Archives For Founders

Well, it looks like Congress is going to attempt to enact the Senate’s health care bill using the reconciliation process. President Obama certainly suggested as much in Thursday’s Health Care Summit, downplaying the significance of such a move and suggesting it may be necessary in order to “move forward.”

First, he said to Senator McCain:

You know, this issue of reconciliation has been brought up. Again, I think the American people aren’t always all that interested in procedures inside the Senate. I do think that they want a vote on how we’re going to move this forward. And, you know, I think most Americans think that a majority vote makes sense, but I also think that this is an issue that could be bridged if we can arrive at some agreement on ways to move forward.

I interpret that as, “Agree with us, or we’ll pursue this using reconciliation. Americans won’t mind.” That also was the thrust of the President’s closing remarks, where he said:

[T]he question that I’m going to ask myself and I ask of all of you is, is there enough serious effort that in a month’s time or a few weeks’ time or six weeks’ time we could actually resolve something? And if we can’t, then I think we’ve got to go ahead and make some decisions, and then that’s what elections are for. We have honest disagreements about — about the vision for the country and we’ll go ahead and test those out over the next several months till November. All right?

This is most unfortunate. Reconciliation — the process by which budget-related bills can be approved without threat of a filibuster (and thus without winning the support of at least 60 Senators) — moves the Senate away from its constitutional role as a moderating, consensus-building check on the other two entities that must approve legislation, the House of Representatives and the President. While the House and the President are designed to respond to majority impulses, the Senate is explicitly designed not to work that way; otherwise, California, with its 38 million people, wouldn’t have the same voting power as Wyoming, with its population of 540,000. If the Senate transforms itself into what is effectively a second House of Representatives for this piece of non-budget legislation (which, somewhat ironically, is actually opposed by a majority of Americans) then what’s to stop it from doing so on any future bill? The Senate will no longer be the Senate.

But don’t just take my word for it. Democratic Senator Robert Byrd, who defined the narrow contours of the reconciliation process in the so-called “Byrd Rule,” adamantly insists that the process is inappropriate for sweeping social legislation like the pending health care reform bill. On April 2, 2009, he wrote the following to his Senate colleagues:

I oppose using the budget reconciliation process to pass health care reform and climate change legislation. Such a proposal would violate the intent and spirit of the budget process, and do serious injury to the Constitutional role of the Senate.

As one of the authors of the reconciliation process, I can tell you that the ironclad parliamentary procedures it authorizes were never intended for this purpose. Reconciliation was intended to adjust revenue and spending levels in order to reduce deficits. It was not designed to cut taxes. It was not designed to create a new climate and energy regime, and certainly not to restructure the entire health care system.

Just last week, Senator Byrd reiterated his position in another “Dear Colleague” letter. In that letter, he insisted that any attempt to use reconciliation to enact health care reform would be “grossly misguided.”

Senator Byrd isn’t the only Democrat who recognizes the importance of maintaining the Senate’s supramajority rule for important social legislation. Friday afternoon, I spent several hours reading through the Congressional Record from May 10, 2005 to May 25, 2005, a period during which the then-Republican majority leadership in the Senate was threatening to eliminate the supramajority requirement for approving judicial nominees. A number of Democratic senators — including Senators Bayh, Biden, Clinton, Dodd, Durbin, Feingold, Feinstein, Harkin, Kohl, Lautenberg, Leahy, Murray, Nelson, Reid, and Schumer — spoke eloquently and passionately about the Senate’s crucial and constitutionally prescribed role as a non-majoritarian body. Their characterization of the Senate’s special role was spot on.

Here’s some of what they had to say (emphasis added, of course):

SENATOR CHUCK SCHUMER, May 10, 2005:

It is the Senate where the Founding Fathers established a repository of checks and balances. It is not like the House of Representatives where the majority leader or the Speaker can snap his fingers and get what he wants. Here we work many times by unanimous consent where you need all 100 Senators to go along. In some instances, we work where 67 votes are needed, in some with 60, and in most with 51. But the reason we don’t always work by majority rule is very simple. On important issues, the Founding Fathers wanted — and they were correct in my judgment — that the slimmest majority should not always govern. When it comes to vital issues, that is what they wanted.

The Senate is not a majoritarian body. My good friend from Utah spoke. He represents about two million people in Utah. I represent 19 million in New York State. We have the same vote. You could have 51 votes for a judge on this floor that represents 21 percent of the American people. So the bottom line is very simple. This has not always been a 50.1 to 49.9 body. It has been a body that has had to work by its rules and by the Founding Fathers’ intent. Even when you are in the majority, you have to reach out and meet not all, not most, but some of the concerns of the minority.

***

SENATOR HARRY REID, May 18, 2005:

For further analysis, let’s look at Robert Caro. He is a noted historian and Pulitzer Prize winner, and he said this at a meeting I attended. He spoke about the history of the filibuster. He made a point about its legacy that was important. He noted that when legislation is supported by the majority of Americans, it eventually overcomes a filibuster’s delay, as a public protest far outweighs any Senator’s appetite to filibuster.

But when legislation only has the support of the minority, the filibuster slows the legislation-prevents a Senator from ramming it through, and gives the American people enough time to join the opposition. Mr. President, the right to extended debate is never more important than when one party controls Congress and the White House. In these cases, the filibuster serves as a check on power and preserves our limited government. …

For 200 years, we have had the right to extended debate. It is not some ” procedural gimmick.” It is within the vision of the Founding Fathers of this country. They did it; we didn’t do it. They established a government so that no one person and no single party could have total control.

Some in this Chamber want to throw out 214 years of Senate history in the quest for absolute power. They want to do away with Mr. Smith, as depicted in that great movie, being able to come to Washington. They want to do away with the filibuster. They think they are wiser than our Founding Fathers. I doubt that is true.

***

SENATOR CHRIS DODD, May 20, 2005:

One of the reasons the extended debate rule is so important is because it forces us to sit down and negotiate with one another, not because we want to but because we have to. I have helped pass many pieces of legislation in my 24 years here, both as a majority and minority Member of this institution. I have never helped pass a single bill worth talking about that didn’t have a Republican as a lead cosponsor. I don’t know of a single piece of legislation here that didn’t have a Republican and a Democrat in the lead. We need to sit down and work with each other. The rules of this institution have required that. That is why we exist. Why have a bicameral legislative body, two Chambers? What were the Framers thinking about 218 years ago? They understood the possibility of a tyranny of the majority. And yet, they fully endorsed the idea that in a democratic process, there ought to be a legislative body where the majority would rule.

So the House of Representatives was created to guarantee the rights of the majority would prevail. But they also understood there were dangers inherent in that, and that there ought to be as part of that legislative process another institution that would serve as a cooling environment for the passions of the day. So the Framers … sat down and said: There is a danger if we don’t adopt a separate institution as part of the legislative branch where the rights of the minority will also prevail, where you must listen to the other side in a democracy, pay attention to the other side.

***

SENATOR JOE BIDEN, May 23, 2005:

At its core, the filibuster is not about stopping a nominee or a bill, it is about compromise and moderation. That is why the Founders put unlimited debate in. When you have to-and I have never conducted a filibuster-but if I did, the purpose would be that you have to deal with me as one Senator. It does not mean I get my way. It means you may have to compromise. You may have to see my side of the argument. That is what it is about, engendering compromise and moderation.

Ladies and gentlemen, the nuclear option extinguishes the power of Independents and moderates in this Senate. That is it. They are done. Moderates are important only if you need to get 60 votes to satisfy cloture. They are much less important if you need only 50 votes. I understand the frustration of our Republican colleagues. I have been here 32 years, most of the time in the majority. Whenever you are in the majority, it is frustrating to see the other side block a bill or a nominee you support. I have walked in your shoes, and I get it. …

I say to my friends on the Republican side: You may own the field right now, but you won’t own it forever. I pray God when the Democrats take back control, we don’t make the kind of naked power grab you are doing. But I am afraid you will teach my new colleagues the wrong lessons.

***

Much, much, much more below the fold. Please read it — it’s important and, well, a little fun! Continue Reading…

I’m delighted to report that the Liberty Fund has produced a three-volume collection of my dad’s oeuvre.  Fred McChesney edits, Jon Macey writes a new biography and Henry Butler, Steve Bainbridge and Jon Macey write introductions.  The collection can be ordered here.

Here’s the description:

As the founder of the Center for Law and Economics at George Mason University and dean emeritus of the George Mason School of Law, Henry G. Manne is one of the founding scholars of law and economics as a discipline. This three-volume collection includes articles, reviews, and books from more than four decades, featuring Wall Street in Transition, which redefined the commonly held view of the corporate firm.

Volume 1, The Economics of Corporations and Corporate Law, includes Manne’s seminal writings on corporate law and his landmark blend of economics and law that is today accepted as a standard discipline, showing how Manne developed a comprehensive theory of the modern corporation that has provided a framework for legal, economic, and financial analysis of the corporate firm.

Volume 2, Insider Trading, uses Manne’s ground-breaking Insider Trading and the Stock Market as a framework for many of Manne’s innovative contributions to the field, as well as a fresh context for understanding the complex world of corporate law and securities regulation.

Volume 3, Liberty and Freedom in the Economic Ordering of Society, includes selections exploring Manne’s thoughts on corporate social responsibility, on the regulation of capital markets and securities offerings, especially as examined in Wall Street in Transition, on the role of the modern university, and on the relationship among law, regulation, and the free market.

Manne’s most auspicious work in corporate law began with the two pieces from the Columbia Law Review that appear in volume 1, says general editor Fred S. McChesney. Editor Henry Butler adds: “Henry Manne was an innovator challenging the very foundations of the current learning.” “The ‘Higher Criticism’ of the Modern Corporation” was Manne’s first attempt at refuting the all too common notion that corporations were merely devices that allowed managers to plunder shareholders. Manne saw that such a view of corporations was inconsistent with the basic economic assumption that individuals either understand or soon will understand the costs and benefits of their own situations and that they respond according to rational self-interest.

My dad tells me the sample copies have arrived at his house, and I expect my review copy any day now.  But I can already tell you that the content is excellent.  Now-under-cited-but-essential-nonetheless corporate law classics like Some Theoretical Aspects of Share Voting and Our Two Corporation Systems: Law and Economics (two of his best, IMHO) should get some new life.  Among his non-corporations works, the classic and fun Parable of the Parking Lots (showing a humorous side of Henry that unfortunately rarely comes through in the innumerable joke emails he passes along to those of us lucky enough to be on “the list”) and the truly-excellent The Political Economy of Modern Universities (an updating of which forms a large part of a long-unfinished manuscript by my dad and me) are standouts.  And the content in the third volume from Wall Street in Transition has particular relevance today, and we would all do well to re-learn the lessons of those important contributions.

The full table of contents is below the fold.  Get it while it’s hot! Continue Reading…

Here’s another reason—as if you needed it—as to why getting a reasonable bailout of the mortgage-backed securities market through Congress was so difficult. Below I reproduce an analysis from Gregg Easterbrook of the Brookings Institute:

Supposing we assume the bailout is required, here is what bothers me about the plan so far: Taxpayers don’t get stock, what they get is warrants that can be exchanged for stock, and nonvoting stock to boot….  Even if the warrants are called [sic, Easterbrook means exercised], taxpayers get no voting positions…. A week ago, Warren Buffett rescued Goldman Sachs by injecting $5 billion in capital. Did Buffett bargain for warrants that can be exchanged at an unknown later date for nonvoting shares? No: He is not a fool. Buffett gave Goldman Sachs $5 billion in return for senior preferred stock, the kind that votes and also is more valuable than ordinary shares…. The United States Congress and the White House should use the public’s $700 billion to buy … senior preferred shares. Why are Congress and George W. Bush not simply following the road map laid out on this problem by the smartest investor of our era?

The problem is that this is factually mistaken from beginning to end. Easterbrook says that Buffett did not get warrants, but in fact he did—indeed, warrants to purchase $5 billion of common stock with a strike price of $115 per share and a five year term. Easterbrook says that the preferred shares Buffett received are “the kind that votes,” but they’re not. Like the six classes of preferred stock Goldman already has outstanding, Buffett’s shares do not vote in the election of directors. Like virtually all preferred shares, they have very limited voting rights that do not allow the holder any ability to control the affairs of the company. This is all set out in the press release Goldman Sachs issued to announce the transaction and in Item 303 of the Interim Report on Form 8-K it subsequently filed with the Securities and Exchange Commission.

More generally, it’s apparent from his blog that Easterbrook simply doesn’t understand what preferred stock is and how it relates to common stock. As most readers of this blog know, preferred stock is “preferred” not because it’s “more valuable than ordinary shares” but because it ranks ahead of common shares in order of payment. That makes it less risky than common shares but not generally more valuable than common stick. Indeed, since return is proportionate to risk, preferred shares generally have a lower expected return than common shares, and since control follows risk, preferred shares generally have less voting rights than common shares. The preferred shares Buffett purchased from Goldman are thus perfectly typical in these respects.

My point here is not that Easterbrook doesn’t understand what he’s talking about (though he clearly doesn’t). My point is that an intelligent person in the opinion-making class trying his honest best to inform the American public about the merits of the bailout can utterly fail to understand the issues at stake. That’s not because people like Easterbrook are fools (they certainly are not) but because the matters are so complex and technical that even informed, intelligent non-specialists can get them very badly wrong.

This is a genuine challenge for democracy. In The Federalist No. 10, Madison argued that representational republicanism is superior to direct democracy because it can “refine and enlarge the public views by passing them through the medium of a chosen body of citizens, whose wisdom may best discern the true interest of their country and whose patriotism and love of justice will be least likely to sacrifice it to temporary or partial considerations.” In other words, democratically elected representatives are on the whole likely to make better decisions than the people themselves, in part because they are better informed than the average voter. History has by and large proved Madison correct in this. Part of the problem in passing the bailout program last week, however, was that our elected representatives were dealing with issues that were often too complex and difficult even for intelligent, informed people who were trying hard to understand them. I do not for a moment suggest that anyone else should get to decide such matters except the elected representatives of the people, but I think we should realize that the world has become so complex that issues like this may begin to appear with increasing frequency.