The Becker-Posner Blog

China’s Tilt Toward the Private Sector? Becker

In a speech this month to Communist party officials (reported in yesterday’s New York Times), Li Keqiang, the recently chosen Prime Minister of China, called for greater reliance on the private sector and reduced dependence on governmental regulations and oversight of the economy. In a remarkable admission he said “The market is the creator of social wealth and the wellspring of self-sustaining economic development.” Several troubling developments in the Chinese economy led to Li’s speech.

China has had very rapid economic growth during the past 30 years that lifted many hundreds of millions of Chinese out of dire poverty. However, during the first quarter of 2013, China’s GDP expanded by “only” 7.7% compared to a year earlier. Although China’s rate of growth is still fast compared to other nations, it is considerably lower than its growth during earlier years. For example, from 2003 to 2011, China’s GDP grew at rates that ranged from about 9% to over 14%. While the last quarter may be only a temporary decline in China’s growth rate, it is consistent with a slowing of growth during the past several years, and with other adverse developments in the Chinese economy.

The Chinese economy has used low wages to specialize in labor-intensive products for the export market. This model is breaking down because wages have risen greatly during past decade, and export markets have shrunk because of reduced demands from the sluggish economies of the European Union, Japan, and the United States.

Chinese growth has been very uneven, as urban areas have prospered much more than rural areas. This has greatly increased income inequality, especially between farmers and factory workers. The increase in inequality has been magnified by China’s policy of restricting migration from farms to cities, and by not providing the same education and health care to these migrants that is available to other city residents.

China has encouraged investment and discouraged consumption by allowing the state-run banking system to provide investors with low interest rates and easy credit terms, and by price controls and other restrictions on the provision of consumer goods. As a result, private consumption accounts for only about 35% of China’s GDP, compared with over 70% in the United States. Since China’s exports are expected to rise more slowly in the future, in part because its currency will appreciate in value relative to the dollar and other major currencies, the domestic market will become a more important destination for China’s production.

These are some of the problems that explain Prime Minister’s Li desire to unleash the power of the private sector to galvanize China’s economy. A good place to start is with the state-owned enterprises (SOEs) that are still very important in manufacturing, banking, energy, and telecommunications. These SOEs frequently have protected economic positions because competitors are not allowed to enter; for example, three state-operated enterprises divide up the telecom sector. Studies indicate that SOEs are on the whole considerably less efficient than private companies, partly because SOEs get many subsides, including loans on subsidized terms from the state-run banking system, and soft budget constraints.

Therefore, it is particularly important to curtail the lending and other practices of state-owned banks, and to allow private domestic and foreign banks to become more important providers of credit. This would encourage private enterprises by giving them access to credit on terms that are market driven, and that are more comparable to the terms available to the SOEs.

The many millions of migrants from rural sectors to urban areas should be fully legitimatized, so that they have the same rights to education, health, and credit as persons born in cities. This would help reduce inequality and increase productivity by speeding up the migration out of the less efficient parts of the rural sector into more efficient factories and service activities.

The financial crisis and major recession that was brought about in part by excesses in the private banking sector in the United States and some other developed countries led to a widespread reaction against capitalism and the private sector. This happened as well in China for a couple of years as the state sector expanded relative to the private sector.

China’s new leaders have now made clear that the country needs to rely much more on the creativity and resourcefulness of the private sector if it is to move beyond middle income status, and become a major economic power as measured not only by aggregate GDP, but also by per capita GDP. It remains to be seen whether even the new leaders can overcome the strong opposition of SOEs and other special interest groups to the implementation of a major shift toward the private sector.

 

 

 

 

 

The Chinese Economy—Posner

A very poor country can grow rapidly, but a rich one cannot. The U.S. economy is very robust by international standards, but it rarely grows by more than 3 percent a year (except in the catching-up phase that follows a dip in the business cycle), and much of this growth is attributable to population increase; the U.S. has a relatively high birth rate and a high immigration rate. China grew at a very high rate, once it abandoned the communist economic system, from a very low base, but it is not surprising that the rate has slowed—yet slowed to a rate, still very high, of 7.7 percent in 2012. 

I don’t know what the future holds, but it wouldn’t surprise me if the Chinese rate of economic growth plummeted. There are many negatives in China’s economic picture. The obvious one is the state-owned enterprises, which account for about half of total Chinese output. They are inefficient and corrupt, but also deeply entrenched, with numerous links to the communist officialdom that runs the country. 

But there is also the uncertainty remarked by Becker that is created by China’s need to reduce the ratio of output that is exported and output that is consumed domestically, because increasing wages of Chinese workers have increased competition from countries where wages are still very low. The problem in reorienting an economy from producing primarily for export to producing primarily for the domestic market is that the sale of consumer goods requires an elaborate distribution infrastructure, a service culture, and a reasonably well informed consuming public, none of which is necessary for exporting and each of which is difficult to create. So China faces large restructuring costs in reorienting its economy to producing more for and selling more in the domestic market. 

China is experiencing a brain drain, though retarded at present by poor employment opportunities in Europe (owing to Europe’s economic misery) and good ones, still, at home. Many of China’s brighest, best educated young people do not want to remain in China, and are welcomed as immigrants by many countries, such as the United States, Canada, and Australia. One reason they don’t want to remain is China’s political system. China is a dictatorship, and in a dictatorship everything is subordinated to its maintenance. China not only is not democratic; it does not (as authoritarian regimes sometimes do—the Prussia of Frederick the Great is a famous example) protect personal liberties. China is also corrupt, increasingly militaristic, ethnically divided, hostile to minorities, and fearful of cults and religious sects. Its traditions, like those of Russia, are antithetical to the political and economic cultures of most prosperous countries. The negative features of Chinese society are relevant not only to explaining the brain drain, but also to judging whether its economy is likely to continue growing rapidly. 

Emigration of the young is further worrying from the standpoint of economic growth because, as a result of China’s “one-child” policy (albeit sporadically enforced), the population is aging rapidly. This both diminishes labor supply (and so forces up wages, reducing China’s international competitiveness) and diverts resources to supporting unproductive elderly persons. 

Another obstacle to continued rapid growth of the Chinese economy is the continuing rapid increase in the amount of pollution, which has already reached staggering proportions, beyond what developing countries usually encounter. As economic activity increases, so will the amount of pollution; to prevent it from getting altogether out of hand, China will have either to divert greater resources to pollution control, which will increase welfare but not measured economic output, or slow the rate of economic growth. 

Still another source of concern is the recent drop in China’s economic growth rate, from about 10 percent to 7.7 percent. That is a drop of almost 25 percent, which implies a significant drop in the return on investment, which in turn implies that investment will fall. Such a fall will increase unemployment. It may also put strains on China’s banking system (if firms that borrowed to invest have difficulty repaying their loans, because of falling output)—a system already reported to be heavily stressed. 

And finally I’m mistrustful of Chinese statistics. Should we trust economic reporting by officials of a dictatorship? I think not.

Security Surveillance Cameras—Posner

In the wake of the Boston Marathon attack last month, considerable attention is being paid to surveillance cameras, which played a key role in the identification of the two attackers; their identification led within days to the killing of one and the arrest of the other. Had they not been identified, they might have escaped from the Boston area and committed a terrorist attack in New York City or elsewhere. 

Many businesses (notably banks) and even homes have surveillance cameras nowadays. Usually they are pointed at the interior of the building though sometimes also or instead at the entrance to or the grounds of the building. These uses of surveillance cameeras are uncontroversial. But there is controversy over surveillance cameras that are owned by or form part of a network of surveillance cameras that is accessible to government, especially when, as is increasingly common, the surveillance cameras are technologically sophisticated and can for example enlarge the photographed
images, take pictures at night, enable face recognition by matching facial features of a person photographed by the camera with a database of facial features, and even follow a vehicle or pedestrian as it or he goes out of the range of one camera and into the range of another. 

Most surveillance cameras are privately owned and operated and therefore do not provide coverage of vehicles (and sometimes their drivers or passengers), or of pedestrians other than the entrance to the private establishment. But some cities, like London, New York, and Chicago (and many others, including many much smaller ones, as well), install large numbers of surveillance cameras outdoors (for example on lamp posts), where they can photograph vehicles and pedestrians. Moreover, many owners of private businesses or other private institutions (or public institutions, such as public schools, that may be part of a different part of government from the part to which the police or other
law enforcement agencies belong) agree to give the police or some other law enforcement agency access to their surveillance cameras, thus creating a much richer surveillance network than the government would have if it were limited to placing surveillance cameras in public places. So when for example one reads that Chicago now has 22,000 surveillance cameras, one is to understand that the Chicago police department has access to a network of 22,000 surveillance cameras; only a relatively small number are owned by the police. 

So what are the costs and benefits of these surveillance networks? These seem to be largely unknown. The financial costs probably are small, since most of the cameras are private and the network as a whole probably operates as a substitute for a number of police who would otherwise have to be watching personally the users of streets, sidewalks, parks, and other public spaces. The benefits of the surveillance camera networks include preventing crimes (as by observing suspicious behavior in time to head off a terrorist attack or other crime), deterring criminals (including, of course, terrorists) by increasing the likelihood that they will be apprehended and successfully prosecuted, apprehending criminals who have not been deterred, and, by providing evidence for use in criminal prosecutions, helping to convict criminals. But I am not aware of studies that enable these benefits to be estimated, even crudely. Obviously there are benefits, however, and the costs of terrorist attacks and other murder sprees are such that the expected benefits of comprehensive surveillance are likely to be substantial. 

The major costs, or at least the costs that people worry about, are of two kinds. One is the potential for abuse by government, and is the focus of civil liberties organizations, which invoke, though inappropriately, the “telescreens” in George Orwell’s novel Nineteen Eighty-Four (1948), whereby “Big Brother” (the totalitarian government depicted in the novel) watches the interior of every home. Our government is not totalitarian, obviously, though there have been abuses of government surveillance, notably in the Cold War, and surveillance within the home is more intimidating than surveillance in public. 

The greater concern is invasion of privacy; many people don’t like the idea of being watched, even in public, by government monitors, even if there are no abuses. I find this concern difficult to understand, and I don’t think it’s actually widely shared. Even before the Boston Marathon attack focused attention on the security benefits of surveillance cameras pointed at streets and sidewalks, surveillance cameras public as well as private were widely endorsed. 

Although “privacy” has positive connotations and is greatly valued by most people, most people don’t think of streets and sidewalks as private places, because they are open to personal observation (including eavesdropping) by strangers, including police, journalists, and (other) snoopers. The incremental invasion of privacy by the photograph seems to most people offset by the benefits in enhanced security. 

More interetingly, the social as distinct from private value of privacy is easily exaggerated. After all, as a practical matter, privacy means concealment; and with some exceptions (such as trade secrecy), concealment is more often a social bad rather than a social good. People conceal aspects of themselves that might cause others to shun them or, more generally, transact with them on less favorable terms; privacy is thus, to exaggerate slightly, a form of fraudulent marketing of oneself. Against this characterization it can be argued that people often exaggerate the significance of personal aspects of a person that everyone prefers to conceal, such as psychiatric or other medical impairments, an arrest record, a business failure, a criminal relative. But this is a paternalistic ground governmental protection for privacy. The less protection for privacy there is, the better behaved people are likely to be and also the more realistic they are likely to be in evaluating the disfavored “private” characteristics of other people. 

Still, there is an argument that privacy is inverse to conformity; that creativity tends to be correlated with nonconformity; and hence that a population is likely to be more creative if there is considerable legal protection of privacy. I think this is an argument worth taking seriously, but that it has little or no application to security cameras in public places.

The Internet, Surveillance Cameras, and Misuse of Big Data-Becker

Surveillance cameras, tax reporting, Internet-based data, emails, mobile phone records and their cameras are some of the more salient modern ways that provide information on individuals and organizations. Few object when banks and other organizations use surveillance cameras on their premises to deter theft and robbery. There is much greater concern when Internet companies like Google and Facebook use their vast stores of data to learn about the interests and other personal information, of the millions of individuals who use their services. Probably, however, the most serious threat is the misuse of “big data” by governments, including democratic governments.

This past week the possible misuse of extensive data by the Internal Revenue Service and the Justice Department has been widely reported. Prior to the presidential election in 2012, tax inspectors may have singled out for closer scrutiny the applications of “Tea Party” and other conservative organizations for tax-exempt status. The Justice Department secured telephone records of reporters for the Associated Press in order to find their sources for leaked information. Data mining with advanced technologies played a part in both alleged abuses of governmental power.

To be sure, using the vast data resources of modern governments to target opponents is not new. For example, Richard Nixon wanted tax inspectors to audit his list of “enemies” and avoid auditing his friends, but George Shultz, the then Secretary of Treasury, refused to go along. What is different now is the explosive growth in governmental (and private) access to “big data” with extensive information on millions of individuals and hundreds of thousands of organizations.

Of course, big data has many valuable uses. To give a few examples, health insurance companies can better forecast their future financial obligations from their extensive information on the past health, use of medical resources, and other behavior of millions of insured individuals and families. Economists use the vast government social security data to track how earnings of different individuals vary over the lifecycle, and even how the earnings of children are related to those of their parents. Governments use their extensive information on incomes and deductions to discover who is likely to be underreporting their incomes and over reporting their deductions to tax authorities.

Yet each of these and other big data sets is subject to abuse. Extensive health histories enable insurance companies, unless checked, to reclassify men and women into worse health categories as they age and experience health problems. Such reclassification takes away the prospect of individuals getting some long term health insurance from annual insurance contracts. Big data sets available to researchers have been manipulated to identify individuals and corporations. Already mentioned is that governments sometimes use extensive tax information to target individuals and groups who oppose them. The information from government surveillance cameras, as Posner indicates, may be improperly used for political advantage, as when cameras detect well-known political leaders in cars with women who are not their spouses.

Fortunately, the Internet, social media, and other modern technologies are not only a major source of the big data that is sometimes used for bad purposes, but these technologies often also help expose these abuses. Individuals who become privy to damaging information about governmental (or private) behavior can publicize that behavior on the Internet to vast audiences. For example, since information about these events is quickly posted online,The Internet has forced China to admit to events that in the past would have been kept secret, such as governmental land grabs, protests against local pollution levels, local health epidemics, and deaths from mining disasters, 

How to harness big data to socially valuable purposes while keeping down abuses is becoming an important priority in democratic societies. The Internet is an important source of big data, but it also is an increasingly valuable way to control the abuses.

 

 

The Rise in College Tuition and Student Loans-Becker

During the past 30 years tuition at American colleges has been growing at a fast pace. The increase has been greatest at 4-year private colleges and universities, and least at 2-year public colleges, but all college categories have had large tuition increases. For example, real tuition at the 4-year private colleges has more than doubled since 1980, while tuition at 2-year public colleges increased by over 50%.

Many commentators have criticized these large tuition increases. Colleges and universities are said to be too greedy and are charging what the traffic will bear, or  colleges are claimed to conspire together to increase tuition. Although colleges do conspire on some financial issues, such as agreeing through the NCAA to prevent payments to college athletes, conspiracy is not likely to be important in determining tuition since over 4000 colleges and universities compete fiercely for students, faculty, and funding.

The growth in tuition is not explained by any conspiracy theory, but mainly by increases in the cost of producing college education. Professors and other teachers are the principal input in colleges, so that the cost of these teachers is an important determinant of the cost of producing education. College teachers are well educated since they almost always have Masters degrees, and at the better colleges and universities they are very likely to have PhDs or similar advanced degrees.

Colleges have to compete for highly educated persons against employers in both the private and public sectors. Since after 1980 earnings of highly educated persons has risen rapidly in these other sectors, colleges have had to pay a lot more for their faculties and administrative staffs. The greatly increased pay of faculty has substantially raised college costs, which in part have been passed on to students through higher tuition and other fees.

This analysis also explains why tuition has grown most rapidly at 4-year private colleges and other elite schools. These schools tend to have faculties that are considered the most skilled and productive, and they invariably have PhDs or other advanced degrees. Since the rise in earnings in recent decades has been greatest for the most educated individuals, the costs of more elite colleges and universities have risen faster than that of other schools. They too have passed through to students some of these much greater costs via much higher tuition.

The increased return to greater skill means that colleges have an incentive to increase the workload of students, and improve the quality of the education they provide. Higher quality education is more expensive, however, which further has increased the cost of providing education, and the tuition charged students.

Whatever the cause of the tuition increases, to many that indicates that college is no longer a good investment. That is, the costs of going to college are claimed to now outweigh the benefits for many of the students who attend college. This is particularly the case, it is argued, for students who take out large student loans to finance their education.

A benefit-cost analysis of an activity like attending college cannot be based only on costs, in this case represented by tuition, but also requires evidence on benefits. While tuition increased rapidly since the 1980s, so too did the monetary returns from college. In 1980, the average graduate of a 4-year college earned about 40% more than the average high school graduate, whereas now the average college premium is over 80%. The increase in earnings has been even greater for persons who received graduate degrees.

What happened to the value of a college education during the past several decades depends on how the increase in earnings from going to college compares to the increase in tuition and other costs of college. Calculations show that the average gain in earnings during the past 30 years has exceeded the rise in tuition, so that the average rate of return on graduating from college has greatly increased, despite the large growth in tuition.

Nevertheless, the rise in tuition has forced many students to take on larger student loans than students did in the past. This has led to growing calls to forgive much of student indebtedness, even though college is a better deal than it was in the past, and student loans are already significantly subsidized. Moreover, despite a widespread belief that student loans are the main source of debt to younger individuals, in fact student loans remain a relatively small fraction of their total debt. An article in the New York Times of May 11 shows that although student loans have grown rapidly during the past decade, they are still only 15% of the total debt of individuals under age 35 (and a smaller fraction of the debt of those over age 35), whereas mortgages comprise 74% of their debt. The article claims that the “heavy” load of student debt is weighing on economy, but surely mortgages are a far more important influence on the spending of younger families.

Of course, a high level of student debt is a burden for individuals who are not earning a lot, and the default rate on student loans is much higher for low earners than for others with student debt. Students with low earnings mainly went either to proprietary colleges or to 2-year colleges. Their debt problems are not surprising since it is well known that these students are not likely to earn a lot after they enter the labor force. Perhaps greater constraint should be placed on their access to publically subsidized student loans, and perhaps interest rates on student loans should be positively related to earnings.

But any changes in policies regarding student loans should recognize that despite the rapid growth in tuition, college education remains a very good investment for the large majority of students who graduate from college.

 

 

College Costs and Quality—Posner

I graduated from Yale College in 1959. Tuition, room, and board at Yale in the late 1950s was $2000 a year; this year it is $60,000. Adjusted for inflation, this is a more than threefold increase. Average salary for a full professor at Yale went from $13,000 in 1959 to $186,000 this year (excluding medical school faculty), which after correction for inflation, an almost twofold increase. The rates of increase in these two variables varies from college to college, but I believe it is generally true that college costs have risen significantly faster than faculty costs. One thing that has depressed the increase in faculty costs is the increasing use of graduate students and other part-time faculty in lieu of tenure-track faculty. In addition, the administrative staffs of colleges have grown rapidly, in part because of increased legal regulation of education. Also, colleges have increased the quality of student housing and provided other amenities for students, in an effort to compete more effectively for rich kids. In addition, greatly reduced state subsidies for state colleges, in the wake of the economic depression that began in 2008, have forced state colleges to increase tuition. 

The increase in faculty salaries may be in part a “Baumol” phenomenon. The economist William Baumol pointed out long ago that competition may force up salaries in markets in which capital is not a good substitute for labor, and the result in those markets will be higher prices unrelated to higher quality. Suppose there are productivity increases in engineering but not in teaching; still, teacher salaries will have to rise in order for colleges to be able to compete with engineering firms for labor, and because there are few if any productivity improvements in teaching the higher salaries will be translated into higher prices. An alternative explanation is that salaries for skilled workers in general have risen, and college teachers are skilled. But it is only if skilled workers have alternatives in other
markets that their wages would rise in markets that do not show productivity gains. But, to repeat, increased faculty salaries, whatever their cause, do not explain the steep increase in college costs. 

I do not have the sense that the quality of college education has improved in the last half century. Colleges have become more competitive, but the forms that the increased competition has taken do not seem to have improved quality. From the standpoint of society as a whole, the goals of higher education are to enlarge general (as distinct from firm-specific) human capital by imparting valuable intellectual skills to young people of intelligence and ambition, and to produce research that generates mainly external benefits and so is underproduced by for-profit entities. To a large extent, certainly, colleges and universities work toward those goals, and with considerable success. But from the standpoint of a private college’s trustees and administrators, an equally important goal is to maximize the institution’s revenue (net of cost) and hence tuition income, donations, research grants, and income from consulting and patents—the grant money and income from consulting and especially patents being shared between faculty and university. The consequences of these endeavors include a high level of expenditures on student amenities (to attract rich kids), on intercollegiate sports (to stimulate alumni donations), and on faculty “stars” who can attract research grants and impress parents and alumni. Other consequences include light teaching loads for faculty stars as a form of untaxed compensation, the shift of teaching responsibilities from tenured faculty to graduate students and non-tenure-track floating faculty, pandering to students (beyond just the provision of amenities) and so grade inflation, reduction in required courses and distribution requirements, dilution of college-level education by promiscuous grant of advanced-placement credits (in effect giving college credit for high-school coursework), and proliferation of extracurricular activities—all being aspects of treating students as “consumers” to be pampered in partial compensation for high tuition and student debt and to encourage future donations. Still other consequences of endeavors to maximize revenue include recruitment of student athletes who may have no intellectual interests or promise, “legacy” admissions (discrimination in favor of student applicants who are children of alumni, especially wealthy alumni—though that is a very old practice, as is recruitment of student athletes), and encouraging applied research (because it is patentable, as basic research is not). False advertising of job opportunities for graduates of graduate schools and professional schools (such as law) is also a not uncommon university marketing tools. 

The federal student loan guaranty has pernicious aspects. In particular, it disincentivizes colleges to screen student loan applicants, and in fact incentivizes college administrators not only to raise tuition but also to encourage students to take on excessive debt, since the loans are guaranteed and therefore the university doesn’t have to worry about whether the students can pay back the loans. 

The greatest hope for improvements in quality and reduction in costs of higher education may be the
“MOOCs”—massive open online courses. They have revolutionary potential for enhancing competition in higher education by using computer and communications technology to improve quality and drastically reduce cost.

Breakthough in the War on Drugs?—Posner

No, no breathrough. It’s true that earlier this week the White House released its “National Drug Control Strategy 2013,” heralded in some quarters as a breakthrough in national drug control strategy because it calls drug addiction a disease and promises to devote a higher percentage of federal drug control funds to treatment and prevention of drug abuse than in previous years. But a solid majority of federal drug control funds (58 percent) will continue to be devoted to the enforcement of the federal criminal laws, with their savage sentences, against participants in illegal-drug markets. 

The publication of a White House “National Drug Control Strategy” is an annual event, which wordily (the 2013 version is 95 pages long) heralds nonexistent progress and makes false promises of more to come. The General Accountability Office has evaluated the 2013 version and found it wanting, noting the government’s lack of progress toward achieviing the goals of diminished drug use stated in the 2010 version.

The new (that is, the ostensibly new) strategy gives continued primacy to the “war on drugs,” which best describes the criminal-law and (abroad) paramilitary campaigns against the drug trade. No one thinks these campaigns can eradicate illegal drugs. The realistic-seeming objective is, by increasing expected punishment cost and by taking out of circulation (through imprisonment) those not deterred by the cost, the war on drugs raises the prices of illegal drugs. Yet those prices remain very low. The reason appears to be the very high elasticity of supply of drug dealers. It’s like Karl Marx’s “reserve army of the unemployed”; if there is no dearth of persons willing to be drug dealers at modest wages, the principal effect of law enforcement may be to increase labor turnover, at enormous cost in police and prosecutorial resources and above all in incarceration: half the federal prison population in the United States consists of drug offenders. Some 1.7 million persons who are in prison or jail (state or federal) or on probation or parole (or its federal equivalent, supervised release) are in those situations of confinement or restriction because of drug offenses. No doubt the mere fact that drugs are illegal deters some consumers—but how many relative to the large number of persons who have no interest in consuming mind-altering drugs, legal or illegal? 

Increasingly the war on drugs seems an expensive failure. But treatment and prevention (prevention other than through the threat or actuality of imprisonment) are no panaceas. There are several problems. The first is the difficulty of distinguishing between harmful and harmless use of drugs. Much of the consumption of illegal drugs is either not harmful to the user at all, or is no more harmful than the legal substitutes (such as cigarettes and alcoholic beverages) to which consumers of mind-alterating drugs would be likely to turn if the illegal drugs were unavailable or very expensive. It would be foolish to break a person of his cocaine habit only to see him become an alcoholic. 

Furthermore, not all drug users are addicts; and not all addictions are harmful. Much behavior is habitual, yet harmless; “addiction” is simply a pejorative term for habitual behavior.  

No doubt much drug use is harmful to the user. But trying to prevent self-destructive behavior (at least by adults) is problematic. It not only is often very difficult to identify such behavior, but unless it imposes external costs it is a questionable object of government attention. One person’s self-destructive behavior is another person’s greatest pleasure in life. And therefore people generally are allowed to engage in self-destructive behavior, whether playing football, hang gliding, mountain climbing, smoking cigarettes, or drinking sugared soft drinks. Forcing people to be healthy is not a feasible goal of public policy—especially forcing people to avoid just one type of unhealthful habit, thus inviting them to switch to an unhealthful habit that happens to be lawful. There are externalities to self-destructive behavior, but often they can be curbed by withholding public benefits. For example, a person disabled from working by drug addiction is ineligible for social security diability benefits. 

“Prevention” and “treatment” sound good, especially in contrast to “prosecution” and “imprisonment.” But there is a serious question of efficacy. I don’t know how feasible it is to break people of a drug habit, but suppose it’s quite feasible. Even so, unless they had become addicts accidentally, they are likely to become re-addicted once their treatment is complete. They will become re-addicted for the same reason they became addicted in the first place. They will be like the countless overweight people who go on diet after diet yet never achieve a lasting loss of weight. 

It’s been noted disapprovingly that the 2013 White House strategy report does not mention the legalization of recreational (as distinct from just medicinal) use of marijuana by the states of Colorado and Washington. On the contrary, the strategy announces ambitious though probably Quixotic plans to extirpate the growing of marijuana in the United   States. (How could that be achieved? Marijuana can be grown in one’s garden, or for that matter indoors. No importation or manufacture is required.) 

Of course a state cannot preempt a federal law. But wouldn’t an ideal experiment for the federal government to conduct be to suspend enforcement of federal marijuana laws in Colorado and Washington (except to forbid the export of marijuana from those states to other states) and see what the consequences were? And if it turned out that the health consequences were nil, wouldn’t that point to the possible repeal of the laws nationwide? Anyway, if Colorado and Washington want to allow recreational use of marijuana by its citizens, why should the federal government care? 

Note finally that decriminalization could be coupled with excise taxation to make illegal drugs, like legal alcohol and cigarettes, a source of badly needed government revenues. Decriminalization coupled with taxation might well be a superior alternative to prohibition. As with liquor, drug use by children would continue to be prohibited and heavy punishments would be imposed on dealers who sold to children.

Alternatives to the War on Drugs-Becker

The 40 year-old American “war on drugs” has been a colossal failure. No progress in dealing with drugs can be expected until that basic truth is recognized. Every conceivable approach has been tried to help the war succeed, such as long prison terms for persons convicted of selling or using drugs, trying to prevent drugs from entering the US from Mexico and other countries, and confiscating huge quantities of drugs (remember The French Connection?). At some point all wars that fail are terminated, and alternative approaches explored.

The two main alternatives to the war on drugs are decriminalization and legalization of drugs. Decriminalizing drugs means that using drugs would no longer be a criminal activity, while trafficking in drugs would remain a crime. Legalization of drugs means that trafficking in drugs as well as using drugs would not be a crime.

With decriminalization, individuals in possession of small quantities of drugs would not be subject to criminal charges, so that they need not fear imprisonment or other punishments. Since eliminating any criminal punishment for using drugs reduces the effective cost of using drugs, decriminalization might increase experimentation with drug use.

At the same time, however, decriminalization might well reduce the fraction of drug users who regularly consume large quantities of drugs, which is usually a sign of drug addiction. The likelihood of becoming and remaining addicted to drugs or other goods is not determined only by personal biological and psychological propensities to become addicted. For example, many individuals end their addictions to smoking and drinking alcohol when they get married, find good jobs, or mature.

The war on drugs makes it much more difficult for individuals who are unhappy about their addictions to cocaine or other drugs to end their addictions. When using drugs is a criminal offense, drug addicts who want to quit hesitate going to drug clinics, or seeking other help, because they are subject to arrest. Although decriminalizing drugs makes it easier to experiment with using drugs, it also encourages the development of for-profit and non-profit organizations that help individuals terminate their reliance on cocaine, heroin, and other addictive drugs. Since smoking and drinking are legal, the non-profit organization AA could develop to help heavy drinkers end their addiction, and profit-making companies had the incentive to create patches to help individuals stop smoking.

The evidence from Portugal, a country that decriminalized all drug use in 2001, offers some support for the claim that decriminalization of drug use will reduce addiction to drugs. A 2010 study in the British Journal of Criminology concluded that decriminalization in Portugal reduced imprisonment on drug-related charges, only slightly increased, if at all, drug experimentation among young persons, increased visits to clinics that help end drug addictions, and reduced deaths from drug overdoses.

As Posner indicates, a growing number of states have decriminalized the use of marijuana for medical purposes, and a couple of states have decriminalized all uses of marijuana. Effectively, if not legally, marijuana has been decriminalized in a large number of American states, despite its violation of federal law.

Decriminalizing drug use does lead to decriminalization of some drug trafficking as well since some sellers of drugs would only keep small quantities of drugs on their persons in order to claim, if questioned by the police, that they are users rather than sellers of drugs. Still, decriminalization would not by itself end many of the costs of the war on drugs since they involve actions against large-scale traffickers. Only full legalization of the selling as well as consuming of drugs could do that. As Kevin Murphy and I said elsewhere (Wall Street Journal, Jan.5, 2013), “full decriminalization on both sides of the drug market would lower drug prices, reduce the role of criminals in producing and selling drugs, improve many inner-city neighborhoods, encourage more minority students in the U.S. to finish high school, lessen the drug problems of Mexico and other countries involved in supplying drugs {to the U.S.}, greatly reduce the number of federal and state prisoners and the harmful effects on drug offenders of spending many years in jail, and save the financial resources of government”.

In most countries, including the United States, smoking and drinking are rather heavily taxed through so-called “sin taxes”. For those concerned that legalizing drugs would greatly increase the use of drugs, legalization could be combined with a tax on drugs, like these other sin taxes. Some drug transactions might move underground to avoid paying this tax, but most production would remain legal because of the many contractual and other advantages of legally producing drugs.

The retreat from the war on drugs has already begun. The question is whether it will be a sensible retreat with systematic changes in the law toward decriminalization and legalization of drugs, or a disorganized retreat that leaves users and sellers of drugs with unclear legal status.

 

 

 

Reforming Immigration Policy-Becker

American immigration policy is simply a mess! Skills of potential immigrants receive a lower weight in determining priority for legal immigration than in any other developed country. This year, the 65,000 places under the H-1B program that gives firms the opportunity to get temporary visas for skilled immigrants (up to two terms of 3 years each) were fully subscribed five days after the program opened. Approximately 11 million illegal immigrants are in the country. They are highly unlikely ever to be deported, yet have an insecure and restless future. And these are just some of the highlights of the U.S.’ immigration problems.

Any sensible immigration reform would greatly increase the opportunities for skilled immigrants to come to this country on a permanent basis. Once that were accomplished, there would be no need for an H-1B program, or any other program of temporary visas for skilled workers. The millions of illegal immigrants in the United States will not disappear, so like it or not, ultimately most of them will have to be offered a pathway to citizenship. The years of waiting in one’s home country before receiving a green card should end, and be replaced by a process where legal entry into this country is quick and efficient.

A group of senators from both political parties has introduced a bill for major immigration reform. This bill includes a substantial expansion in the H-1B temporary visa program from 65,000 to 110,000, expanded opportunities for skilled immigrants, a pathway to citizenship for many illegal immigrants, and further tightening of the border with Mexico. The bill also proposes a “merit-based” point system, already used by some other countries, that would award points to immigrants based on their education, employment prospects, and family ties. For example, young skilled immigrants would get many points, whereas older individuals not closely related to residents here would get very few points. Potential immigrants with greater number of points would have higher priority in the immigration queue.

This bill is a clear improvement in most respects over the current immigration system. Yet this is an easy criterion, given how bad current policies, and the bill has several major drawbacks. The pathway to citizenship for illegal immigrants would be contingent on first creating a more effective border fence and greater border policing activity. One major problem with that approach is that the pressure to enter from Mexico may be greatly declining. Net illegal immigration from Mexico during the past half dozen years has been minor, and possibly even negative. Of course, this is partly the result of the weak American labor market for low skilled workers due to the recession and its aftermath.

I believe, however, that the recession is not the only reason for the drying up of illegal immigration from Mexico. Since Mexican birth rates have plummeted during the past couple of decades, the number of young Mexicans looking for work in Mexico or the US has declined considerably. In addition, the Mexican economy has done well during the past decade, despite the American recession, so that many more jobs are available in the Mexican labor market. It is likely that even when the American labor market fully recovers, many fewer illegal immigrants will want to come from Mexico than had been the case in earlier decades. The sections of the Senators’ bill designed to limit entry of illegal immigrants may be in effect fighting an old battle that is no longer so relevant.

The second big problem with the Senators’ immigration bill is that it contains many arbitrary rules and quotas for different groups. It would allow so many to be admitted under temporary skill visas, another batch would be admitted under the merit-based point system, a certain number would be accepted because they have advanced degrees in math, engineering, and the sciences, a sizable number of lesser skilled workers can come in as guest workers under a new “W” visa, and so on. These are arbitrary limits due to political compromises between different factions and the different political parties.

I understand that politics will be important, but it is essential to recognize that a much better approach is possible. This approach sets a price for legal immigration, and allows everyone to enter, or legalize their status if they are here illegally, who can meet that price. Elsewhere (see my monograph, “The Challenge of Immigration: A Radical Solution”, 2011) I use as an illustration a price of $50,000. I show that such a price would attract young, skilled, and ambitious men and women since they would gain the most from coming here. Many illegal residents would be willing to pay that price too in order to legalize their status since there are huge economic and other advantages of becoming a legal resident. A loan program analogous to the student loan program would lend money to poorer but ambitious immigrants, so that they are not kept out by the cost of entry.

Many details to the selling approach have to be worked out (some can be found in the monograph, and also in the Wall Street Journal article by Edward Lazear and me called “ A Market Solution to Immigration”, March 1, 2013). Although the Senators’ bill is a major improvement over the present immigration system, it involves many arbitrary quotas and limitations. Selling the right to immigrate removes essentially all these restrictions, and requires only a single decision about what to charge immigrants for the right to enter the United States legally.

Reforming Immigration Policy—Posner

I completely agree with Becker that the bill introduced last week in the Senate—the “Border Security, Economic Opportunity, and Immigration Modernization Act of 2013”—would if enacted as written be a big step in the direction of reforming our immigration policy, a policy that Becker rightly calls “simply a mess!” However, the bill is unlikely to be enacted as written. To be passed by Congress in this era of ferocious partisanship will doubtless require numerous compromises that may frustrate many of the sponsors’ aspirations for reform. 

Even if enacted without change, the proposed law would leave much to be desired. It is an unreadable 880 pages in length (legislation has become obese in tandem with the increasing obesity of the population). There is fortunately a very helpful 17-page summary, see http://www.aila.org/content/default.aspx?bc=25667|44052 (visited Apr. 21, 2013)—yet, helpful as it is, were it the proposed law rather than the 880-page monstrosity, it would still be too complicated—a bureaucratic nightmare. At a time of legitimate or at least widespread concern with the growth of government bureaucracy, the proposed law if enacted as written would substantially expand the bureaucracy (or rather bureaucracies) involved in the enforcement of the immigration laws. Doubtless the changes made to the bill as it runs the congressional gauntlet will increase its bureaucratic complexity and opacity. 

One respect in which the bill would expand bureaucracy is its ambitious, expensive effort to make our long border with Mexico impermeable to illegal immigration. The effort probably is Quixotic, like all previous efforts to seal the border, and so will fail. And Becker points out that given the decline in recent years in illegal immigration from Mexico, the effort to “secure the border” may also be superfluous—a waste of money designed to assuage, though admittedly for what may be imperative political reasons (democratic politics is an art of compromise), the paranoia of citizens of the states that abut the border. 

It’s difficult to understand why illegal immigration from Mexico is considered by so many Americans a very serious problem. The idea that illegal Mexican immigrants take jobs away from Americans appears to be largely false, as it seems that most of the jobs they get in the United States, notably in
agriculture, are not attractive to Americans. And the idea that they are moochers, who have crossed the border to take advantage of our social welfare policies, seems wrong because they have far fewer entitlements to social welfare than lawful residents of the United States have. The estimated 11 million illegal immigrants (mostly from Mexico and other Central American countries) are a large and productive component of the supply of labor in the United States (Mexicans are famously hard workers—“to work like a Mexican” is a California expression for working too hard), usually earn only modest wages, and do not partake largely of social welfare largesse. 

It is desirable that they be allowed to become citizens, and the proposed law provides a “path to citizenship” for them, provided they are not criminals or otherwise undesirable. The path is expensive for low-wage workers, however, and also long—10 years or more: thus steep and long. And actually longer than it seems, because the “path” is not to open until the burder with Mexico is “secured,” which it may never be. Many illegal immigrants may therefore prefer to remain in their illegal status, since few illegal immigrants are actually deported, provided they are law abiding and keep a low profile. The length and gradient of the path to citizenship are designed to rebut charges that the new law will proide “amnesty” for illegal immigrants; the fear is that amnestry operates to increase illegal immigration by implying that future illegal immigrants will be the beneficiaries of a future amnesty. Some current or future illegal immigrants may be motivated by hope of a future amnesty; but for many, and I would guess for most, such a hope would not be decisive in persuading a person considering immigrating illegally to take the plunge. However, although I don’t expect the enhanced border security to have much of an effect on illegal immigration, it should at least offset the lure that hopes of a future amnesty would create for some foreigners contemplating immigrating to the United States illegally. 

The proposed law contains, as Becker points out, a confusing medley of provisions designed to ease barriers to the immigration of highly educated foreigners—multiple paths, in short, to citizenship. The actual easing of barriers by virtue of these provisions is likely to be offset by the amount of red tape required to wade though in order to take advantage of the provisions; just choosing which provision to invoke in aid of being permitted to immigrate is likely to baffle many potential immigrants. Still, though needlessly complex, these provisions would not be seriously objectionable if, as Becker sensibly proposes, we offer would-be immigrants the option of simply buying the right to immigrate to the United States. Depending on the price, the option will more or less automatically open a quick path to citizenship for precisely those foreigners whose skills, matching U.S. business needs, will give them reasonable assurance of earning enough money in this country to make the exercise of the option cost-justified to them—and to us as beneficiaries of the labor of high-skilled workers. 

Of course “selling” U.S. citizenship, like selling kidneys and other organs, is just the kind of sensible economic proposal that shocks people who lack an understanding of economics—and that’s almost everybody.