The US embargo of Cuba began in 1960, a year after Fidel Castro turned this island toward communism. It was extended to food and medicines in 1962, the same year as the showdown with Russia over the installation of missiles there. The embargo has prevented American companies from doing business with Cuba, and discouraged tourism to Cuba. The American government also tried with quite limited success to prevent other countries from trading with Cuba.
In general economic embargoes are undesirable because they interfere with free trade among countries. Yet a case could be made for an embargo against Cuba. Castro not only allowed Russian missiles to be installed in Cuba, just 90 miles from Florida, but was also actively trying to interfere in other countries by sending troops and so-called advisers. The aim of the embargo was to impose economic hardship on Cuba that would force Castro to drop these international actions, and possibly even lead to the toppling of his government and the end of communism in Cuba. Castro did stop his international adventurism, but he and communism remained firmly entrenched for decades.
The Cuban economy has done badly, and has fallen behind the economies of many comparable countries. For example, in 1959, Cuban per capita income was above that of Taiwan, another island close by a hostile super power. Cuba’s two main exports were sugar and tobacco, while Taiwan’s were sugar and rice. At that time, Taiwan began its transition toward a private market system and globally oriented economy, whereas Cuba abolished private property and the government took charge of the economy with central planning and central organization. Since then Cuba’s economy has fallen far behind Taiwan’s as Taiwan has taken advantage of world markets to grow at a remarkable rate while Cuba has chugged along with very slow growth. Cuba’s per capital income is a fifth or less of that of Taiwan. Sugar and tobacco remain important exports of Cuba, while Taiwan has shifted toward complex electronic and industrial goods. Fidel Castro was a charismatic leader who mesmerized audiences with his oratory, but he utterly failed to deliver the goods to the Cuban people.
Cuba’s weak economic performance is in small part due to the embargo since the US would be a natural important trading partner for Cuba, as it is for other nearby Caribbean countries, and for Mexico and other Central American countries. Yet communism itself is the main cause of its poor economic performance. One can say this with complete confidence since communism has utterly failed as an economic system in every country where it has been tried.
One only need look at the difference between the economies of South and North Korea for a clear natural experiment on the disadvantages of an economic system with no private property and central direction of the economy. Prior to the Korean War, the backward part of the Korean economy was in the south and the advanced industrial part was in the north. The roles are now radically reversed since the South and its private enterprise system is far ahead economically (and in other dimensions as well) of the North.
In the last decade, with Fidel Castro ailing and his brother Raul taking over leadership, the Cuban government has begun to realize what the Cuban people long ago learned, that communism is responsible for the vast majority of its economic weakness. Despite the opposition of hardliners, Cuba is allowing very small-scale private firms in retailing and other sectors, and houses can be bought and sold to a limited extent. These are only baby steps away from communism, but they put Cuba on a slippery slope toward a more market-based economy that will be hard to reverse.
Free trade is a principle that the United States should follow except in extraordinary circumstances. Cuba under Fidel, especially in his early days, may have provided enough of these circumstances to justify the embargo. 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.
It is time to end the embargo on the export and import of goods and services between the United States and Cuba The Cuban people will benefit almost immediately. This may just be the time when such a move puts added pressure on the Cuban government to end its failed experiment with communism.
I agree with Becker that we should end the embargo. It was first imposed in 1960, two years after Castro took power, and strengthened after the Cuban missile crisis in 1962, and thereafter modified from time to time—and recently somewhat relaxed, so that today in fact we have several billions of dollars in trade with Cuba each year.
Communist Cuba in Castro’s heyday, before the collapse of the Soviet Union followed by the rapid collapse of communism in all countries except North Korea—and Cuba—was, even apart from the missile crisis, an active although not dangerous enemy of the United States, supporting and fomenting communist subversion against a variety of nations some of them allies of the United States. But the embargo was never much more than an annoyance to Cuba, because the embargo was not joined by other nations. And it is not as if the United States were the only source of a raw material or manufactured good essential to the Cuban economy. Or that the United States were the sole destination for goods produced by Cuba that Cuba had to export in order to obtain foreign currency. Cuba’s principal exports were and are sugar and tobacco. When the United States as part of the embargo stopped importing these products from Cuba, it increased its imports of them from elsewhere, which meant that other nations that produced those goods diverted some of their output to the United States. The countries they had been buying sugar and tobacco from these other exporting countries had either to pay a higher price to them so that they would not divert output to the United States—or buy from Cuba. So the embargo closed one destination for Cuban exports, the United States, but opened up others.
Apparently the embargo had some small negative effects on the Cuban economy, but one imagines that its major effect was actually to bolster Castro by giving him an excuse for the awful performance of the Cuban economy—the U.S. embargo. The true cause of that awful performance was communism; for we know from the economic performance of the other communist countries, before communism collapsed almost everywhere, that communist economies, by suppressing the operation of free markets in goods and services, are grossly inefficient. Castro hurt Cuba with his policies, but actually helped the United States by impelling the emigration of many of Cuba’s ablest, most energetic citizens to the United States.
But to all this the embargo was and continues to be almost completely irrelevant. Its persistence is probably owed largely to the political influence of Cuban-Americans, who will do anything to hurt Castro’s regime and whoe live (and vote) mainly in Florida, where they form a significant electoral bloc. The nation’s fourth largest state by population, Florida is the most important swing state in the American electoral system.
With 20 states having now legalized medical marijuana use, and two (Washington and Colorado) having legalized recreational use of marijuana, the days of legal prohibition of use of marijuana for recreational as well as for medical purposes seem numbered.
The case for prohibiting marijuana was never strong. It is a mind-altering drug, but no more so than alcohol, and it is considered less likely to induce violent behavior, and in general to have less destructive effects on the heavy user, the “addict.” There is little evidence that it is a “gateway” drug, in the sense that use of it induces the user to “progress” to more harmful drugs, such as cocaine, methamphetamine, Ecstasy, LSD, heroin, or, for that matter, alcohol; in fact there is evidence that marijuana is largely a substitute for alcohol. While prohibition doubtless deters many young people from using marijuana, it seems unlikely that young people with strong addictive propensities, for whom consumption of an addictive drug might be destructive, are deterred. Legalization would undoubtedly increase the use of marijuana unless very heavy taxes were imposed (which would in turn give rise to a black market, thus largely undoing the effects of legalization), but probably not the number of addicts. Actually, the emergence of a black market would be unlikely unless very heavy taxes were imposed on the sale of marijuana, given the natural consumer preference for a legal, FDA-regulated drug over an illegal one.
Although some 58 percent of Americans believe that recreational use of marijuana should be made legal, law enforcement activity aimed at discouraging marijuana use continues at a high level, with some 750,000 persons being arrested every year on marijuana charges, almost 90 percent for possession rather than for production or distribution. Despite the threat of criminal punishment (though punishment for mere possession, other than possession with intent to distribute, is largely nominal), the American market for marijuana is very large—some $36 billion a year (that’s the conservative estimate: estimates range as high as $113 billion). There is no doubt that the use of marijuana would increase if it were legalized, because many people are unwilling to violate criminal laws even if the expected punishment cost (the gravity of the punishment discounted by the probability that it will be imposed) is slight. But if the increased use decreased the use of substitute drugs (including alcohol), there might well be no net increase in the use of mind-altering drugs. Furthermore, legalization would undoubtedly be accompanied by the imposition of sales taxes comparable to those for cigarettes and alcohol (indeed the desire for tax revenue was apparently a major factor in Colorado’s decision to decriminalize marijuana), which would both generate needed tax revenues and limit the increase in use. Suppose marijuana were legalized and a 33 percent sales tax imposed. And suppose total sales remained at $36 billion because the effect of the higher price resulting from the sales tax was offset by greater demand for the drug and by the efficiencies in production and distribution that would be obtained making it a legal product. Then the sales tax would generate $12 billion in annual tax revenues. Along with tax revenues would come the further benefit to government finances of eliminating an estimated $7.6 billion in annual police and prison costs of marijuana prosecutions and convictions.
Although my analysis strongly suggests that there would be net benefits from decriminalizing the sale of marijuana throughout the United States, it does not follow that enacting a federal law that would do that would be a good idea—not only because opposition to legalization remains strong in a number of states, but also because the steps that the liberalizing states have already taken—20 to legalize medical use of marijuana and 2 of them to legalize recreational use as well—are likely to make enforcement of marijuana laws in other states ineffectual. In all 20 states there will be increased availability of marijuana, production will be cheaper because it will be done openly, and it will be difficult to prevent exportation to the prohibitionist states, overwhelming law enforcement resources in those states. The death knell of prohibition would be a decision by the Department of Justice to reduce prosecution of producers and distributors of marijuana, because federal criminal penalties of drug crimes are far more severe than state penalties and so have greater deterrent effect, though neither deterrence nor incapacitation seems to have much effect on the supply of illegal drugs, since the elasticity of supply of drug dealers is very high. Dealers make good incomes relative to alternative employment opportunities and expected punishment costs are low.
Decriminalizing a drug like marijuana means that it no longer is a crime to possess marijuana for personal use, The advantages of decriminalizing marijuana are so numerous and powerful that it is difficult to understand the intense opposition.
The movement at the state level of the United States to decriminalize various uses of marijuana-especially for “ medical” purposes- has accelerated in recent years. It will not be long before marijuana use for many purposes will be decriminalized in the great majority of states, and I also expect rapid expansion in the number of states that legalize marijuana for all recreational uses. It is much better for states rather than the federal government to decide about the legality of drug use since that would allow some states to continue to treat marijuana use as a criminal offense if they so wish. However, as Posner points out, it becomes harder for some states to criminalize marijuana use when the great majority of states have decriminalized it.
Decriminalizing consumption and some production of marijuana would have large beneficial effects on Mexico. Traditionally, Mexico has produced the majority of marijuana consumed in the US. The distribution of marijuana from Mexico to the US is controlled by powerful drug cartels that have made enormous profits from their trafficking in drugs. The Mexican government’s battles with these cartels have caused tens of thousands of deaths, and wholesale corruption of Mexican police and government officials. The trend toward legalization of marijuana in America is lowering the profitability of Mexican cartels and weakening their hold over the Mexican population.
Many people are unhappy when they are addicted to drugs, be it alcohol, nicotine, cocaine, or marijuana. They would like to free themselves from their addictions, but that is not easy to do by the definition of what an addiction means. This is especially difficult for addictions to illegal substances. Clinics are reluctant to treat individuals who are addicted to substances that are illegal to consume, groups like AA are more difficult to form and thrive, and informal support group also face many obstacles.
Critics rightly claim that decriminalizing marijuana is likely to encourage experimentation with marijuana use, and probably will increase total consumption (although see our discussion of taxes in the following paragraph). However, what is more important, decriminalization will tend to reduce the rate of addiction to marijuana. The reason is that decriminalization will encourage the development of more clinics that treat this addiction, will help spread the growth of Marijuana Anonymous organizations that help addicts break their addictions, and will produce other efforts to combat severe addictions to marijuana. As a result, while marijuana use may go up, the number of addicts is likely to go down. This should allay the fears of many opponents of decriminalization that it would lead to a large expansion in the number of addicts.
Decriminalizing marijuana paves the way for taxing its use, in the same way that alcoholic consumption became rather heavily taxed after the end of Prohibition. The higher the tax rate, the higher the retail price of marijuana, and hence the lower would be its consumption. So replacing the present situation with significant taxes on the legal consumption of marijuana could end up lowering the demand for marijuana, despite the effects of decriminalization on experimentation with marijuana.
The present spending of substantial resources on trying to combat marijuana use would be replaced by considerable revenue from taxing its use. That potential revenue is a temptation of many strapped state governments to decriminalize marijuana. Of course, if the tax rate were too high, some of the marketing of marijuana would move underground to try to escape the tax. However, experience with other goods that are heavily taxed, including alcohol, shows that the advantages of legal sale and purchase of a substance like marijuana are so large that the tax rate could be rather high without a large fraction of the sales going underground.
A good use of the tax revenue would be on education and other efforts to point out the harm from becoming addicted to drugs. Some of the revenue could also be used to support drug clinics and other private groups that are trying to both treat addictions and to discourage individuals from becoming addicts. These are far better uses of government revenues than are the expenditures on police, courts, and prisons to apprehend and punish individuals who consume marijuana.
Thursday Northwestern Law School is holding a conference on the war on drugs. The announcement is below. I am chairing a panel at 4 p.m. to 5:30 of three economists on the topic "costs and benefits of the war on drugs." It should be an interesting session, and indeed the entire conference should be interesting.
Rethinking the War on Drugs
A Symposium Sponsored by:
Seventh Circuit Bar Association Foundation
and Co-Sponsored by: Northwestern University School of Law and
The print media and the blogosphere have many discussions of the high and rising cost of attending college, the debt burden weighing on college students, the fact that the average real earnings of college graduates have risen only slowly during the past 40 years, and the difficulty young college students are having in getting good jobs. The conclusion frequently reached is that too many high school graduates seek a college degree, and that these graduates have been sold a bill of goods about the value of a college education.
The facts cited are generally correct, but the conclusion about the low value of going to college is completely wrong. The fallacy stems from believing that earnings from a college education determine the benefit of a college education. The truth is that the benefit is determined by the earnings from a college education relative to what earnings would be if a person stopped her education after high school. A first approximation to this gain in earnings for the typical person is given by the difference between the average earnings of college and high school graduates.
A recent study by the Pew Research Center conveniently brings out some facts that have been known, but are worth repeating. The study looks at changes over time in the ratio of the earnings of the average college graduate aged 25-32 relative to the average earnings of high school graduates of the same ages. They divide successive cohorts into Millennials (born after 1980), Generation Xers, Baby Boomers, and older Silents (b orn between 1928 and 1945). The study finds that young college graduates earned on average about 24% more than young high school graduates in the Silents generation, but this percent difference increased to about 47% in the Boomers generation, and now young Millennial college graduates are earning more than 60% than young Millennial high school graduates.
The study understates the trend in the earnings of high school graduates by including persons with a graduate equivalence degree (GED), whose numbers have grown in importance over time. Studies by Heckman and others show that the GEDers should be treated as high school dropouts, not high school graduates, since their earnings are similar to those of dropouts.
The recession hit the earnings and employment of college graduates, but it hit even worse the earnings and employment prospects of high school graduates. As a result, the recession actually increased the gain from graduating from college.
While the price level adjusted average earnings of college graduate grew slowly over the 45-year period of the Pew study, the average real earnings of high school graduates and dropouts actually fell over this long time period. This is why the gap between earnings of college and high school graduates grew by so much. Graduating from college paid off very well not in absolute terms but relative to the alternative, which is the only way to measure the gain from college.
Of course, the change in the cost of attending college also has to be considered before one can conclude that college is a good investment. And college tuition has grown at an unusually rapid rate over the past 35 years. Nevertheless, college remains a good investment after netting out the cost of tuition from the higher relative earnings of college graduates. The Pew study also asked young Millennial college graduates whether they felt college was worth the significant financial cost. About 90% of these young graduates said college had either already paid off (83%) or will pay off in the future (8%). Such confidence in the value of their college degree even holds for the two-third of these Millennials who borrowed money to help pay for their schooling.
Over the past 45 years the fraction of young persons who graduate from college has greatly increased, although the rate of increase slowed during past 20 years. That the returns from college increased even though many more young persons are completing college implies a powerful growth in demand for college graduates over this time period. The growth in demand for college graduates is related to the development of the Internet and other technologies, the growth of the service sector, and globalization. High school graduates can no long count on getting good jobs in manufacturing.
The study also shows that the fraction of college graduates with student loans grew quite rapidly over time as tuition rose rapidly and as government-supported loans became more readily available- 66% of Millennials took out loans vs. 43% for Baby Boomers. The burden of these loans is usually exaggerated since most graduates can easily finance their loans from the higher earnings they receive. Graduates who borrowed a lot and are earning relatively little are the ones who face a loan burden. The best way to help such college graduates is to have a repayment system whereby individuals who earn more pay back more, while those who earn less pay back less.
Such an income-contingent loan program works best when graduates face risk to their future earnings that they cannot predict very well. As a way of dealing with risk it works not so well when future earnings are more predictable. In particular, it favors graduates in low paying fields, like K-12 teaching- and hurts graduates in well-paying fields, like business or finance. On the whole, an income-contingent system is probably better than the present fixed repayment system, but it is not a panacea.
Becker’s data are solid, but I am not what inferences can be confidently drawn from them.
In particular, I doubt whether it’s possible to infer the value of a college education from a comparison of earnings of college graduates to earnings of persons who do not graduate from college (I’ll ignore the intermediate category—persons with some college but not a bachelor’s degree or better). The reason is that kids are not randomly assigned to go, or not to go, to college. The noncollege graduates are therefore not a valid control group. I am not aware of whether there have been efforts to control for IQ differences in assessing the effect of a college education on earnings.
Suppose returns to IQ have risen because of the increasingly technological character of economic activity (including finance), increased automation of work tasks (including many service jobs), and increased outsourcing of low-skill jobs in manufacturing. This does in fact seem to have happened. Such increased returns would increase the college enrollment and graduation rates because of the complementarity between IQ and college (and graduate-level) training. But the driver of the increased earnings of college graduates would be IQ and the college and graduate education of high-IQ kids, rather than the demand for college graduates as such. And there would be no basis for inferring benefits of college for kids who did not have high IQs.
Such a pattern would be consistent with excess college enrollments, if many college students were insufficiently intelligent, motivated, energetic, etc. to benefit from a college education, but were enticed by low-cost government loans and by skillful marketing into attending college.
I am merely questioning whether the difference between the average earnings of college graduates and of high school graduates (I am ignoring the average earnings of kids who don’t graduate from high school) necessarily represents the return to a college education. If the earnings of high school graduates are dropping because of reduced demand for such graduates owing to a shrinkage of the kind of jobs for which they are suited, the gap between earnings of college graduates and non-college graduates will expand even if there is no increase in the average earnings of college graduates. And there might not be an increase if a large number of high school graduates are enrolling in college who do not have the qualities that enable them to benefit from a college education.
Because as Becker points out the cost (the tuition cost rather than the opportunity cost) of college has been growing rapidly, attending college is a particularly bad choice for kids unlikely to benefit from a college education. It is then pretty much all cost and no benefit.
This leads me to question the proposal that debt on federal loans for college education be made inverse to incomes. That would mean that the lower the college graduate’s income, the lower his debt; but if his income is low, how likely is it that he benefited from college?
A better idea might be to borrow from the German model of providing technical education in lieu of college. There are many high-skilled jobs (though fewer than there used to be) that require careful training but not a college education, such as being a crane operator or an air traffic controller or a mortician. I don’t know why people who are aiming for such jobs, or who cannot realistically aspire to upper-middle-class jobs, should be attending college, other than for the prestige and social opportunities of being a college student and especially a college graduate—not that those are negligible dividends from a college education, but they will often not to be worth the cost, both direct and opportunity, of college.
I wonder what role high school guidance counselors do play or should play in helping high school students decide whether to apply for college admission. It would not surprise me if good counseling resulted in fewer applications.
And a final point: I think the “general education” that colleges traditionally impart is less important than it used to be because of the rise of the Internet. The Internet provides kids from early childhood on with immense informational (including cultural) resources, as a result of which I believe young adults today are better informed and more intellectually sophisticated than used to be the case. They may not need college as much, unless they are aiming for and have the aptitudes for an upper-middle-class career.
There are, especially in Europe and East Asia, and to a limited extent in the Western Hemisphere, small countries that are well governed. But among large, populous countries, there appears to be only one well-governed country: Germany. The United States is the third largest country by land mass (after Russia and Canada) and population (after India and China), the wealthiest, the militarily most powerful, and generally regarded as the leading nation in the world—its geopolitical center. But all these are negatives from the standpoint of governance, as are the nation’s ethnic and cultural diversity, political divisiveness, high crime rates, and highly unequal distribution of income. Another major negative is the difficulty of changing the U.S. Constitution. Although there have been a number of amendments, the basic structure, set by the original Constitution of 1789, has not been changed significantly.
A serious problem of governance, or management, that all but the smallest organizations, whether private or governmental, encounter is the tension between the goals of the organization and the personal goals, which typically differ, of the individuals who comprise the organization. Stated differently, the individuals have personal utility functions that differ from the organization’s utility function. The larger the organization, the greater the divergence is likely to be and the more difficult to minimize. The organization that is the federal government of the United States has more than 4 million employees.
Competition between organizations is an important control on the divergence (which economists refer to as “agency costs”—the costs created by the fact that the employees of an organization have their own goals that often conflict with those of their employer). But nations do not feel the same competitive pressures as corporations. Even a small, miserable, effectively bankrupt nation like Greece does not disappear, as large corporations not infrequently do, because of its inefficiency. Because corporations are simpler and smaller and also more constrained by competition than nations, we can expect them to be managed more efficiently, and specifically to adopt an organizational structure that minimizes agency costs. So let’s glance at the structure of the typical large corporation and compare it to our federal government structure. There will be a board of directors to exercise a general but loose supervision over the corporation (and in turn subject to very loose control by the shareholders), intervening decisively only in crisis situations or where there is vacancy in the office of the Chief Executive Officer. The CEO will be the dominant figure in the corporation, exercising something close to dictatorial power, assisted by a small personal staff. Often he will overshadow the chairman of the board of directors—he may even double as chairman and CEO. There will be a Chief Operating Officer, exercising day to day management, while the CEO, as the public face of the corporation, will formulate policy, provide overall guidance, inspiration, and “vision,” appoint the major subordinate corporate officials (general counsel, chief information officer, chief financial officer, etc.), and maintain personal relations with important investors, customers, competitors, and regulatory officials. The corporation will have several or many operating divisions, reporting to the COO or CEO, each headed by a vice president or equivalent. The employees in each division will serve at the pleasure of their superiors; no one will have fixed tenure.
Compare the federal government. The closest to a board of directors is the Congress, but it differs mainly in having a good deal of policy responsibility, and, since it does not appoint and is not appointed by the President (corresponding to a corporate CEO), there is no presumption that its policy preferences will coincide with the President’s. The President’s exercise of his own policymaking powers will often work at cross-purposes with Congress’s exercise of its powers; nor can he appoint senior officials without the concurrence of a division of the Congress, namely the Senate. A further dilution of presidential power results form the existence of an independent federal judiciary, headed by the Supreme Court. Federal judges and Justices have lifetime tenure, can invalidate legislative and executive action both federal and state, and rarely (because of that tenure) will a President be able to appoint a majority of the Supreme Court Justices or other federal judges.
The President has a personal staff (officially the “Executive Office of the President”) that numbers more than 2000. The staff assists him in overseeing the large number of “divisions” (executive departments, such as State and Defense and free-standing agencies such as the Environmental Protection Agency) into which the federal government is divided. The heads of these divisions, however, do not have hiring or firing authority, as a practical matter, over most of the employees, who are tenured civil servants. The heads serve short terms, and often are appointed for political reasons unrelated to experience or competence. The brevity of their terms and frequent lack of relevant skills or knowledge create tense relations with the tenured bureaucrats. As a result, the President’s control over the more than 4 million federal employees (of whom about 40 percent are military) is as a practical matter quite limited.
A further division of government is brought about by federalism: the division of the nation into 50 states, each with quasi-sovereign powers. The federal government has considerable power over the states, but far less than a CEO or COO would have over the operating divisions of their corporation.
The structure of the federal government reflects the state of the nation in the eighteenth century. The population was roughly 1 percent of what it is today, there were only 13 states and as a result the Congress was small, and the federal government was tiny. It is doubtful that starting over in today’s circumstances a constitutional convention would create a similar system.
The most glaring deficiency is the limited authority of the President and the absence of an official corresponding to the Chief Operating Officer of a private corporation. From an efficiency standpoint the President should be able to promulgate laws (not just regulations), subject to override by supermajorities of Congress; appoint subordinate officials without the concurrence of the Senate; and create a position analogous to that of a COO; this would result in a structure analogous to that of France, which has both a President and a prime minister, the latter being in charge of day to day governmental operations (though France is not an example of a well-governed country). The President should also be authorized to control the finances of the states, alter their boundaries, appoint their principal officials, and veto their laws. And no civil servants should have tenure. The result of all these changes would be to conform American government to the “government” of a large private corporation.
Maybe the President would become the “outside” partner and his Chief Operating Officer the “inside” partner, the former dealing with relations with foreign countries (in the broadest sense, comprehending not only foreign relations in the conventional sense, but also immigration, trade, and military assistance and intervention), the latter with the formulation and implementation of domestic policies.
Of course these are not feasible reforms. Anything that strengthens the President weakens other sources of power, not only in the government itself (legislators, civil servants) but also in the private sector, which through campaign donations and other forms of political activity exert a powerful and self-interested influence on governmental action, resulting in enormous waste and perversity.
In an interesting and ominous book by Joseph A. Tainter called The Collapse of Complex Societies (1988), the author points to historical episodes of collapse of societies that had become too complex to manage effectively, such as the Mayan civilization of Central American and the Western Roman Empire. Successful societies, such as Britain, the United States, and Germany, in the nineteenth century, and Japan and the Soviet Union in roughly the first half of the twentieth century, tend, like successful companies, to expand. Expansion makes governance more complex, which can lead to ungovernability and eventual collapse. Companies that become ungovernable can shrink to a manageable size by selling off parts of themselves; or they can simply liquidate, in which event their assets are sold to other companies. There are examples in the government sphere, as in the peaceful division of Czechoslovakia into Slovakia and the Czech Republic, or the peaceful dissolution of the Soviet Union, but more often such fragmentation is involuntary, often indeed violent.
Governments, even in small countries, are vast bureaucracies that manage thousands of activities. The federal government of the United States, for example, runs a vast and complicated healthcare system, levies taxes on individuals and corporations, pays benefits to retirees, runs a large and highly mechanized military, decides whether pipelines can be built and oil exported out of the US, manages a vast payment system for the unemployed, and enforces complex regulations of banks. I could go on endlessly. A smaller government like Argentina’s does about as many things, but on a much smaller scale.
As Posner indicates, large corporations also have extensive bureaucracies, but several differences between public and private bureaucracies work against the relative efficiency of governments. The most basic is that government bureaucracies are just too big to perform most of their activities effectively. Governments undertake too many and too complicated activities to expect effective oversight from presidents, prime ministers, and legislators. Private corporations would also be much less efficient if they grew to the size of large governments, which explains why corporate bureaucracies are far more limited in size, and especially in scope.
Further raising the efficiency of corporate bureaucracies relative to public bureaucracies is that corporations typically face much stronger competition. Corporate competition is from other firms, non-corporate as well as corporate, and from firms that form when a corporation faltered in its efficiency. Also, a badly performing corporation often faces a battle from ”corporate raiders” for control of the corporation. Although such private competition is not always effective in disciplining the corporations who are too bureaucratic to be efficient, many formerly powerful corporations have vanished after they no longer performed well. These include Lehman brothers, A&P Groceries, Wong computers, Bethlehem Steel, and Woolworth.
Government bureaucracies also face some competition, but it is much weaker and less immediate. In democracies, elections occur at regular intervals, but the complexity of governments makes it extremely difficult for voters to judge whether the incumbents are performing well. Profit statements are usually a good guide to corporate performance, but there is nothing comparable for governments. Interested voters can look at a few things to judge, for example, whether government-financed health care is effective, but nothing for government performance is as simple and as inclusive as a balance sheet report on how profitable a corporation is. In addition, powerful special interests often spend considerable resources to insure that voters hear their point of view far more often and more effectively than opposing views.
Another difference between corporate and government bureaucracies is that corporations use the price system far more than do governments. For example, government pay scales are much more compressed than are those of corporations. A head of a major government agency, such as the SEC or the EPA, has at least as much responsibility as the heads of major corporate divisions, but government heads earn only a fraction of what corporate heads do. Of course, heads of government agencies often leave after several years to take lucrative private sector positions, but they would do that much less frequently if they were better paid in their government jobs.
Another example is from the immigration authority (USCIS) that allocates visas on a first-come-first-served- basis that often takes weeks and even months. A corporation handling this issue would have a system of fees that would be higher for those who need a quicker decision.
So my answer to the question posed in the title of my discussion of whether government bureaucracies are too big and inefficient is a strong “yes”. Government should do much less so they can concentrate on and do better with the tasks they are most needed for, such as police and military, infrastructure, safety nets, and regulation of activities with big externalities. Regrettably, I am not optimistic that much can be achieved quickly in slimming down governments, given the strong self-interests and special interests that benefit from the present situation.