More than two weeks ago, my co-blogger was subject to one of the most remarkable attacks I’ve seen in the blogosphere. I have declined so far to participate in the mostly hot-headed debate. But I write now because last Friday, J. Bradford DeLong, whose personal attack on Todd a couple of weeks ago was one of the most influential and often-cited, launched a fresh attack on Todd. Since DeLong is, among other things, a Professor of Economics at U.C Berkeley, Chair of Berkeley’s Political Economy major and former Deputy Assistant Secretary of the Treasury, there are those who will take his comments seriously. Todd could easily defend himself, but he’s withdrawn from the battlefield. I’m unwilling to let this one go.
In the latest post, DeLong accused Todd of, among other things, engaging in class war, engaging in culture war, being “mendacious” by “trying to keep his readers from thinking about the consequences of the Bush policies he supported,” and lying about his own income. He also claims that Todd is “ignorant” or “mendacious” because he does not know that “the laws that Barack Obama has lobbied for and gotten Congress to pass, in the long run don’t expand but shrink the government relative to what it otherwise would be.” I mention these claims mainly just to indicate the tone of DeLong’s post and set the table for what follows. I’ll just add with respect to the last-mentioned item that if Todd is “ignorant” that Obama is actually shrinking government then Todd has a lot of company.
The DeLong point I want to focus on is his last: “I genuinely do not understand why Henderson has his job.” By which he means Todd’s law professor job.
DeLong’s sole reported basis for this is a post, not by Todd, but by my co-blogger Jay Verret, who refers to a recent Henderson paper, Insider Trading and CEO Pay. Jay says Todd’s findings in the paper “are in line with Henry Manne’s original thesis from nearly 40 years ago that insider trading didn’t diminish firm market value on net and may serve a useful purpose as an executive compensation device to motivate managers to maximize the value of the firm.”
DeLong responds that “[g]iving firm managers the freedom to use information they privately have as a result of their jobs to decide when to buy and sell shares of stock does not motivate managers to manage the firm in the interest of shareholders.” That’s because, according to DeLong, “the ability to engage in insider trading. . . gives managers an incentive to make the price of the stock vary–they don’t care which way.. . . Insider trading makes executives’ portfolios’ long not the company but long the volatility of the company. . . . This claim that freedom to engage in insider trading aligns executives’ interests with those of shareholders is so basically wrong, so obviously erroneous, so simply stupid that–well, words fail me.”
As Jay notes, there’s at least significant intelligent debate on these issues. Opponents of insider trading regulation don’t argue that insider trading is always good, but that firms should be allowed to contract for it. But the most remarkable thing about DeLong’s post is that it accuses Todd of being “stupid” and unfit for law teaching because of an argument Todd didn’t make!
If DeLong had bothered to look even at the abstract of Todd’s article, perhaps he would have noticed that the article’s not about alignment of incentives, but about whether boards bargain with insiders over their gains. Todd finds evidence consistent with the hypothesis that “boards pay executives in a way that reflects the profits they are expected to earn from informed trades.”
Todd doesn’t even argue based on this evidence that insider trading liability should be abolished. Rather, he says only that “the case for classic insider trading is made much weaker by this data.” He also notes in the abstract that “there still may be good reasons to prohibit some individuals from trading on material, non-public information.” One of these reasons might be DeLong’s point that firms would be better off if insiders weren’t paid with insider trading profits. Maybe that holds even if the insiders are willing to pay for the opportunity to trade. I don’t necessarily subscribe to DeLong’s arguments, but I’m not willing to call somebody “stupid” and unfit for teaching for making them. My only point here is that Todd doesn’t discuss this issue at all.
I will leave it to the reader to decide what we should make of a Professor of Economics at U.C Berkeley, Chair of Berkeley’s Political Economy major and former Deputy Assistant Secretary of the Treasury who is willing, in print, to accuse somebody of being “simply stupid” for a position he does not take expressed in a blog post he didn’t write.
