The Stanford Law Review Online has just published an Essay by William B. Gould IV entitled The 2011 Basketball Lockout: The Union Lives to Fight Another Day—Just Barely. Gould, a former chairman of the National Labor Relations Board, provides a succinct postmortem on the 2011 lockout:

The backdrop for the 2011 negotiations was the economic weapon once regarded as a dirty word in the lexicon of American labor-management relations—the lockout. This economic weaponry, endorsed by the Supreme Court since 1965, became the flavor of the two prior decades; baseball flirted with it in 1990, basketball in 1995 and 1999. One of hockey’s lockouts even resulted in the cancellation of the entire 2004-05 season. The lockout again was utilized in 2011 by recently peaceable football as well [...]]]>

The Stanford Law Review Online has just published an Essay by William B. Gould IV entitled The 2011 Basketball Lockout: The Union Lives to Fight Another Day—Just Barely. Gould, a former chairman of the National Labor Relations Board, provides a succinct postmortem on the 2011 lockout:

The backdrop for the 2011 negotiations was the economic weapon once regarded as a dirty word in the lexicon of American labor-management relations—the lockout. This economic weaponry, endorsed by the Supreme Court since 1965, became the flavor of the two prior decades; baseball flirted with it in 1990, basketball in 1995 and 1999. One of hockey’s lockouts even resulted in the cancellation of the entire 2004-05 season. The lockout again was utilized in 2011 by recently peaceable football as well as by basketball. The owners gravitated towards the lockout tactic because in the event of strike (protesting changes in conditions in employment, which proved ineffective), players who crossed the union picket line could play and still sue in antitrust simultaneously. The lockout put more pressure on the players to settle. . . . The union now was represented by David Boies, who had only a few months before represented the NFL and successfully deprived that union of its only effective antitrust remedy—i.e., an injunction against the lockout, which would have required the owners to open the camps in early summer. Thus the basketball union now would not pursue the injunction remedy, notwithstanding the persuasiveness of Judge Bye’s dissenting opinion in the football case. Of course, Boies would have met himself coming around the corner if he argued for it in basketball.

He concludes:

Nonetheless, even though the union was stripped of its most effective antitrust remedy, litigation seems to have moved the parties together. It most certainly called the NBA’s bluff, in that the league’s regressive or inferior option was quickly forgotten. True, the NBA obtained givebacks that are estimated to be worth more than $300 million. Not only did it win on revenue sharing with the players—the players will possess between 49% and 51% as opposed to 57%—but more stringent luxury tax penalties for violators also have been instituted. As National Basketball Players Association Executive Director Billy Hunter said, the latter element constitutes the “harshest element of the new system.” At the same time, guaranteed contracts were preserved, restricted free agents will benefit from the reduction of the so-called “match period” when teams may match competing offers from seven to three days, which may encourage bidding on these players. The cap remains soft in that the so-called incumbent “Bird” players (named for Celtics superstar Larry Bird) may exceed the cap and have more expansive increases and lengths of contracts than other players. A so-called “amnesty” for bad contracts was permitted, in that even though the contracts must be paid, a player on each club may be waived and his salary not counted towards his team’s cap. What appeared to be a rout of the players in November emerged as a reasonable face-saving compromise.

Read the full article, The 2011 Basketball Lockout: The Union Lives to Fight Another Day—Just Barely by William B. Gould IV, at the Stanford Law Review Online.

Note: Updated quotation.

Elliott Fisher, director of the Center for Health Policy Research at Dartmouth Medical School, describes the “three key attributes” of ACOs: “organized care, performance measurement, and payment reform.” Fisher has argued that insurers are not well-positioned to improve the quality of health care because [...]]]> Critics of the ACA have frequently complained that the legislation does not do enough to improve quality or to cut costs. However, the Act did create incentives for new alliances of hospitals and doctors, known as “Accountable Care Organizations.” Now provider lobbies are demanding some pretty dramatic changes to health care regulation in order to implement ACOs. In this post, I want to explain what ACOs are, and why they challenge traditional health care regulatory models.

What’s an ACO?

Elliott Fisher, director of the Center for Health Policy Research at Dartmouth Medical School, describes the “three key attributes” of ACOs: “organized care, performance measurement, and payment reform.” Fisher has argued that insurers are not well-positioned to improve the quality of health care because they “have largely focused on negotiating favorable prices within relatively open networks of providers” instead of trying to improve the health care their members received. (Private insurers have little incentive to keep current subscribers healthy over the long term, since at least half of subscribers on average churn into different plans within three years of signing up with a given plan.) He believes that a “virtual network” of physicians could do a better job, if they teamed up with hospitals. ACO refers to this legal alliance, which would be entitled to receive payments in exchange for cutting costs or improving quality.

In an ACO, an “extended hospital medical staff” (or “a hospital-associated multi-specialty group practice”) can join forces with a hospital and agree to be compensated via a lump sum payment. If the group manages to keep overall costs beneath the lump sum payment, it can share the gains among its members. Each part of the team also has an incentive to work together to keep those they care for healthy. In an ideal world, the ACO responds to the concerns about fragmentation discussed in last month’s symposium on the volume edited by Einer Elhauge recently released by Oxford University Press.

ACO Skeptics

But there are skeptics. Jeff Fisher worries about shadowy new pressures on providers that patients won’t be aware of:

Consumers would not be aware that they were being treated by ACOs. Rather, they would be “attributed” to them: virtual patients of virtual organizations. Aggregate health spending for attributed patients would be tracked, and increases in that spending would be capped using a form of “shadow capitation.” ACOs that lived within the caps would get their fees increased. Those that overspent would see their fees reduced or frozen.

Gail Wilensky believes that hospitals may dominate ACOs, predicting that “if they are the only entities receiving the payment, it will have a bad imbalance between groups of physicians and the hospitals.”

Robert Pear has also reported that a “frenzy of mergers involving hospitals, clinics and doctor groups eager to share costs and savings” worries consumer advocates and antitrust scholars.

“In an environment where health care providers are financially rewarded for keeping costs down,” [a lawyer for the Consortium for Citizens with Disabilities] said, “anyone who has a disability or a chronic condition, anyone who requires specialized or complex care, needs to worry about getting access to appropriate technology, medical devices and rehabilitation. You don’t want to save money on the backs of people with disabilities and chronic conditions.”

“The new law is already encouraging a wave of mergers, joint ventures and alliances in the health care industry,” said Prof. Thomas L. Greaney, an expert on health and antitrust law at St. Louis University. “The risk that dominant providers and dominant insurers may exercise their market power, individually or jointly, has never been greater.” Lobbyists and industry groups are bearing down on the Federal Trade Commission and the Justice Department, which enforce the antitrust laws, and the inspector general’s office at the Department of Health and Human Services, which ferrets out Medicare fraud.

Those agencies are writing regulations to govern . . . accountable care organizations. They face a delicate task: balancing the potential benefits of clinical cooperation with the need to enforce fraud, abuse and antitrust laws. . . . [According to one insurer strategist,] “In some markets, the dominant hospital is like the sun at the center of the solar system. It owns physician groups, surgery centers, labs and pharmacies. Accountable care organizations bring more planets into the system and strengthen the bonds between them, making the whole entity more powerful, with a commensurate ability to raise prices.”

Why do ACOs implicate fraud, abuse and antitrust laws? At a recent government workshop on ACOs, participants addressed “circumstances under which collaboration among independent health care providers in an ACO permits ACO providers to engage in joint price negotiations with private payers without running the risk of engaging in illegal price fixing under the antitrust laws.” HHS also explored “the different ways in which the Secretary may exercise waiver authority or create new exceptions and safe-harbors related to the physician self-referral law, the Anti-kickback statute and the CMP law in order to encourage the creation and development of ACOs.” The AMA has pushed for “explicit exceptions to the antitrust laws” for participating doctors. And, as Pear reports, the president of the Federation of American Hospitals says “the fraud and abuse laws should be waived altogether.”

Evolving Fraud, Abuse, and Antitrust Laws

What is one to make of all this? Many health law scholars have been skeptical of fraud and abuse laws for some time. For a taste of the scholarship, consider this excerpt from Mark A. Hall’s 1988 article in the Journal of Health Politics, Policy, & Law:

Someone uninitiated to the intricacies of health care financing would find it startling to learn that it is potentially a felony punishable by five years imprisonment for a rural hospital to recruit a badly needed specialist to the community, for a doctor to discount his services by waiving insurance deductibles and coinsurance, or for a health care institution to pay its doctors a bonus as a reward for efficient practice. A case can be made that each of these activities falls within the literal terms of the broadly worded Medicare and Medicaid referral fee statute. Enticing a physician to join the medical staff necessarily involves implicit or explicit incentives to refer the physician’s patients to that hospital. Price discounts can be characterized as payments to refer one’s patients to one’s self for treatment. And efficiency bonuses can induce doctors to admit patients to a particular hospital or encourage them to direct patients to a particular insurance plan.

Because these and other absurd applications of the referral fee concept are within a plausible reading of the federal referral fee statute, the statute has been a constant thorn in the side of the health care industry since the 1977 enactment of its current form. However, some relief is now in sight. The Department of Health and Human Services (DHHS) has issued a series of ‘‘safe harbor’’ regulations specifying payment practices that are deemed legal despite their potential referral incentive.

Over the past 20 years, regulation of fraud and abuse has waxed and waned. In 1996, James F. Blumstein concluded that “the modern American healthcare industry is akin to a speakeasy—conduct that is illegal is rampant and countenanced by law enforcement officials because the law is so out of sync with the conventional norms and realities of the marketplace.” Nevertheless, as Joan Krause has shown, there are important public purposes behind these laws, and it’s troubling to see a hospital leader simply advocate for them to be swept away tout court in the case of ACO’s.

Antitrust issues are also complex here, and perhaps help demonstrate the wisdom of delaying the implementation of at least this part of the ACA for a few years. As Tim Greaney has demonstrated time and again, providers have had little to fear from antitrust laws over the past decade. His 2007 article on physician cartels memorably summarizes the situation for doctors:

For over thirty years the United States Department of Justice and Federal Trade Commission (“Agencies”) have confronted bands of businessmen who have steadfastly refused to pay attention to legal precedent, repeated governmental pronouncements, and administrative sanctions imposed on their colleagues. The conduct revealed in these cases evidences a willingness to blatantly disregard the law by repeatedly undertaking arrangements already deemed illegal by the enforcers or by concocting schemes that raise untested but dubious justifications.

[T]hese cases involve physicians, some grouped in associations numbering in the thousands and almost always proceeding with the advice of business consultants and counsel. The conduct challenged by the government involves the formation of loosely-structured organizations, ranging from Independent Practice Associations to Preferred Provider Organizations (PPO) to other kinds of loose “networks” that collectively bargain with employers or managed care organizations for provider contracts.

It’s hard to read Greaney’s work on the topic without concluding that a toxic mix of “doctrinal shortcomings, political pressures, and institutional constraints” have severely compromised antitrust enforcement already. Greaney’s 2004 article on antitrust in health care, Chicago’s Procrustean Bed, also suggests that health care antitrust has, for years, been biased “strongly [in] favor defendants” due to the persistent failures of Chicago-inspired doctrine to reflect “market imperfections” in health care.

Reduced Regulation Should Be Conditioned on Better Calibrated Payments

One could draw two lessons from these trends. Perhaps policymakers should be cautious about granting overly broad antitrust exemptions to ACO’s in a field where competition law’s prerogatives have already been whittled away.

Or one could call health care antitrust a largely failed project, and start regulating dominant ACO’s as veritable health care utilities, as critical to regional infrastructure as roads, electricity, or water. The logic of concentration seems inevitable in the field: insurers and providers have long been in an arms race for bargaining power. Joe White has explained the dynamic:

One might wonder why consolidation among insurers [in the US over the past 20 years] did not allow them to resist the providers’ demand for increased payments. The simple answer is that there were two concentrated parts of the market and one fragmented part. The insurers had to choose between fighting a full-pitched battle with the providers or exploiting their own market power vis-à-vis the employers. Raising premiums to employers was a lot easier.

In theory, employers could have demanded restrictive networks (at lower prices). But since everyone had agreed that employees did not like restrictive networks, and providers (especially hospitals) were not willing to discount much to get into such networks, there were not many available for purchase. Individual employers could not invent such a product; they could only shop around and find the relatively best deal by customizing other contract terms, such as cost sharing. The system left substantial room for entrepreneurship, but this entrepreneurship did not serve to improve health care values.

What can be done in a health care marketplace that’s increasingly looking like the “clash of the titans?” Perhaps inspired by the utility model, Maryland has implemented a hospital payment system where “all payers—public and private—pay the same rates.” If ACO’s deliver a coup de grace to insurers’ efforts to control provider prices, it’s only fair that the same governmental authorities behind the ACO movement condition its rewards on the responsibility to provide affordable care.

Concluding Thoughts

Legal scholar Kevin Werbach once observed that the internet has been centripetal, “pull[ing] itself together as a coherent whole.” For Werbach, network formation theory both explains these centripetal tendencies, and some of “the pressures threatening to pull the Internet apart” into balkanized units. Werbach counsels that governments need to “catalyz[e] network formation, and moderat[e] the forces that push towards excessive concentration of power.” These recommendations should also govern new efforts to create “virtual networks” of care in the wake of the new health reform legislation (the ACA). Like many forms of network power, the ACO’s could quickly have negative unintended consequences if regulators fail to anticipate the ways they could be abused.

ACA stands for Affordable Care Act, not Accountable Care Organizations Above All Else. ACOs may work, but only if policymakers can replace classic instruments of health care regulation with calibrated financing decisions that reflect new industry realities.

X-Posted: HealthReformWatch.com.

I have three brief points, involving a comparison with Japan, some thoughts about competition, consumer protection and innovation, and finally, a somewhat different take on the lessons of Wikipedia.

This symposium is incredibly timely, particularly given the concern in recent weeks about [...]]]> First off, thanks to Concurring Opinions and Danielle Citron for hosting this online symposium on Jonathan Zittrain’s The Future of the Internet – and How to Stop it.  Before I launch into my own thoughts, I want to add my own version of the praise that the book has already won.  It is an immensely readable work that succeeds in showing us where we’ve been, how we got to where we are, and the steps to take to avoid going where we’d rather not be.

I have three brief points, involving a comparison with Japan, some thoughts about competition, consumer protection and innovation, and finally, a somewhat different take on the lessons of Wikipedia.

This symposium is incredibly timely, particularly given the concern in recent weeks about the Google/Verizon agreement.  In TFOTI, Zittrain highlights the risks that threaten the Internet’s future, and explains how the net neutrality debate is in some ways a mismatch for those risks.  For example, he points out that the migration from the Internet to, in his words, tethered appliances like the iPhone and TiVo, ultimately provide an end-run around net neutrality on the Internet (pp. 177-185).  Accordingly, he argues that preserving generativity is a better-tailored principle.

The lead in The Economist this week also takes on the Google/Verizon agreement, and critiques net neutrality from a different angle calling America’s “vitriolic net-neutrality debate” “a reflection of the lack of competition in broadband access.”  If you’re reading this symposium, you probably already know, possibly because you read this, that in many other industrialized countries incumbent telcos were forced years ago – and not just in a superficial way – to open up wholesale broadband to competitors.

I’m in Tokyo this academic year thanks to Temple’s long reach across the globe and to my gracious hosts at Keio University Law School.  I’ve been travelling to Japan repeatedly since the late 1980s, and one of the changes I’ve been  struck by is how a country that in the 1990s was generally held to be well behind the U.S. in telecommunications now seems ahead in broadband and mobile Internet. 

Indeed, this is more striking given that the Japan’s lagging telcos used to fit a pattern, still observable in Japan, in which non-tradeable domestic sectors generally seem relatively inefficient.  However, the Japanese government not only required NTT, the monopoly domestic telephone company, to sell wholesale broadband to ISPs, but also prevented NTT from competing with the ISPs by prohibiting NTT from bundling in services with broadband Internet and thus becoming both supplier and competitor.  The result was an explosion in activity by new entrants, with significant consumer benefit.  I’ve always wondered how this policy came about, and the best account I’ve found, suggesting that it was parts happy accident and parts good intention, is this one by Takanori Ida.  As Ida observes, network economics is not yet so well understood that you can accurately predict the result of policy, though you may be able to design a better policy if you assume you cannot predict the future (p.78).

This brings me to my second point, about competition policy and innovation.  If you’ve followed the Supreme Court’s antitrust opinions over the past decade, after Trinko and LinkLine, you would be forgiven for laughing at the idea that antitrust could have a role in opening up access to rivals to the incumbent telcos.  (Although you could read Trinko as suggesting that if you want an Aspen Highlands-like forced access for rivals to network incumbents, you should get it from the FCC, not the Sherman Act.)   Similar to Nicholas Nassim Taleb’s point about taking steps to benefit from unanticipated positive “black swan” events, Zittrain makes the point that generativity allows disruptive innovation to benefit us in ways we cannot anticipate.  As a result, policies oriented at the future of the Internet should focus on how to preserve our opportunity to benefit from, particularly, user-generated innovation.

One of Zittrain’s biggest fears is the ability of manufacturers of tethered devices or providers of “walled garden” services on the Internet to make their products less generative after the fact.  In short, instead of planned obsolescence, there is remote-controlled sterilization.  Consumer protection may have a role to play here, though it may not be a panacea.  Disclosure regimes, rules giving users the opportunity to opt out and “de-tether” at a future point in time, and rules requiring portability of user-generated content may provide comfort, albeit imperfect, to users.   Platform operators and users have come to see the value in generativity – witness how the “tethered appliance” iPhone now sells itself based on the compatible work of others in the App Store.  However, the potential for exploitation after the fact will continue to exist.  And opportunism and its potential can impose costs by deterring user generated innovation.  This is important, since if users become leery of participating on dominant platforms for fear of having the rug pulled out from them, they may participate less, or not at all, and we won’t know what we will have lost as a society in terms of innovation.

Finally, Zittrain points to Wikipedia and how it gets its users to work well together in generating content as a model for how to solve some of the Internet dilemma of security versus generativity..  My colleague David Hoffman and I did a study in which we looked at the decisions of Wikipedia’s arbitration committee.  We found that their dispute resolution system did not actually resolve disputes about “correct” content on Wikipedia.  Rather, the focus of their dispute resolution system was to create and highlight norms of behavior and good faith for the community to follow – and to ban those who could not or would not at least try to be part of the community.  As George Costanza would say, “you know, we’re living in a society.”  A Wikipedia-like solution for problems that Zittrain sees would have to involve greater mass recognition that there ought to be civic virtue and social responsibility on the Internet.  In addition to providing us with useful insights, The Future of the Internet exhorts us all to take a constructive role in maintaining our power to take a constructive role.

This summer started off with a three part series from Professor Olufunmilayo B. Arewa looking at the credit crisis and possible changes that would focus on averting future market failures, rather than continuing to create regulations that only address past ones.  Part I of Prof. Arewa’s looks at the failure of risk management within the financial industry.  Part II analyzes the regulatory failures that contributed to the credit crisis as well as potential reforms.  Part III concludes by addressing recent legislation and whether it will actually help solve these very real problems.

Next, Professors Alan Devlin and Michael Jacobs take on an issue at the “heart of a highly divisive, international debate over the proper application of antitrust laws” – what should be done when [...]]]>

This summer started off with a three part series from Professor Olufunmilayo B. Arewa looking at the credit crisis and possible changes that would focus on averting future market failures, rather than continuing to create regulations that only address past ones.  Part I of Prof. Arewa’s looks at the failure of risk management within the financial industry.  Part II analyzes the regulatory failures that contributed to the credit crisis as well as potential reforms.  Part III concludes by addressing recent legislation and whether it will actually help solve these very real problems.

Next, Professors Alan Devlin and Michael Jacobs take on an issue at the “heart of a highly divisive, international debate over the proper application of antitrust laws” – what should be done when a dominant firm refuses to share its intellectual property, even at monopoly prices.

Professor Carter Dillard then discussed the circumstances in which it may be morally permissible, and possibly even legally permissible, for a state to intervene and prohibit procreation.

Rounding out the summer was Professor Clay Calvert’s article looking at journalists’ use of open record laws and death-related privacy rights.  Calvert questions whether journalists have a responsibility beyond simply reporting dying words and graphic images.  He concludes that, at the very least, journalists should listen to the impact their reporting has on surviving family members.

1. From Deloitte’s 12-page summary:

Because the new U.S. law is complex, it can be helpful to remind ourselves that its underlying purpose is relatively simple and has two powerful strands: 1. ‘De-risk’ the financial system by constraining individual organizations’ risk-taking activities and capturing a broader set of organizations’, including the so-called “shadow” banking system, in the regulatory net 2. Enhance consumer protections. . . .For example, the need for “arm’s-length” swap desk affiliates combined with the move from over- the-counter to exchange trading for derivatives, tighter constraints on leverage and risk-taking, and higher liquidity requirements imply lower profit margins in future from those [...]]]> Via Ezra Klein’s Wonkbook (definitely one of my favorite morning emails), a variety of takes on what’s in the financial reform bill:

1. From Deloitte’s 12-page summary:

Because the new U.S. law is complex, it can be helpful to remind ourselves that its underlying purpose is relatively simple and has two powerful strands: 1. ‘De-risk’ the financial system by constraining individual organizations’ risk-taking activities and capturing a broader set of organizations’, including the so-called “shadow” banking system, in the regulatory net 2. Enhance consumer protections. . . .For example, the need for “arm’s-length” swap desk affiliates combined with the move from over- the-counter to exchange trading for derivatives, tighter constraints on leverage and risk-taking, and higher liquidity requirements imply lower profit margins in future from those activities.

Some estimates I’ve seen have estimated the profit margins might be around 15% lower.

2. Simon Johnson on the Kanjorski Amendment as a “new kind of antitrust:”

Effective size caps on banks were imposed by the banking reforms of the 1930’s, and there was an effort to maintain such restrictions in the Riegle-Neal Act of 1994. But all of these limitations fell by the wayside during the wholesale deregulation of the past 15 years. Now, however, a new form of antitrust arrives – in the form of the Kanjorski Amendment, whose language was embedded in the Dodd-Frank bill. Once the bill becomes law, federal regulators will have the right and the responsibility to limit the scope of big banks and, as necessary, break them up when they pose a “grave risk” to financial stability.

I wish I could say I was as optimistic as Johnson about the prospects for effective enforcement here, but he certainly knows the lay of the land far better than I do. As Barry Lynn shows, in a variety of industries, we need a new form of antitrust, or at least better competition advocacy.

3. The Roosevelt Institute publishes a variety of takes; William K. Black is the most pessimistic:

The fundamental problem with the financial reform bill is that it would not have prevented the current crisis and it will not prevent future crises because it does not address the reason the world is suffering recurrent, intensifying crises. A witches’ brew of deregulation, desupervision, regulatory black holes and perverse executive and professional compensation has created an intensely criminogenic environment that produces epidemics of accounting control fraud that hyper-inflate financial bubbles and cause economic crises. . . .

The financial industry, with Bernanke’s support, already got Congress to extort FASB to gimmick the accounting rules so that insolvent banks could hide their losses and continue to pay the executives (already made rich by destroying “their” firms — that’s the meaning of Akerlof & Romer’s classic article: “Looting: Bankruptcy for Profit”) massive bonuses. All of this is made possible by huge, off budget subsidies to [systemically dangerous institutions] via the Fed and Fannie and Freddie.

4. Daniel Indiviglio on the uncertainty at the heart of the legislation (does it end or encourage TBTF?):

The prevailing debate between Republicans and Democrats on financial reform is whether the new bill institutionalizes the too big to fail problem. Democrats swear it doesn’t, since the legislation also includes a new non-bank resolution authority which will make quite certain that all firms can, and will, fail if they run into trouble. Republicans haven’t developed a very sensible criticism to this, but they could. While the resolution authority ensures that big firms fail, it would also almost certainly provide them some advantage.

A lot will depend on regulators’ interpretation and enforcement here.

5. James K. Galbraith provides some background:

The financial crisis in America isn’t over. It’s ongoing, it remains unresolved, and it stands in the way of full economic recovery. The cause, at the deepest level, was a breakdown in the rule of law. And it follows that the first step toward prosperity is to restore the rule of law in the financial sector.

[What went wrong?] First, there was a stand-down of the financial police. The legal framework for this was laid with the repeal of Glass-Steagall in 1999 and the Commodities Futures Modernization Act of 2000. Meanwhile the Basel II process relaxed international bank supervision, especially permitting the use of proprietary models to value complex assets—an open invitation to biased valuations and accounting frauds.

Key acts of de-supervision came under Bush. After 9/11 500 FBI agents assigned to financial fraud were reassigned to counter–terrorism and (what is not understandable) they were never replaced. The Director of the Office of Thrift Supervision appeared at a press conference with a stack of copies of the Code of Federal Regulations and a chainsaw—the message was not subtle. The SEC relaxed limits on leverage for investment banks and abolished the uptick rule limiting short sales to moments following a rise in price. The new order was clear: anything goes.

Second, the response to desupervision was a criminal takeover of the home mortgage industry. Millions of subprime mortgages were made to borrowers with undocumented incomes and bad or non-existent credit records. Appraisers were selected who were willing to inflate the value of the home being sold. This last element was not incidental: surveys showed that practically all appraisers came under pressure to inflate valuations in order to make deals happen. There is no honest reason why a lender would deliberately seek to make an inflated loan. . . . Third, the counterfeit mortgages were laundered so they would look to investors like the real thing. . . .Fourth, the laundered goods were taken to market. . . . Upon taking office, President Obama had a chance to change course and didn’t take it.

The question now is whether FinReg will provide a “second chance” for an Administration that so far has not distinguished itself on the financial reform front.

Image Credit: 1901 image of J.P. Morgan.

That break up would eliminate the continuing threat to the US economic and political system posed by banks deemed so big that government lavishes trillions in aid to avoid letting them fail—at enormous cost to ordinary citizens and the real economy. It is by far the cleanest and most reliable solution to the manifest havoc massive banks wreak, not addressable by any [...]]]> Thanks to banking industry mistakes and government’s orchestration of its rescue, the country now has ten banks that together command some $10 trillion in assets, roughly equal to nearly 70% of the country’s gross domestic product. Pending legislation would break those up into a total of about 36, each still commanding about $285 billion in assets apiece—larger than the next largest bank is now.

That break up would eliminate the continuing threat to the US economic and political system posed by banks deemed so big that government lavishes trillions in aid to avoid letting them fail—at enormous cost to ordinary citizens and the real economy. It is by far the cleanest and most reliable solution to the manifest havoc massive banks wreak, not addressable by any pending technocratic tinkering like better regulation or capital requirements.

The break-up idea is not as radical as it is controversial, due to foes of ex ante legal constraints on private power.  All passage of the legislation would mean is substantially a return to the scale and distribution of the US banking system as of the mid-1990s, when no bank commanded assets exceeding more than a few percent of GDP. In important part, as the lists below suggest, the conglomerate mergers of the past two decades that caused this massive concentration of economic and political power would be reversed.

If so, expect greater competition, with benefits to consumers, savers and investors; more careful risk management by banks and their lenders, given that they’d no longer enjoy a government guarantee against failure; and generally a less unbalanced economic and political environment in the country that massive bank scale has consolidated.

But don’t count on this legislation to pass. As the bailout showed, the forces at the country’s largest banks are far too powerful for Congress and the President to resist easily.  They’ll need support from ordinary citizens to fight the megabanks seriously.

Listed below are the largest banks in the country, measured by assets, noting which would have to break up under the legislation—and, for the largest four, some of the old brand names that would be revived in the newly-competitive field.

A. The Largest Four (to be divided into a total of about 21)

1. Bank of America ($2.2 trillion; 16% GDP) [Barnett Bank, Boatmen’s Bancshares, FleetBoston, Montgomery Securities, NationsBank, Robertson Stephens, Security Pacific (plus Merrill Lynch from this period’s bailouts)]

2. JP Morgan Chase ($2 trillion; 14% GDP) [Bank One, Chase Manhattan, Chemical Bank, First Chicago, Hambrecht & Quist, Manufacturer’s Hanover (plus Bear Stearns and Washington Mutual from this period’s bailouts)]

3. Citigroup ($1.85 trillion; 13% GDP) [Commercial Credit, Primerica, Travelers, Salomon Brothers]

4. Wells Fargo ($1.24 trillion; 9% GDP)) [CoreStates, First Interstate, First Union, Norwest (plus Wachovia from this period’s bailouts)]

B. Tier Two: The Next Largest (to be divided into a total of about 9)

5. Goldman Sachs ($850 billion; 6% GDP)

6. Morgan Stanley ($771 billion; 5% GDP)

7. MetLife ($771 billion; 5% GDP)

C. Tier Three (to be divided into a total of about 6)

8. HSBC ($391 billion)

9. Tannus ($369 billion)

10.  Barclays ($365 billion)

D. The Next Ten Massive Banks (not needing to be divided)

11. US Bancorp ($281 billion)

12. PNC ($269 billion)

13. BONY/Mellon ($212 billion)

14. Suntrust ($174 billion)

15. GMAC ($172 billion)

16. Capital One ($169 billion)

17. BB&T ($165 billion)

18. State Street ($156 billion)

19. Citizens ($148 billion)

20. TD Bank ($145 billion)

Data: Federal Reserve

[The hedge fund] Magnetar made the Wall Street banks look like chumps. [In] one deal . . . Magnetar put up $10 million in equity and then shorted $1 billion of AAA-rated bonds issued by the CDO. It turned out that in this deal, JPMorgan Chase, the investment bank, actually held onto those AAA-rated bonds and eventually took a loss of $880 million. This was [...]]]> As post-mortems of the financial crisis proliferate, it’s helpful to keep an eye on some foundational causes. Michael Lewis recently commented that “the people who squandered the most money paid themselves the most”—and continue to do so. We’ve all heard about agency problems, but rarely are they as crisply illustrated as in this post by James Kwak:

[The hedge fund] Magnetar made the Wall Street banks look like chumps. [In] one deal . . . Magnetar put up $10 million in equity and then shorted $1 billion of AAA-rated bonds issued by the CDO. It turned out that in this deal, JPMorgan Chase, the investment bank, actually held onto those AAA-rated bonds and eventually took a loss of $880 million. This was in exchange for about $20 million in up-front fees it earned.

But who’s the chump? Sure, JPMorgan Chase the bank lost $880 million. But of that $20 million in fees, about $10 million was paid out in compensation (investment banks pay out about half of their net revenues as compensation), much of it to the bankers who did the deal. JPMorgan’s bankers did just fine, despite having placed a ticking time bomb on their own bank’s balance sheet. Here’s the second lesson: the idea that bankers’ pay is based on their performance is also hogwash. (The idea that their pay is based on their net contribution to society is even more absurd.)

I was recently at a conference on “Too Big to Fail” banks organized by Zephyr Teachout, and several experts explained how the tail of massive compensation was wagging the dog of societal capital allocation. William K. Black‘s theory of “control fraud” is one of many efforts to illuminate the persistent conflicts of interest between banks, bankers, and investors, but one needn’t designate any of these conflicts “fraudulent” in order to see how socially destructive they have become. Rather, pulling back to see the big picture—from the lens of political economy—illuminates the key drivers of the crisis. As Kwak notes, “the crisis was no accident: it was the result of the financial sector’s ability to use its political power to engineer a favorable regulatory environment for itself.” Thinkers across the political spectrum—from Kling to Kuttner—can recognize the critical role of political connectedness in driving bankers’ compensation.

This dynamic is more than an American story. It explains economic developments in many parts of the world where close ties between political and financial elites exist. When writers like Zachary Karabell and Niall Ferguson talk of the “superfusion” of China and the US into Chimerica, they usually emphasize the complementarity of the two partners: China’s “savings glut” fuels US consumption. But I can’t help but think of growing similarities between the two powers, and the “fusion” of public and private interests in each. For example, consider this passage on Shanghai from Perry Anderson’s review of Yasheng Huang’s Capitalism with Chinese Characteristics: Entrepreneurship and the State:

Huang demonstrates how little average households in the city benefited from its glittering towers and streamlined infrastructures. Amid a ‘forest of grand theft’, officials, developers and foreign executives prospered while private firms were stunted and ordinary families struggled to get by, in ‘the world’s most successful Potemkin metropolis’. Nationwide, in 20 years, officialdom – raking in four successive, double-digit increases in its salaries between 1998 and 2001 alone – has more than doubled in size.

America’s “officialdom” may not have grown that fast, but the revolving door between “Government Sachs” and the executive branch continues to turn. Having just endured a decade of zero job growth, many Americans are struggling to get by. While their material struggles are of an entirely different order than those of the poor in China, both countries face growing public concern about corruption.

I hope that Simon Johnson and James Kwak’s book, Thirteen Bankers, can help the US avoid the Chinese scenario, where political and economic power are hopelessly intertwined in the CCP. But if we fail to adequately insulate financial firms from government (and vice versa), we’ll have to grope for a second-best solution. Whether that involves matching Chinese grand strategy in resource procurement, reshaping defense spending as industrial or innovation policy, or some other plan, remains to be seen. But it is clear that the US is seriously endangering its future as a global power if, as Keynes put it, the “capital development of [the] country becomes a by-product of the activities of a casino.”

Around Mile 11, I was hurting and turned from a combination of Irish rock and random songs to some pod casts. After some short New York Times and NPR pod casts, I remembered that I had downloaded a series of C-Span interviews with [...]]]> Here is a sentence I never expected to write. So there I was on Monday in the middle of running the Dublin Marathon when I decided to listen on my Ipod to a C-Span podcast interview with Justice Stevens. I had traveled to Dublin to run the actual Dublin marathon and to co-host Antitrust Marathon IV: Marathon with Authority, a round table discussion co-hosted with the British Institute of International and Comparative Law and the Irish Competition Authority.

Around Mile 11, I was hurting and turned from a combination of Irish rock and random songs to some pod casts. After some short New York Times and NPR pod casts, I remembered that I had downloaded a series of C-Span interviews with the current Justices and Sandra Day O’Connor.

I have a special fondness for Justice Stevens. We are both Chicagoans, Cub Fans, and Northwestern Law grads. More improbably, we even had the same antitrust professor (James Rahl) at Northwestern, albeit about 35 years apart. That plus the fact he was primarily an antitrust litigator before going on the bench was enough to get me to devote the next 30 some minutes, and about 3 miles, to the Stevens interview.

A lot of it was a fluffy discussion of his chambers and personal history. But mixed among the fluff and the questions for non-lawyers (What is certiorari?), there were a handful of interesting tidbits. Justice Stevens talked about the reasons and impact of not participating in the cert pool, the importance of writing his own first drafts, and his interest in having the court hear a few more cases than its current docket. There are no smoking guns or shocking revelations, but Justice Stevens does mention the need for Justices from diverse legal backgrounds, such as veterans and litigators, as an important mix for the Court to have on the bench. Justice Stevens is of course both and as far as I know the only current Justice to actually have made his living as a litigator.

The main thing I came away with was the genuine niceness of the good Justice which was my impression from the only time I ever met him. In 1993, I taught in a summer program in Innsbruck, Austria where Justice Stevens was lecturing. Instead of staying for the three days as promised, he stayed and lectured the entire week and interacted warmly with the students and the rest of the faculty. At one point, a student asked him to sign the packet of course materials which he did after class. Because he did not want to play favorites, he then stayed and patiently signed for more than a hundred students.

In the pod cast interview, Stevens demurred on picking a most important or favorite case. But when asked about a most memorable experience, he didn’t hesitate and proudly mentioned throwing out the first pitch at Wrigley Field before a Cubs game at the age of 85.

With that, I grinned, quickened my pace a bit, and headed up the next of an endless series of hills on my way around Dublin on a surprisingly warm and sunny late October day.

I have not listened to the rest of the interviews. But if anyone else has, please post if there are particularly revealing or interesting moments.

The Google Book Search settlement will be, if approved, the most significant book industry development in the modern era [emphasis added]. . . . The Authors Guild has about 8000 members. [...]]]> The Google Books litigation has inspired a lot of commentary on the web. As an early October fairness hearing approaches, a consensus appears to be building: the proposed settlement is too important and complex for a court to approve in its current form. Agent Lynn Chu has complained that “No one elected the[] ‘class representatives’ to represent America’s tens of thousands of authors and publishers to convey their digital rights to Google.” Pamela Samuelson, by all accounts one of the leading academics in American intellectual property law, has this to say:

The Google Book Search settlement will be, if approved, the most significant book industry development in the modern era [emphasis added]. . . . The Authors Guild has about 8000 members. OCLC has estimated that there are 22 million authors of books published in the U.S. since 1923 (the year before which books can be presumed to be in the public domain). Jan Constantine, a lawyer for the Authors Guild, is optimistic that authors and publishers of out-of-print books will sign up with the Registry, but there are many reasons to question this.

For one thing, the proposed settlement agreement implicitly estimates that only about 750,000 copyright owners will sign up with the Registry, at least in the near term. Second, many books are “orphans,” that is, books whose rights holders cannot be located by a reasonably diligent search. Third, many easily findable rights holders, particularly academic authors, would much rather make their works available on an open access basis than to sign up with the Registry. Fourth, signing up with the Registry will not be a simple matter, since the Registry won’t just take your word for it that you are the rights holder. You are going to have to prove your ownership claim.

The non-representativeness of the class is one ground on which it is possible to object to the proposed Book Search settlement. Other reasons to object or express concerns will be explored in subsequent articles. Objections must be filed with the court by September 4, 2009.

A suitable platform for hosting public discussions of the deal only launched a few weeks ago, thanks to the diligent efforts of James Grimmelmann (who is also organizing an academic conference on the issue in October). The proposed settlement raises a number of issues, which may only be addressed by extensive regulation of the project — or a public alternative dedicated to serving those marginalized by the current proposal.

The issues fall into at least four categories:

1) Antitrust: Randal Picker, Christopher Suarez, and James Grimmelmann have addressed the proposed settlement’s likely effects on competition in the field. On the surface, it appears that Google Books would be a good alternative to companies like Amazon and Elsevier, offering a new intermediary designed to drive down the cost of access to knowledge. However, academics have pointed out several specific terms of the proposed settlement that threaten to reduce competition in the field of digitized books in the long term.

2) Pricing: Here the basic worry is that Google Books could become like the big intermediaries criticized by the open access movement for excessive pricing of academic, scientific, and technical works. Universities have been burned in the past by nonchalantly accepting big publishers’ mergers and growing control over a corpus of academic journals. Though Google is supposed to bargain on behalf of book users to reduce prices charged by book owners, the record of private insurers in accomplishing the same “middleman” role is not heartening.

The proposed settlement envisions that Google will stand between consumers and producers of knowledge. It will play a role similar to that of private insurers in standing between providers and patients—determining what access people get, how much they have to pay, etc. The worrisome aspect of that arrangement is that providers and private insurers are both very concentrated in the US, and consumers (i.e., the businesses and individuals who buy insurance plans) are not. That’s a key reason why the US spends so much more on health care than other industrialized nations, without getting better results, access, or quality.

I’d expect to see the same dynamics play out in the context of books if this settlement goes through, because it promises to create parallel levels of concentration in the Registry (imagine all hospitals combined into one bargaining unit) and Google (similarly, imagine a merger of Cigna, United Health, and WellPoint). Bilateral monopolies aren’t pretty for those on the outside — think of ever-rising ticket prices for fans that result from the negotiations of the players’ union and baseball owners. That’s why I think a “public option” is as important in digitized books as it is in health care. And at the very least, ongoing antitrust supervision, like that provided for similar schemes in the past, should apply here.

3) Privacy: Here I can’t do better than EPIC, a leading group on these issues. Here are their concerns:

Civil liberties organizations are urging Internet users to tell Google to adopt privacy protections for the Google Book Search. A judge in New York will determine later this year whether to approve the proposed settlement that would establish the service and give Google access to detailed personal information without any privacy safeguards.

The chart at the bottom of that page shows how the settlement threatens the “right to read anonymously.”

4) Cultural Power: Authors are concerned about Google’s power over the distribution, visibility, and pricing of their work. The Registry’s proposed leadership is not sufficiently representative of the wide range of publishers and authors. Perhaps a) different types of books should be subject to different types of boards of leadership, and b) all decisions about distribution, visibility, and pricing be made in an open manner. As for 4a), I think academic author in particular should worry about their books being subject to the types of revenue strategies pursued by, say, romance novelists or self-help authors. We need a separate board to handle academic books, or at least university press books. As for 4b): Google will counter that it needs to be secretive here, as it is in so many other areas, because unsavory actors could game the system. But Google should at least concede that concerns about gaming are lower in the book space than in the search space, since search engine optimizers are unlikely to publish fake books to game the system. Also, there could be a relaxation of these terms of openness as long as there is some open alternative.

In conclusion: for me, the key problems law can address are

a) extraordinary pricing power by Google/Registry alliance,
b) lack of transparency about how terms will be set,
c) lack of a public alternative to serve the people that Google fails to serve, and
d) threats to privacy

How do we solve these problems? I would propose the following responses:

a) guarantee of some form of free or subsidized access for those making under 300% of federal poverty level wages,
b) either open all Registry proceedings or at least follow Danny Weitzner’s approach to “extreme factfinding” here,
c) condition the settlement on either i) Google’s giving a copy of the digitized corpus to the government in exchange for the cost of scanning and a reasonable rate of return and/or ii) the government requiring all works copyrighted after 2009 to be digitally deposited and part of a corpus that the government could operate and make available on its own terms, and
d) allow EPIC and others to negotiate with relevant FTC policymakers to build in privacy safeguards.

I know these terms are all likely to be controversial. A public option in particular should respect the autonomy and growth of private search in this field — the organization of knowledge is an exciting field for private sector innovation. But I hope one thing is clear: it would be unjust to allow the parties to settle the case without giving a wide range of stakeholders an opportunity to fully vent their concerns. And given the likely need to involve the FTC, DOJ, and Copyright Office in ongoing supervision of the settlement terms, it is time for some inter-branch cooperation and coordination on the issue.

Image Credit: *keng.

[G]lobally interconnected and integrated financial networks just may be too complex to prevent crises like the current one from reoccurring. . . . A 2006 report co-sponsored by the Federal Reserve Bank of New York and the National Academy of Sciences concluded that even defining systemic risk was beyond the scope of any existing economic theory. Actually managing such a thing would be harder still, if only because the number of contingencies that a systemic risk model must anticipate grows exponentially with the connectivity [...]]]> The “optimal size and complexity of developing countries’ financial systems” has been hotly debated in the economics community. Writing for the Harvard Business Review & Boston Globe, Duncan Watts focuses on our own dilemmas in a provocative account of complex systems:

[G]lobally interconnected and integrated financial networks just may be too complex to prevent crises like the current one from reoccurring. . . . A 2006 report co-sponsored by the Federal Reserve Bank of New York and the National Academy of Sciences concluded that even defining systemic risk was beyond the scope of any existing economic theory. Actually managing such a thing would be harder still, if only because the number of contingencies that a systemic risk model must anticipate grows exponentially with the connectivity of the system.

So if the complexity of our financial systems exceeds that of even the most sophisticated risk models, how can government regulators hope to manage the problem? There is no simple solution, but one approach is close to what the government already does when it decides that some institutions are “too big to fail,” and therefore must be saved – a strategy that, as we have seen recently, can cost hundreds of billions of taxpayer dollars. . . .

An alternate approach is to deal with the problem before crises emerge. On a routine basis, regulators could review the largest and most connected firms in each industry, and ask themselves essentially the same question that crisis situations already force them to answer: “Would the sudden failure of this company generate intolerable knock-on effects for the wider economy?” If the answer is “yes,” the firm could be required to downsize, or shed business lines in an orderly manner until regulators are satisfied that it no longer poses a serious systemic risk. Correspondingly, proposed mergers and acquisitions could be reviewed for their potential to create an entity that could not then be permitted to fail.

Of course, our system has been headed in precisely the opposite direction, largely thanks to the “best and brightest” now at Treasury and the Fed. As Simon Johnson puts it, we “pay too much deference to the expertise and presumed wisdom of a sector that screwed up massively.”

D IS FOR DIGITIZE: A Conference on the Google Book Search Lawsuit

New York Law School, Thursday, October 8 through Saturday, October 10, 2009

Everything about the Google Book Search project is larger than life, from [...]]]> Writing in Slate, Mark Gimein knocks down a number of straw man arguments against the Google Book search deal. I look forward to seeing how he grapples with more serious concerns, like those raised by James Grimmelmann. I’ve also been impressed by Christopher Suarez’s working paper on the need for antitrust scrutiny of the proposed deal . Suarez proposes a number of sensible settlement modifications that I hope the court will take seriously. It doesn’t have much time to get this right, as the following conference announcement shows:

D IS FOR DIGITIZE: A Conference on the Google Book Search Lawsuit

New York Law School, Thursday, October 8 through Saturday, October 10, 2009

Everything about the Google Book Search project is larger than life, from Google’s audacious plan to digitize every book ever published to the gigantic class action settlement now awaiting court approval. D is for Digitize will give this complex lawsuit the sustained attention it deserves. An interdisciplinary lineup of academics and practitioners will examine the settlement through the lenses of copyright, civil procedure, antitrust, the publishing industry, information policy, and literary culture. The conference is timed to coincide with the rescheduled fairness hearing in the Google Book Search case, which will be held on Wednesday, October 7 in New York City, just five blocks from New York Law School.

I look forward to seeing those interested in the future of access to knowledge at the conference, which I plan to attend.

[S]earch engines routinely disappear websites for violating unpublished, invisible rules. Many of these sites are spammers, link-farmers, malware sneezers and other gamers of the system. . . . The stakes for search-engine placement are so high that it’s inevitable that some people will try anything to get the right placement for their products, services, ideas and agendas. Hence the search engine’s prerogative of enforcing the death penalty on sites that undermine the quality of search.

[Nevertheless, i]t’s a terrible idea to vest this much power with one company, even one as fun, user-centered and technologically excellent as Google. [...]]]> With inimitable clarity, Cory Doctorow made the case for an open alternative to Google in The Guardian earlier this month. He focused on the secrecy of search:

[S]earch engines routinely disappear websites for violating unpublished, invisible rules. Many of these sites are spammers, link-farmers, malware sneezers and other gamers of the system. . . . The stakes for search-engine placement are so high that it’s inevitable that some people will try anything to get the right placement for their products, services, ideas and agendas. Hence the search engine’s prerogative of enforcing the death penalty on sites that undermine the quality of search.

[Nevertheless, i]t’s a terrible idea to vest this much power with one company, even one as fun, user-centered and technologically excellent as Google. It’s too much power for a handful of companies to wield.

Search engines like Google have some good reasons for keeping their algorithms confidential–if they were public, manipulators could quickly swamp Google users with irrelevant results. However, just as Comcast cannot circumvent net neutrality regulation by saying all its traffic management and spam-fighting methods are trade secrets, search engines should not be able to use such arguments to escape regulation altogether. Moreover, there are ways of developing a qualified transparency that would let a trusted third party examine a search engine’s conduct without exposing its business methods for all the world to see.

But Doctorow does not want regulation here–he wants an alternative. Having made a similar case for a “public option” in the case of health insurance, I like this line of argument, but I think Doctorow is underestimating the barriers to entry. Though he’s aware of the failure of Wikia, Doctorow wonders if a “wikipedia for search” could be built:

We can imagine a public, open process to write search engine ranking systems, crawlers and the other minutiae. But can an ad-hoc group of net-heads marshall the server resources to store copies of the entire Internet? . . . . It would require vast resources. But it would have one gigantic advantage over the proprietary search engines: rather than relying on weak “security through obscurity” to fight spammers, creeps and parasites, such a system could exploit the powerful principles of peer review that are the gold standard in all other areas of information security.

The “rival public system” approach has been suggested for search engines a few times before. About a decade ago, Introna & Nissenbaum demonstrated that “the conditions needed for a marketplace to function in a ‘democratic’ and efficient way are simply not met in the case of search engines.” Recognizing this, Jean-Noel Jeanneny made a case for a French language alternative to dominant US-based search engines. The Quaero project in the EU appears to be answering that call, though in a far more dirigiste manner than Doctorow would probably like.

I have a few thoughts on a “public option” in search, building on a talk I gave at Yale Law’s Library 2.0 conference in the spring.

First, I think we have to fully understand just how big Google’s present operation is. They’re using somewhere between 100,000 and a million computers to index the web. Is a program like SETI or other distributed computing systems capable of “storing” that in many computers? Indexing the web is a project orders of magnitude more storage- and processing-intensive than hosting an online encyclopedia like Wikipedia, or even hosting the collaborative editing process that is Wikipedia’s “secret sauce.”

Nevertheless, there are some steps that could lead to an infrastructure for a public option in search. Google’s supporters have frequently argued that it needs to scan and store books because they could be lost in disasters. Couldn’t a similar case be made that government or an NGO needs to index Google’s archive of web pages and books in case, say, a tornado hits a central Google storage facility? At what point does it become critical infrastructure?

Note that there should be a strict separation in such a proposal between information a search engine company properly owns (such as user data patterns, records of how many people clicked on what, etc.), and an underlying collection of materials that would be “archived” as a base of content for the public option. For example, to take one small slice of search, books: I would argue that any settlement of the current lawsuit between Google and publishers should require the U.S. Copyright Office to require digital deposit of all copyrighted books in the US, as a database for a future public option in search. In antitrust terms, the digitized copies are an “essential facility” for future advances in book search–particularly if the cozy relationship between Google and a books “Registry” envisioned in the current settlement documents is ratified by the courts.

The big question here is whether we want a government entity to do all this archiving for the web generally, or some publicly funded third party. Some might think that the latter entity is a better bet in terms of privacy protections. But the more one understands how flimsy a legal barrier separates government actors from “private” data stores, the less difference it makes whether the database used for the public option is in governmental or NGO hands.

Finally, even if a public alternative in search seems unlikely, I deeply believe we need to guarantee one in book search. Note that in web searches, Google’s role is usually only to direct us toward what is most relevant–not to ration access to knowledge, a role it so often plays in book search with snippets, restricted portions, etc. In this new role it is much more like a private health insurer rationing access to care than it is your traditional Web 2.0 info-company organizing access to the web by creatively accessing the wisdom of crowds. It’s a middleman, and if we’ve learned anything from the health care field, it’s that highly concentrated provider markets combined with highly concentrated insurer markets lead to ever-higher prices for everyone outside that charmed circle of bilateral monopoly. Here’s how Joseph White characterized the developments in health care:

One might wonder why consolidation among insurers did not allow them to resist the providers’ demand for increased payments. The simple answer is that there were two concentrated parts of the market and one fragmented part. The insurers had to choose between fighting a full-pitched battle with the providers or exploiting their own market power vis-a-vis employers. Raising premiums to employers was a lot easier.

Substitute “publishers” for “providers,” “Google” for “insurers,” and “readers” for “employers” in that dynamic, and you have a pretty good sense of how the book search settlement will ultimately play out without some alternative service. Right now, Medicare is the only entity exercising genuine price discipline and providing universal access in the US health field. We need something like it in book search.

PS: I have more thoughts on Doctorow’s piece in the comments section of this interesting blog post by Berin Szoka. I really hope Doctorow does not endorse First Amendment protection for whatever dominant search engines do.

What could derail real health reform? Most likely, fake health care reform, particularly the kind that assumes there is something near a “free market” in operation now. As health care antitrust scholar Thomas Greaney argued yesterday, markets [...]]]> Is genuine health reform possible?  Several recent developments are promising.  President Obama’s big Congressional majorities (plus the Specter defection) are reminiscent of the Johnson-era milieu that led to Medicare and Medicaid.*   Key interest groups are less “Harry and Louise” and more “try to appease.”  Most importantly, the failures of managed care, consumer-directed health care, and other artifacts of the “ownership society” are now self-evident.  As unemployment rises, lack of insurance spikes, compounding the misery of many of those unlucky enough to get thrown out of work.

What could derail real health reform? Most likely, fake health care reform, particularly the kind that assumes there is something near a “free market” in operation now. As health care antitrust scholar Thomas Greaney argued yesterday, markets for health care are often very concentrated or riddled with barriers to entry:

The unfortunate fact is that a majority of the country is served by a few dominant insurers. (In 16 states, one insurer accounts for more than 50 percent of private enrollment; in 36 states, three insurers have more than 65 percent of enrollment). Likewise, because of lax antitrust enforcement, most markets are characterized by dominant hospital systems and little competition among high-end physician specialists.

In these circumstances, which economists call ‘bilateral monopoly,” the players often reach an accommodation in which they share the monopoly profits rather than compete vigorously. A prime example is the experience in Massachusetts, where Blue Cross/Blue Shield, the dominant insurer, reached an understanding with the dominant hospital system, Partners Healthcare, that entrenched higher prices for health insurance and hospital care.

Some might hold out hope that the Obama administration’s new emphasis on antitrust enforcement might solve that problem, but I would not hold my breath. After losing seven hospital merger cases in a row, the government is not exactly in a position to go storming into health care markets to demand competition. Only new antitrust laws are likely to accomplish much in that direction, and even if they were by some miracle adopted this year, I can’t imagine them having much effect within any reasonable time frame.

Rather than hoping for a magical market to provide care for all, it’s time to realize that only a guaranteed public option can optimally balance access, cost-control, and the type of value-based purchasing that leads to quality improvement. The public option now discussed by the Obama Administration and the Senate Finance Committee won’t displace private insurance for the already insured. In fact, as Greaney notes, it may well help some private insurers by providing “a benchmark to hold up against private plans’ quality and cost performance.” The public option will almost certainly be one of many choices for health insurance consumers, expanding choice rather than constricting it.

By providing transparent accounts of coverage decisions, the public plan may well spearhead the types of comparative effectiveness analysis and evidence-based medicine that all health scholars agree need to be at the heart of rational health policy. As Diane Archer compellingly testified, “disclosure of insurer medical and cost data would drive accountability from the private insurers and promote better behavior.” In a sector as permeated by government subsidies and regulations as health care, a public plan option offers some hope that the demand side in health care can gain some bargaining power relative to the supply side.

*We can only hope that the old lessons of guns and butter will lead Obama to reallocate military funds to health needs, rather than following LBJ’s and Nixon’s path to stagflation.

This Sunday, the Association of National Advertisers announced its opposition to the Google-Yahoo deal [...]]]> Search engines are indispensable to the quest for helpful information in our data saturated age. Although custom search engines attract small audiences, the big three—Google, Yahoo, and Microsoft—run the lion share of online searches, with Google performing 62% of U.S. Internet searches and with Yahoo next in line running 17.5% of searches. Not surprisingly, Google attracts a disproportionate share of online advertisers, the main source of revenue for search companies. The recent joint venture advertising agreement between Google and Yahoo heralds the further concentration of online advertising in the search market from three to two hands by allowing Google to sell search ads that display next to Yahoo search results.

This Sunday, the Association of National Advertisers announced its opposition to the Google-Yahoo deal on the grounds that the partnership would “diminish competition, increase concentration of market power, limit choices currently available and raise prices to advertisers.” Frank Pasquale presented spirited and compelling testimony on this issue before the House Judiciary Committee’s Task Force on Competition Policy and Antitrust Laws this summer. (I attended the hearing and highly recommend viewing the C-SPAN recording—see here). As Pasquale brought alive at the hearing, the joint venture agreement would cement Google’s dominance over the online advertising market. Benjamin Edelman of Harvard Business School explains that such excessive market share allows Google to control the ads generally available (and unavailable) to consumers. For instance, in August 2004, Google banned an ad critical of President Bush, but, of course, consumers did not know what they were missing. Worth serious consideration is Pasquale’s concern that the opacity of Google’s practices enables it to conceal any abuse of its soon-to-be overwhelming power in the online advertising market.

Stucke addresses four main questions in his article:

Prevailing competition advocacy glosses over four fundamental questions: First, what is competition? Second, what are the goals of a competition policy? Third, how does one achieve, if one can, the objectives [...]]]> make it Maurice Stucke’s Better Competition Advocacy, 82 St. John’s L. Rev. 951 (2008). In this work, he convincingly argues that “The goals of antitrust law enforcement are subsumed by, but not necessarily co-extensive with, the goals of competition policy.” Stucke’s article not only extends an impressive line of work on competition law, but also offers some insights on the dangers of over-specialization for legal scholars generally. I’ll offer some excerpts now, and try to apply the piece to some current controversies later this week.

Stucke addresses four main questions in his article:

Prevailing competition advocacy glosses over four fundamental questions: First, what is competition? Second, what are the goals of a competition policy? Third, how does one achieve, if one can, the objectives of such desired competition? Fourth, how does one know if the economy is progressing toward these goals?

Stucke argues that conventional competition policy based on the work of the Chicago School answers all these questions in narrow and unsatisfying ways.

After surveying considerable diversity of opinion on the definition of “competition,” Stucke argues that it cannot be an “end in itself,” but might better be thought of as “a policy tool to achieve broader government objectives for the economy.” These objectives include much more than gross measures of “consumer welfare” or “wealth maximization.” The goals of competition policy are necessarily diverse–only an ideologue would try to subordinate all its objectives to one overriding end:

Other than for an idealist, competition policy cannot be reduced meaningfully to a single goal. “It is the essence of the economic problem that the making of an economic plan involves the choice between conflicting or competing ends–different needs of different people.” Competition officials, ultimately, must recognize the existence of multiple goals and values.

The challenge for the socialist or the dogmatic laissez faire [idealist] is (1) to discount the means proposed by her opponents, or (2) to define an end that is sufficiently narrow in scope to preclude any means other than the idealist’s. . . . [M]uch to the idealist’s frustration, others may not share the idealist’s narrowly defined goal or its urgency. . . .[F]aced with opposition, the idealist, whether a socialist or laissez faire adherent, may seek to remove competition policy from the legislature, other federal or state agencies, the generalist courts, or the general population and place it in the hands of policy experts who share her ideal and abhor seeing their shared conception of competition debased.

Stucke realizes that there is a symmetry between the implausibility of dirigiste socialism and libertarianism here. Would that conference organizers who routinely “balance” panels with a libertarian and, say, a Galbraithian Democrat, realize that true balance would probably mean including a member of the Scandinavian left!

Stucke then concentrates on all the pressing social issues that conventional, scientistic antitrust analysis misses:

Competition policy cannot be beyond the judgmental. Behind allocative efficiency’s façade of positivism lie such moral questions as:

Given utilitarian welfare economic theory’s ambivalence about distributional effects, does economic efficiency necessarily produce the just outcome? If not, what must the state do?

Is a vibrant market economy antagonistic or conducive to society’s moral progress, as measured by its tolerance, support of the poor, etc.?

Is the market’s “socio-political function” to “minimize[e] the necessity of resorting to internal ethical constraints on human behavior and/or external legal-governmental-political restrictions[?]”

Is there a “social mortgage” on private property, in that “the very existence of the institution of private property is to ensure that the basic needs of every [individual] are met and sustained[?]”

Stucke knows the counterargument of the laissez-faire ideologue: that distribution is better accomplished directly via the tax system, rather than through legal rules. But he adds to Sanchirico’s classic rebuttal of that old chestnut a very important comment on the parochialism evidenced by the very act of pressing that case:

[T]his “not-my-job” mentality promotes parochialism. Much has been praised about the division of labor. No doubt, such specialization enables the ever-increasing complexity in the manufacturing and services sectors. But the leading attorneys in the twenty-first century will not be those with the greatest mastery in their narrow field of expertise. Rather, they will be problem solvers, identifying issues across disciplines, and assisting their clients in finding answers to those problems. Similarly, competition authorities cannot furrow deeper in their field, ignorant of the issues or concerns in other fields. Instead, when “pressing problem[s]” arise, “current individual disciplines [may] prove inadequate to solve that problem.” Even if the specialist feels confident that her specialized knowledge can provide the answer, other specialists may disagree, believing that their disciplines carry the solution.

Of course, the economic rewards for such parochialism can be high. Perhaps that is one reason why its adherents have been relatively blind to the problems of inequality that helped inspire the Sherman Act, and which Stucke contends should be a concern of antitrust policy:

Although neoclassical economic theory may be indifferent to [many] distributional effects, one concern underlying the Sherman Act’s passage in 1890 was the growing disparity in wealth. . . . Senator Sherman identified this inequality of condition, of wealth, and opportunity as the greatest threat to disturbing social order: This inequality “has grown within a single generation out of the concentration of capital into vast combinations to control production and trade and to break down competition.”

The disparity in income, based on the index of income concentration or Gini coefficient, decreased between 1947 and 1968, but increased thereafter, accelerating notably during the Reagan Administration, which . . . severely cut back its antitrust enforcement. According to another measure, the disparity in wealth in recent years is higher than when the Sherman Act was promulgated. Other measures show the ever-widening salary gap between the average CEO and the average worker, and between the richest one percent and the average worker. The traditional response is to invest in educating skilled workers. But how does one reconcile another signpost that the earnings of the average United States worker with an undergraduate degree have not kept up with the gains in productivity in recent years?

Stucke insists that antitrust policy mavens need to let us know “how they will keep us apprised with measurable signposts to ensure that [competition policy is] indeed heading in the right direction.” Unfortunately, as Dupre & Gagnier have noted, “most economists believe that the core of economics can be developed with no assumptions at all about what an economy should aim to provide.” Let’s hope that those with influence on antitrust policy start recognizing the types of social goals (like equality of opportunity) that Stucke mentions.

1) The ABA Antitrust Source is out, with a preview of the upcoming Supreme Court term.

2) You can catch the Kirkpatrick Antitrust Conference (on Conservative Economic Influence on U.S. Antitrust Policy) on a webcast that Georgetown is generously providing. (It can also be downloaded via iTunes.)

For a taste of the proceedings, check out my colleague Marina Lao’s careful critique of the Supreme Court’s 5-4 decision in Leegin. It will be featured in a forthcoming book, Where the Chicago School Overshot The Mark: Effect of Conservative Economic Analysis on U.S. Antitrust (ed. Robert [...]]]> D. Daniel Sokol has been blogging up a storm at the Antitrust & Competition Policy Blog. I thought I’d highlight a few things I’d seen there, plus some other sources.

1) The ABA Antitrust Source is out, with a preview of the upcoming Supreme Court term.

2) You can catch the Kirkpatrick Antitrust Conference (on Conservative Economic Influence on U.S. Antitrust Policy) on a webcast that Georgetown is generously providing. (It can also be downloaded via iTunes.)

For a taste of the proceedings, check out my colleague Marina Lao’s careful critique of the Supreme Court’s 5-4 decision in Leegin. It will be featured in a forthcoming book, Where the Chicago School Overshot The Mark: Effect of Conservative Economic Analysis on U.S. Antitrust (ed. Robert Pitofsky, Oxford Univ. Press).

3) And for some humor, check out a Rockefeller’s attack on antitrust, reviewed here by Seth Bloom (Senior Counsel on the staff of the Senate Antitrust Subcommittee).

As Bloom writes,

Rockefeller’s Pollyannaish views of the virtues of an unregulated free market, without the intervention of antitrust law, might cheer those who wish to renew the Standard Oil trust, but should be unsatisfying for the rest of us. Anyone who has tried to win an argument over a bill with his or her cable television company, or tried to avoid an “early termination fee” 18 months into a two-year contract with his or her cell phone provider has experienced the market power controlled by a dominant firm with little competition. Anyone who has seen air fares rise when a competing airline exits a market in the face of predatory pricing, or is merged into a dominant carrier, would not be very happy to forego antitrust enforcement. Anyone who has observed what happens to prices when they are controlled by cartels – for example, crude oil in the hands of the OPEC cartel – might not be so willing to dismiss the need to prohibit price-fixing.

What I’m wondering is if Rockefeller will reach out and attack the IP laws next. As James Boyle has argued,

We appear to have a kind of bipolar disorder in our view of the state. When it comes to breaking up high tech monopolies through antitrust, we are deep sceptics. We point out the unanticipated consequences and deadweight losses to state intervention. We say the state is a blundering second or third best to the genius of the market, its efforts to establish limits and quotas will create a mess that even the Invisible Hand cannot sweep clean.

But when it comes to setting up some of those same quotas, limits and monopolies in the first place – in this case, by overly broad intellectual property rights that clog the channels of competition and allow companies to leverage their existing property into a control over tied services – we are much more sanguine. This, after all, is property, not regulation. Here there seems to be an optimism about unintended consequences, a willingness to believe that vague state regulatory schemes have got it right – even when existing market leaders can twist them to prevent challenges to their position. In one view, the state is a bumbling idiot, in the other a scalpel-wielding genius, carving just the right pound of flesh to satisfy our debts to creators without shedding a drop of the blood of competitors and future innovators. Can this be the same state we are talking about?

To Cato’s credit, they have questioned some expansive IP laws, and have provided a forum for Boldrin and Levine.