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Archive for December, 2009

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Never Let A Crisis Go To Waste, Vietnam Edition

Posted by Josh Wright on December 22, 2009

In light of economic worries in Vietnam, the WSJ reports that the country is soon likely to impose a widespread set of price controls and restrictions on political activity after an encouraging move toward freer markets:

Carlyle Thayer, a veteran Vietnam watcher and professor at the Australian Defense Academy in Canberra, says conservative factions in the ruling Politburo are tightening their grip on the country as Vietnam’s economic worries—especially inflation and fallout from currency devaluations—grow. He says he expects more crackdowns and arrests to come in the run-up to the country’s 2011 Party Congress, a major political event that will aim to map out Vietnam’s political and economic direction for the following five years.  In turn, the crackdowns threaten to curtail investment and economic growth in the country…..

Now, the price-control unit of Vietnam’s Finance Ministry is drafting proposals that, if implemented by the government, would compel private and foreign-owned companies to report pricing structures, according to documents viewed by The Wall Street Journal and corroborated by Vietnamese officials.  In some cases, the proposed rules would allow the government to set prices on a wide range of privately made or imported goods, including petroleum products, fertilizers and milk to help contain inflation as Vietnam continues pumping money into its volatile economy. Typically, the government applies this kind of aggressive measure only to state-owned businesses, and it is unclear whether Vietnam will write the wider rules into law.

Somewhat relatedly, here is one of my favorite papers about the economics of contractual relationships and enforcement institutions in Vietnam (McMillan & Woodruff).

Posted in economics, international politics, international trade, markets | Comments Off

Daubert and Antitrust Economics, Or When Should An Antitrust Economist Have Training in Economics?

Posted by Josh Wright on December 22, 2009

Judge Saris’s district court opinion denying the motion to exclude one of the plaintiff’s economic experts in  Natchitoches Parish Hospital v. Tyco International recently came across my desk.  It is an interesting case involving allegations that Covidien, a leading supplier of “sharps containers” used for the disposal of various needle-involving medical products (syringes, IVs, etc.) violated the antitrust laws with various market share discounting arrangements with buyers and exclusive dealing contracts with GPOs.   I’ve not been following this litigation very closely, which has now apparently survived summary judgment.  What caught my eye was a passage from the Daubert opinion to exclude Professor Einer Elhauge’s expert economic testimony on behalf of the plaintiff.  As an interesting side note, we’ve had occasion to opine ourselves on some of Professor Elhauge’s views on the related topic of loyalty discounts here.  If you’d like to get caught fully up to speed, read the briefs.  I’ll start you off with the motion to exclude , the opposition, and a declaration submitted by John Bates Clark Medal / Nobel Prize winner Daniel McFadden in support of the motion to exclude.

The basis for the motion to exclude is that, in effect, Professor Elhauge is untrained as an economist and / or as an econometrician.  The brief uses stronger language.  But the basic point is that Professor Elhauge has, according to the brief, taken a few introductory undergraduate economics courses and a law school law and economics course and, again according to the brief, submitted an expert report with various errors (primarily of a statistical and econometric nature, as I read the brief and the McFadden declaration).  Holding aside the substantive issues concerning the alleged methodological errors, on the issue of expertise and qualifications, the opposition brief argues that:

Tyco’s claim that Prof. Elhauge is not qualified to offer an opinion in this case is groundless, and ignores: a) Prof. Elhauge’s particular expertise in antitrust economics, b) his extensive economic qualifications, and c) his peer-reviewed economic articles, textbooks and service on law and economic advisory boards. Moreover, numerous courts (and the U.S. Congress) have qualified Prof. Elhauge to testify on the very same issues as those involved in this case.

On point (a) in particular, the brief elaborates:

It is in fact, exactly what Prof. Elhauge identifies as his area of expertise: antitrust economics, which he defines as “the application of economic principles and methods to antitrust issues.” Elhauge Dep. at 8, see also Elhauge Declaration at 99.5. He testified at his deposition that he considers this discipline to be distinct from economics in general. Dep. at 8. He also qualified his statement that he is not an econometrician by defining that person as someone who “specializes in developing methodologies for [statistical] analysis of economic problems,” and stating that he applies econometric methods to various issues, but he is not a “scholar who develops methodology in econometrics.” Dep. at 9. The specific expertise required for this case is the practical application of economic principles to antitrust theory – not the scholarly development of econometric models or expounding on economic theories in general or performing economic tasks for their own sake.

The brief goes on to argue that the defendants have ignored Professor Elhauge’s qualifications in the distinct area of “antitrust economics,” including:

a peer-reviewed economics article on loyalty discounts published in the Journal of Competition Law & Economics; several other published antitrust economics articles; peer-reviewed textbooks on antitrust law and economics; being selected as the editor of the Research Handbook on the Economics of Antitrust Law; co-authoring a volume of the Areeda antitrust treatise that covered both law and economics of tying; and serving on a number of law and economic advisory boards.

Here’s how the court frames and then resolves the economic qualifications debate:

As a threshold matter, defendants have challenged Professor Elhauge’s credentials because he holds no academic degrees in economics. He currently teaches antitrust, contracts, and corporations at Harvard Law School but has never taught a class in economics or statistical modeling. undergraduate courses on economics, he majored in science. took only one graduate level course on the economic analysis of legal issues.  Based on this background, defendants contend he is not qualified to perform regressions and other technical statistical analyses. …

Defendants’ argument is unpersuasive.  While he is not qualified as an expert in economics generally speaking or econometrics, Professor Elhauge is qualified in the narrower field of antitrust economics.  Professor Ashenfelter, who is an expert in econometrics, pinpointed no methodological flaws or technical errors in the econometric analysis that Professor Elhauge presented. (Report at 1, 25). In the comments on the report, defendants do not refute this conclusion. As the validity of the econometric methodology is not an issue in the case, the lack of econometric/economic credentials affects the weight, not the admissibility, of Professor Elhauge’s testimony.

It would take a much larger investment on my part than I am willing or able to make at the moment to evaluate the underlying econometric battle on the merits (but do see the exchange between McFadden and Elhauge), but on the point of witness qualifications, the opinion seems quite problematic.  As an absolute matter, it is certainly true that possession of a Ph.D. in economics is neither a sufficient condition to testify in all issues arising in antitrust litigation nor a necessary condition to testify as an expert witness.  But it also seems to be a fairly sensible default presumption to assume that a potential expert witness without formal training in the economic methods providing the basis for his expert opinions is not qualified to offer those opinions pending compelling evidence to the contrary.  So, I guess that takes us right into the nitty gritty, doesn’t it?

While Professor Elhauge is as highly qualified an antitrust legal scholar as they come, and one that I greatly respect, I just don’t see it.  The only qualification on the list that seems relevant to the existence of the underlying skills required to offer the theoretical and statistical expert evidence in the case is the peer-reviewed journal publication in the Journal of Competition Law & Economics.  While the JCLE is a very nice journal, and one that I’ve published in once and have a second article forthcoming in for 2010, I just don’t see how this publication alone provides the basis for econometric testimony without the underlying training (with or without a Ph.D.).   The Antitrust Law Journal is also peer reviewed and publishes work by economists, law professors and practitioners.  Is every antitrust lawyer who has published in either the JCLE or Antitrust Law Journal qualified under the court’s standard?   What would it take for a lawyer with a publication in one of these journals not to satisfy the court’s Daubert standard?

I’m completely unpersuaded as to the relevance of authoring law school textbooks and treatise chapters that discuss the underlying economics as a qualification to offer expert testimony grounded in economic training — much less statistical work.  Again, the court’s overall approach seems to imply that “antitrust economics” is something anyone can do–it’s not real economics; it’s just law with a little bit of talk about demand curves and prices.  Maybe this is a predictable consequence of the empirical bubble in legal scholarship?  Perhaps lawyers, and judges, believe that the economics / econometrics is largely control over some jargon and knowing how to hit the right buttons on a statistical software package.  Nothing that a smart and talented lawyer couldn’t teach themselves over Spring Break.

The court’s analysis seems particularly troublesome in this regard.  As I read the passage above, Judge Saris (adopting the plaintiff’s argument) identifies “antitrust economics” as a sub-field of “economics” in which the expertise required to satisfy Daubert can be established in the absence of any expertise in economics generally or statistical methods.  Now, one can see this argument running in the other direction.  For example, I might consider myself to have some expertise in economics generally because I have a Ph.D. in economics, but would not consider myself an expert in macroeconomics, labor economics, or international trade.   Similarly, even within the field of industrial organization, and further within the sub-field of antitrust economics, there are specialized areas where I would not consider myself to have the relevant expertise to offer expert testimony.  Generalized economic training does not always translate to specifically tailored expertise in the narrow issue of interest.  However, the argument here is that the lack of general economic training is no obstacle to producing narrowly tailored testimony within the sub-field of “antitrust economics.”   That doesn’t make any sense to me, and again, equates antitrust law and antitrust economics in a manner that strikes me as at tension with the purposes of Daubert.

I’ve got some more thoughts on this issue, particularly as it relates to the court’s use of an independent court appointed expert (I believe in this case settled upon by both parties) to arbitrate the Daubert dispute, and to some of my own research agenda involving the burdens placed on generalist judges to understand complex economic evidence.  More on those issues later.  For now, just some questions.  I’ve been critical of the district court’s approach here.  Do others find it a sensible approach?  Perhaps I’m just protecting the guild.  If Daubert is not the answer here, and it certainly comes with its costs, what other solutions are there?  Are court appointed experts a reasonable partial solution to help resolve Daubert-related disputes?

Posted in antitrust, economics | 3 Comments »

Regulating Local Food Out of the Market

Posted by Thom Lambert on December 22, 2009

The Nanny Brigade has once again descended on the Windy City. It previously sought to protect us from unhealthy trans fats, smoking in private establishments that we voluntarily patronize, and those oh-so-offensive theatrical depictions of smoking. The Nannies are now working to protect Chicago’s well-heeled from risks associated with the locally produced, artisanal sausages sold in some of the city’s finest restaurants. Whatever would we do without these folks (other than enjoy our lives more)?

At the end of November, the Chicago Reader published an article on small, local sausage makers whose products are beloved by foodies but who are not licensed by the government. The charcuteries’ sophisticated patrons realize they’re dealing with unlicensed meat-preparing facilities, but they know the sausage makers, are aware of the high-quality products they use and the care they take in making their products, and are willing to purchase the products despite the absence of a commercial license. Many of the charcuteries would have to shut down if forced to comply with applicable regulations, which were written to govern (and to protect) large-scale industrial operations. As one of the meat-preparers explained:

The regulations are written for industrial food operations. And if you apply them to small-scale local producers, no one’s gonna do it. It’s legislating local food out of the market. Unfortunately, the health departments don’t appreciate that. But that food is actually safer. It’s easier for someone on that small scale to move things more quickly and be more careful. Local markets are self-regulating. If there’s anything wrong with your products and someone gets sick from it, then you’re out of business.

Not surprisingly, the food regulators disagree with this assessment. Last week, regulators from the Illinois Department of Agriculture raided one of the Chicago restaurants that was mentioned in the Reader story (along with its sister restaurant). While the story never said those restaurants bought any of the offending meat products, it did observe that some of the underground meat-preparers obtained their meats from the same processors as the raided restaurants. The state’s compliance officer said that the raid, which unearthed 80 pounds of illicit bacon and some headcheese, was prompted by the Reader story. She warned that the other restaurant mentioned in the story might also be raided.

We’re not talking about dives here. The raided restaurants were celebrity chef Rick Bayless’s Frontera Grill and Topolobampo. Accolades for those restaurants include an International Herald Tribune ranking of Frontera as “the world’s third best casual restaurant,” a Conde Naste Traveler review proclaiming Frontera’s fare “the best Mexican food I’ve had outside Mexico,” and a New York Times declaration that Topolobampo is “the most elegant and serious Mexican restaurant in the country.” The to-be-raided restaurant is North Pond, which landed spots on Travel & Leisure‘s list of the top forty restaurants in America and Epicurious‘s list of the “top ten farm-to-table restaurants.”

Part of the appeal of Frontera, Topolobampo, and North Pond — all favorites of mine — is that they strive to use small-batch, locally produced ingredients. Such ingredients tend to be produced with a bit more tender loving care, they’re generally fresher, they give diners a connection to their own geographic region (a connection that many people really value), they help ensure the persistence of a local agricultural community (which lots of folks like), and their production is at least perceived to be less resource intensive (e.g., it involves lower transportation costs). But the diminutive scale of many small-batch food preparers precludes them from being able to comply with the various food safety regulations that were drafted for large-scale food processors (and tend to insulate those processors from competition).

Now the public health crowd is sure to jump down my throat for suggesting that we permit the risk of food borne illnesses in order to allow diners to enjoy, and local artisans to craft, small-batch meat products. Doesn’t the government have a responsibility to ensure the safety of our food supply? I actually don’t think it does, but I won’t argue that fairly extreme point here. Instead, I’ll make the narrower argument that the government is pursuing its objective in the wrong way.

Imagine if Frontera or Topolobampo served artisanal sausage that made patrons ill. Rick Bayless’s empire would come crashing down in an instant. The local meat-preparer that made the sausage would be immediately out of business. Tort liability would ensue. In short, market pressures and the tort system create extremely strong incentives to avoid significant risks — far stronger than the incentives created by the costly and cumbersome food regulatory machine. (Frontera’s recent raid resulted in the seizure of some bacon; no fines were issued. Big deal.) Moreover, the regulatory machine tends to be both over- and underinclusive in its reach: It sanctions conduct that poses little risk (like home sausage-making by yuppies on Chicago’s North Shore) while giving a pass to real risks that haven’t yet been identified by the centralized regulators (who are somewhat far from the action) and incorporated into a formal rule. Market pressures, on the other hand, nimbly regulate all risks perceived by those closest to the action, while ignoring non-risks.

In light of the strong and focused incentives created by the market and the tort system, how about something shy of an outright ban on meat products that haven’t received the government’s stamp of approval? There are lots of alternatives here. The best, I believe, would be pure laissez faire. In such a world, producers would seek to make their products more attractive to consumers by earning the seal of approval of private certifiers. Competition among those certifiers (i.e., competition to be “most trusted”) would lead them to focus on just the right factors for evaluating food safety — to structure their rules so that they catch all real risks but ignore non-risks. The Jewish community relies on this sort of private certification system for Kosher foods, and it works quite well.

While I’d opt for laissez faire, I realize it’s a political non-starter. So how about a scheme in which the government (e.g., USDA) acts as a safety certifier but doesn’t ban non-certified products? We could structure this as either an opt-in system or an opt-out system. Under the former approach, food sellers who complied with all USDA requirements would have the right to advertise their products as USDA inspected — that is, they could opt into the system. Consumers who want the governmental seal of approval could then seek out only USDA-approved foods. An opt-out system would be a little more paternalistic. Under that approach, producers could sell foods that hadn’t met USDA’s requirements, but only if they opted out of the regime by labeling the products as “Not USDA-Approved.”

The point is, there’s a spectrum of regulatory alternatives here. From least to most restrictive, it proceeds from laissez faire (let markets, aided by private certifiers, do the work), to an opt-in public certification system (let USDA certify for those who care about its approval), to an opt-out public certification system (let those who want to avoid USDA’s requirements do so if they warn consumers), to an outright ban (the status quo). The option our government has selected — the most restrictive, and the most likely to protect an industry group from consumer-friendly competition — threatens to drive local, small-scale food producers out of the market. For example, the charcuterie that was the primary focus of the Chicago Reader article, E&P Meats, voluntarily shut down in response to the regulators’ raid of Frontera Grill. That’s “protection” I, as a locavore and handmade sausage afficionado, can do without.

Posted in markets, regulation | 1 Comment »

Paul Krugman is a partisan hack

Posted by Todd Henderson on December 22, 2009

Occasionally I read Mr. Krugman’s column for entertainment purposes — sort of like watching Project Runway or Animals Gone Wild. This morning was one of those occasions. The man is a partisan hack of the worst sort. Why does anyone take his political observations seriously?

Some thoughts about this morning’s column.

1. Krugman starts by calling the pending health care legislation “an awesome achievement,” “a huge step forward,” “seriously flawed,” and something “we’ll spend years if not decades fixing it,” all in the same sentence. Huh? This just doesn’t make any sense. If this is the best we can do at the height of Democrat power and popularity (no one thinks the Democrats will consolidate power in the next election), how exactly is it a step forward? Isn’t it more likely or just as likely that the flaws in the bill will only get worse over time? What evidence is there in our history that bad laws get better, new bureaucracies shrink, or policy failures magically correct themselves over time?

Interestingly, the Republican attempts to kill the bill by opposing care rationing (so-called death panels) and a strong individual mandate may end up making the bill worse if it becomes law. If we have nationalized health care, I want both death panels and high penalties for those who don’t buy insurance. Of course, I prefer no bill at all, or something more narrowly targeted on the worst cases, like kids who get cancer and can’t get insurance or people who lose everything after contracting a horrible disease. But, the compromise we seem to be getting is the worst of all worlds, it seems.

2. Krugman would say that this is exactly his point. He notes that the “Democrats won big last year [and] [i]n any other advanced democracy this would have given them the mandate and the ability to make major changes.” A couple of responses. First, look around the world, Mr. Krugman, and point me to advanced democracies with less dysfunctional legislative processes. And, since I’m a stickler, use some objective metric to measure outcomes. Legislatures are messy places, and the genius of our constitutional system is that change is difficult. Societies only survive if they evolve slowly over time; we can all flourish better if we have stability and certainty in our laws and policies. Radical change does not work.

Second, why is the public’s rejection of health care reform a sign of a dysfunctional Senate instead of rational updating? I concede that the president and Democrats won based on promises of reform, but these were vague promises that are unenforceable in both directions. Policy is not made at the ballot, and the people may sensibly change their mind based on details. People are rejecting the specific reforms proposed by the president and Congress, not the idea of reform.  This is not necessarily a sign of dysfunction but sophistication.

3. Krugman then laments that there is much to be done — e.g., climate change, financial reform — and that the dysfunctional Senate means some or none of it will be done. Of course, he blames the 40 Republican senators for this. Funny that, since it only takes 60 to get any law passed in the Senate. If there is blame to be given for failure to get out of the way of a radical reordering of our economy in favor of government control, the blame lies with Democrat senators and the leadership in Congress and from the White House. Republicans oppose a government takeover of health insurance and a huge tax increase on the economy to reduce some future risk of rising seas. Whether these are the optimal policies is debatable, but why should the Democrat senators who agree with them lay down their principles in favor of Mr. Krugman’s world view?

4. Krugman points to a recent study showing filibusters are getting more common. So what? It is impossible to know in the abstract whether this is a good or bad thing. What is the optimal number of filibusters? I have no idea, and neither does Krugman. Perhaps legislation is getting more radical over time, or perhaps the stakes are higher in modern bills, or perhaps the size of our government has grown so much that each additional spending bill and extension of government is that much more dangerous. I don’t know how to even evaluate the issues, and I’m sure I’m not alone. Throwing some numbers around doesn’t prove anything interesting.

5. Then Krugman claims that Republicans are worse than Democrats. News flash, Mr. Krugman, all politicians are the same, and neither party has a monopoly on idealism, wisdom, or fair play.When we point the finger at the other political party without recognizing the failings of our own, we are resting on the wobbiliest of arguments.

6. In a nod to his readers with BDS (Bush Derangement Syndrome), which is probably all of them, he dismisses Bush’s ability to get his way with Congress by claiming he was a “buy-now-pay-later president.” The evidence for this is that he “rushed” us to war and never asked us to pay for it, and that the prescription drug benefit was unfunded. One is wrong, the other is true but irrelevant to his point. Whether the wars in Iraq and Afghanistan were the right call is debatable, but it isn’t debatable that both were authorized by Congress and paid for by Congress. As for the drug benefit, it may or may not be unfunded, but Krugman is making this comparison to President Obama. The same president Obama that has run up the largest budget deficits in US history and supported massive spending bills that our great grandchildren will be paying for. Again, these may or may not be the right calls, but they are clearly pay-later programs. Health care is the prime example. The program is based entirely on (phantom) future cuts to make it solvent.

7. I could go on and on, but I’ll stop by noting how clearly one-sided this is. Imagine a world in which radical Republicans led by the extreme of their party have 60 votes in the Senate and are trying to ram through prayer in public schools, a ban on all abortions, wars against Venezuela and Iran, and other policies that Mr. Krugman would find deeply wrong and offensive. Would Paul Krugman write the same column lamenting the power of the 40 Democrats standing in their way? No chance. He would be lionizing them and the genius of our Founders. So let’s call a spade a spade: Krugman doesn’t like the results today so he wants to change the system. It is sloppy analysis, the worst kind of partisanship, and definitely in the category of be careful what you wish for.

Next time, I think I’ll watch Project Runway instead.

Posted in markets | 8 Comments »

FTC Nominee Hearings

Posted by Josh Wright on December 21, 2009

Statements from Nominees Brill and Ramirez, respectively, from the December 15th hearings.

Posted in federal trade commission | Comments Off

Henry Manne on Henderson on "Art and Politics"

Posted by Todd Henderson on December 21, 2009

Comes now a comment from the incomparable Henry Manne on my earlier post about whether I should buy “Sandinista!” by the Clash (See, Art and Politics post):

“It is truly déjà vu all over again, and the doubling up is appropriate because the issue I have reference to took place mainly at the University of Chicago in the late 40s or early 50s.  The issue was not playing disapproved musicians; it was teaching or reading the poetry of one Ezra Pound.  Pound is by some accounts (I have no wisdom on this matter at all) one of the greatest poets of the 20th Century.  He was also the most famous traitor to America in World War II, when he offered his services to the Nazis but mainly did broadcasts to US troops on behalf of the Italian Fascist regime.  He was by all accounts a bit of a nut case (to use the technical term), and that undoubtedly saved his life.  There were a great many Americans who wanted him hung but also a great many who thought that he was simply too great an artist to end up at the end of a rope, at least if it was not self-tied.  The compromise (and it was one of those political compromises that stops issues but certainly does not resolve them) was to find an American court to find him insane so that he could be institutionalized.  Apparently his life was not too harsh, and his many admirers visited him regularly.  Nonetheless he was a traitor and a really vicious anti-Semite, so what was the heavily Jewish University of Chicago circa 1950 to do?  Well, in typical U of C fashion, they punted.  That is, the issue you discuss in your blog was examined at length (some would say far to great a length) until finally everyone got tired of arguing about it, and the issue simply disappeared.  I do not know to this day if there was any pressure on a professor not to teach Pound’s poetry.  That would have been very unusual at the U of C in the era long before PC reared its ugly head.  Of course, after a while World War II was forgotten, anti-Semitism became almost de rigueur and treason to America became almost a badge of honor.  But then, aesthetic standards may have changed too, and, for all I know, no one is even interested in Pound’s poetry today.”

Posted in markets | Comments Off

Drawing lines

Posted by Todd Henderson on December 21, 2009

One of the first things law students learn is that law is mostly about drawing lines between acceptable and unacceptable conduct. Some lines are easy to draw: murder is out; giving money to charitable causes is in. But even in these cases, there are definitional and moral puzzles at the boundaries. When is taking a life acceptable? Killing in war or self defense is generally OK, but what about unborn babies? What should count as a charitable cause? Giving to a church that runs a soup kitchen is OK, but it is difficult to imagine giving tax-favorable status to a mosque that raises money to pay for suicide bombers.

As can be seen from these examples, arguments about slippery slopes are closely related to line drawing problems. The typical slippery slope argument looks something like this: if we allow X, then inevitably Y will be permitted, where X is acceptable but Y is unacceptable. Lawyers deploy slippery slope arguments routinely, but we have reason to be cautious of them given their power. Sort of like invoking Hitler in a debate, they often prove too much.

So when we hear arguments that the government should not be permitted to eavesdrop on certain cell phone calls of suspected terrorists because inevitably such powers will be used to punish political enemies for what they say to their lovers, we should be skeptical. Perhaps the cynicism provides an important political check on misuse of power, but slippery slope argument can easily lead to nonsensical policy choices.

Consider this example ripped from today’s headlines. According to this story, a woman in Virginia suffocated her child to death, but cannot be charged with any crime because the baby was still attached by the umbilical cord. Why such a strange result? According to three legislators in Virginia who were asked to support a change in the law, the conduct is too close to legal abortion, and therefore might lead to criminal charges against doctors or mothers in those cases.

The slippery slope argument deployed here by these legislators is preposterous. Even accepting that abortion is legal in the third trimester (an almost unthinkable result), is it really the case that we cannot draw lines between a doctor and a woman deciding it is in the best interests of the lives involved to kill a new-born or nearly-born baby for medical reasons and a healthy mother smothering to death a healthy child in cold blood? There is no slippery slope here.

These bad arguments are not limited to particular ideologies. Gun-rights advocates routinely oppose restrictions on ownership, like licensing, education, and safety restrictions, out of fear that these regulations will inevitably lead to confiscation. Those who fear such a result have reason to deploy these arguments, but the rest of us have reason to oppose them when they are so outlandish. If the only thing preventing our government from seizing our weapons (or radios or whatever) is the absence of laws like these, then our society is in very bad shape indeed.

Of course, politicians deploy slippery slope arguments frequently because they use slippery slopes to their advantage. Incremental changes are often explicitly designed to wear down resistance to bigger changes that are planned for the future. The passage of SCHIP, a welfare program for health care for children (“It is for the children!”), is a good example. The plan was to start offering government-sponsored health care for the most sympathetic, and then, after achieving acceptance, move to other groups, such as the nearly poor, before finally offering government care for everyone. This is not as bad as it seems at first blush. If incrementalism can be used to provide information about or show the effectiveness of certain policies, then the approach is a sensible one. After all, if the people are strongly opposed to the new program, extensions will be unlikely.

In any event, there is nothing about the experience with SCHIP that says much about the woman in Virginia. She is a monster of the worst kind, and deserves to spend the rest of her years sleeping on a government matress behind government iron bars. The fact that we as a society are so polarized about abortion that the factions are pushed to such extremes (the other being the cold-blooded murder of doctors performing abortions) shows an absolute failure of the Supreme Court-centered approach to this issue. Slippery slope arguments in these cases are simply additional evidence of this failure.

Posted in politics | 4 Comments »

Update on backdating

Posted by Geoffrey Manne on December 20, 2009

It’s been quite a while since we discussed backdating here at TOTM.  But back when it was all the rage, we were substantial contributors, formulating (we believe) some of the first fundamental explanations of the issues.  Some of the best posts from our backdating archive are here:

I look pretty young but I’m just backdated, yeah (Geoff Manne)

Option Backdating: The Next Big Corporate Scandal? (Bill Sjostrom)

Backdated options and incentives (Bill Sjostrom)

Jenkins channels Manne (Geoff Manne)

Explaining Backdating (and Jenkins Channels Manne Again) (Josh Wright)

No, Matt, executive compensation is not all about norms (Geoff Manne & Josh Wright)

Thoughts on Walker on Backdating (Josh Wright)

Along with Larry Ribstein (of course) we were early critics of the law, economics and reporting of the backdating “scandal.”  One of our posts, “No, Matt, executive compensation is not all about norms,” was made into a short law review essay.  Geoff’s “I look pretty young but I’m just backdated, yeah” post was one of the first substantial criticisms of the claims in the Wall Street Journal article that broke the story.

Although we basically gave up the backdating reporting as the story dragged on, we have been interested to watch the spectacle unfold.  And it has been quite a spectacle.

With the latest”mockery of justice” in the prosecution of these cases upon us, we thought it might be a good time to revive some of our old posts for readers who might have forgotten that there was once a substantive debate over the topic, rather than a series of prosecutorial embarrassments.

Frankly, as Larry notes, the embarrassments stem in part from the fact–as we have discussed in the posts linked above–that these cases never should have been brought in the first place.  Maybe a reminder is in order.

Posted in blogging, business, corporate governance, disclosure regulation, executive compensation, law and economics, option timing scandal, regulation | Comments Off

Art and Politics

Posted by Todd Henderson on December 19, 2009

When I first met my father in law, he spent hours trying to convince me of the cultural superiority of his tastes. Some of these were indeed triumphs. I’m thinking here of “Dr. Strangelove,” “The 400 Blows,” and the music of Richard Wagner. (Others were not. I’m thinking here of “Children of Paradise,” a movie about mimes.) His love of Wagner is curious; he was born in Israel and almost his entire family was murdered in the Warsaw ghetto. This is not a trivial issue. Hitler loved Wagner too, and used his music for political ends. Wagner was himself a hater of Jews. Accordingly, Israel banned public performance of Wagner’s music nearly six decades ago, and the taboo was not broken until 1995 when “The Flying Dutchman” was played on Israeli radio. Six years later Daniel Barenboim (a Jew) led the Berlin Staatskapelle in a performance of an overture from “Tristan und Isolde” at an Israel Festival, which only reignited the controversy.

I respect my father-in-law’s ability to separate politics and art. But this is also just a necessity for me; listening to only Ted Nugent and watching only Chuck Norris movies would make my leisure time quite depressing. So I pay to see movies by Nora Ephron and Steven Spielberg, and I listen to music by Bruce Springsteen. But maybe there should be lines.

I love the music of “The Clash,” agreeing with a British critic who called them “the only band that matters.” But what should I make of their 1980 album “Sandinista!”? With its red and black colors and vehemently anti-American lyrics, the album is a political disgrace. For instance, the song “Washington Bullets,” which is not an homage to the NBA team of the (then) same name, tells us where the Clash were coming from:

   For the very first time ever
   When they had a revolution in Nicaragua,
   There was no interference from America
   Human rights in America
   Well the people fought the reader,
   And up he flew ...afdb
   With no Washington bullets what else could he do?

But the music is pretty wonderful. Should I put aside the political idiocy and just listen to the music? I’m not sure this can be done. After all, I would never buy an album called “National Socialists!” or “CCCP!”, no matter how incredible the music was. For now, I’ll pass, belieiving that, as cultural critic Wayne Booth wrote, the company we keep matters.

Posted in markets, music | 8 Comments »

"Diminishing the price of law"

Posted by Todd Henderson on December 18, 2009

The lesson from Jones, see my post below, is that law untamed can be very costly, and with little benefit. This is, of course, not a new idea. In a critical essay of “Southey’s Colloquies on Society,” Lord Thomas Macaulay wrote eloquently about the cost of law and government:

“Our rulers will best promote the improvement of the nation by strictly confining themselves to their own legitimate duties, by leaving capital to find its most lucrative course, commodities their fair price, industry and intelligence their natural reward, idleness and folly their natural punishment, by maintaining peace, by defending property, by diminishing the price of law, and by observing strict economy in every department of the state. Let the Government do this: the People will assuredly do the rest.”

This short passage was intended as a rebuttal to the source of prosperity claimed by Mr. Southey — “the omniscient and omnipotent State.”

Thus our arguments today about the size and scope of government, way bigger battles than the rule in Jones but of similar foundation, are centuries old. Those on the Right believe, as Aaron Director said, that “extensions of government activity should be viewed under a presumption of error,” while those on the Left believe the opposite — that extensions of private activity should be thought of as presumptively bad. See the debate about health care, climate change, retirement security, and on and on. As a matter of sloganeering, one can see this in the treatment of “profits.” To the Left, profits (or the profit motive) are bad.They are signs of power, abuse, advantage taking, and excess. To the Right, profits are a sign that the market is working. Profits are evidence of consumer preferences and help the market allocate resources in the economy. Profits by computer companies tell us that we as a society should spend more money on computers and less on other things. We cannot resolve the debate here but to say that the issue is simply one of government power.

The battle rages at the level of politics, with the forces attempting to constrain government failing miserably. Government spending as a percentage of the size of the economy has grown from less than 10 percent in 1900 to over 45 percent today. See useful charts and graphs here. It is, of course, possible that spending could be higher and government power more excessive if we did not have strong voices arguing in the tradition of Macaulay and Director, but the efficient role of government imagined by Macaulay and prescribed in our Constitution seems quaint. The fight must go on, but politicians of both parties in this country can’t seem to help themselves when in power. Of course, we shouldn’t blame them anymore than any individual who simply responds to the incentives of the rules of the game they are playing. To change behavior, we must rewrite the rules.

Which is why the battle raging at the local level of law, as in Jones, is so important. Finding the efficient role for law in ordering our affairs — what Macaulay called “diminishing the price of law” — is a battle that still can be won. This is just a variant of a slogan of the environmental movement: Think Globally, Act Locally. Those who believe that liberty and free markets are the best mechanism of prosperity can win battles and skirmishes about what the right rules should be for government and law, and hopefully achieve a larger victory in an uncoordinated manner that would make Hayek proud.

Posted in financial regulation, markets, politics, regulation | 3 Comments »

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