A modern government is not a single, simple thing. It consists of many institutions, agencies, and activities and includes many separate actors—legislators, administrators, judges, and various ordinary employees. These actors act somewhat independently, and even, at times, at cross-purposes. Because government is complex, no single measure suffices to capture its true “size.” Each of the commonly employed measures has serious shortcomings and sometimes can be misleading. Nevertheless, the various measures reveal at least something about the size of government. The most common measure used by economists is government expenditure as a percentage of gross domestic product (GDP). Sometimes, net national product or national income is used, which make more defensible denominators. Table 1 sketches the long-run growth of government in six countries in terms of this measure. As the table shows, government expenditures have grown enormously during the past century. As late as 1913, for example, even in a group of seventeen economically advanced countries, government expenditures averaged only about 13 percent of GDP. At most (in Austria, France, and Italy), they came to just 17 percent, and for the United States they were less than 8 percent. Taxation and government employment were at similarly low levels. In contrast, by 1996, government expenditures in the same seventeen countries had reached nearly 46 percent of GDP. Sweden’s were the highest, at more than 64 percent, and U.S. expenditures reached more than 32 percent.1 Taxation, government employment, and other aspects of government had expanded similarly. Moreover, governments have vastly increased the scope and societal penetration of their regulation in ways that spending measures do not reflect. In the United States, for example, private individuals and firms spend hundreds of billions of dollars each year to comply with government regulations aimed at reducing air and water pollution, lowering health risks, and eliminating workplace discrimination against women and members of various ethnic and other protected groups. Table 1 Government Expenditure as a Percentage of GDP France Germany Sweden Japan United Kingdom United States Circa 1870 12.6 10.0 — 8.8 9.4 7.3 1913 17.0 14.8 10.4 8.3 12.7 7.5 1920 27.6 25.0 10.9 14.8 26.2 12.1 1937 29.0 34.1 16.5 25.4 30.0 19.7 1960 34.6 32.4 31.0 17.5 32.2 27.0 1980 46.1 47.9 60.1 32.0 43.0 31.4 1990 49.8 45.1 59.1 31.3 39.9 32.8 1996 55.0 49.1 64.1 35.9 43.0 32.4 Source:Vito Tanzi and Ludger Schuknecht, Public Spending in the 20th Century: A Global Perspective (New York: Cambridge University Press, 2000), p. 6. Though imperfect, the measures illustrated in the table reflect the size of government. However, they have only a rough association with its scope—that is, the number of separate matters the government tries to influence or control. Over the very long run, governments have increased in both size and scope, but in any particular short period, the two measures may diverge widely. Likewise, we need to consider, apart from either size or scope, the government’s power—its authority and capacity to bring coercive force to bear effectively. Again, over the very long run, most governments have increased in size, scope, and power, but the three dimensions have grown at different rates in particular short intervals. To some extent, governments may substitute growth in one dimension for growth in another; they may augment, say, their scope or power rather than their size. Eventually, however, an increase in one dimension tends to lead to increases in the others. Passage of the Social Security Act in 1935, for example, increased the power and scope of the U.S. government, but not until two decades later did the operation of the Social Security system begin to have a major effect on the magnitude of federal spending. Crises and the Growth of Government Superimposed on the century-long trend to bigger government—measured by size, scope, and power—are several episodes of extraordinarily rapid growth associated with crises, especially the two world wars and the Great Depression. Although much of the wartime expansion of government was reversed when the wars ended, not all of it was, and thus each episode had a “ratchet effect,” lifting the size of government to a permanently higher level. Wartime expansions of government power tended to become lodged in the statute books, administrative decisions, and judicial rulings, and these legacies fostered the growth of government even during peacetime. New York City’s rent controls, for example, date from World War II (see rent control). Moreover, crisis-driven changes in the prevailing ideology supported greater long-term growth of government. Many who had opposed “big government” in the United States as late as 1930, for example, became convinced by the fifteen years of activist government during the Great Depression and World War II that government should play a much larger role in economic affairs. One upshot was the Employment Act of 1946, by which the federal government pledged itself to continuing management of the national economy. Crises promoted the growth of government in other countries, as well. During both world wars, all the belligerents adopted extraordinary measures of economic control to mobilize resources and place them at the government’s disposal for war purposes. These measures included price, wage, and rent controls; inflationary increases in the money stock; physical allocations of raw materials and commodities; conscription of labor; industrial takeovers; rationing of consumer goods and transportation services; financial and exchange controls; vast increases in government spending and employment; and increased tax rates and the imposition of new kinds of taxation. On each occasion, the war left institutional and ideological legacies that promoted the subsequent resort to similar measures even during peacetime. As Bruce Porter wrote, “The mass state, the regulatory state, the welfare state—in short, the collectivist state that reigns in Europe today—is an offspring of the total warfare of the industrial age.”2 The Great Depression elicited similar responses, especially in the United States under Franklin D. Roosevelt’s New Deal. Many current welfare-state and regulatory institutions—the Social Security system, the Securities and Exchange Commission, the National Labor Relations Act, to name but a few—originated with the New Deal. Later crises, such as the social and political turbulence associated with the civil rights revolution and the Vietnam War between the early 1960s and the early 1970s, likewise contributed significantly to the expansion of the welfare state, spawning, for example, Medicare, Medicaid, and a host of welfare, antidiscrimination, and environmental regulatory programs that remain in force today. Trends and crises interact. Because trends bring about the particular preconditions on which each crisis bursts, they affect how each crisis unfolds. And because each crisis leaves the long-run condition of the economic and political systems altered, it affects later trends. Although many economists have dismissed crisis events as “aberrations” or statistical “outliers” in the growth of government, this practice is a serious mistake: the long run, after all, is nothing more than a series of short runs. Structural Changes Promoting the Growth of Government In the nineteenth century, a number of interrelated “modernizing” changes began to accelerate: industrialization, urbanization, the relative decline of agricultural output and employment, and a variety of significant improvements in transportation and communication. As these developments proceeded, masses of people, though made better off in the long run, experienced tremendous changes in their way of life. In response, they sought government assistance in order to gain from, or at least to minimize their losses from, the social and economic transformations that swept them along. The ongoing structural changes altered the perceived costs and benefits of collective action for all sorts of latent special-interest groups. Thus, for example, the gathering of large workforces in urban factories, mills, and commercial facilities created greater potential for the successful organization of labor unions and working-class political parties. New means of transportation and communication—the railroad and the telegraph, later the telephone and the automobile—reduced the costs of organizing agrarian protest movements and agrarian populist political parties. Urbanization created new demands for government provision of infrastructure such as paved streets, lighting, sewerage, and pure water supply. All such events tended to alter the configuration of political power, encouraging, enlarging, and strengthening various special interest groups. The structural transformations, in addition to increasing the demand for government, also increased the supply. When, for example, more people received their income in pecuniary payments traceable in business accounts, as opposed to unrecorded farm income in kind, governments found it easier to collect income taxes. The modern welfare state is often seen as originating in Imperial Germany in the 1880s, when Otto von Bismarck established compulsory accident, sickness, and old-age insurance to divert workers from revolutionary socialism and to purchase their loyalty to the Kaiser’s regime. The lesson was not lost on governments elsewhere, and, by 1914, most other Western European countries had enacted similar programs. The U.S. government caught up in 1935, after such policies had been adopted at state and local levels earlier in the twentieth century. From the mid-nineteenth century onward, collectivist ideologies of various stripes, especially certain forms of socialism, gained greater intellectual and popular followings. Traditional conservatism and classical liberalism increasingly fell out of favor and, with a lag, suffered losses in their political influence. By the early twentieth century, the intellectual cutting edge in all the economically advanced countries had become more or less socialistic (in the United States, in greater part, “Progressive”). The masses also had become more supportive of various socialist or Progressive schemes, from regulation of railway rates to municipal operation of utilities to outright takeovers of industry on a national scale. Not until the 1970s did this collectivist ideological tide begin to turn, and even now, collectivism remains the reigning mode of thought for most intellectuals and political leaders. In the United States, politicians who call themselves conservative today would have been regarded as socialists a century ago. Indeed, quadrennial Socialist Party candidate Norman Thomas announced in 1956 that he would no longer run for president because even the Republican Party had adopted all of his socialist proposals. And the scope of government has grown enormously since 1956. Political developments mirrored the changes in the economy and in the dominant ideology. Throughout the nineteenth and twentieth centuries, democracy tended to gain ground. The franchise was widened, and more popular parties, including frankly socialist parties and labor parties closely allied with the unions, gained greater representation in legislatures at all levels of government— more so, however, in Europe than in the United States. Everywhere, the trend toward universal manhood suffrage and, eventually, women’s suffrage became seemingly irresistible. We might note that even Adolf Hitler came to power via the ballot box. Modernizing economic transformation, collectivist ideological drift, and democratic political reconfiguration tended to bring about a changing balance of forces that favored, not always but as a rule, increases in the size, scope, and power of government. Where We Stand For more than half a century, the political economy of the economically advanced countries has been rife with interest groups seeking policies that make government bigger. The old fundamental checks on such growth—vestigial allegiance to classical liberal ideology and, in the United States, a Constitution long understood as placing limits on the government’s role in economic life—have more or less dissolved as significant obstacles. Intellectual developments during the past thirty years, however, have revived the classical liberals’ hope that, ultimately, they may be able to stem the ongoing growth of government that now seems to be an inherent aspect of the workings of the modern political economy. About the Author Robert Higgs is senior fellow in political economy at the Independent Institute and editor of the Independent Review. Further Reading   Higgs, Robert. Crisis and Leviathan: Critical Episodes in the Growth of American Government. New York: Oxford University Press, 1987. Higgs, Robert. “Eighteen Problematic Propositions in the Analysis of the Growth of Government.” Review of Austrian Economics 5 (1991): 3-40. Higgs, Robert. “The Ongoing Growth of Government in the Economically Advanced Countries.” Advances in Austrian Economics 8 (2005): 279-300. Holcombe, Randall G. From Liberty to Democracy: The Transformation of American Government. Ann Arbor: University of Michigan Press, 2002. Jouvenel, Bertrand de. On Power: The Natural History of Its Growth. Indianapolis: Liberty Fund, 1993. Originally published in French in 1945. Mueller, Dennis C. “The Size of Government.” In Dennis C. Mueller, Public Choice II. New York: Cambridge University Press, 1989. Pp. 320-347. Porter, Bruce. War and the Rise of the State: The Military Foundations of Modern Politics. New York: Free Press, 1994. Tanzi, Vito, and Ludger Schuknecht. Public Spending in the 20th Century: A Global Perspective. New York: Cambridge University Press, 2000. Twight, Charlotte. Dependent on D.C.: The Rise of Federal Control over the Lives of Ordinary Americans. New York: Palgrave, 2002.   Footnotes 1. Vito Tanzi and Ludger Schuknecht, Public Spending in the 20th Century: A Global Perspective (New York: Cambridge University Press, 2000), pp. 6-7.   2. Bruce Porter, War and the Rise of the State: The Military Foundations of Modern Politics (New York: Free Press, 1994), p. 192.   (0 COMMENTS)

Immigration is once again a major component of demographic change in the United States. Since 1940, the number of legal immigrants increased at a rate of one million per decade. By 2002, approximately one million legal

The average U.S. consumer now enjoys a larger and higher-quality home than ever before. In 2001, the average home was 1,693 square feet, while in 1960 it was less than 1,200 square feet. In 2001, 58 percent of homes had three or more bedrooms, and 57 percent had 1.5 or more bathrooms. Compare that with 1970, when fewer than half of homes had three or more bedrooms and only 30 percent had 1.5 or more bathrooms. Housing amenities have also improved. In 2001, 76 percent of homes had a washing machine, 73 percent had a dryer, 56 percent had a dishwasher, and 44 percent had a kitchen sink garbage disposal; 58 percent of homes had a garage, and 80 percent had an outdoor deck or patio. In 2001, 82 percent of homes had some form of air-conditioning and 55 percent had central air; in 1970, only 36 percent of homes had airconditioning and 11 percent had central air. Housing has improved almost across the board. Now, 98.7 percent of homes have complete plumbing that includes sinks, hot water, and flush toilets compared with 93.5 percent thirty years ago. The improvement has been especially dramatic for low-income households. University of California at Berkeley professors Quigley and Raphael (2003) report that the percentage of homes occupied by the poorest onefifth of income earners that have incomplete plumbing declined from 40 percent in 1963 to essentially zero today. While the size and quality of homes have increased, so have prices. Between 1970 and 2001, the median price of owner-occupied housing rose from $78,051 to $123,887 (in 2001 dollars), leading a number of groups to declare a national affordability crisis. But despite noticeable price increases, housing is not necessarily unaffordable. The U.S. Census’s 2001 American Housing Survey estimates the cost of owning the median home at $725 per month. If 30 percent of income is spent on housing, any household earning $29,000 per year can purchase the median home. Median household income in the United States is much higher, at $41,994, and so spending $8,700 per year on the median home is well within reach. Although a nationwide affordability crisis does not exist, the numbers in certain regions are less rosy. In many areas of California and the Northeast, for example, housing is much more expensive than in the rest of the United States. Most commentators attribute the elevated prices to high demand for scarce land. A number of economists, however, point to another explanation. High prices may not be due to intrinsically valuable land but, instead, to housing regulations such as restrictions on density, height, and design; building fees; slow approval processes; restrictions on growth; and preservation laws. One way of measuring whether high prices are due to regulations or high demand for land is to look at how much increased lot size increases the value of a home. If land scarcity drives housing prices, doubling the lot size would increase the difference between construction costs and home value by 100 percent. But Edward Glaser and Joseph Gyourko (2002) found that consumers in most cities value homes on twenty-thousand-square-foot lots by only ten to twenty thousand dollars more than they do equivalent homes on ten-thousand-square-foot lots. This indicates that intrinsically valuable land is not the main cause of high prices. Economists who have studied the issue conclude that the scarcest input for housing is government permission to build. Econometric estimates indicate that only 10 percent of the gap between construction costs and home prices is caused by intrinsically high land prices; the other 90 percent is caused by zoning and land-use regulations. Glaser and Gyourko conclude that “land-use regulation is responsible for high housing costs where they exist” (p. 30). Another study reached the same conclusion using a different methodology. Stephen Malpezzi (1996) constructed an index of seven different land-use regulatory variables and ranked fifty-six different metropolitan areas according to how strictly land use was regulated. Regulatory variables included measures such as changes in length of approval time, time required to get land rezoned, amount of acreage zoned for residential development, and percentage of zoning changes approved. Malpezzi found that a change from a lightly regulated environment to a heavily regulated one increased home values by 51 percent and decreased the number of permits to build by 42 percent. Home ownership rates also declined by about ten percentage points. Regardless of methodology, evidence shows that areas with high levels of regulation have higher housing prices, higher rents, and lower home ownership rates. Although no national affordable housing crisis exists, prices are quite high in some high-regulation jurisdictions. In Santa Clara County, California, for example, the median price of a newly constructed home in 2003 was more than $638,000. Assuming a family can spend 30 percent of its income on a mortgage, even with low 5 percent interest rates a family must earn more than $135,000 per year to afford the median-priced new home. If the above estimates are correct, regulations such as urban growth boundaries, moratoriums on building permits, environmental regulations, and other restrictions raise home prices as much as $300,000 in this county. Put another way, the portion of purchase price paid by residents of Santa Clara County due to regulation is almost enough to buy three complete homes of median value elsewhere in the United States. In addition to land-use restrictions, governments drive up housing prices for lower-income families by dictating improvements in housing quality that the families might not otherwise choose. Governments do this by, for example, setting minimum lot sizes. Also, the federal government’s urban renewal program between 1949 and the early 1970s destroyed more than 600,000 low-income dwellings, replacing them with 250,000 homes that were mostly for middle- and upper-income buyers (O’Sullivan 1996). Martha Burt’s 1992 study found that urban renewal’s destruction of low-quality, low-cost residential hotel rooms in U.S. central cities contributed to the rise of homelessness. Real federal outlays for housing have steadily increased since the early 1960s to reach their current level of approximately thirty billion dollars per year. Today, approximately 6 million renter households receive federal housing subsidies, and 1.5 million households live in public housing. But the public sector lacks a profit incentive, and government programs are highly inefficient. One study estimated that for every hundred dollars of government spending on housing production, housing worth only forty-three dollars to the residents is produced (Mayo 1986). Because residents of public housing do not own it—and, indeed, no one owns it—public housing usually deteriorates rapidly through poor upkeep, in many cases becoming uninhabitable within twenty years. Some of the worst effects of public housing have been on the very residents the housing was created to help. Public housing projects are often plagued by high crime, and are thus considered undesirable places to live. In contrast, private developers and landlords have an incentive to make sure customers are satisfied: they lose business otherwise. Recognizing that government is not a particularly good landlord, many policymakers are looking for other “affordable” housing solutions. At the local level, inclusionary zoning is becoming increasingly popular. The word “inclusionary” actually refers to price controls on a percentage of new homes. Builders and subsequent owners are forced to price the homes so they are “affordable” to people at specific income levels. In Tiburon, California, for example, where the median price of existing homes exceeds $1 million, builders are required to sell 10 percent of new homes for $109,825 or less. Inclusionary zoning is most popular in California, Maryland, and New Jersey. A nationwide 1991 survey found that 9 percent of cities larger than 100,000 had inclusionary zoning, and the number is increasing rapidly. In 1990, roughly thirty jurisdictions in California had inclusionary zoning; the number had increased to more than one hundred by 2004. Inclusionary zoning produces negative effects similar to those caused by other price controls. Price controls restrict the supply of new homes and actually make housing less affordable. Because builders are forced to sell a portion of a development at a loss, inclusionary zoning functions as a tax on new construction. Estimates of the level of the tax in California cities such as Portola Valley are above $200,000 per market-rate home. To maintain normal profit margins, builders end up passing the tax on to landowners and other home buyers. Elasticities of supply and demand determine exactly how the burden is split, but the result is almost certainly higher home prices. Inclusionary zoning also leads to less construction. In the forty-five San Francisco Bay Area cities for which data are available, new construction fell by 31 percent in the year following the adoption of inclusionary zoning (Powell and Stringham 2004). In some cases, inclusionary zoning halts development completely. The experience of Watsonville, California, illustrates this effect. In 1990, Watsonville’s inclusionary zoning ordinance imposed price controls on 25 percent of new homes. Between 1990 and 1999, with the exception of a few small nonprofit developments, almost no new construction occurred. The law was finally revised in 1999 because, in the words of Watsonville Mayor Judy Doering-Nielsen, “There was an incredible pent-up demand. Our inclusionary housing ordinance was so onerous that developers wouldn’t come in.” Jan Davison, director of the city’s Redevelopment and Housing Department, commented that the inclusionary zoning law “was so stringent, and land costs were so high, that few units were produced,” but “[it] was completely redone in 2000, and we got more units produced” (Morgan 2003). Watsonville reduced the number of units under price controls from 25 percent of all developments to 15 percent on smaller developments and 20 percent on developments of fifty units or more. In the three years after easing requirements, the city’s housing stock increased by 12 percent. In addition to restricting supply, inclusionary zoning produces a number of other undesirable effects. Price controls exacerbate shortages, decrease mobility, and are a poor way of helping those most in need. Because inclusionary zoning comes with restrictions on resale, it prevents equity appreciation and leads families to live in the homes longer than they would otherwise. This takes homes off the market and does not help other low-income families who are seeking to buy homes. Even if a family’s income has considerably increased, owners of price-controlled homes are less able to move because price controls prevent their homes from appreciating at market rates. These residents are stuck with an asset that they cannot fully cash out and cannot even pass on to their children unless those children also meet low-income guidelines. This creates an incentive for owners to evade the law and resell or sublet their units at market rates. Governments then must spend resources supervising the price controls. Interestingly, even high-priced construction benefits all consumers. When a high-income household moves into a high-priced new home, it vacates its old home for someone else. That family, in turn, vacates its old residence, freeing it up for someone else. Economists call this process “filtering” because as new homes are built, the existing stock “filters down” to lower-income households. A classic study, New Homes and Poor People, looked at the chain of existing home sales in thirteen different cities and found that each new home generated an average of 3.5 moves. Even though new housing tends to be higher priced, low-income households make up to 14 percent of the moves generated by new housing. According to Malpezzi and Green (1996), “to the extent that a city makes it easy for any type of housing to be built, it will also enhance the available stock of low-cost housing” (p. 1811, italics added). When new construction is prevented or slowed, this process is stifled. Without new homes, high-income buyers bid up prices on existing homes, thus making all housing less affordable. A sure way to make housing more affordable is to reduce zoning regulations and other restrictions on new construction. Despite the regulations, the U.S. housing market is quite resilient. Ninety-eight percent of Americans live in privately owned and constructed homes. The size and quality of these homes have increased substantially over the past few decades. Some cities, such as Houston, Texas, have gone without zoning, and some, such as Celebration, Florida, are almost entirely privately planned. Developments such as Santana Row in San Jose, California, now provide streets, parks, and even private security. A shift away from government planning to private planning is positive for renters and homebuyers (Beito et al. 2002). About the Authors Benjamin Powell is an assistant professor of economics at San Jose State University and the director of the Center for Entrepreneurial Innovation at the Independent Institute. Edward Stringham is an assistant professor of economics at San Jose State University. Further Reading   Beito, David, Peter Gordon, and Alexander Tabarrok. The Voluntary City: Choice, Community, and Civil Society. Ann Arbor: University of Michigan Press, 2002. Burt, Martha. Over the Edge: The Growth of Homelessness During the 1980s. New York: Russell Sage Foundation, 1992. Glaeser, Edward, and Joseph Gyourko. “Zoning’s Steep Price.” Regulation (Fall 2002): 24-30. Green, Richard, and Stephen Malpezzi. A Primer on U.S. Housing Markets and Housing Policy. Washington, D.C: Urban Institute Press, 2003. Lansing, John, Charles Clifton, and James Morgan. New Homes and Poor People. Ann Arbor: Institute for Social Research, 1969. Malpezzi, Stephen. “Housing Prices, Externalities, and Regulation in U.S. Metropolitan Areas.” Journal of Housing Research 7, no. 2 (1996): 209-241. Malpezzi, Stephen, and Richard Green. “What Has Happened to the Bottom of the U.S. Housing Market?” Urban Studies 33, no. 10 (1996): 1807-1820. Mayo, Stephen. “Sources of Inefficiency in Subsidized Housing Programs: A Comparison of U.S. and German Experience.” Journal of Urban Economics 20 (1986): 229-249. Morgan, Terri. “Loosened Rules Lure Developers to Watsonville.” San Jose Mercury News, October 18, 2003. O’Sullivan, Arthur. Urban Economics. Chicago: Irwin/McGraw-Hill, 1996. Powell, Benjamin, and Edward Stringham. Housing Supply and Affordability: Do Affordable Housing Mandates Work? Policy Study no. 318. Reason Public Policy Institute, 2004. Quigley, John, and Steven Raphael. “Is Housing Unaffordable? Why Isn’t It More Affordable?” Journal of Economic Perspectives 18, no. 1 (2004): 191-214. U.S. Census Bureau. Annual Housing Survey, 1973: United States and Regions. Washington, D.C.: U.S. Census Bureau, 1975. U.S. Census Bureau. American Housing Survey for the United States: 2001. Washington, D.C.: U.S. Census Bureau, 2002.   (0 COMMENTS)

Inflation is a sustained increase in the aggregate price level. Hyperinflation is very high inflation. Although the threshold is arbitrary, economists generally reserve the term “hyperinflation” to describe episodes when the monthly inflation rate is greater than 50 percent. At a monthly rate of 50 percent, an item that cost $1 on January 1 would cost $130 on January 1 of the following year. Hyperinflation is largely a twentieth-century phenomenon. The most widely studied hyperinflation occurred in Germany after World War I. The ratio of the German price index in November 1923 to the price index in August 1922—just fifteen months earlier—was 1.02 × 1010. This huge number amounts to a monthly inflation rate of 322 percent. On average, prices quadrupled each month during the sixteen months of hyperinflation. While the German hyperinflation is better known, a much larger hyperinflation occurred in Hungary after World War II. Between August 1945 and July 1946 the general level of prices rose at the astounding rate of more than 19,000 percent per month, or 19 percent per day. Even these very large numbers understate the rates of inflation experienced during the worst days of the hyperinflations. In October 1923, German prices rose at the rate of 41 percent per day. And in July 1946, Hungarian prices more than tripled each day. What causes hyperinflations? No single shock, no matter how severe, can explain sustained, continuously rapid growth in prices. The world wars themselves did not cause the hyperinflations in Germany and Hungary. The destruction of resources during the wars can explain why prices in Germany and Hungary would be higher after the wars than before. But the wars themselves cannot explain why prices would continuously rise at rapid rates during hyperinflation periods. Hyperinflations are caused by extremely rapid growth in the supply of “paper” money. They occur when the monetary and fiscal authorities of a nation regularly issue large quantities of money to pay for a large stream of government expenditures. In effect, inflation is a form of taxation in which the government gains at the expense of those who hold money while its value is declining. Hyperinflations are very large taxation schemes. During the German hyperinflation the number of German marks in circulation increased by a factor of 7.32 × 109. In Hungary, the comparable increase in the money supply was 1.19 × 1025. These numbers are smaller than those given earlier for the growth in prices. What does it mean when prices increase more rapidly than the supply of money? Economists use a concept called the “real quantity of money” to discuss what happens to people’s money-holding behavior when prices grow rapidly. The real quantity of money, sometimes called the “purchasing power of money,” is the ratio of the amount of money held to the price level. Imagine that the typical household consumes a certain bundle of goods. The real quantity of money measures the number of bundles a household could buy with the money it holds. In low-inflation periods, a household will maintain a high real money balance because it is convenient to do so. In high-inflation periods, a household will maintain a lower real money balance to avoid the inflation “tax.” They avoid the inflation tax by holding more of their wealth in the form of physical commodities. As they buy these commodities, prices rise higher and inflation increases. Figure 1 shows real money balances and inflation for Germany from the beginning of 1919 until April 1923. The graph indicates that Germans lowered real balances as inflation increased. The last months of the German hyperinflation are not pictured in the figure because the inflation rate was too high to preserve the scale of the graph. Hyperinflations tend to be self-perpetuating. Suppose a government is committed to financing its expenditures by issuing money and begins by raising the money stock by 10 percent per month. Soon the rate of inflation will increase, say, to 10 percent per month. The government will observe that it can no longer buy as much with the money it is issuing and is likely to respond by raising money growth even further. The hyperinflation cycle has begun. During the hyperinflation there will be a continuing tug-of-war between the public and the government. The public is trying to spend the money it receives quickly in order to avoid the inflation tax; the government responds to higher inflation with even higher rates of money issue. Most economists agree that inflation lowers economic welfare even when allowing for revenue from the inflation tax and the distortion that would be created by alternative taxes that raise the same revenue.1 Figure 1 During the German Hyperinflation, the Real Quantity of Money Fell as Inflation Increased ZOOM   How do hyperinflations end? The standard answer is that governments have to make a credible commitment to halting the rapid growth in the stock of money. Proponents of this view consider the end of the German hyperinflation to be a case in point. In late 1923, Germany undertook a monetary reform, creating a new unit of currency called the rentenmark. The German government promised that the new currency could be converted on demand into a bond having a certain value in gold. Proponents of the standard answer argue that the guarantee of convertibility is properly viewed as a promise to cease the rapid issue of money. An alternative view held by some economists is that not just monetary reform, but also fiscal reform, is needed to end a hyperinflation. According to this view, a successful reform entails two believable commitments on the part of government. The first is a commitment to halt the rapid growth of paper money. The second is a commitment to bring the government’s budget into balance. This second commitment is necessary for a successful reform because it removes, or at least lessens, the incentive for the government to resort to inflationary taxation. If the government commits to balancing its budget, people can reasonably believe that money growth will not rise again to high levels in the near future. Thomas Sargent, a proponent of the second view, argues that the German reform of 1923 was successful because it created an independent central bank that could refuse to monetize the government deficit and because it included provisions for higher taxes and lower government expenditures. Another way to look at Sargent’s view is that hyperinflations end when people reasonably believe that the rate of money growth will fall to normal levels both now and in the future. What effects do hyperinflations have? One effect with serious consequences is the reallocation of wealth. Hyperinflations transfer wealth from the general public, which holds money, to the government, which issues money. Hyperinflations also cause borrowers to gain at the expense of lenders when loan contracts are signed prior to the worst inflation. Businesses that hold stores of raw materials and commodities gain at the expense of the general public. In Germany, renters gained at the expense of property owners because rent ceilings did not keep pace with the general level of prices. Costantino Bresciani-Turroni argues that the hyperinflation destroyed the wealth of the stable classes in Germany and made it easier for the National Socialists (Nazis) to gain power. Hyperinflation reduces an economy’s efficiency by driving people away from monetary transactions and toward barter. In a normal economy, using money in exchange is highly efficient. During hyperinflations people prefer to be paid in commodities in order to avoid the inflation tax. If they are paid in money, they spend that money as quickly as possible. In Germany, workers were paid twice per day and would shop at midday to avoid further depreciation of their earnings. Hyperinflation is a wasteful game of “hot potato” in which people use up valuable resources trying to avoid holding on to paper money. Hyperinflations can lead to behavior that would be thought bizarre under normal conditions. Gerald Feldman’s book The Great Disorder shows a photo of a small firm transporting wages in a wheelbarrow because the number of banknotes required to pay workers grew very large during the hyperinflation (Feldman 1993, p. 680). Corbis, an Internet source of photos (www.corbis.com), shows an image of a German woman burning banknotes in her stove because doing so provided more heat than using them to buy other fuel would have done. Another image shows German children playing with blocks of banknotes in the street. More-recent examples of very high inflation have occurred mostly in Latin America and former Eastern bloc nations. Argentina, Bolivia, Brazil, Chile, Peru, and Uruguay together experienced an average annual inflation rate of 121 percent between 1970 and 1987. In Bolivia, prices increased by 12,000 percent in 1985. In Peru, a near hyperinflation occurred in 1988 as prices rose by about 2,000 percent for the year, or by 30 percent per month. However, Thayer Watkins documents that the record hyperinflation of all time occurred in Yugoslavia between 1993 and 1994.2 The Latin American countries with high inflation also experienced a phenomenon called “dollarization,” the use of U.S. dollars in place of the domestic currency. As inflation rises, people come to believe that their own currency is not a good way to store value and they attempt to exchange their domestic money for dollars. In 1973, 90 percent of time deposits in Bolivia were denominated in Bolivian pesos. By 1985, the year of the Bolivian hyperinflation, more than 60 percent of time deposit balances were denominated in dollars. What caused high inflation in Latin America? Many Latin American countries borrowed heavily during the 1970s and agreed to repay their debts in dollars. As interest rates rose, all of these countries found it increasingly difficult to meet their debt service obligations. The high-inflation countries were those that responded to these higher costs by printing money. The Bolivian hyperinflation is a case in point. Eliana Cardoso explains that in 1982 Hernán Siles Suazo took power as head of a leftist coalition that wanted to satisfy demands for more government spending on domestic programs but faced growing debt service obligations and falling prices for its tin exports. The Bolivian government responded to this situation by printing money. Faced with a shortage of funds, it chose to raise revenue through the inflation tax instead of raising income taxes or reducing other government spending. About the Author Michael K. Salemi is an economics professor at the University of North Carolina in Chapel Hill. Further Reading Introductory   Bresciani-Turroni, Costantino. The Economics of Inflation: A Study of Currency Depreciation in Post-war Germany. New York: Augustus M. Kelley, 1937. A readable classic originally written in Italian. Cardoso, Eliana A. “Hyperinflation in Latin America.” Challenge (January/February 1989): 11-19. Interesting and accessible. Federal Reserve Bank of San Francisco. “The Optimal Rate of Inflation.” FRBSF Economic Letter 97-27, September 19, 1997. A very readable overview of theoretical analyses of the welfare effects of inflation. Feldman, Gerald. The Great Disorder. Oxford: Oxford University Press, 1993. Source of the wheelbarrow picture. Graham, Frank D. Exchange, Prices, and Production in Hyperinflation Germany, 1920-1923. New York: Russell and Russell, 1930. Readable with a focus on data. Holtfrerich, Carl-Ludwig. The German Inflation 1914-1923: Causes and Effects in International Perspective. New York: De Gruyter, 1986. Written by an economist who worked with German archives. Sargent, Thomas J. “The Ends of Four Big Inflations.” In Rational Expectations and Inflation. New York: Harper and Row, 1986. Sargent explains in detail why fiscal reform is needed to end hyperinflations. Salemi, Michael, and Sarah Leak. Analyzing Inflation and Its Control: A Resource Guide. New York: National Council on Economic Education, 1984. Designed to help high school teachers teach about inflation.   Advanced   Bomberger, William A., and Gail E. Makinen. “The Hungarian Hyperinflation and Stabilization of 1945-1946.” Journal of Political Economy 91 (October 1983): 801-824. Cagan, Phillip. “The Monetary Dynamics of Hyperinflation.” In Milton Friedman, ed., Studies in the Quantity Theory of Money. Chicago: University of Chicago Press, 1956. Fischer, Stanley, Ratna Sahay, and Carlos A. Vegh. “Modern Hyper- and High Inflations.” Journal of Economic Literature 40, no. 3 (2002): 837–880. A comprehensive look at modern episodes and theory. Salemi, Michael. “Hyperinflation, Exchange Depreciation, and the Demand for Money in Post World War I Germany.” Ph.D. diss., University of Minnesota, 1976.   Footnotes 1. For more on the “optimal” rate of inflation, see Timothy Cogley, “What Is the Optimal Rate of Inflation,” FRSBSF Economic Letter 97-27, online at: http://www.sf.frb.org/econrsrch/wklyltr/el97-27.html.   2. See http://www.sjsu.edu/faculty/watkins/hyper.htm.   (0 COMMENTS)

To most people, capital means a bank account, a hundred shares of IBM stock, assembly lines, or steel plants in the Chicago area. These are all forms of capital in the sense that they are assets that yield income and other useful outputs over long periods of time. But such tangible forms of capital are not the only type of capital. Schooling, a computer training course, expenditures on medical care, and lectures on the virtues of punctuality and honesty are also capital. That is because they raise earnings, improve health, or add to a person’s good habits over much of his lifetime. Therefore, economists regard expenditures on education, training, medical care, and so on as investments in human capital. They are called human capital because people cannot be separated from their knowledge, skills, health, or values in the way they can be separated from their financial and physical assets. Education, training, and health are the most important investments in human capital. Many studies have shown that high school and college education in the United States greatly raise a person’s income, even after netting out direct and indirect costs of schooling, and even after adjusting for the fact that people with more education tend to have higher IQs and better-educated, richer parents. Similar evidence covering many years is now available from more than a hundred countries with different cultures and economic systems. The earnings of more-educated people are almost always well above average, although the gains are generally larger in less-developed countries. Consider the differences in average earnings between college and high school graduates in the United States during the past fifty years. Until the early 1960s, college graduates earned about 45 percent more than high school graduates. In the 1960s, this premium from college education shot up to almost 60 percent, but it fell back in the 1970s to less than 50 percent. The fall during the 1970s led some economists and the media to worry about “overeducated Americans.” Indeed, in 1976, Harvard economist Richard Freeman wrote a book titled The Overeducated American. This sharp fall in the return to investments caused doubt about whether education and training really do raise productivity or simply provide signals (“credentials”) about talents and abilities. But the monetary gains from a college education rose sharply again during the 1980s, to the highest level since the 1930s. Economists Kevin M. Murphy and Finis Welch have shown that the premium on getting a college education in the 1980s was above 65 percent. This premium continued to rise in the 1990s, and in 1997 it was more than 75 percent. Lawyers, accountants, engineers, and many other professionals experienced especially rapid advances in earnings. The earnings advantage of high school graduates over high school dropouts has also greatly increased. Talk about overeducated Americans has vanished, replaced by concern about whether the United States provides adequate quality and quantity of education and other training. This concern is justified. Real wage rates of young high school dropouts have fallen by more than 25 percent since the early 1970s. This drop is overstated, though, because the inflation measure used to compute real wages overstates the amount of inflation over that time (see consumer price indexes). Real wages for high school dropouts stayed constant from 1995 to 2004, which means, given the price index used to adjust them, that these wages have increased somewhat. Thinking about higher education as an investment in human capital helps us understand why the fraction of high school graduates who go to college increases and decreases from time to time. When the benefits of a college degree fell in the 1970s, for example, the fraction of white high school graduates who started college fell—from 51 percent in 1970 to 46 percent in 1975. Many educators expected that enrollments would continue to decline in the 1980s, partly because the number of eighteen-year-olds was declining, but also because college tuition was rising rapidly. They were wrong about whites. The fraction of white high school graduates who entered college rose steadily in the 1980s, reaching 60 percent in 1988, and caused an absolute increase in the number of whites enrolling despite the smaller number of college-aged people. That percentage kept increasing to an all-time high of 67 percent in 1997 and then declined slightly to 64 percent in 2000. This makes sense. The benefits of a college education, as noted, increased in the 1980s and 1990s. Tuition and fees did rise by about 39 percent from 1980 to 1986, and by 20 percent more from 1989 to 2000 in real, inflation-adjusted terms (again, using the faulty price indexes available). But tuition and fees are not, for most college students, the major cost of going to college. On average, three-fourths of the private cost of a college education—the cost borne by the student and the student’s family—is the income that college students give up by not working. A good measure of this “opportunity cost” is the income that a newly minted high school graduate could earn by working full time. During the 1980s and 1990s, this forgone income rose only about 4 percent in real terms. Therefore, even a 67 percent increase in real tuition costs in twenty years translated into an increase of just 20 percent in the average student’s total cost of a college education. The economics of human capital also account for the fall in the fraction of black high school graduates who went on to college in the early 1980s. As UCLA economist Thomas J. Kane has pointed out, costs rose more for black college students than for whites. That is because a higher percentage of blacks are from low-income families, and therefore had been heavily subsidized by the federal government. Cuts in federal grants to them in the early 1980s substantially raised their cost of a college education. In the 1990s, however, there was a substantial recovery in the percentage of black high school graduates going on to college. According to the 1982 “Report of the Commission on Graduate Education” at the University of Chicago, demo-graphic-based college enrollment forecasts had been wide of the mark during the twenty years prior to that time. This is not surprising to a “human capitalist.” Such forecasts ignored the changing incentives—on the cost side and on the benefit side—to enroll in college. The economics of human capital have brought about a particularly dramatic change in the incentives for women to invest in college education in recent decades. Prior to the 1960s, American women were more likely than men to graduate from high school, but less likely to go to college. Women who did go to college shunned or were excluded from math, sciences, economics, and law, and gravitated toward teaching, home economics, foreign languages, and literature. Because relatively few married women continued to work for pay, they rationally chose an education that helped in “household production”—and no doubt also in the marriage market—by improving their social skills and cultural interests. All this has changed radically. The enormous increase in the labor participation of married women is the most important labor force change during the past twenty-five years. Many women now take little time off from their jobs, even to have children. As a result, the value to women of market skills has increased enormously, and they are bypassing traditional “women’s” fields to enter accounting, law, medicine, engineering, and other subjects that pay well. Indeed, women now constitute about one-third of enrollments in business schools, more than 45 percent in law schools, and more than 50 percent in medical schools. Many home economics departments have either shut down or are emphasizing the “new home economics”—that is, the economics of whether to get married, how many children to have, and how to allocate household resources, especially time. Improvements in the economic position of black women have been especially rapid, and black women now earn almost as much as white women.1 Of course, formal education is not the only way to invest in human capital. Workers also learn and are trained outside schools, especially on the job. Even college graduates are not fully prepared for the labor market when they leave school and must be fitted into their jobs through formal and informal training programs. The amount of on-the-job training ranges from an hour or so at simple jobs like dishwashing to several years at complicated tasks like engineering in an auto plant. The limited data available indicate that on-the-job training is an important source of the very large increase in earnings that workers get as they gain greater experience at work. Bold estimates by Columbia University economist Jacob Mincer suggest that the total investment in on-the-job training may be well above $200 billion a year, or about 2 percent of GDP. No discussion of human capital can omit the influence of families on the knowledge, skills, health, values, and habits of their children. Parents affect educational attainment, marital stability, propensities to smoke and to get to work on time, and many other dimensions of their children’s lives. The enormous influence of the family would seem to imply a very close relation between the earnings, education, and occupations of parents and children. Therefore, it is rather surprising that the positive relation between the earnings of parents and children is not so strong, although the relation between the years of schooling of parents and their children is stronger. For example, if fathers earn 20 percent above the mean of their generation, sons at similar ages tend to earn about 8-10 percent above the mean of theirs. Similar relations hold in Western European countries, Japan, Taiwan, and many other places. Statisticians and economists call this “regression to the mean.” The old adage of “from shirtsleeves to shirtsleeves in three generations” (the idea being that someone starts with hard work and then creates a fortune for the next generation that is then dissipated by the third generation) is no myth; the earnings of grandsons and grandparents at comparable ages are not closely related.2 Apparently, the opportunities provided by a modern economy, along with extensive government and charitable support of education, enable the majority of those who come from lower-income backgrounds to do reasonably well in the labor market. The same opportunities that foster upward mobility for the poor create an equal amount of downward mobility for those higher up on the income ladder. The continuing growth in per capita incomes of many countries during the nineteenth and twentieth centuries is partly due to the expansion of scientific and technical knowledge that raises the productivity of labor and other inputs in production. And the increasing reliance of industry on sophisticated knowledge greatly enhances the value of education, technical schooling, on-the-job training, and other human capital. New technological advances clearly are of little value to countries that have very few skilled workers who know how to use them. Economic growth closely depends on the synergies between new knowledge and human capital, which is why large increases in education and training have accompanied major advances in technological knowledge in all countries that have achieved significant economic growth. The outstanding economic records of Japan, Taiwan, and other Asian economies in recent decades dramatically illustrate the importance of human capital to growth. Lacking natural resources—they import almost all their energy, for example—and facing discrimination against their exports by the West, these so-called Asian tigers grew rapidly by relying on a well-trained, educated, hardworking, and conscientious labor force that makes excellent use of modern technologies. China, for example, is progressing rapidly by mainly relying on its abundant, hardworking, and ambitious population. About the Author Gary S. Becker is university professor of economics and sociology at the University of Chicago, a professor at the Graduate School of Business, and the Rose-Marie and Jack R. Anderson Senior Fellow at Stanford’s Hoover Institution. He was a pioneer in the study of human capital and was awarded the 1992 Nobel Memorial Prize in Economic Sciences (see also biographies section). Further Reading   Becker, Gary S. Human Capital: A Theoretical and Empirical Analysis, with Special Reference to Education. 2d ed. New York: Columbia University Press for NBER, 1975. Freeman, Richard. The Overeducated American. New York: Academic Press, 1976. Kane, Thomas J. “College Attendance by Blacks Since 1970: The Role of College Cost, Family Background and the Returns to Education.” Journal of Political Economy 102 (1994): 878-911. Mincer, Jacob. “Investment in U.S. Education and Training.” NBER Working Paper no. 4844. National Bureau of Economic Research, Cambridge, Mass., 1994. Murphy, Kevin M., and Finis Welch. “Wage Premiums for College Graduates: Recent Growth and Possible Explanations.” Educational Researcher 18 (1989): 17-27. National Center for Education Statistics. “Digest of Education Statistics 2001.” NCES 2002-130. U.S. Department of Education, March 2002. National Center for Education Statistics. “Paying for College—Changes Between 1990 and 2000 for Full-Time Dependent Undergraduates.” NCES 2004-075. U.S. Department of Education, June 2004. National Center for Education Statistics. “Projections of Education Statistics to 2012.” NCES 2002-030. U.S. Department of Education, October 2002. “Report of the Commission on Graduate Education.” University of Chicago Record 16, no. 2 (1982): 67-180. Topel, Robert. “Factor Proportions and Relative Wages: The Supply Side Determinants of Wage Inequality.” Journal of Economic Perspectives II (Spring 1997): 55-74. Welch, Finis, ed. The Causes and Consequences of Increasing Inequality. Bush School Series in the Economics of Public Policy. Chicago: University of Chicago Press, 2001.   Footnotes 1. National Center for Education Statistics, “Educational Achievement and Black-White Inequality,” NCES 2001-061, U.S. Department of Education, 2001.   2. Gary Solon, “Intergenerational Income Mobility in the United States,” American Economic Review 82 (June 1992): 393-408.   (0 COMMENTS)

Game theory is the science of strategy. It attempts to determine mathematically and logically the actions that “players” should take to secure the best outcomes for themselves in a wide array of “games.” The games it studies range from chess to child rearing and from tennis to takeovers. But the games all share the common feature of interdependence. That is, the outcome for each participant depends on the choices (strategies) of all. In so-called zero-sum games the interests of the players conflict totally, so that one person’s gain always is another’s loss. More typical are games with the potential for either mutual gain (positive sum) or mutual harm (negative sum), as well as some conflict. Game theory was pioneered by Princeton mathematician john von neumann. In the early years the emphasis was on games of pure conflict (zero-sum games). Other games were considered in a cooperative form. That is, the participants were supposed to choose and implement their actions jointly. Recent research has focused on games that are neither zero sum nor purely cooperative. In these games the players choose their actions separately, but their links to others involve elements of both competition and cooperation. Games are fundamentally different from decisions made in a neutral environment. To illustrate the point, think of the difference between the decisions of a lumberjack and those of a general. When the lumberjack decides how to chop wood, he does not expect the wood to fight back; his environment is neutral. But when the general tries to cut down the enemy’s army, he must anticipate and overcome resistance to his plans. Like the general, a game player must recognize his interaction with other intelligent and purposive people. His own choice must allow both for conflict and for possibilities for cooperation. The essence of a game is the interdependence of player strategies. There are two distinct types of strategic interdependence: sequential and simultaneous. In the former the players move in sequence, each aware of the others’ previous actions. In the latter the players act at the same time, each ignorant of the others’ actions.

Futures Markets In the late 1970s and early 1980s, radical changes in the international currency system and in the way the Federal Reserve managed the U.S. money supply produced unprecedented volatility in interest rates and currency exchange rates. As market forces shook the foundations of global financial stability, businesses wrestled with heretofore unimagined challenges. Between 1980 and 1985, Caterpillar, the Peoria-based maker of heavy equipment, saw exchange-rate shifts give its main Japanese competitor a 40 percent price advantage. Meanwhile, even the soundest business borrowers faced soaring double-digit interest rates. Investors clamored for dollars as commodity prices collapsed, taking whole nations down into insolvency and ushering in the Third World debt crisis. Stymied financial managers turned to Chicago, where the traditional agricultural futures markets had only recently invented techniques to cope with financial uncertainty. In 1972, the Chicago Mercantile Exchange established the International Monetary Market to trade the world’s first futures contracts for currency. The world’s first interest-rate futures contract was introduced shortly afterward, at the Chicago Board of Trade, in 1975. In 1982, futures contracts on the Standard and Poor’s 500 index began to trade at the Chicago Mercantile Exchange. These radically new tools helped businesses manage in a volatile and unpredictable new world order. How? Futures are standardized contracts that commit parties to buy or sell goods of a specific quality at a specific price, for delivery

When economists speak of the “gender gap” these days, they usually are referring to systematic differences in the outcomes that men and women achieve in the labor market. These differences are seen in the percentages of men and women in the labor force, the types of occupations they choose, and their relative incomes or hourly wages. These economic gender gaps, which were salient issues during the women’s movement in the 1960s and 1970s, have been of interest to economists at least since the 1890s. Figure 1 Labor Force Participation Rates of Men and Women, 25-44 Years Old, 1890-2000

After World War II the German economy lay in shambles. The war, along with Hitler’s scorched-earth policy, had destroyed 20 percent of all housing. Food production per capita in 1947 was only 51 percent of its level in 1938, and the official food ration set by the occupying powers varied between 1,040 and 1,550 calories per day. Industrial output in 1947 was only one-third its 1938 level. Moreover, a large percentage of Germany’s working-age men were dead. At the time, observers thought that West Germany would have to be the biggest client of the U.S. welfare state; yet, twenty years later its economy was envied by most of the world. And less than ten years after the war people already were talking about the German economic miracle. What caused the so-called miracle? The two main factors were currency reform and the elimination of price controls, both of which happened over a period of weeks in 1948. A further factor was the reduction of marginal tax rates later in 1948 and in 1949. Before By 1948 the German people had lived under price controls for twelve years and rationing for nine years. Adolf Hitler had imposed price controls on the German people in 1936 so that his government could buy war materials at artificially low prices. Later, in 1939, one of Hitler’s top Nazi deputies, Hermann Goering, imposed rationing. (Roosevelt and Churchill also imposed price controls and rationing, as governments tend to do during all-out wars.) During the war, the Nazis made flagrant violations of the price controls subject to the death penalty.1 In November 1945 the Allied Control Authority, formed by the governments

We live in a greenhouse world; without such gases Earth would be too cold to sustain life as we know it. Water vapor, the principal molecule that keeps us warm, accounts for almost all (98 percent) of the natural heating of the world. Other gases, such as carbon dioxide (CO2), methane (CH4), and nitrous oxide (N2O), also contribute to a warmer world. Over the last three hundred years, as the world has industrialized and become more and more dependent on fossil fuels, the concentration of CO2 in the atmosphere has increased by more than 30 percent while methane concentrations, mainly from agriculture, have increased by about 150 percent. Atmospheric scientists have predicted that increases in those greenhouse gases will lead to, or are already producing, a warmer world. The Intergovernmental Panel on Climate Change (IPCC, a UN body tasked with the science of global warming) believes that if nothing is done to slow global warming, the amount of CO2 will have doubled by the year 2060, causing the world’s temperature to rise by about 2.5°C (4.5°F). Interestingly, Swedish scientist Svante Arrhenius, the first to predict global warming (1896), believed that it would be beneficial, especially for northern countries. In 1992, however, the fear of harm from global warming led most of the world’s national governments, including the U.S. government, to sign the United Nations Framework Convention on Climate Change at the Earth Summit in Rio de Janeiro. These governments pledged to take voluntary steps to cap carbon emissions at 1990 levels by the year 2000. The U.S. Senate ratified that treaty later in 1992. International activity continued with a subsequent meeting in Berlin (1995), followed by the meeting in Kyoto (1997) that negotiated a protocol mandating emission reductions by the advanced countries of the world but exempting the rest of the globe. The Clinton administration signed the protocol, knowing that with large countries like China and India excluded, the Senate would be unlikely to ratify it. Indeed, President Clinton refused to send the protocol to the Senate for ratification, and the Senate voted 95–0 against any treaty that excluded some countries. Shortly after taking office, George W. Bush announced that the United States was withdrawing from the treaty on the