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another day. McClelland's insistence on waiting to get his forces
organized before launching another attack allowed the Confeder-
ates time to both escape and dig in to create stronger defensive
positions, from which they could later more readily kill more
Union attackers.
Another and more general way in which one kind of safety in-
creases other risks involves the role of wealth. Reconsider the
common statement, "If it saves just one life, it is worth whatever it
costs." This sacrifice of wealth would make sense only if wealth
saved no lives. But, in reality, wealth is one of the biggest life-
saving factors, so that sacrificing wealth costs lives, whether that
sacrifice takes the form of money spent for safety devices or a
reduction in economic efficiency for the sake of risk reduction.
Whether any given policy makes sense depends on how much risk

reduction takes place for how much sacrifice of wealth. Forbidding
trucks from driving 100 miles an hour on the highway probably
saves more lives than it costs in lost efficiency, but forcing cars to
drive under 15 miles an hour may not. In short, decisions about
policies designed to produce net savings of lives involve incremen-
tal trade-offs, not categorical pronouncements, however attractive
those pronouncements may sound.
The role of wealth in saving lives can be dramatic, whether com-
paring rich and poor in a given society or prosperous nations with
Third World nations. An economist in India has pointed out that
"95% of deaths from natural hazards occur in poor countries."
Since virtually all countries were poorer in the past, this also im-
plies that deaths from natural disasters have been declining over
time, for both rich and poor countries. Empirical evidence sup-
ports that conclusion.
Six to eight thousand people perished in a hurricane that struck
Galveston, Texas, in 1900 but fewer than 50 died when Hurricane
Andrew hit Florida in 1992”even though Andrew was the most
destructive hurricane ever to hit the United States. Similarly in In-
dia where, as Indian economist Barun Mitra put it, a drought in
the year 2000 was dubbed the worst of the century by the media,
which "struggled to identify even one victim, while quietly forget-
ting the past famines that cost the lives of millions." Medical, au-
tomotive, and other hazards are likewise affected by the wealth of
the people and nations where they occur.


Everything that is called insurance is not in fact insurance. In the
countries of the European Union, government retirement pro-
grams account for 90 percent of all retirement income, often under
the name "social insurance." But real insurance is very different
Risky Business 157

from these government pension programs. Real insurance is based
on careful mathematical and statistical calculations of risks and of
the premiums required to cover those risks. These are known as
actuarial calculations and only when the assets of insurance com-
panies cover their liabilities are they said to be actuarially sound.
Their assets include both the premiums they have received and
their additional earnings from having invested those premiums.
Whatever they are obligated by law to pay to their policy-holders
are the insurance company's liabilities.
Government-run social insurance programs seldom have
enough assets to cover their liabilities, but rely instead on making
current payments out of current receipts. These are called pay-as-
you-go programs”and sometimes they are also called pyramid
schemes. Pyramid schemes are privately run pay-as-you-go
plans”and they are illegal because of their high risk of default
and the opportunities for those who run them to take part of the
money for themselves. The most famous pyramid scheme was run
by a man named Charles Ponzi, who went to jail back in 1920. He
used the same principles behind the pension plans of many West-
ern governments today.
Ponzi had promised, within 90 days, to double the investment of
those who paid into his program. The first investors who were not
deterred by warnings from skeptics were in fact rewarded by hav-
ing their investments pay off double in 90 days. Ponzi simply paid
the first wave of investors with money received from the growing
second wave of investors, and the second wave from the even
larger number of those in the third wave, as enthusiasm for his
plan spread. So long as the number of people attracted to this plan
formed an expanding pyramid, both the earlier investors and
Ponzi profited handsomely. But, once the pyramid stopped grow-
ing, there was no way to continue to pay off those who sent Ponzi
their money, since his scheme created no new wealth.

The American Social Security pension system and similar gov-
ernment pension systems in the countries of the European Union
likewise take in payments from people who are working and use
that money to pay the pensions of people who have retired. Unlike
Ponzi's pyramid scheme, these government pension plans have
much longer than 90 days before the promised pensions are sched-
uled to be paid. They have decades before they have to redeem the
promises of the system to workers after they retire. Moreover, the
small generation of people working in the 1930s, when Social Se-
curity began in the United States, was succeeded by a much larger
"baby boom" generation after World War II, so the pyramid of
contributors was predestined to grow. The economies of countries
with such programs also grew, allowing working people with much
higher incomes to be taxed to cover pensions based on the much
lower incomes of the 1930s generation. The promises not only
were kept, the benefits were often expanded beyond those
Those who warned that these were essentially Ponzi schemes
without enough assets to cover their liabilities”that they were "ac-
tuarially unsound" in the financial jargon”were either not be-
lieved or were brushed aside for having made objections that were
theoretically correct but in practice irrelevant. One of those who
brushed these objections aside was Professor Paul Samuelson of
MIT, winner of the first Nobel Prize in economics:

The beauty of social insurance is that it is actuarially unsound.
Everyone who reaches retirement age is given benefit privileges that
far exceed anything he has paid in ... Always there are more youths
than old folks in a growing population. More important, with real
incomes growing at some 3% a year, the taxable base upon which
benefits rest in any period are much greater than the taxes paid his-
Risky Business 159

torically by the generation now retired ... A growing nation is the
greatest Ponzi game ever contrived.

By the end of the twentieth century, however, the day of reckon-
ing began to loom on the horizon for these government pension
programs, as it had for the original Ponzi scheme. Contrary to
Professor Samuelson's assertion, there are not always "more youths
than old folks." As birth rates declined in the Western world and
life expectancy increased, vastly increasing the number of years in
which pensions would have to be paid to more people, it became
painfully clear that either tax rates were going to have to rise by
very large amounts or the benefits would have to be reduced in
one way or another”or both”or the system would simply run
out of money.
In 2002, the credit-rating agency Standard & Poor's calculated
the liabilities representing promised pension benefits to add up to
more than the annual Gross Domestic Product of nine of the 15
European Union nations. These were the kinds of overwhelming
debts usually run up in fighting a major war. Moreover, wars usu-
ally end in a few years, so that these debts can begin to be paid off,
while there are endless generations of retirees ahead, living longer
and longer. Demographic projections showed the size of the pop-
ulation of retirement age, compared to the size of the working-age
population, to be rising sharply for the first half of the twenty-first
century, not only in the European Union countries, but in Japan
and the United States as well.
The underlying reason for the crisis atmosphere surrounding
many discussions of how to "save" Social Security in the late twen-
tieth and early twenty-first centuries came from the fact that the
contributions paid by workers were not invested, like insurance
premiums, but spent. Because there was no real fund of wealth to

draw on in pay-as-you-go government pension plans, these plans
had the same fatal weakness as the original Ponzi scheme. Yet
none of that became obvious in stage one. Decades passed before a
financial crisis developed, and even then the reason for the crisis
was not obvious to many people. The crisis was often blamed on
changing demographics, rather than on those who set up a scheme
that could work only so long as demographic trends did not
change”even though demographic trends had been known to
change many times in the past.
Chapter 6

The Economics of

I t is painfully obvious that discrimination inflicts economic and
other costs on those being discriminated against. What is not
so obvious, but is an important causal factor nonetheless, is that
discrimination also has a cost to those who do the discriminating.
Moreover, the cost of discriminating varies with the circum-
stances. For an American owner of a professional basketball team
to refuse to hire blacks would be to commit financial suicide. But,
for the conductor of a symphony orchestra to pass over the rela-
tively few black violinists available would cost practically nothing,
in the absence of anti-discrimination laws, since there are far more
white violinists available to take their places.
Variations in the costs of discrimination help explain many oth-
erwise puzzling anomalies, such as the fact that blacks were star-
ring on Broadway in the 1920s, at a time when a black man could
not enlist in the U. S. Navy nor a black woman be hired as a tele-
phone operator by most phone companies, even in the Northern
states. Variations in the cost of discrimination also help explain
why black ghettoes in the United States tended to expand with
the growth of the black population in the twentieth century, while
in centuries past Jewish ghettoes in Europe tended simply to be-
come more overcrowded with the growth of the Jewish popula-
tion. In countries around the world, employment discrimination


has tended to be greatest in the hiring of government employees
and employees in government-regulated utilities.
Before getting into the economics behind such things, it is first
necessary to be clear as to just what is and is not defined as dis-
crimination, so that we can avoid talking past each other, as hap-
pens too often in discussions of discrimination.


Prejudice, bias, and discrimination are too often confused with one
another. Each requires careful definition before discussing sub-
stantive issues, if those discussions are not to get hopelessly bogged
down in semantics.


Prejudice means pre-judgement. Yet the term has been widely used
more loosely to refer to adverse opinions in general about particu-
lar racial or ethnic groups. Unless we are prepared to accept as
dogma that there cannot possibly be anything about the skills, be-
havior, or performance of any group, anywhere in the world, which
reduces their productivity as workers or their desirability as neigh-
bors, we cannot automatically equate adverse opinions or actions
with prejudgments. Too much empirical evidence exists to allow
any such dogma to survive scrutiny. For example, per capita con-
sumption of alcohol and rates of alcoholism have varied by some
multiple among various groups in the United States and in the So-
viet Union, among other places”and the adverse effects of alcohol
and alcoholism have been too well documented to require elabora-
tion. Rates of crime, disease and other adverse conditions have
likewise varied widely among various groups in countries around
the world.
The Economics of Discrimination 163

Was it only coincidental that cholera was virtually unknown in
American cities before the large-scale arrival of immigrants from
Ireland in the nineteenth century”and that cholera epidemics
swept primarily through Irish neighborhoods in Boston and
Philadelphia? Were the organized crime activities of the Chinese
tongs in various countries in Southeast Asia mere "perceptions"?
Was the Maharashtrian majority in Bombay simply prejudiced
against other Maharashtrians when they preferred to buy from
businesses run by people from South India, rather than businesses
run by their own compatriots? Is it just racial prejudice which
causes black taxi drivers in New York to avoid picking up black
male passengers at night?
Adverse judgments and actions cannot be automatically attrib-
uted to prejudgment. Often those with the most direct knowledge
have the most adverse judgments, while those observing from
afar”or not observing at all”attribute these adverse judgements
and actions to prejudice. By the same token, particular minority
groups may be sought out for particular attributes judged favor-
ably, without this being a matter of prejudgment. During the great
era of skyscraper-building in the United States, for example, Mo-
hawk Indians were often sought out to work high up on the steel
frameworks while the skyscrapers were being built, because of
their demonstrated ability to perform their work undistracted by
the dangers.
In centuries past, Germans' reputation in mining caused them
to be sought out for this work in England, Spain, Norway, Mex-
ico, and the Balkans. Back in the eighteenth century, when
Catherine the Great decided that Russia needed to bring in "some
merchant people" from other countries, she informed one of her
high officials that merchants in other parts of Europe should be
issued passports to Russia "not mentioning their nationality and
without inquiring into their confession." This was a way of cir-


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