China: Does 8% Growth Cause Less Satisfaction?

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China's economy grew at extraordinary annual rates of 8% or more, on a per capita basis, in the two decades from 1990 to 2009. Using the old "rule of 72" that is sometimes taught to approximate the effect of growth rates, take 72, divide by the annual growth rate, and it will tell you (roughly) how many years it takes for the original quantity to double. So at an 8% growth rate, China's per capita GDP doubles in 9 years, and quadruples in 18 years. In the two decades from 1990-2009, average per person GDP in China has quadrupled, at least. The number of Chinese living below the international poverty line of $1.25 in consumption per day fell by 662 million from the early 1980s up to 2008, according to World Bank estimates.

But survey researchers as people in China (and all over the world): "All things considered, how satisfied are you with your life as a whole these  days? Please use this card to help with your answer:
       1 “dissatisfied” 2 3 4 5 6 7 8 9 10 “satisfied”."
These researchers find that people in China are not, on average, more satisfied in 2009 than in 1990. How can this be?

This finding is an example of the "Easterlin paradox." Back in 1974, Richard Easterlin wrote a paper called A. (1974) "Does Economic Growth Improve the Human Lot?" which appeared in a conference volume (Nations and Households in Economic Growth: Essays in Honor of Moses Abramovitz, edited by Paul A. David and Melvin W. Reder). The paper is available here.  Easterlin found that in a given society, those with more income tended to report higher happiness or satisfaction than those with less income. However, he also found that the average level of happiness or satisfaction on a 10-point scale didn't seem to rise over time as an economy grew: for example, in the U.S. economy between 1946 and 1970. He argued: "The increase in output itself makes for an escalation in human aspirations, and thus negates the expected positive impact on welfare."

But can this effect hold true even when the standard of living is rising as dramatically as in China?  Easterlin, still going strong at USC, looks at the data with co-authors Robson Morgan, Malgorzata Switek, and Fei Wang in "China's life satisfaction, 1990-2010," just published in the Proceedings of the National Academy of Sciences.  Here is a (slightly messy) graph showing survey results from six different surveys of satisfaction or happiness in China.: the World Values Survey, a couple of Gallup surveys, and surveys by Pew, Asiabarometer, and Horizon. The surveys use different scales: 1-10, 0-10, 1-4, 1-5, so the vertical axes of the graph are a mess. But remember, this is a time frame when per capita GDP more than quadrupled! It's hard to look at this data and see a huge upward movement.

Easterlin and co-authors summarize the patterns this way: "According to the surveys that we analyzed, life satisfaction in the Chinese population declined from 1990 to around 2000–2005 and then turned upward, forming a U-shaped pattern for the period as a whole (Fig. 1). Although a precise comparison over the full study period is not possible, there appears to be no increase and perhaps some overall decline in life satisfaction. A downward tilt along with the U-shape is evident in the WVS, the series with the longest time span."

Indeed, Easterlin and co-authors point out that the happiness trend may be biased upward, because of this time there was a large rise in the “floating population" of "persons living in places other than where they are officially registered) in urban areas." This group tends to have lower life satisfaction.  " Between 1990 and 2010, the floating population rose substantially, from perhaps 7% to 33% of the total urban population ...  If the floating population is not as well covered in the life satisfaction surveys as their urban-born counterparts, then this negative impact is understated, and thus the full period trend is biased upward."

Why has satisfaction not flourished in China with the rise in GDP growth? Surely one reason is what some call the "aspirational treadmill:" the more you have, the more you want. But the reason emphasized by Easterlin's group is that "the high 1990 level of life satisfaction in China was consistent with the low unemployment rate and extensive social safety net prevailing at that time. Urban workers were essentially guaranteed life-time positions and associated benefits, including subsidized food, housing, health care, child care, and pensions, as well as jobs for grown
children ..." However, urban unemployment in China rose sharply from about 1990 into the early 2000s, but has fallen some since the mid-2000s. In addition, "Although incomes have increased for all income groups, China’s transition has been marked by a sharp increase in income inequality. This increasing income inequality is related to the growing urban–rural disparity in income, increased income differences in both urban and rural areas, and the significant increase of unemployment in urban areas associated with restructuring ..."

Intriguingly, the rise in income inequality in China is mirrored by greater inequality in reported life satisfaction. "In its transition, China has shifted from one of the most egalitarian countries in terms of distribution of life satisfaction to one of the least egalitarian. Life satisfaction has declined markedly in the lowest-income and least-educated segments of the population, while rising somewhat in the upper SES [socioeconomic status] stratum." For example, here's a graph that divides the population into thirds by income level. The figure shows what share of the population gave an answer from 7-10 on the World Values Survey satisfaction data. Notice that in 1990, all three income groups are clustered together. By 2007, they have separated out, with the highest income group remaining at about the same level, and the other groups declining in reported satisfaction--despite the fact that the incomes for all groups are much higher.


Taken to an extreme, the Easterlin paradox and these results from China might seem to suggest that economic growth is a waste of time. After all, economic growth doesn't seem to be making people more satisfied! But Easterlin would not make this argument, and it doesn't quite fit the survey results.
When answering on a scale of 1-10 or 1-5, most people will make a choice thinking about the present. They don't answer by thinking:  "Wow, I'm sure glad that I wasn't born a Roman slave 2000 years ago, and compared to that, I'm a 10 in satisfaction." Nor do they think: "Wow, compared to people who live 100 years from now, I'm living a short and deprived life, so I'm a 1 in satisfaction."

When people in China answered a "satisfaction" survey in 1990, they were not all that far removed in time from a period of brutal repression, and so it's not shocking to me that many in the lower and middle part of the income distribution told surveyers (who after all might have a government connection) that they were really quite satisfied. It's not just the economy that has grown in China since 1990; it's also the willingness and ability of many ordinary people to express dissatisfaction or discontent. I suspect that not many people in China would view their 1990 standard of living as similar or preferable to their current standard of living.


People do seem to answer satisfaction questions with some perspective on the rest of the world. For example, in a Spring 2008 article in my own Journal of Economic Perspectives, Angus Deaton presents evidence that if you look across the countries of the world in 2003, the level of satisfaction seems to rise steadily each time per capita GDP doubles.

It would be unwise to use survey data at different points in time, measured on scales that only offer the same limited range of choices, to argue that people do not receive greater satisfaction or happiness from economic growth. If I was choosing a 1970 standard of living in 1970, I might give it a similar numerical satisfaction score that I would give a 2012 standard of living in 2012--but that doesn't mean I would be equally happy in 2012 with a 1970 standard of living!

However, the results of the satisfaction surveys do highlight that when people are asked about their satisfaction, they take many factors into account along with average income levels: health, education, personal and political freedom, economic security, risk of unemployment, inequality, and others.When China allowed a greater degree of economic and political freedom, it unleashed an extraordinary rate of economic growth, but it also made created a public space for many other potential reasons for dissatisfaction. A record of past economic growth, even when exceptionally rapid, doesn't trump present concerns in people's minds--nor should it.

Capital Controls: Evolution of the IMF and Conventional Wisdom

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Back when I was first being doused with economics in the late 1970s and early 1980s,  the idea that a country might impose controls on the inflow or outflow of international capital had a sort of fusty, past-the-expiration-date odor around it. Sure, such control had existed back before World War II, and persisted for some years after the war. But wasn't it already time, or slightly past time, to phase them out? Not coincidentally, this was also the position of the IMF at around this time. But when the IMF was founded back in the late 1940s, it accepted the necessity for capital controls, and now, the IMF is returning to an acceptance of capital controls--but with a twist. Let me walk through this evolution.

At the founding of the IMF back in the late 1940s,  "almost all members maintained comprehensive capital controls that the drafters of the Articles assumed would remain in place for the foreseeable future," reports the IMF in a 2010 paper on "The IMF's Role Regarding Cross-Border Capital Flows." The perspective was that "bodies such as the General Agreement on Tariffs and Trade (GATT—now the World Trade Organization, WTO) wereto be responsible for the liberalization of trade in goods and now services, while the Fund would ensure that members liberalized the payments and transfers associated with such trade." However, while the IMF would encourage liberalizing payments for trade, it would not especially encourage international capital flows for purposes of financial investment, based on a "rather negative view of capital flows that then prevailed, premised on the belief that speculative capital movements had contributed to the instability of the prewar system and that it was necessary to control such movements."

By the 1970s, the position of the IMF (and many mainstream economists) had changed. "Many advanced economies were liberalizing their capital accounts and it was recognized that international capital movements had begun to play an important role in the functioning of the international monetary system ..."
The IMF began to actively encourage countries to allow free movement of capital for investment purposes, although it stopped short of requiring such a change as a condition for loans. The general tenor of the IMF advice was that if there were problems with international capital flows, they could typically be resolved in other ways, like though flexibility of exchange rates or alterations in fiscal and monetary policy. By the 1990s, the IMF was proposing that all of its countries should gradually but surely remove all capital controls.
For more details on the IMF history with respect to capital controls, see the April 2005 report from the IMF's Independent Evaluation Office, Report on the Evaluation of the IMF's Approach to Capital Account Liberalization.

But this proposal never took effect, and one big reason was the East Asian financial crisis of 1997-98. The east Asian "tiger" economy like South Korea, Thailand, Malaysia, Indonesia and Taiwan had been growing ferociously in the 1980s and into the 1990s. They were viewed as genuine economic success stories: growing with rapid productivity growth, and fairly well-managed in their fiscal and monetary policies. But they attracted a wave of international investment capital in the early 1990s that pumped up their currencies and stock markets to unsustainable levels, and when the bubble burst and the international financial capital rushed out, it left behind a financial crisis and a deep recession. Of course, the recent difficulties in small European economies like Greece, Ireland, Portugal and Spain follow a similar pattern: international financial capital rushed in, promoted a boom, and then rushed out, leaving financial crisis and recession.


If you are in an economy that is small by global standards--which is most of them--then international capital markets have a tendency to dramatically overreact. It's like if when I said "I'm hungry," someone dumped a bathtub full of spaghetti over my head, and then when I said "that's too much," they starved me for a week. When small national economies look like a good place to invest, international money floods in and can lead to price bubbles and unsustainable booms. When the economic problems become apparent, then at some point a "sudden stop" occurs and international money floods out, leading to financial and economic crises.

Even before the east Asian crisis hit, some folks in the IMF and many outside it were rethink its notion that capital controls should only be viewed as obstructions to be removed, and began trying to develop a more nuanced view. The most recent IMF effort along these lines is a series of papers on "capital flows and the policies that affect them." The first paper in the series is the 2010 paper cited above. The fourth paper came out in March 2012, called  "Liberalizing Capital Flows and Managing Outflows." Here are a few highlights (references to figures and citations omitted):

Removing capital controls has theoretical benefits, but in the real world often has costs
"In perfect markets with full information and no externalities, liberalization of capital flows can benefit both source and recipient countries by improving resource allocation. The more efficient global allocation of savings can facilitate investment in capital-scarce countries. In addition, liberalization of capital flows can promote risk diversification, reduce financing costs, generate competitive gains from entry of foreign investors, and accelerate the development of domestic financial systems."

The main cost of removing capital controls is the risk of sudden stops
"The principal cost of capital account openness stems from the vulnerability to financial crises triggered by sudden stops in capital flows, and from currency and maturity mismatches. Systemic risk-taking can increase investment, leading to higher growth but also to a greater incidence of crises. Many empirical studies have established the strong association between surges in capital inflows (and their composition) and the likelihood of debt, banking, and currency crises in emerging market countries. Other studies, however, do not find a systematic association between crises and capital account openness, but find that the relationship hinges on the level of financial sector development, institutional quality, macroeconomic policy, and trade openness ... "

The main policy recommendations still propose a gradual movement toward fewer restrictions on capital movements, but this recommendation now comes hedged about with qualifications. Three of these seem especially important to me.

1) "In low-income countries, the benefits of capital flows arise mainly from foreign direct investment (FDI). In many countries, FDI has helped to boost investment, employment, and growth. Low-income countries generally need to strengthen their institutions and markets in order to safely absorb most other types of capital flows, which carry substantial risks until such thresholds are met." A common recommendation is that countries should allow foreign direct investment, and then gradually open up to international investment in equity markets, and then gradually open up to international lending and borrowing.


2) The pace at which this gradual opening-up to international capital happens should depend on the prior development of a nation's economic conditions and political institutions.

3) When using capital constraints, focus more on limiting international inflows than on outflows. This recommendation is a reversal from the early days of IMF, when constraints on capital outflows were common, but constraints on inflows were almost unheard of. But the recommendation makes sense. Limits on capital outflows are very hard to enforce in an interconnected modern world economy, and they are only needed when the financial crisis has already occurred. Limits on capital inflows, like encouraging foreign direct investment but discouraging dependence on short-term capital inflows from abroad, helps to prevent a financial bubble from inflating in the first place.

This advice seems sensible to me, if perhaps difficult to implement After all, would it have been politically or economically possible for Greece or Ireland or Spain to have restricted inflows of international financial capital back in 2007 or 2008? In response to such questions it's worth repeating an honest confession from up near the front of the March 2012 IMF report. "[T]he theoretical and practical understanding of capital flows remains incomplete. Capital flows are a financial phenomenon, and many of the unresolved analytical and policy questions related to the financial sector carry over to capital flows."

Illustrating Economies of Scale

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The concept of "economies of scale"has been lurking around economics since Alfred Marshall's Principles of Economics back in 1890 (see Book IV, Ch. VIII, from the 1920 edition here). It's one of the few semi-technical bits of economics-speak to make it into everyday discussions. But in explaining the concept to students I don't always have as as many good concrete examples as I would like. Here are some of the examples I use. But if readers are aware of sound citations to academic research to back up these examples, or other other examples with a sound research backing, I'd be delighted to hear about them.

A number of examples of economies of scale are plausible real-world examples. Why are there only two major firms producing airplanes: Boeing and Airbus? A likely answer is that because of economies of scale make it, it is difficult for smaller firms to get more than a very specialized niche of the market. Why are there two big cola soft-drink companies: Coca-Cola and Pepsi? Why are there a relatively small number of national fast-food hamburger chains: McDonald's, Burger King, Wendy's? A likely explanation is that there are economies of scale for such firms, partly in terms of being able to afford a national advertising and promotion budget, partly in terms of cost advantages of buying large quantities of inputs. Why is there only one company providing tap water in your city? Because there are economies of scale to building this kind of network and running duplicative sets of pipes for additional water companies would be inefficient.

While I believe that these examples are a reasonable enough approximation of an underlying truth to pass along to students, I confess that I'm not familiar with solid economic research establishing the existence and size of economies of scale in these cases.
  
In the second edition of my own Principles of Economics textbook, I give one of my favorite example of economies of scale: the "six-tenths rule" from the chemical manufacturing industry. (If you are an instructor for a college-level intro economic class--or you know such an instructor!--the book is available from Textbook Media. The price ranges from $20 for a pure on-line book to $40 for a black-and-white paper book with on-line access as well. In short, it's a good deal--and on-line student questions and test banks are available, too). The research on this rule actually goes back some decades. Here's my one-paragraph description from the textbook (p. 178):

"One prominent example of economies of scale occurs in the chemical industry. Chemical plants have a lot of pipes. The cost of the materials for producing a pipe is related to the circumference of the pipe and its length. However, the volume of gooky chemical stuff that can flow through a pipe is determined by the cross-section area of the pipe. ... [A] pipe which uses twice as much material to make (as shown by the circumference of the pipe doubling) can actually carry four times the volume of chemicals (because the cross-section area of the pipe rises by a factor of four). Of course, economies of scale in a chemical plant are more complex than this simple calculation suggests. But the chemical engineers who design these plants have long used what they call the “six-tenths rule,” a rule of thumb which holds that increasing the quantity produced in a chemical plant by a certain percentage will increase total cost by only six-tenths as much. "

A recent related example of how pure size can add to efficiency is a trend toward even larger container ships. For a press discussion, see Economies of scale made steel: The economics of very large ships in the Economist, November 12, 2011,. The new generation of ships are 400 meters long and 50 meters wide, with the largest internal combustion engines ever built, driving a propeller shaft that is 130 meters long and a propeller that weighs 130 tons. Running this ship takes a crew of only 13 people, although they include a few more for redundancy. Ships with 20% larger capacity than this one are on the way.

One useful way to help make economies of scale come alive for students is to link it with antitrust and public policy concerns. For example, a big question in the aftermath of the financial crisis is whether big banks should be broken up, so that the government doesn't need to face a necessity to bail them out because they are "too big to fail." I posted about this issue in Too Big To Fail: How to End It? on April 2, 2012  One piece of evidence in the question of whether to break up the largest banks is whether they might have large economies of scale--in which case breaking them up would force consumers of bank services to pay higher costs. However, in that post, I cite Harvey Rosenblum of the Dallas Fed arguing: "Evidence of economies of scale (that is, reduced average costs associated with increased size) in banking suggests that there are, at best, limited cost reductions beyond the $100 billion asset size threshold." Since the largest U.S. banks are a multiple of this threshold, the research suggests that they could be broken up without a loss of economies of scale.

Another recent example of the interaction between claims about economies of scale and competition policy came up in the recently proposed merger between AT&T and T-Mobile. The usual counterclaims arose in this case: the companies argued that the merger would bring efficiencies that would benefit consumers, while the antitrust authorities worried that the merger would reduce competition and lead only to higher prices.
Yan Li and Russell Pittman tackle the question of whether the merger was likely to produce efficiencies in "The proposed merger of AT&T and T-Mobile: Are there unexhausted scale economies in U.S. mobile telephony?" a discussion paper published by the Economic Analysis Group of the U.S. Department of Justice in April 2012.


"AT&T’s proposed $39 billion acquisition of T-Mobile USA (TMU) raised serious concerns for US policymakers, particularly at the Federal Communications Commission (FCC) and the Antitrust Division of the Justice Department (DOJ), which shared jurisdiction over the deal. Announced on March 20, 2011, the acquisition would have combined two of the four major national providers of mobile telephony services for both individuals and businesses, with the combined firm’s post-acquisition share of revenues reportedly over 40 percent, Verizon a strong number two at just under 40 percent, and Sprint a distant number three at around 20 percent. ...

All of this raises the crucial question: How reasonable is it to assume that under current (i.e. without the merger) conditions, AT&T and T-Mobile enjoy substantial unexhausted economies of density and size of national operations? Recall that the fragmentary estimates made public suggest claims of at least 10-15 percent reductions in cost, and perhaps 25 percent or more. Absent an econometric examination of mobile telephony for the US as a whole as well as for individual metropolitan areas, what can we infer from the existing literature? The literature on at least one other network industry is not particularly supportive. ... Most of the existing empirical literature features observations at the firm level, with output measured as number of subscribers or, less frequently, revenues or airtime minutes. These studies tend to find constant returns to scale or even decreasing returns to scale for the largest operators – i.e., generally U-shaped cost curves. ...


[I]t is unlikely that T-Mobile, and very unlikely that AT&T, are currently operating in a range where large firm-level economies related to activities such as procurement, marketing, customer service, and administration would have been achievable due to the merger. Regarding both measures, the presence of “immense” unexhausted economies for the two firms seems unlikely indeed. On this basis (and on this basis alone), our results support the decision of DOJ to challenge the merger and the scepticism expressed by the FCC staff."


Li and Pittman also raise the useful point that very large firms should perhaps be cautious about claiming huge  not-yet-exploited economies of scale are available if only they could merge with other very large firms. After all, if economies of scale persist to a level of output where only one or a few mega-firms can take advantage of them, then an economist will ask whether this is a case of "natural monopoly," and thus whether there is a case for regulation to assure that the mega-firm, insulated from competitive challenge because it can take advantage of economies of scale, will not exploit its monopoly power to overcharge consumers. As Li and Pittman write of the proposed merger between AT&T and T-Mobile: "[W]e may justifiably ask whether if one believes the evidence of “immense” economies presented by the merging companies, one should take the next step and consider whether mobile telephony in U.S. cities is a “natural monopoly”, with declining costs throughout the relevant regions of demand?"

Finally, an intriguing though that economies of scale may become less important in the future, at least in some areas, comes from the the new technology of manufacturing through 3D printing. Here's a discussion from the Economist, April 21, 2012, in an article called "A third industrial revolution"

"Ask a factory today to make you a single hammer to your own design and you will be presented with a bill for thousands of dollars. The makers would have to produce a mould, cast the head, machine it to a suitable finish, turn a wooden handle and then assemble the parts. To do that for one hammer would be prohibitively expensive. If you are producing thousands of hammers, each one of them will be much cheaper, thanks to economies of scale. For a 3D printer, though, economies of scale matter much less. Its software can be endlessly tweaked and it can make just about anything. The cost of setting up the machine is the same whether it makes one thing or as many things as can fit inside the machine; like a two-dimensional office printer that pushes out one letter or many different ones until the ink cartridge and paper need replacing, it will keep going, at about the same cost for each item.

"Additive manufacturing is not yet good enough to make a car or an iPhone, but it is already being used to make specialist parts for cars and customised covers for iPhones. Although it is still a relatively young technology, most people probably already own something that was made with the help of a 3D printer. It might be a pair of shoes, printed in solid form as a design prototype before being produced in bulk. It could be a hearing aid, individually tailored to the shape of the user’s ear. Or it could be a piece of jewellery, cast from a mould made by a 3D printer or produced directly using a growing number of printable materials."

Right now, 3D printing is a more expensive manufacturing technology than standard mass production, but it is also vastly more customizeable. For uses where this flexibility matters, like a hearing aid or other medical device that exactly fits, or making a bunch of physical prototypes to be tested, 3D printing is already beginning to make some economic sense. As the price of 3D printing falls, it will probably become integrated into a vast number of production processes that will combine old-style mass manufacturing with 3D-printed components. One suspects that a high proportion of the value-added and the price that is charged to consumers will be in the customized part of the production process.

Lawyers without Licenses?

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I wrote a few days back about how widespread state-level requirements for occupational licenses limit the job market opportunities for many low-skilled workers. But of course, many other occupations are licensed, too. In their book  First Thing We Do, Let's Deregulate All the Lawyers, Clifford Winston, Robert Crandall, and Vikram Maheshri make the case for lawyers without licenses. (The Brookings Institution Press page for ordering the book is here; the Amazon page is here.) Cliff Winston has a nice readable overview of their argument "Deregulate the Lawyers," which appears in the Second Quarter 2012 issue of the Milken Institute Review (which is ungated, although a free registration is required).

Just to be clear, the proposal here isn't for abolishing law schools or law degrees. Instead, the proposal is that it should be legal, if the buyer so desires, to hire people without such degrees to do legal work. Here are a few of the points they make:

• The U.S. has about one million lawyers. [T]oday, all but a handful of states – the notable exception
  being California – require bar applicants to be graduates of ABA-accredited law schools. And every state except Wisconsin (which grants free passes to graduates of the state’s two major law schools) then requires them to pass a bar exam.
• "State governments (and state appellate courts) have also gone along with the ABA’s [American Bar Association's] wish to prohibit businesses from selling legal services unless they are owned and managed by lawyers. And not surprisingly, the group’s definition of the practice of law is expansive,
  including nearly every conceivable legal service, including the sale of simple standard form
  wills."
• In the book, Winston, Crandall, and Maheshri attempt to estimate how much more income lawyers are able to receive, above and beyond the alternative jobs for those with similar levels of education, as a result of these licensing rules. They argue that about 50% of the income of lawyers is a result of the licensing limits. I view this number as closer to an educated guess than a precise valuation, but given that the U.S. spends about $200 billion per year on legal services, even half that amount would be a very large dollar value. 
• In usual markets, more supply drives down the price. But when a society has more lawyers, and more of those lawyers end up in political and regulatory jobs, it is plausible that under the current regulatory restrictions that lawyers as a group are making more work and generating billable hours for each other. 
• It's never easy to predict what would happen if it became legal to hire those with less than a three-year law degree from an accredited institution to do legal work. But it seems plausible that a lot of jobs done by lawyers could be done by someone with fewer years of education and fewer student loans to pay off: basic wills; criminal defense in simple cases of DWI or public intoxication; basic divorce and bankruptcy; simple incorporation papers; real estate transactions; and other situations. One can imagine that the skills needed in these cases might be taught as part of an undergraduate major in law, or law schools might offer one-year and two-year degrees along with the full three-year degree, or even as part of an apprenticeship program. National firms might seek to establish brand names and reputations in these areas, like H&R Block does for tax preparation services. In some cases, like certain kinds of legally required corporate disclosure filings, perhaps sophisticated forms and information technology could substitute for a lawyer filling in the blanks. 
• Certainly, some of these steps might drive down wages for existing lawyers. But on average, lawyers receive pay that is well above the U.S. average, with unemployment rates below the U.S. average. Indeed, the U.S. economy as a whole might be better off if some of those who now work as lawyers entered other parts of the private sector--perhaps starting and managing businesses. "There is little doubt that some people who become attorneys would have chosen to work in other occupations – and possibly made greater contributions to society – if they were not attracted to law by the prospect of inflated salaries."
•  Many people with low-incomes end up without legal representation because of cost. "Surely, many of the currently unrepresented litigants would be better off even if they gained access only to uncredentialed legal advocates."
• Perhaps the quality of legal representation would decline without the licensing laws, but it isn't obviously true. "[T]the American Bar Association’s own Survey on Lawyer Discipline Systems reported that, in 2009, some 125,000 complaints were logged by state disciplinary agencies
  – one complaint for every eight lawyers practicing in the United States. Note that this figure is a lower bound on client dissatisfaction because it includes only those individuals who took the time to file a complaint." A deregulated environment for lawyers might well produce other methods of ensuring quality: warrantees; money-back guarantees; brand-name reputation; and firms that monitor or rate providers of legal services. 
• Deregulation in the airline industry back in the 1970s occurred partly because it was possible to observe how airline competition was actually working within the states of California and Texas. Might there be some example of deregulating the lawyers that would have similar effect? "One state – perhaps Arizona, whose legislature has declined to re-enact its unauthorized practice statute, or California, whose bar indicated it would not initiate actions under its statute – may realize benefits that build support elsewhere. And perhaps England’s and Australia’s recent efforts to liberalize regulation of their legal services will attract attention here."

My own sense is that while the U.S. economy does need a certain number of big-time lawyers, but many law students spend years of class-time and tens of thousands of tuition dollars on classes that bear no relationship to the law that they will actually practice. Back in college, one of my economics professors used to have a nice pre-packaged rant against regulations that were intended to ensure high quality, because he believed that everyone should have the right to buy cheap and low-quality stuff if it was what they wanted--or all they could afford. The legal services that most of us need most of the time could be provided far more cheaply, and at least as reliably, without requiring that every provider get a four-year college degree and then spend three more years in law school.

U.S. Losing Its Lead in College Graduates

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Alan Krueger, chairman of President Obama's Council of Economic Advisers, gave a lecture at Columbia University in late April on "Reversing the Middle Class Jobs Deficit." A certain proportion of the talk is devoted to explaining how all the good economic news is due to Obama's economic policies and how all of Obama's economic policies have benefited the U.S. economy. Readers can evaluate their own personal tolerance for that flavor of exposition. But the figures that accompany such talks are often of independent interest, and in particular, my eye was caught by some figures about U.S. college attendance.  (Full disclosure: Alan was editor of my own Journal of Economic Perspectives, and thus my direct boss, from 1996-2002.)

First look at the share of U.S. 55-64 year-olds in 2009 who have a post-secondary degree of some sort. It hovers around 40% of this age group, highest in the world, according to OECD data. Then look at the share of U.S. 25-34 year-olds in 2009 who have a post-secondary degree of some word. It's also right around 40% for this age group. Although one might expect that a higher proportion of the younger generation would be obtaining post-secondary degrees, this isn't actually true for the United States over the last 30 years. However, it is true for many other countries, and as a result, the U.S. is middle-of-the-pack in post-secondary degrees among the 25-34 age group. This news isn't new--for example, I posted about it in July 2011 here--but it's still striking. It seems to me possible to have doubts about the value and cost of certain aspects of post-secondary education (and I do), but still to be concerned that the U.S. population is falling back among its international competitors on this measure (and I am).


Krueger also points out that the chance of completing a bachelor's degree is strongly affected by the income level of your family.  The horizontal axis shows the income distribution divided into fourths. The vertical axis shows the share of those who complete a bachelor's degree by age 25. The lower red line is for those born between 1961-1964--that is, those who started attending college roughly 18 years later in 1979. The upper line is for those those born from 1979-1982--that is, those who started attending college in 1998.
Here are a few observations based on this figure:

1) Even for those from top-quartile groups in the more recent time frame, only a little more than half are completing a bachelor's degree by age 25. To put it another way, the four-year college degree has never been the relevant goal for the median U.S. high school student. Given past trends and the current cost of such degrees, it seems implausible to me that the U.S. is going to increase dramatically the share of its population getting a college degree. I've posted at various times about how state and local funding for public higher education is down; about how the U.S. plan for expanding higher education appears to involve handing out more student loans, which then are often used at for-profit institutions with low graduation rates; and about how alternatives to college like certification programs, apprenticeships,  and ways of recognizing nonformal and informal learning should be considered.


2) Those from families in in lower income quartiles clearly have a much lower chance of finishing a four-year college degree. My guess is that this difference is only partly due to the cost of college, while a major reason for the difference is that those with lower incomes are more likely to attend schools and to come from family backgrounds that aren't preparing them to attend college. Moreover, the gap in college attendance between those from lower- and higher-income families hasn't changed much over the two decades between the lower and the higher line in the figure, so whatever we've been doing to close the gap doesn't seem to be working.

3) It's a safe bet that many of those in the top quarter are families where the parents are college graduates, supporting and pushing their children to be college graduates. It's also a safe bet that many of those in the bottom quarter are families where the parents are not college graduates, and their children are not getting the support of all kinds that they need to become college graduates. In this way, it seems likely that college education is serving a substantial role in causing inequality of incomes to pass from one generation to the next.  Krueger has referred to this pattern of high income inequality at one time leading to high inequality in the future as the "Great Gatsby Curve," as I described here.