December 31, 2006

Responses on Drunken Driving and Trans Fats--BECKER

Many valuable comments, and I will respond to a few of them.

Maximum penalties are not the right statistic on punishment for drunk driving or other offenses. Actual punishments are the right one. In this regard, some of the calculations posted on actual punishments in the U.S. were interesting, and show how mild some of them are. Studies for Sweden and Norway I believe show clearly that punishments are more severe there. I indicated through my reference to Votey's work, which shows that this greater severity contributes to the lower rates of accidents from drunk driving in Sweden.

In many European cities, such as Stockholm, public transportation is not obviously better than in a city like Chicago, but there is no comparison between the drunk driving rates in these two cities.

I do not agree that decisions whether to drive are necessarily made during or after drunk driving. When drinkers fear punishment, they make them before by not driving if they expect to drink a lot, or by having a designated driver. That is common in Scandinavia and some other countries.

There is an "optimal" level of drunk driving, but markets without punishments exceed that level because of the harm caused by drunk drivers to others. I am not trying to eliminate driving while drunk, but to bring it closer to this optimum. The tort system alone cannot do this partly for the reasons given by Parry in his post, and partly because some drivers who hurt others are judgment proof, especially when they kill or badly injure others. That is most of the basis more generally for criminal laws and punishments beyond torts.

I do not claim that punishment should be a break-even proposition in terms of the costs and benefits to drunk drivers, but rather punishments should be at least as great as the damages caused to others. Even that should be qualified when damages are not in the form of monetary compensation to those harmed. See the working out of these principles in my paper on crime and punishment reprinted in a collection of my essays called The Essence of Becker.

On Trans Fats:

I respond briefly. Heart disease is not common in younger persons unless they are extremely obese, and I do mean extremely. In fact the effect of weight on mortality is not large except at the extremes of the Body Mass index (BMI) distribution. This is shown in the work of my colleague Robert Fogel and his students, and others.

I believe consumer ignorance is Posner's main argument, so I took that on directly, and showed I believe it is of questionable importance. Without consumer ignorance, I presume he would surely allow consumers to decide themselves.

What is remarkable to me is not how slow but how fast the response has been to evidence on the harm from trans fats. Producer after producer are declaring that their products are trans fats free. This is not an isolated instance; I recommend the writings of Pauline Ippolito of the FTC on the rapid response of advertising for products, and for the ingredients that go into different products, in response to evidence on the harm from salt, on which cereals are good for you, on why fats are bad, etc.

On the child car seats evidence, see an article by in the NY Times for July 10, 2005, The Seat-Belt Solution, By Stephen J. Dubner and Steven D. Levitt.

Posted by Richard Posner at 11:12 AM | Comments (2) | TrackBack (0)

December 24, 2006

Fatalities from Drunken Driving--BECKER

One of the most disturbing aspects of the holiday season is the sharp rise in automobile fatalities, in part due to drunk driving from overdrinking at parties and other celebrations. The United States has almost 40,000 deaths per year from automobile accidents, and about 40 percent are due to drunk driving. This exceeds the annual number of deaths from major diseases like prostate and breast cancers, and drunk driving deaths are also concentrated among young persons, while deaths from most diseases come at much later ages.

That the number of deaths per mile driven is not fixed but varies greatly with different conditions is seen from the wide differences among countries in the number of deaths per passenger vehicle. The United States is at the high end, and in 2004 had about 1.8 road traffic deaths per 10,000 vehicles, compared to less than 1 per 10,000 vehicles in Sweden and Norway, 1.1 in Germany, and 1.0 in the United Kingdom. A few countries in the more economically advanced nations have higher death rates than the United States, including S. Korea at 3.6, and Hungary at 3.9. A number of factors help explain these international differences, including the quality of the roads, speed limits, minimum driving ages, age distribution of the driving population, density of traffic, amount driven per vehicle (presumably higher in America), and other factors. I concentrate on accidents due to drinking.

The American approach to drunk drivers has been more laissez faire than other nations, with relatively light punishment for drunk driving, often even when it caused serious accidents. In the last couple of decades, however, under pressure from groups like Mothers Against Drunk Driving (MADD), states and the federal government have begun to crack down on drunk driving, and driving by youth. Largely in response to such pressure, the minimum drinking age in all states has been raised from what was typically age 18 to age 21. States also established more standardized criteria for what constitutes driving while drunk, and have lowered the minimum level of blood-alcohol concentration that is taken to indicate driving while drunk from 0.10 per cent to 0.08 per cent. More checkpoints and patrols have been put on the road to give sobriety tests to suspected drunk drivers.

As a result, alcohol-related fatalities fell dramatically from 1982 to 1994. But the trend has stalled since that year, and alcohol-related driving fatalities have bottomed out at about 17,000 per year. When adult drivers cause their own accidents or that of their passengers because they were drunk, one can reasonably assume they and their passengers are capable before they get drunk of determining what risks to take, such as whether to drive, speed, how much alcohol to absorb, and other factors that increase their risk of an accident. But drunk drivers often kill or injure persons in other cars, or pedestrians, and in this way they impose what are called negative externalities on these innocent victims. This is the main case for public policies to reduce drunk driving and other externality-causing driving behavior.

One approach is to tax gasoline and perhaps cars to cut down the amount of driving. Another way is to tax alcohol to cut down the amount of alcohol consumed. But these are very blunt policy instruments because they punish also people who drive without driving while drunk, or people who drink even in large quantities without driving or otherwise endangering others. By punishing only people who are discovered to be driving while drunk, or who get into accidents because they were drunk, or who are much more likely than others to drive while drunk, such as teenagers, one avoids much punishment of drinkers or drivers who do not risk the lives and property of others, and concentrates punishments on those who either are likely to, or actually did, impose external costs on others. At the same time, this would discourage, perhaps greatly, the tendency to drive after heavy drinking.

My colleague, Kevin M. Murphy, prepared estimates for the United States for the year 2000 of the total cost imposed by drunk drivers who get into accidents on drivers and passengers in other cars, and on innocent pedestrians. These costs include estimates of the statistical value of the lives lost (see my post on September 3, 2006 for a discussion of this concept), the value of medical expenses for those injured, and the value of the property lost. The total of all these external costs from drunk driving in the year 2000 is about $15 billion, with the great majority of this total coming from the $5 million value placed on each of the more than 2,000 innocent persons who lost their lives in that year because of drunk driving.

About 1.4 million persons in that year were arrested for drunk driving. Given the calculations in the previous paragraph, this means the cost imposed on others from driving while drunk amounts to about $10,000 per person arrested for drunk driving. This is a large amount, and provides a first order guidance to the punishment that should be imposed in some form on the drunk drivers arrested: large fines, suspended licenses, and jail terms in some cases. Such large punishments would match the damages done from drunk driving, and at the same time would encourage many persons to avoid driving while legally drunk. To show this with a little algebra, suppose that g per cent of all drunk drivers (=N) are arrested, and let that be the same for everyone- presumably it is higher for those who actually cause accidents. Let the punishment to those arrested be d per person, which is Murph''s $10,000 figure, where d=D/gN, and D is total damages from all accidents caused by drunk driving. Then the total punishment to those arrested =gNd=D, which is the right number in order to have drunk drivers pay for all the damages to others that they cause.

On incentives to drunk drivers, the expected damages per drunk driver =gd=gD/gN=D/N= damages per drunk driver=p D/pN, which is what it should be, where p is the assumed common probability that a drunk driver gets into an accident. The assumption of a probability common to all drunk drivers of causing an accident is clearly not perfectly accurate, but far better than the assumption that all persons who drink are equally likely to harm others. Morover, the size of the punishment might not be the same for all those arrested, but could depend on alcohol-blood levels, the recklessness of the driving behavior, and the severity of the accident if they had been in an accident, past offenses, and other factors that try to relate punishment to the magnitude of the "crime" committed and the degree of individual responsibility.

To my knowledge, no state in the United States imposes anything approaching such serious punishments on persons arrested for drunk driving. In fact, they are generally much too lenient, and do not treat this as the serious crime that it is. Countries like Sweden are much harsher in their punishment of persons arrested for drunk driving. Driving with a blood alcohol level exceeding only 0.2 parts per thousand may lead to prison terms of up to six months, and the driver's license is usually suspended. Driving with a blood alcohol level of over 1.5 may lead to one year of prison. My experience there and in Norway is that these deterrents work very well, and induce people who are planning on drinking any significant quantities to be careful not to drive afterwards. Several econometric articles by H.L. Votey indicate that punishments by fine, revoking of driving licenses, and imprisonment are important in explaining the lower tendency in Sweden to drive while drunk and the lower rates of accidents due to drunk driving, although some of the results are disputed by H. Lawrence Ross.

The American approach to drunk driving is surprisingly soft, often including the treatment of drunk drivers who seriously injure or kill innocent persons because of reckless driving. Given the sharp increase during the past 20 years in the severity of punishments for felonies, and the over 2 million persons in jails or prisons, this reluctance to try to cut down the disgraceful number of highway deaths due to driving while drunk is anomalous and disturbing.

Posted by Richard Posner at 05:21 PM | Comments (24) | TrackBack (0)

Drunk Driving--Posner's Comment

This topic could be thought a continuation of our last week's topic, the trans fat ban in New York City. We are again dealing with safety regulation. The case for punishing drunk drivers may seem clearer than the case for banning trans fats in restaurant meals because the externality is more pronounced and consumer competence is not in issue, but the appearance is deceptive. Becker's proposal for heavier penalties for drunk driving could be criticized as paternalistic, because it regulates an input rather than an output. If there are 1.4 million annual arrests for drunk driving, and if we assume realistically that this is only a fraction of the actual incidents of drunk driving, yet only 2,000 innocent people are killed by drunk drivers, then it follows that most drunk driving is harmless. Why then punish it with arrests and severe penalties? Why not just punish those drunk drivers who cause deaths or injuries to nonpassengers? In fact we do punish such drivers, under such rubrics as reckless homicide (if the victim dies) or reckless infliction of bodily injury. And the punishments are severe. Why punish the 99+ percent of drunk driving that is harmless? Indeed, if the penalties for reckless homicide are optimal, the implication is that the number of deaths from drunk driving, 17,000 a year, is also optimal.

This is actually a plausible inference. If there are only 2,000 nonpassenger deaths (other than that of the drunk driver himself) caused by drunk driving every year (and how many of the accidents in which a drunk driver is involved are actually caused by the drinking?), then the probability of being killed by a drunk driver is very small, and the value of life estimate that I used in my post on the trans-fat ban should be usable here as well to conduct a cost-benefit analysis of drunk driving. The probability of a drunk driver's killing someone must also be small, given the number of drunk drivers implied by the arrest statistics. Suppose the annual probability that a drunk driver will kill a nonpassenger is .001 (as it would be, given the 2,000 victim figure, if there are 2 million drunk drivers, which is a very modest extrapolation from the arrest figure, since many drunk drivers are not caught). Then the expected injury cost from drunk driving is $7,000 (.001 x $7 million). (This corresponds to Becker's $10,000 figure, which seems to me too high, as it disregards the drunk drivers who are not arrested. Notice that if only a third of drunk drivers are arrested each year, the expected-cost figure drops to $3,333.) This implies that a driver who derives at least $7,000 in utility per year from drinking while driving (more commonly, shortly before driving) is behaving optimally and should not be punished at all.

The larger issue that the drunk-driving question raises is the choice between ex ante and ex post regulation. Health inspections of restaurants and, yes, a ban on trans fats are examples of ex ante regulation. Such regulation prevents dangerous activity rather than waiting for the danger to materialize and using the legal system to punish the injurer. The tort system is an example of ex post regulation. If you drive recklessly but don't injure anybody, you have not committed a tort. Tort law comes into play only when an injury occurs. The theory is that an optimal tort penalty for the injury deters tortious conduct, not perfectly--or there would be no tort cases--but well enough.

Criminal law is a mixed bag. Crimes that result in injury are punished, usually quite severely, but much preparatory conduct--attempts and conspiracies--is punished as well, even when no harm results (the failed attempt, the abandoned conspiracy). Arrests for speeding--and for drunk driving--are examples of ex ante regulation. The economic argument ex ante regulation is that ex post regulation is often inadequate. This is obvious in the trans-fat situation--it would be impossible to figure out which victims of heart disease owed the disease, and to what extent, to which restaurants. In the case of reckless homicide, the answer is less clear. Suppose drunk driving is inefficient--the drunk driver derives less utility than the expected accident cost--and so we want to deter it by punishing the drunk driver who kills or injures a nonpassenger. Suppose the value of life is $7 million and 10 percent of the drivers are not apprehended. Then the optimal penalty would be a fine of $7,780,000 ($7 million ÷ .9). Few drivers could pay that, so the trick would be to impose an equivalent disutility on them by nonpecuniary means, such as imprisonment.

This is not to suggest that punishing drunk drivers who are arrested, the method that Becker endorses, can't achieve the correct deterrence. But punishing just the ones who kill might be more efficient--there wouldn't be as much need for policemen, there would be fewer trials and prison terms, and probably many drunk drivers are quite harmless, for it is unlikely that everyone who drives while drunk has an equal probability of causing an accident. In general, heavy punishment of fewer people is chaper than light punishment of more people.

Thus, only if ex post punishment failed to deter optimally would there be a strong case for punishing drunk drivers who are not involved in accidents with nonpassengers (assuming drunk driving is inefficient, the assumption questioned earlier in this comment)--or at least a strong case based on the simple model of rational choice that underlies my analysis. Maybe drunk drivers systematically underestimate the effect of drinking on the likelihood of an accident, or believe that they can fully compensate for the danger by driving more slowly, or exaggerate the degree to which they can hold their liquor, or exaggerate their driving skill. Maybe their drunk-driving behavior is addictive, and they do not realize, before starting to drink, that they won't be able to avoid drinking before they drive. These might be grounds for ex ante regulation--even for regulations anterior to arrest, such as stiff alcohol taxes.

Posted by Richard Posner at 05:13 PM | Comments (30) | TrackBack (0)

The Trans Fats Ban--Posner's Response to Comments

My piece provoked as I expected a number of interesting comments. Some take a strong libertarian line, which can be traced back to John Stuart Mill: government has no right to regulate private activity that does not have adverse effects on nonconsenting third parties. But I consider myself a Millian, and if I am correct that it is very difficult for people to absorb information about the dangers of trans fats, and if I am further correct that the cost of ill health from heart disease will be shifted in part through programs like Medicaid and Medicare to the as it were nonconsenting taxpayer, then the ban is Millian. I appreciate the concern that adoption of a sound regulation of restaurant meals will encourage further, less justifiable, interferences with consumer autonomy. But one can never expect government to get things just right, given the play of politics. There are always going to be silly regulations, but that is not a compelling argument for having no regulations at all. The commenters who denounce the "nanny state" do not indicate what if any regulations they approve of. Do they think there should be no inspections of restaurants by health inspectors? No regulation at all of food or drug safety by the Food and Drug Administration?

Some commenters think that people should be encouraged to study the dangers of trans fats and make their own judgments about what to eat. But people have limited time to do research on such matters. It makes sense to delegate the research to a central authority, so that instead of 300 million people trying to learn about trans fats and every other lurking menace, a handful of experts conducts the research and when it is reasonably obvious how we would react if we were informed of its results, implement the proper response. Surely our capacity to absorb information is quite limited and we must rely on the research of others for most of what we know and the knowledge of others for our protection.

Some of the comments reflect a (natural) misunderstanding of the concept of "value of life," pointing out correctly that people do not sell their lives for the calculated value. All value of life means is this: if the average person would demand $7,000 to assume a .001 (one in a thousand) risk of immediate death, there would be a net increase in social welfare if the risk could be averted at a cost of less than $7,000. Suppose 10,000 people are exposed to the risk. Then the total cost that the risk imposes is $70 million ($7,000 x 10,000), and net social welfare will be increased by a measure that eliminates the risk at a cost of less than $70 million. Another way to put this, with identical implications, is that a 1 in 1,000 risk of death will result in 10 deaths in a population of 10,000, and the $70 million loss figure amounts to valuing each life at $7 million.

Some comments take issue with the details of the cost-benefit analysis. That is fair, but notice how I scaled down the benefit figure radically in order to allow a generous margin of error, and how I excluded a major benefit--eliminating the suffering, as distinct from death from, heart disease. I doubt that any plausible adjustments could reverse my conclusion that the benefits of the ban exceed the costs.

I do think it worth emphasizing that trans fats seem exceptionally dangerous--almost in the category of poisons. The article in the New England Journal of Medicine that Professor Becker cites estimates a 6 to 19 percent reduction of what the authors call heart disease "events" from eliiminating trans fats, and the research backing it seems solid. Incidentally, I did not see in the article anything about trans fats doing more for the taste of foods than substitute oils--in fact the article discusses a Danish study that finds no quality difference.

I agree with Becker that many young people who are clogging their arteries by eating restaurant meals rich in trans fats will be saved by better cholesterol drugs that we can expect in the future. However, those drugs will doubtless be paid for in large measure by taxpayers through the Medicare and Medicaid programs. This means that the cost of trans fats will be shifted, in part at least, from those who consume them to those who do not--a classic externality, which justifies public intervention (depending on its cost and efficacy) even to Millian liberals such as myself.

Posted by Richard Posner at 10:15 AM | Comments (16) | TrackBack (0)

December 21, 2006

Comment on the New York Ban on Trans Fats--BECKER

Posner gives an excellent analysis of the possible risks from consuming too much trans fats, but I believe he reaches the wrong conclusion about whether the NY ban of trans fats in restaurants is warranted. In my view this ban is a further example of the tendency for local and federal government in the United States and other countries to act as nanny states. They presume with insufficient evidence that consumers are typically too ignorant to make decisions in their own interests, particularly regarding health, but in other areas as well.

Posner provides a well-presented case for what he calls the "Chicago" argument for why such an ordinance as New York's is unnecessary and undesirable. Perhaps it is no surprise to many readers that I find his argument unconvincing. He rejects these arguments because of his belief about consumer ignorance of trans fats. Posner does not mainly argue that restaurant-goers do not know which restaurants use trans fats, or even that they may be bad for you, or that restaurants possess private information not known to consumers about the adverse effects of trans fats.

His main concern is what he considers to be the great difficulty consumers have in "absorbing" information about trans fats. Posner gives a few reasons why he believes absorbing trans fat information is particularly difficult: that there is still considerable ignorance about the health risks of trans-fats, that consumers do not know their total intake of these fats, and that consumers are unaware that alternatives are often claimed to be more or less equally tasty. In short, according to Posner, consumers do not absorb the alleged fact that the benefits of avoiding or cutting down trans fats far exceed their costs.

As far as I can judge, the evidence is rather strong that trans fats contribute to heart disease, but the degree of harm from different levels of these fats is still to be determined. The best summary of the scientific evidence that I know of is "Trans Fatty Acids and Cardiovascular Disease" in the April 2006 issue of the New England Journal of Medicine. The authors carefully review many studies, including several with quite small random samples. The estimated mean effects of common levels of trans fats on cardiovascular disease are typically large, but one of the best data sets that they analyze cannot reject (at the 95 percent confidence interval) the conclusion that there is either no effect of trans fats on this diseunase, or only a small one. So I have only modest confidence from the studies analyzed that typical trans fats consumption levels have large effects on cardiovascular disease.

To be sure, evidence cannot disprove Posner's claim about consumer ignorance of, and inability to process, information about trans fats. However, the fact that about half of all NYC restaurants did not use trans fats even prior to passing this ordinance--although these may be the restaurants where it was easier to eliminate trans fats-- that many foods sold in ordinary supermarkets and other groceries have become trans fat free in a short time period, that we do not know much about whether consumers who eat high trans fat foods in restaurants eat little of these fats at home, that young persons are the primary consumers of heavy trans fat diets, and other unknown and relevant variables should make us skeptical of the ignorance argument. Indeed, it is remarkable how fast the food industry and restaurants have responded to the greater evidence during the past few years that trans fats in sufficient quantities contribute to heart disease. The article I cited earlier appeared only about 8 months ago.

There is evidence in other areas that consumers respond quickly to health news. For example, studies have documented the rapid reduction in salt intake and growth of low salt foods in response to evidence in the 1980's--now considered exaggerated--that high salt levels have been an important source of high blood pressure.

The prominence of young persons among the big consumers of trans fats, cholesterol, and calories in foods like French fries and big Macs may not be due to ignorance. Rather, they may have an unarticulated awareness that when they reach older ages where heart disease and other diseases are more common, drugs are likely to have been developed that offset the negative consequences of what appears now to be unhealthy diets. Lipitor and similar drugs have greatly reduced the consequences of high levels of "bad" cholesterol, and drug companies believe they will pretty soon have drugs that will raise levels of "good" cholesterol. So even if prolonged consumption of trans-fats has sizable negative health consequences in today's knowledge environment, that is likely to change many years down the road when today's youth are at risk for heart disease. Taxpayers may pay for a good share of their future expenditure on such drugs, but that is a wholly different and more complicated issue

On Posner's assumptions, one might expect either that restaurants would be pressured to eliminate trans fats, or that eliminating trans fats would cause consumers to be worse off. Posner's first order estimate of the benefits from eliminating trans fats in New York City restaurants is $3.5 billion, and he takes $60 million as a generous estimate of the cost to restaurants from becoming trans fat free. Then the cost of trans fat consumption would exceed the expected benefits from lower prices in restaurants with trans fats, even for quite but not completely ignorant consumers who attach no more than a 2% chance to the likelihood that these fats have serious consequences for their health (0.02 x $6.5 billion exceeds $100 million). These largely ignorant consumers too would only go to restaurants that are trans fat free; hence other restaurants would have to adjust or go out of business.

Posner also gives a kind of lower bound estimate of the benefits as $100 million, and also suggests a much lower cost to restaurants of becoming trans fat free--I take this as $30 million. With a small taste benefit from the use of trans fats-- the New England Medicine Journal article I cited earlier does admit positive effect of trans fats on "palatability"-- the total cost of the ban would equal or exceed total benefits. For example, suppose 1 million persons on average eat 200 meals per year in NYC restaurants with trans fats. If they value the taste of trans fats in their foods only by 35 cents per meal, the taste cost to consumers of the ban would be $70 million per year. Then the total cost of the ban would equal the benefits from the ban.

Does one really want to go down the road of a ban on trans fats when the net gains to consumers are dubious, and probably negative, and when reversing directions is politically difficult? As an example of the difficulty in adapting politically, new evidence indicates that requiring child car seats may increase their risk of injury in accidents, yet there is no movement to reverse these laws.

These and related calculations suggest that while city and other governments should continue to help provide the best information available about the effects of trans fats and other foods on health, market forces of supply and demand should determine the fats consumed. Otherwise, we encourage further attempts to legislate fat and calorie content of permissible foods not only in restaurants but also in foods consumed at home, and absurdities such as the new Italian ordinance that models cannot be too slim because it sets a bad weight example for young women. There are just too many opportunities for ill-considered attempts to override on limited evidence individual judgments about what they want to consume.

Posted by Richard Posner at 11:06 AM | Comments (21) | TrackBack (0)

December 17, 2006

The New York City Ban on Trans Fats--Posner

New York City's Board of Health has decided to ban trans fats in food sold in restaurants (also in food sold by catering and meal services), the ban to become fully effective in mid-2008. The ban raises a fundamental issue of economic policy.

Trans fats are largely synthetic fats widely used in fried foods and baked goods. There is substantial medical evidence that they are significant contributors to heart disease (perhaps increasing the incidence of heart disease by as much as 6 percent) because they both raise the cholesterol that is bad for you (LDL) and lower the cholesterol that helps to protect your arteries against the effects of the bad cholesterol (HDL). About half of New York City's 20,000 restaurants use trans fats in their cooking; and roughly a third of the caloric intake of New Yorkers comes from restaurant meals.

A strict Chicago School economic analysis of the ban would deem it inefficient. The restaurant industry in New York is highly competitive, and so if consumers are willing to pay a higher price for meals that do not contain trans fats, the industry will oblige them; to force them to shell out more money, rather than leaving it to their decision, is thus paternalistic, indeed gratuitous. Restaurants catering to health-conscious eaters will advertise that they do not use any trans fats in their meal preparations, or will state on the menu the amount of trans fats in each item. Other restaurants will cater to diners who prefer a cheaper meal to a heathier one. The ban thus forces people who want to eat in restaurants to pay higher prices even if they would prefer to pay less and take the risk of an increased likelihood of heart disease. Some of these would be people who eat in restaurants rarely, and avoid trans fats when they cook at home, so that the health risk to them of a restaurant meal containing trans fats is small. Others would be people who disbelieve the medical opinion--and such opinion often is wrong--or think that trans fats improve the taste of food or that the ban is the result of political pressure from producers of substitutes for trans fats, such as corn oil, or from the restaurants that have voluntarily abandoned the use of trans fats and don't want to be put at a competitive disadvantage by restaurants that have lower costs because they do use trans fats. Moreover, the enforcement of the ban will increase the costs of New York City government, resulting in higher taxes on an already heavily taxed population. Since half the restaurants in New York City continue to use trans fats, this shows that a majority of consumers would not support the ban.

What is missing in this analysis is a cost that, ironically, a great Chicago economist, George Stigler, did more than any other economist to make a part of mainstream economic analysis: the cost of information. It might seem, however, that the cost of informing consumers about trans fats would be trivial--a restaurant would tell its customers whether or not it used trans fats, if that is what they're interested in, and if it lied it would invite class action suits for fraud. But there is a crucial difference between the cost of disseminating information and the cost of absorbing it. If gasoline stations in the same neighborhood charge slightly different prices for the same grade of gasoline, the reason may be that the price difference is smaller than the time (and gasoline!) cost to the consumer of driving to the different stations to see which has the lowest price. But if the consumer did bother to conduct that search, he would have no difficulty in understanding the information that he obtained. It is different with trans fats. Many people have never heard of them; many who have don't know that they are (very probably) harmful to health; and, above all, almost no one outside the medical and nutrition communities knows how harmful trans fats are, and in what quantity. That is, they do not know what a dangerous level of trans fats is, what their own consumption of trans fats is relative to that level, and how much their restaurant-going increases the total amount of trans fats that they consume. They have, in short, no idea of the benefit of avoiding trans fats in restaurants. And except for a few hypochondriacs and people who already have heart disease, no one wants his restaurant experience poisoned by having to read a menu that lists beside each item the number of grams of trans fats it contains and indicates (perhaps with a skull and crossbones) the danger created by consuming the item. Actually the danger would be impossible to explain to diners, because it would depend on the diner's average daily consumption of trans fats, which neither the diner nor the restaurant knows.

In such a situation, even those of us who distrust government regulation of the economy should be open to the possibility that the ban on trans fats would produce a net improvement in the welfare of New Yorkers by satisfying a preference that most of them would have if the cost of absorbing information about the good in question were not prohibitive.

A very crude cost-benefit analysis suggests that this possibility is real. Proponents of the ban estimate that it will reduce the annual number of heart attack deaths in New York City by 500. That can be taken as an upper-bound estimate. It seems high to me, as the total annual number of deaths from heart disease in New York City is only 25,000, and it seems unlikely that removing trans fats from restaurant meals alone would cause a 2 percent drop in the heart disease death rate. If that 500 figure holds up, then if one uses the consensus economic estimate of the value of an American life (an estimate based on behavior toward risk, behavior that reveals the cost that the average American is willing to pay to reduce the risk of death), which is $7 million, a saving of 500 lives confers a benefit of $3.5 billion. (This figure is too high, but I will adjust it later.) On the cost side, although the restaurant industry is up in arms about the ban, and although the ban's proponents cannot be correct that the industry would incur no cost at all to substitute other fats for trans fats--for if there were no cost, the substitution would have been made years ago, when trans fats began to be implicated in heart disease--I have not seen evidence that the cost would be great. Remember that half the restaurants in New York City have already phased out trans fats, without anyone noticing a big jump in restaurant prices. And the manufacturing cost of the substitutes for trans fats does not appear to be higher--the only advantage of trans fats is that they increase the shelf life of foods somewhat. This is important to restaurants, by enabling them to economize on spoilage costs, but surely not critical.

The New York City restaurant industry has annual sales of $9.5 billion. I do not know what percentage of those sales is accounted for by the restaurants that have already phased out trans fats, so let me assume, conservatively, that the restaurants that have not done so account for $6 billion of the $9.5 billion. Suppose the ban would increase their costs by 1 percent--which seems too high, however, since the major costs of a restaurant are wages, which would be unaffected, and the cost of food, which would be affected only slightly (the shorter the shelf life, the more food must be bought relative to the amount that can be sold). Apparently the substitutes for trans fats do not affect the taste of food.

One percent of $6 billion is $60 million. My $3.5 billion benefit figure is obviously much greater than my $60 million cost figure, and probably it is too great. Many of the 500 deaths may be of people who have advanced heart disease and thus a truncated life expectancy and impaired value of life, quite apart from trans fats. Most of the deaths are of elderly people (only about 12 percent of deaths from heart disease in New York City are of people below the age of 65), whose value of life may be below average, though most elderly people cling pretty tenaciously to life, consistent with studies that find that elderly people are on average actually happier than young people. I suspect too that the figure of 500 deaths due to trans fats in restaurant food is too high. But suppose I slash it to 100, and assume that the average value of life in this group is only $1 million; this still yields a benefit figure, $100 million, that comfortably exceeds the cost figure, comfortably enough to cover the cost of enforcing the ban. Moreover, the benefit figure excludes the benefit to people who have heart disease but do not die of it (or have not yet died of it). Heart disease causes suffering even when it does not kill the sufferer.

I have also excluded from the benefit figure any external benefit, that is, a benefit to people who do not have heart disease (or perhaps never eat in restaurants), but subsidize the medical expenses of those who do, through Medicare, Medicaid, and risk pooling by private insurance companies. I exclude it because I'm not sure it's a net external benefit. Even a total elimination of heart disease might not significantly reduce aggregate expenditures on health care, because it would result in an increase in illness and death caused by other diseases, such as cancer. (Diseases in effect compete with each other; if a person is saved from one disease, this increases the "market" for another disease.) It would also increase the average age of the population, which might result in greater transfer payments and hence heavier taxes.

My cost-benefit analysis is, necessarily, highly tentative. However, it inclines me to a sympathetic view of the trans-fats ban. I anticipate strong opposition from libertarians.

Professor Becker is traveling, and as a result will not be able to post his comment on the trans-fats issue until mid-week.

Posted by Richard Posner at 07:22 PM | Comments (58) | TrackBack (1)

December 10, 2006

Should We Worry about the Rising Inequality in Income and Wealth?--Posner

Economic inequality is growing in the United States and other developed countries, and also in rapidly developing countries, notably China and India. Becker and I blogged about economic inequality on April 23, almost eight months ago, but indications that inequality is surging at the very top of the income distribution merits a further look, as does the recent study of world income inequality that is the focus of Becker's comment. Recent reports in the media document phenomenal returns to hedge-fund operators, private-equity investors, and other finance specialists, astronomical CEO salaries, enormous returns to software entrepreneurs, a stampede of lawyers and doctors to Wall Street, $200,000 law-firm signing bonuses for 27-year-olds who have clerked for the Supreme Court, enormous philanthropic gifts ($100 million gifts to colleges and universities by alumni are no longer unusual), and soaring demand for products bought only by superwealthy people, such as full-sized passsenger airliners converted at great expense to private airplanes, $40 million homes, paintings costing tens of millions of dollars, and automobiles costing several hundred thousand dollars. There are now almost 800 billionaires in the United States and countless millionaires, and one out of every 500 U.S. households have an annual income of at least $1 million.

Now this is to look only at the top of the income distribution. It is not to consider the income distribution as a whole, let alone poverty. In the more conventional focus on earnings by quintiles, one sees little change in recent years. But since 1980 the percentage of total personal income going to the top 1 percent of earners has risen from 8 percent to 16 percent. It is the top of the distribution on which I’ll be focusing.

What are the causes, and what are the effects, of this trend in the income (and of course wealth) of the highest-earning segment of the distribution? Part of it is reduced marginal tax rates, because high marginal tax rates discourage risk-taking. Consider two individuals: one is a salaried worker with an annual income of $100,000 and good job security, and the other is an entrepreneur with a 10 percent chance of earning $1 million in a given year and a 90 percent chance of earning nothing that year. Their average annual incomes are the same, but a highly progressive tax will make the entrepreneur's expected after-tax income much lower than the salaried worker's. Many of the people at the top of the income distribution are risk takers who turned out to be lucky; the unlucky risk takers fell into a lower part of the distribution. It is rich people as a class who are growing relatively richer, not necessarily individual rich persons.

Marginal income tax rates on the wealthy have not declined much in recent years, however; but the income tax rate cuts since 2001 have favored the wealthy. Another and more important factor in the recent wealth surge is a growing return to high IQs; outstanding success in highly complex fields such as finance and software is highly correlated with high levels of intelligence. And increased size of markets as a consequence of increased international trade provides greater returns to successful innovations.

I am more interested in the effects of the increasing incomes of the rich--though one might ask: are there any effects, other than those that are perfectly benign? Even though the federal income tax is increasingly a proportional rather than a progressive tax (though it is still somewhat progressive--the average tax rate for the top 1 percent of earners--24 percent--is roughly twice that for all federal taxpayers), the more skewed the distribution of income, the higher the proportion of taxes that is paid by the rich. And in fact the top 1 percent of earners pay more than one-third of all federal income taxes today, which is a boon to the rest of the population. Very wealthy people also provide patronage for the arts, funds for high-risk ventures (actually, art is one of those ventures), and money for philanthropic enterprises. And there is very little envy of the rich on the part of other Americans, in part perhaps because of the much-derided but very real "trickle down" effect. This is due partly to philanthropy but more to the enormous consumer surplus generated by products such as Microsoft Windows, the brainchild of persons who are now billionaires. It is also due in part to the fact that, given diminishing marginal utility of income, income increases at lower levels in the income hierarchy increase personal welfare more than increases at higher levels do. Moreover, real wealth is a function of improvements in the quality and variety of products and services, and these improvements benefit all classes of the population.

All this is not to say that the existence of a stratum of exceedingly wealthy people is altogether to the good. There are three potentially bad consequences for our society:

1. The existence of enormous financial returns to IQ deflects high-IQ people from entering careers in which the social returns may greatly exceed the private returns: government service, basic science, and teaching. The quality of both the civil service and the public schools appears to be falling.

2. Massive philanthropy directed abroad can interfere with a coherent foreign policy. Major philanthropies such as the Gates Foundation do not coordinate their spending decisions with U.S. national goals.

3. Huge personal wealth may play a disproportionate role in political competition. Personal wealth confers an enormous advantage on a candidate, but also permits a person who does not want to be a candidate to exert an influence on candidates and policies, as in the case of Richard Mellon Scaife and George Soros. The fact that a person is a highly intelligent speculator, such as Soros, is no guarantor of political insight or wisdom; and the fact that a person has inherited a vast fortune, such as Scaife, is no guarantor of ability of any sort. More important, however, heavy campaign spending by the wealthy force nonwealthy candidates to spend increased time and effort on fund raising, which makes a political career less attractive to nonwealthy persons and makes nonwealthy politicians less well informed about policy and more dependent on interest groups than if campaign spending were lower.

Are these consequences serious enough to warrant remedial action? I think not, except that they may provide some grounds for wanting to retain, perhaps even to strengthen, the estate tax. The disincentive effects of taxing estates are much less than those of income taxation.

Posted by Richard Posner at 08:08 PM | Comments (76) | TrackBack (0)

World inequality--BECKER

A recent UN report on world inequality of wealth attracted widespread media coverage. The Report finds that the richest 2 percent of adults own half the world's assets, which clearly indicates a very skewed world distribution of assets. When put into context, however, the inequality in wealth appropriately defined is not nearly as large as the report might suggest, and wealth inequality in the world has almost surely become smaller over time, not larger as some in the media reported.

The UN Report was prepared by very good economists, and does a commendable job in what it tries to do. That is to measure the value in 2000 of the world distribution of physical and financial assets, net of any debt--this is usually called net worth. The authors had direct wealth data for countries that have more than half the world's population, and an even larger share of its wealth, and they infer wealth in countries missing from their data. Their results do show both considerable inequality in assets, and a long tail at the upper end of asset holdings--called skewness in statistical language. The report does not even attempt to show what happened to world inequality over time, even though some of the media reports that it demonstrates that inequality greatly increased in recent decades.

World inequality in wealth is to a large extent determined by inequality across nations. Comprehensive data on what happened to the distribution of assets in the world over time are not available, but the income data show a sizeable decline, not increase, in world income inequality since 1980. This is mainly but by no means entirely due to the remarkable rate of growth in incomes in two quite poor nations, China and India, which contain about 37 percent of the world's population. Studies also show that both the number of and the fraction of the world's population who live on either $1 or $2 of income per day has fallen quite sharply during the past 25 years, again partly due to China's and India's growth.

Earnings, not incomes from physical or financial capital, are the predominant determinant of incomes for the vast majority of persons in the world in rich as well as poor nations. Put differently, human capital, not assets, is the most important form in which people hold their wealth. Human capital is itself determined by education, training, nutrition, and other forms of health investment. Human capital wealth that determines earnings is about three times as large as wealth in the form of physical assets of all types. Such wealth from human capital is much more equally distributed and is much less skewed in its distribution than are assets.

Even earnings and money incomes exclude the contribution of better health to people's "real" income, defined as the incomes that produce wellbeing. World inequality in health among countries has declined greatly since 1960 when measured by life expectancy at various ages, even thought the AIDS epidemic in Africa has largely eliminated the gains in life expectancy in that continent after 1970. Inequality in "full" income among countries has declined much more rapidly than inequality in per capita GDP since 1960, where the growth in full income is defined as the sum of the growth in GDP plus the value placed by individuals in different countries on the improvements in their life expectancy--for definitions and various results on world inequality, see the article by Becker, Philipson, and Soares in the American Economic Review, March 2005.

Income inequality within the United States and many other countries has indeed grown a lot since 1980, in part due to much greater returns on education and other human capital, and in part due the somewhat related growth in incomes at the upper end that Posner discusses. This widening inequality appears to be largely due to technological and other changes, such as globalization, that have increased returns to persons with more education and other human capital, including high-end abilities. However, inequality in life expectancy has fallen within most of the developed countries as a result of more equal access to health care---in the U.S. due mainly to the growth since 1970 of Medicare and Medicaid. So while inequality in full income probably also grew, and perhaps substantially, it grew more slowly than did inequality in earnings and incomes on assets.

My discussion should not be construed as complacency about the inequality found within countries like the United States, or among countries. For example, America should do a much better job of providing a way for able young persons from more disadvantaged backgrounds to finish high school and go to college--the past 25 years have been devastating for persons with little education. This is not an easy problem, but head start and related early childhood programs seem to be effective, legalization of drugs would reduce the temptation for inner city youth to drop out of school to sell drugs, and I also support greater competition among schools. Unlike Posner, I do not support the estate tax because it brings in little tax revenue relative to the large costs involved in legally avoiding this tax--through trusts and the like-- and also in illegally evading this tax (see my more extended discussion of the estate tax in my post on May 15, 2005).

Many other poor countries should be following China and India's example and open up their economies to competition and world trade, so that they too can grow faster. Similarly, the rich countries have to reduce their restrictions on imports of goods produced by developing countries, and by countries that want to be developing.

To conclude, it is worth remembering that world inequality in "real" incomes has declined, not increased, a lot during the past 25 years. Much more can be done to equalize opportunities both within and between nations, yet it is unwise to concentrate attention primarily on inequality in assets. This is one component of inequality, but it is by no means the major determinant of inequality in wellbeing.

Posted by Richard Posner at 08:01 PM | Comments (47) | TrackBack (0)

December 03, 2006

Is Student Debt Too High?--BECKER

Some members of the new Congress are claiming that the debt of students to finance their college education is too high, and that more generous federally funded student grants should be available. Reforms of the college loan program are desirable, but when placed in a proper perspective, college students generally receive an excellent deal on their student loans.

Over 60 per cent of students who finished in 2003-04 college or graduate studies with a Certificate or a Degree had taken out a loan. This percent was highest at 70 to 80 per cent for students who received a professional degree, was also high for students who attended for-profit colleges, while the percent was lowest for students who graduated from two-year public institutions. This difference by type of college is partly explained by the fact that the fraction taking loans is much larger for students from families with low incomes since poorer students are more likely to go to for-profit colleges.

Even after adjusting for inflation, the average student loan increased by about 50% in the decade prior to 2004. The average size of the loan for those with loans was about $15,000 for graduates in 2003-04 with Bachelor's Degrees, it was much lower naturally for those who received certificates or degrees after two years of college, and was substantially higher for those with Masters and other post-graduate degrees. Perhaps surprisingly, the average loan did not vary much between for-profit, other private, and public colleges.

Although the debt of graduating students is not a minor burden, it is not usually a major one either, if the size of loans is related to benefits from college as well as to financial and other costs. Costs measured by tuition did increase at a rapid rate since 1980. According to calculations by Pablo Pena at the University of Chicago, tuition at private non-profit four-year colleges rose 140 per cent in real terms from 1980 to 2005, which means an annual rate of increase of over 3.5 per cent. Public schools charge a lot less but they too had rather rapid increases in tuition. Students who are from poor families have the most trouble paying for college, and obviously that burden gets heavier when tuition is higher. This helps explain the increase over time in both the fraction of students who take out loans, and the size of the typical loan.

On the other side of the ledger, higher tuition over time was related to sharply higher financial benefits from a college education. The typical college graduate earned per hour about 50 per cent more than the typical high school graduate in 1980, and the gap is now about 95 per cent. Earnings of graduates with a professional degree or other post-graduate education grew even faster over time than did earnings of college graduates.

The net benefits from graduating from college are determined by the higher earnings college graduates would receive over their lifetime compared to what they would receive if they started working after high school, minus tuition and any other costs of a college education. The data I have just given show that the increase in the earning advantage from a college education during the past couple of decades was far greater than the increase in tuition, so that average rates of return on a college education--a measure of the net benefit--increased greatly. In addition, various non-monetary benefits of a college education also grew over time. Probably the two most important of these benefits are that higher education increases health through the improvements it induces in lifestyles and medical care, and higher education also improves investments in the learning and behavior of one’s children.

How big a burden is the average loan for college graduates who take loans, which is about $15,000 to $20,000? The net present value of the earnings of typical graduates of four-year colleges over their lifetimes after discounting future earnings and subtracting out tuition and other costs has been shown to be over $300,000 more than what high school graduates earn. Even a $20,000 student loan debt is small relative to such a large benefit. Put differently, if the only way to go to college would be to borrow $20,000 under a student loan program at the prevailing 7 per cent interest rate on these loans, the returns from college to a typical graduate would be big enough to allow the borrower to pay off the loan and have a lot left over.

Of course, such loans would be a much greater burden for students who only received two years of college, perhaps because they dropped out of a four-year program, or because they received an Associate Degree. Such students do not earn nearly as much as graduates of four-year colleges. However, the burden of a fixed amount borrowed is not the right comparison since as I indicated, graduates of two year programs borrow much less than do graduates of four-year programs. In reality, the burden of what graduates of two year programs typically borrow is not much greater compared to their discounted earnings than the rather minor burden of the actual loans taken by graduates of four-year colleges.

Within any category of graduates, earnings vary considerably by type of job-- teachers and clergymen earn a lot less than investment bankers--and by degree of success within jobs. Fixed interest loans are not the best way to borrow when loans are used for risky activities. Returns on higher education are rather risky, even after adjusting for how they co-vary with returns on assets. Businesses often borrow with the equivalent of equity to finance start-ups and other risky activities, where the equity pays off well if the venture is successful, and pays little if the venture fails.

This suggests that student loans should not have fixed interest rates that require a fixed amount to be repaid per $1.000 borrowed, but rather should have the equivalent of an "equity" repayment system. That would mean that persons who earn very little repay little, while those who earn a lot repay a lot (per $1,000 borrowed). Requiring individuals who are repaying student loans to submit their income tax statements each year, so that lenders could document what the borrowers earned, could enforce such an income-contingent repayment system.

The United States already has a small student loan program that allows repayments to be conditional on the incomes of borrowers. But a system with both fixed interest loans and income-contingent loans has a "moral hazard" problem. Students who expect to go into well-paying jobs would tend to borrow at fixed interest rates since that would be cheaper to them than repayments that rise with higher earning. A possible reform of the federal program that would reduce this moral hazard would be to shift entirely to an income-contingent system, where persons with student loans who earn little would repay relatively little, and those who earn a lot would repay much more.

A full income-contingent loan program would not be without its own problems since it would attract students who expect to go into low- paying occupations, and repel students who expect to higher earnings. In addition, such a program would "tax" high earnings that would further discourage effort by high earners, and further encourage them to try to hide incomes. But it might work better than either the present largely fixed interest system, or a dual system that allowed both fixed interest loans and income-contingent loans, with the choice among these systems determined by students.

Posted by Richard Posner at 09:51 PM | Comments (37) | TrackBack (0)

Student Loans--Posner's Comment

Generally, it is more efficient both socially and privately for the consumer, in this case the student, to pay the full cost of the goods and services that he buys than for the government to pick up any part of the tab. A student admitted to an elite college like Harvard and Yale has high expected lifetime earnings, and it seems absurd that the federal taxpayer should be required to defray a part of the cost of his education. This is not a point about distributive justice, for nowadays most federal income tax is paid by high-income individuals. It is a point about the inefficiency of using the federal tax and spending power to subsidize purchases by affluent (as measured by expected earnings over the recipient's lifetime) consumers. The inefficiency lies not only in the transaction costs associated with the subsidy (including lobbying expenses), but also and more importantly in distorting the allocation of resources. Suppose that for some marginal student the expected return from a college education, net of tuition and opportunity cost (the forgone income from working if the student attends college instead), is negative, but turns positive if his tuition expense is subsidized; then the subsidy is inducing a waste of resources.

This would be obvious if the subsidy were for a course in automobile repair, but maybe there is something special about college or university education that distinguishes it from other services, including other educational services. There are two arguments. One is that higher education (lower also, presumably) confers social benefits (that is, benefits not captured by the student), whether by making people more informed voters, or by making them more productive workers (assuming they cannot capture their entire contribution to social output in their wage), or by reducing subsidized health costs by increasing health (Becker notes that educated people are healthier than uneducated people).

This is not a good argument for a subsidy because it does not appear that many persons who would benefit from a college education fail to obtain one. As Becker points out, the private returns (higher earnings) from a college degree are very great and a student can borrow to finance the tuition and other costs of the degree. It seems unlikely, though it is not impossible, that kids who would not personally benefit from college nevertheless would, if paid to go to college, confer the social benefits of a college education that the students who do benefit personally might be thought to confer.

But the points I have made so far really argue just against increasing the existing subsidies for college education, rather than against any subsidies. College education is already heavily subsidized, notably in the case of state and city colleges, where the taxpayer picks up a big share of the cost; but private colleges receive various tax breaks, so they are subsidized too. (I would not call alumni donations "subsidies," however, since they are voluntary and give value to the donor.) Since a worker usually cannot recapture in his earnings the full effect of his labor on output (because he produces some consumer as well as producer surplus), and college increases the productivity of those students who are intelligent enough to benefit from a college education, there is an argument for making college affordable by any qualified applicant. However, it is unclear to me whether this requires any subsidies; all that is required is that the boost in expected earnings from attending college exceed the cost of the loans, or other costs, that the student must incur for college to be a rumerative choice. For then the student will be motivated to attend college even though his doing so will produce social as well as private benefits. All that is important from the motivational standpoint is that the private benefits exceed the private costs.

The second argument for subsidizing higher education is that its high cost nowadays, which for students who must borrow to pay tuition and living expenses forces them to go into debt, deflects students from nonremunerative jobs, such as (in the case of debt-written law students) public interest legal practice, or public school teaching, that (especially teaching) may confer substantial social benefits. (I doubt that public interest law practice does.) The students have too much debt to be able to pay it off without taking a high-paying job. However, a student loan subsidy is a clumsy device for channeling students into employment that is underpaid from a social standpoint, since every student gets the subsidy but only a handful are induced by it to enter the desired channel. It would be more efficient to raise the pay for the jobs that are thought to confer social benefits. A loan-forgiveness program, where forgiveness is conditioned on taking one of the favored jobs, is better tailored to the end of encouraging students to take such jobs than a loan subsidy; it operates to raise the full income of the job.

To repeat an earlier point, which tends to be neglected in discussions of the student-loan issue, if I am right that very few persons who could benefit from a college education are deterred by its cost, the main effect of increasing the subsidy will be to attract applicants who would not benefit if they weren't being "paid" to attend college. That would be a misallocation of resources.

I conclude that the case--for which I gather there will be support in the new Congress--for increasing the student-loan subsidy by having the federal government subsidize a larger part of the interest on the loan is a weak one.

Posted by Richard Posner at 09:42 PM | Comments (35) | TrackBack (0)

eXTReMe Tracker

361 entries | 8676 comments