Gary Becker was right, part five: Human capital

Human capital is generally reckoned to be the skills, knowledge, and experience possessed by an individual or population.  It represents the value of our human capacities, and is what enables us to achieve our goals individually, or collectively in organizations and nations.  It can be invested in through education and training, and can improve both the quality and the level of production.  It has a rate of return that can be measured, albeit inexactly.

Gary Becker controversially compared the rates of return on human capital with the rates of return on children.

When human capital is abundant, rates of return on human capital investments are high relative to rates of return on children, whereas when human capital is scarce, rates of return on human capital are low relative to those on children.  As a result societies with limited human capital choose large families and invest little in each member; those with abundant human capital do the opposite.

We have empirical evidence that people in poor countries have large families.  They need the economic contribution the children will make to the family budget, and they need children to support them in old age.  As societies grow richer there are more opportunities to educate and train children instead of putting them to work.  Furthermore, social benefits, rather than children, can support the aged.  These factors explain why wealthier societies have lower population growth.  Indeed, most European populations are in decline, and it is immigration, rather than fertility, which contributes to those that are not.

It should be noted that the rate of return on human capital rises, rather than diminishes, as the human capital increases.  The more there is of it, the more worthwhile it is to invest in it.  This, in turn, implies better future production, both in quality and output.  Resources can increase even if population rises, contrary to what Malthus thought.

The doomsayers tell us that a massively over-populated world will have neither the food nor the resources to cope, and predict wars and starvation.  But set against them are the optimists, including Becker, who think that rising stocks of human capital will reduce population pressure and make more efficient use of resources.  Yet again, Becker seems to be on the winning side.

Minimum wages cost jobs

The leader of the UK's opposition Labour Party, Ed Miliband, outlines plans today to tackle low pay with a five-year plan to set a new, higher, minimum wage, linked to average earnings. This, it is said, firmly puts tackling inequality at the heart of the party's 2015 general election campaign.

The motive may be noble, but the policy itself is mistaken. A minimum wage helps only those who are already in work. It makes life more difficult for the very poorest, namely those who are out of work.

A minimum wage raises the cost of employing people. That is its whole purpose. But higher wage costs mean that employers – already under financial pressure from domestic and foreign competition, from everyday business costs, and from the costs of government regulation and taxation – have only two options. They can either hire fewer people, or toughen working conditions – cutting holidays, providing fewer breaks, spending less on the work environment.

Professors Richard Vedder and Lowell Gallaway from the United States – which has a much longer history of minimum wage legislation than the UK – explained all this as long ago as 1995, in their Adam Smith Institute report Minimum Wage Costs Jobs.

And the evidence is clear. When minimum wages were introduced in the UK in 1999, they did not seem to add to unemployment. But the starting rate was set very low initially; and the UK was then already on the cusp of one of the biggest (and as we now know, disastrous) credit-fuelled booms in history. With business and employment racing ahead, the job-killing effect of a low minimum wage was hard to see.

It became much easier to see after the 2008 financial crash, though. The first people that hard-pressed employers dispense with, and the last they choose to hire, are people like unskilled workers, young people who need to be trained up, women who want flexible hours, minority groups, and people on benefits who may have to learn or re-learn the habits of work.

These are the very groups that the policy is intended to help. But the post-crash unemployment statistics, with close to a million young people out of work, show that it does exactly the opposite. Starter jobs (remember all those cinema ushers, petrol-pump attendants, and bag-packers in grocery shops?) dry up. Young people or those on benefits cannot even get on the first step of the jobs ladder.

As well as harming those it wants to help, the minimum wage helps those who are already better off, or soon will be. They include students doing low-paid jobs that they regard as purely temporary, a means of getting skills and references for a better job. And second or third earners in a household, working to bring in a little extra cash for luxuries. But these are not the people that the minimum-wage policy is designed to help.

The minimum wage is well-meaning policy – but sadly, a wholly counterproductive one. If you really want to help the poorest, you should help them by improving their access to paid work, by cutting workplace regulation and taxes.

Sadly people still aren't understanding the actual climate science

One of the most irritating things about the debate surrounding climate change is that people don't actually look at the evidence beinf presented. Instead, they use whatever evidence is presented as simply a bolstering for their own pre-extant prejudices. Any evidence of the effect of climate change is used to support the argument that we must do more and more quickly. Any evidence of not much happening is taken to prove that we need do nothing: this is a pox on most houses argument, yes. Too few people are actually reasoning from the evidence to what ought to be done. Take this for example, from The Observer:

The last assessment report of the Intergovernmental Panel on Climate Change (IPCC) put a modest figure of one to three feet as the likely rise in sea levels that will be experienced this century. The disintegration of the entire West Antarctic ice shelf changes that forecast drastically. A figure of more than 10 feet is now a more likely option. Vast tracts of heavily populated coastline around the world face inundation. Millions are likely to lose their homes. It may take more than a century for this devastation to occur. Nevertheless, it now looks to be inevitable, says Rignot. Nor will the residents of low-lying regions such as Bangladesh or Florida be surprised at this forecast. They are already experiencing the consequences of rising sea levels triggered by melting icecaps.

The actual report said that the melting of those West Antarctica glaciers is now inevitable and will lead, over time, to a rise of four feet in sea level. whether it's true or not we have to take on trust: but how can you take that evidence, of four feet plus one or three and make a risen of 10 foot this century? Especially when the West Antarctica figures are not for "maybe take more han a century" but "will take some centuries at a minimum" but are now inevitable?

There's nothing at all wrong with campaigning to avert a perceived danger. Whether that danger is the costs that climate change might bring or the costs that will be incurred by trying to deal with it. But wouldn't it be nioce if everyone really did use the evidence with which they're presented as a useful starting point for logical thought rather than simply a prop for whatever prejudice they might already have?

The Institute of Actuaries needs to fire these people

For the sake of their own reputation the Institute and Faculty of Actuaries really do need to fire the fools that came up with this report:

In just over five years Britain will have run out of oil, coal and gas, researchers have warned. A report by the Global Sustainability Institute said shortages would increase dependency on Norway, Qatar and Russia. There should be a "Europe-wide drive" towards wind, tidal, solar and other sources of renewable power, the institute's Prof Victor Anderson said.

The report itself is here and is over a year old. It's also the most monstrously steaming pile of horse puckey you're ever likely to come across. Piffling balderdash personified.

I, given my background, looked at the section on minerals and their potential supplies in the future. They're taking their evidence from places like The Oil Drum (a home for peak oil phantasists, not people who know anything about minerals) and this miserably pitiful excuse for an article in New Scientist, something that used to be a good magazine. Forgive me if I seem a little brash here but these people know nothing at all of the subject under discussion. They confuse mineral reserves with the amount of a mineral that is available to us: seemingly ignorant of the fact that "reserve" is an economic concept. Price changes and reserves do. Further, reserves are the working stock of currently extant mines: they bear no relationship whatsoever to the amount that is likely easily available (resources) nor to total availablility. They end up with some barkingly mad predictions as a result: aluminium is, I think, 8.5% or so of the crust of this planet yet they have it as being in very scarce supply. They think that gallium might run out when there's a thousand year supply just in the bauxite we already know we'll dig up for aluminium. They have phosphate rock and potash as being very scarce when resources of these two (recall, this is stuff we already know where it is, how to dig it up and we're likely to make a profit from doing so, we just haven't actually proven it yet) will last 1,500 and 13,000 years, not to mention that they make up 0.2% and 2.5% of the crust of the planet. We'll not run out before the heat death of the universe.

Lord alone knows who has paid these people or why but before they besmirch the reputation of the Institute of Actuaries any further it's my very strong recommendation that they fire them.

This report is nonsense of a kind that even Edward Lear would be ashamed of as it's not even funny.

Yes, more people are dying on the job in North Dakota

We don't and shouldn't welcome the news that more people are dying on the job (erm, while working is perhaps less amenable to teenage smuttery) in North Dakota than were doing so some years ago. However, it is rather important to work out why this is happening rather than just blaming it all on neoliberalism or the idea that no one cares about the working man. Sadly, people are failing to do that:

Life is cheap in North Dakota, where a new study (PDF) finds that workers are being killed on the job at five times the national rate. Deaths on the job in North Dakota more than doubled from 2007 to 2012, rising from 25 to 65, as reported by Al Jazeera America’s Renee Lewis. The reasons for this are deeply disturbing for what they say not only about industrial workplace safety, but about politics in 21st century America and how capital is favored over workers. The increase in deaths tracks the frenzied efforts to extract oil and natural gas from the rich Bakken fields, believed to hold more than $1 trillion in carbon-based fuels. There is so much money to be made quickly that companies are not even waiting for adequate infrastructure to move all the natural gas to market. Blaming the rising death toll on the oil companies, however, misses the real problem, which lies squarely with our elected officials.

And off he goes to blame those elected officials for not hring enough workplace inspectors and for, in general, just not giving a damn for these masses being killed.

Except there's something we should take note of here. We know that North Dakota is in the grip of a massive oil boom. And we also know that the oil industry as a whole, where ever it is based, has a higher death rate than most other industries. In fact, if we look at that PDF report that is being referred to, on page 49 we are told that oil and gas extraction has a death rate per 100,000 workers of some 16 pa. As opposed to one of 3.4 for the economy in general. Thus, if some 200,000 or so people had moved from other work into the oil and gas extraction industries then we would have explained that entire rise in the working death rate.

Nothing at all to do with political cowardice or malfeasance, simply a structural change in the make up of the workforce.

It's still entirely possible that the politicians of North Dakota are ignorant of their duties and incapable of carrying out those they do understand: no reason why the politicians of that fair State should be any different from politicians elsewhere. But we must always remain alert to the reasons why things happen, not just to noting that they do. Has the working death rate risen considerably in North Dakota? Most certainly, it has. And this is exactly what we would expect to happen when we see a large scale movement of labour into an industry notably more dangerous than those that preceeded it. It would be far far worse if he mocement had been into logging (129 deaths per 100,000) or fishing (120) and we would see a fall if everyone went off into educational and health servicres (0.7 per 100,000).

Working out why things have happened is better than just kicking out at the usual targets.

Gary Becker was right, part four: Immigration

Gary Becker proposed a remarkable  way of dealing with immigration.  He suggested selling the right to live and work in the US or the UK.  His proposal was that the countries should set a price ($50,000, for example), and admit foreigners prepared to pay it.  Of course certain categories such as terrorists or criminals would be excluded, but otherwise the doors would be open to those prepared to stump up the money.

His reasoning was that this would lead to the type of immigrants of most value to the recipient country.  Skilled people would be ready to pay because they would enjoy a bigger pay differential in moving from a poor country to a rich one than would poorer people.

Young people would be attracted because they would enjoy longer working lives in which to reap the benefit of their investment.  And those intending to settle permanently and make a commitment to the host country would have a longer time there to enjoy the benefits than those who intended to return to their own country.  All three categories make desirable immigrants.

Whether or not one agrees with the details, it is easy to agree with Becker on the principle that immigration should be encouraged where it is certain to make a positive contribution to the host country as well as to the immigrant.  Several countries already have schemes in place to achieve this.  St Kitts and Nevis offers citizenship as well as residence to those investing $250,000 in sugar industry diversification or $400,000 into real estate.  Dominica offers citizenship for an investment of $100,000.  The US will give a green card to someone investing $500,000 and creating 10 jobs for Americans, and Canada will let you in for 400,000 Canadian dollars.

The Becker proposal does deal with the objection that some raise about immigrants coming in and claiming welfare and health benefits.  The objection seems unlikely, in that most immigrants are young and healthy and seeking work, but we can be reasonably sure that no claimants would be coming in under Becker-type rules.  Many who oppose immigration are ready to make exceptions for skilled workers and those prepared to invest in their host country.  International businesses might well stump up the money required for them to transfer in skilled workers with none of the hassle and delays of conventional applications.

Once again Becker has shown how economics can be applied to areas other than the economy.

Why we shouldn't let the prodnoses determine our diets

An amusing little coincidence of three stories that cross the desk here at Adam Smith Towers. Firstly, from Chris Blattman, the news that most published research is actually wrong:

Published medical science is deeply flawed. More often than not, when I’ve looked up a study claiming X, the statistics are deeply problematic. I suspect poor training and poor refereeing are proximately to blame, but there must be some deeper absence of incentives. It’s a shameful state of affairs.

The specific study that is being talked about here is the one that made everyone think that Omega 3 fatty acids were good for your heart. On hte basis that Inuit eaters of whale and seal blubber had less heart disease than everyone else. But they reached this conclusion without actually looking at the incidence of heart disease in Inuits who ate whale and seal blubber. something of a leap from evidence to conclusion there.

The second is about a new movie, "Fed Up", from the people who brtought you "An Inconvient Truth". Although Al Gore is a little porky to present this extravaganza, given that it's about how the modern food industry makes everyone obese.

The problem at hand, of course, is the standard American diet, especially in its current iteration, which took shape in the early 1980s after the commencement of the official “eat food lower in fat” recommendations. Those recommendations led to a 25 percent increase in the per-capita supply (and indeed consumption) of calories.

Yes, it is indeed a problem. But as Mark Bittman goes on, the rest of it is all to rail about the amount of sugar that is in the current diet. Which is again something of a problem, for here's our third piece of news:

Last week it fell to a floundering professor, Jeremy Pearson, from the British Heart Foundation to explain why it still adheres to the nutrition establishment's anti-saturated fat doctrine when evidence is stacking up to refute it. After examining 72 academic studies involving more than 600,000 participants, the study, funded by the foundation, found that saturated fat consumption was not associated with coronary disease risk. This assessment echoed a review in 2010 that concluded "there is no convincing evidence that saturated fat causes heart disease".

The sugar (and also the salt) is in all our foods because it's the only way to make it taste of anything if there's no animal fats around. So, let us assume that there is an epidemic of obesity (on the grounds that we should take peoples' arguments seriously, at the very least so that we can see where they lead) and that it is being caused by sugar in our food. Well, what caused that? The previous generation of prodnoses telling us all not to eat saturated fats.

At which point clearly we should tell them all to (mumble mumble) off and we'll get on with filling our bellies in our own manner, thank you very much. For they don't actually know what they're talking about.

Yes, that is my caramelised pork crackling over there......could you pass the butter? It's a tad dry...

Gary Becker was right, part three: Drugs

Last February Gary Becker wrote a post on the Becker-Posner blog calling for marijuana to be decriminalized.  Ten months earlier he publicly called for the legalization of a wide range of drugs.  He listed some of the advantages of decriminalizing marijuana, such as undercutting drug cartels, enabling those needing medical help to come forward, and saving costs on enforcement.

There is no doubt that the war on drugs has been a disaster.  It has led to a huge upsurge in crime in both the producer and consumer countries.  There have been murders by the tens of thousands, and the profits from the illegal drugs trade have corrupted the law in many countries.  Drug use has not deceased.  Any rational person would propose trying a different approach, yet most of those in legislatures and the media insist that we should do even more of what we already know does not work.

Becker is in accord with what the Adam Smith Institute has said.  We have called for addiction to be regarded as a medical problem rather than a criminal one.  We proposed that clinics be set up on High Streets manned by doctors and nurses.  Addicts would be able to go in and, subject to undergoing medical examination and receiving advice, should receive free supplies to be consumed on the premises.  Since people would not do this for recreational drugs, we proposed that cannabis, ecstasy and cocaine should be legalized.

The crime built up on the drugs trade would vanish.  Teenagers would no longer shoot each other on the streets in drug turf wars.  Prisons would find they had space again.  People would no longer find their habits set them against the law, regarding police and the courts as their enemies.  Control over quality would be established, and deaths from tainted doses or overdoses would diminish.

Yes, drug use might increase.  More young people might be tempted to give it a try, just as many do today with tobacco and alcohol.  But what we have at the moment is far worse.  We have a situation with drugs approximating to America's stint on prohibition of alcohol, with criminal gangs flourishing like weeds and lawlessness prevailing.  It is time to try it Becker's way instead.

Are the big banks simply paying efficiency wages?

We all know that top bankers at large banks get paid vast sums of money. But quite why is still a matter for discussion. It isn't, cannot be, simply because bankers are greedy. We know that everyone's greedy so that's not an explanation of why some and only some are getting the big bucks. An interesting piece of research gives us further insight:

The next step is to look at executive pay. Unsurprisingly, the chief executives of the big banks come out on top. Between 2010 and 2013, the median total pay, including cash and stock awards, of the CEO of a large bank was more than $57 million, $22 million above the median compensation for the chiefs of smaller firms, according to Mr. Cannon’s research. What drove these paychecks? Not performance but size. Mr. Cannon found no apparent links between compensation and shareholder returns, but he did discover a robust connection between a bank’s assets and its officers’ pay. “There is strong evidence that size has been the key driver of bank executive compensation since the financial crisis,” his note concludes.

People who run larger banks get more money than those who run smaller ones. And that's just about only connection to pay that we can see.

So, if you want to reduce top bankers' pay then reduce the size of the top banks: and since we want to do that anyway, to get rid of the whole idea of too big to fail, why not?

But what this is also telling us is that in the current system the banks are behaving entirely rationally. Or at least potentially so according to the idea of efficiency wages. This is often put forward by Chris Dillow, the thinking man's Marxist. The larger the organisation, and the less detailed oversight it is possible to have of the people running it, the higher the efficient level of wages to pay to those running it. Simply because there's more shareholder value for them to lose if they mess up, and there's more for them to steal if they're that way inclined. We could describe it as bribing them to stay attentive and honest and if that's the way you want to describe it then fine. But it is also efficient, which is why perhaps people do it.

Gary Becker was right, part two: Cuba

For many years Gary Becker wrote a blog with Richard Posner.  In the last entry, shortly before his death at age 83, Becker wrote one entitled "The Embargo of Cuba – Time to Go."  The US embargo of Cuba, began in 1960, was designed to put pressure on Castro's communist government, and if possible to persuade Cubans to overthrow it.  It did not achieve that objective, but it did give Cuba a fig-leaf excuse to explain away the economic failure of communism.

In 1959 Cuban, exporting tobacco and sugar, was richer per head than Taiwan, exporting rice and sugar.  Nowadays Taiwan has a modern, open market economy trading globally, and has a per capita income over five times that of Cuba, where tobacco and sugar are still important exports.  Becker wrote:

Since Cuba no longer provides any significant threat to American interests, there is no sense in continuing to punish the Cuban people with an embargo on trade, nor to provide excuses to its leaders for the poor performance of the Cuban economy.

This is one of the main objections to embargoes: they punish the wrong people.  General embargoes hit the living standards of poor people in countries subjected to them.  Those people are denied access to global goods, and cannot sell what they produce on world markets.  They also hurt the countries that impose them.  The US International Trade Commission estimates that its embargo on Cuba costs America $1.2bn annually, largely through lost potential gains in tourism, agriculture and other industries.

Becker recommended that "free trade is a principle that the United States should follow except in extraordinary circumstances," a sentiment most free market supporters would endorse.  Richard Cobden thought that free trade between nations would eventually lead to peace, and it is true to a large extent that nations which trade with each other learn to negotiate with each other and settle disputes peaceably.  Furthermore, trading nations begin to see each other as partners, to depend on each other for goods, and for their peoples to learn more about each other.

Becker is right.  Raising the Cuban embargo would bring immediate benefit to the people there, and would probably speed up that country's retreat from communism and its entry into the modern world.