Gary Becker

Gary Becker

Gary S. Becker, who won the Nobel Memorial Prize for Economic Science in 1992, is the Rose-Marie and Jack R. Anderson Senior Fellow at the Hoover Institution and University Professor of Economics and Sociology at the University of Chicago. He is an expert in human capital, economics of the family, and economic analysis of crime, discrimination, and population. His current research focuses on habits and addictions, formation of preferences, human capital, and population growth. He is a featured monthly columnist for Business Week magazine and is one of the initial fellows of the Society of Labor Economists. In addition to being a Nobel laureate, Becker is a recipient of the 2007 Presidential Medal of Freedom.

Suicide and its Assistance

Let me state at the outset that I believe a free society should allow the right to end one’s life through suicide. A suicide decision is not made lightly since the great majority of people cling to life even under the most dreadful circumstances. Only people who feel quite hopeless about their future seriously contemplate suicide.

Rational forward–looking persons with good information about their future circumstances would commit suicide only when convinced that they would be worse off by continuing to live. David Hume said (in his Essays on Suicide and the Immortality of the Soul) “That suicide may often be consistent with interest and with our duty to ourselves no one can question, who allows that age, sickness, or misfortune may render life a burden, and make it worse than annihilation.” Schopenhauer was also confident about the rationality of suicide, “It will generally be found that, as soon as the terrors of life outweigh the terrors of death, a man will put an end to his life” (Parerga and Paralipomena).

Although I support the right to suicide, ideally it is best to have a cooling off period to make sure that a suicide is not attempted in a moment of great agitation that will pass before long. For example, a teenage boy may hang himself because he is bluntly rejected by his girl friend. If his hanging were prevented, he would likely have realized in a few months that he will be attracted to other girls as much or more than to the one who rejected him. He would be ashamed that he was so upset by her rejection.

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Wealth and Income Taxes on the Rich

We are resuming our weekly entries. Sorry for any inconvenience we caused.

The Occupy Wall Street movement has not expressed clear goals, but it does want higher taxes on the “rich”. President Obama agreed in his State of the Union address, and proposed that the rich-in his case, anyone with an annual income of at least $1 million- pay no less than 30% of their income in federal taxes. Others have proposed to add annual taxes on household wealth, in addition to taxes on income. The fact is that Obama’s tax goal is already being met by the complicated American tax code, while even a small wealth tax would discourage savings and create other problems.

According to a 2010 study by the Congressional Budget Office, the effective federal tax rate on the top 1 percent of households has already been about 30%. This might seem to be a misprint since very wealthy persons like Warren Buffet and Mitt Romney report that they pay only about 15% of their income in taxes. However, much of their incomes come from investments that are first taxed at the corporate tax rate of 35%, and then the after-corporate tax income is taxed again when paid out as corporate dividends, or when capital gains are realized.

According to the same CBO study, federal taxes on the middle classes comprise on average only about 15% of their incomes, This disparity in tax rates indicates that the American tax system is already quite progressive when corporate income taxes are combined with personal income and capital gains taxes. To be sure, it is inefficient to have such high tax rates on corporate incomes. Eliminating the corporate income tax, and then taxing personal incomes, capital gains, and dividends at the same rate would go a long way to both simplifying the tax code and to improving its efficiency.

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My discussion of this important subject will elaborate answers to the following questions:

  1. Does imprisonment reduce crime? Yes.
  2. Do many crimes cause considerable harm and hardships to victims? Yes.
  3. Does America imprison too many people?  In light of my answers to 1) and 2) you might expect my answer to this question to be “no”, but it is a strong “yes”.

Imprisonment reduces crimes against the general public if only because of the incapacitation effect; that is, person in prison cannot commit crimes against the public-they can and do commit many crimes against other prisoners. For certain crimes, imprisonment also has a deterrent effect, so that potential offenders are deterred from committing crimes by the prospects of prison terms, especially when the probability of apprehension is not negligible.

This conclusion does not deny that imprisonment raises the likelihood that some prisoners will commit crimes when they are released because their skills at legal employment eroded while in prisons, or they learned in prison how to be better criminals, or they become blacklisted for certain jobs, or for other reasons. Nevertheless, Levitt’s study cited by Posner and other studies find that on balance imprisonment reduces crime. The main disagreement is over whether the whole effect of imprisonment on crimes comes from the incapacitation effect, or whether some is also due to deterrence. I believe deterrence is also at work.

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The Euro Crisis and Euro Bonds

After the financial crisis erupted in 2008, continental Europe on the whole appeared to be in better shape than the US. The main reason was that the big EU banks held smaller amounts of questionable mortgage-backed securities than did American (and British) banks. The housing markets in Germany, France, Italy, and most other member countries-Spain and Ireland are two exceptions- had not boomed as much as the American and British markets.

Unfortunately, the apparent more solid position of EU banks has turned out to be an illusion because these banks held large amounts of euro-denominated sovereign debt of Greece, Portugal, Italy, and other economically weak members of the EU. The presumption of EU banks in holding so much sovereign debt of weak members was that the strong members would not allow defaults on any sovereign debts issued in Euros. This same presumption led the now bankrupt American fund, MF Global Holdings, to bet billions of dollars on the expectation that sovereign debt of all members of the euro-zone would be paid off in full.

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The Occupy Wall Street Movement

Will the “Occupy” movement develop into a significant political force? I am doubtful: the movement is already losing supporters in most places where it has been active. Cold weather will accelerate the decline. The movement is losing ground not because the issues it raises are unimportant, but rather because the great majority of Americans and those in other countries with Occupy groups do not sympathize with most of the people doing the occupying.

We discussed the unemployment situation in the US last week, and reform of banks in several previous posts, so I concentrate my comments on the inequality issues raised by occupiers. American inequality in the distribution of incomes, and inequality in many other Western nations, has grown a lot since the late 1970s. This growth can be separated into the growth in earnings inequality across education and other skill classes, and the growth in income at the very top of the income distribution. I start with the inequality by skill since that is what most closely affects the vast majority of people.

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The persistently high unemployment rate in the United States during the Great Recession has led to claims that much of American unemployment is “structural”. According to this view, the demand for workers by companies is insufficient to employ all unemployed workers because there is a mismatch between the skills possessed by many American workers and the skills required by companies. The structural advocates believe the skills demanded by companies tend to exceed or otherwise be different from the skills possessed by many unemployed workers. As a result, so goes the argument, these unemployed workers cannot find jobs and remain unemployed for a long time.

Although I will argue that not much of American unemployment is “structural” or due to such a mismatch, the structural theory is on the surface supported by the large number of long-term unemployed, the most disturbing feature of American unemployment during the Great Recession. Structural advocates claim that unemployed individuals with skills that are only weakly demanded face prospects of remaining unemployed for a long time. Since the unemployment rate rose above 9% in 2009, the fraction of the unemployed who have been out of work for over 6 months has grown to over 40%. Prior to the start of the recession in 2008, long-term unemployed were a little under 20% of total unemployment. Although long-term unemployment usually rises during prolonged recessions, the magnitude of the rise during the current recession is unusual for the United States.

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Greece and the Euro

I will discuss the following two crucial questions about Greece and the euro:

Should Greece have become part of the euro? No.

Should Greece leave the euro? Not now, but probably in the future.

Greece initially gained many apparent advantages from becoming part of the euro zone. The Greek government could borrow on the international capital market at interest rates that were only a little above the rates paid by Germany, the strongest EU economy. These low rates probably reflected a belief among investors that the strong members of the EU would support investors in the weaker economies if these economies ran into financial difficulties. Being part of the euro zone also led to easier access of Greek goods and services to the markets of other euro members, especially France and Germany. As a result, Greek GDP grew at good rates until the financial crisis hit.

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Free the Captives

When government officials become the servants of the companies they regulate rather than the masters, they are “captured.” Political economists who describe this process point out that when regulators are captured, much of what they do is motivated, consciously or not, by a desire to help the industry they are regulating, even when the social goals they should pursue are very different. A famous illustration of capture is the way airlines were regulated under the Civil Aeronautics Board (CAB) from 1940 to 1978. Large airlines of the time, such as American and Delta, naturally had a strong incentive to try to keep new airlines out of the industry. As a compliant ally of the airline industry, the CAB did not approve one new interstate airline during this almost forty-year period. Only after President Carter abolished the CAB did many new airlines enter the industry; some of the old standbys, such as Pan Am and Eastern, ceased operations because they could not adjust to a competitive environment.

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(photo credit: boris drenec)

Government Workers and Fiscal Problems

Posner’s results are consistent with findings of little connection among the richer countries between their per capita incomes and the share of incomes spent by the government. Unfortunately, causation is hard to determine from such regressions. For example, as Scandinavian countries got richer, they raised government employment, partly by taking over much of the child-care services traditionally supplied by families. This helps explain why women in Scandinavia are much more likely than men to work for the government. A further problem with using government employment as a measure of government’s impact on an economy is that many regulatory agencies, such as the EPA (Environmental Protection Agency), the Fed and other central banks, and labor departments often have large effects on an economy through regulations that require few employees.

Public employees in Greece, Italy, in state and local governments of the United States, and government workers elsewhere are in the news in recent months not so much because of links to productivity, but rather because of connections to fiscal difficulties. Private companies typically adjust to financial problems partly by reducing employment and earnings of their employees, although such adjustments are harder in countries with strong unions and stringent labor protection legislation.

Both employment and wage adjustments are much harder for governments in difficult fiscal situations. Many of their employees are protected from being laid off by union contracts and civil service rights. It is also usually extremely difficult to cut their earnings, again partly due to restrictions imposed by unions and government rules. Government workers also take many of their benefits in the form of early retirements, and generous health benefits and incomes after retirement. These inflate current government spending when many past employees are receiving retirement benefits. In addition, as Posner indicates, votes of government employees can influence election outcomes if they are aroused by what they perceive to be unfair treatment from an incumbent political party.

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