flexibility in hiring and firing, and other changes were necessary to produce the growth in employment that had occurred in both Great Britain and the United States.
Germany under the Social Democratic leadership of Gerhard Shroeder significantly shortened the duration of unemployment compensation, and introduced other incentives for workers to look for jobs and for companies to hire them.
In France, however, the resistance to change has been greater, and the Socialists while they were in power even went backwards by introduced a 35 hours workweek that was supposed to spread a limited number of jobs among more workers.
Instead, it appears to have reduced employment.
The Conservatives under President Jacques Chirac and Prime Minister Dominique de VIllepin have been slightly better.
They modified the 35-hours law, allowed a two-year probationary period for employees at firms with less than 20 employees, followed Spain by introducing short-term employment contracts, and made a few other changes.
Unemployment of young persons in most countries tends to be about twice the overall unemployment rate, and so it is for France.
Youth unemployment rate is about 22 per cent, and fewer than 30 per cent of French youth between ages 15-24 have jobs, which is half the rate in Great Britain.
Unemployment rates of educated persons are generally much below those of the less educated, which explains why the low educated Muslim youth have unemployment rates well in excess of 30 per cent.
In order to improve economic opportunities for young persons, the law that led to these riots extends the more generous employment rules for small firms to young workers.
Under this new law (not yet in effect), workers under age 26 could be discharged within the first two years of their employment without employers having to give any cause.
It might seem strange that these riots have been led by students and union members, groups that are well treated by the French system.
University students are favored both because they pay only token tuition, and they have relatively good job prospects after they graduate.
Nevertheless, among other acts, students occupied the Sorbonne for three days until they were forcibly evicted.
Posner and I had indicated in our earlier discussion of the riots by young French Muslims that riots are not easy to predict by economic and social variables like unemployment, economic progress, or the degree of discrimination.
Still, one line of analysis may explain the heavy participation of both university students and unionists in the current riots.
Employment by small companies and of young workers constitutes only a fraction of total employment.
Therefore, to make a large dent on the economy's performance, the greater flexibility given to small companies and for employment of young workers has to be followed by other laws that apply to all employees.
These include much greater overall flexibility in hiring and firing, lower minimum wages, and reduced taxes on employment.
Therefore, if this law is allowed to be implemented, it is likely to be followed by laws that reduce the employment advantages between the better educated and unionized "insiders" who have good pay and stable employment, and the less educated younger and immigrant workers who tend to be unemployed and have uncertain job tenure.
This is why the conflict between employment insiders and employment outsiders can help explain why college students, who are future insiders, and unionists, who are current insiders, make up the bulk of those rioting.
Since insiders make up a majority of all employees, it is not surprising that apparently most of the French people want the government to withdraw this law.
Although this explanation might be accepted for union involvement in these protests, does it help understand the participation of students since university students all over the world feel a responsibility to protest and sometimes riot? But consider that students have not taken over the Sorbonne since the famous 1968 student riots that brought down the de Gaulle government.
I agree that students like an occasional riot, but usually a cause celebre is needed to galvanize them into action.
The new youth labor law was the catalyst this time.
That the riots may help university graduates and other insiders by discouraging politicians from taking away some of their advantages is surely an important added bonus.
I can be very brief since most of the many comments involved a battle between posters over free trade.
My position on that issue is well known, and I will leave it for others to  continue the discussion.
I do not even mind being included among the "people with academic jobs" since I do have one.
I should point out, however, that as I have written on this blog, I oppose tenure for academics, including myself, and that I earn much of my income from the "cut throat" competitive markets of writing books and giving lectures.
As someone pointed out, what is relevant is the unconditional probability, not the conditional probability, of the increase in terrorism due to the port deal.
For example, if the probability of terrorism was minuscule, it would hardly matter if the conditional probability of a terrorism act, given that one occurred, was greatly increased by the Dubai operation of a few ports.
As I indicated in my column on illegal immigration, I would favor much more immigration, perhaps even free immigration, if governments played a small role, as they did in the nineteenth century.
But given the welfare state, and the importance of votes, it is no longer sensible to be a free trader on immigration.
Thanks for the interested and interesting comments.
Let me add a few reactions to the discussion.
I agree that terrorist attacks sometimes (but not always) take time.
I presented only a very mild statement that maybe the War reduced the probability of attack since there has been none for five years.
Surely, if attacks had come, as in Spain-where it took hardly more than one year to generate a very deadly attack- the War would have been blamed, at least in part.
The Spanish attack helped to defeat the government that sent troops to Iraq, and hastened a withdrawal afterwards by the newly elected government.
Why Spain and not here?.
I do not see how anyone can claim that Iraqis are no better off, despite the continuing number of horrible Iraqi deaths.
It can hardly be doubted that the vast majority of Iraqis supported the overthrow of Saddam.
I suspect that a similar majority would oppose the quick withdrawal of U.S.
troops.
That should not be the reason for keeping them, but we should be clear on where Iraqis stand.
William Nordhaus is an outstanding economist, and I have learned a lot from his many original writings.
But an estimate of the war's cost of between $100 billion and $2 trillion is hardly a sharply defined basis for decision-making.
The $7 million estimate for a statistical value of life is for young persons taking various risky decisions.
Of course, soldiers are volunteers, but so too are men and women who take risky construction jobs, or join the police force.
Estimates of the statistical value of life are trying to measure the amount of compensation people require in order to induce them to take on additional life-threatening risks.
I should add that different studies come up with different number, and I consider $7 million on the high side.
Posner and I have no NBER paper on the cost of the war- one commentator is confused on this.
I assume he means the paper by Davis, Murphy, and Topel that we refer to.
They are the ones who consider continuing containment as one alternative to going to war-they also discuss other possibilities.
Perhaps as claimed in the comment, they overstate the cost of containment, but surely considering the cost of alternatives is better than concluding about the desirability of the War without discussing any alternatives?.
There can be only one Muppy, my former student.
The suggestion of insurance on a war is original, but I do not see how a country can take out insurance on fighting a war that runs into hundreds of billions of dollars.
There would have to be a large and reliable market where people can bet in aggregate large sums against the government.
But various internet betting markets could have wagers on the costs in any year, the number of casualties, whether any WMD would be found, etc.
That may be a bit macabre, but it does encourage many alternatives to official estimates of the costs and benefits of fighting a war.
Recall that there was a betting market on whether Larry Summers would resign as President of Harvard.
Unfortunately, for Harvard and other universities, those betting that he would resign won.
The third anniversary of the start of the Iraqi war has brought forth several assessments of how it was conducted, what its cost has been, and what the costs will be in the future.
These include analyses of whether American military leaders adequately prepared for a war of insurrection, whether economic costs were grossly underestimated, and whether the American people were prepared for the protracted nature of and heavy casualties during the insurrection period.
I will concentrate mainly on attempts to measure economic costs, but these estimates include assigning costs to deaths and injuries of American military personnel.
Clearly, aggregate costs to the United States have been considerable, and they will continue to rise as the insurrection persists and additional lives are lost.
These costs include the military equipment lost during the war and subsequent fighting, the value placed on deaths and injuries, increased depreciation of military equipment, higher cost of attracting enlistments to the military, and reconstruction aid to Iraq.
Davis, Murphy, and Topel of the University of Chicago Graduate School of Business in "War in Iraq versus Containment", unpublished, February 15, 2006 make various estimates of the aggregate cost under different scenarios about how long the insurrection continues, the number of American lives that will be lost in the future, etc.
They assume a statistical value of life of about $7 million per each military death, and about seven injuries per fatality.
Their median estimate of the total cost discounted back to 2003 at a 2 per cent interest rate is about $450 billion, while their "high" estimates are between $650 and $850 billion.
One can quarrel with their estimates--such calculations are extremely difficult-- but they are carefully made.
In any case, their results show that the cost of the war is large in some absolute sense.
Estimates of the war‚Äôs cost by Bilmes and Stiglitz in "The Economic Costs of the Iraq War", have received much more publicity.
Stiglitz very briefly summarizes these estimates in a short piece this month called "The High Cost of the Iraq War", in the online forum Economists' Voice.
In many respects their numbers are similar to those by Davis, Murphy, and Topel, but they are larger.
Their "conservative" estimate of budgetary costs that does not include additional interest on the larger federal debt due to the war is $650 billion when discounted at 4 per cent.
They also have "conservative" estimates that include additional interest on government debt, but I do not understand why this should be counted since they already count military spending as a cost.
 They adjust the $650 billion figure to account for increased depreciation of military equipment, the value of lives lost, and additional costs due to the many injuries of military personnel.
Mainly due to the assumption about increased depreciation and additional losses due to injuries, they raise their estimate to $840 billion.
I believe they exaggerate how large these costs are, but the calculations are difficult to make.
Even so, their total is consistent with the high end of the Davis, et al.
estimates.
I am much more doubtful about the additions that Bilmes and Stiglitz make to reach total costs of between $1 and $2 trillion, the numbers that have received the greatest publicity, and are cited in Stiglitz;‚Äô Economic Voice paper.
They assume that the war increased the price of oil from $5 and $10 a barrel for between 5 and 10 years.
These are sheer guesses that are far from obvious.
This would depend on the net reduction in Iraqi oil production, the increase in the oil supplied by other producers, and the effects of the war on demand for oil.
It is not clear that there was even a net reduction when one considers the alternative of continuing containment.
Assuming the scandals in the UN administered oil for food program would have been discovered anyway, might not Iraqi exports under containment been considerably reduced?.
About half of the increase in their estimate of costs from $1 to $2 trillion is due to their most generous assumption about the magnitude and duration of the oil price increase.
The other half is due to what strikes me as highly dubious assumptions about other macroeconomic effects of the war.
Since they count government spending on the war as a cost, it is a bit of a stretch (and even double counting under reasonable assumptions) to count also some of the reduced spending on other government programs.
This requires assumptions about private versus  public returns on spending that have little basis in hard evidence.
I have similar doubts about their adjustment ($250 billion) for the effects of the war on economic growth.
I tentatively conclude from these two studies that the cost of the war will amount to somewhere between $500 and $850 billion, taking account of the loss in life and injuries.
These are certainly high numbers, and generally much larger than initially estimated by the administration and many outsiders.
Has the war been worth its cost? The American people are increasingly expressing grave doubts about that.
I do not know the answer to this question, but whether the war was justified depends on how the Iraqi situation plays out, and what would have happened had we not gone to war.
The Bilmes-Stiglitz paper, along with other papers on the cost of the war, do not compare these costs with the costs of alternative policies.
Davis, et al do estimate the cost of various alternative scenarios, including continuing the containment of Saddam Hussein that had been in place before the war.
Their middle range scenario concludes that the present value of the cost of continuing containment would have been about $400 billion.
This is lower than their estimates of the cost of the war, but how much lower depends on which war estimate is used.
With their middle range estimate of war costs, the difference is not large, but the difference is considerable with the $840 billion estimate of Bilmes-Stiglitz.
It is not a justification for the war but neither is it totally irrelevant to put the war's cost in perspective.
The over 2000 young American men and women killed are a minor fraction of the almost 60,000 soldiers killed, and 350,000 casualties, during the Vietnam war.
It is also a fraction of the 40,000 mainly young persons killed annually in automobile accidents.
Consider the magnitude of the cost of the Vietnam War if it had been (and should have been!) calculated the correct way.
I have not mentioned anything about the costs or benefits to the Iraqi people.
Much property has been destroyed and many Iraqis killed during the insurgency, but can anyone doubt that practically all Kurds and Shiites (about 75 per cent of the total population), and some Sunnis, consider themselves better off now than under the brutal regime of Saddam? This brutality includes not only the enormous devastation to the Iraqi economy, but also the many thousands of deaths that he caused, a number that would be well in the hundreds of thousands if deaths due to the Iran invasion are included.
Since Democrats as well as Republicans often mention spreading democracy, I do not see how the effects on Iraqis can be ignored.
No terrorist attack has taken place in the U.S.
since 9/11, including the three years after the war started.
Maybe that would have happened anyway, and maybe the war even raised the probability of such attacks.
Still, the circumstantial evidence would suggest that the war might have decreased the probability of attacks in the U.S.
This could be because terrorists have been busy concentrating on Iraq, or because we have killed many who might have been involved in such attacks.
Still, I believe the war should be assessed a bad failure if Iraq degenerates into civil war that leads before very long to another brutal dictatorial regime.
On the other hand, if Iraq stabilizes reasonably soon, has a decent government, and starts to progress economically, the war would have been a success.
I say this not only because the war got rid of a cruel and dangerous dictator who inflicted immense harm on his own people, and who would have used highly destructive weapons on others if he ever obtained them.
In addition, a stable and progressive Iraq is likely to have beneficial effects on Syria, Saudi Arabia, and other bad regimes in the Middle East that will directly benefit the whole free world, possibly including creating a background for a peace between Israel and its Arab neighbors.
It could be a decade or more before the ultimate verdict about the war is available.The future looks precarious at present, but it is too early to throw in the towel and conclude that the war was a costly failure.
Posner shows that salaries of federal judges are low compared to those of lawyers in private practice or academia, and judges' salaries have declined substantially over time relative to earnings of practitioners and law professors.
This would imply that being a judge is now less attractive than in the past, but it does not imply that judges are underpaid.
For one thing, the number of lawyers has increased greatly over time relative to the number of federal judges, so only a smaller fraction of the stock of good lawyers has to be attracted to the federal bench than in the past.
Underpaid jobs by definition have difficulty attracting and holding high quality workers.
 Posner's evidence indicates that resignation rates of federal judges are low, not high.
It would be useful to know whether the quality of judicial opinions have declined over time, for that would be a way to determine whether the quality of judges has declined.
One-way to measure whether quality has declined is to determine the trend in the frequency with which higher courts overturn the opinions of district and circuit judges, but that approach would have to hold constant both the difficulty of the cases and also the quality of the judges doing the overturning.
I believe that given Posner's discussion of judges' salaries, a high priority should be given not to adjusting their salaries, but to raising their pensions to induce more of them to retire before they are too old and have served 25, 30, or more years.
Supreme Court Justices now serve an average of 26 years, and retire on average at age 80.
I argued in an earlier post (see Becker, March 12, 2005) that lifetime tenure for Supreme Court Justices and federal judges is undesirable precisely because few judges resign.
 Low rates of resignations combined with large improvements in life expectancy mean that all federal judges, not just Supreme Court Justices, tend to stay on the bench for decades.
The framers of the United States Constitution could not have foreseen the very large increases in tenure of judges when they stipulated that members of the Supreme Court would have lifetime tenure.
Judges who stay for decades run the risk of becoming isolated and out of touch with newer issues.
Moreover, judges who are incompetent or lose their mental facilities can stay on for many years.
Term limits for judges would be a good solution to such excessive tenure of many judges, but that would require a constitutional amendment for Supreme Court Justices, and would be politically difficult to implement for other federal judges.
A different approach would be to employ the carrot instead of the stick, and use financial incentives to induce more judges to retire at reasonable ages.
Posner indicates that judges already have generous pensions and health benefits, but their pensions can be made still more generous.
Suppose pensions were improved so that judges could retire after age 70, and/or after a certain number of years on the bench, at an annual pension that is 150 per cent of their salaries as active judges.
A circuit judge would then receive about $250,000 per year if he retired and only $175,100 if he continues.
That is likely to influence the retirement decisions of many judges.
If a 50 percent retirement premium were too weak an incentive, the premium could be made larger.
The financial burden on the federal budget of even large increases in the pensions of judges would be minor since judicial salaries are a tiny fraction of the budget.
Another way to encourage earlier retirement of judges would be to offer them several years of income as a bonus if they retire at say age 70, or after 15-20 years or so of service.
 Bonuses to encourage professors to retire were introduced by many universities after a federal law in the early 1990's prevented these institutions from forcing professors to retire.
Data for the University of Chicago and  other universities suggest that some 30 per cent of professors who reach their sixties accept a bonus of about two years salary plus medical benefits to retire then.
For most occupations it would not be wise to have pensions that are multiples of salaries.
But judges are unusual since they have de facto lifetime tenure, and many of them do continue to serve for many decades until they are in their late 70's or 80's.
Very high retirement pensions for federal judges seem to be a good way to induce them to retire at reasonable ages and lengths of tenure.
In March the National People's Congress of China passed a law to take effect in October that legalizes private property and gives it equal status to public property.
As a matter of principle this is a revolutionary measure since the abolition of private property is a basic tenet of traditional socialism.
However, de facto, China has long ceased to be a socialist country as the private sector has grown rapidly to produce about two-thirds of its GDP.
In 1989 I visited Poland as that country was beginning a transition from a socialist state to one based on private enterprise and private property.
In a meeting with the head of the ideology department of the Communist Party, I asked whether private property is consistent with communism and socialism? His answer was that they were still debating that! The Polish Communist Party was shortly afterwards swept out of power before the ideologues could provide an official answer, but China has now given its own answer.
It is clear from the contentious debate over legalizing private property that its official recognition is a major step away from China's claim to be a socialist state.
Although a law legalizing private property was proposed years ago, it was delayed until now by vocal opponents who correctly believe that widespread ownership of private property is inconsistent with socialism.
Dissent this time, however, was not welcomed, and the 3000 delegates to the Congress overwhelmingly passed the law with only a few votes against.
This legalization of private property, when added to the admission not long ago of entrepreneurs into the Communist Party, completes China's official recognition of the dominance of capitalism in its economy.
I will concentrate my remaining comments on likely consequences of the new law for the economic development of China.
That nation has had an extraordinary development during the past 30 years, with an average annual growth rate of its GDP exceeding 7 per cent without any laws fully legalizing private property.
The inference I draw is that official protection of private property is not essential in generating rapid development from low levels of income, and that China has had enough de facto protection of property to allow its private sector to grow rapidly from negligible levels to the predominant form of economic organization.
Despite limited official protection, houses, land, businesses, and corporate shares are privately bought and sold.
Strong profit incentives encourage the formation of new businesses, investments in farms and companies, and improved productivity.
Recent calculations indicate that the efficiency of China's economy improved at over 4 per cent per year since 1993, while the growth in capital per worker contributed an equal amount to its annual growth of 8.5 per cent in labor productivity.
These are unprecedented achievements, especially when one recognizes too China's large improvements in output per worker during the 15 years prior to 1993.
I would qualify this very rosy picture in three ways.
Studies indicate that long-term investments in agriculture have been discouraged by uncertainty among farmers about whether they can maintain possession of their land in the longer run.
Numerous riots and other violent incidents have taken place in rural parts of China in protest against the forced expropriation of land by local governments that provide little compensation.
Even the new law will not give farmers fully marketable rights over the land they now will own in principle but not fully in fact.
City dwellers have also been increasingly concerned about the security of the ownership of their homes since they have faced expropriation of their land by city governments in need of land for other purposes.
The new law states that compensation has to be offered for houses and land taken by governments, but is silent on how big the compensation should be,.
I believe property rights that are much more secure than in the past are necessary to enable China to grow much further, and begin to join the club of higher income nations.
The advanced economies that China would like to emulate protect software, patents, franchises, buyback provisions, complicated leases and property ownership clauses, and still other forms of tangible and intangible property.
This protection is necessary if investment is to be encouraged in such forms of property that are increasingly important as an economy progresses.
Even with laws officially protecting private property of the type just passed, full protection requires an independent judiciary that enforces these laws in a reasonable and efficient way.
Anglo-Saxon countries have been the best protectors of property rights in good part because that is how their legal systems operate.
China lacks such a judiciary, and so enforcement of contracts of all types through the courts has not been guaranteed.
 Chinese courts are an arm of the central government, and have judges who do not even claim to be independent.
Courts in China are known to be often arbitrary, which means that enforcement of laws and contracts is sometimes capricious.
If effectively implemented, the new law legitimatizing private property will have important implications for the future direction of the Chinese economy.
That these implications are evolutionary rather than revolutionary is indicative of how far China has come from its socialist past.
David Cameron, the leader of the Conservative Party, set off a considerable debate in Great Britain on marriage when he recently claimed "Families come in all shapes and sizes and they all need support [because]‚Ä¶married couples stay together longer.
Therefore, there is a very strong case for supporting marriage [in the tax system].
Children do better if their mother and father are both there to bring them up".
The Bush administration is also very pro-marriage, and in the past has considered using the tax code to encourage marriage.
Virtually all studies show that children brought up in intact families do better at school, and have fewer drug and delinquency problems, than do children whose parents divorced or never married.
However, that evidence alone does not tell us whether or not children of divorced parents would have done poorly even if their parents had stayed together, perhaps because parental fighting creates an unpleasant atmosphere.
Good evidence on the effects of divorced parents on children is much more elusive, but the limited material available confirms that divorce makes children worse off.
This is partly because one-parent families have less money and time to spend on children, and because these families tend to live in worse neighborhoods.
Moreover, the process of witnessing parents going through a divorce may also harm children.
A little evidence also indicates that being brought up only by mothers is harder on boys than girls, probably because boys benefit more when their fathers live with them.
Since single mother families are so common among blacks, this finding has been used to help explain why young African-American males do a lot worse than young African-American females in school performance, delinquency, and on many other measures.
Different outcomes between boys and girls of growing up in families without fathers suggest that this rather than which parents continue to live together is what harms children.
Even if having two parents in a household is beneficial to children, it is far from clear whether marriage per se benefits children compared to having parents who live together without being married.
A further question is whether all two parent households, or only households with two biological heterosexual parents, benefit children? The statement by Cameron at the beginning of my discussion says that 'families come in all sizes and shapes and they all need support'.
I am persuaded that children raised by two gays or lesbians do worse than children raised by heterosexual parents, although the evidence is far too limited to be certain about this.
The tax code of the United States require joint filing by married couples.
This imposes higher taxes on couples when both work than if they were single partly because two low-income earners who marry might have too much income to qualify for the earned income tax credit, and would receive less if they do qualify.
The progressive tax structure also penalizes two earner married couples, especially when their earnings are similar.
Hundreds of other provisions also impose a marriage penalty, although they are mainly minor ones, while many provisions give small subsidies to married couples when only one of them works.
Any tax penalty imposed on two earner married couples has become more important during the past several decades because these couples are much more common.
An obvious solution to a marriage penalty from joint filing would be to require, or at least allow, married couples to file separately and split their incomes.
Separate filing is now the norm in virtually all other member countries of the OECD.
Subsidies to marriage could be easily implemented by allowing larger per person standard deductions to married couples than to single persons, but it is not obvious that the tax code should be manipulated to try to alter these family arrangements.
Arguments based on the external effects of parental divorce and other separation decisions on children are often not applicable because the vast majority of parents do love their children.
These parents take account of their children's interests in deciding whether to separate, and in their other decisions.
Mainly for this reason, all countries leave the care of children to parents, except in extreme cases of neglect by parents.
Moreover, since justifications for marriage subsidies based on the positive effects of marriage on young children would not apply to couples without children, or with grown children, should subsidies be given to such families? Furthermore, suppose it were shown conclusively, the available evidence is mixed, that young children are worse off when both parents work.
I doubt if there would then be much support for additional taxes on two-earner families, although the logic of doing this is the same as that for providing marriage tax subsidies.
Explicit marriage subsidies (or penalties) ,or taxes on two-worker families, will not have large effects on either marriage or the number of married couples where both work unless the subsidies (or penalties) were much bigger than would be politically feasible.
But even if the tax system could be used effectively in these ways, it involves too much social engineering over choices by adult men and women.
Except in extreme cases of child abuse and neglect where parental choices have sizable external effects on children, government interventions in family decisions tend to cause more harm than do good.
Rankings of educational programs, hospitals, physicians, cars, and other goods and services have become increasingly popular during the past 20 years.
There is a robust market for various rankings because of the difficulty students, patients, and other consumers have in getting sufficient information about the numerous attributes being offered, such as quality of other students and faculty, size of classes, earnings of graduates, or mortality rates of hospital patients.
I believe that on the whole rankings convey useful information about quality, although there are obvious problems in getting reliable rankings.
Perhaps the most serious problem with rankings is that institutions "game the measure".
So if the ratio of admissions to acceptances were used, then as Posner indicates, schools might tend to admit applicants who do not have good alternatives.
If hospitals are ranked partly by the death rate among patients, then hospitals have an incentive to shy away from admitting terminally ill patients, or those with difficult-to cure conditions.
Yet schools and other organizations respond to their ranking position not only by gaming the measure, but also by improving what they provide.
In this way, some business schools and colleges ranked low in the amenities and other characteristics of the learning experience provided students have responded by improving physical facilities and the guidance offered to students, reducing class size, and increasing networking.
The issue in determining whether measures have on balance positive or negative value to consumers is whether the good information provided exceeds the misleading information, due in part to "gaming".
The difficulty for consumers is that not only do colleges, business schools, and hospitals provide credence products, but also that there is little or no repeat business since students do not go to the same college more than once, and few patients have multiple spells in the same hospital.
Still, applicants to colleges (and/or their parents), and sick persons choosing hospitals tend to recognize that institutions have an incentive to game the measure.
That weakens the quantity of information they believe they get from rankings based on particular measures, but it does not generally make the information worthless.
Any conclusion that rankings make the information available to consumers worse does not do justice either to the difficulty of making sensible decisions about education programs and medical help in the absence of ranking information, nor to the competitive search for different criteria to use in rankings of schools and medical care.
A more accurate conclusion would be that the great interest in rankings, and the rapid expansion in the number of magazines, newspapers, and non-profit groups that provide rankings of schools, hospitals, doctors, and other goods and services suggests strongly that consumers believe they do get useful information from rankings.
How much information they get varies with their access to other information.
Those profit and non-profit organizations that provide rankings compete by emphasizing different criteria.
For example, the several newspapers and magazines that rank MBA programs weight differently evaluations of business recruiters, earnings of graduates, the increase in earnings of graduates compared to what they earned before enrolling, the amenities provided, the research of faculty, the attention to globalization issues, and so on.
That rankers compete by using different criteria and weightings strongly suggests that significant numbers of applicants to schools consider how rankings are determined.
To be sure, there are ways to improve the basis of rankings that make them less vulnerable to gaming by the institutions being ranked (see the discussion of hospital rankings in Mark McClellan and Douglas Staiger, "Comparing the Quality of Health Care Providers", and other papers by these authors).
For example, MBA programs can be compared not by earnings of graduates, but by the increase in earnings of graduates compared to what they earned before entering an MBA program.
This shift in the earnings measure would help control for the quality of students in a program (the Financial Times' rankings of MBA programs are based partly on this measure of value added).
To help determine what benefits students actually get from an MBA program or college, one should not only interview current students, but also those who graduated 3, 5, or 10 years ago.
After several years of working or additional study, the effects of attempts to influence student evaluations through superficial amenities should have been replaced by a consideration of longer-term benefits.
The obvious interest in rankings by consumers suggests that they consider the rankings of schools and programs, or health care, or automobiles to be valuable.
These rankings can be, and are being improved, but that they have survived the test of the marketplace indicates that consumers believe they are useful enough to be willing to pay for them.
According to the economists' analysis of externalities, a substance should be taxed, and in extreme cases banned, only if it raises the earnings and other benefits to users at the expense of harm imposed on others.
For this reason, excessive drinking is fined and punished also in other ways, since heavy drinkers are more likely to get into accidents that harm others.
Similarly, a substance should be subsidized if it benefits others while benefiting users.
Posner's example of substances that encourage greater innovation fits this category.
Substances that raise benefits to users by the same amount as it raises their overall productivity should be neither banned nor encouraged.
In economies with competitive labor and products markets, individuals tend to receive earnings and other benefits that equal their "marginal product"; i.e., equal their contribution to total output.
Substances or anything else that raise the productivity of individuals who receive their marginal product should be neither taxed nor subsidized.
For example, sleeping pills enable users to get a better night's sleep, which allows them to get to work on time and have a clearer mind while at work, and thus become more productive while at work.
There is no reason to tax or subsidize this use of sleeping pills because individuals taking the pills would generally be paid the full increase in their productivity, and they would bear the full costs.
 The vast majority of substances that people take to affect their cognition fit into this category of meriting neither ban nor encouragement since they primarily affect the productivity of users without having significant external effects on others, either positive or negative.
Exceptions are substances that raise the benefits of users in situations that have a "zero sum" aspect, so that the user's gain corresponds to about an equal lose to others.
Sports competitions have important zero sum aspects since fans care a lot about who wins and loses in addition to the quality of the play, so that increases in the performance of every player without changing outcomes brings relatively little benefit to fans.
This importance of relative performance to fans provides the justification put forward in our discussion on sports doping on August 27, 2006 for major league baseball and other organized sports leagues to place limits and bans on the use of certain drugs among their players.
For these drugs may have long run negative consequences for the health of users without raising fan welfare by much.
However, I do not see any reason why governments should be involved in enforcement of any bans imposed by sports leagues, and it was absurd for Congress to hold hearings on whether either Roger Clemons or his former trainer were lying.
Governments may be helpful to sports leagues in enforcing their ban by punishing violators, but governments might also be helpful to companies in getting their workers to reduce absenteeism.
Still, that is no reason for governments to be punishing workers who do not show up for work because there are no externalities outside the workplace of the individual company or league that warrant government intervention.
Other examples where relative performance helps to determine benefits include entrance to college based on test scores, such as the SAT test, or patent races to see who comes up first with the technique or process that several competitors are seeking to discover.
South Korea and other countries have tried to use laws to cut down on private tutoring and other investments that increase the likelihood that a student may succeed in gaining entrance to top universities, where the number of acceptances remains constant.
Presumably, these countries would want to ban students from taking various stimulants that improve their performance, perhaps at a risk to their health, but such bans are difficult to enforce.
Some economists have claimed that superstar situations involving singers and other entertainers, novelists, money managers, and lawyers have this zero sum character since a person can make a huge income by being only slightly better at what he does than others.
Since fans and customers prefer to listen to the best singers or have their money managed by funds that seem to be the best, someone who is only a little better than the competition can attract a very large fan base, or a lot of money to be managed.
 They may earn only a little from each fan or on each dollar invested, but make it up through the millions of fans they have and the billions of dollars they manage.
The superstar phenomena discovered by my late colleague Sherwin Rosen is real and important in modern societies with huge economies of scale in communication, but it is not a zero sum situation.
A superstar still only collects the value of his net contribution to output.
The value is large not because of externalities, but because a superstar may only add a little utility to each fan, but he adds thislittle to each member of a huge fan base.
All in all, even aside from enforcement issues, I see little reason for governments to ban the use of Provigil and other stimulants that improve cognitive performance.
There are some situations where this improvement mainly benefits users at the expense of harm imposed on their competitors.
For the most part, however, potential users are the best judge of whether they should use stimulants since they bear the lion's share of the costs as well as receive the benefits.
Medicare is the federal system that covers hospitalization, physician care, drugs, and a limited amount of nursing home care for men and women over age 65.
President Lyndon Johnson started it in 1965 in a modest financial way when the elderly were a small fraction of the adult population, and when drugs and surgeries to treat diseases of old age were far fewer and less complex.
This program has grown in the 42 years since then into a major entitlement, with spending of almost $400 billion, which is more than 3 percent of American GDP.
Of even greater concern is the projected growth in this program during the next several decades.
If past growth in Medicare is a reasonable guide to future growth, and assuming that real GDP grows at an annual rate of two and one half percent, Medicare spending as a share of GDP will double by 2020, and increase some 3-4 times by 2050 to 10 percent or more of GDP.
Dollar spending on Medicare patients would increase to over a trillion dollars by 2020.
Less than half of the projected increase would be due to the further aging of the population, while the majority is the result of the expected continuing growth in spending on hospitalizations, surgeries, and drugs for the elderly of given ages.
Much of the increased spending would occur even with the most efficient health delivery system since senior citizens along with younger adults put a high value on living longer in reasonably good health.
The value placed on longer life and good health generally rises as incomes grow; indeed, economic analysis and past experience indicates that the willingness to pay for better health will increase in the future at least as rapidly as incomes do.
Still, there is no doubt that while the American health care delivery system has many strengths, including an encouragement to medical innovation, medical costs for the elderly could be significantly reduced with no reduction in quantity and quality if various inefficiencies in the system were corrected.
Numerous proposals have been advanced to make the Medicare delivery system more efficient.
Former Secretary of State and of the Treasury George Shultz, along with Professor John Shoven, in an important forthcoming book, Putting our House in Order, review several of these proposed reforms and advance their own thoughtful reforms for social security as well as Medicare and Medicaid.
We discussed various reforms of American spending on medical care in our blog posts on January 13 of this year, and I will not repeat them now.
Instead, I discuss why drugs should have an important role in inefficient as well as efficient medical delivery systems.
Medicare only started to cover spending on drugs in 2003, and the coverage had various defects.
These include a deductible that is much too low, and a "doughnut" where there is no coverage at all for additional spending in the middle ranges of drug spending (see my discussion on Feb.
13, 2005 of these and other defects of drug coverage, with suggestions for how to make that coverage more effective).
It is no surprise that spending on drugs by the elderly were not part of Medicare at the beginning since drugs were a minor part of their total medical spending in 1965.
However, discoveries since then have led to various blockbuster drugs, and many less revolutionary advances in medications.
These include drugs to lower blood pressure and cholesterol, to treat Parkinson's disease and other disorders of the nervous system, to help thin the blood, to overcome erectile dysfunction, to fight Aids, and to reduce testosterone to combat the spread of prostate cancer.
The share of their total medical care that seniors spend on drugs has moved steadily upwards during the past 40 years, and now is more than 12 percent, and before long might approach 20 percent.
Drugs should be part of an effective health delivery system not only because of the continual introduction of new drugs, including a growing importance of genetic based drugs, but also because drugs have a very attractive cost structure, especially for the growing elderly population.
As the number of persons over age 65 increases during the next several decades, it would be useful to have a health delivery system in which costs do not rise as rapidly as the number of persons treated.
Surgeries do not have this property since their cost tends to increase in proportion to the number of surgeries performed since each one takes a more or less fixed number of surgeons and supporting personnel.
Hospitals also have few economies of scale with respect to the number of in-patients treated once a relatively small efficient bed size is reached.
Drugs have a totally different cost structure.
They typically have very high fixed costs of research and development and low marginal costs of adding additional users.
To develop a new drug to treat depression, or Alzheimer's, or another serious medical problem, usually requires hundreds of millions of dollars in the form of spending on research and various stages of clinical trial development, including many failures before a successful treatment is developed.
Once a valuable drug is developed, however, the cost of producing each pill is usually small, certainly a tiny fraction of its fixed costs of development.
This means that additional users can be added with relatively little increase in total costs, and a decline in average cost per user.
This property of the cost of producing drugs has two extremely important implications for Medicare costs.
The first is that drugs are an efficient way to treat diseases and disorders that hit a large number of men and women since then the fixed costs can be spread over a larger number of users.
This makes them particularly valuable to the elderly who are a growing share of the population in the United States and all other developed countries, and in many developing countries as well, including China.
Moreover, the U.S.
and world populations are also increasing, which increases the demand for all drugs, including those that help treat older persons.
Drugs are also valuable in inefficient delivery systems that have trouble choking off medical treatments that would not pass a benefit-cost calculation.
This would characterize systems with highly subsidized medical care, with excessively low deductibles, or with rules that cannot deny treatments to the very elderly and those close to dying who would benefit only a little from receiving treatment.
Surgery, hospitalization, and close physician supervision are expensive ways to treat seniors who do not benefit much from this care since the cost of these procedures tend to rise in proportion to the number treated.
On the other hand, while treating seniors with drugs sometimes also may not add much in the way of benefits, the additional cost per user would be much smaller than the average cost per user.
This property of the cost of using drugs makes them particularly useful in the American medical system since that system errs on the side of generosity toward the elderly and others compared to the health care systems in most developed countries.
This advantage of drugs in inefficient health delivery systems does not argue against the need for major reforms of Medicare to make it more efficient.
It recognizes, however, the value of second-best solutions in a political environment where reforms of health care are likely to come slowly because they run up against many powerful vested interests.
Hardly a day goes by during this housing crisis that the media does not report on families in foreclosure proceedings, or in arrears in repayment on mortgages that had close to zero down payment requirements and low ‚Äúteaser ‚Äú interest rates.
The many excuses offered by some home owners for their plight, and also eagerly by the authors of these human interest stories, is that the borrowers did not understand that these introductory interest rates might rise a lot after a few years, or that they would have negative equity in their homes if housing prices stopped rising and began to fall.
An obvious alternative explanation for their behavior is that they gambled that the good times would continue indefinitely.
This type of response to failed decisions is not unique to the present housing crisis, but is part of a strong trend toward shifting responsibility to others.
Women who sign a pre-nuptial agreement specifying the amount of their husband's pre-marital wealth that would be theirs in the event of divorce often try to have the agreements overthrown in divorce litigation.
They claim that they did not understand what the agreements meant, or that their husbands took advantage of them in other ways to get them to sign the agreements.
Usually they signed simply because that was the only way they could marry the men they very much wanted to marry, perhaps in part because the men were wealthy.
Many criminals who confess to or are convicted of serious crimes try to have the courts excuse or mitigate their behavior.
They allege that they had uncaring or abusive parents, or that fathers, relatives, stepfathers, or other adults molested them as children.
Abusive treatment is awful, but still the vast majority of children abused do become law-abiding and responsible adults.
That is a major fact that courts should pay attention to.
Successful attempts to shift the responsibility for bad decisions toward others and to society more generally create a "moral hazard" in behavior.
If individuals are not held accountable for decisions and actions that harm themselves or others, they have less incentive to act responsibly in the first place since they will escape some or all of the bad consequences of their actions.
It does not matter greatly whether this moral hazard resulted from the shifting of blame for unsuccessful actions to the "small print" in a contract, to an abused childhood, to a mental state, or to many other  efforts to shift responsibility away from oneself.
An important foundation of the philosophy behind the arguments for private enterprise, free economies, and free societies more generally, is that these societies rely on and require individual decision-making and responsibility.
This philosophy not only emphasizes the moral hazard reasons to require individual responsibility, but also "the use it or lose it principle", a colloquial expression indicating that various mental and physical capacities wear down and erode if they are not used on a regular basis.
This principle implies that people who are accustomed to having other persons or governments make their decisions for them lose the ability to make good decisions for themselves.
Free societies lead to better decision-making partly because men and women accumulate more experience at making decisions that affect their well-being and that of others.
Of course, I recognize that not all individuals are equally capable of making decisions in their own interests.
Clearly, the mentally retarded have trouble understanding complicated decisions.
People sometimes get fooled by how contracts and transactions are presented to them, perhaps because of cognitive quirks.
College-educated persons generally manage their financial assets better, and respond more successfully to many types of economic, health, and other stresses, than persons with less schooling.
For example, educated residents of New Orleans reacted more effectively to the challenge of the Katrina hurricane than did high school dropouts.
Similarly, the anarchy in Russia following the collapse of communism greatly lowered the life expectancy of all Russian men except those men with a college education.
These men continued to improve their life expectancy throughout the economic crisis that engulfed Russia.
Still, greater practice in making decisions, and greater responsibility for the consequences of one's decisions, usually significantly improves decision-making by the vast majority of adults, regardless of limitations in their education and cognition.
Moreover, many of the decisions and actions that do not work out well are not due to low education, inability to understand what is going on, or biased and incorrect information.
For example, the sub prime mess that continues to devastate financial institutions of the United States and elsewhere is not due to the limited information given to borrowers since this crisis has also financially ruined many highly educated and sophisticated bankers, hedge fund managers, and others with years of experience dealing with complicated financial assets.
Borrower and lender alike, regardless of their financial experience, were caught up in the atmosphere brought on by a bubble that seemed to promise perpetual good times in financial markets.
What if anything should governments do to help out in this present financial crisis, mindful of the many kinds of moral hazard that are lurking, but also mindful that the financial structure is delicately balanced? Despite the moral hazard risks, interventionist policies might be justified not because some borrowers or lenders were taken advantage of, but if these interventions would help the economy recover more quickly, and insure that the recession is neither prolonged nor deep.
Still it is difficult to see the merits in the Fed's efforts to help the sale of Bears Stearns to JPMorgan Chase by guaranteeing many billions of mortgage and other assets of the company.
Becker makes the ingenious suggestion that the effect of adding drug coverage to the Medicare program is to prevent spending on drugs from growing as rapidly as the number of persons covered by Medicare.
The reason is that because the marginal cost of drugs tends to be very low; most of the costs of drugs are fixed costs of research and development.
Hence the larger the number of persons eligible for Medicare drug benefits, the lower the average cost of drugs.
Nevertheless the net effect of the addition to drug coverage on total Medicare spending is likely to be a substantial expansion in the total cost of Medicare.
As of January of this year, 25 million persons had enrolled in Medicare Part D (the drug part), and the total annual expense to Medicare is estimated to reach $36 billion this year.
As the program is only two years old, further increases in enrollment and usage can be expected, irrespective of increases in the eligible population, since more than 40 million persons receive Medicare benefits.
The net addition to Medicare costs will be less than the cost of Medicare drug coverage if drugs are a net substitute for other covered treatments.
But they may not be, because there is also a complementary relation between drugs and other forms of treatment, such as surgery; to the extent that drugs reduce the pain, discomfort, or disability of surgery, they may increase the demand for surgery by reducing its nonpecuniary costs, a cost reduction that though real will not be reflected in the Medicare cost figures.
In addition, by increasing the demand for drugs, Part D will increase the net expected profits from new drugs, and thus increase the incentive to create such drugs, with the heavy fixed costs that, as Becker points out, are entailed by the development of new drugs.
Still another problem with Medicare drug coverage is that people have less aversion to popping a pill than to being operated on or otherwise confined in a hospital.
The cost of surgery, as it appears to most people, includes a significant nonpecuniary element that of course is not reimbursed by public or private health insurance.
Taking drugs does not impose such costs unless a drug has serious side effects.
Hence the Medicare drug subsidy should cause a greater percentage increase in demand than the traditional Medicare subsidies did.
Drugs also provide an attractive but costly substitute for life-style changes designed to improve one's health.
If the choice is between giving up rich food and taking a pill paid for by Medicare, the latter may be preferred though the social cost may be higher; the subsidy confronts the consumer with false alternatives from an overall social perspective, just like monopoly pricing.
The addition of drug coverage to Medicare entrenches the worst feature of the Medicare program, which is the lack of a means test.
There is no reason why people who can afford to purchase health insurance that will cover their medical expenses in their old age should be subsidized by the taxpayer.
There is, however, no political will to require a means test.
More broadly, there is no political will to reduce public expenditures on health care.
The focus of politicians is not on containing costs but rather on what has the opposite effect: expanding coverage.
Congress is moving to require health insurance companies to cover mental illnesses, despite uncertainties about the efficacy of treatments for mental illness and the "cosmetic" element in the treatment of such illness because of the lack of a clear distinction between being mentally ill and simply being less happy, focused, energetic, outgoing, and, in short, successful than one would like to be.
Especially because of the optional character of treatment for borderline mental "illness," demand for such treatments will be highly responsive to a subsidy, assuming the insured person who demands such treatments can shift some of the cost to the other members of his insurance pool.
Notice too how the movement to require insurance coverage for mental illness will interact with Medicare drug coverage to further expand drug usage by the elderly.
In addition of course the politicians want to extend health-insurance coverage to the 40 million plus uninsured Americans, and this will increase the demand for medical services.
What politicians say in a presidential-campaign year is not, however, a reliable guide to their intentions.
I suspect that when the new Administration takes office in January of next year it will find that fiscal constraints preclude any significant expansion in the gargantuan federal subsidies for health care (including such indirect subsidies as imposing mandates on private insurance companies); but neither can we expect meaningful measures of cost containment.
Until the mid 1960's, female high school graduates were less likely than male graduates to go to college, and female college students were far more likely to drop out than were male students.
The direct reason for this difference was that many younger women married and then dropped out of school - mainly to start having families.
Perhaps a more basic reason for this gender difference in education was that women did not participate in the labor force so much in those days, and hence many women did not believe a college education was useful.
All this has changed radically since 1970.
Female high school graduates are now no less likely to enter college than are male graduates, and a much larger fraction of girls than boys finish high school.
These two facts imply that considerably more women enter college than men.
The fraction of college students who are female is further increased by the greater propensity of women who enter college to finish and graduate.
About 57% of American college students are women, and they constitute about 60% of those who graduates.
Similar trends toward making women a majority of college students apply to many European countries, and some Asian countries as well.
What explains this reversal from under representation of women in college to over representation ((see the related discussion in my blog entry for July 17, 2006)? One important cause is that marriage and child-rearing exert a much weaker pull out of school for women than in the past since women marry and start families at much later ages than 40 years ago.
This increase in age at marriage is related to the decline in birth rates, and to the increased time that women want to spend working rather than caring for children and running households.
A college education is more attractive to women who spend greater time in the labor force since going to college significantly raises earnings of women as well as men.
The financial attractiveness of a college education has grown sharply for both sexes since the 1970's because of the large rise in the earnings premium from a college education.
The average hourly earnings of college-educated persons grew from about 40 % higher than that of high school graduates in 1980 to about 80% higher in recent years.
This trend toward a much higher college education premium is also found in many other countries as well as the United States.
Although quantitative evidence on non-earnings benefits are more limited, the advantages of a college education in improving health, raising children, managing financial assets, responding to adversity, and in other areas of life have also grown along with the growth in the college earnings premium.
This implies a widening advantage of a college education even to women who spend a significant portion of their time raising children and managing a household.
In addition, the propensity of college-educated women to be married has increased a lot relative to the marital rates of women with less education, so that graduating college no longer significantly reduces a woman's chances of marriage.
Since these forces pushing women toward a college education have been strong during the past several decades, it is no surprise that a much larger fraction of young women now enter and complete college than a half century ago.
This does not, however, fully explain why women are more likely than men to be in college since most of these forces have been just as powerful for men, and college-educated men still spend a larger fraction of their time working in the labor force than do college-educated women.
An important reason why women not only closed the education gap with men, but also changed the direction of that gap, relates, I believe, to the better performance of women in school.
The average grades of women at every education level exceed the average grades of men, while the variation around the average is larger for men.
Persons with low grades find school unpleasant since their teachers criticize them, and they come to believe that they are failures.
Since many more boys than girls in high school have low grades because both average grades are lower and the variance in grades is greater for boys, more boys than girls find high school unpleasant and drop out before graduating.
Dropouts truncate the grade distributions of graduates at the lower end, so that average grades of boys who graduate high school are closer to the average grades of girls who graduate than are the averages for all boys and girls in high school.
The same process operates at the college level.
Men have much lower grades in college and find the experience less pleasant, so they drop out of college in much larger numbers than women, and are much less likely to graduate.
That many more men than in the past continue on to college after high school indicates that they are aware of the rise in financial and other benefits from college.
That they drop out of college in large numbers presumably indicates that they are either discouraged by their low grades, or they just do not like being students.
Why women at all ages do better in school than men is not so easily understood.
It is unlikely that women do better mainly because they expect to remain in school longer- this is causation from remaining in school longer to better grades- since women had better average grades than men even when they were more likely to drop out of school.
One line of explanation argues that women are more diligent students, less rebellious, and more docile students.
Whatever the explanation for the remarkable shift in college attendance rates of men and women during the past 40 years, this shift is likely to have major implications for future changes in the gender gap in average earnings, the fraction of heads of business that are women, and other measures of gender differences in achievement.
I agree with Posner that Buckley was not a major originator of ideas.
He was, however, an absolutely superb public intellectual who had the courage to be a conservative when that was still highly unpopular, especially in the New York City circles that Buckley inhabited.
He persuaded many young college students that a conservative stance is a respectable position intellectually, and to this end founded the political youth movement Young Americans for Freedom.
He influenced Barry Goldwater and Ronald Reagan, although he was a much less important influence on their thinking, or on that of Margaret Thatcher and other conservative political leaders, than more creative thinkers like Milton Friedman and Friedrich Hayek.
I did not know William Buckley personally, but I admired his multi-talented contributions.
He was a  media entrepreneur, as seen from the influence of The National Review, a magazine that he founded when conservative magazines were not popular, and supported financially for many years.
He wrote a widely read syndicated column On the Right, and hosted for many years Firing Line, a weekly television program that debated public policy issues.
I have only occasionally read National Review or his columns, or watched his television programs, but I usually enjoyed and admired them when I did.
When young he had repugnant views on several issues, like racial matters and McCarthyism, but he had the intellectual honesty to eventually repudiate most of these opinions.
Over time he became the favorite conservative of liberals for his wit, use of language, and urbane debating skills.
Although a friend and skiing companion of Milton Friedman, Buckley had little interest in economic issues per se, and he was not concerned with the effects of taxation, regulation, and other economic policy issues.
He recognized and accepted that his support of strong armies would lead to a much bigger government.
He  had a well-publicized conversion toward legalizing the use of drugs, a conversion influenced by Milton Friedman's strong stand in favor of legalized drugs.
Discussions by economists of regulation, competition, and other economic issues generally concentrate on their contribution to economic efficiency, and the analysis of conditions under which competition and private enterprise promotes efficiency.
Friedman, Hayek, and George Stigler, three leading free market economists of the twentieth century ,were very much interested in these issues, but they also took a much broader view.
For example, in Capitalism and Freedom, Friedman claims that greater freedom should be the goal of economic activity, and also discusses the connection between political and economic freedom: "economic freedom is an end in itself‚Ä¶economic freedom is also an indispensable means toward the achievement of political freedom".
Hayek's Road to Serfdom and Constitution of Liberty argues that a private enterprise system is crucial for the achievement of political and social freedoms.
Stigler in his Five Lectures on Economic Problems references with approval the classical economist' much broader approach toward the contributions of individual choice and private enterprise.
By making individuals responsible for their decisions, competition and private enterprise force individuals to become more self-reliant since this type of economic system provides much stronger pressures to act responsibly than do systems where individuals have their choices made for them by governments.
In essence, this approach argues that competitive economic systems do not just (usually) satisfy individual preferences in an efficient way, but that these systems also change preferences themselves in valuable directions.
Hayek claimed in Individualism and the Social Order that Adam Smith, and presumably Hayek as well, believed that "man was by nature lazy and indolent, improvident and wasteful, and that it was only by the force of circumstances that he could be made to behave economically or carefully to adjust his means to his ends".
Buckley was not interested in the technical discussions of economists, and the nitty-gritty economic issues they analyzed, but he was drawn to a generally free market position because he was attracted by the broader virtues of free markets and capitalism in encouraging economic, political, and civil freedoms.
He did not care as much as economists do that, for example, agricultural price supports make for inefficient food production, or that tariffs on imports raised the cost to consumers of various goods.
On the other hand, he did care very much that these and other interferences tend to stifle various freedoms.
In this way he was, I believe, greatly influenced by the broader perspective of the effects of an economic system on individual responsibility taken by classical economists and the leading free market economists of his time.
Pressures for both increased government and private assistance to poorer nations may well result from this recession because some nations that can least afford a setback may suffer the most due to reduced demand for their exports of commodities and other goods.
In considering the topic of private charitable giving to other countries, Posner stresses one of the economic rationales for tax exemptions of charitable giving; namely, that tax deductions are a recognition of the interdependence among individuals in the benefits from charitable activities, such as those by hospitals or schools.
If many individuals and organizations benefit when recipients of their charity has more resources, each donor will tend to under give because they do not take account of the benefit to other donors from their donations.
That is, giving by any individual or organization produces a positive or beneficial "externality" because it adds to the welfare of other givers.
Another important rationale for tax exemption of charitable contributions is to decentralize giving away from the government and toward the private sector.
Just as government grants to hospitals and other beneficiaries crowd out giving to these beneficiaries by private foundations and religious organizations, so too does private giving reduce the need for government giving.
For example, when private universities obtain support from wealthy individuals and foundations, this allows them to compete more strongly against public universities, and thus reduces the need for as much public funding of higher education.
This "crowding" out of government giving may be valuable because private donations are generally better thought out and more efficient than public grants and aid.
Both arguments seem to apply rather fully to giving to foreign charities as well as to domestic ones.
Private giving to help foreign hospitals, doctors, schools, or individuals reduces the need for foreign aid by the US government to the same type of organizations and individuals.
This is preferable because government foreign aid invariably goes through other governments, and hence tends to be centrally controlled, and subject to government inefficiencies and corruption.
Private giving is more effective at getting the assistance to those who need it.
Giving by an American individual or organization to foreign charities also creates an externality to other givers and to others who benefit as well from such giving.
There is a positive externality even if one counts only the benefits produced to other Americans, as long as many American individuals and organizations benefit from the giving to particular foreign charities.
That both arguments for tax deductions are applicable to foreign giving makes a case for also allowing giving to foreign charities to be tax deductible.
There is, however, one important argument against doing so: the difficulty of determining whether foreign recipient charities are legitimate and acceptable charities.
If such giving were deductible, American individuals or businesses might try to funnel assets into fake foreign "charities" that they control in order to reduce their taxes.
Such tax evasion may be relatively easy for American authorities to determine for American charities, but extremely hard for them to pinpoint in poorer countries with limited data and few investigations of fraud.
It may also be difficult to determine if foreign recipient organizations are spending the contributions received from Americans on desirable purposes rather than in promoting terrorism and other activities detrimental to US interests.
Still, I tend to support allowing at least some tax deduction for giving to foreign charities.
Otherwise, it may be just another form of protectionism, where American services and goods are favored over foreign services and goods.
Since protectionist arguments take many disguises, it is likely that some of the opposition to allowing tax deductions for foreign charities is due to the desire to impose tax disadvantages on the "import" by American individuals and organizations of foreign "goods".
In my post on Sunday I gave an example to illustrate the Treasury's plan to buy the "toxic" assets of banks.
Since I left a few quite important implications of the example unclear, this addendum will consider the same example in more detail.
Recall that the Plan would encourage hedge funds and other financial institutions to bid for bank assets.
These institutions would only have to put up about 7% of their bid price since the Treasury will supply another 7%, and the FDIC will loan the remaining 86%.
If assets appreciate in value over the bid price, the Treasury and funds share the profits equally after the FDIC is repaid.
If the asset declines in value, funds are only liable for 7% of the decline, and the FDIC and Treasury absorb the rest.
In my example, there is a 10% chance that an asset will be worth $1000, and a 90% chance that it will be worthless, so that the full expected value of the asset is $100.
Assuming competition among funds forces them to bid the expected value of this asset to them, how much will they bid? When the asset pays off $1000, a fund would get half the difference between $1000 and 86% of its bid price, while if the asset becomes worthless they would be compensated for everything but 7% of what they bid.
The expected value of these outcomes is approximately $243, and that would be the price that competition forces hedge funds and other funds to pay for the assets.
Since the expected value of the asset is only $100, government subsidies would encourage funds to bid about 2 1/2 times the true worth of the asset!.
The government would pay the difference between the bid price and the worth of an asset, or $143 in this example.
Contrary to many assertions made about the Treasury Plan, this subsidy does not on average go to successful bidders since the expected cost of the asset to them equals the expected value of the asset to them.
Of course, the luckier buyers of these assets can make a lot of profits, and they could be subject to Congressional wrath that they profited at the government's expense.
The $143 subsidy goes to banks, for they would receive almost 2 1/2 times the worth of their "toxic " assets.
Perhaps good reasons motivate the government to use this indirect way to subsidize banks rather than to give them the subsidy directly.
However, it is a strange program indeed where banks get subsidized in proportion to how many "bad" assets they hold.
This will make banks wish that they had made even greater mistakes, and held more assets that are likely to be truly worthless.
However, these worthless assets could be worth a fortune to banks.
The severity of this recession has stimulated calls for greatly increased regulation of the financial sector, and for changes in some of the present regulations.
Some new regulations are desirable, but the type of new regulations must be in response to a recognition that regulators failed in this crisis because they did not use the authority they had to rein in some of the investor exuberance.
The claim that the crisis was due to an insufficient level of regulation is not convincing.
For example, commercial banks have been more regulated than most other financial institutions, yet commercial banks performed no better than other classes of financial institutions.
At the other extreme, hedge funds have been the least regulated, and on the whole they did better than most others in the financial sector.
One major problem with regulations is the regulators themselves.
They get caught up in the same bubble mentality as private investors and consumers.
For this and other reasons, they fail to use the regulatory authority available to them.
This implies that as much as possible, new regulations should more or less operate automatically rather than requiring discretionary decisions by regulators.
Many critics have blamed part of the financial crisis on the requirement that financial institutions value their assets at market prices rather than historical costs.
One problem with such "mark to market" pricing that became apparent during the crisis is that it is difficult to accurately value assets in very thin markets that have few transactions.
Moreover, most of the transactions that do take places are fire sales made because sellers need quick cash.
In such markets, if assets are held for a while before they are sold, their value may be much higher.
One does need flexibility in using the mark to market principle, but this accounting method is most of the time a much more useful way of valuing assets than using original cost of the asset, even when adjusted for depreciation.
For assets that have been held for significant periods of time may be subject to huge changes in worth that make original cost largely irrelevant.
Perhaps a useful approach (suggested to me by David Malpass) is that instead of requiring all companies to use either mark to market or cost based accounting, companies should be permitted to decide which method to use.
This would add a little to the information complexity of evaluating company assets, but it would also make the accounting process more flexible.
Presumably, however, companies should have to commit to one or the other accounting rules for some timee rather than being allowed to change their approach whenever they see fit.
Once we are out of this crisis but not before we are out, I believe capital requirements should be imposed on investment banks, hedge funds, and other financial institutions in the form of maximum allowable ratios of assets to capital.
One major advantage of such a requirement is that it can operate rather automatically rather than requiring regulators to make discretionary choices.
The extremely high leverage in many financial institutions during the past few years created a fundamental instability in the financial sector regarding its ability to respond to large negative aggregate shocks to the system rather than only individual firm idiosyncratic shocks.
Limiting the ratio of assets to capital would help prevent the high leverages that contributed to the collapse of many financial institutions in the wake of the sharp falls in the values of the assets they were holding.
Capital requirements also provide a way to respond to the "too big to fail" principle when, rightly or wrongly, large firms are often kept from going bankrupt.
When large financial firms get into trouble, they impose costs on everyone else both due to the repercussions on financial and other markets, and to the taxpayer monies used to bail them out to prevent their complete collapse.
For example, during this crisis the sharp declines in the values of the diversified commercial bank Citigroup, and of AIG, a giant insurance company and in recent years hedge fund, imposed major costs on the system.
Their collapse led to massive and continuing federal government injection of monies into these companies.
One-way to reduce the likelihood of a too-big-to fail-problem is to impose higher capital requirements relative to assets on larger financial firms.
That is, to implement a progressive set of capital requirements relative to assets that would increase as the size of a bank or other financial firm increased.
Since they would not be allowed to expand so much beyond their capital base, larger financial institutions would be better prepared to deal with aggregate shocks to the financial system than they were during this crisis.
Such a progressive system of capital requirements would also reduce the incentives to become large since this system would impose a "tax" on becoming big.
In an environment when large firms are protected by the government from failing, and when their failure helps bring down other interconnected financial and other firms, decreased incentives to become a large financial institution are desirable because of the cost these institutions impose on everyone else.
The Internet has produced revolutions in many kinds of behavior, such as greatly reducing the advantages from reading newspapers, but one of the most important is in providing easy access to various kinds of social interactions.
The remarkable growth of social networking sites, such as Facebook and Twitter, reflect the desire of many individuals to communicate with other persons they do not know.
The explicit goal of various networking sites, like E Harmony and Monster.com, is to solve age-old matching problems.
A challenge over many centuries is how to help eligible young men and women find suitable marital mates? Traditional societies use marriage brokers and relatives to bring young persons and their parents together, while in modern societies young persons meet through co-educational colleges, jobs, and dating.
Both traditional and modern societies have struggled with the difficulty of finding suitable matches- Mrs.
Bennett's lamented in Pride and Prejudice (published at end of 18th century) the difficulties of finding suitable husbands for her five daughters.
Similar matching problems occur in modern labor markets, where workers search for good jobs, and employers search for good workers.
Search theory in economics shows how both workers and firms generally stop short of finding the best possible matches because of the cost in time, money, and passing up opportunities of continuing the search process.
As a result, workers of given skills may end up with jobs that pay differently, and that differ also in other characteristics, while firms that pay similar wages may employ workers of different productivities.
The Internet provides significant opportunities to improve the search process, whether for men and women looking for suitable mates, or for workers and firms looking for good employment matches.
It provides an especially good method of searching for individuals who are new to a city or other area, for persons who do not meet many potential matches through their work, schools, friends, or relatives, for those who want to cut down on the time spent searching, and for others who do not want their friends or others to know that they are actively searching.
According to its publicity, eHarmony, an important online marital matching site, "matches you based on compatibility in the most important areas of life - like values, character, intellect, sense of humor, and 25 other dimensions.".
Online matchmaking has grown rapidly during the past decade.
Some estimates claim American online dating and matchmaking companies take in over $1 billion per year.
Estimates for China and India, probably exaggerated, are at $1.3 billion and $300 million, respectively.
Revenues from online dating sites continue to grow rapidly, especially in Asia, although the worldwide recession has slowed down these growth rates.
These data exclude men and women who meet online not through official matching sites, but through more informal social networking, as in chat rooms and Facebook.
It is difficult to know precisely how many men and women marry because they met their mates through online matchmaking sites.
 I know several friends who did, but perhaps I know busy or hard to please men.
Match.com says it has more than 15 million members.
A study by Harris Interactive conducted for eHarmony finds that over 86,000 eHarmony users married between April 2006 and March 2007, which is three times the number estimated for 2005 in a different study.
The Harris study also estimated that over two percent of all persons marrying between April 2006 and March 2007 were introduced through eHarmony.
Economic theory and empirical evidence (see my A Treatise on the Family) indicate that men and women who marry tend to have similar backgrounds by religion, race, education, family income, and many other characteristics.
This is called positive assortative mating.
Since marriages between persons of similar characteristics usually (but not always!) produce more satisfactory relationships, it is not surprising that marriages between unlikes; that is, persons with quite different characteristics, such as by education, religion, or race, are far more likely to end in divorce than are marriages between similar persons.
I would expect matches made online,just  like those made by traditional matchmakers, to generally bring together persons with rather similar characteristics since the preferences of individuals, and also the matching algorithm used by different online sites, would tend to match individuals with similar backgrounds.
Given the analysis and evidence cited in the previous paragraph, this would imply that marriages brought about online would tend to be more stable than other marriages.
I have not seen any studies that try to test these theoretical implications on the degree of assortative mating and the marital stability of online matches.
The online job search market is much larger than that for dating and marital matching.
Help wanted ads used to be an important source of income for local and even larger newspapers, but most of that market has dried up because job search shifted online.
This has been one of the important factors in the sharp decline of newspaper revenues, and the despair gripping that industry.
Online employee-employer matching companies claim many advantages for their method of matching workers to jobs.
Foe example, the company OpenHire asserts in its advertising that it will "Centralize your recruiting into one system that reduces data entry, eliminates processing service fees and controls agency fees.
OpenHire integrates with e-mail, online job boards, corporate job sites and internal intranets...".
By lowering search costs, online matchmaking for the marriage and labor markets, and for other markets as well, improve the efficiency of these markets by reducing the variance in the quality of the matches to persons with given characteristics, whatever the characteristics are.
In the future these markets will have more of an international flavor, where individuals will search online for good job or marital matches in countries other than where they are living.
Online matchmaking, whether formal or informal, will increasingly have major implications for the sorting of individuals in marriages, jobs, and in other types of matches, implicatiosn that would have been extremely difficult to foresee in the early days of the Internet.
One good aspect of the Treasury's plan to enlist the private sector in buying mortgage-backed and other bank assets is that it reduces the uncertainty-if it is implemented! - about what the government plans to do further in aiding banks.
Starting with the vacillations of Henry Paulson, the former Treasury Secretary, the federal government's efforts to help banks have lacked a clear direction, and have wasted a lot of taxpayers money.
Especially during a serious recession (I will call this a recession, not a depression, until the cumulative fall in GDP equals or exceeds 8-10 percent-so far the fall in US GDP has been about 2%, and world GDP has hardly fallen), consumers and businesses can cope much better if they know what the government plans to do.
They can adjust much more easily to known government policies, even if they are not good policies, than to changing policies that lack any direction.
A major criticism of early plans for the government to buy bank assets through an asset auction was that the government would overpay for the assets since they did not know the worth of the assets offered to them.
Although that difficulty might be overcome, the Geithner proposal uses government money to encourage hedge funds, pension plans, and other financial institutions to buy bank assets in order to use private competition to determine the worth of these assets.
Hedge funds and other financial institutions do not want to overbid since that would reduce their profits from any future appreciation in the value of the assets bought.
Competition among different financial intermediaries for these assets would prevent them from underbidding since they would then not be able to buy the assets.
To encourage private participation, the Treasury Secretary is offering bidders very generous terms.
If say a hedge fund bids $100 for an asset, the fund would have to risk only about 7%, or $7.
Another 7% would be risked by the Treasury (i.e., from taxpayers), and the rest would be a loan guaranteed by the Federal Deposit Insurance Corp.
(FDIC).
If the asset rises in value over time, the Treasury and the hedge fund would share the profits equally, while the hedge fund's losses if the price goes below $100 is limited to the $7 it puts up, no matter how low the price goes.
Therefore, the downside loss to private companies in this example would be sharply limited by the equity they put in, while the upside gain could far exceed their initial equity.
This means that hedge funds and other funds would find riskier assets very attractive, and they would bid more for them than for less risky assets with the same expected return.
For example, suppose one asset had a 100% chance of being worth $100 in the future.
The expected value of the asset is obviously $100, but a private fund would bid $107 because the Treasury would pay $7 of this bid.
Suppose, on the other hand, there is another asset that has a 10% chance of appreciating to $1000, but it has a 90% chance of becoming worthless.
The expected value of this asset is also $100, like the safe asset, but in my example it is worth much more to bidders under the Treasury's terms since the FDIC would pay the successful bidder 86% of its bid price if the asset became worthless.
It can be directly shown that private funds bidding their expected value would then bid about $242 for this asset, which far exceeds the asset's overall expected value of $100 because the FDIC is guaranteeing most of the loss, and the fund would collect half the appreciation.
Even if it were desirable to subsidize private funds to bid for bank assets, is it wise to structure the subsidy in this way so that the bidding is skewed toward more risky assets? One reason for doing so is that assets with greater variability in their future worth are presumably harder to value.
Hence banks holding these assets might value them more than other financial institutions would.
These would then be the type of assets that banks would be reluctant to sell in an unsubsidized market since market bids would be below bank estimates of their value.
The Treasury's approach raises the willingness to pay by hedge funds and other financial institutions for precisely such risky assets.
Posner's proposal is to do more of what the government did earlier; namely, lend to banks in return for preferred stock in the borrowing banks.
This has the advantage of being simpler than the Treasury's convoluted proposal, and Posner gives some other advantages.
However, I would worry a lot that the government when they hold greater amounts of stock would try to micromanage banks even in greater detail than they are already doing.
Congress and the president have complained loudly about bonuses, pay levels, golf outings, and other business activities, and legislation was introduced to limit pay and perquisites.
Under Geithner's plan, Congress might have less incentive to micromanage the decisions of hedge funds and others who buy bank assets since the government would have an equity interest in particular assets rather than an equity interest in the overall profits of these funds.
However, Congress would also complain a lot if hedge funds and others made a large profit from the assets they bought with government guarantees.
Perhaps this is why the Treasury's proposal gives such a huge subsidy to the funds that would bid for bank assets.
In the absence of large subsidies, leaders of these funds would be reluctant to expose themselves to the torrent of criticism and interference from Congress and perhaps also the President.
Nevertheless, it is highly worrisome that taxpayers would become committed to such potentially large additional subsidies to the financial sector.
The over $800 billion American fiscal stimulus package is.
enormously unpopular in many quarters.
Yet for others, including some.
well-known economists, a second package is needed to make unemployment decline.
faster.
It is very difficult to give a definite answer to the effectiveness of.
what has been spent so far, but I believe both theory and quite limited.
empirical evidence suggest that it is likely having a small “multiplier”.
According to simple Keynesian models, the rationale for.
increased government spending during a recession is straightforward.
If.
governments employ underutilized labor and capital when they spend more, that.
provides an immediate boost to employment and output.
A further stimulus comes.
from the spending by the owners of the unemployed labor and capital who benefit.
from the government spending.
Their spending helps multiply the effects of the.
government spending still further, and so does spending by the recipients of.
this second round of spending.
The total impact is the sum of all these.
separate boosts, and its ratio to the initial level of government spending is.
called the spending multiplier.
A study by Dr.
Christina Romer, Chair of the.
Council of Economic Advisers, published shortly before she took office claimed.
the spending multiplier during the recession at that time would be well over 1.0.
In reality, several major considerations neglected by this.
Keynesian analysis suggest a rather different multiplier.
There is often a long.
delay between discussions of a fiscal stimulus, enactment of a law providing.
for the stimulus, and the actual spending.
Dr.
Romer discussed the broad.
dimensions of the current stimulus package even before she took her current.
position, and Congress passed the law providing for about an $800 fiscal.
stimulus shortly after President Obama took office.
Yet it is now more than one.
year later, and only about a half of the stimulus package has been spent.
In.
the meantime, the economy first hit bottom, and then has begun a strong.
recovery in GDP, and a modest recovery in unemployment.
The long lag between.
discussion, enactment, and actual spending is an old criticism of fiscal.
stimulus even by very committed Keynesians.
Nor did the actual stimulus package voted by Congress.
correspond very closely to the theory behind the multiplier from government.
spending.
Instead of being concentrated mainly on sectors that had suffered.
large increases in unemployment, such as construction, the stimulus spending.
was oriented toward many sectors that liberal members of the Democratic.
controlled Congress wanted to greatly expand.
These include healthcare,.
schools, alternative energy sources, and medical and basic research.
Some of.
this spending may have considerable social value, but it provides little.
stimulus since sectors like health, education, and wind power development were.
not hit hard by the recession, and hence have had low levels of unemployment.
Government spending in these areas would tend mainly to bid labor away from.
either the private sector, or other government programs, or raise the earnings.
of those already employed.
As a result, any multiplier from the stimulus.
package is likely to be less than one, not greater than one.
Even though the theory behind the multiplier has been around.
for a long time, few studies credibly estimate multipliers from different kinds.
of government spending.
Part of the problem is that many other things are.
usually also changing when government spending changes, so it is difficult to.
find “natural” experiments where the effects of government spending are.
isolated from changes in other important variables.
Some of the relevant.
factors that may be changing are prices, including wage rates and interest.
rates, consumption, and private investment.
Robert Barro of Harvard University has been estimating both.
spending and tax multipliers from past episodes, not from the current one.
Using historical data obviously has many limitations from the point of view of.
evaluating the current stimulus, but such an evaluation is difficult because many aspects of the American economy have.
been changing during this recession along with stimulus spending, such as the.
monies spent on bank bailouts.
Barro's estimated spending multipliers are based.
mainly on fluctuations in defense spending before, during, and after wars, such.
as World War II and the Korean War.
He reports in a recent Wall Street Journal article (February 23).
estimated spending multipliers over a two-year period following changes in.
defense spending.
These multipliers equal about 0.4 following the first year,.
and 0.6 after two years.
They indicate sizable changes in overall GDP per $100.
billion change in defense spending, but they also suggest that government.
spending significantly crowds out either personal consumption spending, private.
investment, or exports.
Still, if these were the only effects of stimulus.
packages, multipliers of about 0.6 would indicate that larger government.
spending, such as the Obama stimulus package, can induce significant growth in.
GDP, presumably especially when unemployment rates are high.
However, greater spending has to be paid for eventually by.
higher taxes, including inflation taxes, since governments are subject to long.
term budget balance requirements, just as are households and businesses.
Barro.
also estimates tax multipliers based on the effects on GDP of changes in.
average marginal tax rates from federal and state and local income taxes, and.
social security payroll taxes.
These tax multipliers are about -1.1, which.
means that increases in marginal tax rates that raise tax revenue by say $300.
billion would lower GDP by over $300 billion in the following year.
Putting these estimated spending and tax multipliers.
together, in recognition that government budgets have to be balanced.
eventually, indicates that the Obama stimulus package on balance would have a.
small, possibly even negative, overall effect on GDP.
To be sure, these results.
have to be qualified since changes in nondefense spending, as in this stimulus.
package, may have larger multipliers than those estimated by Barro, although it.
is not obvious why that should be so.
Moreover, if the spending occurs in 2009.
and 2010, and raises GDP for a few years during a recession, perhaps that is.
worth any reductions in GDP that follows in later years when taxes are actually.
increased to produce the budget balance (although much of that effect might be.
anticipated earlier).
A few other discussions of the current stimulus package have.
much rosier conclusions about its effects on employment and GDP.
But these.
estimates have little credibility because of the difficulties in disentangling.
the stimulus effects from those of Fed and Treasury spending on bailouts, many.
other factors that have been changing along with the stimulus spending, and the.
intrinsic strengths of the private sector of the American economy     (see, for example, an article by     Cogan, Taylor, and Wieland.
in the Wall Street Journal of September 17, 2009 for a discussion of some of.
these factors).
My conclusion is that the Obama-Congress stimulus was an.
attempt at reengineering government’s role in the economy that was badly.
designed and executed relative to the alleged goal of giving a short-term.
stimulus to the economy.
Its design, and the general evidence on the effects of.
spending fiscal stimulus, should make Americans wary of any attempt to pass a second.
stimulus package, whatever form it takes.
Although the American Constitution does not provide for the.
filibuster, the founders of this country were very much concerned about.
protecting the rights of minorities.
The checks and balances between the.
Congress, President, and Judiciary built into the Constitution were designed to.
make it difficult to pass legislation that infringed on the rights of important.
minorities.
The Bill of Rights was added to the Constitution to solidify this.
protection.
Alexander Hamilton, James Madison, and John Jay in their.
essays in the superb Federalist Papers argued for the Constitution against a.
skeptical New York public.
They recognized the necessity of having a.
constitution that protected minorities from “ephemeral” majorities, and they.
claimed the separation of powers, and other aspects of the Constitution, would.
succeed in protecting most minorities.
The founding fathers were not believers.
in a naïve form of democracy where simple majorities should always have their.
way.
Posner gives a brief history of the evolution of the.
filibuster rule in the Senate.
The requirement that at least 60 senators, or.
60% of the senate members, are needed to impose cloture and cut off debate is.
not an overly stringent requirement for issues of any real significance.
The.
size of the supermajority needed to cut off debate is considerably smaller than.
the Constitutional stipulated two-thirds majority required to overcome a.
presidential veto of a bill sent from Congress.
Surely, for example, a simple.
majority should not be sufficient to commit a country to a major war, for that.
could involve both a large sacrifice of the lives of men and women from.
different regions and backgrounds, and much higher taxes and the creation of.
large amounts of public debt, although I do not believe any senator has ever.
tried to filibuster against US entry into a war.
Several senators from the South in the 1950s tried to use.
the filibuster to block civil rights legislation.
Since for almost a century.
after the Civil War the South had been preventing its sizable black population.
from obtaining a decent education, good jobs, judicial protection, and common.
decency, many in the North were outraged at this filibuster attempt to block.
the provision of better education, voting rights, and other protections to.
Southern blacks.
Nevertheless, the civil rights legislation would require major.
changes in the South, and it is not unreasonable that more than a simple majority.
of Senate votes should have been necessary to implement these momentous (and also.
highly desirable) changes.
However, it should have been possible during the.
1950s when Southern senators were filibustering to use a supermajority in the.
Senate to invoke cloture to end the filibuster.
The many proposed changes in health care in the House and.
Senate bills is the most controversial and important of all the current bills.
working their way through Congress and President Obama’s agenda.
Expenditures.
on health care currently absorb 16% of American incomes, and this percentage.
continues to grow.
Since many of the changes in these health bills would have.
large effects on taxpayers and patients, any major new health bill should be subject.
to a possible filibuster that would require the votes of at least 60 senators to cut off.
further debate.
The President has said that the debate has gone on long.
enough, and that further prolonged debate on health reform would be useless.
He.
therefore proposes to use the “reconciliation” procedure to avoid any.
filibuster and allow a health bill to be passed with a simple majority in the.
Senate (and of course the House).
I cannot say whether this is a wise political.
maneuver, but I do believe the use of reconciliation in this case is harmful.
from the point of view of the country’s welfare.
Despite the long debate, many provisions of both the House.
and Senate bills remain highly controversial.
These include, among many others,.
the way the uninsured would get coverage, the de-emphasis on health savings accounts,.
the postponement until 2018 of the elimination of the tax advantages from.
expensive employer-based health plans, no increase in the ability of persons.
and companies in one state to contract with insurance companies located in.
other states, and especially the minor efforts to raise out of pocket expenses.
by consumers of health care in order to reduce their overuse of doctors, drugs,.
and even hospitals.
Such a badly designed health care bill would on the whole.
worsen rather than improve the American health care system, and it should not.
be allowed to slip by through the back door of reconciliation.
So my conclusion is that the supermajority requirement of.
invoking closure to cut off Senate debate is useful protection not only to.
minorities, but also to overly hasty passage of controversial legislation.
People on all positions will sometimes be frustrated by the need to have such a.
supermajority, but in the long run most of the time they will be happy that.
such rules are in effect.
Studies show that men and women place a high value on even.
small decreases in their probability of dying at different ages.
Presumably,.
the same is true of increases in the quality of their lives.
This is why, given.
the rise in incomes over time, and the revolution in the development of.
blockbuster drugs and the advances in medical technology, the share of.
national income spent on health care would have risen over time in the US, even.
if it has had the best health care delivery system.
Indeed, the share of income that is spent on health has risen quite sharply over time in every economically.
developed country, regardless of the nature of their health system.
Clearly, however, the American health system does have many.
defects, which contributed mightily to the growth of the share.
of medical spending to 17% of American GDP.
Yet when I was recently asked whether I.
prefer the present healthcare bill to no change in the health delivery.
system for a decade, I answered “no change”.
Even though the American.
healthcare system can use many reforms, regrettably the bill that.
passed the House and Senate is a messy compromise to attract reluctant.
Democrats that is short on needed reforms.
Instead, the bill is filled with.
many complicated, and generally bad, new regulations, higher subsidies, and.
greater taxes.
The most important needed reform is an increase the fraction.
of total medical costs that come from out-of pocket expenses in the form of.
large deductibles and significant co-payments.
Out-of-pocket spending accounts.
for only about 12% of total American spending on healthcare, whereas the share.
of out-of –pocket spending is over 30% in Switzerland, a country considered to.
have one of the better health delivery systems.
Partly because of this major.
difference, health care takes 11% of Swiss GDP compared to the much higher.
American percentage.
As far as I can discover, nothing in the new bill really.
tries to raise the out-of-pocket share, and some changes would reduce it even.
further.
These include tax credits for individuals and families that earn up to.
400% of the federal poverty level (up to about $90,000 for a family of four).
that enable them to get coverage through newly created Insurance Exchanges.
Another desirable reform is to reduce the reliance of the.
American health system on tax-deductible employer-based insurance since tax.
deductibility has encouraged low deductibles and low co-payments.
It has also.
locked workers with health problems into their current jobs since they may not.
qualify for insurance at other companies because of these pre-existing health.
conditions.
The bill does propose to phase out tax deductibility for the more.
expensive plans by 2018, but who knows if that will ever be implemented.
For the most part, however, the bill increases our.
dependence on employer-based health care by imposing sizable penalties on.
companies that do not provide their employees with sufficient health insurance.
Many.
companies are already beginning to add to their projected future costs the.
anticipated increase in the cost to them of insuring their employees.
These.
changes will particularly affect the costs of smaller companies since they are.
the main ones that do not provide health insurance for their employees.
Since smaller companies are responsible for a disproportionate share of.
additions to employment during recent years, this provision of the bill will.
tend to reduce the demand for workers and hourly wages.
The US health care market is over-regulated rather than under-regulated.
One example is that families in one state are generally not allowed to buy.
their health insurance from companies located in other states.
Another example.
is the mandates that states impose on insurance companies, such as coverage of.
the costs of normal birth deliveries.
Such coverage has little to do with.
insurance against unexpected health costs, whereas coverage of extraordinary.
delivery costs is a desirable protection against unexpected health care risks.
The bill generally pushes in the direct of greater regulation, such as the.
limitations imposed on how much health insurance companies can spend on.
administrative costs relative to their other costs, the mandated reviews of the.
premiums charged by health insurance companies, and the mandated provision of.
health insurance by small companies.
Health savings accounts (HSAs) have been one of the most.
important innovations in the health care field during the past decade.
These.
accounts require large deductibles, such as $2500, that individuals and.
families most cover out of their own pockets.
Unused portions of the amounts in.
these accounts can be carried over tax free from any year to future years, and.
can eventually be phased into their old age pension accounts.
HSAs with large.
deductibles encourage individuals to economize on their normal health care.
expenses, such as visiting doctors for colds or flu shots that they could get.
much more cheaply at CVS, Walgreens, and other retail medical clinics.
There is.
little mention of HSAs in the new bill, and certainly no encouragement to their.
expansion.
The American health care delivery system needs greater.
transparency and easier access to medical information by consumers.
The bill.
takes a valuable step in this direction by encouraging the development of.
online medical records and medical histories for all individuals, no matter how.
many doctors they have seen, or how often they have moved.
A few other parts of.
the bill would also increase information and transparency, but for the most.
part the bill obscures rather than enlightens consumers about the health area.
Many of the most important taxes come early while the additional spending kicks.
in much later, so that it will appear for a few years as if the new system will.
cut medical costs.
Consumers will get a false impression that they are getting.
a more efficient medical care system when in fact the new system will turn out.
to be both expensive and invasive of individual choices.
Proponents of the bill claim it will save hundreds of billions of dollars.
during the next ten years from cuts in Medicaid and Medicare, but it is far.
from obvious how such cuts will materialize.
Moreover, some changes will.
clearly increase the costs of these programs, such as the expansion of Medicaid.
coverage to individuals well above the poverty line, and by additions to drug.
coverage of seniors under Medicare.
I do not see how the bill will lead to.
Medicare savings since there is no increase in out of pocket payments by.
Medicare enrollees, and Congress is likely to continue to override any.
scheduled cuts in payments to Medicare doctors and others.
The most likely.
attempt to cut future Medicare costs will be through greater rationing of.
health care to the elderly, but lobbying groups for the elderly will fiercely.
resist these efforts.
Adequate and appropriate coverage for persons with.
pre-existing health conditions is a challenge for any healthcare system,.
especially those with private insurance.
Although the bill addresses this.
issue, it makes coverage of pre-existing conditions more difficult in one.
dimension by expanding rather than contracting employer-based health insurance.
The bill prevents insurance companies from dropping individuals if they develop.
serious sicknesses, and also prevents these companies from imposing limits on.
how much they will pay to cover an individual’s health costs during any year.
In addition, uninsured individuals with pre-existing conditions will be able to.
obtain health insurance through the new health insurance exchanges run by.
non-profit companies.
The only truly efficient way to handle the pre-existing.
condition issue is to try to develop an insurance system in which young adults,.
who generally have few serious existing medical conditions, can take out.
long-term healthcare insurance.
Long-term health insurance programs have been.
proposed in the academic literature, but they have been implemented only to a.
very small extent.
Perhaps the bill’s approach to pre-existing conditions is.
the best that can be expected at this point if nothing is done to wean the system.
from employer-based tax-deductible health insurance (which at least does provide long.
term health insurance for employees who stay with the same company for many.
years).
Although the impact on the costs to taxpayers of the more.
than 40 million uninsured persons in the US is usually greatly exaggerated, I.
do support a requirement that everyone has health insurance that covers medical.
catastrophes.
Coverage limited to catastrophes would not be expensive for the.
uninsured since they are mainly young and are generally in quite good health.
They could readily pay the premiums for catastrophic insurance from their.
incomes.
The health care bill does make health insurance compulsory, but it.
does this in an unsatisfactory way by requiring rather extensive benefits, and.
by subsidizing coverage for individuals and families with incomes far above the.
poverty line.
So for all the reason I have given, and many more, no change.
in the present American healthcare delivery system would be much better than.
the new bill.
The American system has many great strengths and some serious.
weaknesses.
The bill will generally weaken the strengths and strengthen the.
weaknesses.
Greater unemployment is a casualty of every recession, and.
the so-called Great Recession is clearly no exception.
The unemployment rate.
grew from under 5% to just over 10% at its peak, and has fallen during the past.
few months a little to 9.7%.
    Most.
forecasters are predicting only a gradual further decline in the unemployment.
rate during 2010, and some even predict that this rate will increase before it.
continues to fall again.
Aside from its level, the most disturbing feature of.
the unemployed is its composition since many of them have been without a.
regular job for over six months.
Men and women who are unemployed for a relatively short.
time-say for no more than a few months- create relatively few problems for.
themselves or the economy.
They can usually finance their consumption while.
unemployed- such as on housing, food, and other basic expenses- out of their.
own savings, unemployment compensation payments, and from loans from family and.
friends.
The long-term unemployed are the major problem.
And the fraction of.
the unemployed who have been out of work for six months or more increased.
greatly during the Great Recession to reach over 40% of the unemployed in.
February 2010.
The average period of unemployment for these long -term.
unemployed is about 7 months.
Only a year earlier, in February 2009, the.
long-term unemployed constituted only 22% of the total number of unemployed.
persons, and even that percent was up from its share of the unemployed at the.
beginning of the recession in December 2007.
The long-term unemployed tend to lose confidence in their.
abilities, their resources to finance their consumption gets depleted, and.
their skills begin to depreciate.
They may be forced to uproot their families.
to move to new communities where employment is more readily available.
As a.
result of all these factors, their family life undergoes considerable stress,.
which leads to marital problems, and not infrequently to divorce.
These effects.
are all reasons why special attention has to be given to reducing the rate of.
long-term unemployment, and mitigating some of its harmful effects.
In most respects, the characteristics of the unemployed are.
similar during this recently ended recession as it has been during all prior.
recessions, and even the Great Depression of the 1930s.
Unemployment is.
concentrated among the young, less educated, and low skilled.
For example,.
according to the March 10  th   report of the Bureau of Labor.
Statistics, (seasonally adjusted) unemployment rates in February of this year.
was 16% for high school dropouts, 11% for high school graduates, only 8% for.
persons with some college or associate degrees, and a quite low 5% for persons.
with a bachelor’s degree and higher levels of education.
Similar differences.
are found by age and skill level.
So despite all the attention given to the.
growth in the unemployment of highly educated persons from the financial.
sector, the burden of increased unemployment is still being mainly borne by the young and.
less skilled.
Although more educated and older workers are far less likely.
to become unemployed, once they do they have a much tougher time finding jobs.
that pay them close to what they had been getting while employed.
This is why.
college educated and older workers constitute a much larger percent of the long.
term unemployed than they do of the total number unemployed.
These differences.
in long-term unemployment are easy to understand.
Many kinds of low paying jobs.
are available to the young and high school dropouts in all parts of the.
country.
This means that these workers can relatively easily find other jobs if.
they become unemployed, even though the new jobs may not last so long and they.
may have to seek still other jobs.
Finding other jobs with comparable pay to their.
old ones is much harder for more skilled and experienced workers since they are.
more specialized in their knowledge.
They may have to move to another region to.
get suitable employment.
The fraction of workers who have been unemployed for at.
least 6 months tends to rise for a while after a recession, even after the.
overall unemployment rate starts to fall.
This is not surprising since the fact.
that a person has been unemployed for many months is an indication that he or.
she cannot easily find a new job.
As a result, the long-term unemployed are.
less likely than other unemployed workers to find jobs quickly after the.
economy begins to pick up.
In several of the prior recessions, the unemployment rate.
came down slowly after the recession was over.
The Great Recession ended during the third quarter of 2009, yet the unemployment rate continued.
to rise for a few months after that.
It has now started to decline slowly, and.
is likely to continue to fall at a slow rate.
Regrettably, the decline may be.
particularly slow in the present situation because Congress and the President.
have created too much uncertainty about, among other things, health care costs.
to employers, taxes on higher incomes and on businesses, taxes on carbon.
emissions, caps on the pay of some executives, and the new regulations.
of lenders.
Businesses are reluctant to take on many additional employees until.
they become more certain about their costs, and the direction the economy is.
moving in.
Unfortunately, several remedies that have been suggested to.
reduce the rate of long-term unemployment will be ineffective.
For example,.
many people believe the solution is to retrain the long-term unemployed.
However, retraining adults of all ages, but especially older workers, have.
generally been failures: it is much too costly relative to the benefits in.
terms of new jobs.
A current proposal in Washington is to give companies a.
subsidy if they hire workers who have been unemployed for longer than a few months.
The problem with this proposal is that the Job Openings and Labor.
Turnover Survey (or JOLTS-I am indebted to Ed Lazear for bringing these data to.
my attention-) shows that even during this period of high unemployment, there.
are about four million new hires every month, and slightly more separations than.
that when employment is falling.
So the great majority of the new hires that.
would receive a subsidy under such a proposal to stimulate employment would.
have occurred anyway.
The program would end up being another costly subsidy to.
businesses.
The only real remedy for the long-term (and other).
unemployed is to have the economy grow fast, as it did after the severe.
recession in 1982 when unemployment peaked in December of that year at 10.8%,.
and then fell rather rapidly.
There is no magic bullet to accomplish this, but.
I do believe it would help a lot if the leaders in Washington did not try to.
radically transform various aspects of the economy while we are recovering from.
a serious recession, and thereby magnify the high degree of uncertainty that is typically.
caused by a recession.
Instead, they should be concentrating on fighting the.
recession, and stimulating long-term economic growth.
The short answer is “yes”.
Yet possibly much more serious.
challenges to the euro will arise in the future unless some important changes.
are made in the European Monetary Union (EMU).
When the euro was launched on January 1, 1999, I was.
skeptical about its long run viability primarily for two reasons.
The members.
of the EMU maintain their ability to follow different government spending and.
taxing policies, and their economies are subject to specific shocks because.
they produce different products and services, and have varying levels of per.
capita incomes and wealth.
Since no country has the power to print Euros, no.
country can offset these country-specific difficulties by devaluating their.
currencies relative to the currencies of other members of the EMU, or even by.
devaluing relative to countries outside the monetary union.
Devaluation under.
these circumstances reduces the net import of capital by a devaluing country,.
and hence eases its foreign debt.
In the past, countries like Italy or Greece.
that had, among other troubles, insufficient taxes relative to government.
spending, frequently devalued their own currencies (the lira and drachma,.
respectively).
When the debt was issued in local.
currencies, devaluation also in effect “inflated away” some of the real value of any.
foreign debt.
A partial alternative to devaluation when a country is in.
economic trouble is for many of its workers to move to other countries where.
jobs are more plentiful and wages are higher.
Such migration helps soak up the.
unemployment and reduces the scarcity of jobs caused by the economic.
difficulties.
This is essentially what happens in the US, a common-currency.
union of 50 states.
States that do poorly relative to other states experience.
outmigration of many of their younger workers.
Yet migration is still quite.
limited within the EU, despite the progress that has been made.
However, the remarkable success of the euro since its launch.
more than a decade ago had been convincing me that I and other euro-currency.
skeptics had exaggerated the importance of these missing ingredients in the.
EMU.
The euro has become of the most important international currencies.
After.
falling sharply for a couple of years from its initial launch rate of close to.
$1.2 per euro to just about $0.80 per euro, it bounced back to reach over $1.5.
dollars per euro.
The euro is still above its initial exchange rate, with a.
current exchange value versus the dollar of about $1.35.
In the past few years,.
considerable speculation developed that the euro might well supplant the dollar.
as the number one currency for international contracts and for assets held.
internationally.
These rosy euro forecasts have ended, at least for a while.
Not only Greece, but also Portugal, Spain, Italy, and Ireland are in financial.
trouble with their international creditors, although Greece appears to be in.
the most immediate difficulties.
They may all get out of these troubles without.
defaulting on their debt, but similar challenges are likely to arise in the.
future unless major changes are made in the architecture of the EMU.
Either.
much more power over taxation and government spending has to be taken away from.
the individual member countries and given to the central authorities of the European.
Union in Brussels, or much more effective measures need to be introduced that.
would prevent government spending of different countries from greatly exceeding.
their tax receipts.
Since most countries within the monetary union are probably.
more willing to leave the union than give up sovereignty over their spending.
and taxation, the centralization of taxation and spending authority seems.
unlikely.
Perhaps a system of fines and other punishments to weak-willed.
countries will be sufficiently strong to deter future transgressions, but that.
seems unlikely.
There is no simple way out of this dilemma, which is why.
Germany, after much initial reluctance, is warming to the idea of calling on.
the IMF to help Greece.
One plan being discussed is for the eurozone countries.
to provide the funding used by the IMF.
Since much of the IMF financing comes.
from the US, eurozone financing would avoid the EMU appearing to ask the US for.
assistance.
Although the European Central Bank opposes this indirect route of.
helping Greece, the hope is that the IMF is more capable than the EMU.
of imposing stringent restrictions on Greece’s spending and taxation.
Some commentators have drawn analogies between the fiscal.
difficulties of the United States and Greece and other weak members of the EMU.
As Posner shows, the US and Greece have many similarities in terms of fiscal.
deficits and the rate of annual turnover of its government debt.
However, one.
crucial difference is that the US has a much more robust economy, and greater.
growth prospects.
The other absolutely essential difference is that the US.
debt is denominated in dollars, a currency that it controls, while none of the.
EMU countries can issue more Euros.
If push came to shove, the US could.
consider meeting its obligations to creditors by issuing additional dollars,.
and partly inflating away its international debt burden.
Inflation is a.
potential weapon for the US Treasury, almost regardless of whether its debt is.
in the hands of Americans or foreigners, although both groups would protest.
against seeing the real value of their assets greatly reduced by inflation.
Greece can probably force domestic holders of its government debt to take.
severe haircuts, but aside from bankruptcy, it is much more impotent than the.
US against international creditors.
Perhaps, as Posner suggests, Greece and possibly also the.
other fiscally weak members of the EMU should be allowed to declare bankruptcy,.
although this is not without serious consequences for the future of the EMU.
Still, the monetary union might well be stronger in the long run if its weaker.
members were forced out, or were forced into more responsible behavior by having to.
bear the consequences of irresponsible actions.
During the past 30 years, higher education has boomed worldwide.
Virtually every country has significantly increased the fraction of its young men and women who go on for a college or university degree.
The higher education boom is just as large in developing countries as it is in developed countries, although naturally poorer countries still lag behind in the fractions of young persons with college degrees.
China is an extreme example of what has been happening in developing countries, as enrollments in Chinese universities increased several fold during past 15 years.
The United States also increased its enrollments, but at a slower rate than many other rich countries.
When measured by the fraction of young people with a college education, the US ranking has dropped from among the top three countries several decades ago to somewhere between 10  th   and 15  th  .
A worldwide trend suggests that universal forces lie behind it.
In the case of the higher education boom, one major force is the introduction of computer and other technologies that give an advantage in labor markets to individuals who command information and knowledge.
The rapid transfer of technologies from richer to poorer countries, partly the result of foreign direct investments, is also raising the demand for educated persons in many less developed nations.
If the value of higher education in the modern information-oriented economy has been overrated, the sizable growth in the number of educated persons should have lowered the earnings premiums for college graduates, and raised the unemployment rates of these graduates.
In fact, these earnings premiums have generally risen, not fallen, and often the growth has been large.
Moreover, unemployment rates of the college-educated have remained much below those of high school graduates and high school dropouts.
In the United States, for example, the average earning of persons with four year of college increased from about 35% above the average earnings of high school graduates in 1980 to about 55% higher in 2009, despite a growth during this period in the fraction of the American labor force with a college education.
The earnings premiums for persons with a post-graduate education have increased even faster over this 30 year-period.
Moreover, the unemployment rates of lower educated persons have remained much higher than the unemployment rates of persons with higher education.
The rise in the earnings premiums in the United States since 1980 for college-educated persons, is consistent with growth over this period in the demand for college graduates that dominated the increases in their supply.
A rise in the earnings premiums for persons with a higher education in found in most countries, except sometimes where the growth in the supply of college-educated persons has been unusually rapid, as shown by developments in China.
Starting in the mid-1990s China had an extremely fast increase in the supply of persons with a college education.
Since so many young college graduates entered the labor force, the earnings of young graduates dipped a little below those of young high school graduates.
But the earnings of college graduates with considerable work experience continued to grow sharply, suggesting a sizable increase in the demand for college graduates with much job experience (this is based on research by James Liang of Stanford University).
This brings me to Paul Krugman’s analysis that Posner commented on.
I agree with Krugman that not everyone in the United States or elsewhere will benefit from a college education, but the United States and pretty much all other countries are very far from that extreme.
However, if Krugman were correct that software was replacing college educated persons on a large scale, that high wage jobs have been more “offshorable” than jobs done by the low-paid, and that college education is becoming less helpful in finding good jobs, then surely during recent years the earnings gains of college graduates should already have begun to fall behind the gains of less educated persons.
Yet since the early 1990s and even during the last decade, the facts are the opposite: the average earnings premiums of college graduates in the US, and especially the premiums of persons with a post-graduate education, have continued to increase, despite the growth in the numbers of educated persons in the labor force (this evidence can be found in “Explaining the Worldwide Boom in the Higher Education of Women” by Gary Becker, William Hubbard, and Kevin Murphy, The Journal of Human Capital, Fall 2010).
So the most recent trends in the earnings of college graduates do not support the view that the US is overeducating its labor force.
All this indicates that President Obama is correct, and that America has to make greater efforts to increase the number of persons qualified to enter and finish colleges and universities.
This is mainly a male problem since the fraction of American women who complete college has grown rapidly: women now receive about 60% of all four-year college and masters degrees, while men receive only 40%, whereas in 1970 women received about 40% of these degrees.
Part of the American problem results from the high dropout rates from high school, including in the dropout rate students who only get a High School Equivalency Degree (GED).
These dropout rates have remained stable at about 25% of all high school students, a depressing figure relative to those in other developed countries, where dropout rates are usually below 10%.
The students who are dropping out do not get good jobs since the evidence is overwhelming that the pay of dropouts is very low, and their unemployment rates are very high.
Not much support in these data for any “hollowing out” of job opportunities alluded to by Krugman.
Especially disturbing is that African-Americans and other minorities are vastly over represented among those dropping out of high school.
So my conclusion is that America will benefit greatly from increasing the numbers of young men and women who go to and graduate from colleges and universities.
To do that, however, will require improving the preparation received at K-12 levels, including the education at the very earliest school levels for young children poorly prepared for school.
The challenges are enormous, but the potential gains are worth considerable effort from public and private bodies.
The main story of unions during the past half-century in the United States is the sharp decline in union membership to only 7% of private sector workers, and the equally sharp growth of union membership to 36% of all government employees.
Nor are these trends unique to America; for example, union members declined to about 15% of all British private sector workers, and unions are much more important among public-sector workers.
Unions declined over time in the private sector in most developed countries partly because of the shift from manufacturing with large plants, where unions have been strong, to the service sector with small establishments, where unions have been weak.
Other factors reducing unionization include the growth of competition from imports, and the sharp expansion over time of the welfare state.
The latter has meant that governments are providing medical benefits and other services that had been provided by unions.
As Posner indicates, an important reason for the growth of unions among government employees has been the expansion of government.
This expansion increased the number of government employees, and gave them a more powerful voice as voters, and as contributors to political campaigns.
Employees in companies should be able to bargain collectively with employers if they so wish.
However, employees should not have the right to monopoly power when they bargain, no more than employers should have this right.
Yet while employers are subject to anti-trust laws that forbid collusions and other monopolistic practices, unions were exempt from the anti-trust laws by the Clayton Anti-Trust Act of 1914, reinforced by the National Labor Relations Act of 1935.
This exemption meant that unions had the legal right to organize workers in whole industries or occupations, which would give unions some monopoly control over hiring, and the supply of workers to industries and occupations.
Unions exercise this power by threatening to strike and to withhold the labor of their members.
The right to bargain collectively should also be available to government workers.
Yet since these workers face only limited competition from the private sector and from other governments, they should not have the monopoly power that comes with the right to strike.
Regrettably, many government unions do have this option.
Strikes give government unions significant monopoly power over the public purse because they can use a strike to shut down transportation services, garbage collection, and other vital public services.
Even without the strike threat- indeed, possibly even without unions- public employees can often extract considerable benefits from local, state, and the federal government in the form of higher earnings and generous pensions and health benefits.
Public employees form a sizable voting bloc with formidable resources of money and the time of members to spend on supporting political candidates who they expect will be generous when it comes time to bargain over compensation.
Whatever the source of their power, unions have managed to obtain better compensation than is available to comparable workers in the private sector.
The best evidence supporting this is the much lower turnover of most public employees compared to that of private sector employees.
For example, in January 2011, turnover rates among private sector workers were about 2 1/2 times those among government workers.
Clearly, workers in any sector are less likely to quit if they are doing better than what they expect to get in alternative jobs.
Also reducing turnover is that public employees cannot be laid off easily because they usually receive tenure after only one or two years of employment.
The higher compensation of public employees is heavily weighted toward deferred benefits in the form of favorable medical plans, and especially early retirement ages with generous retirement incomes.
Retirement income is usually calculated not as a function of lifetime earnings, but of earnings during the last few years before retirement.
Employees can artificially raise these earning by concentrating most of their overtime hours during the pre retirement years.
Early retirement ages and generous benefits when retired are found not only at various governmental levels in the United States, but also among public employees in Europe and many other countries as well.
Presumably, in setting this form of compensation, politicians all over the world have responded to their (apparently correct) belief that voters and the media pay greater attention to earnings of government employees than to their deferred benefits.
There is so much public attention to earnings that it is difficult to pay high-level government employees anything close to what they might earn in the private sector.
This explains why turnover is much greater among top government employees than among the average government worker.
Deferred compensation has sometimes been excessive in the private sector as well- demonstrated by General Motors’ financial difficulties- but for the most part the private sector has avoided very early retirements and other extremes of deferred compensation received by public employees.
Unfunded retirement liabilities of many state and local governments are so large that it is highly unlikely that they will ever be paid.
For example, according to Joshua Rauh’s calculations in the Milken Institute Review, First Quarter, 2011, unfunded retirement liabilities of the state of Illinois are more than 5 times the state’s annual tax revenue, while the unfunded liabilities of Chicago are more than 7 times that city’s own annual revenue.
This explains the recent efforts by governors and mayors of many states and cities to confront government unions and force a change in the system of retirement for state and local workers.
The city of Los Angeles recently reached an agreement with its unions to increase significantly the contributions of union members to their retirement benefits.
I anticipate that other cities and states will force similar, and sometimes more drastic, changes in their retirement systems.
Japan has certainly been unfortunate during the past couple of decades.
It has had almost twenty years of confidence-destroying slow economic growth, a series of humiliating confrontations with a rising and more aggressive China, and finally the biggest earthquake ever recorded in Japan.
And this earthquake not only directly caused great damage, but it also set off a tsunami with huge destructive power.
As if this were not enough, the combined earthquake-tsunami badly damaged two nuclear energy plants located on the fault lines and by the sea, damage that led to the release of as yet undetermined amounts of radiation.
Still, I do not expect this disaster, despite its severity, to have major effects on the Japanese economy, but it will have a big impact on the nuclear power industry, and may help different countries better prepare for very rare but destructive natural events.
The fundamental loss to the Japanese people from this earthquake-tsunami-nuclear disaster is the destruction and damage to people and property.
Perhaps in the end about 20,000 people would have been killed, and many others would be severely injured, including the unfortunates who were exposed to high levels of radiation.
Twenty thousands deaths are a terrible loss, but they are only a small subtraction from the economy since they constitute about 0.016% of the Japanese population of some 127 million people.
Studies of what people in a country like Japan would be willing to pay to avoid highly rare destructive events like that of a magnitude 9.0 Richter scale earthquake combined with a major tsunami suggest that these 20,000 deaths would be valued by about $3 million per death (many of those who died are older and have shorter remaining lives).
The total cost of 20,000 deaths would then be $60 billion, a large sum to be sure, but again very small relative to Japan’s GDP of about $5 trillion.
The loss of property is even more difficult to calculate at this point.
Since the earthquake hit a depressed region of Japan dependent on declining industries like farming and fishing, it could not have caused a major loss in buildings, equipment, and consumer durables relative to Japan’s total stock of assets.
The output produced by the worst affected parts of this region are no more than about 4% of Japan’s GDP, so that percent would be a gross upper bound to the economy’s loss of buildings and equipment.
Even if the leaks from the nuclear reactors are contained without major public exposure to radiation, the combined loss of people and property are sizable in an absolute sense, and of course are disastrous to the people who lost their lives and property, or the lives of their loved ones.
Still, it is not a major economic loss to Japan as a whole, and per se these losses should not result in more than a small decline in the per capita standard of living of the Japanese people.
Further economic consequences always follow from major disasters.
Production by some businesses has been temporarily reduced since supply chains were disrupted.
Since the earthquake hit a depressed and declining region, out migration of young men and women will accelerate, as will the decline of fishing and farming in that region.
Construction will increase to replace some of the destroyed homes, businesses, and infrastructure.
Presumably also, substantial amounts will be spent on repairing the damaged nuclear plants.
These increased activities might give the appearance of an economic boom in the region, but it is a fake “boom” since they will mainly replace or repair destroyed and damaged buildings and equipment.
I do not expect it to take very long before the region replaces most of its damaged property.
A year after the powerful Kobe earthquake in 1995 that destroyed or damaged about 100,000 homes, GDP of the Kobe region of Japan surpassed its level prior to the earthquake.
The growing worldwide boom for nuclear energy will surely end.
Nuclear power does not use fossil fuels and does not cause environmental harm if the radioactive waste is disposed of properly.
However, these major advantages now have to be weighed against the different events that can damage nuclear reactors, and release large amounts of radiation into the atmosphere.
At the minimum there will be a justified reluctance to locate new reactors on earthquake fault lines and close by seas that may have major tsunami action.
Some reactors already in these vulnerable locations may be closed or relocated.
Yet I hope that this does not also lead to a sustained moratorium on construction of new nuclear energy plants, but rather mainly induces even closer attention to safeguards against the release of high radiation levels, whether due to natural disasters or terrorist attacks.
It is difficult for people, no matter what their intelligence, to factor into their behavior the consequences of exposure to events that are both very rare, such as a major earthquake, and cause major damage when they do occur.
It often takes decades that encompass most or all of a typical lifetime before another such event occurs.
In addition, it is not always clear about how much protective action should be taken against such events.
The expected damage from such events, which is the product of a small number (the probability of the event), and a large number (the damage inflicted when the event occurs), may itself be only moderate in size.
Such moderate expected damages would not justify very expensive protective measures.
Governments have important roles to play in providing the latest information in readily accessible form on the location and likelihood of major, if rare, potential disasters.
They also have the responsibility to prevent the building of plants, such as nuclear reactors, in places that would greatly harm people and property in the event of catastrophic events.
At the same time, governments need to allow housing and other markets the flexibility so that individual choices can price into different locations their vulnerability to various rare but catastrophic events.
An important World Bank study on disasters (see the important book ”Natural Hazards, UnNatural Disasters”, staff of the International Bank for Reconstruction and Development/ World Bank, 2010) shows, for example, that in flexible housing markets property values often are lower in areas more vulnerable to earthquakes and other disasters.
The revolutions and protests in Tunisia, Egypt, Libya, Bahrain, and other parts of the MENA region (Middle East and North Africa) are the most important world development in the past 20 years, even though it is still highly uncertain about the types of governments that will emerge, the effects on their economic and political freedoms, and their production of oil.
I expect, however, that these economies will become more competitive and less government-controlled, and that world oil prices would tend to be higher in both the short and long runs.
The larger MENA countries are mainly autocratic, and their governments tend to dominate their economies.
Corruption is common, and political connections are usually needed to start and grow businesses, to gain access to raw materials and other inputs, to obtain protected positions in telecommunications and other sectors, and to get credit from government banks.
The Heritage Foundation and The Wall Street Journal prepare annual indexes of overall economic freedom for many countries, including those from the MENA region, that can be roughly compared across countries.
Studies have shown that the degree of economic freedom in different countries in any year is positively related to their subsequent economic growth.
Saudi Arabia and Turkey have the highest index of overall economic freedom of any of the larger MENA countries.
Their levels of economic freedom place them in the “moderately free” category.
Then come Morocco, Egypt, and Tunisia, with indexes in the “mostly unfree” category.
Syria and Yemen have even less freedom, while Iran and Libya are close to the bottom of all 179 countries considered, with indexes of economic freedom in the “economically repressed” category.
None of the major oil producers of the MENA region are democratic, with the exception of Iraq that has a fledgling democracy.
They have a mixed record on economic freedom.
Qatar, The United Arab Emirates, Kuwait, and Saudi Arabia are in the moderately free category, while the others have much less economic freedom.
Countries that become much more democratic as a result of the upheaval rocking the MENA region are likely to become far more transparent about how they spend their oil and other public revenues since information flow is much greater in democratic than autocratic countries.
They would also become less corrupt since the greatest amounts of corruption are generally found in more authoritarian countries.
Information flows about all aspects of life would increase, so that citizens would become much better informed about what is happening in their own countries and in the world.
If, as I expect, the shift away from autocratic regimes in the MENA region would increase the role of competition, and increase the private sector, that should speed up the rate of economic growth in these countries.
However, the evidence is very mixed on whether democracies in general spur economic growth.
Probably the most significant difference is that the variation in growth rates among democratic governments tends to be less than that among autocratic governments.
Enlightened dictators can accomplish a lot for their economies, but misguided ones can cause disasters-as in China’s “Great Leap Forward” under Mao.
The much greater information flow in democracies and the relatively free elections tend to prevent democracies from engaging in terrible and unpopular policies for prolonged periods.
The world is especially interested in what will happen to world oil production if many of the major oil producers from the MENA region become much more democratic.
I say “if” because large oil reserves tend to discourage the growth of democracy (see, for example, Michael L.
Ross, “Does Oil Hinder Democracy?” World Politics, 2001).
One reason for this is that sizable oil production gives military leaders and autocrats a strong incentive to gain control of these governments and their large revenue base because that does not require trying to collect high taxes on earnings and profits.
However, if large oil producers did become much more democratic, the effects on their oil production is unclear.
Would they encourage production and refinery of oil by international companies with much expertise at these activities, or would they, as in democratic Mexico and Brazil, reserve oil production and refinery for less efficient government-owned companies? Their oil production might well decline if government enterprises ran the oil industry.
Democratic regimes might have a longer time horizon than the replaced autocratic regimes, especially if the latter governments feared being overthrown.
Such governments tend to pump out oil (and other natural resources) at a faster pace since they would not expect to collect the oil revenues in the more distant future.
MENA country regimes that become much more democratic as a result of the current unrest would tend to produce less oil than the autocratic regimes they replaced if they use government-run oil companies, and have a long horizon.
This would mean higher oil prices in the near and long term.
On the other hand, if these democratic governments used efficient international companies to produce and refine their oil, and if they did not have a particularly long time horizon because they needed larger revenues, they might increase their oil production compared to the autocratic regimes they replace.
Although it is uncertain which scenario will prevail, I lean toward expecting reductions in oil production from the MENA region, and higher world oil prices.
Posner correctly argues that there is no hard and fast line that separates plagiarism from accepted use of other peoples written work.
But wherever the line is drawn, plagiarism is the reverse of counterfeiting activities.
Plagiarists try to take credit for the work of others, while counterfeiters credit others for their own work.
Both have been with us for a long time, but the internet and other new technologies have made both plagiarism and counterfeiting easier.
A potential plagiarist has access through the internet to extensive written materials on any topic, while counterfeiters can discover designs and products to copy, and can find customers through email and websites.
It is also more difficult to detect plagiarists and counterfeiters since the number of potential sources for reports and other document to the plagiarists is immense, as are the outlets for counterfeiters.
A well-recognized part of the theory of deterrence of illegal and other undesirable activities is that punishments should be greater when the likelihood of detection is smaller.
So it follows that since these technologies have made plagiarism much easier, and its detection more difficult, punishments of plagiarists should be greater than in the past.
Posner discusses the damage from plagiarism by students and professors, and appears to conclude that punishment should be less severe on professors caught plagiarizing than on students.
I share his concern about plagiarism, but do not agree with this conclusion.
Plagiarism by professors and other writers makes greater use of the work of others than does plagiarism by students.
As Posner notes, this provides an incentive for authors to discover professors and other writers who plagiarize since citations of ones work is the major way to gain a reputation in academic fields, and sales is the source of income to professional writers.
But the analysis of deterrence implies that punishment should be directly related both to the magnitude of the gain from an illicit activity, and the extent of knowledge about whether it is illicit.
On both issues, professors are more culpable than students.
A professor who succeeds in plagiarizing typically gains far more from this than a student who plagiarizes in preparing say a term paper.
The student may get a higher grade, while the professor helps his chances of getting tenure, promotions, and raises.
In addition, professionals know much more than students do about the distinction between plagiarism and simply relying on the contributions of others.
This is why I side with students who believe that professors discovered to have plagiarized are typically let off too easily.
They should be fired for clear-cut and flagrant plagiarism.
Unfortunately, that does not usually happen if they are in senior positions because that means revoking their tenure, which is usually vigorously opposed through litigation and other means.
In particular, The American Association of University Professors, a kind of union of professors, has opposed with almost a religious fervor all attempts to revoke tenure of faculty except for the most dismal behavior, defined in part by what is politically incorrect at the time.
To return to counterfeiting, companies that produce clothing with unauthorized labels of famous designers, watchmakers who falsely claim their watches are Rolexes or other expensive brands, or private producers of $20 bills pretend to be other producers in order to free ride on their reputations and markets.
These and other examples of reverse plagiarism are clear violations of patent or copyright law even when the counterfeit product is just as good as the original, which it often is not.
I mentioned earlier that production of counterfeits has become easier because of the internet and other technologies, while detection is more difficult also because of these technologies.
Detection is also more difficult because markets have become more global.
These changes imply that punishment of counterfeiters should be harsher than in the past.
However, globalization often makes it harder to punish producers of counterfeit products since developing countries do not really want to enforce the copyright and patent protection on products made elsewhere.
Pope John Paul II was conservative on family matters, but was highly innovative on more important questions for the Catholic Church in the long run.
These include his early, continued, and open hostility to communism when many intellectuals and some church leaders were supportive or accommodating, his steering of the clergy in Latin America and elsewhere out of active involvement in politics, his much more favorable attitude to capitalism than his predecessors, his rapprochement to the Jews and Moslems, and his commitment to peace, even when he differed with America and other powerful nations.
This explain the world-wide outpouring of grief over the Popes death, including the vast majority of Catholics who were violating church doctrines on contraceptives and divorce.
He will be long remembered for these enormous contributions, whatever happens to the sexual revolution.
I start this way in my comment on Posner partly to express the high regard I have for Pope John Paul II (I should make clear that I was elected to the Pontifical Academy of Sciences while he was Pope).
A reason more directly relevant to our topic this week is that the conflict between the actual behavior of most Catholics, and the Churchs doctrines on contraceptive use and other family matters, is not unusual when dealing with culture and norms.
Indeed, it dramatically illustrates the fact that powerful economic and social forces usually trump religious views and other social norms, until these views and norms adjust to the new forces.
Birth rates, divorce, and pre-marital sex provide a powerful example of this well-known principle.
For many reasons, most mentioned by Posner, families in modern countries generally have few children, and instead invest a lot in the education, training, and health of each child.
These reasons include the high value of human capital in technologically advanced economies, low rates of child mortality, the growth of female education, earnings, and labor force participation, and the decline of manufacturing and rise of the service economy.
Among other things, these forces increased the financial independence of women that gave them a greater say in family matters, and made them much more willing to divorce than in the past.
As a result of these forces, the vast majority of families in the world have fewer than three children.
There is no effective way to do this, while continuing normal sexual activity, without extensive reliance on effective contraception.
So as economic development has spread throughout the world, family after family, regardless of their religious views, have greatly increased their contraceptive use in order to have fewer children.
Birth rates in Spain, Italy, Poland, and other predominantly Catholic countries are among the lowest anywhere.
Ireland is the most religious country in the Christian world by virtually all measures of religiousity, yet Irish families are using contraception extensively.
Their birth rates have plummeted, even while they loved Pope John Paul II, and remain highly devout Catholics.
Clearly, these families are separating their decisions about contraception from their degree of religiousity.
Low birth rates were made easier by better and more efficient contraceptives.
The attractiveness and effectiveness of condoms continued to improve throughout the past 80 years.
The pill, the most effective method of birth control, was developed only in the 1950s.
Abortion became safer and legal in growing numbers of nations.
The legalization of abortion illustrates that it is difficult to be certain about how much of the improvement in birth control methods were a response to pressure from families wanting few children, and how much was due to technological innovations that proceeded largely independent of such demand.
Whatever the causation, better ways to prevent births became available not only to married couples, but also to their teen-age children.
The rapid growth in pre-marital teenage sexual activity not only in the United States, but also in many other nations, is the strongest manifestation of the sexual revolution.
Teenagers could now explore sex without much fear of pregnancy, a fear that was a major form of birth control in the past.
Surveys on premarital sexual activity among American 19 year old females indicate that the fraction that had engaged in pre-marital intercourse grew from about 25 per cent in 1950 to around 80 per cent currently.
 The number of sexual partners women had by age 20 also increased greatly.
Data further indicate that the larger numbers of teenagers engaging in pre-marital intercourse know more about and have easier access to effectives contraceptives than did sexually active teenagers in the past.
About 60% of the women in 1960 who engaged for the first time in premarital intercourse used no contraception, while condoms were used 20% of the time.
By the mid 1990s, about two thirds used either condoms or the pill.
Yet even in recent years, a quarter of teenage women who engage in intercourse for the first time use no contraception.
This is a larger fraction of all teenagers than the total fraction of teenagers in 1950 who engaged in pre-marital intercourse.
So the sharp growth in sexual activity among young persons was not simply due to better and better-known contraceptives, but also to a greater willingness to engage in sex prior to marriage.
This is strong evidence that the sexual revolution led to a much more permissive and receptive attitude toward sex outside of marriage even without birth control, although abortion is now an option for many women.
Events such as economic growth and new technologies often induce changes in behavior despite prevailing norms that initially oppose this behavior.
As this new behavior becomes more common and habitual, norms evolve to catch up to the behavior.
This adjustment of norms to behavior rather than simply visa versa is widespread, including attitudes toward sex, divorce, womens work, husbands helping out with child care, and children support of elderly parents.
Time will tell whether the attitudes of the Catholic Church on sexual matters will also evolve, but I believe that the Church will still be attractive to many Catholics even if their behavior violates Church teachings on questions like contraception.
So it is possible to understand the basis of the sexual revolution using an economic approach, but the approach must recognize that norms and habits are also important.
These norms and habits usually adjust eventually to new forms of behavior, and the new norms greatly accelerate this behavior after they do adjust.
I disagree with Posner that sex will become, either morally or in other ways, just another consumer activity, like eating.
Sexual intercourse is a very intimate relation between two people that grew as humans evolved during the past 50,000 years when they apparently began to separate into families.
This relation carries a lot of emotional attachment and baggage that will not vanish simply because contraceptives are effective and birth rates are low.
Thanks once more for interesting comments.
I have a few reactions.
I argued in my entry that it was in the interest of a country like China to pay little attention to intellectual property rights since it is a net importer of knowledge.
I suggested this will change not only because of WTO pressures, but also because as China continues to grow, it will be producing more knowledge itself, and would then have more incentives to protect knowledge.
I was well aware of American violation of European intellectual property rights during 19th century.
The rural countryside is poor protection for unemployed urban workers since farmers are still dirt poor compared to urban workers.
That is why there is such strong pressure for rural persons to move to cities, a pressure that the present regime is trying to slow down.
I agree the absorption of East Germany in a very inefficient way, such as the one for one  exchange rate between eastern and western marks, hurt the German economy.
But many of its problems in labor markets and elsewhere really are independent of this, and Germany was already slowing down before the absorption.
To be sure, the size of China is important for many questions of trade and global military influence.
And the aggregate GDP of China is likely to become the worlds largest before long since its population is so large.
But surely per capita GDP is the relevant measure for understanding what is happening to the economic well being of the typical individual?.
The evidence supporting the causation from economic growth to greater democracy is not based on a single study, but a history of studies for the past 40 years.
I know of no respectable recent evidence that overthrows this conclusion.
It is not true that I neglected civil rights.
I did discuss the authoritarian regime of China, the greater freedom to farmers, the freedom to change jobs, etc.
I could have added greater access to computers, internet, etc, although a lot remains to be done before China is a free society by any standard.
I am not familiar with Slates criticism of de Soto.
I believe he has done very important work on the underground economy, and his emphasis on the latent property of the poor is a keen insight.
However, he carries that insight much too far.
Bad property rights are a real problem in many countries, but China is a good example of a country that is growing from poor income levels at a rapid rate with weak property rights.
I do not believe the poor of Latin America-de Sotos example-have a lot of property, even if they had rights over all of it.
I do not know Barnetts work, but I will try to look into it, and see if it justifies a topic.
A few comments.
Being small has some disadvantages in international negotiations, but mainly small countries slip through the cracks of various barriers and obstacles.
The WTO and monetary unions among small nations certainly is often part of the explanations why being small is not as disadvantageous as in the past, and has certain advantages.
True, a homogeneous culture may help a nation integrate, but countries splitup typically because the cultures are different and sometimes clash.
Examples include Yugoslavia, the Serbs and Czechs in the former Czechoslovakia, Ukraine and Russia, and so forth.
Splitting up enables them to engage in trade and movement of capital and people without cultural, religious, or ethnic clashes getting in the way.
I will stick by my analysis of East and West Germany.
If they had stayed independent, wages would have fallen in the East.
Of course, some young people would have moved to the West-they do anyway! But new companies would have started attracted by the low wages, and these wages would also have attracted companies from other nations, especially West Germany, if the labor environment more generally was attractive.
To be sure, the 1-1 exchange of currencies was politically necessary, given integration, but isnt this political necessity another reason why integration was a bad idea from an economic viewpoint?.
International trade grew partly because of the growth in nations, and partly because trade increased between nations.
But as you realize, the large growth in U.S.
exports and imports is an indication of the general growth in international trade.
This is one of the important factors that made small nations more viable economically.
In the Federalist papers, Alexander Hamilton argued for the proposed U.S.
Constitution that gave the federal government great powers because he claimed large countries with strong central governments have freer internal markets, can better deal with foreign aggression, and can raise taxes more easily to pay for needed government services.Yet since 1946, the number of countries has grown from about 76 to almost 200.
Some of that growth has been due to countries gaining independence from colonial powers, such as India or Zaire.
Others resulted from a subdivision of countries into smaller units, such as the breakups of Czechoslovakia into the Czech Republic and Slovakia, or of Yugoslavia into several independent nations.
Agitation to form independent nations continues in all regions of the world.
Has this splintering into smaller nations, often due to nationalistic aspirations, lowered their economic efficiency? My conclusion is that developments in the global economy during the past 50 years have greatly reduced the economic disadvantages of small nations enumerated for his time by Hamilton.
In fact, being small now may even have efficiency advantages.
This would help explain the splintering of nations along ethnic, religious, linguistic, and geographic lines.
In the past, larger nations generally provided bigger domestic markets with relatively low barriers to movements of goods, services, capital, and labor.
By contrast, tariffs, quotas, capital and immigration constraints severely limited the movement of goods, capital, and people across national boundaries.
But many of these barriers have come tumbling down as international trade has boomed for the past half century, propelled at first by GATT and then by the World Trade Organization (the WTO).
Members of the WTO are forced to have low tariffs and quotas on import of most goods and services, and to some extent, on capital as well.
As a result, world imports and exports have grown since 1950 at the remarkable rate of about 10 per cent per year.
In other words, small countries can now gain the advantages of large markets through trading with other nations.
So it is no surprise that international trade generally constitutes a larger fraction of the GDP of small nations than of large ones.
For example, exports in 2004 relative to GDP are about 10 per cent for the United States compared to 37 per cent for Iceland.
Most poor nations that experienced rapid economic growth during the past four decades also were extensively involved in international trade.
This is true not only of the Asian tigers- South Korea, Taiwan, Japan, Singapore and Hong Kong- but also of Chile and Mauritius.
These are all small except for Japan.
In addition, much greater use of international trade helped rescue the two giants, China and India, from their long economic sleep.
Smaller nations even have some advantages in a world with much international trade.
Their exports are too little to be considered a threat to other nations, so they are not subject to as many barriers as those from large nations, They often specialize in niche markets that are too insignificant, or not accessible, to large nations.
For example, the tiny principality of Monte Carlo with about 5000 citizens has become a tax haven and gambling center for rich sports stars and other wealthy individuals.
Singapore and Hong Kong have been mainly trading centers for shipments of goods to their much larger neighbors.
Mauritius has succeeded by concentrating on textiles and tourism.
Apropos of Hamiltons other arguments, small nations can now free ride on the military umbrella provided by the United States, NATO, or the United Nations.
Small nations may still be at a disadvantage in providing other government services, but powerful groups in large nations often use the economies of scale in raising taxes and dispensing subsidies to exploit weaker ethnic, national, or economic groups.
Smaller nations are usually also more homogeneous, so the powerful interests there have fewer other groups to exploit.
Tariffs and quotas on foreign producers impose a relatively big economic cost on small countries since they have little influence over the international prices of imports and exports.
This cost reduces the ability of domestic producers to get politicians and voters to go along with their efforts to weaken competition from producers in other countries.
The economic consequences of the reunification of East and West Germany demonstrate some of these advantages of being smaller.
East German productivity was much below that in West Germany when the communist government was overthrown.
Economists both inside and outside of West Germany warned against the consequences of both exchanging one East German mark for one West German mark, and preventing East German wages from falling much below those in West German.
The result not surprisingly has been very high rates of East German unemployment- still around 20 per cent- with the unemployed and others supported by massive financial transfers from West German taxpayers.
These transfers more than a decade after reunification still amount to 4 per cent of total German income.
Both Germanies would have been better off economically if East Germany remained independent, and had an agreement with West Germany for free movement of goods, people, and capital across their borders.
Wages in the East would then settle at a fraction of those in the West to reflect the lower productivity of East German workers.
These low wages would attract companies from Germany and elsewhere to outsource some activities to the East that would provide jobs and raise employment and wages.
Unfortunately, the prospects of attracting investments in East German have worsened with the expansion of the EU to include central European nations, like the Czech Republic, Slovakia, and Poland, with much cheaper, and less unionized, labor.
The split into the Czech Republic and Slovakia about a decade ago is also instructive.
There was concern then that Slovakia would have trouble going it alone because they received transfers from the richer Czech region, and because many powerful leaders in Slovakia were ex-communists.
But economic pressures forced a much more realistic assessment of what they needed, so Slovakia threw the communists out of power, and prospered by reforming rapidly toward a freer market economy.
My conclusion is that economic consequences no longer discourage secessionist movements that are driven by hostility among different religious, ethnic, linguistic, and other groups.
This explains the continued secessionist pressure in some countries, such as the recent call by the main leader in the Basque region of Spain for a referendum there on whether they should become more or less completely independent from the rest of Spain.
They already have considerable autonomy, so this example shows that giving power to regions is an imperfect substitute for full independence.
Political pressure remains strong among French Canadians for Quebec to become independent from the rest of Canada, although this sentiment is weaker than a decade ago as Canadian regions have received greater autonomy.
Many Kurds in Iraq, Iran, and Turkey still dream of an independent Kurdistan.
The Tamils in Sri Lanka, and different groups in Indonesia continue their fight for independence.
And is it any surprise that most Taiwanese do not want to become part of a greater China, despite growing threats from China?.
Mainly due to the growth of the global economy and globalized trading, the evidence is overwhelming that small nations can now do very well economically, perhaps better than larger ones.
In light of this evidence, it is surprising how many people, including economists, continue to believe that their economies will be ruined if secessionist movements succeed.
NOTE: Posner and I believe that we should place more emphasis on  events of interest to the international community.
So we will discuss international issues more frequently, starting with our entries on China.
Chinas economic growth since it freed agriculture from the oppressive hand of government has been spectacular, averaging some 7-10 per cent per year in real GDP since 1980, even allowing for some inflation in the official numbers.
It has becoming a leading destination of foreign investment, one of the worlds biggest exporters, and among the largest users of oil and other natural resources.
Its potential seems to be so limitless, after awakening from a slumber that lasted for centuries, that many are already forecasting that China will replace the United States during the 21st century as the leading economic power.
Perhaps these forecasts will be correct-my crystal ball is very cloudy- but some cautionary comments are needed because we have heard that tune before.
The German miracle after World War II was so impressive that many forecast Germany would overtake the United States rather quickly, in part because Germany supposedly discovered a new way to organize economic society- a  social contract among workers and companies- that would propel that nation past Americas old fashioned capitalism.
But Germany began to flounder in the 1980s, did much worse in the 1990s, and is considered by many now to be the sick man of the European Union.
Krushchevs prophesy in the late 1950s that the USSR would bury the US was not about military victory but economic superiority.
This was made when Soviet official statistics showed extremely rapid economic growth.
The apparent miracle of Soviet growth suggested to the great economists Joseph Schumpeter and Paul Samuelson, and many others that central planning might be superior economically to capitalism and decentralization of economic power.
The latest case prior to China is Japan, which experienced impressive economic growth from the early 1950s into the late 80s that propelled Japan into the elite club of the richest economic powers.
Japan too had supposedly discovered a new approach of consensus capitalism with a long-term business outlook that was allegedly superior to old Adam Smith varieties of competitive capitalism.
This alleged superiority of the Japanese system was extolled in a series of articles by the very good economist Alan Blinder, and in books with various titles, such as The Japan That Can Say No.
Yet Japan basically stagnated since the early 1990s, and now the concern is whether it can ever come out of this stagnation and deflation (I am confident it will eventually).
Its economic  model now seems riddled with inefficiencies and drawbacks, and is no longer considered a new wave of capitalism.
None of this proves that China will not be an exception, and continue to grow well beyond other nations, but these examples do suggest caution in conceding the next 50 years or so to Chinas economy.
Countries invariably discover that it is much easier to grow rapidly when they are economically way behind since they could then import the knowledge embodied in technology and human capital developed by leading countries.
As a country begins to catch up to the knowledge frontier, a simple transfer of knowledge is no longer productive.
It then has to participate in the generation of new technologies and approaches, which is far harder than simply using advances made elsewhere.
To be sure, China has considerable strengths that should enable it to grow relatively rapidly for much longer.
China has an abundant, hard-working, and ambitious labor force.
The government also radically liberalized the incredibly rigid labor markets under its old style central planning toward flexible markets that allow companies to hire and fire easily.
Also workers now have the freedom, they did not before, to find jobs that best suit their talents and interests.
China has opened its economy to foreign investments and domestic entreprenuers, something the Soviet Union, Japan, or even Germany never really did, and China has been learning from the new technologies brought by these investors.
China has also created a highly competitive environment in most markets, where companies have flexibility to change prices as costs change, and as competitors alter their prices and terms of sale.
Chinas long history of great respect for knowledge and scholars has returned.
Even poor families now sacrifice their meager resources to insure their children a decent education and other investments in human capital.
During the past couple of decades, China has been blessed with far-sighted leaders that have generally wisely approached liberalizing its economy.
They started off with relatively simple steps that gave farmers greater freedom to decide what to produce on their small private plots, and to sell their output at more market-based prices.
After seeing the overwhelming success of these first steps, they gradually liberalized much of the rest of the economy, allowing workers freedom to choose jobs, employers freedom to determine hiring and firing, markets freedom to set most wages and prices, foreign investors to start factories, often in partnership with local governments, and stock exchanges to develop in Shanghai and elsewhere.
Meanwhile, the mainland has largely lived up to its agreement to give considerable economic autonomy to Hong Kong.
This rapid development of the Chinese economy has provided many benefits to the US and other rich economies.
Chinese has exported clothing, toys, simple electronics, and many other labor-intensive goods at prices far below those possible without Chinas development.
Chinas growth helps provide a much larger and richer market for the knowledge-intensive products and services produced by rich nations, such as cars, computers, drugs and medical instruments, kitchen appliances, and many others.
Chinas development so far poses economic problems mainly not for the advanced nations, but for developing nations that produce the same types of labor-intensive products as China does.
These nations include Mexico, Pakistan, Brazil, and some countries of Africa.
It is a general but sometimes neglected result in trade theory that the growth of a large nation will raise world GDP per capita, but can hurt the nations that are most similar to the growing nation.
Richer nations could be hurt eventually if China continues to move up the product ladder.
It would then produce and export more knowledge-intensive products, partly made possible by Chinas disrespect for property rights, intellectual property, and patent protection laws.
But even so, I believe that rich nations will generally benefit from Chinas progress since different richer nations generally specialize in different types and varieties of products and services.
Moreover, as China gets richer, it will provide even larger markets for exports from other nations.
But to return to the main theme, as with Russia, Germany, and Japan, it is not inevitable that China will continue to grow rapidly enough to equal or surpass eventually the growing per capita incomes of the US and Western Europe.
For like the other nations that looked unstoppable, China has serious problems, and other problems might surface as it becomes richer.
China has a disastrous capital market, with government banks that have been forced to make loans to inefficient public companies.
The result has been hundreds of billions of dollars of debt that will never be repaid, and are now being auctioned off.
Perhaps that debt overhang will be rapidly absorbed, but Japan suffered for more than decade with a huge supply of bad bank debt that they did not absorb efficiently; indeed, the government has continued to encourage the creation of more bad debt.
China still has many highly inefficient public enterprises that authorities are reluctant to close because they fear discontent from laid off workers.
These enterprises can stay in business only because they receive uneconomic loans from other state enterprises; namely, the banks.
China does not have a developed system of commercial laws, and shows little respect for intellectual property rights.
This may well be a rational strategy for a developing nation that is mainly using knowledge originated elsewhere, but this strategy becomes a drawback as a country becomes richer, and must begin to participate itself in the production of new knowledge.
Authoritarian regimes can do well economically when they have good leaders, but they can produce disasters when these leaders have foolish economic ideas.
China discovered this under Mao, with his incredible great leap forward that helped kill millions of rural Chinese.
While the evidence indicates that authoritarian regimes do not grow slower on average than democratic governments, they do have more unstable growth rates than democracies.
I believe China will become more democratic if it continues to grow rapidly, but economic progress could falter badly if they select poor leaders who have strange ideas about how economies should be organized.
China has had a much faster decline in birth rates to below-replacement levels than other developing nations, no doubt helped by its so-called one child policy.
This has meant a prematurely aging population that creates a burden on its evolving social security and health systems as relatively few young persons one way or another have to finance the care of increasing numbers of elderly.
The rapid fertility decline also greatly slowed its population growth, which may have looked attractive in a poor Malthusian-style economy.
But knowledge-based economies often thrive on larger populations because of what economists call increasing returns to scale in the production of new knowledge, and in the degree of specialization in different types of human capital.
While exports to the worlds population provide some offsets to declines in a countrys population, domestic populations are much more important usually in determining the advantages of investments in knowledge and human capital.
A more intangible but important factor is that as countries get richer, they often introduce policies that retard further progress.
This happened in Germany with legislation that made labor very costly, and ossified its labor and retirement markets.
It happened in Japan that kept many regulatory restrictions on services, on foreign investments and immigration, and maintained a protected and inefficient banking system.
It can surely happen also in China in ways that are difficult to forecast at this early stage of its development.
I am not saying that China will not become the leading economic nation, but rather that it is far too early to tell.
The many failed predictions about Japan and other nations should make us modest about such long-term predictions.
Perhaps India will become the leader-it has strengths (and weaknesses) that China lacks- or maybe Brazil if it can finally get its act together.
Or indeed, perhaps the US will continue to be the most dynamic economy.
Many economists and others wrote off this economy during the 1970s and some of the 80s when productivity growth declined and the economy faltered.
Since I do not believe countries necessarily age the way species do, the US can continue to do well- productivity started growing rapidly about 10 years ago- if it provides a good environment for new companies, flexible labor and product markets, sizeable investments in human capital and technology, and an open attitude to new ideas, immigrants, and different ways.
Those of you alive in 20-30 years will be able to discover if my skepticism and analysis will be borne out by events.
Income inequality widened, particularly between urban and rural households after China began its rapid rate of economic development in 1980.
At the same time, the fraction of Chinese men, women, and children who live on less than $2 a day--the World Bank's definition of poverty--greatly fell.
Few would argue that the poor in China did not become much better off due to the rapid economic development, even though the gap between their incomes and those of the middle and richer classes widened by a lot.
A similar conclusion would apply to India as the explosion in its general economic development during the past 20 years widened the gap between rich and poor, but raised the income levels of the very poor.
I make this observation in reaction to the great concern expressed by politicians and many others in the United States over the rather substantial increase during the past 25 years in earnings inequality among Americans.
The China and India examples illustrate that whether rising inequality is considered good or bad depends on how it came about.
I believe that the foundation of the growth in earnings inequality of Americans has mainly been beneficial and desirable.
The basic facts are these.
There has been a general trend toward rising gaps between the earnings of more and less skilled persons.
With regard to education, real earnings (that is, earnings adjusted for changes in consumer prices) earnings of high school dropouts did not change much.
Earnings of high school graduates grew somewhat more rapidly, so that the gap between dropout and graduate earnings expanded over time.
The main action came in the earnings of college graduates and those with postgraduate education.
They both increased at a rapid pace, with the earnings of persons with MBA's, law degrees, and other advanced education growing the most rapidly.
All these trends produced a widening of earnings inequality by education level, particularly between those with college education and persons with lesser education.
I should also note that while an upward trend in the earnings gap by education is found for both men and women, and for African Americans and whites, the earnings of college educated women and African Americans increased more rapidly than did those of white males.
As a result, inequality by sex and race, particularly among college educated persons, narrowed by a lot.
As the education earnings gap increased, a larger fraction of high school graduates went on to get a college education.
This trend toward greater higher education is found among all racial and ethnic groups, and for both men and women, but it is particularly important for women.
The growth in the number of women going to and completing college has been so rapid that many more women than men are now enrolled as college students.
Women have also shifted toward higher earnings fields, such as business, law, and medicine, and away from traditional occupations of women, such as K-12 teachers and nurses.
The greater education achievement of women compared to men is particularly prominent among blacks and Latinos.
The widening earnings gap is mainly due to a growth in the demand for educated and other skilled persons.
That the demand for skilled persons has grown rapidly is not surprising, given developments in computers and the Internet, and advances in biotechnology.
Also, globalization increased the demand for products and services from the U.S.
and other developed nations produced by college educated and other highly skilled employees.
Globalization also encouraged a shift to importing products using relatively low-skilled labor from China and other low wage countries instead of producing them domestically.
Rates of return on college education shot up during the past several decades due to the increased demand for persons with greater knowledge and skills.
These higher rates of return induced a larger fraction of high school graduates to get a college education, and increasingly to continue with postgraduate education.
Some of you might question whether rates of return on higher education did increase since tuition grew rapidly during the past twenty-five years.
However, increases in tuition were mainly induced by the greater return to college education.
Pablo Pena in a PHD dissertation in progress at the University of Chicago argues convincingly that tuition rose in part because students want to invest more in the quality of their education.
Increased spending per student by colleges is partly financed by higher tuition levels.
This brings me finally to the punch line.
Should not an increase in earnings inequality due primarily to higher rates of return on education and other skills be considered a favorable rather than unfavorable development? Higher rates of return on capital are a sign of greater productivity in the economy, and that inference is fully applicable to human capital as well as to physical capital.
The initial impact of higher returns to human capital is wider inequality in earnings (just as the initial effect of higher returns on physical capital is widen income inequality), but that impact becomes more muted and may be reversed over time as young men and women invest more in their human capital.
I conclude that the forces raising earnings inequality in the United States is on the whole beneficial because they were reflected higher returns to investments in education and other human capital.
Yet this is not a ground for complacency, for the responses so far to these higher returns is disturbingly limited.
Why have not more high school graduates gone on for college education when the benefits are so apparent? And why did the fraction of American youth who drop out of high school, especially African American and Hispanic males, remain quite constant at about 25 per cent of all high school students?.
The answer to both questions lies partly in the breakdown of the American family, and the resulting low skill levels acquired by children in broken families.
Cognitive skills tend to get developed at very early ages, while my colleague, James Heckman, has shown that non-cognitive skills, such as study habits, getting to appointments on time, and attitudes toward work, get fixed at later, although still relatively young, ages.
High school dropouts certainly appear to be seriously deficient in the non-cognitive skills that would enable them to take advantage of the higher rates of return to greater investments in education and other human capital.
So instead of lamenting the increased earnings gap by education, attention should focus on how to raise the fraction of American youth who complete high school, and then go on for a college education.
These pose tough challenges since the solutions are not cheap or easy.
But it would be a disaster if the focus were on the earnings inequality itself.
For that would lead to attempts to raise taxes and other penalties on higher earnings due to greater skills, which could greatly reduce the productivity of the world's leading economy by discouraging investments in human capital.
The fundamental feature of the political process in any democratic society is that voters have only a weak self-interest to be informed on political questions that will come before candidates running for office, or on the details of the positions taken by these candidates.
The simple explanation for this well known "rational ignorance" is that whether any voter supports or opposes particular candidates has a negligible influence over the outcomes of elections when hundreds of thousands, and even many millions, are voting.
Lobbying activities and campaign contributions try to fill this void by either directly trying to influence legislators, governors, and presidents, or by trying to persuade voters to support particular positions.
They persuade by providing information and misinformation, and by changing attitudes and beliefs.
They sometimes also try to influence elected officials by bribing them with gifts, money, and favors, and also by making campaign contributions that candidates can spend to try to help get elected.
The ignorance of voters implies that many different ways will be used to persuade them to vote in particular ways.
Given the powerful and extensive role of government in society and the economy, one might expect that a large number of hours and many dollars would be spent influencing voters and officials.
Yet as Posner indicates, what is remarkable is not how much is spent on lobbying and campaign contributions, but how little.
Yes, the $3 billion spent in the 2004 presidential and congressional elections is a lot of money in an absolute sense, but it is peanuts compared to the Federal government's expenditures on different programs of over $2 trillion.
It is also small relative to the thousands of regulations that directly and in many indirect ways affect business actions and personal decisions.
Posner tries to explain why lobbying and campaign spending is small relative to the important issues at stake.
As he indicates, for many reasons the influence of additional spending on outcomes favorable to those doing the spending may be rather small.
It remains somewhat puzzling, however, why this additional influence is so small.
Whatever the explanation, it is not clear to me why we should want to restrict spending and lobbying, aside from punishment for outright bribes, and for other forms of malfeasance by officials and contributors.
Perhaps we do want to restrict how soon members of say Congress could work as lobbyists after they leave office.
According to one study of a few years ago, over 40 per cent of a sample of members of Congress who left government to be active in the private sector eventually registered as lobbyists.
Yet ex-legislators may be socially as well as privately helpful as lobbyists since they are familiar with the workings of the legislative process and have good personal contacts.
If as I (and Posner) believe) the essence of democracy is competition in the political process, that competitive process should include persuading and influencing activities.
That is, competition in the market to influence political outcomes by persuading voters and legislators is the only effective way to produce checks and balances on points of view that reach voters and officials.
To be sure, the degree of competition is not perfect in lobbying or campaign contribution since some groups are able to collect much more money to spend than are other groups that have an equally vested interest in political decisions.
But there are many other ways to influence votes and decisions.
Newspapers also influence opinions, and a free press demands no controls over how much newspapers can spend trying to influence the opinions of readers on political issues.
The Internet has thousands of bloggers and others who try to influence political opinion.
They too are unregulated in order to provide competition in the expression of opinion.
Many organizations, such as those with retird persons, encourage members to spend their time on influencing how official vote on particular issues.
The use of time for political purposes is essentially also unregulated.
So why should legislation single out explicit lobbying and explicit campaign contributions, and neglect all the other ways of influencing political outcomes? Lobbying and contributing to campaigns are only one major source of persuasive and influence efforts in the vast competitive market that tries to influence political decisions.
Another way to make my point that there is excessive attention in the US to lobbying and campaign spending is to compare political outcomes here with those in Europe or Japan.
All the data indicate that much more is spent on campaigning and lobbying in the US than in either of these other places.
Yet it is not obvious that either Europe or Japan has better political outcomes, measured either by the quality of legislation, or by the response to public opinion.
Indeed, I believe their outcomes are worse, or at least no better.
That would suggest that the United States is excessively concerned about the relatively small level of resources that is spent on explicit lobbying and campaigning.
I am not usually as diligent as Posner, so I need not apologize too much.
But I regret that other commitments kept me from replying to the comments on several weeks' postings.
I will discuss taxes and inequality now, and on one or two more of the past discussions tomorrow or Tuesday.
TAX COMPLIANCE.
My estimate of the total cost is crude, but it is not that different from several others, and is much lower than say the Tax Foundation estimates.
Some commentators went wrong in not appreciating that tax compliance costs, as most costs, are highly skewed.
As I pointed out, many people fill out the short form and spend relatively little time.
I adjusted for that by lowering the number of hours for me-which I believe understates my annual hours- by 50 per cent.
I did indicate that various tax complications encourage inefficient behavior to take advantage of special treatments.
I also indicated that lobbying led to many of the special deductions and provisions.
But that does not mean that an economy with restrictions on campaign contributions will have a simpler tax system since groups that spend a relatively large amount of time or money lobbying, even if much less money than under an uncontrolled system, will exert greater influence.
I do have to comment on the issue of efficiency and special interests.
That the political system responds to more powerful interest groups is clear enough.
That may define the efficiency of the political system-given the lobbying- but the power of various special interests may still reduce the efficiency of the economy.
Many of the special tax provisions obviously make the economy less efficient, even if the political system is responding efficiently to the demands of various interests.
Casey Mulligan and I have an article in the Journal of Law and Economics where we argue, and present some evidence, that a simpler less complicated tax system tends to lead to greater taxes.
So perhaps tax complexities help to keep down total taxes.
But one still has to count as harmful the cost in efficiency produced by tax complexity and other tax complications.
On the wholly different subject of Raymond Aron, I greatly admire the various articles and books of his that I read, but I did not read the book mentioned.
Aron pointed out the weaknesses and horrors of communism while most French intellectuals were great admirers of say the Soviet Union.
THE GROWTH IN EARNINGS INEQUALITY.
There are many studies of the causes of the rise in earnings inequality- see for example papers by Kevin M.
Murphy (my colleague) or Lawrence Katz of Harvard.
These studies suggest, they do not definitively prove, that globalization and especially new technologies are the most important factors.
Illegal and legal immigration played a role in keeping down the earnings of the less skilled, but it is not the dominant factor.
As readers of this blog know, I strongly support increased legal immigration, especially of skilled immigrants.
That would tend to lower earnings differences by skill, but not by a lot.
Signaling and credentialism are not causing the rise in earnings inequality by education.
Whatever the effects of such considerations, they were as important to college earnings in the 1970's as at present.
Indeed, partly for this reason, the signaling interpretation of the earnings premium to college education has been in retreat as earnings differentials rise, and knowledge becomes more and more important in an economy.
Some of you deny that college education teaches much.
This is obviously false when considering learning by students of engineering, physics, modern finance, or many other specialties in various areas.
But college education also helps students process information more effectively since they get so much practice doing this through readings and exams.
In the information and knowledge age, the ability to process information efficiently is increasingly valued not only in the labor market, but also in obtaining good information about health, using the Internet more effectively, etc.
To be sure, not everyone can profit from a college education or from finishing high school.
But that does not mean that the numbers going on to college or graduating high school is the efficient or optimal number.
The quality of k-12 schools and encouragement from family and friends to continue education can make a big difference.
Some people remarkably rise above terrible circumstances, but sometimes sufficiently gifted boys and girls cannot, and that is what society should be working on.
Some of you discussed more general questions about justice, capitalisms' effects on inequality, inequality in access to health (which incidentally has gone down, not up), and what are attractive statistical measures of inequality.
These are all very interesting questions, but go far beyond my focus on the rise in earnings inequality.
Earnings inequality is clearly the most important determinant of overall income inequality-for example, far more important than inequality in inheritances- so a concentration on earnings is getting at the main source of the change in overall inequality.
The causes of the sharp increase in gasoline prices during past year and a half are clear.
The main ones are the rise in the price of oil to over $70 a barrel, and the lack of unused capacity in oil refineries that makes it difficult to increase gasoline production.
Since refineries pollute and are generally unpleasant to have in one's neighborhood  (the NIMBY, or Not in My Back Yard, mentality), political opposition prevented any new refineries from being built in the United States since the 1970's.
We are reaping the consequences of that opposition.
Gasoline prices have risen by about $1 during the past year to almost $3 a gallon.
This is a very large increase over a short period of time, but it should be put in perspective.
Spending on gasoline by the average household has risen from about 2% of its total consumer spending to a still low 3%-it reached over 41/2% of personal consumption spending in 1981.
The real cost of gasoline, adjusted for changes in the price level, is less than in 1981.
Since a typical family has a higher real income than it did 25 years ago, the burden of high gas prices is easier to bear now than at that earlier time.
The higher price will pinch for families who commute long distances to work in their SUV's, but the price of gasoline does not have a major effect on the many poor families who take public transportation to work.
Most of the other economic consequences of higher gas prices are beneficial to a world concerned about an over-dependence on Middle East oil producers.
They induce consumers to drive less and to shift toward more fuel-efficient cars.
They encourage politicians to worry about why American refineries have not been built for over 30 years, and to remove some of the regulatory obstacles.
High oil and gas prices encourage the hunt for additional sources of oil in shale and tar pits, and give researchers greater incentive to search harder for alternatives to the gasoline-powered internal combustion engine, such as electric powered engines, fuel cells, ethanol, and other alternatives.
On the other hand, many potential political consequences of high gas prices are worrisome and even scary.
As Posner indicates, the proposed $100 rebate to taxpayers would help many well-to-do families, and have a minor effect on families that have been hard hit by the rise in gas prices.
Perhaps even worse are the proposals to investigate whether oil companies have conspired to raise gasoline and oil prices.
No one mentioned any oil conspiracy when real gasoline and oil prices declined significantly during the 1980's and 1990's.
Stagnation in the number of American oil refineries, the havoc caused by Katrina to refineries in the Gulf, rapidly growing world energy demand, and disruptions in the world supply of oil during the past year are sufficient to explain high gas prices without any conspiracy theory.
I doubt if "excess" profits tax on oil producers will be introduced, but even the suggestion to do that is disturbing.
It is related to, although different from, the oil "windfall" profits tax in effect during most of the 1980's.
Profits of oil producers are volatile, and were depressed during the 1980's and '90‚Äô' when oil prices fell a lot.
Higher profits encourage greater investments in looking for new oil reserves, while governmental restrictions on profits discourage the search for new oil sources that are crucial to controlling oil prices in the longer run.
I do believe Congress should roll back the some $2 billion in tax breaks given to oil companies last year.
They never should have been given in the first place, but these benefits mainly reflect the political power of the oil industry, a power that is at least temporarily in retreat.
One of several better ways to encourage oil production in North America is to open the Northern Alaskan region to oil production; President Bush has proposed that once again.
The advisability of raising taxes on gasoline, supported by Posner, is not so clear, even aside from the political impossibility of increasing taxes when gas prices are high.
One disadvantage of higher taxes is that they partly offset the incentives provided by high gasoline and oil prices to invest in new sources of oil, such as shale, that reduces dependence on Middle Eastern oil.
Federal, state, and local governments of the U.S.
combine to impose taxes on gasoline of about 60 cents per gallon.
Studies by Resources for the Future suggest that this is more than adequate to cover all effects of pollution, aside perhaps from some larger estimates of the effects of gasoline consumption on greenhouse warming.
The purpose of gasoline taxes is to cut consumption by raising gasoline prices to consumers, but the $1 increase in gasoline prices during the past year has cut gas consumption.
These higher prices, if they stay, will cut gasoline usage much further as consumers have more time to adjust their behavior.
If the optimal tax on gasoline was $1 when gasoline sold for $2, the effective tax is now $1.60: the 60 cents imposed by governments and the $1 increase due to market forces.
So, if anything, this argument suggests that gasoline taxes be reduced rather than increased while prices are so high.
As my wife and I were recently preparing our income tax data to give to our accountant, I began my annual guess about the cost of complying in the U.S.
with the Federal Tax code.
But instead of just shaking my head over it, as I usually do, I made a few simple calculations that I will share with our readers.
I will also offer some suggestions on how to cut down drastically compliance costs and reduce the negative effect of federal taxes on the efficiency of the economy.
We spent at least 25 hours in 2005 preparing and keeping track of our 2005 income, deductible expenses, and other data relevant for tax purposes.
Our accountant spent another 6 or so hours, so together our tax filing used over 30 hours.
Last year the IRS processed about 130 million tax returns.
If the average filer along with any professional help together spent about 20 hours, 2.6 billion hours would have gone into complying with the 2005 tax code.
This may seem huge, but the Tax Foundation put much more effort into their calculations, and finds that about 6 billion hours were spent in complying with the federal income tax code alone.
Businesses spend many more hours than most individuals do, while many filers who primarily have taxes withheld by their employers spent less time because they use the "short" tax form.
Still, over half of all filers consulted accountants, lawyers, or other professionals for assistance in preparing their taxes.
During the tax season, apparently over 1 million persons work professionally helping others prepare their tax returns.
If we value my 2.6 billion hours estimate conservatively at an average of about $40 per hour because higher income filers and tax preparers spend many more hours in tax preparation than lower income filers, the aggregate cost of complying would be over $100 billion.
This is almost 10 per cent of the approximately $1.2 trillion that will be paid in 2005 in federal income taxes.
The Tax Foundation concludes that total compliance costs for 2005 will amount to $265 billion, or over 20 per cent of federal income tax revenue.
Even with my lower estimate, compliance costs are big, despite the availability of computer software that greatly helps in tax preparation.
The culprit is clearly the complicated tax code that has produced over 66,000 pages of federal tax rules.
Of course, these complications are not there by accident, but are the result of pleadings and lobbying (see our discussion last week of lobbying) by special interests for favorable tax considerations.
These include efforts by builders and home owners to get the government to allow deductions for interest paid on mortgages, by philanthropic organizations and universities to have charitable contributions deductible from reported income, by state and local governments to allow the deductibility of state and local income and property taxes, by industries lobbying to get accelerated depreciation on capital purchases, and special tax provisions for the oil and gas industry.
They also include lobbying by financial institutions to get incomes accumulated in IRA's to be tax free, by employers and other groups that prefer the earned income tax credit over more generous welfare payments, and so on for the many pages in the tax code.
These numerous provisions not only enormously raise the direct cost of tax compliance, but cause many changes in behavior to take advantage of favorable treatments in the tax code.
These alterations in behavior, like expenditures on compliance, usually make the economy less efficient, whether because many talented lawyers and accountants spend their time finding tax loopholes, or because too many and very large houses are built to take advantage of the favorable tax treatment of housing expenses, or because of many other changes in behavior.
Complications in the tax code are an excellent example of the conflict that sometimes arises between what is rational at the individual level, and what is rational to society as a whole.
Each interest group lobbies to promote the interests of its members, although their interests advance usually at the expense of the interests of others.
When many groups succeed in promoting their interests, losers vastly outweigh winners since each group gains from what they do, but loses from what is done to them by hundreds of other powerful interest groups.
There is no magic cure to this problem, at least none that I have encountered.
Still, it is valuable to see clearly the problems and how they might be corrected because the future may provide opportunities for reform that are not presently available.
A window of opportunity could arise to implement thoroughgoing changes that are not now politically feasible.
One example of this kind of process is the voluntary army: a pipedream in the 1950's and 1960's became feasible in the 1970's because of the discontent over the draft during the Vietnam War.
The only way to radically reduce compliance costs is to engage in drastic surgery on the complexities of the tax code.
The best approach would be to essentially eliminate all deductions, and have tax rates based just on total consumption, or as a second best alternative, just based on total income.
Then compliance costs would be small because taxes owed could be calculated on a form the size of a postcard.
Such a radical simplification is often confused with a flat tax, which is a tax that is the same percent of income at all income levels.
But eliminating all special deductions and benefits does not imply a flat tax, nor does a flat tax imply enormous tax simplification.
In fact, most people who propose a flat tax really are proposing a progressive tax structure since they want incomes below a certain level to be free of all income taxes, and then a constant tax rate on each dollar of income about this minimum level.
One could still have low compliance costs with a greater degree of progression in rates if tax rates started at zero and rose as incomes increased.
Most degrees of tax progression are consistent with low compliance costs, although the more complicated the degree of tax progression, the greater the alterations in behavior that reduce an economy's efficiency.
To return to the cost of tax compliance, it is obviously excessive and socially wasteful.
It is not easy to be optimistic about the prospects for tax simplification since the fundamental trend over time in the United States has been a steady increase in the complexity of the tax code.
But at some future time, concern over the social waste in compliance costs that amounts to between 10 and 20 percent of total revenue produced by the income tax may galvanize American taxpayers into a revolt that, at least for a while, would result in drastic simplifications of the tax code.
Recently Sam Zell, a leading Chicago businessman, arranged to buy the Tribune company, owner of the Chicago Tribune, Los Angeles Times, other newspapers, and many TV and radio stations.
Aside from the low price that he paid, which reflected the rapidly declining fortunes of the print media and conventional TV stations, the most noteworthy aspect of the deal is that he plans to take the company private through the creation of an ESOP, or employee stock ownership plan.
The number of American ESOPs has grown substantially during the past 30 years, and they are currently estimated to hold more than ¬Ω trillion dollars in assets and cover over 10 million workers.
Probably the main reason for their growth is that ESOPs had during this period sizeable tax advantages that include deductibility from federal taxes not only of the interest payments but also of much of the principal used to finance creation of an ESOP.
The argument made for these special privileges is that employee ownership is a good thing for workers that should be encouraged, but is that true?.
In reality, the creation of an ESOP is often a management tool to fend off unfriendly takeover bids.
This was certainly the case behind the pilot-led ESOP created by United Airlines, and may have played a role in the ESOP to be created at Tribune company.
ESOPs that help keep poorly performing management in power would contradict the claim that this organizational form improves rather than contributes to poor performance.
Employee ownership is said to induce employees to work harder because they then have a financial stake in the company where they work.
If that were true, owners would not need a tax advantage to create a sizable employee ownership since they would subsidize stock ownership by employees in order to improve productivity.
Employees in a small closely held company with few workers may feel part of a family and work harder when they own an interest in the company.
But in large companies with thousands of employees, such as Tribune company and other ESOPs like Science Applications International, ownership is not likely to be a strong motivating factor because hard working employees would then mainly benefit the many other employees and stockholders.
Between 1995 and 2000 United Airlines was an ESOP with employee representatives on its board.
Soon after 2000 the company entered bankruptcy with employees and management not known either for their great effort.
Careful studies that compare the productivity of employee-owned companies with those owned by general stockholders are limited in number and scope, and advocates of ESOPs often get quite emotional in reacting to criticisms of the concept.
Still, there is little hard evidence indicating that ESOPs are better run than normal companies.
Reputable studies of employee ownership in the United States and other countries generally indicate that both profits and productivity remained about the same after companies introduced employee ownership.
This is not surprising since most ESOP-owned companies are not run by employees, and for the reasons I gave employee ownership does not usually better motivate workers of larger companies.
However, the most powerful argument against the view that employee ownership improves efficiency is that new firms would tend to take this form if it improved efficiency, and many older firms would convert to employee ownership on their own, even without tax advantages from doing so.
Yet despite the competitive nature of American industry, with substantial rates of entry and exit of companies, less than 10 percent of employees in the United States work in firms that have ESOPs despite the considerable tax advantages to this organizational form.
This more than all the highly imperfect comparisons between the performance of ESOPs and other companies is persuasive evidence that ESOPs would not usually be more efficient.
Indeed, given the tax advantages, there would be many more ESOPs if they were equally efficient.
Various types of employee-ownership of enterprises are found in many other countries.
Usually they are the result of legislation that either forces or encourages this form of ownership through regulations and tax advantages, sometimes when public enterprises are privatized.
The evidence on their efficiency as determined by their spread and performance in these countries is similar to that for the United States: even with special privileges, employee ownership has not become the dominant organizational form of enterprises.
This suggests again that employee-owned companies would tend to under perform more conventional ownership structures that have stockholders who either manage the enterprise, or are largely independent of both employees and managers.
The biggest and most obvious drawback of employee ownership from the perspective of the financial wellbeing of employees is that they hold their assets in one basket, the company where they work.
Even without ownership of equity the wealth of experienced employees is still poorly diversified since it is largely in the form of human capital whose value depends on the success of the company that employs them.
When the company does well, earnings from their human capital tend to rise more quickly, while the opposite occurs when the company does poorly.
Ownership of shares in the company exacerbates the economic dependence on the company's performance since now the value of the financial assets of employees also rises and falls with the company's fortunes.
The same problem arises with the many corporate pension plans that mainly hold bonds and stock that they have issued.
When the company does poorly, the value of pension assets, and thus of the retirement incomes of employees, go down along with earnings, employment and profits of the company.
Forcing top management to hold much of their financial assets in the stock of the companies they run through stock option and stock ownership plans reduces their financial diversification too, but that may be beneficial to the company's performance since the decisions of CEOs and others at the top do greatly impact company performance.
As I indicated earlier, that is not the case for typical employees of large corporations.
The disadvantages of being poorly diversified is not simply hypothetical, but was sadly brought home to employees of companies like Enron and United that had substantial stock ownership by employees.
After these companies went into bankruptcy, mainly due in Enron's case to mismanagement and corruption, many employees not only lost their jobs but employees lost much of their other wealth as well.
To me, the absence of a military draft is the most important factor behind the minimal number of violent protests against the increasingly unpopular war in Iraq.
Explicit riots over the draft already occurred in New York City during the Civil War soon after the North instituted the draft in 1863.
These riots were mainly by young working class men who could not afford to buy a substitute, a system in effect at that time.
So it is no stretch to claim that violent riots have occurred in the United States when unpopular wars are combined with a draft.
Recall that President Nixon and many other politicians during the Vietnam War felt that the drafting of young men to serve in the armed forces was partly responsible for the violent protests against the war.
As a result, Nixon in 1969 set up the 15 members Commission on an All-Volunteer armed Force (Gates Commission) to look into whether an all-volunteer armed forces should replace the draft.
 Milton Friedman, Alan Greenspan, and General William Westmoreland, who had commanded military forces in Vietnam until mid-1968, were all members of the Commission.
Apparently largely due to the persuasive powers of Friedman, the Commission, while initially evenly divided between those in favor of and those opposed to the draft, came out in 1970 with a unanimous recommendation to end the draft.
The draft was abolished in 1973, and protests largely vanished, although the war did not end until 1975.
Representative Charles Rangel of New York has proposed to reinstate the draft.
He has claimed that President Bush would not have invaded Iraq had a universal draft been in place.
I do not believe he is right, but I do believe the pressure to withdraw earlier would have been far greater if young men were being drafted in large numbers.
The war in Iraq is being fought only with volunteers for military and civilian service, although some members of the armed forces and the reserves would not have joined if they anticipated the war when they enlisted.
The reliance solely on military volunteers means that "taxes" to fight the war are spread over all taxpayers, and are not concentrated on young people.
Moreover, draftees are more costly in terms of the resources lost to other activities, and they are on the average less dedicated to the military than are volunteers.
When draftees, and those who volunteer mainly to escape the draft, make up a significant fraction of military personnel, much of the burden of a war falls on them, not on the average taxpayer.
Even those who volunteered during the current war have shifted some of the burden of their service to taxpayers by demanding and receiving higher pay.
 Since most of those involved in violent protests in general, and wars in particular, are usually young males, is it any surprise that they are protesting much less during this war when they are paying a much smaller share of the cost than young men did during Vietnam?.
I agree with Posner that the many fewer deaths from the Iraq war than from the Vietnam War have weakened the impetus to protest violently, despite the war's unpopularity, although the slightly over 3000 deaths have to be augmented by the many more serious injuries to military personnel to get a full measure of the personal cost of the war in Iraq (see my discussion of the cost of the Iraq war in the post on March 19, 2006).
Still, I believe violent opposition to the war would have been far greater if many of those killed or seriously wounded had been draftees, .
My emphasis on the importance of the draft in sparking unrest during the Vietnam War may seem misplaced since most young men who took part in violent protests were college students.
Until 1969 students usually had their military service deferred.
However, students could anticipate being drafted when their education ended.
Studies have shown that the number of students in colleges and universities expanded during the Vietnam War beyond the numbers expected in peacetime because some persons continued with their education only in order to escape, or delay, being drafted.
Even if college students ended up avoiding the draft, they were being indirectly taxed if they only stayed in college to avoid that.
They would have been attracted to protests in recognition of the indirect costs they were paying as a result of the draft.
An additional factor that encouraged protests by college students during the Vietnam era is that the returns to college were not high and were declining then for the typical student, not only for those in college to avoid the draft.
The major change in this regard during the past 30 years has been the unprecedented increase in the monetary and other benefits of a college education (see my post on April 22).
Since the 1970's, real earnings of young high school graduates hardly increased, if they did at all, while real earnings of high school graduates increased slowly.
The only explosion in earnings has been among college graduates, especially of younger ones.
With no risks of being drafted, and with a potentially large cost from reduced job opportunities if arrested for participating in violent protests, college students could lose a lot more now than during the Vietnam era by joining such protests.
I will make three points: the United States system of health care may not be the most efficient but people here get good value for their large spending on health care, employer-based health insurance has the frequently overlooked major advantage of providing long term insurance, and catastrophic health coverage probably should be made compulsory.
Americans spend the largest amount of any country on health care, both in terms of dollar spending, and as a percent of income-the health sector in the United States takes about 1/7 of GDP, which is a far larger percent than any other country.
 Although this share of income has grown rapidly during the past 25 years, the benefits are also very large.
Using the economists concept of how much people are willing to pay for improvements in their life expectancy- called the "statistical value of life"- Kevin Murphy and Robert Topel (see their ‚Äú"he Value of Life and Longevity", Journal of Political Economy, 2006, pp.
871-904) estimate that improvements in life expectancy in the United States from 1970-2000 is worth over $95 trillion (yes, trillion!).
Even after netting out the $35 trillion dollar increase in medical spending over the same period, the net gain exceeds $60 trillion.
Of course, not all the increase in life expectancy is attributable to medical spending, as declines in smoking and other behavior changes made major contributions to longer life.
On the other hand, the large improvements in the quality of life due to medical spending, including hip replacements, pacemakers, organ transplants, Viagra, and other advances should be added to the benefits of the increased medical spending.
Other OECD countries, such as Europe and Japan, had comparable improvements in life expectancy with much smaller increases in medical spending.
Perhaps that means they have more efficient health care delivery systems than the United States has, but these nations generally ration care, and are less generous in providing quality of life improvements, such as hip replacements and breast reconstruction after breast cancer.
The United States is also the world's leader in medical research, and residents of other countries come to this country for advanced medical treatment of serious diseases and ailments.
I have argued in a previous post (January 29, 2007) that the tax advantage currently enjoyed by employer-provided health plans should be extended to individual and other group based plans in order to level the playing field among competing plans.
 All tax advantages should have a cap, however, so that "Cadillac" coverage is not deductible, and any extension to individuals and that other group plans of the tax advantage of employer plans would not raise the overall tax burden.
Even with such changes, employer-based plans would continue to be important in competition against other group-based plans.
A drawback of employer-based health coverage is that workers with existing medical conditions who are covered by such plans would be discouraged from changing jobs because their condition may discourage companies from taking them on.
However, most job changes are by younger workers who have few serious medical conditions.
Employees who have been with the same company for a few years or longer are not likely to change jobs, although the propensity of senior workers to lose their jobs has risen a little in recent years.
The advantage of employer-based medical insurance to employees who remain with the same employer for many years is that they effectively have long-term medical coverage against serious health problems that could arise in the future.
 The big problem in individual health insurance coverage is that it is on a year-by-year basis.
Anyone who develops a serious health problem can lose his coverage or be forced to pay much higher rates, especially if he wants to change plans or insurance companies.
Long-term health insurance with individual plans is uncommon mainly because health insurance companies cannot force customers to make a long-term commitment.
If a person has experienced good health, he may seek a cheaper plan with another company that would reward his additional years of good health, an experience that his original plan could not fully anticipate.
Given such "adverse selection", health insurance companies are discouraged from offering long-term insurance.
Most individuals and families need a combination of health savings accounts that give them incentives to conserve on normal health spending, and protection against major health problems.
President Bush's State of the Union address proposed an excellent extension of health saving accounts that would help handle more normal health spending (see my post on this on January 29, 2007).
To avoid the risk that individuals and families would attempt to free ride on taxpayers and others by not contracting for catastrophic medical coverage, one can make such coverage compulsory for everyone, either through group plans, such as from employment, or through individual plans.
As Posner indicates, poorer individuals and families are already covered through Medicaid, so no additional subsidy for lower income persons is needed to implement compulsory coverage of catastrophic health problems.
An article by James Altucher, a columnist of the Financial Times, this past week essentially asserted that college and university education is a waste of time, that students would be better off by working rather than attending classes, or by using the money that went to tuition to travel instead.
("A mind is a terrible thing to waste but so is all the money that is being flushed down the toilet in the elitist quest for a good education.
The best education is falling on the ground and getting a few scrapes.
‚Ä¶Just don't get robbed for four straight years [by going to college]").
Two days later a columnist of the Wall Street Journal, David Wessel, argued just the opposite, that the benefits of higher education have never been higher, at least in the United States, and that the puzzle is why more Americans do not finish high school and college.
Who is right? The evidence is overwhelming that Wessel is right about the benefits of education, and that Altucher does not know the subject he is writing about.
It is well documented that the average earnings premium from a college education in the United States increased from about 40 percent in the late 1970's to about 80 percent at present.
Not everyone does well financially from going to college, or badly by not going-Bill Gates is an obvious but extreme example of a college dropout- but the average person who does go has far better prospects for earnings, employment, and occupation than the average person who stops schooling after finishing high school.
The economic benefits from completing high school also went up relative to those to high school dropouts, although they did not increase as much as the benefits from college.
A similar picture holds for Great Britain and many other countries, although the changes elsewhere have been smaller than in the United States.
Nor is this all.
Research increasingly demonstrates that education improves performance in virtually every aspect of life.
Educated persons on the whole are healthier, are better at investing in their children, have more stable marriages, smoke much less and in general have much better habits, commit many fewer violent crimes, are better at managing their financial resources, and at adjusting to unexpected shocks, such as hurricane Katrina.
It might be thought that these correlations between education and various benefits, including earnings and health but not only these, are the result of abler persons, such as those with higher IQ's, and healthier persons getting more schooling rather than the effects of schooling.
More able and healthy persons do have greater amounts of schooling, but literally hundreds of studies have tried to correct for these differences.
They find that even after making these and other corrections, the effects of education on various monetary and non-monetary benefits remain very large.
An additional finding is also important.
Not only have the earnings benefits of education increased during the past 30 years, but so too have health benefits, the advantages of education in raising children, and the benefits of education in managing one's assets.
The growing gains from education are pervasive and not limited to earnings, or to economic benefits narrowly conceived.
This suggests that the forces producing the greater advantages are also broad and general rather than narrow and specific.
Three such broad forces have been identified.
Probably most important is that the technological progress of the past 30 years has increased the demand for educated and other skilled persons.
Examples include the growth of the Internet and the personal computer, developments in biotech, innovations in financial instruments, and rapid progress in technologies that improve the health of adults.
Globalization and the economic development of countries like India and China is a second factor that raised the returns to skill, for global growth increased the worldwide demand for products and services that use highly educated and other more skilled inputs.
A third general force is due to the decline in the cost of plant, equipment, and other physical capital, in part the result of lower real interest rates.
Educated and other skilled manpower is complementary with physical and financial capital, whereas low skilled labor is a substitute for such capital.
Hence a cheapening of physical and financial capital would raise the demand for educated inputs relative to the demand for the less educated.
Estimates indicate that in the United States the average rate of return on a college education in the form of higher earnings is about 10 percent.
The average return is lower for students who fail to complete four years of college, and is higher for those who do graduate work.
If the benefits of better health, better skills at raising children, better financial management, and so forth are added to the benefits of higher earnings, the total rate of return on college would rise to 15 percent or more.
Should not such high returns have induced most persons who finish high school to go on for a college education, and encourage additional boys and girls to finish high school?.
Up to a point they have, so it all depends on whether one looks at the glass as half empty or half fill.
Since earnings and other benefits of a college education began to increase almost 30 years ago, the fraction of high school graduates who go to college has also increased greatly, and the increase has been pervasive among different genders and racial groups.
Higher enrollments are found for white males and females, African American males and females, and Hispanic males and females.
Over 60 per cent of high school graduates now get some higher education, one of the highest percents in any country.
True, many of these college entrants, especially men, fail to finish college, but at least they show awareness of the advantages of a college education.
The real failure of the American education system compared to other countries is in the large numbers who drop out of high school.
What is even worse from the perspective of equalizing opportunity is that the fraction dropping out of high school, some 20- 25 percent of high school students, is concentrated among African Americans and other minorities.
Surprisingly, this fraction has not declined over time by very much, despite the huge increase in the returns from greater amounts of schooling.
I do not have a good explanation for the lack of response in the high school graduation rate to the greater benefits of education, except that the American family started deteriorating rapidly only a little earlier than the returns to education began to rise rapidly.
The reduced preparation for schooling, especially among boys in the many families without fathers, was offsetting the increased benefits from additional schooling.
How to better prepare students so that more of them want to complete high school and attend college, and benefit from their schooling experience? It would be important to help stabilize African American and other families.
In an earlier post (March 12 of this year) I discussed a subsidy to couples if they get and stay married.
That might be an option, especially if the subsidy to marriage was greater to lower income couples, although I give various arguments in that post why such a subsidy may not be desirable.
Perhaps head start school programs for children from broken families would be a better approach.
Legalizing drugs would contribute, so that students would not drop out of high school drawn by the (slim) prospects of making a lot of money through the sale of drugs.
The quality of public schools attended by most minority students is low-although teachers at these schools face formidable obstacles- so school vouchers and other ways to increase competition among schools for students would be helpful.
T.
It was an oversight that I did not discuss explicitly long term prospects for food price increases.
The brief discussion below corrects this.
A major concern about the rapid rise in food prices is that these high prices will persist into the indefinite future, and perhaps food prices will rise much further.
An analogy is often drawn with oil prices since both have risen rapidly during past couple of years, and there is much fear by oil importing countries that oil prices will continue to go up during the next few years.
However, the analogy to oil is seriously flawed.
Whatever happens to oil prices, there are grounds for much greater optimism about food prices.
Any increase in the production of oil is limited by its fixed availability at different locations on earth.
The supply responses to higher prices of agricultural production will be much greater than that of oil production for two fundamental reasons.
The first is that only a small fraction of potential arable land is used for farming because the growth of cities and suburbia has led to mass conversions to other purposes of land formerly used to grow foods.
Persistent high and climbing prices of grains and other foods will induce conversion of some of this land back to farming.
The second reason for optimism relates to the lower productivity of food production in the poorer parts of the world relative to the United States and other developed countries.
Higher food prices will induce an increase in productivity in developing nations by encouraging greater use of machinery, fertilizers, and other forms of capital.
It will also encourage consolidation of some agricultural holdings into the hands of more efficient farmers.
 Efficiency in oil production is more uniform in different parts of the world than is food production since the major energy international conglomerates produce all over the globe, including many poorer nations.
The major deregulation movement of the past 100 years started with the Ford and Carter administrations in the 1970s, and continued through the Reagan years.
This movement came to an end with the passage of the Americans with Disabilities Act of 1990 under the administration of George W.
Bush.
Since then some sectors, such as labor markets and product safety, have been regulated much more extensively, while others, including commercial and investment banking, have had no further declines in the extent of regulation.
Despite the considerable and tangible successes of this deregulation movement, the pressure is intense to significantly increase the regulations affecting consumer safety, the introduction of new drugs, and especially financial markets.
The 1970s saw a bipartisan reduction in the regulation of airline travel, trucking, security exchanges, and commercial banking.
Measures of the success of this deregulation include sharp declines in the cost of air travel and of shipping goods by truck, huge reductions in commissions on stock transactions, and higher interest rates on bank deposits.
Not only has no serious attempt been made to re-regulate these activities, but also European and many other nations on all continents have copied the American deregulation of airlines and securities.
The impetus to tighter regulations varies from sector to sector, although there is a growing belief that many activities are insufficiently regulated.
Obviously, the current turmoil in the financial sector is stimulating many proposals to regulate extensively various types of financial transactions.
Yet it is not obvious that the problems in the financial sector resulted mainly because of insufficient regulation.
 For example, commercial banks are probably the most heavily regulated group in the financial sector, yet they are in much greater difficulties than say the hedge fund industry, which is one of the least regulated industries in the financial sector.
Banks participated very extensively in originating mortgages, including subprime mortgages, and in buying mortgage-backed securities, and so they are suffering from the high foreclosure rates, and the sharp decline in the market value of these securities.
One reason why extensive regulation of commercial banks did not prevent many banks from getting into trouble is that bank examiners became optimistic along with banks about the risks associated with mortgages and other bank assets because the market priced these assets as if they carried little risk.
It would run counter to human nature for regulators to take a skeptical attitude toward the riskiness of various assets when the market is indicating that these assets are not so risky, and when originating and holding these assets has been quite profitable.
One can expect regulators to mainly follow rather than lead the market in assessing riskiness and other asset characteristics.
To some extent that was also true of the Fed's behavior during the past few years.
I believe that Alan Greenspan is right in claiming that the main cause of the housing boom was not the Fed's actions but the worldwide low interest rates due to an abundant world supply of savings.
The demand for very durable assets like housing is greatly increased by low interest rates.
Still, the Fed seems to have contributed to the booming demand for housing and other assets by keeping the federal funds rate artificially low during the boom years of 2003-05.
In evaluating the need for greater financial regulation, one should also not forget that the American economy greatly outperformed the European and Japanese economies during the past 25 years.
Might that not be related in part to the fact that the United States led the way with major financial innovations like investment banks, hedge funds, futures and derivative markets, and private equity funds that were only lightly regulated? An infrequent period of financial turmoil may be the price that has to be paid for more rapid growth in income and low unemployment.
Rapid income and employment growth might be worth an occasional period of turmoil especially if they do not lead to prolonged slowdowns in the real part of the economy.
So far the effects on GDP and employment have not been severe, although the financial distress is not yet completely over.
Nevertheless, a few important regulatory changes are probably warranted.
For the first time the Fed allowed investment banks access to its federal funds window, and the Fed guaranteed $29 billion worth of mortgage-backed assets to induce J.P.
Morgan to take over that investment company.
Since these types of Fed actions would likely be repeated in the event of future financial turmoil, investment banks would have an incentive to take on additional risk since they can reasonably expect to be helped out by the Fed in the future.
For this reason it might be desirable for the government to impose upper bounds on the permissible ratios of assets to equity held by investment banks.
The ratio of assets to the equity of the five leading investment banks did increase greatly from about 23 in 2004 to the highly leveraged level of 30 in 2007.
Other regulations of financial institutions may also be merited, but elaborate new regulations of the financial sector would be counterproductive.
For example, the Fed has proposed limits on how much mortgage interest rates can exceed the prime rate for low-income borrowers with poor credit ratings.
This would be a foolish intervention into the details of credit contracts that have all the defects of usury laws.
The financial sector has served the economy well by managing, dividing, and pricing                       different types of risks in the economy.
It would be a mistake if Congress and the President allow the present financial turmoil to panic them into inefficient new financial regulations.
The World Bank's index of food prices increases by 140 percent from January 2002 to the beginning of 2008, and a full 75 percent just since September 2006.
This highly unusual explosion of food prices has been seized upon by neo-Malthusians as the beginning of a day of reckoning due to the collision between he limited capacity of the earth to produce foods and the growing demand for food and other commodities induced by rapid world population and income growth.
Malthusians have turned out to be wrong in the past when they extrapolated from events like food price inflation to prophesies about world catastrophe-witness the embarrassingly wrong predictions in Paul Ehrlich's The Population Bomb about the impending mass world starvation in the 1970's due to what he considered vastly excessive world population growth.
They are also wrong about this current food price rise because it has nothing to do with population growth, and is only a little related to the rapid expansion in world incomes in recent years.
Rather, the boom in petroleum prices and subsidies to ethanol and other biofuels are the most important forces explaining the recent increase in food prices.
Both the sharp run up in oil prices, and the continuing subsides to ethanol production in the United States, and to a lesser extent Europe, induced an increasing diversion of corn from feed and human consumption to the production of biofuels.
The main goal of the diversion has been to produce more ethanol as a substitute for gasoline.
During the past year, one quarter of American corn production, and 11 percent of global production, was devoted to biofuels, and the US contributes a lot to the world corn market.
The growth in demand for biofuels explains why acreage was shifted from other grains to corn-the acreage devoted to corn in the United States increased by over twenty percent in 2007-8, while that devoted to soybean production declined by more than fifteen percent.
The reallocation of production away from other grains explains the rapid price increases for wheat, soybeans, and rice as well as for corn.
The huge increase in petroleum prices also pushed up the cost of producing foods, and hence food prices, since energy is an important input in the production of fertilizers and agricultural chemicals.
Other factors affecting the rise in food prices include the drought in Australia in 2006-07 that cut world grain production during those years, and the fall in the value of the dollar that may have increased the dollar value of foods and other commodities.
The Malthusian forces of population and income growth ontributed only a little to explaining the big increase in grain prices since 2002.
The large rise of world food prices came after food prices had been either stable or declined for many years.
Although incomes in China and India, countries that account for almost 40 percent of the world's population, did grow rapidly during this decade as well as during the 1990's, global consumption of corn, wheat, and rice grew more slowly since 2000 than during the five years earlier.
To be sure, the slower growth in consumption is partly the result of the rapid increase in grain prices.
However, if an unusually large increase in world wide demand for grains to use as feed for animals and for human consumption explained the rapid increase in these prices, consumption should have grown more rapidly during the later period, even after adjusting for any induced increase in grain prices.
Some countries, including Argentina, India, Russia, and Vietnam, have responded to the sizable run up in food prices by severely restricting, or heavily taxing, food exports.
By reducing exports of rice and other grains, these policies lowered the supply of these grains to importing countries, and helped bid up world prices.
At the same time, however, these restrictions kept a lid on domestic prices of rice and other grains by diverting some supplies to domestic markets.
Governments in countries that restricted food exports usually responded to urban riots and other domestic disturbances, such as those in Egypt, Haiti, and Vietnam, that were protests against food price increases.
The restrictions on food exports reflect the general tendency of governments in poorer countries to favor urban consumers over farmers.
Since food accounts for a large fraction of household spending in poorer countries-over 70 percent in poor households- sharp food price increases would cut by a lot the purchasing power of poorer urban consumers.
On the other hand, farmers are hurt by restrictions on their food exports since they get lower domestic prices than they could get on the world market.
Restrictions of food exports also lower the efficiency and overall incomes of the countries imposing them since a lid on domestic food prices discourage farmers from increasing their food production at a time when world food prices have been rising at a fast pace.
Some analysts have justified these export restrictions as a way to combat the effect of rising food prices on poverty.
However, poverty is much more prevalent among rural than urban families in developing countries like China, Egypt, India and Vietnam.
So restrictions on food exports in developing nations not only lower the efficiency of their food production, but also usually raise inequality and overall poverty.
The greater political clout of urban households in developing nations is the pressure behind the support for these inefficient and inequitable export restrictions, just as the greater political clout of farmers in developed nations maintains the inefficient, and probably energy-wasteful, ethanol subsidies in the United States and other rich countries.
Executive compensation has been criticized both for being too generous, and for encouraging excessive risk-taking relative to the desires of stockholders.
Yet while there are links between the level of pay and the amount of risk chosen, these are mainly distinct issues.
Executives may be paid little, but the pay can be structured to have a much better payoff when profits are high than when profits are low.
In this case, the average level of pay over both good and bad times would not be particularly generous, but its structure would tend to encourage risk-taking behavior.
On the other hand, a CEO's pay might be excessively high on average, but not appreciable better when his company does well than when it does badly.
He would be overpaid, but he would not have a financial incentive to take much risks.
Does the pay structure in American corporations, with the growing emphasis during the past several decades on stock options, bonuses, and severance and retirement pay, encourage excessive risk-taking, where "excessive" is defined relative to the desires of stockholders? It may look that way now with the sizable number of major financial companies that have taken huge write downs in their mortgage-backed and other assets, while top executives of some of these companies have only had modest declines in their pay (although others, such as the head of Bears Sterns, have taken huge hits).
However, these financial difficulties do not necessarily imply that heads of most financial companies knowingly engaged in more speculative activities than desired by stockholders because of the incentives CEOs had.
A more compelling explanation is that heads of companies have undervalued the risks involved in holding derivatives and other exotic securities, particularly securities that were rather new and not well understood.
Let me stress, however, that I am not trying to excuse the many CEOs in the financial sector and in other sectors who got off much too easily for terrible investment decisions.
Bubbles are prolonged periods of excessive optimism where the true longer-term risk to holding particular assets is generally underestimated.
The housing boom of the past few years now appears to have been a serious bubble where pervasive optimism about housing price movements raised the rate of increase in housing prices far beyond sustainable levels.
Sophisticated lenders as well as low-income borrowers underestimated the risks involved in the residential housing market, as they appeared to have assumed that housing prices would continue to rise for a number of years in excess of ten percent per year.
Evidence suggesting that the risk taken by companies during the recent boom was not mainly due to a principal-agent problem between executives and stockholders is that the major private equity firms also experienced serious loses on their investments, especially on their housing investments.
Private equity companies have much less of a principal-agent problem than do Citicorp, Bears Sterns and other publicly traded companies because private equity companies have a concentrated ownership.
Also borrowers in the residential housing market have basically no principal-agent problems since they buy for themselves; yet many of them too took on excessive risk because of undo optimism about the housing market.
The private equity example provides a more general way to test whether CEOs take greater risks than their stockholders desire.
One can analyze the relation between the degree of concentration of stock ownership in different companies and various measures of risk, such as their year-to-year variance earnings, adjusted for industry and other relevant determinants of this variance.
The excessive risk argument would suggest that the more concentrated the ownership, the smaller would be the actual exposure to earnings and asset risk.
Another test of the excessive risk argument is whether the trend toward greater compensation in the form of stock options and other performance contingent compensation increased the risk taking of companies.
Some have attributed much of the dot-com bubble to increased performance based compensation.
However, most dot-com companies that went under were quite small and rather closely held by venture capitalists and similar investors.
Hence these companies did not have a sharp conflict between stockholders and managers.
Moreover, during the dot-com bubble, assets of minor Internet companies were raised in market value to more than 100 times earnings, even when they had no sales, let alone earnings.
Such huge earnings-profits ratios suggest excessive risk taking by stockholders more than by managers.
Economic theory does imply that the increasing trend toward performance-based compensation would increase the degree of risk-taking by top executives.
It is much less clear whether this effect is large- doubts are expressed by Canice Prendergast in his study "The Tenuous Trade-Off Between Risk And Incentives",  Journal of Political Economy, 2002, (Oct), 1071-1102.
It is also unclear if CEOs have been induced to take more risks than the level of risk desired by stockholders.
Furthermore, and most important, there is no persuasive evidence that the structure of CEO compensation played an important roll in either the dot-com or housing bubbles.
The increase in flight delays is just one aspect of a general decline in airline service.
A few prominent examples of this decline are the elimination of meals in economy on domestic flights, more lost baggage, and dirtier seats and toilets.
Posner gives several reasons why service has declined, with concentration on flight delays.
I will add one reason to those he mentions that has been very important but is usually overlooked; namely, that the decline in service is an integral part of the substantial fall in the cost of airline travel after the airline industry was deregulated.
The crucial point is that the lower income and leisure flyers, and families with children that now make up the vast majority of customers on domestic routes, and a substantial fraction on international flights, prefer lower prices to better quality service and higher prices.
On this interpretation it is no surprise that Southwest Airlines achieved remarkable success by offering low prices with no meals, and only non-reserved economy seats.
The revealed preference of the majority of flyers has been that they prefer lower prices to meals and many other amenities that were once standard on flights in the United States.
American Airlines and other more traditional airlines have been forced to react to the competition from the no frills airlines by, for example, eliminating meals, and sometimes eliminating first class seats and even reserved seats, so that they too can offer lower prices.
The same considerations explain the greater crowding on flights since airlines can offer much cheaper seats with average loads of 80 percent rather than say 50 percent.
The reason is that the cost of handling the additional 30 percent of passengers is very low compared to the high cost of owning and operating planes, and compared even to the reduced revenue they receive from these passengers.
Most persons who now fly prefer lower prices with more crowded planes and greater delays in boarding to the high prices and low occupancy rates that prevailed prior to deregulation.
The same trade off between price and service applies to the flight delays discussed by Posner.
These delays are stochastic in that they vary from day to day according to different probability distributions of delay times.
When delays persist, airlines are forced by the regulatory authorities to increase their scheduled flight times to recognize that typical travel times are longer.
Airlines can cut down their delays by having greater amounts of deicing equipment during winter in the event of unexpected icing of planes, greater reserves of crews in case some crew members call in sick or get stranded, a larger number of backup aircraft in case some aircraft develop mechanical problems, and so on for other determinants of delays.
I am arguing that many passengers prefer the combination of low fares and greater delays on average to higher fares and fewer delays because it is cheaper to operate planes when inventories of people and equipment are smaller.
Consider as an analogy a clothing store that has a large inventory of merchandise.
It charges customers a lot for the suits and dresses it sells partly to help finance the convenience to customers of having many types of clothing to choose from.
More generally, sellers often offer customers goods that have at least two dimensions: price and size of inventories.
Prices generally are higher when inventories are greater so that delays in buying particular merchandise due to unexpected surges in demand are shorter because of the greater inventory of goods.
Of course, not all passengers are identical, and some of them prefer shorter delays and higher prices to the present situation.
A number of airlines have been started in order to cater to these customers by providing exclusively first class or business class seats.
These airlines have generally not been successful, probably because there are not enough of these customers to support commercial airlines that only offer first class service.
Instead more affluent flyers have opted to buy shares in or outright ownership of private planes where service is far better and delays are much shorter.
Private planes even have shorter delays from air traffic congestion because they frequently use less crowded airports.
Air traffic delays at major airports can be reduced through varying pricing of take offs and landings with time of day and the density of traffic, as discussed by Posner.
Implementation of such sophisticated pricing is always difficult with publicly owned resources like airports and roads.
So the privatization of airports could make possible greater flexibility in pricing the use of airports to take account of congestion.
The high fixed cost and low variable cost of airlines do not imply that airlines must be unprofitable in a competitive environment.
Southwest and Jet Blue are two examples of airlines that have done quite well by offering low prices and limited service.
Airlines made considerable profits in the latter part of the 1990s, but then the industry was hit first by 9/11, and then by the sharp run up in the cost of their fuel.
Fuel costs have become more important to airlines than labor costs.
The hotel industry offers insights into the airline industry.
This industry is more competitive than the airline industry since entry into the hotel industry is even easier than into the airline industry, and hotels also have high fixed costs of operations and relatively low variable cost of servicing individuals who occupy their rooms.
Hotel prices adjust in the short run to the level of demand, but there are times when it is hard to get rooms, and people with reservations are denied rooms because of overbooking.
Yet hotels have on average been quite profitable, which has stimulated various booms in the building of new hotels.
To be sure, airlines have been exposed to major shocks, such as deregulation, terrorism attacks, and expensive fuel, but there is no intrinsic structural reason why the airline industry should be less profitable than the hotel industry.
Most richer nations nowadays, and many developing nations, have "independent" central banks, such as the European Central Bank and the Federal Reserve Bank.
Independence cannot be precisely defined, but it is supposed to indicate that the central bank of a country has the freedom to make decisions which the government, represented by the Treasury in the United States, does not like.
The purpose of independence is to allow monetary policy to be decided independently of fiscal policy, although obviously even independent banks and governments may respond in consistent ways to broad economic events, such as the present recession.
The motivation for having an independent central bank is the many occasions in the past when subservient central banks accommodated the government's desire to spend more without raising additional taxes.
Central banks accommodate fiscal authorities essentially by buying government securities that help finance government spending.
In return for receiving government debt, a central bank would either directly print additional currency that governments can spend, or it would create reserves in commercial banks that lead to an expansion of bank deposits and monetary aggregates, such as M1.
Either way, inflation would result from this monetization of the government debt, often severe inflation and even hyperinflation.
Hostility to rapid inflation led to the political support behind giving central banks much greater independence from fiscal authorities.
The history of the Federal Reserve's transition in and out of independence is illuminating (see Allan Meltzer's book, A History of the Federal Reserve, 2003).
The Fed fully and enthusiastically compromised its independence from the Treasury during World War II.
It bought large quantities of government debt to help the government finance the large wartime deficit.
Inflation from the resulting big expansion of the money supply was suppressed through wage and price controls.
This inflation became open after removal of these controls at the end of the war.
For a half dozen years after that war was over, President Truman and the Treasury pressured then much more reluctant Fed officials into maintaining the Fed's subservience.
Eventually, however, the Fed regained its independence in the famous Accord reached in March 1951.
Nevertheless, the Vietnam War, the Great Society Program, and the reinstitution of wage and price controls by Richard Nixon in the early 1970s led to later erosions of the Fed's independence.
Even during normal times, central banks, whatever their nominal independence, are under strong pressure to accommodate expansionist fiscal policy, especially as elections approach.
During extraordinary times, whether in peacetime or during wars, this pressure usually becomes too powerful to resist.
So the rather complete bending of the Fed to the Treasury's wishes during the present worldwide recession is not surprising.
Still, that does not make it right, and I have some doubts about the Federal Reserve's recent behavior.
One concern is the somewhat arbitrary choices the Fed made about which banks to bailout and which ones to close or merge into other banks.
This added significantly to the enormous uncertainty already prevalent in financial markets.
I am also worried about the Fed's support of the huge federal deficits generated by the sharp expansion in federal spending.
I understand such actions are necessary to help governments fight wars, but why help finance so much spending during this recession, particularly spending that has dubious stimulating potential?  One example is the almost $800 billion so-called stimulus package that will do little to stimulate the economy, but will greatly raise long term government spending in directions desired by the President and Congress (see the posts on January 11 of this year).
Another example of dubious government spending that the Fed seems willing to help finance is the ill thought out Treasury plan for hedge funds and other financial institutions to buy toxic bank assets (see the criticism of this plan in my posts on March 29 and 31).
The huge increase in bank reserves is a major consequence of the Fed's monetization of the government's large spending programs.
Reserves went from about $8 billion in early Fall to around $800 billion, or a hundred fold increase in only 6 months.
The recession rather than the wage and price controls imposed during prior periods is keeping inflation suppressed at present.
Once the economy begins to recover, the inflationary risks will be enormous.
In order to soak up these reserves, the Fed would have to sell large quantities of its government securities back to the private sector.
These sales would put downward pressure on security prices- that is, upward pressure on interest rates- that will slow the economy's expansion at that time.
For this reason, any government in power then, whether Democratic or Republican, will vigorously resist such Fed actions.
Hence it is not obvious that the Fed will be able to conduct these sales sufficiently smoothly to prevent either a recession or a serious bout of inflation.
These are not pressing concerns when a serious recession is the immediate problem, but they will become major challenges down the road.
It is very difficult for either amateur investors or even professional money managers to do better picking their own stocks than the performance of the major stock indexes, such as the US Dow Jones Industrial Average (DJIA) or the Japanese Nikkei Index.
In fact, most investors in active funds do worse than broad stock averages, after netting out what is paid to fund managers.
Funds that do better than stock averages for several years are usually taking sizable risks that eventually catch up with them through sporadic sharp falls in the values of their portfolios.
This happened to many exotic funds during the present financial crisis.
This difficulty in "beating the market" is behind the development of index funds that simply hold a broad portfolio of stocks whose price movements mimic that of the overall indexes.
While the difficulty of beating market averages suggests that stock markets are reasonable efficient, conclusions about efficiency are far more complicated when the criterion is whether stock prices are determined by market fundamentals: present and future earnings, interest rates, and the degree of risk associated with earnings and interest rates.
On the one hand, prices of individual stocks do very much depend on their present and expected future earnings, interest rates, and their systemic risks- the betas in finance theory.
On the other hand, prices of both individual stocks and of aggregate indexes often fluctuate in ways that deviate from the fundamentals.
For example, during the Internet bubble, shares of many Internet companies sold for more than $50 or even $100 a share, even though these companies were not only losing money, but had no significant sales.
These high prices were supported by radically wrong expectations about the future prospects of these companies.
Many of these stocks became worthless, while most surviving Internet stocks lost almost all their prior market value.
Even many non-internet stocks were excessively priced during the bubble years, as the stocks in major stock indexes were selling for a while at well over 20 times their earnings.
Stock markets are not performing efficiently when stock prices are either too high or too low relative to risk-adjusted discounted earnings.
Sometimes, however, it is not easy to determine whether and how much prices deviate from fundamentals.
For example, corporate profits were very high when the DJIA peaked in 2008 at 14,200, so that if these profits had continued, this price level did not imply excessive price-earnings ratios.
The sharp fall of this index to its present value of about 8000 has been associated with a plummeting of actual and expected earnings, which led to a collapse in financial stocks and in prices of other stocks as well.
Perhaps it should have been clear that profits in 2004-07 were too high to be sustainable, but it surely was not apparent to the vast majority of participants.
Can one say that individuals and funds are behaving irrationally if they are not shorting stocks, or are not mainly invested in bonds and other assets, when stock prices are much too high relative to fundamentals? Similarly, are investors rational when they are shorting stocks, or investing in other assets than stocks, when stocks are too low relative to fundamentals? The answers are not clear without further information since stocks may remain high (or low) relative to fundamentals for quite a while.
Therefore, going long (or short) may also be profitable for a while.
To be sure, at some point the day of reckoning always comes when stock markets move much closer to fundamental levels.
At that time, persons and funds lose a lot if they are long on stocks when they fall back sharply toward levels determined by fundamentals, or short on stocks when they rise sharply.
However, predicting when the reckoning comes may be extremely difficult even for highly rational and far-sighted persons with extensive knowledge.
Interesting research years ago by Benoit Mandelbrot, that has been made more popular by Nassim Taleb's book The Black Swan, analyzes the incidence in stock markets (and elsewhere) of very small probability long tail events that give rise to large upward or downward movements in stock prices.
By their very nature it is extremely difficult to forecast the timing of these low probability events.
This is one reason why even most experts' forecasts of the large movements in stock prices are usually so bad.
One can then hardly expect even reasonably rational stock market participants to be able to predict major turning points in stock prices.
A "rational" stock market bubble would be a situation where stock prices reflect present earnings and the expected future earnings of the large majority of market participants, and where future earnings are expected to rise over time.
Then equilibrium stock prices would also rise over time.
These earnings expectations eventually deviate far from the earnings that would be determined by sales, costs, and the like.
In this scenario, more or less every participant is acting rationally relative to his expectations, yet the market is not behaving efficiently.
Considerable frontier research in finance and macroeconomics is trying to determine whether much credence can be placed in the real world relevance of such rational price bubbles.
The widespread and sharp rise in housing prices during the early part of this decade in the United States and many other countries is said to have contributed to the worldwide economic boom through wealth effects that induced greater consumption.
Similarly, the still steeper fall in these prices during the past few years is supposed to have reduced world consumption and helped induce the sharp downturn in world economic activity.
Yet even sharp rises and falls in housing prices are likely to produce only modest wealth effects on consumption to the extent that changes in interest rates are responsible for the housing price changes (I am indebted to Kevin M.
Murphy for many discussions of the determinants of housing prices and their effects).
Both long term as well as short term interest rates have been low since most of the period after 2001 (whether due to a deliberate low interest rate policy of the Federal Reserve or large savings by China and other Asian countries is not crucial for my discussion).
These low interest rates were an important, although not the only, force behind the boom in housing prices in the United States and many other countries-e.g., expectations about future housing prices were also important.
The prices of durable assets like housing are negatively related to interest rates, as long as the service flows from the durables are unchanged.
Families buy houses instead of renting space mainly because they believe that ownership is a better way to consume housing services than renting.
Therefore, if housing services were unchanged, the flows of utilities to homeowners over time would also be unchanged.
The high and rising housing prices in United States are supposed to have produced a positive wealth effect to individuals who owned homes that increased their consumption and reduced the US savings rate.
Similarly, the steep drop in housing prices since 2006 is often claimed to have induced a negative wealth effect that contributed to the drop in aggregate consumption and rise in the aggregate savings rate.
This wealth "loss" comes to several trillion dollars.
Although these effects seem obvious and important, a closer analysis raises serious questions about the magnitude of any wealth effect on consumption.
Consider a very simple lifecycle and bequest story to bring out the main points.
Suppose there are two periods of adult life: young and old.
All young individuals buy homes at a given price that is determined by the quality of the homes and interest rates.
For simplicity, for the moment I assume only one type of house quality.
Older adults live in their homes until they die, and they then bequeath these homes to their children.
The children then live in their inherited houses until they die, and then bequeath them to their own children.
In fact, houses are the main assets that most middle class US families bequeath to their children.
Now introduce an unexpected fall in interest rates that increases the price of houses.
Everyone who owns a home gets a windfall increase in their wealth because their homes are now more valuable.
However, if they still want to bequeath their homes to their children, their opportunities to consume would not become more favorable, as long as other opportunities are not affected by the fall in interest rates.
Their children in turn inherit a more valuable asset, but that asset does not bring any more housing services than before the price increase.
Hence, children's consumption would also be unaffected since they simply hold their houses until they bequeath them to their children in the succeeding generation.
This example with inheritance of homes brings out the essentials most clearly, but the basic analysis would be unchanged if young adults were unrelated to older ones, or if they received no bequests from their parents.
While older adults would then get a windfall when interest rates go down, they still have no extra resources to increase their consumption of other goods, if they want to consume the same amount of housing services.
The only elderly gaining from higher home prices are those who want to downside their living space.
Younger adults find housing services more expensive, so if anything they are made worse off by the higher housing prices.
Yet as with older adults, the apparent change in the position of the young is largely illusionary since their houses would also be worth more after they own them.
More complicated analyses might produce larger wealth effects of higher housing prices due to lower interest rates.
For example, higher house prices may give owners the opportunity to take out larger mortgages that help them finance purchases of other durables, including education for children.
At the same time, however, higher prices make it more difficult for young persons to afford housing.
Recent media reports suggest that first time homebuyers are taking advantage of the fall in housing prices to buy foreclosed and other cheaper property.
Higher house prices due to lower interest rates may induce some people to substitute toward larger homes, as happened during the housing boom, and toward reduced consumption of other goods.
This is because higher prices induce additional construction of houses that lowers the cost of housing services.
Yet even with a substitution toward larger homes, total consumption may not change, but only its composition between housing and other services.
Lower interest rates may have other effects on the tradeoff between present and future consumption that do not come from the housing market.
These effects would closely depend on what caused interest rates to fall.
To discuss these causes would take me far beyond an analysis of the wealth effects of changes in housing prices.
The message of my discussion is not that higher housing prices have no wealth effects, but rather that any such effects are likely in the aggregate to be much smaller than what is often claimed.
Perhaps this explains why empirical estimates of the housing wealth effect often differ greatly.
It also suggests that while the rapid declines of house prices during the past few years may have had large effects on apparent wealth, it probably was not much of a drag on aggregate consumption, nor much of a stimulus to the savings rate.
Six months ago essentially all large American banks and many smaller ones received loans from the federal government to help shore up their capital base as they tried to weather the financial storm.
Some banks would likely have failed during the severe strains in the capital market last September and October were it not for these loans.
This past week, however, the two strongest large banks, Goldman Sachs and JPMorgan Chase, indicated that they wanted to, and were able to, repay their loans.
Should they be allowed to do so?.
It appears that not all banks wanted to take government loans in October, but some large banks were apparently "forced" to as part of the TARP loan program devised by then Secretary of the Treasury Henry Paulson.
According to some accounts, the government exercised this pressure in order to avoid disclosing which banks were the weakest and needed these loans to survive.
This explanation of the government's behavior is strange since generally participants in financial markets do not have an excess of information about the financial viability of different banks, but rather they do not have enough information.
It is wrongheaded for the government to try to mislead markets about which banks are weak.
Indeed, the purpose of disclosure requirements mandated for banks and other companies is to raise the degree of public information available about different companies in order to assist participants to make wiser decisions.
In any case, most firms and individuals active in financial markets already had a fair idea of which banks were stronger and which ones were weaker.
Many of the banks worse fears about the strings attached to these loans have been realized.
The resulting government intervention in bank managerial decisions include the well-publicized restrictions on bonuses and other pay to executives, restrictions on banks' ability to hire foreigners, and frequent demands to appear before Congressional committees to justify what they are doing.
Less onerous interventions include Congressional and the media's opposition to banks holding expensive golf and other outings, bank use of private planes, and meetings at luxurious resorts.
Goldman, JPMorgan, and other banks want to repay their government loans primarily to eliminate these and potentially other government restrictions on managerial decisions.
I see no compelling reason why they should be prevented from repaying their loans.
One argument made against allowing them to repay is the same one used to justify requiring the relatively strong banks to take the loans in the first place; namely, that the weaker banks would be exposed if the stronger banks repaid at this time.
However, they are already exposed since the major participants in financial markets already know that banks such as Goldman and JPMorgan are much stronger than say Citi and Bank of America.
A more sophisticated version of this argument is that if the strong banks were allowed to repay now, the weak banks would also try to repay, and thereby become still weaken, since they do not want to appear weaker than their competitors.
However, weak banks are unlikely to try to repay if that would so further weaken them that they would soon require even larger government bailouts before long.
Moreover, repayment by strong banks would be a good motivator if it gave weaker banks stronger incentive to get into a financial position whereby they too could repay without damaging their viability.
Another argument advanced against allowing any repayment at this time is that this would weaken the capital position of repaying banks (even those that claim to have enough capital to repay).
Yet especially the stronger banks would not want to repay the Tarp loans if that means that before long they have to ask the government for additional loans.
Goldman has raised an additional $5 billion in equity to help finance their repayment, and the company has reduced its assets to 14 times its capital compared to 26 times at the end of 2007.
JPMorgan claims to be able to repay their loan without having to raise any more capital.
In any case, the Treasury is soon releasing results of the stress tests they have given to all major banks.
We will then have better information to determine if the banks that want to repay now can comfortably pass these tests.
I am confident that these banks will rank quite high, which would help explain why they are eager to repay.
If Goldman and JPMorgan were simply allowed to repay their TARP loans, they would still have the sizable benefits of the Temporary Lending Government authority (TLGP) that provides FDIC guarantees on bonds issued by covered banks.
These guarantees stem from Goldman 's conversion into a bank holding company last fall-JPMorgan was already such a company.
Goldman has borrowed about $28 billion under TLGP.
This would be the right time to start reducing these guarantees for Goldman and JPMorgan as a condition for these banks being allowed to reduce government controls over their decisions.
Given the current and projected large scale budget deficits.
of the United States, many people are advocating that the US follow the example.
of Europe and many other countries, and introduce a value added tax (VAT).
President.
Obama suggested only a few days ago that a VAT for Americans is still on the.
table.
The case for a VAT is that it is a relatively efficient tax that induces.
less distortion in behavior than say a progressive income tax that raises the.
same amount in revenue.
On the other hand, once introduced the VAT almost always.
tends to rise over time, which increases the burden of government spending and.
taxation.
If a country were starting a new tax system I would on the whole (I.
discuss my concerns later) recommend relying mainly on a VAT.
However,.
countries like the US that already have complicated tax systems would make a.
mistake to simply add a VAT to the tax system without radical surgery in income and other taxes.
Since a VAT is a tax on the value added by companies at each.
stage of production of consumer and investment goods, it is similar to a sales.
tax levied directly on these consumer and investment goods.
Usually, a VAT is a.
fixed percent, such as 10 or 20 percent, of the value added by each company,.
although often medicines and certain other necessities are exempt.
    A VAT does not distort consumption.
decisions relative to savings and investment decisions since it taxes consumer.
and investment goods at the same rate.
An income tax, by contrast, discourages.
savings and investment because it taxes savings twice: once on the income from.
which any savings are taken, and again on the income earned later on from any.
savings.
Like an income tax, a VAT does distort the decision whether.
to work more, or take more leisure and earn less.
Since leisure time is not.
taxed, a VAT encourages an increase in leisure time and a decline in working.
time.
A VAT is usually a flat tax, with the same tax rate for richer people who.
spend a lot on consumption and poorer persons who spend much less, whereas.
income taxes are usually progressive, with higher marginal tax rates on higher.
incomes.
The higher the marginal tax rate, the greater the labor-leisure and.
other distortions-economists call the inefficiencies introduced by these.
distortions dead weight losses.
A flat VAT tax would be more efficient for two.
reasons than a progressive income tax that raises the same revenue: it does not.
discourage savings relative to consumption, and it induces fewer distortions on.
other behavior because it has flat rather than rising tax rates.
A flat income.
tax eliminates the effects of rising tax rates, but still distorts savings.
behavior.
The downside of a value added tax to anyone concerned about.
growing government spending and taxing is very much related to its upside;.
namely, that a VAT is a more efficient and relatively painless tax.
As with all.
taxes, proposals to increase the rate of taxation on value added runs into.
opposition from individuals and companies hurt by a higher VAT.
    However, since a VAT is easy to collect.
and causes fewer distortions in behavior than income and most other taxes,.
governments have an incentive to raise the VAT over time.
In fact, value added tax rates do.
usually start low, but tend to grow rapidly over time.
For example, the VAT.
rate in Europe started low but now ranges from 15 to 25%, and averages about.
20%.
In Denmark, for example, the VAT rate was 9% in 1962, but quickly rose to.
25% by 1992, and has remained at that level.
So the greater efficiency of a VAT and its easy of.
collection is a two-edged sword.
On the one hand, it would raise a given amount.
of tax revenue efficiently and cheaply.
Since economists usually evaluate.
different types of taxes by their efficiency and easy of collecting a   given   amount of tax revenue, economists.
typically like value added taxes.
The error in this method of evaluating taxes is that it does not.
consider the political economy determinants of the level of taxes.
From.
this political economy perspective, the value added tax does not look so.
attractive, at least to those of us who worry that governments would spend and.
tax at higher levels than is economically and socially desirable (see the.
discussion by Mulligan and me “Deadweight Costs and the Size of Government”,.
The Journal of Law and Economics, October 2003).
In deciding how to close the sizable fiscal deficits facing.
the US and other countries, introducing or expanding a VAT appeals to many.
economists and politicians because of the features already discussed.
However,.
the problems is that a VAT would be introduced not as a partial or full.
substitute for personal and corporate income taxes, but rather as an additional.
tax.
This would make it much easier to close the fiscal gap by maintaining or.
increasing government spending and overall tax levels.
Since high taxes and high levels of government spending.
would discourage economic growth and raise rather than lower the overall.
distortions in an economy, I am highly dubious about introducing a VAT into the.
federal tax system unless accompanied by a major overall of this system.
One.
big improvement that does not involve a VAT would be to flatten the present.
income tax rates and greatly reduce the various exemptions, so that the tax basis is widened.
Even then it is.
necessary to be vigilant about combating the incentives government officials have.
to increase flat taxes over time, whether they are flat income taxes or flat.
value added taxes.
Marriage emerged as the most popular institution throughout.
history primarily because it was an effective arrangement to improve the care and.
upbringing of children.
Marriage is not necessary to have children,.
but it has been of enormous importance in the rearing of children.
Birds and.
other non-human species do not have “marriage”, but both parents are often.
involved in raising their offspring.
With the sharp declines in birth rates since 1970 in Western.
and other rich countries, including much larger fractions of adults who do not.
have any children, both men and women have significantly increased their ages.
at marriage, and sharply raised their propensities to divorce.
In 1950, a.
typical woman and man married at ages 20.3 and 22.8, respectively, whereas now.
the typical marital ages are 26.0 and 27.7, respectively.
These changes in age at.
marriage are related to reduced demand for many children, increased college.
education of both men and women but especially of women, much greater labor.
force participation of married and divorced women, and the narrowing of the.
gender gap in earnings.
There are several reasons to be concerned about the below population.
replacement fertility levels in all of Europe and about half the world’s population,.
including China and Japan.
Low fertility makes it much harder to finance retirement.
benefits, medical care for the aged, and other entitlements that rely on taxing.
working age populations to pay for the support of older persons.
Low birth.
rates in richer countries also induce increased migration of young workers from.
poorer countries with large families to provide the unskilled and other young.
workers that every society needs.
Low birth rates lead to sex-selected abortions.
in societies with a strong preference for having at least one son, as in China.
and parts of India.
Below replacement fertility eventually causes populations.
to decline (aside from migration), which has unknown consequences for economic.
growth and other macro economic and social developments.
As important as these.
topics are, I will not discuss them further since our subject today is low.
marriage rates and high propensities to divorce, which raise distinct issues.
from the effects of low fertility.
The most important economic and social concerns due to low marriage rates are.
the effects on rearing of children.
These effects are not due to lower marriage.
rates alone, but rather to the close connection between these low rates and.
high divorce rates, and to the greater propensity of women to have children.
without being married, or without living with the fathers of their children.
Although many single mothers do an absolutely wonderful job.
in raising their children, common sense and most academic findings suggest that.
having a father present during the raising of children generally has a positive.
effect on the development of non-cognitive traits of children.
These include a.
general respect for authority and reduced rebelliousness in school, and the.
avoidance of gangs and other criminal activities.
It also appears that the.
absence of fathers has a greater effect on the non-cognitive traits of sons.
than daughters, although that is a less well-established finding.
The sharp deterioration during the past 50 years in the.
stability of black families in America is responsible, I believe, for much of.
the continuing dismal record in school performance and in society more.
generally of children from black families.
When over half of all black children.
are raised in families with only one parent, one can hardly be optimistic about.
their development.
Black leaders were highly critical of Patrick Moynihan when in.
a famous report in 1965 he attributed the low achievement levels of many black.
children to the absence of fathers in their homes.
However, most leaders of the.
black community have come around to sharing Moynihan’s views as a result of the.
further deterioration in black families since his report, and the continuing poor.
school performance, high crime rates, and low incomes and high unemployment of.
many black children and young adults.
Children in white and Hispanic families have also suffered.
from the growth in divorce rates and in single motherhood.
Children of divorced parents and other children raised by single moms generally.
do worse in school, attend less good schools, are more likely to drop out of high school, and have poorer job market experiences.
Although the moms.
in single parent families also have lower incomes and education, I believe that.
a sizable portion of the below average performance of children from single parent.
families is due to their family structures.
I am not claiming that children are worst off when their.
parents divorce if their parents were fighting a lot, or if they had.
abusive fathers.
Rather, it appears that up to a significant point, children.
are better off in intact families even when their families are not ideal.
If.
correct, this suggests a considerable gain not from encouraging marriage per.
se, but from policies that encourage families to stay together.
One approach is.
for governments to subsidize intact families, whatever their income levels,.
rather than just subsidizing families with only one parent because they have.
lower incomes.
Other approaches may be better, but the effects of single.
parenting on the development of children is a far more important question than.
the question of who can call themselves “married”, and other family issues that preoccupy the.
attention of many politicians and others.
The entitlement fiscal burden from projected spending increases on.
retirement benefits and health care during the next couple of decades is scary.
for Western Europe, Japan, The United States, and other rich nations.
I will.
concentrate on the US, but the picture is often as bad or worse in these other.
nations.
In 2010, spending on social security retirement benefits.
amounted to about 4.3% of American GDP, while Medicare and Medicaid added.
another 5 ½ %.
This gives a total federal spending on health and retirement.
benefits of about 10% of GDP, which is 40% of overall federal government.
spending of 25% of GDP.
Without incorporating the effects on spending of the.
new health care bill, and with no further changes in retirement ages and other.
aspects of social security benefits, the combined spending on these.
entitlements is expected to rise in twenty years to about 15% of projected GDP.
The expected increase in spending on health of the elderly is the biggest.
component of this increase, although social security payments will also rise.
significantly.
State and city obligations to retirees are often forgotten.
in calculating the burden of government commitments to retirement and health.
benefits, but these too are sizable for many localities.
A recent report in the.
New York Times indicated that a new analysis of California’s pension liabilities found a.
hidden shortfall of more than half a trillion dollars.
This is several times as.
large as the state pension obligations that had been reported, and over six.
times the size of California’s outstanding bonds.
Calculations for Illinois and.
some other states, and also for some cities, also indicate large future pension.
obligations.
That the retirement obligations of state and local.
governments are sizable is not surprising since they have early retirement ages.
for police, firemen, and other government employees.
These governments also usually use.
earnings in the last year or two prior to retirement to determine the level of.
retirement benefits.
Hence government employees nearing retirement have strong.
incentives to push for higher pay and overtime work since higher earnings then.
have a multiplier effect on the size of retirement benefits.
Future fiscal problems for the federal government will be particularly.
challenging not only because entitlements are growing rapidly, but also because.
the federal debt has been ballooning due to the extraordinary deficits during.
the past two years.
Large deficits are likely also for the next couple of.
years.
The combined cost of interest on government debt, social security.
benefits, and spending under Medicare and Medicaid will take at least 20% of.
projected GDP by 2030, even without any sizable increase in the interest rates.
that creditors demand to hold the much larger US government debt.
This percent equals.
about 80% of current government spending relative to GDP, and is a full 100% of.
the ratio of federal government to GDP for several decades prior to the.
financial crisis.
Several reforms could greatly slow the growth in federal,.
state, and local retirement benefits.
The most basic would be to change social.
security and other retirement systems to defined contribution individual account.
systems.
By that I mean that state and local government employees, and everyone.
under social security, would accumulate tax free retirement accounts from.
annual contributions to these accounts, perhaps forced contributions from their.
annual earnings.
Such accounts would be similar to the IRA and Roth accounts.
that many people already have, although rules might control the allocation of.
funds in these accounts among stocks, bonds, and cash.
This control on asset.
allocation would be designed to prevent the elderly from taking excessive.
risks, and then needing to be bailed out by government transfers.
If such a fundamental reform is not politically feasible,.
then minimum retirement ages to collect social security benefits should be raised to age 70 for the.
general population in recognition of the actual and projected growing health of.
older persons.
Exceptions would be made for the truly disabled, and for workers.
in physically demanding jobs, such as firemen and policemen.
However, even in.
these occupations the large majority of employees are capable of continuing to.
work beyond the young current retirement ages.
Indeed, many policemen retire in.
their fifties with generous pensions to take jobs with private security firms.
Reforming Medicare is even more difficult politically, as.
seen from the content of the recently passed health care legislation.
Among.
other approaches that could save sizable amounts of public spending on health.
care (several possible reforms are discussed in our posts of last week on the.
new health care legislation), the out-of-pocket spending required of the.
elderly covered under Medicare could be greatly raised from its present quite.
low level.
It could be increased by raising sharply both deductible levels required.
of most Medicare recipients and their co-pay rates.
As a result of the low.
out-of-pocket expenses under the present system, neither patients nor their.
physicians have strong incentives to make serious benefit-cost calculations of whether.
expensive treatments are desirable.
Another useful reform would be to extend.
the minimum age of Medicare coverage to age 70, whereas during recent Congressional.
discussions of health care bills, opponents had to beat back efforts to lower.
rather than raise the minimum age at which a person becomes eligible for.
Medicare.
The burden of entitlements and other government spending.
depends very much on the growth of GDP since it is the ratio of government.
spending to GDP that determine the real tax burden.
If GDP could grow by ½.
percent per year faster than it would otherwise, the effects on GDP and the tax.
burden of given government spending in twenty and thirty years would be enormous.
To achieve such a higher.
growth rate would require lower, not higher, taxes on both physical and human.
capital, more, not less, encouragement to entrepreneurial activities, and.
greater emphasis on competition in labor and product markets instead of.
bailouts of companies like GM, Chrysler, and Citibank that were badly managed.
All of my suggestions would be met by strong political.
opposition from entrenched interest groups, such as the elderly, government.
unions, and poorly managed companies.
Yet without these changes, or something.
comparable, the entitlement and debt burden at all levels of government will.
grow during the next couple of decades to levels that will become a serious.
drag on the performance of the American economy.
And as I indicated at the beginning,.
similar, if not larger, problems are confronting Western Europe and Japan.
While median family income in the United States fell for.
over a decade prior to the beginning of the recession that started in late.
2007, per capita incomes continued to grow during that time period.
From 2000.
to the beginning of 2008, American per capita GDP, after adjustment for.
inflation, grew at a decent pace at about 1 ½ percent per year.
Per capita real.
consumption of both durables and non-durables, an important measure of the real.
incomes of individuals, also grew at a good rate until the recession.
These.
measures suggest sizable improvements in the welfare of the average person.
during most of this decade, yet the median household income cited by Posner.
suggests the opposite.
How can these conflicting conclusions be reconciled?.
The data I cite are arithmetical averages, while, as Posner.
indicates, his data on household incomes are medians, or midpoints, of the.
distribution of household incomes.
Trends in arithmetical average incomes and.
median household incomes have differed in the US for a variety of reasons.
One.
obvious factor is changes in the degree of inequality in the distribution of.
earnings.
Earnings inequality of full time workers did rise rapidly in the.
United States during the 1980s, and more slowly but significantly during the.
1990s.
However, inequality among different education and skill groups increased.
much more modestly during the first seven years of this decade than in the.
prior two decades.
As Posner indicates, incomes at the very high end,.
especially in the financial sector, did grow rapidly during the years leading up to the recession.
That contributed in a modest way to the difference between.
the trends of average and median incomes.
Other factors that helped raise inequality.
in median household incomes during the past 30 years include the growth in the.
number of households headed by a single parent to about 9% of all households.
Also important has been the decline in the labor force participation of males.
at the lower end of the skill distribution, especially of African-American.
males, and the growth in earnings from the underground economy, due to illegal.
immigration, taxes, and regulations.
Earnings from the underground economy are.
not included in most statistics on earnings.
These and other factors explain.
why the number of Americans with incomes below the official poverty line seemed.
to increased by 15% between 2000-2006, and why by the end of 2008 over 30.
million workers appeared to earn less than $10 per hour.
The best longer-term solution to the inequality problem is.
to reduce the fraction of Americans who dropout of high school, a theme I have continued.
to emphasize in various postings on our blog.
This drop out fraction has been.
stagnant for the past several decades at about 30% for males, and a somewhat.
lower but still high percent for females.
This is almost surely the highest fraction.
of high school dropouts among rich countries, and is heavily concentrated among.
children from African-Americans and Hispanic families.
In large cities, often less.
than half of all the children enrolled in public schools end up graduating.
In the first half of the 20  th   century, dropping.
out of high school reduced economic prospects, but not by so much since many.
good jobs were available to persons with limited education.
Prospects for high.
school drop outs began to fade after World War II, and really fell during the.
past 30 years because of technological changes toward greater demand for.
skilled workers, shifts of the economy toward health, education, and other services.
that use more skilled workers, and globalization that reduced jobs in America.
for low skilled workers.
High school drop outs now face a dismal future not.
only in the form of low earnings, but also poor health, less likelihood of both.
marrying and staying married, and worse outcomes on practically all other.
aspects of life in the modern world.
Probably the most fundamental cause of the continuing high.
drop out rates has been the large deterioration in family stability during the.
past 50 years.
This has led, among other things, to the growth of low-income.
single parent families that contain about ¼ of all young children, and to the.
absence of the influence of fathers on the discipline and motivation of.
children in these households.
Family stability is difficult to improve,.
particularly in the shorter run (although see my blog post of April 4).
However, schools can be improved relatively quickly by.
holding teachers and administrators up to higher standards.
President Bush took.
important steps in this direction, and President Obama has been adding to and.
improving these changes by requiring even better school performance.
I addition, studies.
have shown that charter schools, vouchers, and other ways to raise competition.
among schools that cater to children from poorer families contribute in.
important ways to better achievement scores of these children.
That is why the.
caps placed by many states and localities on the number of charter schools-mainly.
under pressure from teachers unions- should be removed, as some cities are.
doing.
In trying to use public policies to reduce inequality, the.
goal should be to achieve this without reducing the efficiency of the economy.
When efficiency declines, incomes of poor as well as better off households tend.
to fall.
The great attraction of reducing the high school drop out rate, and.
other improvements in the school performance of children from lower income and.
lower educated families, is that they are likely to increase the economy's efficiency while.
at the same time raising incomes at the lower end of the earnings distribution.
The new rulings announced by the Department of Transportation to force airlines, among other things, to return the fees for checking baggage if the baggage is lost, to post full prices including taxes, and to raise the compensation for being bumped involuntarily from flights, are not very onerous to airlines.
However, they do add to the many rules that already require airlines to post various prices, to compensate passengers for bumping, and to engage in other behavior that is supposed to protect passengers.
The new and old rules regarding passengers, and many rules of behavior imposed on companies in other industries, such as the so-called consumer protection components of the Dodd-Frank law on financial regulation, all reflect a fall in government confidence in the ability of consumers to make reasonable choices.
I believe this lack of confidence greatly underestimates the capacity of the great majority of consumers to make forward-looking choices in their own interests.
It also underestimates the degree to which the forces of competition protect consumers against the consequences of the bad decisions they do make.
I briefly defend each of these claims.
Low cost airlines that provide cheap tickets and minimal services grew rapidly after the deregulation of airlines that began in the 1970s allowed the entry of new airlines.
Their growth shows how sensitive passengers are to price, and how many are willing to exchange lower prices for fewer services, such as no meals, or no assigned seats.
Southwest Airlines started only in the 1970s after facing much opposition from regulators, and it is now the largest American airlines in terms of domestic traffic.
Or consider whether most passengers know that many airlines now add separate charges for checked baggage, even though these charges are often not displayed prominently in advertising or in passenger contracts with airlines.
It is obvious from the fact that many more bags are being carried onto planes since these changes went into effect (and thereby delaying the departures of planes) that many passengers both know about these new checked bags fees, and they have responded to them.
For those who may be ignorant of these fees, Southwest Airlines constantly reminds consumers in their advertising (“bags fly free”) that they are one of the few airlines that do not charge for the first or second checked bags.
This is not to deny that some passengers are ignorant of the separate charges for baggage and food, do not realize that sizable taxes add to the full cost of airline tickets, forgot about frustrations due to long and unpleasant flight delays, and are unaware of other aspects of the full monetary and psychic cost of flying.
However, if significant majorities of passengers are reasonably well informed about full prices of tickets and other aspects of the flying experience, their behavior helps protect the ignorant passengers.
For airlines usually have to make their pricing and other decisions on what the clear majority of passengers know and respond to since they usually cannot separate the more active customers from the passive ones.
If that majority is responsive to charges that are not prominently displayed, to taxes, and other aspects of the total cost and experience of flying, airlines will tend to keep prices and charges lower to all, including the more ignorant flyers.
Competition among airlines may be an even greater protection for uninformed consumers than the behavior of reasonably well-informed and responsive consumers.
As Posner indicates, if government regulations impose costs on airlines, ticket prices will tend to rise since airlines have been struggling for decades just to earn a decent return on their capital.
Suppose, to illustrate the effects of competition, that one airline discovers its profits increase when some of the costs to passengers are placed in small print on the passenger ticket contract because enough passengers act as if they are not aware of the costs found in small print.
Then other airlines competing for passengers will copy the first airline, and also put these costs in small print.
Furthermore, their desire to get more of the now more profitable passenger business will induce them to reduce prices on other dimensions of travel, or add to services, such as providing assigned seats when seats were not previously assigned, or adding individual videos for each seat.
The end result will be that competitive pressures that lower prices or increase services to passengers will help compensate passengers who do not recognize the costs in small print, although to be sure they may be only partially compensated.
So I clearly agree with Posner that the new regulations imposed on airlines are mainly a mistake.
They add to the costs of airlines and to the costs of flying in the mistaken belief that most consumers are easily tricked by airlines.
Beyond that, the regulators fail to see that competition is the most effective way to protect even ignorant consumers from the consequences of their ignorance.
The competitiveness of the airline industry is evident from the many new airlines that have entered and existed this industry during the past 30 years, and from the low profits during the decades after deregulation.
Encouraging competition in this and other industries is the only really effective way to help the great majority of consumers, including ignorant and easily fooled consumers.
Food prices are on the move once again as the world economy recovers from the financial crisis.
The Commodity Research Bureau’s index of the prices of foods- including corn, wheat, steers, and sugar- doubled between 2002 and 2008, fell by 25% during the crisis, and has increased since the world recovery to a level beyond the prior peak.
Higher prices of foods mainly hurt the poor since poor countries and poorer families within a given country spend a much larger fraction of their incomes on foods than do rich countries, and then richer families within a country.
For example, the share of national income spent on food is over 40% in India, less than that but still large in China, and under 15% in the United States.
If families were spending 40% of their income on food, a 30% increase in food prices would raise by 12% the income they would need to maintain the same level of consumption of all goods.
By contrast, a family spending only 15% of its income on food would only need a 4.5% increase in their income to maintain the same consumption basket.
This simple arithmetic explains why the current rapid price increase in foods and other commodities, and past large increases in these prices, often caused great distress among poor families of Africa, Asia, and elsewhere in the world.
This distress led to food riots in many countries, and other protests by the poor against the large rise in their cost of living.
Governments responded to these protests in various ways that often lowered the cost of food to consumers, but usually at the expense of inducing inefficient behavior by farmers and consumers, and often even at the expense of the poor.
For example, during the current sharp run up in food prices, several food-exporting countries, such as Russia and Ukraine, have banned, or greatly restricted, the ability of farmers to export their produce.
This lowers the price of food to urban consumers in these countries, and thereby helps the urban poor.
However, such bans reduce the prices received by poor farmers of these countries.
This reduces their incentives to raise their production of food, and makes these farmers worse off.
It also raises the cost of food to families in food-importing countries, and thereby hurts the poor in these countries.
Since farmers in developing countries are generally much poorer than those who live in cities and other urban communities, the poor may overall be made worse off when countries greatly restrict their food exports.
Unlike the situation in rich countries like the United States, city dwellers and other urban populations in developing countries like China and India usually have more political clout than rural families.
For example, the massive famines in China during 1958-61 that resulted from the Great Leap Forward were concentrated in rural areas partly because farmers were forced to supply much of their reduced food output to the cities.
This greater political power of urban populations also explains the restrictions on food exports in developing countries, even though they discourage food production, reduce the national incomes of these countries, and also overall tend to reduce rather than increase the real incomes of their poor.
To contain the rise in the retail food costs, many countries, including China, have also imposed retail price controls on foods that figure most prominently in the diets of lower income families.
This helps those poorer families that are lucky enough to be able to buy most of the food they desire, but such price controls are likely to hurt the majority of poorer families.
The reason is that price controls on food prices reduce the incentives of farmers to grow more food since they cannot benefit from what would be higher prices.
Artificially lower food prices not only discourage food production but also increase the demand for food.
The resulting excess demand for food means that price controls cause food rationing at both the retail and wholesale levels.
Richer families tend to gain from this rationing compared to poorer families since they can offer “under the table” payments and other inducements to retailers to give them a disproportionate amount of the limited available food.
Still another common policy in developing nations is to subsidize foods, such as bread and rice, which are important stables in diets of poor families.
If implemented appropriately, this approach has the advantage of targeting the goods consumed more by poor families.
Yet one weakness of the programs is that they also subsidize middle income and rich families that buy these staples.
In addition, they discourage any efforts by consumers to shift some of their food purchases away from bread and other stables that would be rising a lot in prices without these subsidies, and toward other foods that would increase by smaller amounts.
Direct income subsidies are probably the best way to reduce the suffering by poor families due to big increases in food prices that take a sizable share of their total spending.
If families below a specified poverty income level received an income supplement, then this level should be indexed to the cost of living by poor families.
Especially in poorer nations this means indexing definitions of poverty to the cost of food.
An income subsidy approach has the advantage of allowing prices of foods and other goods to be determined by the forces of supply and demand.
As a result, it encourages famers to grow more food when food prices rise, and also encourages poor (and other) consumers to reallocate their spending away from foods that rise most in price, and toward other foods and consumer goods.
The recent agreement between the Republican House leadership and President Obama to cut $38.5 billion from the federal budget during the rest of the year is a small step in the right direction of bringing federal spending under control.
Since spending skyrocketed during past several years from about 20-22% of GDP to its present level of 25% of GDP, much more has to be done to bring federal spending back to its longer term share of GDP (for a way to approach this problem during next few years, see the Wall Street Journal April 4th op ed “Time for a Budget Game-Changer” by George Shultz, John Taylor, and myself).
A much bigger problem is presented by the expected growth in government spending on medical care and retirements during the next several decades.
This growth is the main subject of Representative Paul Ryan’s recently released over 70 page “Roadmap” for entitlement control,and to a lesser extent tax reform.
The report also includes cuts in defense spending and domestic discretionary spending that would help in taming the budget during the next half dozen years.
Ryan's Roadmap is bold, creative, politically risky, and clearly highly controversial.
On the whole, the Roadmap contains excellent proposals that, if enacted, would greatly improve the long-term budgetary situation of the federal government of the United States, and the long-run prospects for the American economy.
I will briefly evaluate the main changes in health care spending.
1
The Roadmap proposes to provide a $2300 health insurance tax credit for individual tax filers, and a $5700 tax credit for joint and family tax filers.
This tax credit would substitute for the present tax exclusion of employer provided group health insurance from employees’ taxable income.
This is quite close to a proposal made by Senator McCain during his campaign for president.
The present system of tying health insurance to employment through special tax advantages is both expensive and wasteful.
It also discourages job turnover by employees because they have to obtain new coverage after changing employers or taking time off from work.
Eliminating the tax exclusion of employer health coverage would break the artificial advantage given to employer health insurance compared to other group plans and to individual coverage.
My main objection to the plan is that tax credits eliminate an important source of taxable income, so it would be better that the $2300 and $5700 government transfers be tax deductible rather than tax credits.
Since individuals and families with low incomes and low marginal income tax rates would benefit little from a tax-deductible transfer, they should be helped through special provisions.
2
The Roadmap would reform Medicaid for older recipients partly by substituting block grants to the states for the present system of matching state spending on Medicaid.
This would force states to pay 100% of their expenditures in excess of their Medicaid grants rather than sharing these additional expenses with the federal government.
The Roadmap would provide younger Medicaid recipients with health care debit cards that could be used only to purchase health care services and supplies.
Families with incomes below 100% of the official poverty level would receive $5000 into their debit accounts (in addition to the proposed tax credit), while higher income families would receive smaller amounts.
Both reforms of Medicaid are in the right direction because they introduce greater incentives to economize on medical spending by states, and by individuals and families on Medicaid.
3
Medicare is the most rapidly growing entitlement program, and the most difficult to reform of all the entitlements.
Unfortunately, to make it more politically acceptable, the reform proposed in the Roadmap will only start after 2021 when 55 year olds today will be 65.
It would have been much preferable to have it start in five rather than ten years.
Under the Ryan plan, seniors would no longer enroll in a government health care program, but instead they would buy health insurance from private insurance companies that would compete for their business.
To help them do this, seniors would receive federal subsidies in amounts that would depend on their incomes.
For example, couples with incomes below $160,000 would receive the full standard amount, whereas couple with incomes between $160,000 and $400,000 would receive only half the standard.
The standard payment would be the average amount Medicare currently spends per beneficiary, adjusted for health risk, for inflation, and for increases in the medical cost index.
There are several advantages to these proposals for Medicare compared to the present system.
Competition among insurance companies will increase efficiency in the delivery of medical care, and thereby keep costs down.
The subsidies will help lower-income seniors afford decent medical coverage, but higher income seniors would have to pay more of their own money for insurance rather than taxpayers’ money.
In addition, individuals and families could buy more expensive coverage beyond the basic plans financed by the proposed Medicare grants, but they have to pay for that additional coverage themselves.
A major weakness of the American health care system is that out of pocket expenses are such a small percent of total medical spending.
This proposal helps to correct that distortion.
The Roadmap has the potential to bring major savings as well as better care to the market for health care.
I do not believe that the sizable growth in the fraction of GDP spent on health care in the United States (and also in other countries) has been a waste of money.
Both the young and old attach very high value to improvements in the quality of their life, and in their life expectancy.
However, substantial efficiencies are certainly available through proper reforms in the health delivery system.
Politicians have been afraid to touch medical care as they call it part of the “third rail” of politics, which would involve monkeying with benefits to the elderly.
Representative Ryan and his committee deserve great credit for putting forward a bold and specific plan.
It can be improved, but if the main parts were adopted, it would be a big help to reining in long term medical expenses.
“March Madness” involves a tournament of now 68 top college basketball teams.
It culminates tomorrow night in the championship game between upstart Butler and perennial basketball power, the University of Connecticut.
The National Collegiate Athletic Association's (NCAA) sanctioned basketball playoffs start in middle of March and attract a large audience in attendance, and additional millions who watch the games on television all over the world.
Every year prior to this final tournament, and sometimes even during the tournament, different violations become public of NCAA rules on behavior of players and coaches.
Violations of these rules by colleges are to be expected because the rules are basically an attempt by the NCAA to suppress competition among schools for college basketball and football players, the two most lucrative and most watched college sports, and thereby increase the profits to schools from these sports.
The toughest competition for basketball and football players occurs at the Division I level.
These sports have both large attendances at games-sometimes, more than 100,000 persons attend college football games- and widespread television coverage.
As a result, many Division I schools with big time sports programs get many millions of dollars from their basketball and football programs.
Absent the rules enforced by the NCAA, the competition for players would stiffen, especially for the big stars, as they would receive large scholarships and various gifts of cars, housing, and cash to themselves and their families.
Payment to players, if competition for players were allowed to operate freely, would severely eat into the profits made by colleges from the big time sports.
To avoid that outcome, the NCAA sharply limits the number of athletic scholarships, and even more importantly, limits the size of the scholarships that schools can offer the best players.
NCAA rules also severely restricts the gifts and housing players are allowed to receive from alumni and others, do not allow college players to receive pay for playing for professional teams during summers or even before they attended college, and limits what they can be paid for non-playing summer work.
The rules are extremely complicated, and they constitute hundreds of pages that lay out what is permitted in recruiting prospective students, when students have to make binding commitments to attend schools, the need to renew athletic scholarships, the assistance that can be provided to players’ parents, and of course the size of scholarships.
It is impossible for an outsider to look at these rules without concluding that their main aim is to make the NCAA an effective cartel that severely constrains competition among schools for players.
The NCAA defends these rules by claiming that their main purpose is to prevent exploitation of student-athletes, to provide a more equitable system of recruitment that enables many colleges to maintain football and basketball programs and actively search for athletes, and to insure that the athletes become students as well as athletes.
Unfortunately for the NCAA, the facts are blatantly inconsistent with these defenses.
Consider the recent widely publicized violation of NCAA rules by five Ohio State football players and their coach.
The players’ “crime” was that they sold some of their football memorabilia, including signed autographs, for modest sums, and for tattoos.
The coach’s “crime” was that he failed to report these violations in a timely fashion.
All the players involved, which includes the star of the team, and the very respected coach, will have to miss the first 5 games of the 2011 season.
This is almost half of the 12 games played during the regular season.
Nothing done by the players involved stolen property or anything else that would violate any laws except those imposed on players by the NCAA.
A large fraction of the Division I players in basketball and football, the two big money sports, are recruited from poor families; many of them are African-Americans from inner cities and rural areas.
Every restriction on the size of scholarships that can be given to athletes in these sports usually takes money away from poor athletes and their families, and in effect transfers these resources to richer students in the form of lower tuition and cheaper tickets for games.
That players are recruited as students as well as athletes applies to a considerable extent to Stanford, Duke, Notre Dame, and a few other Division I schools that have high academic standards.
The NCAA points out that the overall average graduation rate is about the same for student-athletes as it is for other students.
That result also applies to African American and Hispanic students.
However, the graduation rates for these minority students-athletes are depressingly low.
For example, the average graduation rate of Division I African American basketball and football players appears to be less than 50%.
Some of the top players quit school to play in the NBA or NFL, but that is a tiny fraction of all athletes who dropout.
The vast majority dropout either because they use up their sports eligibility before they completed the required number of classes, or they failed to continue to make the teams.
Schools usually forget about athletes when they stop competing.
An important further difference between athletes and non-athletes who dropout of school is that athletes would have been able to get much better financial support for themselves and their families but for the NCAA restrictions on compensation to athletes.
They could have used these additional assets to help them finish school, or to get a better start if they dropped out.
In 1984 the U.S.
Supreme Court declared the NCAA’s restrictions on the televising of college football games an illegal conspiracy in violation of the Sherman Antitrust Act.
The court said, “good motives alone will not validate an otherwise anticompetitive practice”.
Since that decision, the televising of college football and basketball games has rapidly increased.
It is time for the court to apply the same valid reasoning to the restrictions on scholarships and other aspects of the competition by colleges for athletes, and to declare these restrictions also a violation of the Sherman Act.
Were that done, both student-athletes and schools with greater concern for academic performance of their athletes would gain at the expense of colleges that put athletic competition before academic achievements.
The internet is one of the most remarkable and important innovation of modern times.
Although initially encouraged by the American government, it has mainly grown worldwide in an unregulated, unsubsidized, and decentralized fashion.
Its impact has been huge on communication and information, and to a much lesser extent as yet, on sales, and its development during the next couple of decades is likely to be just as important.
The present and future revolutionary impact of the internet, and my skepticism toward government regulation and involvement, colors my attitude to informal or formal regulation of blogging and spam, and extends to taxation of internet transactions.
I agree with Posner that additional regulation of blogging and other internet postings is undesirable and unnecessary.
Robert Merton, the late outstanding sociologist of science, demonstrated that the main way plagiarism and dishonesty are policed in research is through the incentives provided other researchers to discover and expose such malfeasance.
These incentives are even more powerful in blogging and other internet activities, where many thousands of individuals seek to discover serious errors committed by bloggers, business leaders, and politicians.
I have been impressed by the extent of the information revealed in comments on our blog, far more than in the responses per column from readers during the almost 20 years I wrote for Business Week magazine.
The case for taxation of internet transaction is to level the playing field with conventional retail and other outlets.
A couple of years ago over 100 economists signed a petition to Congress to allow taxation of internet transactions for precisely this reason.
Evidence by my colleague Austin Goolsbee does indicate that internet purchases are higher in states with bigger sales taxes.
Although this argument about equal treatment of different type of sales has merit, it is not enough in my opinion to overcome the case against internet taxation.
I oppose taxation of the internet not because it is an infant industry that needs artificial stimulation to grow, nor because sales taxes of a few per cent alone would destroy this industry.
Rather, my reluctance to interfere with the dynamics of the growth of the internet largely explains my opposition to taxation of transactions and other activities on the internet.
I fear that the additional regulation of the internet that would inevitably accompany efforts to enforce taxation of transactions by either American states or the federal government would have a negative effect on internet growth in the United States.
Any significant sales tax on internet transactions would induce sellers and buyers to find ways to evade paying the tax.
That includes setting up offices outside the United States, perhaps while shipping from places within the country, false invoicing, and still other methods from creative minds intent on evasion.
All taxes induce avoidance and evasive actions, but internet transactions are particularly difficult to police, as seen, for example, from the proliferation of internet pornography.
Hence attempts to collect taxes is likely to lead to substantial regulations that would slow down the so-far remarkable rate of innovation on the internet.
There are a few good other arguments against taxation of internet transactions.
But the most important, I now believe, is its effects on further regulation of this dynamic media.
Spam does create real problems since it wastes time of recipients, and discourages use of email and other parts of the internet.
As Posner indicates, spam has grown rapidly, and is commanding a larger share of all emails sent and received.
The main factor behind its rapid growth is the low cost of sending spam in large volumes.
A report by students in the Graduate School of Business of the University of Chicago collects very useful information about the spamming industry.
Their study clearly shows how much cheaper spam is to send than either junk mail or telemarketing.
About 150 spam operators appear to control the industry, and they collect many millions of names by scanning the internet.
They then sell lists of names for tiny amounts per name.
The vast majority of spam is unwanted by recipients, but spam is costly either to block, designate as spam on recipient email accounts, or read and then send to trash.
In other words, spam creates what economists call negative externalities or harm to recipients, which sometimes calls for regulation or taxation to discourage the activity producing the harm.
However, Guity Nashat (my wife) has indicated to me that the negative effect of spam is mitigated to the extent it substitutes for more costly intrusions on the time of recipients, such as telemarketing and junk mail.
The total harm caused by spam is net of this reduction in other intrusions by sellers on recipients time.
The harm from spam is probably still positive, but less than when evaluated in isolation.
To the extent that the net effect of spam is a serious problem, there would be a case for simple and effective methods to reduce spam.
By simple I refer to my concern expressed above over inducing additional regulations of the internet, in this case to control efforts to avoid anti-spamming approaches.
A 2004 Federal Act requires an opt-out notice with a valid return email address, and places restrictions on unsolicited commercial email.
 Europe instead has a presumably more effective opt-in provision, but apparently does not provide any opportunity for companies or consumers to sue for damages.
The effectiveness of either of these laws appears to be very limited, partly because many spamming companies have moved their operations to countries like Taiwan and China that do not yet regulate spam.
Other proposed solutions to the spam problem include Bayesian filters, challenge-response systems, blacklists, and digital signatures.
Perhaps some combination of these systems will prove effective against spam without overly regulating legitimate email.
As yet this has not been the case.
So while it could be advisable to experiment with various approaches, it would be a mistake for governments to move aggressively against spam until more evidence is available on which anti-spamming devices are effective without imposing major costs on legitimate uses of the internet system.
Otherwise, the attempt to regulate spam is likely to end up causing more harm to the internet and to society at large than any benefits that accrue from reduced spamming.
I enjoyed reading all the comments.
As the discussion makes clear, the issue of estate taxation raises many interesting questions that would take more than one posting to cover at all adequately.
Let me try to respond to some of the points raised.
As some of you indicated, and others denied, the estate tax is not necessary to get a circulation of the very rich since wealthy families did regress over time even before the estate tax became important.
Although many of the descendants of John D.
Rockefeller are still quite rich, as a family they have fallen greatly in wealth compared to the Gates and other much newer wealthy families.
There is nothing intrinsically regressive about consumption taxes.
There can be various rebates, exemptions, and credits that would make the overall system progressive in the usual meaning of that term: that the average tax rate rises with level of consumption, or that marginal rates rise at some consumption levels and do not fall at any others.
My preferred way to make a consumption tax progressive is via exemptions.
The most efficient way to implement a progressive consumption tax along these lines is to allow all savings to be deducted from income, and then tax the residual (which is consumption), with an exemption at the lower end that should be quite generous.
The NYTimes article that referred to my 1987 Presidential address to the American Economic Association badly misstated what I said.
I did not claim that childrens income was not much related to the income of their parents.
In fact I assumed for the sake of discussion that about 40% of the parents income advantage was passed on to children.
Note that grandchildren would then only have about 16% of the advantages of their grandparents.
It is true that some recent work claims the fraction passed on might be as high as 50% rather than 40%, but that is controversial, as Dean Lillard of Cornell and others have argued.
I also stand by my claim that there is no credible evidence that the degree of intergenerational mobility has fallen during the past few decades.
If consumption were taxed, the basis would automatically be stepped up since that true basis would determine consumption spending.
Even if one does not like a consumption tax, surely an inheritance tax is much better from any equity standard than the estate tax.
I agree that the value of the inheritance for tax purposes should be based on the market value of inheritances, not the purchase price.
I do not believe that if the Federal estate tax were eliminated, it would simply be replaced by much higher estate taxes by the states.
For it is easy for many rich persons to change their state of residence by moving to states with lower estate taxes.
That is certainly a lot easier than changing country of residence, and a considerable number of the very rich even do that.
The tax cut law of 2001 included a slow phase out of the estate tax by 2010, but the tax is supposed to be reinstated in 2011 when the entire 2001 law expires.
This strange political compromise on estate taxes presumably will not last, so it is a good time to consider what should be done about this tax.
I believe taxes on estates should be permanently abolished since they do little to reduce income or wealth inequality, benefit a vast army of lawyers and accountants whose role is to find ways to cut taxes on the estates of the wealthy, create problems for some families with smaller businesses, and do not raise a lot of tax revenue.
In April the House of Representatives rather strongly voted to repeal permanently the tax on estates, so the issue now goes to the Senate, where some Democrats are promising a filibuster.
In earlier times, bequests of assets, especially property, were the dominant way to pass economic wealth from parents to children.
But after the knowledge revolution took off toward the end of the 19th century, bequests of financial and material wealth have become less important in the overall economy.
Instead, the most important way for parents to bequeath economic position is through the transmission of knowledge in the form of education, training, and other human capital.
Such capital embodied in people now comprises over 70 per cent of all wealth in economically advanced nations, far more important than material capital.
In modern economies children of better educated, higher earning, and more able parents on the average receive greater training and schooling, better health, and are more encouraged to develop their talents than are children in other families.
Primarily for these reasons, children of parents with greater human capital form an economic elite that tends to have better jobs, less unemployment, and higher earnings.
But this elite circulates over generations, and there is no convincing evidence that the degree of circulation, the degree of social mobility across generations, has been falling during the last couple of decades.
Some defenders of a sizeable estate tax rate claim not any major effect on inequality, but that it allegedly brings in lots of revenue with little disincentive to wealth accumulation and other behavior.
However, estate and gift taxes in fiscal 2005 are expected to contribute only $24 billion in federal tax revenues, which is about 1 per cent of estimated total federal tax receipts, and just one third of federal revenue from excise taxes.
The rise in exemptions may have reduced revenue from estate taxes, but this tax did not contribute much more even a decade ago.
$24 billion is not small change, except to politicians, but if the estate tax were abolished, the lost revenue could be made up without difficulty with only modest increases in income or consumption taxes.
A main reason for the small yield of estate taxes is that very rich persons with large estates often pay little to the government since they employ skilled lawyers and accountants to help them find ways to sharply cut their estate taxes.
Trust and estate planning is the specialty of about 20,000 lawyers who, along with accountants, spend their expensive time discovering ways to reduce the amount owed in estate taxes.
These ways include gifts, trusts that may skip a generation, insurance trusts, and charitable trusts and foundations.
These talented individuals should be spending their time in more economically productive ways.
Since the average estate-planning attorney earns more than $150,000, spending on 20,000 of them would be in excess of $3 billion.
If another $1 billion goes to estate accountants, total spending on tax avoidance would seem to be in excess of $4 billion.
This is more than 1/6th of the revenue generated by this tax, a strikingly high percent.
The estate tax is a bad way to reduce the effect of inheritances on inequality in the distribution of incomes and wealth, even for families that do leave large estates.
For this tax does not consider how many children, parents, other relatives, or friends share estate resources.
A parent who leaves $10 million to an only child has a larger effect on the personal inequality of wealth in the next generation than does someone leaving the same amount to be divided among several children, nieces, nephews, friends, and employees.
Similarly, a large bequest to successful children with high incomes raises inequality more than does the same size bequest to children with low or just average incomes.
This is why taxing inheritances rather than bequests would be a better way to reduce inequality in succeeding generations.
That is, $10 million in bequests divided five ways should generally be taxed at much lower rates than the same amount given to one person, while $10 million divided among several well off children should also be taxed at higher rates than the same amount divided among children with modest incomes.
Although an inheritance tax would be better than the estate tax, I am not advocating a direct tax on inheritances, for there is a better approach that indirectly does tax inheritances (see the discussion later of consumption taxes).
The estate tax also makes it harder for families to pass successful businesses on to their heirs.
Despite the 2001 tax law that increased exemptions, families are still sometimes forced to sell more successful and profitable businesses upon death of the principal owner in order to pay estate duties.
This is why farmers and other owners of small businesses continue to be active politically in advocating much lower estate taxes, if not their complete abolition.
High tax rates on estates may be thought to be universal, but in fact many countries have low taxes on estates.
Moreover, some countries, including Canada and Switzerland, essentially have not taxed bequests to close family members, although they may tax capital gains on assets transferred to children.
I cannot go deeply in this discussion into the reasons why I believe a tax on consumption, perhaps a progressive one, instead of income and corporate taxes, should form the heart of the federal tax system.
Suffice it to say that consumption taxes, unlike income taxes, do not distort savings decisions, a particularly important issue for the United States.
A general reliance on consumption taxes would, among other things, replace an estate tax by indirect taxes on inheritances.
The tax on inheritances would be indirect because they would not be taxed when they are received, but only as they are spent.
So if a family receives a large inheritance that raises their consumption several fold, the amount they would pay in consumption taxes would also increase several fold for as long as the family continues to consume at a much higher level.
So my conclusion is that the estate tax should go, or at least have greater reduced rates, since this tax has little effect on inequality in a knowledge economy, encourages costly avoidance behavior to take advantage of various tax loopholes, raises only a modest amount of government revenue, and reduces incentives to form family businesses and other entrepreneurial activity.
Estate taxes do not even tax the right base if the aim is to reduce the effect of inheritances on inequality in the personal distribution of income and wealth.
 The energy and political capital spent on supporting high estate taxes is better spent on trying to raise opportunities to children from poor families by improving their education, training, and health.
A former president of the World Trade Organization, the current British Chancellor of the Exchequer, the House of Bishops of the Episcopal Church, and many others have claimed without citing any evidence a close connection between poverty and terrorism.
Poverty may be related to terrorism, but in ways that are far more indirect and weaker than alleged.
Any sizeable effect of poverty on terrorism is not apparent from what is generally known about terrorist activities.
The suicide bombers in the 9/11 attack were mainly highly educated Saudis, not poor Moslems from other parts of the Middle East, Asia, or Africa.
The Basque region of Spain may not have done well economically in recent decades, but the members of its ETA terrorist organization are generally middle class and reasonably well educated.
The same goes for the Baader-Meinhof German terrorists, and many other terrorist groups in different nations.
Examples such as these can usually be chosen to support a particular position on most issues, so more complete evidence is necessary to draw any conclusions with confidence.
Fortunately, a few studies do systematically analyze the relation between poverty and terrorism.
Harvard economist Alberto Abadie has recently studied both terrorism within a country and transnational terrorism for almost 200 nations (NBER Working Paper No.
10859).
He estimates the poverty-terror relation after controlling for the degree of political freedom, religious and ethnic heterogeneity, and other variables.
He finds little net relation between the degree of terrorism and poverty, where poverty is measured by per capita GDP, the degree of inequality within a country, and a couple of other ways.
Clearly, terrorism is important when there is political, ethnic, religious, and other conflicts between groups.
Jewish terrorist organizations attacked the British army in Palestine, the Tamils oppose the Sinhalese and Moslems in Sri Lanka, the Moslems and Hindus of India and Pakistan continue to battle, the IRA has attacked both the British and protestants in Northern Ireland, and so on for many other examples.
Abadie finds these connections as well as an important relation between terrorism and the degree of freedom.
Countries with the greatest political freedom, such as Western Europe, the United States, and Japan generally have relatively little terrorism, although a number of exceptions include Germany’s Baader-Meinhof terrorists and Italy’s Red Brigades.
Highly oppressive regimes effectively deter terrorism by close surveillance of their populations, and by severe punishments to apprehended members of terrorist groups.
Countries in the middle ranges of political rights usually suffer the most from terrorism, perhaps because as Abadie conjectures, these countries are in political transition, with considerable disorganization and conflict.
Alan Krueger and Jitka Malechova examined the backgrounds of about 130 suicide bombers from Hezbollah in Lebanon who died on missions between 1982-1994.
They found that these bombers were not poorer but rather were much more educated and better off economically than the general Lebanese population.
One of Krueger’s graduate students at Princeton found similar results for Palestinian bombers: a much smaller fraction came from poor backgrounds than is the fraction of poor in the Palestinian population as a whole, while more than half of all bombers went beyond a high school education compared to a small percentage of the Palestinian population who did.
I agree with the basic conclusions of the studies by Abadie, Krueger et al, and of a few others that poverty is not directly an important cause of terrorism.
But a couple of significant qualifications are in order.
The first is a technical point that may be crucial in interpreting some of the evidence.
Any terrorist organization has available a supply of potential suicide bombers or other terrorists who have different levels of education and economic opportunities.
To make my point in a simple way, suppose all potential bombers gain the same utility from destroying members of a hated group, such as Israelis, through successful attacks that are likely also to kill the bombers.
Suppose too, they suffer to the same extent if they fail in their missions-they may be captured without hurting anyone, or they may only kill themselves.
Recruits with good economic opportunities would only be willing to undertake suicide missions that have a relatively high likelihood of destroying some enemies too.
For they would not be willing to go on missions that have little chance of succeeding since they would then prefer safer terrorist activities, or doing well economically while working peacefully.
In this case, relatively highly educated terrorists will be sent on missions that are more likely to succeed in destroying their enemies as well as themselves.
As a result, the education and other determinants of the economic opportunities of successful bombers will exceed the opportunities of bombers who fail (and who may be captured).
Similarly, the education of captured bombers would be less than the education of all bombers since low educated individuals, such as the many teenagers sent on suicide efforts to Israel, would go on missions with smaller chances of succeeding.
To protect against these misleading interpretations, the sample of bombers or other terrorists must be representative of all terrorists- not mainly either “failures” or “successes”- before reliable conclusions can be drawn about the relation between economic opportunities and the recruitment of terrorists.
This analysis suggests that the Krueger- Malechova study of Hezbollah terrorists who died on their missions may be biased toward their finding that terrorism and variables like education appear to be positively related.
A second possible qualification would arise if the process of rapid economic development reduces terrorism by orienting more educated and abler individuals toward advancing economically rather than toward terrorist activities.
I have not done a systematic study of the link between say economic growth and terrorism, but nations or regions that are experiencing rapid growth appear to have lower incidences of terrorism.
Continuing economic growth also eventually leads to greater democracy, so a positive link between economic growth and democracy and a negative link between growth and terrorism could help explain the observed negative relation between terrorism and democracy.
To be sure, terrorism may be less common when nations are growing rapidly because the causation goes from terrorism to little growth; that is, terrorism discourages investments and other engines of growth.
Whether the causation is from growth to little terrorism or from terrorism to little growth would have to be discovered from systematic and careful studies.
But I believe that some of the causation runs from growth to reduced terrorism because it becomes harder to interest many individuals in risky terrorist activities (and other political activism) when economies are expanding rapidly and opportunities are booming.
I will address several good comments.
I do not believe that compensation should be tied exclusively to performance because most CEOs, along with other employees, have a preference for a minimum stable income.
But I do agree that performance-based compensation should be the major component, especially for large companies.
In fact, there has been a sharp growth over time in the share of the total compensation of CEOS that is based on performance.
Several of you confused substantial deviations between compensation and performance during any year in some companies with what determines why average CEO pay increased so much over time-six fold, in fact.
That is the main problem I address.
Unless the frequency of mismanagement grew over time, the evidence on mismanagement for any year cannot explain the growth in pay over time.
Yes, not only CEOS but other high level executives are much better paid in the U.S.
than elsewhere.
The reasons for this are closely related to why American CEOS are so much better paid than elsewhere.
Samantha Joy, there is no contradiction between these two sentences: "The usual explanation given by economists for the positive relation between compensation and firm size is that the largest companies attract the best management.
Therefore, bigger companies have to pay their CEOS better.
[and} ‚Ä¶the relation between pay and (company) size is likely to be sizable, even when top management in different sized companies do not differ greatly in skills and abilities.
I  want to emphasize the word "greatly".
Small differences in ability have large effects on productivity in large companies, and hence have large effects on compensation.
This is related to the "superstar" phenomena emphasized by my late colleague, Sherwin Rosen.
The answer to the question of whether American CEOS are overpaid is clearly "yes" for those who earn large bonuses and generous stock options when their companies are doing badly, either absolutely or relative to competitors.
Business Week has had an annual list of the most overpaid CEOS relative to the performance of the companies they head.
A number of well-known companies usually top that list.
But the concern in the media and in Congress over CEO pay is not motivated by some bad apples like these, but by the huge increase in the typical CEO pay in the US during the past 25 years.
The total real compensation (that is, compensation adjusted for increases in the price level) of CEOS in larger publicly traded companies during this period grew a remarkable six fold, where compensation adds together regular pay, bonuses, stocks awarded, the value of stock options, and payouts from longer term pay programs.
A big but not the only component of the increase is due to much greater use of stock options.
Since median fulltime real earnings during the same period only just about doubled, the gap between pay at the top and the average pay of employees widened enormously.
It is hard to resist the widespread perception from these trends that CEOS and other top executives are being increasingly overpaid.
The case against the pay of American CEOS looks even more powerful by recognizing that the typical American company head receives greater total compensation than company heads in Great Britain, Canada, Japan, Spain, and in pretty much all developed countries.
Clearly, American CEOS are much better paid than CEOS elsewhere, even when per capita incomes of the countries do not differ by very much.
Yet competition for top management can explain the rapid rise over time in the pay of the average American CEO.
To understand how competition works in the management market, consider the strong and stable relation at any moment between the total compensation of CEOS at publicly traded companies, and the size of the companies they head.
For every 10 per cent increase in firm size, measured by the market value of assets, by sales, or by related variables, compensation increases by about 3 per cent.
This "30 per cent" law held during the 1930's, and has held for every succeeding decade, including right up to the present.
Note that stock options and other forms of compensation than salaries and bonuses were unimportant until the 1970's, so this relation is not due to the rapid growth of options and compensation through shares of stock.
The usual explanation given by economists for the positive relation between compensation and firm size is that the largest companies attract the best management.
Therefore, bigger companies have to pay their CEOS better in order to discourage them from going to head smaller companies.
It is also socially efficient to have the best mangers run the largest companies because their greater skills then have a bigger influence since they would manage a larger amount of labor and capital.
The efficient combining of better managers with larger companies in a competitive market for top managers would imply a positive relation between firm size and the total compensation package.
This analysis does not explain why the 30 per cent rule holds, but it suggests that the relation between pay and size is likely to be sizable, even when top management in different sized companies do not differ greatly in skills and abilities.
We need two additional facts to explain the sharp rise in pay over time, and the much higher pay in the United States than other countries.
The first is that the average size of large American companies has grown in real terms about six fold during the past twenty-five years, regardless of how "large" is measured, as long as the same measure is used consistently over time.
The other important fact is that the largest 50, 100, or 500 American publicly traded companies are much bigger than the largest companies in other countries.
Clearly, if large companies pay more, and if the average size of companies has grown sharply over time, average compensation would also grow, even if the value of the increasingly generous granting of stock options and equity shares were fully understood by stock markets and boards of directors.
It is also possible to understand why average compensation grew about as rapidly as average company size, although the argument here is more complicated (for the details of this argument, see Xavier Gabaix (MIT) and Augustin Landier (NYU), "Why Has CEO Pay Increased So Much?" unpublished, April 17, 2006).
The allocation of better managers to larger firms, and competition for these managers among companies of different sizes, means that companies in say 2006 would have to pay more for their CEOS than even the same sized companies did in 1980, although much less than six times as much.
The reasoning is that the 2006 companies of a given size are competing against relatively larger companies than comparable size companies did in 1980.
Using this analysis, Gabaix and Landier are able to explain why total compensation of the average CEO of larger companies grew about six fold along with the six-fold growth in average company size during the past several decades.
The same argument explains why compensation of American CEOS is much higher than that of CEOS in other countries.
Since average firm size is much lower elsewhere, their pay would be more like that of pay in the US in 1980 or 1990 than the pay of CEOS in today's much larger American firms.
As the market for top executives becomes increasingly global, the pay of CEOS in other countries would rise, and that of CEOS in America might fall.
For example, to attract Carlos Ghosn, a Brazilian working in France, to turn around Nissan, a seriously ailing company, Nissan had to pay him not at the low Japanese CEO levels, but at the much higher levels found in other countries.
I believe that the explanation based on the allocation of CEO talent largely is behind the explosion in compensation of American CEOS during the past several decades.
Yet at the same time, some American CEOS are obviously grossly overpaid since they have mismanaged their companies, and still receive exorbitant compensations.
But mismanagement is not new and probably has not become so much more important over time.
So I am suggesting that the rapid growth of compensation of American CEOS, and its premium over compensation of CEOS in other countries, is not mainly due to a growth in the degree of excess payment of executives in the United States.
Rather, on this interpretation, the main cause of the increase in pay is the greater challenges and opportunities facing executives who manage much larger combinations of resources.
I have been writing about immigration policy for quite a while.
Each time I am impressed by how much interest there is in this subject, and the strong beliefs and emotions involved.
I will respond to some of the many comments, although I will not do all of them justice.
I strongly believe in either enforcing laws or changing them.
I am not happy with the position we face with regard to illegal immigrants.
It is not good precedent to ignore immigration laws in deciding how to treat illegal immigrants, but we do that too with tax amnesty opportunities.
With so many illegal immigrants here, it is unrealistic to believe we can throw them all out.
We should have faced the issue many years ago, as I, along with others, were advocating, but we did not.
So we have to adjust to what we have.
I believe amnesty at this time, with a few fines and payment of some back taxes, is probably the best of bad alternatives, but we can take steps to reduce problems with future illegal immigrants.
A relatively secure identity card that is needed to get a job, combined with serious fines to employers that hire with workers without these cards, seems like the best available approach.
We should, however, greatly expand the number of legal immigrants accepted.
This would include unskilled as well as skilled, but I would put great emphasis on the skilled.
This country can easily accommodate and benefit from substantial increases in the number of legal immigrants admitted.
To be sure, workers that the immigrants compete against would have their earnings lowered, but that effect would be relatively small, and the gains to others would be far greater- the excess of gains over losses can be easily demonstrated by simple economic analysis.
I do not deny that immigrants come for many reasons: higher earnings, freedom, better opportunities for children, etc.
But it is unrealistic to deny that some come to take advantage of free and good medical care, free and good schools for children, and other benefits.
Moreover,  incentives to come due to the generous entitlements would become much greater if we tried to return to the nineteenth century of unlimited immigration.
To Robert Book, I do agree that the first best might be to deny illegal immigrants access to various benefits.
I discussed that in my earlier post on immigration.
But that policy has been tried and failed politically.
It is hard politically to enforce denying medical and other benefits to sick adults, and even more so, to sick children.
So what I taught in Econ.
301 is right, but has to be expanded to take account of political economy considerations.
A common fallacy is to assume a fixed number of jobs, so that if immigrants take some, native-born Americans have fewer.
Or if older workers keep their jobs because they work until later ages, younger workers have fewer jobs.
The number of jobs that can be created is very elastic, and depends on wages, productivity, etc.
What is true is that immigrants will lower the earnings of natives with similar skills.
I addressed that issue above.
Although we blogged on immigration not long ago (see entry for March 6th), immigration reform is currently being extensively discussed by Congress, and President Bush proposed various immigration reforms.
We decided to consider the subject once again.
I will defend three reforms.
First, the United States can and should greatly increase the number of legal immigrants accepted, with most of the emphasis on skilled immigrants.
Second, it is not politically possible to send back the millions of illegal immigrants that are here, but other steps might be taken with regard to their eligibility for various government programs.
Third, if a feasible enforcement policy could be worked out, employers should be punished for hiring undocumented workers in order to reduce the incentives for many more illegal immigrants to come here.
The case for expanded legal immigration recognizes the great benefits this country has received from immigrants throughout our history.
The unlimited immigration of the nineteenth century is no longer an attractive policy because of the artificial incentives to come created by various entitlement programs.
Nevertheless, this relatively unpopulated nation can readily and productively absorb many more immigrants.
Skilled immigrants in particular should receive high priority- they do not under present policies- because they add highly valued skills that are well paid in the above ground sector, and they contribute much more in taxes than they receive in government benefits from Medicaid, unemployment compensation, and other government programs.
In addition, skilled immigrants commit little crime, they have law-abiding and generally high achieving children, and they supply various services that otherwise might be outsourced to countries like India and China.
I would also like to admit legally some hardworking unskilled immigrants, and I will discuss this later.
Unfortunately, I do not see anything in the president's proposal to increase the number of skilled immigrants, perhaps because all the attention is now on illegal immigrants.
But skilled individuals deserve a high priority.
One approach is to expand greatly the number allowed to enter under temporary programs, such as the H-1B visa program mainly for high-tech workers.
But programs for temporary admission are not attractive (for reasons discussed in my March 6th post), and a more desirable policy would provide permanent admission to many more skilled immigrants.
More generous admission of these immigrants should be a fundamental part of any overhaul of the United States' immigration policy.
Although the exact number of illegal immigrants in this country is not known, estimates range from about five million persons to close to twelve million.
Surely, it is not feasible politically to round most of these up and return them to where they came from.
The recent immigrant demonstrations show that this could lead to riots and unrest that would be more destructive than helpful.
Moreover, many of these immigrants are well integrated into American life, and it would make little economic sense, as well as be inhumane, to send them back, even if that were feasible.
The call by some Republican to send most illegal immigrants back to where they came from seems more like political grandstanding rather than a serious proposal.
So I accept that the vast majority of illegal immigrants are here to stay for as long as they want to.
The president's proposal essentially to give permanent residency to illegal immigrants who have jobs involves some face-saving because he wants to deny that he is in effect proposing to give amnesty to immigrants who are here illegally.
Still, the proposal is basically a major step in the right direction, for it not only recognizes the impossibility of throwing out millions who are here illegally, but the proposal also makes a valuable distinction between those with and without jobs.
That part of the proposal is consistent with the approach taken in the H-1B and other programs that gives preference to immigrants who have jobs.
If the president's proposed reforms were not to become simply another amnesty program-the previous one was in 1986- that would encourage further illegal immigration, a way must be found to discourage the number of illegal immigrants who want to come.
The current policy of returning apprehended aliens is ineffective since the majority of those who are returned simply turn around and come again.
Perhaps a wall along the border will help.
I doubt if using the national guard to patrol borders (I do not like the use of national guards for that purpose) or many more border agents could greatly stem the tide, given the length of the border with Mexico, and the many persons who specialize in finding new ways to cross over.
Most Americans do not wish to give significant jail sentences to illegal aliens who are apprehended.
For there is considerable, although not universal, sympathy for immigrants whose only crime is that they come to this country to seek much higher wages, better working conditions for themselves, and brighter futures for their children.
What then can be done? As I said in my March post, I favor reducing the benefits available to illegal immigrants, which means denying them access to most health, education, and other benefits.
But I recognize that it is unlikely if that would be politically feasible or desirable in certain situations, such as for illegals who have school age children, or those who are ill.
So I am not optimistic about the feasibility of doing much along these lines.
Clearly, it would help a lot if Mexico developed much faster.
Its record during the past several years is pretty good, due mainly to the NAFTA Free Trade agreement, various reforms Mexico introduced to make its economy more flexible, and a booming world economy.
Still, Mexico is unlikely to increase its progress sufficiently rapidly to greatly reduce the desire of many Mexicans to come to the United States in the forseeable future.
It would be desirable to increase significantly the number of unskilled persons accepted each year, along with the greater increase in skilled individuals accepted, although neither group should be eligible for entitlement benefits for several years.
This policy would reduce the number of unskilled persons who want to come here illegally, but it would not eliminate the problem.
So is stemming further large-scale illegal immigration a hopeless task? Perhaps it is, which is why I titled my previous entry "The New American Dilemma: Illegal Immigration".
But an approach that I dismissed in my March post may be worth exploring further.
Although the 1986 immigration law barred employers from hiring illegal immigrants, it has not been much enforced because employers argued they were victims of forged social security cards, green cards, and other ID's that would certify employees were in this country legally.
An identity card that is hard to duplicate and that would have to be checked by employers at a central clearing house before hiring someone would be the only really effective method of reducing forgery to minor levels.
That would have to be combined with sizeable monetary fines for employers who hired employees without the required documentation.
These fines should rise with the number of illegal aliens hired, and with whether an employer was a repeat offender.
Even if such an identity and punishment system were introduced and were effective, some illegal immigrants would come here to work for households and at other underground activities.
But identity cards would greatly cut back the number of illegal immigrants who would come.
That is all any policy toward illegal immigrants can hope to achieve.
Posner has a fine discussion that covers lots of interesting issues.
I will try to extend the analysis in a few directions.
Private security personnel are used throughout the American economy.
There are more than 750,000 employees of security companies, which exceed the number of state and local police.
Private guards regulate admission to important buildings, such as financial centers, patrol neighborhoods, transport money and guard banks, watch customers in shops to discourage shoplifters and robbery, and offer other kinds of protections services.
Their numbers more than doubled since 1990, and grew even more rapidly after 9/11, especially in cities like New York.
Posner suggests there are about 25,000 private security employees in Iraq, which is only a drop in the bucket compared to the total number of private security personnel operating within the United States.
Since private security companies are often hired for dangerous domestic activities, their role in Iraq is in many respects an extension of their domestic activities.
Israel's use of private security protection in dangerous situations is informative about the kind of responsibilities guards can have.
Many suicide bombings by terrorist groups in Israel did succeed in terrorizing many Israelis.
They became reluctant to use buses, go to restaurants and movie theatres- food take outs and videos increased a lot, and bus travel declined- and they reduced their congregation in other public places.
To alleviate these fears, restaurants, theatres, buses, and other private businesses spontaneously greatly increased their use of private guards to search individuals who entered an establishment or bus, and to watch out for potential terrorists.
Evidence compiled for a study of terrorism by Yona Rubenstein and myself indicates that private guards remained cheap despite the large increase in their numbers.
They also helped thwart a number of suicide attacks, sometimes at the cost of their lives.
Although private security guards are relatively cheap in Israel, it is not difficult to understand why American security personnel in Iraq are much better compensated than soldiers who serve there.
Most of these soldiers signed up when the threat of actually being sent to a dangerous combat zone was pretty small.
So their pay was largely determined by other factors, such as training they would receive by serving in the military, their young age, the attractions of military life, patriotism, and so forth.
After the Iraq war started they had no choice over whether they went there-if ordered to go they went.
By contrast, employees of private companies are older and more experienced, and they have to be induced to go; financial inducements are an important part of the inducement package.
Enlistments in fact fell after the war started, so the military then had to offer larger bonuses and other inducements to stimulate enlistments and re-enlistments.
These higher military personnel costs are part of the estimates of the cost of the Iraq war by Bilmes and Stiglitz that we discussed in our posting on March 19th.
To my knowledge there is no compelling evidence that American private guards in Iraq have been likely to behave irresponsibly, cowardly, or use excessive force.
The relevant comparison would be with the behavior of soldiers in Iraq, and I do not know of such comparisons.
Posner quotes a U.S.
general on the bad behavior of private security personnel in Iraq, but I would not put a lot of weight on the general's assertions.
Most military officers prefer to have security forces under their command, so they are tempted to overstate the performance of their troops relative to that of private security personnel.
To be sure, the military has some advantages over private security forces since the military can impose discipline that is unavailable to private companies, such as military trials, imprisonment, court-martials, and other punishments.
On the other hand, private companies are forced to compete against each other for the Iraq and other security business.
Competition induces companies to screen their employees and fire the bad apples since the Pentagon will stop using companies that supply ineffective personnel, or personnel that brings bad publicity because of an excessive use of force and other misbehavior.
Incidentally, since I believe private security usually performs very well, I never was convinced by the arguments to federalize employees who search baggage at airports.
Private companies would do the job better than a single (monopoly) government employer if the standards of performance were clearly set by the government agency in charge of airport security.
As in other sectors, a considerable advantage of private employees over federal government employees would result from the competition of different security companies for the business of providing airport security.
I would expect competition among companies to have produced more innovation and greater efficiency in airport security checks than we have received, or will get, with federal employees.
A few points in response to many comments on the important subject of the movement left in Latin American governments.
As the statistics provided by someone indicates, Cuba has done very badly since Castro took over.
My favorite comparison is between Cuba and Taiwan.
These two islands had about equal per capita incomes in 1960 and some similarity in exports.
Yet now Taiwan's per capita income is many times that of Cuba's.
A couple of you attributed that to the economic isolation of Cuba by the United States.
That may have hurt Cuba somewhat, but for many years it was offset by very generous support from the Soviet Union.
Of course, Cuba is not an isolated example-no communist country performed well, either in its economy or in the freedoms of its people.
Let me add that have opposed the American boycott of Cuba.
It provides an excuse to supporters of Castro for the economic failures.
It is also a bad policy because boycotts are not very successful, and to the extent this one has succeeded, it has hurt the Cuban people.
On Venezuela, of course its GDP is doing well with the very high price of oil-so is the Russian economy, Saudi Arabia's, the Iranian economy, etc.
The test will be how Venezuela does when the price of oil falls.
I predict that it will do very badly indeed.
I oppose American interference in the crops that can be grown in Bolivia or anywhere else- as I explained in an earlier post on the war on drugs.
But that is not the major cause of the problems in the Bolivian economy.
Someone asked about whether any countries in the region introduced significant reforms in their economies.
I would mention not only Chile, but also Mexico and Brazil, two very important nations, as well as various Central American economies, and a few others.
Most of the reforms have not gone far enough, and the reforms were not always efficiently done, but there were major reforms.
The substantial but far from complete reforms in Brazil in my judgment explains why Lula has followed rather market oriented and "conservative" policies.
Even though official crime statistics are often suspect, there is no doubt that crime rates vary enormously from country to country.
What is more interesting is that poorer and more slowly developing countries generally have higher incidences of crime, often much higher.
There are several reasons why poorer countries and those that are growing slower would have more crime, but do higher rates of crime also contribute to poverty and weaker growth? I believe the answer is yes.
That crime is negatively related to a country's income and its development is seen strongly in the data.
For example, in the period 1998-2000, countries with the highest murder and kidnapping rates included Colombia, Jamaica, Mexico, South Africa, Russia, Zimbabwe, and others that were not then doing well economically.
An economy that is doing poorly has more crime because crime flourishes when wages are low and unemployment is high.
That is, crime is encouraged when legal alternatives to using time at crime do not pay well.
The returns to education and other human capital usually are low in stagnant economies, so that young persons are then more inclined to drop out of school.
Dropouts have the free time to engage in theft, the sale of illegal drugs, and other criminal activities.
My remaining discussion concentrates on why high crime rates also slow economic growth and progress.
One reason was made clear to me when speaking to a leading businessman in Mexico City, a city with extremely high rates of kidnapping, robbery, and theft.
He said in many countries wives who are with their husbands in the United States encourage their husbands to give up their jobs and return home because the wives miss their families and friends.
Due to the high crime rates in Mexico City, however, Mexican wives often do not want to return to that city because they feel it is not safe to raise their children there.
Of course, for the same reason, foreigners with families are often reluctant to work in countries with much crime.
High crime rates directly raise the cost of doing business.
For one thing, foreign and domestic businesses, and wealthy individuals, need to spend considerable resources on providing security for valuable machinery and inventories, and for their employees.
For example, wealthy Mexicans, Brazilians, and South Africans employ hundreds of security personnel simply to protect their families and high- level employees.
Partly because more people drive to work and to shop because of the fear of crime if they walked or took public transportation, and because good highways and roads in poorer nations are scarce relative to this augmented traffic, the time cost of commuting to work and to go shopping is sizable.
People who do walk in cities like Rio de Janeiro or Mexico City often remove their watches and jewelry, and make sure they are carrying a little but not too much money.
High rates of crime are often the result of corrupt police and the judiciary who make little effort to catch criminals or prevent crimes.
Acceptable standards of behavior by officials and others also tend to decline when crime is common.
In addition, dishonest individuals are willing to work in law enforcement for low salaries when many crimes are committed because they can expect to supplement their income generously through bribes from criminals.
It is then no surprise that police in high crime countries like Brazil and Mexico are paid very badly since there is no problem attracting enough (corrupt) candidates to work at low pay.
Corruption in law enforcement encourages corruption in the enforcement of contracts and regulations.
International evidence on corruption of officials in different countries indicates that high crime and high corruption levels tend to go together.
To be sure, corruption of officials and judges sometimes help a country with bad laws do better by inducing weak enforcement of these laws (see the posts on corruption on August 28, 2005).
Moreover, corruption may not be much of a problem when bribing officials to enforce contracts and reasonable laws is cheap.
Still, studies of economic growth suggest that on the whole corruption retards economic growth by discouraging investments in physical capital, and perhaps also in human capital, because corrupt officials do not enforce contracts and regulations honestly, and the returns to hard work and investments generally are lower.
The foreign investment capital that is crucial to economic development is particularly discouraged because foreigners often perceive-usually accurately- that contracts and regulations tend to be interpreted in favor of domestic businesses and against foreign ones.
Production and distribution of drugs also flourish in environments with corrupt police and judges.
What is worse, drug activities tend to corrupt officials and police, and hence weaken enforcement of other laws as well.
Such an environment is hardly conducive to the creation of legitimate business and investments.
The potential profits from the drug trade is sometimes so large-especially when trans shipment of drugs to the United States and other major markets is feasible- that even the top leaders of some countries have been heavily involved in the distribution of drugs.
For all these reasons and others, countries with much crime have trouble achieving economic development.
The market for corporate control is sometimes claimed to be more effective at replacing inefficient management when a relatively small number of shareholders-members of particular families in the cases of the Wall Street Journal and New York Times ‚Äì cannot maintain control over management because their shares have much greater voting rights than shares owned by others.
Perhaps in situations where voting rights differ, stockholders who own a small minority of all shares could repel would-be corporate raiders who might improve the operations of a company.
I do not believe these fears are justified, I first discuss whether government regulators should permit different voting classes of common stock, and then consider these issues in the context of family-controlled newspapers.
Obstacles to the market for corporate control may exist due to different classes of voting shares, but these obstacles are not important in reasonably well-functioning markets for corporate control, like the American one.
To be sure, corporations should be required to disclose many aspects of their governance, including whether some classes of shares have greater voting rights than others, in order to give greater information to potential investors in these shares.
Once that is done, however, the case for outlawing classes of shares with different voting rights is weak.
With information readily available about voting rights, investors could assess the potential effects on corporate performance of control over management by a minority of shareholders who own high-powered voting shares.
Those investors who believed that such control might lead to lower profits and entrenchment of inefficient management would only buy low-powered shares if their prices were sufficiently reduced to compensate for such negative effects on profitability.
Prices of shares with lower voting rights would then be reduced until investors expect to get the same market risk-adjusted return on these investments as on shares with greater voting rights.
In countries, such as Italy, where non-voting stock are common and protection of stockholder interests are weak, voting shares sell for a sizable premium over non-voting shares.
In the United States, however, the premium on voting shares is only a few percent.
This premium is small presumably because the American market for corporate control operates quite well, even when there are different voting rights.
While there is no good case for using government regulation to prevent different classes of shares from having different voting rights, private stock exchanges could have their own rules about voting.
The New York Stock Exchange at one time did not allow companies to be listed if some of their shares had no voting rights.
In the 1980's after General Motors purchased Hughes aircraft, it issued shares with limited voting rights.
GM threatened to leave the NYSE and go to the Nasdaq market if that rule was not changed .The NYSE gave in to GM, and changed its rule about non-voting shares.
As Posner indicates, several generations of the same families have controlled major newspapers in the United States, such as The Wall Street Journal and The New York Times.
To protect their control, some of these families, such as the Bancrofts who control the Wall Street Journal, issued shares with different voting rights, with the family retaining ownership of the high-powered shares that had much greater voting rights.
This system often worked well for several generations; for example, the WSJ was highly profitable and expanded rapidly during the period from 1940 to the 1980's with the Bancroft family in control.
But the management of Dow Jones, the owner of the WSJ, made bad investments during the 1990's that led to discontent among family members.
The financial problems for all newspapers, not only family-controlled ones, were multiplied many fold by the rapid development of the internet that offers news, weather reports, sports, and information in ways that are much more flexible than the printed media, and is updated over the whole day, and every day.
Competition from the Internet has made the newspaper industry a declining industry that has not yet bottomed out.
Perhaps most of the major papers will survive, but they will have to place more emphasis on their online versions.
Newspapers that have been controlled for several generations by a single family will be more likely to change ownership under this pressure from the Internet because their many descendants would be unable to agree on how to adjust to the new competition.
But the generous offer by Rupert Murdoch for the high-powered shares of the Bancroft family that controls the WSJ indicates that shares with different voting rights will not be a major obstacle to a shift of control out of these families.
That is a good thing because outsiders will often have much better ideas about how to adjust to the revolutionary effects on the media of the rise of the Internet.
After extensive debate, the United States Senate last week passed a comprehensive immigration bill.
 I believe the bill is a mixed bag of good and bad reforms that pleased none of the vocal interest groups.
As I have argued before (see my blog entry on October 16, 2005), the United States would benefit greatly from immigration of many engineers, computer experts, scientists, and other highly skilled men and women.
The increased value of skilled workers in the economy is reflected in the growth in the earnings during the past 25 years of more educated and other skilled workers relative to earnings of the less educated and skilled.
The higher value placed on skilled workers is due both to the development of computers, biotech, and other technologies that favor skilled workers over less skilled workers, and to the advantages in a global market of producing skilled goods.
Large-scale immigration of more educated and other skilled workers would help satisfy the economy's thirst for skilled workers.
By increasing the supply of skilled workers, such immigration would also reduce the widened earnings gap between more and less skilled workers.
Skilled immigrants have many other advantages: they have very low crime rates, they are young and employed, they do not draw unemployment compensation benefits or social security benefits, they contribute a disproportionate amount in taxes, and their children generally do well in school.
By "large-scale" I mean one million or more skilled immigrants per year.
This may seem like a lot, but currently the United States takes about 1 million legal immigrants each year.
With a total population of over 300 million, this country should not have difficulties in absorbing one million skilled immigrants annually.
The Senate bill does provide for 200,000 temporary guest workers per year plus a much smaller number of employment-based visas each year for the next 10 years.
These "temporary" workers would in fact have an easy road to citizenship.
Even if all these slots were filled by skilled workers-and the bill gives little if any priority to skilled workers- the numbers admitted each year would be far below my goal of a million skilled workers per year.
So the Senate bill is on much too small a scale, and gives insufficient emphasis to skilled workers, which is where immigration reform should be centered.
The hardest challenge to immigration reform is to decide what to do with the 8-12 million illegal immigrants already here.
The bill proposes a three-tier policy.
Illegal immigrants who have been in this country for 5 years or more (estimated at over 6 million persons) would be granted immediate amnesty.
Illegal immigrants who have been here between two and five years (several million more illegals) could with somewhat greater difficulty arrange to receive amnesty and lawful work permits.
The roughly two million illegal immigrants here less than two years would not get amnesty, and they would be deported if apprehended.
It will be a nightmare enforcing this provision since it will impossible to determine for many immigrants whether they have been here illegally two years or more.
Those who have been here less than two years have a very strong incentive to claim that they have been here much longer.
One can imagine the lawsuits and other enforcement problems in trying to determine the length of stay for person who crossed illegally, and have held jobs in the underground economy where they were paid in cash with little record keeping.
In addition to these practical difficulties, amnesty is a bad approach conceptually.
Granting amnesty now attracts additional illegal workers in the future since they anticipate future amnesties that would legalize their being here.
The previous major amnesty of illegal entrants in the 1980's was not forgotten in the immigrant communities.
These communities are kept closely informed about all the details of new proposals on immigration.
As Posner indicates, amnesties are common in other areas, and are used, for example, to collect back taxes.
The attractions of amnesties are due to what economists call "time inconsistency".
Amnesties do encourage violation of tax and other laws, and ex ante are undesirable.
However, after the fact, amnesties are useful in order to get more tax revenue, recognize the large numbers of illegal residents already in a country, etc.
So this conflict between what is desirable when formulating policies, and what is desirable after policies have been in effect for a while, is what explains the popularity of amnesties.
Despite the after the fact advantages of tax amnesties, immigration amnesties, etc., countries are likely to be better off if they could avoid having them at all.
An approach better than immigration amnesties is to adapt to the illegal immigrant case my suggestion to sell the right to immigrate (see the blog entry on February 21, 2005) .
Under this plan illegal immigrants already here could legitimatize their status, but they would be subject to an additional penalty by being forced to pay a fee, or fine, to the federal government.
The exact amount would have to be determined, but suppose it would be $10,000-$15,000.
Any illegal immigrant who could pay that fee would be granted immediate legal status similar to that granted by the Senate bill to those here five or more years.
If ten million illegal immigrants each paid $10,000, that would aggregate to $100 billion, or about 5 percent of the total federal government budget.
Immigrants who did not buy their legitimacy would be subject to arrest and deportation, in the same way as the Senate bill would treat those immigrants who have been here less than two years.
Selling the right to stay to illegal immigrants would be recognition of the reality that America is highly unlikely to deport more than a small fraction of the millions of illegal immigrants who are already here.
Requiring illegal immigrants to pay a fine to buy the right to stay would not give them a free ride, but would impose a cost on their being here illegally.
By contrast, the amnesty approach in effect tells illegal immigrants they can stay without cost even though they broke American laws that determine who has the right to come here.
At the same time, many illegal immigrants would jump at the opportunity to pay to stay here if that would legitimatize their immigration.
Posner presents evidence on the sizable subsidies received by American farmers from the federal government of the United States.
However, the US is not unique, for every rich country including France, Germany, Great Britain, and Japan, heavily subsidizes their farmers, no matter how small the agricultural sectors.
 In fact, some of these other countries subsidize farmers more generously than even the United States.
On the surface, this universal tendency for rich countries to subsidize farming, no matter how different are the details of their political systems, is a paradox.
For since only a small fraction of the populations of these countries work in agriculture, farmers cannot contribute much to any majority voting coalition.
Add to this paradox that pretty much every developing country, no matter whether they have democratic or totalitarian political systems, rather heavily tax farmers in order to subsidize their urban populations.
Taxing of farmers is as true of India as of China, Mexico as well as Argentina, Egypt as well as South Africa, and similarly for the other poorer nations.
In all these countries, farmers are a significant fraction of their populations, and they form a majority in many, such as India and China.
This different treatment of farmers in rich and poorer nations is dramatically seen in the causes of and the responses to the recent worldwide explosion of food prices.
American and European subsides to biofuels are an important factor behind the rise in food prices, for these subsidies directly raised the price of corn to consumers, and indirectly raised the prices of other grains (see our recent discussion on April 13 and 17 of the rise in food prices).
Riots broke out in many cities around the world in protest against the increases in the prices of bread and other food stables.
To quell these riots and other urban unrest, many countries restricted their exports of agricultural goods in order to lower the prices and increase the supply of these goods to their urban citizens.
The effect of these export restrictions was to lower the incomes of the farmers in these countries since they were prevented from selling some of their produce on the world market where prices are higher.
This response to rising food prices by the governments of poorer nations is not explained by any concern about fighting poverty in these nations.
The fact is that farmers in developing countries are much poorer on average than are their city residents, which explains the continuing migration from the rural areas to cities in these countries.
So by putting restrictions on the exports of farm goods, developing countries are not only making their economies less efficient, but also they are adding to the overall incidence of poverty among their populations.
The gap between the incomes of rural and urban families is much smaller in developed countries that subsidize rather than tax farmers.
Indeed, with the high prices for cereals and other foods during the past couple of years, average farm incomes are often above those of city residents.
I believe that the explanation for the very opposite treatment of farmers in developing and developed countries is interest group competition (see my "A Theory of Competition Among Pressure Groups for Political Influence", The Quarterly Journal of Economics (Aug., 1983), pp.
371-400.
 This analysis shows that small groups, like farmers in rich countries, often have much greater political clout than large groups, like farmers in poorer countries.
The reason is that even large per capita subsidies to small groups, such as farmers in the US, impose rather little cost (i.e., taxes) on each member of the large groups, like urban and suburban residents of the US.
As a result, these large groups do not fight very hard politically against the small per capita taxes used to subsidize farmers.
By contrast, a large subsidy to farmers in developing countries would require imposing high per capita taxes on their relatively small urban populations since farmers are a rather large proportion of the total population in these countries.
Instead, the same political pressures as in developed countries lead poorer countries, regardless of the nature of their political systems, to subsidize the smaller urban populations at the expense of the larger farm populations.
Hence a common approach to the political process based on interest group pressures can explain both the taxing of poor farmers in developing nations, and the subsidies to well off farmers in richer nations.
The consumer protection issue has been thrust into public attention by the housing debacle because many families have had lenders foreclose on their homes, while other home owners are in serious arrears on their mortgage payments.
Ye neither consumer ignorance nor cognitive defects in consumer decision-making had much to do with the housing bubble.
Many home owners with low education and earnings, and with limited financial acumen became homeowners toward the end of the bubble period.
They tended to lose little from the bubble since they put almost no money down, and they were given low ("teaser") interest rates on their mortgages.
They frequently walked away from their homes when prices dipped below the value of their mortgages, and lost little.
On the other hand, highly sophisticated lenders, including giant companies like Bear Stearns, Citibank and UBS, lost billions of dollars through paying too much for their mortgage-backed securities.
Many top executives of these banks were out millions of dollars because they owned lots of shares of their companies, and they had generous options that went under water.
Government regulators, not private incentives, created the important asymmetry between gains and losses to the executives of these companies.
Financial leaders know that when many banks get into financial difficulties at the same time, the "too large to fail" principle of bank regulators would be applied, so that equity owners would be at least partially bailed out.
Bear Stearns' equity investors lost a lot when JP Morgan purchased the company, but they would have lost more if the Fed had not guaranteed $29 billion of BS assets.
The consumer ignorance and cognitive defects stressed by Posner did not cause the housing bubble, for it was due to a belief that rising housing prices and the general good times would continue for much longer.
Allan Greenspan, probably the greatest central banker of the past several decades, recognized that it is not easy to distinguish legitimate increases in prices from excessive price increases.
The fact is that during price bubbles, regulators, including central bankers, usually get caught up in the same optimistic frenzy that drives participants.
How would greater regulation have helped when commercial banks, one of the most heavily regulated of all industries, did so badly during this housing bubble?.
I am not trying to deny that consumers often have very imperfect information about the products they buy, but they do not have to rely only on their own information.
The advantage to companies of getting and maintaining their reputations as they compete for consumers is a powerful regulator of the quality of products that consumers receive.
Shoppers, for example, rely on Whole Foods, Safeway, and other supermarkets to do much of the information processing for them, and consumers hold the supermarkets responsible for bad-tasting foods, and other products that do not live up to claims of their suppliers.
It is not the diligence of regulators but the reputations of companies that are mainly responsible for all the high quality merchandise consumers purchase without having to know all the details.
I agree with Posner that companies do not want to "foul their nests", but still companies have had no hesitation in saying that they do not use trans fats-a purely voluntary provision of information to consumers not required by regulations- or that their cereals use oats that may be good for the heart, or that their products are lower than before in salt and fat, or that their airlines have better on-time records or more comfortable seats than competitors, or that their cars have better repair records or better hold their value as they age than cars of competitors, or that their drugs can prevent erectal dysfunction, lower cholesterol levels, treat pain better because of more powerful ingredients than in the past, or have other positive effects on the health and pleasure of consumers.
Posner seems to believe that consumers have less information than in the past because their time is more valuable and they are busier.
Their time is more valuable in large measure because they have greater levels of human capital that increases their skills, and enables them to use and process information more effectively.
The Internet has also made an enormous difference in enabling consumers to acquire information more easily, whether through offering comparisons of hotel rates and prices of cars being offered for sale, or through the provision of information about effectiveness and side effects of different drugs and medical procedures.
The same factors that make time more valuable to consumers make it easier for them to acquire and process information about the products they buy.
Various groups have pushed in recent years for greater regulation of all types of consumer choices, including smoking, eating of fast foods, the ingredients allowed in foods, such as trans fats, the drinking of alcoholic beverages, and many other products and services.
This pressure toward greater regulation of consumer choices is not the result of consumers finding it more difficult to get information about products and the consequences of consuming them.
Nor have the cognitive defects referred to by Posner become more prevalent or harmful.
Instead, the movement toward increased regulation of consumer choices reflects in large measure greater reluctance among some groups to accept these choices.
It is unacceptable to many persons both inside and outside the medical profession that some individuals want to smoke or eat a lot and become overweight, even if they knew and possibly exaggerate the negative health consequences of smoking and overeating.
The increase in weight of teenagers, for example, is not explained by cognitive biases, but by sharp declines in the cost of fast foods, and the development of Internet and other sedentary games.Increasing intervention in consumer choices also reflects the erosion of individual responsibility (see my discussion on March 16), so that consumers and their advocates blame others when consumer choices turn out to be harmful and costly.
I do not deny that regulations may be required when the consequences of mistakes are very serious, and when the forces unleashed by competition provide inadequate protection.
One example is the permissibility of lawsuits against surgeons who make obvious mistakes during their surgeries, such as leaving sponges in a patient's body.
Another possible example is the regulation of airline safety, although airlines suffer a lot when they have accidents, regardless of regulatory measures, and government safety regulations have often been inadequate and misleading.
Important exceptions notwithstanding, the overall trend toward greater regulation of consumer choices is disturbing.
Consumers make worse decisions when they are not responsible for their decisions, or when they can sue or otherwise get compensated when they make bad decisions.
Consumers make mistakes, but they learn from them when they have to bear the consequences of their decisions.
They are generally far more competent to make decisions in their own interests than are regulators or lawmakers as long as consumers are the ones who benefit from good choices and are hurt by bad choices.
This is why I continue to be a minimalist on government regulation, and greatly prefer the controls over behavior that stem from consumer responsibility and the discipline of competition.
In the mid-1990's Mexico started an anti-poverty program, called Progressa, that revolutionized the way low income countries try to reduce child labor and the school dropout rate.
This new approach typically pays poor parents to keep their children in school and to take them for regular health check-ups.
The reasoning motivating this approach is that while poor parents may love their children as much as rich parents do, the need for greater income induces poor parents to take their children out of school, so that they can go to work and add to the family's income.
Offering monthly cash payments if the children remain in school and performs well instead of going to work helps compensate these families for the loss in their children's earnings.
The results of Progressa are publicly available so that they can be objectively analyzed, and compared with a control group of similar families who were not invited into the program.
Studies by economists in the United States and elsewhere clearly show that Progressa has succeeded in inducing the mainly rural parents in the program to keep their children in school longer than they would have.
The budgetary cost of that achievement has been sizable; although the cost would have been much less if Progressa had offered the subsidies mainly to parents with children at the ages-usually when children were in the 6-8 grades-when poor rural Mexican parents typically took their children out of school.
For many years I have enthusiastic about using incentives to encourage greater school attendance by children from poorer families.
I first wrote about Progressa, and similar programs in Brazil and elsewhere, in a Business Week article entitled " 'Bribe' Third World Parents to Keep Their Kids in School", Nov.
22, 1999.
Such programs seem to be the most effective way to induce poor families in developing countries to reduce child labor by keeping their children in school much longer.
Prior to the introduction of these programs, poor parents simply ignored laws against child labor, and those requiring children to stay in school until they either reached a certain age or attained a minimum grade level.
Until recently, programs similar to Progressa had spread to many countries, but all of them were low to moderate income countries.
However, within the past year, New York City and a few other American cities have started experimental programs to adapt the incentive concepts behind Progress to the situation of poor families in the United States.
The New York experiment is fully funded by private foundations and individuals, including Mayor Bloomberg- I will concentrate my discussion on this city's program.
Since the children involved are older than those in Progressa, they rather than their parents are paid for good attendance and for raising their test scores.
Their parents are also paid to improve the choices they are more directly responsible for, such as working longer hours, and taking their children more frequently for health checkups.
It is obviously too early to evaluate the benefits and costs of the New York experiment, but I am confident that it will raise the performance of the students participating.
The reason is simply that boys and girls as well as adults respond to incentives, as every parent realizes time after time.
Rewarding these poor students for better performance is similar to the tuition scholarships and stipends that colleges award to students with good grades.
To earn the "pay" offered, students involved will skip school less often.
They will also pay closer attention to their teachers during classes and do more homework, so that they can do better on the standardized tests that are being used to judge their performance.
Whether this particular experiment has the most effective link between rewards and increase in performance on these test will only be clear with further experimentation, but a pioneering program of this kind has to start somewhere.
The New York program is not without many critics, which perhaps explains why it has been funded privately rather than by public resources from tax revenue.
 Some critics believe it is wrong to pay children and parents to do what they should want to do anyway in their own self-interest since doing better in school will be valuable in getting good jobs when they are young adults and enter the labor force.
 Most high school students do in fact recognize the importance of doing finishing high school and doing reasonably well, but the New York program is directed precisely to those who are performing badly, perhaps because they heavily discount the future, or are in dysfunctional families.
Other critics content that change has to start with these dysfunctional families that are responsible for their children skipping school and their poor school performance.
The family is surely important to the achievements of children, but children from these families and their mothers can still do much better now if they are given strong financial incentives to do so.
Another set of criticisms does not deny the importance of incentives to poor families and their children in rich countries like the United States.
However, it argues that the existence of incentive programs, such as in the New York experiment, will encourage some children who have been doing well to lower their school performance, so that they can qualify for the program.
All incentive-based programs with income or other cutoff points induce some families to change their performance to better qualify for the programs.
One has to be mindful of this effect in designing a program for poor parents and their children to make sure that that it is not so generous as to attract many more families to qualify by worsening their performance.
I believe that this is a greater problem with the payment system to parents than that to children, but further experience will inform us about that.
Yet such possible risks are no reason to delay incentive-based programs until families become less dysfunctional, or their children become more aware of the future benefits of better school performance.
Too many children, especially of African-American and Hispanic backgrounds, are doing so badly in school, and they are dropping out of school in such large numbers, that we should be willing to try an approach that has been successful in developing countries.
I commend New York for being willing to take initial steps in the direction of offering financial incentives to badly performing students that encourage them to work harder to get more out of their education .
The run-up in the world price of oil during the past several years, and especially the rapid climb during the last few weeks to over $120 per barrel, has fueled predictions that the price will reach $200 a barrel in the rather near future.
Such predictions are not based on much analysis, and mainly just extrapolate this sharp upward trend in oil prices into the future.
The price of oil in "real" terms (i.e., relative to general prices) will not reach $200 in this time frame without either terrorist or other attacks that destroy major oil-producing facilities, or huge taxes on oil consumption.
I try to explain why in the following.
The two previous sharp increases in the world price of oil, in 1973-4 and 1980-81, were due to supply disruptions.
The first one was the result of the formation of OPEC that led to output restrictions by members of this cartel, while the later one was due to the Iran-Iraq war that curtailed petroleum production in these two countries.
Although the world price of petroleum rose by a lot in all three episodes, worldwide oil production went down in the two earlier ones, while production has risen during the current price boom.
The present boom in oil prices has been mainly driven by increases in demand from the rapidly growing developing nations, especially China, India, and Brazil, although output growth in the US and European have added to world demand, and speculation on potential future price increases also contributed to the increased price of oil.
To be sure, supply problems in Nigeria, Venezuela, Russia, and other major oil-producing states have contributed to accelerations in the oil price increases at times during the current boom.
Note the contrast between the major causes of the current explosions in oil and food prices.
Although the sharply rising prices of different commodities are often lumped together, increases in the prices of corn and other foods have in larger part come from the supply side rather than from demand.
The main supply culprits in the market for foods have been the diversion of corn acreage to the production of ethanol, and the increased cost of fertilizers and chemicals used in food production due to the rise in the price of oil (see my discussion of rising food prices on April 13 and 17).
The rapid growth of world oil prices during 1973-74 and 1980-81 contributed in a significant way to the world recessions during those years.
Yet even though world oil prices in real terms are now above the prices in 1981, the previous peak in oil prices, and despite the sharp run-up in prices during the past couple of years, the world economy has not (yet!) been pushed into recession.
One reason for the difference is that unlike the previous episodes, the current price rises have slowed rather than eliminated the boom in world output.
Another difference from the previous episodes is that the share of oil and other energy inputs in GDP is down by a lot in the developed world since 1980, especially in Japan and Europe, but also in the US.
Of course, even with energy's smaller role in the production of output, any rise in oil prices to over $200 a barrel in the next few years would have serious disruptive effects on the world economy.
To many persons who have commented on this prospect, such a high oil price seems plausible, given the expected continuation of the rapid growth in the GDP of China, India, Brazil, and other major developing countries.
For the evidence is rather strong that the short run response of both the supply of and the demand for oil to price increases is rather small.
The small elasticity of both the supply and demand for oil explains why the moderate reductions in world oil supply during the earlier price spikes, and the moderate increase in world demand during the current price boom, produced such large increases in price.
However, the long run response to price increases of both the demand and supply for oil and other energy inputs is considerable.
For example, given enough time to adjust, families react to much higher gasoline prices by purchasing cars, such as hybrids and compacts, that use less gasoline per mile driven.
They also substitute trains and other public transportation for driving to work and for leisure purposes.
High energy prices, and hence the opportunity for large profits, induce entrepreneurs to work more aggressively to find fuel-efficient technologies, including the use of batteries as a replacement for the internal combustion engine.
Clearly, given high enough oil prices, many ways are available to increase the supply of petroleum, Explorations for additional supplies will be extended deeper into oceans and other remote places because the high cost of extracting oil from these sources would be offset by the high energy prices.
Usable petroleum is also already being extracted from oil sands and oil shale, and high and rising oil prices will speed up and extend this process.
The reserves of tar sands in Canada and Venezuela are huge; indeed, Canada is getting much of its oil production from this source.
Oil shale is also abundant in several places, including the United States, and while extraction of petroleum from shale is expensive and complicated, the high prices have induced some countries to start doing this.
Rising prices of oil and other energy inputs will eventually be controlled by new technologies that greatly economize on the use of these inputs.
Increased supplies of oil and other energy sources that become profitable to exploit only with prolonged high prices will also push these prices back.
The number of overweight children and adults has grown sharply since 1980.
The explanation is usually partly based on the increased availability of sodas and fast foods that have many calories.
Also emphasized is the growing number of leisure hours spent at sedentary activities, such as watching television and using computers and cell phones.
To combat obesity, an article in the April 30, 2009 New England Journal of Medicine by Brownell and Frieden argues for a tax on sugared beverages.
I agree with Posner that this is a bad idea.
From the data presented by the authors of that article, only a very high excise tax on sugared beverages might reduce calorie intake enough to significantly affect the number of overweight and obese children and adults.
According to these authors, sugar-sweetened beverages now account for about 10 to 15% of total calorie intake.
They also claim that a review of various studies indicates that a 10% increase in the price of beverages reduces consumption by about 8%.
These assumptions imply that a tax on beverages that increases its price by 10%-that means a 10 cent tax on a can of soda that sells for about $1.00- would slightly reduce the intake of calories from sodas by 0.8% to 1.2%.
Even this overstates the total effect on calorie consumption, given that consumers who like sugar would substitute toward cakes, candies, and fruit drinks that naturally have lots of sugar.
The result of this tax on beverages would be at most a very small reduction in the intake of calories and sugar.
Indeed, it is quite possible that since consumers do not only buy products on the basis of their sugar and calorie content, these substitutions away from beverages and toward sweets and other drinks induced by a tax on beverages could actually increase calorie and sugar consumption.
In addition, as Posner indicates, there is little reason to tax the many consumers of sodas and other sweetened beverages who do not become obese, and whose consumption does not cause any social problems.
That is why the usual recommendation is not to tax all drinking, but only heavy drinking, or better still only the heavy drinkers who cause auto accidents and other harm to innocent persons.
A similar approach to the problem of overweight individuals would not tax consumption of beverages or fast foods, but would directly tax excess weight.
Such a tax would be unusual to say the least, but it could be implemented if desired.
To me, calculations showing the minor effects of moderate taxes on sugared beverages on weight suggest that such taxes would be only the opening salvo in an effort to tax fast foods and other foods with many calories.
One justification given by the authors of the New England Journal of Medicine article for caloric taxes is that the growing rate of obesity is partly due to ignorance of consumers, especially children, about the harmful health consequences of consuming many calories.
It is also alleged to be partly due to the inability of consumers to act on the information they have because they are alleged to lack self control in their eating habits.
These authors also argue that consumers who eat too much and become overweight impose costs on taxpayers since much medical care is financed out of government tax revenues.
I do not find these arguments persuasive.
As Posner indicates, children without enough parental guidance and supervision are more likely than adults to be ignorant of the health consequences of high calorie intake, and children are also less able to exercise self-control over their eating.
Very much offsetting this, however, is that the negative health consequences of being overweight and even obese will generally be significantly lower for children than for adults.
The reason is that aside from very extreme obesity, the really harmful effects to overweight children will not usually kick in for another 25 or more years when they are in their forties or older.
However, one can reasonably expect sizable progress during the coming decades in the development of drugs, such as lipitor, that will reduce the health consequences of high cholesterol and excess weight for heart conditions, diabetes, and some cancers.
From that perspective, perhaps even ignorant and impulsive children are not acting so stupidly by indulging themselves in their eating since the future will likely see the development of drugs that will alleviate many serious medical conditions.
To be sure, taxpayers will pay for much of the cost of the development and use of these new drugs.
This brings us to the argument that excess weight imposes costs on others through the health payment system.
Yet such a health payment "externality" argument is hard to use consistently.
Consider a person who significantly shortens his life because of heavy smoking, and thereby reduces the amount of public spending on him through social security, and subsidized health care.
Would those who advocate taxes on beverages and other foods because obese persons make use of publicly funded health benefits support a subsidy to smoking if smoking cuts the use of health care and social security benefits? Clearly not, and nor should they.
The same logic implies skepticism toward arguments to tax sugared beverages because obese persons make greater use of the health care system.
Many doctors and others who advocate taxing sugared beverages and fast foods at heart do not believe that consumer taste for sugar and fast foods should be taken into account in devising public policy.
Perhaps not, but they have to advance better arguments than they have done so far to justify policies that interfere with the exercise of these tastes and desires.
The short answer is "yes", although not immediately, and not inevitably.
My reasons for an affirmative answer are partly demographic and partly economic.
Asia has a large fraction of the world's population, and their biggest economies are generally experiencing rapid growth as they narrow the gap in living standards with the West.
To start with the demographics, about 4 billion persons, or almost 60% of the world's population, live in Asia.
India and China alone have about 2 ¬Ω billion individuals.
Other Asian countries with populations in excess of 100 million are Japan, Indonesia, Pakistan and Bangladesh, while Vietnam and the Philippines each have almost 100 million persons.
In addition, Asia's population is growing much faster than that of either Europe or North America, so that 20 years into the future, Asians will constitute more than 2/3 of the total world population.
By contrast, the whole European Union has only about 500 million people, and the very low birth rates in almost all countries within this Union imply that its population will be falling over time, unless offset by steep levels of immigration.
The United States is still growing- partly fueled by considerable immigration- but more slowly than Asia's.
As a result, the populations of Europe and North America will decline over time, perhaps absolutely but surely relative to the growing numbers in the rest of the world.
Large populations alone do not have much impact on the world economy, as seen from the rather minor economic influence of both China and India prior to 1980, or the unimportance to the world economy of Sub-Sahara Africa's 800 million persons.
Asia must have rapid economic growth during the coming several decades for it to become the major player in the economic world.
Fortunately for them, China, India, Indonesia, Vietnam, and some of the other larger Asian countries discovered during the past 20 years many of the vital ingredients required to produce economic progress.
These ingredients include first of all a reliance on private companies and competition, and a much smaller role for government direction of the economy.
China started along this path in the late 1970s, while India began to throw off its socialist traditions in the late 1980s and early 1990s.
Second in importance is the utilization of the world economy to find markets for Asian exports, and to attract foreign capital to finance its rapid industrialization, although India has lagged far behind China in using both world capital and world markets.
Most Asian countries also have recognized that human capital is the foundation of modern knowledge-based economies, and they have begun to emphasize investments in education and training.
As a result of these and related policy shifts, Asia as a whole experienced rapid economic growth during the past 20 years, and has narrowed the gap in per capita incomes with the rich countries of Europe and North America.
The major Asian economies are likely to continue to grow rapidly for the next decade, and perhaps well beyond that decade, given how far behind Asian per capita incomes still are, the thirst of most of its population to become rich like the West, and the momentum their economies have built up.
I say "perhaps" beyond the next decade because one cannot be sure that leading Asian countries will not shift away from growth-producing policies in the more distant future.
its rapid growth in both per capita income and population implies that Asia's importance in the world economy will increase quite rapidly.
As a result, Asia will become a far more important source of consumer demand not only for products made in Asia, but also for exports from America and the EU.
In addition, it is likely that researchers and companies in Japan, China, India, and elsewhere in Asia will generate an increasing share of the world's important innovations.
Greater economic dominance of Asia does not necessarily mean that the United States will not continue to be the world's leader in per capita income and innovation.
The development of Asia can stimulate the US and the EU economies by providing greater opportunities for trade, including valuable imports and large markets for its exports, and other advantages from having a more developed and larger Asia.
The economic threat to the West is not Asia's development, but it is government excessive interference in the performance of markets, like the automobile bailout in the US, that may choke the very competitive system that created Western wealth, and demonstrated how to become rich to countries elsewhere.
To be sure, as the economic center shifts to Asia, that continent will expect much greater influence over international institutions, like the IMF and the World Bank, ia greater role in determining common international trade policies, more say on climate policies, and on many other world economic issues.
The larger Asian countries will also expect to have a more important role in determining world security and anti-terrorist policies.
On security issues and possibly on climate and some other international questions, major conflicts might well emerge between countries like China and India, and the United States and the EU.
Every century or so, a major flu pandemic (an epidemic with a global impact) occurs.
The last one, the Great Pandemic of 1918-19, infected many hundreds of millions of people, and killed about 50-100 million men and women worldwide.
The Asian flu of 1957 is estimated to have killed 2 million people, and the pandemic of 1968 killed over 1 million persons.
Various false alarms have also occurred, such as the swine flu outbreak in 1976 in the US, where over 40 million persons received flu vaccinations, and 30 persons died from the vaccinations, while few died from the flu itself.
Is this swine flu scare the "big one" that has come almost 100 years after the Great Pandemic? If so, what would be its economic cost?.
So far, less than 1,000 persons worldwide are confirmed to have swine flu -they are mainly persons under age 16- and the death rate is a few percent of those contracting the disease.
However, it is still too early to be confident that the effects of this swine flu will be mild or moderate since flu pandemics, including the Great Pandemic, often go through phases, where the first phase is rather moderate, and the next phases are much more devastating.
Whatever the course of this flu outbreak, health officials are confident that before long a major pandemic will strike that could wreak devastation throughout the world.
Note that flu pandemics involve a huge " externality" because infected individuals have limited incentives to consider the likelihood of infecting others when deciding how much contact to have with other individuals.
This externality justifies a significant public health involvement in trying to control the spread of flu during a pandemic.
Consider the cost of a modern flu pandemic with the impact of the Great Pandemic.
Fifty million deaths in 1918-19 constituted about 2.8% of the world population at that time.
 Since world population has grown twofold since then, a flu pandemic at this time that killed 2.8% of all people would take about 150 million lives.
This is a staggering number.
It can be converted into an equally staggering monetary value by using findings on what people are willing to pay to avoid fatal health and other risks- what economists call the statistical value of life.
It is estimated that this statistical value of life for a typical young adult in the United States is about $5 million.
This means that a young person would be willing to pay about $500 for a decrease of 1/10,000 in the probability of dying at each age, and $1000 for a decrease in the probability of dying of 1/1,000.
To get a monetary value of the aggregate cost of another such great pandemic, we assume that the comparable statistical values of life in other countries equal $5 million times the ratio of the per capita incomes to the US per capita income.
For example, the statistical value of life for a typical young person in a country with half the per capita income of the US would be $2.5 million.
Then if we assume that the same percent of the population would die from such a pandemic in all countries, the total cost of a pandemic equal in severity to the Great Pandemic would be over $100 trillion.
This is such a huge amount that it is hard to visualize.
It dwarfs in magnitude the effects of such a pandemic on world GDP, the economic effects that are usually calculated.
A study published in the science magazine Lancet in December 2006 by Murray, et al estimates that a modern pandemic of equal virulence to the Spanish flu that caused the Great Pandemic would kill not 150 million persons, but about 60 million people.
They also claim that these deaths would be very much concentrated in poorer countries.
Using Murray, et al's calculations to adjust my estimate of what people of the world would be willing to pay to avoid such a pandemic would reduce the estimate from $110 trillion to about $20 trillion.
The number of deaths from such a virulent flu might well be proportionately less than that caused by the Spanish flu because of important developments in the world health care system.
On the one hand, the explosion in world population since 1919, the growth of cities at the expense of the countryside, and the development of air travel that led to much greater movement of persons across national boundaries imply that the spread of flu among people has become a lot easier.
Offsetting these changes are others that make it a lot easier to contain the spread and severity of flu pandemic.
Public health officials can more quickly isolate and identify the genetic composition of different flu strains than they could during the Great Pandemic.
Officials of different countries are also in much greater contact with each other, and can collaborate to partly quarantine the epicenters of future pandemics.
Perhaps the most important development in recent decades that would save lives during a future pandemic are vaccines and antiviral drugs, such as Tamiflu.
Vaccines might be produced quickly enough to inoculate huge numbers against new flu strains, even highly virulent strains.
When taken early enough, the antivirals can greatly moderate the course of an illness and speedup recovery.
The US and the European Union apparently have large enough stocks of antivirals to treat about 16% of their populations-the US supply covers about 50 million persons- while Japan has even large drug supplies relative to its population.
The poorer countries of Africa and elsewhere are the least prepared to fight a major pandemic.
Of course, new flu strains may emerge that cannot be treated by the known antivirals.
And bioterrorists may be able to produce and spread highly deadly viruses of all kinds.
At the same time, however, drug companies are better prepared than even a few years ago to ramp up production of old drugs, and to develop additional drugs to fight new flu strains and other viruses that are not treatable by present drugs.
I have indicated that the vast majority of people are willing to pay a lot to gain protection against deadly flu viruses.
This is why it would be desirable to greatly increase the stockpile of drugs and vaccines even if the probability of another pandemic were low, and its nature not known.
For example, the expected worldwide cost in terms of willingness to pay to avoid the risk of another great pandemic that had a one in hundred probability of occurring during the next twenty years would be approximately 1/100 x $20 trillion, or about $200 billion.
This cost would justify sizable increases in world spending on antiviral drug and flu vaccines.
Posner and I decided to post again this week on the conservative movement because of the great interest in our discussion last week.
I will try to respond to some of the thoughtful comments and criticisms, and clarify some of my claims.
I claimed in that post that the current Republican Party is trying to incorporate two inconsistent sets of beliefs: one is the support of competition and generally freer markets, and the other is the advocacy of interventionist policies on various social issues, such as gays in military, stem cell research, or in international affairs.
Both these positions are often linked together as "conservative", but they involve contradictory views of government.
I argued for a consistent conservative position that supports individual choices, and opposes big government.
To be sure, government intervention may be required when individuals make decisions that impose sizable external costs (or benefits) on others that are not incorporated into their decisions.
On this approach, however, the harmful (or beneficial) effects on others must be considerable before government actions would be justified because governments are generally so inefficient.
A blog by the excellent development economist William Easterly.
(http://blogs.nyu.edu/fas/dri/aidwatch/2009/05/confused_american_liberals_and.html) suggests a different definition of conservative beliefs, as do some of those who posted on our blog.
Easterly argues that the true definition of a conservative is someone who respects traditions and existing institutions, and who wants to limit change.
Although that is a common definition of the essence of conservatism, I do not believe it is a consistent or sensible one.
I do agree that considerable respect for what has survived and thrived in the past is warranted, and my anti-big government conservative would certainly respect institutions that have performed well for a long time.
However, conditions do change, sometimes in crucial ways, and a sensible conservative philosophy would recognize the necessity of changing one's views when this happens, even when that goes against venerable traditions.
To take one example, until the latter part of 19th century, married women in England were not allowed to own personal property, including money, in their own name, Even though they had a long history in England and many other countries, such laws were discriminatory and undesirable.
Note that some other countries, notably Islamic countries, did not have such laws.
Another example:  laws against divorce may have made sense in an environment where women did not work and had many children since women would have faced serious financial difficulties if their husbands divorced them (I say "may have" because laws might have protected women's rights to financial support if divorce had been allowed).
For these reasons the great philosopher, David Hume, who was a strong supporter of freedom of choice, argued for laws against divorce.
However, anti-divorce laws make little sense in the modern world when many married women work to earn a living, and they have few children.
Therefore, a true conservative that generally opposes government involvement in private decisions would fully support laws that make divorce quite easy to obtain by both men and women.
Many comments on my discussion centered on the issue of abortion, and that is an especially difficult issue for someone who believes in individual rights.
For there is an obvious conflict between the rights of women to control their bodies and their motherhood, and the rights of fetuses that might be far enough along in their development to be considered human beings.
This is a very prominent example of the general difficulty of determining where to draw the line when the rights of children conflict with the rights of their parents.
I do not claim to have a definitive resolution of this conflict in the case of abortion, or in some other parent-child conflicts.
But I come down on the side of women's rights to make decisions about their body, except in very late term abortions where fetuses can survive outside a woman's body, and therefore can be considered real children.
Abortions often allow women to have children at later dates when they are better prepared emotionally and in other ways to have children.
In effect, abortions in these cases would allow women to substitute children who would be born later, and would be better taken care of, for the fetuses that are aborted now.
That seems to me to be a tradeoff worth making.
Moreover, laws banning abortion would be difficult to enforce against wealthy women since they would be able to get abortions illegally under reasonably good conditions, including by going abroad.
Poor women who want abortions would suffer the most from enforcement of an anti-abortion law, as they are the ones who mainly suffer from laws against the use of drugs and many other types of laws.
Conservatives are not isolationists on international affairs since they recognize that the interests of a country like the US are affected by what happens in other countries.
This is clear in Reagan's successful efforts to wear down the Soviet Union during the Cold War, or in more contemporary efforts to anticipate terrorist attacks planned in other countries.
However, just as with the use of government powers on purely domestic issues, conservatives would recognize that governmental foreign actions are usually very inefficient (as in conducting wars), and are often driven by special interests.
A conservative philosophy would limit governmental international interventions to cases where the risks from not taking actions are very large, and the interventions reasonably straightforward.
The roots of conservatism go back to philosophers of the 17 and 18th centuries, such as John Locke, David Hume, and Adam Smith.
They opposed big government, and favored private decision-making, primarily because they argued that individuals were generally better able to protect their interests than could government officials tied down by bureaucracy and special interests.
They claimed further that making decisions for oneself and suffering the consequences were usually good for people, even when these decisions led to bad outcomes, because learning from one's own mistakes helps improve future choices.
Modern conservatism is only partly built on these roots.
Its support of competition and private markets, and hostility to sizable regulations, is a direct descendant of the classical liberal views, as espoused for example in Smith's Wealth of Nations.
Competition and markets puts faith in the power of individuals and firms to satisfy their own and society's wants better than when governments manage firms and whole industries.
To such conservatives, the present US government's management of the American auto industry is an invitation to disaster for that industry.
It would be much better to have allowed GM and Chrysler several months ago to be reorganized through bankruptcy proceedings.
Classical conservatism would recognize that the intervention of the Fed and Treasury in the finance sector may be necessary, given the crisis in that sector, but classical conservatives would look for this involvement to end as soon as possible.
The other pillars of modern conservatism are aggressive foreign policy to promote democracy in other countries, and government actions to further various social goals, such as fewer abortions or outlawing gay "marriage".
These views fit less comfortably in the conservative tradition that is hostile to big government and skeptical about the use of government power to override individual decisions.
Classical conservatives would argue that governments are no more effective at interventions internationally or on social issues than they are on economic matters.
So governments should usually not get involved in such issues, except when its intervention has enough benefits to compensate for governmental inefficiency and ineffectiveness.
This usually is not the case.
A political party, like the Republican Party, may encompass both economic conservatives, and social and international conservatives, even though the philosophies behind each type are inconsistent with each other.
The reason is that for parties to compete at the national level, or in other large political arenas, they have to put together coalitions of groups with different interests, such as different types of conservatives, or market interventionists with laissez faire internationalists.
However, even large parties are generally stronger and more coherent when different factions share most of the same philosophy.
The Democratic Party is now fairly well united in the belief that governments frequently do better than private decision makers in both the economic and social spheres.
Similarly, the Republican Party under the leadership of Eisenhower and Reagan had a more consistent classical conservative philosophy of supporting private markets in the economy, little military involvement in other countries, and even little interference in social arrangements.
Neither Eisenhower nor Reagan was particularly religious, and they did not have strong views about gays or abortion rights.
The shift in the attitudes of the Republican Party toward more interventionist views on social issues, and to some extent also on military involvement to create more democratic governments in other countries, has created this crisis in conservatism.
Better stated, it has created this crisis in the conservatism of the Republican Party.
I believe that the best way to restore the consistency and attractiveness of the conservative movement is for modern conservatism to return to its roots of skepticism toward governmental actions.
This involves confidence in the capacity of individuals to make decisions not only in their own interests, but also usually in the interests of society at large.
Such a shift in attitudes would require more flexible approaches toward hot button issues like gays in the military, gay marriage, abortions, cell stem research, and toward many other issues of this type.
It will not be easy for the Republican Party to emerge from the doldrums if it cannot embrace such a consistently skeptical view of government.
Governments that control central banks have often used their.
power to increase the money supply and create inflation.
A growth of the money.
supply increases the revenue collected by the government through an inflation.
imposed tax on the holders of money.
These and other abuses of governmental power over central.
banks helped create the intellectual support for independent central banks.
During the past several decades several central banks, such as the Mexico.
central bank, have become more independent of their government.
I have little doubt that central banks should have.
considerable independence Yet complete central bank independence from.
politicians does not seem desirable since banks also can abuse their powers.
At.
times they can be tone deaf to what is happening in the economy, and at other.
times they are too much under control of the private banks that they regulate.
An analogy is often drawn between an independent judiciary.
and an independent central bank.
Just as an independent judiciary often.
prevents legislatures and heads of governments from abusing their power to.
formulate and interpret laws, so an independent central bank is supposed to.
prevent governments from inflating the money supply, and in other ways.
creating monetary mischief.
Yet the analogy between central banks and the.
judiciary is incomplete and not perfect.
If the Supreme Court gives an.
unpopular opinion, such as its recent decision on the unconstitutionality of.
bans on spending by corporations during elections, that does not directly reflect.
on the governing policies of the President or Congress.
Indeed, President.
Obama has openly criticized the opinion and clearly expressed his opposition.
On the other hand, when central bank policies help create inflation or.
unemployment, the governing party will be blamed because the electorate cannot distinguish the effects of central bank behavior from the effects of.
presidential and legislative decisions.
Milton Friedman in “Should there be an Independent Monetary.
Authority” (1962) and elsewhere argued against complete independence of the Fed.
and other central banks because that would give too much power to the top bank.
officials.
He also opposed making a central bank subservient to political.
leaders because that could lead these leaders to misuse the bank’s powers in order to promote their short –term political gain.
His solution was a monetary rule, such as a.
fixed growth rate in the money supply.
Such a rule would make many important.
central bank decisions completely automatic, and independent of the desires of.
both central bank heads and government officials.
Taylor-type interest rate.
rules that have greatly influenced some central banks are generalizations of.
Friedman’s rule on money supply growth that are linked to inflation and the.
growth of GDP.
Taylor-type rules also can operate automatically, and could be.
largely independent of both central bankers and politicians.
Yet even if a central bank followed a rigid rule to.
determine its interest rate and money supply policies, it would be necessary to.
periodically evaluate how well the rule was working.
And since central banks.
are unlikely to continue to follow a fixed rule in the face of a financial.
crisis, evaluations of its discretionary decisions are also necessary.
While.
the bank should provide its own evaluations, these would tend to be biased.
toward justification of what it had done.
This is why I support substantial but not complete.
independence of central banks from legislative and executive oversight.
     Such oversight can force central banks.
heads to justify what they did in a public and open arena.
The need to provide.
regular reports on its behavior to legislative committees would bring out.
mistakes made by the central bank.
It would also induce central bankers to take.
more careful decisions since they would anticipate having to justify what they.
did in a public forum.
The US approach to the Fed makes a reasonable compromise.
between independence and oversight.
The President appoints, subject to Senate.
approval, all seven members of the Board of Governors of the Federal Reserve for.
14-year terms.
Neither the President nor the Senate can remove any member prior.
to the expiration of their terms because of disagreements with bank policies.
The President chooses, subject also to Senate approval, the Chairman of the.
Board, the most powerful position on the Board, from among the sitting.
Governors.
The chairman serves for four years and can be reappointed.
The.
chairman must report twice a year to Congress on the Fed’s policies, and he is.
asked to testify on other occasions before Congressional committees.
He also collaborates.
with the Treasury on various occasions, as during the 2008-09 financial crisis.
Some critics believe the Fed has too much independence from.
Congress and the President.
Following this line of criticism, Representative.
Ron Paul of Texas in 2009 introduced a bill that would provide for greater.
Congressional oversight of the Fed.
Others believe that the Fed and other.
central banks have too cozy a relation with governments, and that political.
pressures excessively influence central bankers to conform to short-term.
political wishes.
The best way to help meet both objections is to make public.
all the Fed’s decisions (and that of other central banks), with no more than a.
short lag.
Rather than being an asset, central bank secrecy is a handicap to.
businessmen and consumers who make investment and other decisions that are.
affected greatly by what the bank does.
To maximize public information, the central bank, whenever feasible,.
should follow known interest rate and money supply rules that are clearly related.
to the rate of inflation and the degree of slack in the economy.
Under these conditions, present laws on the length of the.
chairman’s term and that of the other members of the Fed’s Governing Board, and.
the laws requiring periodic reports of the chairman before Congress, would be.
effective.
A system that has the Fed following rules that govern its policy decisions, combined with some discretionary.
authority in crises, and also with some congressional oversight would provide a.
reasonable mixture of central bank independence and control by Congress.
Both Europe’s short-term and long-term economic futures do.
not look bright.
The need to bail out Greece, and possibly also Spain,.
Portugal, and Italy is the immediate problem, but the fundamental problems go.
much deeper.
Relatively rapid economic growth will cure many budgetary.
imbalances since the challenge is not the size of government debt per se, but.
its size relative to GDP.
A faster growing economy can tolerate sizable growth.
in government spending as long as the growth rate of its debt is no faster than.
the rate of growth of GDP.
Unfortunately, large government spending and rigid.
economies, the European approach, tend to both increase the growth rate of.
government debt, and at the same time lower the growth rate of GDP.
As a.
result, the prospects for rapid growth in most European economies, and for.
getting government debt under control, are dim unless major reforms are.
introduced into their welfare state, labor markets, regulatory framework, and.
other government policies.
Europe needs high income and.
other tax rates in order to finance its system of early retirements and.
generous pension benefits, especially among its large numbers of government.
employees, its liberal unemployment benefits, easy access to welfare payments.
to support unmarried mothers, the care of children, and many other government.
subsidies.
Edward Prescott has shown (see e.g., his “Why do Americans Work so.
Much More than Europeans”, Federal Reserve Bank of Minneapolis, Quarterly.
Review, 28, July 2004) that higher marginal tax rates account for a significant.
part of the difference in employment, earnings, and hours worked between the US.
and the main European countries.
High tax rates reduce both the level of income.
at any moment and the rate of growth of income over time.
Very low European birth rates contribute to the difficulty.
in financing generous support of the elderly since fewer men and women of prime.
working ages are available to be taxed to support the growing number of retirees, although.
the greater education, and hence greater productivity, of each young European.
partly but not fully compensates for having fewer young workers.
The.
substantial increase in life expectancy is an enormous benefit of modern.
medicine and of greater knowledge about healthy personal care.
However, longer.
expected lifetimes have greatly raised pension and health burdens in most.
European countries since their retirement ages have not increased in proportion.
to the growth in years lived of older persons.
The rigidities imposed by a single currency, the euro, will.
continue to cause frictions and difficulties for countries in the European.
Monetary Union.
Part of the problem, as in the current Greek crisis, is the.
separate fiscal regimes of member countries.
    But budgetary deficits and reckless borrowing are not the.
only forces that create tensions within a common currency.
Some countries using.
the Euro will at times experience severe shocks to their economy that create.
unemployment and deficits in their foreign trade accounts.
Economically weaker.
countries with own currencies usually respond to such shocks by devaluating.
their currency, as Greece frequently did in the past when it had the drachma.
Devaluation is not available to individual countries within.
the euro monetary union.
They have to adjust to bad shocks to their individual.
economies either through increased unemployment, reduced wages, or migration of.
some unemployed workers to countries that are doing better.
These adjustments.
are difficult for Greece, Italy, Spain and other weak members of the EU because.
their labor markets are inflexible, and because many workers in these countries.
are reluctant to migrate elsewhere, partly because they would give up generous.
benefits.
States of the US also have a common currency, and also face.
state-specific shocks since they specialize somewhat in different commodities.
and services.
However, the difficulties states face in adjusting to their.
economic shocks are reduced by the much greater flexibility of US than European.
labor markets, and the willingness of many unemployed Americans to move to.
states that are doing well.
Apropos of comparisons between US and Europe, the US faces.
many of the same problems as Europe, but generally they are in a more muted.
form.
The US has more flexible labor markets, lower marginal tax rates, fewer.
invasive regulations, a smaller welfare state, higher birth rates, greater.
immigration, more rapid incorporation of immigrants into the general economy,.
greater encouragement to starting new businesses, greater competition, and many.
other economic advantages.
Nevertheless, the US has large fiscal deficits, and.
large health care and retirement obligations that will be growing rapidly over time.
To manage effectively a growing federal government debt, it.
is essential that the growth in entitlements be reduced, in part by raising the.
age of retirement and of access to Medicare.
It is also crucial that government.
policies encourage more rapid economic growth of the American economy.
Unfortunately, this is not true of many policies proposed or implemented during.
the past 18 months.
These include, among many others, higher income taxes on.
corporations and on persons with bigger incomes, government regulation of pay,.
especially the pay of executives, health care “reform” that will raise, not.
lower, government spending on healthcare, special subsidies to various unproven.
green technologies, so-called job creation bills that create few jobs per.
dollar spent, and more aggressive anti-trust actions against successful companies,.
such as Google.
These and other policies will reduce US economic growth at a.
time when faster growth is more necessary than ever.
Sorry for this late post  Gary Becker.
The April US employment report gave mixed signals.
The good.
news is that employment grew by 300,000, and the employment gain in March was.
revised upwards from 160,00 to 230,000.
But in seeming contradiction, the unemployment.
rate also rose by two percentage points, from 9.7% to 9.9%.
Which of these.
figures gives a better indication of the speed and breadth of the American.
recovery from a deep recession?.
The employment figures are consistent with the solid growth of 3.2% in.
real GDP during the first quarter of 2010.
Economists trust employment data more than unemployment datat since the latter is subjective, as.
unemployment figures depend on how many persons are actively looking for work.
The.
unemployment rate excludes men and women who lost their jobs but have given up.
finding new ones.
It also excludes potential new entrants to the labor market.
who would like to be employed, but are not actively looking for work since they.
do not expect to find anything.
Such an explanation of the difference in the.
change in employment and the change in unemployment would suggest that the.
underemployment rate fell since the measure of underemployment includes people.
whose hours have been reduced, or who are working part-time because they cannot.
find full time work.
Yet contrary to these expectations, the reported.
underemployment rate also increased, from 16.9% to 17.1%.
In most other respects, the anatomy of unemployment has been.
no different during this recession than other severe recessions.
Most of the.
unemployed are young and have limited education and other skills.
Long term.
unemployment-those unemployed more than 6 months- now accounts for almost half.
the unemployed, up from 40% in February of this year, and from 22% in February.
of 2009.
As is typical during serious recessions, long-term unemployment grew a.
lot as the recession became more severe and prolonged.
The fraction of the.
unemployed who are long term unemployed usually rises even after a recovery.
begins since the unemployed who have not been able to find jobs for many months.
are among the least likely to find employment during the early stages of a.
recovery.
Employment has been growing more slowly than is typical.
during this recovery.
Usually, an economy recovers faster after severe.
recessions than after mild recessions because greater pent up demand by.
consumers and investors accumulates during severe recessions.
For example, the recovery.
was very strong in 1983 after a prolonged recession when unemployment peaked at.
10.8% in December of 1982, higher than the peak unemployment rate of 10.2 in.
October 2009.
The recovery was even sharp during the Great Depression years of.
1934-36 until a second severe dip began in 1937.
GDP grew sharply not only during the first quarter of this.
year, but even more rapid at 5.6% during the last quarter of 2009, and decently at.
2.2% during the third quarter of 2009.
So GDP is growing at reasonably good.
rates, although it is not booming.
GDP grew, for example, considerably faster during.
the all the quarters of 1983 after the severe recession that peaked in December.
1982
The difference between the much faster rates of growth in GDP than in.
employment during much of the Great Recession, and so far during the recovery.
period, is the result of the continuing improvement in labor productivity, measured.
by output per employee or per hour worked.
The typical pattern during most recessions is for measured.
labor productivity to fall     a    s.
good employees are kept on even though they do not have much to do, and as.
fixed capital is underutilized.
Yet productivity continued to grow during most.
of this past recession.
A common explanation for this improvement in.
productivity is that businesses tried to squeeze more out of their employees.
and capital because times were bad.
However, times are bad during all serious.
recessions, yet measured productivity usually falls.
The EU has had a more.
serious recession in GDP than did the US, yet EU countries followed the typical.
patter with reductions in labor productivity during the recession.
This growth in labor productivity during the recession of.
2007-09 suggests that unemployment may fall more slowly than is typical after a.
severe recession because growth in GDP will be achieved in good part through.
further improvements in labor productivity.
Why the recovery in employment and.
in unemployment has been relatively slow, given the severity of the recession,.
is not completely clear, but I believe one factor is the uncertainty about the.
policies that Congress and President Obama are impatient to implement.
Among the issues of concern to businessare how severe will be the new.
regulations of the financial sector? Will taxes be raised on individuals with.
higher incomes and corporations? Will a stiff carbon tax be introduced? Will.
trade unions be encouraged? Will the Justice Department adopt a new approach to.
anti-trust policy that is less pro consumer and more pro competitors of.
successful businesses? Will caps and other restrictions on the pay of top.
executives be continued and expanded? Members of Congress and persons close to.
President Obama have discussed these and other possible policies that may have.
discouraged many businesses from rapidly increasing employment and investments.
in capital.
To be sure, other uncertainties are likely also affecting.
business hiring, such as whether the EU will experience a double dip because of.
its sovereign debt crisis, or whether China will have to cut back because of.
excessive inflation and structural defects.
But the US government does not.
control most of these other uncertainties.
It does control its own policies,.
and they should be pro a private enterprise competitive economy rather than anti.
big and small business, and pro big unions.
Bubbles in prices of stocks, houses, or other assets are.
usually defined to mean sizable and somewhat prolonged deviations in these.
prices from the fundamental determinants of the prices.
These price deviations.
are supposed to get larger and larger until the bubble bursts, and then price.
rather abruptly go back close to the levels expected from fundamentals.
Do.
bubbles so defined exist? I believe they do, although I applaud economists who.
work hard to find explanations of such price movements in more subtle changes.
in fundamentals.
But we do not have good explanations for when bubbles.
arise and when they end.
Bubbles depend on expectations that get out of whack and.
become self-fulfilling for a while.
In recent years, one of the most glaring.
examples of what appears to be a bubble is the pricing of young Internet and.
biotech companies during the period 1995-2000.
Many companies in these fields.
that had no earnings or even any sales, and objectively had little prospects of.
earning anything in the reasonable future, were deluged with money from venture.
capitalists and others.
Their stocks if they went public had enormous market.
values relative to any likely discounted earnings.
After a few years the market.
realized the folly of what had been happening, the bubble burst, values came.
back to earth, and most of these companies went out of business.
The boom in housing prices in the United States that started.
in the late 1990s, and peaked in 2006, is another example of what looks like a.
bubble.
According to data that Karl Case and Robert Shiller compiled, real.
housing prices in the United States went up on average by about 10% a year for.
six or seven years, and then crashed after 2006 to erase much of the previous.
gain.
Neither increases in construction costs nor in overall population levels,.
two major fundamental determinants of housing prices, appear capable of.
explaining these price movements.
Some of the price rise is surely explained by.
low interest rates on mortgages and low down payment requirements, but part of.
the bubble mentality was the willingness of lenders to give ridiculously.
generous terms to many buyers who had little ability to withstand any even.
moderate shocks to their economic circumstances.
The most plausible view of asset price bubbles is that the.
price increases of an asset are supported by expectations of even further price.
increases that makes it worthwhile to buy and hold the asset at prices that far.
exceed the prices determined by the fundamentals.
A sophisticated and.
attractive version of this argument is that social interactions produce large.
and cumulative changes in prices from modest initiating forces.
It is well.
known in social interaction theory (see, for example, the book Social Economics.
by Gary Becker and Kevin Murphy) that a “social multiplier” can magnify small.
initial changes in demand for a good or asset into large changes in prices or.
consumption.
According to this argument, suppose a “few” participants in.
say the housing market begin to expect significant price appreciation, perhaps.
due to low interest rates.
Their expectations then influence the expectations.
of others through a “contagion” or social interaction, process.
As more and.
more persons expect housing prices to rise, this leads to expectations of even.
greater housing price increases, and a bubble in housing prices starts.
The.
bubble would end when expectations about price increases become even a little.
pessimistic since then price levels would seem much too high, and price.
decline expectations could spread through the populations.
Prices may then fall.
abruptly to earth.
Although I find a social interaction approach to bubbles.
appealing, it does run into several difficulties.
Why do not enough savvy.
investors see through what is going on, and build up large short.
positions.
These short holdings would prevent a bubble from getting out of hand because they in effect.
increases the supply of the asset to help offset much of the unrealistic.
increase in demand? Some investors like John Paulson did take short positions.
in the residential housing market and made fortunes, as this theory would.
predict, although Paulson did it very indirectly through mortgage-backed.
securities and swaps.
However, papers in finance point out that in many asset.
markets it is difficult to take large short positions on the future prices of.
these assets.
Such difficulties would limit how much short arbitrage occurs.
(see the classic paper by Andrei Shleifer and Robert Vishny “the Limits of.
Arbitrage”, Journal of Finance, 1997).
However, if only small initial shocks are required because.
of the magnification produced by social interactions, why do not bubbles occur.
even more frequently in markets like housing? The national housing indexes that.
Case and Shiller compiled show only a few episodes over the past century when.
major deviations from fundamentals occurred at the national level-the Florida.
land boom of the 1920s was a local, or at most a regional, phenomena.
Moreover, if the social interactions explanation is right,.
bubbles should also happen in a downward direction, so that prices could.
continue to fall   below   levels.
justified by fundamentals.
National housing prices have basically never been.
significantly below levels expected from construction costs and other.
fundamentals.
Prices below fundamentals have persisted for years in declining.
cities, as Edward Glaeser of Harvard has shown, but these are not examples of.
bubbles.
Rather, they reflect the slowness in the rate of depreciation in the.
excess housing found in declining cities.
Perhaps downward bubbles are.
generally less common because it is easier to take long rather than short.
positions, so that arbitragers can more easily buy assets in sufficient.
quantities to keep prices from falling too much below the fundamental.
determinants.
If only small initiating and terminating forces are needed.
for bubbles to start and end, then it is easy to understand why bubbles occur,.
and why the start and end of bubbles are so difficult to predict, either by.
market participants or government officials.
Some economists have suggested.
recently- discussed in the May 8 issue of The Economist- that governments try.
to take actions, such as countercyclical taxes on real estate, that prevent.
bubbles, in particular housing bubbles, from getting out of hand.
The papers.
The Economist cited appear to misuse the “externality” argument for.
government actions in the housing market, but in addition I am highly skeptical.
that government officials can succeed where profit-seeking market participants.
fail.
At least in the US, the vast majority of government officials involved.
encouraged rather than tried to moderate the housing bubble.
I believe the best.
contribution public policy can make to the control of bubbles is to follow.
steady well-defined rules of behavior, such as Taylor-type rules, or capital.
requirement rules, that at least prevent political pressures from exacerbating.
any bubbles that do develop in housing and other markets.
Throughout history people who make good profits during.
economic crises have been condemned as “speculators”, and used as scapegoats,.
often by the very governments whose policies caused a crisis.
These speculators.
have been imprisoned, and sometimes even put to death Successful speculators,.
however, usually dampen fluctuations in outputs and prices, and help provide.
markets where companies can hedge risks that accompany their business.
activities.
Posner’s definition of speculation as bets placed on future.
prices of assets or commodities is good enough for my purpose.
A speculator in.
the oil market, for example, would buy some quantity of oil contracts at a.
given price with the expectation that he will sell these contracts in the.
future at a sufficiently higher prices than he paid to justify interest.
carrying costs, and other costs of holding these contracts.
If successful he.
makes a profit.
At the same time, however, he would serve two socially useful.
functions.
He would raise the demand for oil now, and thereby raise present oil.
prices.
When he sells his long contracts in the future he would raise the.
supply of future oil, and hence lower future oil prices.
In this way, he would.
contribute to greater stability of oil prices over time.
Speculators also provide futures, or hedging, markets for.
oil and other producers of commodities and assets.
These producers may not want.
to bear the risk of what future spot prices will be, so they may contract in.
futures markets to sell their future outputs at market-determined prices.
They.
sell in part to speculators who hope to profit from any difference between the prices.
in futures markets and actual future prices.
When prices of oil, natural gas, copper, food, and other.
commodities rose sharply during the period 2004-08-oil reached a peak of over $145.
a barrel in 2008- politicians, the media, and many others blamed speculators in.
these markets for the severe price increases.
Of course, no one credited.
speculators with the sharp fall in these prices during the past couple of years,.
for it has been obvious that the worldwide recession was the main cause of this.
steep fall in commodity prices.
It should have been equally obvious that.
booming world demand by China, the US, and other countries mainly explained the.
run up in commodity prices during the boom years prior to the world recession.
As the world economy continues its recovery from the crisis, commodity prices.
will continue to rise again, with or without speculators.
Oil has already.
recovered from its bottom of about $45 a barrel in 2009 to reach over $80 a.
barrel in recent months.
Speculators who made money on the run up in oil and other.
commodity prices went long; that is, they bought oil and other commodities- commonly.
through financial assets in futures markets- and they sold their assets in the.
future at higher prices.
They profited by buying at lower prices and selling at.
higher future higher prices, but their purchases and sales helped to even out.
commodity prices over time.
That is, successful speculators tended to help.
commodity markets by leveling somewhat the movement of commodity prices over.
time.
Speculators who went short say in the oil market during the long period.
of run up in its price tended to lose money because they raised the effective.
supply of oil at an earlier time in order to buy oil back at higher prices at a.
later time.
Their short sales and subsequent purchases increased rather than.
decreased the magnitude of price increases over time.
To be sure, speculators who shorted oil not long before it.
reached its peak price in 2008 made money if they continued their short.
positions until the sharp fall in oil prices after the world economy crashed.
Yet these short speculators also helped stabilize oil prices by lowering them.
before they peaked through their shorting activities, and then helping to raise.
oil prices somewhat after prices collapsed by covering their short positions.
Similarly, speculators who went long on oil shortly before the peak in oil.
prices lost money because they bought at higher prices than they were able to.
sell at after the crash.
These speculators exacerbated the fluctuations in.
prices since they helped bid up oil prices further when they were high, and.
helped lower them further when these prices were low.
As a good rule of thumb-there are some exceptions to this.
rule- speculators in competitive speculation markets, whether long or short,.
contribute to a more efficient functioning of the economy when they make money,.
and they help make the economy less efficient when they lose money.
Yet it is.
precisely the speculators who make money who are attacked by political leaders and.
others, not those who make bets that steer an economy in inefficient directions.
and also lose money for themselves.
Applied to the financial crisis, if when housing prices were.
rising so rapidly, more speculators had been shorting the housing market, or.
shorted mortgage-backed securities whose value depended on what happened in the.
housing market, their actions would have reduced the sharp increase in housing.
prices, and reduced the subsequent steep fall in these prices.
Therefore, it.
was the absence of sufficient short speculators when commodity and asset prices.
were rising sharply that helped widen the run up and eventual collapse in these.
prices.
No amount of writing by economists will eliminate the.
hostility to individuals who make lots of money when times are bad.
Still, in.
designing policies to reduce the future severity of financial and other.
economic difficulties, it is important to continue to emphasize that.
speculation serves a useful social purpose, especially when the speculators are.
making profits.
The dotcom boom at the end of the 1990s was a classical and magnificent bubble.
Venture capitalists and other investors were throwing tens, and often hundreds, of millions of dollars at Internet startups and fledgling biotech companies that usually were not making profits, and frequently did not have any sales.
The bubble burst in 2000, and the huge valuations placed on these companies disappeared, along with many of the companies.
It is only a decade later, but a second dotcom boom has begun, and some early signs are surfacing of a possibly another bubble.
This boom is being fueled mainly by social networking companies like Facebook, Twitter, and LinkedIn, and also by Chinese Internet companies.
Other Internet companies, like the Internet phone and video company Skype, are also in the mix.
Microsoft recently purchased Skype for $8.5 billion, which is ten times Skype’s sales, and several hundred times its operating income last year.
During the dotcom frenzy of the ‘90s, tech companies that were traded publicly, usually on the Nasdaq, had greatly inflated valuations.
Share prices were often immediately bid up by more than 100% after tech company shares started trading on public exchanges.LinkedIn is one of the few social networking companies that have had an IPO, and its market value already has soared.
LinkedIn started trading on the New York Stock Exchange on May 18 at a share price of $45 that valued the company at about $4.3 billion.
Its price rose the next day to close at $86 per share, almost double the offering price.
It now trades at around $88 per share.
The company had revenues in 2010 of about $243 million, but indicated in its filing that it did not expect to make profits this year.
Facebook and Twitter have not yet had IPOs, but they are actively traded in secondary markets.
In an excellent discussion in its May 14  th   edition of the boom in tech stocks, The Economist shows that Facebook is valued on this secondary market at over $75 billion, and Twitter at almost $8 billion.
These are enormous valuations relative to the sales and profitability of these hugely popular social networking companies.
Adding to the froth in the tech market is the successful listing of many Chinese Internet companies on either Chinese or American stock exchanges.
To be sure, China has almost 500 million Internet users, and this number is still growing rapidly, but the valuations place on these tech companies is quite high relative to their sales, and much higher relative to their profits.
Does all this add up to a new bubble in the making? I would like to believe that a company like Microsoft, which has had so much success in the past, knows what it is doing in paying an apparently very high price for Skype.
But Microsoft has stumbled badly during the bad decade or so as it tries unsuccessfully to compete against Apple and Google.
This suggests there is a reasonable chance that Microsoft is stumbling again as it desperately tries to find its way.
Recall too that Rupert Murdoch, an enormously successful investor in newspapers, television, cable, and film companies, apparently greatly overpaid in 2005 for Myspace.com, an online social networking company.
The present situation is not yet close to the situation in 1999 and 2000, when tech stocks listed on the Nasdaq had risen to ten times their prices in 1995.
Still, if Microsoft and Murdock paid inflated prices for Myspace and Skype, it would be no surprise if other investors who have more limited business experience with Internet companies would have inflated expectations about future earnings prospects of these companies.
In trying to determine the likelihood of another bubble, there is on the one hand, the large worldwide growth in the number of Internet users since 2000, and the improvement in the business models of online companies.
This might well mean that the present situation is very different than the bubble in the late 1990s.
But there also is, on the other hand, the present love affair with social networking companies, which could mark the beginning of another bubble in tech companies.
The prospects of a bubble, therefore, are uncertain at present, but if these high valuations of social networking and other online companies continues and worsens, a bubble could build that would cause great harm not only to careless investors, but also to the many basically solid social networking and other new tech companies.
The federal government subsidizes basic and applied research on both the quality of life and the length of life.
An example of research on quality is the efforts to find implantable artificial kidneys that can replace dialysis for persons with severe kidney disease since dialysis is a limited and very confining procedure.
Research into finding cures for breast and prostate cancers exemplifies research on extending the length of life.
It might seem clear that research on extending the lives of frail persons over say age 80 does not produce much value to these persons or to society, but economic analysis of the “value of life” shows that this conclusion is far from obvious.
The main criterion used to measure benefits from all kinds of medical advances is how much individuals affected by these advances, and society as a whole, would be willing to pay for them.
Clearly, reducing the incidence of Alzheimer’s disease, or finding drug substitutes for dialysis, would add great value to individuals who would have been victimized by Alzheimer’s or would have been on dialysis.
As Posner indicates, however, this does not necessarily imply that putting lots of time and money into developing ways to extend the lives of old people is worthwhile, particularly those who are frail.
On the one hand, the health care delivery systems of the United States and of many other rich countries do not seem able to prevent newly developed expensive drugs, costly surgeries, and other medical interventions from being used to prolong the lives by a tiny amount of very sick elderly persons.
It might be better if research spent on these kind of medical innovations went instead to improving the quality of life for other elderly persons, or to helping reduce death rates from cancers, cardiovascular diseases, and other major killers.
On the other hand, even old and frail men and women are often willing to pay a lot for rather small improvements in their expected lifespan.
Economists have estimated how much individuals must be paid to be willing to work at jobs with higher death rates, to avoid being involved in deadly traffic accidents, or to take on other life-threatening risks.
After manipulating these willingness to pay estimates, the conclusion is that the statistical “value of a life year” to a young or a middle aged American is about $120,000.
This is far higher than average earnings in any year- about $45,000 for men who work full time- because the value of life estimate includes the value placed on the many hours not spent at work, and on other sources of utility.
The present value of a reduction in the probability of dying now and at each future age would be worth more to younger persons since older individuals have fewer years of life remaining.
But is the value of a “life year” also worth less to the old and perhaps frail? The answer to that is less obvious than may seem (the following analysis is based on work in progress, referred to by Posner, by Kevin Murphy, Tomas Philipson, and myself).
Presumably, frail elderly people tend to receive less utility from a year of their current life since their lack of health prevents them from greatly enjoying their leisure time and consumption of different goods.
However, the utility cost of any time and money they might spend on prolonging their lives is also lower for them.
The fundamental measure of the value of a life year is the ratio of the utility gained to this marginal utility spent on prolonging life.
This ratio could even be higher for the old and frail than for healthy younger persons.
In addition, since old and frail people have only a short remaining lifetime, the fear of dying, long recognized as of great importance by novelists and philosophers, is more immediate to them than to younger persons.
Their fear of dying could make old people quite willing to spend liberally to delay their deaths even by a few months.
Finally, as Posner recognizes, the old would be willing to spend most of their wealth to prolong their lives even by a little bit if they value their lives by a lot more than they value any bequests they would leave to children or others.
Of course, Medicare, Medicaid, and employer health insurance distort many health care decisions in the US since sick individuals mainly pay not their own money, but the monies of taxpayers or of other employees.
Medicare, for example, presumably leads to too much spending on the very old because the government ends up financing the great majority of this spending.
This is an important determinant of the actual spending on the health of the elderly, but I have argued that many of the old and frail would be willing to spend a lot of their own money to prolong their lives even by a small amount.
“Poor countries cannot afford democracy” is a common refrain suggesting that poor countries need strong and authoritarian leaders to overcome the various forces that kept them poor for centuries.
In apparent support for this claim is the fact that the great majority of rich countries are mainly democratic.
Yet, while the effects of democracy on economic performance are controversial, democracies can have some economic advantages for poor as well as rich countries.
The actual effects of democracy on the economy and other aspects of life should be compared not with an ideal form of government, but with various governments that do not have a free press, do not allow open competition for political office, do not have widespread suffrage, and lack the other institutions and freedoms that define democracies.
As Winston Churchill famously said, “"No one pretends that democracy is perfect or all-wise.
Indeed, it has been said that democracy is the worst form of government, except for all those other forms that have been tried from time to time." This is from a House of Commons speech on Nov.
11, 1947 that was delivered about two years after he was defeated in an early post- World War II election.
Many studies have tried to isolate the effects of democracy compared to authoritarian systems of government on economic development, inequality, education, and many other factors.
Since it is very hard to separate the effects of democracy from that of many other variables, these studies fail to reach conclusive results.
The tendency, however, is to find that once other suitable factors are taken into account, there seems to be only a weak relation between long-term average rates of growth in GDP and whether countries are democratic.
Democracies do appear to encourage broader investments in education, and education does help promote faster economic growth.
While some authoritarian leaders greatly improve their economies, they are not the rule.
For every example of a dictator like Pinochet and Chiang Kai Shek (in Taiwan) who produced fast economic growth, there is a Stalin or Idi Amin in Uganda with dismal economic policies.
Similarly, not every democracy handles the economy well.
India, for example, has been a vibrant democracy since its independence in 1947.
This democracy during its first 40 years produced slow growth under a socialist government, and then India transited to much faster economic growth after the government shifted toward more market-friendly economic policies.
While average rate of growth do not appear to differ much between democracies and authoritarian regimes, the variability in performance does differ more among authoritarian governments.
China has had remarkable growth since the 1980s, but the prolonged devastation and hardship produced by China’s “great leap forward” (when millions of farmers starved to death) and its Cultural Revolution would unlikely have occurred in a democratic country like say India.
Nor is it likely that say Cuba and many African nations would have suffered so long with such terrible economic policies if they had reasonably democratic institutions.
One reason why persistent economic distress is less likely in democracies is that a free press would publicly report the distress and severely criticize the economic policies causing it.
Similarly, political candidates would openly attack policies that lead to prolonged economic crises, and they would often be voted into office with a mandate to change the policies.
Some economic commentators use the strong correlation at any moment in time between wealth of countries and democratic governments to argue that democracy causes greater wealth.
To be sure, many long-term democracies, such as the United States and Great Britain, grew very wealthy.
So too, however, did countries like Taiwan and South Korea that started to grow rapidly under dictatorships, but became democracies, some rather quickly, when they became richer.
The sociologist Seymour Martin Lipset many years ago concluded from an examination of historical evidence that growing wealth mainly encourages democracy, rather than visa versa.
I believe he had basically the right interpretation of the data correlating wealth with democracy.
Especially in the modern world, as people get richer they travel more, learn more through newspapers, television, and the Internet about what is going on in their own and in other countries, and communicate by phone, email, texting, and in other way.
People in wealthier countries want freedom not only in economic choices, but also in social and political life.
These aspirations are not compatible with governments that censor what people read and hear, that try to suppress open discussions on politically sensitive subjects, and suppress challenges from political candidates outside of the officially recognized parties.
So yes, poor countries can afford democracy, as long as they use their democratic government to promote economic freedoms.
Unfortunately, many poor countries, including democracies, fail to do this.
President Obama and members of Congress are calling for a sharp reduction in the substantial direct subsidies to American oil companies.
Many countries also give an indirect subsidy to oil producers and refiners by subsidizing the purchase of gasoline.
In Saudi Arabia, for example, subsidies have reduced the price of a liter of gasoline (1 gallon equals about 3 ¾ liters) to 12 cents, which had made gasoline there cheaper than bottled water.
The largest subsidies to gasoline are usually found in oil producing countries: Saudi Arabia, Iran (although the Iranian government greatly reduced gasoline subsidies in 2010), Russia, Venezuela, Indonesia, and the UAE.
Yet, the economic case for either direct or indirect subsidies to the production and refining of oil is quite weak.
One argument commonly made for subsidizing gasoline prices, especially when, as at present, oil prices are rising rapidly, is that this helps the poor.
Yet these subsidies disproportionately favor the middle classes and the rich since poor families in general, and especially those in developing countries like Indonesia, Egypt, and Iran, are much less likely to own cars, and the poor drive fewer miles with the cars they do own.
Since subsidies lower the retail price of gasoline, this increases the demand for gasoline.
Especially after subsidies have been in place for a number of years, the response of demand to lower gasoline prices is substantial as consumers drive more miles, shift consumption toward gas-guzzlers, keep older cars on the road longer, and make other adjustments that increase the consumption of gasoline.
Government-owned oil producers in countries that subsidize the purchase of gasoline must divert more of their production to domestic use, and hence are prevented from getting the world price for this oil used domestically.
Subsides obviously harm poor countries like Egypt that have subsidized gasoline so much that it has gone from being self-sufficient in oil to becoming an importer of oil.
The United States and other developed countries like Japan and those in Europe tax rather than subsidize gasoline consumption.
The US is also a large producer of oil, and as I indicated at the beginning, the US does directly subsidize oil producers.
Although estimates of the exact value of these subsidies vary, most analysts put them at several billion dollars per year.
One justification frequently given for subsidizing domestic producers of oil is that this increases domestic oil production at the expense of imports.
Greater domestic production is considered valuable because of national security concerns about the availability of imported oil during world crises, especially oil from the unstable Middle East and from Russia.
However, a fiscally better way to meet national security concerns would be to tax oil imports rather than subsidize domestic producers since an import tax would bring in additional tax revenue, whereas subsidies to oil companies are financed by tax revenue.
Also better than subsidies to oil producers would be for the US to encourage rather than discourage offshore drilling for oil, and greater drilling on government-owned lands.
President Obama has just indicated that he is taking steps to allow greater oil and gas drilling offshore and on public lands.
From an American national security point of view, the development of effective hydraulic fracturing, or “fracking”, methods to recover natural gas from rocks deep underground is a godsend since the US has enormous reserves of such gas-among the two or three largest in the world.
Some states are encouraging greater natural gas production through fracking, although others have severely restricted the use of this procedure because of environmental concerns.
Fracking pumps enormous amounts of water deep underground, and this could contaminate water supplies, although the level of this risk is still controversial.
As this discussion indicates, energy policy depends on more than national security concerns since global warming and local pollution caused by fossil fuels are also important.
Domestic oil may be better than imported oil from a national security viewpoint, but it is worse from a pollution perspective since producing and refining oil causes local pollution.
Domestic natural gas produced through fracking methods directly causes some local pollution, but it is less harmful to the environment than domestic coal, which is the main alternative to natural gas for electricity generation.
A potential alternative to greater domestic production of fossil fuels is much greater output from other sources of energy, like nuclear power, wind, and solar power, which all cause little pollution and are domestically produced.
The governments of the US and of many other countries already heavily subsidize wind power and solar energy.
Nuclear was making a return to popularity, but the disaster in Japan has as least temporarily greatly stalled its return.
Some subsidy may be justified for these alternatives, but energy from either wind or solar is unlikely ever to be produced at a reasonable cost on a large enough scale to replace fossil fuels as the major source of energy.
I still support expansion of nuclear power, but the safety issue clearly needs further attention.
It would be preferable to limit subsidies to wind and solar, and increase government support of basic research on various alternative ways to either produce energy, such as with batteries, or contain the pollution from oil, coal, and natural gas.
The private sector generally has weak incentives to work on basic research since the results of such research are not patentable.
Clearly, governments have very imperfect incentives as well, but still some government help to the private sector seems warranted for basic research in the energy field that is looking for effective ways to reduce pollution and find alternative sources of energy.
World population grew by almost 300% during the twentieth century; over the same time period, world per capita incomes grew by about 400%.
This association of sizable increases in world population with large increases in per capita incomes should continue to the end of this century.
Forecasts of the world’s population only a few years in the future are generally quite accurate because the number of births and deaths during the next few years are largely determined by the existing distribution of the number of people at different ages.
At the same time, forecasts of the population 50 or more years into the future are notoriously inaccurate because of difficulties in predicting changes over a long time period in birth rates, and to a much lesser extent, also in death rates.
In particular, one cannot take seriously the UN’s median forecast of 10 billion persons by the end of the century.
For this forecast assumes that birth rates in high fertility countries will not decline during the next half-century.
Since it is highly likely that these countries will raise significantly their per capita incomes and education of their women, their fertility rates will fall, probably drastically.
If so, world population in 2100 would be well below 10 billion people.
However, for the sake of this discussion, I assume that the UN forecast is approximately correct, so that about 10 billion people will inhabit the earth by the end of this century.
Posner mentions various likely benefits of a much larger population, such as greater demand for and supply of innovations in the medical and other sectors, and greater world specialization by skill.
Few countries have experienced sustained declines in their populations since the beginning of the 19  th   century.
The substantial world growth in per capita incomes during the past 150 years has been associated with growing world populations.
I believe that declining populations are bad for long run economic welfare.
If I am correct, countries such as Russia, Japan, and Germany, with fertility rates that are far below replacement levels are likely to face an unattractive economic future unless either they take in enough immigrants to make up for their low fertility levels, or they have large increases in fertility rates.
Given the sharp rise in food prices during this first decade of the 21  st   century, it would appear difficult to feed adequately a much larger and richer world population.
Yet, unlike say the production of copper, no natural limits sharply curtail the amounts of food that can be produced.
Food output will expand with a growth in the amount of land devoted to food production-currently agriculture takes a small fraction of the world’s arable land.
Also, the world can invest much more in fertilizers and in improving food technology, so that greater output can be squeezed out of each acre used to grow corn, wheat, soy, dairy, meats, and other foods.
Greater demand for water due to larger populations and greater wealth would make clean water scarcer.
This could produce a water shortage unless countries began to price more efficiently the water used in agriculture and industry, by far the largest water users.
With sensible prices, the available water should be sufficient to satisfy all essential water needs of a much larger world population.
An increase from 7 to 10 billion people on the planet will significantly raise population density in many parts of the world, and thereby increase the potential for severe outbreaks of communicable diseases.
However, cities like Hong Kong show that it is possible even with current knowledge to control the spread of disease in densely populated communities.
As knowledge of how to track and combat diseases greatly improves over time, the medical challenges created by densely populated areas should be reduced even further.
A larger population combined with growing per capita incomes would increase global warming and worldwide pollution.
Although the severity of the global warming problem by the end of this century is not fully established by climate science, the world should be prepared to meet various worst-case climate scenarios.
This would require the development of mitigation techniques that can be rather quickly ramped up in case global warming turns out to be a severe problem (see the analysis in Becker, Murphy, and Topel, “On the Economics of Climate Policy”, The B.E.
Journal of Economic Analysis and Policy, Volume 10, number 2).
Such technologies are certainly achievable by the end of the century with substantial private and public investments in developing new methods to capture and store various harmful gases emitted by fossil fuels.
If world population grew to 10 billion by the end of the century-an unlikely outcome- that would present considerable challenges.
However, greater population would add real benefits as well, and I am inclined toward the view that the benefits will exceed the harm.
I agree with Posner that companies should not be forced to provide health insurance for all their employees since some employees may not want such insurance--for example, they may get it from a spouse.
I also agree that co-payments should be required from employees since otherwise they have a strong incentive to use excessive medical care.
Some of the older companies with generous health insurance plans, such as those in the automotive sector, now face staggering health expenses, in part because their plans had negligible co-payments by employees.
However, even employee co-payments of 10 or 20 per cent--which is at the high end--may not provide sufficient incentive for them to economize on health spending.
An important improvement is health savings accounts (HSA), which were authorized by Congress in 2003 for everyone not on Medicare who has a health plan with high deductibles, such as $1000 for an individual and $2000 for a family.
A family can make an annual tax-free contribution to its HAS that cannot exceed its deductible on its health plan, and is subject to an upper limit-- in 2005 the limit for families is $5250.
If in any year they spend less on medical care than they put in, they can carry the balance forward, and invest the remainder on a tax-free basis until age 65.
No further contributions are allowed once a person reaches age 65 and usually enrolls in Medicare.
Remaining balances on an HSA can then be used as a retirement annuity.
This annuity is taxed without penalty as resources are withdrawn for spending on non-medical expenses.
HSAs provide a strong incentive to economize on medical expenses in any year since unspent amounts can be carried forward to future years when possibly more important medical problems arise.
They can also be carried into retirement and used as a supplement to retirement income.
As a result, HSAs give families a much stronger reason to scrutinize whether various medical expenses are really necessary since they would be trading off present care for future care and other future benefits.
Although co-payment medical systems also provide some incentive to economize on spending, most of the additional expense would be borne by the medical insurer, such as his employer, HMO, or insurance company, since the co-payment rate is a fraction of the total.
HSAs provide stronger incentives to use medical care efficiently because all dollars saved today by the insured can be used for medical care in the future.
Since an HSA requires a large deductible, they are best when combined with a form of catastrophic insurance; that is, medical insurance that pays only for large, expensive, and unusual medical problems.
For this reason, and to cut down free riding by the uninsured on taxpayers, I believe everyone should be require to have catastrophic medical insurance--with the very poor covered by Medicaid.
The premium on such catastrophic coverage might be allowed to be deducted from taxable income, the way HSA contributions are.
Although employers are increasingly providing HSAs, families that start them on their own would receive the same tax benefits as when they are provided by employers.
The United States' system of employer provided health care is not the usual one in most of the world.
It was given a boost during World War II because employers could offer this "fringe" benefit to help get around controls over wages during a tight labor market with strong competition for a limited pool of labor.
It remained afterwards because the growth in income tax rates gave an increasing advantage to any system that allowed premiums for health insurance to be provided tax-free.
Prior to the passage of the 2003 law on HSAs, individuals and families who purchased health insurance on their own were at a disadvantage compared to employee health insurance since they could not deduct their health insurance premiums unless they itemized their medical expenses.
This advantage explains why employers provide the vast majority of health plans for persons of working ages.
But now an HSA provides an alternative that allows tax-free contributions to medical accounts that can be independent of employment.
An HSA combined with catastrophic health insurance provides a very good system of health coverage.
Catastrophic plans also need not be taken through an employer but could occur through a fraternal organization, church, professional association, or other group that gains the economies of administrative scale from group coverage, and can average risks of serious illness among different members.
The establishment of HSAs provides an opening wedge into removing the special privileges granted to employer provided health insurance.
The next step would be to remove the tax advantage from all employer plans except HSAs, and except perhaps catastrophic health coverage if contributions to non-employer catastrophic plans are also tax-free.
In our last posting, I argued that many mentally and physically healthy older persons in developed nations retire earlier than is socially efficient.
Since retirement benefits are not sensitive to the accumulated social security taxes that a person pays on his or her earnings, workers who become eligible to retire often find the improvement in retirement benefits from working longer too small to provide enough incentive to continue working.
We come back to the retirement issue this week because I discovered during a just concluded trip to Japan that this country has taken the lead in encouraging much later effective retirement than other developed nations.
The system in Japan is a bit complicated, but has several important features that could be implemented in the United States and other nations.
The Japanese approach also has implications for many comments on our discussion last week- I respond to these separately.
The official retirement age at medium and large Japanese companies is 60 for both men and women, and it is quite rigidly enforced, even for top executives.
This retirement age is close to the lowest among rich countries, with official retirement in the United States being about five years later at age 65, and the average among 30 OECD member nations being about 64.
As Posner and I discussed in the previous entry, the American Age Discrimination in Employment Act of the early 1990‚Äôs even prohibits mandatory retirement for professors and a few other occupations.
Most Japanese do not stop working at age 60.
The OECD reports that Japanese men generally continue to work until almost age 70, and the average retirement age of women is only a few years younger.
These retirement ages of both men and women are the highest among all OECD nations that include not only the United States, but also the nations of Western Europe.
I was initially puzzled by these OECD data for Japan since they suggested much later retirement ages than I presumed from my erroneous belief that actual retirement ages were close to the official ones.
But Japanese specialists on older workers indicated to me that their numbers are similar to those of the OECD.
According to these Japanese sources, about half of all men aged 65-70 are working, and so too are about one quarter of men between 70-75.
Hence they too estimate an average retirement age of near age 69.
Even when they stay at the same company after age 60, which is fairly common, workers and executives are placed at lower level jobs with significantly reduced pay.
Others go to smaller companies with lower pay, although perhaps in comparable positions that they had in the larger companies that had employed them for many years.
In all cases they work at their new jobs for a fixed term, usually five years.
Upon finishing that term at age 65,they tend to move on to other jobs, also with a fixed term, and frequently with a further reduction in their earnings.
What spurs the Japanese to work beyond the official retirement age is partly that they usually are in good health, and do not look forward to about 30 years of retirement without much to do.
However, they also continue to work because retirement benefits from the government and private companies are modest, even for higher-level executives.
Retirement income of about $2000 per month is at the high end, so most workers who retire at 60 receive much less than that.
They decide to work in their 60's and their 70's in order to supplement greatly their incomes.
In this way the Japanese system enables men and women to keep working to relatively late ages while at the same time providing flexible earnings and activities of older workers.
In effect, this system recognizes that while older workers generally remain productive in the modern era of good health, they may not continue to merit the earnings reached after many years of employment.
Some economists have attributed mandatory retirement to the need to move older workers out of the labor force because they are paid more than their contribution to production.
Whether or not this interpretation of mandatory retirement is correct, the Japanese system does provide flexibility in both the earnings and occupations of older workers while still mandating official retirement at the early age of 60.
The Japanese system where employees past age 60 sometimes work for lower pay at the same company that had employed them would not be possible in the United States and some other countries because of legislation that prohibits alleged discrimination against older workers.
The combination of legislation that prevents companies from lowering the earnings of older employees, and of legislation that prevents mandatory retirement in some occupations, creates a major rigidity in the market for older workers.
In several crucial respects the retirement system of many European countries is the opposite to that of Japan.
For example, the official retirement age of men in Belgium, German, and the United Kingdom is 65, five years higher than in Japan.
Yet, actual retirement ages are considerable lower in these countries than in Japan.
For example, the typical age of retirement is 59 and 61 in Belgium and Germany, respectively.
Effective retirement ages are also below age 60 in Italy, France, and several other Western European countries.
In these countries inflexible labor markets make it difficult for older persons to find work, and generous benefits encourage retirement at even earlier ages than the official age.
Early ages of actual retirement and generous retirement benefits contribute to the very serious problems faced by the social security systems of most West European nations, and to a lesser extent of the United States.
By extending their actual retirement ages to the Japanese levels, these nations would go some ways toward solving their problem of financing old age benefits.
The Japanese intrinsically face a tougher retirement problem than most other member nations of the OECD since they have one of the lowest birth rates in the world, the oldest life expectancy, and virtually no immigration.
As a result, about 40 per cent of the Japanese population is expected to be aged 65 or older by the year 2050, the largest fraction of elderly among OECD countries.
The continued employment of most of their men, and to some extent their women, well beyond the official retirement age of 60 has helped to meet, although it has not solved, Japan‚Äôs challenge of a rapidly aging population.
Still, however, their flexible approach to the employment of older persons provides an excellent example to be emulated by other nations faced with a rapidly growing elderly population.
The eminent domain clause of the Fifth Amendment of the U.S.
Constitution states that "Nor shall private property be taken for public use, without just compensation".
This clause allows private property to be taken for public use, but requires "fair" compensation.
The clause raises three major questions: what is "public use", what is "fair compensation?", and is the principle of eminent domain desirable in a modern economy? I briefly discuss all three questions.
PUBLIC USE.
The recent 5-4 Supreme Court decision in   Kelo v.
City of New London   elaborated on the court's interpretation of "public use".
The majority argued that it meant "public purpose", even if the project is undertaken primarily by private companies and individuals, as long as it produces general benefits in the form of increased economic development, greater tax revenue, and the like.
The minority opinion written by Justice O'Connor considered this interpretation to be excessively broad, and argued for a narrower interpretation, but her opinion did not provide a clear criterion for narrowing it.
The Institute of Justice, representing the 15 homeowners who opposed the city‚Äôs plan to raze their homes, wants to limit the clause to situations with actual ownership or use by the public.
Examples acceptable to the Institute include construction of roads or public utilities, although courts in the past have allowed a much broader interpretation of the right to eminent domain.
It is difficult to establish a simple dividing line between what is and what is not a public use.
Since private companies are involved in building roads, running electric power plants, and other public use projects, why is that fundamentally different from using eminent domain to authorize construction of private baseball stadiums, or private business redevelopment in a poor neighborhood?.
Although the majority opinion by Justice Stevens argues the reasonable position that the decision-making power in specific instances should be left to state and local governments, the power to condemn property allows a government to avoid the need to demonstrate that a planned development will actually raise economic value or other benefits.
The best judge of this is the market test of whether the new owners could fully compensate the old owners and still benefit, yet the right to eminent domain means that a public project can avoid having to pass this test.
FAIR COMPENSATION.
To me, the only reasonable interpretation of "fair compensation" is the worth of property to the present owners.
This often is greater than  the highest bids for the property in the marketplace.
For example, one of the 15 homeowners who objected to selling her home to the city of Bridgeport was born there 87 years ago.
Clearly, the house was worth more to her than the city‚Äôs assessment.
Why should she be forced to sell at a price that could be way below its full value to her?.
A second problem with the fair compensation test is that large property owners usually do better in the litigation over compensation than do small owners.
The reason is that larger owners hire better attorneys and spend in other ways to increase their compensation.
In the Kelo case, the Institute of Justice, a non-profit libertarian NGO, came to the defense of the 15 small property owners, but that usually does not happen.
A PhD study years ago by Professor Patricia Danzon of Wharton showed that smaller property owners generally receive lower compensation relative to market assessments of value than do large owners.
The true picture is probably much worse since she did not have data on the subjective value of having lived in a home for a long time.
IS EMINENT DOMAIN DESIRABLE? In addition to analyzing where to draw the line in deciding what is legitimate "public use", we should ask whether the line should be allowed at all.
Is eminent domain a desirable principle in the 21st century? In the 18th, 19th, and early 20th centuries, governments did rather little, so there was not much to fear from great abuse of the eminent domain constitutional clause.
In fact, the first real eminent domain case was not decided until 1876.
Now, however, government at all levels do so much that the temptation is irresistible to use eminent domain condemnation proceedings to hasten and cheapen their accumulation of property for various projects, regardless of a projects merits.
Without the right to eminent domain, governments would have to buy property in the same manner that private companies often accumulate many parcels to create shopping centers, factory campuses, and building complexes, like Rockefeller Center.
There are difficulties involved in combining separate parcels into a single more extensive property, but whey should that be made too easy, as through a condemnation proceeding?.
To be sure, property owners may have incentives to free ride and hold out, particularly when their homes or businesses help complete a larger property, as in the property needed to construct a road.
But usually a road can take competing paths, a power plant can be built in different locations, and so forth, so that buyers, government or private, can use the leverage from competition among sites to reduce the advantage of holding out.
And sometimes they can build around stubborn holdouts, as happened when the property to build the privately accumulated Rockefeller Center was put together.
I am not claiming that a system without eminent domain would work perfectly--it would not.
But modern governments have more than enough power through the power to tax and regulate.
Although eminent domain can be considered just another (but highly intrusive) form of regulation, condemnation is too powerful and easy a regulatory form.
Power corrupts is an old saying, which explains why condemnation has indeed been frequently abused (see Martin Anderson's classic study,   The Federal Bulldozer  ).
It allows governments to avoid the market test of whether a proposed project adds value in the sense that a project is worthwhile even after owners of property are bought out through regular market proceedings.
Eliminating the eminent domain clause from the Constitution is obviously not feasible in any foreseeable time frame.
But it is still useful to discuss the benefits and costs of this clause, or to question whether it is desirable.
A negative answer might help provide guidance to judges, legislatures, and voters in determining how far they want to push the privileged position of property accumulation for an alleged.
I would like to respond briefly to a few comments on my posting on retirement in Japan.
I never argued Japan has an ideal system in labor markets or elsewhere in the economy.
In fact, I have been critical of many aspects of the Japanese economy.
But they do seem to have made a better adjustment than Western nations to the trend toward increased life expectancy with better health at older ages.
Americans do not seem to value leisure more than the Japanese.
In fact, American men and women now work longer hours per year at most ages prior to 65 than Japanese men and women do.
I believe many more Americans would also want to work past age 65 mainly if the social security system and other retirement systems were more flexible, and perhaps also if the labor market handled older workers a little better.
No one would be required to work past age 65.
But with a growing recognition that the present social security system is not likely to pay future retirees sufficient benefits, many more workers are likely to want to continue beyond 65.
Japanese fertility is low in rural as well as urban areas.
Since the rural population is a very small fraction of the total, Japanese fertility is dominated by urban fertility.
Later retirement does not automatically solve the medical care problems for older persons.
But it would be reasonable to combine later retirement with later ages of qualifying for medicare.
That would help the medicare system a lot.
I will try to respond to a few of the many good comments on my discussion last week of retirement.
One person asked if I believe I am capable of doing work of the same quality that I had done in the past.
My answer is no--age brings valuable experience, but at some point one loses some capacity for originality.
Some of you believe that early retirement is necessary to provide full employment.
Yet labor markets can employ the vast majority of people who want to work if conditions of employment are flexible.
Japan has low unemployment rates with high levels of employment among the elderly (see my posting this week) because it allows flexible earnings of older workers.
Other nations could employ many more of their older workers if they allowed compensation to be market determined.
What is the so-called "natural" rate of unemployment is somewhat controversial.
A couple of decades ago, it was believed to have risen in the United States to 6 per cent or more.
But experience of the past 20 years suggests that the United States can achieve full employment with 5 per cent, or perhaps even lower, unemployment.
I agree that flexibility is necessary in dealing with older (and other) workers since the deterioration in their health and other measures of productivity varies greatly.
That is why I believe conditions of employment of older workers should not be determined by legislation--which tends toward rigid rules--but by market forces.
I am no fan of age discrimination legislation, such as the ADEA in the United States.
After all, older workers are among the best paid of all workers and have among the lowest rate of unemployment.
African Americans by contrast have relatively low pay and high unemployment rates.
So the argument for anti-discrimination legislation in their case has essentially no applicability to older workers.
As one of the commentators responded, pensions generally now vest when an employee is discharges, so there is no saving in pension costs by firing older workers.
Health costs may be another matter, but that is a further reason to separate medical insurance, and its tax benefits, from employment.
I have always believed that economists have to consider nonmaterial aspects of life like character, love, and the like.
Economics can deal in a useful way with these traits.
Some of you claim that capitalism and capitalists are the source of inequality and hard-hearted treatment of older workers.
I do not believe that is correct.
Inequalities, for example, under Mao and Stalin were enormous, including those in the economic sphere.
And employee-owned companies, such as United or Avis, have usually fared very badly because of incompetent management.
I have only a few reactions to the comments.
The various state mandates on health coverage by insurance companies are a major problem in the American health insurance system that I did not address.
One person mentions that New York State prohibits large deductions to individual accounts.
I was not familiar with this, but I am not surprised.
However, I am not sure that this is consistent with the HSA Act of 2003, which requires large deductions in order to implement an HSA.
Catastrophic care is clearly important, but is by no means the dominant source of medical care.
 In fact, it is generally not important for families up to age 60 or so.
These families would gain the most from the combination of an HSA with catastrophic coverage.
If my proposal for catastrophic insurance is implemented, I am convinced many insurance companies would jump into this market, unless price controls over premiums made this type of coverage uneconomic.
One of the interesting aspects about drugs is that costs are typically per pill rather than per unit dosage.
I regularly cut pills in half to take advantage of this.
I am surprised more people do not do this.
I have no personal interest in the proposals I made.
The health insurance at my university is fine, but I hope it moves to an HSA system.
More generally, I always prefer a large deductible on every type of insurance when I am given a choice.
Individuals are much better at covering small loses than are insurance companies, and can take various efficient actions to minimize their expenditures on such loses.
This is why HSA‚Äôs are such a good idea.
Someone asked my opinion of the attempted takeover of Unocal by the state-owned Chinese oil company, China National Offshore Oil Corporation.
I do not see any good reason to oppose it.
If they can run this company more efficiently, the United States is better off, not worse off.
We went through such fears about Japanese takeovers of American companies during the 1980‚Äôs.
Mainly, they overpaid for these companies, and in effect transferred wealth to Americans!.
The Japanese Keiretsu have declined a lot in importance since economic stagnation set in there during the early 1990‚Äôs.
No, our organization of business is totally different, so I do not see the slightest risk of such a development in the U.S.
Posner discusses many of the thorny issues involved in the.
allocation of funds by The Department of Homeland Security.
to American cities to combat terrorism.
I will concentrate.
my comment on how to align the incentives of cities to those.
of the country as a whole.
Posner points out that there is  a conflict between the.
incentives of cities and those of the federal government.
When cities do more to prevent terrorism against their.
residents and buildings, they also help the country fight.
terrorism against other cities and towns without getting.
compensated for that help.
He also indicates that if the.
federal government simply gives money to cities, the cities.
may reduce the amounts they would otherwise spend fighting.
terrorism.
Both problems arise in many infrastructure and.
entitlement programs, such as road-building, Medicare for.
the poor, and the fight against contagious diseases.
These sources of the tendency for cities to underspend on.
anti-terrorist activities can be at least partially overcome.
if Homeland Security did not outright give various amounts.
to different cities, but instead relied on the method used.
to combat similar issues that arise with other grant.
programs.
The Department of Homeland Security should offer.
to give cities a certain number of dollars for each dollar.
they spend on antiterrorist activities.
For example, if a.
city spent $30 million, they might get an additional $60.
million from the federal government.
In this example, a city.
would get to spend $3 dollars for each dollar they used from.
their own funds to fight terrorism.
Federal matching of this type discourages cities from.
cutting back on their spending to fight terrorism since they.
lose say $3 dollars for each dollar they cut back.
Matching.
grants also induce cities to give de facto recognition to.
the fact that each dollar they spend helps residents of.
other cities as well by improving the overall American fight.
against terrorism.
The ratio of federal spending to city.
spending should be a measure of the ratio of the benefits to.
other cities compared to the benefits to the city spending.
their own money to fight terrorism.
The matching need not be independent of how cities spent.
their own monies.
Cities are more likely on their own to.
spend on salaries than on capital goods that are produced.
elsewhere since spending on employees gives jobs to local.
residents.
The matching grants should then be oriented.
toward capital spending rather than labor spending.
In fact,.
the Homeland Security program is so oriented, and that seems.
to me to make some sense.
However, matching grants, particularly if the ratio of.
federal to local contributions is large, can create the.
opposite problem from that created by outright grants;.
namely, cities may spend too much since their spending is.
multiplied through the amounts available in matching funds.
This is usually controlled by placing upper limits on the.
amounts that could be received in matching funds.
Cities.
that are especially attractive to terrorist attacks--such as.
New York and Washington--would spend more fighting terrorism.
even without federal grants.
Still, on their own they may.
not spend enough, so the upper limits they could receive in.
matching grants should exceed that available to say Kansas.
City.
One problem is that as coastal cities like Los Angeles, San.
Francisco, Boston, New York, and Washington became better.
prepared to fight terrorism, terrorists might shift inland,.
to places like Detroit, Chicago, Cleveland, Omaha, Topeka,.
and elsewhere.
As the bombing in Oklahoma City showed, even.
attacks in smaller cities cause considerable fear and.
consternation.
That is why a federal program has to be.
national, and target smaller places as well as larger ones.
Matching grants encourage smaller cities also to contribute.
to the fight against terrorism, and they will spend more.
when they become more vulnerable after the more attractive.
terrorist targets became better prepared.
So the system is.
partly self-correcting through the incentives that cities.
have to protect their own citizens.
But matching grants do not solve all the problems of how to.
best allocate limited federal funds.
So the federal.
government will still need some guidelines  that determine.
which cities should be given more Homeland money, although.
in a matched way.
A report due out at end of July on agricultural policies in countries that belong to the Organization for Economic Cooperation and development (OECD) quantifies the extensive government subsidies farmers receive in these countries.
These subsidies amount overall to about 29% of their farm revenues.
This per cent varies considerably: from highs of 68% in Switzerland, 64% in Norway, and 56 % in Japan, to "only" 16% in the US, and a relatively low 5% in Australia.
The beautiful views of cows and sheep on the very green Swiss mountains are courtesy of the Swiss government that pays farmers generously to keep these animals grazing on the mountains.
Developing nations object to the farm subsidies by rich countries because they make it difficult for farmers in their own countries to compete in the world markets for agricultural goods.
The European Union has high tariffs against farm imports from countries outside the Union, while the US gives significant export subsidies to its agricultural products.
Most rich nations have direct payments to farmers when agricultural production increases, and they also help subsidize the cost of water, seed, machinery, and other farm inputs.
Farm subsidies are the main complaint lodged by developing nations against the trade policies of developed nations in the ongoing Doha talks on more open international trade.
Richer nations in turn complain about the many barriers to imports of Western and Japanese goods erected by poorer nations.
Both sides are right, but the US and other rich nations should greatly liberalize their farm policies irrespective of whether developing nations lower their trade barriers.
The reason is not mainly to help poorer nations, although it would do that in a way that adds to world economic efficiency and trade.
Freeing agriculture would also help consumers and even many farmers in rich nations.
Whether subsidies to agriculture raise or lower prices to domestic consumers depends on the form the subsidies take.
Restrictions on imports of farm goods clearly raise domestic farm prices by cutting back access to farm products from more efficient producers in poorer nations.
Subsidies to farm exports also raise domestic prices by artificially diverting production from the domestic to the export market.
Subsidies to farm inputs like water encourage excessive use of water compared to other inputs.
This is partly through inducing farmers to shift production toward crops that use a lot of water, such as rice, and away from crops that use little water.
The result is lower prices for water-intensive crops, and higher prices for water-sparing crops.
The OECD report estimates that more than half of the farm subsidies in member nations are through policies that raise domestic prices of agricultural goods.
The argument is sometimes made that farm subsidies are desirable to encourage small farms, and the way of life on these farms.
Yet this claim is contradicted by the evidence available for many decades, and confirmed again in the OECD report, that the vast majority of subsidies go to the largest farms.
In many cases they are given to people who own but do not farm their land.
Another argument in defense of farm subsidies is that they contribute to a better environment.
Some of the subsidies may do this by reducing population density and pollution, but many others add to environmental damage.
For example, subsidies to irrigation and other water use by farmers is one of the major ways that fresh water is wasted.
Environmental and geopolitical arguments are used to justify the large subsidies to ethanol production from corn in the US.
Ethanol helps reduce the West's dependence on oil because ethanol is a substitute for gasoline.
GM and other companies are beginning to promote E85, which means 85% ethanol and 15% gasoline.
Automobile fuel tanks can easily be modified to take this combination, but the US still has only a small number of gas stations that have the expensive equipment to dispense highly ethanol-intensive fuel.
Ethanol not only reduces dependence on oil imports, but also ethanol based fuel cause less pollution than gasoline does.
Ethanol probably also uses less energy, although that is debated since both the plants that produce ethanol, and the fertilizers that help to grow corn, use considerable quantities of natural gas.
The US has subsidized ethanol production from corn primarily to help corn growers rather than to reduce energy use since it is combined with a steep tariff on imports of ethanol from elsewhere.
These imports would come mainly from Brazil that produces ethanol from sugar cane at a much lower cost than the US production from corn.
Instead of subsidizing domestic production of ethanol, a much wiser policy for the US would be to eliminate these tariffs and import ethanol from democratic and friendly countries like Brazil that can produce ethanol more cheaply.
The economic case for eliminating farm subsidies by rich countries is a compelling one since these subsidies are inefficient, generally raise food prices to consumers in these countries, and anger developing countries that see their natural markets blocked.
Yet while economists have been rather united in their criticisms of agricultural policies, the farm lobby has been powerful, especially in Japan and many European nations.
This is despite the fact that farmers in most rich countries constitute no more than a tiny percentage of the labor force.
It may seem paradoxical that farmers are typically rather heavily taxed in poor countries, like India and China, where they constitute a large fraction of the population, and are subsidized in rich countries dominated by cities and towns.
But the economic analysis of interest group politics demonstrates that small groups are often much more powerful politically than large groups, even in democracies where large groups would seem to command more votes.
The explanation is that small groups may be organized more easily-although farmers tend to be spread out geographically- and the per capita tax on others to finance the subsidy to small groups tends to be smaller than the per capita cost of subsidizing large groups.
Whatever the explanation, experience has shown that it is difficult to eliminate, or even greatly cut back, farm subsidies in richer nations.
There is more hope for being able to change the subsidies to ways that are less discouraging to agricultural imports from poorer nations, that do not mainly help richer farmers, and that do not raise food prices to consumers.
Possibilities include the equivalent of an earned income tax credit to fulltime farmers who make low incomes, lump sum income payments to farmers, and possibly greater support for education in farm areas.
While the best politically feasible alternatives to present policies are not so clear, it is obvious that the present system of farm subsidies in rich nations is a lightening rod for conflict in trade talks with third world countries, while they help their own farmers in highly inefficient ways.
There is a well-known conflict in privatizing a government enterprise between the desires to raise revenue from the privatization and to create an efficient enterprise.
Government revenue is increased by giving the privatized company a protected position against competition, while allowing other companies to compete vigorously against the privatized company increases efficiency.
Greater efficiency typically means lower prices for the privatized product, and hence lower bids for the enterprise to be privatized.
Governments often succumb to the desire to increase their revenue, which has caused the creation of monopolies in privatization programs all over the world.
I differ with Posner in believing that the revenue from a monopolized privatization would not be fully raised elsewhere if not raised from the privatization because it is difficult to tap other sources of revenue to substitute for foregone revenues from privatizations.
Put differently, governments end up with bigger total spending budgets when they increase their revenue from privatizations by giving privatized companies some monopoly power.
Still, I generally strongly support privatizations, even when privatized companies have monopoly power in setting prices and other conditions of the sale.
The reason is that other companies are more likely to find ways to compete against private monopolies than against government ones.
A very important part of this argument is that technological progress is faster with private monopolies than with public monopolies.
For example, ATT was a private regulated monopoly before the breakup of the Bells in the early 1980‚Äôs into competing entities.
The breakup was desirable, but still ATT was much more efficient than were the government run companies that dominated the telephone industry at that time in the rest of the world.
These and the arguments given by Posner strongly imply that highways, along with postal systems, trains, airports, ports, and other infrastructure, including even some security activities, should be privately rather than publicly operated.
The main challenge arises when it is more difficult to stimulate competition for the privatized company because of so-called "natural monopoly" conditions in the industry.
 Due to economies of scale, it may not be efficient, for example, to have another highway built across Indiana to compete against the Indiana toll road.
Yet even in that case, it would still be desirable to privatize the toll road, but controls could be imposed on the prices and other conditions that can be levied imposed on consumers by the privatively owned road.
Yet I believe that in the dynamic world we live in, natural monopoly considerations are less common than often supposed because new technologies and processes can bring competition to what appear to be protected markets if the profits are large enough.
In this way, the supposed natural monopoly position of traditional telephone companies due to the large fixed costs of a network of telephone wires has been eroded by the development of cable and its alternative wired network, and of course by wireless telephony and the use of the internet for phoning.
Roads and airports are examples of industries that pose greater challenges to create competition among private companies.
However, smaller airports in a region, such as the one at Gary Indiana, would be expanded to attract business from higher priced dominant airport in the same region, like O‚ÄôHare, if the dominant airport was charging excessive fees, and if both airports were privately run.
Even a second private toll road would be built to compete against at least part of a privatized toll road that was charging excessive fees, especially over the most densely traveled portions of the privatized road.
The theory of the efficient allocation of resources is radically changed when dynamic competition with induced technological progress is the framework of analysis instead of the traditional static theory of competition.
Dynamic competition analysis is more comfortable with accepting short -term monopoly power of privatized enterprises that are allowed to set their own prices.
The reason is that the monopoly profits from high prices by the privatized enterprise would stimulate other entrepreneurs to find ways to compete against the enterprise, and in this way claim some of the monopoly profits through lower prices and better service.
Natural monopoly looms large in the theory of static allocation of resources, but is considerably less important in the actual world because of technological progress that is induced by monopoly power and excessive profits.
When dynamic competition is effective, a public enterprise, like a toll road or the postal system, should be sold without any restrictions on future pricing, unlike what happened in the sale of the Indiana toll road.
I do not go so far as to claim that dynamic competition always arises in a powerful way to compete against privatized roads or other privatized infrastructure that have no restrictions on pricing.
But I do believe it is far more common and effective than in textbook discussions of competition and entry.
If that is the case, it would then pay to privatize most of the public infrastructure of roads, communication, mail delivery, electric power generation, and the like, with few controls over the prices that can be charged to consumers.
That would create some pockets of persistent monopoly profits, but it would take politics out of rate setting.
It would also stimulate the development of different ways to compete against what appears to be an unassailable monopoly enterprise.
I will briefly respond to some of the interesting comments.
Many politicians oppose privatizations because of the opposition from employees of the enterprises that might be privatized.
Employees have opposed every single privatization that I am familiar with.
The reason is clear: public companies have too many employees from an efficiency perspective, and the employees know this.
Also they have to work harder for lower pay when their enterprise becomes private.
Windows has a large share of the market, but Apple, Linus, and other systems limit the power of Microsoft's Windows.
Microsoft's power is in my judgment rapidly declining in the overall computer-internet market.
This is one of the best examples of the difference between static and dynamic competition.
The USPO illustrates the worst of public monopolies.
It has lagged virtually all the important mail delivery innovations in recent decades.
It is grossly overmanned, and its employees are often surly and unpleasant.
The need to subsidize mail sent to remote places is no justification for a public monopoly.
Such mail can be subsidized-if that is desirable- without having a public monopoly.
Simply subsidize Fed Ex or any one else for their deliveries to such places.
Take away the protection of the law and subsidies, and the USPO would collapse within a short time.
Many public institutions in higher education offer very fine products, but that is because they face stiff competition from each other and from private universities.
Eliminate that competition-as in Germany, France, or Italy- and one sees how ineffectual public universities become.
Phone service has become much cheaper, not more expensive, since the telephone market was opened up.
It is far cheaper to make long distance calls, including international ones, than it was before.
Imagine what the phone system would be like if ATT still had a monopoly: where would wireless, cable, and Internet telephony be? ATT would have used its political power to resist and handicap every one of these and other innovations.
During the past couple of week, the U.S.
housing market has had a record number of home foreclosures, a rise in delinquency rates on mortgage loans, and further declines in housing starts.
Default rates are especially high on subprime mortgage loans, which are loans to borrowers with poor credit histories and low or erratic earnings.
The greatly increased availability of loans to borrowers with bad credit was fueled mainly by five years of low interest rates.
Many lenders turned to what had been a neglected subprime loan market in their search for higher returns.
The rapid appreciation in housing prices, in good part itself the result of low rates of interest, also gave lenders confidence that they could recoup the value of their loans in the event of defaults and foreclosures.
In addition, new way of packaging mortgages and of combining them with other assets that reduce overall risk on portfolios with subprime loans lowered the risk of lending in the subprime market.
Members of Congress and others have called for much stricter lending standards for these loans, and sharper controls over the interest rates that can be charged.
But subprime loans have made home ownership possible for groups that cannot get mortgages in the prime lending market.
These recent criticisms of subprime loans- they were not much criticized while the housing market boomed- are reminiscent of the attacks in the '80s and '90s on the market for "junk", or low-grade, bonds.
New and untested companies often do not have enough collateral to satisfy the stringent criteria of commercial banks.
The development of the junk bond market enabled them to raise money from nonbank investors by issuing bonds that paid much higher interest rates than those on loans to prime companies.
These bonds enabled startups with few tangible assets to borrow outside the banking system by offering much higher rates to compensate for the greater risk.
Although junk bonds too were said, often by the competitive source of loans, bankers, to encourage undue risk-taking, such bonds have survived and even thrived, and not only in the United States.
Moreover, some of the companies, such as CNN and MCI, that financed their early development with junk bonds have become very successful.
The same type of considerations applies to families with bad credit histories due to low and uncertain earnings, poor resource management, and other factors.
Mortgages would not be available to these families to buy homes if lenders could only get the same interest rates and other loan conditions that they get from prime borrowers.
Like new companies with limited collateral that issued junk so that they could survive the competitive business atmosphere, the market for subprime loans made the dream of owning a home come true for thousands of families.
While the default rate on subprime housing loans is high compared to the past, and the higher rate of defaults have forced about 20 subprime lenders to either close, seek buyers, or raise additional financing, delinquencies and defaults on these loans are far from being the rule rather than the exception.
The fraction of subprime mortgage loans entering foreclosure in the first quarter of this year jumped to a 5 year high of 2.4 per cent from about 2 per cent in the last quarter of 2006.
This is a large percentage rise in the default rate, but so far at least the vast majority of subprime loans are not yet in default, and are being repaid.
The default rate on prime loans also jumped, to 0.25 per cent, high for this type of loan but only 1/10th the default rate on that for subprime loans.
The default rate on prime loans also rose by much less than the rate on subprime loans.
It is not surprising that lower quality housing loans would be more likely to go into default during periods of rising interest rates and a slowdown in the housing market.
Lower quality loans of all types are always more vulnerable to slowdowns in the markets that generated these loans.
Although many African American and other poor families became homeowners for the first time due to the development of the subprime loan market for housing, critics claim that many of these families were duped by misleading presentations of lenders into taking out short duration variable interest loans, loans with low down payments, or loans that were simply beyond their capacities to pay.
No doubt overly eager or unscrupulous lenders did sometimes misrepresent the difficulty of making payments to borrowers with little experience in financing home ownership.
However, intentional misleading presentations to families who were clearly unqualified to take on home ownership was not the norm but rather were exceptions.
The reason for my belief is not confidence in the morality of all lenders in the subprime market, but rather that delinquencies and especially defaults on these loans hurt lenders as well as borrowers.
As defaults have risen, and the increase in housing prices slowed dramatically- in many areas prices have been falling- it has become increasingly difficult to recoup the amounts loaned by repossessing houses and selling them off.
Moreover, in some states repossession of homes is difficult after owners declare bankruptcy.
The fact that the majority of the companies that specialized in lending in the subprime market have gotten into serious financial difficulties, and many have closed, indicates that lenders as well as borrowers were badly damaged by the collapse of the subprime market.
Both lenders and borrowers would have been hurt much more by the rise in interest rates and the end of the housing boom had the American economy not continued to have low levels of unemployment and growth in real GDP.
Posner raises an important issue: why do Americans (and persons of other nationalities) grieve so much when American military personnel (or the military personnel of these nations) are killed during military actions, even when those killed had volunteered for military service? In addition to the reason he stresses-the altruism of Americans toward their military personnel- I believe two other factors are important.
Although the pay required to attract volunteers rose after casualties began to appear in large numbers in Iraq, it did not rise by a large amount.
Yet even small increases in the probability of losing one's life are valued highly when young persons are asked to take on the risks found in different civilian occupations.
When directly applied to military risks, these estimates suggest that if the Iraq war increased the chances of dying to a typical new member of the American military force by one percent per year of service, this would require about a $3000 increase in pay for each year of service for each person in the military.
The amount would be considerably higher for those who knew they would be posted into military action in Iraq, and would be higher in general if one percent is lower than the true risk.
The actual increases that have been required to attract volunteers have been much lower than $3,000 per person serving in the military.
This suggests that those young men and women who have volunteered are attracted for other reasons than the higher compensation paid to undertake these military risks.
One compelling other reason would be patriotism on their part, and a resulting desire to serve their country.
Americans feel considerable indebtedness to its military personnel who lose their lives in combat when their enlistments have been due to such non-financial assessments of the risk to their lives from becoming members of the armed forces during wartime.
This indebtedness to those killed for volunteering as least in part for patriotic reasons would explain why there is considerable concern and regret over those who die while serving in combat zones.
The same concern applies to policemen who are killed in the line of duty because many are assumed also to be serving because of their interest in protecting the public from criminals.
This reflection on the motives for serving shows up in the difference in attitudes toward the usual volunteers for military service, and the attitudes toward "mercenaries".
A mercenary is assumed to be serving mainly for monetary reasons rather than for patriotism.
For that reason, their deaths causes less concern and mourning on the part of the civilian populations that they are protecting.
 To be sure, some of the volunteers serving may not have strong patriotic motivation, but they too gain sympathy since it is impossible to tell them from the very patriotic members of military service.
A second explanation for the great concern about those killed in Iraq is that volunteers enlist under the implicit expectation that the military will take appropriate steps to protect those serving in as effective a manner as possible.
There is a widespread perception that the war has been fought with inadequate understanding of the enemy, and insufficient protection of American personnel serving in combat-related positions.
That would mean the country has let its military personnel down.
This belief about inadequate protection of its military enlistees has led to guilt, and the "altruism" that Posner refers to, toward those serving and dying in Iraq while fighting a war that has not been conducted very well.
Economists have been emphasizing in recent years that that while cognitive abilities of individuals certainly raise their education and earnings, many non-cognitive skills are often more significant.
These skills include simple factors like finishing one's work on time, to more complicated ones like good judgments in making decision, or effectiveness at using talents of subordinates.
Posner argues convincingly that non-cognitive talents may be of greater importance in determining success at top-level government leadership positions than analytical brilliance and other cognitive skills.
He provides several explanations for the mixed success of cognitively able persons at important government positions, including limited extensive governmental experience- although not applicable, for example, to either Donald Rumsfeld or Richard Cheney- their reluctance to rely on the experience and knowledge of underlings, and the difficulty of using systematic analysis to evaluate the uncertainties in major government decisions.
The limited role of top analytical skills might explain why voters, as opposed to intellectuals, typically do not weight heavily the "IQ" of presidential candidates in  choosing whom to vote for.
The modest value of exceptional analytical skills should also imply that presidents would not place major emphasis on these skills when choosing their top cabinet officers and other high level appointees.
Although as Posner indicates, some presidents have appointed brilliant men who failed at major positions, on the whole brilliance is not the most important characteristic that presidents use in choosing their top appointees.
Of course, government leadership positions are not unique in requiring a much more varied set of talents than cognitive analysis.
Success at top business and academic administrative positions also depend on omplicated mixtures of different talents.
Cognitive brilliance is often not essential, and sometimes is even a handicap, in determining success at these positions as well.
Many of the most successful business leaders have not been brilliant at systematic analysis, and some cognitively highly able persons failed miserably.
Posner mentions Lawrence Summers, who was highly successful both as an academic teacher and researcher, and as a U.
S.
Treasury official, but had major troubles as president of Harvard.
Another example from the academy is George M.
Beadle, a Nobel Prize winning biologist who was a rather mediocre president of the University of Chicago.
To be sure, that many persons with exceptional analytical abilities fail at top leadership positions in large organizations may largely reflect the fact that failure, or at least mediocrity, is more common than success among heads of large organizations, whether it be government, business, or academic institutions.
I am confident of that claim with respect to universities, the organizations I know best, where inspired leadership has not been common.
A major reason for this must surely be the great difficulty in predicting how men or women would perform when they get promoted within an organization, or when they move in a lateral way from one organization to another.
The skills, for example, to succeed as provost of a university involves an ability to deal effectively with professors, to evaluate recommendations for professorial promotions and outside appointments, and to handle related faculty matters.
Many provosts use success at that position to become candidates for presidents of universities, but the talents required to succeed as president are quite different.
Presidents have to raise money, deal with businessmen, foundations, and legislatures, appoint deans, and make other basic administrative and organizational decisions.
How well someone performed as provost gives some but limited insight into how well they would perform at the different tasks required of a president.
This is even truer when they become president at a university different from the ones where they were provost.
With Hillary Clinton a very serious candidate for the U.S.
Presidency, Angela Merkel as Chancellor of Germany, and Segolene Royal who almost became president of France, women have clearly arrived as political leaders in Europe and the United States.
More to the point of this essay, the increasing role of women in political life is a reflection of the general education and employment advance of women in many countries.
Consider first education.
Men in the United States who were born around 1930 were far more likely than women born at that time to attend college, whereas among those born 40 years later, about 10-15 percent more of the women than men went to college.
Over twice as many men as women graduated a four-year college in that earlier cohort, while women in the later cohort were considerably more likely than men to graduate.
Put differently, whereas in earlier cohorts women were much more likely to drop out of college, this pattern has sharply reversed, so that male students now are more likely to drop out.
As a result of these trends, somewhere between 55 and 60 per cent of all students in American colleges are women.
The same general trends in educational achievements of men and women are found in other countries with advanced economies.
Nor is this trend restricted to advanced economies.
An article a few weeks ago in the New York Times indicated that female college students far outnumber male students in the moderately poor Moslem country of Algeria, and many more of the judges and lawyers there are female.
Even in the fundamentalist country of Iran, women now apparently outnumber men at universities, although shortly after the Iranian revolution in 1979, attempts were made to discourage women from getting a higher education.
The subjects studied by women in high school and college are also converging to those studied by men.
According to data presented by Golden, Katz, and Kuziemko (see "the Homecoming of American College Women: The Reversal of the Gender Gap in College", Journal of Economic Perspectives, Fall 2006 for these data, and some of the other data used in my discussion), girls are about as likely as boys to take physics and math courses in American high schools, and girls are more likely to take chemistry courses.
Girls have better grades on average at all levels of education, while the dispersion in grades and performance is greater for male students.
This means that male students are much more represented at the extremes of the school performance distribution: at very low as well as very high levels of school performance.
The propensity of women to go to college exceeds that of men in part because the financial gains from a college education compared to stopping education after high school have been higher for women than for men.
According to calculations by my colleague Kevin M.
Murphy, in 1990 college-educated women had average hourly earnings that were about 65 per cent higher than the average hourly earnings of female high school graduates, while the difference for men was only about 58 percent.
The financial gains to both men and women from attending college increased by a lot from the mid 1970's on, although after 1990 they increased more for men.
During the past 60 years in all economically advanced nations, and in most developing countries as well, women began to work much more in the economy, and they acquired significantly more schooling, partly because birth rates declined sharply.
As a result, women now have considerably more time that is free of household responsibilities.
The American and other advanced economies also shifted away from manufacturing and toward services, where women have always been more likely to find employment.
Discrimination in admissions to medical, law, engineering, and some other professional schools also declined, perhaps mainly under the pressure of the growing number of women who wanted to enter these programs.
About half the students at medical and law schools in the United States are female, and their enrollments in MBA programs and engineering schools are also increasing rapidly.
A larger fraction of employed women are now working full time compared to the situation 50 years ago.
For example, about two thirds of women who graduated college in recent years work full time compared to about one third a few decades ago.
The greater education and greater commitment to the labor force of women than in the past helped raise the annual earnings of women relative to men.
Some estimates indicate that wives earn more than their husbands in over 30 per cent of families where both work, and the fraction of families in which wives are the main breadwinner has been growing at a brisk pace.
Yet, women still on average earn less than men, and women are much less represented in the top deciles of the overall distribution of earnings.
The next couple of decades should see a narrowing of both these gaps, but will they be eliminated? If, as is likely, women will continue to take time off from work to care for young children, and to miss work when their children get sick or need other special attention, that would continue to reduce both their average earnings relative to men, and their representation in the top of the earnings distribution.
To be sure, the greater education attainment of women, and their better performance at school, would tend to raise their average hourly earnings above that of men.
Their better education and school performance would battle against their household responsibilities in determining the earnings of women relative to men.
Still, even if the average hourly earnings of women reached parity or surpassed that of men, it is unlikely even without discrimination against women that they will be as represented as men at the top of the earnings distribution.
For while combining household with market activities hurts average earnings, it is a really strong hindrance to having enough time to make that supreme commitment to work that is usually necessary to achieve great financial success.
The types of loans available to consumers have grown at unprecedented rates during the past 40 years.
These include credit card debt, expanded availability of mortgages, student loans, payday loans, reverse mortgages, and many other types.
The provocative social commentator and columnist David Brooks, in the article referred to by Posner, laments this development- he calls his column "The Great Seduction".
He believes that one of its main consequences is that individuals use credit to consume too much when they are younger instead of saving at these ages so that they can consume more at later ages.
Obviously, some individuals borrow too much, and get caught in a spiral of high interest rate payments, bankruptcy, and insufficient assets as they age.
Nevertheless, on the whole the growth of credit instruments available to consumers has been a positive development that helps finance investments in education and other human capital, and produces a more optimal consumption profile over the lifecycle.
In the earlier times mentioned by Brooks, many families were farmers with incomes that fluctuated greatly because of changes in the weather, and because of pests and diseases.
Urban workers also faced severe risks due to the threat of unemployment and other difficulties in labor markets.
Families had little opportunity to get commercial credit to help tide them over the bad times.
They had either to borrow from relatives, accumulate assets that could protect them against future risks, or suffer much during the bad times.
They would have saved less and welcomed credit cards, mortgages, and harvest loans as more effective ways to adjust to these risks.
Until the past 50 years, children from well off families had a large advantage in going to college because their studies were in large measure financed by their parents.
The great boom in college education (that we wrote about last week) has seen many more students from modest income backgrounds entering and often completing college.
They typically finance their education by working while in school and by borrowing with student loans and credit card debt, or their parents borrow in various ways to help them out.
Without such credit, many of these students would be unable to get the college education that is so crucial to success in modern economies.
The debt of college students does not simply pay for tuition, but also helps cover living expenses while in school.
College students earn little then and in the first decade or so after they enter the labor force, while they earn much more when they are older.
For this reason, the most forward looking and least impulsive college educated individuals want to borrow, not save, when they are young in order to raise their consumption then, and thereby help smooth out their consumption as they age.
In addition, most men and women have greater consumption pressures when they are in their thirties and early forties because they raise their children then, and often provide financial support to elderly parents.
Most young people who do not go to college are high school graduates, and they too have lower earnings and greater family responsibilities during their thirties and forties.
They also would like to borrow at younger ages to raise their consumption at these ages to more appropriate levels compared to their consumption when they are older.
Studies by my colleague Erik Hurst show that consumption of Americans beyond age 65 is generally not low relative to consumption at younger ages; apparently, they save enough when younger to enable them to consume generously when retired.
In earlier time, families had to save to provide for their old age consumption since social security and company pensions were non-existent.
A few other factors have contributed to the borrowing boom in recent decades.
The decline in family stability has reduced the access to credit from relatives during bad times.
Commercial credit has substituted for the family credit that was formerly available.
Improvements in the capacity of lenders to track and monitor their loans, and to compensate restaurants and other businesses for their short term loans to credit card users, has reduced effective interest rates to consumers on small loans much below what they were in the past.
Household Finance and other lenders of small amounts to consumers used to charge over 30 percent annual interest, and more when that was legal.
In a rational world, much lower interest rates on consumer debt would induce considerable additional borrowing, and it has.
Every new form of credit brings with it abuse from some borrowers and lenders.
This has clearly been the case with the expansion in consumer credit instruments, but the benefits from this expansion seem to have far outweighed the costs.
Increases in energy prices sharply accelerated during the past year, as the price of oil more than doubled, and gasoline prices in United States rose by 25 percent.
Responding to these price increases, Senator McCain and President Bush have called for an end to the 27-year old federal moratorium on offshore drilling for oil and gas in US waters, while Senator Obama supports a continuation of the ban.
McCain has also indicated that he is reconsidering his opposition to drilling in the Artic region of Alaska.
In another response to the energy price boom, Obama has proposed an excess profits tax on oil companies, while McCain has come out against such a tax.
What does economic analysis contribute to an evaluation of these proposals?.
Supporters of a continuation of the moratorium worry that offshore drilling and oil leakages will kill many fish, and damage beaches and other coastal areas.
These are potential risks, but whether to continue the moratorium involves a balancing of the advantages of drilling against environmental and other risks.
These risks have not been affected by the rise in energy prices, but the benefits from drilling clearly have increased.
Additional oil (and gas) from offshore drilling would lower US spending on imported oil, and thereby reduce the transfer of wealth from Americans to other oil and gas producers.
Larger domestic energy supplies would also improve energy security in the event of a disruption in the supplies of oil and gas from major producers located in places like the Middle East and Nigeria that have had terrorist attacks on oil production facilities.
Even if offshore drilling started tomorrow, it would take several years before actual production began since construction of platforms in deep water and installation of equipment take time.
The value of ending the moratorium now would depend not on energy prices and risks of disruption this year or the next, but on the situation beginning in several years and extending over the following decade.
Some oil specialists are predicting a rise in the price of oil to $200 a barrel during the next few years.
I have argued previously why such a large price increase is unlikely (see my post on May 11); indeed, oil may very well retreat from its present level of over $130 a barrel.
Still, as long as world GDP continues to grow over the next decade at a sizable pace-which is likely- the price of oil will remain far above what it was in the 1990's.
This means that the financial and other benefits from offshore drilling are likely to greatly exceed the benefits at the time the moratorium was imposed, for oil was then much cheaper even in inflation-adjusted terms.
The increasing share of imports in the oil consumed by the United States, and the rise in oil prices, explain why the value of imported oil rose more than five fold since the 1980s.
This is why cost-benefit calculations of whether to end the moratorium and allow offshore drilling have shifted in the direction of allowing drilling.
Although the risks of offshore drilling are much harder to quantify than the benefits, I believe the shift in the benefit-cost ratio has been large enough so that the time has come to allow drilling.
Norway and Great Britain, to take two examples, have allowed drilling in the North Sea for many years without suffering major environmental damage.
To be sure, in the end oil companies are the ones who have to decide whether the gains from drilling are worth the risks, including lawsuits if there are damaging oil spills, but these companies seem eager to start drilling offshore.
The proposed excess profits tax on the earnings of oil companies would discourage the search for additional oil, and hence would have the opposite effects on this search from a relaxation of the moratorium on offshore drilling.
An excess profits tax that is expected to persist for many years discourages further exploration for oil simply because much of the profits on new oil production would be taxed away.
In 1980, President Jimmy Carter introduced a windfall tax on oil companies to prevent them from profiting a lot from the high price of oil due to the Iran-Iraq war.
An evaluation by the Congressional Research Service, a think tank that provides reports to Congress, concluded that the tax significantly reduced domestic oil production and raised oil imports.
Disillusionment with the tax led to its abandonment in 1987.
Yet the lessons from this fiasco have been forgotten, for since the post-Katrina rise in gasoline prices in 2005, members of Congress have made regular attempts to introduce legislation with a sizable excess profits tax on oil companies.
Even those Americans who worry a lot about global warming and other global pollution form the use of oil should be reluctant to discourage oil production offshore or elsewhere by American oil companies.
Lower production by American companies would cause a rise in the world price of oil.
Moreover, increased production by other countries would tend to offset reduced production by the United States, so that the effect on global warming and global pollution is likely to be modest.
However, the increase in wealth transferred from the United States to the Middle East, Russia, Venezuela, and other oil-producing countries could be substantial.
Time is the most precious resource of men and women, and even older children.
This is why it is disturbing that so much time is wasted through bad policies of the public authorities that manage infrastructure.
I have been bothered for many years by the tendency of local and state authorities to repair roads only during weekday daylight hours.
Presumably, that saved money through the avoidance of overtime and double time pay for night and weekend work, but it usually added many hours to travel times because of the huge traffic jams that were created during the most congested times.
Even modest estimate of the value of the time of those caught in traffic holdups would have easily exceeded the extra pay required to have work at night and during weekends when traffic is much slower.
Fortunately, recognition of the importance of the value of time has apparently increased in recent years since much more repair work now takes place at night and on weekends.
Yet few other efforts are being made to reduce the time lost due to heavy traffic on roads in major, and many smaller, metropolitan areas.
Traffic has grown in virtually all cities, with consequent greatly increased delays during commuting and other times.
Moreover, heavy delays are no longer found only while entering the central city in the morning and leaving it in the evening, as delays are also common while exiting a city in the morning and returning in the evening during the increasingly common reverse commuting.
The solution is not mainly new urban highways, which are expensive to construct and disturb the functioning of local communities, but through pricing traveling on roads that already exist in order to economize on the time of commuters and other travelers.
One important way to price roads and reduce the time of those caught in traffic delay is to introduce "congestion tolls" that vary with time of day and extent of the traffic.
London, England has been using congestion tolls for several years to reduce the heavy traffic during weekdays into and out of the center of London.
Despite some grumbling, this toll system has been successful, and is being extended to other parts of London where congestion is also a serious problem.
Mayor Bloomberg of New York has proposed similar tolls for entry into the busiest parts of Manhattan, but so far his proposal has been blocked by the state.
The opposition to traffic congestion charges is not based on concerns about the feasibility of such a toll system since London and several other cities have successfully demonstrated that modern electronic transponders make congestion charges easy enough to use and enforce.
Much of the reluctance comes instead from opposition to higher taxes in cities already burdened with heavy taxes.
Reductions in other taxes could offset a congestion tax to keep total city tax revenue unchanged, but experience shows that every new tax is usually only partially offset by reductions in other taxes, and that total tax revenue in fact increases.
Perhaps such opposition could be blunted if New York explicitly offered to combine a road congestion tax with compensating reductions in its local gasoline taxes to keep unchanged the total tax revenue collected from drivers.
Congestion tolls are more effective than gasoline taxes in reducing traffic during periods of heavy traffic since gasoline taxes do not raise the cost of driving by more during periods of heavy traffic.
Congestion tolls are probably also more effective in reducing local, although not climate-damaging global, pollution.
Similar reluctance to price the time of travelers appropriately is seen in the growing delays in air travel.
The Joint Economic Committee has estimated that the total cost of United States air traffic delays in 2007 may have been as large as $41 billion.
Almost a third ($12 billion) of that is due to the value the Committee places on the 320 million hours spent by air travelers during these delays.
As Posner indicates, $12 billion may underestimate the true time cost since it neglects factors like the cost of missing connecting flights.
On the other hand, it may overstate the true cost of the time involved since the Committee values this time on the average at about $38 per hour, or almost $80,000 per year for persons working 2000 hours.
That valuation would be too high if persons caught in traffic delays use their time to work on their computers or read for pleasure.
A new airport runway is almost finished at O‚ÄôHare airport.
However, before building new runways, busy airports, such as O‚ÄôHare, Kennedy and LaGuardia, and Los Angeles International, should start charging much more for the use of existing runways, and for take off slots during the busiest hours of travel.
This would cut delays, and the time and other costs caused by delays, by inducing airlines to shift some of their departure and arrival times away from the busiest and most expensive times.
To be sure, as Posner indicates, there is a coordination problem among the different airports connected by air travel.
Still, a city would encourage more travelers to use their airports if they priced takeoffs and landings better, so that travelers would spend less time in delays, and airlines would spend less on fuel, and the personnel used during delays.
The worldwide boom in college education during past several decades has been as remarkable as it was unexpected.
Many economists in the United States were claiming in the 1970s that college education was overrated, at least as far as its effects on earnings.
Yet starting in the late 1970s, the number of American high school graduates who went on for higher education began to grow at a reasonably fast rate.
Were these college students disappointed by the effects of their education on their subsequent earnings and other aspects of their life, or did the nay-saying economists just get it wrong?.
The evidence is now crystal clear that in fact college education turned out to be an excellent investment for the vast majority of these students.
Despite books like "The Overeducated Americans", published in the late 1970s, that argued that the earnings gains from a college education were in serious decline, the gains from attending and graduating college actually increased rapidly after 1980.
A natural interpretation of the increased enrollments in college is that expectations of improvement in their earnings, health, and other determinants of welfare attracted large numbers of Americans into higher education.
Supporting evidence for this interpretation is that the same trends in earnings and enrollments took place in the rest of the world.
The earnings gap between persons with university and high school education increased in the great majority of countries, more or less regardless of their level of economic development.
And as in the United States, the higher benefits from college stimulated sizable increases in the fraction of high school graduates who went on for further education.
For example, in the top half of countries as measured by per capita incomes, the average percent of 30-34 year olds with a higher education increased between 1970 and 2000 from about 12 percent to over 20 percent.
Lower income countries had similar increases, although poorer nations have much smaller fractions of persons with higher education.
In the great majority of countries, women increased their propensity to go to college much more rapidly than men.
This sharply reduced the gender gap in college education.
 In fact, more women than men are getting higher education in virtually all the rich countries, and also in many middle -income countries.
In the United States, a little under 60 percent of younger college graduates are now women, whereas in 1970 men were far more likely than women to start and especially to finish college.
Higher returns to college are an important immediate cause of this boom in the number of persons going to college in countries all over the globe and at different stages of economic development, but why did returns to college increase so universally? The answer must relate to general causes that were widely applicable.
One factor that immediately comes to mind is the sharp expansion during the past several decades in the amount of international trade, including a rapid growth in foreign direct investment (FDI).
The classical theory of international trade implies that in poorer countries with cheap low skilled labor, a growth in trade of goods and services should increase the demand for goods using relatively much of the low skilled labor, and trade should lower the demand for goods using the relatively expensive skilled labor.
Increased trade has the opposite effects in rich countries.
As a result, increased trade should raise the earnings of skilled workers relative to other labor in richer countries, but lower the relative earnings of skilled workers in poorer countries.
Yet the gap between the earnings of skilled and less skilled workers has tended to rise in poorer countries as well.
The growth in FDI helps explain this apparent contradiction to classical trade theory, for FDI tends to raise the demand for educated and other skilled workers in recipient countries.
Educated and other skilled workers become more valuable in developing countries when they import capital from the technologically advanced nations.
The newer technologies that have been developed during past three decades, such as the computer and the Internet, biotech, the mapping of the genome and other advances in medicine, and cell phones and social networking, also increased the overall demand for  educated persons.
Since the United States is the most important innovator in the world, and has one of the most efficient economies, it has experienced a particularly rapid widening of the college earnings premium.
Under the right circumstances, these newer technologies flow from the rich innovating countries, such as the United States and Japan, to developing and other countries.
Technologies may be embodied in internationally traded goods and services, or in capital transfers, or brought back by students who study in the innovating nations.
Since the international transfer of technologies is expedited by having a larger number of well -educated persons, the transfer of technologies also raises the demand for persons with higher education.
Many articles have complained that the increased benefits from higher education have contributed to widening inequality, not only in the United States, but in many other countries as well, including major developing countries like China and India.
The larger education earnings premiums certainly helped widen income inequality, but these larger premiums also raised the efficiency of investments in capital by raising rates of return on human capital.
Higher returns on capital obviously raise the efficiency of an economy.
The challenge to public and private policies is to increase the number of persons who manage to go to and benefit from college, for that would reduce inequality while raising the number of persons who benefit from the higher returns to a college education.
How to accomplish this is too large a topic to be considered in this discussion, but improving the preparation of disadvantaged children so that they can benefit more from schooling should probably have high priority.
Also important would be to increase the quality of schools available to these children by raising the degree of competition among schools.
The number of general-purpose newspapers has been declining in cities ever since the growth of television, and the decline accelerated after the Internet was developed.
The trend downward will continue, and perhaps even accelerate.
I do not see much of a future for the general-purpose hard copy newspaper that combines opinions, sports, advertisements, comics, and information.
A telling fact is that young people today do not read general newspapers, whereas they did in the past.
When I was a boy my father bought at least five newspapers every day, and I "read" (that is, looked mainly at sports and comics) three or four of them.
It is now rare to see anyone under age 30 reading the New York Times, Chicago Tribune, or any other major newspaper.
A teacher used to be bothered when bored students starting reading newspapers in class.
That is no longer a problem since they now turn to their computers and play video games or email friends.
I find it hard to reconcile the rapid decline in the number of newspapers with Posner's data suggesting that newspapers are quite profitable.
Declining industries, such as the American automobile industry, have always been associated not with profits but with substantial losses, as is happening to Ford, General Motors, and Chrysler.
There is no doubt that the many newspapers which went out of business did so because they were losing money.
Of course, the surviving newspapers tend to be the ones that are more profitable, but they too are experiencing financial problems.
They are cutting staffs, long-term owners are selling their papers to others- as with the Wall Street Journal and Chicago Tribune- and they are trying various approaches to deal with the tough competition from online advertisements and other online services.
The Internet has gravely wounded the newspaper industry because it provides information, opinion, and entertainment more frequently and effectively than newspapers do.
The Web offers as much sports news as desired, and presents the progress of baseball and other sporting in real time.
The weather is updated every hour, or more frequently, and so are stock market quotes.
 Online ads give pictures and personal information about individuals looking for jobs, and prices and other characteristics of products offered for sale.
Major as well as minor news stories, local and general news, and opinions on numerous issues are continually being presented.
A case still made for good newspapers and magazines is that they separate facts from opinions, and do enough checking to stand behind the materials presented as facts.
I do not know of anything comparable on the Internet, although the reputations of better-known bloggers do rise and fall with changing perceptions about their insights and accuracy.
Yet it is not apparent that the demand is very strong for this dimension of what newspapers have traditionally provided.
Newspapers are trying to strengthen their survival prospects by expanding online presentations, and combining these with print editions.
In the short run this may help them, which explains why all the major newspapers are moving aggressively to expand online materials, and widen their online customer base.
However, I do not believe this approach will succeed in the long run.
The reason is that the way newspapers bundle different services is not the right approach to online presentations that usually provide information about the weather on websites that are different from those used to discuss sports or present ads for cars.
Some online sites specialize in opinions about domestic politics, others discuss religion, some present pornographic pictures and films, while others focus on economic issues.
The traditional newspaper does not readily fit into this format, and so they are generally losing money in their online efforts.
This does not imply that online presentations in the future will continue to be organized in the same way as at present.
Perhaps the growing tendency for some websites to link to other sites will coalesce into organized multi-site presentations that deal with many different topics.
Already some subscriber-based sites collect and present the best blogs on different topics.
How that will evolve is not clear to me, but it is unlikely to develop into anything that looks like the conventional newspaper that has bundled news, information, and advertisements for hundreds of years.
The rapid and continuing decline in the number of major newspapers will be regretted mainly by older persons who are accustomed to reading several newspapers daily-my wife and I still subscribe to four and read others online.
However, by voting with how they use their time, the great majority of consumers clearly have shown that they prefer to get their information, entertainment, and opinions from television, and especially from the Internet, than from newspapers.
The best way to evaluate America's expensive health care system would be to estimate the effects of different kinds of healthcare on the quality and quantity of health for individuals of various ages, incomes, races, and other categories.
To my knowledge, no researchers have come close to doing this.
Instead, the American system has sometimes been found wanting simply because life expectancies in the United States are at best no better than those in France, Sweden, Japan, Germany, and other countries that spend considerably less on health care, both absolutely and relative to their GDPs.
Life expectancy is surely one supremely important measure of health since individuals in rich countries are willing to pay a lot even for small increases in their probabilities of surviving different ages (see the studies in the book "Measuring the Gains from Medical Research", ed.
By Kevin M.
Murphy and Robert Topel, 2003).
Studies show that an additional year of life is worth over $120,000 to the typical American adult, apparently also including older adults, where "worth" is measured by willingness to pay for a one-year improvement in length of life.
One can easily see without a lot of fancy calculations that the large sums Americans are willing to pay for improvements in health imply that they would pay a considerable fraction of their incomes in order to achieve significant improvements in their life expectancy, and also in their quality of life.
Similar conclusions apply to other countries since the willingness to pay in different countries for an additional year of life varies approximately proportionately to their per capita incomes.
Although such calculations show that improvements in life expectancy are worth a lot to most people, national differences in life expectancies are a highly imperfect indicator of the effectiveness of health delivery systems.for example, life styles are important contributors to health, and the US fares poorly on many life style indicators, such as incidence of overweight and obese men, women, and teenagers.
To get around such problems, some analysts compare not life expectancies but survival rates from different diseases.
The US health system tends to look pretty good on these comparisons.
A study published in Lancet Oncology in 2007 calculates cancer survival rates for both men and women in the United States, the United Kingdom, and the European Union as a whole.
The study claims that the most important determinants of cancer survival are early diagnosis, early treatment, and access to the best drugs, and that the United States does very well on all three criteria.
Early diagnosis helps survival, but it may also distort the comparisons of five or even ten-year survival rates.
In any case, the calculated five-year survival rates are much better in the US: they are about 65% for both men and women, while they are much lower in the other countries, especially for men.
These apparent advantages in cancer survival rates are large enough to be worth a lot to persons having access to the American health system.
Several measures of the quality of life also favor the US.
For example, hip and knee replacements, and cataract surgery, are far more readily available in the US than in Europe.
The cancer survival and quality of life advantages enjoyed by US residents indicates that Americans get something for the large amount they spend on health care, but they do not indicate that the bang for the health buck is greater in the US, or even that the US health delivery system is reasonably efficient.
Indeed, the American health system has several characteristics that may considerably lower its efficiency.
The American system ties medical insurance to employment by allowing company spending on medical premiums to be fully tax-deductible.
Companies introduced health benefits during World War II in order to get around wage controls to be competitive in attracting employees.
It was maintained as income tax rates increased during subsequent decades.
This employer-based system is partly responsible for the high number of Americans who have no insurance coverage, since many small companies do not provide insurance to their employees.
In addition, the system favors persons with high earnings since tax deductions for insurance premiums are worth more to them.
A much better approach, so far opposed by President Obama, would provide a certain number of dollars each year to every person-perhaps $2500- as tax credits to be used only to buy health insurance and pay for medical care.
Unused amounts in any year would be folded into health savings accounts (see my discussion of these accounts and other health care issues in posts for April 15, 2007 and January 13, 2008), and unused balances in any year would be carried over to spend in later years.
This approach gives the same tax incentives to everyone, and it would encourage individuals to economize on their health care spending since unused balances would be available to spend in the future.
 It would also induce many persons without health insurance to get some since otherwise they lose access to this tax credit.
Health insurance is expensive in the US partly because most states mandate coverage of various health expenditures that have little to do with insurable risks.
For example, the majority of states require insurance companies to cover the medical costs of all birth deliveries, even though these deliveries are mainly planned, and the expenses are known beforehand.
The proper insurance approach would cover only unusual birth expenses caused by complications in the delivery and post delivery stages.
By getting rid of unnecessary mandates, health insurance would become much cheaper, especially in states with the more onerous mandates.
The President wants to establish government-run health insurance companies to compete with private companies.
This is a bad idea because experience from government-owned enterprises in other sectors conclusively shows that that they are run inefficiently, in good part because of political interference.
Moreover, government enterprises do not compete fairly since they generally are subsidized, often generously and in hidden ways.
Private health insurance companies in the US compete very strongly, although they are hampered by mandates and other regulations that frequently have nothing to do with effective and honest coverage of health needs.
Since the document laying out the President's financial reform package is 88 pages, I will concentrate my evaluation on a few basic issues.
1) Do the reforms rely mainly on regulatory discretion or on new rules? 2) Is there adequate attention to the issues raised by financial institutions being "too big to fail"? 3) Is it proposed to micromanage the operations of financial institutions and individuals? 4) Most important, are these reforms likely to greatly reduce the likelihood of another financial meltdown? I take them up in turn, but my overall grade for the plan is no higher than a B-, and perhaps as low as a C.
During this crisis, regulators of banks and other financial institutions generally did not use the authority they already had to rein in the asset expansion and various excesses of commercial banks and other financial institutions.
This is not at all surprising since regulators usually get caught up in the same "exuberance" as bankers, and no more see the looming risks to the system and to individual banks than do bank executives.
Moreover, examples from many industries show that regulators frequently get "captured" by regulated firms, and tend to support the interests of these firms.
This occurs even when the actions of firms are contrary to the public interests, and when regulated firms do not bribe or exercise other improper influence on regulators.
For these reasons, any new regulations should mainly operate automatically through rules rather than relying on discretionary decisions of regulators.
Unfortunately, although the plan does contain new rules, they rely too much on discretionary choices of regulators.
For example, the plan advocates creating a mechanism that allows regulators to take over large, failing financial firms, and to decide how to fix them, but it does not specify how the regulators should fix banks, or even when they should take them over.
The plan encourages the Fed to monitor systemic financial risk, but it does not indicate how the Fed should determine whether systemic risks are excessive.
My overall grade on the place of rules vs.
discretion in the proposed changes would be no higher than a B-.
Countries tend to bailout large firms more often they should, including large and/or highly interrelated banks and other financial institutions.
Nevertheless, big and complex financial institutions that appear to be failing will often be bailed out in the future, especially in light of the perception that the failure of Lehman Brothers triggered a sharp worsening of the crisis, and a dramatic retreat from risk.
In order to reduce the likelihood of the need for such bailouts, large banks should be required to have especially high capital requirements (see my post on March 9).
Perhaps they should also be forced to have much of their capital in liquid forms.
The President does propose that the Fed should more heavily regulate and supervise large financial firms- possibly including special capital requirements- but the proposals appear to give the Fed much more discretion than is desirable.
Overall, the grade on the too big to fail proposals is a B or B+.
Abundant evidence from the US experience and that of other countries indicates that governments do badly when they attempt to micromanage firms and individuals in the financial and other sectors.
Nevertheless, the government proposes to have regulators issue guidelines on executive pay, with the intent of "better" aligning pay with stockholder value.
It also wants to "better" relate the compensation of financial firms to the long-term performance of their loans, and to require non-binding shareholder votes on executive compensation.
Another proposal would prevent "unsophisticated" individuals from trading derivatives "inappropriately".
Others would ban or restrict mandatory arbitration clauses, and would regulate bank overdraft provisions.
Still other parts of the plan would mandate that some employers offer automatic IRA plans to employees, and the government proposes to regulate closely the investment choices made by holders of these plans.
The degree of micromanagement of company and individual behavior in these and other provisions is distressingly high (see our posts on the case against controls over executive pay on June 14th).
This is why the overall grade on the proposed degree of micromanagement of financial institutions and individual behavior is no higher than a C.
Would the changes embodied in President Obama's financial plan greatly reduce the likelihood of another major financial crisis? An honest answer is that no one really knows because it is not yet clear which of the myriad aspects of the American financial system were the most important causes of the crisis.
For example, some discussions blame the generous compensation packages provided to executives of banks and funds, especially the close dependence of total executive compensation on current profits and the value of their stock holdings.
However, Japan had a terrible financial and economy wide crisis throughout the 1990s, even though Japanese executives are paid much less than their American counterparts, and Japanese executive pay is much less dependent on profits and stock prices.
Others have claimed consumer ignorance is responsible for the sharp growth in subprime and other mortgages, and for the great expansion of credit card debt.
Yet who could blame poorer families for buying homes when they received great deals in the form of low interest rates-partly due to the Fed's policies! - and very low down payment requirements.
Low down payments and low interest rates might have been mistakes of the lenders, and of government policy that encouraged such loans, but they hardly indicate that consumers were fooled into taking out these mortgage loans.
Similarly, lower income consumers like to borrow on their credit cards because that debt is often the cheapest and most flexible form of credit available to them.
Small print on credit card contracts and fast-talking mortgage salesmen were just not important forces in determining what happened in mortgage and other consumer credit markets.
A basic problem is that when little is known about the likely effects of new financial regulations, they are more likely to harm rather than help the financial system.
Suppose, for example, that regulation of pay of financial executives appears to have a 1/2 chance of improving the efficiency of the financial sector by 25%, and a 1/2 chance of reducing efficiency by the same 25%.
The average expected impact of such pay regulation on efficiency would be zero, but it would increase risk by raising the expected variance in the efficiency of outcomes.
Therefore, when there is sizable ignorance about the consequences of new regulations, governments should only introduce those financial reforms that are much more likely to improve rather than worsen the performance of the financial sector.
When the government's financial proposals are evaluated from the medical principle of "do no harm", they cannot be given better than a C grade.
The lesson from this low grade is not to stop reforming the financial sector, but to go slowly, and introduce now only those changes that seem quite likely to reduce the prospects of another crisis.
For example, higher capital requirements, especially for larger banks, seem to be justified even though the precise role in the crisis of high and growing leverage of bank assets is not clear.
Similarly, central counterparty exchanges for derivatives are often desirable, although the benefits are likely to be greater if traders are induced to participate in these exchanges rather than mandated to do so.
The case for other changes in financial markets may also be strong.
However, most of the proposals in the President's plan should be put on hold until much more is learned about the causes and possible cures for this and future financial crises.
This week the Obama administration, acting through Secretary of the Treasury Geithner, appointed a pay czar to review, reject, and possibly set the pay of companies that received large amounts of federal assistance during the financial crisis.
No appeals will be allowed from his decisions.
The Czar, Kenneth Feinberg, will have broad authority over compensation for the top executives and 100 top employees at Bank of America, Citigroup, American International Group (AIG), General Motors, and a few other companies that received large federal bailout monies.
This is surely one of the more preposterous ideas to come out of Washington.
The title of my post, "The Fatal Conceit", is taken from the title of a book published in 1988 by Friedrich Hayek.
In this book Hayek attacks socialists for "the fatal conceit" that government officials can effectively determine prices and production through various forms of central planning without having the incentives and information available to firms in competitive markets.
A closely related conceit is behind the belief that someone sitting in Washington can determine the pay to hundreds of executives and other employees.
The social purpose of competition and private enterprise is to provide quick responses to constantly changing market conditions.
These responses include determining and changing the salaries, bonuses, and stock options of employees and top executives.
Companies get into trouble and even fail when their decisions, including decisions on the quality of employees and their compensation, are less effective than decisions of their competitors.
All the companies that will have the pay of top employees under the control of the Czar compete against companies, both domestic and foreign, that will be free to set the pay of their employees.
If these companies offer higher pay than the Czar allows for companies under his jurisdiction-whether this higher pay takes the form of bonuses or other forms, or whether fully justified or not-the controlled companies will lose their best employees to competitors, and they will have trouble attracting employees who are highly capable.
The Czar could even be making serious mistakes if he just allowed the pay of companies under his control to match the pay offered by competitors.
For it is plausible that companies in hock to the government may have to pay more than competitors to entice capable persons to take on the task of resurrecting these companies.
This is especially likely since Congress and the Treasury will be calling them to testify and second-guessing their decisions.
The background of the Czar, Kenneth Feinberg, is not reassuring in these respects.
A lawyer, he first worked for the federal government, and then during the past several decades headed a law firm based in Washington.
Since he apparently has never been an employee of any company other than the government and Washington law firms, how can this background prepare him to set the pay of large companies, such as AIG or GM, that are in highly competitive industries?.
In recent interviews Mr.
Feinberg claimed that excessive risk-taking fuelled the crisis, and that this risk-taking also led to excessive compensation.
Surely, risk-taking has essentially nothing to do with the problems of GM and Chrysler, two of the companies under his wing.
Growing leverage by banks of their limited capital base did contribute to the crisis, and perhaps that also greatly increased the pay of bank executives.
However, even if this claim is entirely correct, I do not see how that can help him efficiently determine the pay of the (fortunately) few companies under his jurisdiction when their competitors can set the pay of their employees much more freely.
Defenders of the selection of Mr.
Feinberg point to his almost three years spent as a pro bono Special Master of the fund that compensated victims of the 9/11 terrorist attacks.
I do not know how well he carried out these duties, but determining compensation of victims is entirely different from what is required to set compensation of executives.
As Special Master he had to assess the value of losses due to wrongful deaths and injuries.
Although that assessment is not easy- it depends on lost earnings and other aspects of the so-called statistical value of life- it really has little to do with determining employee pay in a few companies engaged in highly competitive and changing industries.
The same fatal conceit behind the setting up of a pay Czar is also responsible for the belief that members of Congress and Washington officials are capable of steering GM and Chrysler toward profitable directions.
This is behind the government pressure on these companies to shift toward small fuel-efficient cars, even though GM and Chrysler have been best at producing trucks and larger cars.
Perhaps they will be able to make this shift, but it is far more likely that Honda, Kia, Toyota, and other foreign auto manufacturers that have been making small cars for decades will eat their lunch.
According to data compiled by my colleagues Matt Gentzkow and Jesse Shapiro, the number of daily newspapers in the United States has been declining for more than 90 years, from a peak of about 2200 to its present level of about 1400.
The decline started with the advent of radio, accelerated with the growth of television, and continued of course as the Internet became more popular.
The likelihood is that many more newspapers will disappear during the coming decade, and that dailies no longer will be a major source of information and news.
This has already happened to evening newspapers: their circulation went from about five eights of the circulation of all dailies in 1940 to only about 12% at present.
A free press has been a foundation of democracies because the press spreads information about political and other developments.
This is why one of the first moves totalitarian and other non-democratic governments make is to suppress the press.
For example, the Iranian government has closed virtually all newspapers that are openly critical of the government.
Nevertheless, I do not believe that the decline in the number of dailies, even if it rapidly accelerates, poses a major threat either to the viability of democracies, or to the spread of political and other information.
The main reason for this belief is that the Internet is far more efficient than newspapers in providing news, information, and opinion.
This is obvious with respect to sports, financial developments, and weather since online updates are much more frequent than is possible even for the best papers.
During the past 10 days of the Iranian election crisis, my wife and I turned mainly to the Internet for the very latest news and pictures on what was happening in Teheran and elsewhere in that country.
These sources certainly included online editions of several newspapers, but also important were various online accounts by observers of and participants in the protests.
That the Internet is a more efficient provider of news and opinion than newspapers is seen in the fact that hardly anyone under age 40 now reads papers.
Readership is also declining among older persons, but many of them continue to read papers- we subscribe to 3 daily and 2 Sunday editions- primarily because they built up strong habits of reading papers at breakfast or at other times.
The lack of newspaper reading among younger persons is in small part a lifecycle effect, but mainly it is a strong predictor that the market for papers will continue to fall sharply.
The best newspapers, like the New York Times, Wall Street Journal, Financial Times, and Washington Post, not only present the latest news, in depth analysis of events, and selected opinions, but they certify the accuracy of what they are reporting through reputations built up over many years for objectivity, and care in checking sources.
To be sure, they sometimes slant which facts to emphasize, or select stories that fit in with their particular points of view.
Polls do strongly confirm that the great majority of journalists are liberal.
Nevertheless, readers can usually have confidence in the news and other reports in the eminent papers.
Do online reports have a similar accuracy? I confess to being surprised by the huge numbers of men and women (including Posner and me!) who want to use the Internet to present their opinions and describe events they witness.
Many millions of bloggers regularly report on everything from what they had for dinner to major political developments.
Although the quality of these discussions varies greatly, many of them have gained reputations for rather accurate and unbiased reporting and analysis.
A good example is the open source encyclopedia, Wikipedia, which has millions of entries that are continually updated.
I have not read enough articles in Wikipedia to have an overall assessment, but I have been favorably impressed by most of those that I have read and can evaluate for their accuracy.
Although the printed newspaper industry is doomed, and will be missed by those of us that remember newspapers in their heyday, they are being replaced by good substitutes in the form of blogs, social networks like Facebook and Twitter, online news gathering by various groups, including newspapers, and other electronic forms of communication.
People in democracies will continue to have access to independent and often quite accurate, reports on events in their own countries and most other parts of the world.
In fact, the populations of undemocratic countries now have much greater access to what is happening in the world than they had in the past because it is far more difficult to suppress access to the Internet and other electronic forms of communication than it is to suppress newspapers.
Since a college education is expensive, many students would.
be unable to receive a higher education unless they got help with the.
financing.
Some students are lucky to receive the needed resources from their.
parents, but many others in the United States and elsewhere have to borrow in.
order to attend college.
The vast majority of loan programs available to.
students are highly subsidized by governments, either through direct government.
loans with generous interest rates and other terms, or through government.
insurance of loans from private banks combined with restrictions on the.
interest rates banks can charge students.
Even though student loans cannot be discharged through.
personal bankruptcy, default rates have been high.
The average rate of default.
in 2007 was high, about 7%, but still much below the over 20% rate in 1990.
In.
addition, many borrowers with lower incomes work out terms that involve slow.
and usually only partial repayments of the amounts borrowed.
As Posner.
indicates, for-profits have a high default rate of close to 25% on their.
student loans.
There is a clear hierarchy in default rates by type of school:.
For-profits have the highest default rates, followed by public and non-profit.
junior colleges, then by graduates of four year colleges, and graduates of medical and law schools, and other high.
earning professionals have the lowest default rates.
Since student loans are heavily dependent on government.
financing, governments have a legitimate and important interest in these.
default rates.
Consequently, it is proper for governments to impose limits to.
colleges on both the fraction of their students who can default, and also on.
the fraction of students at a school who can receive government loans.
However,.
the present default limits of 25% for profit-making institutions are too.
generous.
Banks would be forced out of business if the default rates on their.
commercial loans were so high.
The maximum allowable default rates should be.
cut to 15% %, or so.
That itself, without any other changes, would give.
for-profit and other colleges much stronger incentives to police better who.
they accept as students since they would not want to exceed such more stringent.
ceiling on default rates.
A lowering of the permitted default rate is a far superior.
approach to reducing defaults than is the proposed limit on the amount of loans.
available to students who are expected to have low incomes.
For it is hard in.
most cases to know in advance how much a student borrower will eventually earn.
Students entering well-paying fields may turn out to do badly, whereas those.
entering poorly paying fields might do extremely well.
Colleges have a strong.
incentive to police their default rates in order to remain eligible for student.
loans, but one can hardly expect government officials to be able to predict.
with any accuracy the eventual earnings of students applying for loans.
Unfortunately, various proposals to restrict loans to low earning.
students partly reflect the federal government's desire to bash for-profit colleges.
Yet.
these colleges play a significant role in the portfolio of college choices.
available to students.
For-profit colleges appeal to older and fulltime working.
students who never received a college education.
To be sure, the quality of the.
courses offered by for-profit colleges are generally are not so high.
But many.
public colleges, such as Loop College in Chicago, or Santa Monica Junior.
College, also offer courses at the low end of the quality spectrum, and also.
have high loan default rates.
That for-profit colleges can compete against.
highly subsidized public and private non-profit schools indicates that the.
for-profits are offering an education valued by certain students that is not.
available to them at other schools.
In addition, comparison of default rates between for-profit.
colleges and public colleges is not the right measure of how much government.
subsidies they receive.
All public colleges and most private ones receive large.
direct subsidies from various governments that enable them to offer much lower.
tuition levels than are offered by for-private colleges.
Many students in.
public colleges, especially the lower quality ones, also drop out without.
finishing, and also receive low earnings, after having been generously.
subsidized by governments.
The right comparison between for-profit and public.
schools might be the increase in earnings of students per dollar of government subsidy, no.
matter what form these subsidies take.
The for-profits may still look worse on.
this measure than do the public colleges they compete against, but the.
difference would be much smaller than the differences in default rates.
Some argue that for-profits can only compete by misleading.
students into believing they will benefit much more from such an education than.
they will actually benefit.
Clearly, some of that does occur.
However, even.
some of the best colleges and universities are quite misleading in their.
advertising and other attempts to attract students.
For example, very few.
philosophy, French, or English Lit departments warn incoming students that jobs.
in their fields are scarce, and that most entering students may never get a.
decent job using their specialized training.
To be sure, for-profits tend to be.
more flagrant in their efforts to attract students, but it is a difference in.
degree.
So my conclusion is that while stiffer default rules on.
government subsidized student loans are needed, for-profits should not be.
discriminated against in these rules since they offer valuable forms of.
education.
Moreover, public colleges receive substantial direct government.
subsidies that for-profit colleges do not receive.
With lower allowable default.
rates, for-profit (and other colleges) would cut back on the number of students.
accepted whom they expect to eventually default on their student loans.
During the past couple of years, the financial crisis.
induced the US, Europe, Japan, and many other countries to greatly increase.
their fiscal deficits and government debt.
Unlike the UK and Germany, and a few.
other countries, The Obama administration has done little to attack the fiscal.
deficit that has grown much larger since his election as president.
The absence.
of action on the deficit front has been reported to be an important reason why.
Peter Orszag recently announced his resignation of Director of the Office of.
Management and Budget.
Yet despite the seriousness of the rapid increase in.
government spending and fiscal deficits during the crisis, the main budgetary.
issue facing all developed countries during the next couple of decades is the.
expected growth in spending on entitlements: mainly, spending on retirement.
incomes, and medical care given to the elderly.
The growth in these.
expenditures is partly due to growing life expectancy and relatively low birth.
rates that will raise the number of retirees collecting social security.
benefits while reducing the relative number of men and women who are working to.
pay for these benefits.
The growth in medical entitlements is mainly the result.
of technological advances and other changes that has led to a sharp expansion.
in both private and public spending on medical care during the past several.
decades, an expansion that is expected to continue into the future.
Orszag, when head of the Congressional Budget Office (CBO).
in August 2008, predicted that unless radical actions are taken, the cost of.
Medicare, Medicaid, and social security will rise from 18 percent of GDP in.
2008 to 28 percent by the middle of this century, and perhaps to 35 percent.
soon thereafter.
Of course, such estimates depend on many guesses, such as the.
future rates of growth of GDP, how life expectancy will change, and how many.
expensive advances will occur in medical care.
Still, these estimates are.
consistent with those made by others, and clearly indicate that health and.
retirement entitlements will become a growing American fiscal problem unless.
important steps are taken to scale them back.
Similar concerns apply to the UK,.
Germany, Japan, and other rich countries.
I have supported changing retirement systems from.
pay-as-you-go to individual account defined contribution systems, as in.
American IRA and Sep private retirement accounts.
I also support sharply.
increasing the fraction of all medical care spending on the elderly that comes.
from out of pocket spending by patients (see my post on March 28).
Another.
reform could also greatly reduce future public spending on retirement incomes.
and health benefits, and make an important contribution to closing the long run.
fiscal deficit.
This reform involves a big increase in the average age of.
retirement before individuals become eligible to qualify for either social.
security or old age public healthcare benefits.
When the American social.
security system was established in 1935, the expected retirement age was 65.
At.
that time, the average life expectancy for 65 year olds was a mere 12 years.
Therefore, years in retirement amounted on average to about one quarter of the.
47 years that men typically worked in the 1920s (before the Great Depression).
prior to reaching age 65.
Expected life expectancy of men aged 65 now averages about 18 years,.
and it is a few years longer for women.
Men who retire at age 65 have typically worked on the average about 45.
years, so retirement years for these men is about 40% of working years.
Actual retirement of many men and women actually occurs at age.
62, despite the decline in physically demanding work, and the.
improvements in.
health.
I propose that the US and other countries greatly raise over time.
the retirement age before the average person became eligible for either social.
security retirement income or publicly-funded health benefits.
One simple and attractive rule would be to raise retirement age by an amount that.
makes the   ratio   of years spent in.
retirement to years spent working equal to the ratio that existed at the.
beginning of the social security system.
Suppose the average person starts.
working at age 20, and lives a further 18 years if they make it to age 65.
Then.
the average number of years spent in retirement for these persons would equal.
about one quarter of their average working years, the ratio prior to the.
introduction of American social security, if average retirement ages were.
raised to age 69 or 70.
If the average retirement age were raised to near 70 to.
qualify for retirement and elderly health benefits, retirees would still have.
more absolute years of retirement than they did 90 years ago.
Moreover, their.
retirement years would be better because they would be healthier, both.
physically and mentally.
As at present, men and women in poor health would be.
able to retire earlier through the disability system.
The US has been slowly increasing the normal retirement age in.
stages first from age 65 to 66, and then to age 67 for everyone born after.
1960
These have been steps in the right direction, but they do not go far.
enough and have been too slow.
It is time to raise more rapidly the normal retirement age for persons in.
reasonably good health to age 70 before they become eligible for either social.
security or Medicare benefits.
This would add three years to taxable earnings,.
and eventually reduce the number of elderly collecting social security benefits.
by almost 20 % compared to what it would be under present retirement ages.
It.
would also significantly reduce spending on Medicare, although by less than 20%.
since persons over age 75 take the bulk of this spending because they are in.
worse health than younger retirees.
Maintaining the ratio of working to retirement years is a.
reasonable first approximation to a guideline for determining the eligible age.
for retirement and health benefits.
As the health and life expectancy of the.
elderly continues to improve in the future-as they surely will- retirement ages.
should be raised beyond age 70.
After many decades of hopelessness, there are finally grounds.
for believing that sub-Saharan Africa may be close to taking off toward.
sustained economic growth.
Africa has rebounded from the worldwide recession.
faster than many other nations.
The International Monetary Fund estimates that.
African GDP rose by 4.7 per cent in 2009, and the Fund forecasts that Africa’s.
growth will increase still further to almost 6 per cent in 2010.
The rate of.
economic progress is not uniform in all the African economies, but these are.
impressive figures for a continent that has disappointed for so long.
Several factors explain why Africa’s future looks rather.
bright.
Probably number one is the continuing discovery in Africa of minerals.
and fossil fuels that are demanded by China, India, and other countries as.
world economic growth picks up.
Experts estimate that the recently discovered.
coal deposits in Mozambique are the largest new coal reserves since the major.
finds in Australia during the 1960s.
Oil reserves in Nigeria, Ghana, and other.
parts of Africa constitute more than 10% of the world’s reserves of oil, and.
South Africa has 40% of the world’s gold.
Africa also has about one third of.
the world’s cobalt- a mineral used to prepare   magnetic  , wear-resistant, and.
high-strength   alloy  s- and many.
other minerals.
Africa exports natural resources primarily to the rapidly.
developing countries like China, and to the US.
For example, Africa’s trade.
with China has multiplied several fold during the past decade to reach more.
than 12 percent of total African exports, on par with Africa’s trade with the.
US.
    Trade with India, Korea, and.
Brazil, although much smaller, is also growing at fast rates.
Governments in many African countries generally adopted a.
socialist approach to direction of their economies when they became independent.
nations after World War II.
At that time, even many economic experts considered.
socialism and government management of an economy, as practiced very.
differently in the Soviet Union, China, and India, to be the best approach to.
economic development.
Yet government control led to widespread inefficiency and.
corruption in Africa (and elsewhere) since these governments had neither the skills nor the.
incentives to conduct honest and effective public administration of the.
economy.
However, attitudes of African leaders toward markets and.
private business began to change a couple of decades ago, in part because the.
socialist approach failed.
Also important was the rapid economic growth.
experienced by the Asian tigers, China, India, and Chile as these nations.
shifted toward greater roles for the private sector and smaller economic roles.
for government.
Democracy has also become stronger in some African countries,.
although strongmen and other undemocratic leaders still are prominent in many.
African countries.
While some.
optimism about Africa’s future is warranted, its future is not assured because.
Africa still faces important problems.
Yes, the private sector in mobile.
phones, natural resources, and elsewhere has grown a lot in many African.
countries, but the expansion of private companies has often taken the form of.
crony capitalism rather than competitive capitalism.
By crony capitalism I mean.
that governments give special protected positions to favored companies in.
important sectors of the economy rather than allowing competition among.
companies to determine who are the winners and losers.
Crony capitalism is.
partly the result of a continuing excessive role of the government in the.
economy.
At the same time it encourages government corruption because companies.
compete politically to obtain these favored positions, partly by bribing.
government officials to favor them.
Crony capitalism may be better than.
socialist direction of an economy, but is is far inferior to competitive.
capitalism.
During the past 30 years, fertility has fallen in all.
regions of the world, including Africa.
But the typical African women still has.
5 children over her lifetime; a number that far exceeds that in every other.
region of the world.
Families with many children do not have the resources to.
invest much in the education, health, and other human capital of their.
children.
As a result, for example, the World Economic Forum’s index ranks South Africa.
at the very bottom in both math and science education out of over 100 countries.
considered.
Moreover, high birthrates eat up economic progress and limit.
the magnitude of increases in per capita incomes.
However, if African economies.
continue to grow at a high rate, parents will begin to reduce rapidly the.
number of children they have in order to invest more human capital in each.
child, as has happened in every other country that experienced sustained.
economic progress.
Most African countries have enormous health problems due to.
the heavy incidence of malaria, Aids, and other diseases.
For example, life.
expectancy in South Africa declined from 65 years at 1990 to just about 50.
years as the prevalence of Aids among 15-49 year olds grew to about 20%.
Yet.
great progress is possible in improving health in this region.
Foreign.
assistance can be important in the health field through the provision of.
medicines, knowledge, and medical personnel,as long as the aid mainly goes to.
NGOs and other private African organizations rather than through.
corrupt governments.
Africa still gets too much foreign aid that raises.
government spending at the expense of the private sector.
Net official aid to.
Africa has risen sharply since 1970 as shares of both government spending and.
GDP.
In 2008, such aid constituted more than 30% of government spending and 4%.
of African GDP.
India discovered during its first 40 years of independence that.
foreign aid-India used to be the world’s largest recipient of foreign aid- only.
slowed down the necessary adjustments toward a smaller government sector and a.
larger competitive private sector.
Africa needs to learn the same lesson.
Clearly, for these and other reasons, economic progress in.
Africa is not assured.
Yet the evidence provides grounds for far greater.
optimism about Africa’s future than at any time during the past 100 years.
Political economists describe the process whereby government officials end up being the servants rather than the masters of the firms they are regulating as the “capture” by the industry of their regulators.
When regulators are captured, much of what they do is motivated, consciously or not, by a desire to help the companies they are regulating, even when the social goals that the regulators should pursue are very different.
A famous illustration of capture is given by the way airlines were regulated under the Civil Aeronautics Board (CAB) from 1940 to 1978.
Large airlines of those times, like American and Delta, naturally had a strong incentive to try to keep new airlines from entering the industry.
As a compliant ally of the airline industry, the CAB did not approve one new interstate airline during this almost 40-year period.
Many airlines entered the industry when President Carter abolished the CAB, and some of the old standbys, such as Pan Am and Eastern, ceased operations because they could not adjust to a competitive environment.
An economically disastrous example of the capture theory is provided by the disgraceful regulation of the two mortgages housing behemoths, Fannie Mae and Freddie Mac, before and leading up to the financial crisis.
In their fascinating recent book, Reckless Endangerment, Gretchen Morgenson and Joshua Rosner explore in great detail how Fannie Mae used political connections and intimidation of anyone who stood in their way to gain a highly dominant position in the residential mortgage market.
The authors’ show that various government officials, including congressmen and presidential cabinet members, closed their eyes to what these two government-supported enterprises (GSE) were doing.
They allowed them to take on enormous risks, while publicly defending their behavior as not being highly risky.
Fannie Mae was created in 1938 as a government enterprise that purchased mortgages from banks that loaned money to homebuyers.
It eventually became a private investment company regulated by the government, where investors expected that the government would help out if these companies got into trouble.
By the beginning of the crisis in 2008, Fannie and Freddie held or guaranteed about half of the United States’ $12 trillion of assets in the residential mortgage market.
In September 2008, both Fannie and Freddie were taken over by the federal government when they became insolvent.
The loss to taxpayers is likely to be in the hundreds of billions of dollars because many of the mortgages are subprime and of little value.
Reckless Endangerment shows how the chief executive officers of Fannie Mae furthered the reach and reduced the regulatory control over their company by assiduously courting congressmen, Fed officials, the Congressional Budget Office, high-level officials of the U.S.
Treasury, the Secretary of Housing and Urban Development, and major economists.
The prominent and well informed congressman, Barney Frank, gets especially sharp criticism for his continual support of Fannie and Freddie while he was initially a member, and later chairman, of the House Financial Services Committee, the powerful committee charged with oversight of the housing and financial sectors.
Barney Frank remained an unwavering supporter of Fannie and Freddie until 2010, when he admitted that they should have been more closely regulated.
In a bit of irony, he is a principal author of the 2010 Dodd-Frank act that attempts to reform the financial sector mainly by giving even greater discretion to the regulators.
Fannie and Freddie had so much money and political power at their disposal that it became risky for anyone to oppose what they wanted: large increases in their holdings of subprime and other mortgages, with no questions asked.
Different government agencies that were supposed to either regulate or oversee these GSEs ended up as advocates instead.
Well-known economists wrote favorable articles downplaying the riskiness of the holdings of Fannie and Freddie.
These articles were sometimes published in journals or other publications sponsored by these companies.
A few government officials were brave enough to risk the wrath of Fannie and Freddie.
The authors give particular praise to June O’Neill (I am proud to say she is a former student of mine), who was then head of the Congressional Budget Office.
A member of her staff wrote a report that was critical of the degree of risk to taxpayers from the assets held by Fannie and Freddie.
These companies tried to get June to suppress the report- she refused- and then a few members of the House of Representatives in cahoots with Fannie and Freddie subjected her to vicious attacks when she steadfastly defended the report in testimony before Congress.
The Fed also comes in for sharp criticism by the authors.
One example discussed was a Boston Fed publication in October 1992 claiming that minorities were widely discriminated against in gaining access to mortgage credit.
The media, many regulators, and some economists widely praised this study as offering definitive evidence of extensive discrimination against minorities in the credit market.
Fannie Mae’s head, the politically astute James A.
Johnson, seized on this reaction to promote a large increase in mortgages to poor residents of African-American and Hispanic communities with bad credit histories.
Since I had written a book on discrimination against minorities in the economy, I was curious to see how the authors reached such definite conclusions about mortgage discrimination.
I became convinced after reading their study that it was deeply flawed, and failed to show what they claimed about discrimination in the market for mortgages.
The theory of discrimination against minorities implies that minority applicants for mortgages would need to have better credit records and higher employment stability than comparable whites in order to obtain mortgages.
This suggests that default rates would be lower and profitability higher on loans to minorities.
The study’s authors presented no evidence to support these implications of discrimination theory.
All the circumstantial evidence, and some real evidence, showed just the opposite.
I published my criticisms in a column for Business Week in 1993 (reprinted on pp.
119-120 in The Economics of Life, a collection of my Business Week articles).
The Boston Fed and their supporters tried defending this article against my attack and those by others, but their arguments were weak.
Nevertheless, the view persisted that the Fed had “proved” widespread discrimination in the credit market against minorities, and this helped justify an expansion of mortgage loans to families with low incomes and poor employment records.
The Fannie and Freddie story does not demonstrate that government officials, congressmen, economists, and others who sang their praises were corrupt, although undoubtedly some were.
But rather that powerful companies and industries can bring massive resources to bear in promoting their interests through lobbying, congressional testimony, financial support to help political candidates win elections, attacks on critics, hiring experts to promote their views, and in many other ways.
The result is, as Simon Newcomb, an outstanding American economist and astronomer of the 19  th   century, said a long time ago, “one cent per year out of each inhabitant would make an annual income of $500,000.
By expending a fraction of {their} profit, the proposers of policy A could make the country respond with appeals in their favor…Thus year after year every man in public life would hear what would seem to be the unanimous voice of public opinion on the side opposed to the public interests” (p.
459 of his 1885 Principles of Political Economy).
I am not claiming that the reckless behavior of Fannie Mae and Freddie Mac was solely, or even mainly, responsible for the financial crisis.
Enormous blame must go to the commercial and investment bankers who took on vastly excessive risks that endangered their companies and the economy.
Nevertheless, that officials charged with overseeing Fannie and Freddie protected the interests of the companies instead of the interests of taxpayers and the general public does not only offer resounding support for the capture theory.
For this capture of regulators also inflicted great harm on taxpayers, the American and world economies, and many of the families who exposed their life savings to undue risks in the mortgage market.
The International Energy Agency (IEA) recently coordinated the release onto the oil market of some of the strategic oil reserves of the United States, Japan, and ten other countries that hold reserves.
The release was motivated by the rapid run up in oil prices from about $95 a barrel at the beginning of 2011 to over $120 a barrel in April of this year.
I will discuss the fundamental determinants of the sharp fluctuations in oil prices, the role of “speculators”, and why it was unwise at this time to release oil from these reserves.
After the initial huge increase in oil prices following the Arab oil embargo in 1973, the magnitude of the fluctuations in these prices has been impressive.
In 2008 dollars (i.e., adjusted for inflation), prices were about $40 a barrel in 1973, rose to $75 in 1981, fell to around $20 in the mid 1980s, and then stayed low until the early part of this century.
These prices rose spectacularly to reach over $140 a barrel before the financial crisis hit, then fell sharply, and they have been recovering rapidly since the world economy again began to grow more rapidly.
Fundamentals in the oil market, that is, the supply and demand for oil, explain the vast majority of the large fluctuations in oil prices.
Demand for oil changes over time because of recessions that reduce world output and hence demand for oil, and also because of world economic growth, especially in the developing world.
Economic development raises oil demand because the demand for cars, and hence gasoline, increases rapidly with development, and because manufacturing and other sectors increase their demand for oil-based inputs.
To get a feel for the effects of demand changes on oil prices, consider a 3% increase from one year to the next in world demand for oil.
The induced increase in price depends on how responsive (or elastic, in economists’ terminology) is the quantity of oil produced to higher oil prices.
Oil production is not easily increased in the short run, especially with Opec controlling about 35% of the world supply of oil.
A typical estimate of the short run world supply elasticity for oil is quite low at about 0.1.
This number means that to induce a 3% increase in the supply of oil would require a 30% increase in oil prices, which is ten times at large as the increase in world demand.
This example shows that the low elasticity of supply implies that even modest changes in the demand for oil have very large effects on its price.
The sensitivity of oil prices to underlying shifts in the fundamentals is made even greater by the fact that the short-run elasticity of demand is also about 0.1.
To show the effects of such low demand elasticity, suppose world production of oil falls by about 1.5%.
This is about the magnitude of the reduction in world supply from the civil war in Libya that cut its daily oil output from 1.4 million barrels of oil to about 200,000 barrels.
For world consumption to fall by a mere 1.5% would require a 15% increase in price, given the very low demand elasticity for oil.
The actual fluctuations in prices due to shifts in supply and demand would be smaller than in these examples.
When Libyan production fell and oil prices rose, other oil producers raised their supply of oil to take advantage of the higher prices.
But since the overall supply elasticity is also very small, that response was small, so that oil prices still rose by a lot.
Similarly, when world demand for oil grows by 3% and oil prices increase, demand for oil falls because of the higher prices.
However, since the elasticity of demand for oil is also low, that response is limited, so that oil prices would still rise by a lot.
A general analysis of market equilibrium shows that given supply and demand elasticities of 0.1, the percentage increase in price, after taking account of all these adjustments, would still be 5 times (rather than 10 times) the reduction in supply or increase in demand.
Moreover, both supply and demand for oil are more responsive to prices over longer time periods.
This implies that the price rise due to more permanent falls in supply would initially be quite high, but they would get smaller over time.
A higher maintained price of oil induces consumers to economize on the use of oil by buying fuel-efficient cars, by carpooling, and by driving fewer miles.
Companies would substitute gas, coal, and other energy sources for oil.
Similarly, on the supply side, higher long run oil prices induce greater efforts to discover new oil fields, whether deep under the sea, or in other remote places.
Inefficient oil fields would also be brought back into production since their higher costs would be covered by higher oil prices.
Of course, speculators also are active in the oil market.
They may buy oil futures in the expectation that oil prices will increase in the future, or sell oil futures-go “short”- hoping that prices fall in the future.
If their expectations are correct, they help stabilize oil prices by increasing supply when prices are rising, and raising demand when prices are falling.
Put differently, speculation tends to be stabilizing when speculators are making money because they have correct expectations about price movements, and destabilizing when they are losing money because their expectations turn out to be wrong.
Given that the fundamentals imply large price movements from rather small shocks to supply and demand, and that successful speculation tends to moderate price movements, it is hard to believe that speculation has played a major role in causing the large swings in oil prices.
When the IEA countries on June 23 agreed to sell 60 million barrels (half by the US) from their oil reserves over the subsequent 30 days, it basically acted as a speculator on oil prices.
Since oil was in plentiful supply then at about $110 a barrel, the only economic, as opposed to political, justification for the move was the belief that the IEA countries thought oil prices were too high and would be falling in the future.
Perhaps these countries are privy to special information not available to private participants in the oil market about the recovery of Libyan oil production over the next few months, and about whether the unrest in the Middle East and North Africa would spread to other major oil producers in that region.
Special knowledge is required to justify the IEA’s intervention because otherwise that information would already have lowered the price of oil.
Such special knowledge does not seem likely, given that the unrest itself caught all the major governments (and private participants) by surprise.
Moreover, government oil stocks should not be used with the intent to profit from special information.
Instead the information should be made public (if not based on politically sensitive information).
Strategic reserves should be a hedge against supply disruptions during wartime or other crises when oil is not readily available even at so-called market prices.
The only two previous interventions by the IEA were due to large supply shocks: the Persian Gulf War in 1991, and the effects of Hurricane Katrina, although the world oil market continued to function without major supply disruptions during these crises.
The oil market is presently functioning very well, despite the high price of oil, so there is no good economic case for selling oil from strategic reserves at this time.
A college’s policy of legacy admissions means that the children of graduates of the college are more likely to be accepted by the college when they apply than are other applicants with similar records.
Such a policy has the biggest effect on acceptances by elite colleges, partly because they are the hardest schools to get into.
Although many colleges do not reveal data on admissions rates of legacies compared to others, the limited data available indicate a large gap.
For example, in 2008 Princeton admitted about 40% of all legacy applicants compared to less than 13% of other applicants.
Dartmouth’s legacy acceptance rate then was more than twice that of other applicants.
However, some of this difference is spurious because legacy applicants are generally better qualified since their parents are better educated and wealthier, and send their children to better schools.
As Posner indicates, legacy admission policies have been widely criticized as being unfair to non-legacy applicants who may have better records.
Such a criticism has merit from a narrow perspective, but a legacy policy may in the longer run help both students and faculty.
First of all, legacies may help to raise a school’s “harvest” rate; that is, the fraction of accepted applicants who decide to attend.
Colleges and universities at all levels are competing against similar institutions for a limited number of qualified high school students.
If different applicants look equally acceptable on the basis of their records, preference to the children or grandchildren of alumni may be warranted, even aside from financial considerations.
Acceptance rates by different applicants are a major uncertainty facing colleges as they try to achieve good entering classes.
Since applicants with family links to a school are more likely to attend if admitted, that would make their admission more valuable than would the admission of equally able students without any family connections to that school.
This type of reasoning implies that it would be desirable for schools to lower somewhat the admission standards for legacies since the loss to a school from admitting somewhat lower quality legacy applicants could be more than made up by higher acceptance rates from legacies.
How much a school should lower its admission standards to accept legacies depends on the differences between the acceptance rates of legacies and those of other applicants, and on other factors.
Another common argument made for legacy admissions is the importance of alumni gifts to the quality of education a college offers.
Private colleges and universities, and increasingly also the major public universities, rely greatly on gifts and endowments to finance their education programs.
There is a strong tradition in the United States of “giving back” by alumni in the form of fnancial contributions.
Alumni are by far the principle source of small to moderate gifts to colleges and universities, and they, along with private foundations, are the major source of very large gifts.
Individuals who have given tens, and sometimes hundreds, of millions of dollars to institutions of higher learning almost invariably have graduated from, or at least attended, the institutions that received their large gifts.
Families that have more than one member who attended a particular institution of higher education tend to be more loyal to that institution than families with only a single graduate of that institution.
Families with several graduates are more likely to attend alumni events and participate in alumni activities.
In addition, a study of graduates of Middlebury College, a liberal arts college in Vermont, indicates that individuals with relatives who also attended Middlebury are more likely to provide financial support.
Since financial support is crucial to the effective performance of any college, greater gifts along with higher acceptance rates from legacies, would give legacies an edge in deciding on admissions policies.
How much edge to give them should depend on how much more likely they are to provide significant financial support, how much higher are their acceptance rates when admitted, and how their other achievements compare to non-legacy graduates.
The case for giving preference to legacies would be greatly weakened, and could even be reversed, if they were on the whole less successful than other graduates.
I do not believe that is true, and a study of Duke undergraduates indicates that legacy admits perform about as well at Duke as other students who have parents who graduated from (other) colleges.
The financial crisis produced the most severe recession since the end of World War II in all the important measures of economic performance, aside from unemployment rates.
Unemployment peaked at 10.2% in 2009, whereas it peaked at 10.8% in December 1982 at the end of the deep recession that spanned 1981-82.
The recovery from that earlier recession was rapid, as unemployment was down to about 7.5% by 1984, and GDP grew rapidly in 1983 and 1984.
By contrast, as Posner indicates, GDP growth has been slow to moderate in the two years following the official end in 2009 of the past recession.
Real GDP is about 10% below the level it would have been at if growth in GDP continued after 2008 at its long term rate of 3% per year.
At the height of the financial crisis, the media frequently had discussions of the “failure of capitalism”, and the need to radically rein in the private sector through extensive regulations and other government activities.
The politically liberal Congress elected in 2008 along with President Barack Obama reflected these views.
In addition to taking various steps to try to fight the recession, leading members of the new Congress, and President Obama as well, considered they had a mandate to reengineer the American economy through more radical government interventions (see the discussion of uncertainty and the recovery by Steven Davis, Kevin Murphy, and myself in the Wall Street Journal, January 4, 2010, “Uncertainty and the Slow Recovery”).
In addition to repeated attacks on American business, especially banks (some of the attacks on banks were well deserved), Congress passed an expensive stimulus package that did not stimulate much.
The health care bill Congress passed seems likely to increase the cost to small and large businesses of providing health insurance for employees.
Congressional leaders proposed high taxes on carbon emissions, large increases in taxes on higher income individuals, corporate profits, and capital gains as part of vocal attacks on “billionaires”.
Many in Congress wanted to cap, or at least control, compensation of executives.
Proposals were advanced to make anti-trust laws less pro-consumer, and more protective of competitors from aggressive and innovative companies.
Congress passed and the president signed a financial reform bill that is a complicated and a politically driven mixture of sensible reforms, and senseless changes that have little to do with stabilizing the financial architecture, or correcting what was defective in prior regulations.
It is no surprise that this rhetoric and the proposed and actual policies discouraged business investment and slowed down the recovery.
Yet, I had expected the recovery to speed up after radical approaches to the American economy were repudiated in the 2010 Congressional elections, when many of the more liberal members of Congress lost their seats.
For a while the economy did began to pick up, as unemployment declined quite rapidly from hovering around 10% to about 9% at end of 2010, and GDP started growing faster.
But then the economy stalled.
The challenge is to explain the drift in the unemployment rate during the past several months, and the rather tepid growth in GDP that have raised fears of a “double-dip”.
Some of the slow-down in the American economy is undoubtedly due to problems in the world economy: the excessive Greece debt and other serious economic problems facing a slowly growing European Community, the nuclear disaster in Japan and the sluggishness of the Japanese economy, and the possible slowing of the rapid growth in both the Chinese and Indian economies.
Another part is explained by the policies that slowed the early stages of the recovery, perhaps especially uncertainty about the effects of the financial reform act, and lack of clarity about the cost implications to business of the health care act.
I am persuaded that an important third part is due to concerns that the US will be unable to control its fiscal situation.
The ratio of federal government spending to GDP grew from about 21% in 2007 to 25% in 2011, a very rapid change compared to the relative stability of this ratio during the prior 25 years.
Unfortunately, there is not yet a strong enough will in Congress and by the president to lower this ratio during the coming decade.
Indeed, with the looming enormous growth in entitlement spending, especially Medicare, the spending to GDP ratio could well increase sharply in the coming decade, along with the fiscal deficit and the federal debt.
Liberal Democrats continue to be reluctant to agree to big cuts in government spending.
Many Republicans have come out against increasing any taxes, even though sensible tax reform toward a flatter and broader based income tax would raise the taxes paid by some taxpayers.
The most attractive reform of Medicare put forward by any member of Congress is Paul Ryan’s proposal to provide grants to the elderly to buy health insurance, with the size of the grant falling with the income of the recipient (see our discussion of his “Roadmap” in posts for April 4, 2011).
But Ryan’s Medicare proposal has been rejected not only by Democrats, but also by leading members of his own party.
To many investors, the future of the American economy looks dim and also uncertain.
I am a perennial optimist about America, but even I have moments of serious doubts: not about the ability to solve these problems, but about the will to do so.
The best way to get American fiscal and other economic problems under control, and thereby “stimulate” the economy, is to institute growth oriented policies that would increase the long-term growth rate beyond the 3% average annual GDP growth rate of the past 130 years.
These policies include tax reform, cuts in entitlement spending, and more sensible regulations that are less dependent on discretion by regulators (see my post for December 6, 2010 for a discussion of these and other proposals).
Krugman‚Äôs recent New York Times article on French "family values" cited by Posner is the latest of many attempts during the past decade to justify, high labor taxes, restrictions on the ability of companies to shed employees, a French law that restricts work to no more than 35 hours per week, and various other restrictive labor-market legislation in continental countries.
They supposedly lead to more civilized goals than are obtained in the freer Anglo-Saxon markets.
That this leads to very high unemployment rates and limited job opportunities, especially for immigrants and young low skilled native-born men and women, and a shortage of part-time work for mothers and others, is the price that apparently has to be paid for these advantages.
But are any advantages of this system worth such a high price? Clearly, the European system of employment helps the "insiders" with good jobs, and works against "immigrants" and other newcomers ,or "outsiders" in labor markets.
It is claimed that the European system promotes "family values" over individualistic ones.
Yet the data do not support this contention since marriage rates are lower in Europe than in America, and not a single European country has birth rates that are high enough to maintain their populations without continued immigration.
The French birth rates are somewhat higher than their neighbors only because of massive subsidies to having children.
Yet even the French rates are way below replacement levels and those in the United States.
Workers in France, Germany and other continental European nations are also said to gain more leisure hours that they want and yet are unable to obtain in freer labor markets of the Anglo-Saxon type since each work decision there is made more individualistically rather than collectively.
But there is no evidence that these regulations are the result of a strong demand to consume leisure jointly with other families.
As Robert Putnam, the author of "Bowling Alone", and others have pointed out, the trend has been just the opposite: sharply away from joint consumption of leisure in clubs or bars, and more consumption through individualistic activities like television and computer games.
Is there pleasure in the traffic jams that develop as virtually all the French, Italians, and German families that can afford it go on their August vacations to the same limited number of beach and mountain resorts?.
The prospects of declining population and the heavy financial burden from the payments needed to provide generous retirement income and health benefits to older persons would seem to lead European countries to try to attract young immigrants who would pay taxes on their earnings to help finance the cost of these entitlements.
The labor market restrictions, however, make it hard for immigrants to obtain jobs in the legal economy, so either they are unemployed, or they work in the flourishing underground economies of Europe, where they avoid paying taxes.
Apparently, the French intentionally do not collect data on unemployment rates of their Muslim population, but economists there tell me they believe it is more than double the official overall French rate of over 10 per cent unemployed.
Given the poor work prospects of Muslim immigrants, and the fact that the German, French, Dutch, and other European populations do not generally like their Muslim minorities, it is no wonder that Muslims there feel alienated from the general society.
As a result, some of them become bitter, and develop hatred of the West and the fanaticism that leads to radicalism and terrorism.
That only feeds greater opposition from the general population, which helps explain why the French and Dutch strongly voted against approving the new European Constitution.
There is an ongoing debate among economists over whether social mobility is greater in the United States or Europe.
The general evidence on this does not offer a definitive answer, but there is little doubt that most immigrants believe opportunities for themselves and their children are greater in the United States.
This is why America is the first choice of most immigrants whenever they can choose where to go, and it also explains the different attitudes of immigrants in Europe and America.
As Posner emphasizes, most immigrants, non-Muslim as well as Muslim, feel far more accepted in the United States than in Europe, are less segregated here in both their living arrangements and employment, and appear to advance more easily toward higher level jobs.
As a result, they are less promising material for radical Islam, although clearly radicals are operating and planning in the United States as well as in Europe.
However, the British experience is somewhat disturbing to this thesis, for Great Britain is at least a partial counter example to our analysis.
For British labor markets are very much like those in the United States; in fact, Britain has lower unemployment rates than the U.S., has equal labor market flexibility, and provides above ground jobs for Muslims and other immigrants.
I believe the main reason for the difference with the United States is that new immigrants are easily accepted in this country since it is a nation of present or past immigrants.
Foreigners of all kinds have never been so welcome in Britain, and are even less welcome in continental Europe.
So even under the best of economic conditions, immigrants in Europe do not easily integrate into the general society.
Still I confess these vicious attacks on London subways and buses are not only awful, but I also find them difficult to understand.
Do corporations have any responsibilities beyond trying to maximize stockholder value, adhering to contracts, implicit as well as explicit, and obeying the laws of the different countries where they operate? My answer is "no", although maximizing value, meeting contracts, and obeying laws help achieve many of the goals by those claiming corporations should be "socially responsible" by taking care of the environment, considering the effects of their behavior on other stakeholders, and contributing to good causes.
Still, laws and contracts, and individual use of their own resources, rather than corporate behavior, should be the way to implement various social goals.
References to the behavior of corporations really mean the behavior of top management who are in essence employed by stockholders through their representatives-boards of directors.
In most cases, it is rather obvious that management should try to increase stockholder value through their pricing policies, the products they offer, where they locate plants, and so forth.
 CEO's who fail to do this are subject to termination either through takeovers or by being fired.
In fact, the tenure of corporate heads seems to have become shorter over time.
In many other situations, apparent conflicts between maximizing stockholder value and social goals disappear on closer examination.
A corporation may give money to local charities, play up its contributions to the environment, and do other things that appear to reduce shareholder value because that sufficiently improves the government regulations that affect their profitability.
Or a company may give to various public causes, like Ben and Jerry‚Äôs ice cream company did in the past, because this attracts customers who want to support these causes partly by buying the products of companies that make contribute to these causes.
Treatment of employees that on the surface appear to reduce profitability often are in fact consistent with the criteria of maximizing stockholder value while respecting laws and contract.
For example, a company may raise the value to shareholders by keeping on older workers beyond the age where their productivity is sufficiently high to justify their earnings because that attracts younger workers at lower wages since they expect too that they will not be let go when they get older.
Or employees may invest in their on the job training because of an explicit contract or implicit agreement with their employers that their earnings will rise with their tenure as their productivity rises because of their investments.
It would be inconsistent with my criteria if a company did not raise wages appropriately of some employees when their tenure and productivity increased because the company realized that these employees did not have good opportunities at other companies.
This behavior would violate my recommendation that a company maximize stockholder value, subject to obeying all laws and contracts, implicit as well as explicit.
To take an example of what I do not believe companies should do, a global company operating in a poor country should not pay higher wages for either adult or child labor, adjusted for the quality of the labor, than is the prevailing standard in the labor market of this country, as long as higher wages would lower the profits of the company.
 I am assuming the wages they pay do not violate any laws or contracts of the countries where they operate, and that they are not subject to such bad publicity that their profits actually would increase if they paid more.
 I should add that pressure to pay much higher wages in labor markets of developing nations reduces the number employed there by international companies, and would tend to worsen, not improve, the plight of the poor populations of these countries.
Even in cases where this does not contribute to profitability, top management may want to use company resources to promote environmental ends that are not required by law, give to local symphonies, promote fair trade coffee or other fair trade products, and engage in other acts that increase the managers' utility, prestige and standing in their communities.
In a competitive market for managers, management would have to take sufficiently lower earnings, bonuses, and options to in effect pay for the company assets and profits they use to boost their own welfare and community standing.
So in such a competitive management market, management essentially engages in "socially responsible" behavior out of their own earnings.
This would not lower stockholder value, and is consistent with my criteria.
If the management is entrenched, they might be able to give away resources to environmental and other groups without lowering their own earnings, but by lowering instead dividends and other payments to stockholders.
Even this, however, would not affect stockholder returns if instead management could have taken higher earnings, bonuses, or stock options for themselves.
Depending on what they would have done with their higher earnings, the use of company profits for particular social causes may or may not lead to better overall outcomes.
But surely an important goal of any reform in corporate management is to reduce the entrenchment of management, and inject more competition into the market for CEO's and other top corporate leaders.
Whatever the degree of competition in the market for top management, the market for stock ownership is highly competitive.
Those stockholders that want companies to use potential profits for environmental or other social causes might be willing to buy the stocks of companies that do this, even if that means lower monetary rate of return on their investments.
If there are enough of these stockholders, then companies that engage in these practices would be maximizing stockholder values, and their behavior would be consistent with the criteria for corporate behavior that I advocate.
But such socially conscious stockholders are a small fraction of all owners of stocks, especially of large institutional funds and investors.
These funds would avoid companies that are "socially responsible" until prices of the stock of these companies fell sufficiently to give the same risk-adjusted monetary rate of return provided by companies that do not engage in social behavior.
This implies that new companies that are expected to contribute to various social goals beyond making profits, and respecting laws and contracts, will have lower IPO prices if they issue stock than they otherwise would have.
In that case, the founders of socially-minded companies will bear the cost of their social responsibility.
That is appropriate and is not objectionable.
I am bothered only when managers, founders, or others in control of corporations that behave in a "socially responsible" manner try to pass the cost of behaving in this way on to others rather than bearing the costs themselves.
When I have discussed gay marriage with some conservatives, they strongly opposed using the word marriage for gays.
Yet many of them accepted that gay partners should have the right to sign contracts that determine the inheritance of their property, provide various stipulations about living arrangement, the disposition of assets in case they breakup, and many other conditions.
Most of these persons might accept, I believe, that a gay partner can qualify for the social security benefits that spouses get, can be covered under employment medical plans of their partner, and so forth.
But to call these contracts "marriage" makes them see red.
It is not that they believe (and I agree with them) that allowing the word marriage will significantly increase the extent of homosexuality.
Whether homosexuality is due to genes or environment, allowing the term gay marriage to be used is likely to be a very small factor in determining the number of men and women who become gay.
The objections to gay marriage seem even stranger when one recognizes that gay couples have been allowed for a while to engage in much more significant behavior that has been associated throughout history with heterosexual couples.
I am referring to the rights that gay couples already possess to adopt children, or to have one lesbian partner use sperm from a male to become pregnant, bring a fetus to term, and have a baby that the lesbian partners raise together, or the right of one gay male partner to impregnate a woman who bears a child that is raised by the two gay partners.
No one knows yet what is the effect on children of being raised by a gay couple.
Yet it is a far more important departure from how children have been raised throughout history, with potentially much greater consequences, than using the word marriage to describe a gay union.
I believe, although there is little evidence yet, that the effects on children raised by gay couples will usually be quite negative, in part because fathers and mothers have distinct but important roles, in part because their family structures will differ so greatly from that of their classmates and other peers.
Another reason is that gay couples tend to have much less stable relations than heterosexual couples, although the data that demonstrate this is mainly from gay couples without children.
To the extent the greater turnover extends to gay couples with children, which I believe it will, then greater turnover adds a further complication and difficulty for the children raised by gay couples.
So given this radical change when children are conceived and raised by gay couples, I find the furor stemming from the desire to use the term "marriage" to describe a union between two gays to be quaint and incomprehensible.
But as Posner says there is commotion and anger about gay marriage, both pro and con.
and whether justified or not.
Given the strength of these convictions, it is better to have the issue of gay marriage resolved by the legislative process of different states rather than by largely arbitrary judicial decisions that may support or oppose the use of the word marriage to describe unions of homosexuals.
Whatever the outcome of such legislation, gay couples should have the right to contracts that specify their desired asset allocation, conditions, if any, under which they can break-up, visitation rights if they have children and break-up, and any other aspects of their relation that they consider relevant.
With the enforcement of these contracts, they would have practically all the rights that married heterosexual couples have, even when they cannot call their relation marriage.
Indeed, I have long argued (see, for example, my 1985 Business Week column reprinted in G.
S.
Becker and G.
N.
Becker, The Economics of Life) that heterosexual unions should be based on contract rather than judicial decisions or legislative actions.
Contracts are more flexible instruments than laws since they allow the terms of a marriage to fit the special needs of particular couples.
The courts would become involved only in seeing that the contract is being enforced when one party believes it is not, and in insuring that adequate provision is made for any children if a marriage dissolves.
If married heterosexual couples also had to base their relations mainly on contract, as I continue to advocate, gay couples may not feel strongly that they suffer from discrimination if they cannot be considered legally "married".
I agree with Posner that the contractual approach is not likely to be adopted in the foreseeable future.
However, it does suggest that gay couples might actually be in a better position than heterosexual couples if gay couples could use contracts to define their rights and obligations, while heterosexual couples were mainly subject to less flexible judicial and legislative law.
In fact, courts frequently override the provisions of marital contracts among heterosexuals, which they may be less likely to do when dealing with contracts between gays.
Some really fine comments.
I neither have the time nor knowledge to answer all of them, but let me respond to some that I consider more important.
The evidence is increasing that being raised by a single parent has negative effects on children, although there is debate over how big these effects are.
Being raised in an orphanage is obviously not helpful either.
I do not know if being raised by same sex parents would be worse than being raised by a single parent, but I believe that it will usually be worse.
But one of my main points was that since we allow gays to have children one way or another-increasingly not through adoption- then whether they can call themselves ‚Äúmarried‚Äù seems like a minor consideration.
More than one study shows that breakups among homosexual couples is much greater than among heterosexual couples.
Some limited data was included in the first edition of my book A Treatise on the Family, and other studies have been published since then.
Allowing homosexual marriage will discourage some gays or lesbians from entering heterosexual marriages that they later dissolve.
But that effect is likely to be very small.
If allowing same sex marriage reduced the number of partners among homosexuals, that is likely to reduce the incidence of Aids.
That would certainly count as a plus, although I doubt if allowing same sex marriage would reduce turnover of gay relations much more than giving them full and complete access to civil contracts that are fully enforceable in courts.
It is true that informal unions tend to dissolve in very high number, including those among heterosexuals, and in Scandinavia as well as Anglo-Saxon countries.
So allowing official ‚Äúmarriage of gays might greatly reduce their turnover rates, but that is still unknown and I believe unlikely.
Some have criticized my claim that children raised by gay couples will tend to be at a disadvantage, partly because they have same sex parents, and partly because they would differ so much from their peers.
One person asserts that evidence indicates that diversity is beneficial in schools and other organizations.
I believe there is no credible evidence showing that for schools.
African-American children, for example, do well in school when they have good teachers, and principals who enforce high and tough standards-just read Thomas Sowell on this subject.
I do not believe it would be difficult to have a civil contract in place of legal and legislative control of marriage and divorce.
Most couples would start with a standard form, and only add to that form clauses that deal with special aspects of their relation.
I would make such contracts compulsory, partly to remove the bad ‚Äúsignal‚Äù about lack of commitment when a person asks for a contract.
A large number of mainly interesting comments.
I shall try to respond and clarify my position.
I believe corporations have as much right to lobby for laws as other interest groups, and  should not be under any obligation to ignore the laws that are passed,  even those that favor them.
To take an example from the non-corporate world, the most powerful interest group in the United States is probably the AARP, the association of older, and mainly retired, men and women.
They have managed to pass many laws dealing with social security and medicare that are too generous to richer retirees, and are on balance harmful to the general welfare.
But I do not hear many people argue that rich persons should refuse the social security checks that they receive because in a better system that money and perhaps still more resources would go to poorer persons.
Some of the comments claim that since stockholders often cannot get rid of their top management, they cannot get their views known other than by selling their stock.
I dealt with that case in my comment.
The market for top management is indeed not perfect, and that means entrenched management gets greater compensation then they would receive in a more competitive market for managers.
Entrenched managers do not have to fully consider stockholder interests in their decisions, and can take higher compensation, and have the corporations they manage engage in various actions.
Perhaps they will be ‚Äúsocially responsible‚Äù, but surely we do not want to rely on entrenched management to set the standards for corporate behavior? Entrenched and powerful management was the heart of the problem with World Com, Enron, and most other companies that had corrupt leadership.
I said several times in my entry that if stockholders of a company are willing to pay for various  ‚Äúsocially responsible ‚Äú non-profit maximizing actions of the company, then the company should indeed deviate from pure profit maximizing behavior to cater to the stockholder interests.
But such a company would still be maximizing stockholder value, including the values of stockholders about pollution behavior, employee compensation, and charitable giving of the corporation.
But we know from the relatively small number of funds that claim to invest only in socially responsible companies that the vast majority of owners of stock do not want their companies to deviate much from profit and value maximization.
Of course, if corporations can find charities better than stockholders can, then my criteria imply that corporation should do that.
I even gave the example of fair trade coffee.
But that is hardly the most common situation.
Some hard questions were raised about whether corporations should knowingly pollute, encourage use of unhealthy milk formula, and the like.
Some of these cases would be consistent with my criteria because corporations might be sued if they knowingly encouraged behavior that would poison water, or stockholders would not hold stock in companies that they knew used slave labor, and so forth.
However, I do not believe corporations have the obligation in the pollution case to go beyond their legal and contractual requirements.
For example, corporations should not follow the Kyoto Agreement with regard to their production in the United States.
I take this position because it is impossible to know where to draw the line.
Why stop at the reduction in emissions called for by Kyoto? After all, many environmentalists believe Kyoto is far too limited.
Pollution standards should be set by legislation and judicial decisions.
Corporations should obey those standards, not lie about what they are doing, and follow the environmental wishes of their stockholders, but not try to be substitutes for voters and legislators.
Someone remarked on the death of Jack Hirshleifer.
Not directly relevant to our subject, but he was an outstanding and creative economist, and a good friend since my graduate student days.
I believe he would have adopted a position on this subject similar to mine; perhaps he has written on corporate goals.
Very wealthy men and women like Warren Buffett and Bill Gates would frequently create charitable foundations even if that did not help them avoid estate taxes on their wealth.
After all, the estate tax was negligible when Rockefeller and Carnegie created their large foundations.
Nevertheless, a sizable estate tax that exempts charitable giving has encouraged the creation of many large private charitable foundations in the United States.
Private giving to various causes is a substitute for public giving, and private giving tends to be more effective because of the competition among different foundations and other charities.
In this respect I believe the US market for giving is much better than the European approach because financing of the arts, higher education, hospitals, and many other activities to a considerable extent comes from governments in Europe, while in the US these activities much more depend on fees for services and private donations.
Competition among private donors is as conducive to efficiency and productivity growth in these fields as is competition among producers of cars and other such goods.
Although this will not be the main focus of my discussion,  I support the abolition of the estate tax, or at least its significant weakening to cover only very large fortunes, perhaps along the lines of the recent bill on reform of the estate tax passed by the House of Representatives.
The present estate tax is too discouraging to accumulations of moderate amounts of capital in small businesses and other ways.
It also encourages legal and accounting spending devoted solely to finding and exploiting loopholes that is considerable relative to the tax revenue the estate tax raises (about $30 billion in 2005).
If the concern is about inequality caused by inheritance, the tax should not be on estates, which may be divided up among a number of heirs, but on the amounts inherited by individuals.
Decentralized private charitable giving can be encouraged through the tax system even without an estate tax, as long as charitable contributions can be generously deducted from income taxes.
 Indeed, as I argue below there are advantages from having foundations created while donors are alive rather than mainly after their death.
However, if the estate tax were abolished or substantially weakened, it would be desirable to raise significantly the cap on giving in the federal tax code-set presently at 30% of adjusted gross income- to a much higher per cent, perhaps 100 % or even higher (if higher than 100%, there might be a loss carry over provision).
This brings me to my main topic, Warren Buffett's announced gift of over $30 billion to the Bill and Melinda Gates Foundation.
It is unusual in that this amount and any interest earned are supposed to be entirely spent by the time the Gates' have either died or no longer run their foundation.
Even more rare for such a large gift is that Buffett is not creating a foundation with his name, but instead is giving the money to a foundation created and soon to be managed by his friend, Bill Gates.
Most foundations continue long after the death of their creators, and after replacement of the initial managers and Boards.
This commonly leads to a shift away from the donors' intent.
Partly that is desirable given unanticipated changes in the social and economic environments, and in the resources supplied by other donors and by governments.
Most people recognize the need for foundations to react to these fundamental forces, but another type of change over time in foundation goals is more disturbing.
Self-made businessmen who usually have strong beliefs in capitalism and a competitive market system create many of the large foundations.
Such "conservative" views often guide the early days of their foundations' activities, partly because the donors choose managers and Boards who are sympathetic to their beliefs.
Over time, however, foundations frequently become more liberal, as management and Boards change.
Although the market for foundation executives is highly competitive, these executives typically come from education and family backgrounds that are similar to those of modern journalists.
As a result, foundation executives also tend to have a "liberal" outlook on the role of government, and the most pressing social and economic questions.
This liberal outlook often clashes with the views of the original creators of the foundations they manage.
Examples of the shift from conservative to liberal over time include the large Ford and Pew Foundations.
Some foundations created after the death of a conservative donor, such as the MacArthur and Packard Foundations, from the start have a much more liberal orientation than the donors.
I do not know of any prominent examples that moved the other way, from initially liberal to becoming conservative over time.
A solution to the problem of the shift over time away from the intent of donors is for donors to require that their foundations give away all their assets by a set date, or shortly after their deaths or that of managers they trust.
The Olin foundation is the most prominent large foundation that was directed to, and did, succeed in giving away its assets by a set date.
It accomplished that goal, under the leadership of William Simon and James Pierson, while giving its money in a thoughtful manner, such as funding a number of prominent Law and Economics programs at Law Schools.
Warren Buffett believes in capitalism and competitive markets, but he is not a "conservative".
Still, he is concerned that over time his huge gift would be used in ways that he would not approve.
So he is following the example set by Olin and a few other foundations, and he is installing a sunset provision that would require all his charitable assets to be spent by the time the Gates" have either died, or withdrawn from an active role in their foundation.
Even more unusual is his decision not to set up a new foundation under his name, but to give the bulk of his fortune to the Bill and Melinda Gates Foundation.
He has chosen to place his philanthropic money in the same manner as he invests the money in his funds; namely, by picking managers that he believes will use the money well and yield a high return.
The only difference between spending charitable and investment monies is that the former yields returns in the form not of profits, but in terms of effectiveness in furthering the donor's aims.
The Gates foundation has so far been spending most of its money on promoting health in developing countries through attacking diseases that are more common in these countries, such as malaria.
From the little I know about this foundation, it has spent its money relatively well.
So it does not seem surprising that Buffett has confidence in this particular foundation.
What Buffett is doing may be wise, but is very uncommon because most large donors want their names on the Foundation they create, and also on the organizations sometimes set up by recipients of their gifts.
Even the Olin Foundation generally called the Law and Economics Centers they created after Olin.
That Buffett could resist the temptation to have a foundation monument in his name testifies not only to his wisdom but also to the inner confidence of the man.
The City Council of Chicago recently passed an ordinance that makes Chicago the largest city in the United States to impose special wage and fringe benefit requirements for "big box" retailers.
The ordinance requires that beginning next July, companies with more than $1 billion in annual sales and having stores in Chicago with at least 90,000 square feet of space will have to pay Chicago employees a minimum of $9.25 an hour in wages and $1.50 an hour in fringe benefits, such as health insurance.
By 2010 these will rise to $10 an hour in wages and $3 an hour in benefits.
These minimums far exceed Illinois' minimum wage of $6.50 per hours.
About 40 existing stores in the city would be affected.
The ordinance was supported by 35 out of 49 alderman on the Council despite the vehement opposition of Mayor Richard Daley, who in the past could dictate the Council‚Äôs policies.
The mayor is right to be opposed, for it is indeed a bad ordinance, and will hurt the very groups, African-Americans and other poor or lower middle class individuals, that supporters claim would be helped.
The ordinance will raise the cost of using low skilled labor in Chicago by Wal-Mart, Target, Home Depot, and other big retailers with mega stores.
Even without it, large cities are not attractive to mega retailers because space for large stores and for the parking they require is much more expensive in cities than in suburbs and smaller towns.
These big box stores are much more common in suburbs of large cities than in the cities themselves partly for this reason, and partly because many suburban communities offer tax and other financial subsidies to these stores in order to induce them to locate there.
Even if retailers with mega stores were trying to cater at least in part to the Chicago market, this ordinance makes them more likely to open up in suburbs that could be reached by some Chicagoans as well as by those living in the suburbs.
Large retailers that continue to operate in Chicago will reduce their use of low skilled workers by replacing some of them by more skilled employees, and by machinery and other capital.
Retailers will also try to avoid being covered by the ordinance by reducing their space to just below 90,000 square feet.
In a city like Chicago the burden from these responses to the ordinance will fall disproportionately on African Americans and Latinos since fewer jobs will be available to workers in the city with less education and lower skills.
In addition, prices in Chicago of items sold relatively cheaply by stores like Wal-Mart and Target will rise because fewer of these stores will open in the city.
The mega stores that remain will raise their prices because their costs will go up.
Since city customers of these stores are mainly families with modest incomes who seek low prices rather than elaborate service, they more than the affluent classes will be hurt by the rise in prices and reduced availability of big box outlets.
Who would favor such a bad ordinance that will harm the very groups it is claimed to help? Support for the ordinance from more conventional supermarket chains and clothing stores is easy to understand since the mega stores drain away customers and force prices down.
The absence of opposition from low-income consumers who shop at these stores is not surprising since they are not well organized to exert political pressure on the City Council.
The strong backing of the ordinance by Chicago unions is also to be expected.
Unions always favor increases in minimum wages, even when as in this case the minimum only apply to some employers.
Any increase in the minimum wage would raise the demand for unionized skilled workers who would substitute for the less skilled employees displaced by the minimum.
Unions have an additional reason to try to raise the costs of big box companies like Wal-Mart's since these companies do not have unions, and aggressively oppose them.
Higher costs forced on non-union companies reduce the competition they offer to unionized companies.
Perhaps of even greater importance, this ordinance helps demonstrate that unions have the political clout that can make operations more costly and difficult for large non-union retailers.
To ward off further discriminatory ordinances, these companies could be forced to adopt a more favorable stance toward unionization of their employees.
It is more difficult to understand the aggressive support of the Chicago ordinance by most African-American members of the Council and other leaders of the African-American community.
However, it should be noted that some of those who represent predominantly African-American communities voted against the ordinance, including Leslie Hairston who represents the 5th Ward  (where I live).
Not only will fewer jobs be available for African-Americans, but also the prices they pay for food, clothing, and many other retail goods would go up.
One explanation for why most African-American leaders support the ordinance is that they are politically allied with unions and possibly other groups that benefit from this ordinance.
These leaders may recognize that their constituents will generally be harmed by the ordinance, but in return for taking this hit they expect the support of unions on issues like more generous Medicaid support that help low income families.
Clearly, this ordinance might raise serious Federal constitutional issues because of its discriminatory treatment of large retailers.
Since to my knowledge the City Council has not offered any plausible reason for basing the ordinance on square footage of floor space, it is likely to be considered a violation of equal protection of the laws.
Still, ordinances like this one are dangerous not only because of their direct harmful effects, but also because they encourage future legislation that could apply similar and additional requirements to stores like McDonald's and other smaller stores.
It also encourages interferences in other markets, such as the proposal now before the Chicago Council that would require residential developers to include a certain percentage of "affordable" housing units in their  developments.
So Mayor Daley is right to oppose this ordinance and he should veto it, even if the veto will be over ridden.
A report released last Tuesday by the American Council on Education, and discussed in various media articles this week, indicates that over 55% of college students are women.
This reflects a continuing upward trend in women's share of enrollments for the past 30 years.
It is ironic that an earlier 1992 study claimed that colleges were biased against women because women were intimidated to speak up, the type of course work emphasized favored men, etc.
In a political response to at most a minor problem, Congress unwisely passed "gender equity" legislation during the 1990‚Äôs.
The gender gap in enrollments is especially large for lower income African-Americans and Latinos, and is negligible for children from middle and upper income white families.
I do not believe there is reason to be concerned about the overall growth in the relative number of women college students-good for them- but I continue to worry about the performance of African American and Latino young men.
On pretty much all objective measures, women deserve to have greater college representation than men because they study harder, get better grades, are more likely to graduate from high school, complete their school work in a more timely fashion, write better, and in other ways outperform young men.
Schools competing in trying to get the best students naturally respond to this, and end up selecting larger numbers of young women than young men.
Women still remain a minority, however, in the sciences, engineering, business, and economics.
The  trend toward increased college enrollment of women will continue the growth in the education of women in the labor force compared to that of men.
This should further narrow the gender gap in earnings, a gap that has already narrowed greatly since the mid-1970's.
Since the education of younger women is exceeding that of men, will the gender earnings gap begin to reverse signs, so that women will earn more than men?.
In answering this question, first note the study by Francine Blau and Lawrence Kahn, which shows that the gender pay convergence slowed during the 1990's even though the education of women in the labor force continued to grow relative to that of men.
This slowdown in convergence is consistent with my belief that earnings of the average women in the labor force will not rise above that of the average man, although an increasing fraction of women in the labor force will have higher hourly earnings than men.
While the gap between the education of women and men in the labor force will continue to grow, the commitment of women to careers will remain below that of men, despite the claims about their career ambitions from the selected college women in the media stories on the enrollment gap.
Women will continue to have much greater responsibilities for child care than men do.
That means sometimes long periods of being out of the labor force, more reluctance to work overtime, less willingness to take jobs that require much out of town travel, greater likelihood of taking absences to care for sick children, and other behavior that lowers both hourly earnings and hours worked.
All these differences continue to be found in Sweden, perhaps the country with the greatest degree of gender equality, and they would apply in even greater force to the United States and other countries.
Although young women do considerable better on average then men in school, the variance in performance among men is much greater than the variance among women, and admisssion policies should depend on variance as well as mean performance.
Due to their greater variance, many more men drop out of school, have failing grades, study little, have disciplinary problems, and the like.
Greater variance also implies, however, that many more of the outstanding students are men.
Certainly after many decades of teaching economics, I would confirm that my female students have done better on the average, while the men were more likely to be at both tails of the distribution; that is, men were more often both very bad and very good.
I would hasten to add, however, that I have had a considerable number of very exceptional female students too.
Larry Summers got into trouble by suggesting that the variance in gender difference in achievement- a gender differ in performance is found on many dimensions of behavior- might have a genetic basis.
It surely might for reasons put forward by many biologists, but I believe (and I am confident that Summers would agree) that the difference in variance is mainly explained by interactions between genetic and environmental forces.
Young girls may be discouraged from high achievement, or young women may recognize that they will have and want childcare responsibilities, and realize that this will cut down on their career commitments.
Of great social concern is the very poor performance by African American and Hispanic young men compared to young women of the same race or ethnicity.
African American young men not only tend to drop out of high school more and are less likely to go to college, but the men are also far more likely to end up as delinquents, in jail, murdered, unemployed, and in other bad circumstances.
This to me is the most serious racial issue in the United States, and is only partly reflected in the much higher college enrollment rates of African American women than men.
Perhaps African American boys are more affected than girls by the absence of fathers in their households, or negative peer pressure is more harmful to boys, or drug selling and other crimes is more appealing to them compared to school, and so on.
I am not going to try to solve such a major problem in this post, except to indicate that legalizing drugs would help African American young men, and so too would any steps that can be taken to stabilize the family structure of African Americans.
The final issue I address is whether it is proper for colleges to use an affirmative action plan for men; that is, to have easier admission standards for male applicants to bring enrollments closer to 50-50 for men and women.
I believe it is a perfectly legitimate strategy.
Since the US higher education system is highly competitive, different schools should be allowed to choose their policies on these and most other issues.
Then they compete for students and for funds from donors by offering different programs, including the ratio of female to male students.
An additional factor in this case is that usually does not apply to affirmative action programs to help racial or ethnic minorities is that the group facing higher standards, female applicants, often want schools to try to get more male students so that their social life would be better.
After all, most schools that formerly had students of only one sex-such as Princeton and Vassar- have become coed to provide a better social and perhaps also intellectual life.
Since affirmative action toward men would be supported not only by men, but also by many women, easier standards for male applicants seems to be a desirable policy for many colleges.
Collective punishments are part of "negative" incentives that are used to reduce crime, military aggression, and other injurious acts.
There is often a strong case for such collective punishment to deter harmful acts.
Punishing the individuals or groups who commit these acts through police, armed forces, and the judiciary is the first line of defense against such socially harmful behavior.
Sometimes, in addition, "positive" incentives are used to encourage the help of private enforcers.
This is accomplished by offering payments to whistleblowers who report white collar crime, to spies who give information on the military intentions of potential enemies, and to individuals who provide information on wanted criminals or unsolved crimes.
In his discussion in favor of collective punishment, Posner uses the example of employers who may be held liable for injuries due to acts by their employees while performing their duties.
Employer punishment is often appropriate for the reasons Posner gives.
A less good example frequently discussed is the owners of bars who are penalized for automobile accidents or other injuries caused by persons who became drunk at their bars.
Similarly, some states hold the hosts of parties partly responsible for any automobile accidents or other injuries caused by guests who had too much to drink at their parties.
I believe that collective responsibility in these drunk-driving examples and in many other situations is inappropriate because those being punished have little ability to deter the injurious behavior that is being discouraged.
Can party hosts be expected to keep track of how much each of their guests has drunk, especially at large cocktail parties? That seems to me to an unwise use of negative incentives unless the goal is to discourage cocktail parties themselves.
Otherwise, it is best to only punish the individuals who get drunk at parties and afterwards injure others.
They are the ones who can best keep track of how much they drink.
It is easier for managers of bars than party hosts to keep track of the number of drinks ordered by different patrons.
However, punishments to bar owners after serving more than say 4 drinks to patrons who later commit acts that injure others would give heavy drinkers an incentive to bar hop, and have their quota of 4 drinks at each of several bars.
That might cut down the amount of heavy drinking since bar hoping is more costly than drinking at a single bar, but it also punishes heavy drinkers who take care not to drive afterwards or engage in different actions that cause injury to others.
It surely would not make much sense to collectively punish the set of bars where patrons accumulate their excessive amount of drinking.
So my conclusion is that in this case too the preferable policy is to only punish intoxicated persons who cause injuries to others, and not attempt collective punishment of bar owners.
To take a different example, parents should often be held responsible for harms to others caused by their younger children.
Parents can discourage crimes and other anti-social acts of these children by the upbringing they provide, and also by the punishments they administer to children who engage in such acts.
Since after a certain age, perhaps sixteen or eighteen, parents have much less control over children, parental responsibility for children's acts should diminish, and children's responsibility should increase as the children age.
At one time, children were responsible after the death of parents for any debts their parents left.
Children were also punished for other anti-social behavior of their parents.
This type of collective punishment has been eliminated by developed nations, presumably because children do not have the power typically to deter their parents from contracting debts or committing crimes.
The only justification for such collective punishment of children in these cases would be that parents care about the children, and that caring parents would be less likely to enter into debts they cannot pay, or engage in anti-social acts, if children were held responsible for parental behavior.
But such collective punishment to children would have little effect on selfish parents, and it would increase the suffering of their children who already are harmed by having selfish parents.
To take a different political example than the Lebanese one that Posner uses, should the German people have been held collectively responsible for the atrocities committed by Hitler and other Nazis? It was inevitable that many German people suffered from World War II, although bombing of Dresden and some other cities by the Allies was probably unnecessary.
Collective punishment of leading Nazis was appropriate, as was the requirement that Germany pay reparations for property taken, for some of the damages caused by German occupations of various countries, and for the murder of millions of Jews, Poles, Russians, and other groups.
However, it would be more far-fetched to hold the German people responsible for the election of Hitler since he took steps to prevent the German people from voting him out of office.
Moreover, people who voted for Hitler in the first place could not have easily anticipated the full dimensions of the horrors he would inflict on the world.
None of the comments addressed the dead weight costs involved in maintaining the estate tax.
Some estimates suggest that far more than $1 is spent in avoiding the tax for each dollar collected.
This is not surprising, given the attention paid to trusts, generation-skipping trusts, and other methods of legal avoidance.
Such a high ratio of costs to collections hardly qualifies the estate tax as an attractive tax.
I am also concerned about trying to equalize opportunities for children from different families.
But the estate tax makes only a small contribution to that since most of the inequality that is passed on from generation to generation is in the form of earnings.
Children of higher income families earn more than others, and the difference is sizeable.
The estate tax makes a small contribution compared to the effects of parental wealth on earnings and inequality.
Children who inherit a lot may not work hard and lead not very valuable lives.
But I believe that should be left for parents to decide how much they want to leave them.
Moreover, if the desire is to affect inequality in the children's generation, the tax should be on inheritances, not on estates.
So what is the estate tax accomplishing when it is expensive, unimportant in affecting inequality, and does not address directly the inequality of inheritances?.
Still, while I am against the estate tax, as I said in my post, I could tolerate a tax on very large estates.
But the minimum estate that would be taxed should be far higher than it is at present.
In addition, the tax rate should be no higher than about 20 %, so less effort would be put into using lawyers and accountants to reduce the estate tax liability.
Whatever is the case with the Catholic Church and the Republican Party, they are not foundations.
I was referring to foundations that moved from being on the left to becoming conservative or libertarian.
Even without an estate tax, a basis would have to be established for assets that are transferred to heirs.
If it is the original purchase price, then there is no less incentive to trade before death than there would be by the heirs after death.
In either case, capital gains would be taxed at the capital gains rate.
I do not agree that the act of giving makes someone liberal in the sense of a government interventionist.
One can give to support the education of children from poor families, to scientists working on finding cures for cancer or diabetes, and so forth without being a proponent of large government and extensive regulations.
Indeed, the less one believe that governments can do the job; the more one will support private charities.
Quit rates of secretaries and other lower-level federal government employees are considerably below those of comparable workers in the private sector, while government officials quit at much higher rates than their civilian counterparts.
What explains this difference, and is it good or bad?.
The first part of the question is easy to answer: differences in quit rates are due to differences in the ratio of federal compensation to compensation in the private sector at low and high lob levels.
Federal employees at lower level jobs may not make more than their civilian counterparts, but their economic situation is quite good when all other characteristics are taken into account.
Government workers at these levels have great job security since they cannot be fired after a short probationary period, except for the grossest forms of misbehavior, such as frequent absences from work, racial or sexual remarks, etc.
In addition, they get many holidays, good vacations, generous pensions and health benefits, and are usually not under much pressure at work.
The full set of characteristics offered to these federal employees is very attractive, which is why lower level jobs attract many applicants, and the jobs must be rationed through tests and in other ways.
By contrast, federal employees at higher-level jobs-including senior executives in the Department of Homeland Security that Posner discusses- are paid considerably below that of comparable private sector executives.
In order to attract and keep high quality employees, the federal government must provide enough compensating advantages in the form of prestige, power, working conditions, and in other ways.
There is little turnover of federal judges presumably for that reason since most of these judges could earn much more as practicing lawyers, even judges who, unlike Judge Posner, are not particularly energetic.
For many high-level federal officials, government service is a short-term option that may provide interesting experiences, including learning about various policy issues.
But after a while the much higher compensation in the private sector becomes too tempting-of course, their short stay in the government may have been anticipated- and many officials quit the federal government after only a few years (or less).
It would be possible to reduce turnover of federal officials by significantly raising their pay, so that it becomes closer to what they could receive in the private sector.
As with federal judges, turnover might be low even with pay that remained considerable below that in the private sector, but not as much below as at present.
Some talented men and women like working on public problems of great importance, the security of job tenure would appeal to some, and so on.
Members of Congress currently receive salaries of $165,200 per year-leaders in the House and Senate receives a little more- plus generous retirement and health benefits.
That is a lot relative to the pay of most employees in the private sector, and there does not seem to be a shortage of men and women who want to be elected to Congress.
Under present rules, it is not possible to pay senior officials in Homeland Security or other agencies more than members of Congress receive, even when higher pay is necessary to fight off the appeal of employment in the private sector.
To pay top public officials much more than they already get would require a change in these rules, which would not be politically easy.
Yet for the sake of this discussion, suppose it were possible to cut down the turnover of federal officials in the Department of Homeland Security and elsewhere.
Would that be desirable? I believe that having more experienced employees is as valuable to the federal government as it obviously is to the private sector.
Turnover of executives with years of experience at the same private company is low- clearly much below that among federal employees- because these companies value that experience.
Long time executives accumulate useful knowledge about the organization and practices of the firms they have worked for over the years-what economists call firm-specific capital.
I see no reason why such knowledge should be much less important in the federal government.
As Posner indicates, Great Britain and some other countries do manage to retain high-level officials of good quality over much of their working lives.
Turnover of federal officials is undesirable for another reason that is not really applicable to the private sector.
There is much "rent-seeking" by private companies that try to get special treatment and subsidies from the federal government as it spends huge resources.
Hiring of former federal employees to top executive positions at private companies helps them improve their rent-seeking position vies a vies competitors.
 In particular, if competitors all hire former top executives of the Department of Homeland Security, that may simply offset their rent-seeking positions without adding social value.
At the same time losing many top executives weakens this department.
So I favor higher pay for top federal officials in sectors that experience heavy turnover.
 However, without major changes in pay scales, I am skeptical about the advantages of developing much more stringent rules that prevent federal officials from going to work for suppliers of services or products to the agencies that employed them.
The risk of such rules is that they eliminate one of the major present attractions of federal employment at high-level jobs.
Adding such rules to the low pay would then make it even more difficult for federal agencies to attract able and honest top-level executives.
Costs are usually easier to measure in modern wars than benefits.
Two estimates of the past and expected future cost of the Iraq war to the United States by Davis, Murphy, and Topel, and by Bilmes and Stiglitz are discussed in my blog entry for March 19, 2006.
They quantity the cost of materials and equipment used and destroyed during the war, the higher cost of attracting volunteers to the American armed forces, the cost of the many injuries to military personnel, and the cost of reconstruction aid to Iraq.
They also use modern economic research on the amounts necessary to compensate individuals for taking life-threatening risks to value the cost of the number of American lives lost in the war.
The cost estimated by these two studies differs to some extent, as analyzed in my post referred to above.
However, a total cost of the war to Americans in the range of $700 billion- $1.2 trillion overlaps both studies.
For the purposes of my discussion, I assume the total American cost of the war will amount to $1 trillion.
As Posner well discusses, some potential costs are extremely difficult to quantify, and hence they are ignored by both these studies.
Such hard to quantify costs include any increased alienation of Muslims toward the United States, the experience gained by the insurgents in fighting American military power, and a potential widespread conflict between Sunnis and Shiites.
Benefits of the war are even hardier to quantify than the costs.
Possible benefits would include increased skill of the American armed forces at fighting insurgencies in cities that use suicide bombers, car bombs, and other modern tactics, preventing Saddam Hussein from using the international weapons black market to acquire weapons of mass destruction, perhaps a weakening of terrorist organizations like Al-Qadda, the stabilization of the Middle East, and possibly other benefits.
Since difficulties in quantifying such benefits apply to other modern wars and also to many other large-scale activities, it might seem that benefit-cost analysis is useless when applied to these kinds of issues.
Obviously it would be much easier to assess wars and other big events if benefits also could be readily quantified; maybe that will become possible some day as economists continue to make progress in finding ways to quantify various intangible benefits and costs.
I say, "continue" because not that long ago economist believed that the value of life to individuals was unquantifiable.
Yet advances in the theory of risk-bearing showed how the statistical value of a life could be estimated from choices individuals make in situations that increase their probability of dying, such as driving fast, or working as civilians in war zones such as Baghdad.
Still, even without direct estimates of benefits, the costs estimated for the Iraq war can be used to make a benefit-cost assessment of the war.
Given a cost of the Iraq war of say $1 trillion, how big would benefits from the war have to be to exceed this amount, and is that likely? For example, $1 trillion is equivalent to a payment of a little over $10,000 by every single American family, or about twenty per cent of average family income.
Would the typical family be willing to pay that much to finance the war in Iraq because they believe that they will get at least that much in benefits from the war? Almost surely the answer would be an overwhelming "no" in any poll taken about Americans' willingness to pay this amount for the war, although some people might not appreciate some long term benefits (or costs), like a possible regional stabilization or serious harm to a terrorist organization.
The estimated cost of the war can be translated into other measures that may help in determining whether or not the war is considered a success or failure.
For example, if the statistical value of life is taken to be $5 million for the average young American- this magnitude is in the center of various estimates of such a value- then a $1 trillion cost of the war is equivalent to a loss of 200,000 young men and women.
Since this is far greater than the actual loss of lives even in most major wars, like the Vietnam war, it is hard to believe that Americans would be willing to pay that much for the Iraq war, even if Hussein had or was likely to acquire weapons of mass destruction.
To be sure, a complete translation of the total cost into a lives-lost equivalent is extreme and possibly misleading, but it does provide a way of gauging the benefits necessary to justify the huge cost of the Iraqi war.
Most people do not object if others make a fortune producing tangible products, such as Bill Gates' wealth from Microsoft, or the wealth Bill Marriott received from his hotel chain.
There is much greater uneasiness about wealth that results from financial activities, such as that accruing to successful hedge fund and private equity managers.
Financial-based wealth does not seem to many persons to be "earned" to the same extent as wealth based on a tangible product whose contribution to human needs is easily identified.
Although this differentiation between financial-based and product-based wealth is understandable, it is not justified.
Hedge and private equity funds, and other modern asset management companies, provide a highly valuable service by discovering ways to separate, allocate, and manage risk.
Developments in the theory of modern finance that began a half century ago made possible a sophisticated treatment of risk in ways that were unavailable even a few decades ago.
Homeowners can hedge their housing risks with housing futures, companies can hedge their energy costs, and banks can originate mortgages and then sell them off to companies in aggregate mortgage packages that reduce and diversify the risk from slowdowns in regional or even national housing market.
This diversification obviously did not prevent the collapse of the sub prime home lending market, but it did greatly reduce any overall fallout from this collapse.
That some hedge funds have spectacular failures, such as Long Term Capital, is regrettable, but is no different from the failure of a large company with tangible products, such as many large airlines or automobile companies.
To be sure, the new skills at handling risk and aggregating large financial resources has contributed to some major excesses, such as the Internet stock bubble, or the too generous expansion of mortgages to families with bad credit risks.
Yet, the modern management of risk has made home ownership available to many lower income families that would never have happened in the old system where mortgages were originated and then held by banks.
Robert Frank in the op-ed article discussed by Posner does not deny that hedge and private equity funds provide valuable services, but claims that an excessive number of rather talented persons are drawn in financial investing relative to the social worth of these activities.
As Posner indicates, Frank relies on two arguments: the first is overconfidence on the part of individuals entering into hedge and equity funds that leads them to exaggerate how well they would do in this field relative to other fields.
This overconfidence is a particular strong pull into financial management according to Frank because of the extremely high incomes that a few money managers make.
The problem with this explanation of the hedge fund industry is that such overconfidence should lead to lower average earnings among hedge fund and private equity fund managers than they can get elsewhere.
All the available evidence that I am familiar with goes the other way.
For example, starting salaries of MBAs who get jobs in hedge funds and other companies in the financial sector are quite a bit above, not below, what these same persons would get if they went to work in industry.
The overcrowding hypothesis based on factors like overconfidence implies that they would start with lower salaries.
Although we have much less evidence on this, the growth in earnings with experience also seems more rapid among those who went into managing money than graduates who chose other fields, although it is necessary to correct for possibly much lower earnings of those who drop out of a sector.
However, I know of no evidence that this affects average earnings of those who pursue a financial career more than others.
Some hedge funds may earn more than they deserve because it is so difficult with a limited time series on asset returns to determine whether good performance in the past was due to superior skills or good luck.
Lucky funds would end up with not only more assets but also with higher fees per dollars of assets than their true performance merits.
Unlucky funds would be in the opposite situation.
This does not necessarily raise the overall earnings of the average fund manager, but it may increase the inequality of earnings among managers that would affect which men and women get attracted into the industry.
Frank also claims that overcrowding arises because hedge and other equity funds poach on each others' opportunities.
In effect, real resources are spent by funds in a socially unproductive way because they partly take opportunities away from others.
This argument is not without some merit, but other considerations imply the opposite, that too few human resources go into fund management.
Funds have continued to discover new ways of packaging risk and managing that add value to society, but the incentive to invest in such innovations is limited because many important discoveries are readily copied by other funds.
It is not clear to me that the forces like this one that make for under entry into fund management are greater or lesser than those making for overinvestment.
So it would be unwise to motivate the taxation and regulation of hedge and other equity funds under the assumption either that too many human resources have entered this industry, or that the industry needs special encouragement through the tax-regulatory mechanism.
Individuals and groups support government regulation of energy use either because they are concerned about the negative effects of oil, gas, and other fossil fuels on the environment, or about the impact of demand for these fuels on national security.
Prospects for political consensus on energy policies are dim for the many approaches that further one of these causes at the expense of the other.
Environmental-driven energy policies try to reduce pollution from cars, the generation of electric power, and other industrial and household activities.
An obvious example is the current efforts to reduce CO2 emissions from the use of fossil fuels, especially oil and coal.
National security energy policies may try to reduce the vulnerability of energy sources to hostile acts, such as interference with oil or gas imports, or to disruptions at the source, such as with Middle Eastern oil supplies, or the supply of natural gas from Russia.
National security also depends on how much revenue is received by oil and gas producing countries that may support terrorism, or are vulnerable to potential takeover by terrorist organizations.
Many ways to make the supply of energy sources more reliable in order to promote national security conflict with the goal of reducing pollution from the use of energy in the economy.
For example, China and the United States have abundant supplies of coal, and their further development and use would make the energy used by both countries less dependent on foreign supply.
However, coal fired power plants emit large amounts of CO2 that are thought by many to be an important contributor to global warming.
The burning of coal also contributes significantly to local pollution, mainly through the emission of sulphur dioxide gases.
These local emissions can be greatly reduced through known technologies that involve installing expensive scrubbers that may not be used by poorer countries.
Some security specialists advocate that the United States shift more of its demand for oil and natural gas to friendly sources in the Western Hemisphere, such as Canada and Mexico, in order to reduce the vulnerability of its energy imports to hostile acts.
Such a shift, however, would not improve the environmental impact of America's use of oil and gas, nor would it do anything to reduce the revenue from the sale of oil and gas by Middle Eastern and other potentially unfriendly states.
For the world price of these fuels should not be affected by much, if at all, by shifts of U.S.
demand to nearby friendly nations.
Countries that would have bought oil and gas from say Canada and Mexico would now have to buy more of these fuels from Middle Eastern or other potentially unfriendly producers to make up for the shortfalls in available supply from these countries.
Fortunately, various governmental policies contribute to both environmental and national security goals.
A tax on carbon emissions from business and household production would not only help reduce global warming-by how much is still controversial- but it would also lower the world prices of these fuels through reducing the demand for fossil fuels.
Lower prices would cut the revenues received by Middle Eastern states from the sale of oil and natural gas.
This is why a carbon tax receives support from many environmentalists and national security advocates.
Nuclear power also gets high marks on national security grounds (although as we will see, not necessarily on international security grounds) as well as on many environmental issues.
Nuclear power is clean and does not emit CO2, SO2, or other gases that contribute to global or local pollution.
Accidents and natural events that release radioactive materials from nuclear power plants are a risk, such as in the recent earthquake in Nigata prefecture in Northwestern Japan that caused a leak of apparently low level radiation from a nuclear power plant located there.
But serious accidents have been very rare because so many precautions are taken in state of the art plants-the worse accident occurred at Cherynobyl in a plant that had minimal and primitive safety measures.
Although safety is not much of an issue in nuclear power plants in economically advanced countries, it may well be for some of the many plants currently under construction in China and India.
The disposal of nuclear waste, either through reuse, or burial deeply in former mines or far under oceans, may also present major environmental challenges.
Clearly, reuse of much of the waste is feasible-France, a major producer of nuclear power, reuses most of its waste.
My conclusion from reading some of the literature on disposal is that safe burial is also feasible, especially for large countries like the United States and China, but that view is not universally accepted.
Nuclear power has many advantages on national security grounds.
The supply of uranium, unlike oil, is widespread and abundant, and there is little risk that any single or small number of uranium producing countries can blackmail other countries by withholding supplies.
The international security issues from nuclear power relate to countries that as yet do not have arsenals of nuclear weapons.
If these countries develop nuclear power they will automatically generate the plutonium necessary to construct nuclear bombs.
If some of that plutonium fell into the hands of rogue states or terrorist groups, the risk of possibly millions of deaths from nuclear attacks becomes scary.
Driven by environmental and security concerns, more extensive government intervention in the supply and demand for energy are to be expected during the next few years in all economically important countries.
Policies that meet both these concerns are feasible, and clearly would have greater political support than the many approaches that advance one of these goals at the expense of the other.
Estimates suggest that intangible capital, which is mainly skilled employees, constitutes 70 per cent of the total capital of large American companies.
Attracting and retaining skilled workers is the number one priority of these companies.
The fundamental cause of the great emphasis being placed on talent is that production in modern economies is much more knowledge-intensive than production was in the past.
This is because modern technologies and capital require abundant supplies of skilled workers to be effective.
The competition for talent has raised earnings of skilled workers relative to other workers, and has led to an international search for the best and brightest.
When outsourcing of jobs to India (and other countries) began in earnest in the early 1990s, many software engineers and other highly skilled workers in India were available at wages much below those in the United States and Western Europe.
Since the number of skilled workers in countries doing the outsourcing is large relative to the supply of underutilized workers in India, before long outsourcing absorbed all the available skilled workers in countries like India.
As long as salaries of Indian workers benefiting from outsourcing were still far below those in America, the competition for these workers by American and Indian companies would be intense.
This competition would push up the earnings of skilled Indian workers.
Companies report that what they have to pay such skilled workers is rising rapidly: 10-15 per cent per year, and perhaps at much higher rates.
The easier it is to outsource skilled jobs, and the closer is the substitution between work done in India and the United States, the larger would be the induced increase in salaries of skill workers in India from the growth in outsourcing.
If Indian and American highly skilled employees were considered close substitutes by American companies, competition to employ the cheapest workers of a given quality would induce the salaries of such Indian workers to rise near parity with that of American workers of the same skills.
Of course, Indian and American workers are far from close substitutes because transportation and capital costs are cheaper to companies producing and selling in the American market.
Hence outsourcing becomes uneconomic considerably before Indian and American salaries become equal.
A front-page article in the Wall Street Journal several days ago indicated that a few high tech companies in Silicon Valley were closing their operations in India, and shifting them back to the United States.
These companies lament that salaries of Indian technical employees are rising so rapidly that it has wiped out the advantage of staying in India.
Although outsourcing has certainly accelerated as well as reflected the international hunt for talent, outsourcing is not the only factor that has invigorated the talent market.
Migration of skilled workers also is part of the competition across nations for talent.
It has long been recognized that educated and skilled persons within a country move more easily than other workers to cities and regions that offer better paying and more attractive work and living conditions.
This explains, for example, why earnings of college-educated persons in different parts of the United States are quite similar, much more so than the earnings of persons who did not go to college.
Movement of educated and skilled persons to places with better paying jobs operates across nations as well.
Of course, international movement of people is blunted by the many restrictions imposed on immigration by richer nations.
However, in their hunt for talent, countries have been making it easier for doctors, professors, and others with high tech and other skills to move legally across nations (although it may be easier for the less skilled to migrate illegally since they can work underground more readily).
An increasing number of countries, such as Canada, Australia, and to a lesser extent the United States, have adopted point system for immigrants and passed various laws that offer skilled individuals work permits and permanent residency.
The international movement of talented workers has also greatly increased with the globalization of many companies.
Global companies employ workers in different countries from very different backgrounds, and they have little hesitation to choose a president from say Scotland, a vice-president from France, or a head of the research department from India or China.
 Companies actively recruit skilled workers through H-1B and other programs designed to attract skilled workers, and they lobby for more generous programs that favor the immigration of skilled workers.
The supply of educated persons willing to move across countries has also increased considerably.
Television and the Internet have homogenized cultures to a much greater extent than in the past.
The decline in the cost of international air travel makes it much easier to return regularly to one's country of birth to visit family and old friends.
Moreover, as the number of skilled immigrants from a country grows, other skilled immigrants from that country become more willing to emigrate since the new immigrants can expect to find friends and neighbors with similar backgrounds.
Technology and physical capital are complementary with skilled workers in the production process for most modern goods and services.
Therefore, the growth during the past several decades in the international movement of capital and technologies through direct foreign investment in less developed countries has also contributed to the intense competition across countries for highly skilled workers.
Leona Helmsley's bequests of $12 million to her dog, and several billion dollars to the welfare of dogs in general, are highly unusual, eccentric, and strange.
Should these and similar bequests be allowed? No doubt $12 million is far more than can be spent on a single dog in any reasonable way, but is that the right criterion to use?.
An analogy with huge bequests to individuals is appropriate.
The number of billionaires in the world has been growing rapidly rapidly, and a large fraction of these are in the United States.
Most of them will leave hundreds of millions, and even billions, of dollars to their spouses, children, and grandchildren.
Some of these recipients may recklessly go through these huge bequests in a short time, but is there any sensible way heirs can spend billions, or even hundreds of million, of dollars in their lifetimes?  It is difficult for the rest of us to imagine how to spend that much, even with purchases of private planes, several expensive homes, and other luxuries.
Spend these sums they may, but not in ways that would generally be considered useful or sensible.
Similarly, I have no doubt that it is possible to spend $12 million on Helmsley's dog, but that would involve expenditures that most would consider at least as foolish and wasteful as the way some very wealthy heirs spend their much larger inheritances.
This type of reasoning would explain why the Uniform Trust Act authorizes judges to reduce bequests to pets to a so-called maximum comfort level.
Yet, with a couple of exceptions, I do not believe that trustees or anyone else should have the power to decide whether the nature and amounts of bequests for particular purposes are excessive and inappropriate.
Respecting individual preferences, no matter how idiosyncratic, is one important measure of a free society, even when those tastes relate to bequests and inheritances.
As Posner said, peoples' tastes take many forms, and it is not possible to prove objectively that some preferences, such as the huge bequest to Helmsley's dog, are much worse than even larger bequests to worthless children?.
One traditional exception to the principle of accepting bequests relates to those bequests made by persons judged to be incompetent, either because of demonstrated senility or mental illness.
Such an exception, when used sparingly to avoid abuses, can be useful since bequests made by mentally incompetent individuals may well have no rational basis, not even eccentric ones.
Another exception to the rule of allowing bequests, no matter how strange or eccentric, would concern bequests that violate laws.
For example, a bequest to give guns to individuals would be disallowed if there were stringent gun ownership laws.
Similarly, a bequest to promote white supremacy, or the employment only of males, would be judged to violate anti-discrimination laws.
Respect for individual preferences does allow bequests to be taxed.
To reduce the importance of bequests that make little sense, Posner proposes to tax large bequests given to charitable organizations.
 Yet it is not bequests that raise questions about appropriateness, but inheritances.
A large bequest divided among many recipients, including many individuals and charities, does not raise anywhere near the same ethical or other problems as the same large bequest given to a few children or charitable organizations.
The United States' estate tax and that of many other countries is wrong-headed because they tax bequests rather than inheritances.
The case for making charitable organizations exempt from estate, inheritance, and other taxes that apply to individuals and for-profit businesses is that these charities decentralize giving to hospitals, universities, the poor, and for many other purposes that are not readily made self-financing.
Absent private charities, the financial support of these purposes would be concentrated, that is monopolized, in the hands of governments, as it is in countries that do not exempt foundations and charities from estate and other taxes.
The major concern about private charities and foundations is not that they are too large, but that their leaders often perpetuate their organizations beyond any reasonable duration, partly by transforming their goals over time.
I believe a case can be made for keeping the tax exemption in place, but changing present laws to require charities and foundations to have limited durations, perhaps 30 years.
That is, to introduce a kind of sunset provision for private charities and foundations.
If they stayed in business beyond that time period, they would then be subject to significant wealth and income taxes.
New York City's ban on the use of trans fats in restaurants is the first of many efforts to restrict not only trans fats, but also the whole fast food industry.
Boston has approved a similar ban, while on Friday California became the first state not only to ban trans fats in restaurants, but also to ban trans fats in all retail baked goods-packaged goods are so far exempt.
San Francisco as well as New York City has approved bills that require fast food chains to post on menus the calorie content of the food they serve.
Los Angeles is considering a bill that would prevent fast food restaurants like McDonald's from adding any outlets in a 32 square mile part of the city that already has many such restaurants.
The concern behind these and similar ordinances is that trans fats and fast food restaurants have contributed in a significant way to the rapid growth in obesity among Americans.
Several arguments have been advanced to support these and even more onerous bans and restrictions on fast foods, but I believe they are of dubious merit.
One claim is that consumption of trans fats, and of fast foods more generally, creates an "externality" because this helps produce obese teenagers and adults.
The so-called externality results from the fact that greater obesity raises taxes on others because the medical bills of the obese are partly paid by general taxpayers due to subsidized medical care.
As Posner points out, this argument may be weak because obese adults die earlier than others and in this way obesity saves medical costs.
 However, even if true, I am uneasy about such externality arguments.
Typical true externalities occur when actions by one individual or firm directly harm others, as when pollution by a company worsens the health of inhabitants, or when a drunk driver crashes into another car and injuries or kills the driver and passengers of that car.
But the alleged "externality" with regard to obesity is due only to the government's subsidy of medical expenditures, so that it is a case of one government intervention- justified or not- causing another intervention-control of eating.
 It is not a path of intervention causation that most people would be comfortable with in many situations.
For example, since the government subsidizes the medical care of children of poorer parents, a mechanical application of this type of externality argument would say that this justifies governmental control over the number of children that poor parents can have.
Additional children of these families create an "externality" by raising taxes on others to pay for the medical costs of these children.
Many similar examples can be given where government regulations and other government programs cause certain types of behavior that raise taxes or subsidies and adversely affect taxpayers, even though there would be no externality from this behavior in the absence of the government programs.
Another argument made for interventions in the fast food industry and sales of other foods is that individuals are somehow duped into eating too much, and into eating unhealthy foods.
As a result, they gain weight, and become vulnerable to diabetes, heart disease, cancer, and other ailments.
Yet it is hard to justify the word "duped" when studies show that much of the growth in obesity has been due to the development of cheap fast foods that consumers find tasty, and also to the growth of television, computer games, the Internet, and other attractive activities that are sedentary.
 Increased consumption of low priced tasty foods and changed time allocation toward more sedentary leisure and work activities would be optimal responses according to any model of human behavior where individuals are trying to increase their well being, as they, rather than outsiders, interpret their well being.
Economic analysis would predict that the lower priced high caloric goods and sedentary technologies that are found throughout the world would lead to weight gain and growing obesity not only in the United States but also in other richer countries.
And so they have.
 Special theories about consumers being duped, misled by advertising, etc are not needed to explain what are normal responses to low prices and new technologies.
To better understand this movement against fast foods, one has to appreciate first of all that many individuals do not like fat persons.
This might be called an externality from obesity because overweight people lower the utility of others, but few people, even including most economists, would want to take government actions to try to correct eating that has such (prejudicial) effects on others.
A second crucial point is that most of the gain in obesity is concentrated among children and adults in low income, low educated families, especially African-American families and other minorities.
Educated people find it easy to claim that less educated individuals are often misled into choices that the more educated do not like, and often do not understand.
Yet it is no surprise that poorer individuals- poor whites as well as African-Americans-find fast foods particularly attractive.
Fast food outlets are so common in poorer neighborhoods partly because they are cheap.
In addition, since working single parents (mothers), and working dual parents, predominate in minority families, fast foods are a time saving way to consume tasty foods when free time is scarce.
Any possible longer term adverse health consequences of these foods are put on the back burner when immediate needs to feed children and parents are much more pressing.
Requiring restaurants to post calorie content of foods will have a negligible effect on demand for these foods because, as I argue above, consumers are buying these foods not mainly because they are ignorant of the effects on weight, but because of cheapness, convenience, and taste.
Banning fast food restaurants would have an effect by eliminating their convenience.
Still, substitutes would develop, such as prepared foods in supermarkets, or fast foods served not in chains but in individually owned restaurants (hostility to food chains is also partly responsible for the growth of legislation against them).
Maybe eventually some of these substitutes would be banned too.
Such continuing extensions of the power of government are a very unattractive prospect.
Given all the ineptitude in government regulation, as reflected for example in the regulation of Freddie Mac and Freddie Mae, and in other housing problems, I believe it is better to tolerate some mistakes by consumers in their choice of foods.
Such additional regulation of fast foods will make people worse off in the long run as well as in the short run.
Gasoline prices have increased rapidly during the past several years, pushed up mainly by the sharply rising price of oil.
A gallon of gasoline in the US rose from $1.50 in 2002 to $2 in 2004 to $2.50 in 2006 to over $4 at present.
Gasoline prices almost trebled during these 6 years compared to very little change in nominal gas prices during the prior fifteen years.
The US federal tax on gasoline has remained at 18.4 cents per gallon during this period of rapid growth in gasoline prices, while state excise taxes add another 21.5 cents per gallon.
In addition, many local governments levy additional sales and other taxes on gasoline.
Gasoline taxes have not risen much as the price of gasoline exploded upward.
The price of gasoline is much lower than in other rich countries mainly because American taxes are far smaller.
For example, gasoline taxes in Germany and the United Kingdom amount to about $3 per gallon.
Some economists and environmentalists have called for large increases in federal, state, and local taxes to make them more comparable to gasoline taxes in other countries.
Others want these taxes to rise by enough so that at least they would have kept pace with the sharply rising pre-tax fuel prices.
At the same time two presidential candidates, Hillary Clinton and John McCain, proposed a temporary repeal during this summer of the federal tax in order to give consumers a little relief from the higher gas prices.
We discuss the optimal tax on gasoline, and how the sharp increase in gas prices affected its magnitude.
Taxes on gasoline are a way to induce consumers to incorporate the "external" damages to others into their decision of how much to drive and where to drive.
These externalities include the effects of driving on local and global pollution, such as the contribution to global warming from the carbon emitted into the atmosphere by burnt gasoline.
One other important externality is the contribution of additional driving to road congestion that slows the driving speeds of everyone and increases the time it takes to go a given distance.
Others include automobile accidents that injure drivers and pedestrians, and the effect of using additional gasoline on the degree of dependence on imported oil from the Middle East and other not very stable parts of the world.
A careful 2007 study by authors from Resources for the Future evaluates the magnitudes of all these externalities from driving in the US (see Harrington, Parry, and Walls, "Automobile Externalities and Policies", Journal of Economic Literature, 2007, pp 374-400).
They estimate the total external costs of driving at 228 cents per gallon of gas used, or at 10.9 cents per mile driven, with the typical car owned by American drivers.
Their breakdown of this total among different sources is interesting and a little surprising.
They attribute only 6 cents of the total external cost to the effects of gasoline consumption on global warming through the emission of carbon into the atmosphere from the burning of gasoline, and 12 cents from the increased dependency on imported oil.
Perhaps their estimate of only 6 cents per gallon is a large underestimate of the harmful effects of gasoline use on global warming.
Yet even if we treble their estimate, that only raises total costs of gasoline use due to the effects on global warming by 12 cents per gallon.
That still leaves the vast majority of the external costs of driving to other factors.
They figure that local pollution effects amount to 42 cents per gallon, which makes these costs much more important than even the trebled cost of global warming.
According to their estimates, still more important costs are those due to congestion and accidents, since these are 105 cents and 63 cents per gallon, respectively.
Their figure for the cost of traffic accidents is likely too high ‚Äìas the authors' recognize- because it includes the cost in damages to property and person of single vehicle accidents, as when a car hits a tree.
Presumably, single vehicle accidents are not true externalities because drivers and their passengers would consider their possibility and internalize them into their driving decisions.
Moreover, the large effect of drunk driving on the likelihood of accidents should be treated separately from a gasoline tax by directly punishing drunk drivers rather than punishing also sober drivers who are far less likely to get into accidents.
On the surface, these calculations suggest that American taxes on gasoline, totaling across all levels of government to about 45 cents per gallon, are much too low.
However, the federal tax of 18.4 cents per gallon is almost exactly equal to their figure of 18 cents per gallon as the external costs of global warming and oil dependency.
To be sure, a trebled estimate for global warming would bring theirs up to 30 cents per gallon.
However, the federal government also taxes driving through its mandated fuel efficiency standards for cars, although this is an inefficient way to tax driving since it taxes the type of car rather than driving.
Still, the overall level of federal taxes does not fall much short, if at all, from the adjusted estimate of 30 cents per gallon of damages due to the effects of gasoline use on global warming and oil dependency.
Any shortfall in taxes would be at the state and local levels in combating externalities due to local pollution effects, and to auto accidents and congestion on mainly local roads.
Here too, however, the discrepancy between actual and optimal gasoline taxes is far smaller than it may seem, and not only because single vehicle accidents are included in their estimate of the cost of car accidents, and accidents due to drunk driving should be discouraged through punishments to drunk drivers.
One important reason is that congestion should be reduced not by general gasoline taxes, but by special congestion taxes- as used in London and a few other cities- that vary in amount with degree of congestion (see our discussion of congestion taxes on February 12, 2006).
Congestion taxes are a far more efficient way to reduce congestion than are general taxes on gasoline that apply also when congestion is slight.
In addition and often overlooked, the sharp rise in pre-tax gasoline prices has partly accomplished the local pollution and auto accident goals that would be achieved by higher gas taxes.
For higher prices have cut driving, just as taxes would, and will cut driving further in the future as consumers continue to adjust the amount and time of their driving to gasoline that costs more than $4 a gallon.
Reduced driving will lower pollution and auto accidents by reducing the number of cars on the road during any time period, especially during heavily traveled times when pollution and accidents are more common.
The effects of high gas prices in reducing congestion, local pollution, and accident externalities could be substantial.
These authors estimate the size of local driving externalities, aside from congestion costs, at 105 cents per gallon.
Even after the sharp run up in gas prices, this may still exceed the 28 cents per gallon of actual state and local taxes, but the gap probably is small.
It surely is a lot smaller than it was before gas prices exploded on the back of the climb in the cost of oil.
In effect, by reducing driving, higher gasoline prices have already done much of the work in reducing externalities that bigger gas taxes would have done when prices were lower.
A recent New York Times article indicated that the fraction of full-time faculty members in the United States older than age 50 more than doubled between 1969 and 2005, increasing from 23 percent to over 50 percent.
We explore why this graying of American academia occurred, and some of its consequences.
Most of the professors who have been retiring in recent years took their first academic jobs in the late 1960s and early 1970s.
Colleges and universities were expanding rapidly during those years, which meant that job opportunities were abundant and many young faculty members were added.
New hiring slowed as the rate of growth of higher education slowed down in the 1990s and afterwards, which decreased the ratio of younger to older faculty.
Congress passed a law in the early 1990s that made it illegal for colleges to force faculty members to retire unless the schools clearly demonstrated that a professor could not teach or do research at a modestly high level.
Prior to that law, colleges forced their faculties to retire at a given age, usually 65, and made exceptions for those members they considered special in their teaching, research, or other contributions.
Two former colleagues of mine, the Nobel Prize-winning economists George Stigler and T.
W.
Schultz, were kept on for this reason- in Stigler's case until he died at age 81, while Schultz did not fully retire until he was in his mid-eighties.
This is a bad law because colleges now cannot force less competent or less energetic older faculty to retire while keeping the more productive faculty members since they are required by law to offer the same retirement terms to their entire faculty.
The older system allowed schools to undo some of the harmful effects of the faculty tenure system by eventually retiring faculty that they should never have appointed.
to be sure, given the strong competition among schools of higher education in the United States, the growing physical and mental health of older faculty might anyway have led colleges to raise the general retirement age.
Colleges have tried to cope with their inability to force retirement by offering a variety of bonuses to all faculty members who agree to retire voluntarily or go from full time to part time.
However, if older members of a faculty like their jobs, optimal buyout plans that try to induce voluntary retirement would generally lead to later retirements than under a compulsory system that is flexible enough to allow for treating different faculty differently.
As a result, these buyout plans have not prevented faculties from aging, although they have slowed that down since about a third of eligible older faculty members usually agree to be bought out.
Unfortunately, these plans often have an adverse selection effect since the more capable faculty are the ones who frequently accept a buyout.
They may not retire but instead take a job elsewhere, often outside of academia.
The sharply improved healthiness of older Americans has led many of them to continue working at later ages than did earlier generations.
This is true for all types of jobs, but the effect is especially important in occupations requiring intellectual and other mental skills, such as teaching and research at colleges.
These skills now usually last until men and women are in their seventies, whereas physical skills, say those required in masonry or assembly line work, tend to decline rapidly as workers get into their fifties.
It is more difficult to understand the consequences than the causes of the aging of academic faculties, although one obvious effect is that opportunities for young PhDs have deteriorated.
The slowdown in the expansion of institutions of higher learning in the past couple of decades has increased the scarcity of academic positions for younger PhDs.
As a result, young academics have to concentrate more on doing good enough teaching and producing enough research to merit tenure in this tougher environment.
Adding to this job pressure for American academics is that the market for faculty, along with that of many other services, has gone global since students from all over the world come in large numbers to get their graduate education at American universities, especially in the sciences, economics, and a few of the more humanistic fields.
Many of the best of the foreign students stay on to teach and do research.
 They compete against Americans looking for academic positions, and hence narrow the market for Americans.
Indeed, their competition partly explains why in many fields fewer Americans are getting their PhDs, and instead are taking MBAs, law degrees, and other advanced degrees where competition from foreigners has so far been less severe.
One might think that aging faculties would tilt toward a more politically conservative faculty since older persons tend to be more conservative.
However, as the Times article indicates, this does not appear to be true with regard to the faculty aging that is occurring now.
Many older faculty members, especially in the humanities and social sciences, were active in the student and civil rights movements of the 1960s and '70s, and have maintained a radical, often Marxist, orientation toward events and history.
The tough competition for academic jobs gives younger faculty much less time for radical and other political causes.
Moreover, younger faculty went to school after many of these cultural wars were over, and they have more moderate views, although most still consider themselves Democrats, and are usually anti-markets and anti-business.
Important new ideas in different fields come disproportionately from younger persons, and academic research is no exception.
Significant advances not only in mathematics, but also in biology (such as Crick and Watson), in economics, and even in the humanities have typically been made by younger rather than older persons.
This means that while the aging of faculties at American universities adds greater experience, faculties have lost some freshness of approach that comes from having younger faculty.
Of course, it is possible, and perhaps even probable, that growing life expectancy and healthiness of older persons will shift ages of peak creativity toward older ages as well.
The one recommendation from my analysis that would slow down the aging of college faculties is to abolish the federal law that prevents colleges from having compulsory retirement ages for most faculty members.
The strong competition among these schools would lead to more effective utilization of older teachers and researchers than would result from legislation and regulations.
The values of most university endowments have taken large hits during this financial crisis.
The average decline since the real estate and stock market crashes began is probably over 20%, while the value of some endowments dropped by much more than that.
Universities reacted to this severe shock with panic, and they often reduced their spending by too much.
I say "by too much" not because of any confidence that stock markets and real estate will return any time soon to their peak values.
This is highly unlikely for real estate, and dubious for stock markets.
My reason for objecting to large cuts in university spending is that they have usually under spent relative to their endowments.
The philosophy behind these spending rates is that universities should not live off of capital, so that they can pass their capital intact on to future students and faculty.
In order to preserve endowment values for the future, universities have tried to spend from their endowments only the income yielded, including capital gains, adjusted for year-to-year fluctuations in returns, and for other risks.
On average, they have spent between 4% and 6% of their endowments.
This philosophy has not been implemented, if by not living off capital is meant that endowment values would be held rather constant in the long run.
For endowments at all the major universities, and many other schools as well, have grown at very good rates during the past 40 years rather than being maintained intact.
For example, Harvard's endowment increased many fold from 1960 to its peak at well over $30 billion in the fall of 2008.
The University of Chicago was much less successful in its investment and gift-raising strategies than Harvard, but even the value of Chicago's endowment more than trebled from 1960 to its peak in 2008.
University spending has been too little to maintain endowment values constant partly because the annual return on their endowments has been underestimated, and partly because of large annual gifts from alumni and foundations that raised endowments.
These gifts were especially big during the past decade as stocks soared, and as financial executives and others received generous bonuses and stock options, but they have not been negligible even during more normal times.
If we conservatively assume that gifts double endowments over 40 years, than in order to account for gifts and maintain endowment values, schools should spend 1 ¬æ percent of their endowments in addition to the total incomes yielded by the endowment.
Since incomes have averaged over long time periods at about 5-6% of endowments, the additional spending that would tend to keep endowments constant would raise endowment spending by more than one third.
This means a very a large increase in total spending for schools like Harvard that get a big fraction of their annual revenue from endowment income.
The percentage increase in spending would be significant but smaller for schools like Chicago that are less well endowed, and get a larger fraction of their revenue from tuition and grants.
More fundamentally, the argument that universities should try to maintain a constant, or "sustainable", endowment value is flawed and not compelling for reasons similar to the criticisms of proposals to maintain an economy's capital over time to achieve "sustainable" economic development.
Why should schools aim to maintain endowments constant when even aside from private gifts, endowment income provides only a fraction of their annual revenue? Moreover, technological improvements in the efficiency of spending, by schools, such as more effective use of internet learning, may allow smaller endowments in the future to achieve as much in educating students and conducting research as larger endowments do now.
Another reason for spending more out of endowments than the income yielded is that effective spending on training of students and research, and often also spending on sports, are frequently productive in stimulating greater gifts and governmental grants.
For example, schools that produce pioneering research, or that attract able and ambitious students who go on to achieve great success, tend to get larger amounts of foundation and other gifts through the favorable publicity they receive.
In effect, spending is productive not only in raising student and faculty achievements, but also indirectly in inducing greater gifts that can lead to even greater accomplishments in the future.
In recent years members of Congress have proposed forcing universities to spend a larger fraction of their endowments, so that endowments do not increase as rapidly as in the past.
It would not be wise for Congress to get involved in university spending rates, but for the reasons I have given, it is in the self-interest of well-run universities to spend at much higher levels than they have been doing during the past several decades.
In late June the House of Representatives approved The American Clean Energy and Security Act.
If the Senate approves a similar version, this would constitute the most important American legislation on overall control of carbon-emitting gases.
The main provision of the bill is a cap and trade system, to begin in 2012, which would provide allowances for emissions of carbon dioxide and other greenhouse gases.
The goal of the bill is to reduce the carbon emitted by American industries to 17 % below 2005 levels by the year 2020, and to reach more than 83% below 2005 levels by 2050.
Some environmentalists have criticized the 2020 energy-reduction goal as too little and too late.
However, I believe that the optimal greenhouse gas policy is to go slow initially until greater evidence on the severity of global warming becomes more apparent.
The main threat to the world from global warming is an as yet unknown probability of quite severe warming that would cause considerable harm-the world could adjust at relatively little cost to a moderate degree of global warming.
The additional evidence accrued during the next decade will provide more information about the likelihood of the severe warming that would merit more drastic steps.
If such steps become warranted, then the rate of carbon reduction and carbon storage should be speeded up beyond that envisioned in the House bill.
On the other hand, if milder versions look likely, the 2050 goal of a more than 80% reduction in carbon emissions could be relaxed.
Another reason for going slowly at first is to determine how much will be done on global warming not by EuropThese and other developing countries, along with the US, will be the major contributors to greenhouse gas emissions during the next decade.
If the BRICs cannot be bribed or threatened into taking steps to reduce their carbon emissions, the US might rethink how much it wants to do.
Rethinking American policy would be especially urgent if the more the US did, the greater the migration of industries from America to developing countries.
While accumulating information during the coming decade on the severity of the global warming problem, the US should greatly invest in trying to achieve breakthrough technologies in advanced carbon control and storage.
The aim would be to acquire technological knowledge that could be quickly implemented without enormous cost if the evidence warranted imposing major carbon controls and storage in a short period of time.
The House bill allocates about $1 billion annually to the Carbon Storage Research Corp for further research.
This is probably not enough, given the possible need to act quickly and decisively to combat global warming.
Under the House bill during the first decade or so, almost all carbon allowances will be given away, mainly to companies, rather than sold to the highest bidders.
Over time the fraction sold would continue to increase until the vast majority of allowances would be sold.
Many economists have criticized this giving away of allowances during the next couple of decades as a missed opportunity to raise revenue for the federal government through the sale of allowances.
In light of the pending massive federal deficits during the next several years, auctions might seem the best approach.
However, the political reality is that significant cap and trade legislation might not gain enough political support if the government sold energy emission allowances rather than giving the majority to the industries most affected.
For energy-intensive industries are well organized politically, and they would strongly oppose a carbon tax-which is what an auction of emission allowances amounts to- since such a tax would reduce profits in these industries.
On the other hand, energy-intensive industries might support, or only weakly oppose, a cap and trade system where most allowances were given to them since that system could increase their profits, or only reduce them by a little.
Economists typically assume that when a new tax, like a carbon tax, is introduced, government spending is held fixed, so that other taxes can be reduced.
That assumption is often useful for analysis, but may not be realistic politically.
The revenue from a new tax may be mainly used to increase government spending rather than to reduce other taxes.
The case for selling emissions through auctions rather than giving them away is a lot weaker if the government wasted much of the additional revenue, or if the additional spending itself distorts behavior by households and firms.
Empirically, the most common response to "new" tax sources, like a carbon tax, is a combination of reduced other taxes and greater government spending (see Becker, Gary S., and Casey B.
Mulligan, "Deadweight Costs and the Size of Government." Journal of Law and Economics, October 2003).
This typical response makes the case for selling cap and trade allowances considerably weaker than if government spending were held fixed after new tax revenues were collected.
Many Democratic Congressmen, member of the Obama administration, and others writing about American health care envy the 'European" health deliver system since they attribute Europe's lower mortality rates, despite much lower per capita spending on health care than by the US, partly to the European model of health care delivery.
This model involves government domination of spending on medical care that involves extensive government regulation and rationing of access to medical care.
Envy of the European model explains why the Democratic proposed "reforms" of the American system involve large increases in government involvement in health care, including a government-run health insurance plan.
In evaluating whether envy of the European approach is justified, it is crucial to determine whether the higher mortality rates in the US than in  many European countries is due to defects in the American health delivery system, or to other factors.
Mortality rates are affected not only by health care, for they are also very much dependent on personal behavior, such as smoking, eating habits, exercise, stress, how carefully individuals follow the medical advise they receive, and many other kinds of behavior under the control of individuals rather than the medical profession.
The US has relatively high incidences of obesity, partly because Americans consume lots of high fat and high cholesterol foods, and Americans were heavy smokers in the past, just to mention a few unhealthy forms of behavior.
Perhaps then the higher US mortality rates are due much more to differences in personal habits and personal care than to defects in the US health delivery system?.
One way to separate health care from personal behavior is to consider survival from serious diseases, such as various cancers and cardiovascular diseases.
In my post on health care on June 7 of this year I referred to a study published in Lancet in 2007 that compares five-year cancer survival rates for the US, the United Kingdom, and the European Union as a whole.
The study examines early diagnosis, early treatment, and access to the best drugs, and finds that the United States does very well on all three criteria.
As a result, five-year cancer survival rates are much better in the US: they are about 65% for both men and women, whereas they are much lower in these other countries, especially for men.
Early diagnosis helps survival, but it may also distort comparisons of five or even ten-year survival rates since some cancers would be discovered at very early stages.
An alternative that avoids this distortion is to compare age-adjusted mortality rates for different diseases.
Early detection and other medical care that improved life prospects would show up as lower mortality rates.
A recent excellent unpublished study by Samuel Preston and Jessica Ho of the University of Pennsylvania compare mortality rates for breast and prostate cancer.
These are two of the most common and deadly forms of cancer-in the United States prostate cancer is the second leading cause of male cancer deaths, and breast cancer is the leading cause of female cancer deaths.
These forms of cancer also appear to be less sensitive to known attributes of diet and other kinds of non-medical behavior than are lung cancer and many other cancers.
These authors show that the fraction of men receiving a PSA test, which is a test developed about 25 years ago to detect the presence of prostate cancer, is far higher in the US than in Sweden, France, and other countries that are usually said to have better health delivery systems.
Similarly, the fraction of women receiving a mammogram, a test developed about 30 years ago to detect breast cancer, is also much higher in the US.
The US also more aggressively treats both these (and other) cancers with surgery, radiation, and chemotherapy than do other countries.
Preston and Hu show that this more aggressive detection and treatment were apparently effective in producing a better bottom line since death rates from breast and prostate cancer declined during the past 20 by much more in the US than in 15 comparison countries of Europe and Japan.
US death rate rates from prostate cancer went from about 7% above those of the comparison countries in 1990 to over 20 % below the average of these other countries in recent years, or almost a 30% greater fall in US rates.
American death rates from breast cancer declined from about 10% above the average of these other countries in 1990 to slightly lower.
These results suggest that the US health care system does deliver better control over serious diseases than systems in other advanced countries.
Of course, American health care delivery is much more expensive, so a natural question would be whether the greater apparent benefits are sufficient to justify the greater cost?.
To get a very rough answer to this question, suppose generously that the American health care system adds 1 life year on average to persons above age 50 compared to what they would have with the average health care system in the 15 comparison countries used by Preston and Hu.
Suppose also that people over age 50 value each additional life year by $120,00- since this is a ballpark figure often used for the average American, the dollar value may be lower (or higher!) for older persons.
 Given that about 4 million Americans reach age 50 each year, the aggregate value placed on these additional life years with these assumptions would be close to $500 billion.
This is a little over 4% of American GDP, so this assumed improvement in mortality rates, even aside from improvements in the quality of life, could justify much of the additional spending by the US on health care compared to other wealthy countries.
Of course, the assumption that the American health system produces one additional life year for each person over age 50 may be much too generous, and perhaps older people place a much smaller value on an additional year than $120,000.
Still, these calculations suggest that America should hesitate without additional evidence of the type I have used before jumping on the European bandwagon, and conducting radical surgery on the American health care delivery system.
The United States, as the name indicates, was formed as a confederation of independent states-initially only 13, but since expanded to 50.
The first Federal government was based on The Articles of Confederation, but that was abandoned because it gave too little power to the Federal government.
It was replaced in 1787 by the Constitution.
Many governance rules have been a compromise between the growing power of the federal government, and the original vision of the country as a confederation of states that retain much of the legislative powers.
Posner describes the evolution of the Senate from a few members appointed by state legislatures to a much larger body elected directly by the voters of each state, where each member serves a 6-year term that is renewable indefinitely.
Small states, like Rhode Island, have the same number of senators as the most populous states of California and New York.
The Senate is an anachronistic byproduct of the original concept of a federation of states since in the modern world the federal government dominates state governments.
The potential influence of a relatively small number of states is increased by the supermajority rule that is embodied in the filibuster.
The Senate filibuster is not a part of the Constitution, but is a rule the Senate established.
However, the protection the filibuster gives to minorities does fit in with the belief of the founders of the nation that the power of majorities needs to be constrained in order to protect the interests of minorities.
The Constitution, and the checks and balances among the executive, legislative, and judicial branches of government, are important ways they devised to rein in the power of majorities.
Whether someone likes or dislikes the use of the filibuster on particular issues usually comes down to whether they like the legislation that the majority is trying to pass.
However, the evaluation of the Senate filibuster as a legislative rule should depend on whether filibusters have blocked desirable legislation more than they prevented the abuse of power by a majority, especially power by a temporary majority.
Its main use during the past 70 years is not reassuring since Southern senators filibustered on several occasions against civil rights legislation in order to protect discrimination by Southern states against blacks.
However, their filibusters did no more than delay the passage of this legislation, and the delay gave time for the South to become reconciled to the necessity of giving Southern blacks more equal rights.
The mere threat of a filibuster has sometimes discouraged the bringing up of bills in Congress, although these threats also probably only temporarily delayed passage of legislation with a strong and sustained majority interest.
Even senators that oppose particular legislation hesitate to filibuster legislation that has a strong mandate since they risk becoming unpopular.
Yet they may use the threat of a filibuster to extract a compromise more favorable to their position.
The use of the filibuster has been rising over time: the 110th Congress had over 100 closure votes to try to cut off further debate.
The Democratic majority in the present Congress seemed intent on achieving a "filibuster proof" majority of 60 members.
Yet, as Posner discusses, having just the minimum number of senators that can enforce the closure rule gives considerable bargaining power to Democratic senators who do not strongly endorse the Democratic position on particular legislation.
I generally support requiring super majorities in the legislature on a selected number of major issues because I believe the abuse of majority power is a greater danger in the world of big government than is the blocking of the majority's will.
To be sure, the Senate filibuster is not the ideal way to do this, partly because it is not confined to major issues, and partly because the Senate is based on representation by states rather than by population.
Nevertheless, the filibuster may well be better than the alternative of having just straight majority voting in both houses.
A 2300 page bill is usually an indication of many political.
compromises.
The Dodd-Frank financial reform bill is no exception, for it is a.
complex, disorderly, politically motivated, and not well thought out reaction.
to the financial crisis that erupted beginning with the panic of the fall of.
2008
Not everything about the bill is bad-e.g., the requirement that various.
derivatives trade through exchanges may be a good suggestion- but the.
disturbing parts of the bill are far more important.
I will concentrate on five.
major defects, including omissions.
1
The bill adds regulations and rules about many activities.
that had little or nothing to do with the crisis.
For example, it creates a.
consumer financial protection bureau to be housed at the Fed that is supposed.
to protect consumers from fraud and other abusive financial practices.
Yet it.
is not apparent that many consumers were victimized during the financial boom.
years, or that consumer behavior had anything of importance to do with the.
crisis.
For example, consumers who took out subprime mortgages that required.
almost no down payments and had low interest rates were not victimized since.
these conditions enabled them to cheaply own houses, at least for a while.
The.
“victims” were the banks, and especially Fannie Mae and Freddie Mac, that were foolishly.
willing to hold such risky mortgages.
The bill gives the Fed authority to limit interchange or.
“swipe” fees that merchants pay for each debit-card transaction, although these.
fees had not the slightest connection to the financial crisis.
Such price.
controls are in general undesirable, and hardly seem to require the attention.
of the Federal Reserve.
The bill also gives the SEC authority to empower stockholders.
to run their own candidates for corporate boards of directors.
Corporate boards.
often receive some blame for the crisis-mainly unjustified in my opinion- but.
stockholder election of some members will not improve corporate governance, and.
will probably make that worse.
2
The Dodd-Frank bill gives several government agencies.
considerable additional discretion to try to forestall another crisis, even.
though they already had the authority to take many actions.
The Fed could have.
tightened the monetary base and interest rates as the crisis was developing,.
but chose not to do so.
The SEC and various Federal Reserve banks-especially.
the New York Fed- had the authority to stop questionable lending practices and.
increase liquidity requirements.
These and other government bodies did not use.
their authority to try to head off the crisis partly because they got caught up.
in the same bubble hysteria as did banks and consumers.
In addition, regulators.
are often “captured” by the firms they are regulating, not necessarily because.
the regulators are corrupt, but because they are mainly exposed to arguments.
made by the banks and other groups they are regulating.
Despite the fact that regulators failed to use the powers.
they already had, the bill mainly adds not clear rules of behavior for banks,.
but additional governmental discretionary power.
For example, the bill creates.
the Financial Stability Oversight Council, a nine-member panel drawn from the.
Fed, SEC, and other government agencies, that is supposed to monitor Wall.
Street’s largest companies and other market participants to spot and respond to.
any emerging growth in systemic risk in the economy.
With a two-thirds vote.
this Council could impose higher capital requirements on lenders and place.
hedge funds and dealers under the Fed’s authority.
Given the regulators.
reluctance to use the power they already had to forestall the crisis, it seems.
highly unlikely that this Council will act decisively prior to the emergence of.
a crisis, especially when a two thirds majority is required.
3
Insufficient capital relative to bank assets was an.
important cause of the financial crisis.
The bill does reduce the ability of.
banks to count as bank capital certain risky assets, such as trust preferred securities, and gives the Fed authority to impose additional capital and.
liquidity requirements on banks and non-bank financial companies, including.
insurers.
I would have preferred a simple rule that raised capital requirements.
of banks relative to their assets, especially capital of larger and more.
interconnected banks.
As suggested by Raghu Rajan and the Squam Lake group of.
economists, the bill probably should have required larger banks to issue.
“contingent” capital, such as debt that automatically converts to equity when.
the banks are experiencing large losses, or when a bank’s capital to asset.
ratio falls below a certain level.
4
One of the most serious omissions is that the bill.
essentially says nothing about Freddie Mac or Fannie Mae.
In 2008 these.
organizations were placed into conservatorship of the Federal Housing Finance.
Agency.
During the run up to the crisis, Barney Frank and others in Congress.
encouraged Freddie and Fannie to absorb most of the subprime mortgages.
In 2008.
they held over half of all mortgages, and almost all the subprimes.
They have.
absorbed even a larger fraction of the relatively few mortgages written after.
2008
Freddie and Fannie deserve a considerable share of the blame for the.
crisis, but they continue to have strong political support.
I would like to see.
both of them eventually dissolved, but that is unlikely to happen.
Instead we.
are promised that they will be dealt with in future legislation, but I am.
skeptical that anything will be done to terminate either organization, or even.
improve their functioning.
5
Many proposals in the bill will have highly uncertain.
impacts on the economy.
These include, among many other provisions, the.
requirement that originators of mortgages and other assets retain at least 5%.
of the assets they originate, that many derivatives go on organized exchanges.
(may be an improvement but far from certain), that hedge funds become more.
closely regulated, and that consumer be “protected” from their financial.
decisions.
            Most of these and other.
changes in the bill are not based on a serious analysis of what contributed to.
the financial crisis, but rather are the result of political and emotional.
reactions to the crisis.
Usually, such reactions do more harm than good.
That.
is likely to be the fate of the great majority of the provisions of the.
Dodd-Frank bill.
President Obama during this past week signed into law.
extending unemployment benefits to a maximum of 99 weeks, or almost two years,.
for persons who have been unemployed for over half a year and have exhausted.
their state benefits.
The degree of extension varies among states.
depending on a state’s unemployment rate, with higher unemployment states.
getting longer durations of coverage.
The bill that became law is highly.
partisan, passing with almost all Democrats, 31 House Republicans, and only 2.
Republican senator                s.
I believe the law extends.
unemployment benefits for too long, although the economics of optimal.
unemployment insurance gives a less than certain answer.
Unemployment insurance tries to balance two conflicting.
goals.
One is to protect at least some of the earnings of workers laid off from.
their jobs through no fault of their own, while the conflicting goal is not to.
make unemployment status so comfortable that workers try to get laid off, and.
do not look seriously for jobs when they are unemployed.
The first aim is a.
typical goal of insurance against bad outcomes, while the second goal is to.
reduce the degree of “moral hazard”; that is, to reduce the incentive of.
persons to reduce their efforts to remain employed and look seriously for work.
when unemployed because they have insurance against the cost of being unemployed.
One typical way insurance tries to reach a compromise.
between these conflicting goals is to have a deductible that is paid by insured.
persons, such as the $500 deductible many car owners have on their.
automobile insurance.
The trouble with practically all the state-run.
unemployment insurance plans is that they typically have no or a minimal.
deductible because they provide coverage essentially from the first week of.
unemployment.
In addition, they usually limit coverage to a fixed number of.
weeks, such as 26 weeks.
This is an inefficient and costly approach since.
practically all the unemployed can readily cover their first several weeks of.
unemployment from savings, spouses’ earnings, or borrowing on credit cards and.
in other ways.
Unemployed workers usually run into financial trouble only when.
they have been unemployed for an extended time.
An optimal unemployment.
insurance plan would make unemployed workers responsible for their first month.
or two of unemployment, and mainly spend unemployment insurance resources on.
the longer-term unemployed.
A second insurance approach to the moral hazard problem is.
to require significant co-payments, so that the insured have to pay a portion.
of any additional losses they experience after they exhaust the deductible.
American unemployment insurance plans usually do pretty well on this by only.
paying about half or so of the earnings the unemployed had received when they.
were employed.
Many European plans had usually replaced most or all of the.
earnings of the unemployed, and covered unemployed for many years.
After they.
learned the hard way the prediction of economic theory that this encouraged.
significant increases in unemployment, several countries greatly cut back both.
the duration and payment (i.e., replacement) rates for the unemployed.
Interestingly, In Germany this was done under a center-left Social Democratic.
government.
This analysis of insurance provides background for.
evaluating the new extension of unemployment benefits for the longer-term.
unemployed.
The approximately $30 billion committed to this extension has been.
partly justified as a stimulus to what may be a slowing US economy.
However,.
since any “stimulus” from $30 billion would be paltry even to the most.
optimistic stimulus calculations, such a stimulus can hardly be a serious.
justification for this extension of benefits.
This is especially the case when.
federal budget deficits have been so large during the past couple of years, and.
there is no serious evidence that the $800 billion stimulus package.
passed over a year ago has had much stimulating effect on unemployment or GDP.
Much of the evidence usually cited about number of jobs created by the stimulus.
package is based on terrible analysis.
Any new hires under stimulus money is.
assumed to be net jobs created by the stimulus rather than a transfer of.
employment from non-stimulus activities to stimulus-supported activities.
So the case for the new law rests on its insurance.
provisions rather than on its stimulus capabilities.
I argued earlier that.
covering the longer-term unemployed is the more optimal way to approach.
unemployment insurance since the long-term unemployed face the largest economic.
hardship.
From that viewpoint, extending the duration of coverage beyond 6.
months makes sense in an environment where the unemployment rate.
remains excessively high at 9.5%, especially if the extension is accompanied by the.
elimination of unemployment coverage for the first 6-8 weeks of unemployment.
However, the actual large extension poses a major risk of.
creating an unemployment culture where men and women remain “ unemployed” for.
years.
Once the period of unemployment becomes long enough, people begin to get.
the habits from being unemployed for a long time: they sleep late, develop.
various leisure interests, and at the same time their work skills depreciate.
from not using them for an extended period.
Studies have shown that skill.
depreciation is a serious effect of being unemployed for a long time.
Some might retort that this argument is persuasive during.
periods of normal unemployment rates, perhaps 7% and under, but not when jobs are scarce, the.
unemployment rate is over 9%, and it is coming down slowly.
There is merit to this.
response, but on the other hand, the JOLTS data show that even with the current.
high unemployment rates, about 4.5 4 million persons were hired in May 2010.
(and about the same number are either being laid off or quitting their jobs).
So for the most part, even the long term unemployed can find jobs if they are.
willing to take a cut in their earnings, and/or move to other industries and.
occupations.
This analysis leads me to the following conclusions.
During.
bad times, 6 months of unemployment compensation may not be long enough, but.
the 2 years in the new law is too long.
    About 9 months of unemployment compensation.
would be the right length.
Anyone unemployed longer than that would lose these benefits.
If they want to work.
they should be forced to adjust, at least temporarily, to the bad economic.
environment, and accept jobs that they would turn down during good economic.
times.
[K1]        “    The vote in the House was                    272 to 152    , with.
31 Republicans joining 241 Democrats in supporting the measure.
Voting against.
were 142 Republicans and 10 Democrats.
   ”.
NYT:   http://www.nytimes.com/2010/07/23/us/politics/23jobs.html?scp=3&sq=unemployment%20benefits%20extension&st=cse.
Fewer senators crossed partisan lines (2 Republicans.
and 1 Democrat) on this issue.
Power tends to corrupt, and absolute power corrupts.
absolutely”.
This famous dictum of Lord Acton is as relevant today as it was.
when stated in 1887.
It applies to the private sector, such as private.
monopolies, as well as the public sector, but this insight has become much more.
important in the public sector since he wrote because of the large expansion of.
governmental powers during the past 70 years.
I would only add to Acton’s dictum that discretionary power.
is even more corrupting than the power embodied in regulations.
The most.
dangerous trend in presidential power has been the growth in presidential.
willingness to take many discretionary actions that not only have little basis.
in law, but also frequently cause great harm to the economy and the society at.
large.
The harm consists of both the direct damages from the actions, and the.
often large but indirect cost from the increased uncertainty and fear about the.
political environment faced by business, unions, and other groups.
Consider two examples mentioned by Posner.
In 1962 President.
Kennedy used various threats to pressure steel companies to rescind a price.
increase in response to a very generous wage settlement that the industry made.
with the United Steelworkers union.
Even many economists then believed that.
steel prices and steel output had a huge effect on the economy because it was.
claimed that steel was an important raw material in automobile production and.
many other goods.
Yet the value added by the steel industry-the most important.
measure of its importance-was less than a few percent of US GDP.
Moreover, forcing the steel industry to suppress the price.
increase slowed down the substitution of aluminum and plastics for steel in the.
production of cars and other products.
Prices provide important signals to an.
economy of the relative costs of producing different goods, which lead.
businesses and consumers to respond by substituting away from inputs and goods.
rising in price relative to other inputs and goods.
The replacement of steel by.
other materials would have been faster if President Kennedy had stayed out of.
the negotiations, so that the disciplining of the United Steelworkers union and.
the companies could have occurred earlier.
As it was, it took only another decade for the steel.
industry to be turning to Washington for help through higher tariffs on steel.
imports, and direct subsidies.
If the steel workers union and steel companies.
had been allowed to bargain without government interference and help, the.
adjustment by the industry to growing competition from other materials and.
steel from other countries would have been faster and more efficient.
Probably.
too, the survival of the industry without a government lifeline would have.
become easier.
A more recent example is the BP oil spill in the Gulf of.
Mexico that is still not fully contained.
Whatever the degree of carelessness by BP, they will be fined billions.
of dollars as various cases brought by injured parties make their way through.
the courts.
Such tort-based liability is justified, but there was no good.
economic reason for President Obama to interfere by requiring BP to create a.
$20 billion escrow account, and to defer its dividend payments.
These were.
simply politically motivated acts to offset the public impression (not.
obviously correct) that he was too slow to act once the spill was.
discovered.
The British have been claiming that his acts reflect a.
protectionist attitude of the US that is anti-foreign business.
    In any case BP is strong enough to.
repay sizable damages without any presidential interference since its shares still have a market value of over.
$100 billion, even after a large decline in their value following the spill and the.
president’s threats.
It is still too early to evaluate the long-term harm from.
the president’s use of excessive authority against BP.
However, the general.
anti-business tone of the current Congress and presidency that is reflected not.
only in various discretionary acts by the president, but also in proposed and.
actual legislation, such as the health care law, controls over executive pay,.
and the Dodd-Frank bill, are already slowing down the recovery from the.
financial crisis and recession.
I have argued elsewhere (see, for example, the.
article by Steven Davis, Kevin Murphy, and myself in the January 4  th.
issue of the Wall Street Journal) that the anti-business legislation, and the.
uncertainty about subsequent legislation, has contributed to the slowness of.
this recovery compared to recoveries from prior severe recessions.
Unemployment.
has remained sluggishly high in part because both small and large companies.
have been reluctant to take on additional employees in an uncertain and.
threatening environment.
Perhaps that is good politics, but the use of.
presidential and congressional powers against business is surely not good.
economics.
Economists over the years have had a schizophrenic attitude.
toward low probability but highly costly events.
One school of thought argues.
that most people give less attention to such events than is merited, and that.
this explains why many households do not to take out flood, earthquake, and.
other insurance on very small risks (although there may be other explanations.
of this fact).
Some psychologists and economics claim the opposite, that people give too much attention to low.
probability events, as in much of modern behavioral economics.
Whether BP paid enough attention to the chances of and.
damages from a serious leak on its Deepwater Horizon rig in the Gulf of Mexico.
is at the heart of any evaluation of whether BP was negligent in its safety.
approaches to this well.
The chief executive of BP, Tony Hayward, claimed that.
an accident of the magnitude of this one had “a one in a million” chance.
It is.
ironic that when Hayward became chief executive, he vowed to focus “like a.
laser” on safety and reliable operations.
Suppose that his estimate is correct, in the sense that the.
probability of an accident of this magnitude in any year was one in a million.
If the accident ends up causing a $100 billion worth of damages to fish,.
beaches, loss of lives, and in other ways, the discounted value (at a 5%.
interest rate) of this expected cost over time would then be approximately 20.
times $100 billion divided by one million, or $2 million.
A risk neutral BP.
would rationally not want to spend more than that amount to prevent such a leak.
from happening.
Perhaps the damages from this oil spill will turn out to be as.
much as $200 billion, although this seems highly unlikely, especially since the.
value of BP’s shares have declined by about $90 billion since the April 20  th.
disaster.
Even if the damages were more than twice as large as the decline in.
share value, the expected damages would only be about $4 million, a modest.
expected risk for any large business.
Of course, to justify their poor preparation to combat such.
a large leak of oil, Hayward may have greatly understated its probability.
As.
Posner emphasizes, it is very difficult to estimate with any precision what is.
the actual probability of highly infrequent events, and such a leak would fall.
within this class.
So if the annual probability were really more like 1/10,000.
rather than 1/1,000,000, the expected discounted cost would be about $200.
million, a more considerable sum.
These examples show that only when the annual.
probability of such a disaster was reasonably large would it have paid for BP.
to spend a lot to prevent such a leak from happening.
Given the litigation that resulted from the 1989 Exxon.
Valdez oil spill off Alaska, and from other oil leaks, BP should have expected.
that it would be held liable in court for the damages caused by leaks from its.
deep water drilling.
However, it could hardly have expected to be liable for.
new types of claims, such as the one proposed by the Obama administration that.
BP should be responsible for the wages lost by workers who are laid off as a.
result of the six month moratorium proclaimed by the president on all drilling.
off the American coast.
It is ironic that Obama had on March 31  st  ,.
just a few weeks before the Deepwater Horizon oil spill in April, proposed an.
extension of offshore drilling.
Nevertheless, if the Deepwater leak alerted us.
to greater risks of offshore drilling than had been realized, BP should not be.
punished for (inadvertently) providing this useful information.
The president may be right in asking for a moratorium to.
spend a few months reviewing the safety precautions on all drilling off the US.
coastline.
However, it would be unfortunate if this disaster led to permanently.
much greater restrictions by the US on offshore drilling for oil since that is.
at present the most promising source of additional US production of oil.
The.
likelihood, and cost, of future spills has to be weighed against the gains to.
US national security and energy independence from having greater access to.
domestically produced oil.
Since I believe these gains are substantial, I.
expect offshore oil production to continue to have an important place in US.
(and other countries) production of oil since offshore oil is the last frontier.
in the search for new deposits of oil.
Until the early part of the twentieth century, practically all physicians in the United States and elsewhere were primary care physicians, not specialists.
This changed dramatically in all developed countries over the remainder of that century, so that at present, over 75% of all American doctors specialize in fields like surgery, cardiology, dermatology, urology, and oncology.
Specialization in Europe also grew over time, but at a much slower rate than in the United States, the result being that European medicine is practiced with relatively fewer specialists compared to generalists.
The growth in medical specialists over time is largely explained by the general economic theory of specialization and the division of labor.
Medical specialization becomes more attractive when spending on medical care increases since a bigger market for medical care provides even highly specialized physicians a large enough market for their services.
This conclusion is an application of Adam Smith’s famous dictum in the Wealth of Nations that the division of labor is influenced by the extent of the market.
Since medical spending per person and in the aggregate is much higher in the United States than other countries, it is no surprise that American specialization is much greater than elsewhere.
The great advances in medical knowledge, especially since the 1950s, also contributed to the growth in specialization.
For it takes expensive and very time-consuming investments by young doctors as medical residents and in other ways to gain command of the extensive information needed to practice modern surgery, oncology, cardiology, and other specialties.
Specialization also increases when the ability to coordinate different specialists and generalists improves.
That has been happening in the medical field with the growth of online records that transfers information among different specialists and generalists who are caring for the same patients, and especially with the development of group practices and medical centers that enable patients to visit different specialists and generalists in the same suite of offices or in nearby buildings.
Levels of compensation, as determined by the forces of supply and demand filtered through government policies and private insurance companies, also determine the degree and types of specialization.
For medical students respond to the financial returns and other conditions found in different specialties and in general medical practice.
In one important respect at least, as Posner indicates, the health care changes enacted into law by Obama will increase the demand for primary care physicians by providing subsidized medical insurance for over 30 million generally younger persons who have been without medical insurance.
Young people primarily use medical care to treat the flu and other respiratory diseases, to receive general medical checkups, to treat the effects of accidents, and to get help on other medical problems that mainly involve visits, at least initially, to primary care physicians.
However, the further growth over time in spending on the elderly through Medicare and private insurance will primarily increase the demand for cardiologists, oncologists, surgeons, and specialists in geriatric medicine.
Is there a “shortage” of primary care physicians relative to “shortages” of specialists? I am doubtful for several reasons.
Many specialists also engage in general medical practice, especially among patients who initially come to them for specialized treatment, but who then receive medical care for medical problems that are the main business of general practitioners.
This ability of specialists to also practice general medicine enables specialists to fill out their working days, and also tends to prevent any excess demand for primary care physicians from getting too large relative to the demand for specialists.
If this conclusion is correct, waiting times to get appointments for visits to general practitioners should not be significantly longer than the waiting times to get appointments to specialists.
A 2009 survey by Merritt Hawkins, a healthcare consulting company, estimates willingness to take Medicaid patients and also waiting times in 15 metropolitan areas for cardiologists, dermatologists, orthopedic surgeons, obstetricians/gynecologists, and family practitioners.
Willingness of general practitioners to take Medicaid patients is not lower than that of these specialists, with the exception of cardiologists.
While waiting times vary greatly among these areas, they are not systematically longer for family medicine than for the specialties surveyed.
Waiting times are much longer for the Boston area than in any other area perhaps because of the vast expansion in health coverage in Massachusetts during the past decade.
The wait times averaged over all the metropolitan areas vary by category of medical practice, from 16 days in cardiology to 28 days in obstetrics/gynecology.
Family practice is in the middle at about 20 days.
There appears to be a tendency for the categories with generally more urgent needs, like cardiology, to have the shortest waits, and those with the least urgent needs, like dermatology and obstetrics, to have the longest waits.
Much more evidence is needed on both wait times and salaries to reach definitive conclusions about shortages in different medical markets.
However, these waiting time data suggest that substitution on the part of patients between family practitioners and specialists who can offer similar services, and arbitrage among medical students in deciding which fields to enter, prevents the development of particularly large “shortage” of general practice physicians.
Illegal immigration into the United States, Western Europe, Japan, and other rich countries grew rapidly from about 1990 to the beginning of the financial crisis, and has sharply declined since then.
The largest number of illegal immigrants enter the United States, especially from Mexico, but the number of Mexicans crossing the border illegally has apparently slowed to a trickle during the past several years.
Some observers have attributed much of the decline from Mexico to tightened border security, stricter search laws against illegal immigrants enacted by Arizona and some other border-states, and greater enforcement against employers who use illegal immigrants.
These are part of the explanation, but the main factors are economic and demographic, and some of these are likely to be permanent.
The great majority of immigrants all over the world, both legal and illegal, move for economic reasons: to find jobs that pay a lot more than they can earn in their origin countries.
For example, the average illegal immigrant in the United States from Mexico appears to earn about three to four times what he would earn in Mexico.
This is why virtually all the illegal (and legal) immigration is from poorer to richer countries.
Immigration increases when poorer countries are hit by recessions and financial crises, and by internal conflicts that make life there dangerous and more uncertain.
Illegal immigration is especially sensitive to recessions and other causes of weak job markets in richer destination countries.
Illegal immigrants are usually the first to be laid off partly because they tend to be unskilled, and unskilled employees are let go in much larger numbers than are skilled employees.
In addition, illegal immigrants tend to have low seniority since they are young, and employees with lower seniority are generally fired first when bad times hit.
Laid off illegal immigrants usually do not qualify for unemployment compensation, and other safety net benefits.
This is why many illegal immigrants return home after losing their jobs, even though that means they must bear the costs and risks of possible future illegal entry.
It also explains why the flow of illegal immigrants to the United States has slowed to a trickle, given the sharp and sustained rise in American unemployment, especially among younger and unskilled workers.
High unemployment in the United States is presumably only temporary, although it has already persisted for several years.
Other more permanent factors have also been reducing the flow of illegal immigrants from Mexico.
One important long-term force is the sharp decline in birth rates in Mexico during the past 30 years.
The total fertility rate- that is, the number of children born to the average women over her lifetime- has declined in Mexico from almost 7 children in 1970 to over 3 children in 1990, and to only about 2 children at present.
This means that Mexican fertility is now not any higher than American fertility, even though Mexico is much poorer.
The very high fertility rates in Mexico in the 1970s and 1980s produced many young Mexicans in the 2000s.
This is an important determinant of why illegal immigration from Mexico peaked during 2000-2006 since most illegal immigrants are young.
They can more easily bear the hardships and risks of crossing illegally into the United States, and they can look forward to higher earnings for a longer time.
Moreover, high Mexican fertility rates in say 1980 produced many Mexican workers in their twenties after the year 2000, which put downward pressure on their earnings and job prospects.
Outmigration from poorer countries like Mexico, especially of illegal immigrants, tends to fall rather sharply when job availability and incomes in their countries are improving at a good pace.
This has been happening in Mexico for the past 15 years.
The growth in real per capita Mexican incomes since 2000 has raised Mexico’s per capita income by about 40%.
Job markets have become a little more open as well, and average years of schooling have increased significantly, so that better paying jobs are much more readily available in Mexico.
Most immigrants, especially illegal immigrants, prefer not to leave if economic prospects are reasonably good in their own countries, even if their earnings would be considerably higher in richer countries.
Individuals and young families prefer to stay with their parents, siblings, and friends, and with a culture they grew up with rather than becoming strangers in countries with different cultures.
This is especially true for persons who would have to migrate illegally from Mexico since they bear the physical and other risks of crossing the Mexican-US border, have difficulty returning to see their families and friends, and they can be sent back at if apprehended.
Low birth rates and hopefully also growing incomes are likely to be part of the Mexican landscape for a long time.
These forces should greatly reduce the long-run flow of illegal immigrants to the US after the American economy recovers from the financial crisis, and even without stepped up apprehension of illegal immigrants.
Mexicans who would like to immigrate to US could better afford to wait for visas and other permits to cross the border legally since they now have decent economic prospects while in Mexico.
I argued before on these pages that immigration, especially legal immigration, is good for a country like the US that has many opportunities for ambitious and hard-working men and women.
The US should respond to the economic progress and fertility declines in Mexico, elsewhere in Latin America, and also in Asia by expanding greatly the number of legal immigrants accepted (see my monograph The Challenge of Immigration, 2011 for a proposal to sell openly the right to immigrate).
Expansion of legal immigration would be good for America, and it would also further cut down the number of illegal immigrants by enabling more of them to come legally and gain the many advantages of legal status.
I agree with Posner‚Äôs basic approach to corruption, so I will elaborate on some ways to reduce corruption, refer to evidence where corruption actually helps performance, and offer a suggestion for why big-city corruption in America appears to have declined over time.
I confine my comments to corruption in the public sector, although for every public official who is bribed, there is always a businessman, union official, or someone else in the private sector that is doing the bribing.
By corruption I simply mean that public officials accept payments that violate some laws in order to affect the implementation of other laws or regulations.
Corruption so defined is bad if it lowers efficiency in the economy or society- that is, if the cost imposed on everyone else exceeds the gain to an official.
Good corruption raises efficiency, so while the corrupt official may gain, so does the economy and society as a whole.
Clearly, in a country with bad laws, corruption by officials that enable businessmen and others to get around these laws may be helpful.
The Soviet Union, for example, had terrible economic and other laws, and performed badly.
Still, the widespread corruption that existed helped it to do much better than it would have if all officials followed the letter of the law.
A preliminary study by a graduate student at the University of Chicago, Maxim Mironov, analyzes the effects of corruption on economic growth in 140 nations during the past decade.
He finds that corruption in countries with weak institutions, defined by government effectiveness, the rule of law, and the quality of regulations, appears to help countries grow faster, whereas corruption in countries with good institutions slows down economic growth.
For the remainder of my comment I concentrate on corruption that on balance is bad.
Posner points out that corruption flourishes with a weak legal system, and with larger government.
Obviously, if governments strongly regulate many activities, then companies, unions, and other groups that are regulated can do better if they can "bribe" officials to overlook or relax these regulations.
So the wider is the reach of governments, the greater is the corruption potential.
There was relatively little corruption in the Federal government of the US in the early 19th century primarily because the government did so little then.
Other than narrowing the scope of government and strengthening legal institutions, what can be done to reduce (bad) corruption? One simple step is to improve the incentives of officials to act honestly.
The incentive to be honest would be stronger when officials are better paid, and if they are fired from their well-paying jobs, and sometimes also punished rather severely if they are caught engaging in corrupt behavior.
A few studies do support this conclusion that corruption thrives more in environments where officials are badly paid, such as policemen in Mexico.
Corruption is reduced by greater competition between separate political jurisdictions and stronger competition for political leadership.
This implies that corruption is lower in decentralized political systems compared to centralized systems.
Various studies do indicate that democracies generally appear to have less corruption than totalitarian systems, although some of the corruption in totalitarian systems like the Soviet Union may be of the good kind because the laws are so bad.
Corruption is reduced when information is more easily disseminated to the public.
That is why a free press is such an important protector against greater corruption.
The press is more effective in better educated societies, and various studies have shown that corruption is lower when education is greater.
 Education also helps cut corruption by improving political institutions, so part of the positive relation between the amount of corruption and the weakness of institution is the result of the positive connection between education and good institutions.
Work in progress by Professor Edward Glaeser and others at Harvard University suggests that corruption in the US declined over time in part because education increased.
This helps answer Posner‚Äôs question about why corruption in big American cities appears to have been declining.
The steep growth in regulations over time would suggest growing, not declining, corruption.
I believe the increase in education, combined with more vigorous competition among print and other media to disclose information about corrupt officials, and greater geographical mobility of many types of business have all contributed to the apparent decline over time in the amount of corruption in big cities.
I will follow Posner and try to discuss the general principles concerning the State and religion rather than the details of these Ten Commandment cases.
To me, the overriding reason why the State should not make any law respecting the establishment of religion is the case for competition and against monopoly.
Competition allows for entry of producers, including new religious ideologies, such as scientology and bahaism, or new forms of atheism, that cater better to the preferences and needs of people, be they spiritual needs or materialistic ones.
Monopolies restrict entry, and hence preclude the entrance of producers with new ideas, including religious ones.
Throughout history, religions have tried to use the State to give them a privileged and protected position, and in this regard have been no different than telephone companies and airlines that have used government power to keep out competition.
This use of the State to foster particular religions is found in many Islamic societies that subsidize teachings and practices of Islam, the Israeli State that subsidizes Judaism, or some Christian nations that use taxes to pay the ministers' salaries.
As Posner recognizes, many other groups also succeed in getting the State to support their activities, but two wrongs do not make a right.
Governments should not support particular religions, or other groups that feed off the State.
Competition usually increases the demand for a product compared to monopoly.
As Posner indicates, this is one of the arguments Hume made against State-supported religion.
Adam Smith in the   Wealth of Nations   made a similar argument, and a quantitative study by Lawrence Iannoccone tested Smith's claim.
He found some support for the conclusion that religions flourished more when competition among religions is greater.
The US stands out in this regard, for it has several thousand "different" religions competing for members, and it is more religious than other wealthy countries.
However, fundamentalist Islamic countries and Christian countries like Ireland and Poland do actively support a particular religion, and they also have relatively high participation in religious activities.
So they are counterexamples to the Hume-Smith-Iannoccone thesis.
Moreover, as Posner indicates, large state subsidies to one particular religion could lead to greater demand for religion than in an unsubsidized competitive environment.
That is why I believe the case for free competition among religions comes mainly from competition providing opportunities for new religious belief systems, including atheistic beliefs, to cater better to people‚Äôs desires.
To repeat, the case for competition among religions is the same as the case for competition in other industries: to allow entrants with different ideas and points of view to compete for consumer time, money, and other support without any government favoritism.
I support government-financed school vouchers for various reasons that I have discussed elsewhere.
That includes support for vouchers for religious denominated schools, as long as they are available on equal terms to all groups, including explicitly atheistic ones.
The State does have the right to exert control over the curriculums of schools taking government aid in one form or another.
This control can include sharp limits on how much time a school can spend teaching religious doctrines, including doctrines against organized religions.
I am not competent to discuss the legal aspects of the two Ten Commandment cases, but where does this analysis of the case for competition and a level playing field among religious doctrines come out on the issues raised by these cases? As Posner indicates, most of the Commandments deal with ethical issues that would be supported by all groups, and are not really controversial.
Those that are sectarian--say to worship only one God--can be opposed on grounds that they support certain religions against atheistic groups, or even other religions.
Consequently, I believe the principle of a level playing field argues against allowing religious displays, and many of the other displays on public property mentioned by Posner and in the Court's decisions.
Still, these displays, including the Ten Commandments, are far more innocuous then the many laws that give monopoly powers to telecommunication companies, domestic airlines, farm products, and various other industries.
So relative to the harm caused by laws that rig the playing field in these industries, the extensive agitation over the display of the Ten Commandments seems like a tempest in a teapot.
Arguments about affirmative action, and its offshoots, diversity and quotas, bring out almost as much passion as arguments over abortion.
Passion usually replaces reasoned analysis, so I will try to discuss as objectively as I can why I oppose practically all the major forms of affirmative action in place now at universities, the political sector, and businesses in the United States, Western Europe, and many other countries in all regions of the world.
Let me say at the outset that I view affirmative action programs as mainly catering to special interest groups, in the same way as quotas on imports of agricultural goods cater to domestic farming interests.
To be sure, affirmative action programs are defended with attractive language, such as that they are designed to offset the harm of past discrimination, or that they are simply trying to level the playing field for persons of different races, genders, or ethnicities.
But all special interests programs are typically defended with nice-sounding language, such as that agricultural support is necessary to preserve the rural way of life, or that American ownership of energy resources is necessary for national security reasons, or that subsidies to small businesses is necessary to prevent predatory actions by large companies.
I also want to stress that though I oppose affirmative actions, I believe that many other special interest programs, such as various aspects of the social security system, subsidies to agriculture, restrictions on immigration of skilled workers, and the presently developed tort system, do far more economic and social damage than does affirmative action.
Most affirmative action programs, disguised or openly, use lower standards for African Americans and members of various other minority groups than for white males in determining whether they are promoted to higher level jobs in private business or government, admitted to better universities, and in other situations.
Universities have openly used affirmative action by lowering substantially the acceptable SAT score for African Americans (and certain other groups) seeking admission compared to the scores required for whites or Asians.
 A disguised way, adopted by some states, is to admit applicants to state universities and colleges if they rank in the top 10 per cent of their high school class.
This is disguised affirmative action because schools with favored minority groups typically have much worse students than other schools, so it is considerably easier to rank in the top 10 per cent of the lower quality mainly minority schools.
It is obvious why affirmative action may hurt members of the majority group who are denied promotions or admission to various colleges, even though their records are better than many minorities accepted.
But why is it bad for a country like the United States to do this, and often also for the minority groups gaining these privileges? My belief is that affirmative action is bad for any country that aspires to be a meritocracy, as the United States does, despite past slavery and discrimination that are terrible violations of this aspiration.
The case for a meritocracy is that achievements based on merit produces the most dynamic, innovative, and flexible economy and social structure.
Encouraging promotion or admission of less qualified applicants because of their race, gender, or other characteristics, clearly violates this principle, and produces a less progressive economy, and a distorted social structure.
The appeal of a meritocracy explains why one can, as I do, strongly oppose both affirmative action, and discrimination against African Americans, women, and various other groups that have suffered discrimination in employment and in admissions to schools and colleges.
While affirmative action programs give advantages to various minorities that are not justified by qualifications, discrimination does the opposite, and gives advantages to the majority that exceed their skills and qualifications.
(See my The Economics of Discrimination, University of Chicago Press, for a systematic discussion of discrimination theory and measurement.) Unfortunately, laws opposing discrimination against various minorities often evolve into affirmative action laws, where the test of discrimination is not whether better-qualified minorities are passed over for jobs and promotions, but whether firms and universities have a sufficient number of members of designated minorities.
Political pressure also has extended discrimination laws to groups that have suffered little in the past from discrimination, such as older workers.
It is hard to sympathize from a discrimination viewpoint with older workers since they typically earn much more and have much lower unemployment rates than young workers, they easily qualify for decent disability income, and they can retire relatively early to receive taxpayer-supported retirement and medical benefits.
Affirmative action is often justified as making up to African Americans, American Indians, and some other groups for the terrible discrimination and treatment they received in the past.
Some affirmative action advocates argue that giving preference to minority applicants at colleges is no different from legacies-that is, giving preferences to children of alumni.
Perhaps legacies have been overused, and their use is declining at the top universities, but the objective case for them is that this makes for more loyal and generous alumni.
In addition, a good school record of a relative may be a useful predictor of an applicant‚Äôs school record.
I am not trying to minimize the terrible treatment especially of African-Americans in the past.
I am questioning whether affirmative action programs make up for past injustices.
Clearly, some members of favored groups benefit from affirmative action, but others are hurt in direct and not so direct ways.
To consider a direct way, many companies try to avoid hiring minorities favored by affirmative action because they realize they may face lawsuits in the future if they do not promote them, even when the promotions are not justified.
Their refusal to hire because of affirmative action pressures later on makes them subject to anti-discrimination legislation, which is one way that laws against discrimination evolves into affirmative action.
A more subtle way that affirmative action harms many members of the very groups they are trying to promote is illustrated by admissions to college.
If lower admission standards are used to admit African Americans or other groups, then good colleges would accept average minority students, good minority students would be accepted by very good colleges, and quite good students would be accepted by the most outstanding universities, like Harvard or Stanford.
This means that at all these types of schools, the qualifications of minority students would on average be below those of other students.
As a result, they tend to rank at the lower end of their classes, even when they are good students, because affirmative action makes them compete against even better students.
Studies have shown that this simple implication of affirmative action applies to students at good law schools, where the average African American student ranks toward the lower end of their law school cohort.
My observation of many colleges and universities is that this conclusion has general applicability well beyond law schools.
It hardly helps self ‚Äìesteem if one is a member of a group that typically ranks toward the bottom in performance at a university or on a job.
When discrimination dominated affirmative action, an African American or female medical doctor would be better than average since they had to overcome artificial hurdles to get where they were.
That was not a desirable situation because discrimination made it harder for these groups to get ahead, so fewer of them than was warranted by their abilities and skills managed to make it to medical school.
However, now, minority doctors and other professionals are greeted suspiciously by many patients and customers who fear they got where they are only because they were subject to lower standards.
That can hardly make someone feel good, and helps explain some of the segregation and defensiveness of minorities receiving affirmative action help at schools or on jobs.
While opposing affirmative action, I do not advocate just letting the status quo operate without attempting to help groups that have suffered greatly in the past from discrimination.
Employers, universities, and other organizations should make special efforts to find qualified members of minority groups, persons who might have been overlooked because of their poor family backgrounds or the bad schools they attended.
By using this approach, one can spot some diamonds in the rough that would get overlooked.
I know that the economics department at Chicago in recent years has been able to discover and help train some excellent economists from disadvantaged backgrounds by searching harder for them.
Another attractive policy is to help disadvantaged children at early ages rather than using affirmative action when they apply for jobs or colleges.
There is still controversy over how much and how durable is the gain from head start programs, although I believe that extra effort spent on these children at very young ages tends to yield a decent return in terms of later achievements.
But it has been conclusively shown that efforts to educate and help in other ways when children are in their teens generally fail since by that time the children have fallen too far behind others of their age to be able to catch up.
Put more technically, current human capital investments builds on past investments, so if past investments are inadequate, the current investments have low returns.
My concluding comment is that affirmative action is too often confused with anti-discrimination action.
I believe there should be vigorous prosecution of discrimination toward groups like African Americans that have suffered from substantial discrimination.
I also support positive efforts to bring children from minority groups closer to the achievement levels of others.
However, affirmative action, whether under the name of quotas or diversity, does more harm than good, even though it is not the worst form of interest group politics.
What a rich set of comments on an extremely controversial and difficult issue! I will not try to do justice to all of them, but I will make a few responses.
I argued that affirmative action is less costly to society than many other special interest programs.
So I do not understand the criticism of me on this issue.
I agree that most of the diversity arguments about affirmative action are worth little.
Diversity arguments were used in the past by Ivy League universities to keep down the number of Jews, and are now used to keep down the number of Asian Americans.
A diligent student can learn from any good teacher, no matter his or her background.
For example, Jewish students are better off with excellent non-Jewish teachers, sometimes even if they are anti-Jewish, than with mediocre Jewish ones.
I believe the same conclusion applies to others.
I believe a major difficulty is in distinguishing affirmative action from anti-discrimination behavior.
Otherwise, in the absence of legislation requiring quotas or something similar, I would allow competition to determine the employment and admission policies by firms and schools.
If the top 10% of each school were comparable, students from the lower quality schools would perform as well at universities as students at good schools.
But they do not.
I agree that it would be valuable to have more data on performance both in and after schooling of students from various groups.
But I am certain I am right that the bad performance of affirmative action students in law schools is not special to law schools.
It is pervasive on all campuses in most departments and professional schools.
I agree with the references to Tom Sowell's excellent work on affirmative action around the world.
He shows the many pernicious effects not only in the West but also in many other cultures.
My argument about the harmful effects of using affirmative action to affect the quality of colleges attended by minority students of different abilities was one I first saw in an early article by Sowell.
I do agree that affirmative action can discourage working hard.
Advancement should not be made too easy or too hard.
If it is too easy, beneficiaries tend to loaf; if it is too hard, sometimes they give up- see Glenn Loury‚Äôs work on some of this.
I have no problem with looking harder for qualified applicants who might be overlooked, even if one can call this a very weak form of affirmative action.
But surely it is radically different than advancing persons without sufficient qualifications.
I indicated that perhaps legacies were overused, but I gave a rationale why they could be consistent up to a point with improving the long run quality of a university.
, I would not blame a university for using affirmative action if it received larger foundation or government grants when they used affirmative action toward say African-American students.
I would, however, blame the foundation, private or public, for using this criterion.
I should add that I also oppose affirmative action for students from rural areas, etc.
Nothing I said on affirmative action should be construed as applying only to groups defined by race gender, ethnicity, etc.
I do not believe it is correct that Europe does not use affirmative action.
For example, I believe Norway requires a minimal fraction of cabinet members to be women, and there are many other examples of affirmative action in Great Britain and other European nations.
I was not complacent about the disadvantages that many minority students suffer from.
That is why I support head start programs and the like.
But I do believe it is a mistake to confuse even expensive programs that try to bring various minority and other groups up to satisfactory levels with using lower standards to evaluate them.
I agree that in situations without market-clearing prices, as in some admission policies, there would be excess demand or supply that is an invitation to discrimination, segregation, and other bad things.
That is one of the advantages of the price system that is seldom fully appreciated.
For a discussion of some aspects of this issue with regard to schools and neighborhoods, see my book with Kevin Murphy, Social Economics.
Corey takes it on the chin a lot, and I disagree with much of what he says.
But I am very happy that he is an active participant in the discussions.
I like having my views challenged (as well as defended!).
So Corey, keep being involved! The same goes for Palooka and others.
Posner and I intentionally take controversial subjects where there is considerable disagreement, so we expect disagreement.
I hope the discussion stays tough but remains for the most part well-mannered.
Not many comments, so my task is much easier than Posner's.
However, the comments are of high quality even though I disagree with most of them.
I am surprised by the claim-especially given who wrote it- that competition among religions might lead to a "race to the bottom".
Why should that be any truer for religion than for competition among cars or telecommunication companies? What is known is that competition among religions increases the degree of religiosity (measured in various ways), and that more religious persons are more law-abiding, more honest, and so forth.
However, it has been difficult to determine whether religions improve behavior rather than that more law-abiding and honest families are more likely to be religious.
The little good evidence on this suggests some causation from religion to better behavior.
Several persons misunderstood me on one major point, and I apologize if I did not make myself clear.
When I speak about free competition and a level playing field among religions, I was not simply referring to government monetary subsidies.
To take the example provided in one comment, it would violate the concept of free competition if the government only allowed Catholics to vote.
Free competition and level playing field should apply to all areas of government involvement, such as who votes, who can run newspapers, who can set up denominational schools, who can open churches, etc.
A closely related misunderstanding is that I have never advocated competition among religions, newspapers, or anything else, solely on a mechanical notion of "efficiency".
The case for competition is that it better satisfies and influences people‚Äôs preferences-in effect, that it gives them greater choice.
This case for competition applies just as strongly to religions, political parties, and other non-material activities as to the markets for clothing or computers.
Someone questioned whether the Constitution prevents the establishment of an official church because of the desire to allow competition among religions.
I do believe that was a crucial consideration.
For support, one only need read Thomas Jefferson's Bill for Establishing Religious Freedom in the State of Virginia.
Much of what he says there in making the case for religious freedom is best interpreted as showing the advantages of allowing different religions to compete for members on a level playing field.
The Constitution also outlaws monopoly in a few other areas as well.
The first of the Bill of Rights states that "Congress shall make no law respecting an establishment of religion‚Ä¶or abridging the freedom of speech, or of the press".
These are all arguments against monopoly and for free entry into the print world and the world of ideas as well as religion.
Free entry is really all that competition means.
One would not expect a blanket condemnation of monopoly because the founders might well have expected cases of "natural" monopoly;that is, cases where competition would not be efficient or feasible.
I accept the criticism that several of the Ten Commandments might not now be accepted by everyone.
Still, my main point is surely right, that allowing a display of these Commandments on public property is minor compared so many other activities that governments engage in.
I definitely agree that property owned by religious institutions should not be tax-exempt.
My reason is not that this discriminates against atheistic groups since they can have non-profit organizations that would also be tax-exempt.
My main reason is that I am generally doubtful about the tax-exempt status for all non-profits, including, but not confined, to religious groups.
This is a bit off the topic, but I cannot let pass the claim that vouchers would drain the good students from public schools, and would leave the students who remain there much worse off.
The true situation illustrates how competition works.
Schools that lose students to better schools would be under great pressure from parents and others to improve themselves.
They would tend to get new principals, change their teaching, etc.
This is not just theory, for it is backed up in the studies by Carolyn Hoxby of Harvard and others.
The terrorist plot to blow up from 7-10 planes with liquid explosives will once again increase the fear of flying.
After the 9/11 horrendous attacks, U.S.
domestic air travel was down by over 10 per cent for two years, and international travel on American airlines declined much further.
The magnitude of this response went far beyond what could be explained by either the increased objective risk of flying or the greater time spent going through security.
For even assuming that 3 planes a year on American airlines continued to be exploded by suicide bombers, air travel would still be a lot safer than traveling by car and bus, two major alternatives to air travel.
Many people stopped flying in the aftermath of the 9/11 attack because they feared being on a plane with suicide bombers, a fear that far transcended any objective risk of flying.
Since such fears are part of the makeup of human nature--presumably due to biological evolution over time--fear should be incorporated in any useful analysis of the factors that determine willingness to fly, or to engage in other activities that are vulnerable to terrorist attacks.
I anticipate that as evidence of the destructiveness and scope of this latest terrorist plot unfold, many leisure and business travelers will once again be too frightened for a while to travel by plane, especially on international flights to and from the United States.
The drop in air travel will not be as great as after the 9/11 attacks because this plot was foiled before any successful missions were carried out, and because travelers are more inured to terrorist threats than they were before that defining event.
It is clearly important to develop an efficient and effective system to reduce the likelihood of successful terrorism.
Security will have to be continually updated and made more thorough as new information is acquired about terrorist plans.
For example, the inconvenience of air travel will increase further as airport security adjusts to preventing liquid bombs from getting through security checks.
Unfortunately, there is an ongoing battle between the ingenuity, dedication, and fanaticism of terrorists, and effective security measures.
Terrorists continue to probe until they discover weaknesses in airport security.
If they find it too difficult to mount terrorist attacks on planes, they may concentrate on other targets.
Trains are an obvious example since security at train stations is generally very lax.
Still, universal security measures at airports or other sensitive points are not enough.
Although civil libertarians criticize "profiling" of travelers and others, and government officials deny they engage in it, profiling is a necessary part of any reasonably effective security system.
Groups that should be scrutinized carefully differ over time and among region of the world.
For example, the Tamils are responsible for terrorism in Sri Lanka, and the IRA over a decade ago bombed London and other parts of England.
Young Muslim males of Pakistani and Arab background have been responsible for the vast majority of recent terrorist activities in America, Britain, and continental European countries.
This includes 9/11, the British 7/7 subway bombings of last year that killed over 50 people, the Spanish train bombings of the year before which killed almost 200 people, and other actual or thwarted attacks in the West.
Therefore, young males from these groups should receive especially close scrutiny at airports and other public places.
Objectors to profiling of particular groups complain that this would subject many innocent members of groups being profiled to obtrusive and sometimes embarrassing searches and even harassment.
No question that profiling of a group inevitably means that innocent members of that group would experience greater delays and more unpleasant encounters than would innocent members of groups not profiled.
This is regrettable, but there is no effective alternative to profiling when one or a few groups pose far greater threats than do the rest of the population.
To limit the discomfort and anger caused by profiling, members of the profiled groups should be treated politely and with dignity.
They should also be reminded that they too are being protected from terrorist activities by a small fringe.
Those objecting to profiling potential terrorists usually want to subject everyone to the same detailed examination and inquiry.
However, when potential terrorists are part of a group that constitutes only a small fraction of the population, searching everyone with the same detailed care at airports or at other venues would be needlessly costly and time consuming.
This would slow down and thereby reduce air travel and other vulnerable group activities.
It would also lead to loud complaints by those affected after the fear of terrorism had abated.
People in the United States and other free countries are gradually realizing that effective conduct of the war on terrorism means that it is no longer possible to have the full complement of liberties they have been accustomed to.
Terrorists and suspected terrorists may be subjected to psychological pressures in order to gain vital information, pressures that would not have been acceptable in the past.
In addition, government anti-terror agencies will be listening in on some phone conversations, they will inspect some emails, they will check some spending and bank accounts, they will monitor travel, and in other ways too they will intrude on traditional liberties.
Of course, profiled groups, including innocent members, would be subject to more extensive surveillance than others.
Unfortunately, mistakes will continue to be made, as in the detention by Britain a few months ago of some Muslim men who turned out to be innocent.
As readers of this blog and my other writings know, I have little confidence in government.
 Posner's discussion of mistakes by the FBI is just an additional, although important, example of this.
But like it or not, government actions have to be the first line of defense against terrorism.
While vigilance is required to prevent zealous public officials from overstepping their legitimate boundaries, they must have enough power to fight terrorism effectively.
Clearly, some of these powers would not have been accepted in peacetime before 9/11, but since free societies are vulnerable to suicidal and other terrorists, these societies have to limit certain freedoms in order to more effectively fight terrorism.
Hopefully, the vast majority of traditional freedoms can be preserved.
I watched on television Floyd Landis' stirring victory in the hard mountain-ascending stage 17 of the Tour de France after he stumbled badly in the difficult previous stage.
Landis went on to win what seemed like a remarkable victory, but tests taken after stage 17 showed abnormally elevated levels of testosterone.
The French then stripped him of his title as winner of the 2006 Tour.
Professional cycling is now in bad repute partly because of this latest scandal, and partly also because just prior to the Tour several major riders were disqualified for testing positive for banned substances.
These cycling scandals came not long after scandals in American baseball, where Bobby Bonds, Jason Giambi, Mark McGuire, Sammy Sosa, and other stars appear to have been guilty of using performance-enhancing steroids to push them to record breaking performances, especially in home run hitting.
World class track stars, such as Olympic 100 meter champion Justin Gatlin, professional football players, weightlifters, swimmers, and outstanding athletes in other sports also have either failed drug tests or are suspected of using banned substances.
Why should various chemicals, like steroids, blood transfusions and other forms of drug doping, and looming possible gene doping, be banned in competitive athletic contests if the athletes know the risks to their health from using banned substances to enhance their performance? The principle justification for banning doping when it harms persons using  "dope" comes from the fundamental nature of athletic competition.
The reward system is based not so much on absolute performance levels, although that does count, as on performance relative to competitors.
For example, Lance Armstrong, who has successfully fought off continuing claims that he used dope, is remembered primarily for his six consecutive triumphs in the Tour de France, not for his winning times in any of the races, or on any of the stages.
Victories are primarily what count also in World Cup soccer and American football, in weightlifting and boxing, in running, in tennis, and all other competitive sports.
Rewards are related to victories because live and television audiences and the media are mainly interested in outcomes from competition, not absolute performance levels.
That is, they pay primary attention to who wins tennis match, a baseball, basketball, or football game, a marathon, or other contests.
In essence, competitive sports are an example of the "super star" phenomena analyzed by my late colleague Sherwin Rosen.
Super stars, including superior teams, get large rewards even when they are only slightly better than competitors, while those who are only modestly inferior receive much lower incomes and prestige.
As a result, professional baseball, basketball, soccer, golf, tennis, and many other sports have a few performers and teams that do very well, like Tiger Woods, Roger Federer, and the New York Yankees, while the vast majority of their competitors get much more modest benefits.
In this environment, certain types of doping are attractive to athletes because it gives them a competitive edge.
The problem arises because overall outcomes when many of the performers use dope is essentially zero sum in the sense that if all leading athletes take steroids, other chemicals, or different forms of dope, they all tend to increase their performances without often having much effect on who wins or scores high in a race, game, or contest.
In other words, participants may engage in doping to improve their performance and hence chances of doing relatively well, but obviously not everyone can improve their relative position.
In a contest where relative performance is what matters, what may be rational for the individual athlete makes little sense for the collection of athletes.
This becomes a matter of concern when the performance enhancers, like steroids and other forms of doping, have a negative effect on long-term health.
For then users of these enhancers are hurting themselves in the long run without on the average improving their short-term rewards from athletic competition, as long as competitors also use harmful enhancers.
This is the main rationale for trying to ban steroids and other forms of doping from athletic competitions.
It sometimes also leads to bans of other costly enhancers that do not affect overall outcomes.
For this reason, golf limits the number and size of clubs that can be used in competition, baseball bats cannot be "corked", professional tennis limits the types of rackets permitted, and professional baseball, soccer, and other team sports limit the number of players that teams can have on their rosters.
The same argument applies but in much weaker form to performance enhancers that benefit athletes using them, such as training hard and keeping in very good shape, eating a balanced diet and keeping weight at healthy levels, or spending time studying opponents and videos of one's own past performance.
Athletes would tend to use more of these enhancers than if they were not competing, which helps explains why many of them "go to pot" after they retire from active competition.
But since the effect of these enhancers is on the whole beneficial to athletes using them, or at least not very harmful, there is little concern about such activities, and no effort to regulate them.
To be sure, absolute performance also counts to some extent, such as the number of home runs in baseball, scoring averages in basketball, pass completion rates in American football, the number of goals scored by a soccer player, and speed in running the mile and other races.
But even here there is a crucial relative aspect.
Roger Bannister‚Äôs breaking of the 4 minute mile barrier was noteworthy not mainly because 4 minutes has some special significance, but because no one had done that before.
Baseball fans are upset that Bonds, McGuire, and Sosa apparently took steroids because that enabled them to break the single season record for home runs established by Roger Maris, who did not take drugs, allowed Bonds to pass Babe Ruth in total home runs-Ruth did not use enhancers unless one counts constantly getting drunk- and helped Bonds close in on the all time home run leader Hank Aaron-who has a squeaky clean reputation.
While the case for banning various types of drugs and other enhancers is strong, the ability to control doping is limited.
For there is a continuing battle between bans and the discovery of new enhancers that have not been banned.
So steroid use in baseball was not banned until after several major players greatly improved their slugging performance through using them.
Perhaps some sports would like to restrict excessive use of weights and other forms of training, but detection and control of these activities would be impossible.
The result is a fragile equilibrium between the banning of various substances, enforcement of bans, and the search for new substances and ways to evade bans on old substances.
This is not a perfect outcome, but I believe it is on the whole better for competitive sports and for participants than a policy that allows all kinds of performance enhancers and stimulants.
I agree with Posner that President Bush should allow much greater freedom for federal financing of research on embryonic stem cells.
However, I am not convinced that the restrictions he imposed will make that much difference either to world research in this area, or even to that by the United States.
In addition to federal financing of stem cell research, American funds are coming from state governments, foundations and wealthy individuals, and for-profit biotech companies.
Since even the strongest supporters of stem cell research would agree that this field should take only a small fraction of the over $35 billion Federal budget for medical research, it should not be difficult to make up any federal shortfalls with monies from other sources.
Californian voters strongly supported a referendum in 2004 for the state to spend $3 billion on stem cell research.
While that spending is temporarily held up by litigation, private donors in California have pledged hundreds of millions of dollars to help the state make the transition until the litigation is resolved.
New Jersey, Connecticut, Illinois, and Maryland are also discussing state support for research on stem cells.
A few private companies are venturing into the stem cell area, even though they concentrate on aspects of this research that could lead to patents and profits.
The aggregate of all spending on stem cell research by non-federal sources probably exceeds what the federal government would have spent in the absence of any restrictions.
One useful comaprison is with Singapore, the nation considered to have perhaps the most liberal and generous policies toward research on embryonic stem cells.
According to a New York Times article, Singapore has spent a total of $950 million on biotechnology since 2000, and has budgeted another $900 million to be spent over the next five years to finance development of new therapies and drugs.
That this is a much larger fraction of Singapore's GDP than say is the ratio of California's approved $3 billion spending on stem cell research alone to U.S.
GDP is not relevant.
For it is the absolute spending level that determines the amount of research that can be done when comparing America to countries like Singapore with quite high standards of living.
A well-known result in economics is that up to a point increased federal government spending on various programs discourages private and local government spending on similar programs almost dollar for dollar.
By that is meant that if other sources had been spending say $500 million on research on cancer, and if the federal government adds another $200 million to its own spending on cancer research, these other sources would reduce their spending by close to $200 million, perhaps to spend the money on other diseases.
In that example, the greater federal spending had little net effect on total spending on cancer research.
Only if the increase in federal sponsored cancer research greatly exceeded $500 would that make a large difference to the total amount spent on cancer research.
This analysis is directly applicable to the controversy over financing of stem cell research.
The amounts budgeted by state governments, universities, and private philanthropies for research on stem cells is large relative to any additional amounts that would be spent by the federal government in this area, absent any restrictions on what the federal government can finance.
So mainly what is happening is that private and more local public sources of finance are replacing the federal government, and federal monies are going instead to research on other aspects of health.
If that is the case, why it might be asked, have several prominent American stem cell researchers moved to Singapore to conduct their research? Part of the answer is that Singapore is lavishing very high salaries and generous research budgets on a small number of prominent stem cell researchers.
In this way they have also attracted well-known British researchers, even though Britain has a much more liberal government policy toward stem cell research than the U.S.
federal government has.
This means that Singapore probably would have succeeded in attracting some prominent stem cell researchers from the U.S.
even without the present federal restrictions.
Two qualifications should be made to my rather rosy view about the effects of the limited federal approach to financing stem cell work.
One is that, as Posner suggests, some stem cell specialists may believe that the U.S.
restrictions will grow tighter in the future than they are at present.
I believe the opposite is more likely, that pressure will build to loosen them further, but that is far from certain.
Another qualification is that present restrictions make it difficult for researchers supported by federal grants in other medical areas to combine that work with use of embryonic stem cells.
I do not know how serious that restriction is, but scientists who call for more liberal policies on federal financing of embryonic stem cell research do not frequently raise this argument.
My final point is that it is not necessary or possible for the U.S.
to take the lead in all areas of medical research.
If Singapore, Great Britain, Finland, Canada, or other nations take the lead in stem cell research, the United States would be allocating more of its generous federal support of medical research toward other fields.
This may well be close to an optimal allocation of monies spent on medical research among different fields and approaches, even considering U.S.
interests alone.
Many good comments on obviously a controversial subject.
I will respond to a few of them.
Freedom is not an absolute in any society, including the most democratic.
There are tradeoffs between freedom and other values, such as security.
The threat of terrorism has shifted the balance.
All this seems rather obvious.
The main issue is how far one should go in restricting freedom.
That is far more complicated, and there is room for much difference of opinion.
Yes, I am skeptical of government since government actions are typically very inefficient and heavy-handed.
Yet I support public police, a public armed forces, various regulations, and so on.
In many areas even inefficient government actions are better than leaving them to the private sector alone.
Terrorism is one of these important areas.
The quote from Benjamin Franklin about his reluctance to sacrifice any freedom for additional security is interesting.
But I do not know of any evidence that Franklin opposed the harsh treatment given to Tories during the revolutionary war.
Does any one?.
Everyone "profiles" in their daily behavior since all this means is that in the absence of much information about an individual, one judges the individual in part by the groups he or she belong to.
For example, anyone who sees an 80 year old female (or male) would doubt if they would rob us or commit a terrorist act.
So the issue in this discussion can only be about whether it is worth subjecting young Muslim males to special scrutiny and surveillance.
My answer is yes precisely because it has been difficulty for Islamic terrorist groups to enlist others to engage in suicide attacks.
Of course, all such policies deal in probabilities, not certainties.
Muslim terrorists might offer compensation and use persuasion to get a few non-Muslims to be willing to commit suicide, but experience shows not many succumb.
That some female Muslims or converts, etc might be persuaded to be terrorists is why everyone goes through a certain amount of security checking, and so forth, but the degree of checking will be less severe than for the primary profiled groups.
As I stated in my original post, I agree with the comment that innocent Muslim have an even greater stake in preventing terrorism since they suffer when Muslim terrorists blow up planes or engage in other terrorists.
I speak from some experience since my wife was born in Baghdad and grew up in Iran.
She, her brothers, and nephews and nieces have had first hand experience of profiling in entering the United States and other countries.
When done in a pleasant manner they have typically accepted the necessity of the process-their main objection has been when it was heavy-handed and nasty.
I like the idea of paying those profiled for the inconvenience and time involved.
Probably a manageable system could be worked out, and the pay might involve money, other forms of compensation, or both.
The Fed, the European Central Bank, and the Japanese Central bank have all been pumping liquidity into the global economic system through easing borrowing in overnight money markets in order to stem the lending crisis brought on by heavy default rates on sub prime loans.
The Fed on Friday also lowered the rate they charge to banks, and encouraged them to use this rate to borrow for longer than overnight, especially with sub prime loans as collateral for their borrowing.
By contrast, the British Central Bank has not taken any special steps, and the head of that bank, Mervyn King, and some other economists have argued that trying to stem the crisis by making loans cheaper and more available is an unwarranted  bailout of financial institutions.
This could create a risk-called "moral hazard"- which means in this situation that hedge funds and other financial companies might lend recklessly in the future in the expectation that they would be helped again by Central Banks if they get into trouble.
Others have argued that the financial system has to go through a crisis to eliminate all the reckless investments that have been made during the past few years.
I have been a strong opponent of bailouts of individual companies since I do not believe in the "too big to fail" justification when applied even to large manufacturers, financial intermediaries, or service companies.
In particular, I was against the Fed's putting pressure on private investors to bail out Long Term Capital during the financial crisis of the late 1990's.
It would be a further mistake for the Fed or other Central banks to come to the assistance of hedge funds or other lenders that may be in financial difficulties because they excessively invested in assets of dubious value.
They should bear the consequences of their mistakes.
In particular, no assistance should be given to home lenders or others who might go bankrupt because it made an excessive number of highly risky mortgage loans to borrowers with dubious credit.
To be sure, in the environment of the past several years of very low interest rates, sharply rising housing prices, and new instruments for managing and aggregating risk, it is easy to understand why loans to finance home ownership spread to borrowers who in the past would not have been considered sufficiently credit worthy.
Many of these loans have turned sour because interest rates have begun to rise sharply, especially on low-grade mortgages, and because of the steep slowdown in the increase in housing prices.
Yet f the discussion of this experience typically forgets that most homeowners who can no longer meet mortgage payments and may have to sell their homes will get back more than they paid because housing prices remain well above what they were when they bought their homes with cheap loans.
So is laissez faire the right option in this case, and the Fed and other central banks should not offer any special help? I would have absolutely no doubts that this is the right policy if the major risk of the present situation were that some hedge funds and other financial institutions would experience sharp rundowns in their assets and even bankruptcy.
However, the Fed's recent intervention was driven by the fear that the weakness in financial markets will spread to the real economy, and will adversely affect employment, investments, and general welfare in the United States.
The same justification would apply to Europe and Asia as well.
The avowed goal of such interventions would not be to help individual companies or borrowers, but rather to stabilize the complicated and interconnected economic system.
Such an approach by the Fed and other central banks is not foolish, and may be right, but I believe they should continue to be guided by the criteria that have served them very well during the past couple of decades.
That is, their policies should be determined by rules dependent on broad developments in the economy: unemployment, the growth in GDP, and the inflation rate.
Central banks should intervene by lowering interest rates only when these broad economic indicators begin to slip badly.
Since unemployment continues at low levels, and inflation is still modest, the U.S.
GDP growth rate is the only major indicator that has worsened- output in Europe, Japan, and most of the rest of the world has continued to grow at a brisk pace.
I conclude that central banks should be especially vigilant for signs that the damage is spreading to fundamental economy indicators, but should refrain from any special actions until that time.
Otherwise, central bank policy would get confused between rules that depend on broad developments in the economy, and discretion that is affected by development in the housing market, the market for credit, or other specific markets.
Obesity is defined usually as a body-mass index of 30 or greater, where the body-mass index adjusts weight for height by dividing weight in kilograms by the square of height in meters.
Obesity defined in any reasonable way has increased rapidly since 1980 in the United States, and to a lesser extent In Europe and Japan.
About 30 per cent of all Americans have a body mass index of over 30, and about twice that number are considered to be merely overweight.
While all economic levels, ages, racial groups, and both genders became heavier, obesity is much more common among the less educated, lower income persons, women, African-Americans, and Hispanics.
Several factors explain why the average weight of Americans (and those in other developed countries) increased a lot more rapidly after 1980 than it had before.
The effective price of fatty foods began to decline rapidly at that time, in part due to the growth of fast food chains, like McDonald's.
Also important, especially for teenagers, is the attraction of sedentary activities resulting from computers, email and instant messaging, and video games that replaced time at sports and other more physically challenging activities.
(Television viewing by Americans did not increase, and may have declined, during the past 25 years.) The development of many drugs that combat high blood pressure, high cholesterol levels, and other ill health caused by being greatly overweight, and a reasonable expectation of further medical progress in the future, also contributed to the declining concern about being greatly overweight.
Social networks that influence eating and leisure activities has been recently suggested as a further factor in the spread of obesity.
An article in the July 26 issue of The New England Journal of Medicine ("The Spread of Obesity in a Large Social Network Over 32 Years") analyzed the famous Framingham Heart Study for any evidence of social influences on obesity.
This Study has followed about 5000 individuals and their children and grandchildren since 1948, with questionnaires on health, weight, friends, marital status, and many other variables.
The recent exploration of these data between 1971-2003 for obesity social influences finds that a person becomes fatter when his or her friends, spouse, or siblings become fatter.
The authors are aware that this does not necessarily mean causation from weight gain by friends and family to weight gain by this person.
They probe further by adjusting for past weight, by looking at the timing of weight increases, by seeing if weight changes of neighbors are correlated (they are not), and develop a few other tests.
The results withstand all these tests, so they conclude that social influences of friends and family are important in the obesity "epidemic" of the past 25 years.
Yet it is impossible with data of the kind in the Framingham Study to be sure that social influences rather than common changes in variables unobserved by the analyst explain why weight changes move together among friends or other social groups.
To isolate the effects on behavior of group influences rather than the effects of changes in common forces, one needs evidence like what happened to their weights after college students are randomly assigned to each other as roommates (there is a study of the behavior of students who were so assigned), or evidence from other situations where one can more fully rule out friendships due to common interests and backgrounds.
Still, it is plausible that eating habits and leisure and work activities are significantly influenced by what peers and family are doing.
Indeed, considerable circumstantial evidence strongly suggests powerful social influences over many kinds of human behavior.
Nevertheless, however important is the impact of social influences on weight gains, they cannot explain why the trend toward obesity accelerated during the past several decades.
For what social influences do is magnify, not start, the responses of groups to changes in prices, incomes, jobs, technologies available for games and communication, and other factors common to most members.
For example, if a friend starts eating fast foods more frequently for whatever reasons, and I am influenced by his eating habits, then I would more frequently eat more fast foods as well.
If he is also influenced by my eating habits, he eats even more of these foods than he did initially.
But then I would eat still more as a result of his reaction to my eating.
The end result could be a large increase in the fast food consumed by both of us, which could cause significant increases in our weights.
In effect, there is a multiplier response to any initial weight gains due to the presence of social interactions.
To illustrate this "social multiplier" on weight changes, assume that if each time my peers gain a pound of weight, I gain 0.6 of a pound because I alter my behavior to correspond to theirs.
If I influence their behavior to the same extent, then the social multiplier would be 2.5=1/1-0.6, which is the infinite sum of the series of back and forth interactions on weight changes among these peers.
This means that if each member of a group on their own would gain 10 pounds as a result of say a decline in the price of fat, than each would end up gaining much more, 25 pounds, because of the social interactions among them.
This example shows how a sizable social multiplier on weight would transform moderate gains in weight when individuals are considered in isolation into possible epidemics after accounting for the interactions among members of a social network.
The social multiplier on weight gains can be utilized to make it easier to lose weight.
Individuals unhappy with being overweight can recognize that their chances of losing weight are greater if they acquire friends who are thin or who want to lose weight too.
They could try to find such friends by attending exercise classes, or by joining online and other weight losing groups.
A company may want employees to lose weight in order to reduce absenteeism, and to save money on employee health insurance.
It would be able to utilize the fact that employees' beliefs about their appropriate weights are influenced by how heavy their fellow employees are, especially when employees of the same firm are also friends.
The company could heavily subsidize healthy meals, or offer bonuses to employees who lose weight, recognizing that these benefits might cause big reductions in weight because of the social multiplier.
Governments may try to reduce the incidence of obesity because of paternalism, or a desire to reduce public spending on ill health (I am skeptical about the value of such policies-see my blog post on October 8, 2006).
It could take advantage of the social multiplier on weight by recognizing that even modest taxes on the fat in food or on fast food outlets would have large effects on the consumption of fat, and indirectly on weight loss, because of the social multiplier in eating patterns among friends, family, and others.
For at least the past three decades the media and others have been concerned about the "crumbling infrastructure" of the U.S.
highways, including the roads and bridges.
For example, as far back as April 1982, The Reader's Digest had an article entitled "Cures for America's Dying Highways".
This concern led to a series of Federal acts over the subsequent 20 years that tried to help address safety and efficiency issues by providing additional funding for maintenance of roads and bridges through using revenues collected from the federal gasoline tax.
Given that total spending by state and federal governments amounts to over 1/3 of U.S.
GDP, surely there are enough resources in government hands to provide excellent road infrastructure that produces efficient as well as safe travel.
However, a problem in getting adequate resources to any important government activity is that they must compete with so many other demands on the very liberal overall budgets.
In particular, spending on road safety has to compete against spending on medical care, retirement benefits, housing subsidies, public transportation, agricultural subsidies, and numerous other ways to spend government revenues.
The most deserving forms of spending, such as highway safety, might get shortchanged as resources are spent on projects of questionable value, such as agricultural and housing subsidies, or social security benefits to well off individuals.
So is the present concern about safety of the infrastructure merited, or is it just a recurring reaction to the latest major accident, such as the bridge collapse in Minneapolis? As far as I can tell the evidence does not indicate a significant overall safety problem for American roads and bridges.
For one thing, collapsing bridges and other defects in the infrastructure that cause serious accidents are very uncommon.
The overwhelming fraction of all bridges in the country is in good or excellent shape.
 Of the huge number of bridges in this country-Illinois alone has over 30,000 bridges- only a little over 10 per cent are considered "structurally deficit" in the evaluations provided by the Federal National Bridge Inventory.
Moreover, even this negative designation does not mean that these bridges are unsafe, but rather that they are in need of more frequent checkups to detect signs of any additional deterioration.
Actually, few bridges are considered so unsafe that they have had weight limits imposed on the traffic using them.
Moreover, defects in infrastructure ranks far far behind driver and car defects as a cause of highway accidents.
Even with the major advances in car quality during the past couple of decades, many cars on the road still have worn tires and mechanical defects that cause accidents.
Clearly the most important cause of highway accidents are driver defects in the form of driving when under the influence of alcohol or drugs, bad eyesight, slow reactions, poor judgments, and limited driving skills.
Drunk driving alone kills over 15,000 persons per year in the United States out of about 40,000 total annual deaths from automobile accidents.
 These data suggest that the bulk of any allocation of additional federal and state revenues to accident prevention devoted to highway safety should be spent on trying to reduce drunk driving, and discouraging driving by those who are prone to accidents.
Relative not only to poor countries like India with disastrous infrastructure, but also to rich countries like Great Britain and Italy, the American system of roads and highways is quite good, both in terms of accessibility and safety.
That probably is an important reason why the U.S.
has been slower than most other nations in privatizing more than a tiny part of its road system.
Nevertheless, I agree with Posner that the U.S.
should move aggressively toward privatizing many segments of that system (and other public activities as well).
An example of what can and should be done is given by the privatization of the Chicago Skyway, an 8-mile toll road that connects I-94 in Chicago to the Indiana Tollway.
In 2005 the City of Chicago gave the Skyway Concession Company a 99-year lease to operate this skyway; the company paid almost $2 billion to the city for that lease.
The privatization was actually motivated by the difficulties the city had in upgrading and repairing the skyway.
The SCC collects and keeps all tolls and concession revenue, but it is responsible for all operating and maintenance expenditures.The agreement between the City of Chicago and this company is the first privatization of an existing toll road anywhere in the United States.
So far it is working out extremely well, and might be the poster child for privatizations of other roads, although obviously more time is needed to see how the maintenance, efficiency, and tolls charged on the Skyway evolve in the future.
The past few years, and especially this summer, has seen loud and frequent complaints against American airlines because of flight delays, cancelled flights, lost baggage, poor on-board service, overbooking, and other problems.
Only 68% of airline flights were on time in June, down from 73 % a year ago, and complaints in June rose almost 43% compared with June 2006.
Let me try to add to Posner‚Äôs fine discussion about why this has been happening.
It is no surprise that the quality of airline services declined after deregulation of air travel took hold in the 1980's.
The Civil Aeronautics Board that controlled the airline industry prior to deregulation severely restricted the degree of price competition among airlines.
So the main way available to airlines to attract customers from competitors was to offer higher quality services, such as better food, shorter check-in lines, more empty seats on a typical flight, and the like.
After open competition on ticket prices became common due to deregulation, airlines naturally cut back on most of the services that had been provided because they could not compete on price.
Of course, lower prices and greater competition made air travel available to millions of men, women, and children that would have been financially out of their reach under the old system.
That is, the greater price competition brought in the marginal customers that Posner considers who have lower incomes, and who are much less willing to pay for better services.
To some extent, special airlines, such as the now defunct Peoples Airline and Southwest, began to cater to younger and lower income customers by having only cheaper economy seats, longer delays at check-in, simpler (if any) food, and more crowded flights.
The major airlines, like American and United, tried to meet this competition while at the same time offering superior service to first class and business travelers.
Indeed, under competitive pressure, they even improved some of their services to premier customers, including faster lines for them to get through security checks, special rooms where they could be more comfortable while waiting for flights, and faster baggage delivery.
But even first class passengers could not avoid flight delays, break downs of air conditioning on planes, and other recurring problems in air travel.
One obviously important factor in the especially rapid deterioration of airline services during the past few years is the awful financial situation of practically all airlines- there are a few exceptions, such as Southwest.
As bankrupt and other financially weak airlines struggled to stem their losses in the face of steep rises in the cost of fuel, they cut the number of employees serving customers either directly or indirectly, reduced the number of their flights, eliminated food on most of their domestic flights, and made multiple other reductions in services to reduce costs.
Another factor behind the deterioration in services during the past couple of years is the large increase in occupancy rates on planes.
When planes are running at or near capacity, even small weather, security, or other shocks to the system can create major headaches.
With high occupancy rates, it becomes difficult to rebook on other planes when flights are cancelled, baggage delivery is slowed and more baggage gets misplaced, the limited number of toilets on flights are more intensively used, and have become dirtier and more likely to clogg up, overbooking grows to a much bigger problem, and delays get longer even when the number of flights do not increase because some passengers and baggage are late for connecting flight.
In many other ways as well, flights are just much more uncomfortable when all or almost all seats are occupied.
The inconvenience to customers of high occupancy rates is made worse by inflexible prices charged to airlines that gives them various rights at airports.
For example, take off and landing fees for commercial and private planes are largely determined by the weight of an aircraft, are fixed in advance, and they are not sensitive to variations in the cost of using airports at different times.
Weight-based fees encourage smaller planes to clog runways during peak periods whereas they should be encouraged to use off-peak times.
If airports charged higher fees during busier times of the day and on busier days, and if they made some adjustments of fees when there is bad weather and other causes of delays, airlines would be induced to stagger their flights more than at present over a day and during the week, and perhaps even to adjust their schedules to expected to weather conditions.
More flexible prices in turn would particularly help flights with the largest number of total passengers and more first class and business passengers since airlines would be willing to pay more for these flights in order to get them priority positions on take offs and landings.
Hundreds of millions of men and women all over the world have been tuned to their television sets and clued to their computer screens as they followed the Olympic extravaganza in Beijing.
The pride taken by people of different countries in their own athletes as they compete against the best from other countries is truly remarkable.
To Americans, the main interest this year has been Michael Phelps' pursuit of a record setting 8 gold medals in swimming-which he accomplished- the gold and silver medals won by two young American girls in the all around gymnastic finals, and the new basketball "dream team" that so far has easily won against China, Spain, and elsewhere.
The Chinese have been thrilled by their successes in gymnastics and diving, the Australians by their swimmers, and the Rumanian's by the victory of their 38 year old mother in the women‚Äôs marathon.
Pictures were shown of how in 2004 the almost all black country of Zimbabwe with a history of significant racial conflict gave a wildly enthusiastic parade to a white Zimbabwe swimmer who won a gold medal during the Athens Olympics.
And so it goes in other countries whose athletes have won medals.
All the accolades given to Olympic medal winners-especially to those who get gold- provides plenty of incentive for young and talented athletes to train hard for the Olympics in the hope of becoming a medal winner.
When practically all participants in the Olympics are working hard in their training regimes, and since various random factors, such as illness, injuries, and psychological state are extremely important, it becomes difficult to predict individual winners in many of the competitions.
Yet it is rather easy to predict quite well the total number of medals won by different nations.
The article "A Tale of Two Seasons: Participation and Medal Counts at the Summer and Winter Olympic Games", published in 2004 in the Social Science Quarterly by Professor Daniel Johnson of Colorado College and a co-author, examines the determinants of how many medals were won by different countries in the summer and winter Olympics since the end of World War II.
Their regression analysis shows that two very important variables are the total population and per capita incomes of different countries.
Also important are whether a country has an authoritarian government-such as communism- a country's climate, and whether a country is the host country for a particular Olympics.
 These five variables taken together predict closely the total number of medals won by different countries in the winter as well as summer Games.
It is surely no surprise that population matters a lot since there are many more athletes to choose from in large countries.
This is why the breakup of a big country, such as the Soviet Union, had a large effect on the number of medals won by Russia, if Russia is identified with the Soviet Union.
Climate is also no surprise since, for instance, the warm climates of African nations makes it highly unlikely that they will be contenders during the winter Olympics in skiing and other cold weather sports.
Yet countries with colder climates, such as Russia and Scandinavian countries, do well, given the other variables, in summer as well as the winter Games.
Host country effects are somewhat more surprising, but they might be explained by greater familiarity of host athletes with the weather and other conditions of the Games, by the extra incentives provided by the cheers of their fans in attendance, and possibly by the greater preparation efforts of host country athletes.
It is further entirely reasonable that countries with higher per capita incomes, other things the same, do better in Olympic and other international competitions.
Parents of promising athletes have more resources to hire coaches, buy equipment, and get other help in their quest to improve the performances of their children.
High schools and colleges have more resources to spend on their athletic programs.
Private groups establish Olympic and other committees with generous resources to help in the training of the most promising athletes.
Companies sponsor athletic programs and offer other incentives- such as the $1 million that Speedo promised Michael Phelps if he succeeded in winning 8 gold medals at the Beijing Olympics.
The importance of communist and other single party countries on the surface is more surprising.
It is not that these countries send more athletes to the Olympics than other countries with similar populations, etc- they do not- but authoritarian countries do better per athlete that they send.
The reason appears to be that governments of these countries spend considerable resources and energies in finding young promising athletes, and in providing systematic training and equipment in centralized facilities.
According to the NY Times' editorial of August 17th, China has spent billions of dollars on its state sports program since the 2000 Sydney Games.
These countries also can sometimes use their authoritarian structure to force parents to let their children be taken to centralized facilities, and have refu'ed to allow athletes who win medals to retire.
Such activities clearly help explain China‚Äôs rapid rise to athletic prominence, but the same considerations were behind East Germany's success in earlier Olympics, and in the great success of the Soviet Union prior to its breakup.
Democratic governments would not be able to employ some of the techniques used by authoritarian governments, but still must decide on the proper role of their governments in preparing athletes for Olympic and other international athletic competitions.
The strong interest of countrymen in cheering on athletes representing their countries seems like a positive "externality", especially from Olympic success.
However, in private market economies, these so-called externalities from Olympic and some other international athletic achievements are internalized to a considerable extent by endorsements, requests for well-paid speeches, job offers, and other private advantages given to successful athletes.
Many of these private advantages are not possible in government-controlled economies, which might explain why their governments are much more active in financing and training athletes.
Perhaps some externalities remain that justify considerable government involvement in democratic countries.
Indeed, recently countries, such as Germany, have indicated that they plan to spend more in preparing their athletes for future Olympics.
The Times' editorial opposes further government spending on the US Olympic program mainly because the government budget is in deficit and the economy has slowed down.
I believe there are much better reasons for opposition to a much larger government involvement.
The highly decentralized, mainly but far from entirely, privately financed approach to athletics found in countries like the United States and Great Britain is the right way to attract and train Olympic and other athletes in democratic countries with strong decentralized private economic and philanthropic sectors.
For every Ronald Reagan Arnold Schwarzenegger, Jon Voight, Charlton Heston, and a few other prominent conservative Hollywood stars, there are probably more than 50 strongly liberal actors, directors, producers, and other "above the line" categories of filmmakers.
The top "below the line" categories of cinematographers and production designers are also heavily liberal.Less creative crew members, such as grips, have political views that are closer to those of the general American voting population.
Posner gives several explanations of the liberality of filmmakers, including their engagement in fantasy projects, their irregular employment, and the prominence of Jews, who are mainly liberal, in the industry.
There is an additional consideration of great importance.
Whereas most actors and other filmmakers have little interest in tax policy, approaches to Medicare and social security, other domestic economic and political questions, and even in many foreign policy issues (except wars), they are very much concerned about policies regarding personal morals.
I believe the single most important reason why so many of these Hollywood creative personnel are opposed to the Republican party, especially to the more conservative members of this party, is that the personal morals of many filmmakers deviate greatly from general norms of the American population.
Creative contributors to films divorce in large numbers, often several times.
Many have frequent affairs, often while married, they have children without marriage, they have significant numbers of abortions, have a higher than average presence of gays, especially in certain of the creative categories, who are open about their sexual preferences, they take cocaine and other drugs, and generally they lead a life style that differs greatly from what is more representative of the American public.
By contrast, an important base of the Republican Party is against out of wedlock births, strongly pro life and against abortions, against gays, especially those who adopt an publicly gay lifestyle, against affairs while married, and very much oppose the legalization of drugs like cocaine and even marijuana.
It becomes impossible for Hollywood types who adopt these different lifestyles to support a political party that is so openly and prominently critical of important aspects of their way of living.
That the majority of the relatively few conservative filmmakers lead more ordinary lifestyles confirms this hypothesis: they tend to be heterosexual, married, have children while married, are less into drugs, and in other ways too have more conventional lifestyles.
True, some of the most prominent conservative member of Hollywood, such as Reagan and  Voight, have been divorced, but divorce is now more accepted even by most conservative Republicans.
After all, Ronald Reagan was a darling of conservative Republicans, and John McCain also has been divorced.
Note that below the line members of crews lead more conventional life styles, and so they are less likely to be anti conservatives and against Republicans.
When other issues affect filmmakers more than attacks on their morals, their views often become very different.
So while many of the more creative filmmakers consider themselves to be socialists, filmmakers, writers, and other creative types in communist countries were typically very strongly opposed to their governments.
The obvious reason is that these governments imposed substantial censorship on the type of films that could be made, and so directly interfered with what filmmakers and writers wanted to do.
Another important factor stressed to me by Guity Nashat Becker is that members of the print and visual media who generally have strongly liberal political views surround actors and other creative contributors to films.
Since it is well established that political views are greatly affected by the attitudes of people one interacts with closely, it is not surprising that some of the liberality of the media rub off on actors and others in the filmmaking industry.
In addition to their concern about political approaches to personal morality, their association with the media helps make filmmakers anti-business, especially big business, and strongly pro-union.
Do the liberal views of Hollywood stars and leaders have a big affect on the opinions of others? I do not know of any evidence on this, but I suspect they only have a small indirect effect.
 This is not the result of speeches or other statements of their views-since they usually are not articulate in their extemporaneous comments- but their entertainment at various political functions can help generate enthusiastic audiences.
More important probably is that whereas audiences do not go to films unless they enjoy them, anti-business and other liberal views will often be an underlying message of popular films.
I doubt of these messages have a large permanent effect on the opinions of the audiences, but some affect is surely possible.
So all in all, I believe Hollywood is a very minor contributor to general political views, but I do not think their influence can be fully dismissed.
Articles about whether America is in decline is a cyclical industry that rises and falls over about a twenty-year cycle.
The previous cycle started with Paul Kennedy's bestseller of 1986 "The Rise and Fall of the Great Powers", and was vigorously discussed during the next decade.
It was finally dismissed after starting in the early years of the Reagan presidency there was more than twenty-five years of vigorous growth in GDP-much faster than in Western Europe- declines in unemployment to very low levels, and the complete absence of any inflationary pressure.
This gloom and doom industry has begun to grow again during the past few years.
Kennedy had attributed his projected decline of the United States to its role as the world's policeman, and the resulting spending on defense and military manpower and equipment, Yet, defense spending did not account for more than six percent of GDP, and some of the military spending went for military R&D and training that had carryover to civilian products and services, such as the development of the Internet, and the training of pilots.
The new pessimists continue to blame America's role as policeman, and in particular its protracted involvement in Iraq and Afghanistan.
They also see possible doom in the debacle in the US housing market, the high price of oil, and the current economic slowdown in income growth, and declines in employment.
Much emphasis too is placed on the growth of China and India, and also Brazil, and the shift of the world's attention toward these large rapidly developing nations.
Some members of the doom school claim in addition that the United States is getting "old", like old Europe, and is suffering from ailments that afflict old nations.
Readers of our blog will realize that I generally do not subscribe to this gloom and doom school concerning America.
I do agree that being the world's policeman does take resources that could be producing civilian output, and countries in Europe and elsewhere free ride off of America's efforts, but when done right this policeman's role also makes the world a safer place in the future.
However, the resources spent on military manpower and equipment is not large enough to have a serious effect on the growth of US civilian output.
The economy and housing market will before long recover from their current difficulties.
The rapid expansion of China, India, and a few other large nations does mean that the share of world GDP produced by the United States has begun to decline, and is likely to continue to decline over the next decade and longer.
After all, these two huge nations, along with Brazil, comprise over forty percent of the world's population, so their rapid growth must lead to a decline in America's share of world GDP.
But the success of other nations should not be taken per se an indication that America is in decline.
Moreover, and on the whole, the growth of these other nations will help US growth prospects.
The United States has been for several decades the world's leader in technological innovation, so that other nations have been able to free ride to some extent over US investments in new ideas and technologies.
With the rapid growth of China and others, they too will begin to make considerable innovations, and the US will now be able to take advantage of their technological advances.
In other words, in the future, America will become more of an importer as well as continuing to be an exporter of new ideas and innovations.
The expansion of exports from China and other poorer nations has not benefited all nations, especially those that compete with exports of similar products.
However, it has greatly benefited the US and other developed countries because the rich countries can import amazingly cheap consumer goods, and these developing countries provide a market for the industrial goods and advanced services of richer nations.
As the rapidly developing countries get richer, the mix of their products and services will change, and some of them will compete directly with those of richer nations.
Yet the evidence is strong that trade is stronger in general between countries of similar levels rather than different levels of economic development, but is mutually beneficial to both sides.
I see no reason why this should not continue as China's, India's, and Brazil's economic development become much closer to that of the US, Japan, and Western Europe.
Another argument made by the America is declining camp is that as countries continue to get richer, individuals lose their motivation and begin to sharply cut their hours of work and ambitions regarding further accumulation of wealth and income.
In a celebrated article published in 1931 called, "Economic Possibilities for our Grandchildren", the great economist John Maynard Keynes predicted that as incomes continued to grow, then adults in Europe and the United States would by the year 2030 be working about 15 hours per week, and they would spent most of their time in leisure pursuits.
Keynes‚Äô predictions about the long-term rates of growth of income were surprisingly quite accurate, despite the worldwide depression then in effect, but his predictions about how people would spend their growing wealth were way off the mark.
He did not appreciate that higher hourly earnings could lead people to work more hours even though their incomes were higher, and that the continuing development of new products, such as computers and television, would increase people's desire for more spending power.
These effects were magnified by the interest in relative economic position since that induces men and women to strive for higher incomes in order to move ahead of their peers (on all this, see the article by Luis Rayo and me "Why Keynes Underestimated Consumption and Overestimated Leisure for the Long Run", in the recent collection of essays, "Revisiting Keynes".
I am an optimist about the future prospects of America; that is, I believe the individuality, entrepreneurship, and drive in this country will continue to propel the economy and society forward at a good pace.
The biggest risk to America's continuing success lies not in the considerations already discussed, but in the expansion of government regulations and controls that can throttle the dynamic energies of its competitive private sector.
Clearly, various forms of government spending and regulation, such as spending on police and the military, on schools and other infrastructure, are crucial to any prosperous society.
However, the tendency during the past half-century has been to go further than is warranted as different interest groups look to the government for help.
 Governments now often decide what consumer goods can be produced (see our blog discussion last week), subsidize housing and other goods, and regulate who can be fired and hired (especially in many European countries but also increasingly in the US).
Governments also are placing greater stress on equality as opposed to opportunity and efficiency, and pay for medical spending, provide retirement incomes, and often impose heavy taxes on persons who earn more than average.
So far, this expansion of the role of government has not been a crucial deterrent to entrepreneurship and private energies in the United States-a much greater expansion of government has had much more harmful effects in countries like Italy and France.
Although I remain optimistic, I do fear that interest group pressures toward a much larger role of government in the United States may become much harder to resist in the future, and that this could eventually kill, or at least badly wound, the free market-entrepreneurial goose that has been laying the golden eggs.
Many gay couples want to be allowed to call their union "marriage" mainly because they believe this will give their relation a degree of acceptance that is closer to that given to heterosexual unions.
They also believe that marriage connotes a more stable long-term relation, although gay unions have a well-known tendency to dissolve at even higher rates than heterosexual marriages, and that very likely would continue even if their unions are called marriages.
The narrowly economic gains from being married are a decidedly minor part of the desire by gays to have their matches called marriages.
For the reasons just stated, one can understand why many gay couples want to be allowed to marry.
What I find difficult to understand is why there is so much opposition; for example, I doubt if a referendum legalizing gay marriage would pass in many states.
As Posner indicates, allowing gay couples to marry will have little effect on either the attraction or stability of marriages between heterosexuals.
I believe this opposition reflects hostility to gays and their unions that can no longer be expressed in other more traditional forms, such as calling them names or harassing them.
As a result, the marriage issue has become a rallying point that allows hostility to gays to be hidden behind other reasons.
To be sure, it is a strange way to express that hostility in light of other options that have been allowed to gays that are far more radical.
I am mainly thinking of the recent practices of allowing gay couples, married or not, to adopt children, allowing lesbian couples to bear children through sperm supplied by sperm banks, or allowing male gay couples to use their sperm to impregnate women who bear children that a gay couple raises.
Although rather few gay couples have children as yet, that practice is a far bigger venture into the unknown than is permitting gay couples to be married.
It is still too early to have reliable evidence on the effects on children of being raised by gay parents, but I suspect these effects will be more negative than positive, in part because even married gay couples are likely to dissolve their match at relatively high rates.
I also find it strange that gays having and raising children arouses much less opposition than does polygamy, where several women voluntarily agree to be married to the same man (a far rarer form of polygamy is when several men agree to be married to the same woman).
Why should society care if two (or more) women are willing to be married to the same man, especially in an environment where men and women rather than their parents generally make their choices about who to marry? We trust women to make many other decisions that seem strange to others-such as when a twenty year old woman marries a 65 year old man- so what logical grounds are there to disallow several woman voluntarily accepting marriage to the same man? Moreover, since polygamy would increase the demand for women as marital partners-however slightly since polygamy would be very uncommon- the argument that it is a form of exploitation of women is also without foundation.
I have proposed for many years that marriage should be basically a private contract between the men and women involved-they can add a religious ceremony if they so desire.
There is no reason why the standard contract should be supplied by the government rather than by market forces.
An explicit contract would be compulsory, even if it only has a minimum number of stipulations and rules.
Most persons marrying might use such a standard contract, but others would have special provisions, such as the allocation of assets in event of dissolution, responsibilities for housework and other activities, and obligations toward children.
The state would set minimum obligations toward children since society has an interest in how children are treated.
Such contracts would be equally available to homosexuals, as they are already in some countries and many states of the United States.
These contracts would reduce the role of governments in marital arrangements where they have no special competence or interests- again, aside from the protection of children.
It would also eliminate the gay marriage issue since gays would have access to contracts as fully as heterosexuals.
It would also allow couples to stipulate in writing any special arrangements they want to see enforced in their unions.
Such contracts are unlikely to replace government determined marital terms in the foreseeable future.
So until then, it would be wise to expand the concept of marriage to include homosexual relations, and perhaps polygamy as well.
In a recent post (see my discussion on July 28) I explained why the American health delivery system is superior in some important dimensions to health care in most other advanced countries.
Americans have considerably longer life expectancies when they contract serious diseases, like cancers and heart conditions, than do persons living in these other nations.
That post emphasized that many criticisms of the American system do not sufficiently appreciate its positive effects on both the quantity and quality of life.
Here I address a few of its major shortcomings, and suggests ways to overcome, or at least moderate, these without eroding the strong parts of the system.
I recommend to readers the many high quality discussions of health care reform by John Goodman of the think tank, The National Center for Policy Analysis, and also a good op-ed piece in the Wall Street Journal of August 12th by John Mackey, CEO of Whole Foods.
A glaring weakness of the American health system is the over 40 million Americans without health insurance.
 To be sure, they impose much less of a cost on the health care system than is commonly claimed, partly because the majority of the uninsured are young and healthy.
Still, in a country as wealthy as the US, this is embarrassing, and should be rectified.
The least bad solution, strangely, opposed by many conservatives, is to require everyone to take out catastrophic health insurance that covers each person against major illnesses.
Those individuals and families that lack the means to pay for such insurance would be supported under a version of Medicaid.
Such compulsory insurance for everyone would greatly reduce the uninsured problem, in particular their free riding on others when they get seriously sick and go to hospitals for extensive care.
Increasing their medical coverage in this way would add to total spending on medical care, but it might well reduce the cost of medical spending to others.
Since the uninsured would be forced to take out such insurance, they would pay for any major medical care through insurance premiums rather than imposing the cost of their care on taxpayers and other groups who pay for their hospital care.
Another feature of the present system is that most Americans receive their health insurance through employment.
Americans are stuck for political reasons with this system for a while, yet a few important changes may be politically feasible to significantly reduce its cost, inequities, and inflexibilities.
To start, a cap should be placed on the amount of employment-based health insurance that is tax-deductible, so that employees would have to pay for so-called "Cadillac" plans out of their own incomes rather than out of taxpayers' incomes.
A second reform would be to provide the tax savings from these plans in the form of tax credits rather than tax deductions, so that higher income employees would not have a tax advantage to opt for expensive plans only because taxpayers foot much of the bill.
A third and very important reform of the employment -based health insurance system would be to make the same tax savings available to persons who buy health insurance outside of their jobs.
One advantage of encouraging the purchase of non-employment-based health insurance is that persons changing jobs would not risk losing their health insurance.
This would also raise the attractiveness of working at small companies that find it too expensive to provide health insurance.
This extension would increase the taxpayer burden from health insurance, but that burden would be offset by the elimination of the tax deductibility of Cadillac plans.
Perhaps the greatest problem facing the health care system is the high and rapidly growing cost of Medicare for the elderly as the American population ages, and as new drugs and surgical procedures are developed to treat diseases of old age.
I agree with Posner that a means test for Medicare should be implemented, so that older men and women who can pay for their medical care should get a much smaller subsidy.
This would reduce the incentive for these persons to opt for expensive drugs and surgeries only because they pay a small share of the cost.
I do believe that older persons would still be willing to pay a lot to extend their lives, partly out of their fear of death.
But that belief should be put to the test by requiring the elderly who are reasonably well off to spend more of their own money for their medical care.
In order to increase the number of older persons with enough financial means to cover much of their spending on medical care, further encouragement should be given to tax exempt health savings accounts, where unused balances can be carried over to later years.
By age 65, families that have made prudent use at younger ages of the monies in these accounts would then have accumulated sizable balances that will prepare them much better financially for the medical risks of old age.
Another way to reduce medical spending by the elderly in the long run is to encourage, not continue to attack, drug and biotech companies, so that they invest more in developing new drugs that treat better the major diseases of old age.
The research and development work required to expand significantly the production of new important drugs would add only a very small fraction to the huge total medical spending.
Moreover, this cost would be more than offset by the savings from substituting drugs for expensive surgeries or hospital stays, for drugs have the major advantage over these other treatments that they can be used to treat large numbers at relatively small additional cost.
The cost structure of drugs- high initial costs and then low costs of extensive use among the population- is especially advantageous to a health care delivery system, like the American one, that has trouble denying available medical care to persons who might benefit only very slightly.
The current Congressional bills on health car reform generally include a public insurance option; that is, a federal government health insurance plan that would compete against private plans.
The Obama administration is retreating from its emphasis on the importance of including this option, and the details about the form such an option will take have not been spelled out.
Nevertheless, the experiences of other government-run operations strongly indicate that whatever Congress says in these bills, such an option will cause far more harm than good.
For one thing, employees of a government-run health plan are likely to be unionized, just as public school teachers and postal workers are unionized.
These unions have raised the costs of operating schools and the postal system through their pay structure, and they have reduced the efficiency of these operations through opposition to innovations, merit pay, and other efficiency-raising changes.
Supporters of a government-run plan claim that it will be financially self-supporting, and will provide a standard for private plans.
To see how this would work out in practice, consider the postal system, a nominally private but basically a very old government -run business.
The postal system is also supposed to be self-supporting, but only recently it once again asked Congress for additional subsidies to cover deficits.
It strains credibility to expect that a large government-run health care option will not run huge deficits.
Just as part of the postal deficits are caused by government mandates, such as providing Saturday deliveries at no added cost, so Congress will also impose costly and inefficient mandates on the government health care option, in addition to other inefficiencies of such a government health care organization.
The micro details of the way the postal system operates are hardly reassuring about the efficiency or flexibility of a public insurance option.
To illustrate, we summer in a small town on Cape Cod that has about a 1,000 year-round population that rises to about 10,000 during the heart of the summer.
In responding to this large seasonal change, Fed Ex, a non-union private company, rents delivery trucks from auto rental companies to supplement their own fleet of trucks, adds temporary workers, and extends their hours of operation, so that they often make deliveries long after sunset.
By contrast, the local post office maintains exactly the same hours as during the off-season.
This includes closing for lunch from 12-1, closing at 4:30PM every weekday, and staying open only for a few hours on Saturdays.
Since there is no regular mail delivery because the all year round population is too small, many families rent boxes at the post office.
Instead of arranging to allow box-holders to access their boxes at most hours even when the postal window is closed, box access is only marginally better than access to the postal window, including no Sunday box access, and only morning Saturday access.
No doubt many consumers made mistakes in their credit decisions during the past few years, perhaps especially in the mortgages they chose.
It is equally clear that many lenders wish they had never given the mortgages they gave since they lost their shirts by doing so.
Does any of this mean that a commission to protect consumers would be a welcome piece of legislation?.
I am first of all dubious that consumers would have behaved much better if they had simpler contracts, or had the terms better explained to them.
The fundamental problem is that consumers are generalists who must make thousands of decisions in highly different areas.
As a result, they rely not only on their own limited knowledge, but also on competition among producers to help protect their interests.
When that breaks down, as in the housing bubble, many consumers get hurt, but overall it is an excellent strategy for those who must make so many decisions based on quite limited information.
Even if we agree on the above analysis, some will argue that a consumer "czar" would help protect the interests of consumers who make mistakes that markets fail to correct.
For after all, the czar and other members of her commission would be specialists in consumer issues that might enable them to discover and correct consumer mistakes.
This type of analysis is behind the "libertarian paternalism" in the book "Nudge" by Cass Sunstein-a former colleague and the present regulatory czar-and Richard Thaler, a colleague at the University of Chicago.
A realistic view of the political process casts strong doubts on whether this is how such a commission would actually operate.
Many political decisions are the result of a fierce contest between interest groups with different positions, as we are seeing clearly now in the fight over how health care delivery in the United States should be changed.
In these battles, producers, like health insurance companies and doctors in the health care case, are much better organized politically than consumers.
Producers can more easily coordinate their actions politically since they are usually either relatively few in numbers- as with health insurance companies- or they have effective trade associations that push their agendas, as with the farm lobby or the American Medical Association.
Moreover, since what gets passed can greatly affect the livelihood of producers, they have a strong financial interest in getting legislation that helps them, or at least does not do much damage.
The emphasis on consumer ignorance and mistakes makes it harder, not easier, for consumers to act as an effective political counterweight to the political power of producers since they supposedly do not fully know their own interests.
So I would expect producers, such as issuers of mortgages or credit cards, to be able to manipulate in their own favor any attempt by the Commission to push regulations to help consumers.
These advantages that producers gain from regulations have been called the "capture theory" of regulation in the political economy literature.
In the case of consumer ignorance, capture by producers of the regulators is even more harmful to consumers since consumer regulations are likely to end up exploiting, rather than combating, this ignorance in order to benefit producers, the way a private monopoly exploits consumer mistakes.
The cigarette settlement with the State Attorney Generals is a good example.
Cigarette manufacturers paid billions of dollars to the states based on present and future production, even though they were being penalized for the harmful effects of past smoking.
They got a settlement that also taxed potential new cigarette producers, so that cigarette producers were able to raise prices in response to the tax.
In fact, prices went up by considerably more than the additional tax per unit.
This enabled producers to recoup most of their payments to the state governments.
But smokers paid a lot for the settlement through the much higher prices they had to pay.
Perhaps that was desirable in order to cut smoking, but producers got off quite cheaply, and the poorer individuals who tend to smoke a lot were hit heavily by the settlement.
I am dubious about this proposed regulatory commission for all the reasons Posner gives.
In addition, I have argued that the Commission, whatever the intentions of Congress, the President, and members of the Commission, is likely to end up furthering the interests of mortgage companies, credit card issuers, and other producers at the expense of the very consumers it is supposed to be protecting.
The cash-for-clunkers program of the federal government began in late July, and will end this evening.
It provides a credit of from $3500-$4500 for anyone who trades in an older car to buy a new fuel-efficient car.
When measured by its popularity, this has been a highly successful program, for about 500,000 applications have been submitted under the program during these few weeks.
The strong demand caught the government by surprise, so that it had to add a couple of billion dollars to the one billion dollars initially allocated to the program.
Officials are far behind in the paperwork required to compensate dealers for the cars bought under the program.
Unfortunately, that the subsidies are popular is no measure of its public value, and I am afraid there is little to be said at any level in defense of a cash-for-clunkers program.
Hundreds of thousands new cars will be purchased under the program, but many of these purchases would have occurred later in 2009 or in 2010 instead of during the five week window of the clunkers program.
There is little value to the economy in subsidizing consumers to buy cars a few months earlier than they would have bought them anyway.
To be sure, some cars would be purchased under the program that would not have occurred during the next 18 months, if at all.
But if the goal of the program is to help stimulate the economy by subsidizing consumer spending, why limit it to individuals who own old cars? Why not give vouchers to all consumers that they can spend for a limited time period on many durable goods, such as computers, printers, TV sets, washing machines, and refrigerators? If that seems like too obvious a straight handout, the government could require consumers to turn in old computers or other durable goods in exchange for new ones.
Of course, as with the cash-for car clunkers subsidy, many consumers under this more general clunker program would simply alter when they purchased the new durables to take advantage of the subsidy.
The net result would again be subsidies that produced little net increase in spending.
Several arguments might explain why the decision was made to concentrate the clunkers program on cars rather than include other consumer goods.
A cynical view is based on the fact that the federal government is now a major stockholder of two auto companies, GM and Chrysler.
Subsidies to stimulate the demand for cars raises the sales and profitability of these companies, which would help justify the Obama administration's decision to bail out these companies in a big way.
Of course, the longer-term effect on GM's and Chrysler's profits would be small if the cash-for-clunkers program mainly redistributed new car purchases from later times into these past five weeks.
That the government wants its car ownership balance sheet to look better does not mean that the program makes good economic sense.
Another justification for the program relates to the environment, and argues that carbon dioxide and other pollutants from burning gasoline would be reduced if new fuel-efficient cars replaced old inefficient cars.
However, the exchange of clunkers for new cars would raise, not lower, the amount of gasoline consumed to the extent that consumers traded in old cars that they never or seldom drove because the cars were in such bad shape for nice new cars that they would drive a lot.
Even if the older cars were in reasonably good shape but got poor gas mileage, new cars would be driven more miles because, being much more fuel efficient, they would use much less gasoline per mile of driving.
On balance, the clunker exchange might result in only a small net reduction, if any, in the amount of gasoline used.
According to Sunday's New York Times, the average trade-in got 15.8 miles to the gallon compared to about 25 miles per gallon for the cars that were purchased.
If the cars will be driven about 50% more miles per year than the clunkers that were exchanged-not an extreme assumption- there would be essentially no effect on the gasoline consumed.
The main problem I have with the cash-for-clunkers program from the viewpoint of reducing pollution is that the program is such an inefficient way to cut down on gasoline consumption.
The obvious best approach, not politically easy to accomplish, would be to raise the federal tax on gasoline.
This would encourage owners of all cars to drive fewer miles since the cost of driving would go up for every driver, no matter how fuel-efficient their cars were.
Higher gas taxes would especially encourage owners of older inefficient cars to drive much less-as they did when gas prices topped $4 per gallon- and even induce them to trade in their old cars for more efficient cars without offering any special incentives to do so.
This criticism of the clunkers program as inferior to a gas tax applies also to the CAF√â standards approach of the US to raise the miles per gallon of gasoline of the fleet of new cars produced, the cash and tax credit incentives to buy hybrids, and various other approaches that are being used to try to reduce gasoline use.
There is a further major difficulty with the clunkers program that illustrates a much more general problem of fiscal efforts to stimulate the economy.
The details of spending programs are so slow for legislators to work out, and the delays in implementing the spending are so long, that the government "stimulus" gets implemented usually only after the economy is already pulling out of a recession.
The US economy and that of most other major nations have stopped declining and are beginning to grow again.
Yet rather little of the Obama stimulus package has yet been spent.
As Posner indicates, most of this spending has taken the form of transfer payments, but that is for a good reason since government projects are much slower to develop and implement.
Even payments to car dealers under the clunkers program are being delayed because of administrative snafus in processing claims.
This is a classical argument against using government spending for counter cyclical purposes, but seems to have been forgotten during this recession.
The latest output and unemployment figures for the United States indicate that the recession in this country is very probably finally over, given the usual definitions of the turning points of recessions.
Aggregate output fell for the fourth quarter in a row during the second quarter of 2009, but the latest fall was small.
All the indications are that American GDP will increase during the current quarter, although not sharply.
The unemployment rate actually fell slightly in July.
This may be a one-month statistical anomaly since unemployment usually lags the economy, but the rates of fall in jobs and unemployment have been declining for several months now.
The recessions in China, India, Brazil, and a few other countries have also ended, so it strongly looks like the world recession is also over.
Some countries, like Spain, have still not turned the corner, but they will be helped by the end of the global recession.
It was a severe recession, in many respects the most severe global recession since the 1930s, such as the cumulative fall in aggregate output.
But even that only amounted to about four percent.
Moreover, it was not the most severe in all the important dimensions.
For example, the latest unemployment figure for the US is 9.4%, which is high, but well below the 10.8% reached at the end of 1982 after a severe couple of recessions in the early 1980s.
Unemployment will probably continue to rise for a while since unemployment usually lags the turn in output.
However, it now appears that unemployment will very likely peak below 10.8%, perhaps well below that previous high.
In addition, productivity held up better in this recession than in many others.
While this has been a severe global recession, it is very far from resembling the Great Depression of the 1930s.
That depression had a peak American unemployment of 25%, and over a 20% fall in its output compared to the few percentage point falls in output during this recession.
The many comparisons made to the Great Depression by economists and others during the dark months at the end of 2008 and beginning of 2009 now look kind of silly- and I said so at the time- although admittedly there was then considerable uncertainty about how bad this recession would become.
Although the severity of the world wide financial crisis was unprecedented (aside from the 1930s depression), the real side of the economy followed traditional recession patterns.
For example, as usual, durable outputs, such as of cars, tractors, and houses, fell far more sharply than services, especially than education and health.
Much ink was devoted to the many educated employees of the financial sector who lost their jobs, and they did usually have a tough time, but as in previous recessions the least educated were hit the hardest.
As of the end of July, the unemployment rate among high school drop outs was 15.4% compared to 9.4% for high school graduates, and only 4.7% for persons with a bachelors degree or higher.
In addition, the percentage point increases in unemployment rates during the past year were much higher for the less educated.
Similarly, black unemployment clocked in at a 14.5% rate compared to 8.6% for whites, while during the past year black unemployment increased by 4.6 percentage points compared to 3.4 percentage points for whites.
The fraction of those unemployed that have been unemployed for six months or longer, at 34%, is one significant employment statistic that is unusually bad during this recession.
This is apparently the highest fraction of long-term unemployed Americans for 60 years.
How important were monetary and fiscal policies instituted during the past year in preventing a far more serious recession? Only time and further research will permit more confident answers to this question, but I will give my tentative opinion.
Fed open market policies that bought financial assets from banks and others, and created huge amounts of excess bank reserves in the process gave banks a financial cushion that helped dampen their retreat from risk.
Decisions of The Treasury under both Henry Paulson and Timothy Geithner have been a mixed bag, sometimes helping banks deal with toxic assets, while at other times adding to the uncertainty by being erratic and indecisive.
The decisions to let Lehman fail but to merge Bear Stearns and force the merger of Merrill on Bank of America will be debated for a long time.
I continue to believe that the bail out of GM and Chrysler by the Bush, and especially by the Obama, administrations were serious mistakes that will eventually cost over $100 billion of taxpayers' monies.
It would have been far better to let both companies file for bankruptcy in the Fall of 2008, for they would have emerged from bankruptcy court with lower labor costs and considerably slimmer than they are now.
To be sure, Chrysler may have closed shop, not a bad development, and sold its Jeep and one or two other strong divisions to other companies.
Not surprisingly, the Obama administration is taking credit for ending the recession.
According to the New York Times, President Obama said that his administration had "rescued our economy from catastrophe".
The administration in particular is pointing to the stimulus package- the American Recovery and Reinvestment Act- for the relatively good employment report for July.
Yet this stimulus package could not yet have had much direct effect on employment since only about $100 billion, or less than 1% of GDP, of the $787 billion in this package has so far entered the economy.
And much of that $100 billion has been directed to service sectors that do not have excessive unemployment rates.
As I mentioned, some Fed and Treasury policies helped a lot, but the capitalist American economy continues to have strong momentum as well.
Recessions always end and usually change into booms.
While this has been an unusually long recession, the incentives of firms to find profitable opportunities, and the desires of consumers to spend, contributed in important ways to ending this prolonged recession.
Where will the world economy, and the American economy in particular, go from here? Most economists are predicting a flat recovery for the United States that will not take off toward robust growth until late in 2010 or even in 2011.
It is notoriously difficult to predict turning points and how fast economies come out of recessions.
The 1930s had a fast recovery for a couple of years during 1934-36 before it fell back into another severe depression.
One main reason for pessimism about the strength of the recovery is that banks are generally afraid of taking on additional risks since they still hold many assets of dubious value.
In addition, companies are also wary of investing and adding to their employment because of the remaining considerable uncertainty about the economy, and because consumers are continuing to rebuild their wealth portfolios after the hits they took from the sharp declines in stock markets.
I am more optimistic about the world and US recovery than the consensus, although I do not expect a sharp expansion during the next few months.
My reasons for greater optimism include the robust recoveries in China, Brazil, and some other countries that will boost world output, and raise demand for US exports.
The large excess reserves created by the Fed- some $800 billion- will induce banks to look for more profitable investments than the meager interest they earn on these reserves.
The working down of the housing and auto stocks during the past couple of years will result in demand for new residential construction and cars that will stimulate these depressed industries.
Firms are still hiring in large numbers, although less than the number they are letting go.
One indication of the growing strength of the US labor market is that- as my colleague Casey Mulligan pointed out to me- seasonally unadjusted employment has risen during this summer.
Still, I do have some concerns about the US recovery, beyond the overhang of many billions of dollars of rather worthless assets held by banks.
Casey Mulligan has been stressing that the federal government is creating many programs, such as reducing student loan repayments and mortgage payments for persons with low incomes, which discourage the unemployed from finding jobs, and encourage the employed to become unemployed.
The proposed caps of various kinds on executive pay, especially in the financial sector, the large government debt being created due to huge fiscal deficits that will put upward pressure on interest rates, the European style reorientation of anti-trust policies toward protecting competitors rather than consumers, the enormous excess reserves that have a considerable inflation potential, the federal government's likely incompetent management of two of the three American auto companies and a major insurance company, and the planned creation of a consumer czar that will interfere with the goods and services offered consumers are examples of policies that are likely to discourage business investment and risk taking.
So legitimate reasons exist for concern about the speed and strength of the recovery of the American economy.
However, I worry much more about various regulations, spending, and controls being introduced by the present Congress and by President Obama than by intrinsic difficulties in the American economy.
In many past commentaries I attacked labor markets in.
Western Europe as being too rigid regarding layoffs and hires, and for providing too generous unemployment compensation often for very extended periods.
That.
rigidity explained why unemployment rates in the 1990s and the first 6-7 years.
of this decade were much higher there than in the United States.
Responding to.
the facts of high unemployment and long durations of unemployment, and to criticisms.
of their labor market policies voiced by economists, many countries of Western.
Europe began to reform their labor market policies to make them more flexible,.
and to limit the duration of government support of unemployed workers.
The case of Germany is one of the most interesting, only.
partly because Germany is the largest economy of Europe.
Under the long reign.
by the conservative Christian Democratic Union, little was done to reform the.
German labor market.
In a reminder again of the “Nixon going to China”.
doctrine, the socialistic Social Democrats, led by Gerhard Schroder, introduced.
various labor market reforms in 2003 after being elected to power in 1998.
He.
cut the length of the period of eligibility for unemployment compensation,.
extended the age of retirement and reduced retirement pensions, and made it a.
little easier for companies to layoff workers.
In good part as a result of.
these policies, while Germany unemployment had been close to 10%, it fell to 7.5% prior to the onset of the recession, perhaps mainly due to these.
reforms.
Germany was hit hard by the worldwide great recession as world.
GDP took a nosedive, mainly because Germany is the world’s second largest.
exporter after China.
Its GDP fell by over 5 percentage points in 2009, and is.
expected to rise by about 2% this year as world GDP recovers, and because the.
euro has fallen by about 10% relative to the dollar since the euro peaked at.
about $1.5 per euro.
The German economy as measured by GDP was during the first.
quarter of 2010 still somewhat below comparable numbers for the first quarter.
of 2008.
What happened to German employment and unemployment is even.
more interesting.
Employment fell only slightly, but part time work increased.
sharply as jobs were spread.
Unemployment rates increased only a little.
Unemployment is now down to its 7.5% pre crisis level, and employment is back.
at its earlier peak, and part time work is declining, as the German economy.
continues to recover.
Contrast this with the American economy.
On the one hand,.
the US financial system was hit much harder than the German system.
On the.
other hand, the German economy is far more dependent on exports than is the.
American economy.
The net effect of these differences is not completely clear,.
although US GDP fell by a lot during the first year after the recession hit,.
but then began to recover at a moderate rate.
Whereas Germany’s unemployment.
rate grew by very little during the recession, the US unemployment rate grew by.
over 5 percentage points.
This difference in employment and unemployment behavior.
between Germany and the US may be mainly the result of the fact that the.
American labor market is still far more flexible in most respects than the.
German labor market.
However, if that were the main explanation, then the jobs.
recovery in Germany should have been slower than in the US, but that has not.
been the case.
Total jobs in Germany are about at their pre-crisis level,.
whereas the number of Americans employed is still several million below its.
peak in 2008.
Germany was criticized because it did not have a big enough.
stimulus and did not run large enough fiscal deficits to stimulate the.
economy.
    In early 2009, Germany.
introduced a 50 billion euro stimulus package after much urging from.
intellectuals and some economists.
That is about 1.6% of its GDP, with about.
one-third earmarked for infrastructure improvements, and the other two thirds.
going to tax cuts, child allowances, and social benefits.
Even more important.
from the traditional “stimulus” analysis, Germany’s fiscal deficit is expected.
to hit between 5-6% in 2010, smaller than the fiscal deficits in many euro-zone.
countries.
Contrast these numbers with those for the United States.
The.
American stimulus package of about $800 billion-by no means as yet all spent-.
is 6% of American GDP, about four times as large relative to GDP as the German.
stimulus.
Even more telling is that the fiscal deficit during 2009 and expected.
during 2010 amount to about 12% of American GDP, far larger than the fiscal deficits.
Germany has been running.
Germany has recently taken actions to cut spending.
and raise some taxes, while the US government continues to think of ways to.
increase government spending, as if the huge fiscal deficit is not enough.
Let it be clear that I am not claiming that US employment.
and unemployment has been very sluggish in recovering to pre crisis levels.
mainly because the US has had a large stimulus package and large fiscal.
deficits.
They probably have been factors, but the evidence is still too.
uncertain to reach such a judgment.
But it is clear that the stimulus package.
completely failed relative to the explicit predictions of the Obama.
administration and its Council of Economic Advisers about what would happen to.
unemployment.
They predicted unemployment would decline by about 1.5 percentage.
points from a much lower peak, whereas so far the total decline from the higher unemployment peak of 10.2% is only 0.7.
percentage points.
I continue to believe that the biggest factor in the.
sluggish employment recovery of the US is that many of the actual new and.
proposed anti-business legislation, as well as the large fiscal deficits, made.
businessmen and investors cautious about taking on new workers.
These proposals and laws include.
the health care bill, the pro-union bias and anti-business rhetoric of Congress.
and the president, suggested increased taxes on higher earners, changes in.
anti-trust laws to be less pro-consumer, and the endlessly complicated and.
largely misplaced financial “reform” law.
Germany, by contrast, has continued.
with the same coalition government headed by the mainly pro-investment, pro trade.
Christian Democrats.
Germany surely made various mistakes during this recession,.
but the US has made many more.
Posner lays out clearly many of the present and future.
solvency and default risks to the United States federal government.
He bases.
some of the analysis on a valuable recent Morgan Stanley report with the.
provocative title “Ask Not   Whether.
Governments Will Default, but   How  ”.
Default on some of their debt by countries like Greece and Italy are real.
possibilities, and default by leading countries like the US and Germany is.
surely possible.
But I do not believe their default is at all inevitable.
The report first presents the usual measure of default risk-.
the ratio of government debt (not held by other government agencies) to GDP in.
2009- for the federal government of the US and for eight European nations:.
France, Germany, Greece, Ireland, Italy, Portugal, Spain and the United.
Kingdom.
On this criterion, Greece and Italy look in trouble, with ratios of.
about 1.15, and the US looks in reasonable good shape, with a ratio of about ½,.
which is much lower than that for most of the other nations in their comparison.
set.
For example, Germany’s debt/GDP ratio is 0.73, while the United Kingdom’s.
ratio is 0.
68
Morgan Stanley’s report argues debt/GDP is not a good.
measure of default risk, and suggests instead the ratio of debt to government.
revenues.
On this measure, the US looks terrible, with a ratio of 3.58.
This.
ratio is much higher than that of the eight European nations because they tax a.
much larger fraction of GDP than the federal government of the US does.
    Yet it is not obvious to me that using.
tax revenue rather than GDP in the denominator is a better measure of solvency.
risk.
Countries that already collect a sizeable fraction of GDP as tax revenue.
have less room to raise taxes than do countries like the US that tax a much.
smaller fraction.
This argument suggests that the high GDP/tax revenue ratio.
for the US makes its solvency risk lower rather than higher compared to Europe.
On the other hand, that the American federal government raises so much less may.
be a sign of greater resistance to higher taxes in the United States than in.
Europe.
On balance I believe it is better to use the debt/GDP.
measure, although the discussion that follows would be the same with either.
measure.
Two main factors will determine the size of the default risk for the.
US as well as Europe.
As both Posner and the report emphasize, a frightening.
prospect is the expected growth in entitlements over time, especially the.
growth in medical care spending.
This is partly due to the continuing aging of.
populations in developed countries since older persons take a greatly.
disproportionate share of spending on medical care.
Even more important than.
aging itself is that spending on each older age group has risen at a fast rate.
over time with the development of expensive new drugs and surgeries.
In the Affordable Care Act that became law in March of 2010,.
Congress and the president tried to address the high and growing spending by.
the US on healthcare.
The US ratio of spending to GDP is approaching 17%, which.
is essentially the highest ratio in the world.
Unfortunately, in many ways this.
law worsens America’s approach to health care rather than improves it.
One main.
defect is the failure of this Act to increase the quite small ratio of.
out of pocket spending by older sick individuals on their own healthcare.
compared to their spending out of tax dollars.
Obviously, individuals have much less.
incentive to economize on unnecessary health spending, such as the removal of.
the prostate for 85 year old men with prostate cancer, when the great majority.
of their spending comes from tax dollars rather than from their own income and.
wealth.
Another serious defect of the law is that it extends rather than.
contracts the American reliance on employer provided health care.
My post on.
the new law on March 28  th   discusses other defects.
The Morgan Stanley report does not give much weight to the.
potential of faster economic growth to reduce the likelihood of sovereign.
default risk.
If the rate of growth in GDP were speeded up, the debt/GDP ratio.
might be kept under control even without governments collecting a much larger.
share of GDP in tax revenue, as long as the growth in government spending did.
not adjust upward to the faster growth in the economy.
For example, if the.
economy grew in the long run by 2% per capita per year rather than 1.5% per capita.
per year, GDP per capita would double in about 36 years rather than in 48.
years.
This difference in the level of GDP achieved over time would greatly.
improve the ability of governments to handle their debt.
In recent.
months I have argued in several posts on this blog that governments should be.
concentrating on trying to speed up longer-term economic growth rather than.
promoting further stimulus packages and other short run palliatives.
Faster long.
term growth in per capita incomes and real reform in the looming health and.
retirement entitlement are the only truly effective and efficient ways to.
greatly reduce the risk of eventual default on sovereign debt by the US, Europe, and.
other nations.
After falling rather sharply in 2008 and early 2009,.
American GDP grew at a good pace in the fourth quarter of 2009, but has slowed.
down during the second quarter of 2010.
Unemployment declined to 9.5% from its.
peak in November 2009 of 10.2%, but has been stuck around its current level for.
several months.
    This has led to.
growing fears of a double dip recession, and to a call for still greater fiscal.
stimulus.
I do not believe that either of these is correct, and that the.
federal government should be concentrating on providing a good economic.
environment to encourage businesses and entrepreneurs to invest, hire, improve.
productivity, and raise longer-term economic growth of the US.
More than 60 years ago, Arthur Burns- former head of the.
NBER and Chairman of the Fed- and Wesley Mitchell-founder of the NBER- together.
wrote a classic study of business cycles called “Measuring Business Cycles”.
They divided business cycles into several stages, such as the economic peak, economic.
decline, trough, early recovery, late recovery, and then a peak again.
They.
clearly show that business cycles are of uneven length, depth, and severity,.
and that recoveries do not always proceed smoothly.
A recession ends after the.
trough is passed, but they recognized that during recoveries an economy takes a.
while before it reaches and then surpasses its earlier peak.
So from this.
perspective, the troubles the American economy is experiencing are not.
unprecedented, or even unusual.
Nevertheless, I agree with Posner that something is rotten.
about this recovery from the so-called great recession.
The Federal Reserve was.
slow to react to the financial crisis, but on the whole the Fed’s policies.
since then have been decent, given the many unknowns as it tried various old.
and new monetary approaches to stem the financial crisis.
The financial picture.
was quite bleak as banks greatly increased their ratio of debt to assets during.
the boom years, and consumers rapidly expanded their debt to income ratios.
during these years.
So even with the best of responses the recovery probably.
would have been slow and uneven.
But both the Congress and the administration of President.
George W.
Bush, and especially the Congress and President Obama since his.
election in 2008 made the main mistakes after the crisis hit.
Instead of.
concentrating mainly on fighting the recession and promoting faster economic.
growth, the Congress elected in 2008 believed they had a mandate to radically.
remake the American economy.
Aside from repeated attacks on American business,.
especially banks-some of them deserved- they not only passed various stimulus.
packages (that did not stimulate much), but also tried to promote a vast.
legislative program that had nothing to do with fighting the recession.
This.
program was aimed at reengineering the American economy.
It included radical.
changes in the health care system, proposed taxes on carbon emissions by.
companies, much larger subsidies to alternative sources of energy, such as wind power,.
proposals to raise taxes on higher income individuals and on corporate profits,.
and to raise the taxes on capital gains and corporate dividends.
It also.
includes a movement to make anti-trust laws less pro-consumer and more.
protective of competitors from aggressive and innovative companies.
It has as.
its centerpiece a financial reform bill that was a complicated and a.
politically driven mixture of sensible reforms, and senseless changes that had.
little to do with stabilizing the financial architecture, or correcting what.
was defective in prior regulations.
In previous posts I have laid out some of the major defects.
in the financial reform act, the healthcare changes, and the unemployment.
extension bill (see my posts for 7/25 on unemployment, 7/11 on financial.
reform, and 3/28 on healthcare reforms).
To single out a few points of these.
arguments, I criticized the financial reform bill for, among other things,.
neglecting to do anything about Fannie Mae and Freddie Mac, two major.
corporations that were important factors in causing the financial debacle, and.
for adding an excessive amount of discretion to financial regulators who did.
not use wisely the discretion they had prior to the crisis.
I suggested that a.
proper unemployment bill would eliminate most unemployment benefits for persons.
during the first couple of months of their unemployment, and then use the savings.
from that to extend unemployment benefits during bad times to a year.
The most.
desirable reform of health care should have been to increase the out of pocket.
share of medical expenses borne by older persons and other individuals with.
various illnesses- as in countries like Switzerland- but nothing much was done.
about this in the new law.
My detailed criticisms are available in these posts.
Perhaps the new Congress elected after November will try to.
reverse some of these mistakes.
I would like also to see a radical reform of.
the tax system that returns it to the income tax structure that resulted from.
the Tax Reform Act of 1986 promoted by President Reagan, and Democrats Senator.
Bill Bradley and Representative Richard Gephardt.
This Act had a maximum personal.
income tax rate of 28%, except for a “bubble rate” for a few families that hit.
33%.
To compensate for any loss in tax revenue from these.
changes, and to help face the growing debt problem of the US, I would support a.
value added tax, but only as part of such a comprehensive reform of the tax.
structure.
Value added taxes have many attractive incidence features that can.
be a valuable way to raise tax revenue in a system with low personal and corporate.
income taxes.
However, VAT taxes also have the potential to be rather easily.
increased over time without close controls over such increases (see my.
discussion of VATs in my post on 4/25).
Government spending rose a lot during the last year of the.
Bush administration, and rose even more so during the year and one half of the.
Obama administration.
Instead of introducing additional stimulus packages and.
further raising the cost of doing business, Congress and the President should.
try to create an environment where companies, both large and small, and.
entrepreneurs are recognized as crucial forces in a dynamic economy.
Their.
activities can help the American economy not only grow out of the economic.
slowdown, but also raise its economic growth in the future that will greatly.
improve the well being of future generations, and help meet a dangerous future.
debt burden.
Are the Democratic-controlled Congress and President Obama.
very much pro union? Unquestionably.
Do the economic effects of unions on the.
welfare of workers as a whole justify that union bias? No.
Has their pro-union.
orientation seriously retarded the recovery from the recession? Probably.
The.
following discussion tries to justify these answers.
The pro-union orientation has been demonstrated in many.
ways.
Posner gives a few examples, and I will add some more.
The automobile.
industry would not have been bailed out so generously were it not for the.
political power of the United Auto Workers.
The alternative would likely have.
been bankruptcy without a federal bailout, which I favored.
Bankruptcy without.
government involvement would have cut health and other fringe benefits of.
autoworkers more sharply, and might have led to more plant closings in the.
industry.
It would also, however, have led to a more robust recovery of the.
surviving American auto companies, and possibly even in the longer run raised.
employment in auto plants located not in the South because wages and fringe.
benefits would then have been lower at these plants.
An important example this past week offers another.
illustration of the pro union orientation.
For the first time the US has cited.
for labor violations a country, Guatemala, that is a free trade partner with.
the US.
That the American government has the presumption to interfere in the.
labor policies of another country is disturbing in itself.
All commentators.
agree, however, that it was done at the urging of American unions.
This was.
likely an attempt to reduce the competition of goods and.
services from Guatemala and especially from other free trade partners-such as.
Mexico-for goods made by unionized American companies.
Congress tried to pass, and President Obama supported, The.
Employee Free Choice Act to eliminate private elections for union.
certification.
Fortunately, enough moderate Democrats and Republicans have been.
able to beat back these proposals, and they have been shelved, perhaps only.
temporarily.
Economists distinguish competitive from monopoly unions.
A.
competitive union system, like Japan’s, has unions at companies when the.
employees of these companies prefer to bargain collectively.
However,.
competitive unionism does not allow a single union to control the majority of.
companies in the same industry, which is monopoly unionism.
The US typically.
has monopoly unions, such as the steelworkers union, autoworkers union, or.
service workers union, but a long time ago the Clayton Act of 1914 explicitly.
exempted unions from anti-trust laws under most circumstances.
Monopoly unions do tend to raise the earnings and fringe.
benefits of workers in the industries where they exist.
This is seen from the.
ridiculously high fringe benefits that the United Auto Workers unions squeezed.
out of American auto companies during the days when they were profitable but.
not well managed.
Higher union earnings come partly at the expense of the.
profits of the industries unionized, but also at the expense of lower.
employment than would have occurred with more competitive wages and other.
benefits.
The prospective employees priced out of jobs in unionized sectors.
seek employment in other sectors, which lowers the earnings of workers in these.
latter sectors.
The net effect is a misallocation of labor compared to an.
efficient allocation, and possibly even a reduction in the income received by.
workers as a whole, including workers in the non-union sectors.
During this recession, wages did fall for many workers, but.
mainly among non-union workers.
A telling example is what happened at many.
state and local governments that are in serious fiscal difficulties.
Since.
wages of their union workers have been set by contract, they were forced.
primarily to cut wages of administrative staff and other non-union employees.
For example, the state of Illinois has the largest fiscal deficit as a percent.
of its budget of any state.
It required many of its high level non-union employees.
to take 24 unpaid leave days, or about a 9% cut in their salaries, since the.
state government cannot touch the wages of their many unionized employees.
As Posner indicates, only about 7% of all non-government.
American workers are unionized, compared to over 35% of workers at federal,.
state, and local governments.
During the past 40 years, the fraction of.
unionized civilian workers fell steeply-and not only in the United States- while.
the unionization of government workers fell only a little.
It.
might seem unlikely that workers which comprise only about15% of the total labor.
force would have a major effect on the speed of the recovery from the.
recession.
The real threat to a robust recovery on the labor side has.
come from employer and entrepreneurial fears that once the economic environment.
improves, a Democratic Congress and administration will pass pro-union and.
other pro-worker legislation that will raise the cost of doing business and cut.
profits.
In this way the obvious pro-union-pro-worker bias of the present.
government has contributed to a slower recovery, especially in labor markets.
This helps explain the depressingly slow decline in unemployment rates and in.
the number of workers who have given up looking for jobs.
The great majority of parents would like to see their.
children become better off economically than they are, and that hope would be.
even more common among the children.
Yet, polls for a while have suggested that.
neither the majority of children nor parents in the United States are confident.
that this progress will happen.
Despite frequent recent commentary on these.
polls, little systematic analysis has been presented of what determines whether.
the average child will be better off than the average parent, and why pessimism.
about such progress has apparently grown in the US.
The relation in particular families between say the earnings.
of adult children and those of their parents at comparable ages depends on many.
factors unique to any family.
The abilities and health of the children relative.
to that of their parents, the luck of both children and parents in occupational.
and other choices, how concerned are the parents about ensuring that their children.
will become better off than they are, and many other considerations special to.
that family.
I will not deal with individual family idiosyncratic factors, and.
instead focus my analysis on how well average persons in one generation fare.
compared to average persons in their parents’ generation.
The rate of growth in per capita income is by far the most.
important single variable in determining whether children will be better off.
than their parents.
If per capita income is stagnating over time-the lot of the.
world throughout the vast majority of history- the average person in one.
generation will tend to be about as well off as the average person in his.
parent’s generation.
Expectation during this long history of time that children.
will be better off then their parents would have been atypical.
During the past couple of centuries, much of the world has.
experienced systematic growth in per capita incomes that has radically changed.
such expectations.
For example, if income per capita were growing only at 1 percent.
per year, the average individual in the next generation would have about a 30%.
higher income than the average individual in the present generation- I assume.
that generations differ by about 25 years.
From about the middle of the 19  th.
century to the beginning of the 21  st   century, per capita incomes in.
the US grew on average close to 2% per year.
This implies that over this period.
of more than 150 years, or about 6 generations, the average income in one.
generation would have been about 60% higher than the average income in the.
prior generation.
Add to this that health improved rapidly during the 20  th.
century as mortality of mothers during childbirth and that of children during.
their first 3 years were virtually eliminated, and that the huge number of immigrants.
to America did vastly better than their parents did in their home countries.
No.
wonder that optimism abounded in the United States about how children would.
fare compared to that of their parents.
The decline in this optimism is mainly.
related to declines in expectations about whether the US will continue to grow.
at similar rates as in the past.
The difference between generations is even more dramatic in.
rapidly developing nations.
Consider, for example, China with a per capita.
income that has been growing at around 8% per year since about 1980.
    In such a growth environment, the.
average income in the next generation would be more than   six   times larger than that in the present generation.
No wonder.
most Chinese families are happy with what is happening in their country and.
with their government’s policies, despite various restrictions on freedom of.
speech and writing.
Comparisons among the income and health of the average.
person in different generations are not the only determinant of wellbeing and.
optimism about the future.
Changes over generations in the degree of economic.
inequality also have important effects.
Inequality has increased considerably.
since 1980 in the United States, and many other countries, developing as well.
as developed.
When inequality is growing between generations, even if per.
capita income were stagnant, families at the higher end of the income.
distribution in their generation would be optimistic about their children’s.
prospects relative to their own, as long as they expect their children to also.
be at the higher end of the income distribution in the children’s generation.
Conversely, under the same conditions, parents at the lower end of the income.
distribution would be pessimistic about their children’s opportunities if they.
expect their children also to be at the lower end of their generation’s income.
distribution.
A third factor determining the relation between childrens’.
and parents’ economic position is called the degree of intergenerational income.
mobility.
That is, the degree to which richer parents are likely to have richer.
children relative to the income of the children’s generation, and the degree to.
which poorer parents are likely to have poorer children relative to the.
children’s generation.
When the degree of intergenerational mobility is lower,.
rich parents will tend to be more optimistic about their children’s prospects,.
and poorer parents will tend to be more pessimistic.
Some evidence suggests.
that intergenerational mobility in the US has fallen some over time, which.
would lead to greater pessimism among poorer families about their children’s.
prospects.
Despite the inequality that has grown by a lot since 1980,.
and intergenerational mobility that has apparently fallen, I believe that fears.
about economic growth are the main reason for the growing pessimism in the US.
about the long-term economic future.
As I have argued on many occasions in.
posts on this blog, faster economic growth by the US can compensate for growing.
government debt, growing inequality, and other factors that create pessimism.
about the economic future.
I will not repeat much of what I have said previously on.
improving long-term economic growth in the United States and other rich.
countries (for example, see my most recent post on August 15th for some discussion.
of how to improve growth).
I summarize these discussions by stressing three.
factors.
Of greatest importance are improvements in the American K-12 school.
system available to students from poorer families, so that many more of these.
students graduate high school, and those who graduate are better prepared for.
college-the recent report on the results of scores on the ACT test is.
depressing reading since it shows that far more than half of all students.
taking the test are unprepared for college courses.
Second, it is important to have low marginal tax rates on.
personal and corporate incomes, and on capital gains, in order to stimulate.
greater investments and innovations.
Finally, entitlement need to be brought.
under greater control by shifting much more of medical costs to patients.
through greater out of pocket payments, and by converting public and other.
pension systems to defined contribution systems rather than defined benefit.
systems.
America has always been optimistic about its future.
The.
decline in such optimism during the past couple of decades is understandable,.
but highly regrettable.
The best way to restore this optimism is to promote.
faster economic growth.
That is feasible with the right policies, but will not.
happen automatically.
Even America has no destiny to be optimistic about the.
future without important redirection of various public priorities.
Up to the early 1960's, less educated women were more likely to work than highly educated women.
The trend sharply reversed during the past several decades, so that now propensity to work and education are positively related for women (as well as men).
This is partly because highly educated women have a lower tendency to marry, but the labor force trend by education achievement holds also for married women.
The Times article gives the impression that this education-work trend has reversed again in recent years, but although the trend has flattened, there is no evidence of reversal (I had the input of Casey Mulligan and Kevin Murphy, two colleagues who have worked extensively on labor force participation rates of women).
Highly educated men continue to work full time much more than highly educated women, although the difference between these propensities has declined during the past several decades.
The Times article and Posner concentrate on different work propensities of male and female graduates of elite professional schools, but the difference between the sexes also holds for graduates of other professional schools.
Indeed, the gap in the propensities to work of men and women are probably greater for the lesser schools since female graduates of elite colleges and professional schools are less likely to marry than female graduates of lesser institutions.
As Posner indicates, the main reason for this difference is that women drop out of the labor force, or work only part time, in order to care for their young children.
Women rather than men do most of the child-care for various reasons, including biological ones, but I will not go over the different explanations.
The division of labor between men and women is discussed systematically in my A Treatise on the Family.
Posner goes on to ask: should admission policies of schools take into account the fact that female graduates of elite (and I would add other professional schools) work full time much less than male graduates? That question was openly discussed at departmental meetings when I was a young faculty member at Columbia University.
Even though female students did at least as well in the economics program as male students, the issue was whether graduate fellowships should be less readily given to women since they were then so much less likely to work full time later on.
I am proud that many of our female students went on to distinguished careers in economics, but the overall female labor force drop out rate was higher than that of male graduates.
In discussing what professional schools should do with respect to admissions of female applicants, Posner claims a difference between the private interests of professional schools, and the social benefits from graduates-an externality in the language of economists.
However, I believe that differences between private and social benefits are small in the two types of professional schools he highlights: business and law schools.
They generally get almost no direct support from the federal government, and relatively little from state governments.
Moreover, the private gain to a working lawyer or MBA graduate seems to capture pretty much all the social gain from their work.
Posner stresses the potential innovations produced by these graduates, and the taxes they pay.
But major innovations from graduates of these schools are surely rare, and taxes affect the incentives of everyone, not only professional school graduates.
Moreover, taxes would generally have little affect on the incentive to get additional schooling if say the income tax rate is pretty flat.
I believe it is partly because externalities from graduates of law and business schools are so small that little taxpayer money goes into subsidizing these programs, although I should add that economists have had difficulty finding major externalities from most types of education.
Since the market for applicants to professional schools is highly competitive, and since external benefits from the work of their graduates are probably not important (except possibly in medicine), the best policy would seem to be to allow the market to continue to work in determining admissions of male and female applicants.
Schools might be recognizing that even though female graduates work less, male students prefer having many female classmates, and visa versa, that female graduates who do not work in the labor force are still active in fund-raising activities for their alma maters, or there may be other gains from having smart female students along with smart males.
To be sure, the market in admissions is regulated since affirmative action pressures in the guise of anti-discrimination policies prevent schools from taking male applicants in preference to female applicants with equal or even better school records.
Posner recognizes that the logic of his position implies that a relevant measure of discrimination might also include their propensity to work after graduation.
He takes an anti-"profiling" stance by claiming that using potential work experience along with the school records of male and female applicants in determining admissions would be "offensive‚Äù"since many women graduates work full time, and some men do not.
Yet not all top students at Harvard College do well at Yale Law School, while some students with poor grades would do well if given the opportunity, but surely he would not want to abandon using grades and performance at Harvard or other schools as one of the predictors of their performance at professional schools, and hence as an important determinant of admissions?.
Posner would like professional schools to give female graduates (and men too presumably) a bonus if they work and earn a lot.
That is hardly more practical than penalizing women and men who drop-out of the labor force.
Would graduates who succeed in another field also merit a bonus (or penalty)? Should female graduates who do not work full time in order to care for their children get a bonus if the children do unusually well in school? For these and other reasons I cannot get excited about this proposal.
Given the strong competition among law and business schools, and the absence of significant external benefits, I do not believe we can do better than allowing these professional schools to decide on admissions using college records and special exams as the major guide.
For various reasons, even without current anti-discrimination laws, I doubt whether the fraction of female applicants who are admitted to elite and other professional schools would change very much.
It is useful to discuss public policies both when one assumes no political constraints on the policies, and also when some political constraints are accepted, but policies are proposed to make these constraints less damaging.
In his essay Posner mainly takes the former approach, and reaches conclusions about optimal government compensation to victims of disasters.
I believe there is a more direct way to discuss what is the optimal way to compensate without political limitations on what is possible, such as the likelihood of large-scale emergency relief.
My conclusions are generally similar to Posner's, but the approach is different, and some of the implications may also differ.
I believe it is best in deciding who merits compensation from disaster to apply to victims the same criteria used to determine who is eligible for welfare, Medicaid, and other government transfer programs.
For example, families that because of Katrina lost most of their assets, became unemployed, or became sick would qualify for one or more of these programs, regardless of their circumstances before Katrina hit.
Using the usual criteria that determines eligibility for welfare, medical, and other assistance, these families would automatically be helped without the need to have any special relief program.
To be sure, some of these families may have a severe short-term liquidity problem, and they might need immediate access to cash, as in the debit program that was started and then stopped.
But that is often true too of recipients of welfare and other government aid.
The advantage of using the usual criteria for government entitlement programs is that it avoids some of the issues Posner confronts: could victims have afforded insurance, was insurance available, and so forth.
Since we do not ask these or similar questions of persons eligible for welfare or Medicaid (perhaps these questions should be asked), I do not see why they should be asked only of victims of major disasters like Katrina.
Moreover, applying the usual criteria would meet the legitimate needs of persons greatly hurt by Katrina, and would automatically exclude individuals who remain sufficiently well off from federal assistance.
Posner's approach and mine would often help the same people but not always.
Consider, for example, a New Orleans couple with modest income whose only asset was a home that was not insured against flood damage, even though it could have been for modest premiums within their means.
If Katrina destroys their home, under my criteria they might well qualify for several entitlement programs, including Medicaid, and possibly welfare, regardless of whether or not they had insurance, and the reasons why they did not.
It seems that they would also qualify for entitlements under Posner's standard, but he also wants to get into the functioning of the insurance market.
I do not believe that is wise since generally I believe insurance would be forthcoming if demand were sufficient, and if government controls not too burdensome.
Moreover, why should the government only compensate persons for loss of assets due to disasters--perhaps the insurance market did not work so well in insuring against other risks as well that do not arise from disasters.
Should all these persons be compensated? This seems contrary to Posner's efforts, which I agree with, to try to treat disaster victims like others who suffer losses.
In my posting on the Good Samaritan paradox, I accepted that the government would continue to provide aid to persons and businesses affected by natural and man-made disasters, and discussed how the consequences of doing that could be made less harmful.
I suggested compulsory insurance for persons and businesses in high-risk areas, and various restrictions on building materials and zoning.
There may be better ways than these to anticipate governmental and private responses to disasters, and try to reduce their consequences.
So while I believe it would be best to apply the usual entitlement standards to disaster victims, I also believe it is valuable to recognize that is not politically possible at this time.
It is then valuable to try to find ways to implement policies that worsen the efficiency and equity effects of the inevitable large-scale government assistance to disaster victims.
The very large increase in oil and natural gas prices in the past couple of years has led to renewed concern about whether world economic development is "sustainable".
This term is typically not defined carefully, but sustainability requires that improvements in the living standards of the present generation should also be attainable by future generations.
The concern is usually that because fossil fuels and other non-renewable resources are used to produce current economic development, future generations will have much greater difficulty in achieving equally high living standards.
A related concern is that environmental damage due to global warming and other types of pollution will create major economic and some health problems for future generations.
In a simple arithmetical sense, the use of some non-renewable resources in current production clearly reduces the stock remaining for future generations.
But the relevant concept for development purposes is not the physical supply of fossil fuels and other non-renewable resources, but the economic cost of gaining access to them.
Over most of the past 100 years, fossil fuel prices relative to other prices declined rather than increased, even though significant amounts of these fuels were used to help develop many nations.
The reason for the decline in relative prices is that new discoveries and better methods of getting at known sources of oil, gas, and coal led to growing rather than falling stocks of economically accessible reserves.
Exactly 140 years ago a great British economist, W.
Stanley Jevons, argued (see The Coal Question, 1865) that the world was running out of coal, which he claimed in a few decades would make further economic progress impossible for England and other nations.
The book is a high quality statistical study, but even Jevons failed to anticipate the use of oil, natural gas, and nuclear power, the discovery of additional sources of coal, and the extent of improvements in methods of extracting coal and other fuels from the ground.
Of course, what happened in the past is no certain guide to the future.
But a 2005 study by Cambridge Economic Research Associates, a prestigious consulting company in the energy field, estimates that known reserves of liquid fuels (oil and gas) will continue to increase at least in the near term future, especially if the high prices of these fuels during the past year continue.
Their report discusses the growing importance of drilling for oil in deep rather than shallow water, and other technological advances in extracting more cheaply the world‚Äôs stock of oil and natural gas both under land and under water.
Even if one discounts this and other studies, and believes that the relevant reserves of fossil fuels will decline in the future, the supply of energy sources would greatly increase if nuclear power were more extensively used.
That power too is based on a limited resource, uranium, but the supply of uranium is vast relative to its use in generating nuclear power.
Nuclear power cannot only generate electricity, but it can also be used instead of oil or gas to produce the hydrogen used in hydrogen fuel cells.
Although it is too early to tell, hydrogen cells could replace the internal combustion engine in cars, trucks, and busses sometime in the next few decades.
Nuclear power would also help reduce greenhouse gases, such as CO2, and other types of pollution since it is a "clean" fuel (see the May 2005 discussion of nuclear power in our blog).
However, I believe that the most serious deficiency in the usually discussions of "sustainability" is that it should refer to total wellbeing, not simply to what is measured by national income statistics.
Even if fossil fuels become increasingly scarce and expensive, and even with further declines in the environment, improvements in health will continue to advance overall measures of wellbeing.
Life expectancy has grown enormously during the past half century in virtually all countries, including the poorest ones.
Indeed, the typical length of life has generally grown faster in poorer than richer countries as they benefited from medical and other advances in health knowledge produced by the rich nations.
The Aids epidemic has set back several African nations, but the increase in life expectancy has been impressive even in most of Africa.
A recent study (see Becker, Philipson, and Soares, "The Quantity and Quality of Life and the Evolution of World Inequality‚Äù" American Economic Review, March 2005) shows how to combine improvement in life expectancy with traditional measures of the growth in GDP to measure what we call the growth in "full" income.
We demonstrate that the growth in full income since 1965 has been much faster than the growth in material income in essentially all countries, but especially in less developed nations.
A better measure of full income that adjusts not only for the growth in life expectancy, but also for changes in the environment, and for the great advance in the mental and physical health of those living, especially of the elderly, almost surely grew at an even faster rate.
It is highly unlikely that the pace of medical progress will slow down in the coming decades.
Indeed, I believe just the opposite is true, that medical progress is likely to accelerate.
 My belief is based on the magnificent advances in knowledge of the genetic structure of humans and other mammals, and the development of biomarkers, such as the PSA test for prostate cancer, and the blood test for BRAC 1 and BRAC2 gene mutations that greatly raise the risk of breast cancer.
Experts on mortality are predicting huge increases during the next 50 years in the number of people who live beyond seventy, eighty, and even ninety in reasonably good health.
Slowing down and reversing global warming may require reductions in the world's use of fossil fuels, and economically relevant reserves of non-renewable resources could decline in the future rather than increase.
These forces combined might lower GDP per capita in many countries-although I doubt it- but progress in medical knowledge will produce substantial advances in the world's full income.
So just as the per capita wellbeing of present generations is much higher than that of our parents and grandparents, so the wellbeing of the generations of our children and grandchildren are very likely to be much higher than ours (setting aside the damage from possible highly destructive wars and terrorism).
This is why I believe that while the sustainable development literature asks important questions, the analysis has been inadequate and overly alarmist.
Most of the discussion takes a mechanical view of changes in the stock of the stock of non-renewable resources, pays insufficient attention to technological advances in the economy, and gives much too little weight to the enormous advances in health that are highly likely to continue in the future, and possibly even accelerate.
Thanks for correcting two errors: the name of the energy consulting company I referred to is Cambridge Energy Research Associates (my friend, Dan Yergin, the head of this company, will be unhappy I made this mistake).
BRCA1 AND BRCA2 are the correct names of the gene mutations that induce breast cancer.
I do not know where the calculations came from about the enormous number of nuclear plants necessary to replace oil, but I believe they are way off.
I mentioned nuclear power as replacing oil in the context of hydrogen fuel cells becoming a substitute for the internal combustion engine.
No work in this area that I have seen provides any detailed estimates yet of the nuclear power needed, but those given are far below the ones stated in the comment.
Nuclear electric power would mainly replace coal and natural gas, and already 20% of the power in US is from nuclear plants, and about 70% in France.
I do not fully exclude catastrophes from my analysis since I mention that nuclear power would reduce emissions of the greenhouse gases that appear to be causing global warming.
I exclude terrorism and wars since I admit I do not know how to link their likelihood to economic development and medical advances.
Medical advances reduce the consequences of pandemics and probably biological warfare, but economic development probably raises the spread of nuclear and other destructive weaponry.
I certainly do not believe nor did I state that economic development of Africa and other terribly poor regions is unimportant because of medical advances.
Of course, economic development is also important, but it remains very possible if poor countries follow India and China and begin to adopt the right economic policies.
However, bad health is terrible too, and also a cause of limited economic development, so it is worth emphasizing that the health of the populations of most poor nations has greatly advanced during the past several decades.
The world health community justifiably pays enormous attention to the number of deaths from Aids, which amounts to about 3 million persons a year worldwide.
Malaria receives far less attention, even though it too is very deadly, causing about 11/2 million deaths per year.
The world Trade Organization (WTO) declared in 1998 a "war on malaria" that aimed to cut malaria deaths in half by 2010.
Instead, deaths from malaria have been increasing, not falling.
The reason for the failure of this malaria war is mainly that in the name of environmentalism, the WTO and other international organizations rejected the use of an effective technique, namely spraying DDT on the walls of homes in malaria-infected areas.
What is especially disheartening about the huge number of deaths from malaria, and a fact that sharply distinguishes malaria from Aids, is that malaria deaths could be greatly reduced in a cheap way without requiring any fundamental changes in behavior, A small amount of DDT sprayed on the walls of homes in vulnerable malaria regions is highly effective in deterring malaria-bearing mosquitoes from entering these homes.
Finally recognizing this, a couple of weeks ago the WTO relaxed its support of the ban on DDT, and instead supported spraying of DDT on house walls in malaria-ridden areas.
This decision is likely to influence the position on DDT spraying of the World Bank, UDAID, and other relevant organizations.
Some African countries, like Zambia and South Africa, which are not dependent on international support for their efforts at fighting disease, had already started to use DDT as a fundamental malaria-fighting weapon prior to the new WTO guidelines.
South Africa decided to use DDT in the face of EU opposition after suffering a deadly malaria outbreak.
 DDT apparently helped that country greatly reduce its incidence of malaria.
DDT was developed as the first modern insecticide during World War II, and was remarkably successful in reducing deaths from malaria, typhus, and other insect-borne human diseases.
DDT was extensively used worldwide in the subsequent two decades with continued success as protection against these diseases, and was employed even more extensively to rid cotton and other crops of destructive insects.
In 1959, the United States alone used 80 million pounds of DDT, with the overwhelming share being devoted to spraying crops.
This widespread spraying of crops with DDT generated strong opposition to its use because of evidence that DDT was destroying some wildlife.
This opposition was sparked by Rachel Carson‚Äôs 1962 best selling book Silent Spring, which alleged that DDT caused cancer and harmed bird reproduction.
Harm to birds and other species is pretty well documented, but after over 50 years of trying, no real evidence has been found linking DDT to cancer or  other serious human diseases.
In any case, by the end of 1972, DDT's use in the United States was effectively banned.
That ban soon became common in all rich countries, and in most poor countries too, as they responded to pressure from international organizations and Western governments.
One unintended consequence of the DDT ban was a devastating comeback by malaria and some other diseases after they had been in retreat.
Other pesticides that replaced DDT have been much less effective at reducing malaria and other diseases transmitted by insects.
The USAID has been a strong advocate of mosquito bed nets as an alternative to DDT.
Mosquitoes operate mainly from dusk until dawn, so netting over beds can be effective if used persistently and correctly.
Unfortunately, in many African countries bed nets are not readily available, and they are often not used to protect children since poor families may only have one or two nets.
Moreover, families frequently do not bother to use these nets during some of the hours when mosquitoes are still active.
So while bed nets could be a useful part of an overall strategy against malaria, they are not a good substitute for DDT.
Drugs that had been effective for a while in curing malaria or preventing its occurrence have become obsolete over time as the pathogens they target mutate into resistant strains.
This means that drugs used to fight malaria need to be continually updated, but unfortunately international organizations are notoriously slow at responding with newer more effective drugs.
I am an "environmentalist", but I do not believe that all reasonable cost-benefit analysis should be suspended when discussing environmental issues.
The ban on using DDT in houses to fight malaria is an example of environmentalism that lost all sense of proportion.
As has happened with nuclear power and in other environmental situations, exaggerated claims about negative environmental effects of DDT on humans were publicized, and these claims were further exaggerated after being picked up by the media and politicians.
As a result of the hysteria against the use of DDT for any purpose, millions of lives were lost unnecessarily during the past several decades to malaria and some other insect-borne diseases.
These deaths occurred only, I repeat only, because of international pressure on African and other poor countries not to use DDT and certain other pesticides in fighting malaria and other diseases caused by insect bites.
The fact is that the quantities of DDT needed to be quite effective against malaria in tropical and other countries, where it is often at epidemic levels, is a tiny fraction of the amounts that had been used to rid crops of pesticides.
Opponents of DDT use in disease control should wake up and realize that there has been a health "crisis" for decades, a crisis that could have been controlled if more common sense had guided international policy.
The WTO's reversal of its position to allow small amounts of DDT to be used on the walls of houses to prevent mosquitoes from entering them is a belated but welcome recognition of this continuing health crisis.
A few months ago I received an email on an official looking United States Treasury letterhead informing me that I was owed several hundred dollars by the federal government that would be sent if I would just provided some personal information.
I had not heard of this scam but it seems unlikely that I would be notified in this way about a refund (and even more unlikely that I had a refund!).
To make sure I checked with my accountant.
He confirmed my opinion, although he had not heard of this scam either.
Identity theft is one among unfortunately many negative effects of the electronic communication age of credit cards, phones, and the internet.
A common claim, probably based on limited evidence, is that about 9 million Americans each year are victims of identity theft, and many additional victims are found in Great Britain, Canada, Japan, and other developed nations.
$10,000 is said to be the average loss per victim in the United States.
If these numbers are in the right ballpark, the annual amount defrauded in this country alone would be some $90 billion.
The worldwide incidence and cost of identity theft is rising rapidly over time as credit cards and the internet spread throughout the world.
Identity thieves prey on the fears and greed of people.
Greed is the explanation for why many emails, often supposedly from Africa, promise millions of dollars to a trustworthy person if he can take care of huge sums for a while.
All that is asked from victims is their information on their bank account numbers and a little other personal information.
These promises are so absurd that one wonders why anyone would respond, but they are cheap to send, and can be profitable if only a minute fraction of recipients fall for it.
Other approaches rely on fear rather than greed.
Another real example is a telephone call from someone alleging to be a state or local government official.
 He threatens that the person called is subject to arrest because he did not report for jury duty.
However, he reassures that arrest could be avoided if the victim would provide some personal information that could help clear up his record.
It is difficult to sympathize with people who are "taken" because they are trying to get rich quickly in ways that usually involve participating in illegal activities.
Still, effective deterrence of identity theft would be desirable since so many people are victims.
As Posner indicates, the aggregate amount taken by identity theft, plus avoidance spending by potential victims, plus the spending of time and other resources by the identity thieves themselves, exceed the total cost of many other crimes.
Posner notes that the economic theory of optimal deterrence implies as a first approximation that the expected cost of apprehension and punishment to the identity thief should be at least as large as his expected gain from stealing identities.
However, this first approximation may not give a good approximation to the minimum punishment that would deter this crime because there is a very low probability that such identity thieves are apprehended and convicted.
Probabilities are low partly because crimes over the internet are difficult to trace to their source as many criminals are located in small out of the way countries, or in other places that are not easily reached by enforcement officials.
Suppose that the probability of solving a representative identity theft was no better than 1/1000, so that out of say 9 million such thefts each year, fewer than 9,000 are solved by finding the perpetrators.
 If the typical amount stolen is $10,000, making the expected punishment exceed the expected gain implies that a convicted identity thief would be subject to a penalty of $10 million.
Since convicted thieves usually do not have so much wealth, punishments typically take the form of significant prison terms.
If identity criminals are quite risk averse, a 1/1000 probability of a $10 million dollar punishment would be much more onerous than a $10,000 punishment with certainty.
 Hence the punishment required to deter could  be much smaller than $10 million.
On the other hand, if criminals like risk, and the evidence suggest that they often do, adequate deterrence would require an even greater punishment than $10 million, or its jail time equivalent.
The expected punishment required to deter identity theft may also be much less than the loss to victims because in most cases the gain to the thieves is much less than the loss to their victims.
The relatively small gain from gaining access to victim's personal information can be seen from how little is asked online for such information-less than $100 is typical.
This is partly because victims and credit card companies spend valuable resources on cutting their risk of losses from such theft.
The gain is relatively small also because potential victims suffer a psychic loss since they worry about the potential theft of their identities, and actual victims are hurt and angered about the invasion of their privacy.
Net gains to thieves are further reduced below the losses to victims because identity thieves put time and other resources into criminal activities, resources that could have been spent on more socially productive activities.
Thanks for some informative comments.
Clearly, I should have said the WHO rather than the WTO.
I apologize for this carelessness that is especially disturbing to me since I often write about the WTO.
I also regret that I probably exaggerated how many lives could have been saved over the years by extensive use of DDT spraying in houses.
However, I am not guilty of saying that DDT spraying alone would do the job, for I did say that mosquito nets and drugs are also useful.
A combination is the best approach, but these other methods are just not a good enough substitute for DDT spraying.
So I do stand behind a claim that opposition to DDT spraying by many organizations caused a very large number of needless deaths from malaria.
Does the recent WHO statements supporting the use of DDT in homes reflect a change in attitudes toward DDT home use by this organization? One strong critic of my discussion points out several errors in what I said, and I am indebted to him for these corrections.
However, he is inconsistent on this issue of whether the WHO has "changed" its position.
On the one hand, he says that "The WHO‚Ä¶has always supported its use" (that is, DDT spraying), but then quotes with approval a statement by another critic of DDT spraying that "The World Health Organization's new (!) stance on DDT" (my parenthesis).
New or not new, that is the question? I was wrong to say that the WHO had banned the use of DDT in homes until recently.
However, it is accurate to say I believe that the WHO had not strongly endorsed its use until a few weeks ago, and that many donor agencies were for this reason reluctant to finance purchases of DDT for household spraying.
One commenter challenged me (and his challenge was very well answered by another commenter) as to whether DDT house spraying does pass a relevant benefit-cost criterion.
Accepting his assumptions, DDT spraying would cost $12 per year per person.
That amount seems to be a highly worthwhile expenditure if we relate it to estimates of the value of saving the lives of young persons even in very poor countries.
Of course, a full analysis would require knowing the money value placed on their utility by people in poor countries (my paper with Rodrigo Soares and Tomas Philipson in the March 2005 issue of the American Economic Review on declines in mortality in poor countries tries to measure utility value of improved life expectancy, not improvements in GDP alone), the probabilities that such spraying would save lives or significantly improve the quality of lives, the productivity of alternative uses of these funds, such as to find an effective vaccine, and so forth.
I, have not, nor has any one else to my knowledge, made these calculations, but if spraying only costs $12 per year, and it is effective in significantly cutting deaths from malaria (some commenters dispute that), to me that seems like a great use of private or public funds.
I will try to address a few of the various interesting comments.
The comments take very different positions on the importance of mathematics in a modern economy.
A couple of things are pretty clear: most employees do not need a lot of math, but math is becoming more valuable for a larger fraction of the tasks in more advanced economies.
For example, it is difficult to use regression analysis in ways that illuminates without understanding some of the basic mathematical concepts that lie behind regressions.
The statistical theory of estimation need not be mastered, but someone limited to only cookbook knowledge of regressions can make serious mistakes.
The fear of math among many Americans is common, and this fear prevents them from reading simple figures, analyzing say the relation between housing prices and interest rates, understanding probabilities in medical and other areas, etc.
Still, many jobs are designed such that only very basic math, even only arithmetic, is required.
The advantage of the American "build up" learning system is that people can more readily change their minds about what interests them as they try out different programs.
It also implies that there are second and third chances as students can decide their interests are different than what they had believed, and workers can shift to entirely new lines of work.
That flexibility is less common in the learning structures of many other countries.
Obviously, memorization is important to learning, and it is said, for example, that first year medical school is mainly about memorizing various pieces of information about the human body.
Perhaps too I exaggerated the importance of rote learning in the Japanese and other educational systems.
But Japanese businessmen and scientists frequently complain about an excessive emphasis on rote learning.
My experience with Japanese students in the U.S.
is that especially at the beginning they have difficulty in thinking on their own, and rely too much on what their teachers told them.
I believe schools systems should establish minimum standards for graduation that are meaningful, but not very difficult.
Then individual high schools can top that up to an extent determined by their student bodies.
As I argued in previous posts, inequality in American earnings has grown greatly during past 25 years, in large measure because of increasing demands in a modern economy for workers who have considerable knowledge.
Graduates of elite universities have benefited the most from the greater emphasis on knowledge, but all groups that invest in knowledge and information do better in modern knowledge-based economies.
I believe America has adopted better than most other rich countries to these changes, in part because of the flexibility in its learning system, and in part because of its emphasis on lifelong learning.
One of the challenging paradoxes during the past several decades is that American teenagers have consistently performed below average on international tests in math and sciences, and not especially well on reading tests, yet the American economy is more productive than any other.
Of course, an economy's productivity depends not only or even mainly on schooling, but also on its physical capital stock, institutions and laws, and various other variables as well.
Even regarding human capital, however, the United States does better than suggested by its rankings in international tests.
Frequently cited are the results of tests in 2003 of 15-year-olds in math, sciences and reading.
The U.S.
ranked about 25th in math, 20th in science, and was above average in reading out of the about 40 countries that participated.
I believe these results correctly reflect that most American elementary and high schools are much less challenging in math and science than are schools in Finland, Japanese, Hong Kong, and other high scoring countries.
However, the creation of valuable human capital for an economy depends on much more than is measured by tests of fifteen year olds in different subjects.
The philosophy behind U.S.
education is to build up, so that later levels of schooling are more challenging than earlier levels.
This means that more is expected of students at college than was expected of them in the high schools they attended, even though both high schools and colleges vary greatly in their degree of difficulty.
On the other hand, secondary schools in most countries that rank high in these test scores give a lot of home work and expect a lot, while their colleges are often easier.
In Japan, for example, getting into the top universities is very hard, but these universities are easy compared to the secondary schools that their students attended.
As it were, Japanese students rest in college after the exhausting demands of their high schools.
Japan is an extreme version of a build down system, but less extreme versions are found in many of the other participating countries.
This difference in education approach implies that a more relevant international comparison of the production of human capital would be to test not teenagers but young adults, say at age 22.
The U.
S.
would probably still perform below average in math and science, and might not excel in reading, but the relative performance of older Americans would be, I expect, considerably higher than that of fifteen or eighteen year olds.
Another important consideration in international comparisons of human capital is that a larger fraction of Americans than is common in other countries continue their learning after high school at junior colleges, trade schools, non-profit four-year colleges and universities, for-profit online education and universities, such as the University of Phoenix, adult education classes, and in other ways.
This vast array of learning opportunities allows young (and not so young!) persons to pick out programs that suit them, and to change where and what they are studying if they are dissatisfied.
In most other countries, later as well as earlier schooling is not flexible.
This again suggests that the human capital of Americans would look better in international comparisons if comparisons were not of teenagers but of adults in their late twenties and thirties.
U.S.
education in junior colleges, many four-year colleges, at trade schools, and for-profit universities is more oriented toward improving job-relevant skills than is common in post secondary education in other countries.
I refer not only to schools that teach how to drive a truck, use a computer, or cut and shape hair, but also to junior and four year colleges that provide instruction in landscape gardening, bookkeeping, and other practical subjects.
This type of education may not help students know much about the world at large, but it does raise their productivity at work.
Another factor is intangible, but nevertheless is relevant in helping American men and women become innovative at work and in other parts of life.
American schools are less oriented toward rote teaching than are schools in many other countries, and they are more oriented toward giving students practice in thinking through issues and expressing themselves in discussions.
Japan and the United States are outliers at opposite ends among rich countries in the degree of emphasis that schools place on thinking for oneself rather than memorizing information.
The United States may go too far in its emphasis on "self expression" at the expense of teaching valuable knowledge and skills, but still international tests of subject matter knowledge, such as the 2003 tests, do not even try to capture originality and related important aspects of human capital accumulation.
Note in this regard that despite the mediocre record on international tests, American trained scientists do extremely well in garnering Nobel prizes and other international awards.
American CEO's and investment bankers are ranked very high in the international business world for their energy and creativity, which is why many foreign companies have chosen Americans to head their operations.
American workers also rank high when international businesses rank the quality of the workforce in different countries.
To be sure, a significant number of prominent "American" scientists and some business leaders were born abroad and immigrated to this country.
This attraction to skilled immigrants must be taken into account in assessing the quality of the human capital that enters the American economy, although it may  reflect unfavorably on the quality of education provided to American students in math and the sciences.
Still, if America allows India and other countries to pay the cost of training many of the engineers and other skilled workers who end up in the American economy, that is a pretty effective human capital production "system" when considered in its totality.
It is more or less inevitable that China's economy will spew out a lot of pollution, given its extraordinary rate of growth for over 20 years, and the abundant supplies of coal that fuel its power generation.
The important question raised by Posner is what, if anything, will induce China to cut its pollution, including the pollution that spreads internationally to its eastward Asian neighbors and countries in the western hemisphere, especially Canada and the United States.
Posner emphasizes the potential for international collaboration because the harm to these affected countries will tend to exceed the cost to China from cutting its pollution.
China is imposing a burden on these other nations that it does not fully incorporate into its decisions about which fuels to use, how to invest in scrubbing and sequestering technologies and equipment that reduce the amount of pollutants that its plants use, its taxation of gasoline that discourage driving and more efficient cars, and the many other ways to reduce pollution.
Since greater pollution-reduction efforts would lower the growth rate of its output, the harm to other nations would not enter into its policy calculations unless forced to by threats of economic retaliation, or induced to do so by various forms of intercountry compensation and cooperation.
The New York Times article referred to by Posner indicates that opposition to pollution is also growing rapidly in China itself for reasons that have little to do with protests of other countries.
When countries start developing rapidly, their first concern is greater resources for consumption and investment, for they do not believe they can afford to take extensive measures to control air pollution if that slows down their growth out of poverty.
As they get richer, however, concerns about the level and growth of various types of pollutants get magnified.
As economies continue to develop, their citizens exert greater pressure on governments to improve air and water quality.
Governments generally respond by regulating and taxing more extensively the omission of pollutants.
The result typically is that air, water, and other kinds of pollution at first rise sharply with economic development, and then fall about equally sharply as development proceeds still further.
This inverted U-shaped relation between a country's level of pollution and its level of GDP per capita is called the "Environmental Kuznets Curve" after the Nobel prize-winning economist, Simon Kuznets.
He had established such an inverted U-shaped relation between income inequality within a country and its level of per capita GDP, and researchers discovered about 20 years ago that the same type of inverted U relation holds for environmental damage, such as particulates in the air.
In fact, the two Kuznets relations are not independent since one way to reduce inequality in measures of full income that include environmental damage is to reduce the degree of pollution.
Prior to the discovery of this U-shaped environmental relation, the general opinion was that environments were inevitably damaged more as industrialization increased and economies developed.
That is still a common view among those unfamiliar with the evidence.
To be sure, the full evidence indicates that no single relation between environmental effects and economic development fits all pollutants in all countries.
For example, theory predicts that domestic opposition would make governments more responsive to local pollutants of air and water, and less responsive to global pollution, such as emission of greenhouse gases.
In fact, the U-shaped relation does seem to hold better for local pollutants.
These Kuznets-type relations are beginning to take hold in China, as judged from the growing complaints about various types of pollution, and discussions by scientists and government officials about steps to take to respond positively to these complaints.
This reaction to internal complaints may not be sufficient to satisfy its neighbors in Asia and in the Western hemisphere since as I mentioned, different types of pollution operate within and between countries.
Moreover, China's richer neighbors would be more sensitive to pollution than the poorer Chinese are.
However, as China continues to develop, the complaints due to "internal" externalities will begin to interact more with the complaints due to the "external" externalities imposed on other countries.
The combination of internal and external complaints should push China even faster along reductions in environmental damage than has been typical in the past when countries responded mainly only to internal complaints about pollution levels.
There is tremendous speculation about how much, if at all, the Fed will reduce the federal funds rate at its meeting next week on Sept.
18th.
This is the interest rate that banks use to lend their reserves held with the Fed to other banks.
This rate in turn affects the interest rates banks charge borrowers, and ultimately that affects other interest rates in the economy.
The Fed changes the federal funds interest rate through open market operations that involves buying or selling bonds.
Some investors are looking for a full ¬Ω point reduction from a federal funds rate of 5 1/4 per cent to 4 3/4 per cent, while others expect a reduction of only ¬º of one per cent.
If the Fed took no action, there would be many disappointed investors, and probably a large sell off in worldwide stock markets.
The uncertainty among investors about what the Fed (and other central banks) will do, and the expectations that form around this uncertainty, have created an environment where central banks almost have to take some actions to avoid major negative reactions in financial markets.
Instead of central banks determining expectations in financial and other markets, expectations are now determining central bank policies.
As decision time approaches, the Fed comes under enormous political pressure to take the actions expected by influential investors and businesses.
Although political and other forces help determine what the Fed will do, there is still great uncertainty over the precise actions it takes, as with the current speculations over the magnitude of the change next week in the federal funds rate.
This political process surely is not what was intended when "independent" central banks were created.
To regain control over expectations and its own policies, the Fed should establish a rule easily calculated from publicly available information about how the federal funds rate is determined.
With such a rule, investors and businesses would be able to forecast perfectly what the Fed will do next week because market participants would know all the information that determine the Fed's behavior.
There could be no disappointments, and all market adjustments to any changes in the federal funds rate would be fully and continually incorporated in asset prices and other market measures before, not after, the Fed makes its decisions.
Then Fed policies would be determining expectations about interest rates and other variables rather than the other way around.
To show how rules would work, suppose the rule was to target the inflation rate at 2 per cent per year.
If say the actual inflation rate were 3 per cent over a several month period prior to a Fed meeting, the Fed would "lean against the wind", and raise the federal funds rate from its long run level by a specified amount known in advance to investors.
This would counteract the higher than desired inflation rate.
Conversely, if the actual inflation rate had been 1 per cent, the Fed would lower this interest rate by a specified amount that would be known by market participants.
This action would help strengthen an economy that was weaker than the Fed desired.
Investors would know what the Fed would do weeks and even months before the Fed did it, and they would adjust their behavior more smoothly to their accurate expectations about central bank behavior.
The same considerations would apply to more complicated "Taylor rules" that relate actions by the Fed not only to deviations of actual inflation rates from a targeted rate, but also to deviations of actual GDP growth from a potential growth rate.
Since information could be made available to the public about how the Fed would use trends in labor force growth, investments, and productivity to calculate potential GDP growth, the Fed's responses implied by such a rule would also be known in advance.
In this way, investors and other market participants could anchor their expectations to what the Fed will actually do in different macroeconomic situations.
According to a recent unpublished paper by John Taylor of Stanford University, the Fed would have raised the federal funds rate between 2002 and 2006 by considerably more than it did had such a Taylor rule been followed.
By doing that, the Fed's actions would have prevented some of the mortgage and other lending at very low interest rates that took place during the past few years.
Taylor's analysis suggests that following such a rule would have reduced, and perhaps even largely eliminated, the excesses in the housing boom since 2003.
Although the Fed is the most influential central bank, similar advantages of rules over discretion in setting interest rates apply to the European, British, Chinese, Japanese, Indian, and other major central banks.
The less important central banks already have little discretion over their interest rates since global forces outside their control basically determine these.
Of course, in the global economy what any major central bank does, especially what the Fed does, greatly affects the choices available to other central banks.
The use of rules rather than discretion to guide interest rate policy would shield central banks from domestic political pressures, and would anchor market expectations in accurate knowledge about what central banks will do in various local and global economic circumstances.
These types of advantages of rules over discretion apply not only to central bank behavior, but also to policies by other government agencies.
For example, should anti-trust authorities treat each merger, buyout, or meeting among competitors as unique events that require separate analysis to determine if they are anti-competitive, or should these regulators have clear and easily understand rules about what determines anti-trust violations? Clear rules are preferable here too since that would enable companies to predict the responses by anti-trust regulators when considering mergers and other actions.
It would also help insulate these regulators from political pressures.
In particular, the American and European attacks on Microsoft, and the European opposition to the merger of GE and Honeywell, probably would not have happened if competitive policies were guided by clear and sensible rules about what constitutes anti-competitive actions rather than by complaints of and pressures from politicians and from competitors to Microsoft and GE.
Much has been written about the rejection of socialism by major powers like China and the former Soviet Union.
But nowhere is the failure of socialism clearer than in the radical transformation of the Israeli kibbutz.
The kibbutz movement started in the early twentieth century in what was then Palestine by Zionist √©migr√©s from Europe who were idealistic and utopian.
Capitalism, industrialization, and the conventional family repelled these √©migr√©s.
Kibbutzniks, as they were called, replaced these fundamental aspects of modern societies with collective agriculture where all property was owned by the kibbutz, where adults were treated equally regardless of productivity, and they were rotated every few months among the various tasks that had to be performed on a farm, such as milking cows, planting crops, serving meals, and so forth.
They considered the close-knit family to be a creation of capitalism, and substituted for that family structure communal dining, a fair amount of promiscuity, and separate communal living for all children, who were allowed only brief visits with their parents each day.
Several decades ago I spent a few days on such a traditional kibbutz located in the Negev desert, where I was a guest of married couple with two children.
The husband was unusual for a kibbutznik because he was a trained nuclear physicist.
They had a two room apartment-their two children lived in dormitories with the other children of the kibbutz- I met the children briefly on a couple of their daily visits to their parents.
We dined communally on good food, and we watched a movie in the large dining hall afterwards.
Although my host had much more advanced training than other residents, that only gave him the right to spend a few months each year working at a nuclear facility that used his skills.
The rest of the time he rotated like everyone else among the numerous menial tasks on the kibbutz.
He was well paid for his outside professional work, but he had to hand over his pay to the kibbutz, and received the same benefits as everyone else.
He was not happy with this arrangement, but since he grew up on this kibbutz he lacked the resources to buy an apartment and car, and make the other outlays required to move off the kibbutz into an urban environment where he could get a well paying job.
For at that time, rent controls destroyed the rental market for housing, so young couples lived with their parents until they saved enough, or their parents gave them the money, to buy their own place.
However, in this case, their parents did not have their own apartments since they too lived on a kibbutz, and they lacked the financial resources to help their children.
The kibbutz movement was motivated in part by the Marxian dictum of "from each according to his abilities to each according to his needs".
By abolishing capitalistic organization, the founders expected members to live in contentment and harmony, and to work for the common good.
However, from what I was told and could observe during my brief visit, there was not much harmony-jealousies abounded of those who were only a little better off, including my host because he was allowed to spend some time working at his profession off the kibbutz.
Anger was also felt toward those who were considered slackers since they clearly lived off the labor of others.
Since everyone ate, worked, and socialized together, small differences were magnified, and became festering sores.
Nor were the family arrangements any more satisfactory since parents missed their children, and visa versa.
The kibbutz movement was very important in the creation of Israel, and in its early days of independence.
Many military leaders came from the Kibbutz, perhaps because they were accustomed to communal living.
A disproportionate number of the early political leaders and intellectuals also had a kibbutz background.
But as the New York Times recognized in an article this past week, the socialist zeal that propelled the kibbutz movement in its early days has largely now disappeared.
A trend that began more than 40 years ago accelerated in the 1980's as kibbutzim lost many young members, and they failed to attract enough new members.
Many of them were forced into bankruptcy, and the future of this movement was exceedingly dim if they continued with their old ways.
The vast majority of the kibbutz that remained survived because they changed their ways.
They expanded into industry and even real estate, they allowed a substantial degree of private ownership and private enterprise on the kibbutz, pay is no longer equal and is now significantly related to productivity, and parents and children live and eat together privately in their own homes.
These changes may have prevented the Kibbutz movement from disappearing along with the many past Utopian experiments, but they did not prevent the kibbutz from becoming of little importance in the Israeli economy as Israel shifted toward privately owned high tech industry, and also toward privately owned farms, including cooperatives, for its much less important agricultural output.
The transformation of the kibbutz movement from avowedly socialist to mainly capitalist shows clearly in microcosm what happened in socialist countries.
Although even in their most extreme moments these countries were never as radical as the kibbutzim since children continued to live and eat with parents, socialist countries too tried to divorce individual productivity from individual rewards.
They also believed that self-interest was a relic of capitalism, and that they could change human behavior to produce "a new socialist man" by abolishing private property and reorganizing society.
Instead of the small scale of a kibbutz, countries like China and the Soviet Union tried to created socialism on an enormous scale.
Moreover, and this is crucial, while members of any kibbutz voluntarily joined and could leave at will, Russians and Chinese had no choice about whether they wanted to work on collective farms or in government run enterprises, and they could leave only with extreme difficulty and at personal risk.
Utopian socialistic experiments like the kibbutz movement, and countries that tried to create large-scale efficient socialism, all failed for the same reasons.
They did not realize that while the zeal of pioneers, and the result of revolutions, could sustain a collectivist and other-serving mentality for a short while, these could not be maintained as the pioneers died off or became disillusioned, and as circumstances became less revolutionary.
Basically, they ignored the evidence of history that self interest and family orientation is not the product of capitalism, but is human nature due to selection from evolutionary pressure over billions of years.
Sure, there is abundant altruism toward one's family, and some altruism toward others, and the latter might sustain a society for a brief time.
But it shows a depressing ignorance of history to believe that a little propaganda and the enthusiasm of some leaders can organize an effective long-term society on the basis of any altruism and  desires of mostl persons to help institutions, such as a kibbutz or a country, rather than themselves and those close to them.
Universal service usually means that young persons, say 18 year olds, can either be drafted into military service for a specified period, say a year or two, or instead they can work for a similar period in one among a number of qualifying occupations.
In Germany qualifying occupations include menial jobs in hospitals or nursing homes, while France has qualified working overseas in a French company.
This approach to service has been advocated mainly by persons who would like all young persons to serve in the military, but reluctantly recognize that this is impracticable because of the small size of the peacetime armed forces compared to the much larger number of young persons available.
In effect, such compulsory service is a tax on those serving that has many of the characteristics of a very bad tax.
It is a tax in kind, on the time of young persons, rather than a tax on income, wealth, or spending.
A tax in kind limits the ability of those taxed to respond by substituting toward a more efficient allocation of their resources.
In-kind taxes also limit how governments can spend their tax receipts since these tax receipts are not general purchasing power.
Universal service is also a narrow-based rather than a broad-based tax.
Broad based taxes, such as a general value added tax on all transactions, are better because marginal tax rates, and hence the inefficiency caused by the tax, can be lower for a given level of receipts since the base being taxed is more extensive.
By contrast, narrow taxes have high marginal rates for any given revenue, and hence generally distort behavior much more.
In the case of service, young individuals who have much better opportunities in school or at jobs that do not qualify will be taxed heavily, as would young persons who greatly dislike spending all their time either in military service or at one of the recognized alternatives.
Narrow-based taxes often are enacted because of the weak political power of those being taxed compared to groups who benefit either directly or indirectly from such taxes.
For there is no argument based on efficiency why young persons should be the primary suppliers of the resources needed to fund peacetime armed forces.
The effects on efficiency would be better during a major war since then the social cost of the taxes needed to get enough young volunteers for the armed forces may exceed the social cost of a draft.
The logic of combining a military draft for young persons with an alternative of compulsory service at other occupations is questionable also on grounds other than being a bad tax.
If greater employment at hospitals or other tasks has social value beyond the private value to those working there, it would be better to subsidize anyone who works at these tasks than to require young persons to work there.
With subsidies, the general taxpayer would finance any desired greater output in these sectors rather than young persons doing their compulsory service.
Furthermore, a subsidy would attract workers of all ages, and so would be much less socially costly than compulsory service applied only to a single age group.
As Posner indicates, one possible justification for compulsory universal service is the belief that it is good for young men (and women as well?) to serve with low pay in the military or other specified occupations.
The argument might be that such service makes them better citizens, perhaps because they would then appreciate the hardships of the poor.
(Does that mean that the poor should be exempt from this service?) Even accepting this argument, which I do not, compulsory service is a bad policy.
A better way to achieve service with low pay would be to combine a ceiling on the earnings of young persons- the opposite of a minimum wage- with a subsidy to employers if they hired these persons at the desired occupations.
This approach would have the advantage over compulsory service of allowing young men (and women) to avoid the military and other specified options if they had much-preferred alternatives even for the same pay.
Although I have shown that compulsory service is partly equivalent to a ceiling on the earnings of young people, would politicians or anyone else who advocate compulsory service call explicitly for such a ceiling? I very much doubt it!.
An eye-opening article in the New York Times on August 29th discusses the effects of India's economic reforms and subsequent economic growth on the poverty and progress of the untouchables.
This is India's lowest and poorest caste whose members have been shunned by the other castes for centuries.
They have been confined to the dirtiest and least desirables jobs.
The article is built around the views of a successful untouchable, Chandra Bhan Prasad, a former Maoist revolutionary who is married to another untouchable.
His observations and interpretation of the effects of India's economic liberalization that started in 1991 on progress of some untouchables converted him to the belief that competitive and open markets is the only hope for his caste.
The Indian government early after it became independent in 1947 officially abolished the caste system, and especially the horrible position of the 160 million untouchables.
Nevertheless, this caste experienced limited progress during the 40 years of socialism and slow economic growth that followed independence.
Prasad became an economic liberal after seeing what he interpreted as the dramatic effects of 15 years of economic reform on the economic opportunities of the untouchables.
The economic theory of discrimination adds analytical support to Prasad's observations (see my The Economics of Discrimination, 2nd.
ed., 1973).
 An employer discriminates against untouchables, women, or other minority members when he refuses to hire them even though they are cheaper relative to their productivity than the persons he does hire.
Discrimination in this way raises his costs and lowers his profits.
This puts him at a competitive disadvantage relative to employers who maximize their profits, and hire only on the basis of productivity per dollar of cost.
Strongly discriminating employers, therefore, tend to lose out to other employers in competitive industries that have easy entry of new firms.
This is why minorities typically do better in new industries with young and initially smaller firms.
Both Jews and American blacks were accepted more readily in Hollywood in its early days than in other established industries, like steel making and banking, although blacks were limited primarily to entertainment roles.
Contrast this with American baseball, where the major league owners had a virtual monopoly of the industry.
They did not accept any black players until Branch Rickey broke the color bar in 1947 by promoting Jackie Robinson from the minor leagues to the Brooklyn Dodgers.
This long delay in accepting blacks by the baseball monopoly occurred despite the fact that for decades many outstanding black players could be observed playing in segregated Negro leagues.
Employee discrimination against minority fellow workers-such as a male worker who does not want to work for a female boss- cannot be so easily competed away by non-discriminating employers.
For they have to pay discriminating employees more, perhaps a lot more, to work with minority members.
A similar argument applies to consumers who do not want to be served by particular minorities.
Yet in these cases too, competition can blunt the impact of prejudice.
 For profit-maximizing employers will attempt to avoid the cost of discriminating employers by segregating minorities into separate companies.
For example, women bosses may have mainly women employees, or untouchable foremen will supervise untouchable workers.
Segregated minority workers in competitive markets may get paid just as much relative to their productivity as do majority workers in these markets.
In a fundamental way, segregation can serve as a way to bypass the prejudices of other workers, consumers, and employers.
When Jews could not get work in the banking industry at the turn of 20th century, they began to open their own banks that hired mainly other Jews.
African -American doctors and dentists in the old South catered to other blacks as their patients.
Globalization and the growth of world trade have added another competitive force against discrimination, one that is surely helping Indian untouchables and other minorities.
 As I mentioned earlier, costs of production are raised when employers discriminate against various minorities in their country.
Employers in other countries not burdened with costs of discrimination will be able to undersell discriminating employers in the international market for goods.
This too acts as a force lowering the impact of discriminating employers, and reduces the international competitiveness of countries where discrimination in employment is dominant.
The slow growth of the old American South is a good illustration of the effects of international and interregional competition.
Discrimination against former slaves was rampant in most parts of the South.
Private desires to discriminate were supported and often enforced by discrimination by state and local governments.
Blacks were denied access to schools of equal quality, and local governments sometimes retaliated against local companies that promoted blacks to higher-level positions.
As a result, Southern manufacturing companies were at a disadvantage relative to companies from the North and West, and also to those from other countries.
In good measure because of this systematic government discrimination, and private discrimination enforced often by government pressures, the South performed poorly for a century after the end of the Civil War.
The rapid growth of world trade during the past several decades, and the increasing market orientation of different economies, sometimes raise rather than lower income inequality, as least for a while.
However, trade and competition has made this inequality more dependent on differences in human and other capital, and less directly on skin color, gender, religion, caste, and other roots of discrimination.
This is an unsung but major consequence of greater trade and globalization.
Prediction markets are pervasive in finance, especially in modern derivative markets.
Someone who is long on the S&P 500 Index is betting that average stock prices in the United States will be going up, while those who are short in this market are betting that they will go down.
Price movements in these markets are a good measure of aggregate sentiment, where the aggregation process gives greater weight to those willing to risk larger sums.
The aggregation in online political prediction markets, such as the Iowa Electronic Market (IEM), is more democratic because these markets usually place sharp limits on how much can be bet- the IEM limits bets to no more than $500.
Yet as Posner indicates, this and other online political markets have been successful in predicting the outcomes of American elections-more successful than various polls.
In the present election, the IEM odds in favor of the Democrats winning the presidency hovered around 60 per cent From May of 2007 to the end of August, but these odds have narrowed considerably since then to about 51-52 per cent for the Democrats to 48-49 per cent for the Republicans.
Narrowing has also occurred in various polls.
 The IEM market is indicating that Senator Obama now has a small lead over Senator McCain.
Since bets on political online markets are small, the motivation of bettors can hardly be the amounts they win or lose.
Nor can the usual economic theories of risky choices be of much relevance since the risks to bettors' wealth are rather insignificant.
These gambles are made because of utility derived from the gambling itself, not because of the amounts won or lost.
This has the very important implication that the positions taken by bettors-for example, whether they bet that the Democratic rather than the Republican presidential candidate would win- is not necessarily determined by which one they expect to win.
On the contrary, their betting behavior may be in good measure determined by whom they want to win rather than whom they expect to win.
Studies of betting on sports events show a home team "bias" in the sense that the odds tend to be skewed in favor of home teams relative to the actual winning percentages of home teams.
This may be because many local residents bet on their home team, such as Chicagoans betting on the Chicago Cubs, at odds where objectively they should be shifting their bets to visiting teams, and also because individuals in home cities are more likely to bet on games in their cities.
This home team bias is likely to be even more pronounced in political betting markets like the IEM since bets are small.
However, if biases of Democratic and Republican bettors are about equally strong, and if a non-negligible fraction of all bettors are making prediction bets, then aggregate betting would tend to give on the whole accurate predictions about who will win, although these predictions would be quite noisy.
Predictions rather than hopes may be of relatively large importance in the IEM and other online political prediction markets because the main bettors have been academic economists and financial experts rather than the general public.
This type of wishful betting presumably is quite different in betting on other types of events, such as the unemployment rate shown by data to be released on a certain date.
I believe that online political prediction markets, and other online prediction markets as well, should be legal in the United States and elsewhere, even if the amounts bet were quite large.
There is no important substantive difference between such online betting markets and the Chicago Mercantile Exchange and other exchanges that allow individuals and organizations to take positions on movements of stock indexes, housing price indexes, and prices of other derivatives.
A distinction is sometimes made between political betting markets and derivative markets since participants in derivative markets may be hedging other risks that they face.
Yet this distinction has little substance since if larger bets were allowed in online political markets, groups whose welfare depended greatly on political outcomes would make greater use of these markets.
For example, if a Republican presidential win would mean greater spending on military weapons, companies in the arms business might hedge their risks by betting on Barack Obama.
If large bets were allowed, some wealthy groups may bet a lot on their candidates in order to exert bandwagon influences on public opinion through their large bets affecting market odds.
If so, these markets likely would become less reliable as predictors of outcomes, and hence would have less influence on opinions.
To a large extent, therefore, these markets would be self correcting, although online political markets might place various other restrictions on bets, as is common in derivative and other exchanges.
On Sunday of this past week Merrill Lynch agreed to sell itself to Bank America, on Monday Lehman Brothers, a venerable major Wall Street investment bank, went into the largest bankruptcy in American history, while Tuesday saw the federal government partial takeover of AIG insurance company, one of the largest business insurers in the world.
Instead of calming financial markets, these moves helped precipitate a complete collapse on Wednesday and Thursday of the market for short-term capital.
It became virtually impossible to borrow money, and carrying costs shot through the roof.
The Libor, or London interbank, lending rate sharply increased, as banks worldwide were reluctant to lend money.
The rate on American treasury bills, and on short-term interest rates in Japan, even became negative for a while, as investors desperately looked for a safe haven in short term government bills.
The Treasury" extended deposit insurance to money market funds-without the $100,000 limit on deposit insurance.
The Fed also began to take lower grade commercial paper as collateral for loans to investment and commercial banks, and the Treasury encouraged Fannie Mae and Freddie Mac to continue to purchase mortgage backed securities.
Is this the final "Crisis of Global Capitalism"- to borrow the title of a book by George Soros written shortly after the Asian financial crisis of 1997-98? The crisis that kills capitalism has been said to happen during every major recession and financial crisis ever since Karl Marx prophesized the collapse of capitalism in the middle of the 19th century.
 Although I admit to having greatly underestimated the severity of this financial crisis, I am confident that sizable world economic growth will resume under a mainly capitalist world economy.
Consider, for example, that in the decade after Soros' and others predictions of the collapse of global capitalism following the Asian crisis in the 1990s, both world GDP and world trade experienced unprecedented growth.
The South Korean economy, for example, was pummeled during that crisis, but has had significant economic growth ever since.
I expect robust world economic growth to resume once we are over the current severe financial difficulties.
Was the extent of the Treasury's and Fed's involvement in financial markets during the past several weeks justified? Certainly there was a widespread belief during this week among both government officials and participants in financial markets that short-term capital markets completely broke down.
Not only Lehman, but also Goldman Sachs, Stanley Morgan, and other banks were also in serious trouble.
Despite my deep concerns about having so much greater government control over financial transactions, I have reluctantly concluded that substantial intervention was justified to avoid a major short-term collapse of the financial system that could push the world economy into a major depression.
Still, we have to consider potential risks of these governmental actions.
Taxpayers may be stuck with hundreds of billions, and perhaps more than a trillion, dollars of losses from the various insurance and other government commitments.
Although the media has amde much of this possibility through headlines like "$750 billion bailout", that magnitude of loss is highly unlikely as long as the economy does not fall into a sustained major depression.
 I consider such a depression highly unlikely.
Indeed, the government may well make money on its actions, just as the Resolution Trust Corporation that took over many saving and loan banks during the 1980s crisis did not lose much, if any, money.
By buying assets when they are depressed and waiting out the crisis, there may be a profit on these assets when they are finally sold back to the private sector.
Making money does not mean the government involvements were wise, but the likely losses to taxpayers are being greatly exaggerated.
Future moral hazards created by these actions are certainly worrisome.
On the one hand, the equity of stockholders and of management in Fannie and Freddie, Bears Stern, AIG, and Lehman Brothers have been almost completely wiped out, so they were not spared major losses.
On the other hand, that makes it difficult to raise additional equity for companies in trouble because suppliers of equity would expect their capital to be wiped out in any future forced governmental assistance program.
Furthermore, that bondholders in Bears Stern and these other companies were almost completely protected implies that future financing will be biased toward bonds and away from equities since bondholders will expect protections against governmental responses to future adversities that are not available to equity participants.
Although the government was apparently concerned that foreign central banks were major holders of the bonds of the Freddies, I believe it was unwise to give them and other bondholders such full protection.
The full insurance of money market funds at investment banks also raises serious moral hazard risks.
Since such insurance is unlikely to be just temporary, these banks will have an incentive to take greater risks in their investments because their short-term liabilities in money market funds of depositors would have complete governmental protection.
This type of protection was a major factor in the savings and loan crisis, and it could be of even greater significance in the much larger investment banking sector.
Various other mistakes were made in government actions in financial markets during the past several weeks.
Banning short sales during this week is an example of a perennial approach to difficulties in financial markets and elsewhere; namely, "shoot the messenger".
Short sales did not cause the crisis, but reflect beliefs about how long the slide will continue.
Trying to prevent these beliefs from being expressed suppresses useful information, and also creates serious problems for many hedge funds that use short sales to hedge other risks.
Their ban can also cause greater panic in other markets.
Potential political risks of these actions are also looming.
The two Freddies should before long be either closed down, or made completely private with no governmental insurance protection of their lending activities.
Their heavy involvement in the mortgage backed securities markets were one cause of the excessive financing of home mortgages.
  I fear, however, that Congress will eventually recreate these companies in more or less their old form, with a mission to continue to artificially expand the market for mortgages.
New regulations of financial transactions are a certainty, but whether overall they will help rather than hinder the functioning of capital markets is far from clear.
For example, Professor Shimizu of Hitotsubashi University has recently shown that the Bank of International Settlement (BIS) regulation on the required minimum ratio of bank capital to their assets was completely misleading in predicting which Japanese banks got into trouble during that country's financial crisis of the 1990s.
Other misguided regulations, such as permanent restrictions on short sales, or discouragement of securitization of assets, will both reduce the efficiency of financial markets in the United States, and they will shift even larger amounts of financial transactions to London, Shanghai, Tokyo, Dubai, and other financial centers.
Finally, the magnitude of this crisis must be placed in perspective.
Although it is the most severe financial crisis since the Great Depression of the 1930s, it is a far far smaller crisis, especially in terms of the effects on output and employment.
The United States had about 25 percent unemployment during most of the decade from 1931 until 1941, and sharp falls in GDP.
Other countries experienced economic difficulties of a similar magnitude.
American GDP so far during this crisis has essentially not yet fallen, and unemployment has reached only about 61/2 percent.
Both figures are likely to get considerably worse, but they will nowhere approach those of the 1930s.
These are exciting and troubling economic times for an economist-the general public can use less of both! Financial markets have been seriously wounded, and derivatives and other modern financial instruments have come under a dark cloud of suspicion.
That suspicion is somewhat deserved since even major players in financial markets did not really understand what they were doing.
Still, these instruments have usually been enormously valuable in lubricating asset markets, in furthering economic growth, and in creating economic value.
Reforms may well be necessary, but we should be careful not to throttle the legitimate functions of these powerful instruments of modern finance.
In considering what needs to be done to improve the functioning of the financial system, it is necessary to distinguish steps to avoid a major depression in the near term from long run reforms of the financial system.
The Paulson Plan naturally concentrates on the very real short run emergency.
I first discuss this plan and other suggestions, and then briefly consider long-term reforms.
The Treasury's announced insurance of all money market funds carries considerable moral hazard risks, but it has not aroused much controversy.
The Paulson Plan goes much further and involves purchases from banks of up to $750 billion of assets that have uncertain worth.
I say uncertain worth since there is essentially no market for many of these assets, and hence no market pricing of them.
The government hopes to create this market through using reverse auctions.
In these auctions, banks would offer their assets at particular prices, and the government would decide whether to buy them.
This part of the Plan has been heavily criticized because it gives great discretion to the Treasury Secretary since the total value of the assets that would be purchased at this point is not known.
In addition, many are repelled by the intention to bail out companies and their executives who made decisions that got the companies into trouble.
There is also much concern about the moral hazard consequences for the future behavior of banks if they are led to expect to get rescued by the government when their investments turn sour.
While I find helping these banks highly distasteful, moral hazard concerns should be put aside temporarily when the whole short term credit system is close to a complete collapse.
However, the proposed Plan does indicate, as I suggested in an earlier post (April 28, 2008), that the $29 billion bailout of the bondholders of Bear Stearns in March was a mistake.
It probably did have a moral hazard effect by encouraging Lehman brothers and other investment banks to delay in raising more capital because they too expected to be helped if times got much worst.
The agreement apparently just reached between Congress and the White House does allow the government to purchase distressed assets up to about $700 billion- I would have preferred a considerably smaller initial limit.
It does have a provision for Congressional oversight of the Treasury's use of the funds, whatever that is worth, and has several other features as well.
For example, it includes pay limits for executives whose firms seek government help.
That is too much micromanagement of the operations of these banks, even though no one can think much of executives who led their banks into such a mess.
I am also not enamored of the apparent provision that gives the government an equity stake in some banks that they help if these banks should prosper.
It is unwise to allow governments in general to have equity interests in private companies, particularly if this equity gives them voting rights on company policies.
Perhaps inevitably, this did occur in the AIG bailout.
Many examples in recent history, such as the current Alitalia fiasco, show that political interests outweigh economic ones when governments have partial ownership of alleged private companies.
The agreement appears to require the government to use their new ownership of distressed mortgage-backed securities to reduce home foreclosures.
Homeowners as well as bankers should have known that the insanely good times in the housing and mortgage markets could not last forever.
However, consumers are less well informed about financial matters and housing pricing than are the supposed expert executives at banks.
Helping homeowners also uses taxpayers money, but in a way that would generally aid people with modest to moderate incomes.
Indirectly, moreover, it would also help banks by increasing the value of the mortgage-backed securities they hold.
One suggested supplement to the Paulson Plan is to require investment banks and other financial institutions to raise additional capital now, so that they have resources to start widespread lending again.
Such a requirement would be unwise since banks that can raise capital readily are already doing so, as illustrated by Warren Buffet's investment in Goldman Sachs, and Mitsubishi's purchase of a stake in Morgan Stanley.
Were such a requirement imposed, weaker banks might cut their lending even further in the attempt to increase their liquid capital.
Milton Friedman and Anna Schwartz argue convincingly in their Monetary History of the United States that the Fed's raising of reserve requirements for commercial banks during the mid-1930s contributed to a prolonging of the Great Depression.
For it induced these banks to further contract their lending in order to gain the liquid assets that were removed by higher reserve requirements.
The main problem with the modern financial system based on widespread use of derivatives and securitization is that while financial specialists understand how individual assets function, even they have little understanding of how the whole incredibly complex financial system operates when exposed to various types of stress.
In light of such ignorance of the financial system's mode of operation, it is difficult to propose long-term reforms.
Still, a few seem reasonably likely to reduce the probability of future financial crises.
The capital requirements of banks relative to assets might be increased, so that the highly leveraged ratios of assets to capital in financial institutions during the past several years would become less common.
Possibly a minimum ratio of capital to assets should be imposed by the Fed on investment banks and money funds.
As much as possible, the measure of capital should be market, not book, value, such as the market value of publicly traded shares of banks.
 My discussion last week indicated that book value measures badly missed the plight of Japanese banks during their decade-long banking crisis of the 1990s.
The government should as quickly as possible sell Freddie Mac and Fannie Mae to fully private companies that receive no government insurance or other help.
These two giants did not cause the housing mess, but in recent years they surely greatly contributed to it, partly through Congressional pressure on them to increase their purchases of sub prime loans.
They owned or guaranteed almost half of the $12 trillion in outstanding mortgages with less than $100 million of capital.
The housing market already has excessive amounts of government subsidies, such as from the tax exemption of interest on mortgages, and should not have government sponsored enterprises that insure mortgage-backed securities.
Finally, the "too big to fail" approach to banks and other companies should be abandoned as new long-term financial policies are developed.
Such an approach is inconsistent with a free market economy.
It also has caused dubious company bailouts in the past, such as the large government loan years ago to Chrysler, a company that remained weak and should have been allowed to go into bankruptcy.
All the American auto companies are now asking for handouts too since they cannot compete against Japanese, Korean, and German carmakers.
They will probably get these subsidies, even though these American companies have been  badly managed.
A "too many to fail" principle, as in the present financial crisis, may still be necessary on hopefully rare occasions, but failure of badly run big financial and other companies is healthy and indeed necessary for the survival of a robust free enterprise competitive system.
Deficits arise when government spending exceeds the revenues raised from various taxes.
Deficits add to the stock of government debt.
In evaluating the consequences of deficits for an economy, it is first of all crucial to know whether the source of a larger deficit is greater government spending or reduced tax collections, possibly due to reductions in tax rates.
The second issue is the burden to the economy of financing the interest payments due on the government debt.
I take these issues up in turn.
To the extent that the source of the rise in a deficit is increased government spending, then whether that rise is justified depends on how socially valuable are these government expenditures.
By that I mean the social rates of return on these expenditures, such as longer lives for the elderly, relative to the interest cost of raising the required funds, and relative to the returns on other investments in the economy.
Much of the increased government spending in different countries during this recession went to help out banks that were in danger of going under.
While numerous mistakes were made that will be argued about for a long time, such spending on the whole was necessary in order to limit the financial crisis that had developed.
Other parts of the increase in spending in most countries are far more dubious and may even have harmed their economies.
I include in that most of the $800 billion Obama stimulus package, much of which is still not spent even though the brunt of the recession is over This package was promoted as a way to fight the recession, but mainly it is an attempt to reengineer the economy in the directions of larger government favored by many liberal Democrats.
I believe much of this reengineering will hurt the functioning of the economy, and of course at the same time will add to the debt burden.
A very small example was the cash for clunkers program in the US that ended a short time ago.
The 19th century French essayist Frederic Bastiat discussed facetiously the gain to an economy when a boy breaks the windows of a shopkeeper since that creates work for the glazier to repair them, and the glazier then spends his additional income on food and other consumer goods.
The moral of that story is to hire boys to go around breaking windows! The clunkers program was hardly any better than that (see our discussion of the clunkers program on August 24th).
Deficits also arise automatically during recessions because tax revenues fall as the growth in aggregate incomes slows down, and even becomes negative, as it did during this recession.
This automatic effect on deficits during recessions from falling tax revenues is supposed to be balanced by automatic surpluses during prosperity times as tax revenues grow because income are expanding faster.
Unfortunately, the period prior to the recession also had budget deficits, even though incomes grew quite fast, because Congress and President Bush pushed for greatly expanded spending.
To turn to the second question, will financing the debt become a serious obstacle to rapid US growth as the current and projected sizable US deficits increase the ratio of government debt to American GDP? That depends on four critical variables:  the size of the debt/GDP ratio, the level of interest rates, taxz rates, and the rate of productivity growth in the American economy.
Suppose the debt held by the public-which excludes government debt held by other government agencies- reaches 100% of present or near term GDP, which is not unlikely.
The burden on the government budget that this imposes depends on the interest rates on the debt.
At an average interest rate of 5%, that means 5% of GDP would go to servicing the debt, which is a little less than 20% of total federal government spending.
This might be manageable but it is not trivial.
On the other hand, if average interest rates were only 3%, servicing costs would be far more tolerable.
In fact, the US has been paying about 3% on its debt, so even a considerable increase of the debt to 100% of GDP would still be manageable.
But if the Fed starts raising real interest rates to head off the inflation potential in the $800 billion of excess reserves, the debt burden could become a major problem.
Another factor is the savings rates coming from the Asian countries, like China.
If their savings decline sharply, that too would raise world interest rates and increase the debt burden for all countries.
Rapid productivity growth and an improved tax structure could save the situation because the expansion of GDP caused by such growth and better taxes lower the ratio of the debt to GDP, and makes financing the debt easier.
To maintain rapid productivity growth requires that an economy provide powerful incentives to invest in physical and human capital and R&D.
It also requires that Congress and other legislatures do not start growing government spending as GDP grows rapidly.
But members of Congress and other legislatures are tempted to use much of the growing tax revenue on their pet projects.
One important determinant of the incentives to invest is the tax rates on the rewards of investments in new knowledge and capital.
Rich people should pay a larger share of the tax burden, and they do.
However, if the emphasis changes from encouraging investments to redistribution, the poor as well as the rich will suffer.
Probably the poor will suffer more since the rich can more their capital and themselves to the many low tax jurisdictions in the world.
On October 7, 2008 I wrote an op-ed piece for the Wall Street Journal ("We're Not Headed for a Depression") in which I said there would not be a depression, certainly nothing at all resembling the Great Depression of the 1930s.
As the economy continued to decline after that I began to worry that my predictions were going to look foolish, and become famous as one of the many absurdly bad forecasts.
Fortunately for me, and even more so for the world, the forecast turned out to be basically correct.
I recently claimed in a post on this blog on August 9th that the current world recession is over, and many economists and official organizations since then have come to the same conclusion.
The recession was big and world wide, but it was far from a depression-a rule of thumb is that a contraction is a depression only if the fall in output is at least 10%.
The output fall in the US and the world has been less than 5%.
Indeed, this recession is hardly more severe in the US- the epicenter of the financial crisis - than a couple of previous recessions, such as the one from 1973-75 brought on by the first oil shock, and the one in 1981-83 resulting from the Fed's successful efforts to squeeze inflation out of the system.
During the Great Depression American unemployment peaked at 25% and was high during the whole of the 1930s, while output declined by more than 20%.
During this present (or past) recession, output has fallen by a little over 4%, and unemployment so far has remained under 10%-the latest figure gives an unemployment rate of 9.7%.
Since a world of difference exists between the two events, the prevalent fear of a major depression was never realized.
Those who are more pessimistic about this recession point out that unemployment is still rising, and may reach a much higher level than its present rate.
They also rightly indicate that total unemployment and underemployment is much higher than 9.7% because some persons have only found part time jobs, while others have been so discouraged by the weak labor market that they quit looking for work, and so are not counted as unemployed.
I will take up both aspects of this pessimism in turn.
To understand what has been happening to unemployment, it is crucial to recognize that employment has declined, and unemployment has risen, much more relative to output during this recession than in past recessions because labor productivity-measured by output per worker or per hour of employment- has continued to grow during the recession.
Productivity grew by 0.3% during the first quarter of 2009, and by a whopping 1.8% during the second quarter.
Typically, measured productivity falls during serious recessions because of excess capacity of capital and the many employed workers who are underutilized.
Basic arithmetic indicates that for any given fall in output, the greater the rise in measured labor productivity, the greater the fall in employment, and the greater the increase in unemployment.
Unemployment is typically a lagging indicator in the sense that it usually begins to fall only months after output has started to increase again.
Since I expect output to rise only a little in the US during the third quarter that will be over at the end of September, unemployment should continue to rise for a while, almost certainly surpassing 10% at its peak.
However, if, as I expect, the growth in productivity will continue into the future at a good pace because of the many innovations and inventions coming on line, that will lead to greater, not a lesser, growth in employment.
 For at some point, the economics of the positive relation between productivity and employment becomes more powerful than the short-term arithmetic negative relation that occurs during recessions.
In the longer run, advances in productivity are partly produced by investments in R&D and other innovations that generate new products and new processes.
Both new products and new production methods typically require investments in both physical and human capital.
They also stimulate the use of more workers of various skills that utilize the greater capital stock.
This is why over longer time periods, productivity advances and robust labor and capital markets in different economies are strongly positively, not negatively, related.
For this reason, the continuing advances in productivity in the US and elsewhere will at first limit and then reverse the falls in employment and rises in unemployment.
It is true that the total underemployment rate during this recession would be well above the official unemployment rate of 9.7%.
Some estimates put total underemployment at over 16%, which includes individuals who are reluctantly working only part-time, and also persons who have given up looking for work.
However, apples have to be compared with apples, and in judging this recession relative to prior ones, the same calculations have to be made for these past recessions as well.
Exactly the same type of growth in underemployment was operating in these prior recessions, and especially for the severe recession of the 1930s.
Perhaps the fractions of reluctant part timers and persons who stopped looking for work are greater during the present recession than recessions than say in 1973-75, or 1981-83, but I have not seen any demonstration of this.
My guess is that whatever differences exist, they are not enough to reverse the ordering of the severity of different post-war recessions.
My overall conclusion is that productivity advances will lead the world out of the recession, and after a while toward a decent rate of growth in world GDP.
These advances will occur even if the financial sector is not fully recovered from its crisis.
As productivity advances continue at robust levels, that will stimulate the demand for labor, and begin to reduce unemployment and produce sizable rates of growth in employment.
The major American trade unions, including the United Automobile Workers, the United Steelworkers, and the Service Employees International Union, went all out in their support of Barack Obama during the past presidential election.
They supplied money-said to exceed $400 million- and hundreds of thousands of volunteers working for Obama.
It is believed they were important in his winning industrial states like Michigan, Wisconsin, Ohio, and Pennsylvania.
Naturally, unions expect some payback after the resounding victory of Obama, as all interest groups do when the candidates they support win.
Unions are behind the Employee Free Choice Act introduced in Congress early after Obama's election.
That Act would make it much easier for unions to be certified to represent the employees of a company.
The Act, still bogged down in a divided Congress, would allow for open rather than secret voting on whether a union should represent the employees, and would mandate arbitration over union-management contracts.
Because of opposition from some Democrats as well as almost all Congressional Republicans, it is not yet clear how much the legislation that eventually emerges will shift union-management relations in favor of unions.
The bailouts of General Motors and Chrysler have been a second major effort to help unions.
In this case, the Obama administration spent tens of billions of dollars of taxpayer revenue to help these companies.
I expect total Federal spending on GM and Chrysler will eventually equal or exceed $100 billion.
The best alternative to the bailout of these auto companies would have been to allow them to enter bankruptcy proceedings in the fall of 2008 when they were bleeding large losses.
After a year or so in bankruptcy they would likely have emerged with considerably lower obligations for health and pension benefits, and reduced hourly earnings of their employees.
They might then have competed without additional support against foreign auto companies with plants in the US or abroad.
Instead of allowing such bankruptcy proceedings to occur, and in order to reduce the hit that unionized autoworkers would have to take, GM and Chrysler were bailed out generously, and the federal government in effect became the principal owners of these companies.
Although GM and Chrysler were allowed to go into bankruptcy for a short period, in my judgment the main aim of the bailout was to reduce the effect of the financial troubles these companies were having on the earnings and fringe benefits of present and retired autoworkers.
Taxpayers paid what the autoworkers should have paid.
Perhaps the most disturbing tilt toward catering to union interests is the very recent 35 percent tariff the US government imposed on imports of Chinese tires without any finding of illegal trade practices by either the Chinese government or Chinese tire manufacturers.
The White House under special trade rules can impose punitive measures without finding any "fault".
However, this is the first time any president of the United States has used this provision to penalize manufacturers of imported goods or services.
It is not only a terrible precedent, but also this may encourage other countries to follow similar procedures, and impose tariffs on US exports that unions and companies in these countries feel are hurting them.
Unions and their allies have succeeded in placing Buy America provisions in the $787 billion stimulus package, against the objections of many foreign countries.
Unions are also active in trying to get similar provisions in the cap and trade climate bill that will eventually be passed by Congress and supported by the president.
Buy America provisions to stimulate employment of American workers is no different than imposing tariffs to cut imports and increase demand for domestic goods.
Both are inconsistent with the goal of free trade, and invite retaliation by other nations.
Politics in democracies allows powerful political interest groups to influence legislation in their favor.
In that respect, the steelworkers and other unions are not doing anything differently than, for example, medical insurance companies or auto companies, try to do.
But recognizing that this is the way the political process works does not mean that the effects tend to raise the general welfare of the population, as opposed to the welfare of small powerful interest groups.
In this regard, note that non-governmental unions contain only about 8% of the civilian labor force.
This means that the benefits they receive from flexing their political muscle under the present White House mainly hurts other workers and consumers.
In particular, the tariff on tires will raise the cost of tires to American consumers and make them worse off.
Similarly, the bailout of the auto companies will raise taxes and probably also auto prices, and Buy America provisions will make the cost of goods more expensive because they cannot be obtained from cheaper foreign producers.
The overall impact of these steps is a less efficient American economy, and substantial harm imposed on American consumers and non-union workers.
The essence of traditional international trade theory is.
that poorer countries produce goods and services with resources that they have.
in abundance, mainly low skilled labor and sometimes natural resources.
They.
export these goods, and import goods from the richer countries that require.
skilled labor, and considerable physical and financial capital.
This theory.
provides many insights, and must be followed if poor countries are to start on.
the path of economic development.
However, it does not go nearly far enough in.
mapping out how countries can continue rapid development, and go from being.
poor to becoming middle-income, and eventually to becoming rich.
To continue their economic progress, developing countries.
have to move up the product ladder and start producing more sophisticated.
goods.
To do this, they need to import technologies from the rich counties, and.
increase the training and education of their populations.
Advanced technologies.
are partly acquired through foreign direct investment and from trade with rich.
countries.
Along with the more sophisticated goods and services imported,.
developing countries also acquire some of the technologies developed in the.
economically advanced nations.
Importing.
advanced technologies can carry developing countries to middle income status.
To eventually reach much higher income levels, these countries must begin to.
innovate themselves as well.
International trade and foreign direct investment.
are also necessary for this further stage of economic growth, but it is not.
sufficient.
Continuing rapid development toward becoming a rich country.
requires skilled entrepreneurs and workers who can not only utilize and adapt.
technologies imported from developed countries, but who can also create develop.
their own technologies and processes.
Several ingredients are needed to accomplish this- of.
course, particularly important are competitive markets and creative.
entrepreneurs- but in the limited space for the present discussion I want to.
stress the role of education, especially higher education.
In early stages of.
economic development, a country needs a literate and energetic population with.
a wide education base of perhaps only a few years.
But as countries continue to.
grow, they need to upgrade their education levels beyond elementary school.
toward high rates of secondary school completion among young persons.
Economists and other students of economic development have.
learned only in recent years about the great significance also of higher.
education for countries that want to progress beyond middle-income status.
Higher education has become important to the development process mainly because.
of the growing value in the modern world of command over information and knowledge.
    The spread of university education and.
training toward a much larger fraction of young persons is crucial to producing.
efficiently the kinds of products and services that would help developing countries.
continue to drive forward.
For several years, along with others, I have been studying.
the worldwide boom in higher education in both developing and developed.
nations.
These studies document that the rates at which young men, and.
especially young women, have been graduating from universities have accelerated.
in almost every country during the past 30 years.
China, for example, has had a.
growth in enrollments at universities of both young men and women since about.
1990, and a sharp growth since the late 1990s.
A similar rapid expansion of.
higher education has also occurred in many other still developing countries,.
such as South Korea.
Developed countries too have generally also greatly.
increased enrollments at universities, although the US has fallen behind in the.
fraction of young men who go on from high school to receive a college.
education.
The signal given to young persons that higher education pays.
off much more now than in the past is the sizable growth during the past several.
decades in the average earnings of individuals with a college education.
compared to the earnings of those who do not go to college.
Earnings of persons.
with college education increased faster in recent decades not only in developed.
countries, but also in many rapidly developing countries, such as China and.
Brazil, that are supposedly specializing in goods that use less human capital.
Developing.
countries imperil their continued economic advance if they fail to provide much.
greater opportunities for their young men and women to achieve a university.
education.
To conclude, the main message of my comments is that in.
order for poorer countries to continue to grow at fast rates, they must move.
beyond specialization in goods produced with relatively unskilled labor.
They.
need to upgrade the goods they produce by utilizing more advanced technologies,.
and more skilled workers and entrepreneurs.
At first, most advanced.
technologies are imported from other countries, but eventually developing.
nations need to produce themselves many of the technologies required to upgrade.
and expand their production.
To accomplish this last great stage of economic.
development, both public policy and private households and businesses must.
begin to emphasize higher education, and other ways to greatly improve the.
advanced human capital of working men and women.
Protests against "price-gouging"in times of shortfalls in food supplies and other goods go back thousands of years.
Alleged gougers and speculators have been hanged, assaulted, and ostracized.
The recent energy bill passed by the House of Representatives has many good provisions, but also requires the Federal Trade Commission to set standards for "price gouging", and to punish offenders.
Price controls emerged in virtually all countries, including the US, during World War II and other wars, when many products were in reduced supply.
It might seem "where there is smoke there is fire", but I fully agree that prices should be allowed to rise to their equilibrium levels when supply is reduced due to natural and other catastrophes.
As Posner indicates, attempts to suppress prices of gasoline or other goods that experience a great reduction in supply will require using less efficient ways to allocate the limited supply.
The main alternative to higher prices is rationing in some form of another, such as selling on a first come first served basis, selling to persons willing to bribe the suppliers, and so forth.
All these ways are inefficient, and discourage production instead of solving the problem of reduced availability of certain goods.
Anyone who remembers the long lines and waits of an hour or more to get 10 gallons of gasoline after President Carter imposed gasoline rationing can appreciate the wasteful costs created by non-price methods of allocating a limited supply.
Another example is the rent controls that many nations imposed during and after World War II.
Most have since removed their rent controls, but certain cities like New York have kept them, although in a modified form.
Most serious studies of the effects of rent controls in NY and elsewhere show that they speed up the deterioration of housing quality, they cause an inefficient allocation of the limited housing stock, and usually they harm rather than benefit the poor and the young who more frequently have to find housing in the rental market.
Rent controls generally benefit middle class and older renters who often stay in large apartments at ridiculously low rents because it is too expensive to move to smaller apartments available on the open market.
The angry reaction of consumers to high prices caused by a major catastrophe usually is not directed at the persons or companies that profit.
For example, customers are now very upset at owners of gasoline stations as they have posted continual increases in prices due to reduced supplies of gasoline resulting from Katrina, and the rising price of oil.
But the profits of most gas station owners went down, not up, after Katrina.
They have to pay more for the gas they buy, and the higher prices cut back on the demand for their gasoline.
It ishould be pretty obvious that a rise in the price of a major input in production, such as gasoline is to retail gas stations, lowers rather than raises their profits since costs of production have risen.
On the other hand, profits have increased to operators of refineries that were not damaged by Katrina because the damage to Gulf oil refineries raised the wholesale price of gasoline, the main product of refineries.
However, the higher prices and greater profits induced undamaged refineries to squeeze greater production out of their limited capacity, and companies hastened to repair the refineries that were damaged to cash in on the high prices.
In fact, many were repaired in a remarkably short time.
If price were not allowed to rise, profits of undamaged refineries would have been reduced, but the supply of gasoline would have increased at a slower, probably much slower, rate.
Faced with cutbacks in supply, companies often voluntarily sell at lower prices to their regular and best customers to increase the goodwill of these customers, and also because there may be an implicit long-term contract with these customers to keep prices relatively stable.
They sometimes combine low prices to favored customers with rationing of the quantities they give them, while raising prices sharply to their customers who buy less, or more irregularly.
I have no problem with Posner‚Äôs two examples of legitimate use of controls over prices.
In the salvage at sea case, controls are warranted because there is not time during a rescue effort to work out what would be the appropriate sharing rule.
The attempt of the Alaskan seamen to hold up the owners for higher wages while at sea presumably broke an implicit contract that wages are fixed for the duration of the fishing trip.
But shouldn‚Äôt price controls also be used in poor countries when they experience a catastrophic shortfall in the supply of a food staple, such as rice or potatoes (the Irish potato famine is the best-known example)? The poorest families may be unable to pay the higher prices, and they could face starvation.
Still, I do not believe price controls are a good solution, for they discourage greater production and imports of the scarce food, and they encourage farmers to hoard their food crops.
Governments of these countries, and richer countries too through humanitarian aid, should instead become active in buying rice or whatever crop is involved, and reselling that to poor families at lower prices.
Or these governments should increase income transfers to the poor that would enable them to pay the high market prices.
In the modern world, famines are caused not be high prices, but by bad governmental policies.
Famines are virtually unknown in modern democratic societies.
Yet famines and large-scale starvation are still sometimes found in dictatorships, such as in China during Mao‚Äôs Great Leap Forward.
The problem there was not high prices, but Mao‚Äôs foolish policies.
He first caused farm output to fall by his misguided attempt to leap forward,.
He then forcibly took much of the limited supply of food from farmers, so that many of them starved to death, in order to feed city populations.
In addition, he sold some of the reduced crop of grains abroad for hard currencies rather than importing grains to ease the food crisis.
Scientists, engineers, and other highly skilled workers often must wait years before receiving a green card that allows them to stay permanently in the US.
Only 140,000 green cards are specifically allocated annually to mainly skilled workers.
An alternate route for highly skilled professionals, especially IT workers, has been to seek temporary H-1B visas that allow them to come for specific jobs for three years, with the possibility of one renewal.
But Congress foolishly cut the annual quota under that program in 2003 from almost 200,000 workers to well under 100,000.
The small quota of just 65,000 persons for the current fiscal year that began October 1 is already exhausted!.
The right approach is to go in the exact opposite direction: to greatly increase the number of entry permits to highly skilled professionals, and eliminate the H-1B program, so that all such visas became permanent.
Skilled immigrant workers like engineers and scientists are in fields that are not attracting many Americans.
They also work in IT industries, such as computers and biotech, which have become the backbone of the well-performing American economy.
Over one-quarter of the entrepreneurs and higher--evel employees in Silicon Valley were born overseas.
These immigrants create jobs and opportunities for native-born Americans of all types and levels of skills.
Since they earn more than average, highly skilled professional immigrants contribute disproportionately to tax revenue.
They are also considerably younger than average, so they are net contributors to social security revenue.
In addition, they and their children have low crime rates and make few demands on the public purse.
They have low levels of unemployment, seldom go on welfare, generally have above average health, have relatively small families, and their children do well at school and cause few disciplinary problems.
To me it seems like a win-win situation for the US to admit annually a million or more skilled professionals with permanent green cards that allow them eventually to become American citizens.
Permanent rather than temporary admissions of the H-1B type have many advantages to the US as well as to the foreign professionals.
With permanent admission, these professionals would make a much greater commitment to becoming part of American culture rather than forming separate enclaves in the expectation they are here only temporarily.
They would also be more concerned with advancing in the American economy rather than with the skills and knowledge they could bring back to India, China, or wherever else they came from.
In particular, they would become less concerned with absconding with the intellectual property of American companies, property that could help them advance in their countries of origin, perhaps through starting their own companies.
Basically, I am proposing that the H-1B program and the explicit admission of foreign workers be folded into a much larger employment-based green card program for foreign workers.
With the emphasis on skilled workers, the annual quota should be multiplied many times from present limits.
Unlike the present admission program, there should be no upper bound on the numbers from any single country.
Such upper bounds, either in absolute numbers or as percentages, place large countries like India and China with many highly qualified professionals at a considerable and unfair disadvantage.
To be sure, the annual admission of a million or more highly skilled workers, such as engineers and scientists, would lower the earnings of American workers they compete against.
The effect on earnings from this greater competition would discourage some Americans from becoming engineers or other professionals.
The opposition from competing American workers is probably the main reason for the sharp restrictions on the number admitted.
But doesn't the US benefit if, for example, India spends a lot on its highly esteemed Institutes of Technology to train many scientists and engineers who leave to work in America?.
Many of the sending countries protest against this emigration by calling it a "brain drain".
Yet migration of workers, like free trade in goods, is not a zero sum game, but one with a positive sum that usually, although not always, benefits both the sending country and the receiving country.
In the case of migration of highly skilled workers to the US, I believe that it is a winning situation both for the US and for the nations that trained them because these emigrants send back remittances, and some of them return to start businesses based on the experiences they gained in the US.
If America does not accept greatly increased numbers of highly skilled professionals, they might go elsewhere-Canada and Australia, to take two examples, are actively recruiting IT professionals.
 Or they will remain at home and compete against the US through the outsourcing of highly skilled engineering, research, and other such activities.
The growth of outsourcing has created an entirely new case for more generous admissions of skilled immigrants.
Since earnings are much higher in the US, many of these workers would still prefer to come here or to other rich countries, but if they cannot, they can now compete more effectively than in the past through outsourcing and similar forms of international trade in services.
The US would be much better off by having such skilled workers become residents and citizens, and in this way contribute to American productivity, culture, tax revenues, and education than by having them compete from their origin nations.
I do, however, advocate being careful about admitting students and skilled workers from countries that have produced many terrorists, such as Saudi Arabia and Pakistan.
My attitude may be dismissed as religious "profiling", but intelligent and fact-based profiling is essential in the war against terror.
Other countries too should liberalize their policies toward immigration of skilled workers.
I particularly think of Japan and Germany that have rapidly aging and soon to be declining populations that are not sympathetic (especially Japan) to absorbing many immigrants.
But America still has a major advantage in attracting skilled workers since this is the preferred destination of the vast majority of them.
Why not take advantage of the preference to come here rather than forcing highly desirable immigrants to look elsewhere?.
My first preference is to admit many immigrants through a sale of the right to immigrate (see the discussion in our blog entry of February 21, 2005).
Since skilled immigrants would tend to bid the most, that policy too would favor skilled immigrants.
 But in this discussion I have set aside my preference for a market in entry rights in order to concentrate on the importance of getting more highly skilled immigrants, with or without charging for admission.
Let me try to respond to some of the good comments, and clarify my position on others.
I tried to be clear that I would prefer the H-1B program be folded into a program that allows many more skilled immigrants to enter permanently.
I do not believe workers under H-1B program are "exploited"-they do quite well economically- but they would have more commitment to this country if they were allowed in permanently.
Whatever are all the forces that determine earnings, immigration of many skilled workers will lower the wages of native-born skilled workers.
There is no way around this fundamental proposition.
Whether such immigration lowers these wages by a lot, however, does depend on the degree of substitutability of different classes of workers, how many fewer Americans train for these skilled jobs, and other factors.
The other side of the story is that a larger number of skilled immigrants tend to raise, not lower, the wages of unskilled American workers.
It should have been clearer that I am not advocating eliminating unskilled immigrants, or even reducing the number of legal unskilled immigrants.
I believe that many of them make important contributions to this country either directly or through their children and grandchildren.
Perhaps even their numbers should increase-I am very pro-immigration.
But I do believe that if for various reasons we are limited to taking a certain number of immigrants, then strong preference should be given to skilled immigrants for the reasons I cited, and for reasons given in several comments.
The story is told that the Premier of China was approached by one of his staff during the mid 1980‚Äôs who asked whether China should allow so many young persons to study abroad since they would not come back.
His answer supposedly was China does not deserve to get them back if the environment cannot be made attractive enough for them to return.
This is my view on the effects of so-called brain drains.
Skilled workers do not return to Africa because economic and other conditions there are so dismal.
As soon as China began to free its economy, and a little bit other freedoms, a much larger fraction of their students abroad decided to return.
That is also the experience of South Korea, Taiwan, and many other countries.
But even without a large number of returnees, countries benefit on the whole from sending their students and skilled workers abroad.
It is not only the remittances, but also the knowledge gained by those remaining from interactions with relatives and friends working and studying in more advanced countries.
Moreover, greater pressure develops in a country to reform in order to attract more of their students and others back from abroad.
All these reasons might explain why studies show that countries that send more students abroad experience more rapid rates of economic growth.
Some worried about immigrants bringing in diseases in this interconnected world with possible pandemics.
I agree they have to be cleared medically, but that is no more a problem for immigrants than persons who enter the US on tourist visas, or Americans who return abroad after visiting countries where the disease burden is high.
And certainly we can control the health of skilled immigrants better than the health of the mainly unskilled workers who enter the country illegally.
Although I am a little late, I would like to respond to a few comments on my discussion of price gouging.
Judge Posner's and my discussion of our new topic on childcare and paid leaves follows after this response.
Two of the comments questioned my assertion that President Carter introduced price controls on gasoline that produced long lines.
I am right, as shown by the following entry from Wikepedia on the 1979 energy crisis: "In the United States, the Carter administration instituted price controls.
This resulted in long lines appearing at the gas stations as they had six years earlier.
As the average vehicle of the time consumed between 2-3 liters of gas an hour while idling, it was estimated at the time that Americans wasted up to 150,000 barrels of oil per day idling their engines in the lines at gas stations.".
To be sure, Nixon introduced various inefficient controls over energy prices that Carter began to dismantle.
However, Carter introduced controls over gasoline prices that produced I believe longer lines at gasoline stations than those under Nixon.
Of course, I agree that Nixon had terrible policies on energy prices, especially his misguided efforts at price controls over oil, natural gas, and some of their products.
Although search is required to discover prices at different gasoline stations, in any major city or suburban area, search costs are small relative to the gain from sizeable differences in gasoline prices.
This is why the retail gasoline market is on the whole very competitive, as indicated by the strong central gasoline price tendencies in major cities and other extensive markets.
In such competitive markets with rather constant costs per unit of output, the effect of a rise in input prices on retail prices is largely independent of the elasticity of demand for the retail good.
Unfortunately, many Indians, Chinese, and others in poor countries live on the equivalent of less than a few dollars a day, and many of these suffer from malnutrition.
But this has nothing to do with price gouging during crises since most of these persons live in rural areas and work on farms.
It is the result of their very low productivity.
As India and China have progressed rapidly during the past decade and half, the fraction of their populations living at such low levels has declined dramatically, and so has the degree of malnutrition.
Gasoline prices have returned close to pre-Katrina levels because most of the damaged refineries have been repaired, and the undamaged ones have increased their production.
Both effects are in part responses to the (temporary) high gas prices.
So my conclusion is that these high prices served a very useful purpose in increasing gasoline supplies more quickly that would have been the case if price controls on gasoline had been introduced again.
Germany and the United States, among many other countries, have been criticized for not having the extensive system of benefits to parents who have children found throughout Scandinavia and some other countries.
For example, the Swedish government not only heavily subsidizes day care activities for young children with working mothers, but also allows up to eighteen months of paid leave to care for a newborn child.
These benefits are open to both mothers and fathers, but mothers take practically all leaves.
Benefits almost fully compensate for the loss in earnings during the first 12 months of leave, while they offset more than half of earnings during the next 6 months of leave.
Also companies have to take their employees back at comparable jobs when they decide to return to work from a child leave.
The many advocates of a Swedish-type childcare system believe it permits mothers of young children to work while guaranteeing that their children have adequate childcare at government-run facilities.
At the same time, it allows mothers to care for their young children without losing their jobs.
In addition, these subsidies tend to encourage families to have more children since they reduce the cost of having and raising children.
Despite these claims, I believe it would be a mistake for the US, Germany, or other countries to emulate the Swedish approach.
For starters, middle class and rich families can pay for their own childcare services for young children, such as preschool programs, whether or not the mothers are working.
In fact, the majority of such families in the United States do send their young children to day care programs.
It is much more efficient to have better off families buy childcare services in a private competitive market than to spend tax revenue on preschool government-run programs for the children of these families.
The Swedish childcare system was insightfully criticized along these lines in a controversial but I believe correct analysis by my late colleague Sherwin Rosen (see "Public Employment, Taxes and the Welfare State in Sweden", NBER Working Papers 5003, 1995).
It could make sense to subsidize the preschool activities of children of poor families since these children may well receive inadequate care without such subsidies.
The US takes this approach by only subsidizing preschool care of low-income families.
These subsides appropriately take the form of a voucher system rather than government-run pre-school programs.
Poor families are in essence given vouchers each month that they can spend on any approved private day care program for young children.
The market is highly competitive and I believe works well, although there are few careful evaluations of this system.
Still, I believe it provides an example of how a voucher system might work for older children in school.
The case is also weak for following Sweden by providing all women who work with generous and lengthy government-financed paid leaves.
The US does not have this system, yet many working women leave their jobs at least temporarily, or work part time, in order to care for their children.
The vast majority of parents are very concerned about the wellbeing of their children, and give that a lot of weight when deciding whether to care for them rather than using preschool programs and other outside help.
Government ‚Äìfinanced payments to working mothers who take a leave of absence to care for their young children subsidizes women who work compared to women who decide to stay home fulltime to care for children and engage in other activities.
It is still controversial whether there is a significant benefit to children from having mothers who stay home to care for them instead of having mothers who work, and care for their children (perhaps more intensely) only before and after work and on weekends.
On the whole, I believe that work decisions are best left to parents without government subsidies or other government involvement.
Generous government childcare and work benefits for families with young children are advocated sometimes because they promote larger families.
 European and some Asian countries are particularly receptive to this argument since their birth rates are so low that their populations would begin to decline soon unless births increased a lot, or they accepted large numbers of immigrants.
Yet while the Swedish total fertility rate is quite a bit above that of Germany, Italy, and some other European nations, it is still too low to prevent its population from declining in the near future, despite the world's most generous system of work and child care benefits for families with young children.
This may be because the Swedish-type system promotes larger families in an indirect and inefficient manner.
The most direct and best way to encourage births, if that is the goal, is to provide monthly allowances to families that have an additional child.
Subsidizing births directly encourages larger families without mainly targeting women who work, or women who value childcare services a lot.
Moreover, since the vast majority of families even in Europe have at least one child without government subsidies, an efficient family allowance program should concentrate subsidies on the marginal fertility decision; that is, on second, third, or higher order births that may not happen without subsidies.
France has an extensive and complicated system of direct allowances mainly to families that have more than one child.
The best study of the effects of this program (see Laroque, Guy & Salani√©, Bernard, 2005, "Does Fertility Respond to Financial Incentives?" CEPR Discussion Papers, 5007) shows that it has had a significant effect in raising French birth rate to among the highest in Western Europe, although other factors are also important.
However, the system is expensive, and the French total fertility rate is still considerably below its replacement level.
The US does not apparently need any stimulation to family size since its total fertility rate is the highest of any developed country, and it is even above that of many much poorer countries, like China or South Korea.
The case for general subsidies to childcare and for work leaves to employees with young children is also weak.
So I believe that present American policy in these areas is much better than the Swedish approach, and does not need drastic changes.
I applaud the granting of the Nobel Peace Prize to Muhammad Yunus and the Grameen Bank.
Sure, reducing poverty has at most an indirect connection with peace by encouraging democracy.
Still, the Peace Nobel prize has often been so political- it is different from other Nobel Prizes since the Peace Prize is awarded by the Norwegian Parliament- and frequently of such dubious merit, that it is a welcome change to have the Prize given to someone who has really helped the very poor of the world.
Yet, all economists who have studied microfinance agree that it will never be more than a minor factor in ending poverty in any country.
Economic growth requires secure property rights, encouragement of private enterprise, openness to international trade, stimulation of education, limited and sensible regulations, and reasonably honest government.
Microfinance makes only a small direct contribution to any of these variables.
However, microfinance does accomplish something useful, and that is how it should be evaluated.
So far microfinance has been mainly oriented toward women, although itthat is not necessary.
It started in the primarily Muslim rural areas of Bangladesh, where women had great difficult borrowing money in any way to earn income as tiny scale entrepreneurs.
Study of several of these programs suggest that in fact payback rates have been high since borrowers have been subject to great social pressure to repay, they have few alternative ways to borrow, and because of other factors.
These studies also suggest that women who borrow gain bargaining power within their families.
This shows up as an increase in the education of daughters and also sons, greater spending on medicines, and on women's assets, like gold, in families that have women who borrowed under one of these programs.
These programs are usually quite flexible, and sometimes approach the equity type loans that Posner advocates.
If someone is having trouble repaying debt due to no fault of her (or his) own, microfinance lenders, as well as other lenders in these communities, often wait until times get better, instead of demanding all payments be made on time.
In effect, microfinance often work out to be loans with returns that are quite sensitive to how well borrowers do.
Microfinance has spread to rural parts of non-Muslim countries, and these loans too are primarily given to women.
Evaluations of the effects of loans in non-Muslim countries also show high repayment rates, and that female borrowers repay at higher rates than, and generally outperform, male borrowers.
So loans in other countries appear to have similar effects as in Muslim countries like Bangladesh.
I do not believe there is much of a puzzle about why commercial institutions have not made such micro loans.
For one thing, enforcement of repayment by any particular borrower from the group of all borrowers in a local area was originated by the Grameen Bank, and would not be easily copied by for-profit banks and moneylenders.
But even if commercial lenders could have the same high repayment rates, these loans have not typically earned the rates of return required by commercial lenders in poor countries.
The Grameen Bank and other groups active in making micro loans have had some financing from NGO's that do not seek to make commercial returns on their spending.
So my belief is that despite the seemingly "high" interest rates on these loans, they have earned returns, adjusted for servicing, risk, and other costs, that are below market interest rates in their respective countries,.
If private groups want to make gifts to rural women in poor countries, making them through micro loans is a much better way than many alternatives.
 Loans at considerable interest rates aid donors select among a huge number of persons who believe they deserve help.
For by requiring recipients to engage in productive activities that yield enough returns to pay interest and repay principal, micro loans in effect choose to help those with ideas and a willingness to work hard.
What is a better way to choose among too many people who are really poor? In my judgment, it is always better as far as possible to reward people who try to help themselves.
The focus on women may be a good starting point in many countries since they have entrepreneurial ideas, and yet often have great difficulty in borrowing commercially, or even from their families.
Still, one risk here is that the apparent borrower is a woman, but the real borrower is her husband, brother, or father, and she is simply a front for them.
Moreover, many men in poor rural areas also have great difficulty getting access to funds, so these programs should include many more male borrowers as they grow in scope.
Individuals like Pierre Omidyar, one of the founders of eBay, has made a  $100 million contribution to Tufts University for that university to invest in profit-making microfinance programs.
I share his apparent belief in the principle that competition among for-profit firms is the best way to organize and allocate resources in an economy.
It may be possible to get a fully for-profit sector that has large resources, and makes the small micro loans pioneered by the Grameen Bank.
I hope so, but the many for-profit moneylenders and banks in poor countries in the past did not manage to make such small loans at rates that were both profitable and appealing to borrowers.
So I am not convinced that his vision and that of some other American entrepreneurs will be successful.
But their vision of harnessing incentives from the for-profit sector is the right way to try to improve microfinance.
Posner makes as good a case as can be made for worrying a lot about overpopulation, but I do not believe the case is good enough.
I will argue that at this time, in the United States and most other parts of the world, greater population has greater benefits than costs.
I will to some extent be reiterating arguments I made in my blog posting on October 3, 2005.
In considering the effects of greater population it is important to distinguish clearly between more rapid population growth and larger population levels.
I start first with an evaluation of population growth rates.
With the present system of financing social security and medical care of the elderly, faster population growth helps since it increases the number of working individuals relative to the number of retired persons.
For taxes on workers provide the revenue to finance the spending and care of retirees.
So with greater numbers of younger person relative to older persons, tax revenues would rise relative to payouts to the elderly.
To be sure, I have argued in previous blog postings for a different system of financing income and health care to the elderly, but until we get these reforms, additional younger persons help reduce the burden of the elderly.
Although the present system has clear flaws, it is not a ponzi scheme in the sense that it could continue for many, many generations if there are enough younger persons with the incomes to be taxed.
Younger persons also produce a disproportionate share of the new ideas and products, whether in science, business, or the arts.
Declines in their numbers, absolutely and even relatively, lead to more stagnating societies.
These innovations have been good for economies and culture, unless one believes that the typical person in the world was better off 250 years ago.
Population grows faster in a country mainly if either fertility is higher or more people immigrate into the country.
Both contribute to an increase in the number of younger persons, although the fertility effects on the number of working individuals are delayed.
Immigration has an immediate effects since most immigrants are young and of working ages, but there is opposition in most countries to large numbers of immigrants.
Higher fertility will tend to negatively affect how much parents and societies invest in younger persons because the total cost of these investments become greater where there are more children to invest in.
This is a serious consideration for many African countries, or Asian countries like Bangladesh, with very high birth rates, but is much less important in Europe or Japan  or China where birth rates are low.
Even in the United States the typical family has only a little less than two children, so the trade off with investment per child is not a big factor here either.
Although, of course, faster population growth will lead to larger populations, population level effects differ from these population growth effects.
I believe there are two fundamental positive aspects of larger populations.
The greater the population, the larger the market for new products, such as medical drugs, iPods and other high tech innovations, and for still other new products that depend on larger markets.
This has been convincingly demonstrated in studies of pharmaceutical innovations-for example, the larger the number of elderly persons, the more new drugs developed to help diseases of the elderly (see e.g., Acemoglou and Linn, ‚ÄúMarket size in Innovations: Theory and Evidence From the Pharmaceutical Industry‚Äù, Quarterly Journal of Economics, August, 2004.).
In addition, the larger is the level of population, the greater the scope for the division of labor, either within a country, or worldwide when considering world population levels.
It might seem that with 6 billion persons on the earth, there is more than enough population for the finest degree of specialization and division of labor.
However, the growth of global trade has made the gains from increasing degrees of specialization and trade much greater than in the past.
Outsourcing and the rapid growth of China and India are just examples of this development.
The advantages of greater population are more questionable for poor dense populated countries with high birth rates.
Bangladesh, Pakistan, and some African nations fit this description.
Yet, I would not overemphasize this point since India, which is a rather densely populated country with only limited high quality land and other natural resources, showed that it could grow rapidly once it reformed economic policies.
So I am doubtful whether India's large and rapidly growing population had in the past hindered its growth in per capita incomes or improvements in health of the average Indian family.
To be sure, the main focus nowadays of the opponents of greater population is the effects on the environment, both within nations, and globally through greenhouse warming and other forms of global pollution.
It is interesting how the arguments of Malthusians and neo-Malthusians have shifted over time as each of their predictions bit the dust.
Yet while these falsified predictions makes one alert to the dubious assumptions of many Malthusian-like arguments, it does not mean there is no reason to be concerned about harmful environmental effects.
Clearly, with per capita income, technologies, and pricing held fixed, greater population would lead to increased congestion and emission of more harmful pollutants.
But there is no reason to believe that these variables will be held fixed.
Per capita income will be growing, and given my arguments above, perhaps even faster with larger populations.
Then the so-called Kuznets environmental curve will kick in.
This curve summarizes a well-documented empirical relation that as a country's income begins to grow, at first its environment gets worse.
Then, however, the environment gets better as the country spends more on reducing pollutants and has better technologies to do this.
My argument above also suggests that technologies to control pollution are likely to be rising in population, country or worldwide, because the market for these technologies from both the private sector and from governments would expand.
The error made in many of the scariest environmental scenarios is the implicit assumption that technologies are held fixed as population and other variables of environmental concern increase.
In fact, technologies progress rapidly in the modern world, and more rapidly as population is larger or per capita incomes are larger.
So while I am not claiming to have disposed of the many legitimate environmental concerns of greater population, I do believe that they are considerably exaggerated by neglecting the Kuznets curve, and the effects of exogenous and induced technological advances.
For a long time I have found the practice of polygamy intriguing, and have wondered why opposition to this form of marriage is so strong in the United States and most of the world ‚Äìsee my A Treatise on the Family, 1981,1993, Harvard University Press.
I have been reflecting on this subject again as a result of the arrest several months ago of a fundamentalist Mormon leader in Utah who was charged with practicing polygamy, among other things.
The Mormon Church since the 1890's had suspended the practice of polygamy under pressure from the United States Government.
The act of having more than one spouse is now a felony in Utah, punishable by up to 5 years in prison, although authorities usually do not go after polygamists.
While the ferocious opposition to polygamy seemed strange even in the 1970's when I first wrote about this practice, it is much stranger now in light of developments during the past couple of decades.
These developments include a successful movement to legalize contracts between gays that allow them to live as married couples, even though there is ongoing emotional debate about whether such couples can legally be considered "married".
Gay couples can also adopt children.
They can legally have their "own" children too through using male sperm to impregnate one partner of a lesbian couple, or through hiring women to become pregnant from the sperm of one member of a male homosexual relation.
Men and women can be "serial" polygamists in the sense of marrying several times over their lifetimes after divorcing their prior spouses.
Married women and men can have boy friends and girl friends without any legal difficulties, and have children with persons other than their spouses.
I have no problem at all with serial polygamy, with allowing gays to have contracts that are equivalent to being married, or to allowing gay couples to be called married.
I have much more difficulty with children being raised by gay couples since that form of parenting is a venture into the unknown, but maybe that too is ok.
 My intent here is not to comment on these practices, but to ask why then does the strenuous opposition to polygamy continue?.
Although polygamy encompasses both polygyny, where a man has several wives, and polyandry, where a woman has several husbands, polygyny has been far more common in human (and other) societies.
This explains why I concentrate on polygyny, although my arguments apply also to polyandry.
The most frequently encountered argument against polygyny is the claim that it exploits women, and is a continuation of the traditional subjection of women to men.
Women were indeed exploited in many monogamous and polygynist traditional societies, when they were frequently forced to marry men that they did not want to.
That hardly describes the situation these days in the United States, the rest of the developed world, and much of the developing world.
Women choose their partners, and refuse to marry men who they do not want to marry, regardless of their parents' feelings or the ardor of suitors.
 In this world, a woman would not have to enter into a polygamist household if she would not want to.
Would-be polygamist men would have to persuade second or third wives that it is worth it, because of their wealth, good looks, kindness, or in other ways.
 If she is willing to become an additional wife, why should laws prevent that?.
What about a first wife who suddenly finds out that her husband is planning on taking additional wives? She could divorce him, share their property, and receive child support for any children they have in virtually all states without having to prove any "fault" on his part.
Moreover, she could write a contract before marriage stipulating that he cannot take additional wives.
The contract could provide for damages In the event of a divorce due such a violation of the contract.
 Judges would surely take that into account in distributing property, custody rights over any children, and the size of child support.
Some oppose polygyny because they believe too many women would be  "swept off their feet" by smooth-talking actual or potential polygamists.
If that were a great concern, women could be required to be older before they could legally marry into polygamist households, or a "cooling off" period could be mandated before they could do that.
Yet isn't it offensively patronizing to women to believe they cannot make their own decisions about whether to enter into marriages that contain other wives? We do not offer men any special protections against the "wiles" of women, so why do women need such protection? Indeed, I believe that in marital decisions women are more thoughtful and far-sighted than men, partly because marriage has meant much more to women than to men.
The claim that polygyny is unfair to women is strange since polygyny increases the demand for women as spouses in the same way that polyandry would increase the demand for men.
If men were to take multiple wives, that increases the overall competition for women compared to a situation where each man can have at most one wife.
This argument against polygyny is like arguing that a way to increase the economic prospects of minorities is to place an upper bound on how many members of these groups a company can employ.
Of course, actual laws that try to improve the economic circumstances of minorities often in effect take the opposite form by placing lower, not upper, bounds on their employment in different companies.
That too is not sensible but I save that for another day.
Even though women as a group would gain from allowing polygyny, and men as a group would be hurt, not all members of each group would be affected in the same way.
Men who do not have much to offer women would be more likely than under monogamy to remain unmarried, at least until they become older and wealthier, or more matured.
Similarly, educated and otherwise attractive women who have a lot to offer might suffer if they have to face competition from several women who individually have less to offer, but collectively can offer as much or more.
Perhaps opposition from such groups that would be hurt by polygamy is the political economy explanation of why that form of marriage has been outlawed in most of the world.
My argument for polygamy is one of principle to bring out certain fascinating issues.
For, in fact, polygyny would be rare in modern societies even if fully allowed.
Polygyny was popular in the past when men valued having many children.
That is no longer the case, since few couples want more than three children, a number that usually can be easily attained with a single wife.
So the main motivation for polygyny has vanished with the arrival of the knowledge economy where fathers as well as mothers now want a small number of educated children rather than many ill-educated offspring.
Note that polygyny is rare even in those Muslim countries that allow it, such as Iran.
I conclude with two questions.
Why the strong opposition to polygyny if it would be so rare? If modern women are at least as capable as men in deciding whom to marry, why does polygyny continue to be dubbed a "barbarous" practice?.
There is growing concern in rich countries, especially in the United States, about the increase in consumption of fats and sugar, and the related increase in obesity.
These trends are particularly noticeable among teenagers and even younger children, who consume large quantities of fast foods and soft drinks.
Some localities, like New York City, and countries like Denmark, have proposed to either phase out or restrict sharply the use of trans fats in french fries, margarine, and other foods.
The concern goes far beyond trans fats, however, and includes proposals to restrict the sale of foods high in saturated fats, such as big Macs.
One proposal receiving some attention is to impose a tax on foods that contain high quantities of saturated fat in the hope of cutting down consumption of these foods.
The basic law of demand states that a tax on saturated fat would raise the price of fatty foods, and thereby would reduce their consumption.
A good analogy is with other "sin"taxes, such as the very heavy tax in most countries on cigarettes, or the large tax in many countries on alcoholic beverages.
These taxes have greatly raised the price of these goods and reduced their consumption.
For example, it is estimated that every 10% increase in the retail price of cigarettes due to higher taxes cuts smoking by about 4% after the first year, and by a considerable 7% after a few years.
Responses are greater in the longer run because more people decide over time not to start smoking (or drinking), and many of those who were smoking (or drinking) eventually manage to quit or cut down the amounts used.
I do not know of any estimates of the responsiveness of the consumption of bad fats to higher fat prices, but I am confident it would be reasonably large, particularly for teenagers and lower income families who have the highest rates of obesity, and are more sensitive to these prices.
I also believe it would be possible to define a fat tax that would effectively target foods that are high in saturated fat content.
Yet I would like to express some doubts about whether that would be good public policy.
First of all, public policy should not ignore the pleasure consumers get from cheeseburgers, french fries, and other high fat foods, or for that matter from soft drinks, smoking, alcoholic drinks, and other such "sins".
Good policies require that these pleasures are more than offset by strong negative public consequences.
Although the growing obesity of teenagers and of adults too during the past 25 years may be partly related to the greater consumption of fats, a stronger factor seems to be the increased time spent at sedentary activities, and a corresponding reduced time spent exercising and at other active calorie burning activities.
These sedentary activities include watching television, surfing the Internet, playing computer games, communicating on chat rooms and through instant messaging, listening to music on iPods, and other devices.
For a careful analysis of the growth in weight of teenagers that concludes that increased sedentary activities is the main culprit, see the 2006 PhD thesis by Fernando Wilson in the Economics Department of the University of Chicago.
The reduced exercise rate of teenagers is not mainly because they are too fat to have the energy to be active, but rather due to technological developments, such as the internet, computer games, iPods, television, and the like.
Put differently, lack of exercise has caused obesity (to a large extent) rather than that obesity has caused reduced exercise.
I doubt if there would be much of a call for taxes on computer games, or iPods, or use of the Internet in order to reduce obesity.
Dr.
Michael Roizen has pointed out, however, that certain types of computer games do require manual dexterity and other exercise.
Suppose, however, that increased fat consumption is the major cause of the gain in weight.
Is this enough reason to justify active public interventions? I raise this question not only because of the pleasure received from eating foods with saturated fats, but also because doubts have been raised about the connection between excess weight and medical problems like cardiovascular diseases, diabetes, cancers, and other serious diseases.
Of course, no one denies that extreme overweight is dangerous to health, such as a body-mass index (BMI) of over 45.
This would mean that a male of average height weighs over 300 pounds, and less than one % of the American male population is that heavy relative to their height.
And often an important distinction is drawn between overall weight and how much is concentrated in the belly, the later being much more hazardous to health.
A possibly more important consideration than the connection between fat consumption and weight may be that the consumption of fats crowds out diets richer in fruits and vegetables.
Diets heavy on fruits and vegetables appear to reduce the incidence of various serious diseases, such as colon cancer and heart attacks.
If such diets were to be encouraged, a more direct and powerful approach than taxing fat consumption would be to subsidize fruits and vegetables.
Yet teenagers, the group that elicits greatest concern, are likely to have weak responses to lower prices of fruits, and of vegetables like broccoli.
Even if excess weight and bad diets are very unhealthy with present medical knowledge, is it irrational for teenagers and other young persons to ignore the recommendations of nutritionists and medical associations, and to consume diets heavy in fats and gain weight? Not necessarily if they recognize the trade off between present pleasures and future harms, but which they may not recognize.
An additional and highly important consideration that is almost never mentioned is that the next 20-30 years will probably bring at least as much improvement in medical knowledge and new drugs as the past several decades did.
We now have drugs that greatly reduce the potential health hazards of high (bad) cholesterol, drugs to lower blood pressure greatly, drugs to reduce the consequences of mental depression, and many other important drugs that were unavailable a few decades ago.
The not so distant future will very likely see big advances in fighting various cancers, colon and lung cancer included, in preventing or better controlling adverse effects of diabetes, in preventing or slowing Alzheimer's disease, and in reducing still further the risks of strokes and heart attacks.
The many teenagers who are unaware of these medical trends, and are inactive, gain weight, eat few veggies, and consume much fat will still benefit from these medical advances during the next several decades.
Yet suppose medical progress slowed down, and that heavy saturated fat consumption significantly would raise the probability of contracting a major disease in the future.
Are public policy interventions then justified? A common affirmative answer relies on the fact that overweight people who get serious diseases use health resources that are partly financed by taxpayers.
This argument has some merit because of heavy taxpayer involvement in health spending.
But the major flaw is in the health payment system that would be largely corrected by providing stronger incentives to economize on health spending through encouraging health saving accounts, and requiring compulsory private catastrophic health insurance.
These important changes in the health delivery system would give individuals much greater incentive then they have at present, partly due to greater insurance company pressure, to reduce their health spending by getting into better shape, eating better diets, and in other ways.
To be sure, if the health delivery system were not greatly improved, the health spending "externality" from consuming fat would become more relevant.
I believe that aside from this externality argument about the use of taxpayers' monies, there is little reason for governments to intervene in eating decisions, with some important exceptions.
The main ones might include policies to give greater publicity to the health advantages of better diets, and policies that kept unhealthy foods and possibly soft drinks out of school cafeterias and school dispensing machines.
Perhaps a "say no" campaign against saturated fats would work, but I am dubious about its effectiveness.
Sometimes I wonder whether much of the public outcry over the gain in weight of teenagers and adults stems mainly from the revulsion that many educated people experience when seeing very fat people.
Surely, though, this should hardly be the ground for interventionist policies!.
A report to be issued this coming week by the IMF (the technical analysis was released early) shows that greater globalization during the past two decades contributed significantly to  rising inequality during this period in most developing as well as developed countries.
The media greeted this conclusion about the connection between inequality and globalization with claims that the new report is "handing critics of globalization a powerful weapon" and "The report is an unusual admission by the IMF of the downsides of globalization" (Wall Street Journal, October 10, p.9).
Yet a careful evaluation of the report's findings on income and inequality provides in most respects an optimistic assessment of the effects of globalization on developing nations.
The report analyzes what happened to incomes and inequality in over 50 countries.
It finds that essentially all these countries had large increases in per capita incomes since the early 1980's.
While the growth was positive at different income levels, including those at the very bottom, income growth was not uniform among different skills, or at different parts of the income distribution.
Incomes grew faster for the more skilled and in higher income quintiles, which implies that various measures of inequality typically increased in developing nations.
To explain these results, the IMF authors divide the effects of greater globalization into expanded world trade, greater foreign investment, and increased transfers of modern technologies.
They find that all three dimensions of globalization tended to increase per capita incomes of both developing as well as developed countries.
International trade theory implies that trade by a poorer country would increase the relative earnings of its lower skilled workers because richer countries want products from poorer countries that use relatively large quantities of unskilled workers, such as textiles.
The report's evidence quite strongly supports this building block of trade theory: greater trade alone would have lowered earnings inequality within developing countries.
However, the most powerful effect on inequality from globalization is due to transfers of modern technologies.
The evidence from developed economies has been that modern technologies, like the computer and Internet, favor more educated and other skilled workers; in economic parlance, that these technologies are skill biased.
This effect of technological progress has been used to explain the sharply rising gap in earnings between college graduates and others during the past three decades in the United States (see my discussion of inequality in the blog entries for April 23 and December 10, 2006).
Not surprisingly, the IMF's study finds that a similar skill bias applies to international technology transfers, that they raised the earnings gap between more skilled and less skilled workers in developing countries.
In other words, foreign direct investment has a skill bias too, so that its sharp growth over the past 25 years raised inequality in developing countries.
Better capital markets had a similar effect on inequality.
However, the evidence in this report indicates that the effects on inequality due to foreign investment and capital market liberalization, while not minor, were much smaller than the effects of technology transfers.
Is this greater gap between the earnings of more and less skilled workers a good or bad result of globalization? Let us accept that greater inequality is not good, other things the same, but other things are different in the IMF results on inequality.
The increased earnings gap between persons with more and less education in developing countries reflects that the earnings of more educated individuals rose faster than the earnings of the less educated.
The IMF report clearly shows that generally the poorer and less educated in developing nations also became better off in that they have more to spend on food, shelter, health, automobiles, and the other goods that they desire.
This improvement in wellbeing at the lower end of the income distribution surely should count as a benefit of globalization.
The larger earnings gap by education essentially means that the returns on investments in schooling increased.
Few critics of globalization would claim that its effects were bad if globalization significantly raised the returns to financial or physical capital owned by local investors in developing countries.
So how can one complain that globalization is bad because it raises the returns on the education of local human capital investors? Higher returns to human capital investments as well as greater returns to plant and equipment mean that the economy is more productive, which should be a welcome development to poorer as well as richer countries.
Yet intellectuals and politicians in many countries of Latin America, Africa, and even parts of Asia have heavily criticized globalization and its effects.
I believe that developing countries in which the criticisms are strongest are generally countries that have done a bad job of educating its population.
Higher returns on investments in education and other human capital are small comfort to the children of poor families who often do not have easy access to secondary schools, let alone to universities and other forms of advanced investments in human capital.
The lesson of the IMF report and other studies is that globalization is not the source of these serious problems.
Rather, the lesson is that many developing countries have to do much more to open up access to better and greater education for children coming from lower income families.
Only then would these families be able to take advantage of the higher returns to education produced by greater trade and the inflow into their economies of modern technologies and foreign capital.
Posner's examples offer strong support for the sharp limits on free speech in American universities.
Another indication is the recent petition signed by hundreds of Stanford faculty against the appointment of Donald Rumsfield to a very part-time position as a Distinguished Fellow of the Hoover Institution, a think tank that is part of Stanford (I am a Fellow of Hoover).
According to this petition, Rumsfield is not worthy of Stanford, despite his having served his country twice as Secretary of Defense, as a Congressman, and at several other important government positions.
He was also a very successful head of two companies, and he has an intellect that is far superior to many professors at top universities.
Although there are numerous exceptions in economics and political science departments, business and medical schools, and elsewhere, the majority of faculty is considerably to the left of the general population.
They are at the forefront of the politically correct movement.
This is why Larry Summers ran into the problems that led to his resignation as president of Harvard.
However, college faculties are not the only promoters of political correctness.
Many print and TV journalists, actors and movie directors, and others involved in more intellectual and creative pursuits have the same views.
Why is this so?.
I wish I had the answer; I don‚Äôt, so I will speculate about possible reasons.
In his 1950 book, Capitalism, Socialism, and Democracy, the great economist, Joseph Schumpeter, discussed exactly this question when asking why intellectuals were so opposed to capitalism during his time? His answer mainly was that businessmen do better under capitalism, whereas intellectuals believe they would have a more influential position under socialism and communism.
 In essence, Schumpeter's explanation is based on intellectuals' feeling envious of the success of others under capitalism combined with their desire to be more important.
I do believe that Schumpeter put his finger on one of the important factors behind the skepticism of intellectuals toward markets, and their continuing support of what governments do.
Neither the unsuccessful performance of the US government first in Vietnam and now in Iraq, which they so strongly condemn, nor even the colossal failures of socialism and communism during the past half century, succeeded in weakening the faith of intellectuals in governmental solutions to problems rather than private market solutions.
Since their basic hostility to capitalism is largely unabated, but they are embarrassed to openly advocate socialism and very large governments, given the history of the 20th century, intellectuals have shifted their attacks to criticisms of the way they believe private enterprise systems treat women and minorities, the environment, and various other issues.
They also promote political correctness in what one can say about causes of differences in performance among different groups, health care systems, and other issues.
I believe considerations in addition to simple jealousy and envy are behind the opposition of intellectuals to capitalism.
A belief in free markets requires confidence in the view that both sides to a trade generally gain from it, that a person's or a company's gain is not usually at the expense of those they trade with, even when everyone is motivated solely by their own selfish interests.
This is highly counter-intuitive, which is why great intellectuals like the 16th century French essayist, Marquis de Montaigne, even had a short essay with the revealing title "That the Profit of One Man is the Damage of Another ".
 It is much easier to believe that governments are more likely than private individuals and enterprises to further the general interest.
Of course, the evidence that has been accumulated since Schumpeter's book gives good marks to free market systems in promoting the interests of the poor and middle classes, including minorities.
And examples abound of corrupt and incompetent government officials who either mess things up for everyone, or promote these officials' interests.
This evidence has impressed the man and woman in the street, but intellectuals are more removed from the real world, and tend to rely on and trust ideas and intellectual arguments.
This would be my primary explanation for the questions raised by Posner about why faculty (and I add other intellectuals too) have become further to the left of their students and the general population.
In effect, intellectuals have changed their views far less than other groups in response to the evidence.
While intellectual opinions have stood rather still, the general population has moved their thinking against government solutions and toward solutions that use markets and other private transactions and relations.
Malthus and the many neo-Malthusians of modern times assume that the threat from world overpopulation would show up first in rising food prices.
The biologist Paul Ehrlich even predicted in 1968 in the book "The Population Bomb" that hundreds of millions persons in the world would be starving by the mid-1970's because of food shortages.
Of course, that absurd forecast never materialized because during the past 40 years worldwide prices for grains and most other basic foods fell relative to non-food consumer prices.
This has reversed during the past couple of years, especially in 2007, as food price inflation has greatly exceeded the price increases of other consumer prices.
Are the Malthusian fears finally being realized, or is this rise in food prices due to other forces?.
Little evidence supports the role of population growth as an important factor behind the recent spurt in food prices since the growth in world population has slowed in each subsequent decade during the past 30 years.
A more significant force behind the rise in food prices is the rapid growth in the per capita incomes of developing countries, especially China and India, which has raised world demand for proteins found in grains, dairy, and meat.
Subsidies to corn and other crops to produce biofuels have also reallocated substantial acreage away from food production, and toward the production of substitutes for oil and other fossil fuels.
Ethanol production will consume almost 30 percent of corn production in the United States next year, which mainly explains the rapid rise in world corn prices.
In addition, droughts and animal disease in major food producers like Australia and China contributed also to recent food price increases.
Many countries were panicked by the sharp rise in food prices during the past couple of years into imposing price controls on basic foods, export restrictions on food production, subsidies to food imports, and various other measures.
This is reminiscent of Richard Nixon's 1973 ban on the export of soybeans from the United States because of rising soybean and other food prices.
Russia, faced with parliamentary elections in December, has imposed export duties on some grains, while Putin pressured major food retailers to freeze prices on various foods until the election.
The Moroccan government forced bakers there to hold the price of bread steady during the holy month of Ramadan.
The European Union has suspended, unfortunately not rescinded, its rules that prevent farmers from planting cereals on a specified fraction of their land.
Many other countries are also considering controls, subsidies, and regulations to prevent food prices from rising so rapidly.
Most of these policies are counterproductive because they discourage rather than encourage food production.
This is especially true of price controls since farmers will grow less of the foods that have artificially low price ceilings.
For example, if price controls were placed on wheat, farmers will shift some land from wheat to other products whose prices are allowed to rise faster.
Subsides to food production generally lead to greater supplies of food, but at the expense of distorting the allocation of resources between foods and other goods that consumers want.
On the other hand, removing tariffs on food imports, removing subsidies on food exports, and easing restrictions on how farmers can allocate their land among different uses do contribute to greater efficiency in worldwide food production and consumption.
Food prices declined relative to other prices during the past 40 years, and in fact for most of the 20th century, because of remarkable advances in food production technologies.
These include the development of better fertilizers, new crop rotation methods, control of diseases to plants and animals, better breeding techniques, genetic modifications of crops, and other innovations.
There is little reason to expect any slowdown in the rate of innovation during the next several decades, especially if governments reduce their restrictions on genetically modified crops, and if farmers are allowed to respond freely to market prices and other signals.
Rapid increases in the cost of foods hurt consumers in poorer countries more than those in richer countries because households in poorer countries spend a much bigger fraction of their incomes on food.
Food accounts for about 10 percent of total consumer sending in the United States and other rich countries compared to over 60 per cent in very poor countries like Afghanistan, Nigeria, and Bangladesh.
This means that say a thirty percent rise in food prices over a 5 year period, with other prices and money incomes held fixed, would reduce the standard of living in rich nations only by about 3 per cent, but it would lower living standards in poor nations by 21 per cent.
The nutrition of Afghanis and consumers in other poor countries who are already close to the minimal subsistence margin would be severely affected.
Similarly, poorer consumers within a country spend larger fractions of their budgets on food than do rich consumers.
Hence, the poor would be hurt more by rises in prices of basic foods.
This is a main reason why governments are so sensitive to price increases of grains and other stables of the poor.
If they forget, political leaders would be reminded of the 1977 Egyptian riots after that government raised bread prices, or the Mexican unrest at the beginning of this year when the price of the flat corn bread used to make tortilla, a staple of the diets of poorer Mexican households, rose by several hundred percent.
My conclusion is that putting aside two major uncertainties, the Malthusian fears about rising food prices will not materialize.
Food production will adapt to the growing demands from developing countries, and food prices in the future should continue their downward trend of the past century.
One uncertainty that could upset this optimistic forecast relates to global warming, for food prices might rise steeply if global warming had sizable negative effects on the worldwide productivity of agricultural land.
The second concerns biofuels, since food prices would also increase if sizable amounts of additional acreage continue to be diverted to production of ethanol and other biofuels in the attempt to cut down the use of fossil fuels.
The recent two-day strike by the United Automobile Workers (UAW) against General Motors (GM) illustrates clearly the steep decline of the importance of unions in the United States economy.
Once perhaps the most powerful union in America, UAW membership among the big three auto companies has fallen by 40 per cent since the last national contract in 2003, and by much more since the 1980's.
This union represented about one quarter of a million workers at GM as recently as 1994, but its active membership there has shrunk to under 75,000.
As a result of this latest contract, GM will unload its present and future health care liabilities into a trust fund run by the union.
Apparently, GM reduced its liabilities for health care by over $15 billions, and eliminated the uncertainty over its future liabilities toward the medical care of its active and retired employees.
In return GM committed to keeping a number of plants operating in North America, and made a few other concessions.
Perhaps I do not appreciate some subtleties of the contract, but it seems to me GM, once known as "Generous" Motors for its softness in dealing with the UAW (it provided, for example, health benefits without any deductibles), won the confrontation, and came out in better financial shape.
The decline in power of the UAW mirrors more generally the steep fall in American unions.
The fraction of workers that are union members peaked in the United States at about 35 per cent in the early 1950's, and declined since then to only 7 1/2 per cent of the non-governmental labor force.
The only bright spot for unions is its strength among government employees, fueled by considerable relaxation of laws outlawing strikes by government employees.
All developed countries have has some decline in union strength, but generally unions still cover much larger fractions of the labor forces in these countries.
Some of the factors helping to erode union strength are straightforward.
The decline in manufacturing has been important since union power has traditionally been strongest in large industrial companies, such as in the steel, aluminum, and auto industries.
Globalization has increased the competition from production located outside the control of the unions in any particular country, including production by employees abroad of the same company.
Government provisions of unemployment, retirement, and health benefits, and various regulatory controls on layoffs have substituted for similar services provided by unions in the past.
Yet these considerations do not seem to be the full story since globalization, the growth of the welfare state, and declines of manufacturing were at work also in other countries, such as Germany and Sweden, and they had much smaller falls in unionism.
 Presumably, the difference is that laws and attitudes toward unions are much less favorable in the US than in many other nations.
Not that long ago, there was strong support for unions in American academia and among American intellectuals, as well as among blue-collar workers.
Scholars who emphasized the negative side of unions, such as Chicago economists Henry Simons, H.
Gregg Lewis, and Milton Friedman, were looked upon as crackpot reactionaries.
Academics and intellectuals are still generally pro-union, but with little enthusiasm.
They have seen that strong unions promote the earnings, and health and retirement benefits of their members who tend to be well paid-production workers at GM start at close to $30 per hour- without doing anything for workers who earn much less.
As a result, no current union leader has the prestige, name recognition, or media attention that Walter Reuther, John L.
Lewis, and Jimmy Hoffa did several decades ago.
Unions could have an important place in a competitive market economy, but their organization would look different than that of present day industrial and craft unions.
Men and women working for large, impersonal corporations may prefer to bargain over wages, work rules, and health and retirement benefits collectively through company unions rather than individually.
In particular, workers who have spent many years with the same company may find a union helpful in protecting against management that tries to take advantage of the difficulties older workers face finding good jobs.
Other workers in the same industry may elect to not have a union and prefer to bargain individually for wages and benefits.
Companies with unions of their employees would compete for profits and employees against companies with other unions, and also against non-unionized companies.
This type of union structure is called "competitive unionism".
Actual unions in most countries, however, are not company unions, but organize workers in different companies, often in the same industry, into one union, as with the UAW, or the United Steelworkers of America.
By organizing across companies in the same industry, unions hope to exercise greater economic power since they can bargain for similar benefits in competing companies, and can call industry-wide work stoppages.
These unions, in effect, try to get monopoly power in labor markets that enable them to boost their wages and other benefits above competitive levels.
The Clayton Act of 1914 generally exempted trade union negotiations from anti-trust laws, which enable unions to openly seek what amounts to monopoly gains.
In the past I opposed this exemption as making no economic sense because it allowed a minority of unionized workers to raise their benefits at the expense of consumers and other workers.
But with the steep decline of unionism, it no longer matters much, at least in the US and UK, whether unions are exempt or not from the anti-trust laws that apply to companies.
Union attempts at monopoly power cannot be important (outside the government sector) in economies where under 10 per cent of non-governmental employees are unionized, and where companies, and indirectly workers, must compete on world markets.
The cost in litigation and regulatory burden of applying anti-trust laws to unions would exceed any gain from eliminating the union exemption from anti-trust actions.
I agree with Posner that third party liability is desirable in some cases, but that class is narrow.
One appropriate case is where a firm makes a device whose only purpose is to steal satellite signals.
The firm should be held liable when one of its devices is purchased and used for that illegal, and only, purpose.
In addition to the obvious advantages of discouraging the production of goods that have no or few legitimate purposes, there are gains from holding a manufacturer liable rather than having to find and sue the many users of his good.
A little more complicated case is whether parents should be held responsible for the harmful acts of their teenage children.
Surely, parents should be responsible for a sixteen-year old son who gets into an automobile accident while drunk at 2AM.
Parents should be able to exert enough control over their teenage children to prevent them from driving at that hour while drunk.
Less apparent is whether parents should be responsible for their son's actions if he gets into an accident while drunk at 8pm while driving a friend's car without his own parents knowing.
The son should surely be responsible, but even parents who exercise significant and sensible discipline over their children may not be able to prevent such accidents, although of course they can punish him afterwards.
Consider now the case mainly discussed by Posner, of liability by bars for the drunk driving accidents of their patrons after leaving a bar.
Accidents due to drunk driving are a very serious problem in many countries, and the United States in particular does not do enough to deter these accidents.
Yet I am skeptical whether holding bars, restaurants, or party-givers responsible is the right approach.
The rationale behind holding say bar owners liable is that they would then control drinking by patrons who are obviously drunk, and that this would limit the number of automobile accidents by patrons after they have left a bar.
I am dubious about this approach because of the difficulty of effectively enforcing such third-party liability.
Only a small fraction of patrons of most bars both drink heavily and then drive afterwards.
Waiters and other bar employees would have to keep track not only of how many drinks patrons have had, but also of how drunk they are, and whether they would be driving afterwards.
I do not see how many bars could ever hope to have accurate information about all three stages involved in producing drunk drivers, especially whether patrons would be driving afterwards, particularly when they do not know their patrons well.
To be sure, if they were liable, bars might have rules that no patron may have more than I or 2 drinks, which would be the limit in most states before most drinkers would fail the usual sobriety tests.
The problem with such a rule is that it does not focus on the behavior of patrons who are potential drunk drivers.
It punishes patrons who want to drink more than that and have no intention of driving while under the influence.
Moreover, such a rule is ineffective against patrons who go from bar to bar and only have one or two drinks at each one.
It is also ineffective against patrons who drink at home first and then add a few drinks at a bar or restaurant.
The same considerations apply if bars get insurance to cover these liabilities, and then raise the cost of drinking to everyone to cover the additional costs.
It could be claimed that while holding bars liable would not work perfectly, such third-party liability would cut down on the number of drunk drivers.
 It probably would, but would the effect be large, and how much costly and inefficient litigation would be stimulated against bars and others held liable who are not in any important way responsible for the drunk driving of persons who been at their establishments? Why not also hold friends liable who did not stop a drunk driver from drinking so much, or did not force him to take a taxi home? The ultimate question is whether the general and specific harms from imposing liability on bars to innocent patrons, friends, and others exceed the gain from cutting down drunk driving? I believe it does, especially because better approaches are available.
A far more effective way for states to deter drunk driving is to target drunk drivers more closely and punish them more severely.
Posner is doubtful that people who drink heavily and become a menace to others make rational decisions.
Yet Scandinavian countries have found that imposing severe punishments on drunk driving, including roadblocks to detect drunk drivers before they get into accidents, has induced heavy drinkers generally to avoid driving.
When individuals in these countries go out to party, they either designate someone in their group to drive without drinking, or they take public transportation to get home.
Such policies may not work as well in other countries, but certainly much more can be done in the United States to discourage drunk driving.
I believe that the evidence cited by Posner on the substantial decline during the past 25 years in the fraction of fatal accidents in the United States that involve drunk drivers in a significant way is in fact due to tougher policies toward drunk drivers themselves.
Still, the punishments are generally not yet tough enough.
I began thinking about third-party liability after the recent Chicago marathon race on a day that was unusually hot and humid.
About 10,000 registered runners did not show up, presumably mainly because they knew how uncomfortable and possibly dangerous running on that day would be.
The organizers added more water and medical facilities than usual in recognition of the toll running under such conditions would take.
After about some 17 miles they also stopped the race for about 10,000 of the slowest runners.
Nevertheless, several hundred runners had to be hospitalized, and many others became severely dehydrated.
I am confident that some of those who became ill will bring lawsuits against the organizers for allowing the race to proceed, and/or for not supplying enough water and medical help.
This would be a kind of third party liability by the organizers for the harm done by runners to themselves.
Surely, however, the runners could know as easily as organizers what the weather would be, and know better than the organizers about their physical condition, their tendency to dehydrate, and other relevant considerations.
For these reasons, individuals themselves should be responsible for whether it is wise to run under these conditions.
Third-party liability in this case would be a mistake, and in the litigation atmosphere in the US, it is likely that some of the lawsuits could result in judgments against the marathon organizers or sponsors.
The Federal government of the United States has seldom taken an equity interest in private companies, although this has been proposed sometimes, especially as a way to get higher returns on social security assets.
However, the new financial bailout bill provides not only for the government to buy assets from banks, but that it also take an equity stake in the banks being helped.
The purpose is to protect the government from paying too much for the many difficult to value assets that are acquired.
The thinking is that if they overpay for some assets, they can make that back through a rise in the value of the stock or other equity interest that they would have.
However, the main purpose of the buyout is to increase the liquidity of the banking system and thereby reduce the banking system‚Äôs retreat from riskier investments.
Yet the government's actions regarding an equity interest seem to be based on a fear that it will be outsmarted in the prices it pays for assets that are very difficult to value because they have no market.
Whether the government will lose after the fact is not clear since it can afford to hold the assets to maturity.
Moreover, taking an equity interest is also unnecessary in order to protect taxpayers from overpaying.
Modern auction theory offers various ways to induce sellers (or buyers) of assets and other objects to "tell the truth"; that is, to bid their best estimate of an asset's worth.
In using auction to buy bank assets it would be helpful if the government did not automatically take all assets offered by banks, so that banks have to compete against each other.
Competition can also be increased by spreading the auctions out over time (I am indebted to my colleague Phil Reny for useful comments on optimal auction design).
To be sure, the seller's estimates of the worth of their assets may turn out to be wrong, so the government would bear some risk.
However, with an optimal auction mechanism design, the government need not fear grossly overpaying ex ante for the assets they acquire.
Even if the government were to lose money on this buyout, it is a bad precedent for it to take an equity interest in private companies.
Inevitably, this leads to government involvement in business decisions and corporate governance.
Experience shows that political rather than economic criteria tend to dominate in the pressures exerted by government shareholders on corporate decisions.
This is already reflected in the bailout bill since it limits compensation for executives, including "golden parachutes" for executives of the companies helped.
One can hardly have a high opinion of the executives who led such venerable institutions as Merrill Lynch and Lehman Brothers, and many other banks, into investment portfolios with such poor capacity to withstand a financial disturbance.
Still, many of these executives have lost most of their very considerable fortunes since they usually owned or had options on many shares of their companies, and these shares have plummeted in price.
It is appropriate that top executives suffer major losses when their companies collapse.
There is no good reason, however, for the government to interfere and impose limits on salaries and severance pay.
Controls over wages and salaries have never worked well, and only encourage myriad ways to get around them, including generous housing allowances, vacation homes, easy access to private planes, large pensions, and other fringe benefits.
There develops a war between the government's closing of loopholes, and the ingenuity of accountants and lawyers in finding new ones.
Governmental ownership of shares, with or without voting rights, opens up possibilities for much greater mischief than controlling executive salaries.
For example, a bank or other company may want to reduce its employment in order to regain greater profitability.
The government owners of these shares will be under pressure from congressman and senators who represent districts where employment would be affected to try to rescind or modify these cuts.
Even without government ownership, congressmen protest corporate efforts to shift various activities overseas because labor and other resources are cheaper there.
Such objections will be magnified when governments have direct equity stakes.
There are many illustrations of the bad influence on corporate governance exerted by the governments of France, Italy, Russia, and many other countries that own shares in private companies.
One current appalling example is the situation of Alitalia Airlines, where the government owns almost half the stock.
This has been a very inefficiently run airline that is hostage among others to powerful unions.
Strikes have been common, flights frequently takeoff and arrive quite late, and baggage losses are high- experienced travelers try hard to avoid using Alitalia.
Since Alitalia's command of routes into and out of Italy has market value, stronger European Airlines, such as Air France and Lufthansa, have wanted to take this airline over.
However, the Italian government has resisted these efforts and continues to finance the sizeable monthly deficits of the airline.
It fears the power of the unions who realize that many airline jobs at Alitalia will be lost if a more efficient airline takes charge.
This and other examples of harmful government interference in the running of companies where they have an equity interest provides a very good lesson for the United States.
Avoid taking any equity interest in private companies when buying assets of banks under the bailout bill, or when investing other government revenues.
Will this financial crisis mark a substantial retreat from the world's movement during the past several decades toward a competitive market system? Many journalists and others have been suggesting that this crisis will lead to much more active government involvement in the economy, and even induce a return toward government ownership of many companies in the non-financial as well as the financial sector.
In my opinion, what will happen to the worldwide support for competition and privatizations, freer trade, and market-based economies depend greatly on how the American and other major economies fare during the next year or longer.
The US and much of the rest of the world appear to be headed for, if not already in, a recession with falling GDP and rising unemployment.
It is possible that this recession will be steep and somewhat prolonged.
The extreme example of a major depression is the Great Depression of the 1930s, where real GDP declined sharply for a few years during the early 1930s, and where unemployment grew from 3 percent in 1929 to 25 percent in 1933.
Unemployment was still at the remarkably high rate of 17 percent in 1939 prior to the outbreak of World War II.
By contrast, American recessions since 1959 have been so mild that in no year did real GDP fall by much more than 1 percent, and yearly average unemployment rates peaked at about 10 percent.
This unemployment rate was approached in both 1982 and 1983 as the Fed squeezed inflationary expectations out of the system with interest rates that sometimes exceeded 20 percent.
Still, real GDP only fell a little between 1981 and 1982, and then rebounded in 1983, even though unemployment was still high in that year.
As I have said in several recent blog discussions, and in my Wall Street Journal article of October 7th, I do not expect the current crisis to develop into a major depression.
I do expect that most governments will place any worldwide recession that develops, even a severe one, in the context of the sizable world economic developments during the past 40 years not mainly in the US, but in Europe, Japan, China, and most other countries.
Even a couple of years of declines in GDP and relatively high unemployment will not overshadow the remarkable economic achievements during these decades.
These include unprecedented growth in GDP in formerly poor to very poor countries, such as Japan, South Korea, China, India, Malaysia, Chile, Spain, Portugal, and others.
Growth in mainly market-oriented developing economies swept away dire poverty from hundreds of millions of families in Asia, Europe, and South America.
This sustained growth also led hundreds of millions of others into middle class status, where they could afford to buy cars, well-equipped homes, television sets, cell phones, computers, and other goods that not long ago were considered well beyond the means of the typical family in all but a few countries.
Yet, even with a recession of the type I expect, there will be increased regulation of financial institutions.
These could include requirements of minimum levels of capital to assets for investment banks and hedge funds, government insurance of money market funds, and greater oversight of all types of financial institutions-in prior postsI have supported versions of these changes.
Although there may be other regulations and controls, I would not expect the US federal government to hold on for long to its preferred stock interest in various investment banks.
I have not supported such government equity interests, and it would be a grave mistake if the govern continued to maintain such ownership.
Indeed, the government's influence over Fannie Mae and Freddie Mac contributed in a significant way to the housing bust by encouraging these institutions to make many worthless sub prime loans, although clearly other important forces were also at work in the housing bust.
On the other hand, if I am wrong, and there is a prolonged and deep worldwide depression, not simply a recession, the retreat from capitalism and globalization could be severe, as happened during the Great Depression.
Many countries would increase their tariffs and other trade barriers to reduce the competition to domestic production from imports.
Nationalization rather than privatization will be in favor as governments take over ownership of many weak companies.
Regulation of executive salaries and other wage and price controls will become much more common.
Competition will be stifled as governments encourage companies to coordinate their pricing and other policies, and change laws to make it much easier for unions to organize workers.
These are not attractive prospects.
Few people have sympathy for the hedge fund managers and others who made hundreds of millions, and sometimes billions, of dollars during the boom years, Still, middle class and poor families would be hurt the most by unwise government policies and attacks on the foundations of a competitive economy.
Policies that frighten entrepreneurs and discourage them from accumulating private capital and investing in innovations will hurt most of us, but especially workers in various companies.
Not long after the death of Milton Friedman in the fall of 2006, the president of the University of Chicago, Robert Zimmer, formed a committee drawn from the Economics Department, the Graduate School of Business, and the Law School.
He asked the committee, which has Lars Hansen as chair and I am a member, to prepare a proposal for a large institute that would be named the Milton Friedman Institute (MFI) in honor of Friedman's long association with the University of Chicago.
The president and committee considered this far preferable to naming the institute after a rich donor, which is the common practice.The committee presented a report early in 2008 to the Council composed of some faculty members at the University of Chicago.
Apparently, not much opposition to the Institute was voiced at that Council meeting.
However, in late spring of this year a letter was sent to various members of the faculty and administration opposing the MFI.
It was signed by about 100 faculty members and was made available to the press.
This first letter was a confused combination of hostility to the economics department, hostility to market economics, objections to a few statements in the document supporting such an institute, and personal opposition to Milton Friedman, partly because of his alleged involvement in the Pinochet dictatorial Chilean government.
Over time the reasons for the opposition were more carefully articulated, and the number of faculty signing the opposition to the MFI grew to over 150.
Each succeeding letter became available to the media, and many articles began to appear in magazines and newspapers.
The latest statement of opposition mainly concentrates on whether it is appropriate to name such an Institute after Milton Friedman.
I will address that issue in my discussion here.
These comments are mainly taken from a statement I read on October 15, 2008 to a meeting of the whole faculty called by President Zimmer to discuss several issues, but especially the MFI.
I elaborate in some places because our statements were limited to three minutes.
A university names an Institute after a former professor because of 1) his contributions to the university, 2) his contributions to scholarship or science, and 3) his intellectual honesty and character.
On all three grounds I believe Milton Friedman eminently deserves having this Institute bear his name.
Let me first mention I knew him for over 50 years, first as a teacher, then as colleague and close friend.
I admired him enormously at all these different stages.
His main direct contribution to the University of Chicago was as an absolutely superb teacher, by far the best teacher I ever had.
He opened my eyes and that of other students, including Eugene Fama, James Heckman, Robert Lucas, and Lester Telser, and George Tolley, all faculty members at the University of Chicago, to how to use economic analysis to understand the real economic world.
Both in the classroom, and as a supervisor of doctoral dissertations, he was a blunt and trenchant critic of shoddy analysis, both theoretical and empirical.
I along with others took a lashing from him when he thought we did some analysis badly.
 The effectiveness of his teaching alone could merit having an Institute in his name at our university.
Many honors have recognized his enormous contributions to economic science.
Equally important is that these have endured.
A simple measure of that endurance is the large number of citations to his scientific work that still appear in the top economic journals.
Only one or two other economists of his generation share this distinctive measure of longer run impact of their scientific work.
He was perhaps the most intellectually honest person I have ever known.
To be sure, he was an active participant in public policy debates, as are many economists with very different points of view.
But in his policy papers and discussions he used the same economics as he did in his academic work.
He did not try to say things to curry political favor, and never held a position in Washington, except when he had a low level job at the Treasury department as a young economist.
He attacked and defended persons of various political persuasions, including some of his best friends, if he believed their opinions or writings had flaws.
He publicly criticized Arthur Burns, his teacher and close friend, when Arthur was chairman of the Fed, for supporting policies that Friedman considered bad economics.
That public statement put enormous strains on their friendship.
He is called a conservative, but he opposed many conservative positions, such as support for the gold standard, the military draft, and the war on drugs, and advocated many others that were picked up by liberals, such as the negative income tax, and attacks on corporate welfare through government subsidies to corporations.
One of the most persistent accusations is that he advised and collaborated with the Pinochet regime.
In Two Lucky People, Rose and Milton Friedman's autobiography, he discusses his dealings with that government.
He also includes the relevant documents so that readers can judge a lot for themselves.
He turned down two honorary degrees from Chilean universities because they were state universities under Pinochet.
He made one six-day trip to Chile in 1975 at the invitation of a private bank.
He gave two lectures on the "fragility of freedom".
He did have a brief meeting with Pinochet and wrote a letter to Pinochet afterwards urging "shock treatment" of reduced government spending and reduced growth in the money supply in order to cure the rampant inflation then afflicting Chile.
His letter contains many detailed suggestions, including a call for "generous severance allowances" for laid off government workers, and a safety net to alleviate hardship and distress among the poor.
Friedman has also been criticized for helping to train some economists who served in the Pinochet government, even though teachers cannot control what their students do.
Pinochet turned to the "Chicago boys"-economists trained at the University of Chicago- only several years after the centralized control of the economy that he favored had failed completely to lift Chile out of its doldrums.
What is interesting in this regard is that the Social Democratic governments that followed the fall of the Pinochet government and the reintroduction of democracy have continued the vast majority of policies introduced by these Chicago-trained economists.
These policies include low tariffs and a mainly free trade policy, privatized social security, and competitive private companies and universities.
As is well known, Friedman was a strong supporter of competitive market economies, but this was not defended by ideology.
 He used economic analysis to argue that this was the most effective way to raise the living standards of the world's poor.
I strongly agree with him, and so do the great majority of economists in different parts of the world.
To be sure, one can argue against this and other policy positions he took, but that is how intellectual progress is made on crucially important economic questions.
To summarize, great teacher for 30 years at the University of Chicago, outstanding researcher, and absolute intellectual honest in everything he did.
To my mind these are far more than enough for faculty, students, and alumni associated with the University of Chicago, and for others as well, to be proud to have a Milton Friedman Institute at the University of Chicago.
I will first make a couple of comments on the present situation.
It is not yet obvious that the recent steps taken by the Fed and the Treasury have been "failures".
One cannot make that determination when the $700 billion plan has not yet been tried, and the Treasury seems to be changing its mind about the approach to use.
I agree with the argument in the recent article in the Wall Street Journal by Paul Volker, the distinguished former head of the Fed, that the Fed and Treasury have enough tools to end the financial panic, and to get investment by banks started again.
To be sure, a recession is looming, but is this the biggest economic bust since the Great Depression? It is the biggest financial crisis since the 1930s, but the economic bust of the Great Depression meant a 25 percent unemployment rate for much of a decade, and sharp and sustained falls in GDP.
While I expect unemployment to increase significantly from its present 6.1 percent level, and GDP to fall for a while, maybe sharply, there is little chance the downturn will approach anywhere near the 1930s levels.
Perhaps it will be the most severe recession since then, although even that remains to be seen.
Consider what happened in Japan during the 1990s when it had a widely discussed major financial crisis that lasted for a decade.
Unlike the Great Depression, Japan's real GDP did not fall much but was mainly stagnant: the real value of its GDP was 430 billion yen in 1990, 462 billion yen in 1995, and 482 billion yen in 2000.
Nothing in this stagnating Japanese experience approached the economic devastation of the 1930s.
I believe we have learned how to avoid such a huge economic disaster, although a decade of world stagnation would be quite bad.
To come to this week's blog topic, I also have a somewhat different take than Posner on why warning signals were ignored.
The period since the early 1980s until the crisis erupted involved both rapid economic growth for most of the world, and unprecedented stability in this growth.
Inflation rates were low and fluctuations in real output, as measured by the size and duration of recessions, were modest compared to the past.
Economists and central bankers like Greenspan believed that we had learned how to keep inflation low, and also had the capacity to smooth out fluctuations in output and employment.
The main Central Bank technique was inflation targeting, and a more general set of rules, called Taylor rules, that targeted a combination of the inflation rate and deviations of real output growth from its long term trend rate.
These policies did work well for about 25 years, which created considerable confidence that they could handle future economic difficulties as well.
The second relevant development has been advances in financial instruments, such as derivatives, securitization, credit-backed swaps, and other even more esoteric instruments.
These instruments seemed to work quite well in managing, spreading and even reducing the risk of the assets held by banks and other institutions.
However, in the process they encouraged greater risk-taking ventures, as reflected by the large increase in the leverage-that is, in the ratio of assets to capital- of banks and financial institutions like Fannie Mae and Freddie Mac.
What has been insufficiently understood is that the growing use of these instruments, and the growing leverage of financial institutions, created considerable aggregate risk for the system as a whole that could not be diversified away.
This combination of growing central bank confidence in its ability to iron out various wrinkles in economic performance, and the belief that the new financial instruments would help manage and reduce risk, blinded the vast majority of economists (I include myself), bankers, and government regulators to the vulnerability of the whole system.
This vulnerability was especially important for aggregate shocks akin to a classical run on banks.
When institutions are highly leveraged, they have great difficulty coping with a massive loss of confidence in the system.
While Roubini and others who warned about weaknesses in the mortgage market and other parts of the financial system deserve credit for their foresight, experts predicted numerous disasters during the past several decades that never happened.
For example, after the huge one-day stock market collapse in October 1987, Business Week and other magazines and newspapers warned that a Great Depression might soon be coming.
I argued against that view in a column I published in Business Week the same week as the market crash (reprinted in The Economics of Life by Guity N.
Becker and myself).
These dire forecasts turned out to be completely wrong.
Similar highly negative but wrong economic forecasts were made during the internet bubble, after the Asian financial crisis of 1997-98 (on this see my post of September 21st), the aftermath of the 9/11 attack, and after other periods of economic distress.
In an atmosphere where the world economy showed great capacity to withstand difficult shocks, it is not at all surprising that some forecasts of disaster that turned out to be more correct were ignored.
In addition, one should not minimize the great economic achievements of the past 25 years in the form of rapid growth in world GDP, low world inflation, and low unemployment in most countries.
Perhaps these achievements will be overshadowed by a deep world recession, but that remains to be seen.
 If the impact of this financial crisis on the real economy is not both very severe and very prolonged, and time will answer that question, the combination of the past 21/2 decades of remarkable achievement, and the economic turbulence that followed, may still look good when placed in full historical perspective.
Oliver Williamson's influential contributions to the theory of firms were the stimulus for our discussion topic this week of the analysis of organizations.
Posner gives an excellent discussion of various factors that determine organizational structure and efficiency, such as conflicts between principles, like stockholders, and agents, like employees and managers, the ease of communicating information and knowledge from the bottom to the top of the organization, and the number of "layers" in the command structure.
I will concentrate my comments on the environment that organizations face, and especially on the degree of competition they have to deal with.
One of the most compelling observations from highly competitive environments is that many different organizational structures sometimes survive in the same industry.
For example, in the retail grocery sector, large "warehouse" types of stores exist alongside small specialized grocery stores.
Chains that own many supermarkets, such as Safeway and Whole Foods, compete against small mom and pop stores with few paid employees.
George Stigler argued many years ago in a classic article ("The Economies of Scale", reprinted in his collection of essays called The Organization of Industry) that different types of firms that survive in the competition for profits in very competitive environments must be of rather equal efficiency at producing profits.
A corollary is that if a competitive industry were trending over time toward a narrower set of organizational types, this would imply that these types must have become relatively more efficient as the economic and political environments changed over time.
The fact that small supermarkets and large warehouse markets survive the tough competitive pressure of the retail grocery market suggest that both types must be of about the same efficiency in their respective niches of the grocery sector, although the trend seems to be toward larger supermarkets.
That steel mills are much larger than textile factories suggest that economies of scale in steel production must be sufficiently larger than the scale economies in the production of textiles to overcome the larger number of command layers and other inefficiencies of a larger production scale in steel but not in textiles.
Also of relevance to understanding the efficiency of different organizational types is that very different types of firms survive in different countries, often even when they are in the same or similar industries.
For example, Japan and South Korea (occupied by Japan for about 40 years in the 20th century) have large conglomerates that are active in many different industries, such as Korea's SK company whose products range from an oil refinery to cell phones, whereas Taiwan tends toward smaller firms that are more concentrated in particular sectors (although Taiwan was also occupied by Japan).
Both the inter country and within country evidence indicate that no single organizational form is always the most profitable even in a particular sector of the economy.
Different combinations of scale economies, principle-agent problems, compensation practices, thickness of the span of control, and many other variables highlighted in the organizational literature often produce outcomes that are about equally efficient and profitable.
The outcome of strong competition is the only really decisive way to determine which are the possibly quite different but about equally efficient combinations of all these different variables.
The major difficulty in evaluating many governmental organizations is that they often do not face such strong competition and they have no simple measure of success, such as profits.
These two factors make it difficult to use Stigler's survival test.
 To take Posner's example, can the criminal catching activities of say the FBI be efficiently combined with a terrorist deterrent function? If this were a competitive industry with many different organizations and good observable measures of success, one could then look at whether such combinations compete successfully in the longer run against more specialized agencies.
Lacking either much competition or such measures of success, one has to rely in good part on the insights of analyses of these issues.
Similarly, the organization and efficiency of armies is only rarely tested against competition on the battlefield.
When so tested, losing armies often try to reorganize so that they can look more like the successful armies, although generals are often accused of reorganizing to fight the last war.
Perhaps then it is best to try to create competition among governmental agencies, such as both the CIA and FBI trying to deter terrorism, and then provide greater resources to the more successful agency.
This, however, runs into the difficulty that agencies may withhold information from each other in order to gain an advantage in such competition.
The Swiss health care system has several important properties that I (and many others) have been advocating should be incorporated into any reform of the US health care system.
One major advantage of the Swiss system is that employer-provided health care does not receive any special tax breaks, whereas the US system is built on these tax breaks.
 As a result, only a rather a small fraction of Swiss health care is obtained through employment.
Mainly, Swiss families buy health care on their own, so that, unlike in the US, their health insurance does not reduce their incentives to change jobs because job changes do not endanger their health coverage.
Unfortunately, probably due to union pressure, Congress is not planning to eliminate this tax break for employer-provided health care.
Indeed, many Congressmen want to increase the pressure on employers to provide health care to their employees.
The Swiss system includes a mandate that everyone buys a minimum amount of health care coverage.
This solves the American problem where over 40 million persons have no health care coverage.
If uninsured persons get sick-fortunately this is not frequent since they are mainly young-that raises the cost to everyone else since the uninsured typically seek treatment for any illnesses at hospital emergency rooms.
The health care reform bills in Congress do include various coverage mandates, although they are not as straightforward or as desirable as the Swiss mandates.
The Swiss system typically has much larger co-payment rates than the US does for anyone seeking medical care or buying drugs.
By shifting more of the cost to individuals and away from insurance companies, the Swiss give individuals greater incentives to economize on their health care spending since health care is more expensive to them.
On the other hand, the Swiss system does not seem to have the equivalent of health savings accounts (HSAs) that allow consumers to carry over from one year to the next any balances in their health accounts that are not spent.
These HSA accounts should become a more important part of the American system.
The Swiss do not give any special medical advantage to older persons, for they have access to the same health subsidies and same private health insurance system, as does everyone else.
The US could approach the Swiss way by making Medicare much more means tested, so that higher income older persons would pay a much larger share of the costs of their medical care than they do now.
Unfortunately, neither President Obama nor either political party is willing to tamper much with the Medicare system as presently constituted.
The Swiss system has no public insurance option, and relies on competition among private health insurance companies.
I have argued strongly against a public option (see my post on August 17th of this year), and while it appears that this option is being dropped from most Congressional bills, liberal Democrats are still lobbying to have such an option included in any reform package.
Although I do not know the details of the Swiss system, it appears to provide good health care while spending only about 11% of its GDP on health care compared to the US' 16%.
I say " appears" because previously the British and then the Canadian heath care systems were held up as models for the US to emulate until further evidence revealed that these systems had serious flaws, such as long queues for many types of treatments.
In fact, the Swiss system does have some unattractive features that should not be emulated when reforming the American system.
For one thing, the Swiss impose sharp price controls on drugs, lab tests, and other medical procedures.
To take drugs as one important example, Swiss price controls reduce prices of top selling US patented prescription drugs to about 40-50% below their American prices.
In particular, the cost of lipitor in Switzerland is about 1/3 of its American price.
In reality, what the Swiss (and other countries) do is free ride off of the incentive provided by American drug prices for pharmaceutical companies to invest the huge amounts of resources required to produce blockbuster drugs like lipitor.
Very small countries like Switzerland can get away with this free riding since their demand for drugs is so much smaller than that of the US.
However, were the US to emulate the Swiss system, and there is a call from some Congressmen for greater control over drug prices, the incentives biotech and pharmaceutical companies have to innovate would be greatly reduced.
It is precisely the greater price freedom in the US that induced many drugs companies to relocate their research labs out of Europe and into the United States.
Even though the Swiss spend a much lower fraction of their incomes on health care, their life expectancies at age 50 are about 1.5 years better than those in the US.
However, as I argued in earlier posts (see, for example, July 28 of this year), life expectancies depend on many other factors than medical care, and the United States does not look good on most of these factors, such as obesity.
More relevant comparisons are access to various tests, such as mammograms and PSA tests, and survival rates from major diseases, such as cancers and cardiovascular disease.
The US does much better than other countries, including Switzerland, on both sets of criteria.
So despite the obvious conclusion that various reforms of the American health care delivery system are desirable, Americans are getting some important advantages for their large spending on health care.
It is crucial that these advantages not be forgotten when evaluating how much better other countries health delivery systems, including the Swiss system, are than the American system, and in deciding how to improve the American system.
I sympathize with all the people who are upset by the very large bonuses, stock options, and other compensation received by heads of some financial institutions that ran their companies into the ground through bad investments.
However, I also believe it is a big mistake to have a pay czar, Kenneth Feinberg, impose sharp cuts over the salaries and other compensation of the seven financial institutions, like Citibank, that received the most government bailout money.
The Fed has made matters even worse by proposing to implement pay controls over thousands of banks as part of its regular  review of their performance.
General controls over wages have frequently been tried in different countries.
The usual motivation for wage controls is to reduce inflation by keeping labor costs, and therefore prices, from rising rapidly, although wage controls are invariably combined with general controls over prices as well.
Inflationary fears were certainly behind the wage and price controls in almost all countries during World War II, and in the US under President Nixon from 1971-1973.
These measures sometimes succeeded in suppressing inflation temporarily, but they also led to rationing of various consumer and producer goods because of weak incentive to produce or work when prices and wages are kept below their market values.
Companies can still compete for employees when higher pay cannot be offered as inducements by increasing fringe benefits to employees, such as longer vacations and subsidized lunches and other meals.
US companies began to offer free health insurance to employees during World War II as a way to get around the wartime control over wages.
 The American health care system has suffered badly since then from this artificially induced connection between employment and subsidized health care.
In some respects, the effects of controls over pay are even more harmful when they apply only to a small subset of all employees, such as the proposed sharp ceilings on management compensation at the seven companies that received the largest amount of government assistance, or the scrutiny of pay of top executives at the thousands of financial institutions under the Fed's supervision.
The most talented individuals at these firms will tend to leave because they will receive much higher compensation packages by financial and other companies that do not have their pay set in Washington.
So the financial companies that received much government assistance and other banks would lose many of their best people just when they need talented management to help put their companies under a more solid financial foundations.
Without the requisite talent, many of these companies may either go under, perhaps not a bad idea, or more likely the government will bail them out once again-not a pleasant prospect.
o prevent an exodus of whatever talent is left and to attract new talent, Feinberg and the Fed may try to differentiate between more and less able executives, and allow much higher pay for the best of them.
But can a czar or the Fed perform that task better than the forces of market competition for talent? History indicates that is highly unlikely.
These controls over pay not only will cap salaries, but they would also reduce bonuses and stock options, and prevent the executives affected to cash in options for several years.
The reasoning is that this will force executives to take a longer-term view of the risks and other decisions that they take.
One irony is that, as pointed out by Yale's Jonathan Macey in a recent Wall Street Journal op-ed piece, Congress in a 1992 Act prevented corporations from deducting as a normal business expense any salaries that exceeded $1 million.
As a result, corporations were encouraged to shift their pay to stock options, which received more favorable tax treatment.
I have not seen convincing evidence that either the level or structure of the pay of top financial executives were important causes of this worldwide financial crash.
These executives bought large quantities of mortgage-backed securities and other securitized assets because they expected this to increase the average return on their assets without taking on much additional risk through the better risk management offered by derivatives, credit default swaps, and other newer types of securities.
They turned out to be badly wrong, but so too were the many financial economists who had no sizable financial stake in these assets, but supported this approach to risk management.
The experience of other financial crashes also does not indicate that either the level or form of compensation of top financial executives were major factors in precipitating these crashes.
Thousands of banks failed during the Great Depression, as did hundreds of American savings and loans institutions during the 1980s, without heads of these institutions in either case getting particularly high pay, or pay that was mainly in the form of bonuses and stock options.
My impression is that this same conclusion applies to the Mexican bank crisis of the mid 1990s, and the Asian financial crisis at the end of the 1990s.
The generous bonuses and stock options received by financial executives may often have been unwarranted, but they are being used as a scapegoat for other more crucial factors.
Financial institutions underrated the systemic risks of the more exotic assets, and apparently so too did the Fed and other regulators of financial institutions.
In addition, large financial institutions may have recognized that they were "too big to fail", and that they would be rescued by taxpayer monies if they were on the verge of bankruptcy because they took on excessively risky assets.
The worldwide recession has slowed the growth in the demand for cereals and other foods as many countries have experienced stagnation or contraction in their GDPs.
Now that the recession appears to be over, world GDP will start growing again.
Many are forecasting that this growth in world output, especially the growth in developing nations, will put sharp upward pressure on food prices and that of oil, natural gas, and other commodities.
Even the Malthusian specter has been raised again that the growth in world population will exceed the capacity of the world to produce the food demanded to improve living standards in the developing world.
The sharp increases in food and other commodity prices during the period from 2002 to 2008 when world GDP was growing rapidly tends to support these fears.
The World Bank's index of world food prices increased by 140 percent from 2002 to the beginning of 2008, and by 75 percent after September 2006.
The price of oil went up more than fourfold from the beginning of 2002 to its peak at over $145 a barrel during mid 2008.
At that time there were many predictions of oil going to $200 a barrel rather quickly, and also of food prices continuing to rise rapidly.
The world recession clearly made these predictions obsolete, at least until world GDP begins to grow again.
Rapid growth in world GDP will put strong upward pressure on some commodity prices.
However, the supply responses of exhaustible resources, like oil and natural gas, should be distinguished from the supply response of food production.
The supply of fossil fuels is obviously ultimately limited by the amounts in the ground.
Outputs of oil, coal, and other fossil fuels can be increased by new discoveries, such as the recent discovery of oil off of Brazil, by extracting more of these fuels out of existing fields, and by squeezing oil and other fuels out of shale and other rock formations.
Yet, all these ways combined have rather limited effects on total output.
This is why, along with OPEC's restrictions on oil output, long run supply responses of oil, gas, and coal to changes in their prices are usually estimated to be quite modest.
The long run elasticities of supply in response to rises in the prices of fuels are about +0.4 to +0.5.
The short run response of world food production to increases in food prices may not be large either, although farmers can shift rather quickly among the production of corn, soybeans, wheat, and other crops.
In the long run, however, world production of food is quite sensitive to the world price of food.
Given time to adjust, farmers can substantially increase the production from given amounts of land devoted to farming by greater use of fertilizers and capital equipment.
Higher prices encourage investments in discovering mew methods of improving farm productivity, such as corn and other hybrids, the green revolution, and genetically modified foods.
Productivity advances in agricultural output were very rapid at many times during the past century, often outstripping advances in manufacturing and other sectors.
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The amount of land devoted to farming in most countries declined drastically during the past century as urban sprawl, highways, and other land uses took over much of the land formerly used to farm.
In the United States, farmers comprising less than 2% of the labor force and using well under half the available land, produce enough farm goods not only to contribute most of the food that feeds the huge American population, but these farmers also export corn, soybeans, wheat, and other farm goods all over the world.
With high enough food prices, financial incentives will encourage farmers to take some land back from suburban, ethanol production, and other non-food uses.
World prices of food generally declined during the 20th century when world population and world GDP per capita grew enormously.
The reason for these diverse trends is that productivity in the production of food expanded at a more rapid rate than did the demand for food.
The advances in production were due to the use of new and more effective fertilizers, better farm machines, and many applications of scientific knowledge to improving the productivity of agriculture.
Developed countries spent considerable resources on subsidies to farmers to help keep their prices up, not down.
Even though it may not be possible to predict the exact nature of future agricultural innovations, one can reasonably expect similar growth in world farm output during the next several decades, especially if food prices rise by a significant amount.
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Many economists and others in the US are advocating a second fiscal stimulus program, believing that the close to $1 trillion in the Obama stimulus package was too modest.
This call for another round of government spending is taking place despite the fact that about one third of the original package has not yet been spent, even though it is more than one and one half years since the package was signed by President Obama.
Moreover, skeptics (including myself) about whether the US needs another spending package point out that leading economists in the President’s Council of Economic Advisers were far too optimistic about the effects of a big stimulus on unemployment rates.
Instead of a predicted decline in unemployment due to the stimulus of more than 1½ percentage points, the   total   fall in seasonally adjusted unemployment has been only ½ of a percentage point from its peak of 10.2 percent.
Of course, perhaps other factors, such as the uncertainty about the business environment that Congress and the President created through their rhetoric, and also through their actual and proposed legislation, offset powerful effects of the fiscal stimulus itself in reducing unemployment.
The unpleasant fact we economists have to face is that there is not strong evidence on the actual effects of governmental spending on employment and GDP.
The usual claimed effects are generally based on predictions from highly imperfect theoretical models of the economy rather than from strong direct and clear evidence on the employment consequences of different fiscal stimuli.
This is why the UK’s experiment in reducing rather than raising government spending while Britain is still coming out of its serious recession is not only daring in the present economic climate, but it is also of great value in determining whether growing government spending is a valuable way to speed an economy out of a serious recession.
In order to bring under control the large fiscal deficit of Great Britain that is well over 10% of the UK’s GDP, the Tory (coalition) government of David Cameron has proposed a fiscal tightening that amount to about 1.5 percent of GDP during each of the next four years.
This will be accomplished by some increase in taxes, but mainly by cuts in spending on public services, public investments, and various benefits to families.
It is informative to contrast this British approach with that of the US.
Federal government spending during the past few years increased to about 25 percent of GDP from a level that had been rather stable for a couple of decades, under both Democratic and Republican administrations, at close to20 percent of GDP.
The federal fiscal deficit in 2009 was about 12% of GDP, and is expected (or hoped!) to decline in 2010 to about 8%.
These are two of the highest deficit ratios in many decades.
Essentially nothing is being done in Washington about these enormous deficits, aside from some proposals to raise taxes on the rich that will bring in very little additional tax revenue.
Moreover, these proposals have been opposed by many Democrats in Congress as well as by most Republicans.
So which approach will be more successful: the British one that will sharply reduce government spending and fiscal deficits, or the American one that believes these deficits are necessary, and perhaps even too small, to get this country out of the recession? No one knows for sure about the short run effects on their respective economies of these very different approaches.
Perhaps, and this is only a “perhaps” that I am by no means persuaded of, the British approach will cause more short-run harm to employment and GDP than will the American approach.
However, I am convinced that the British way is a far better way to improve the long-term growth prospects of an economy.
That is, reductions in the bloated levels of government spending and fiscal deficits will do much more to stimulate the longer-term growth of the British economy, mainly by encouraging private investment and innovation, than will the present American approach.
Perhaps in good part due to the gridlock in Washington that Posner discusses, this approach shows little desire to cut back on federal government spending, or on actual and projected fiscal deficits.
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The Economist in its October 2-8 issue has a cover page with the title: “How India’s growth will outpace China’s”.
One of the main reasons they give for this claim in their leader on this topic is that India is democratic while China is autocratic.
The other is that India has higher birth rates, and hence a younger population.
Both arguments can be questioned, although I concentrate my discussion on whether democracies favor economic growth.
Visionary leaders can accomplish more in autocratic than democratic governments because they need not heed legislative, judicial, or media constraints in promoting their agenda.
In the late 1970s, Deng Xiaoping made the decision to open communist China to private incentives in agriculture, and in a remarkably short time farm output increased dramatically.
Autocratic rulers in Taiwan, South Korea, Singapore, and Chile produced similar quick turnabouts in their economies by making radical changes that usually involved a greater role for the private sector and private business.
Of course, the other side of autocratic rule is that badly misguided strong leaders can cause major damage.
Mao’s Great Leap Forward is one prominent and terrible example, but so too are Castro’s forcing Cuba into a centrally planned government-controlled inefficient economy, or Iran’s mullah-led government that created monopolies controlled by religious foundations and other groups.
The overall effect of autocratic governments is some average of the good results produced by visionaries, and the bad results produced by deluded leaders.
Democracies help control the range of outcomes.
Visionaries in democracies can accomplish much sometimes, as did Manmohan Singh when Finance Minister of India from 1991-1996, Margaret Thatcher after she became Prime Minister of Britain in 1979, Ronald Reagan as US president during the 1980s, and Japan’s leaders after World War II.
However, their accomplishments are usually constrained by due process that includes legislative, judicial, and interest group constraints.
On the other hand, bad leaders in democracies are also constrained, not only by due process, but also in addition by the reporting of a free competitive press and television, and nowadays too by a competitive Internet.
Whether on average democracies are more conducive than autocracies to economic growth is far from well established.
What is clearer is that democracies produce less variable results: not as many great successes, but also fewer prolonged disasters.
Since the bad outcomes tend to produce more damage than the good ones, less variable outcomes would be an attractive feature of democracies compared to autocracies, even if democracies on average did not produce greater economic growth.
Comparisons between the effects of these different systems of government on economic growth are muddied by the fact that personal freedoms usually increase substantially under autocracies that have been growing at a fast pace.
China is an excellent example.
Although China has remained a one party autocratic system since it started growing rapidly 30 years ago, the degree of personal freedom has expanded enormously.
Personal freedoms in China did not exist when I first visited there in 1981 shortly after the economic reforms had begun.
Changing domiciles was virtually impossible, and Chinese men and women could not even enter Western style hotels and shops.
I have returned a few times since then- most recently a few weeks ago- and the contrast is simply amazing.
Students and many others criticize economic and social policies of the government, including the one child policy, although they cannot openly criticize the one party government, as jailed dissidents show.
Many Chinese have traveled abroad and have seen first hand the freedoms in other countries, and the Internet provides access to opinions and facts on many thousands of subjects.
The government does try to censor out opinions and information from the Internet that are considered damaging to the government, but cheap software has enabled many to bypass the government censors by connecting directly to Hong Kong, which is free of government censorship.
Other examples of growing freedoms under autocracies include Taiwan, South Korea, and Chile.
They all started their economic booms under single party dictatorships, but after a period of quite rapid growth, fierce opposition to the dictatorships emerged.
Before long all these countries did become democratic, with competing political parties.
To return to the comparison of China vs.
India, the analysis I have given indicates that it is far from obvious whether democratic India has an advantage in the economic growth race over autocratic China.
Each has its own strengths and weaknesses from a growth perspective, although India clearly dominates in political and social freedoms.
Yet if, and this is a big if, China continues to have effective leaders, I would give China the edge in terms of future economic growth.
This edge is partly because of the enormous enthusiasm to regain its former great country position among all strata in China’s population: entrepreneurs, professionals, and workers.
On the other hand, a dismal leader could come to power in China and cause considerable damage to the economy.
Overall, I expect India’s growth rate to be lower but more stable, and that stability might be worth a lot.
The traditional public school system had a very weak.
incentive structure.
Since students automatically went to neighborhood schools,.
schools did not have to compete for students.
The teachers unions long ago.
eliminated merit pay, and made.
teachers’ pay determined almost entirely by degrees and years spent teaching.
Finally, in this traditional system, students had little incentive to work.
hard, especially when they did not expect to get much education, and could.
count on always getting promoted.
All this is beginning to change for the better, despite.
fierce opposition from teachers unions to virtually every important reform.
School vouchers, and especially the charter school movement, is bringing.
competition to the traditional neighborhood school.
No longer can public.
schools automatically have a captive audience of all the school age children in.
their neighborhood.
Charter schools are expanding as rapidly as allowed by.
local and state restrictions that have been due mainly to lobbying of.
teachers unions.
Fortunately, restrictions on charter schools, and the even.
greater limits imposed on the scope of school vouchers, are breaking down, in.
large part because parents are becoming vocal, and are also voting with the.
feet of their children.
In addition, careful evaluations of charter schools in.
randomized experiments that compare the performance on standardized tests of.
students in charter schools to performance by students in regular public.
schools generally show that charter school students do significantly better.
(see, for example, studies by Josh Angrist of MIT and co-authors of charter.
schools in and near Boston).
Some progress has also been made in finding ways to better.
motivate students, even in traditional public schools.
A large and mainly well.
designed experiment of poor rural children in Mexico that began in the 1990s,.
originally called Progresa (now called Oportunidades), showed that even young.
children from uneducated families could be better motivated by financial.
incentives.
Progresa gave monthly stipends to mothers of children in the program.
if they attended school regularly and did decently.
School attendance.
did rise for families participating in this program, and students stayed in.
school longer.
Experiments are now ongoing in American public schools by my.
colleagues Steve Levitt and John List, along with Roland Fryer of Harvard, on.
motivating students by giving financial rewards directly to students rather.
than to parents.
Although the studies are not yet completed, I would anticipate.
that students, especially older students, could be well motivated by monetary.
and other rewards for good performance.
Not surprisingly, teachers unions fight hardest against.
reforms that change the way teachers are paid, especially when they introduce.
incentives for teachers to perform more effectively.
Teachers’ pay should tend.
to depend on education and experience, but it should also be sensitive to their.
revealed effectiveness as teachers.
Teachers unions have for many decades.
fought merit pay that allows principals and other administrators to determine “merit” by.
their evaluations of how well teachers perform.
The unions have claimed that.
this approach to merit would give higher pay not to teachers who do the best.
teaching, but to teachers who ingratiate themselves into the good graces of the.
administrators.
Perhaps that argument has some merit in the traditional school.
system where administrators of neighborhood schools have some monopoly power,.
but it is far less compelling as administrators of public schools increasingly.
have to compete for students by offering better education.
In any case, the call now is for merit pay based on more.
objective criteria, such as students’ performance on standardized tests.
Since.
students differ greatly in how well prepared they are for particular classes.
and subject matter, it is crucial to design a merit pay system that ties pay.
not to the absolute level of performance, but to the increment in performance.
added by different teachers.
It may also be desirable to try to reduce.
“teaching to the test”, whereby teachers only emphasize materials that are.
included in the tests used to determine merit pay, although teaching to the.
test is valuable if doing well on the “test” requires knowledge of the.
important principles.
I do not want to minimize the difficulty of getting a well-designed.
system of merit pay, and Posner discusses many such difficulties.
However, my.
colleague, Derek Neal, has proposed an attractive system of merit pay, where.
student performance at the end of the year is compared to that of students who.
perform about as well at the beginning of the year.
Essentially, teachers then.
get a bonus that depends on the percentile ranking of their students at.
year-end compared with the performance of the comparable students.
Other.
education specialists have different ways to determine merit pay that may be.
worth considering.
The disgraceful reaction of the LA teachers union to.
publication by the LA Times of the database that gives performance scores of.
the students of 6000 elementary school teachers is indicative of how teachers unions.
feel toward rewarding better teachers.
The support by Arne Duncan, the US.
Secretary of Education, of the newspaper’s publication of this information is.
highly commendable.
Not only should such information be published and.
publicized, but they should also be used to design a system where merit plays a.
sizable part in the monetary compensation of teachers.
The provision of the Fourteenth Amendment to the American Constitution that appears to (see Posner’s discussion for why I say “appears to”) guarantee all children born in the United States automatic citizenship applies not only to children born to parents who are in this country illegally, but also to students, tourists, and others who are in the country on temporary visas.
Yet most of the anger felt about giving citizenship to all children born here is directed at children of illegal immigrants.
This is partly due to the illegality of the presence of their parents in the US, and partly to the evidence that some women cross the Mexico-US border, or come from other countries, just to have their children become Americans.
The hostility is also fueled by the apparently correct belief that children born of illegal parents are a significant contributor to the total number of births in the United States.
The Pew Hispanic Center estimates that about 8% of all children born in the US in 2008 have parents who are in the country illegally.
This is about double the estimated percent of the US population that are here illegally.
Although it is not possible to know how accurate these estimates are, one would expect Mexican immigrants to have relatively many children, even if the children did not automatically become citizens, since these immigrants tend to be younger and less educated than the typical American.
Extensive studies would be necessary before one could know how many of the children of illegal immigrants were born here because of the guarantee of American citizenship.
Some members of Congress and others have proposed a constitutional amendment to eliminate the granting of citizenship to children born in the United States without at least one parent who is a citizen or has a green card.
Clearly, they are mainly concerned about excluding from citizenship children born to illegal immigrants.
Yet since their ultimate concern is the level of illegal immigration, denying citizenship to the children of these immigrants would be a roundabout and very imperfect way of discouraging illegal immigration.
It is highly unlikely that most of the approximately 11 million illegal immigrants in the United States will ever be forced to return to Mexico, or wherever else they came from.
Most likely is that they will either eventually be given amnesty, and hence citizenship, or they will become permanent residents without citizenship, but with many of the rights of citizens.
These include the right to receive medical care in hospitals, and to send their children to American public schools.
Under either of these scenarios, it will not make a big difference whether children of illegal immigrants born in the US did or did not automatically become citizens since they would de facto have most of the rights of citizens.
I favor generous legal immigration since legal immigrants of different skill levels add a lot to a country’s human capital (see my proposal to sell the right to immigrate discussed in the June 25 issue of The Economist).
However, I oppose illegal immigration because it corrupts the whole immigration system, and it is unfair to the millions of persons who wait for years to immigrate to this country legally.
Probably, little can, or should, be done to greatly reduce the number of illegal immigrants already here.
However, it is very feasible to reduce the inflow of additional illegal immigrants, while at the same time increasing the number of legal immigrants.
Finding an effective way to curtail the inflow of illegal immigrants seems to be a far better way to deal with the issue of illegal immigrants than concentrating a lot of effort and opposition on trying to obtain a constitutional amendment that eliminates the right to citizenship of children born in America to parents who are not American citizens.
During the past two decades the education of women has been booming in practically all countries.
Larger fractions of young women than young men are enrolled in universities in countries as culturally and economically diverse as Brazil, China, and Iran.
In the United States, about 57% of the current graduates of four year colleges are women, while women receive 60% of all the master’s degrees.
Note the radical change since 1970 when women received only 40 % of the degrees from four-year colleges.
A recent report shows that American women are now even getting more PHD degrees than men, although the proportion varies a lot by field.
Women receive only about one fifth of all engineering doctorates, and one quarter of all doctorates in computer science and mathematics, but they are getting a majority of the doctorates even in health sciences and biology.
Since earnings are on average strongly related to education levels, a natural issue to consider is the current and future effects of these trends in college enrollment and graduation rates on the earnings of women compared to men.
In particular, will the average earnings of women beginbefore long to exceed that of men after being so far behind in the past?.
In fact, most countries have experienced sharp reductions in the gender gap in hourly earnings during the past several decades.
Again, to use the United States as an example, in 1980 the median weekly earnings of women who worked full time was a little over 60% of the median weekly earnings of full-time men.
By 2009, that ratio was just slightly below 80 percent.
For younger women, the trends are larger and more dramatic.
The ratio of the weekly earnings of fulltime women aged 25-34 to that of men of the same age was only 69% in 1980, but this ratio rose to almost 89% in 2009.
The change in the gender earnings gap was also quite large for men and women aged 35-44 years old.
The gender gap in earnings at ages 25-44 are relevant for predicting future trends in this gap since these ages incorporate the effects on earnings of the growth in recent years in the education of women relative to men, and these age groups also incorporate the effects of the greater education of women on their commitment to working.
Some simple, although rough, calculations provide an indication of the possible magnitude of the effect of the growth in the education of women on the gender gap in earnings.
Assume that men and women are only either college graduates or high school graduates, and that the average college graduate who is working full time earns on average about 60 percent more than the average full time high school graduate of the same sex.
To incorporate the gender gap in education, I assume that about 40% of women graduate a four-year college compared to only 26% of men.
If men and women of the same education received the same earnings, the assumed greater propensity of women to receive a college education would imply that the average earnings of women would exceed the average earnings of men by about 8%.
This is a sizable reversal of the usual gender gap in earnings.
Of course, a more realistic calculation would recognize that even full time working women of a given number of years of schooling typically earn less than that of full time working men with the same years of schooling.
If the gender gap in earnings of men and women with the same schooling years were 15%, than the average woman would earn about 11% less than the average man; on the other hand, if this earnings gender gap were 10%, than the gender gap in average earnings would only be 4%.
Of course, many other factors in addition to years of schooling affect the earnings of women and men.
Some women do not work in order to stay home to take care of their children, although the fraction of women who are full time homemakers has sharply declined during the past several decades, and college educated women are more likely to work than are less educated women.
In addition, even full time women work fewer hours per week and fewer weeks per year than full time men, again mainly because women typically try to combine work with spending time caring for their children.
These considerations help explain why the average earnings of women are below the average earnings of men with the same years of schooling.
On the other side of the ledger, teen age girls are less likely to drop out of high school than are teen age boys, and the earnings of high school dropouts are quite low.
Moreover, as I showed at the beginning of this discussion, American women are also more likely to receive post-graduate degrees, and persons with advanced degrees tend to earn a lot more than persons with just four years of college.
Although the average earnings of full time women have not yet overtaken that of full time men, as we ahve shown the gender earnings gap has narrowed substantially.
Indeed, in about 30% of all American households with two earners, wives are already earnings more than their husbands.
Moreover, if the gender gap in education continues to widen, it may not be long before the average earnings of fulltime women does exceed that of men.
This would mark a culmination of a remarkable reversal of the gender gap not only in education but also in earnings.
Posner raises most of the important issues.
I will make just a couple of points.
Companies are reluctant to invest in developing vaccines or other protections against the Avian and other types of flu not only because of their legitimate fear of excessive litigation by those person who claim to have been harmed by the vaccine.
In addition, and more important in combating pandemics, they will be forced during a pandemic to allow the production of generics and other much cheaper substitutes for effective drugs they develop, despite any intellectual property rights they are supposed to have.
This has already happened with Roche's Tamiflu drug that apparently offers some protection against avian flu.
The Taiwan government has forced Roche to license the island's health department to produce Tamiflu as long as Roche does not supply enough to meet the needs of the Taiwan population.
Roche has also caved in to demands by Indonesia and  a couple of other countries, saying its patent does not prevent their production  of Tamiflu.Yet so far there have scarcely been 100 human cases of avian flu.
Can you imagine the pressures on any company to either give away its vaccine or allow cheap generic versions if a widespread pandemic develops that could kill millions of persons in many nations, as happened during the 1918-19 flu pandemic and others discussed by Posner?.
These negative incentives for companies to develop vaccines is all the more regrettable since the world's population would be willing to pay enormous amounts to have a vaccine available if a serious deadly pandemic developed.
Economists have estimated from people‚Äôs decisions about various life-threatening risks the amounts they would be willing to pay to reduce their risk of dying from an accident or from a disease.
A young person in the United States is estimated to be willing to pay about $500 for a 1/10,000 decline in the probability of dying at each age.
This means that 10,000 such young persons would be willing to pay in the aggregate about $5 million for such a decline in their risk of dying.
The $5 million figure in this example is what economists call "the value of life" (to young persons for such risks).
Suppose a million individuals in the US alone were at risk of dying during a major pandemic.
If $5 million is taken as the value of a life, this gives a total willingness to pay by the million persons of about $5 trillion, or about ¬Ω of US GDP, for an effective vaccine to avoid getting sick and dying from the pandemic.
This is a very rough estimate that may be too large since some very elderly persons would die, and they generally put less value on living a bit longer.
On the other hand, it is more likely a gross underestimate of what the world would be willing to pay since many millions of persons would also die outside America.
Moreover, it may be a large underestimate even for the US since people would generally pay more to avoid the very large risks due to a deadly pandemic than the 1/10,000 improvement in risk that motivated the $3 million estimate I gave.
So the world's population would be willing to pay a lot for an effective vaccine against avian flu, but companies are given weak incentives to spend a lot on developing such vaccines.
That is the challenge posed to effective public policy, and I agree with Posner that so far the US and other governments have failed to meet the challenge.
I agree with most of Posner's discussion that as usual is presented very clearly.
But I appear to differ on one issue that I believe is important.
The Orphan Drug Act of 1983 greatly expanded research on rare disease that has resulted in the discovery of many more drugs that successfully treat such diseases.
Yet R&D spending on these drugs still takes only a small share of total spending on R&D by biotech and pharmaceutical companies.
This is why I doubt, but cannot prove without much additional research, whether the R&D spending on orphan drugs stimulated by this Act significantly affected spending on finding treatments for more common diseases.
It probably mainly increased total spending on medical R&D by a modest amount.
If this conclusion is correct, is it a mistake to have the Orphan Drug Act give greater intellectual property protection for drugs that treat rare diseases because these diseases would attract little research effort without better protection? I follow Posner initially and ignore the tax benefits and research subsidies provided by the Act.
Suppose that only because of the better patent protection provided for seven years, a biotech company develops a drug that treats a rare disease with a small market, and charges a high price-as in some examples given in the Wall Street Journal articles.
Assume to start the analysis that persons with the disease treated by this drug pay for treatments from their own resources, and enough of them can pay so that the biotech company can cover, perhaps more than cover, their development and production costs.
Surely not only the biotech company, but also persons with the disease are better off that the drug was developed due to the Act, even though they have to pay a lot.
If they were not better off, they would not be willing to pay the high price demanded.
Since it is a win-win situation, in such cases it is obviously helpful to persons with rare diseases to have an Act that stimulates the development of drugs that treat their diseases.
The analysis is not greatly different if private health insurance providers voluntarily cover rare diseases, as discovered with great effort by the woman with Gaucher disease chronicled by the Wall Street Journal.
As Posner indicates, insurance companies might be willing to cover rare diseases since such coverage does not raise premiums very much for other persons who are insured.
This would be a strictly business decision by the insurance industry if made without political pressure.
So voluntary private insurance coverage of persons with rare diseases does not materially change my favorable evaluation of the Orphan Drug Act.
The hard cases arise when the high prices charged for drugs that treat rare diseases are paid not by persons with the diseases, but by the government through Medicaid, Medicare, or other publicly funded health programs.
Then taxpayers rather than persons with these diseases or private insurance companies may foot most of the cost of developing drugs that treat rare diseases.
Should taxpayers be asked to pay $100,000 per year (Posner's estimate of the average cost of the drugs developed for rare diseases) for drugs that can keep persons with rare diseases alive for many years? The answer is not obviously yes, although as Tomas Philipson has argued, government coverage might be justified if taxpayers are concerned about the welfare of persons who are unfortunate to have these diseases, or as a way to provide insurance protection against the risk of being born with rare genetic defects.
Medicare pays enormous sums to hospitals, nursing homes, and drug companies to keep elderly persons alive sometimes for only a few additional months.
Yet the justification for doing this seems weaker than using government funds to pay for expensive drugs that enable young persons with rare diseases to live fairly normal lives for many years rather than dying at young ages.
Perhaps Medicare should not pay a lot to keep elderly persons alive for a short period, but I do not believe the case for government payment of the cost of treating persons with rare diseases can be analyzed in isolation from a more general consideration of what type of health care should be provided out of government funds.
The Act also would look less favorable if, as is likely, biotech and other drug companies sometimes reclassify the markets for new drugs to help them qualify for the Act's benefits.
I also have doubts about the wisdom of the provision that allows drug companies to immediately write off their R&D spending on orphan drugs.
So an overall evaluation of the Orphan Drug Act is not easy.
Still, it might well be desirable to give stronger patent protection to drugs with small markets that treat rare diseases in order to induce the development of such drugs.
Thanks for very good comments.
First, my apologies to Senator McCain for a typo in the spelling of his name.
Campaign contributions do involve rent seeking, but they are not all socially wasted if they lead to desirable political outcomes.
If I knew of an effective way to cut down contributions without affecting outcomes I might support it.
But no one has ever come up with proposals that do not have huge loopholes.
Since I indicated in my discussion that total spending on campaign contributions is rather small, I believe we are better off allowing great freedom to contribute rather then trying to cap them, or in other ways cut down on wasteful components of contributions.
It is not useful to say that democracy should involve cooperation rather than competition.
Every system of government must have a method for actually reaching political decisions, as opposed to simply describing our hopes for how decisions should be reached.
Most modern approaches to democracy since Joseph Schumpeter's discussion in   Capitalism, Socialism, and Democracy   have involved important aspects of political competition as a way of reaching political decisions.
The reason political freedom is useful is not that top leaders always emerge, but that one avoids the sometime terrible policies of totalitarian leaders.
A free press and political competition do not guarantee good outcomes, but it helps reduce the likelihood of the really awful outcomes produced by a Stalin, Mao, or Hitler.
Advertising in politics or the economy helps unknown leaders or unknown firms break into a political or economic market.
To me that is a great advantage of all advertising.
Nor is it clear that advertising raises prices of the products advertised (see the discussion of the theory and evidence in G.
S.
Becker and K.
M.
Murphy, "A Simple Theory of Advertising as a Good or Bad",   Quarterly Journal of Economics  , Nov.
1993).
I agree that I should have been more careful in distinguishing self-financing of campaigns from campaign contributions more generally.
The evidence I cited on the small effect of campaign contributions on outcomes refers to general contributions.
James Snyder gives a good summary of this evidence in an article in the Winter 2003 issue of the   Journal of Economic Perspectives  .
Although there is some dispute for the US about the magnitude of the effects of the minimum wage on the unemployment of low skilled persons, the French results on the effects of its minimum wage are far clearer.
The clearer results for France (see the work of Bernard Salanie) are probably because the French minimum has been much higher relative to its average wage than has been the American minimum.
Note that higher minimums might raise family income inequality not only because it reduces employment, but also because many of those benefiting from higher wages are teenagers and others in fairly well off families.
For the most part (with one or two exceptions) I avoided attributing causes to the French riots.
Instead, I stressed that the French labor market system in effect discriminates against Muslim and other immigrants.
I suspect that the low wages, high unemployment, and poor education of African immigrants contributed to the riots there, but at this point we can hardly be confident about that conclusion.
Let me add that unemployment rates in France and the US are determined in similar ways.
It is not true that persons who have been unemployed for more than six months are no longer considered unemployed in American data.
They are considered to be unemployed if they do not have jobs and are looking for work.
I do believe there is often anti-competitive behavior by economic and other elites.
It usually operates through discriminatory legislation.
Many of the labor laws in Europe favor the elites-in this case, the insiders with good jobs- and hurts outsiders who are looking for decent pay and employment.
I do not believe there is anything in Islamic law, and my wife who teaches Islamic history confirms this, that prevents good Muslims from giving allegiance to non-Islamic states.
However, when Muslims are segregated into separate suburbs, as in most French cities, it presumably is easier to generate hostility to the ruling authorities, and even support for more radical forms of Islam.
In the US, new immigrants do generally have jobs, even when they are unskilled.
Moreover, immigrants can rise over time in the economic ladder more easily here than in Europe.
This does not mean there will be no riots by any American immigrant groups, but I believe they are less likely.
Much has been written about the rioting by mainly Muslim youths of African descent in France, but few discussions have related them to the race riots by African-American youths in the 1960's.
The lessons from these earlier riots are disturbing, but they have a couple of reassuring aspects as well.
Many economists have recognized for more than a decade that the generous minimum wages and other rigidities of the French labor market caused unemployment rates that have remained stubbornly high since the early 1990's.
Immigrants, youths, and other new entrants into the labor market have been hurt the most since they have had the greatest difficulty finding jobs.
The overall French unemployment rate is now almost 9 per cent- compared to about 5 per cent in the US- with a rate over 20 per cent for young persons.
About 40 per cent of the unemployed have been without a regular job for over a year, a rate that is far higher than the American long-term unemployment rate.
The French have intentionally avoided collecting separate economic data on Muslims, but the Muslim unemployment rate is estimated by labor economists in France at more than 20 per cent, with the unemployment rate for young Muslims probably exceeding 30 per cent.
The French labor market is sick, and needs reforms to make it more flexible, so that "insiders" with jobs have less of an advantage over "outsiders" looking for work.
These reforms include making it easier for companies to let go of workers without expensive severance pay packages, lower minimum wage levels-the French minimum is one of the highest anywhere- reduced regulatory barriers to the formation of new companies, and lower social security and other taxes on employees.
If the riots help exert greater pressure on French politicians to greatly free up the French labor market, they would have been of some value not only to Muslim youths, but also to all other French men and women who have been priced out of jobs.
An old and well-established rule of life is that the thoughts of young men turn to mischief when they have lots of time on their hands.
Muslim and other African youths in many poor outer-city suburbs, the notorious banlieues, clearly have had lots of free time because many drop out of secondary school before receiving a diploma, and then they cannot easily get jobs.
Seemingly small events, such as the violent accidental deaths of two youths in the French case, often set off a series of reactions that spread by word of mouth, and in these modern days also by cell phones and the internet.
Copy-cat behavior, burning cars has been a favorite activity in the French riots, have spread to different poor French suburbs with African immigrants outside Paris, and then to the banlieues surrounding other cities.
The race riots in the US during the 1960's also started from what in retrospect looks like misinformation and relatively minor events.
Yet there were more than 750 riots during the period 1964 to 1971 (the Watts riot was in 1965) that killed over 200 persons and injured thousands of others.
 After more than 10,000 incidents of arson, many black communities were in ruins.
Sociologists and economists have not succeeded in explaining which cities had riots and which avoided them.
The likelihood of a riot is not explained by differences among cities in the black unemployment rate, in black incomes relative to those of whites, in rates at which blacks were advancing economically, in the education of blacks relative to whites, and so on for many other variables.
Cities with relatively many blacks were more likely to have riots, and Northern cities were far more likely to have race riots than cities in the South, even though blacks were more numerous and worse off in the South.
Segregation of blacks into largely separate neighborhoods is an important factor, but practically all cities in the North with significant numbers of blacks have been highly segregated.
It is interesting that Marseilles is one of the few major French cities that essentially escaped any rioting (at least so far).
Its large Muslim population is not segregated into poor suburbs, but Muslims live in many different parts of Marseilles.
Although the cities and neighborhoods that experienced American race riots in the 1960's cannot be well explained even in retrospect, the economic position of blacks in rioting cities did suffer badly.
The economic historian, Robert Margo, and a colleague at Vanderbilt examined the effects of the ‚Äò60's riots on employment, incomes, and property values.
They find that from 1960 to 1970 median black family income dropped by about 9 percent, and the median value of black-owned homes dropped even more, in cities with major riots compared with similar cities without such riots.
From 1960 to 1980, male employment in cities with severe riots dropped several percentage points compared with otherwise similar cities.
This analysis suggests that the suburbs with riots in France will also suffer compared to Muslim and other African immigrant communities that did not riot.
One bit of good news from the American riots for France and its Muslim population is that they have not reoccurred on a large scale during the subsequent more than 30 years.
For example, the riots in black communities of Los Angeles in 1992 that began after a video film  on television showed graphically the beating administered by LA policemen to a black man, Rodney King, caused considerable damage, but these riots did not result in many copy-cat riots in other American cities.
Perhaps the negative effects of 1960's rioting on the jobs and wealth of blacks influenced their behavior during other later tense periods.
It is worth noting that whereas black families did advance a lot economically relative to white families during the 1960's and 1970's, my colleague Derek Neal has shown that the economic position of black families relative to that of white families fell a lot since 1980.
This is in the face of greater affirmative action that may have benefited a small number of blacks.
The main causes of the decline since 1980 are a further fall in the stability of black families, and the widening skill differential in earnings that started in the late 1970's.
This decline in the relative position of blacks did not lead, as I indicated earlier, to any resumption of large-scale rioting.
Although black unemployment has remained about twice that of whites, young blacks have been far more likely to find jobs than are young Muslims in France.
Perhaps these riots will give greater power to the few politicians in France who recognize that important economic reforms are needed to help all young Frenchmen get jobs, and to allow them to advance in the economic hierarchy when they demonstrate the requisite talent and ambition.
Economics cannot predict with any confidence how such reforms will affect the prospects of further riots, but these reforms would surely improve the position of young immigrants, regardless of their religion or country of origin.
Chicago, where I have lived for the past 35 years, is not the safest city, but it seems like a paradise of safety compared to Mexico City, where I just spent a few days.
On first arriving I was told that since robbery and kidnapping are so rampant, it is not safe to go for walks, even in the best neighborhoods.
I spent three otherwise delightful days at various meetings where I did not walk more than a few feet in the streets of this enormous and highly attractive city.
As one illustration, we were on our way by car to a luncheon meeting in the middle of the city with an important government official, but were caught in extremely heavy traffic due to a political demonstration.
As the time of the trip increased from an expected 20 minutes to over an hour, I suggested we walk the remaining distance, which was less than half a mile.
The driver, and my host, a native of this city now teaching in U.S., both said it was too dangerous-although some persons were walking the streets in a neighborhood of small shops selling simple and cheap goods.
My companions argued we had a good chance of being robbed or kidnapped since we would stick out in our suits and conversation in English.
I am not trying to single out Mexico City, a city that I am extremely fond of.
 The same experience could be repeated in major cities in all parts of the developing world, although I will concentrate in this discussion on Latin America.
It has been unsafe to walk in Bogot√°, Colombia, and Brazil's Rio de Janeiro for decades.
Buenos Aires is a graceful European style city, but it has experienced such a rapid growth in crime during the past decade of economic instability that it too is now considered quite unsafe.
To develop solutions to this growing crime problem, a Center on Crime is being created in Argentina at the Di Tella University that has the top economics program in that country.
Not just the rich and middle classes are victims when crime rates are high.
Poorer victims lose a few pesos and cheap watches, and may get knifed or beaten in the process, while very small shopkeepers have their take for the day stolen as they close up shop, or even in the middle of business hours.
The poor are victimized disproportionately even though they have little money and other possessions because the rich and middle classes take costly precautions to protect against crimes.
They drive rather than walk or take public transportation, they install burglary systems and live in gated communities, and they hire security protection.
Crime festers and grows in countries where unemployment is high and economic opportunities low for a large enough fraction of the population.
Also essential in encouraging crime is that criminals are not likely to get caught and punished.
In Mexico and many other countries, conviction rates are low partly because the police are corrupt and often commit crimes themselves, and they have no time or incentive to go after other criminals.
Statistics reported by the police indicate that robberies and other felonies are much higher per 100,000 persons in the United States than in Mexico.
Yet anyone who has lived in or visited regularly both countries would recognize that something is fishy about these statistics.
The explanation is found in looking not at police reports, but at crimes as reported by households from Victimization Surveys that ask households if they have experienced various crimes.
These victimization reports indicate that robberies, for example, are far more common per person in Mexico than in the US.
However, a much larger fraction of Mexicans do not bother to report burglaries, assaults, and most other crimes to the police (they do report car thefts since they want to collect the insurance on their cars) because they do not expect the police to do anything about it.
In fact, the police may hassle them, or otherwise take much of their time, and show no results.
The consequences of high crime rates are serious and far-reaching.
A general disrespect for laws often follows when felonies are committed with impunity.
In addition, about 2-3 per cent of employed Mexicans are used to provide private security to protect against crimes rather than being engaged in what would be more productive employment if crime rates were much lower.
High crime rates add to the difficulty of getting skilled and other natives who are working abroad to return to their home countries.
 Foreign companies are reluctant to set up businesses because foreign employees do not want to raise families in high crime environments.
Perhaps most costly to welfare is the pervasive fear of crime when children go to and from school, when going to visit friends, to work, or to shop, especially with children.
A long time ago Jeremy Bentham, the great English utilitarian, emphasized the importance of the "alarm" created by crime.
Over time I have come to appreciate more the significance to welfare of the fear and alarm from the possibility of being robbed or assaulted.
The problems stemming from the high crime rates in Latin America (and elsewhere) are clear, and so too are many solutions.
Unfortunately, solutions are not easy to implement in the present political and economic environments.
In fact, many persons throughout this region are resigned to high crime rates as if that is inevitable in modern economies and societies.
But the US experience shows the contrary.
Crime rates grew sharply in this country from 1960 to the early 1980's.
Many commentators attributed that to the growing alienation of the poor from the rest of society, or to declines in "social capital" that reduced private group protection activities against criminals.
Yet for the past 25 years, crimes against property and against people have fallen greatly, despite a sharp growth in the degree of earnings inequality that might be expected to cause greater alienation by the less educated and less skilled.
The explanation for the fall in American crime rates during the past 20 years is in good part that many more criminals began to be caught and sent to prison.
Another part is due to the legalization of abortion in the 1970's, as analyzed by my colleague, Steve Levitt.
Politicians like former Mayor Rudolph Giuliani of New York discovered that fighting crime is not only socially useful but also is good politics.
I believe that the President-elect of Mexico, Felipe Calderon, and many other new political leaders in Latin America, are aware that crime is an important deterrent to greater economic and social progress in their nations.
I would recommend that they use both the "stick" and the "carrot" to fight crime.
The "stick" included apprehending more criminals, punishing severely criminals who commit major crimes, and not punishing severely those who commit minor crimes.
To apprehend more criminals, it is necessary to reform their corrupt-ridden police forces, partly through the creation of Internal Police Review Boards that focus on police corruption.
The purpose of such Boards would be to punish police who engage in serious crimes, and penalize or dismiss police who do not try to catch criminals and protect against crimes.
The "carrot" partly means much higher pay for police.
Their pay is now abysmally low in Mexico and many other countries, so that men and women attracted to becoming policemen expect to supplement their incomes by bribes and other corrupt acts.
Good pay would attract more honest men and women to the police force.
It would also raise the cost of dismissal to policemen for malfeasance since their best employment alternatives would then be far inferior to police earnings.
Following Argentina's example, universities and think tanks in other countries should create Centers that are dedicated to analyzing the causes of their high crime rates.
They should work on solutions that fit best their particular political, economic, and social circumstances.
It is critical also to improve earnings from and availability of legal jobs, especially for persons at the lower end of the job spectrum.
Crimes tend to rise sharply when unemployment is high and good jobs are scarce.
Significant improvements in the education of young persons from poorer families would greatly increase their earnings prospects.
Improved education is an essential part of the longer run solution to both high crime rates and pervasive poverty, but large reductions in crime rates during the next few years must depend on the other changes I have proposed.
For they would work much faster.
Milton Friedman died this past week.
He was the most influential economist of the 20th century when one combines his contributions to both economic science and to public policy.
I knew him for many decades starting first when I was a graduate student at Chicago, and then as a colleague, mentor, and very close friend.
I will not dwell here on what a remarkable colleague he was.
However, I do want to describe my first exposure to him as a teacher since he enormously changed my approach to economics, and to life itself.
After my first class with him a half-century ago, I recognized that I was fortunate to have an extraordinary economist as a teacher.
During that class he asked a question, and I shot up my hand and was called on to provide an answer.
I still remember what he said,  "That is no answer, for you are only restating the question in other words." I sat down humiliated, but I knew he was right.
I decided on my way home after a very stimulating class that despite all the economics I had studied at Princeton, and the two economics articles I was in the process of publishing, I had to relearn economics from the ground up.
I sat at Friedman's feet for the next six years-- three as an Assistant Professor at Chicago-- learning economics from a fresh perspective.
It was the most exciting intellectual period of my life.
Further reflections on Friedman as a teacher can be found in my essay on him in the collection edited by Edward Shils,   Remembering the University of Chicago: Teachers, Scientists, and Scholars  , 1991, University of Chicago Press.
In considering his many contributions to economics I will pass over his major innovations in scientific economics.
These include his emphasis on permanent income in explaining aggregate consumption and savings, his study of the monetary history of the United States, his explanation of the stagflation of the 1970's, his analysis of the value of a stable and predictable monetary framework to help stabilize the economy, his early contributions to the theory and measurement of human capital, his discussion of choice under uncertainty, and his famous essay on methodology in economics.
I will discuss instead several ideas in his remarkable book,   Capitalism and Freedom  , published in 1962, that contains almost all his well-known proposals on how to improve public policy in different fields.
These proposals on based on just two fundamental principles.
The first is that in the vast majority of situations, individuals know their own interests and what is good for them much better than government officials and intellectuals do.
The second is that competition among providers of goods and services, including among producers of ideas and seekers of political office, is the most effective way to serve the interests of individuals and families, especially of the poorer members of society.
The famous education voucher system found in this book, and based on an article published in the 1950's, embodies both principles: that parents generally know the interests of their children better than teachers unions and school boards do, and that competition among schools is the best way to serve the educational interests of children.
He added the further insight that one can and should separate government financing of education from government running of schools.
The voucher system retains government financing, but forces public schools to compete for funds against private for-profit and non-profit schools.
The voucher proposal has I believe won the intellectual battle over the value of competition among schools at the k-12 school level as well as at the college level, but so far vouchers have won only limited political victories in terms of actual implementation.
This is mainly due to the dedicated opposition of public school teachers unions who fear competition from private schools.
Both individual choice and competition are the foundation of Friedman's 1962 radical proposal to privatize the social security system.
He argued, correctly in my judgment, that the vast majority of families could be trusted to provide for their retirement if given appropriate incentives, and that they should be allowed to invest in retirement funds provided by competitive investment companies.
The government-run social security systems then in effect in the United States and all other countries with retirement systems taxed earnings in ways that discouraged effort and encouraged underground activities.
These tax receipts were then paid out to retirees according to politically determined criteria.
Chile started the first private system of personal accounts modeled along the lines laid out in   Capitalism and Freedom  , and Chile has since been followed to some degree by many other countries, such as Mexico, Singapore, and Great Britain.
The United States has its tax-free IRA's and Sep savings accounts, but this country has not yet implemented privatization of its basic social security system, even though an enormous financial deficit on this system will occur in about 15 years unless the system is significantly reformed.
Friedman also proposed a flat income tax rate in   Capitalism and Freedom  , and showed that a rate of about 20% in the United States could raise the same revenue and in a much simpler and far less costly way than the quite progressive income tax system in effect in the early 1960's.
Further theoretical analysis of what is called optimal tax rates has generally concluded that a rather flat tax would be best at combining efficiency with redistribution of income to poorer families.
The appeal to Friedman of the flat tax was based again on his confidence that individuals react to incentives, and that they take steps to further their interests.
In this case, he argued that highly progressive taxes induce taxpayers to find and exploit tax loopholes, so that legally, and at times illegally, taxpayers cut their tax payments by hiding income or converting income into other forms.
A flat income tax was early introduced by Hong Kong, and has in recent years been followed by many countries, including Russia and eight other Eastern European countries.
The United States significantly flattened its income tax structure since the time Friedman wrote this book, especially as a result of the tax reform act of 1986.
Unfortunately, a more progressive structure has crept back since that reform.
The voluntary army was not discussed in   Capitalism and Freedom  , but Friedman did propose to replace the military draft in several articles published about the same time as the book was published.
He argued that a voluntary army would attract at reasonable cost a dedicated military force of men and women who volunteered due to a combination of patriotism and economic opportunities.
A voluntary system is especially effective in situations where full-scale mobilization of available manpower is not required.
His advocacy of the voluntary army induced President Nixon to put Friedman on a committee to consider whether the United States should replace its military draft by a fully voluntary armed force.
Many persons on the committee initially opposed this idea, especially General William Westmoreland, head of military operations in Vietnam.
Friedman's persuasiveness eventually won over the vast majority of the members to this position, and in 1973 the United States changed to a voluntary armed force.
Seeing how well this system has operated, very few military leaders now want to return to a draft.
Friedman proposed in   Capitalism and Freedom  , and earlier in an article in the 1950's, to abolish the Bretton Woods System of fixed exchange rates, and move to fully flexible exchange rates.
Under a flexible exchange system, rates are determined by the competitive supply and demand for different currencies by individuals and businesses.
The prevailing view had been that such a system of flexible exchange rates would be unstable, so he argued at length why flexible exchange rates would be not constant but stable--unstable rates implied, he argued, that speculators on the average would lose money, which he did not believe was likely.
This view of the behavior of speculators was challenged, but I believe Friedman was basically right.
In any case, the issue was decisively settled after Nixon took the United States off the gold standard in 1972, and replaced it with a system of flexible rates in 1973.
The Chicago Mercantile Exchange led by Leo Melamed then saw the opportunity to set up futures markets in currencies, which it did with Friedman's help.
These markets were enormously successful, and put to rest forever the belief that one could not have an effective system of flexible exchange rates.
They provide an opportunity for businesses to hedge their currency risks by trading on currency futures.
The first chapter of   Capitalism and Freedom   considers the link between economic and political freedom.
He argues there that economic freedom promotes political freedom, and that political freedom is not likely to persist without economic freedom.
The kind of economic organization that provides economic freedom directly, namely, competitive capitalism, also promotes political freedom because it separates economic power from political power and in this way enables the one to offset the other.  Findings since then suggest that while economic freedom can begin under totalitarian regimes, such as under General Pinochet in Chile and General Chiang Kai-Shek in Taiwan, economic freedom produces economic growth and other changes that usually eventually lead to much greater democracy, as in Taiwan, South Korea, and Chile.
The important implication is that China would become more democratic if it continues on its path of greater economic freedom and greater growth.
On whether one can have democracy without economic freedom, Friedman said, "I know of no example in time or place of a society that has been marked by a large measure of political freedom, and that has not also used something comparable to a free market to organize the bulk of economic activity." Sweden and other Scandinavian countries have been vibrant democracies, and yet governments in these countries tax away more than half the income.
However, the majority of these taxes are transferred back to individuals in the form of retirement incomes, medical care, and in other ways.
Although these countries mainly rely on private enterprise, not government enterprises, to organize their economies, is that "enough" freedom to qualify as economically free? That depends on the definition of economic freedom, yet I believe Friedman is right that thoroughgoing restrictions on economic freedom would turn out to be inconsistent with democracy.
To conclude on a more personal level, I was most impressed by Milton Friedman's sterling character--he would never soften his views to curry favor--his perennial optimism, his loyalty to those he liked, his love of a good argument without any personal attacks on his opponents, and his courage in the face of prolonged and virulent attacks on him by others.
I cannot count the number of times I participated with him in seminars, nor how many visits my wife and I shared with Milton and Rose, his wife of almost 70 years.
Rose, a fine economist, would not hesitate to differ with her husband when she believed his arguments were wrong or too loose.
When I spoke on the phone with him last Monday, he sounded strong and a bit optimistic about his health, even though he had just returned from a one-week hospital stay with a severe illness, an illness that a few days later took his life.
Although his ideas live on stronger than ever, it is hard to believe that he is not here.
I can no longer seek his opinions on my papers, but I will continue to ask myself about any ideas I have: would my teacher and dear friend Milton Friedman believe they are any good?.
An increase in the minimum wage has several distinctive negative effects on the economy.
While the wages of some low skilled workers would improve, it would reduce employment opportunities for teenagers and other lower skilled workers.
They are pushed either into unemployment or the underground economy.
A bigger minimum also raises prices of fast foods and other goods produced with large inputs of unskilled labor.
Workers who receive on the job training must accept lower wages in return.
A higher floor on wages prevents the wages of lower skilled workers from being reduced much, and hence discourages firms from providing much training to these employees.
A rise in the minimum wage increases the demand for workers with greater skills because it reduces competition from low-skilled workers.
This is an important reason why unions have always been strong supporters of high minimum wages because these reduce the competition faced by union members from the largely non-union workers who receive low wages.
Most knowledgeable supporters of a higher minimum wage do not believe it is an effective way to reduce the poverty rate.
Poorer workers who are lucky enough to retain their jobs at a higher wage obviously do better, but the poorer workers who are priced out of the above ground economy are made worse off.
Moreover, many of those who receive higher wages are not poor, but are teenagers and other secondary workers in middle class and rather rich families.
Poor families are also disproportionately hurt by the rise in the cost of fast foods and other goods produced with the higher priced low-skilled labor since these families spend a relatively large fraction of their incomes on such goods.
A recent petition by over 600 economists, including 5 Nobel Laureates in Economics, advocated a phased-in rise in the federal minimum wage to a much higher $7.25 per hour from the present $5.15 per hour.
This petition received much attention, and the number of economists signing is impressive (and depressing).
Still, the American Economic Association has over 20,000 members, and I suspect that a clear majority of these members would have refused to sign that petition if they had been asked.
They believe, as I do, that the negative effects of a higher minimum wage would outweigh any positive effects.
That is one reason I would surmise why only a fraction of the 35 living economists who received the Nobel Prize signed on to the petition--I believe all were asked to sign.
Controversy remains in the United States (and elsewhere) over the effects of the minimum wage mainly because past changes in the U.S.
minimum wage have usually been too small to have large and easily detectable general effects on employment and unemployment.
The effects of an increase to $7.25 per hour in the federal minimum wage  that many Democrats in Congress are proposing would be large enough to be easily seen in the data.
It would be a nice experiment from a strictly scientific point of view, for it would help resolve the controversy over whether the effects of large increases in the minimum wage would be clearly visible in data on employment, training, and some prices.
Presumably, even the economists and others who are proposing this much higher minimum must believe that at some point a still higher minimum would cause too much harm.
Otherwise, why not propose $10 or $15 per hour, or an even higher figure? I am confident that for this and other reasons, the actual immediate increase in the federal minimum wage is likely to be significantly lower than $2.10 per hour.
A number of countries, including France, have already initiated this experiment, for the ratio of the minimum wage to the average wage in these countries is much higher than in the United States.
The effects of the French minimum have been carefully studied by two excellent economists, Guy Laroque and Bernard Salanie, in a series of articles, such as " Labor Market Institutions and Employment in France,"   Journal of Applied Econometrics  , 2002.
They find that the relatively high minimum in France explains a significant part of the low employment rate of married women in France.
Salanie has also argued that the high French minimum wage is important in explaining the dismal employment prospects of young persons in France, and the huge unemployment rate of Muslim youths there, estimated to be about 40 per cent.
I am sorry for this late reply to the many interesting posts on polygamy.
I will not be able to consider all the issues raised, but I discuss a few.
I come back to the comments on crime next week.
Someone asked about how polygamy would affect the incentives of men to invest in more skills, etc in order to be more competitive in marriage markets? We do know from historical data that men tend to marry later in polygynous societies in order to have enough income and wealth to be sufficiently attractive as mates.
However, if sharing of resources in a marriage is determined by supply and demand considerations, one can show that the investments in skills and other ways to be more attractive are efficient (see the discussion in the chapter on marriage in the book,   Social Economics  , by Kevin M.
Murphy and me).
However, if sharing is based on rigid rules, such as 50/50 split, investments in skills may be either excessive or insufficient from an efficiency perspective.
Clearly, polygyny has sometimes been encouraged when there is a shortage of men, as when many men have been killed in war.
As William Julius Wilson and others have emphasized, there is now a significant shortage of eligible men in black communities.
Perhaps that would lead to a little polygyny if it were allowed, but as I said in my post, polygyny is quite rare in modern societies even when permitted.
I explained this by a substitution of quality of children for quantity.
I agree with one comment that it also involves a substitution of one higher educated wife for two or more less educated ones.
I do not believe there is much of a biological argument against polygyny.
For most non-human species are polygynous, not monogamous.
I believe polygyny has also been more common among mammals than monogamy.
Probably, a majority of humans in the more distant past also lived in polygamous, not monogamous, societies.
So if anything, monogamy has evolved due to culture and against biology.
Do girls need protection against polygamy? Not if it were openly allowed rather than an illegal activity in some remote rural area of Utah.
I repeat what I said in my post: I have considerably more confidence than some of the posters that young women can make at least as considered decisions with respect to marriage as young men.
If, however, there is a belief that young girls will be taken advantage of, have a law that raises the minimum age before girls can enter into polygynous marriages.
Some completely erroneous statements were made in one of the comments about the relative commitment to marriage of men and women.
These were well answered by other posters, so I will only add that I assume this view also implies that women are less interested in having custody of children than men?.
My comments on gays having children were made only to point out how many marital practices that were forbidden in the past are now allowed.
Perhaps I am wrong in my view that there tends to be negative effects on children raised by gays.
I do not strongly hold this view, and look forward to the time when we have more convincing evidence, one way or the other.
I do not believe the election proves much other than that corruption scandals and the Iraq war hurt Republicans.
Posner gives a very good discussion of some of the criticisms made about the American system.
I will comment on a couple of the issues.
I have seen no convincing evidence that past limits on campaign contributions have improved the political process, or weakened the significance of interest groups.
A major problem is that campaign limits have been difficult to enforce.
Also, as Posner indicates, the Internet has opened up the possibilities of raising large sums in small individual contributions.
I have doubts too about whether it is better or fairer when some groups use lots of time of young people and others to help in campaigning rather than money.
In addition, some of the most powerful interest groups have not mainly had rich members, such as farmers, the teachers union, craft unions (at the local level), and groups in favor of sharp restrictions on immigration.
Very rich Americans and large American corporations have political power to be sure.
Yet the tax on corporate profits in the United States is much higher than in most Western European nations, and the American tax on inheritances is far from the lowest among rich nations.
The United States does have greater earnings inequality and proportionately more rich businessmen than European countries or Japan.
This is partly because the United States has higher before-tax returns to education and other skills than these other economies, even though a larger fraction of Americans get a college education than in most European nations.
The main explanation for the difference is that the United States has a much more flexible economy than most other nations.
In a knowledge economy, this produces bigger benefits to greater education and other skills.
It is also easier to become an entrepreneur in this country than in most other countries.
Political scientists have long wondered why anyone votes in a democracy since any individual's vote is very likely to have a minuscule effect on the outcome of a political race.
The same logic implies that voters have little incentive to be informed about the issues, even aside from the fact mentioned by Posner that many of these issues are highly complex and difficult to understand--such as the effects of a federal budget deficit on the economy.
This means that many votes, particular those least committed to voting, are likely to be swayed by political advertising and emotional appeals.
Under these circumstances, it is not obviously advantageous to have large turnout rates.
International comparisons of political outcomes in Europe vs.
American suggest that Europeans put more emphasis on equality than Americans do, and less emphasis on efficiency.
These and other differences might be attributed, although causation as usual is tricky, to the fact that European nations have much sharper restrictions on campaign contributions, less opportunity for gerrymandering, generally greater voting participation rates, and apparently better "informed" voters than in the United States.
Although the Europeans have less inequality typically, they tolerate much higher rates of long-term unemployment than America has.
All studies show that long-term unemployment is the most destructive of self-confidence and measures of "happiness".
European countries protect agriculture against imports from poor nations more strongly than America does, has a poorer environment to start businesses by individuals with limited resources, and generally have policies that are less tolerant of immigrants from the third world.
The European social security system that provides retirement income and unemployment benefits is much more generous than the American one.
However, Europe spends a lot less on health, including the health of the elderly and the poor, than America does.
Which system is better: the American political system, or the European model with lower campaign contributions, few opportunities for gerrymandering, larger voter turnouts, and apparently a politically better informed population? One can differ on the answer, but it is far from obvious to me that the European approach works out better in practice.
Posner raises interesting and important issues, and even paradoxes, about the nature of advertising by airlines and other sectors.
The specific question that starts his analysis is why airlines with relatively good on time performances do not advertise that fact? To discuss this and related issues, it is necessary to consider the nature of advertising and the role of information in advertising.
The essential points of my discussion are that much advertising conveys essentially no information about characteristics of the products being advertised, that this does not mean that consumers are irrational, and that some advertisers do provide information to compare their products with those of competitors.
Advertisements for soap, perfume, and many of the other products with large scale national advertising provide very little information, but try to get potential consumers to associate their products with pleasant images.
A good example is the large fraction of products advertised on national television.
Such ads may seem to cater to the "irrational" side of consumers, but preferences of consumers get formed in many ways, including reiteration by parents of values and morality without providing much information.
Given this, it would be not surprising if advertisers often could persuade customers to buy their product without supplying a whole lot of information.
Economists have generally not been friendly toward persuasive advertising since it is much easier with the usual economic analysis to discuss advertisements that provide information or misinformation.
Yet tools are also available for considering the persuasive formation of attitudes and preferences with rational consumer behavior - see my book of essays, Accounting for Tastes, 1996.
Although such an analysis of preference formation is dependent on some underlying psychological mechanisms that are not well understood, the process appears to be quite rational.
The role of information in advertisements is complex, and varies greatly across different products, and even over time for the same ones.
For example, while as Posner indicates, airlines almost never mention their online times or offer comparisons of their online records with the records of competitors, airlines do use comparisons with other airlines when advertising other characteristics.
They mention sometimes how their coach seats have more room than the seats of rivals, or that their business class seats fold into a flat bed while competitors' business class seats do not, or compare their food and other service with that of others.
They usually do not mention competitors by name because that is thought to give valuable publicity to rivals.
Recall the old saying of politicians: "I don‚Äôt care what you say about me as long as you spell my name right.".
However, some advertisements show no reluctance to make invidious comparisons with the performance of rival products, and sometimes even name the rival products.
Competitors to Viagra mention that the effects of their products on sexual performance last longer than Viagra does while many other drug advertisements compare the performance of these drugs with those of leading brands.
In these advertisements, considerable information is provided, and usually it is pretty accurate as far as it goes, although they do not mention those aspects where the drugs advertised do not do as well as competitors.
In many industries, newer products that are trying to break into a market dominated by a few leaders show no hesitation in using their ads to criticize the performance of the leading brands compared to their own brands.
Then why don't airlines point out the greater delays by competitors when these exist? Of course, it would be misleading unless it was done for comparable routes since delays are more common in and out of major cities, especially during peak travel times and days, but airlines do not want to make such refined and informative comparisons.
One problem is that delays usually occur on a whole air traffic grid, so that an airline that was lucky one month in having fewer delays on a grid might be unlucky the following month.
This would open an airline to attack and ridicule by competitors if they tried to exploit a short-term on time advantage.
Moreover, delays are so extensive mainly because slot takeoffs and landings are not sold, but are given away free to different airlines.
Since many airlines benefit from free slots, they may not want to highlight delays because they fear that would cause a reaction toward selling them to airlines to cut down on delays.
That said, challenging puzzles remain in using economic analysis to explain the types of information used and not used in advertisements, whether or not there are comparisons to the products of rivals.
However, given all the professional time and thought that goes into advertisements, I am reluctant to claim that advertisers are not rational in what they do, for we do not understand all the relevant considerations that enter into the determination of the types of persuasion and information that are highlighted.
The wealth of some individuals is so staggering that it is hard for the rest of us to fathom.
All of the world's 100 richest individuals are worth much more than $1billion.
Even persons with a few billion dollars would not make this exclusive list since Donald and Samuel Newhouse are tied for the bottom spot with $7billion (the rankings are for March of 2007, and were compiled by Forbes magazine-the data are available at http://www.forbes.com/lists/2007/10/07billionaires_The-Worlds-Billionaires_Networth_7.html; see also the excellent discussion of a similar list in a November 7th article by Martin Wolf in the Financial Times).
Bill Gates, Warren Buffet, and Carlos Slim of Mexico top the list with a net worth estimated to be between $50-60 billion; the asset values of these and others on this list fluctuate a lot over time with changes in the valuations placed on stock and other assets.
This list has 39 Americans, 14 Russians, 8 Indians, and several each from Germany, France, Sweden, and Saudi Arabia.
Mainland China has none yet among the wealthiest individuals (Hong Kong has three), but the rapid wealth accumulation in China means that before long several mainlanders will join this exclusive club.
The list contains both individuals who  inherited most of their wealth,and those who made it by building businesses.
Only a couple of those on this list acquired their wealth from just being a CEO of a significant company.
I am impressed that the strong majority of the world's richest individuals (about 30 out of the 39 richest Americans) made their money rather than inherited it.
 The wealthiest individuals are mainly self-made because inherited wealth gets dissipated over a couple of generations through bad investments, or is given to various charities, or gets broken up and divided among many grandchildren, cousins, and divorced members.
For this reason, no descendants of John Rockefeller, Andrew Carnegie, or other titans of the beginning of the century are among the very wealthiest.
To be sure, some of these "self made" billionaire businessmen accumulated some of their wealth from political connections that gave them protected markets.
This category includes Carlos Slim, many of the richest Russians, and some others.
They tend to be able businessmen, but there is a vast difference between the contribution to society from starting a Google, Microsoft, Wal-Mart's, Arcelor Mittal, or IKEA, and the extraction of profits from a monopoly position protected by government regulations.
If we assume an average rate of return on this wealth of about 6 percent in real terms, then the combined income of the 39 richest Americans amounts to about ¬æ of 1 percent of US gross domestic product (GDP).
This is a sizable share for only 39 out of 300 million Americans, but Carlos Slim alone gets about 1 percent of Mexico's income.
The wealth of the14 richest Russians generate a combined income that is over 4 percent of that country's GDP.
Given the enormous wealth of these individuals, it might be surmised that the gap between the incomes of the very richest and the average individual increased substantially during the past 100 years.
Actually, the opposite appears to be true.
John D.
Rockefeller's income was about 1/3 of 1 percent of the much smaller American GDP of his time, whereas Bill Gates' income is less than 1/12 of one percent of current US GDP.
More generally, the overall inequality in wealth also declined greatly in the US, UK, and other western European nations during the first 60 years of the 20th century.
Inequality has increased significantly since then, but it is still less than at the beginning of the century.
Clearly, governments should not offer individuals protected markets that enable them to accumulate such enormous wealth.
However, as I indicated earlier, the Americans on this list, and most others from Western Europe, Hong Kong, and India acquired their wealth through creating sizable value to consumers from new products and processes, greater efficiencies, and novel services.
Obviously, these individuals were well rewarded for doing this, but consumers have benefited by much greater amounts.
Still, there is pressure in most countries to tax heavily the very wealthy.
One possible reason to do so would be to prevent their children and other descendants from having large advantages over descendants from financially modest families.
But to help in equalizing opportunities, taxes should be on inheritances, not as in the US and many other countries, on estates.
Even inheritance taxes, however, do not reduce the advantages from growing up in very wealthy environments, nor do they affect the huge head start from being raised in  educated households that are not wealthy.
From the perspective of getting a better education and higher earning power, having educated parents is considerably more advantageous than having very wealthy parents.
A heavy tax on the very wealthy would also raise tax revenue that could replace income and other taxes on the not so wealthy.
I believe that individuals with wealth in excess of hundreds of millions of dollars would tend to work about just as hard when their estates would be heavily taxed as they would without estate taxes, as long as they would still have a very large after-tax estate.
However, the revenue raised has to be balanced against the costly evasions and avoidances that such a tax generates.
These costs take the form of trusts that skip generations, the use of insurance policies with irrevocable beneficiaries, migration to low taxing countries, and other techniques known much better to the very rich than to me.
The US imposes a 45 percent tax on all (taxable) estates above a few million dollars.
This tax yields a moderate amount of revenue, but at the cost of creating a large industry of highly skilled estate tax professionals who would have used their talents at more socially productive activities were it not for the demand to find loopholes.
One justification for such high taxes that has some appeal even when only modest sums are collected is that high taxes have encouraged the very wealthy to create large tax-exempt educational and charitable foundations in order to reduce their taxes.
Yet since Rockefeller, Carnegie, and other highly wealthy individuals also created foundations when estate taxes were low, it is not clear how many modern foundations have been created mainly to avoid these taxes.
In any case, larger foundations could still be encouraged with much bigger exemptions from the estate tax-perhaps $50 million or even more.
This tax should only affect the extremely wealthy.
Michael Greenstone of MIT had the excellent idea of using financial data to provide information on what global investors believe about the viability of this government.
In an unpublished article revised on September 18th of this year, he uses data on movements over time in the yields on Iraqi bonds issued in 2006 by the present Iraq government to assess what investors believed about the prospects for success of the "surge" in American military personnel that began in mid-February, 2007.
He shows that yields remained at about 9.6 percent from the beginning of the surge in February to midsummer, then climbed to 11.5 percent in August, and was at that level when he finished his study.
What can one make out of this analysis?.
The bonds were issued with a 5.8 percent annual yield, which seems too low, given the high risks of a default by this government, and that high yield bonds (junk bonds) typically provide considerably higher yields.
So not surprisingly, these Iraqi bonds have been priced in the marketplace at a considerable discount in order to yield to buyers returns that are much higher than 6 percent if the government manages to pay both the interest and principal (due in 2028).
I agree with Greenstone and Posner that prices of these bonds offer a valuable way to determine expectations about the stability of the Iraqi government held by the savvy investors in the international bond market who are placing substantial financial resources at risk.
This does not mean that these investors are never wrong, or do not change their views as the evidence unfolds, but rather that bonds prices offers relevant information about the assessments of Iraq's future by persons who have an important financial stake in whether they are right or not.
The additional evidence available since Greenstone's September study provides a more optimistic assessment than at that time of how the surge is going.
Both American military and civilian casualties are way down during the past two-three months-Greenstone also refers to such data up until the end of August- and civilian life in Baghdad has returned to a semblance of normality for the first times in a few years.
Explosions, mortar attacks in Baghdad, and bombings all declined by a lot in recent months.
As a result, Iraq bond prices have also rallied significantly, so that their yields are down to about 10.5 percent recently.
This is still about 10 percent above yields in February, but the additional premium has been reduced from almost 2 to a little less than 1 percentage point.
Several commentators have emphasized that the steep decline in Iraqi bond prices and corresponding increase in yields that began in August coincided with the beginning of the credit crunch, which significantly raised interest rates on all bonds.
The crunch especially raised rates on riskier bonds, so it is not surprising that highly risky bonds like those issued by the government of Iraq should have fallen greatly in value starting in August.
To correct for this, it would be valuable to compare Iraq bonds with bonds of comparable risk.
Some traders have suggested comparisons with bonds issued by the government of Lebanon since that government's stability is also highly uncertain.
Apparently, Iraqi bonds have outperformed Lebanon's since the beginning of the surge.
This would suggest that the surge may be having a positive effect on investor's expectations about the viability of the Iraqi government, at least relative to the viability of other governments with questionable stability in that most unstable region.
However, Greenstone in his paper, and in some updated calculations of his that he sent me, prefers to use not a single country's data (a single country could be biased by choice of country), but an index of emerging market bonds.
The gap between Iraqi yields and emerging market yields did decline  noticeably from September, but the gap is still much larger than in February.
Another consideration relates to the ability of bond prices to accurately reflect what is happening to risk.
Suppose investors and others believe that the surge has greatly improved the average financial and other prospects of Iraq, including the stability of its government.
However, it is plausible that the riskiness of these outcomes has increased because of growing uncertainty about America‚Äôs commitment to continue its involvement, and the greater chaos that might follow if the surge failed.
On this view, the surge could have improved by a lot the average outcome expected for Iraq in the future, while at the same time it would have increased the likelihood that the government would fail, and that bonds would go into default.
Since the best that bondholders can do is receive interest and principal, while the worse is default on either or both these classes of payments, any increased risk produced by the surge would lower bond prices and raise yields even if expected outcomes greatly improved.
A more appropriate way to assess the effect of the surge on expectations about the economy, and presumably indirectly about the stability of the government, would be to examine changes in valuations on the nascent Iraq stock exchange.
Greenstone discusses trying to do that, but gave up because few stocks are traded, and trades are highly irregular.
Since the market is very thin, it is hard to reach any strong conclusions, but I have the impression from a few reports that prices of stocks on the Iraq stock exchange have risen in recent months.
Whatever the final conclusions about the evidence on the political future of Iraq provided by its bonds, financial markets are an underutilized source of information about the expectations of investors about political outcomes.
To be sure, financial expectations can be very wrong.
For example, Eugene Lerner has shown that the Confederate currency did not depreciate very rapidly (relative to the growth of the money supply) until only a few months before the end of the Civil War, even though historians are unanimous that the South had effectively lost the war long before that.
Still, I generally would have more confidence in the accuracy of the expectations of persons with a serious financial stake in outcomes than in the forecasts of most others who express their views on future political outcomes.
All the rich countries are successful in raising sizable amounts of revenue from taxes with only a rather little tax evasion.
Tax avoidance is the use of legal means to reduce taxes, whereas tax evasion uses illegal means.
The federal government of the US raises almost 20 percent of American GDP through taxes on personal and business income, capital gains, estates, and the sale of gasoline and some other goods.
The estimates from the 2001 IRS National Research Program indicate that the percent of income not reported is quite low for wages and salaries, but rises to over 50 percent for farm income, and about 40 percent for business income.
Income tax payments overall are under reported by about 13 percent.
What determines the degree of tax evasion?.
If taxpayers responded only to the expected cost of evading taxes, evasion would be far more widespread.
The reason is that only about 7 percent of all tax returns are audited (over a 7 year period), and typically the penalty on under reported income is only about 20 percent of the taxes owed.
Virtually no one is sent to jail simply for evading taxes unless that evasion is on a very large scale, or involves massive fraud.
If a person were to evade $1,000 in taxes, his expected gain would be 0.93x$1000 -0.07x$200 (=$1000/5) = $916.
On these considerations alone, he should not hesitate to evade paying the $1,000, and presumably much more.
To be sure, the expected gain is not the right criterion since most taxpayers would be risk averse regarding audits and punishments, especially if there is some chance of much greater than the average punishment or likelihood of an audit.
However, if the expected gain from evading $1,000 were $916, the degree of risk aversion would have to be huge, far higher than the risk aversion that is embodied in pricing of assets, for risk to explain why there is so little tax evasion.
This is not to say that possible punishments have no affect on the amount of tax evasion.
Compliance rates are much higher when governments have independent evidence on a person's income since then the probability of audit when he under reports his income is much higher than when they do not have this information.
For example, income from independent consulting to companies is better reported than tips on earnings, or than the incomes of farmers and other small business owners because employers report how much they paid to independent consultants, whereas no one reports how much they paid in tips, or how much they bought from a local store.
A PhD study in progress at the University of Chicago by Oscar Vela also shows that persons in occupations where integrity is a more important determinant of success, such as law or medicine, are less likely to evade taxes.
Presumably, any publicity that an individual in these occupations was convicted of tax evasion would damage his reputation and earnings.
Vela finds that considerations of reputation, along with more traditional variables in the tax evasion literature do help explain how much evasion occurs for different types of income.
These variables include the likelihood of audits that varies for different classes of taxpayers, punishments for those audited, marital status (not surprisingly, married persons are less likely to evade taxes), the marginal tax rate, and the ease with which governments can match reported incomes with independent evidence on incomes, such as from 1040 and 1099 tax forms,.
Note that tax avoidance as well as tax evasion tends to rise as the marginal tax rate increases.
That is, with higher tax rates, individuals and businesses are both more likely not to report some of their income to the tax authorities, and also to search harder for ways to reduce how much of their income they are obligated to report.
This implies, for example, that flattening the income tax structure would increase the amount of personal income reported to tax authorities because both the amount of evasion and the avoidance of the personal income tax would be reduced.
However, audits, punishments, and the other deterrence variables mentioned in the previous paragraphs do not fully explain why there is not much more tax evasion.
I believe it is necessary to recognize that most people believe they have a duty, moral or otherwise, to report their taxable income more or less honestly.
I intentionally say "more or less honestly" because a little cheating on taxes is usually considered to be ok, as long as it does not go too far.
Individuals might not pay social security taxes on their payments to workers who clean their houses, and they might pay a mason in cash because he then gives them a lower price, but these same persons would be very reluctant to engage in large-scale tax evasion.
Similarly, most people do not believe it is moral to steal money even when there is little chance they will be found out, and they feel obligated to obey many other laws, even when that entails inconvenience and cost to themselves.
There would be considerably more crime if individuals only obeyed laws when the expected cost of being caught, adjusted for risk, exceeded the benefits from disobeying these laws.
To some extent, people obey many laws, including tax laws, because most other persons are doing the same.
If so, their behavior might change radically if they lost confidence that others would pay their taxes and obey other laws.
Clearly, morality about obeying laws does not apply to all types of taxes, or all laws-people often cross a street when the light is red, do not stop at stop signs when riding their bikes, and do not report much of their tips.
Moreover, in many countries of Latin America, Africa, and Russia and other parts of Eastern Europe, individuals do not even feel much obligation to pay ordinary income and other taxes.
They evade except when they expect the chances of being caught are high, as with businesses paying value added taxes.
These countries are unable to raise substantial amounts from taxes on personal incomes or businesses except when marginal tax rates are low.
Instead they rely greatly on value added and other more difficult to evade taxes.
The big three American auto producers General Motors, Ford, and Chrysler, are in terrible financial shape.
They have asked the government for a bailout, and the Democratic leadership in Congress is eager to give them one.
The United Auto Workers union was a strong supporter of President-elect Obama and of Democratic candidates.
These companies have lost tens of billions of dollars during the past few years, and they will shortly run out of cash.
GM's shares have lost almost all their value, and Ford has not done much better.
Cerberus Capital, a private equity company, owns Chrysler, and it has lost most of what it invested in the company.
For this reason Cerberus is trying get out of the automobile manufacturing business.
All three companies were heavily into producing trucks and SUV's when the sharp run up in gas prices induced consumers to shift away from these gas-guzzlers and toward smaller and more fuel-efficient cars.
Moreover, what money GM had been making came mainly not from car production but from its automobile credit business, (GMAC).
This company would borrow from banks to lend to consumers who needed help in financing their GM car purchases.
The financial crisis has dried up the money available to auto financing companies, and hence eliminated the major source of their profits.
If GM is not bailed out, the company claims it will be forced into bankruptcy within a few months, and Ford's situation is only slightly better.
GM is blitzing Congress, President Bush, and President -elect Obama with pleas for a bailout, followed by a warning that bankruptcy will also hurt auto suppliers throughout the nation that depend on GM's business.
GM is also claiming that bankruptcy will put major financial pressure on the Pension Benefit Guaranty Corp, the federal agency that insures benefits to retirees in the auto industry as well as to million of other workers.
Nevertheless, I believe bankruptcy is better than a bailout for American consumers and taxpayers.
The main problem with American auto companies is that during the good times of the 1970s, 1980s and 1990s, they made overly generous settlements with the United Auto workers (UAW) on wages, pensions, and health benefits.
Only a couple of years ago, GM was paying $5 billion per year in health benefits to retirees and current employees because their plans had wide health coverage with minimal co-payments and deductibility on health claims by present and retired employees.
In those days, the UAW was one of the most powerful unions in the US, and it bargained aggressively with the auto manufacturers, carrying out strikes when its demands were not met.
When the American auto industry began to face tough competition from Japanese and German carmakers, they were saddled with excessive pay to their workers, and vastly excessive pensions and health benefits to their current and retired workers.
It is not that cars cannot be produced profitably with American workers: the American plants of Toyota and other Japanese companies, and of German auto manufacturers, have been profitable for many years.
The foreign companies have achieved this mainly by setting up their factories in Southern and border states where they could avoid the UAW, and thereby introduce efficient methods of production.
Their workers have been paid well but not excessively, and these companies have kept their pension and health obligations under control while still maintaining good morale among their employees.
In recent years GM and the other American manufacturers have chipped away at their generous fringe benefits, but their health and retirement benefits still considerably exceed those received by American auto workers employed by foreign companies.
As a result of lower costs, better management, and less hindrance from work rules imposed by the UAW, about 1/3 of all cars produced in the US now come from foreign owned plants.
Bankruptcy would help GM and Ford become more competitive by abrogating significant parts of their labor contracts with the UAW.
One of the greatest needs would be sizable reduction in their health costs through sharp increases in the deductibility and co-payments, and a reduced coverage of medical procedures.
Bankruptcy should also help bring the wage rates of GM and Ford in line with those of foreign producers in the US.
Some of their pension liabilities may be shifted onto the Pension Benefit Guarantee Corp, but even that would be preferable to an overall bailout.
A good analogy is what happened to United Airlines.
By entering bankruptcy it was able to reduce its inflated cost structure by breaking contracts it had with the pilots union and other employee unions.
It exited bankruptcy a slimmer and more efficient airline.
Whether it is able to compete effectively in the long run is still not certain, but it is in much better shape to compete than before it entered bankruptcy.
Bankruptcy may also force out the current management of GM and Ford.
I do not know for certain whether they have competent management- GM surely did not have top management for much of its recent history.
I do believe, however, that when a coach of a team loses a few games, he might legitimately explain that by injuries, bad luck, or even bad officiating.
These excuses become lame when he consistently loses many games, and the correct and common practice is then to fire the coach.
The same considerations apply to top management.
When a company consistently does badly while some of its competitors (like Toyota) are doing well, its time to fire the management team, and see if another team can do better.
Is GM "too big" to fail? I do not believe the company is too big to go into a reorganization-which is what bankruptcy would involve.
Such reorganization would abrogate its untenable labor contracts, and give it a chance to survive in long run.
A bailout, by contrast, would simply postpone the needed reforms in these labor contracts, the business model of GM, and its management.
Some older theories of business cycles-usually associated with the "Austrian" school of economics- claimed that recessions and depressions were useful in helping to remove the poison from an economy that builds up during good times.
For example, weaker companies are the first to go when the demand for an industry's product falls during recessions.
Employees who are allowed a lot of slack during good times are forced to work harder during recessions in order to keep their jobs.
Positive effects such as these may be somewhat important during very mild downturns, but they are overwhelmed during major recessions and depressions by the negative effects.
I define a "major" recession as having an extended period of unemployment rates at 9 percent or more, coupled with declining GDP.
It looks like the US and the world economies may be headed for such a recession for the next year or so.
Economists have underplayed the cost to individuals of mild to severe recessions in part because they have neglected the cost of the "fear" generated by bad economic times.
In his1932 inaugural address in the midst of the Great Depression Franklin Delano Roosevelt reassured he American public that the "Only Thing We Have to Fear Is Fear Itself".
In fact they had a lot more to fear, but Roosevelt recognized the great importance of fear during depressions.
In the present crisis too, consumers and workers have multiple fears due to various kinds of uncertainty.
Homeowners fear that they may lose their homes after having used most of their savings as down payments on their homes.
The employed fear that they will be laid off, while the unemployed fear that its duration will be quite long, and that they eventually will only get jobs that are much inferior to the ones they had.
To be sure, some of the unemployed in many countries will receive unemployment compensation, but many unemployed American do not qualify for this benefit.
Moreover, unemployed workers in this country usually receive much less than their earnings while employed, and after a while they run out of benefits, although benefits get extended during recessions.
The fear about losing one's job interacts with fears about being unable to make payments on homes, cars, and other consumer durables.
Unemployed persons start missing payments on their homes or cars.
If this goes on for several months, they may have their cars repossessed, and their homes put into foreclosure, usually at a time when home prices are down a lot, so that can at best regain only a fraction of the equity they put into their homes.
In addition, the burden of a major recession is not shared uniformly.
It usually falls disproportionately on unskilled workers, the young, and those in shaky financial positions, which tend to be persons with lower educations and incomes.
For example, the unemployment rate of high school dropouts is traditionally several times that of college graduates, so when the average unemployment rate goes from 6 to 9 percent, that of college graduates may rise to about 4 percent, while that of dropouts will increase to over 20 percent.
This recession may be a bit different since the financial sector is being hit so hard.
Individuals and families already in shaky circumstances get hit especially hard by major recessions.
It is relatively easy to measure what happens to the unemployment rate during recessions and its differential incidence among different groups, or the number of persons who drop out of the labor force because they despair of finding a job.
One can also measure relatively accurately the effects on profits, wages, the path of GDP and personal incomes, and other  important variables.
It is far harder to measure precisely the effects of serious recessions on individual welfare and happiness.
Surveys of reported happiness find that workers who become unemployed are less happy than they were, and persons whose incomes have fallen reported a decline in their happiness, at least initially.
Divorce rates and even suicide rates also tend to rise during major recessions, as does crime, discrimination against minorities and immigrants, and pressure toward greater protectionism.
Relative to these major costs, the alleged benefits of a recession to the United States seem quite small, and some of them could also be costs on balance.
 For example, how many infrastructure projects can be undertaken when states are already running deficits, and face even larger ones in the coming months? The federal government will have a huge deficit during the next year, perhaps a trillion dollars, because of the $700 billion bailout, the stimulus package, and the expected sharp declines in tax revenues.
A serious recession will certainly lead to increased regulation of business and labor markets.
Some greater regulation of financial markets would certainly be desirable, as I have argued in prior posts, but some of the likely new regulations will be harmful, such as greater protectionism, wage-type controls over income of top executives, higher taxes on capital gains, and others.
The decline in oil prices by over 50 percent to $60 or less a barrel will certainly help American consumers and companies since the US imports about 2/3 of the oil it uses.
It is also helpful to American interests to have less revenue flowing to Venezuela, Russia, and some of the Middle Eastern countries.
On the other hand, the US is a major exporter of grains and beef, and the decline in their prices will cause considerable problems for farmers.
On balance, I believe the decline in commodity prices is a plus for the US, but not a huge one, especially if oil prices begin to rise sharply after the world recession is over.
A serious recession will further erode the pay and bonuses of top executives at financial and other companies, which many will be happy to see.
Managers of mutual and hedge funds and investment banks may have been making much more money than is justified by their productivity, but surely the misery inflicted on the lesser skilled workers, low income families, poor homeowners, and other economically weaker groups is not worth any benefits from a sharp fall in the incomes of those at the top.
So my bottom line in discussing the question whether depressions have a silver lining is that any such lining is very thin and small compared to the major costs to households, workers, and small businessmen.
I agree with Posner that the future of free market policies in the United States has been damaged by the financial crisis, and by the continuing rise in unemployment and slowdown of the American (and world) economy.
The degree of damage, however, will be determined by the length and severity of this recession.
If the recession does not develop into a deep and prolonged depression, there will not be a sizable retreat from the market policies that have been in effect.
The big victory of Senator Obama and the Democratic Party was not a referendum on free market policies.
Rather it reflected the continuing unpopularity of the Iraq war and of the Bush administration, and months of growing concern about foreclosures, rising unemployment, and the weak economy.
American voters seem to want greater regulation of the financial sector, not an abandonment of policies that generally have supported the private sector and competition.
This is reflected in the economists Obama has appointed to top positions in his administration.
These economists, such as Larry Summers and Paul Volker, have generally recognized the importance of competition as a way to regulate market behavior.
Nevertheless, in light of the severity of the financial crisis, greater regulation of financial institutions is merited.
The challenge is to find regulations that would significantly reduce the probability of future financial crises without discouraging the valuable contributions commercial banks, investment banks, and other financial institutions make to risk management and the financing of home ownership and business investments.
Several changes do seem likely to be beneficial.
Greater capital requirements (relative to assets) for all financial institutions, including investment banks and hedge funds, would help banks better weather runs on their assets.
Greater transparency in the information financial institutions provide about their assets would also be useful, although modern assets are often so complicated that transparency will not always be easy to achieve.
Fully privatizing Fannie Mae and Freddie Mac would help reduce the flow of mortgages to unqualified homeowners.
Incomes of many fund managers and private equity leaders rose enormously, but it is difficult to prevent that from happening again without introducing controls over their salaries, stock options, and bonuses.
The greatest challenge is to find ways to reduce the type of private risk-taking in which the taxpayer bails out failure, although greater capital requirements would help.
Posner advocates a pragmatic approach to the evaluation of public policies.
Up to a point that approach is fine if it just means a careful consideration of all the available evidence relevant to proposed policies, including knowledge built up from the successes and failures of past policies and actions.
But facts themselves are silent without being guided by an analytical framework or theory, so pragmatism is not sufficient to provide important insights into the desirability of various public policies.
Conservatism, liberalism, and various combinations of these positions provide different frameworks to interpret the facts.
Posner agrees that a theoretical framework is crucial for interpreting evidence because knowledge about how particular policies worked in the past or might work in the future is seriously incomplete.
This knowledge has to be supplemented with predictions about how particular policies would affect the operation of the economy, especially over aspects of the economy where evidence about behavior is very incomplete.
These predictions can only come from a theory about behavior and markets that sheds light on the behavior that is not directly observed.
To take a concrete example, the consequences of imposing minimum capital requirements relative to assets on all financial institutions, including hedge funds and private equity companies, depends not only on how such a requirement would affect the operation of the financial system, but also how it would affect investments, employment, and other aspects of the real economy.
To understand these consequences requires a theory of the effectiveness of competition in this sector, and an analysis of whether the present financial crisis would have been much milder if capital requirements had already been in place.
The general point I am making is that an economic theory of how markets operate is necessary to evaluate any significant new regulations and other government policies for financial markets (and more generally, for other markets as well, such as the subject of our blog two weeks ago on whether a bailout of the auto industry is justified).
Some retreat from free market conservatism is to be expected an s a result of the crisis, but it would be a serious mistake if the analysis of financial and other markets that becomes dominant in Washington gives insufficient weight to the enormous contributions of business competition in raising human welfare.
The title of this discussion is taken from a question put by the John Templeton.
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The government's preliminary estimate of the growth in American GDP during the third quarter of 2009 is an impressive annual rate of 3.5%.
This figure may be revised downward (or upward) as more data on the third quarter become available, but it surely definitely signals that the US recession is over.
In my post on August 9th of this year I already expressed my belief that the recession in the US and the world would end during the third quarter.
The end of a recession does not mean that an economy is back to where it would have been without the recession-the US economy is certainly not anywhere near that point yet- nor that the recovery from the recession will be rapid.
The rapidity of the recovery in the US or the world is not yet clear, although many economists who follow short term movements of the economy more closely than I do are predicting a slow and drawn out recovery period in the EU, Japan, and the US.
I am not convinced by their forecasts because of the rapid recoveries in Asia, Brazil, and some other countries, and as long as American productivity continues to grow at a rapid rate.
To be sure, unemployment is likely to continue to increase for a while since it is what is called a "lagging indicator".
However, it almost surely will peak below the 10.8% reached at the end of 1982.
During the past couple of years the world went through a severe recession, but it was not appreciably worse in the United States, as measured by the effects on GDP and unemployment, than during some other recession in the past 40 years.
Of course, without some of the proactive policies of the Fed and the Treasury, this recession probably would have been deeper and longer.
Not surprisingly, these comments lead me to join Posner in taking a negative view of the plan to pay every social security annuitant a $250 bonus in 2010.
The reason given to justify this payment is that the elderly will get no cost of living increase in their social security payments since prices fell rather than rose during the past year.
As Posner indicates, this is an illogical and basically nonsensical justification for this bonus to social security recipients.
Taxpayers already heavily subsidize the elderly through Medicare and to some extent social security payments, and there is little reason to use spurious arguments to add to that subsidy as part of the stimulus package.
More generally, the $787 billion stimulus-spending package of the Obama administration has made little sense since its inception, as I have argued in several blog posts and elsewhere.
Business cycle analysts have long known and documented that fiscal spending programs are not very good at helping to fight recessions since they take a long time to implement.
By the time fiscal spending actually occurs.
the recessions they were supposed to be combating are usually over.
 Only about one third of the present stimulus package has yet been spent-and much of it not very well spent.
Yet, the recession is already over, although to be sure, the recovery is still at the beginning stages.
I do not believe that inflation due to the Fed's rapid increase in bank reserves is yet a major worry, although it will be in a few years as banks spent these reserves by making additional loans and other investments.
Nor do I believe that the huge increase in federal government spending, on the stimulus programs and to help the banks, will be a major cause for concern, as long as American GDP will grow at a much more rapid rate during the next decade than will government spending.
However, the much higher interest payments on the much larger government debt will have to be met either by raising taxes, cutting other government spending, rising tax collections from increased output, or inflation that deflates the real value of these interest payments.
 I am very much worried that it will be impossible to stop the growth of government spending, so that there will be an enormous, and probably irresistible, temptation to inflate to reduce the real value of the debt, and to raise taxes on higher income persons.
Both of these will have negative effects on the growth rate of the American economy.
During this "Great Recession", unemployment has risen from under 5% at the beginning of the recession in December of 2007 to more than double that rate to reach its highest level so far in October of 10.2%.
This is the second highest unemployment rate in the postwar period, surpassed only by the 10.8% rate in December of 1982.
In light of such rather dismal employment figures, it is not surprising that the President will have a "jobs summit" in a few days to consider how to improve the employment market.
Posner correctly indicates that the unemployment rate understates the employment problem since some men and women have left the labor force after giving up finding work, or they are working part time when they would like to work full time.
The so-called "underemployment" rate is estimated to be 17.5%, much higher than the unemployment rate.
Note, however, that the underemployment rate is far harder to estimate accurately than is the unemployment rate, which itself is difficult to measure.
I have responded to Posner's emphasis on the underemployment rate in previous posts that apples have to be compared with apples.
If the underemployment rate, not the unemployment rate, is used to measure the severity of this recession, than the underemployment rate also has to be used for past recessions.
Not surprisingly, underemployment was also considerably higher in these recessions than was unemployment.
The underemployment rate for December of 1982 is estimated at about 17.1%, also much above the high unemployment rate at that time.
Yet while the unemployment rate has not yet reached the rate obtained in 1982, for the first time the estimated underemployment rate has slightly surpassed the rate for that earlier recession.
In addition, while this recession ended during the third quarter (I believe), unemployment usually lags any pickup in the overall economy, so that the unemployment rate is likely to continue to rise further.
However, there are signs of a pickup beginning in the labor market: hours worked of those working have been rising, and wage rates rose by about 2% during the past year.
The rise in wages-which is uncommon during recessions- also casts doubt on claims of extensive wage cutting during this recession.
Yet it is an unusual combination: workers who still have a job are doing better than in other serious recessions, but the underemployment rate has grown to its highest level since the Great Depression.
Keynes and many earlier economists emphasized that unemployment rises during recessions because nominal wage rates tend to be inflexible in the downward direction.
The natural way that markets usually eliminate insufficient demand for a good or service, such as labor, is for the price of this good or service to fall.
A fall in price stimulates demand and reduces supply until they are brought back to rough equality.
Downward inflexible wages prevents that from happening quickly when there is insufficient demand for workers.
The usual suggested remedies are either to stimulate demand for labor, or to reduce the real cost of workers to employers.
The stimulus package has tried to stimulate demand.
While I believe this package has failed to stimulate demand to any significant degree (see the discussion my earlier posts on January 11, 18, and November 1, 2009), and that the claimed employment effects of the stimulus are vastly overstated, I concentrate my discussion, as Posner does, on reducing the real cost of labor to employers.
If rigid nominal wages were the culprit, inflation would reduce the real value of labor costs, and hence stimulate demand by companies for workers.
But deflation rather than inflation is the greater worry now, so this approach does not seem feasible at this time.
The alternative is to cut the cost of labor to employers.
A frequent suggestion by economists and others is to give employers subsidies for each unemployed person that they hire, but I believe this approach has many problems of implementation.
Clearly, companies would have an incentive to fire some employees and replace them with subsidized unemployed workers.
Moreover, if the unemployed hired under the subsidy program received higher pay because companies compete for the subsidy, some workers might remain unemployed rather than accepting jobs now because they expect to do better when the subsidy program is introduced.
Others might even quit to become unemployed, so that they can then become employed at better wages through this program.
Many other adjustments would make such a subsidy program both extremely difficult to enforce in a net job-creating way, and highly intrusive into the employment decisions of companies as the government tries to close various loopholes that are bound to be discovered.
It is wiser to cut labor costs in other ways.
I fully endorse Posner's suggestions to cut the minimum wage, but I do not see that happening with the present Congress.
My favorite approach it to try to stimulate the economy by cutting income taxes, especially corporate income taxes and other taxes on capital, both physical and human capital.
Such tax cuts will stimulate investments in the economy, and in this way increase the demand for workers.
Of course, tax cuts at this moment would add to the deficit and increase the size of the government debt at a time when the debt has already grown rapidly.
Tax cuts may also take time before they raise investments and jobs.
On the other hand, tax cuts that add significantly to the growth rate of GDP will have only modest, and possibly even negative, effects on the ratio of the debt to GDP while they increase investments and the demand for workers.
This seems to me to be an attractive way to approach solutions to the unemployment problem at the jobs summit this Thursday.
Last week two pieces of news about the American economy were disclosed, with important implications for where the economy is going.
On Thursday, the Labor Department reported that during the third quarter of 2009, productivity jumped at the remarkable annual rate of 9¬Ω%.
On Friday, the Labor Department also reported that the October unemployment rate in the United States increased to over 10% for the first time in more than 25 years.
The productivity numbers were not entirely ignored, but were on the inside pages of the Financial Times, Wall Street Journal, and most other newspapers.
By contrast, the unemployment numbers generally received first page coverage at all the major papers, and led to a lot of hand wringing about the economy.
Yet while the figures are rather closely related, the productivity numbers in the longer run are the more important ones.
The two numbers are closely related because when productivity increases by a lot, that means much more output is being squeezed out of given inputs of labor and capital.
Since during the third quarter the growth in productivity-equal to the growth rate in output minus the growth rate in hours of nonfarm workers- was over 9%, it is arithmetically necessary that hours would decline and unemployment increase since output grew "only" by about 4%.
Hours worked did decline by about 5%, and unemployment grew by several percentage points.
The very rapid increase in productivity during the third quarter followed a sharp growth in productivity during the second quarter of about 7%.
The fast growth in American productivity toward the end of this serious recession is quite unusual because measured productivity often falls during recessions as companies are stuck with excess capacity of their capital.
Companies also usually decide to hold on to their best employees, even though they are less than fully occupied with work.
American productivity never fell during this recession.i.
A rapid growth in productivity is generally a good sign since it means that more is being produced with fewer inputs of labor and capital- it is sort of a "free lunch".
However, in a period of reduced employment and rising unemployment, many persons begin to fear that companies are advancing productivity only by laying off employees, and that this process cannot be easily reversed.
Throughout history there has been a widespread fear that economies with the most rapid rates of technological progress have trouble generating full employment because jobs are lost as economies become more productive.
Such an analysis considers economies to have a fixed number of jobs, so that eliminating some of these jobs reduces the number of workers who can be employed.
Recall the Luddite textile workers in early 19th century Britain who attempted to destroy the textile machinery that was being introduced into their industry in an effort to protect their jobs.
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By all accounts, President Obama's visit to China last week was pretty much a failure on all the major issues, which include China's contributions to climate change, nuclear weapons, and various aspects of the world economy.
I will concentrate my discussion on two of the most important and closely related economic issues: the valuation of the Chinese currency, the renminbi, and the huge assets accumulated by China that are mainly held in the form of US Treasury bills and other US government assets.
The Chinese central bank held the value of the renminbi fixed relative to the US dollar at a little over 8 renminbi per dollar during the 1990s, and until 2005.
It then allowed the renminbi to appreciate gradually to less than 7 per dollar until 2008, when it again fixed the rate of exchange between these currencies at about 6.9 renminbi per dollar.
This exchange rate is considerably above a free market rate that would be determined in a regime of flexible exchange rates.
So there is no doubt that China is intentionally holding the value of its currency below the rate that would equate supply and demand.
The dollar has depreciated substantially relative to other currencies since May of 2009.
Since the renminbi is tied again to the dollar, the renminbi has depreciated by the same amounts, including 16% against the euro, 34 % against the Australian dollar, 25% against the Korean won, and 10 % against the Japanese yen.
This substantially depreciation of the Chinese currency has made many other countries angry at China's policy of locking it to the US dollar.
President Obama apparently complained to Hu Jintao, President of the People's Republic of China, about the low value of the renminbi, and urged China to allow it to appreciate substantially.
The US and other countries worry that the undervaluation of the Chinese currencyi increases the demand for Chinese exports, and reduces China's demand for imports from countries like the US because China keeps the dollar and the currencies of other countries artificially expensive relative to their currency.
America and other countries hope that greater demand from China for their exports resulting from a higher value of the renminbi will help these countries resume sizable economic growth as they recover from this severe recession.
They especially want to help reduce the high levels of unemployment found in many of these nations.
Indeed, in good part due to the low value of its currency, China has run substantial surpluses on its current trade account as it imports fewer goods and services than it exports.
The result is that China has accumulated enormous reserves of assets in foreign currencies, especially in the form of US government assets denominated in dollars.
As of September of this year, China had the incredible sum of over 2 trillion dollars in foreign currency reserves, such as US Treasury bills.
This is by far the highest reserve in the world, and it amounts to the enormous ratio of more than one quarter of China's GDP of about $8 trillion (purchasing power parity adjusted).
I am dubious about the wisdom of both America's complaints about China's currency policy and of China's responses.
On the whole, I believe that most Americans benefit rather than are hurt by China's long standing policy of keeping the renminbi at an artificially low exchange value.
For that policy makes the various goods imported from China, such as clothing, furniture, and small electronic devices, much cheaper than they would be if China allowed its currency to appreciate substantially in value.
The main beneficiaries of this policy are the poor and lower middle class Americans and those elsewhere who buy Chinese made goods at remarkably cheap prices in stores like Wal-Mart's that cater to families who are cost conscious.
To be sure, US companies that would like to export more to China are hurt by the maintenance of the Chinese currency at an artificially low value relative to the dollar.
As a result, employment by these companies is lower than it would be, so that this may contribute a little to the high rate of US unemployment.
But I believe the benefits to American consumers far outweigh any loses in jobs, particularly as the US economy continues its recovery, and unemployment rates come back to more normal levels.
Since the opposite effects hold for China, I cannot justify their policies from the viewpoint of their interests.
Their consumers and importers are hurt because the cost of foreign goods to them is kept artificially high.
Their exporters gain, but as in the US, that gain is likely to be considerably smaller than the negative effects on the wellbeing of the average Chinese family.
I reach similar conclusions about China's accumulation of their excessive reserves.
The US has little to complain if China wants to hold such high levels of low interest-bearing US government assets in exchange for selling goods cheaply to the US and other countries.
China's willingness to save so much reduces the need for Americans and others to save more, but is not differences in savings rates also part of the international specialization that global markets encourage? To be sure, why China is willing to do this is difficult to understand since they are giving away goods made with hard work and capital for paper assets that carry little returns.
One common answer is that China hopes to increase its influence over economic and geo-political policies by holding so many foreign assets.
Yet it seems to me just the opposite is true, that China's huge levels of foreign assets puts China more at the mercy of US and other policies than visa versa.
China can threaten to sell large quantities of its US Treasury bills and other US assets, but what will they buy instead? Presumably, they would buy EU or Japanese government bills and bonds.
That will put a little upward pressure on interest rates on US governments, but to a considerable extent, the main effect in our integrated world capital market is that sellers to China of euro and yen denominated assets would then hold the US Treasuries sold by China.
On the other hand, the US can threaten to inflate away some of the real value of its dollar denominated assets-not an empty threat because of the large US government fiscal deficits, and the sizable growth in US bank excess reserves.
Inflation would lower the exchange value of the dollar, and also of the renminbi, as long as China keeps it tied to the dollar.
That would further increase the current account surpluses of China, and thereby induce China to hold more US and other foreign assets, not a very attractive scenario to China.
So my conclusion is that the US in its own interest should not be urging China to appreciate its currency- countries like India have a much greater potential gain from such an appreciation.
On the other hand, I see very little sense at this stage of China's development in maintaining a very low value of its currency, and accumulating large quantities of reserves.
Paradoxically, President Obama and President Jintao should each have been arguing the others positions on these economic issues.
Japan has had a very slow rate of growth in its GDP since 1991, averaging just a little over 1 percent.
Given this slow growth, and the government's continued failed efforts to prop up their economy by running large fiscal deficits, the ratio of government debt to its GDP has risen from only about 50% in 1995 to by far the highest ratio in the developed world, at about 170% in 2008.
Estimates indicate that it could rise to over 200% by next year as the budget continues to spill red ink, and may grow even much further during the next decade.
Such a large debt ratio has been manageable so far only because interest rates have been very low, at about a little over 1%.
But these rates have recently been rising as concern is growing about the fiscal solvency of the Japanese government.
The danger of any explicit default on this debt is minimal since it is all denominated in the Japanese currency, the yen.
Any country can reduce the real value of a debt burden in its own currency by printing money to finance a good chunk of its government spending, and thereby create inflation that destroys part of the real burden of the debt.
I do not expect that to happen in Japan unless the debt burden becomes intolerable down the road.
All this is background for comparisons between Japan and the US.
As Posner indicates, the American ratio of debt to GDP is now about 50%, where Japan was in 1995.
It is also rising rapidly as the government continues to increase its spending on banks, the stimulus package, likely also on health care, maybe subsidizing employment of the unemployed, subsidizing mortgages, and in many other ways.
The ratio of federal government spending to American GDP was quite stable at about 20% for about 40 decades, but this ratio has been rising rapidly during the past year, and it is beginning to approach 30%.
The government debt is not yet a great burden because, as in Japan, interest rates are low, so that annual interest payments on the debt is not a sizable fraction of total government spending.
It is unlikely that US government spending will decline during the next decade, even though some of the short term spending on banks and stimulating the economy will probably fall sharply.
Any spending declines from these directions will be more than replaced by much greater spending on Medicare, Medicaid, and other government financed health programs, on social security, and on various other entitlement programs.
The direct impact on the debt burden of such budget deficits can be reduced only by higher taxes or inflation.
Eventually, I do expect much greater inflation in the US.
The Obama administration has also been vocal about its plan to raise taxes, especially on higher income persons, as soon as the recession is clearly over and the economy is growing again.
That would be a serious mistake.
The best solution to reducing the real burden of the public debt is neither inflation nor higher taxes, but more rapid growth of the American economy.
This involves lower, not higher, taxes on investments and incomes of small and large businesses.
 It also requires greater concern about the fact that the US is falling behind many other countries in the proportion of its young population, especially males, who receive a higher education.
In addition, much greater attention needs to be paid to correcting the depressing statistic that the fraction of boys who drop out of high school has been stuck at about 25% for several decades, even though the economic and other benefits of finishing high school and going to college have risen dramatically.
To its credit, the Obama administration has given high priority to improving the K-12 performance of American students, especially those from minority backgrounds.
In effect, the desirable policies to stimulate growth involve a retreat from the anti-business rhetoric that pervades Congressional Democrats and some of the top players in the executive offices, and a more pro-consumer and pro-business mentality.
It is necessary to maintain the minimalist anti-trust policy that developed during the 1980s and 1990s under Democratic as well as Republican administrations, to retreat from the policy that banks and other businesses, such as GM, cannot be allowed to fail when they are mismanaged.
Desirable policies also include the elimination of efforts to restore union power in the private sector, and resistance to the desires of some members of Congress to have the US retreat from a free trade policy&gt; They also want to impose onerous regulations on businesses of all kinds, especially the more successful ones.
I am perhaps particularly disturbed by the anti-immigration rhetoric of leading members of Congress since immigrants have contributed so much to the dynamism of the American economy and society.
Sizable advances in productivity and the resulting sharp economic growth can ease the burden of growing government spending, and prevent anything like the expanding debt to GDP ratio and stagnation of the Japanese economy.
Can the US do it? Certainly! Will the US do it? Not with the present composition of Congress, and with the tendency of the President to allow some of the more destructive members of his political party to get their way.
In a wide-ranging interview in the Wall Street Journal published on March 27, 2010 I indicated that the American people were unhappy with the state of the economy, wanted greater economic growth and more limited government, and that they would vote that way in November.
Indeed, voters did give President Obama a real “shellacking” (to use his words), as Republicans gained control of the House of Representatives and the governorships of most states, and made large gains in the Senate.
The common expectation is that this division will produce a political stalemate, as both parties position themselves for the presidential election in 2012.
Yet, the American people need an agenda to raise the growth rate of the American economy, and cut sharply actual and future fiscal deficits.
If these happen, not only would unemployment and other short-term problems would be taken care of, but also optimism would return about the longer-term prospects of the United States.
What follows is a partial agenda to raise economic growth and reduce the long run fiscal deficit.
The most important step in raising the growth rate is not to increase but rather to lower taxes on capital and entrepreneurship.
This implies maintaining essentially all the Bush tax cuts, including those on capital gains and dividends, and those on incomes at all levels, including quite high incomes.
The estate tax on very high levels of wealth could be reinstated if politically necessary, but it will only bring in a very small amount of tax revenue, and will be more costly than it is worth.
Tax reform also implies a reduction in the corporate income tax, and especially reductions in taxes on incomes of small businesses.
Successful small businesses that grow to become large companies, such as Wal-Mart, Starbucks, Microsoft, and Apple, form the foundation of the American economy.
They should be strongly encouraged.
One goal of such tax reform is to eliminate as much as possible taxes on capital since economic theory basically implies that economic efficiency requires that capital not be taxed in the long run.
For the supply of capital in the long run is highly responsive to after-tax rates of return on capital.
Modern economies are based on the command of knowledge and information.
Since knowledge is created by basic and applied research, the United States should increase the share of its GDP that is spent on R&D, a share that has been stable at a little more than 2.5%.
The patent system encourages applied research, but basic research, in medicine and other fields, is not patentable, so it needs, and has received, an extra push through subsidies.
While most basic research projects fail, the successes often bring enormous benefits to society.
Neither bureaucrats nor scientists can predict in advance which projects will succeed and which will fail, so it is important to encourage a broad peer-reviewed approach to basic research topics and investigators.
I do not have space in this brief comment to discuss many other policies beyond taxation that are needed to speed up significantly the growth rate of an advanced country like the United States.
These include a quite free approach to international trade, encouragement of immigration, especially skilled and ambitious immigrants, flexible labor and product markets, and limited regulation of most economic activities.
Since the tax cuts and subsidies I advocate will tend to reduce tax revenue, it is especially important to control government spending and the fiscal deficit.
I will concentrate on the two main entitlement programs, old age retirement support and medical spending.
Together they take about 45% of the total federal budget, and unless reformed, will be even more important in the future.
The drain of social security benefits on the federal budget can be reduced relatively easily.
The best approach is to change from a pay as you go system to a defined contribution system.
Barring such a drastic change, it would help a lot to continue to extend the retirement age for healthy men and women until it reaches age 70.
Older persons live longer and in better health than their predecessors, yet social security systems have been slow in all countries in adapting retirement ages to these health improvements of the elderly.
Controlling spending on medical care is much more challenging, and requires radical changes in the present health care delivery system.
The health care law passed this spring (so-called Obama Care) made matters worse rather than better, for reasons partly discussed in my post “The Health Care Bill: Progress or Retrogression?” (3/28/10).
I will not repeat all the arguments in that post, and concentrate on only two major defects of both the old and new laws.
Out of pocket expenses by individuals receiving care should be much higher in the United States than its average level of about 12% of medical spending.
If the American system can move even half way towards the Swiss level of an out of pocket share of over 30%, substantial savings in medical spending would occur in ways that would reflect patients’ evaluations of how much the care is worth to them.
In addition, the American system should be weaned from being mainly tax-deductible employer based health insurance to a more desirable system, where individuals and families can buy insurance in other ways on the same after tax terms as from employers.
Significantly reforming entitlements would greatly slow down the rate of growth in federal government spending.
Despite what some elected Republican officials are saying, politically it will be impossible to actually cut government spending.
However, overall cuts in federal spending are not necessary to get the main fiscal problems under control, and to reduce the effective r  elative   size of government, as long as the economy grows significantly faster than government spending does.
Speeding up the growth rate of the economy, and slowing down significantly the growth rate of federal spending, would accomplish these goals.
Are these changes likely during the next few years? I am optimistic about the tax cuts, and about extending the age of eligibility on access to social security benefits.
Medical care will continue to be a tough nut to crack, but the recently expressed opposition by American voters to the new health care law might help push health reforms in the right direction.
From 2002 to 2008 the prices of many foods, including corn, wheat, and rice, increased by a lot.
For example, The World Bank’s index of food prices increased by over 100% from 2002-2008.
Grains and other food prices fell rather sharply during the financial crisis, along with the fall in oil prices and those of other commodities.
But food prices are rising once again.
The UN’s Food and Agriculture Organization indicated that its food index rose in October to levels last seen during the peak in 2008.
Food prices are marching up again mainly because the world economy is recovering from the crisis.
Fast growing economies like China are increasing their demand for wheat, meats (animals use lots of grain as animal feed) and other foods that were formerly out of reach of the typical family in these economies.
Reactions to the food price increases include Russia’s and Ukraine’s banning of wheat and some other grain exports “temporarily”, and China’s threat this past week to impose price controls on various foods, such as ginger and garlic, that are important in the Chinese diet, and have been rising rapidly in price.
A little basic economics is useful in evaluating these and other proposals.
The world price of grains essentially equates the world supply and demand for grains.
An increase in world demand for cereals and other foods- perhaps because of economic development in poorer nations that raises the average family’s demand for wheat, corn, and meat- would increase both the prices of grains and the quantities produced and consumed.
An increase in world supply-due perhaps to good weather in grain growing regions, or to greater agricultural efficiency, such as through the development of genetically modified foods- would also increase world consumption of grains, but supply increases would lower world grain prices.
A further complicating factor is the growing use of corn and cane sugar to produce biofuels as substitutes for gasoline.
In particular, the United States now unwisely devotes a sizable fraction of its corn output to biofuel production.
So it is necessary in using the supply-demand framework to distinguish production of corn from its consumption as foods either by humans or animals.
According to the USDA, ethanol production in the U.S.
has increased from less than 3 billion gallons in 2003 to over 6 billion gallons in 2007, and is estimated to exceed 12 billion gallons in 2020.
In 2008, about one quarter of US corn production was used to produce biofuels, and that share has been rising since then to almost 35%.
Most of the current proposals to combat increasing food prices are counterproductive, and would reduce efficiency.
For example, Putin’s banning of Russian exports of wheat supposedly only until the end of this year forces Russian farmers to sell all their wheat output in the domestic Russian market rather than to sell part in the world market.
This lowers the price of wheat in Russia below the world price of wheat.
This means that Russian wheat farmers get less for their wheat than if they exported some of it, and Russian consumers pay less since they have a greater supply of wheat available to them.
Such an outcome would be politically popular if urban consumers in Russia have greater political clout than Russian wheat farmers.
However, Russia as a whole is made worse off by this ban since it gives up the higher prices from selling some of its wheat abroad.
In addition, Russian farmers would plant less than the efficient amount of wheat because they would be getting a lower price of wheat than they could get in the world market.
Russia would be better off if it allowed farmers access to world prices, and it could give income transfers to urban families that offset at least some of the resulting higher cost to them of wheat and other foods.
The price controls proposed by China on vegetables and other foods are if anything worse than Russia’s ban on exports.
These controls would keep down prices to consumers, which encourages their demand for the foods affected, compared to demand at what the prices would be if the forces of supply and demand were allowed to operate freely.
At the same time, Chinese farmers would shift some acreage out of the price-controlled foods.
The result would be an artificial “shortage” of ginger, garlic, cabbage, and other foods with controlled prices because of these responses to price controls by both consumers and producers.
Another set of bad policies are the restrictions that many countries, including but not limited to, the United States and other rich countries, impose on imports of foods from developing and other nations.
These restrictions discourage greater food production in poorer countries, precisely the countries where food production is a major source of income.
Import restrictions also cause a world misallocation of food production toward excessive levels in the EU, Japan, and the US, and insufficient production in Africa and other poor and developing nations.
The great advantage of prices in allocating resources is that they simultaneously give signals to both producers and consumers.
Higher prices discourage consumption, and at the same time encourage greater production by profit-seeking farmers.
To be sure, the demand for grains and other foods by consumers is not highly responsive to prices in the shorter run, although their degree of responsiveness grows as consumers have more time to adjust to higher prices.
Similarly, supply is not so responsive to higher prices in the short run since farmers need time to make adjustments in planting, use of capital, and in various other production decisions.
In the long run, however, supply of food is very responsive to prices.
Food is not like oil, natural gas, or copper, where supply is limited by the quantities of these resources in the ground or under water.
Food production can be greatly increased with sufficient time by using more land to grow food, by greater use of fertilizers and capital to extract more output from a given amount of land, and by encouraging R&D on food output that would find new ways to increase productivity, such as happened with the “Green Revolution” and genetically modified foods.
For all these reasons it is reasonable to expect that the worldwide supply of food would be very responsive to food prices in the long run, as long as the forces of supply and demand were allowed to operate rather freely in the world market for foods.
In my early research several decades ago I considered the determinants of birth rates in the United States.
I found, along with others, that higher income and more educated families had fewer children, that urban fertility was lower than rural fertility, that fertility tends to fall during recession (birth rates fell during this financial crisis), and that some other identified variables also had important effects on birth rates.
But Catholic families at that time had considerably more children than Protestant or Jewish families with the same incomes, education, urban status, etc.
The usual explanation for this was the obvious one: because of Church doctrines, many Catholic families in the United States were reluctant to use condoms or the other effective contraceptives that were then available.
A similar Catholic effect on fertility was also found in past international studies as well.
Predominantly Catholic countries in Europe and elsewhere, such as Ireland, Spain, or Mexico, had larger families than did predominantly Protestant countries, like Sweden or Norway, even after adjusting for the effects on fertility of differences among countries in their average incomes, education, importance of cities, and other variables.
Again, the explanation given for this result was that Catholic families were more reluctant to use contraception to reduce the number of children they had.
Demographers even used the situation in Ireland to define a class of behavior called “Irish family patterns”, which meant that men and women married late-in their late twenties and early thirties- and that after marriage women gave birth at frequent intervals because couples made little effort to control their births once married.
These findings of a strong Catholic “effect” on fertility changed radically during the past 40 years or so.
 Studies for the United States now show that Catholic families have, if anything, fewer rather than a greater, number of children compared to Protestant families who have similar incomes and education.
A similar reversal has occurred in international comparisons.
Catholic countries like Spain, Italy, and Poland now have total fertility rates-the number of children born to the average woman over her lifetime- of only 1.4, 1.4, and 1.2, respectively, far below these rates in the predominantly Protestant countries of Northern Europe.
Even “Irish” family patterns no longer hold in Ireland, where the typical woman has a little less than two children over her lifetime instead of four or five, even though she is not marrying any later than the typical Irish woman did in the past.
The Catholic Church allows the use of the “rhythm” method to avoid conceiving during a sexual act, but the only possible inference from the studies I have referred to is that Catholic families are also making extensive use of condoms and other contraceptives.
This inference is confirmed by evidence on sales of condoms and other contraceptives.
Although there is some controversy over exactly what he meant, Pope Benedict XVI said in recently published interviews that male prostitutes might use condoms if that would help them avoid spreading HIV/AIDS.
Yet the low birth rates of the great majority of Catholic families indicates that even many highly devout Catholics have been made extensive use of condoms and other contraceptives for decades.
It is hard not to conclude from this evidence that economics has trumped religion in Catholic fertility decisions, and in other Catholic decisions regarding marriage and divorce.
Developing and developed economies provide strong economic incentives to reduce the demand for children because the education, potential earnings, and labor force participation of married women has greatly increased in these economies, and the trade off between the quantity and “quality” of children has shifted away from quantity and toward quality.
That is, since modern economies mainly reward persons who have much education and other human capital, parents tend to invest a lot in each of a fewer number of children.
Fertility behavior is not the only area where Catholics are violating Church teachings.
Many young Catholics have sex before marriage, and use condoms and other contraceptives to avoid producing pregnancies.
If they do get pregnant, many get abortions to avoid having a child out of wedlock.
Catholic divorce rates in the United States and elsewhere have grown sharply since 1970, even though they still are somewhat below those of Protestants.
That the economic and other incentives in modern technologically advanced economies induced many Catholics to violate Church teachings on use of contraceptives, divorce, sex outside of marriage, and in other family areas may have profound implications for the evolution of Church doctrines on these and related questions.
Perhaps the limited exception to the Church’s ban on use of contraceptives that Pope Benedict has apparently granted to male prostitutes is the beginning of a dialogue among the leaders of the Catholic Church on how best to respond to the obvious conflict in contraception use and other sexual and family decisions between traditional Church doctrines and the actual behavior of the vast majority of Catholics.
Other governments, and their central banks, have reacted vocally and negatively to the Federal Reserve’s plan for another round of quantitative easing-which means that the Fed purchases long-term bonds.
These negative reactions to QE2 outside the United States are presumably motivated by their self-interest, but I believe that another large-scale Fed purchase of bonds is also against American interests.
One justification frequently given for further Fed open market operations is that it will increase bank lending through raising bank reserves (“high powered” money).
The reluctance of banks to lend has clearly been a factor in the slow down in the US recovery.
Yet the Fed’s creation during the past couple of years of well over trillion dollars in additional reserves through open market operations has not induced rapid increases in bank lending.
Instead, banks have accumulated huge amounts of excess reserves; that is, reserves above the amount they are required to keep as collateral for their deposit liabilities.
Given that banks already are holding such large reserves that carry low interest rates, it is hard to see why creating additional reserves will stimulate much additional lending.
The big constraint in the lending market is that both borrowers and lenders perceive considerable risk to investments.
This is partly due to government policies, like the health care and the financial reform bills, and proposals to raise taxes on higher incomes and on capital gains that will raise costs of doing business, and lower after-tax incomes of investors.
Perhaps that perception will change due to the recent election of many Congressmen who say they want to lower taxes and reduce the size of government, but this perception of a risky investment environment will not change because the Fed creates large quantities of additional reserves.
The eventual inflationary impact of QE2 is another reason to be skeptical about its desirability.
Before too long the US economy is likely to recover at a faster pace, and bank lending will then increase by a lot.
At that time, the reserves created by the Fed will be converted through increased bank lending to businesses and households into money, such as currency and demand deposits.
This growth in the money supply will create far more inflation than the Fed desires, unless the Fed dampens the growth by large scale selling of much of the several trillion dollars of assets it accumulated during the financial crisis.
The Fed does have the tools to control the resulting increase in inflation through selling these assets and reducing bank reserves.
However, it is problematical whether it will have the political will to do that.
Any large effort by the Fed to sell assets and reduce reserves will not only dampen the inflation rate, but the real economy as well.
As a result, the Fed will be under strong political pressure to reduce their open market operations.
Whether the Fed succumbs to that political pressure depends on Chairman Ben Bernanke’s willingness to fight the political battles.
Perhaps he will, but my guess is that a compromise will be reached whereby the Fed will tighten but less than it would like.
The end result will be a greater rate of inflation than is good for the economy.
Central banks and other participants in currency markets are expecting an eventual significant increase in prices in the United States.
This is why they have been trying to reduce their holdings of dollar-denominated assets that would decline in real value with inflation.
These efforts in turn lower the value of the dollar relative to the euro, yen, and other currencies.
Until the inflation rate actually increases by a lot, this reduction in the exchange value of the dollar reduces the prices of US goods in the international market.
This in turn stimulates the demand for US exports, and reduces the demand by American consumers for goods made abroad.
However, once inflation actually takes off, the process will tend to be reversed: demand for US exports would decline, and American demand for imports would go up.
In justifying the planned purchase of hundreds of billions of dollars of long-term bonds, Chairman Bernanke indicated that the goal is partly to lower long term interest rates relative to short term rates- which are already close to zero- and thereby stimulate longer term investments.
A large purchase of long-term bonds would indeed lower long term rates relative to short -term rates, but the effect is not likely to be large.
The reason is that long -term interest rates are essentially a weighted average of current and expected short-term rates, adjusted upwards for the greater riskiness and lower liquidity of long-term bonds.
That is to say, the long-term shape of the interest rate yield curve is mainly determined by these fundamentals, and it is much less affected by changes in the relative supply of short and long-term assets.
Fed Chairman Bernanke wrote in an article in the Washington Post on November 4  th   that "The Federal Reserve cannot solve all the economy's problems on its own." The slowdown in the recovery of the American economy is not the result of Fed policy, and cannot be cured by yet another bout of open market operations.
This is why the Fed should curtail, and better yet, eliminate its plans for QE2.
A report this week from the Institute of Medicine made the front pages of many newspapers and was reported extensively on television.
Based on its examination of numerous studies of possible links between TV watching and weight gain, the report attributed a significant part of the increasing obesity among teenagers and young children to television advertising of foods and drinks with high sugar and fat content.
It recommended that companies work with scientists and others to reformulate their products and ads.
Some persons at the Institute of Medicine went further and raised the prospect of possible Congressional regulation of TV ads oriented toward children, even though, as we will see, the evidence provided by the report is weak and not persuasive.
Before examining this evidence, obesity of children should be placed in perspective.
Obesity has increased for most of the past twenty -five years among all groups and at all ages, including the elderly.
Presumably, advertising of goods like Big Macs and Coke Cola has less influence over the consumption of adults, particularly that of older men and women.
Moreover, obesity has grown in all developed countries, even those with much sharper controls over advertising.
Obesity in the United States and elsewhere started increasing particularly rapidly in the early 1980's.
Studies by economists, especially those by Richard Posner and Tomas Philipson, Jesse Shapiro, David Cutler, and Edward Glaeser, and Fernando Wilson sifted through many factors that might be responsible for this accelerated trend toward greater obesity.
The two most important factors highlighted by these studies is the lower effective price of fat due to the development of efficient fast food outlets that save on time, and for teenagers a more sedentary use of leisure time due to the growth in time spent with computers, browsing the internet, and playing video games.
There is no doubt that McDonald's and other companies tend to increase their revenues when they raise advertising budgets-otherwise, companies would not be spending as much on advertising.
But most of the increase in sales to a company when it advertises more tends to come at the expense of sales by competitors.
So if Wendy's raises its advertising, sales by McDonalds and other competitors would tend to fall.
To the extent that advertising mainly redistributes customers among competitors, the elimination of advertising of fast foods or sugary beverages through regulation would have relatively little effect on the overall demand for these products.
As far as I could tell from examining the complex report by the Institute of Medicine, it did not include any studies (presumably because none are available) that directly looks at the effects of advertising by fast food and beverage companies on the overall consumption of these goods by teenagers and younger children.
Instead, virtually all the studies available to them examine the effects on children's weight of greater or lesser exposure to television.
The problem with such studies, even in the very few that are carefully designed, is that they cannot separate the effect on weight of greater exposure to advertising through watching more television from the effect on the propensity to gain weight from other activities correlated with watching TV, such as more sedentary behavior, or eating popcorn and other snacks while watching.
The authors of the report recognize this serious shortcoming in a section on "Recommendations for Future Research", where they say "Even within the domain of television, most of the research that relates television viewing to diet and to diet-related health does not distinguish exposure to food and beverage advertising from exposure to television in general.
This lack of relevant research severely constrains the findings that can be drawn about the influence of food and beverage marketing on the diet and diet-related health of American children and youth".
A PhD study in progress by Fernando Wilson at the University of Chicago suggests that this qualification is crucial.
He shows that the big increase since 1980 in children's use of time was not toward greater television viewing, for this remained rather constant during the past 25 years-and maybe has declined slightly.
What increased by a lot was time spent with computers and videos games at the expense of lesser time spent at sports and other more active activities.
Since advertising on computers and video games has been far less important than advertising on television, it is hard to see how the growth in obesity during the past 25 years could be explained at all by advertising toward children, unless TV advertising became much more effective than it had been.
Advertisements clearly influence the demand for different goods, but they also are sensitive to the desires of consumers, including the influence of parents over what is consumed by their children.
At the same time that consumers have been gaining a lot of weight, they have become more conscious about eating oats and other high fiber foods, about the vitamins added to different cereals, about the sugar content of foods and beverages, and eating other healthy foods.
A study a few years ago by Pauline Ippolito and colleagues at the Federal Trade Commission found that when some parents began to want healthier cereals for their children, companies were quick to respond with new and healthier cereal brands.
As soon as they were allowed to do so, they also began to advertise the healthy advantages of oat cereals and other products with high fiber content or with many vitamin supplements.
If children nowadays are heavier because they are less physically active than they used to be, or because their parents find fast food cheap and convenient, it is difficult to see how advertising by food and beverage companies are to blame.
And despite the hype the study received, the Institute of Medicine's report on obesity and advertising did not present any convincing evidence that television advertising oriented toward children has been responsible for the increase in children's obesity during the past quarter century.
Our discussion last week on capital punishment generated a lot of comments that are worth discussing in more detail.
Since capital punishment is so controversial, we decided to continue the same subject this week.
First, let me correct a misunderstanding in some of the comments.
I never claimed the evidence is anywhere near conclusive that capital punishment has an important deterrent effect.
I stated that the evidence from quantitative studies is decidedly mixed, yet I concluded that "the preponderance of evidence does indicate that capital punishment deters".
Although the weight of the positive evidence should not be overstated, the frequently stated claim that these studies prove that capital punishment does not deter is clearly false.
My belief in its deterrent effect is partly based on these limited quantitative studies, but also because I believe that most people have a powerful fear of death.
David Hume said in discussing suicide that "no man ever threw away life, while it was worth living.
For such is our natural horror of death‚Ä¶".
Schopenhauer added also in discussing suicide "‚Ä¶as soon as the terrors of life reach a point at which they outweigh the terrors of death, a man will put a an end to his life.
But the terrors of death offer considerable resistance‚Ä¶".
Nevertheless, the main point of my comment last week was not to try to prove that capital punishment deters murders, but rather to argue against the view that it is "immoral" for the State to take lives through capital punishment even if we assume that the deterrent effect on murders is sizeable.
Indeed, I believe that deterrence can be the only reasonable basis for capital punishment.
Revenge, retribution, and other arguments sometimes made to justify capital punishment are too subject to government abuse, and have been abused.
Some readers interpreted my views as implying that a major goal of government policy should in general be to save lives.
That is not my belief.
I am against governments interfering, for example, with the rights of people to overeat even when that causes obesity, disease, and possibly early death because overeaters are primarily "harming" themselves.
In my view, people should have the right to do that.
Murder, on the other hand, involves taking the lives of others, and any reasonable discussion has to distinguish such behavior from individuals taking actions that affect only their own lives.
In economists' language, murder involves the most severe negative externalities.
If we assume for the sake of this discussion that there are two fewer murders for each murderer executed, the State would reduce two of these severe externalities for each murderer that it executes.
This issue of the effect of capital punishment on innocent victims has to be confronted by even those most opposed to its use.
And I frankly do not see how any reasonable and relevant philosophy could oppose the use of capital punishment under the assumptions of this example.
Admittedly, the argument gets less clear-cut as the number of lives saved per execution falls from two to lower values, say, for example, to one life saved per execution.
In this case, I compared the qualities of the life saved and the life taken, to the dismay of some readers.
In particular, I wrote that "wouldn‚Äôt the trade-off still be desirable if the life saved is much better than the life taken, which would usually be the case?" I do not see how to avoid making such a comparison.
Consider a person with a long criminal record who holds up and kills a victim who led a decent life and left several children and a spouse behind.
Suppose it would be possible to save the life of an innocent victim by executing such a criminal.
To me it is obvious that saving the lives of such a victim has to count for more than taking the life of such a criminal.
To be sure, not all cases are so clear-cut, but I am just trying to establish the principle that a comparison of the qualities of individual lives has to be part of any reasonable social policy.
This argument helps explain why capital punishment should only be used for some murders, and not for theft, robbery, and other lesser crimes.
For then the trade off is between taking lives and reducing property theft, and the case in favor of milder punishments is strong.
However, severe assaults, including some gruesome rapes, may approach in severity some murders, and might conceivably at times call for capital punishment, although I do not support its use in these cases.
A powerful argument for reserving capital punishment for murders is related to what is called marginal deterrence in the crime and punishment literature.
If say perpetrators of assaults were punished with execution, an assaulter would have an incentive to kill the victims in order to reduce the likelihood that he would be discovered.
That is a major reason more generally why the severity of punishments should be matched to the severity of crimes.
One complication is that capital punishment may make a murderer fight harder to avoid being captured, which could lead to more deaths.
That argument has to be weighed in judging the case for capital punishment.
While marginal deterrence is important, I believe the resistance of murderers to being captured, possibly at the expense of their own lives, is really indirect evidence that criminals do fear capital punishment.
Some readers asked whether I also favor public executions of convicted murderers, mangling of their bodies, and other methods used in some countries still, and in most countries in the past?  I do not because they seem unnecessarily abusive of convicted murderers without any compensating gains.
However, I admit I would reconsider this position if it were demonstrated that such added punishments have a large effect in reducing the number of murders.
For those who find such a position "barbaric", I would ask how many innocent victims are they willing to tolerate before they might take a more positive position on these additional punishments?.
Of course I am worried about the risk of executing innocent persons for murders committed by others.
In any policy toward crime, including capital punishment, one has to compare errors of wrongful conviction with errors of failing to convict guilty persons.
My support for capital punishment would weaken greatly if the rate of killing innocent persons were as large as that claimed by many.
 However, I believe along with Posner that the appeal process offers enormous protection not against wrongful conviction but against wrongful execution.
And this process has been strengthened enormously with the development of DNA identification.
However, lengthy appeals delay the execution of guilty murderers, and that can only lower the deterrent effect of capital punishment.
So to summarize once again my position on this controversial question, I favor capital punishment because and only because I believe it has "sizeable" deterrent effects.
I would join the anti-capital punishment side if this view turns out to be wrong, if it were proven that many innocent persons are wrongly executed, or if it is administered in such a racially biased manner as to wrongly convict many black persons, and to be little used against white murderers.
But I do not believe that the available evidence strongly supports any of these arguments against the use of capital punishment.
Posner has a good discussion of the various issue related to capital punishment.
I will concentrate my comments on deterrence, which is really the crucial issue in the acrimonious debate over capital punishment.
I support the use of capital punishment for persons convicted of murder because, and only because, I believe it deters murders.
If I did not believe that, I would be opposed because revenge and the other possible motives that are mentioned and discussed by Posner, should not be a basis for public policy.
As Posner indicates, serious empirical research on capital punishment began with Isaac Ehrlich's pioneering paper.
Subsequent studies have sometimes found much weaker effects than he found, while others, including a recent one cited by Posner, found a much larger effect than even that found by Ehrlich.
The available data are quite limited, however, so one should not base any conclusions solely on the econometric evidence, although I believe that the preponderance of evidence does indicate that capital punishment deters.
Of course, public policy on punishments cannot wait until the evidence is perfect.
Even with the limited quantitative evidence available, there are good reasons to believe that capital punishment deters murders.
Most people, and murderers in particular, fear death, especially when it follows swiftly and with considerable certainty following the commission of a murder.
As Posner indicates, the deterrent effect of capital punishment would be greater if the delays in its implementation were much shortened, and if this punishment was more certain to be used in the appropriate cases.
But I agree with Posner that capital punishment has an important deterrent effect even with the way the present system actually operates.
Opponents of capital punishment frequently proclaim that the State has no moral right to take the life of anyone, even a most reprehensible murderer.
Yet that is absolutely the wrong conclusion for anyone who believes that capital punishment deters.
 To show why, suppose that for each murderer executed (instead of say receiving life imprisonment), the number of murders is reduced by three- which is a much lower number than Ehrlich's estimate of the deterrent effect.
This implies that for each murderer not given capital punishment, three generally innocent victims would die.
This argument means that the government would indirectly be "taking" many lives if it did not use capital punishment.
The lives so taken are usually much more worthwhile than that of the murderers who would be spared execution.
For this reason, the State has a "moral" obligation to use capital punishment if such punishment significantly reduces the number of murders and saves lives of innocent victims.
Saving three other lives for every person executed seems like a very attractive trade-off.
Even two lives saved per execution seem like a persuasive benefit-cost ratio for capital punishment.
But let us go further and suppose only one life was saved for each murderer executed.
Wouldn‚Äôt the trade-off still be desirable if the life saved is much better than the life taken, which would usually be the case? As the deterrent effect of capital punishment is made smaller, at some point even I would shift to the anti-capital punishment camp.
But given the difference between victims and murderers, the deterrent effect would have to be considerable less than one person saved per murderer executed before I would shift positions, although account should also be taken of the considerable expense involved in using capital punishment.
Of course, one wants to be sure that the number of persons wrongly executed for murder is a very small fraction of the total number executed.
Posner argues convincingly that the safeguards built into the American system are considerable.
They do not prevent any innocent persons from being executed, but they certainly make the risk very low.
Capital punishment cannot be used if the goal is never to erroneously execute anyone, but then its deterrent effect is lost completely.
European governments are adamantly opposed to capital punishment, and some Europeans consider the American use of this punishment to be barbaric.
But Europeans have generally been "soft" on most crimes during the past half-century.
For a long time they could be smug because their crime rates were well below American rates.
But during the past twenty years European crime has increased sharply while American rates have fallen-in part because American apprehension and conviction rates have increased considerably.
Now some European countries have higher per capita property crime rates than the United States does, although violent crimes are still considerably more common in the United States.
At the same time that America was reducing crime greatly in part by greater use of punishments, many European intellectuals continued to argue that not just capital punishments, but punishments in general, do not deter.
To repeat, the capital punishment debate comes down in essentials to a debate over deterrence.
I can understand that some people are skeptical about the evidence, although I believe they are wrong both on the evidence and on the common sense of the issue.
It is very unpleasant to take someone's life, even a murderer's life, but sometimes highly unpleasant actions are necessary to deter even worse behavior that takes the lives of innocent victims.
Let me comment very briefly, and put forward a controversial additional explanation for the growth in obesity.
I do believe that more is spent on advertising of goods than of political candidates, but I do not believe goods advertising is at a lower level than political advertising.
Just the opposite in many cases!.
Farm subsidies are not the main cause of the decline in the price of fat.
These subsidies were generally just as high, if not higher, in the '50s and '60s as during the '80s and '90s.
However, the total cost of food declined during the past couple of decades, but it did not before that.
One reasons seldom mentioned as a general factor partly behind the rise in obesity is the expectation that new drugs will greatly reduce the adverse consequences of being obese.
I am not claiming that many teenagers are conscious of this consideration.
However, any one who has observed the development of blood pressure and cholesterol lowering drugs during the past few decades can rationally believe that in twenty years or so still newer drugs that control diabetes and other diseases will be developed.
Then for anyone who likes to eat sugary and fat foods, it does not seem so irrational to do so when the consequences will be much less harmful to health than they are at present.
To be sure, if the government will pay for the use of such drugs, obesity imposes costs on others.
So becoming obese may not be socially "rational" or efficient, but there seems to be an important element of individual rationality, given the trend in drug development.
That conflict between private and social behavior is worth investigating further, although I have seen very little discussion of it.
I am adding responses to comments on my postings on both parental responsibility and obesity.
I apologize that I do not always do this, but my only excuse is time pressure.
I do not know about the Australian system, but it sounds interesting.
Australia has been a pioneer in student loans and other ways, so I am not completely surprised to learn that they have been active in providing parental incentives to improve education.
I do believe that parents are mainly responsible to raise their children, but that is why I am willing to offer parents incentives to give their children better opportunities.
Pressure can be placed on parents to induce their children to behave better.
My view is that poor parents love their children as much as rich ones, but poverty leads to behavior that is disadvantageous to the children's future.
Progresa and similar programs try to offset that.
The fact is that Progresa has "worked" at least in the sense of leading to longer school attendance and better grades at school.
Should parents be punished for children's behavior? Absolutely in my judgment since they are ones who can have the greatest influence affecting their behavior.
If parents bring children into the world, why does that not carry with it parental responsibility for various forms of their children's behavior?.
Posner gives an excellent analysis of the possible risks from consuming too much trans fats, but I believe he reaches the wrong conclusion about whether the NY ban of trans fats in restaurants is warranted.
In my view this ban is a further example of the tendency for local and federal government in the United States and other countries to act as nanny states.
They presume with insufficient evidence that consumers are typically too ignorant to make decisions in their own interests, particularly regarding health, but in other areas as well.
Posner provides a well-presented case for what he calls the "Chicago" argument for why such an ordinance as New York's is unnecessary and undesirable.
Perhaps it is no surprise to many readers that I find his argument unconvincing.
He rejects these arguments because of his belief about consumer ignorance of trans fats.
Posner does not mainly argue that restaurant-goers do not know which restaurants use trans fats, or even that they may be bad for you, or that restaurants possess private information not known to consumers about the adverse effects of trans fats.
His main concern is what he considers to be the great difficulty consumers have in "absorbing" information about trans fats.
Posner gives a few reasons why he believes absorbing trans fat information is particularly difficult: that there is still considerable ignorance about the health risks of trans-fats, that consumers do not know their total intake of these fats, and that consumers are unaware that alternatives are often claimed to be more or less equally tasty.
In short, according to Posner, consumers do not absorb the alleged fact that the benefits of avoiding or cutting down trans fats far exceed their costs.
As far as I can judge, the evidence is rather strong that trans fats contribute to heart disease, but the degree of harm from different levels of these fats is still to be determined.
The best summary of the scientific evidence that I know of is "Trans Fatty Acids and Cardiovascular Disease" in the April 2006 issue of the   New England Journal of Medicine  .
The authors carefully review many studies, including several with quite small random samples.
The estimated mean effects of common levels of trans fats on cardiovascular disease are typically large, but one of the best data sets that they analyze cannot reject (at the 95 percent confidence interval) the conclusion that there is either no effect of trans fats on this diseunase, or only a small one.
So I have only modest confidence from the studies analyzed that typical trans fats consumption levels have large effects on cardiovascular disease.
To be sure, evidence cannot disprove Posner's claim about consumer ignorance of, and inability to process, information about trans fats.
However, the fact that about half of all NYC restaurants did not use trans fats even prior to passing this ordinance--although these may be the restaurants where it was easier to eliminate trans fats-- that many foods sold in ordinary supermarkets and other groceries have become trans fat free in a short time period, that we do not know much about whether consumers who eat high trans fat foods in restaurants eat little of these fats at home, that young persons are the primary consumers of heavy trans fat diets, and other unknown and relevant variables should make us skeptical of the ignorance argument.
Indeed, it is remarkable how fast the food industry and restaurants have responded to the greater evidence during the past few years that trans fats in sufficient quantities contribute to heart disease.
The article I cited earlier appeared only about 8 months ago.
There is evidence in other areas that consumers respond quickly to health news.
For example, studies have documented the rapid reduction in salt intake and growth of low salt foods in response to evidence in the 1980's--now considered exaggerated--that high salt levels have been an important source of high blood pressure.
The prominence of young persons among the big consumers of trans fats, cholesterol, and calories in foods like French fries and big Macs may not be due to ignorance.
Rather, they may have an unarticulated awareness that when they reach older ages where heart disease and other diseases are more common, drugs are likely to have been developed that offset the negative consequences of what appears now to be unhealthy diets.
Lipitor and similar drugs have greatly reduced the consequences of high levels of "bad" cholesterol, and drug companies believe they will pretty soon have drugs that will raise levels of "good" cholesterol.
So even if prolonged consumption of trans-fats has sizable negative health consequences in today's knowledge environment, that is likely to change many years down the road when today's youth are at risk for heart disease.
Taxpayers may pay for a good share of their future expenditure on such drugs, but that is a wholly different and more complicated issue.
On Posner's assumptions, one might expect either that restaurants would be pressured to eliminate trans fats, or that eliminating trans fats would cause consumers to be worse off.
Posner's first order estimate of the benefits from eliminating trans fats in New York City restaurants is $3.5 billion, and he takes $60 million as a generous estimate of the cost to restaurants from becoming trans fat free.
Then the cost of trans fat consumption would exceed the expected benefits from lower prices in restaurants with trans fats, even for quite but not completely ignorant consumers who attach no more than a 2% chance to the likelihood that these fats have serious consequences for their health (0.02 x $6.5 billion exceeds $100 million).
These largely ignorant consumers too would only go to restaurants that are trans fat free; hence other restaurants would have to adjust or go out of business.
Posner also gives a kind of lower bound estimate of the benefits as $100 million, and also suggests a much lower cost to restaurants of becoming trans fat free--I take this as $30 million.
With a small taste benefit from the use of trans fats-- the   New England Medicine Journal   article I cited earlier does admit positive effect of trans fats on "palatability"-- the total cost of the ban would equal or exceed total benefits.
For example, suppose 1 million persons on average eat 200 meals per year in NYC restaurants with trans fats.
If they value the taste of trans fats in their foods only by 35 cents per meal, the taste cost to consumers of the ban would be $70 million per year.
Then the total cost of the ban would equal the benefits from the ban.
Does one really want to go down the road of a ban on trans fats when the net gains to consumers are dubious, and probably negative, and when reversing directions is politically difficult? As an example of the difficulty in adapting politically, new evidence indicates that requiring child car seats may increase their risk of injury in accidents, yet there is no movement to reverse these laws.
These and related calculations suggest that while city and other governments should continue to help provide the best information available about the effects of trans fats and other foods on health, market forces of supply and demand should determine the fats consumed.
Otherwise, we encourage further attempts to legislate fat and calorie content of permissible foods not only in restaurants but also in foods consumed at home, and absurdities such as the new Italian ordinance that models cannot be too slim because it sets a bad weight example for young women.
There are just too many opportunities for ill-considered attempts to override on limited evidence individual judgments about what they want to consume.
One of the most disturbing aspects of the holiday season is the sharp rise in automobile fatalities, in part due to drunk driving from overdrinking at parties and other celebrations.
The United States has almost 40,000 deaths per year from automobile accidents, and about 40 percent are due to drunk driving.
This exceeds the annual number of deaths from major diseases like prostate and breast cancers, and drunk driving deaths are also concentrated among young persons, while deaths from most diseases come at much later ages.
That the number of deaths per mile driven is not fixed but varies greatly with different conditions is seen from the wide differences among countries in the number of deaths per passenger vehicle.
The United States is at the high end, and in 2004 had about 1.8 road traffic deaths per 10,000 vehicles, compared to less than 1 per 10,000 vehicles in Sweden and Norway, 1.1 in Germany, and 1.0 in the United Kingdom.
A few countries in the more economically advanced nations have higher death rates than the United States, including S.
Korea at 3.6, and Hungary at 3.9.
A number of factors help explain these international differences, including the quality of the roads, speed limits, minimum driving ages, age distribution of the driving population, density of traffic, amount driven per vehicle (presumably higher in America), and other factors.
I concentrate on accidents due to drinking.
The American approach to drunk drivers has been more laissez faire than other nations, with relatively light punishment for drunk driving, often even when it caused serious accidents.
In the last couple of decades, however, under pressure from groups like Mothers Against Drunk Driving (MADD), states and the federal government have begun to crack down on drunk driving, and driving by youth.
Largely in response to such pressure, the minimum drinking age in all states has been raised from what was typically age 18 to age 21.
States also established more standardized criteria for what constitutes driving while drunk, and have lowered the minimum level of blood-alcohol concentration that is taken to indicate driving while drunk from 0.10 per cent to 0.08 per cent.
More checkpoints and patrols have been put on the road to give sobriety tests to suspected drunk drivers.
As a result, alcohol-related fatalities fell dramatically from 1982 to 1994.
But the trend has stalled since that year, and alcohol-related driving fatalities have bottomed out at about 17,000 per year.
When adult drivers cause their own accidents or that of their passengers because they were drunk, one can reasonably assume they and their passengers are capable before they get drunk of determining what risks to take, such as whether to drive, speed, how much alcohol to absorb, and other factors that increase their risk of an accident.
But drunk drivers often kill or injure persons in other cars, or pedestrians, and in this way they impose what are called negative externalities on these innocent victims.
This is the main case for public policies to reduce drunk driving and other externality-causing driving behavior.
One approach is to tax gasoline and perhaps cars to cut down the amount of driving.
Another way is to tax alcohol to cut down the amount of alcohol consumed.
But these are very blunt policy instruments because they punish also people who drive without driving while drunk, or people who drink even in large quantities without driving or otherwise endangering others.
By punishing only people who are discovered to be driving while drunk, or who get into accidents because they were drunk, or who are much more likely than others to drive while drunk, such as teenagers, one avoids much punishment of drinkers or drivers who do not risk the lives and property of others, and concentrates punishments on those who either are likely to, or actually did, impose external costs on others.
At the same time, this would discourage, perhaps greatly, the tendency to drive after heavy drinking.
My colleague, Kevin M.
Murphy, prepared estimates for the United States for the year 2000 of the total cost imposed by drunk drivers who get into accidents on drivers and passengers in other cars, and on innocent pedestrians.
These costs include estimates of the statistical value of the lives lost (see my post on September 3, 2006 for a discussion of this concept), the value of medical expenses for those injured, and the value of the property lost.
The total of all these external costs from drunk driving in the year 2000 is about $15 billion, with the great majority of this total coming from the $5 million value placed on each of the more than 2,000 innocent persons who lost their lives in that year because of drunk driving.
About 1.4 million persons in that year were arrested for drunk driving.
Given the calculations in the previous paragraph, this means the cost imposed on others from driving while drunk amounts to about $10,000 per person arrested for drunk driving.
This is a large amount, and provides a first order guidance to the punishment that should be imposed in some form on the drunk drivers arrested: large fines, suspended licenses, and jail terms in some cases.
Such large punishments would match the damages done from drunk driving, and at the same time would encourage many persons to avoid driving while legally drunk.
To show this with a little algebra, suppose that g per cent of all drunk drivers (=N) are arrested, and let that be the same for everyone- presumably it is higher for those who actually cause accidents.
Let the punishment to those arrested be d per person, which is Murph''s $10,000 figure, where d=D/gN, and D is total damages from all accidents caused by drunk driving.
Then the total punishment to those arrested =gNd=D, which is the right number in order to have drunk drivers pay for all the damages to others that they cause.
On incentives to drunk drivers, the expected damages per drunk driver =gd=gD/gN=D/N= damages per drunk driver=p D/pN, which is what it should be, where p is the assumed common probability that a drunk driver gets into an accident.
The assumption of a probability common to all drunk drivers of causing an accident is clearly not perfectly accurate, but far better than the assumption that all persons who drink are equally likely to harm others.
Morover, the size of the punishment might not be the same for all those arrested, but could depend on alcohol-blood levels, the recklessness of the driving behavior, and the severity of the accident if they had been in an accident, past offenses, and other factors that try to relate punishment to the magnitude of the "crime" committed and the degree of individual responsibility.
To my knowledge, no state in the United States imposes anything approaching such serious punishments on persons arrested for drunk driving.
In fact, they are generally much too lenient, and do not treat this as the serious crime that it is.
Countries like Sweden are much harsher in their punishment of persons arrested for drunk driving.
Driving with a blood alcohol level exceeding only 0.2 parts per thousand may lead to prison terms of up to six months, and the driver's license is usually suspended.
Driving with a blood alcohol level of over 1.5 may lead to one year of prison.
My experience there and in Norway is that these deterrents work very well, and induce people who are planning on drinking any significant quantities to be careful not to drive afterwards.
Several econometric articles by H.L.
Votey indicate that punishments by fine, revoking of driving licenses, and imprisonment are important in explaining the lower tendency in Sweden to drive while drunk and the lower rates of accidents due to drunk driving, although some of the results are disputed by H.
Lawrence Ross.
The American approach to drunk driving is surprisingly soft, often including the treatment of drunk drivers who seriously injure or kill innocent persons because of reckless driving.
Given the sharp increase during the past 20 years in the severity of punishments for felonies, and the over 2 million persons in jails or prisons, this reluctance to try to cut down the disgraceful number of highway deaths due to driving while drunk is anomalous and disturbing.
Some members of the new Congress are claiming that the debt of students to finance their college education is too high, and that more generous federally funded student grants should be available.
Reforms of the college loan program are desirable, but when placed in a proper perspective, college students generally receive an excellent deal on their student loans.
Over 60 per cent of students who finished in 2003-04 college or graduate studies with a Certificate or a Degree had taken out a loan.
This percent was highest at 70 to 80 per cent for students who received a professional degree, was also high for students who attended for-profit colleges, while the percent was lowest for students who graduated from two-year public institutions.
This difference by type of college is partly explained by the fact that the fraction taking loans is much larger for students from families with low incomes since poorer students are more likely to go to for-profit colleges.
Even after adjusting for inflation, the average student loan increased by about 50% in the decade prior to 2004.
The average size of the loan for those with loans was about $15,000 for graduates in 2003-04 with Bachelor's Degrees, it was much lower naturally for those who received certificates or degrees after two years of college, and was substantially higher for those with Masters and other post-graduate degrees.
Perhaps surprisingly, the average loan did not vary much between for-profit, other private, and public colleges.
Although the debt of graduating students is not a minor burden, it is not usually a major one either, if the size of loans is related to benefits from college as well as to financial and other costs.
Costs measured by tuition did increase at a rapid rate since 1980.
According to calculations by Pablo Pena at the University of Chicago, tuition at private non-profit four-year colleges rose 140 per cent in real terms from 1980 to 2005, which means an annual rate of increase of over 3.5 per cent.
Public schools charge a lot less but they too had rather rapid increases in tuition.
Students who are from poor families have the most trouble paying for college, and obviously that burden gets heavier when tuition is higher.
This helps explain the increase over time in both the fraction of students who take out loans, and the size of the typical loan.
On the other side of the ledger, higher tuition over time was related to sharply higher financial benefits from a college education.
The typical college graduate earned per hour about 50 per cent more than the typical high school graduate in 1980, and the gap is now about 95 per cent.
Earnings of graduates with a professional degree or other post-graduate education grew even faster over time than did earnings of college graduates.
The net benefits from graduating from college are determined by the higher earnings college graduates would receive over their lifetime compared to what they would receive if they started working after high school, minus tuition and any other costs of a college education.
The data I have just given show that the increase in the earning advantage from a college education during the past couple of decades was far greater than the increase in tuition, so that average rates of return on a college education--a measure of the net benefit--increased greatly.
In addition, various non-monetary benefits of a college education also grew over time.
Probably the two most important of these benefits are that higher education increases health through the improvements it induces in lifestyles and medical care, and higher education also improves investments in the learning and behavior of one‚Äôs children.
How big a burden is the average loan for college graduates who take loans, which is about $15,000 to $20,000? The net present value of the earnings of typical graduates of four-year colleges over their lifetimes after discounting future earnings and subtracting out tuition and other costs has been shown to be over $300,000 more than what high school graduates earn.
Even a $20,000 student loan debt is small relative to such a large benefit.
Put differently, if the only way to go to college would be to borrow $20,000 under a student loan program at the prevailing 7 per cent interest rate on these loans, the returns from college to a typical graduate would be big enough to allow the borrower to pay off the loan and have a lot left over.
Of course, such loans would be a much greater burden for students who only received two years of college, perhaps because they dropped out of a four-year program, or because they received an Associate Degree.
Such students do not earn nearly as much as graduates of four-year colleges.
However, the burden of a fixed amount borrowed is not the right comparison since as I indicated, graduates of two year programs borrow much less than do graduates of four-year programs.
In reality, the burden of what graduates of two year programs typically borrow is not much greater compared to their discounted earnings than the rather minor burden of the actual loans taken by graduates of four-year colleges.
Within any category of graduates, earnings vary considerably by type of job-- teachers and clergymen earn a lot less than investment bankers--and by degree of success within jobs.
Fixed interest loans are not the best way to borrow when loans are used for risky activities.
Returns on higher education are rather risky, even after adjusting for how they co-vary with returns on assets.
Businesses often borrow with the equivalent of equity to finance start-ups and other risky activities, where the equity pays off well if the venture is successful, and pays little if the venture fails.
This suggests that student loans should not have fixed interest rates that require a fixed amount to be repaid per $1.000 borrowed, but rather should have the equivalent of an "equity" repayment system.
That would mean that persons who earn very little repay little, while those who earn a lot repay a lot (per $1,000 borrowed).
Requiring individuals who are repaying student loans to submit their income tax statements each year, so that lenders could document what the borrowers earned, could enforce such an income-contingent repayment system.
The United States already has a small student loan program that allows repayments to be conditional on the incomes of borrowers.
But a system with both fixed interest loans and income-contingent loans has a "moral hazard" problem.
Students who expect to go into well-paying jobs would tend to borrow at fixed interest rates since that would be cheaper to them than repayments that rise with higher earning.
A possible reform of the federal program that would reduce this moral hazard would be to shift entirely to an income-contingent system, where persons with student loans who earn little would repay relatively little, and those who earn a lot would repay much more.
A full income-contingent loan program would not be without its own problems since it would attract students who expect to go into low- paying occupations, and repel students who expect to higher earnings.
In addition, such a program would "tax"  high earnings that would further discourage effort by high earners, and further encourage them to try to hide incomes.
But it might work better than either the present largely fixed interest system, or a dual system that allowed both fixed interest loans and income-contingent loans, with the choice among these systems determined by students.
Many valuable comments, and I will respond to a few of them.
Maximum penalties are not the right statistic on punishment for drunk driving or other offenses.
Actual punishments are the right one.
In this regard, some of the calculations posted on actual punishments in the U.S.
were interesting, and show how mild some of them are.
Studies for Sweden and Norway I believe show clearly that punishments are more severe there.
I indicated through my reference to Votey's work, which shows that this greater severity contributes to the lower rates of accidents from drunk driving in Sweden.
In many European cities, such as Stockholm, public transportation is not obviously better than in a city like Chicago, but there is no comparison between the drunk driving rates in these two cities.
I do not agree that decisions whether to drive are necessarily made during or after drunk driving.
When drinkers fear punishment, they make them before by not driving if they expect to drink a lot, or by having a designated driver.
That is common in Scandinavia and some other countries.
There is an "optimal" level of drunk driving, but markets without punishments exceed that level because of the harm caused by drunk drivers to others.
I am not trying to eliminate driving while drunk, but to bring it closer to this optimum.
The tort system alone cannot do this partly for the reasons given by Parry in his post, and partly because some drivers who hurt others are judgment proof, especially when they kill or badly injure others.
That is most of the basis more generally for criminal laws and punishments beyond torts.
I do not claim that punishment should be a break-even proposition in terms of the costs and benefits to drunk drivers, but rather punishments should be at least as great as the damages caused to others.
Even that should be qualified when damages are not in the form of monetary compensation to those harmed.
See the working out of these principles in my paper on crime and punishment reprinted in a collection of my essays called The Essence of Becker.
On Trans Fats:.
I respond briefly.
Heart disease is not common in younger persons unless they are extremely obese, and I do mean extremely.
In fact the effect of weight on mortality is not large except at the extremes of the Body Mass index (BMI) distribution.
This is shown in the work of my colleague Robert Fogel and his students, and others.
I believe consumer ignorance is Posner's main argument, so I took that on directly, and showed I believe it is of questionable importance.
Without consumer ignorance, I presume he would surely allow consumers to decide themselves.
What is remarkable to me is not how slow but how fast the response has been to evidence on the harm from trans fats.
Producer after producer are declaring that their products are trans fats free.
This is not an isolated instance; I recommend the writings of Pauline Ippolito of the FTC on the rapid response of advertising for products, and for the ingredients that go into different products, in response to evidence on the harm from salt, on which cereals are good for you, on why fats are bad, etc.
On the child car seats evidence, see an article by in the NY Times for July 10, 2005,   The Seat-Belt Solution  , By Stephen J.
Dubner and Steven D.
Levitt.
A recent UN report on world inequality of wealth attracted widespread media coverage.
The Report finds that the richest 2 percent of adults own half the world's assets, which clearly indicates a very skewed world distribution of assets.
When put into context, however, the inequality in wealth appropriately defined is not nearly as large as the report might suggest, and wealth inequality in the world has almost surely become smaller over time, not larger as some in the media reported.
The UN Report was prepared by very good economists, and does a commendable job in what it tries to do.
That is to measure the value in 2000 of the world distribution of physical and financial assets, net of any debt--this is usually called net worth.
The authors had direct wealth data for countries that have more than half the world's population, and an even larger share of its wealth, and they infer wealth in countries missing from their data.
Their results do show both considerable inequality in assets, and a long tail at the upper end of asset holdings--called skewness in statistical language.
The report does not even attempt to show what happened to world inequality over time, even though some of the media reports that it demonstrates that inequality greatly increased in recent decades.
World inequality in wealth is to a large extent determined by inequality across nations.
Comprehensive data on what happened to the distribution of assets in the world over time are not available, but the income data show a sizeable decline, not increase, in world income inequality since 1980.
This is mainly but by no means entirely due to the remarkable rate of growth in incomes in two quite poor nations, China and India, which contain about 37 percent of the world's population.
Studies also show that both the number of and the fraction of the world's population who live on either $1 or $2 of income per day has fallen quite sharply during the past 25 years, again partly due to China's and India's growth.
Earnings, not incomes from physical or financial capital, are the predominant determinant of incomes for the vast majority of persons in the world in rich as well as poor nations.
Put differently, human capital, not assets, is the most important form in which people hold their wealth.
Human capital is itself determined by education, training, nutrition, and other forms of health investment.
Human capital wealth that determines earnings is about three times as large as wealth in the form of physical assets of all types.
Such wealth from human capital is much more equally distributed and is much less skewed in its distribution than are assets.
Even earnings and money incomes exclude the contribution of better health to people's "real" income, defined as the incomes that produce wellbeing.
 World inequality in health among countries has declined greatly since 1960 when measured by life expectancy at various ages, even thought the AIDS epidemic in Africa has largely eliminated the gains in life expectancy in that continent after 1970.
Inequality in "full" income among countries has declined much more rapidly than inequality in per capita GDP since 1960, where the growth in full income is defined as the sum of the growth in GDP plus the value placed by individuals in different countries on the improvements in their life expectancy--for definitions and various results on world inequality, see the article by Becker, Philipson, and Soares in the   American Economic Review  , March 2005.
Income inequality within the United States and many other countries has indeed grown a lot since 1980, in part due to much greater returns on education and other human capital, and in part due the somewhat related growth in incomes at the upper end that Posner discusses.
This widening inequality appears to be largely due to technological and other changes, such as globalization, that have increased returns to persons with more education and other human capital, including high-end abilities.
However, inequality in life expectancy has fallen within most of the developed countries as a result of more equal access to health care---in the U.S.
due mainly to the growth since 1970 of Medicare and Medicaid.
So while inequality in full income probably also grew, and perhaps substantially, it grew more slowly than did inequality in earnings and incomes on assets.
My discussion should not be construed as complacency about the inequality found within countries like the United States, or among countries.
For example, America should do a much better job of providing a way for able young persons from more disadvantaged backgrounds to finish high school and go to college--the past 25 years have been devastating for persons with little education.
This is not an easy problem, but head start and related early childhood programs seem to be effective, legalization of drugs would reduce the temptation for inner city youth to drop out of school to sell drugs, and I also support greater competition among schools.
Unlike Posner, I do not support the estate tax because it brings in little tax revenue relative to the large costs involved in legally avoiding this tax--through trusts and the like-- and also in illegally evading this tax (see my more extended discussion of the estate tax in my post on May 15, 2005).
Many other poor countries should be following China and India's example and open up their economies to competition and world trade, so that they too can grow faster.
Similarly, the rich countries have to reduce their restrictions on imports of goods produced by developing countries, and by countries that want to be developing.
To conclude, it is worth remembering that world inequality in "real" incomes has declined, not increased, a lot during the past 25 years.
Much more can be done to equalize opportunities both within and between nations, yet it is unwise to concentrate attention primarily on inequality in assets.
This is one component of inequality, but it is by no means the major determinant of inequality in wellbeing.
The study by Gross and Simmons discussed by Posner in part confirms what has been found in earlier studies about the greater liberalism of American professors than of the American population as a whole.
Their study goes further than previous ones by having an apparently representative sample of professors in all types of colleges and universities, and by giving nuanced and detailed information about attitudes and voting of professors by field of expertise, age, gender, type of college or university, and other useful characteristics.
I will try to add to Posner's valuable discussion by concentrating on the effects on academic political attitudes of events in the world, and of their fields of specialization.
I also consider whether college teachers have long-lasting influences on the views of their students.
As Posner indicates, the type of persons who go into different fields varies by the characteristics of the field, so that students who become sociologists tend to be more liberal, while those who enter accounting tend to be more conservative-see Table 8 of the Gross-Simmons study on political identification of professors by field.
It is also true, however, that the nature of the material analyzed in a field affects the political identification of persons in that field.
The late eminent economist George J.
Stigler claimed in an article many years ago that the study of economics tends to make the student more conservative because economics emphasizes that the hidden longer run effects of many government policies have much more negative consequences than the initial direct effects.
Economists also show how decentralized competitive markets contribute to the general welfare.
Similarly, the study of sociology emphasizes the oppressive effects of certain social forces on particular groups, like the less educated and minorities, which influence the attitudes of sociologists toward the prevailing capitalist economic system.
Admittedly, it is difficult to see the connection between the political attitudes of professors in various other fields and the nature of these fields.
For example, why do less than 4 percent of historian, according to Gross and Simmons, consider themselves Republicans, whereas 23 percent of nurses do? Perhaps one important factor is that teachers in practical fields, like engineering, nursing, and medicine, see the limitations of what can be accomplished by various types of interventions, whereas those in theoretical fields, like mathematics and literature, can dream of more utopian solutions.
Still, the dichotomy between the theoretical and the practical has trouble explaining why a field like history has such liberal academics since many historians deal with various disasters brought about by government ventures.
The differences in political views by age are informative.
Generally, younger men and women are more liberal than older ones since age brings experience with the limitations of what can be achieved by grandiose programs.
This is captured in the old adage that goes something like  "if you are not a socialist when young you have no heart, but if you remain one when you get older you have no brains".
Yet Table 15 in Gross and Simmons shows that academics aged 26-35 are significantly less liberal than those aged 50 and older.
I suggest that events of the past 30 years are a major reason for this age-reversal on liberal tendencies.
The collapse of communism, the growth of the Asian tigers that have emphasized private enterprise and export-oriented policies, the rapid development of China and India after abandoning communism and socialism, respectively, all reduced the attractiveness of Marxist, socialist, and communist ideologies.
These events had less effect on the views of older academics since their views were largely determined when older academics were young, but these events had a great influence on attitudes of younger academics since their beliefs were formed while these transforming events were occurring.
Even economists, traditionally more conservative than those in other social sciences, are now much more market oriented and less sympathetic to various forms of government intervention than they were when I was a student many years ago.
During the interim, not only did communism, etc collapse, but Keynesian interventionist attitudes also lost favor, and many more studies have shown the harmful effects of different attempts at government interventions in labor and other markets.
The retreat among economists from interventionist policies is found not only among American academic economists, but also among younger economists in Europe and Asia, and also to some extent in Latin America.
The reason is that the same forces affected economists elsewhere as affected American academic economists.
I suspect, but do not have the evidence, that younger academics in other countries are also decidedly less liberal than older ones in other fields as well.
Given the indisputable evidence that professors are liberal, how much influence does that have on the long run attitudes of college students? This is especially relevant since some of the most liberal academic disciplines, like the social sciences and English, have close contact with younger undergraduates.
The evidence strongly indicates that whatever the short-term effects of college teachers on the opinions of their students, the long run influence appears to be modest.
For example, college graduates, like the rest of the voting population, split their voting evenly between Bush and Kerry.
The influence of high incomes (college graduates earn on average much more than others), the more conservative family backgrounds of the typical college student (but less conservative for students at elite colleges), and other life experiences far dominate the mainly forgotten influence of their college teachers.
This evidence does not mean that the liberal bias of professors is of no concern, but rather that professors are much less important in influencing opinions than they like to believe, or then is apparently believed by the many critics on the right of the liberality of professors.
Modern national income accounts developed about 75 years.
Although a sterling achievement that won Richard Stone a Nobel Prize in economics, even pioneers like Stone and Simon Kuznets recognized that these accounts had serious limitations as measures of wellbeing.
Among the major oversights that remain to this day are that these accounts neglect the value of time spent in households at housework and other activities, they do not attempt to measure investments in human capital, they fail to adjust for the environmental damages due to pollution, and they take no account of improvements in the quantity and quality of life.
The UN's Human Development Index recognizes some of these defects in income accounts, and attempts to correct them by combining percentage changes (or percentage levels) in per capita incomes with percentage changes in life expectancy, and percentage changes in education levels.
However, as Posner points out, the weights attached to these different changes (1/3 weight to each) are completely arbitrary.
Moreover, there is substantial double counting since much of the value to increased education results from its effects on raising incomes and lower mortality, and these are counted separately.
The UN Index ignores modern research that provides a method that is well grounded in economic analysis to combine changes in national income with changes in various types of mortality risk.
This method calculates the "statistical value of life", which essentially measures how much individuals are willing to pay for various improvements in mortality rates.
To get a measure of the per capita change in what has been called "full" income, one simply adds the per capita change in real income to the value placed on the improvements (or deterioration, as in some African countries due to Aids) in mortality risks.
One can divide this change by the initial level of per capita real income to obtain a measure of the percentage changes in full income.
These full income measures combine changes in life expectancy and in ordinary income not in some arbitrary way, but by extending the willingness to pay concept that is used in national income accounting to valuations of changes in life expectancy.
Hundreds of estimates of statistical values of life have been made for different countries.
They are derived from evidence on how consumers and workers value various types of risks to their life.
The most common type of study determines how much individuals need to be paid to choose occupations, like construction, that involve relatively large risks of fatal accidents.
Other studies use the speed of cars under different circumstances, recognizing that after a point greater speed raises the risk of a deadly accident.
Still others examine the willingness of individuals to pay for expensive drugs that are believed to reduce the probability of dying from different major diseases.
There is a range of estimates even for a given country, but the central tendency of estimates for young Americans is that they require some $500 to take on a risk that adds about 1/10,000 to their annual risk of dying.
So the statistical value of a typical young American life in this case would be $5,000,000=$500/1/10,000.
Based on similar calculations for a number of countries, a rough approximation is that young persons in other countries would have statistical values of life that multiply the American value of life by the ratio of per capita income in that country to the American per capita income.
In a paper I published with Tomas Philipson and Rodrigo Soares in the American Economic Review, March 2005 called "The Quantity and Quality of Life and the Evolution of World Inequality", we apply this method to estimate the relative changes in full income from 1960-2000 in about 100 countries.
A common finding on income growth is that the usual measures of per capita incomes grew only a little more rapidly during this period of time in poor and less developed countries than in richer countries.
Even that slight degree of income convergence is found only when income changes in each country are weighted by its populations since the two largest countries with about 40 per cent of the world's population, China and India, experienced unusually rapid growth in per capita incomes.
That conclusion about little change in inequality among countries is altered quite significantly when changes in full incomes are compared.
Since mortality declined more rapidly in poorer countries than richer ones, adding the value placed on declines in mortality to get measures of changes in full incomes affect the calculations for poor countries more than for rich countries.
In fact, the percentage increases in full incomes are on the average much more rapid in poorer countries than in richer ones, which imply a sizable convergence in full incomes across nations during the past several decades.
The main reason for this convergence was the transfer of antibiotics and other drugs and medical knowledge from rich to poor countries.
The vast majority of economists, including me, were surprised by the extent of the subprime mortgage crisis.
This needs to be recognized when evaluating the numerous proposals about how to prevent the next housing crisis, and also about how to help those who are in danger of having their homes foreclosed.
Many economists and members of Congress have claimed that the housing crisis was greatly magnified because unqualified home buyers with limited incomes and assets were not fully aware of the terms of their mortgage loans, such as that the low initial (teaser) interest rates were only temporary.
This belief in the beneficial effects of greater knowledge about mortgage terms is inconsistent with the evidence that the most sophisticated banks and investment companies, including Merrill Lynch, Citibank, and Morgan Stanley, have written down their housing investments by billions of dollars.
No one can reasonably claim that these banks lacked the skills and knowledge to evaluate all the terms of, or the likelihood of repayment, on the subprime and other mortgages that they originated or held as assets.
The losses to investors have been so large, and have so eroded their capital base, that some of the major investment companies have needed large infusions of capital from Middle Eastern and Asian Sovereign Funds (see our discussion of these funds on December 10th).
Although there was some fraud by mortgage lenders and by borrowers, fraud was not the main reason why so many subprime mortgages were issued.
Otherwise savvy investors greatly undervalued the risks associated with many of the mortgage-backed securities that they held.
They and borrowers alike did not fully appreciate that interest rates were likely to increase from their unusually low levels, and that many borrowers lacked the financial means to meet their mortgage repayment obligations at higher rates, and sometimes even at the low initial rates they had received.
Given the low interest rate lending atmosphere of the past few years, it is highly unlikely that borrowers would have turned down the mortgages they received if they had much better information about terms, or that lenders would have been more reluctant to originate or hold these mortgage assets if they had better information about the credit and other circumstances of borrowers.
This is why I doubt that the rules proposed this week by the Federal Reserve to require lenders to get more information about borrowers, and to provide more information to borrowers about the terms of mortgage loans, would have been effective in warding off this crisis, or will be effective in preventing future crises.
Some have proposed that families should not be allowed to get mortgages if they do not meet minimum standards of income and assets, even if lenders would be willing to provide mortgages, and would-be borrowers still want a mortgage after being informed of the risks.
This proposal is a dangerous form of paternalism that denies the rights of both borrowers and lenders to make their own decisions.
Moreover, it is ironic that only a few years ago, banks were being investigated for "redlining"; that is, for avoiding lending to blacks and other residents of poor neighborhoods.
The Fair Housing Act of 1968 prohibits discrimination in lending, and The Community Reinvestment Act of 1977 requires banks to use the same lending criteria in all communities, regardless of the living standards of residents.
As a result of the present crisis, however, banks and other lenders are being criticized for equal opportunity lenient lending to all, including black residents of depressed neighborhoods.
The United States housing market is riddled with subsidies and regulations, including among many others, insurance by the Federal Housing authority of mortgages to first time and low income homeowners, tax deductibility of interest payments on mortgages ‚Äìto families that itemize their deductions- and the quasi-governmental Fannie Mae  and Fannie Mac Corporations that channel billions of dollars to the mortgage market.
Nevertheless, both the White House and leading Congressional Democrats have proposed additional rules to help borrowers who may have difficulty avoiding foreclosure under present conditions.
Treasury Secretary Paulson has been negotiating "voluntary" agreements with mortgage lenders to freeze the low introductory rates for five years on some subprime home loans, and to offer borrowers the right to refinance their loans into more affordable mortgages.
The Democrats want to go much further than the administration, and have proposed, for example, to help homeowners renegotiate terms of their mortgages if forced into bankruptcy.
I am skeptical of additional government interventions into a housing market that already has too much.
To be sure, homeowners who only temporarily have trouble meeting repayment schedules on their mortgages should not have to go into foreclosure.
But lenders already have strong incentives to help these borrowers since lenders are also hurt by foreclosures, especially in the current weak housing market where it is not possible to sell repossessed homes at reasonable prices in poorer neighborhoods.
Lenders also have much better evidence and experience than governments can ever have regarding which borrowers have a reasonable chance of handling their mortgages if given some temporary help, such as allowing selected borrowers to be in arrears on payments for a while, permitting some borrowers to renegotiate terms, and making other adjustments that raise the likelihood of eventual repayment.
Lenders also are better informed about which borrowers are hopelessly in debt, and are better off going into bankruptcy rather than trying to sacrifice savings or consumption to meet their mortgage payments.
A counterargument to this skepticism is that the government should intervene further in the housing market because the Fed is partly responsible for the crisis by keeping interest rates artificially low.
Perhaps the Fed did keep the federal funds rate too low for a couple of years preceding the onset of the crisis, but low interest rates were found worldwide.
The main reason for the low rates was not the Fed, but the high savings rates in China and other rapidly developing nations that put pressure on interest rates all over the world.
Instead, the Fed, Treasury, and Congress should concentrate on using monetary and possibly taxl policies to help maintain the strength of the American economy that has so far done well despite the housing crisis.
If these policies can help promote continued growth of GDP, probably for several months at a slower pace than during the past few years, with a robust labor market and low unemployment, borrowers in reasonably good economic shape will likely keep their homes as they navigate through the housing crisis.
The growth of large government managed funds during the past few years has been spectacular.
These funds are estimated to manage between $2-3 trillion, and their assets are increasing rapidly.
Sovereign funds have grown mainly because of the run-up in fossil fuel and other commodity prices, although China is creating a large fund with the capital earned from its trade surplus in goods.
If present energy and commodity prices continue, sovereign funds could have over $10 trillion in assets within a few years.
I do not believe that the scale of these funds is a healthy development for these countries.
The largest fund is that by The United Arab Emirates, which is thought to have assets of about $900 billion.
Next in size are the funds from Singapore, Saudi Arabia, Norway, and China: each has capital of about $300 billion.
Following these giant government funds are another 20 or so funds with much smaller amounts of capital.
Oil producing countries have about two thirds of the capital of all sovereign funds.
The aggregate assets of sovereign funds greatly exceed the approximately $1.5 billion invested in hedge funds.
During the past couple of years, sovereign funds have begun to invest more aggressively in international companies.
For example, the Abu Dhabi Investment Authority recently gave cash infusion of $7.5 billion to Citigroup to help replace bank capital that had been depleted due to the credit crunch.
China's State Foreign Exchange Investment Corp invested in the IPO of the large private equity company, Blackstone, and was embarrassed after the stock declined greatly from the issuing price.
Sovereign funds have made other investments in private companies, and many more are expected.
With only a few exceptions, such as the fund of the Norwegian government, sovereign funds are secretive and not at all transparent.
Lack of transparency is a major obstacle to citizens of countries with secretive sovereign funds in determining whether the money that automatically flows to the funds is being well spent.
Even estimates of the total assets of most sovereign funds have to be arrived at through guesswork, and except for an occasional well-publicized transaction, their asset allocations are kept private.
While private equity and hedge funds have also been criticized because they are little regulated- I do not share this criticism- they are paragons of voluntary disclosure and good governance compared to the vast majority of sovereign funds.
Private equity and hedge funds voluntarily disclose information mainly because they compete vigorously for funds, whereas sovereign funds automatically get their resources because of government ownership of oil producing and other commodities.
Compounding the adverse effects of the extreme secrecy is that managers of these funds, being government employees on fixed salaries, have only limited financial incentives to try to achieve higher returns for given risk.
Even when those in charge of sovereign funds hire private managers for some of their capital, there is still what economists call a principal-agent problem because government officials choose the managers.
As a result, one would expect that the management of these funds would be excessively conservative to avoid investment blunders and bad publicity, or that managers would be tempted toward corruption by companies that want to attract investments from these funds.
Or governments will use the funds for other government purposes, such as the just announced unwise decision by Brazil to create a sovereign fund to intervene in the foreign exchange market to shore up that country's currency.
Given that little information is available, it is very difficult to discover whether a fund is managed too conservatively, or whether corruption affects investments in a significant way.
A major reason behind the growth of sovereign funds is the desire by oil producing and other countries to avoid what happened during previous booms in commodity prices.
Vast revenues in the past were spent with little concrete results to show later on.
Countries now recognize that the enormous boom in their export prices, such as oil close to $100 a barrel, is not likely to last.
That makes it prudent to save rather than spend most of the revenue that is being collected.
The desire to save the surplus is commendable, but that consideration alone does not imply that governments rather than households should do the saving.
Central banks and fiscal agencies should accumulate assets during years with high oil and other commodity prices, or what are in other ways unusually good times, in order to protect against the adverse effects of bad times on fiscal and foreign trade deficits.
However, the Abu Dhabi fund and the other large funds, and many smaller ones, have far more assets than is necessary for cyclical management of government portfolios.
Instead of government funds retaining the excess assets, they should be distributed as national dividends, or as reductions in taxes.
One advantage of distributing most of a funds' assets as dividends, or reduced taxes, is that since families at different stages of the life cycle have very different investment needs, they would invest such a dividend in ways that best suit their individual needs.
Younger couples that are investing in children, and actively accumulating wealth, will spend their dividends on buying homes, cars, and other consumer durables, saving for the education of their children, and investing in mutual funds and other financial intermediaries.
Since older persons with adult children already own their homes and other durables, they would spend their dividends mainly on conservative financial instruments.
To be sure, countries accumulating some of the largest funds are not at all democratic, so that any national dividend would only go to a relatively small fraction of the total population.
But so too are any benefits from the investments of sovereign funds, so a national dividend would not be any worse in this dimension.
For many years economists and central bankers have congratulated themselves on the remarkable stability of US economy.
Since the early 1980s, inflation has been under excellent control, and business cycle fluctuations in real GDP have been modest.
For example, in no year since 1955 was US average unemployment as high as 10 percent.
The highest annual rate was 9.7 percent in1982 during the recession then, and the next highest was 8.5 percent during the recession related to the first oil price boom.
Moreover, many economists attributed the quite high average rate growth rate of American GDP in large part to the low rate of inflation and the stability of the economy.
Stable prices and mild business cycles were in turn explained not only by the underlying strength of the American economy, but also in an important way by policies learned by the Fed and other major central banks.
Inflation targeting explicitly guided the European Central Bank, the New Zealand Bank, and a number of other central banks.
It was also important to the Fed.
Through such targeting, central banks would raise their interest rates and tighten up access to credit when inflation exceeded say 2 per cent.
Inflation has been remarkably mild for the past quarter century.
Japan experienced deflation, not inflation during its stagnant 1990s.
To control real business cycles, central banks relied on formal or informal versions of generalized inflation targeting to include real output changes.
In these Taylor-type rules, central banks responded not only to inflation rates, but also to slowdowns in the growth of GDP relative to what was estimated as their long-term trend values.
When the growth rate slowed relative to trend, central banks would loosen up their interest rates and access to credit.
They would tighten when growth rates were above trend values.
By "leaning against the wind" in this fashion, steps were taken to dampen the magnitude of fluctuations in real output.
In light of the severity of the recession that the world economy is now experiencing, for example in the US, Europe, and the UK, can this widespread confidence in our knowledge of how to tame the business cycle through central bank policy be called "a Grand Illusion"? In answering this question, one does have to recognize that the Fed and other central banks learned major lessons from the Great Depression about the value of loosening its purse strings when times were bad.
And no one can deny that the past 25 years was a remarkable, and perhaps unprecedented, good run for the American, British, Chinese, Indian, and the world economy.
Clearly, however, central bankers and we economists were unprepared for the magnitude of the present financial crisis, and even less for its large effects on the real economy through the drying up of credit for mortgages and business investments.
This recession is still ongoing, but it appears as if it will be the most severe recession since 1982, when American unemployment peaked in some months at about 10.5 percent.
One year into the recession according to the NBER dating, unemployment has reached 6.7 percent, and it is still rising at a fast pace.
Central banks, especially the Fed, did respond rather rapidly to the unfolding of the financial crisis, even before it had a large impact on the economy.
The Fed employed all the weapons in its traditional arsenal, such as lowering interest rates and easing access to the discount window.
It also innovated beyond traditional approaches by allowing investment banks access to its credit, and by helping to arrange for the takeover or elimination of weak investment banks, such as Bears Stern and Lehman brothers.
In contrast to the Fed, the US Treasury took a series of actions with dubious merit, including bailouts and a fiscal stimulus, that had few consistent principles.
The latest as reported in the NY Times and Wall Street Journal is to use Fannie Mae and Freddie Mac to encourage banks to drop mortgages to 4.5 percent in order to raise housing prices and encourage home building.
Yet Freddie and Fannie and their government guarantees contributed to the housing mess by encouraging excessive building of residential dwellings.
Any effect of this proposed price ceiling on housing prices on mortgage rates would be small, but the damage to adjustments in the housing market would be major.
The goal of policy should be to reduce, not increase, the power and distortions caused by these two institutions.
In any case, the Fed and Treasury's actions combined obviously were not sufficient to greatly contain the damage to the real sector.
The retreat from risk has been so large that treasury bills and bonds are selling at very low interest rates, other measures of risk are way up, and lenders are reluctant to lend, even when expected rates of return on their investments are high.
Not surprisingly, the confidence of central bankers and economists that we have learned how to moderate greatly the real business cycle has been shattered.
It is revealing how many leading macroeconomists have been silent during the unfolding of this crisis.
Perhaps the prudent approach is to go back to the drawing board before offering an interpretation of what happened, and how to combat it.
Despite the seriousness of the present crisis, we should not forget that the past quarter century has been a great period of growth and stability for most of the world.
Hundreds of millions of men, women, and children were pulled out of extreme poverty in China, India, and elsewhere by the rapid growth of their economies, due in considerable measure to the steep expansion in world trade, and the stability of the world economy.
Even with  two years of a rather deep world recession added in, the period since the early 1980s would look good by historical standards.
True, as I argued in prior posts on our blog, additional regulations of financial institutions are desirable, and the Fed has to think deeply about how to expand its arsenal of weapons.
Yet it would be a major mistake to seriously hamper a worldwide competitive market engine that has brought so many benefits to the world's population.
The recently exposed Ponzi scheme by Bernard Madoff is named after Charles Ponzi, an immigrant to the United States, who ran his swindle in 1920, based supposedly on profits from postal reply coupons.
He took in a great deal of money for those days that was partly spent on high living.
After less than a year he was exposed by a newspaper, and spent many years in jail before being deported back to Italy.
In a Ponzi scheme, investors in a fund typically receive good rates of return on their investments for a while because they are paid with new monies that are invested in the fund.
Even when such funds do not make bad investments, or when managers do not spend a lot on themselves and their families, Ponzi funds must attract new investors at a rapid rate in order to pay good returns to prior investors.
With wasted spending and bad investments, the required growth rate in new monies is even higher.
Since high growth rates of new investments are hard to maintain over time, eventually Ponzi funds collapse.
Then comes the day of reckoning as investors are shocked to discover that they have been duped, and have lost most or all of what they invested.
Ponzi-type swindles probably go back to Greek and Roman times Over 50 years ago I had a wealthy uncle who invested with an individual who seemed to be doing remarkably well with a secretive investment strategy: he paid high returns in the form of monthly dividends, and allowed people to withdraw their investments.
My uncle not only increased his investment, but advised other family members and friends to do the same (my father was either smart or lucky enough not to do so).
After a couple of years the manager vanished, and investors lost all they had given him.
It turned out that he was paying these good dividends not from returns on his investments, but from the new funds he was raising- a typical Ponzi scheme.
While he did not lose most of his considerable wealth, my uncle went into a year-long depression after he found out he had been "taken".
What was unusual about Madoff's swindle is that it continued for over two decades, and was the largest Ponzi scheme ever uncovered, with perhaps $50 billion lost or missing.
It was also the first fully international Ponzi scheme, with investors from Europe, the Middle East, and China, as well as mainly from the US.
One hedge fund, the Fairfield Greenwich Group, put over $7 billion into Madoff's fund, and encouraged others to invest in it as well.
Bernard Madoff is a 70 year old apparently affable but retiring, person who did not live especially lavishly.
He was very active in Jewish circles, so that, many of his investors were wealthy Jews, such as Jeffrey Katzenberg, Steven Spielberg, and Mortimer Zuckerman, and Jewish organizations, including the Eli Weisel Foundation and Yeshiva University.
The enormous scope of Madoff's swindle raises two obvious questions 1) how could this scheme go on for so long without being exposed, and 2) how could so many sophisticated individuals be taken in by a fund that provided almost no information on how it was able to achieve consistent returns of from 8-13 per cent for many years during both good and bad times?.
In regard to the first question, various hedge fund managers were puzzled by how Madoff could make such consistently high returns with the information provided about what he did.
Apparently, one claim was that he placed both put and call options on say the S&P 100 index.
That might make money when stocks are falling rapidly, but the fund should have lost money on average during the mainly good years of the scheme's existence.
One former hedge fund manager, Harry Markopolos, reported him for a decade to the SEC and also to state regulatory bodies.
The SEC conducted some rather superficial investigations, but nothing much came of them-the SEC is now looking into why the swindle was not discovered much earlier.
I believe this is another illustration of what has happened frequently, namely, that regulators too get caught in the hype surrounding an investor, or the economic viability of different banks.
Of course, it is well documented that after a catastrophic event, many "obvious" signs are discovered that if taken seriously could have prevented the event.
For example, after 9/11 it was revealed that the FBI did not investigate carefully warnings that some major terrorist act was being planned.
This was also the case with the Japanese attack on Pearl Harbor.
Roberta Wohlstetter in her outstanding book, Pearl Harbor: Warning and Decision, explains why the Japanese plan to attack Pearl Harbor was not discovered despite the considerable prior intelligence about their plans for an attack.
This is also the case with the Madoff swindle, which makes it more puzzling.
Why did many sophisticated individuals, funds, and other organizations entrust so much money to his management, and to management by various intermediaries, without doing any significant amount of due diligence? Part of the answer is that these individuals are not sophisticated in financial matters, and each successive set of investors assumed that previous investors had done some investigation.
This led to an example of  "information cascades", where private information is revealed sequentially over time to different individuals.
Later participants can be badly misled if the information of earlier participants is far from accurate.
Moreover, Madoff had developed an outstanding reputation.
He was a respected member of the financial community and exclusive social circles, and a former president of the Nasdaq Stock Market.
He helped pioneer electronic trading of stocks, and continued this profitable stock trading business while independently building up his asset management business.
He did not let everyone invest with him, so that those who were accepted felt privileged.
His activities went on for so long without exposure that newer and older investors alike considered his investments to be legitimate, even if secretive.
He bolstered his clients' confidence by quickly refunding investments to anyone who asked.
Stock markets are not fully efficient, and a small number of investors, such as Warren Buffet, can consistently do better than the major indices over very long time periods.
However, markets are sufficiently efficient that such a record is extremely difficult to maintain.
It takes very many years to establish a good investment track record that is due to skill instead of a good record due to plain luck.
The numerous investors not well versed in financial matters have great difficulty appreciating that there are no magical or secretive ways to consistently beat the market.
This is why when anyone asks me for advice, I recommend buying a diversified portfolio of stocks and other assets that controls risk while providing decent returns.
Some money managers may be able to beat that in the long run, but it is extremely difficult to discover who they are.
As a result, most investors looking for exceptional returns are likely to be taken for a ride either by charlatans, or by lucky fund managers whose luck eventually runs out.
Union members constitute a mere 7.5 percent of the private sector American labor force, only one third of its share 25 years ago.
This is why the UAW is a dinosaur, a relic of times past when unions were much more important.
The UAW 's membership has declined by more than one third since 1970, and its membership is still declining at a fast clip.
GM had one quarter of a million UAW workers in 1994, but now has less than 75,000 workers who are members.
It is rather easy to explain why in effect, the US has become a non-union private sector economy.
The rapid shift during the past several decades from manufacturing to services has been a significant contributor since the generally smaller service establishments have always been much less unionized than the larger manufacturing establishments, like steel mills and auto plants.
Globalization has been crucially important in several dimensions.
Increased competition from imports have undercut the higher prices charged by domestic competitors who are forced to pay large benefits to their unionized workers.
In addition, if a union tries to raise worker benefits, and hence production costs, by a lot, companies often close these plants, and set up production in other countries where costs are lower.
Government provision of unemployment benefits and rules about layoffs- including anti-discrimination legislation- and voluntary provision by non-union companies of health and retirement benefits, and codified rules about the treatment of employees in regards to hiring, layoffs, and discipline have greatly reduced the advantages of unions in providing such benefits.
Border and southern states discovered that they could be attractive to companies if they had more hostile environments to unions than other states.
When companies like Toyota and Honda decided to set up auto factories in the US, they generally avoided states where unions were powerful, and instead mainly went to states where unions were not important.
Now foreign companies produce more than one third of all cars made in the US.
Much of the decline in UAW membership has been offset by the growth of non-union workers in plants owned by foreign companies.
In addition, cars made abroad have been out -competing cars made domestically by GM, Ford, and Chrysler.
As a result, cars made by foreign companies, whether in the US or elsewhere, now account for more than half the cars sold in this country.
These powerful forces aligned against unions imply that the UAW and other large manufacturing unions are essentially finished, perhaps unless they receive major financial and regulatory support from the federal government.
This is why the AFL-CIO and Change to Win went all out to get Senator Obama elected president.
Unions are said to have spent over $400 million during the presidential race, and had several hundred thousand volunteers make phone calls and house visits.
They claim to have been pivotal in Obama's victories in closely contested states like Ohio and Pennsylvania.
According to one poll, about 2/3 of the members of the AFL-CIO unions voted for Obama, and only 1/3 for McCain.
Unions strongly supported Obama not only because Democrats have traditionally been much more pro-union than Republicans, but also because Obama had been explicitly supportive of unions.
He and Joe Biden as senators co-sponsored the so-called Employee Free Choice Act.
This Act failed to muster enough votes in the present Congress, but unions have placed highest priority on its passing in the new Congress that has a much bigger Democratic majority.
Such a bill would give workers the right to join a union as soon as a majority of those employed at an establishment signed cards saying they wanted a union.
Under present rules, there must be an election by workers to determine whether they want a union, with votes of individual workers being secret rather than publicly expressed on cards.
Any substantial shift of federal and state governments toward pro-union regulations would harm the American economy and the position of the typical employee.
As Posner indicates, unions want greater monopoly power so that they can raise the wages and other benefits of union members above their competitive levels.
Unfortunately, the effects of this are to reduce earnings for non-union workers, shift production outside the US, or toward states with less pro-union laws, and shift production in unionized plants away from labor and toward capital.
None of these changes are beneficial to the efficiency and performance of the American economy, especially in a global environment.
Although the union leadership believes the Employee Free Choice Act and related legislation could add several million members, the good news is that they are likely to be wrong.
The forces I discussed earlier that contributed to the decline of unions in the US are very powerful, they will continue to operate, and they are extremely difficult to reverse.
So while pro-union federal legislation might well slow down the decline of unions in the private sector of the economy, it is highly unlikely to greatly affect the downward trend.
Posner gives an excellent and skeptical discussion of the negotiations over terms of the auto bailout.
I am in full agreement with him except on one crucial point: I believe, as I stated in my November 18 discussion, that the big three auto companies should be allowed to go bankrupt.
This sharp recession is actually a good rather than bad time for them to go bankrupt.
The global auto industry is in a deep depression, and GM, Ford, and Chrysler have been among the hardest hit.
GM said that it expects to produce about 30 percent, or 250,000, fewer cars in the first quarter of 2009 than it did in the comparable quarter of 2008.
It is temporarily closing about 20 North American factories in order to make these production cuts.
Since they cannot sell their cars anyway because of the depression in car demand, especially for their cars, any disruptive effects bankruptcy would have on their production actually helps them adjust their production of cars to the reduced demand for these cars.
GM and the other carmakers have claimed that bankruptcy would have a particularly big effect on sales because consumers would fear that their warranties on the cars they bought could not be honored in the future.
Whether this is true or not would depend on whether consumers expect these companies to emerge from bankruptcy in the future as stronger rather than weaker companies compared to a bailout.
If they expect bankruptcy to lead to better labor conditions for the company and smaller debts, bankruptcy would give consumers more rather than less confidence that their warranties would be honored in the future.
Furthermore, car prices would only have to fall a little to offset any fears about future warranty protection since car buyers are not willing to pay a lot for warranties.
But suppose for this and possibly other reasons, customers did reduce their demand for cars of the bankrupt American car producers.
What would that mean? Presumably, they would not stop buying cars, but they would instead shift their demand toward the closest substitutes; namely, American-made cars of Toyota, Honda, Nissan, and other foreign carmakers.
Their share of American made cars is over one third and rising, so bankruptcy of the big 3 might speed up this growth in their share.
What that mainly means is increased employment of autoworkers in Tennessee and other states where foreign producers congregate relative to employment of autoworkers in Michigan, Ohio, and other Midwestern states where the factories of the American car producers are mainly located.
I understand the political pressures that the bailout is responding to.
The UAW was an important supporter of Obama and Congressional Democrats, whereas the workers in foreign-owned plants are mainly nonunion, and tended to vote more for Republican candidates.
Still, one should not confuse the politics of the situation with what is the better economic outcome for consumers, and what is the effect of bankruptcy of the big three automakers on overall American employment and unemployment.
My earlier discussion argued that in fact bankruptcy would strengthen rather than weaken the competitive position of the American automakers, especially when combined with government debtor-in-possessor financing.
The bankruptcy proceedings would likely break the union contracts and reduce their pay to levels comparable to those received by American employees of foreign car manufacturers.
They would also break the contracts for health payments and pension obligations, which have been significant factors in causing their financial distress.
Bankruptcy would also help the companies restructure their debt so that interest payments are much lower.
I do not know whether even after all this, the big three can compete effectively in the long-run market for cars--almost surely Chrysler cannot--but bankruptcy combined with management changes, especially at GM, would give them their best chance.
This is certainly true compared to the alternative proposed by the Democrats, which includes the preposterous idea to create an auto "czar" who would oversee the industry.
Since when does the American approach to market structure include czars and congressional management of an industry? Such an approach is just an encouragement to the development of a chronically sick patient (American auto producers) who never gets better, and continues to rely on taxpayer support.
It is true that the bankruptcy judge has great powers as well to guide the restructuring of bankrupt companies.
However, companies either eventually close down as a result of entering bankruptcy, or emerge as generally more viable companies--as happened with United Airlines and other companies in the airline industry.
This is an additional reason why bankruptcy is a much better alternative to a bailout that will cost far more than $25 billion, and could continue for a long time.
I am disappointed that President Bush seems willing to use several billion dollars of the $700 billion financial rescue package to aid the auto companies after Congress could not agree on a bailout.
Whatever President-elect Obama will do after taking office, the right policy for the president is to follow Congress' lead and allow American car manufacturers to restructure through bankruptcy.
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Relative to initial expectations, and given that the heads.
of almost all leading nations attended, the recently concluded United Nations.
climate change summit in Copenhagen was an embarrassing failure.
The final.
accord was only a statement of intention, and had no binding pledges on actions.
to reduce greenhouse gas emissions, although the majority of attending nations.
did agree to ''take note'' of a vague last-minute compromise document by.
President, Barack Obama, and the leaders of four major emerging powers: China,.
India, Brazil and South Africa.
The most important issue on the initial agenda was to reach.
agreement on major worldwide cuts during the next several decades in greenhouse.
gas emissions.
Yet the final Copenhagen document removed from an earlier draft.
a proposal to target a 50% cut in world greenhouse gas emissions by the year.
2050
The final document does acknowledge the need to limit world temperature.
rises to less than 2 degrees centigrade above pre-industrial levels, but it does not include any way to enforce achieving this goal.
The second major aim of the US, Europe, and other rich.
countries was to get agreement from China, Brazil, India, Russia, and other.
important developing countries to greatly reduce their greenhouse gas emissions.
during the next couple of decades.
China has become the world’s largest.
producer of carbon dioxide, supplanting the US, now.
in second place.
In return for agreeing to large reductions in emissions,.
developing countries hoped to receive substantial aid from the rich countries.
This effort also failed.
The only firm deal on aid in the final accord is for.
developed countries to provide a paltry $30 billion to help developing nations.
cope with the effects of climate change from 2010 to 2012, although the rich.
nations indicate that they will try to jointly provide $100 billion year to.
developing countries by the year 2020.
It is easy to see why the fundamental difference at the.
Copenhagen meeting was between the developed and developing world (the second.
most important difference was within the developed world, where Europe and.
Japan wanted more aggressive emission cuts from the US).
A well documented.
finding by development economists is that as per capita income grows in the.
course of economic development, countries become more concerned about both.
local and global pollution, such as global warming.
This is why the BRIC.
countries-Brazil, Russia, India, and China- and other developing countries feel.
it is unfair to ask them to take actions that the developed countries.
themselves did not take when they too were much poorer.
This fundamental conflict is the reason why rich countries.
were willing to discuss possible aid, or “bribes”, to developing countries if they undertook.
large cuts in their carbon dioxide emissions (see the proposal along these.
lines in my post in December 2004 on our old website Becker-Posner-blog.com.).
This explains the goal of providing $100 billion of annual aid by 2020.
$100 billion is a lot of money, but it is paltry compared to.
the GDPs of the most important developing countries, and even to their.
industrial output base.
For example, China, the largest of the developing.
countries, has a GDP of about $8 trillion, adjusted for purchasing power.
parity, compared to the $14 trillion of the United States.
Since China is the.
world’s largest exporter of goods, its industrial sector- where carbon.
emissions are concentrated- accounts for almost half its total output.
Even if.
we suppose, unrealistically, that China receives a full half of the proposed.
aid, or $50 billion annually, that is only 5/8 of one per cent of its current.
GDP.
So China would be economically much worst off if, in return for this $50.
billion, China had to cut emissions enough to reduce its growth rate by only.
a little.
For example, if cuts in its carbon dioxide emissions reduced China’s.
annual growth rate for the next decade from 8% to 7.37%, the lose in GDP from.
the lower growth in the first year would just offset the $50 billion in aid.
However, in later years, China would lose much more than the aid from rich.
countries since its GDP base would be much larger due to its rapid economic.
growth.
The difficulty in reaching agreement on enforcing compliance was a major obstacle to getting rich countries to agree to large amounts.
of aid.
China and other developing countries argued that monitoring of.
their compliance with their pledges to reduce emissions of greenhouse gases.
infringed their sovereignty as independent nations.
Yet without serious.
monitoring of compliance, such agreements are of dubious value since developing.
countries, especially non-democratic ones, may accept aid from rich countries,.
and then fudge their published records on degree of compliance.
The rich countries of Europe, Japan, and the United States.
may still implement further steep cuts in their own carbon emissions.
But that.
is likely to have only a modest effect on worldwide carbon emissions if the.
BRIC countries and the other almost 200 countries are not included.
A.
major reason why the 1997 Kyoto Protocol failed is that it exempted developing.
countries from any targeted cuts in emissions.
Large cuts by rich countries.
alone would speed up the already rapid shift of economic power to Asian and other.
developing nations.
Some companies in Western countries would transfer much of.
their most polluting outputs to developing countries, and industrial companies.
from China and elsewhere would grow at the expense of American, European, and.
Japanese companies.
So my conclusion is that either rich nations have to pony up.
a lot more money to get developing countries to agree to large cuts in their.
greenhouse gas emissions when monitoring of compliance would be limited.
Or.
rich countries have to go it alone in cutting their emissions, and then accept.
a much smaller impact than they would like from their own cuts on worldwide emission reduction.
Even the strongest proponents of immediate sharp cuts in world emissions.
of greenhouse gases –which I am not- have to recognize the implication from the.
failure of the Copenhagen meeting that large worldwide reductions in emissions.
are not achievable in the near future.
In determining whether governments should use their.
monopsony power-defined well by Posner- to reduce drug prices, it is essential.
to distinguish between generics and drugs that are still protected by patents.
Generics are produced under competitive conditions because they typically.
become available only after patents on drugs expire.
The production of generics.
would be inefficiently low if the government used its buying power to force.
down prices to the government, and to patients, to levels where demand for.
drugs by patients exceeded the supply of these generics.
Even a government monopsonist can avoid causing such an.
inefficiently low output of generics if it bought generics at competitive.
prices, but required generic drug producers to give them upfront payments in.
order to get their business.
This is called two-part pricing in the literature.
on monopoly pricing, and applies fully not only to government monopsonists, but.
also to unions that set wages along with employment of their members.
However,.
successful two-part pricing is delicate to achieve, and if used unwisely on.
generic producers it could force some of them out of business in the long run.
because they cannot obtain a decent return on their capital investment.
The wisdom of the government’s using its economic power to.
lower the prices of drugs it buys is even more questionable for drugs under.
patent protection.
The whole purpose of patent laws is to give drug innovators.
monopoly power for a period of time in pricing their drugs in order to.
encourage the R&D research that leads to these innovations.
The government.
would be taking away with one hand what it gave with another hand if it then.
used its buying power to take back some of this pricing power.
A different version of two-part pricing might help even with.
patented drugs.
The government could arrange to pay producers of patented drugs.
a certain amount upfront if they sold units of the drugs to them at the cost of.
producing these drugs.
Such upfront payments would help offset the large.
spending on R&D required to discover successful drugs.
The major difficulty.
in this approach is in determining the size of these upfront payments to drug.
companies, especially when the media and members of Congress would be quick to.
claim a sell out to powerful drug lobbies.
One reason why companies and researchers in the United.
States are greatly overrepresented in the development of new diagnostic and.
therapeutic drugs compared to say Europe (see, for example, the paper by.
Whitman and Raad “ Bending the Productivity Curve: Why America Leads the World.
in Medical Innovation”, November 2009, Cato Institute) is that prescription.
drug prices are about 50% higher in the United States than in Europe.
Another.
factor is that almost half of all pharmaceutical sales are in the US.
Posner recognizes that especially persons under government.
Medicare and Medicaid are encouraged to buy an excessive amount of drugs.
relative to their medical needs because their co-payment rates are only a.
fraction of the total cost to the government.
Posner also believes that.
advertising and other promotion of drugs induce consumers to buy more drugs.
than they really “need”.
Perhaps that is true, although I am doubtful.
Stil, both.
these considerations suggest that the government should force consumers to pay.
more for drugs under Medicaid and Medicare.
Higher consumer prices could induce.
consumers to eliminate any “excessive” use of drugs.
Whether the government could.
politically get lower prices from pharmaceuticals and yet force many consumers.
to pay more is surely questionable.
A different reason why investments in developing new drugs.
may be excessive is that it is hard to deny the use of new drugs once they are.
developed, even when new drugs are only slight improvements over existing.
drugs.
The difficulty in denying their use may arise from political pressure by.
the elderly and others who benefit, even if only by a little, from the new.
drugs.
In addition, children who help their elderly parents pay for their.
medical care may feel “guilty” in not allowing them to consume the latest.
drugs, even when they add little to their parents health and longevity.
Other considerations, on the other hand, suggest that drug.
companies may not spend enough on developing new drugs.
One is that even.
elderly people appear to be willing to pay a lot of their own resources for.
small extensions in their life- see the various Rand experiments on demand for.
medical care.
Persons with serious diseases believe or hope that if they can.
extend their lives even for a short while, new drugs will come along that will.
greatly improve their life prospects.
This happened during the 1990s for persons with Aids since Aids cocktails developed then that greatly extended lives of persons with Aids.
Very sick patients with these expectations would be willing to spend a lot for relatively small.
initial extensions in their life expectancy.
Another reason why too little may be spent on developing new.
drugs is that companies with blockbuster patented drugs collect only a fraction of the total benefits to patients, despite the high.
prices they charge.
This is partly because similar drugs are often developed prior to.
the expiration of the patents of the original drugs.
The net outcome of all these forces is that the American.
government would be unwise to use its economic power to force down drug prices,.
unless it used sophisticated forms of two-part pricing of drugs.
I believe that in.
the long run major drug discoveries lower rather than raise medical spending by.
reducing the need to rely on lengthy hospital stays and expensive surgeries to.
treat serious diseases.
Neither former Fed Chairman Alan Greenspan nor the present.
Chairman Ben Bernanke anticipated the financial crisis that erupted in 2008.
In.
addition, Greenspan helped keep interest rates low for several years after the.
9/11 attacks on the United States that contributed to the boom in housing.
prices, the stock market, and other asset prices.
For these and other reasons.
there is considerable anger and disappointment toward the Fed in Congress and.
among some economists.
This hostility explains the grilling that Bernanke received.
this past Thursday in the hearings before the Senate Banking Committee on his.
nomination for a second term as Chairman.
It also explains the drive by many.
members of Congress to have Congress exercise greater control over the Fed’s.
behavior, and to take away from the Fed its power to supervise banks.
As part.
of this Congressional pressure, Republican Congressman Ron Paul of Texas has introduced a bill.
to have the policies of the Fed audited by the Government Accountability Office.
(GAO).
The problem with these attacks and proposals is not that the.
Fed behaved perfectly either during or before the crisis-far from it- but.
rather that closer Congressional supervision and oversight is likely to make.
matters much worse rather than better.
For example, although the Fed is.
criticized for not foreseeing the financial crisis and for its low interest.
rate policies, at the time there was no outcry in Congress against these.
policies.
In addition, few, if any, Congressmen warned that a financial crisis.
would develop unless the Fed tightened up its supervision of banks, and also.
raised interest rates.
Members of Congress also directly contributed to the.
unsustainable housing boom.
Barney Frank, one of the most knowledgeable Congressmen.
about financial matters, urged banks to increase their mortgages to subprime.
borrowers.
The Community Reinvestment Act of 1977, extended further in 1995,.
also basically forced banks to increase their mortgage lending to consumers in.
poorer areas who were not likely to be in a financial position to meet their.
mortgage payments.
The Fed clearly made some serious mistakes as it struggled.
to cope with a financial crisis that was far more serious than Bernanke and.
other members of its governing Board had anticipated.
By not letting Bear.
Sterns collapse, the Fed probably raised expectations that it would do the same.
for Lehman Brothers and other major investment banks if they got into serious.
trouble.
All hell broke loose in financial markets when the Fed then let Lehman.
go under.
Perhaps too the.
Fed should not have put so many resources into saving AIG, the major commercial.
insurance company that also became a major insurer in the credit default swaps.
market.
Other decisions by the Fed can be legitimately questioned, but there is.
little support for the view that the Fed would have behaved better if Congress.
had been more closely supervising Fed policies.
In any case, Congress already.
has considerable supervisory powers over the Fed.
This central bank has to.
produce an annual report on its activities, and the Chairman must testify at.
least twice a year before Congress.
During this testimony, he has to explain.
what actions the Fed has taken, and to justify them when questioned by members.
of Congress.
The minutes of the Board’s eight meetings each year are made.
publicly available-with a lag- so that everyone can see what the members are.
discussing, and any disagreements.
Central Banks in many countries have fought over decades and.
even centuries for the type of independence in their decision-making that the.
Fed enjoys.
The problem usually with dependent central banks is that they.
engage in considerable inflationary printing of money under the urging of the.
executive or legislative bodies that control them.
The increased money supply.
is an inflation tax, with the revenues used to finance greater government.
spending that would not have been feasible with the income tax and other tax.
revenue raised from companies and households.
The potential for inflation in a few years in the United.
States is considerable because of the Fed’s extensive and unprecedented open.
market operations as it tried to shore up the financial system.
These.
operations created over a trillion dollars of banks excess reserves.
When the.
upswing in the economy gains momentum, banks will use these reserves to lend.
much more to companies and households, a process that will increase currency.
and demand deposits, and thereby inflate prices.
In order to subdue this.
inflation, the Fed will have to sell many of the securities that it purchased.
in open market operations, and find other ways to withdraw reserves and some of.
the inflationary potential from the American banking system.
Such Fed actions will raise interest rates, and put downward.
pressure on the economy’s growth, and contribute to increased.
unemployment.
    History shows that.
such inflation-fighting actions are far less likely when central banks are not.
independent, and legislative or executive branches control their policies.
Even.
the oversight that Congress already has over the Fed is likely to induce the.
Fed to rein in its inflationary fighting policies.
It would be an unpleasant.
and ironic prospect if increased Congressional control of Fed policies led the.
Fed to engage in more of the “easy” money policies that many members of.
Congress are rightly criticizing this central bank for promoting during earlier.
years of the decade.
The justification economists give for concepts of national.
income, such as Gross Domestic Product (GDP) and Net Domestic Product (NDP), is.
that the price of a good measures both the utility households gain from.
consuming that good, and under competition price also measures the cost to.
sellers of producing the good.
This interpretation of the value of goods sold.
in terms of both utility and production costs helps justify not only concepts.
like GDP, but also helps link consumer price indexes to the cost of producing a.
given level of utility to the average consumer, and also ties producer price.
indexes to the cost of producing given amounts of output.
A tremendous achievement of the 1930s was the construction.
of early measures of GDP and NDP by pioneers in national income accounting,.
like the Nobel-winning economists Simon Kuznets and Richard Stone.
They.
recognized from the outset that their national income accounts only very.
imperfectly measure what is produced each year, let alone consumer utility.
Despite these limitations- I discuss in detail a couple of these shortly- these.
national income accounts have proved very useful in quantifying changes over.
time in the real value of what is produced in numerous nations and regions of.
the world.
They have also provided useful measures of changes in the degree of.
inflation at different time periods.
For example, measured real GDP shows clearly that the.
worldwide Great Depression of the 1930s was far more severe in its effect on.
production and incomes than the world recession of the last couple of years.
The growth in real GDP during the third quarter of 2009 strongly suggests that this recession ended during that quarter.
Data on the growth of GDP per capita also clearly indicate that China and other.
rapidly developing countries during the past couple of decades significantly.
reduced the gap between their own standard of living and that of the wealthy.
Western countries, although cross country comparisons of real GDP typically.
make additional price adjustments to national income accounts for differences in purchasing power.
Similarly, indexes of changes in consumer and producer.
prices unambiguously show that the middle and end of the 1970s were periods of.
substantial inflation in the United States and Europe, that Japan had.
significant deflation during the 1990s, and that many countries experienced.
mild deflation in prices during the recent recession.
So despite their various limitations, measures of aggregate.
changes in real output and prices, and other concepts related to the national.
income accounts, have been valuable tools for policy-makers, economists, and.
others.
Although the United Nations Human Development Index (HDI), which tries.
to rank countries by their level of “human development”, has the virtue of.
incorporating improvements in life expectancy-I return to this subject later-.
in all other dimensions it is far inferior to national income accounts.
In.
constructing the HDI for different countries, this index gives equal weight to.
measures of their life expectancy, education level, and GDP.
Since education is.
an important source of improvements in life expectancy and GDP, the HDI.
involves serious double counting by including education as an independent.
variable on an equal footing with these other variables.
Moreover, even aside.
from the double-counting problem, the 1/3 weight attached to life expectancy,.
education, and GDP are completely arbitrary, and not based on any analysis of.
either consumer utility or costs of production.
Although national income accounts are far more useful than.
the HDI and other suggested alternatives, these accounts have serious omissions.
and other limitations.
    Posner.
discusses many of these, so to avoid too much duplication I will concentrate on.
only two.
GDP and other output measures do not include work in the household.
(neither does the HDI), such as time spent on child rearing, preparing meals,.
and other valuable household activities.
These activities have traditionally.
occupied much more of the time of women than men, so that GDP and related.
measures of output exclude very important production mainly by women.
New national time use surveys for the United States and.
other countries allow this omission to be corrected, at least to some.
extent.
    Time use surveys give the.
amount of time spent on child rearing and other forms of work in different.
households, and also the time spent on leisure.
Other data sets provide.
evidence on the hourly earnings of women and men in different households when.
they are working in the labor force.
By multiplying the time spent at household.
work, and perhaps also the time spent on leisure, by measures of their actual or.
potential hourly earnings, one can derive an estimate of the cost of household.
time that is conceptually similar to measures of the cost of producing market.
work.
Such measures of total output or income adjusted for.
household time would be imperfect, but they would be superior to income.
measures like GDP that exclude the value of household work.
For example, when.
increases in economic development and education raise the time married women.
spend in the labor force mainly by reducing the time they spend working at.
home, national income accounts exaggerate the increase in total output by.
failing to subtract reductions in output produced at home.
National income accounts do not incorporate improvements in.
life expectancy, which is a major limitation because of the magnificent.
advances in health and declines in mortality during the past 100 years.
throughout the world.
The HDI has the virtue of incorporating life expectancy.
into its measure of human development.
However, this index ignores modern.
economic research that provides a method to use consumer and producer behavior to.
combine changes in national income with changes in various types of mortality.
risk into a single index of what is called “full” income.
This method.
calculates the "statistical value of life", which measures how much.
individuals are willing to pay for various reductions in mortality rates (see.
the fuller discussion in my post on Dec.15, 2007).
The concept of “full” income combines changes over time in.
GDP with estimates of the value placed on reductions over time in mortality.
risks (or increases in mortality, as in some African countries in recent years.
due to the Aids epidemic).
Such full income measures combine changes in life.
expectancy and in ordinary income not in an arbitrary way, but by extending the.
willingness to pay concept used in national income accounting to valuations of.
changes in life expectancy.
A.
common finding is that the usual measures of per capita incomes grew only a.
little more rapidly during the decades 1960-2000 in poor and less developed.
countries than in richer countries, even after accounting for the rapid growth in the.
world’s two most populated countries, China and India.
That finding on changes.
in world inequality is greatly altered when comparisons are made not of GDP per.
capita but of full income per capita.
Phillipson, Soares, and I construct such.
measures of full income for about 100 countries for these decades (see our.
The Quantity and Quality of Life and the Evolution of World.
Inequality The American Economic Review, March 2005)."
Since mortality.
declined more rapidly in poorer countries than richer ones, adding the value placed.
on declines in mortality to measure changes in full incomes have a much greater.
effect on adjustments for poorer countries than for richer countries.
The.
result is that the growth rate in full incomes are generally much more rapid in.
poorer countries than in richer ones, which implies that inequality in full.
incomes per capita declined greatly across nations during the past several.
decades, even though inequality among countries in GDP per capita did not.
change much.
Despite.
all the limitations of national income accounts, they are still the best.
available way to measure changes over time in the amount of production in an.
economy, and even for comparisons of real output per capita among different.
countries.
Nevertheless, these accounts can be made even better by including.
the value of time spent at home, and the value of improvements in life.
expectancy.
A demonstration that such changes in national income accounting are.
feasible would encourage serious efforts at including some of the other.
improvements in national income accounts discussed by Posner and others.
Perhaps the “war on drugs”, initiated by President Nixon in the 1970s, was worth starting, in part for the reasons Posner gives.
I say “perhaps” since I have always been skeptical of the war, particularly in light of the disastrous American experience with prohibition of alcohol between 1920-1933.
Whatever one’s views on the initial case for making drugs illegal, the cost has been tremendous, and in many aspects unanticipated.
Moreover, and this is the crux of my discussion, the costs of this war go far beyond those estimated in the recent study by Miron and Waldock discussed by Posner.
These authors do a good job of estimating the amount   directly   spent by the United States in fighting the war on drugs.
They calculate about $41 billion is spent on this fight by state and local governments, and by the federal government, through policing efforts, the cost of court personnel and buildings used to try and convict drug offenders, and the cost of the guards and other resources used to imprison those convicting of drug offenses.
They also estimate that a similar amount could be raised in tax revenue from “sin” taxes on drug use if that became legal.
These estimated direct costs of the war are significant, yet they are regrettably only a small fraction of the total social costs due to the war on drugs.
It is no accident that much of the drug trafficking is found in poorer black and Hispanic neighborhoods since high school dropouts and other low earners are attracted to becoming involved in the drug trade.
The result typically is a sizable deterioration in the quality of living in drug-dominated neighborhoods, with residents often terrorized by the drug dealers.
No one to my knowledge has estimated the social cost of neighborhood deterioration due to drugs, but it is likely very high.
Drug prices are much higher than they would be if drugs were legal- probably much more than 100% higher for most drugs- because drug traffickers must be compensated for the risks of going to jail and the violence from being in the drug business.
The high prices of drugs tend to reduce drug use, but it also makes life very difficult for anyone who does become a heavy user.
Since the cost of maintaining their drug habits and addictions often overwhelm their earnings, many heavy users turn to prostitution and other crimes to get enough money to pay for their drug use.
Most sellers of illegal drugs are high school dropouts who on average do not earn much from their sales, and they also face the risk of jail time.
However, they continue selling drugs because their legal opportunities are limited, and also because occasionally a small time seller rises up in the drug organization and makes it big.
Legalization of drugs will very likely increase the high school graduation rate because it would reduce these illegal opportunities for dropouts.
As a result, drug legalization would radically reduce the numbers of young uneducated persons going into the drug trade, and increase their numbers in better paying legal jobs since they would be better qualified for these jobs.
This would be another important indirect benefit from legalizing drugs.
Perhaps, however, the worse results of the American war on drugs are found in its effects on other countries, especially Mexico, Colombia, and other Latin American countries.
Mexico is also engaged in a war on drugs, but it is a war almost entirely fought against drugs shipped from Mexico into the United States.
The overwhelming majority of drugs that are either produced in Mexico, or that enter Mexico from other countries, are destined for shipment across the border to the United States.
The two main drugs shipped from Mexico are marijuana and cocaine, the same two drugs that Miron and Waldock show constitute the vast majority of drugs used by American consumers.
Mexico is engaged in a real war, with advanced military equipment used by the drug gangs; often the gangs have better weapons than the army does.
The casualties have been huge: an estimated 30,000 + persons have been killed in recent years as a result of the drug violence, far greater than the combined deaths of American and allied forces in Iraq and Afghanistan.
Many of these deaths are of drug cartel members, but a considerable number also are of soldiers and policemen, journalists, and innocent bystanders.
After the drug lords discovered that they are very good at violence and intimidation, they expanded geographically and into other activities.
They have spread out from concentration in enclaves near the border or in the West of Mexico into many other areas, including major cities like Monterrey.
Some towns have become uninhabitable, as former residents fled from the violence, some entering illegally into the US.
Drug lords have taken control in many places of prostitution, gambling, extraction of monies from businesses for “protection” services, and indirectly also various local governments.
Colombia has fought a long and bloody war against its drug cartels that involved many deaths on both sides, including civilian deaths, and a major drain on government resources.
A good part of the country had been fully under control of the drug lords.
As in Mexico, the drugs produced and refined in Colombia were almost entirely shipped to the United States.
Fortunately, the government finally appears to have won the war, at least for the present.
No one has estimated the social cost of American drug policy on Mexico, Colombia, and other countries, but it has to be immense.
Perhaps these countries should just allow drugs to be shipped to the US, and put the full burden of stopping these shipments on American enforcement agencies.
The American government would protest, but such a result would provide a clearer picture to the American people of the full cost of current policy, including the major costs imposed on other countries.
One can hope that then we will get a serious rethinking of the American war on drugs, and some real political movement toward decriminalization and legalization of various drugs.
The disturbingly large present and prospective fiscal deficits of the federal government receive much attention, and deservedly so.
Yet the financial situations of many state and local government finances are also in bad shape, and in many respects they are far more difficult to solve than are the federal fiscal problems.
California provides a dramatic example.
It has a current annual budget deficit of over $20 billion, which amounts to about 20% of its annual spending.
My home state of Illinois is not far behind, with a fiscal deficit also of about 20% of total spending.
States like Nevada even have much bigger deficits.
Many cities, like Chicago and New York, also face dismal fiscal futures.
Some states, like Texas, have much better fiscal health, either because they have had greater fiscal discipline, or because the Great Recession has a smaller impact on their tax revenues.
Tax revenues will recover as the American economy recovers, and that will help reduce state and local fiscal deficits.
For many states, however, such as California and Illinois, the increased tax revenues from an economic recovery are unlikely to eliminate their deficits because they have a structural gap between spending and revenues.
They cannot easily cut spending because a sizable fraction of their spending goes to education, welfare, health, roads, and criminal justice.
All these activities have strong political support.
Nor is it easy for states and cities to greatly raise taxes.
Taxpayer groups are generally well organized politically to lobby against their own taxes being raised.
In addition, competition among states and localities for companies and residents, and competition from untaxed online sales, puts a ceiling on how much taxes can be increased without badly hurting a state or local economy.
Perhaps states that have relatively low income taxes-Illinois has a flat tax of 3%- can raise them a little, but states that have high income taxes- the maximum rate in California already reaches almost 10% at moderate income levels- would find it difficult to raise income taxes by much without encouraging substantial out-migration of small businesses and richer individuals.
As bad as their present fiscal situation is, the long-term picture for state and local government finance is even more dismal.
The vast looming problem is the huge level of unfunded liabilities for pensions and health care to retired government employees.
Recent estimates place the present, or discounted, value of state and local government unfunded liabilities at over $3 trillion.
This amounts to about 22% of American GDP, and it is more than 150% of annual state and local government spending.
Unfunded liabilities are so large because of several factors.
Most state and local government employees can retire when they are still young- often after 20-25 years of government employment.
To make matters worse, these governments continue to use defined benefit systems, where the amounts paid to retired workers are only very loosely based on a worker's contributions to the pension system.
Often, retirement incomes depend mainly on earnings during the last few years of government employment prior to retirement.
Earnings tend to be much higher at older than at younger ages, and workers sometimes make the relevant earnings even higher by taking overtime pay shortly before retirement, and by other means.
Medical benefits to retired state and local government workers are another important determinant of unfunded liabilities.
These benefits are usually quite generous, with low deductibles and co-payments, and low premiums.
Of the $3 trillion in unfunded liabilities, about 20% are liabilities from expected medical care, and the large remainder is from pensions.
Since medical spending has been rising rapidly over time, the share of state and local liabilities due to medical spending is likely also to be rising over time.
Fiscal adjustment by states and cities is further complicated by the heavy unionization of their employees.
Whereas unionization in the private sector declined drastically during the past several decades to only about 7% of the private labor force, unionized state and local government employees grew dramatically to about 40% of all these employees.
Government unions, like the teachers unions, are powerful and entrenched, and would battle fiercely against efforts to greatly reduce any part of their total compensation.
The federal government also has immense unfunded medical and social security liabilities for retired workers.
But unlike state and local governments, the federal government can in a pinch help finance these liabilities by effectively printing money through bonds that are directly or indirectly purchased by the Federal Reserve.
The federal government can also raise taxes without worrying about the competition among states for businesses or richer individuals, although federal income and other taxes have sizable effects on incentives as well.
Nevertheless, despite the obstacles, state and local governments do have several options that could help get their unfunded liabilities under better control.
They could delay retirement ages of most new state and local employees, and even of many present employees, until they reach their sixties (employees doing strenuous physical work could retire earlier).
That would simply be requiring their employees to retire at about the same ages as do most non-governmental workers.
In addition, they can begin to convert, as have many private employers, from defined benefit retirement systems to defined contribution systems.
In the latter system, retirement benefits depend on the present value of pension taxes paid by each worker, accounting also for changes in returns on assets.
Finally, states and local governments could force present and future retirees to pay for a larger fraction of the medical care that they receive.
Of course, the teachers union and other powerful state and local government unions will strongly resist efforts to substantially cut their generous retirement benefits.
Governments can, however, fight back if they have strong support from the taxpayers who will be burdened with financing these unfunded obligations.
If the governments were losing these political battles, cities but not states, as Posner indicates, could even threaten the “nuclear” option of declaring bankruptcy in the expectation that bankruptcy courts will reduce the size of their unfunded retirement obligations.
One way or another, cities and all states with the most serious unfunded liability problems would eventually be forced to either lower their spending or raise their taxes.
Either way that would reduce their competitiveness against other states.
It is hard to come away with much optimism for the economic futures of the states and cities with the greatest fiscal problems.
Employment in the United States fell by a lot during the Great Recession from December 2007 to June 2009.
The unemployment rate grew correspondingly from a low of 4.4% in May 2007 to a peak of 10.2% in 2009, and the underemployed grew even faster.
That was bad enough, but the growth in employment and decline in unemployment since the trough of the recession has been quite slow.
Forecasters got a shock on Friday with the release of preliminary data that indicated the unemployment rate rose a little from 9.6% to 9.8% in November rather than remaining stable or even falling a little.
Although data for one month alone do not mean much because of large measurement errors, the average growth in employment over the past three months has been slow, and the unemployment rate has hardly budged.
Even more disturbing is that the fraction of the unemployed who have been out of work for longer than six months has remained at a very high level of a little over 40%, up from the much lower level of about 15% prior to the recession.
The slow recovery is disturbing because speedy recoveries typically follow severe recessions.
For example, the sharp contraction of the American economy between 1981-’82 produced an unemployment rate of 10.8% in December of ’82, but that was followed by a steady fall in unemployment to a rate of only 7.4 in November 1984.
It has been one and one half years since the NBER determined that the Great Recession had ended, but unemployment has only fallen by about ½ of a percentage point, and the growth in employment has been well below the cumulative declines in employment during the recession.
Nor is the comparison between this recovery in employment and that of past recoveries the only cause for concern since some European countries have done much better.
The Great Recession hit Great Britain hard since its banks were also in deep trouble, and Britain’s economy is in many ways similar to that of the US.
Yet while Britain experienced larger declines in GDP during this recession than the United States did, its unemployment rate did not rise nearly as much, and is now under 8%, much below the American rate.
Germany’s labor market is organized differently than the British labor market, its banks were in less trouble than were the Anglo-Saxon banks, and it subsidized employment during the recession.
Nevertheless, it is noteworthy that while German exports, second largest in the world, had to sharply contract during the Great Recession, its unemployment rate is around 7%, and has fallen rather rapidly during the recovery.
One mechanical way to discuss what is happening to unemployment is to look at the growth in output, productivity, and capital.
 Given the growth in say GDP, the growth in employment and capital arithmetically must be smaller, the greater the improvement in productivity.
American GDP has been growing at the unimpressive annual rate during the past two quarters of about 2%, while productivity has been improving at a quite good rate- it increased by 2.3% in the 3rd quarter of 2010.
This leaves only limited, if any, room for growth in employment.
Some analysts have seized on this purely arithmetical relation between output, inputs, and productivity to argue that the continuing improvements in productivity explains why employment has been increasing so slowly since the end of the Great Recession.
However, the attempt to impute causation from productivity growth is a mistake since employment can grow rapidly even when productivity is growing rapidly if the growth in output is sufficiently rapid.
The history of the United States and all other countries that experienced good to rapid economic growth since the end of World War II is one of quite rapid growth in both productivity and in employment.
If an economy had a fixed number of jobs, then advances in productivity might well eliminate some jobs-the way computers eliminated many clerical jobs- and fewer jobs would remain.
Advances in particular technologies have sometimes eliminated certain jobs, but they have often created an even larger number of new jobs, the way many jobs now depend on the computer and Internet.
The main reason why employment has been growing slowly in the United States is not the advance in productivity, but rather it is that many companies do not want to add many employees because they feel very uncertain about what will happen to demand, profits, and costs during the next year or two.
Although banks are flush with over a trillion dollars of excess reserves, they have been reluctant to lend to new and other small firms that want to borrow, or to consumers, because banks are uncertain about whether they will be paid back on time by the borrowers.
Some uncertainty by borrowers and lenders is inevitable coming out of a severe recession.
However, that normal uncertainty has been magnified by fears about the government sector.
Many businesses have been afraid that the new healthcare law will raise their employment costs, that taxes and regulations on business, high incomes, and investments will go up, that the financial reform act will excessively increase the costs of banking and of other business activities, that the growth in government and the large deficits of the past several years will force increases in future taxes, a smaller private sector, and a less efficient economy.
I have been arguing on this blog and elsewhere that the best approach now is for Congress and the president to concentrate on increasing long-term economic growth (see my post on 11/07 for an agenda for growth).
This would require low taxes on investments, encouragement to basic R&D, and sharp reductions in expected government spending, especially on social security retirement income and Medicare and Medicaid.
 Tax revenue would also have to increase, and this could be accomplished through widening the tax base, such as by eliminating the tax exemption on mortgages, by flattening out income tax rates, and perhaps also by adding a value added tax.
Many in China and elsewhere believe the US economy is too sick to be cured.
I do not agree, but recovery would require some unpalatable medicine with regard to spending and taxes, somewhat along the suggested by the recent majority-backed Report of the National Commission on Fiscal Responsibility and Reform.
Unless the US takes serious actions to promote its long-term growth, the next decade may be a very difficult one.
Both supporters and opponents of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 usually confuse its short term-stimulus effects on the economy, and its long-term effects on economic growth.
I would give it a grade of C+ as a short-term stimulus to the economy, and a grade of B+ for its effects on longer-term growth.
The Act provides for a one-year two-percentage point reduction in employee contributions to social security taxes at an estimated cost in tax revenue of over $100 billion.
This will add a significant amount to the budgetary deficit for the year going forward, while providing very little short-term stimulus.
Even the most simplistic Keynesian analysis recognizes that a one-year tax reduction will be mainly saved in order to spread out the added consumption from this additional “wealth” of households over more than a single year.
In economics terminology, a one-year tax relief would be considered a transitory increase in income rather than a permanent increase.
Evaluating the desirability of the extension of unemployment compensation to the long term unemployed (up to 99 weeks of unemployment) is more complicated.
Although, like the social security rebate, this also is just a temporary windfall to these unemployed, they are likely to have exhausted their liquid assets during their long period of being unemployed.
They would tend to become liquidity constrained, and hence would consume a large part of their unemployment benefits.
This extension of benefits to the long-term unemployed could have been made more or less revenue-neutral by reducing, or preferably eliminating, unemployment compensation to the men and women who have been unemployed for less than 3 months (they constitute about 40% of all unemployed).
The great majority of the short-term unemployed are not liquidity constrained since they can finance their unemployment from savings, earnings of spouses, and borrowing from relatives and friends.
Unemployment benefits as insurance against the risks of becoming unemployed are best concentrated on the longer-term unemployed because they are more likely to have run out of assets.
Just as with other insurance, the optimal unemployment insurance would have a sizable deductible-that is, little payment during the first several months of unemployment- and then significant insurance coverage for longer-term unemployment.
Also, as with other insurance, a good program tries to protect against moral hazard; that is, against the unemployed not looking for jobs because they prefer to continue to collect unemployment checks.
Such moral hazard considerations imply that payments should begin to fall, and eventually be eliminated, after say six months or so of unemployment.
One exception would be during and shortly after severe recessions, as at present.
The largest component of this Tax Relief Act is the extension of the Bush-era tax cuts on incomes, dividends, capital gains, and estates.
This extension will have some relatively short-term benefits to the economy by stimulating investments and the formation and expansion of small businesses, but the main case for extending these tax cuts is their effects on longer-term economic growth.
The growth rate in per capita incomes is determined mainly by the rates of investments in human and physical capital, and by technological progress.
Both these drivers of economic growth are in good part in turn determined by tax rates on personal and business incomes.
I view the maintenance of the Bush tax cuts as only the first important move of the American tax code toward a more effective income tax structure.
That structure would have a broad-based low rate flat tax on personal incomes, with little, if any, taxation of corporate incomes, and with dividends and capital gains taxed as ordinary income.
As the majority report of the recent National Commission on Fiscal Responsibility and Reform proposed, the income base should be greatly broadened by eliminating the deductibility of interest on mortgages, and a variety of other special deductions that result from the political influence of various special interests.
I showed in a post last month (see 11/07/10) that even a one-half percent increase in the American long-term rate of economic growth would have a large effect in 20 years on both per capita incomes, and on the size of the US debt relative to its GDP, as long as the rate of growth in government spending was not allowed to increase along with the growth in incomes.
Control over the rate of growth of spending is essential even with faster economic growth in order to try to prevent the debt to GDP ratio from becoming a major problem.
A broad-based flat income tax could have a relatively modest tax rate- perhaps about 25%- and still raise as much revenue as the tax structure that would exist if the Bush tax cuts were allow to lapse.
A flat consumption tax would be even better than a flat income tax since such a consumption tax would not distort the incentive to save.
However, this type of consumption tax is unlikely to be introduced as a substitute for the income tax.
It could play a role as a supplement to the income tax if that combination were necessary to prevent a narrow-based progressive income tax system from being imposed.
