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

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

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

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

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

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

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

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

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

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

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

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

 

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

 

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

There has been an unprecedented drumbeat of accusations of unethical behavior by American (and foreign) business firms. The accusations that have gotten the most publicity concern, naturally enough in light of the financial collapse of 2008 and the worldwide economic depression that ensued and is still with us, banks (both commercial banks, like Citigroup and JP Morgan Chase, and “nonbank banks” such as Goldman Sachs and Lehman Brothers), related entities, such as mortgage brokers, hedge funds (accused of widespread insider trading), Ponzi schemes (such as Madoff’s); ratings firms such as Standard & Poor’s; pharmaceutical companies; other for-profit medical providers; law firms (accused of padding bills); manufacturers and retailers of foods (accused of engaging in misleading marketing practices that contribute to the nation’s obesity and diabetes epidemics); Internet search firms (such as Google) and social media (such as Facebrook) (accused of invasions of privacy); for-profit colleges and vocational schools (accused of misleading applicants). Although I am calling these accusations ones of unethical behavior, most of them violate either criminal or civil law. Business behavior that is unethical but probably not also illegal would include such things as packing a corporate board of directors with patsies who do not act as representatives of the shareholders (as they are supposed to) but are in the pocket of the CEO, the confusing disclosure of credit terms, exploitation of consumers’ difficulty in understanding interest rates, and hiring pretty girls to hawk new drugs to physicians. 

There is nothing new about unethical business behavior. Nor is it confined to “business” in the sense of for-profit private enterprise. Most colleges and universities are nonprofit, but they have come under searing criticism of late for exorbitant administrative salaries, excessive tuition, and misrepresentations of the job opportunities of their graduates (law schools have become particular offenders in this regard). Regulators are accused of going easy on the regulated because they hope to be hired by a firm they are regulating after their stint of government service. State legislatures are accused of vote suppression, and donations to political campaigns are criticized as quasi-bribery. 

Nor is it possible to say that there is more unethical behavior in business (broadly defined to include any provision of goods or services—the “market” in the broadest sense) today than there was ten or twenty or a hundred years ago. My guess is that, given the growth of regulation and expansion in legal remedies, there is less today than there was fifty or a hundred years ago. It is mainly anger at the banks, widely blamed for our economic troubles since 2008, and the increased scope and penetration of the electronic media, that are responsible for the fact that unethical business behavior is receiving much more publicity than in times past. 

Yet the publicity on how widespread unethical behavior is should invite a critical look at the free-market ideology that is both a cornerstone of conservative ideology and politics and a highly influential current of economic thinking generally. It is the current typified by the popular economic writings of Milton Friedman and by Alan Greenspan’s contention (before the 2008 crash) that financial markets, and by extension markets generally, are “self-regulating”: they operate efficiently with little or no regulatory supervision by the government. Which we now know to be false, at least in the case of finance.  

Competition is doubtless essential to the efficient production and distribution of goods and services. But it is not an antidote to unethical practices by producers and distributors. There are three problems. One is the limitations of negative advertising. Suppose a cigarette manufacturer discovers a way of reducing the incidence of lung cancer among heavy smokers by 50 percent. Can one imagine an ad that said: “if you’re a heavy smoker, switch to our cigarettes—it will reduce the likelihood of your getting lung cancer (as a result of smoking heavily) by 50 percent”? The advertiser would be poisoning his own well. Problems are often common to an entire market, and advertising that touches on a common problem tends to be self-defeating (“our airplanes crash only half as often as our competitor’ planes”; “airbags are more likely than our competitors’ to prevent your chest from being crushed by the steering wheel in a head-on collision”). 

A second and related problem is created by cognitive and informational deficiencies that weaken the
effectiveness of consumers as enforcers of competition that enhances consumer welfare. For example, quoting prices that are not rounded to a dollar is a wasteful practice; it slows down transactions, increases record-keeping expenses, and is a drain on the U.S. Mint, because a penny costs more than a penny to produce. But sellers understand that a price of $7.00 strikes many consumers as substantially greater than a price of $6.99, and knowing this sellers are extremely reluctant to round. 

Third, most competition is between organizations, and organizations are composed of people whose utility functions are not identical to that of the organization. Organizations are often nests of intrigue, where striving for personal advance can disserve organizational goals. This is true at the highest level; a CEO may be far more concerned with his salary than with the value of the corporation, and may (within limits of course) be able to promote the former at the expense of the latter. CEOs often as I said earlier try to pack the board of directors with friends and patsies, generously compensated for doing very little, so that the CEO’s salary will not be questioned and his tenure will be secure. 

The legislative process is frequently and justly criticized on the ground that legislators’ horizon (often
just the next election) tends to be truncated, causing them to ignore long-term costs and benefits. But the same often is true in business, especially finance, where short-term profits may be enormous, as they were in the housing and credit bubbles of the early 2000s. It will often make sense from an individual trader’s perspective to take very great risks, if from a statistical standpoint the risks are unlikely to materialize until after substantial profits have been earned. 

All the tendencies to inefficiency that are inherent in a market economy are actually magnified in the United States by the intensity of competition, as well as by inequality of incomes and the weakness of the social safety net, a prevalent free-market ideology that has given rise to strong political opposition to regulation, the enormous publicity that is given to wealthy people and the widespread public dissemination of affluent people’s incomes and wealth, the limited prestige of most careers that are not lucrative, the absence of aristocracy, which would provide an alternative ladder of success to money, and the American tendency to attribute financial success to skill and hard work even when it is largely attributable (as often it is, especially though not only in financial markets) to luck.

Extremely lax regulation, especially by the Securities and Exchange Commission, which regulated "nonbank banks” like the ill-fated Lehman Brothers) but also by the Federal Reserve, other federal banking regulators, and state insurance regulators, and spotty regulation of foods, drugs, and medical devices would not be problems if markets were really self-regulating, as Greenspan thought. They are not. We probably need stronger regulation. The danger is excessive regulation, which gave rise to the deregulation movement that began in the late 1970s, and had on the whole beneficial effects (though not in finance—the deregulators did not appreciate the potential macroeconomic consequences of a financial crisis). A balance is difficult to achieve. But the pendulum may have swung too far in the direction of deregulation.

The traditional case for competition and private enterprise does not assume that it produces perfect outcomes. Rather, the case is that the outcomes from competition are generally good, and certainly much better than those in a government- dominated economy, or in any other alternative ever devised. This is worth bearing in mind as we consider the topic for this week: business and corruption.

Posner gives many examples of unethical and illegal behavior by businessmen in recent years. These and other examples are certainly not great advertising for private enterprise, but as he indicates, this is not proof that such behavior has increased over time. Much more important, it is not proof that unethical behavior is more common in business than in say government or universities. After all, to take just one example, four former governors of our own state of Illinois were sent to prison, and one is currently doing extensive time in prison. for widespread corrupt practices.

Posner also argues that inefficiencies and unethical behavior in business are magnified by competition, at least by the intense competition among business in the United States. I very much disagree with this claim since there is no convincing evidence or theory indicating that corruption and inefficiencies are greater when businesses compete intensely. Competition helps discipline business behavior by giving consumers alternatives when they believe they are harmed by unethical business behavior. For their part, companies usually try to get repeat business and keep the loyalty of their customers by offering dependable goods and service. Monopolies need not worry much about consumer loyalty since their customers have limited alternatives.

To be sure, I would not claim that competition always works in this way, or that private and public monopolies are always inefficient. Sometimes, as Posner indicates, consumers are fooled by the “small print” in contracts they sign, or they choose products that are more harmful than they anticipated. Sometimes too, businesses engage in unethical practices because their competitors are profiting from these practices. But many examples illustrate that, overall, competition surely helps consumers.

The postal system was a lethargic, rigid, surly organization dominated by its unionized workers while it had a (government-enforced) monopoly of regular mail delivery. Competition from FedEx, UPS, and the Internet has greatly improved delivery of information and goods, and has even made the postal system a little more efficient and a little nicer. Microsoft used its monopoly power to extract surplus from consumers of Office and the Internet that it dominated until faced with extensive competition from Google, Apps, Facebook, and other ways to communicate and use the Internet. No one who has dealt with local government-created private monopolies like Comcast will extol the virtues of not having competitors to turn to for better services.

To take an international example, perhaps 40% or more of China’s manufacturing employment is in state-run enterprises often with real monopoly power. Private companies that usually face considerable domestic and international competition dominate the rest of manufacturing, agriculture, and most services. There is very widespread agreement that the private sector, not public enterprises, has produced the dynamism that has driven the Chinese economy forward. And when commentators speak about corruption in China they are usually referring to local and central governments, and the regulators appointed by these governments.

Nothing in my discussion, however, should be taken to imply that competitive private sectors are always self-regulating. Economists were already arguing in the middle of the 19^th century that the financial sector needed regulation and a government lender of last resort. Consumers would have difficulty determining the safety of new drugs without regulations that forced extensive clinical trials (but the FDA also has regulations that are highly counterproductive). I can give other examples where regulations are beneficial, but my main claim is that competition usually helps consumers whether in software, groceries, or education. Competitive private enterprises, not governments or regulators, have led the way in helping countries progress and reduce the incidence of terrible poverty.

 

Net illegal immigration from Mexico to the United States has been essentially zero and perhaps even negative, during the past few years. Is this entirely due to depressed labor markets in the US and tougher border policing, or have longer run forces also been at work? The answer is that fundamental changes in Mexico have contributed to the immigration slowdown, and these changes will continue into the future. As a result, the highly controversial American political issue of what to do about illegal immigration should become much less important in the future.

Immigration theory divides the factors determining immigration into “push” and “pull” forces. Push forces refer to conditions in the countries where immigrants come from, such as low incomes, high levels of unemployment, restricted opportunities for children, and religious, racial, and other forms of discrimination that make living there unattractive. Pull forces refer to opportunities in receiving countries, such as good earnings, jobs, and opportunities for children. Individuals migrate when the combination of push and pull forces make the expected gains from moving large enough to overcome the substantial difficulties of moving, including separation from parents, siblings, and even spouses for prolonged periods.

In all major immigration episodes, younger adults do most of the moving since they are less tied down by family responsibilities, and are more willing to take on the various risks involved in moving to another country. For many years, the net gain from moving to the US has been very high to young Mexicans with modest skills and education. The main reason has been much lower incomes in Mexico, even for persons with jobs, and jobs were more available in America since Mexico has had highly restricted labor markets. These forces encouraged millions of younger Mexicans to endure the uncertainties and costs of crossing the border illegally.

The Great Recession put a temporary end to easy availability of jobs in the United States since at the height of the recession the unemployment rate of low-skilled workers ballooned to about 16 percent. The difficulties of finding good jobs even encouraged some illegal immigrants to return to Mexico. That, along with tighter border patrols, greatly reduced the number of illegal border crossings.

Once the American economy resumes its long-term growth path with full employment (it has not been on this path for the past 4 years), the economic pull from the US should return to where it had been before the economic crisis. However, the push from Mexico has been decreasing and should continue its downward path for the foreseeable future. One important cause is the sharp decline in Mexican birth rates during the past couple of decades. Not long ago Mexico was a country with high birth rates that produced many young adults who had trouble finding jobs. Now, the Mexican total fertility rate (TFR)- the number of children born to a typical woman over her lifetime- has plummeted to about 2.25. This rate is only a little above the population replacement rate of 2.1. Unlike in the past, the number of young people in Mexico will no longer be growing rapidly over time, so that the numbers looking for work in the Mexican labor market will be on the decline.

The push from Mexico has also diminished because its economy has been growing at a good clip during the past 9 years. Excluding the large drop in 2009, the growth rate in real GDP has been over 4% per year. Mexico’s growth rate after 2009 considerably exceeds the American rate of under 2%, which is remarkable since about 80% of all Mexican exports go to the depressed American economy. One consequence is that the gap between earnings in Mexico and the United States is narrowing. This clearly reduces the demand to immigrate to America, especially under the difficult circumstances illegal immigrants face.

The US must find a way to offer a path to citizenship for the millions of illegal immigrants in the country. I have suggested elsewhere (”The Challenge of Immigration: A Radical Solution”, IEA, 2011) that the best approach is to sell the right to immigrate. Since illegal, as well as legal, immigrants could buy this right, such an approach would help solve the problem of illegal immigration.

But even if no new policies are adopted to reduce the flow of illegal immigrants, the number of new immigrants from Mexico will not return to pre-recession levels because economic opportunities are rising in Mexico, and there will be fewer young Mexicans who need to find jobs.