The Economics of Crime

Ed Rubenstein
Economics Analyst, National Review

Ed RubensteinEd Rubenstein is an economic consultant and journalist specializing in public policy and tax issues. Since 1988, he has written the popular “Right Data” column in National Review, in which he debunks many long-standing myths about the economy. His essays have also appeared in the Wall Street Journal, the New York TimesInvestor’s Daily, and the Harvard Business Review. During the 1980s, Mr. Rubenstein was the senior economist at W.R. Grace & Co., and a member of the federal Grace Commission on cutting waste in government. His first two books were published in 1994: The Right Data and From the Empire State to the Vampire State (co-authored with Herb London).

In this issue of Imprimis, Edwin Rubenstein and Robert Woodson discuss some of the most troubling issues in our society: crime, illegitimacy, and welfare dependency. Their remarks were delivered during Hillsdale’s February 1995 Center for Constructive Alternatives seminar, “Crime in America: Fighting Back with Moral and Market Virtues.”

“The Economics of Crime”

Polls show that Americans regard crime as the number one social problem facing the nation. We fear being a victim of violent crime, or having our property violated, far more than we fear being unemployed or suffering a loss of income. Crime far outstrips inflation, the deficit, or any other economic problem. Yet until recently, the economics profession had little to say about the root causes of criminal activity. Economists could do little more than tally the figures. We know, for example, that there were about 34 million criminal acts committed in the United States in 1992—about 94,000 crimes daily. This is a Justice Department estimate. We don’t know the exact number, because many, if not most, crimes are not reported. We do know, however, that the national crime rate—crimes per capita—has tripled over the past 30 years. And at least 71 percent of all violent crimes (rape, robbery, assault, personal theft) involve some kind of economic loss. The direct costs in one sample year, 1992—in cash, cars, and personal property—came to about $18 billion. But this is merely the tip of the iceberg. Crime victims suffer trauma, depression, and fear that inevitably affect their ability to work and help others. These problems can last a lifetime. The total costs to crime victims can, therefore, easily reach $250 billion to $500 billion each year. Then there are the public costs. State and local governments spend about $80 billion per year on public safety. That includes police, courts, prisons, and parole systems. There are about 700,000 policemen and an even larger number of private security guards. We have, in effect, become a police state, incarcerating 1.1 million people. Our incarceration rate has doubled since 1980. It is the world’s highest—4 times greater than Canada’s, 5 times England’s, 14 times Japan’s.

The Causes of Crime

How to explain the exploding crime rate? Economists are at a loss. Most economic activities are rational. The decision to buy a car, a house, or to go to college, for example, is usually the result of careful calculations. Costs are weighed against benefits. By contrast, criminal activity seems irrational. The career criminal, according to James Q. Wilson, was long ago identified as: “typically an impulsive young man who grew up in a discordant family where one or both parents had a criminal record, discipline was erratic, and human relations were cold and unpredictable. He had a low IQ and poor verbal skills. His behavioral problems appeared early, often by age eight, and included dishonesty and aggressiveness. Even in kindergarten or first grade he was disruptive, defiant, and badly behaved. He had few friends and was not emotionally close to those associates with whom he began stealing and assaulting.” These social pathologies are not the things economists feel comfortable talking about, at least not professionally. We like to quantify things. We use prices and incomes to explain behavior. Anti-social attitudes don’t fit into our economic “models.” Indeed, the notion that economic factors alone explain crime doesn’t jibe with the facts. Real per capita incomes have doubled since 1960. That should have substantially reduced the crime rate. The male unemployment rate is lower now than it was then. So is the poverty rate. The percentage of people who are church members is about the same. Church attendance rates are higher. But look closely. The crime rate is increasingly concentrated in the inner city. You are actually less likely to be assaulted, raped, robbed, or burglarized today than you were in 1980—unless you are a minority resident of an inner-city neighborhood. For the white middle class, all crime rates except auto theft are down. But the fear of crime is universal even if the actuality is local. For minorities, rates of all crimes, including homicide, are up. Black males living in these areas are 10 times more likely to die violently than the average American. And innercity blacks also suffer much higher rates of rape, robbery, burglary, and aggravated assault than do whites. This is not about race, nor about economics. Yes, the gap between the rich and the poor, who are often minorities, has widened over the past three decades. But our “poor” are the envy of poor people in every other nation in the world. Most countries have far wider income dispersions, along with far lower crime rates. Social factors, especially the alarming decline in intact families, explain most of the rise of criminality. The percentage of black children born to single mothers has increased from 22 percent in 1960 to 68 percent today. In inner cities, the figure is typically in excess of 80 percent. And the newest trend is white illegitimacy, which has exploded from 2 percent in 1960 to 22 percent today. Using sophisticated statistical models, economists have at last begun measuring the impact of family dissolution on crime. In 1994, William Niskanen, chairman of the Cato Institute, reported that a 1 percentage point increase in births to single mothers appears to increase the violent crime rate by 1.7 percent. Obviously, the babies themselves aren’t committing the crimes. Illegitimacy is merely a proxy for a general decline in moral values and attitudes toward authority. Similarly, Niskanen found that a 1 percent rise in the black or Hispanic population pushes the violent crime rate up by about 1.8 percent. Single parent families, and the culture that condones them, are the root cause of most violent crimes. As Charles Murray wrote recently in the Wall Street Journal, “Illegitimacy is the single most important social problem of our time—more important than crime, drugs, poverty, illiteracy, welfare, or homelessness because it drives everything else.” We do not have the highest illegitimacy rate in the world. Sweden does. Yet crime is not a major problem there. The U.S. differs from the permissive welfare states of Western Europe in having an underclass that is not merely poor, but has few chances of escaping poverty. The inner-city poor are isolated in areas where not working is the norm, crime is commonplace, and welfare is a way of life. Because the “underclass” is not a census category, we don’t know for sure how much crime it causes. But we do know that most crimes are committed by repeat offenders. People who once agreed that the cause of poverty and crime was a lack of money—and the solution was more money—now admit that, at least for the underclass, the problem is not simply money; it is behavior.

The Rational Criminal

If the war against crime depended on our changing this behavior, the prospect would be grim indeed. Such attitudes do not change very rapidly. If attitudes change slowly, then short-run changes in crime rates must reflect something else—perhaps changes in the opportunities or incentives facing criminals. About 25 years ago, economists began developing a new model of criminal activity. The major breakthrough was the work of Gary Becker, a University of Chicago economist and now a Nobel laureate. In Becker’s model, criminals are rational individuals acting in their own self interest. In deciding to commit a crime, criminals weigh the expected costs against the expected benefits. The “cost” of crime to criminals consists of two parts. One is the income foregone by devoting time to criminal activity—the so-called opportunity cost. For most criminals this is very small. They usually are unskilled and uneducated. Legal alternatives usually don’t pay as well. The second, and far larger, cost is the time criminals expect to be incarcerated because of their activity. “Expected punishment” is not the same as the length of time a convicted criminal actually spends in prison. Most crimes never result in an arrest. Many of those arrested aren’t prosecuted. Many convicts are paroled. Expected punishment, from the criminal’s viewpoint, is a probability, not a certainty. Take burglary. Only 7 percent of U.S. burglaries result in an arrest according to the National Center For Policy Analysis (NCPA). Of those arrested, 87 percent are prosecuted. Of those prosecuted, 79 percent are convicted. Of those convicted, a mere 25 percent are sent to prison. (Most are paroled.) After multiplying these probabilities, we see that a potential burglar faces only a 1.2 percent chance of going to prison for each act of burglary committed. Once in prison, he will stay there for about 13 months. But since he will escape imprisonment more than 98 percent of the time, the expected “cost” of each burglary to the burglar is only 4.8 days. The rational criminal will ask himself whether an act of burglary is likely to net him goods worth more than 4.8 days behind bars. If the answer is yes, then his crime pays. The goal of the criminal justice system is to raise expected costs of crime to criminals above the expected benefits. People will commit crimes only so long as they are willing to pay the prices society “charges.” Unfortunately, the expected prices of criminal activity are shockingly low. In 1990, a murderer could expect to spend only 1.8 years of his life in prison for his crime. A rapist could expect just 60 days. A car thief, 1.5 days. If the numbers appear low, the reality is worse. Those crimes with the longest expected prison terms (murder, rape, robbery, and assault) are the least frequently committed, comprising about 12 percent of all serious crime. The remaining 88 percent carry an expected prison term of only a few days. Despite the enormous rise in criminal justice spending since 1950, the “cost” of crime to the average criminal is lower today. Again, we can look at the figures from the NCPA: Between 1950 and 1974, the expected punishment for all serious crimes fell from 24 days to 5.5 days. The crime rate rose 300 percent over this period. Obviously, criminals themselves were aware of the reduction in expected punishment. They responded to the reduced “cost” of crime by producing more of it. Similarly, during the 1980s, Congress created mandatory minimum sentences for certain violent crimes, urging the states to do likewise. As expected time in prison rose, the crime rate declined. Once again, criminals responded rationally to economic incentives. Numerous crime bills have tried to increase the costs and reduce the economic incentives to criminal activity. Despite spending enormous sums—$30 billion authorized in the 1994 crime bill alone—they generally have missed their target. For example, last year’s bill authorized federal grants to hire 100,000 new police officers. However, no funds were made available for the woefully overburdened court system. Thus while arrest rates may go up, the probability of prosecution will fall, leaving the expected “cost” of crime about where it was before. Worse still, political considerations dictated the dispersal of funds: at least half of all the new police funds were directed to cities with populations under 150,000.

Fighting Crime Effectively

Although crime is a national problem, it is best fought by local initiatives. Unfortunately, Congress doesn’t see it that way. The 1994 bill is laden with federal micromanagement. And keeping career criminals off the street is essential to fighting crime. “Three strikes and you’re out” is a good start, but it’s expensive. Maintaining a single criminal behind bars costs taxpayers at least $25,000 per year. However, the Rand Corporation reports that the average professional criminal commits between 187 and 287 crimes a year, at a cost to society of $2,300 per crime—more than $400,000 a year. So paying for new prisons is really a bargain. Yet we must remember that the ultimate cause of criminal activity is a breakdown in internal controls— call it character or personal morality. Some people simply never learn the difference between right and wrong. Public policy cannot directly change the internal controls on which human character, and ultimately human behavior, depend. But the criminal justice system can perform the essential role of reminding society that crime is wrong and that it carries serious cosequences.