October 01, 2007
The Decline of Unions-Becker
The recent two-day strike by the United Automobile Workers (UAW) against General Motors (GM) illustrates clearly the steep decline of the importance of unions in the United States economy. Once perhaps the most powerful union in America, UAW membership among the big three auto companies has fallen by 40 per cent since the last national contract in 2003, and by much more since the 1980's. This union represented about one quarter of a million workers at GM as recently as 1994, but its active membership there has shrunk to under 75,000. As a result of this latest contract, GM will unload its present and future health care liabilities into a trust fund run by the union. Apparently, GM reduced its liabilities for health care by over $15 billions, and eliminated the uncertainty over its future liabilities toward the medical care of its active and retired employees. In return GM committed to keeping a number of plants operating in North America, and made a few other concessions. Perhaps I do not appreciate some subtleties of the contract, but it seems to me GM, once known as "Generous" Motors for its softness in dealing with the UAW (it provided, for example, health benefits without any deductibles), won the confrontation, and came out in better financial shape.
The decline in power of the UAW mirrors more generally the steep fall in American unions. The fraction of workers that are union members peaked in the United States at about 35 per cent in the early 1950's, and declined since then to only 7 1/2 per cent of the non-governmental labor force. The only bright spot for unions is its strength among government employees, fueled by considerable relaxation of laws outlawing strikes by government employees. All developed countries have has some decline in union strength, but generally unions still cover much larger fractions of the labor forces in these countries.
Some of the factors helping to erode union strength are straightforward. The decline in manufacturing has been important since union power has traditionally been strongest in large industrial companies, such as in the steel, aluminum, and auto industries. Globalization has increased the competition from production located outside the control of the unions in any particular country, including production by employees abroad of the same company. Government provisions of unemployment, retirement, and health benefits, and various regulatory controls on layoffs have substituted for similar services provided by unions in the past. Yet these considerations do not seem to be the full story since globalization, the growth of the welfare state, and declines of manufacturing were at work also in other countries, such as Germany and Sweden, and they had much smaller falls in unionism. Presumably, the difference is that laws and attitudes toward unions are much less favorable in the US than in many other nations.
Not that long ago, there was strong support for unions in American academia and among American intellectuals, as well as among blue-collar workers. Scholars who emphasized the negative side of unions, such as Chicago economists Henry Simons, H. Gregg Lewis, and Milton Friedman, were looked upon as crackpot reactionaries. Academics and intellectuals are still generally pro-union, but with little enthusiasm. They have seen that strong unions promote the earnings, and health and retirement benefits of their members who tend to be well paid-production workers at GM start at close to $30 per hour- without doing anything for workers who earn much less. As a result, no current union leader has the prestige, name recognition, or media attention that Walter Reuther, John L. Lewis, and Jimmy Hoffa did several decades ago.
Unions could have an important place in a competitive market economy, but their organization would look different than that of present day industrial and craft unions. Men and women working for large, impersonal corporations may prefer to bargain over wages, work rules, and health and retirement benefits collectively through company unions rather than individually. In particular, workers who have spent many years with the same company may find a union helpful in protecting against management that tries to take advantage of the difficulties older workers face finding good jobs. Other workers in the same industry may elect to not have a union and prefer to bargain individually for wages and benefits. Companies with unions of their employees would compete for profits and employees against companies with other unions, and also against non-unionized companies. This type of union structure is called "competitive unionism".
Actual unions in most countries, however, are not company unions, but organize workers in different companies, often in the same industry, into one union, as with the UAW, or the United Steelworkers of America. By organizing across companies in the same industry, unions hope to exercise greater economic power since they can bargain for similar benefits in competing companies, and can call industry-wide work stoppages. These unions, in effect, try to get monopoly power in labor markets that enable them to boost their wages and other benefits above competitive levels. The Clayton Act of 1914 generally exempted trade union negotiations from anti-trust laws, which enable unions to openly seek what amounts to monopoly gains.
In the past I opposed this exemption as making no economic sense because it allowed a minority of unionized workers to raise their benefits at the expense of consumers and other workers. But with the steep decline of unionism, it no longer matters much, at least in the US and UK, whether unions are exempt or not from the anti-trust laws that apply to companies. Union attempts at monopoly power cannot be important (outside the government sector) in economies where under 10 per cent of non-governmental employees are unionized, and where companies, and indirectly workers, must compete on world markets. The cost in litigation and regulatory burden of applying anti-trust laws to unions would exceed any gain from eliminating the union exemption from anti-trust actions.
Posted by becker at 07:36 PM | Comments (10) | TrackBack (0)
The Decline of Unions--Posner's Comment
I agree with Becker that the settlement between GM and the UAW was a major victory for GM; I suspect that the strike was a face-saving gesture for the union's leadership--a pretense that the strike, that symbol of union power, had wrested important concessions from the company. What is significant about the health trust fund is not that it will remove a large contingent liability from GM's books--a matter simply of accounting--but that it will enable GM to cap that liability by paying a lump sum to create the trust, which then becomes responsible for the employees' (including retired employees') health costs. The risk of soaring health costs is shifted from the company to the workers. If the trust grows faster, through investment of its assets, than the health costs of the trust’s beneficiaries, the workers will do fine. If not, they, rather than GM, will be the losers. So a cloud of uncertainty over the company's future will be lifted.
The purpose of unions is simple: it is to increase unionized workers' incomes above the competitive level, where "income" includes not only wages and fringe benefits but also safety and other aspects of working conditions. The unions do this by cartelizing the sale of labor services. A union that organizes the work force of the major competitors in a market obtains monopoly power over the supply of labor to those firms, and that power enables it to negotiate better terms for its members than they could obtain in a competitive labor market. (The union cannot force the workers in the collective bargaining unit to join the union, but it can charge them an "agency fee" for negotiating on their behalf as well as on behalf of the union members.) The union takes a share of the monopoly gain in the form of union dues.
As with any monopoly, union cartelization causes inefficient substitution, whether of capital for labor or of production by nonunionized competitors, and it also generates rent-seeking costs--the costs to unions of organizing an employer's work force and the costs to employers of fighting union organizing efforts. Not only are union cartels inefficient, but they penalize the least productive workers, workers not worth the union wage to employers.
What has wrecked the unions, outside of the public employment sector, is the rise of competition in the product markets that used to provide the most favorable conditions for unionization. When thousands of workers are doing essentially the same work in the same plant in an oligopolistic industry, the cost of organizing is minimized. The existence of a large homogeneous work force reduces the cost of communicating the union’s message and reduces conflicts of interest among workers that would make it difficult to agree to a common package of wages, benefits, and improved working conditions. With few producers, the cost of organizing the entire industry's work force is reduced and the benefits to the workers and to the union (in union dues and agency fees) increased. These conditions are most likely to be found in traditional assembly-line manufacturing, which as Becker notes has declined, in significant part because of the pressure of foreign competition. (That is why unions oppose free trade.) The more competitive an industry, the more difficult it is for unions to extract significant concessions from an employer: higher labor costs will simply deflect an employer's customers to his competitors. Unionization accelerates its own decline.
But the particular pickle that GM and the other American auto manufacturers, together with the UMW, find themselves in is also due partly to the U.S. tax code, which makes health benefits deductible to the employer and nontaxable to the employee. This unsound tax policy creates an incentive for the employer and the union to negotiate generous health benefits in lieu of generous wage increases--and without careful controls the employer’s obligations can skyrocket. "Lifetime" benefits can be a highly attractive perk if health costs rise only gradually, but if they rise rapidly (in part because of increasing longevity, in part because of better but more costly therapies) the employer may find himself saddled with labor costs that make his product noncompetitive. So GM and the other automakers took a big risk in agreeing to extremely generous health benefits, but so did the UMW. For it is difficult for a union to agree to retract concessions that it has obtained from the employers with whom it bargains; it signals weakness. But by hesitating to backpedal, the union has jeopardized the automakers' survival and by doing so has jeopardized its own survival--and guaranteed its decline.
Another factor in the decline of unions may, paradoxically, be the National Labor Relations Act, an important New Deal measure that has long been thought pro-union. Before the Act was passed, there was plenty of union activity (the percentage of the work force that was unionized was larger before the Act was passed than it is today), but because of the absence of a tight legal framework for union organizing, labor-management struggles were more like war than like political campaigning. There was a good deal of violence and the organizers, as underdogs, earned a large measure of public sympathy. The NLRA created a detailed legal regime of government-supervised electoral competition and negotiation; violence ceased to be a significant factor in labor relations--and the labor heroes disappeared, and with them unionization as a burning political issue.
As Becker notes, the area in which unions have made gains in recent decades is that of public employment. Public employment would always have been a fertile field for union organizing had it not been for laws forbidding strikes by public employees. Public employers provide services rather than products, and service interruptions due to strikes impose greater costs than interruptions in the production of goods because service cannot be produced for inventory or stored; public employees are voters and so government is reluctant to take tough measures against strikers; and public employers are generally monopolists. On all these counts, unionization today poses greater risks to efficiency in the public than in the private sector. In the private sector, the decline in unionization has greatly reduced the power of unions to extract supracompetitive wages and benefits--to the point where, the continued exemption of most union activities from the antitrust laws probably makes good sense. The benefits of antitrust enforcement against practices that nowadays have probably only a small effect on the efficiency of labor markets might well fall short of the costs in enforcement.
Posted by Richard Posner at 07:13 PM | Comments (19) | TrackBack (0)
Notice
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Posted by Richard Posner at 09:36 AM | Comments (2) | TrackBack (0)
September 23, 2007
Universal National Service--Posner
There are perennial calls for drafting all 18 year olds to serve in either the military or some civilian alternative. Congressman Charles Rangel has repeatedly introduced bills in Congress (the "Universal National Service Act") that would do this. The bills have never come close to passage, and are unlikely to in the future even with Democratic control of both houses of Congress. But universal national service is one of those seductive ideas that refuse to die completely, and perhaps therefore it deserves a serious analysis. It is analytically interesting and can serve as an example of the utility of a cost-benefit approach to public programs.
Roughly 4 million Americans reach the age of 18 every year. There are only 1.4 million active-duty military personnel, so only a small fraction of each vintage of 18 year olds could be assigned to the military. At their present size, our active-duty armed forces require only about 150,000 new recruits each year. So any universal national service obligation would have to be primarily an obligation to do civilian work.
Civilian national service (in the United States--thus excluding the Peace Corps, and the missionary work that young Mormon men are required to perform for two years without compensation) funded by the federal government exists already. The "AmeriCorps" program provides federal grants to a large number of service organizations, both public and private. Although these organizations pay only the living expenses of their volunteers plus a modest education grant, the federal contribution amounts to some $27,000 per volunteer.
The number of volunteers supported by AmeriCorps grants is small--well under 100,000. But of course total volunteer activity is much greater than that, and by no means limited to young persons--an affiliate of AmeriCorps is the "Senior Corps." A survey by the U.S. Department of Labor found that there were some 60 million American engaged in volunteer activities in 2006 and that the median number of hours that the volunteers devoted to such activities was about 50 hours a year. Thus, assuming that the average is not much different from the median and that a full-time job is 2000 hours a year, there were the equivalent of 1.5 million full-time volunteers (50/2000 x 60 million). That number is important because a universal national service obligation would have a substitution effect: someone required by law to provide a year of national service would be likely to reduce the amount of volunteer service that he would provide in the future. If, for example, there were a two-thirds reduction in volunteering, from 1.5 million full-tine equivalents to 500,000, and thus a loss of 1 million full-time-equivalent volunteers, universal national service would augment volunteer activities by only 3 million full-time equivalents a year (4 million - 3 million). Granted, this number would rise if universal national service had a complementary effect on volunteer service rather than or, more plausibly, as well as a substitution effect--if, that is, the year of obligatory service created a taste for such service. I find this implausible.
If 4 million persons were conscripted for one year's national service, at an annual expense of $27,000 per person, the program would cost more than $100 billion a year--probably much more, because the $27,000 figure excludes the overhead expenses of the service organizations that receive the per capita grants. The $100 billion (or whatever the correct figure is) would be a transfer payment, but it would generate costs of two types. The first would be the deadweight costs that the taxes required to fund the payment would impose. The second and doubtless greater cost would be the difference between the value of the conscripts' national service work and the value of their output in whatever jobs they would have had were it not for their national service obligations. About half the 18 year olds would (but for their national service obligation) be in college rather than working, and so the effect of universal national service on them would be to postpone their entry into the job market by a year. Their lost wages in their first job would be a rough estimate of the value of their work in that job. The starting salary for college graduates is more than $40,000, other than for liberal-arts majors, and this is about twice the starting salary for high school graduates. That is some evidence that a universal national service program would be inefficient: it would in effect reallocate a year of a college graduate's working life from after college to before college, when he would be less productive.
Against this it could be argued that the national service work that the 18 year olds would perform would have a social value in excess of its private value. But this seems unlikely for most jobs that these teenagers would perform, such as helping out in hospitals and nursing homes and picking up litter on roadsides and in parks. A possible exception is tutoring children, since education produces significant social benefits. But only a small fraction of the 4 million national service conscripts could usefully be employed in that activity.
Universal national service would also have peculiar effects on the distribution of income. The unpaid national service workers would replace low-paid service workers, pushing many of them into poverty.
Proponents argue that, all narrowly "economic" issues to one side, universal national service would confer intangible social benefits in the form of increased solidarity, as all Americans would share in the experience of working for the overall social good without compensation beyond modest living expenses. But given the heterogeneity of the jobs that the national service workers would be performing, the solidarity-enhancing effect would surely be quite limited. It would be different if the 4 million were all drafted into the armed forces for a year, but that is infeasible.
In a candid moment proponents of universal national service might respond that its real purpose is to take rich kids down a peg by forcing them to work for a year with minimal compensation. The hope would be that the experience would make the rich empathize more with the poor and therefore treat them more generously. This seems unlikely, though the issue is worth studying. A person's attitude toward issues of distributive justice is shaped by a variety of factors, including temperament, parental values--and personal experiences not limited to a year's working without pay.
Posted by Richard Posner at 11:35 AM | Comments (35) | TrackBack (0)
Universal National Service is a Tax, and a Bad One –Becker
Universal service usually means that young persons, say 18 year olds, can either be drafted into military service for a specified period, say a year or two, or instead they can work for a similar period in one among a number of qualifying occupations. In Germany qualifying occupations include menial jobs in hospitals or nursing homes, while France has qualified working overseas in a French company. This approach to service has been advocated mainly by persons who would like all young persons to serve in the military, but reluctantly recognize that this is impracticable because of the small size of the peacetime armed forces compared to the much larger number of young persons available.
In effect, such compulsory service is a tax on those serving that has many of the characteristics of a very bad tax. It is a tax in kind, on the time of young persons, rather than a tax on income, wealth, or spending. A tax in kind limits the ability of those taxed to respond by substituting toward a more efficient allocation of their resources. In-kind taxes also limit how governments can spend their tax receipts since these tax receipts are not general purchasing power. Universal service is also a narrow-based rather than a broad-based tax. Broad based taxes, such as a general value added tax on all transactions, are better because marginal tax rates, and hence the inefficiency caused by the tax, can be lower for a given level of receipts since the base being taxed is more extensive. By contrast, narrow taxes have high marginal rates for any given revenue, and hence generally distort behavior much more. In the case of service, young individuals who have much better opportunities in school or at jobs that do not qualify will be taxed heavily, as would young persons who greatly dislike spending all their time either in military service or at one of the recognized alternatives.
Narrow-based taxes often are enacted because of the weak political power of those being taxed compared to groups who benefit either directly or indirectly from such taxes. For there is no argument based on efficiency why young persons should be the primary suppliers of the resources needed to fund peacetime armed forces. The effects on efficiency would be better during a major war since then the social cost of the taxes needed to get enough young volunteers for the armed forces may exceed the social cost of a draft.
The logic of combining a military draft for young persons with an alternative of compulsory service at other occupations is questionable also on grounds other than being a bad tax. If greater employment at hospitals or other tasks has social value beyond the private value to those working there, it would be better to subsidize anyone who works at these tasks than to require young persons to work there. With subsidies, the general taxpayer would finance any desired greater output in these sectors rather than young persons doing their compulsory service. Furthermore, a subsidy would attract workers of all ages, and so would be much less socially costly than compulsory service applied only to a single age group.
As Posner indicates, one possible justification for compulsory universal service is the belief that it is good for young men (and women as well?) to serve with low pay in the military or other specified occupations. The argument might be that such service makes them better citizens, perhaps because they would then appreciate the hardships of the poor. (Does that mean that the poor should be exempt from this service?) Even accepting this argument, which I do not, compulsory service is a bad policy. A better way to achieve service with low pay would be to combine a ceiling on the earnings of young persons- the opposite of a minimum wage- with a subsidy to employers if they hired these persons at the desired occupations. This approach would have the advantage over compulsory service of allowing young men (and women) to avoid the military and other specified options if they had much-preferred alternatives even for the same pay. Although I have shown that compulsory service is partly equivalent to a ceiling on the earnings of young people, would politicians or anyone else who advocate compulsory service call explicitly for such a ceiling? I very much doubt it!
Posted by becker at 10:49 AM | Comments (9) | TrackBack (0)
September 16, 2007
Rules vs. Authority in Central Bank (and Other) Policies-Becker
There is tremendous speculation about how much, if at all, the Fed will reduce the federal funds rate at its meeting next week on Sept. 18th. This is the interest rate that banks use to lend their reserves held with the Fed to other banks. This rate in turn affects the interest rates banks charge borrowers, and ultimately that affects other interest rates in the economy. The Fed changes the federal funds interest rate through open market operations that involves buying or selling bonds. Some investors are looking for a full ½ point reduction from a federal funds rate of 5 1/4 per cent to 4 3/4 per cent, while others expect a reduction of only ¼ of one per cent. If the Fed took no action, there would be many disappointed investors, and probably a large sell off in worldwide stock markets.
The uncertainty among investors about what the Fed (and other central banks) will do, and the expectations that form around this uncertainty, have created an environment where central banks almost have to take some actions to avoid major negative reactions in financial markets. Instead of central banks determining expectations in financial and other markets, expectations are now determining central bank policies. As decision time approaches, the Fed comes under enormous political pressure to take the actions expected by influential investors and businesses. Although political and other forces help determine what the Fed will do, there is still great uncertainty over the precise actions it takes, as with the current speculations over the magnitude of the change next week in the federal funds rate. This political process surely is not what was intended when "independent" central banks were created.
To regain control over expectations and its own policies, the Fed should establish a rule easily calculated from publicly available information about how the federal funds rate is determined. With such a rule, investors and businesses would be able to forecast perfectly what the Fed will do next week because market participants would know all the information that determine the Fed's behavior. There could be no disappointments, and all market adjustments to any changes in the federal funds rate would be fully and continually incorporated in asset prices and other market measures before, not after, the Fed makes its decisions. Then Fed policies would be determining expectations about interest rates and other variables rather than the other way around.
To show how rules would work, suppose the rule was to target the inflation rate at 2 per cent per year. If say the actual inflation rate were 3 per cent over a several month period prior to a Fed meeting, the Fed would "lean against the wind", and raise the federal funds rate from its long run level by a specified amount known in advance to investors. This would counteract the higher than desired inflation rate. Conversely, if the actual inflation rate had been 1 per cent, the Fed would lower this interest rate by a specified amount that would be known by market participants. This action would help strengthen an economy that was weaker than the Fed desired. Investors would know what the Fed would do weeks and even months before the Fed did it, and they would adjust their behavior more smoothly to their accurate expectations about central bank behavior.
The same considerations would apply to more complicated "Taylor rules" that relate actions by the Fed not only to deviations of actual inflation rates from a targeted rate, but also to deviations of actual GDP growth from a potential growth rate. Since information could be made available to the public about how the Fed would use trends in labor force growth, investments, and productivity to calculate potential GDP growth, the Fed's responses implied by such a rule would also be known in advance. In this way, investors and other market participants could anchor their expectations to what the Fed will actually do in different macroeconomic situations.
According to a recent unpublished paper by John Taylor of Stanford University, the Fed would have raised the federal funds rate between 2002 and 2006 by considerably more than it did had such a Taylor rule been followed. By doing that, the Fed's actions would have prevented some of the mortgage and other lending at very low interest rates that took place during the past few years. Taylor's analysis suggests that following such a rule would have reduced, and perhaps even largely eliminated, the excesses in the housing boom since 2003.
Although the Fed is the most influential central bank, similar advantages of rules over discretion in setting interest rates apply to the European, British, Chinese, Japanese, Indian, and other major central banks. The less important central banks already have little discretion over their interest rates since global forces outside their control basically determine these. Of course, in the global economy what any major central bank does, especially what the Fed does, greatly affects the choices available to other central banks.
The use of rules rather than discretion to guide interest rate policy would shield central banks from domestic political pressures, and would anchor market expectations in accurate knowledge about what central banks will do in various local and global economic circumstances. These types of advantages of rules over discretion apply not only to central bank behavior, but also to policies by other government agencies. For example, should anti-trust authorities treat each merger, buyout, or meeting among competitors as unique events that require separate analysis to determine if they are anti-competitive, or should these regulators have clear and easily understand rules about what determines anti-trust violations? Clear rules are preferable here too since that would enable companies to predict the responses by anti-trust regulators when considering mergers and other actions. It would also help insulate these regulators from political pressures. In particular, the American and European attacks on Microsoft, and the European opposition to the merger of GE and Honeywell, probably would not have happened if competitive policies were guided by clear and sensible rules about what constitutes anti-competitive actions rather than by complaints of and pressures from politicians and from competitors to Microsoft and GE.
Posted by becker at 11:42 PM | Comments (12) | TrackBack (0)
Rules versus Discretion--Posner's Comment
I am not competent to offer an opinion on macroeconomic policy. But I can, with some confidence, say this about Becker's proposal that the Federal Reserve Board adopt a rule approach to adjusting the money supply to limit inflations and recessions: there is no way in the existing legal regime to make such a rule enforceable. The Board is a creature of Congress. If it resists strong political pressures, Congress can retaliate. Unlike the Supreme Court, the Board has no constitutional standing. And even the Supreme Court, which Congress could not abolish without a constitutional amendment, is not immune from political pressures, because Congress can limit the Court's jurisdiction and controls the Court's budget. Moreover, political pressures influence who is appointed to the Court--and to the Fed as well. And Congress can pass laws that would impede or even nullify Fed policy, as by raising or lowering taxes or running deficits or surpluses in the federal budget.
Therefore, it might well be a mistake for the Fed to surrender discretion in favor of a rule approach. Discretion enables the Fed to bend in the face of political pressure; rigid adherence to rules might cause the Fed to break in the face of particularly intense such pressure. I understand that some central banks do follow a rule approach, but they may operate in a political context different from ours--I do not know.
The larger question is whether any public official can be totally nonpolitical in a democratic (perhaps in any) system. I suspect not.
On the broader issue of rules versus discretion, I doubt that generalization is possible. Rules have great virtues, but they are limited because they are necessarily based on information possessed by the rulemaker when the rule was made. No rulemaker is omniscient. After the rule is promulgated, unforeseen circumstances are likely to arise to which the rule will be maladapted. The inflexibility of rules has to be traded off against the benefits in simplicity, clarity, and ease of compliance and application that rules confer. The tradeoff will not always favor rules.
There are three alternatives to rules. One is standards. A fixed speed limit is a rule; negligence is a standard. A standard is less definite than a rule, which is a minus, but it is more flexible, which is a plus. It would be impossible to anticipate every possible cause of an accident (driving above 60 m.p.h. at night, in snow, in heavy traffic, on a divided highway, or in an SUV, etc.) and make a rule that would declare each cause to be either culpable or excusable. The negligence standard enables a court to determine liability as cases arise, on the basis of a weighing of the costs and benefits of measures that would have avoided the particular accident.
One way to state the difference between rules and standards is that standards enable information obtained after promulgation to be incorporated into the law without need for formal rulemaking. When for example Congress passes a vague statute, thus leaving it to the judges enforcing the statute to fill in the details, in effect the judges are enlisted in the legislative process. An example is the per se rules of antitrust laws, which are judge-made rules supplementing the general directives in the antitrust statutes.
Another alternative to rules is discretion, which differs from a standard in not being enforceable in court. For example, prosecutors in our system have discretion whether or not to prosecute a particular person for a particular crime. Unless a prosecutor bases an exercise of his discretion on an invidious ground, such as race or religion, a court will not review that exercise. Discretion in the criminal law is a way of introducing needed flexibility without creating loopholes through which criminals could escape the law. Criminal laws tend as a result to be overinclusive. People are constantly cutting corners of various sorts, often not realizing that by doing so they actually are violating a criminal statute. Prosecutors are, quite wisely, not given sufficient resources to prosecute every crime, but instead are given discretion to allocate their limited resources as they see fit. They can overlook the minor crimes without worrying that the criminal law contains loopholes that may enable a major criminal to elude justice.
Similarly, no driver actually obeys all the driving laws, but police rarely bother to ticket anyone who exceeds the posted speed limit by less than 5 or 10 m.p.h. Suppose the posted speed limit is 60 m.p.h., but the de facto speed limit is 70. If the posted speed limit were raised to the "realistic" speed limit of 70, many drivers would drive faster because the police would not have enough resources to catch all the speeders, so the realistic speed limit would rise. Moreover, police would lack flexibility to ticket the occasional driver who was driving above the posted but below the de facto speed limit but who the police believed should be ticketed anyway because he was driving erratically--weaving, tailgating, etc. Of course they could ticket him for these activities, but it would be harder to determine and prove them, compared to detecting speed with a radar gun.
The third alternative is presumptions or guidelines, which have the structure of rules--that is, are simple and definite--but which allow discretion in enforcement. An example is the federal sentencing guidelines, which enable a defendant, a judge, and probation officers to determine a definite range for a sentence for a particular crime committed by a person having particular characteristics (such as criminal history), but allow the judge to sentence outside the range if he can give a good reason for doing so based on sentencing factors set forth by Congress. This approach makes sense when there is a need for guidance but strict rules would be too inflexible.
The merger guidelines used by the Justice Department and the Federal Trade Commission are a further illustration of the presumption/guideline approach. They enable firms contemplating mergers to have a pretty good idea in advance of whether the merger will provoke a challenge from one of the enforcement agencies. The firms can go to the agency assigned to their proposed merger before the merger is consummated and get a definitive determination of whether it will be challenged. This procedure enables the lawyers and economists at the agency to decide whether the proposal is consistent with the spirit as well as the letter of the guideline.
Posted by Richard Posner at 11:31 PM | Comments (14) | TrackBack (1)
September 09, 2007
How to Control China's "Export" of Air Pollution--Posner
Two weeks ago the New York Times published an article on pollution in China: "As China Roars, Pollution Reaches Deadly Extremes," Aug. 26, 2007, section 1, page 1. The point of interest is this: "Sulfur dioxide and nitrogen oxides spewed by China's coal-fired power plants fall as acid rain on Seoul, South Korea, and Tokyo. Much of the particulate pollution over Los Angeles originates in China" (p. 6). These effects are separate from China's growing contribution to global warming: it is possible that by the end of this year China will surpass the United States as the leading emitter of carbon dioxide into the atmosphere. Although China is making some efforts to curb pollution, its efforts are more likely to reduce the rate of growth of pollution than to reduce it from its current level, because of the continued rapid expansion of the Chinese economy, which includes a rapid growth in the number of vehicles using China's roads.
Global warming affects the entire earth, though unequally, but Chinese air pollution is "exported" mainly to a few nations, mainly Korea, Japan, and the western United States. Other differences between the carbon-emission and conventional air-pollution phenomena are that there is far more uncertainty about the magnitude of the threat posed by global warming, and far greater costs to arresting global warming, than in the case of China's external air pollution, and this enables one to see the problem of international control of air pollution in rather clearer terms than that of controlling carbon emissions.
It is a problem of externalities. The costs of Chinese air pollution to Koreans, Japanese, and Americans are not costs to China, and the benefits of abating this external pollution would not be benefits to China. But this description of the problem ignores the Coase theorem, one version of which is that if transaction costs are low, the market itself will internalize externalities and thus solve the externalities problem. We might think of the present legal regime as one in which China has a property right in the activities that give rise to pollution, or stated more precisely that its ownership of coal-fired power plants, gasoline-powered vehicles, and so forth carries with it a right to pollute. If so, then Korea, Japan, and the United States (assuming they are the only countries seriously affected by Chinese pollution) could persuade China to reduce its pollution by paying China an amount of money just slightly above what it would cost China to reduce its pollution "exports" to these countries to the level desired by the "victim" nations. This assumes that the cost of the negotiations, both among the victim nations and with China, would not be so great as to prevent a deal that made all the parties involved better off; but it is not clear why those costs should be particularly high. Nor is there a serious danger that China would increase its polluting activities in order to extort more money from the other nations, since pollution hurts the people of China far more than it hurts any other population (the pollution described in the Times article is grotesque in its magnitude and lethality).
The transaction would be efficient, but it would also bring about a transfer of wealth from what I am calling the victim nations to China. But this is a common kind of market event. A real estate developer who wanted to create a residential community on land adjacent to a funeral home, and feared that the funeral home's presence would depress house values by giving the occupants of the houses an unwelcome reminder of their mortality, could pay the funeral home to relocate.
And if buying off a polluter seems crass--"Greens" would denounce it for conveying the message that pollution is a legitimate byproduct of economic activity (a "commodity" for the victims of air pollution to buy from the polluter)--there are other means of inducing China to reduce air pollution. There are things that China wants from Korea, Japan, and the United States, and these countries can give China some of those things in barter for China's strengthening its enforcement of its existing pollution controls or adopting and enforcing newer, more stringent ones.
An alternative would be to negotiate an international agreement by which China and all other nations surrendered control over their pollution to an international environmental protection agency. But the transaction costs would be prohibitive, in part because of extreme uncertainty about the policies that the agency would adopt. Nations do not surrender their sovereignty lightly.
Posted by Richard Posner at 10:14 PM | Comments (28) | TrackBack (0)
China's Air Pollution-Becker
It is more or less inevitable that China's economy will spew out a lot of pollution, given its extraordinary rate of growth for over 20 years, and the abundant supplies of coal that fuel its power generation. The important question raised by Posner is what, if anything, will induce China to cut its pollution, including the pollution that spreads internationally to its eastward Asian neighbors and countries in the western hemisphere, especially Canada and the United States.
Posner emphasizes the potential for international collaboration because the harm to these affected countries will tend to exceed the cost to China from cutting its pollution. China is imposing a burden on these other nations that it does not fully incorporate into its decisions about which fuels to use, how to invest in scrubbing and sequestering technologies and equipment that reduce the amount of pollutants that its plants use, its taxation of gasoline that discourage driving and more efficient cars, and the many other ways to reduce pollution. Since greater pollution-reduction efforts would lower the growth rate of its output, the harm to other nations would not enter into its policy calculations unless forced to by threats of economic retaliation, or induced to do so by various forms of intercountry compensation and cooperation.
The New York Times article referred to by Posner indicates that opposition to pollution is also growing rapidly in China itself for reasons that have little to do with protests of other countries. When countries start developing rapidly, their first concern is greater resources for consumption and investment, for they do not believe they can afford to take extensive measures to control air pollution if that slows down their growth out of poverty. As they get richer, however, concerns about the level and growth of various types of pollutants get magnified. As economies continue to develop, their citizens exert greater pressure on governments to improve air and water quality. Governments generally respond by regulating and taxing more extensively the omission of pollutants.
The result typically is that air, water, and other kinds of pollution at first rise sharply with economic development, and then fall about equally sharply as development proceeds still further. This inverted U-shaped relation between a country's level of pollution and its level of GDP per capita is called the "Environmental Kuznets Curve" after the Nobel prize-winning economist, Simon Kuznets. He had established such an inverted U-shaped relation between income inequality within a country and its level of per capita GDP, and researchers discovered about 20 years ago that the same type of inverted U relation holds for environmental damage, such as particulates in the air. In fact, the two Kuznets relations are not independent since one way to reduce inequality in measures of full income that include environmental damage is to reduce the degree of pollution.
Prior to the discovery of this U-shaped environmental relation, the general opinion was that environments were inevitably damaged more as industrialization increased and economies developed. That is still a common view among those unfamiliar with the evidence. To be sure, the full evidence indicates that no single relation between environmental effects and economic development fits all pollutants in all countries. For example, theory predicts that domestic opposition would make governments more responsive to local pollutants of air and water, and less responsive to global pollution, such as emission of greenhouse gases. In fact, the U-shaped relation does seem to hold better for local pollutants.
These Kuznets-type relations are beginning to take hold in China, as judged from the growing complaints about various types of pollution, and discussions by scientists and government officials about steps to take to respond positively to these complaints. This reaction to internal complaints may not be sufficient to satisfy its neighbors in Asia and in the Western hemisphere since as I mentioned, different types of pollution operate within and between countries. Moreover, China's richer neighbors would be more sensitive to pollution than the poorer Chinese are. However, as China continues to develop, the complaints due to "internal" externalities will begin to interact more with the complaints due to the "external" externalities imposed on other countries. The combination of internal and external complaints should push China even faster along reductions in environmental damage than has been typical in the past when countries responded mainly only to internal complaints about pollution levels.
Posted by becker at 09:32 PM | Comments (14) | TrackBack (0)
September 02, 2007
The Transformation of the Kibbutz and the Rejection of Socialism-Becker
Much has been written about the rejection of socialism by major powers like China and the former Soviet Union. But nowhere is the failure of socialism clearer than in the radical transformation of the Israeli kibbutz.
The kibbutz movement started in the early twentieth century in what was then Palestine by Zionist émigrés from Europe who were idealistic and utopian. Capitalism, industrialization, and the conventional family repelled these émigrés. Kibbutzniks, as they were called, replaced these fundamental aspects of modern societies with collective agriculture where all property was owned by the kibbutz, where adults were treated equally regardless of productivity, and they were rotated every few months among the various tasks that had to be performed on a farm, such as milking cows, planting crops, serving meals, and so forth. They considered the close-knit family to be a creation of capitalism, and substituted for that family structure communal dining, a fair amount of promiscuity, and separate communal living for all children, who were allowed only brief visits with their parents each day.
Several decades ago I spent a few days on such a traditional kibbutz located in the Negev desert, where I was a guest of married couple with two children. The husband was unusual for a kibbutznik because he was a trained nuclear physicist. They had a two room apartment-their two children lived in dormitories with the other children of the kibbutz- I met the children briefly on a couple of their daily visits to their parents. We dined communally on good food, and we watched a movie in the large dining hall afterwards.
Although my host had much more advanced training than other residents, that only gave him the right to spend a few months each year working at a nuclear facility that used his skills. The rest of the time he rotated like everyone else among the numerous menial tasks on the kibbutz. He was well paid for his outside professional work, but he had to hand over his pay to the kibbutz, and received the same benefits as everyone else. He was not happy with this arrangement, but since he grew up on this kibbutz he lacked the resources to buy an apartment and car, and make the other outlays required to move off the kibbutz into an urban environment where he could get a well paying job. For at that time, rent controls destroyed the rental market for housing, so young couples lived with their parents until they saved enough, or their parents gave them the money, to buy their own place. However, in this case, their parents did not have their own apartments since they too lived on a kibbutz, and they lacked the financial resources to help their children.
The kibbutz movement was motivated in part by the Marxian dictum of "from each according to his abilities to each according to his needs". By abolishing capitalistic organization, the founders expected members to live in contentment and harmony, and to work for the common good. However, from what I was told and could observe during my brief visit, there was not much harmony-jealousies abounded of those who were only a little better off, including my host because he was allowed to spend some time working at his profession off the kibbutz. Anger was also felt toward those who were considered slackers since they clearly lived off the labor of others. Since everyone ate, worked, and socialized together, small differences were magnified, and became festering sores. Nor were the family arrangements any more satisfactory since parents missed their children, and visa versa.
The kibbutz movement was very important in the creation of Israel, and in its early days of independence. Many military leaders came from the Kibbutz, perhaps because they were accustomed to communal living. A disproportionate number of the early political leaders and intellectuals also had a kibbutz background. But as the New York Times recognized in an article this past week, the socialist zeal that propelled the kibbutz movement in its early days has largely now disappeared. A trend that began more than 40 years ago accelerated in the 1980's as kibbutzim lost many young members, and they failed to attract enough new members. Many of them were forced into bankruptcy, and the future of this movement was exceedingly dim if they continued with their old ways.
The vast majority of the kibbutz that remained survived because they changed their ways. They expanded into industry and even real estate, they allowed a substantial degree of private ownership and private enterprise on the kibbutz, pay is no longer equal and is now significantly related to productivity, and parents and children live and eat together privately in their own homes. These changes may have prevented the Kibbutz movement from disappearing along with the many past Utopian experiments, but they did not prevent the kibbutz from becoming of little importance in the Israeli economy as Israel shifted toward privately owned high tech industry, and also toward privately owned farms, including cooperatives, for its much less important agricultural output.
The transformation of the kibbutz movement from avowedly socialist to mainly capitalist shows clearly in microcosm what happened in socialist countries. Although even in their most extreme moments these countries were never as radical as the kibbutzim since children continued to live and eat with parents, socialist countries too tried to divorce individual productivity from individual rewards. They also believed that self-interest was a relic of capitalism, and that they could change human behavior to produce "a new socialist man" by abolishing private property and reorganizing society. Instead of the small scale of a kibbutz, countries like China and the Soviet Union tried to created socialism on an enormous scale. Moreover, and this is crucial, while members of any kibbutz voluntarily joined and could leave at will, Russians and Chinese had no choice about whether they wanted to work on collective farms or in government run enterprises, and they could leave only with extreme difficulty and at personal risk.
Utopian socialistic experiments like the kibbutz movement, and countries that tried to create large-scale efficient socialism, all failed for the same reasons. They did not realize that while the zeal of pioneers, and the result of revolutions, could sustain a collectivist and other-serving mentality for a short while, these could not be maintained as the pioneers died off or became disillusioned, and as circumstances became less revolutionary. Basically, they ignored the evidence of history that self interest and family orientation is not the product of capitalism, but is human nature due to selection from evolutionary pressure over billions of years. Sure, there is abundant altruism toward one's family, and some altruism toward others, and the latter might sustain a society for a brief time. But it shows a depressing ignorance of history to believe that a little propaganda and the enthusiasm of some leaders can organize an effective long-term society on the basis of any altruism and desires of mostl persons to help institutions, such as a kibbutz or a country, rather than themselves and those close to them.
Posted by becker at 08:53 PM | Comments (50) | TrackBack (2)
