One of my long-term projects (once I jettison some administrative responsibilities, like co-chairing my school’s dean search committee!) will be to apply the decision-theoretic approach to regulation generally.  I hope to build upon some classic regulatory scholarship, like Alfred Kahn’s Economics of Regulation (1970) and Justice Breyer’s Regulation and Its Reform (1984), to craft a systematic regulatory model that both avoids “regulatory mismatch” (applying the wrong regulatory fix to a particular type of market failure) and incorporates the decision-theoretic perspective. 

In the meantime, I’ve been thinking about insider trading regulation.  Our friend Professor Bainbridge recently invited me to contribute to a volume he’s editing on insider trading.  I’m planning to conduct a decision-theoretic analysis of actual and proposed insider trading regulation.

Such regulation is a terrific candidate for decision-theoretic analysis because stock trading on the basis of material, nonpublic information itself is a “mixed bag” practice:  Some instances of insider trading are, on net, socially beneficial; others create net welfare losses.  Contrast, for example, two famous insider trading cases:

• In SEC v. Texas Gulf Sulphur, mining company insiders who knew of an unannounced ore discovery purchased stock in their company, knowing that the stock price would rise when the discovery was announced.  Their trading activity caused the stock price to rise over time.  Such price movement might have tipped off landowners in the vicinity of the deposit and caused them not to sell their property to the company (or to do so only at a high price), in which case the traders’ activity would have thwarted a valuable corporate opportunity.  If corporations cannot exploit their discoveries of hidden value (because of insider trading), they’ll be less likely to seek out hidden value in the first place, and social welfare will be reduced.  TGS thus represents “bad” insider trading.  
• Dirks v. SEC, by contrast, illustrates “good” insider trading.  In that case, an insider tipped a securities analyst that a company was grossly overvalued because of rampant fraud.  The analyst recommended that his clients sell (or buy puts on) the stock of the fraud-ridden corporation.  That trading helped expose the fraud, creating social value in the form of more accurate stock prices.

These are just two examples of how insider trading may reduce or enhance social welfare.  In general, instances of insider trading may reduce social welfare by preventing firms from exploiting and thus creating valuable information (as in TGS), by creating incentives for deliberate mismanagement (because insiders can benefit from “bad news” and might therefore be encouraged to “create” it), and perhaps by limiting stock market liquidity or reducing market efficiency by increasing bid-ask spreads.  On the other hand, instances of insider trading may enhance social welfare by making stock markets more efficient (so that prices better reflect firms’ expected profitability and capital is more appropriately channeled), by reducing firms’ compensation costs (as the right to engage in insider trading replaces managers’ cash compensation—on this point, see the excellent work by our former blog colleague, Todd Henderson), and by reducing the corporate mismanagement and subsequent wealth destruction that comes from stock mispricing (mainly overvaluation of equity—see work by Michael Jensen and yours truly).

Because insider trading is sometimes good and sometimes bad, rules restricting it may err in two directions:  they may acquit/encourage bad instances, or they may condemn/prevent good instances.  In either case, social welfare suffers.  Accordingly, the optimal regulatory regime would seek to minimize the sum of losses from improper condemnations and improper acquittals (total error costs), while keeping administrative costs in check.

My contribution to Prof. Bainbridge’s insider trading book will employ decision theory to evaluate three actual or proposed approaches to regulating insider trading:  (1) the “level playing field” paradigm, apparently favored by many prosecutors and securities regulators, which would condemn any stock trading on the basis of material, nonpublic information; (2) the legal status quo, which deems “fraudulent” any insider trading where the trader owes either a fiduciary duty to his trading partner or a duty of trust or confidence to the source of his nonpublic information; and (3) a laissez-faire, “contractarian” approach, which would permit corporations and sources of nonpublic information to posit their own rules about when insiders and informed outsiders may trade on the basis of material, nonpublic information.  I’ll then propose a fourth disclosure-based alternative aimed at maximizing social welfare by enhancing the social benefits and reducing the social costs of insider trading, while keeping decision costs in check. 

Stay tuned…I’ll be trying out a few of the paper’s ideas on TOTM.  I look forward to hearing our informed readers’ thoughts.

[Cross posted at TechFreedom.org]

Back in September, the Senate Judiciary Committee’s Antitrust Subcommittee held a hearing on “The Power of Google: Serving Consumers or Threatening Competition?” Given the harsh questioning from the Subcommittee’s Chairman Herb Kohl (D-WI) and Ranking Member Mike Lee (R-UT), no one should have been surprised by the letter they sent yesterday to the Federal Trade Commission asking for a “thorough investigation” of the company. At least this time the danger is somewhat limited: by calling for the FTC to investigate Google, the senators are thus urging the agency to do . . . exactly what it’s already doing.

So one must wonder about the real aim of the letter. Unfortunately, the goal does not appear to be to offer an objective appraisal of the complex issues intended to be addressed at the hearing. That’s disappointing (though hardly surprising) and underscores what we noted at the time of the hearing: There’s something backward about seeing a company hauled before a hostile congressional panel and asked to defend itself, rather than its self-appointed prosecutors being asked to defend their case.

Senators Kohl and Lee insist that they take no position on the legality of Google’s actions, but their lopsided characterization of the issues in the letter—and the fact that the FTC is already doing what they purport to desire as the sole outcome of the letter!—leaves little room for doubt about their aim: to put political pressure on the FTC not merely to investigate, but to reach a particular conclusion and bring a case in court (or simply to ratchet up public pressure from its bully pulpit).

The five page letter concludes with, literally, three sentences presenting Google’s case, one of which reads, in its entirety, “Google strongly denies the arguments of its critics.” The derision is palpable—as if only a craven monopolist would deign to actually deny the iron-clad arguments of Google’s competitors so painstakingly reproduced by Senators Kohl and Lee in the preceding four pages. This is neither rigorous analysis nor objective reporting on the contents of the Senate’s hearing.

While we worry about particularly successful companies being singled out for punishment, we hold no brief for Google in this debate. Instead, in all our writings, we’ve tried to present a consistently skeptical view about a worrisome trend in antitrust enforcement in high tech markets: error-prone and costly intervention in markets that are ill-understood and fast-moving, to the great detriment of consumers and progress generally. Although our institutions have received financial support from Google among a range of other companies, organizations and individuals, our work is focused on this broad mission; we have no obligation or intention to support any company simply because it finds value in supporting our mission.

We’ve defended (and one of us has even worked for) Microsoft in the past, and just yesterday, we lamented the fact that the Obama Justice Department and the FCC have effectively blocked Google’s arch-rival, AT&T, from buying T-Mobile. Rather than defend any particular company, our goal, to paraphrase Hayek, is to “demonstrate to [regulators] how little they really know about what they imagine they can design”—lest they undermine how competition actually works in the name of defending outdated models of how they think it should work. Unfortunately, the letter from Senators Kohl and Lee does nothing to assuage our concern and suggests instead that crass politics, rather than sensible economics, could determine the outcome of cases like this one—if not in a court of law, then in the court of public opinion and extra-legal intimidation.

To begin with, the letter asserts that “Google faces competition from only one general search engine, Bing,” suggesting that only Bing (and it, only ineffectively) could keep Google in check. In essence, the Senators are prejudging an essential question on which any case against Google would turn: market definition. But why would the market not include other tools for information retrieval? Is it not at least worth mentioning that more and more Internet users are finding information and spending time on social networks like Facebook and Twitter, while more and more advertisers are spending their money on these Google competitors? Isn’t it clear that search itself is evolving from “ten blue links” into something more social, multi-faceted and interactive?

In a remarkable leap, the senators then identify the specific alleged abuse that Google’s alleged market power leads to: search bias. That’s remarkable because, other than the breathless claims of disgruntled competitors (given plenty of air time at the September hearing), there is actually no evidence that search bias is, in fact, harmful to consumers—which is what antitrust is concerned with. (Read both sides of this debate in TechFreedom’s free ebook, The Next Digital Decade: Essays on the Future of the Internet.)

As our colleague, Josh Wright, has thoroughly demonstrated, this “own-content” bias is actually an infrequent phenomenon and is simply not consistent with an actionable claim of anticompetitive foreclosure. Moreover, among search engines, Google references its own content far less frequently than does Bing (which favors Microsoft content in the first search result when no other search engine does so more than twice as often as Google favors its own content).

Of course, none of this is even hinted at in the Senators’ letter, which seems intended to condemn Google for “preferencing” its own content (under the pretense of withholding judgment). It’s a little like condemning Target for deigning to use its trucks to supply inventory only to its own stores instead of Wal-Mart’s, or, say, condemning a congressman for targeting earmarks for his own state or district. Earmark bias!

In Google’s case, the fundamental basis for these claims, according to the letter, is that “Google’s business model has changed dramatically in recent years.” This is a remarkably candid admission: a company that successfully advances its organization, keeping up with rapidly-shifting technology and mercurial demand, can be condemned—and its business practices adjudged illegal—simply by virtue of the fact that it has, indeed, evolved to offer products it didn’t offer before. Never mind that those products didn’t previously exist and, in some cases, were in fact invented by that company! How would punishing this serve consumers?

To add insult to injury, the story is “corroborated” by the senators’ parroting, without caveats, claims by Google’s rivals that they are harmed by Google’s favoring its own content, and that “they would not attempt to launch their companies today given GoogIe’s current practices.” As a general matter, antitrust law treats such self-interested claims of competitors with the skepticism they deserve. You wouldn’t know it from reading the letter (nor from reading the transcript from the September hearing), but harm to competitors is not the same thing as harm to consumers or competition more generally (which is what antitrust law cares about). The reason is simple: nothing harms competitors more than effective, vigorous competition. Reasoning backward from harm to competitors to infer anticompetitive conduct is the height of irresponsible antitrust enforcement.

The letter also reports, again with no caveats, claims by the CEOs of Yelp! and Nextag that “75 percent of Yelp!’s web traffic consists of consumers who find its website as a result of Google searches, and . . . 65 percent of Nextag’s traffic originates from Google searches,” and that losing this much traffic to Google preferencing its own content would be catastrophic. But the letter fails to mention that most searches for brand names on Google are “navigational” rather than “informational.” As Google competitor Expedia’s CEO recently explained:

The majority of, at least Expedia’s, and I believe Hotel.com’s traffic that comes from search to our site actually come through people searching for Expedia, for example. So in typing in Expedia in Google or so on, typing in Hotels.com in Google. So of the 25% for Expedia, for example, the majority of that traffic is someone who’s already looking for Expedia, and that person is going to find Expedia one way or the other because they are searching for something very specific. (Expedia earnings call, 10/28/10, quoted here).

Indeed, a recently published independent academic study conducted across search engines concluded that 52% of “business queries” (and 72% of organizational queries) were navigational. In other words, most of the Google traffic going to these sites was likely from users who simply typed in “Yelp” or “NextTag” as a convenient way of getting to those sites. Such searches are not diverted (and not even claimed to be diverted) to Google’s own sites, and the first search result for the search term “Expedia” will always be expedia.com. Thus, the majority of these searches that are claimed to make up 75% and 65% of the complaining companies’ traffic is not in any way threatened by Google’s business model, and is completely irrelevant to assessing the effect of Google preferencing its own content.

Furthermore, the letter does not mention Yelp’s recent boast that over 40% (and growing) of its searches are now conducted on its mobile app—insulating it from whatever “power” Google might exercise over traditional searches. While generic search may be the default navigational tool for many desktop users, a great many users seem to prefer searching with apps like Yelp’s on their mobile devices, further underscoring the complexity of the markets at issue and the problem with the kind of facile market definition on display here.

Moreover, who really knows what anyone might have done in 1999 (Nextag) or 2004 (Yelp)? It is facile and meaningless for the companies to imply that Google’s conduct is stifling today the same business models that emerged 7 or 12 years ago, before the ensuing evolution of the market. It would be a shame, in fact, if those same companies were emerging only today, and one shouldn’t be surprised in a rapidly evolving marketplace to find that many once-brilliant ideas turn out to be bested by the vagaries of uncertain, innovative markets. Remember, it wasn’t so long ago that Yahoo! ruled the “portal market,” which morphed into the “search” market “controlled,” in turn, by AOL and AltaVista. A static snapshot of the market at any given moment might have inspired the sort of hand-wringing Google inspires today. But the market kept evolving—without government intervention—each time rendering today’s tech titans tomorrow’s has-beens. Nostalgia and a reflexive preference for the status quo are the worst vices of regulating any evolving market, especially high-tech ones. Estimates that Yelp’s upcoming IPO may put the company at a valuation of $1-2 billion should at least make us somewhat skeptical of such claims, anyway.

It is for this reason—the disconnect between the interests of competitors and those of “competition” and the consumers it serves—that it’s particularly disingenuous for the letter to identify Tom Barnett only as “the Assistant Attorney General for Antitrust in the administration of President George W. Bush.” This is an ostentatious attempt to appeal to Republicans normally skeptical of government meddling, giving him the last word to claim that “the ultimate result of Google’s practices will be an Internet with fewer choices for consumers and business, higher prices, and less innovation.” (Sen. Lee himself seems to have fallen prey to claims by soi disant conservatives like Rick Rule (also, coincidentally, antitrust attorney to several of Google’s complainants) that antitrust meddling is a core part of capitalism—rather than another form of government regulation prone to capture by incumbents and politicization, precisely as Judge Bork warned in the Antitrust Paradox.)

A fairer letter would have noted the far more salient fact that Barnett is counsel for Expedia Inc., a member of the anti-Google Fairsearch coalition, for which he has served as spokesman. As Josh Wright has ably demonstrated, AAG Barnett and counsel-to-Expedia Barnett have wildly divergent views. While AAG Barnett is rightly celebrated as a thoughtful and restrained antitrust expert (indeed, he taught Berin antitrust law!), counsel-to-Expedia Barnett is a faithful and diligent advocate for his client (as well he should be). It is no disrespect to him to say that his client’s interests are not necessarily the same as those of the consumers Senators Kohl and Lee purport to represent; it is, however, questionable to hold out his views on this matter as representative of consumer interests.

The letter goes on to highlight mobile search as a particularly problematic arena. Why? Because “Google may, as a condition of access to the Android operating system, require phone manufacturers to install Google as the default search engine.” But . . . they haven’t actually done that! The mobile phone market is remarkably competitive and ever-shifting. (One can easily imagine this same letter being written to raise pressing, irreversible concerns about Apple’s iPhone a year or two ago—just before Google’s Android operating system managed to seize the 43% of smart phone operating system share about which this letter is so concerned). Nevertheless, the FTC is urged to “ensure robust competition” in a market marred only by the senators’ purely speculative story about what could conceivably happen some day in the future. Is this really a responsible use of antitrust law?

It certainly isn’t responsible analysis. The Senators’ professed concern for robust competition and protection of the free market is undermined by the letter’s uncritical repetition of attacks on Google made by its competitors. At best, this letter is a missed opportunity to fairly present both sides of this complex case. For this reason, as well as the inconvenient fact (oddly completely absent from the letter) that the FTC is, as we noted, already actually investigating Google, we urge Chairman Leibowitz to investigate nothing more pertaining to this letter than the shape of the arc it makes as it flies through the air into his office wastebasket.

I should warn you that not everyone will greet your arrival as enthusiastically as I.  A great many smart folks on our planet—especially highly educated people in rich countries like my own—have fallen under the spell of this fellow named Malthus, who once warned that our planet was “overpopulated.”  Although Mr. Malthus’s ideas have been proven wrong time and again, his smart and influential disciples keep insisting that your arrival spells disaster, that this lonely planet just can’t support you. 

Now my own suspicion is that modern day Malthusians, who are smart enough to know that actual events have discredited their leader’s theories, continue to parrot Mr. Malthus’s ideas because they lend support to all manner of governmental intervention into private affairs.  (These smarty-pants Malthusians, who are well-aware of their own intelligence, tend to think they can arrange things better than the “men and women on the spot” and are constantly looking for reasons to go meddling in others’ business!)  Whatever their motivation, Mr. Malthus’s disciples just won’t shut up about how our planet is overpopulated.

You should know, though, that this simply isn’t true.  The first time you hear one of Mr. Malthus’s followers decrying your very existence by insisting that our planet is overpopulated, you should ask him or her:  “Overpopulated relative to what?”  Modern Malthusians can never give a good answer to that question, though they always try.

Sometimes they say “living space.”  But that’s plain silly.  Our planet is really pretty huge.  Indeed, if all seven billion people on the planet moved to the state ofAlaska, each person would have 2,300 square feet of living space!  Now I realize lots of cities get crowded, but that’s because people choose to live in those areas—they’ve decided that the benefits of enhanced economic opportunity in a densely populated area outweigh the costs of close confines.  If they really wanted extra living space, they could easily find it in our planet’s vast uninhabited (or sparsely inhabited) regions.

Sometimes modern day Malthusians say the planet is overpopulated relative to available food.  Wrong again.  In the nations of the world where institutions have evolved to allow people to profit from coming up with new ideas that enhance welfare, individuals have developed all sorts of ways to get more food from less land.  Accordingly, food production has always outpaced population growth.  Now, modern day Malthusians will probably tell you that food prices have been rising in recent years – a sign that food is getting scarcer relative to people’s demand for it.  But that’s because governments, beholden to powerful agricultural lobbyists, have been requiring that huge portions of agricultural output be diverted to fuel production even though the primary biofuel (ethanol) provides no environmental benefit.  As usual, it’s actually bad government policy, not population growth, that’s creating scarcity.

In recent days, Mr. Malthus’s disciples have insisted that the world is overpopulated relative to available resources.  Nothing new here.  Back in the 1970s, lots of smart folks contended that the earth was quickly running out of resources and that drastic measures were required to constrain continued population growth.  One of those smarty pants was Stanford University biologist Paul Ehrlich, who, along with his wife Anne and President Obama’s science czar John Holdren, asked (in all seriousness): “Why should the law not be able to prevent a person from having more than two children?”  (See Paul R. Ehrlich, Anne H. Ehrlich & John P. Holdren, Ecoscience 838 (1977).)  (Ehrlich also proclaimed, in his 1968 blockbuster The Population Bomb, that “The battle to feed all of humanity is over. In the 1970s hundreds of millions of people will starve to death in spite of any crash programs embarked upon now. At this late date nothing can prevent a substantial increase in the world death rate.”)

In 1980, Prof. Ehrlich bet economist Julian Simon (a jolly fellow who would have welcomed your birth!) that the booming population would raise demand for resources so much that prices would skyrocket.  Mr. Simon thought otherwise and therefore allowed Prof. Ehrlich to pick five metals whose price he believed would rise over the next decade.  As it turns out, the five metals Prof. Ehrlich selected — chromium, copper, nickel, tin, and tungsten – fell in price as clever, profit-seeking humans discovered both how to extract more from the earth and how to substitute other, cheaper substances.  Mr. Simon was not at all surprised.  He recognized that the long-term price trend of most resources points downward, indicating that resources are becoming more plentiful, relative to human needs, over time.  (Modern Malthusians may point to some recent price trends showing rising prices for some resources, especially precious metals.  It’s likely, though, that those price increases are due to the fact that central banks all over the world have been creating lots and lots of money, thereby threatening inflation and causing investors to hold their wealth in the form of commodities.)

The fundamental mistake Mr. Malthus’s disciples make, Little One, is to assume that our planet is the ultimate source of resources.  That’s just not true.  Our planet does contain lots of useful “stuff,” but it’s human ingenuity – something only you and those like you can provide – that turns that stuff into “resources.”  Take oil, for instance.  For most of human history, messy crude oil was a source of annoyance for landowners.  It polluted their water and fouled their property.  But when whale oil prices started to rise in response to scarcity (or, put differently, when the world started to look “overpopulated” relative to whale oil), some clever, profit-seeking folks discovered how to turn that annoyance into kerosene, and eventually petroleum.  Voila!  A “resource” was created!

Just as people once worried about overpopulation relative to whale oil supplies, lots of folks now worry about overpopulation relative to crude oil.  Well I’m not that worried, and you shouldn’t be either.  As oil prices rise, more and more clever profit-seekers will turn their energies toward finding new ways to obtain oil (e.g., hydraulic facturing), new techniques for reducing oil requirements (e.g., enhanced efficiency), and new substitutes for oil (e.g., alternative fuels).  Mr. Malthus’s disciples will continue to fret about the limits to growth, but the historical record is clear on this one:  Human ingenuity – the ultimate resource – always outpaces the diminution in useful “stuff.”

And so, Little Resource, your arrival on our planet should be celebrated, not scorned!  As you and your fellow newborns flex your creative muscle, you’ll develop new sources of wealth for the world.  As you do so, birth rates will plummet, as they typically do when societies become wealthier, and the demand for a cleaner environment, demand that rises with wealth, will grow.  We therefore need not worry about “overpopulation.”

We do, though, need to ensure the survival of those institutions – property rights, free markets, the rule of law – that encourage resource-creating innovation.  I, for one, promise to do my best to defend those institutions so that you and your fellow newborns can add to our planet’s resource base.

(Before the housing advocates lose their cool, an important disclaimer: Every possible effort should be made to keep a family in their homes, including taxpayer-financed principal modifications for deserving, underwater borrowers. My proposal applies only to vacated homes that have completed the foreclosure process.)

Until the Washington Post ran an article last week, titled Banks turn to demolition of foreclosed properties to ease housing-market pressure, I was reluctant to admit my position in public. I had whispered my idea into the ears of several finance professors, but none was willing to stand behind it. And for good reason: How can one advocate bulldozing a home when so many families are losing their homes?

According to the Post, some of the nation’s largest banks have begun giving away abandoned properties to the state and even footing the $7,500 bill per demolition. In 2009, Ohio passed a law creating “land banks” with the power and money to acquire unwanted properties and put them to better use, like community gardens. Similar laws were passed in Georgia, Maryland, and New York. Wells Fargo donated 300 properties nationwide last year, and Fannie Mae donated 30 properties per month to the Cuyahoga (Ohio) land bank. The story even identified a “land bank expert” at Emory University. Now that the Post has given me cover of plausibility, let’s discuss the costs and benefits.

One of the first lessons in an undergraduate microeconomics class is that bulldozing homes to create construction jobs is a bad idea. Even after those new construction workers rebuild the bulldozed homes, society has the same amount of homes as before but lacks whatever output those workers could have created in the alternative. The objective of economic policy is not to maximize jobs—if that were the case, entire cities would be bulldozed and reconstructed—but rather to allocate resources efficiently. Because so many economists have this lesson in mind (and because so many are pacifists), it is hard to embrace any policy that involves a bulldozer.

But this bulldozer scheme is motivated for different reasons. Too much land has been allocated to homes, many of which were built in bubble during the early half of last decade. As a result, too many neighborhoods in America are afflicted with abandoned properties. A vacant house is estimated to be worth half its normal market value. Imagine trying to sell your house at market rates when a close facsimile is available across the street for half the price! To add insult to injury, the excess supply of abandoned houses invites vandalism and neighborhood blight—the textbook negative externality—further depressing home values. Using data from foreclosures in the Cleveland area, Kobie and Lee (2010) show that the length of time that a home is in foreclosure has a significant drag on neighboring home values.

Well-functioning markets tend to equilibrate supply and demand, but housing markets are highly inefficient in this regard because of the time lag between beginning construction and selling a home: A housing boom sends signals to builders that new construction will be profitable. By the time the housing bust comes, the new builds become permanent mistakes.

To illustrate this “market failure,” consider downtown Miami. A drive down Brickell Avenue reminds one of New York City. Whereas there used to be one row of high-rises on the bay-side, the avenue now boasts rows and rows of developments as far as the eye can see. Had the developers known that many of these complexes would stand empty—the Census Bureau estimates that a whopping 18 percent of Florida’s homes stood vacant in March 2011—they would have tempered their enthusiasm. According to the Florida Association of Realtors, the inventory overhang has sent home prices plunging: the median price for homes sold in January 2011 was seven percent less than January 2010, and prices are expected to fall by another five percent in 2011.

And why is this so troubling for the economic recovery? According to the Fed, the nation’s stock of household real estate declined by $6.5 trillion since 2006. A family spends its income based in part on its perceived wealth; when housing values decline, families spend less. Economists call this the “housing-wealth effect.” Case, Quigley and Shiller (2006) found a statistically significant and rather large effect of housing wealth upon household consumption, and weak evidence of a stock market wealth effect.

A robust stock market might offset this decline in wealth (and hence spending), but the Dow hasn’t cracked 13,000 since April 2008. In the meantime, families are hoarding their cash. The $6.5 trillion elimination in household wealth puts the President’s $300 billion jobs-stimulus program in perspective: If the housing-wealth effect is dragging down spending, then a one-time injection of $300 billion dollars won’t have much of an impact. In contrast, a 10 percent increase a housing wealth—housing values are off 30 percent since 2006—would increase consumption between 0.4 and 1.4 percent according to Case, Quigley and Shiller.

When applied to vacated homes that have completed the foreclosure process, the bulldozer scheme would eliminate some of the excess supply of housing, which would temper the downward pressure on home values. In the place of a cluster of abandoned homes sucking the life of a neighborhood, imagine a children’s park, a dog park, or a community garden. Now that the banks have figured out bulldozing can be cheaper than maintaining the properties, paying taxes, and marketing the properties, the only thing stopping this idea from gaining traction is public sentiment.

My lunch crowd, comprised of economists, retort that the elimination of excess housing supply via bulldozers might be a boon to existing homeowners but would punish future homeowners. But wouldn’t a future homeowner prefer to invest in a slightly more expensive asset class with expected growth over a less expensive asset class with negative expected growth for the foreseeable future?

Finally, the bulldozing scheme need not be mutually exclusive with other schemes to relieve the housing crisis. Other ideas are worth trying, even if they wouldn’t spur much economic activity. Some are calling on Congress to eliminate the barriers keeping underwater homeowners from refinancing their mortgages. According to Macroeconomic Advisers, such a plan might boost GDP growth by 0.1 to 0.2 percentage points, as it merely redistributes money from lenders to borrowers. Others have called for massive debt forgiveness, achieved via a federal program to purchase troubled mortgages and give homeowners better rates. As Ezra Klein of the Post points out, however, the politics of using taxpayer dollars to pay off mortgages are impossible to crack. To stabilize the housing market, Larry Summers calls on government sponsored enterprises to finance mass sales of foreclosed properties to those prepared to rent them out, and to drop their posture of opposition to experimentation for programs such as principal reductions.

Whichever course we take, speed is of the essence: The housing drag is not going away on its own. According to RealtyTrac, the nation’s banks, along with Fannie Mae and Freddie Mac, have an inventory of more than 816,000 foreclosed properties, with an additional 800,000 working their way through the foreclosure process. Insisting that each of those homes be paired with a family—a noble cause—is tantamount to pushing off recovery for several more years.

I modestly propose to remove a fraction of these homes from inventory. If you don’t like the ring of a bulldozer scheme, how about “The Neighborhood Parks” scheme? Even if I can’t convince any economists to get on board, environmentalists should be pleased.

1. Reinhart-Rogoff was a hit, mentioned several times.  Aside from the merits of the book, I think people were trying to give Obama cover for no recovery.  R-R apparently says it takes an average of 7 years to get out of a financial crisis.
2. The first speaker (Gene Sperling) was late and the Gillian Tett of the FT, the moderator, took some informal polls of the audience (mainly business journalists.)  Pretty pessimistic: Thought that there would be a double-dip, the EU would lose at least one member, and yields would not increase.
3. Sperling (Director of the National Economic Council) spent a lot of time talking about how bad unemployment is and arguing for the President’s Jobs plan (which the Senate has already rejected.)  Not much new to propose.
4. Peter Orszagh (former OMB Director, now with CITI) made a few interesting points.  He said that the Administration got the original forecast wrong, and did not realize that the recession was “L” and not “V” shaped.  He also predicted that middle class incomes will not return to their original level and that policy should not fool people into thinking they would.
5. Several speakers (Laura Tyson of Berkeley and former CEA Chair; Steve Case , AOL founder) argued for better immigration laws (no quarrel there: the Republicans have got themselves into a terrible position on immigration).  Tyson in particular argued for more STEM (science, technology, engineering, mathematics) education.  I asked her if she thought the increasing gender imbalance in colleges (now about 2 women per man) was responsible for the STEM problem and she indicated that it might be part of the problem.  Really something worth further examination and some policy analysis.  Of course the immigration mess makes this problem worse since it is harder to import engineers from abroad.
6. Someone (I think Steve Rattner, former Auto Czar) made the point that while the American economy is doing badly and unemployment is a real problem, American companies are doing very well, in part because of foreign earnings.  There were also several inconclusive discussions of a tax holiday for repatriation of foreign earnings.  Some said that this would be “unfair” but others understood that future effects, not past fairness, was what was relevant.  Not clear what the effects would be, however.
7. A few mentions of Sarbanes-Oxley and Dodd-Frank, but mostly the role of regulation was ignored.  Health care was mentioned but not, I believe, Obamacare.  Everyone agreed that businesses were “afraid” to spend money but little discussion of the source of the fear.
8. Most were not worried about conflict with China.  I asked about Chinese demographics (aging population, gender imbalance with too many males.)  Whenever I hear discussions of China I raise this issue since people seem to ignore it and it is a serious issue.  Michael Spence (Nobel Laureate, now at NYU) said that China was in a position to establish a viable retirement program (no details) but that the gender issue was not one that was being dealt with.  There seemed to be almost envy of the ability of the Chinese to do what they wanted independent of the desires of the people.
9. Laurence Fink of BlackRock made the interesting point that the current situation seems a lot like the 1970s, including the widespread pessimism.  Martin Wolf, Chief Economics Commentator of the FT, agreed.  But the lesson he drew was that we need more and wiser regulation.  I spoke with him briefly and indicated that I was in the Reagan Administration, and that last time we got in a pessimistic mess like this deregulation al la Reagan was the solution.  He rejected this approach.  But I am hopeful.

We’ll have a wrap-up tomorrow of all of the posts here.  I will offer some reactions after I’ve had time to absorb the volume of ideas presented.  In the meantime watch this space for more Truth on the Market.

Cliff Winston and I think that the best way to proceed is through a variety of different state experiments. Some states could allow bar exams for persons who have not attended law school or who have subscribed to on-line law school programs. Others could offer a variety of different exams for different prospective specialties. Still others could repeal their unauthorized practice of law prohibitions. Others could allow non-lawyers to own legal services operations. Still other variants could be tried, including total deregulation. Let’s see what works – and not only in the United Kingdom.

This view is based upon the assumption that the best way to achieve the goal of deregulating all the lawyers is to create incentives for entrepreneurs to produce new and innovative legal information products.  As noted in my earlier post, innovation and entry by entrepreneurs into the legal information market can be a powerful force that weakens of the economic and political power of those whose interests are aligned with maintaining the current regulatory regime.  One result of this process is that deregulation becomes more likely.   This dynamic is why I love Virginia wine, even though I never drink it.

Creating incentives for entrepreneurs to innovate and enter requires a mechanism that allows them to appropriate a return to their investments.  Intellectual property rights can be an essential mechanism through which this occurs. Indeed, intellectual property rights can effectively protect many innovative legal information products.  However, in several important cases, legal information is subject to what can be described as a form of legal exceptionalism that results in weakened intellectual property rights.  In general, the availability and scope of intellectual property rights are limited so that the costs of restricting the use of already produced information do not exceed the benefits associated with the marginal incentives to create the information.   Intellectual property rights for law and related works seem to be further limited because of heightened concerns regarding use costs that are specific to legal information.

Perhaps the best example of legal exceptionalism is the legal treatment of the privately produced model building codes in Veeck v. SBCCI, 293 F.3d 791 (5th Cir. 2002, en banc).  In this case, Veeck posted SBCCI’s copyrighted model building codes on a website in violation of a license agreement that prohibited copying or distributing the work. The court held that the copyrighted code text entered the public domain when adopted as law by several local jurisdictions.  Through SBCCI retained copyrights to its model codes, they could not enforce them against Veeck, who identified the posted SBCCI model codes as the building codes of two municipalities.

Current copyright law precludes copyright protection for any work “prepared by an officer or employee of the United States Government as part of that person’s official duties”.  Under this definition, court opinions written by federal judges, congressional bills and statutes, and federal regulations are ineligible for copyright protection.  Courts have applied similar rules to state legal materials, including state judicial opinions, statutes, and regulations.   These rules assume that the use costs of intellectual property protection outweigh gains from improved private incentives to produce model laws.   Copyright law does not explicitly preclude copyright for model codes and other privately produced laws.  However, the court’s holding, by elevating due process concerns with public access to the law over providing economic incentives to produce model codes, effectively extends this prohibition to privately produced model codes and laws that have been adopted as law.

Protecting due process concerns does not require precluding copyright protection for privately produced works adopted as law.  Broad fair use privileges for those bound by the laws or codes could address these concerns while simultaneously protecting model codes from appropriation by competing commercial interests and other jurisdictions.   Restrictive licenses can also serve to appropriately balance the use-creation tradeoff by clarifying parties’ expectations regarding permitted uses and pricing of the copyrighted model law.   As part of these licenses, jurisdictions that adopt privately produced and copyrighted model codes could alleviate due process concerns by authorizing use by citizens bound by the law while preventing reproduction for other purposes.  Courts could require similar licenses to be granted by those wishing to file briefs and other potentially copyrightable documents.

The court’s holding in Veeck unnecessarily limits the ability to use these mechanisms by effectively eliminating copyright protection rather than retaining the protection and using the mechanisms discussed above that would permit limited public use and mitigate any due process concerns.  In doing so, the courts holding, along with other similar forms of legal exceptionalism unnecessarily weakens incentives for legal innovation and can result in less pressure to deregulate all the lawyers.