July 01, 2007

Trading Off Domestic Policy Successes against Military and Foreign Casualties--Posner

Francis M. Bator is a well-known emeritus professor of economics at Harvard, who in 1965–1967 was deputy national security adviser in the White House. That of course was a crucial period in the Vietnam War, the period in which U.S. forces in Vietnam expanded from about 30,000 troops to 500,000. The American Academy of Arts and Sciences has just published a short monograph by Bator entitled No Good Choices: LBJ and the Vietnam/Great Society Connection, in which he argues that our Vietnam fiasco was not due to Lyndon Johnson's lack of foreign-policy experience, or to his being misled by military and other advisers, or (perhaps as a result of either or both of these two factors) to either a foolish optimism about the likely outcome of the war or a foolish pessimism that abandoning South Vietnam would result in other countries' turning communist (the domino effect). Bator argues that Johnson, when he authorized an expanded American-led ground war in 1965, did not expect to defeat the communists. Rather, he feared that his domestic "Great Society" programs (Medicare, the "War on Poverty," the Voting Rights Act, and so forth) would be defeated in Congress by a coalition of Republican and Democratic hawks if he was seen as "losing" Vietnam, as Truman had "lost" China, to the communists. He had to stave off the evil day. And thus he had not only to expand the war but also to conceal his misgivings about the effect of the expansion on the likely outcome of the war. He also had to give the generals just enough of what they were asking for to keep them on the reservation, as it were. He refused to give them all they asked for, however, as that would have necessitated a public acknowledgment of the gravity of the situation in Vietnam, which would have produced calls to shelve the Great Society and fight the war all out and would also have deprived the Great Society programs of necessary funding.

I do not know whether Bator's analysis is correct. (The principal weakness of his account is in failing to explain why, after his Great Society programs were enacted, and until the shock of the Tet Offensive in February 1968, Johnson continued expanding our forces in Vietnam.) But here is an interesting economic question: supposing he is correct, how should a government trade off domestic-policy gains against American and foreign war casualties? If a country is attacked, it fights unless hopelessly overmatched. But our involvement in the Vietnam war was optional. It might have been justified in terms of national security, but I am assuming with Bator that President Johnson did not think it was justified in those terms.

The considerable costs that could be anticipated from the large expansion in 1965 of our military commitment included monetary costs, U.S. military casualties, South Vietnamese military and civilian casualties, and Viet Cong-North Vietnam military and civilian casualties. Of course, Johnson could not have predicted how great the aggregate costs of the expansion would be, but he would have known that they would be high. Some of our military casualties could perhaps be discounted: those to professional soldiers and genuine volunteers (as opposed to those who volunteered as an alternative to being drafted) on the ground that they were compensated ex ante. But to this it could be objected that people who join the army do not think it will be committed to a losing war for purely domestic-policy gains.

The enormous losses sustained by the military and civilian populations of South Vietnam generated some offsetting gains, by postponing the North Vietnam conquest to 1975, but probably not net gains. The North Vietnamese civilian population suffered even greater losses, and for no gains, but there is a question what weight we should give to the hardships that we inflict on an enemy population. International law suggests, however, that we should give them some weight.

Were the losses worth it? There are three questions:

1. How to monetize the domestic-policy gains? The monetary costs of the expanded war can be calculated, including not only our military outlays but also the destruction of property in Vietnam. And though there are conceptual problems (some indicated above) in monetizing the deaths and injuries and other suffering that the expansion of the war inflicted, it is pretty obvious that the aggregate losses were immense, quite apart from the political turbulence in the United States that the expanded war engendered, culminating in the Watergate scandal. But the gains? The Great Society programs were primarily redistributive rather than efficiency-enhancing. They probably imposed net social costs, redeemed if at all by morally attractive enhancements of distributive justice. Professor Bator suggests that a decision for war could be justified by "the scandalous disenfranchisement of 13 percent of American citizens on grounds of race." Presumably he is referring to the Voting Rights Act, a Great Society program designed to increase voting participation by blacks. The reference to 13 percent is to the entire black population of the United States; the Act was operative in only a subset of southern states. In any event, I think it highly dubious that the death of literally millions of people could be thought a price worth paying for the Voting Rights Act.

2. Should wars ever be fought for reasons other than national security? I hesitate to say "never" because there are some very small wars. The war in Kosovo, in which no Americans and very few Yugoslavs died, may well have been justified, although American national security was not at stake. But it seems a pretty sound rule of thumb that wars should not be fought in order to promote a domestic program.

3. Should a war be waged on false pretenses? Johnson of course did not tell the American public that he was expanding the war in order to avoid the derailment of his Great Society program in Congress, rather than because the war could be won at a price worth paying. Bator does not discuss this issue. Again I hesitate to make a categorical judgment. The government knows things bearing on a decision for war that it cannot share with the public, either because the public cannot be educated in the full range of relevant considerations or because they are things that the enemy must not be permitted to learn. But this is not a good argument in the case of Johnson's enlargement of the Vietnam war. The pros and cons were not esoteric. The choice was a much bigger war with poor prospects and no Great Society, a bigger war with a Great Society (Johnson's choice), or a much smaller war either with a Great Society, or, if disgruntled hawks got their way, with no Great Society (the hawks did not have the political power to force a bigger war). In retrospect, it seems that all the choices except the one that was made (and concealed) would have been better.

Posted by Richard Posner at 04:04 PM | Comments (15) | TrackBack (0)

Comment on the Alleged Trade Off Between Going to War and a Domestic Agenda -Becker

I have not read Bator's monograph, but I am doubtful about the claims he makes to explain Lyndon Johnson's support of the Vietnam War. Posner discusses well the dubiousness of any assertion that the Great Society Program added enough value to justify the over 50,000 Americans killed, the more than 150,000 wounded, the fissions created in American society, the thousands of Vietnamese killed or injured, and the vast amounts of property and equipment destroyed. The ending of the draft in 1973 and its replacement by a voluntary armed force, clearly an unanticipated consequence of the unpopularity of the war, and possibly one not desired by Lyndon Johnson and many of his advisors, is arguably the most beneficial outcome of the war.

I do not know what President Johnson thought, but the war is unlikely to have helped much, and possibly it hindered, the passing of the Great Society program. Consider some of the centerpieces of this program. Posner quotes Bator as justifying the War in part because of passage of the Voting Rights Act that effectively gave the franchise to blacks who had been disenfranchised in some southern states. That Act is important, but it would have been passed had the war not occurred. For the civil rights movement began in the 1950's, partly with the Brown vs. Topeka Board of Education decision by the Supreme Court in 1954 that ended formal desegregation of southern schools. Giving the growing political and economic clout of blacks, and their allies in both parties-after all, President Eisenhower, a Republican, called in the troops to force integration in the Little Rock school system- one cannot reasonably argue that the Vietnam War hastened to any significant degree the passage of the Voting Act.

Or consider Medicare and Medicaid, passed under Johnson, which involved an enormous expansion of the role of the federal government in financing medical care. These Acts had a profound impact on the availability of doctors and hospitals to the elderly and poor. Possibly, the Vietnam War quickened the passing of these Acts by a few years, but it is highly unlikely that it did more than that. Western Europe and all the other OECD countries also had very large expansions in government financed medical care during the past 40 years, and none of them had any significant part in the Vietnam war, or any other war during this time period.

The past several decades were the decades that defined the growth of the welfare state in all rich countries. The United States would not have resisted this trend even if the Vietnam War had not occurred. After all, the welfare state expanded under practically all presidents after World War II, regardless of political party. Expansion of governments into the financing of the welfare, pension, and health areas was "in the air", and the war at most speeded up its introduction a little. Several years' advancement in timing is a small gain for the large price America paid from its casualties and defeat in this war.

Budgetary considerations are also relevant in evaluating Bator's argument. Wars usually put pressure to keep down other government spending in order to reduce the rise in the budget deficit. This certainly happened during World War II and the Korean War, where non-war spending fell by 11 per cent per year from 1940-45 (the period of U.S. involvement in World War II), and 6 per cent per year during 1950-1953 (the Korean War years). The first term of George W. Bush's administration during the Iraq War is one exception since spending on domestic programs during this term grew by about 5 per cent per year, and the budget deficit grew rapidly. Domestic spending was constrained during the second term while spending on the war increased much further.

The Vietnam War period is another exception since non-war spending grew by 14 per cent per year from 1965-1971, the main period of this war. That growth clearly reflects the Great Society spending expansion. Whether this expansion of domestic programs was caused by the war, as argued by Bator, is less persuasive, however. For the Democrats not only controlled the presidency but also Congress during this period, and considerable evidence indicates that overall federal spending grows more rapidly when one party controls both the legislative and executive branches. That interpretation would also explain the difference between Bush's two terms because the Republicans controlled Congress as well during the first term, but not during most of his second term. Since expansion of domestic programs is the rule rather than the exception when one party controls all the branches of the federal government, it does not seem as if Johnson needed to go to war to get the Great Society programs he wanted.

Posted by becker at 03:54 PM | Comments (7) | TrackBack (0)

June 24, 2007

Are Subprime Loans Useful? BECKER

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.

Posted by becker at 09:35 PM | Comments (16) | TrackBack (0)

Subprime Mortgage Loans--Posner's Comment

The subprime-mortgage imbroglio is just the latest chapter in an age-old concern with the charging of interest, especially to individuals. Medieval Christianity forbade the charging of interest on the ground that it was unnatural for money to increase (as by lending $100 at a 10 percent interest rate so that at the end of the year the $100 has grown to $110), because unlike pregnancy there was no mechanism by which an inanimate object such as money could reproduce itself. Behind this superstition lay undoubtedly a hostility to commercial society, which persists today in some quarters of the Muslim world; Islam forbids charging interest although substitutes are tolerated. The concern with lending has persisted into modernity even in Western societies. Usury laws, which set a ceiling on interest rates, and the Truth in Lending Act, which requires detailed disclosure of annualized interest rates in consumer loans, are examples of this concern.

The relaxation of usury laws--a natural concomitant of the spread of free-market ideas in American society--allowed lenders to offer loans at very high interest rates to borrowers with poor credit ratings. Payday loans, which charge astronomical interest rates to persons who need money to tide them over till their next paycheck, and subprime mortgage loans sometimes at annual rates 4 or 5 percent higher than mortgage loans to borrowers who have good credit, were consequence of the relaxation.

I agree with Becker that credit is no different from any other commodity. For government to place a ceiling on price prevents people from buying the commodity who would be willing to pay a higher price, and thus it prevents a mutually beneficial, and therefore value-maximizing, transaction. The argument for the ceiling is that people who have a poor credit record have demonstrated their incompetence to borrow and so should for their own good be prevented from borrowing more. That is not a compelling argument, apart from any general objections to government paternalism than one may have. A person may have a poor credit record, yet know that he can pay a high interest rate and that he will be better off despite the cost. As Becker notes, although the rate of default on subprime mortgage loans is high, still, the vast majority of those loans are repaid. For many people they are the only route to home ownership, which is greatly valued by the owners but has also been thought (perhaps dubiously) to have social value; that at any rate is the rationale for the tax deductibility of mortgage interest.

I do think that there is reason to think that the subprime mortgage market is imperfect, though not reason enough to warrant government interference with that market. The subprime mortgage lenders have engaged in aggressive marketing that may have deflected borrowers from shopping for better terms in the prime market. There are of course many gullible consumers and many people who have difficulty understanding the cumulative costs of high interest. There are also many people who like to speculate or otherwise gamble without a good appreciation of the odds. Perhaps there is even something of a "bubble" aspect to the subprime market. When housing prices were rising, borrowing to buy a house even at a high interest rate (interest rates generally were low until very recently, but high to subprime borrowers) was a leveraged investment, both on the borrowing side and on the lending side. The borrowers expected to repay the high interest out of the rapid appreciation in the value of the house, and the lenders expected to be cushioned against the consequences of a high rate of defaults by those same rising prices: if they had to foreclose, the house would be worth enough more than the mortgage to enable the lender to recoup. A bubble arises not because people fail to perceive that an asset is overvalued, but because they think the perception is not widespread and therefore the asset will maintain or increase its market value. No one wants to sell an asset while its price is still rising, but if enough people think that way the price may rise to a point at which a slight perturbation in the market may cause a crash. Given the riskiness of subprime mortgage loans, a modest decline in housing prices or rise in interest rates (many subprime mortgages were at floating rather than fixed rates) could precipitate enough unexpected defaults to create distress not only among subprime borrowers but also among the lenders. Apparently that is what has happened.

Although the result is not a happy one, I do not perceive adequate grounds for government intervention. Proposals for limiting subprime loans have the quality of closing the barn door after the horses have escaped. The subprime "crash" has presumably educated both borrowers and lenders in the riskiness of the market, and if subprime lending persists it will not be because of ignorance of the risk. Of course if subprime lenders have resorted or are resorting to fraud in inducing such loans, they should be punished, but for that no new laws are required.

Posted by Richard Posner at 09:20 PM | Comments (30) | TrackBack (0)

Women's Economic Role--Posner's Response to Comments

There were some excellent comments on my posted comment of a couple of weeks ago, which I have been slow in responding to. One commenter pointed out that a possible reason for colleges to favor male applicants is that there is greater variance in performance among men than among women, and so, in the words of the commenter, "colleges, especially the good ones, tend to be risk-takers in admission, since it is disproportionately valuable for them to get the very top students." Another comment points out that a college may want to admit a certain minimum number of men in order to provide more dating opportunities for women. Maybe there is a tipping phenomenon at work as well--that if there are too few men, male applications drop because men don't want to be thought attending a "women's college."

A number of comments expressed puzzlement with the proposition that the higher average grades of women could signify discrimination in favor of men rather than of women. The puzzlement is understandable because of a typo: in the third line of my post, for which I apologize: "men" should be "women." The easiest way to understand the point is to imagine that the average woman's grade point average is an A and the average man's a D. Then it would be evident that the college was discriminating in favor of men, because it was admitting D men in preference to A or B women (I say "or B" to allow for the possibility that the college has admitted all its A applicants)

Another comment pointed out that if there is discrimination in the job market, women will have a stronger incentive than men to get good grades in order to improve their job-market prospects. Anti-Semitism has been thought a factor in pushing Jews to excel in their studies.

Posted by Richard Posner at 08:06 PM | Comments (1) | TrackBack (0)

June 17, 2007

Intelligence and Leadership--Posner

IHere is a puzzle: effectiveness in senior leadership positions in government does not seem to be well correlated with intelligence. Washington was a better President than Jefferson, though less able intellectually. Franklin Roosevelt, Harry Truman, Dwight Eisenhower, and Ronald Reagan were not as bright as Herbert Hoover, Richard Nixon, Jimmy Carter, or Bill Clinton. Lincoln, a brilliant lawyer, is an exception; Theodore Roosevelt perhaps another exception; and doubtless there are others. But overall the correlation between intelligence and effectiveness in the Presidency may actually be negative. Even more striking are the failures of Kennedy and Johnson's national security team in Vietnam and George W. Bush's national security team in Iraq. McNamara and his whiz kids (such as Daniel Ellsberg, Harold Brown, and Alan Enthoven), the Bundies, Walt Rostow, George Ball—these were extremely able people, many of them (like McNamara and McGeorge Bundy) truly brilliant. And Bush assembled an outstanding national security team--Cheney, Rumsfeld, Powell, Wolfowitz, Rice, Tenet (appointed by Clinton but held over by Bush). Two members of the team--Cheney and Rumsfeld--were former secretaries of defense! And Powell was a former chairman of the joint chiefs of staff.

It could just be bad luck, but I think not. Economists distinguish between general and specific human capital, the first created by IQ and education and the second by training and experience in a particular job. A person who has a large amount of general human capital is likely to find a job in which that capital, augmented by on the job training and experience, is highly productive. The resulting success will make him an attractive candidate for a high-level government job. The high-level jobs are filled generally by lateral entries from quite different jobs, rather than by civil servants. Some of these high-level jobs are technical; an example is the chairmanship of the Federal Reserve Board. Such jobs are relatively easy to fill with persons who can be predicted with reasonable confidence to do a good job.

But there is a tendency to exaggerate the versatility of the combined general-specific human capital that a lateral entrant brings to a high-level government job of a managerial or advisory rather than technical character. There are several characteristics of such a job that actually militate against the prospects for the success of an extremely intelligent person. First, these are "ensemble" jobs in the sense that many different skills or aptitudes are necessary to successful performance; if one of these, such as intelligence, is very highly developed, a person may neglect the others.

Second, it may not be possible to use step-by-step, logical reasoning to solve the problems laid at the feet of the occupant of a job like secretary of defense or secretary of state or national security adviser. Such questions as what to do in Vietnam or what to do in Iraq do not lend themselves to rigorous analysis because there is not enough information to analyze. Intelligence is not designed for coping with situations that are not complex, but rather are profoundly uncertain. Having great information-processing skills is not worth a lot if you have no reliable information.

Third, leaders or managers should be more intelligent than their followers or subordinates, but not too much more intelligent. If they are too much more intelligent, they will have difficulty assessing the capacities and limitations of their underlings and they will be tempted to substitute their intelligence for their underlings' knowledge. Analysis and knowledge are, to an extent, substitutes. You can multiply two numbers rapidly if you have good computational skills or if, though your computational skills are mediocre, you have memorized the multiplication table. Knowledge in government resides in civil servants, and they tend on average to be less intelligent (also of course less powerful) than brilliant laterals. So the latter are tempted to think that they can make decisions with minimal assistance from the civil servants.

The temptation is reinforced by a failure to distinguish between intuition and step-by-step reasoning. Cognitive psychologists explain that the human unconscious contains more information than we can access at a conscious level. As Herbert Simon (an economist and psychologist) explained, conscious attention is a severely limited faculty and must be carefully rationed. Through intuition, however, we can access the larger repository of unconscious information. Hence we speak of a person as having "experience" or "good judgment" or "common sense," as distinguished from being brilliant in the sense of being quick or having a good (conscious) memory. So now imagine a confrontation between a brilliant person who has no knowledge about Vietnam or Iraq, and a career State Department officer who has spent his whole career working on conditions in one of those countries, who knows the language, has lived there, and is steeped in the country's history, culture, and politics. Suppose he offers some advice to the brilliant senior official, and the latter asks him to explain and justify the advice. He may be unable to do so because he may be drawing on a repository of information below the conscious level. The brilliant official may be irritated at his inability to extract much more than a conclusion from the expert.

What is required at the top levels of government is not brilliance, but managerial skill, which is a different thing, and includes knowing when to defer to the superior knowledge of a more experienced but less mentally agile subordinate. Moreover, so specialized is management as a job that success in managing a business may not translate at all into success in managing a government agency. The firm-specific human capital that a person acquired in a career of management in a business firm may have no value for the management of a government agency, or for that matter a university, a private foundation, or an international organization. Indeed, an experienced manager of a firm may falter and have to be fired if a change in the firm's environment requires a different type of management skill.

A striking example of the specialized character of leadership human capital is Larry Summers. A truly brilliant person and successful secretary of the treasury, he failed as president of Harvard University though he seemed to many people (myself included) to be an outstanding choice. I have the highest personal and professional regard for Summers and blame the failure of his presidency not on him but on the Harvard faculty of arts and sciences. But the fact is that he failed, because he was not able to port his very considerable suite of intellectual and managerial assets to the management of an organization critically different from the Treasury Department.

Posted by Richard Posner at 04:19 PM | Comments (59) | TrackBack (0)

Intelligence and Leadership-BECKER

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.

Posted by becker at 03:21 PM | Comments (7) | TrackBack (0)

June 10, 2007

Women's Role in the Economy-BECKER

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.

Posted by becker at 10:02 AM | Comments (11) | TrackBack (0)

Women's Economic Role--Posner's Comment

I have very little to add to Becker's excellent discussion. One puzzle remains is why women have better college grades than men. One possibility is that colleges discriminate against men in admissions. For if colleges admitted blindly on the basis of academic prowess, they would keep admitting women until male and female grades were equal at the margin. The average grades of women might still be higher than those of men. But this would be surprising, unless most of the students in the applicant pool were women.

Discrimination against women in admission to college would not be irrational if male alumni are expected to be on average more generous donors, either because of higher average earnings or because, as Becker notes, men are likely to dominate the upper tail of the income distribution; alumni in the upper tail are likely to be disproportionately generous donors.

Another possibility, unrelated to current sex discrimination, but perhaps to historical discrimination against women, is "legacy" admissions. If alumni children are favored by college admissions officers (largely for financial reasons--admitting alumni children increases expected donations by alumni), and the alumni parents are disproportionately male because men used to go to college in higher numbers than women, this could explain why males are being admitted who are expected to be poorer students than women who could have been admitted in their place. However, given that alumni are likely to have an equal number of male and female children, this explanation would work only if alumni prefer their sons to be admitted to the same school.

Still another possible explanation for the higher average grades of female than male students is that men get as much out of college as women do even when male grades are lower, because there is more to college than academic performance and the "more" may be more valuable on average to men than to women. Male sports and other male social activities in college may build teamwork, and networks, that create more valuable human capital for men than these activities would do for women, perhaps because men will have greater participation in the labor market, where teamwork and connections are vital assets. On this view (proposed by Asher Meir in correspondence), male students substitute nonacademic for academic college activities, resulting in lower average grades that are, however, offset by the social human capital that they acquire from engaging in the nonacademic activities.

Whether the wage gap between men and women will continue to narrow because the ratio of male to female college students will continue to fall seems to me speculative. The ratio may not fall at all if colleges see advantages in the current ratio, though this would leave unexplained why it has fallen as far as it has already. If the ratio does not continue to fall, I do not see what would drive female wages up relative to male wages. Rising prosperity may actually induce many women to substitute household for market work, because diminishing marginal utility of money income, combined with higher income tax rates at higher incomes, would tend to make untaxed household income more attractive.

Posted by Richard Posner at 09:40 AM | Comments (38) | TrackBack (0)

June 04, 2007

Ex Ante Compensation for Military Death--Posner

The public is upset by the casualties that our soldiers are suffering in the Iraq war, and it might seem that their upset would cause no puzzlement even to an economist. But there is an economic puzzle. It is this. Ours is an all-volunteer military. No one is forced to join. Everyone who does join realizes that he may find himself in a combat zone. This is an expected cost of military employment and in a competitive labor market will be reflected in the wage. That is, the wage rate in a competitive labor market will compensate a worker for any risks that the particular employment can be expected to create--a proposition that goes back to Adam Smith. If the risk materializes, the employee has no cause to complain, provided it was the risk that he understood the job involved or should have understood it involved when he signed up for it, because he was compensated in advance. Yet that is not how the public views our military casualties. That is the economic puzzle which I address.

What is not puzzling is why the families and friends of a killed or injured soldier grieve. Ex ante compensation for a loss does not wipe out the loss, even if it is a purely financial loss. It just provides the inducement to bear the risk of incurring the loss. One's spouse might consent to one's working at a very dangerous job, yet still grieve when one was killed at the job.

Nor is it a puzzle why, as in the recent search for the three American soldiers captured by the enemy in Iraq, immense resources are devoted to rescuing soldiers, rather than writing them off as having consented ex ante to their plight. The compensating wage for bearing risk varies, obviously, with the risk, and the risk in turn depends on efforts that are and will be made to minimize the risk, including body armor, rescue, medical treatment, and so forth. Knowing that one's fellow soldiers do not just abandon one when the cost of rescue would be disproportionate to any tactical value of the rescue reduces the wage that a volunteer army has to pay to attract soldiers of the quality it wants.

But the question remains how to explain the upset that the public feels at our mounting casualties in the Iraq war. Is it just shock at seeing photographs of dead and badly injured Americans? But in fact such photographs are rarely shown. Or is it perhaps that the risk of death and injury is greater than our soldiers had reason to expect when they signed up? Were this the concern, one would expect sympathy to be withdrawn from soldiers killed or injured who signed up within the last two years, for by two years ago it was clear that a great many recruits would be fighting in Iraq before the war ended. The case of soldiers who joined the military before the September 11, 2001, terrorist attacks indicated that the United States could be expected to be involved in more military operations than previously anticipated might be thought different. But most of those soldier completed their military obligation and so be allowed to resign without penalty years ago. The situation of those who "re-upped" is no different from that of recent recruits.

Could there be a paternalistic concern--that recruits are not calculating the risk of death or injury accurately and as a result are not receiving an adequately compensatory wage differential over a safe job? This is unlikely. One reason is that a great, and probably unobtainable, amount of information would be required in order to calculate that differential. The risk of death or injury in combat is an example of what statisticians describe as "uncertainty" rather than "risk," reserving the latter term for situations in which a numerical probability can be estimated. The incidence and length of wars, the probability of serving in a combat zone and for how long, and the amount and severity of the fighting in that zone are all imponderables. The resulting uncertainty argues for an alternative to building ex ante compensation into the soldier's wage when he is hired. Hence the practice of paying combat pay as a bonus to the soldier's ordinary wage. At present, soldiers serving in combat zones, mainly Iraq and Afghanistan, receive $225 a month as combat pay on top of their regular wage. The $7,000 bonus paid Marines who agree to be deployed to a combat zone for seven months is a similar response to the difficulty of fixing conventional ex ante compensation.

A further complication is illuminated by the economic concept of monopsony. The term refers to a situation in which there is no competition on the buying side of the market, as distinct from no competition on the selling side (monopoly). In a monopsonized market sellers receive less than they would in a competitive market because of their lack of alternatives. Persons who join the military to obtain or exercise technical skills have civilian alternatives, so the military has to compete with civilian employers for the services of such persons. But if you want to be a combat soldier, there is only one possible employer (if you are an American) and that is the U.S. government. So the government can pay a low wage to persons desiring that employment--in fact it seems that it can pay a lower wage than it does to its military technicians (adjusting for the value of the technical training that the latter receive) even though the latter are less exposed to combat risks.

I suspect that the main reason for public distress at U.S. military casualties is altruism, which is stronger in a family setting but extends to strangers as well, as in charitable giving. Most people are grateful to those who protect them, even if the protectors are well compensated. But what of those Americans who believe that our involvement in Iraq is a mistake and that our soldiers, or at least most of them, should be withdrawn? Most of the critics of the war realize that the soldiers are trying to protect us, even if the soldiers are mistaken in believing that they are doing so. If anything, critics feel sorrier for the troops than supporters of the war, because they think that the casualties represent sheer loss, so that the soldiers are deluded as well as endangered.

Posted by Richard Posner at 03:08 PM | Comments (42) | TrackBack (0)