Archive for the ‘Economic Analysis of Law’ Category

Higher Education Costs: What Could The Federal Government Do?

posted by Dave Hoffman

President Obama’s State of the Union glossed on a topic that’s quite relevant to the recent debates about legal education:

“Of course, it’s not enough for us to increase student aid. We can’t just keep subsidizing skyrocketing tuition; we’ll run out of money. States also need to do their part, by making higher education a higher priority in their budgets. And colleges and universities have to do their part by working to keep costs down. Recently, I spoke with a group of college presidents who’ve done just that. Some schools re-design courses to help students finish more quickly. Some use better technology. The point is, it’s possible. So let me put colleges and universities on notice: If you can’t stop tuition from going up, the funding you get from taxpayers will go down. Higher education can’t be a luxury— it’s an economic imperative that every family in America should be able to afford.”

As political pap goes, this is as good as any. But I’d go a step further to ask how the government could help keep down costs, apart from threatening to take away subsidies. Costs have many drivers, including rising student demand for particular kinds of campus amenities, legacy benefit costs that plague all large-scale employers, and rising health costs. But the biggest factor is faculty salaries. Given tenure (which affects law schools disproportionately because of our accreditor’s monopoly) it might seem like this is a wicked problem. Maybe it is, but the President could have called for the Congress to make a small change in law that might make a real difference: repeal that portion of the ADEA which prohibits mandatory retirement ages for university professors.

As is well-known, the federal government prohibits mandatory retirement policies except when age is a bona fide occapational requirement or when the person is a qualifying executive. 29 U.S.C. §§623(f), 631(c). An exception for tenured employees, including professors, was phased out in 1993. (The law phasing out the exception passed in 1986). As this study predicted, the impact on research universities in particular is severe, as an increasingly high percentage of workers stay on the job after age 70. Why does this matter? If teaching and/or scholarship decreases after many years on the job – and there is some evidence that they do – universities have few remedies given tenurial job protections for under performing employees. In today’s economy, with an increasingly volatile stock market, and unpalatable health insurance choices, we’d probably also expect that fewer faculty will retire voluntarily in the future than they used to. Thus, many institutions will find it hard to reduce costs by reducing faculty sizes (or paying less per person by replacing older, more expensive, employees with younger, cheaper, ones.) We will deliver fewer educational goods, at higher costs.

Now there are good reasons for prohibiting mandatory retirement in general. But I’ve never understood why those reasons translate when you’ve got a tenured faculty who often exercise more self-government than law firm partners. In any event, given the economic realities of the moment, lumping faculty in with other workers feels like a luxury students can no longer afford.

January 25, 2012 at 2:01 pm Posted in: Economic Analysis of Law, Education, Law School Print This Post 3 Comments

Some Truly Fascinating Numbers on Video Game Economics

posted by Deven Desai

Back in October, Valve co-founder Gabe Newell explained the economics of video games as his company sees it. The Geekwire article is worth the read. For now, I’ll point out that he admits “We don’t understand what’s going on” and uses the language of co-creation of value, which I happen to believe is the current future as it were, to describe what the company is doing:

This is probably the biggest change that’s affected the gaming business over the last few years. It’s not just that we have digital distribution to our customers. It’s that we have this incredible two-way connection that we’ve never had before with our customers.
We’ve gone from a situation where we dream up a game, we spend three years making it, we put it in a box, we put it out in stores, we hope it sells, to a situation that’s incredibly more fluid and dynamic, where we’re constantly modifying the game with the participation of the customers themselves

The comments on piracy comport with insights from other industries:

One thing that we have learned is that piracy is not a pricing issue. It’s a service issue. The easiest way to stop piracy is not by putting antipiracy technology to work. It’s by giving those people a service that’s better than what they’re receiving from the pirates. For example, Russia. You say, oh, we’re going to enter Russia, people say, you’re doomed, they’ll pirate everything in Russia. Russia now outside of Germany is our largest continental European market. … the people who are telling you that Russians pirate everything are the people who wait six months to localize their product into Russia. … So that, as far as we’re concerned, is asked and answered. It doesn’t take much in terms of providing a better service to make pirates a non-issue.

The information on pricing is really cool. “[W]e varied the price of one of our products. We have Steam so we can watch user behavior in real time. That gives us a useful tool for making experiments which you can’t really do through a lot of other distribution mechanisms. What we saw was that pricing was perfectly elastic. In other words, our gross revenue would remain constant. We thought, hooray, we understand this really well. There’s no way to use price to increase or decrease the size of your business.”

Yet he goes on to describe how sales such as a 75% price reduction lead to a “gross revenue increased by a factor of 40.” They tested against a product they did not own and saw similar results. Then they tested free. It turns out free to play and and free work differently. His thought is that the user base matters because they value the products differently including “what the statement that something is free to play implies about the future value of the experience that they’re going to have.”

Furthermore, conversion rates shift too. Free to play often “see[s] about a 2 to 3 percent conversion rate of the people in their audience who actually buy something, and then with Team Fortress 2, which looks more like Arkham Asylum in terms of the user profile and the content, we see about a 20 to 30 percent conversion rate of people who are playing those games who buy something.”

What do all these tests mean? As Newell said, it’s unclear. That is why I could see some rather cool studies being done for this emerging area.

December 26, 2011 at 6:31 pm Posted in: Behavioral Law and Economics, Economic Analysis of Law, Intellectual Property, Technology Print This Post No Comments

Movies, Now More Than Ever, Or Is It Video Games?

posted by Deven Desai

OK, that title is a riff on a line from The Player. I loved it when the film came out and still do. It says so much of nothing, but captures a vibe that persists. Yet again it seems the film industry is in trouble, or rather doldrums. The Times reports that this year’s box office was a bit off from last year. Another favorite film industry (and maybe true for all content industry) is “Nobody knows anything.”) So as the article notes “Movies are a cyclical business” and last year’s numbers may have hangovers from the previous year’s Avatar release. Then again the prices have gone up and attendance is down so there may be a real drop in the industry. There are some better answers in the article than other wrap up stories I recall reading as a kid growing up in L.A. and devouring the Calendar section of the L.A. Times when it was good.

For example as the NY Times puts it:

What has gone wrong? Plenty, say studio distribution executives, who point to competition for leisure dollars, particularly among financially pressed young people (the movie industry’s most coveted demographic); too many family movies; and the continued erosion of star power.

One more thing: “You have to go back and look at the content,” said Dan Fellman, president of domestic distribution for Warner Brothers. “Good movies always rise to the occasion. Bad ones, not so much.”

In the immortal words of Keanu Reeves, “Whoa.” Studios admitting that they compete for leisure dollars? Acknowledgement that star power is not that powerful? Furthermore, the article notes that consumers use social media and the Internet to sort rubbish copycat films from good ones” Per the Times, Phil Contrino, editor of BoxOffice.com, offers, “Because they have less disposable income and because they are more plugged in to audience reaction on Facebook and Twitter, the teenage audience is becoming picky,” he added. “That’s a nightmare for studios that are used to pushing lowest-common-denominator films.” Now let’s throw in video games. Call of Duty did $400 million dollars in its first day of sales.

In sum, the youth audience does not have huge amounts to spend and if choosing between a film that seems unoriginal and a video game, the video game often wins. And despite some odd spin about films aimed at older audiences doing well, the article also explains star vehicles aimed at older audiences failed which seems to go back to make a good movie and people are more likely to see it in the theater.

Will sequels and re-releases in 3D draw me to the theater? Yes (damn you Lucas and your 3d Star Wars ploy!)!! But would it help if there were really good new stories? Heck yeah!

For an odd closing, I offer that economists and academics in law could do well to study the way leisure dollars are spent, the demographics of the content industries, and way that some digital industries thrive while others claim to flounder. Then again, maybe nobody knows anything.

December 26, 2011 at 5:39 pm Posted in: Economic Analysis of Law, Intellectual Property, Technology Print This Post No Comments

Paying People Not To Use Talk To Their Cellphones’ Virtual Assistants in Public

posted by Dave Hoffman

The NYT isn’t entirely worthless. There’s a cute technology piece up on how irritated the reporter and his friends-on-the-street are by people who talk to their iPhone’s Siri when they could just as easily text. As the Times puts it, this is a problem of unfelt externalities:

“James E. Katz, director of the Center for Mobile Communication Studies at Rutgers, said people who use their voices to control their phones are creating an inconvenience for others — noise — rather than coping with an inconvenience for themselves — the discomfort of having to type slowly on a cramped cellphone keyboard. Mr. Katz compared the behavior with that of someone who leaves a car’s engine running while parked, creating noise and fumes for people surrounding them.”

The piece goes onto claim that eventually, we’re get used to this noise pollution. Perhaps we will! But if we don’t, there are options other than anti-nuisance regulation. After all, there are competing rights here: the right to speak so you don’t have to confront your inability to text without typos and the right not to hear what the person next to you on the subway wants for dinner. Now, we could ban Siri-like Apps in public places. But, as all good Coasians know, there’s another option. We could decide that the Siri-ans should have the right to speak wherever they are: irritated hearers can simply pay the offending speaker not to talk into their iPhone in public. In fact, I wonder if Apple could perhaps make an App for that. Call it the “Shut Down Nearby Siris For Five Minutes Auction App.” People could list the price at which they’d agree to be paid to be silenced; irritated listeners could either pay that price or bid at a lower rate. If hearers and speakers matched, we’d achieve (in the Article’s words) the socially efficient outcome: back to the “old days when people just texted in public.”

December 3, 2011 at 1:08 am Posted in: Behavioral Law and Economics, Economic Analysis of Law Print This Post 14 Comments

The Law and Economics of Tort Accidents, Illustrated

posted by Dave Hoffman

Via Andrew Sullivan comes this nice figure illustrating the effect of a car driver’s care level on pedestrians. It might have come directly from the chapter on the economics of tort law in Mitch Polinsky’s famous An Introduction to Law and Economics. The chart’s author, presumably unlike most mainstream law and economists, argues that local governments ought to be permitted more freedom to regulate driver speed (as opposed to letting the level vary ex post through a liability regime.) I think it might be a better example of the importance of regulations requiring sidewalks.

October 31, 2011 at 7:23 pm Posted in: Economic Analysis of Law Print This Post 5 Comments

Analog Return: Vinyl, Zines and Motivation for Creation

posted by Deven Desai

Analog: The Resurrection is coming to a store near you. At least it looks that way. The Times reports that vinyl is making a comeback. I happen to have a fair amount of vinyl from when I saved up to buy LPs as a kid. But now companies like Goota Groove are among about 20 places that press vinyl and that together make up “the fastest-growing segment of the beleaguered music industry.” I have to note that the “beleaguered” view may have some challengers. TechCrunch reported that per SoundScan music sales have started to inch up. Plus according the to Times:

Last year, 2.8 million vinyl records were sold in the United States, according to the Nielsen Company, which tracks music sales through its SoundScan system. This year’s numbers are about 40 percent higher, and the real figures are higher still. Most vinyl now is sold in independent record shops, at rock clubs and through homemade Web sites. “SoundScan only gets about 15 percent,” Slusarz told [the reporter], smiling. “The majority of the stuff we press, it doesn’t even have a bar code.”

Furthermore this paper The Creative Destruction of Copyright – Innovation in the Record Industry and Digital Copying found

Eight years into a severe recession and a surge in unauthorised copying, the number of new titles published each year continues to expand at roughly the same rate of growth during the recession period as it did during the preceding boom period.

This result is counter-intuitive regarding the severity and duration of the recession. It challenges a fundamental assumption in much of the economic literature on the impact of unauthorised, digital copying, which has focused on the impact of unauthorised copying on industry revenues. According to the observations presented above, this literature will not support strong conclusions concerning copyright policy. That is because the manipulated variable in copyright policy is not suppliers’ revenues but ‘innovation and creativity’ as means to secure a diverse supply of cultural products that is responsive to societal change. The empirical findings also deflate the case for public investments in greater copyright protection, for penal procedures against so-called copyright ‘pirates’, and for setting high compensatory payments in civil cases brought by rights holders against infringers.

In short, there’s much more going on in the music market than mainstream methods of measurement capture. Indeed, small run print may be making a comeback too at least in the form of zines.

All of these points remind that creativity is not always about incentives, “MOST zines are labors of love, done as side projects and hobbies. The goal isn’t to turn a profit, but rather to capture a cultural moment, which in turn, offers the creators the freedom to explore and experiment.” In addition, the problem of capturing what is going returns here. “It’s hard to track exactly how many zines are in circulation at any time. Some are handwritten sheets that are photocopied a few dozen times, stapled and distributed by hand. Others, more upscale, are printed professionally in runs of several hundred and may be sold online.”

It seems that new creativity, old mediums, and the desire for a differently crafted artifact are driving some interesting areas of business. For those researchers, note writers, innovation junkies, and cultural theorists out there, I’d say there is some research to be done about how these businesses are doing, the size of the vinyl and/or zine market, what technology may have allowed these endeavors to take off, the non-economic motivations in place here as well as the economic ones. There may be more, but those leap to mind.

October 27, 2011 at 12:12 pm Posted in: Cyberlaw, DRM, Economic Analysis of Law, Intellectual Property, Technology Print This Post One Comment

The Conservatism of Occupy Wall Street

posted by Frank Pasquale

Occupy Wall Street has continued to hold Liberty Plaza, and has inspired hundreds of other protests. It’s usually interpreted as a leftish populist complement to the Tea Party, ala this diagram:

Some have praised OWS and the Tea Party for challenging ossified and corrupt institutions. Others dismiss the two groups as mere “primal screams,” uninformed by a realistic sense of policy.

I’d like to step beyond the rival narratives of “what does OWS do for the left” and “how does OWS relate to the Tea Party.” These are important questions, but I think they miss a deeper feature of the movement: its conservatism. Sure, Bill O’Reilly and Rush Limbaugh are portraying the protesters as druggies, socialists, and hippies. But millionaire media moguls do not define modern conservatism; principles do. Some of the most appealing ideals of modern conservatism have found a home in the OWS movement. Gregory Djerejian has put it well:

While I will readily confess I find it odd as something of a Burkean that I am sympathetic to these protesters, they are not looking to trot out the guillotines, in the main (although I did spot a “Behead the Fed” sign!), but rather, they have smelled the radicalism of the blows dealt the integrity of a representative democratic system poised by the almost unfettered oligarch-like behavior among too many elites wholly disconnected from, yes, the 99% they speak of. They are acting to secure conservative aims of re-balancing a society that is becoming dangerously unmoored and increasingly bent asunder.

In the rest of the post, I’ll explain the conservative values behind OWS and the larger wave of economic discontent it reflects.
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October 27, 2011 at 10:37 am Posted in: Economic Analysis of Law, Financial Institutions, Law and Inequality Print This Post 7 Comments

Reversal Rates, Reconsidered

posted by Dave Hoffman

What is the meaning of an appellate court’s “reversal rate”? Opinions vary. (My view, expressed, succinctly, is “basically nothing.”) However conceived, we ought to at least be measuring reversal correctly. But two lawyers at Hangley Aronchick, a Philadelphia law firm, think that scholars (and journalists) have conceptualized reversal in entirely the wrong way.

According to John Summers and Michael Newman, we’ve forgotten that every case the Supreme Court takes implicitly also considers shadow cases from other circuits ruling on the same issue — that is, the Supreme Court doesn’t just “reverse” the circuit on direct appeal, it also affirms (or reverses) coordinate circuits while resolving a split. Thus, both our numerator and our denominator have been wrong. They’ve written up the results of this pretty interesting approach to reversal in a paper you can find blurbed here. Among the highlights: (1) reversal is less common that is commonly supposed; (2) the Court doesn’t predictably follow the majority of circuits; (3) there are patterns of concordance between circuits in analyzing issues; and (4) even under the new approach, the ninth circuit is still the least loyal agent of the Supreme Court.

I think that this method has real promise, and I bet that folks who are interested in judicial behavior will want to check it out.

September 30, 2011 at 12:21 pm Posted in: Economic Analysis of Law, Empirical Analysis of Law, Supreme Court Print This Post No Comments

Bernard Harcourt’s Realist Political Economy

posted by Frank Pasquale

It’s becoming clearer that classic Keynesian stimulus—ranging from Obama’s minimalist jobs program to the robust visions of a Krugman or Delong—won’t be enough to get us out of the Great Recession/Lesser Depression. The exhaustion of conventional macroeconomic thought (chronicled in outlets like the Real World Economics Review) has cleared some space for more imaginative thinkers. As John Kay observes:

Economics is not a technique in search of problems but a set of problems in need of solution. Such problems are varied and the solutions will inevitably be eclectic. Such pragmatic thinking requires not just deductive logic but an understanding of the processes of belief formation, of anthropology, psychology and organisational behaviour, and meticulous observation of what people, businesses and governments do.

In this post, I want to briefly highlight Bernard Harcourt’s work in crossing disciplinary boundaries to engage in the synthesis necessary to truly understand our plight.

Consider the following paradoxes or contradictions, which will also be highlighted at a conference that Harcourt is keynoting:
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September 23, 2011 at 10:06 am Posted in: Criminal Law, Culture, Economic Analysis of Law, Philosophy of Social Science, Uncategorized Print This Post 3 Comments

The Future of Empirical Legal Studies

posted by Dave Hoffman

Kenesaw Mountain Landis would have hated both sabermetrics and ELS.

Reading these two articles on the problems of complexity for sabermetrics, I wondered if the empirical legal studies community is coming soon to a similar point of crisis. The basic concern is that sabermetricians are devoting oodles of time to ever-more-complex formulae which add only a small amount of predictive power, but which make the discipline more remote from lay understanding, and thus less practically useful. Basically: the jargonification of a field. Substituting “law” into Graham MacAree‘s article on the failings of sabermetrics, we get the following dire warning:

“Proper [empirical legal analysis] is something that has to come from the top down ([law]-driven) rather than the bottom up (mathematics/data driven), and to lose sight of that causes a whole host of issues that are plaguing the field at present. Every single formula must be explainable without recourse to using ridiculous numbers. Every analystmust be open to thinking about the [law] in new ways. Every number, every graph in a [ELS] piece musttell a [legal] story*, because otherwise we’re no longer writing about the [legal system ] but indulging in blind number-crunching for its own sake. …

Surveying the field, I no longer believe that those essential precepts hold sway over the [ELS] community. Data analysis methods are being misapplied and sold to readers as the next big thing. Articles are being written for the sake of sharing irrelevant changes in irrelevant metrics. Certain personalities are so revered that their word is taken as gospel when fighting dogma was what brought them the respect they’re now given in the first place. [ELS] is in a sorry state.

How do we fix it? Well, the answer seems simple. [ELS] shouldn’t be so incomprehensible so as not to call up the smell of [a courtroom, or the careful drafting of the definition clauses in a contract, or the delicate tradeoffs involved in family court practice, or the importance of situation sense]. Statistics shouldn’t be sterile and clean and shiny and soulless. They shouldn’t just be about [Law]; they should invoke it. Otherwise, they run the risk of losing the language which makes them so special.”

Note: this is an entirely different than Leiter’s 2010 odd critique that ELS work was largely mediocre. The problem, rather, is that the trend is toward a focus on more complex and “accurate” models, often without the input of people with legal training, and insufficient attention to how such models will be explained to lawyers, judges and legal policymakers. (See also all of Lee Epstein’s work.)

August 28, 2011 at 5:41 pm Posted in: Economic Analysis of Law, Empirical Analysis of Law Print This Post 3 Comments

Shared Sacrifice of Whom?

posted by Frank Pasquale

As Drew Westen observes today, “400 people control more of the wealth than 150 million of their fellow Americans,” and “the average middle-class family has seen its income stagnate over the last 30 years while the richest 1 percent has seen its income rise astronomically.” These extremes cry out for a theodicy, justifying mammon’s ways to man. As wealth gets more concentrated, here is one of the millions of “faces of austerity” whom policymakers must answer to:

Cynde Soto dreads the arrival of yet another benefit notice. Her cash assistance has been cut four times in two years. State medical coverage is getting more expensive and no longer includes dental care or podiatry. And the in-home help she needs to take care of basics has been cut by about 20 minutes a day.

“That doesn’t sound like a lot to people but … I’m a quadriplegic,” said the 54-year-old Long Beach resident. “I can’t even scratch my own nose.”

When TV talking heads prate about “shared sacrifice,” they might want to pause to consider stories like Soto’s. They should also reveal where a particular multimillionaire will invest gains from, say, the continuation of the Bush tax cuts, or the zeroed out estate tax of 2010. How much gold does the rotting teeth of the poor buy? Are volunteer dentists effectively subsidizing summer houses? Executive protection dogs? Private jets to summer camp?

These trade-offs become more compelling as data renders the narrative of “trickle down job creation” implausible. The most recent “recovery” saw 88% of gains go to corporate profits, and about 1% go to wages. Workers are caught in a downward spiral: unemployment reduces their bargaining power, which in turn lets bosses pile more duties onto fewer people, who effectively increase unemployment more by doing the work or 1.5 or 2 or 3 workers for the price of 1. Many women face the brunt of the transition: “When companies decide to lay off secretaries and assistants while making employees pick up the slack, women take the hit.” Every margin has to be worked to keep CEOs’ pay averaging hundreds of times that of their typical workers.
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August 7, 2011 at 7:23 pm Posted in: Economic Analysis of Law, Politics, Uncategorized Print This Post 42 Comments

Guns, Butter, or Gambling

posted by Frank Pasquale

Sandy Levinson has posted interesting reflections on our tendency to “absolutize” the public debt. There is at least one good and one bad rationale for us to do so. The good rationale is straightforward: government is the ultimate risk manager. We rely on it to aid recovery after disasters, to defend US interests, and to provide for those who cannot survive using their own funds. In a world of advanced and expensive medical technology, that last category potentially includes nearly everyone, at some point in their lives. The debt ceiling debate is a wake-up call for us to choose more carefully between guns and butter. We need credit so that the government can borrow to, say, rebuild a city after a massive earthquake.

But there is also a bad reason for the rising stakes of US spending. To put it bluntly, the too-big-to-fail banks are the new Fannie Mae and Freddie Mac. The government must “keep its powder dry” in constant vigilance, ready to “re-TARP” the damage should any panic befall them. Consider, for instance, the current agonies of the Eurozone, as described by John Lanchester:

[Greek protesters] want the Greek government to default, and the banks to accept losses for loans they shouldn’t have made in the first place. It is that prospect which spooks everyone else in the EU, and the world economic order generally. . . . Who owns that Greek debt? [M]ainly French and German banks. Yes, but banks insure their debt via the use of complex financial instruments. Insure it with whom? Don’t know: some of it is insured with British banks as counter-parties to the risk, but that risk will be insured in its turn, so that the identity of the person holding the parcel when its last layer of wrapping comes off is a mystery. That mysteriousness was the thing that made Lehman’s collapse turn instantly into a systemic crisis.

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July 10, 2011 at 5:25 pm Posted in: Economic Analysis of Law, Financial Institutions Print This Post 3 Comments

Beneath the Lamp Post

posted by Dave Hoffman

Though many bemoan the expense and terrible functionality of PACER, the federal government’s electronic docketing system, it is vastly superior to existing state alternatives. While some states have decent, and searchable, e-dockets, others do not, and it’s often quite hard to figure out the scope of the state databases. The result is that a researcher (or a lawyer) who wants to study live dockets at the state level is faced with a host of known unknowns, making aggregate statistical inference basically impossible. Even descriptive statistics about state courts are hard to verify. It’s a black hole. (With some illumination provided by the BJS and other bodies.)

This frustrates me, and if I could wave a magic wand (or controlled Google) I would create a national e-docketing system for all state filings, permitting full-text searchers across states for comprehensive data – including searches of motions and orders – in both civil and criminal litigation. The current state of the world, by contrast, directs much of the new empirical legal research to focus on federal cases and federal outcomes, because PACER provides access to the kinds of data that researchers need. The problem, of course, is that PACER collects only Federal dockets, which aren’t representative of the kind or scope of litigation nationwide. Though of course studying dockets is vastly superior to studying opinions – if you want to know what judges are doing – we’re left still peering through a dark piece of glass. Worse, I think, is that researchers end up focusing their energies on topics for which federal litigation is the dominant way of resolving legal claims. Thus, there’s much more, and much better, docket-centered empirical work about securities law and federal civil rights statutes than there is about common law adjudication.

Our sadly patchwork court records system doesn’t just hurt academics looking to illuminate doctrinal puzzles. (The horror! Tenured professors can’t write more papers!) It also means that lawyers and corporate officers may be forced to rely on anecdote and salience when deciding how to engage with the litigation system — a calculation that may lead such repeat players to develop a long-term strategy to exit the litigation system altogether. If the state courts want to preserve their business, they need to innovate. One way to do so would be to join forces in data collection, archival, and search.

(Image Source: Flicker)

May 15, 2011 at 5:49 pm Posted in: Courts, Economic Analysis of Law, Empirical Analysis of Law Print This Post 11 Comments

Lochner in China

posted by Frank Pasquale

In the book Will the Boat Sink the Water? The Life of China’s Peasants, Chen Guidi and Wu Chuntao conclude that “the edifice of China’s industry is built from the flesh and blood of toiling peasants, and urban development was achieved through their pain and sacrifice.” It looks like the wonders of freedom of contract will spare some managers the hassle of dealing with the collateral damage:

In the wake of a huge wave of suicides at Foxconn plants, the company began reforming its practices related to the suicides. Among these changes included installing anti-suicide nets to catch workers who attempted to leap out of company windows. Yet workers are also being forced to sign a non-suicide pact as a condition of employment. As part of the pact, the employees families have to promise “not sue the company, bring excessive demands, take drastic actions that would damage the company’s reputation or cause trouble that would hurt normal operations” in the case of a suicide.

I highly recommend the entire report from Students & Scholars Against Corporate Misbehaviour (SACOM), a Hong Kong-based advocacy and research group that has studied the production process in some detail. Even more mundane aspects of some workers’ lives are hard to explore, given another contract they are free to sign. Some workers “did not dare to tell their basic salary, position, product that they produce, fearing that will constitute a breach of ‘confidential[ity] agreement[s].’” With a bit more vigorous contract enforcement, laissez-faire’s apologists may never have to hear again about squalid dormitories, 100-hour weeks, and shifts of standing for 14 hours in a row. Who knew the market could so efficiently reduce the negative externality of guilt-inducing news?

May 10, 2011 at 2:41 pm Posted in: Constitutional Law, Economic Analysis of Law, Law and Inequality Print This Post 6 Comments

Missing Care, Missing Drugs: Canaries in the Medical Coal Mine

posted by Frank Pasquale

While Washington has been focusing on repealing or rolling back parts of the Affordable Care Act, persistent embarrassments of the American health system show how untenable the status quo is. Both lower and middle class families are facing serious problems as they contend with providers’ and insurers’ cost constraints.

I’ll first address the familiar issue of health disparities. According to a recent news report, Lauren E. Wisk of the School of Medicine and Public Health at University of Wisconsin, Madison “examined data from the 2001-2006 Medical Expenditure Panel Surveys on 6,273 families with at least one child.” Wisk’s study shows that excessive financial burdens from cost-sharing are keeping many children from getting the care they need:

Families aren’t choosing to spend their money on going to the doctor when someone is sick because of how much it cost them to see the doctor last time. They’re sacrificing their health because it costs too much to be healthy. . . . We expect that if people aren’t getting the care they need, they’ll be sicker as a result. When you put this all together and look at the big picture, the cost of health care in the U.S. could actually be causing Americans to be sicker.

We might wonder: how can this be? Isn’t the economy in recovery? But we’ve seen this picture before, in the developing world. Growth does not help everyone. India, for example, has had astonishing economic growth, but it “is home to about a third of the world’s underweight and stunted children under the age of 5,” and “the impressive economic growth of the past decade has made only a modest dent into the obstinately high incidence of severe underweight and stunting of children in the country.” As Amartya Sen has shown, not only China, but also Bangladesh, are ahead of India in reducing the number of underweight children, despite the fact that “GNP per capita of $1,170″ in India, “compared with $590 in Bangladesh.” The critical number really is median GNP, and beyond that, real allocation to the sectors and concerns that matter. As the US surpasses Ivory Coast and Pakistan in inequality, don’t count on gains from growth to go to the people who need it.
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May 6, 2011 at 11:56 am Posted in: Economic Analysis of Law, Health Law, Intellectual Property, Law and Inequality Print This Post No Comments

From Truth to Trust

posted by Frank Pasquale

In my last post, I praised Hernando de Soto’s proposal to improve business recordkeeping, or “economic facts.” Commenter A.J. Sutter responded that de Soto’s “notion of ‘economic facts’ itself represents a fallacious reification. Those ‘facts’ are constructed by social actors.” Sutter emphasizes the inevitably subjective, contingent aspects of accounting practices. He concludes that “rolling back some [accounting] innovations might be a good idea,” but “the recovery of some sort of ‘objectivity’ is not likely to be the result.”

He is in good company; consider, for instance, this dismissal of de Soto’s ideas from Annelise Riles’s profound and original book Collateral Knowledge: Legal Reasoning in the Global Financial Markets:

Contrary to De Soto’s simplistic claim that the very existence of registered property rights produces clarity and certainty about the delineation of powers and obligations (and hence that the only necessary reform of the financial markets is the creation of an adequate registration system for property in derivatives), most of property law is in fact about the enormous ambiguities that surround what powers and obligations flow from titled property ownership. If I own a piece of land, does that mean I have a right to build a factory on it that billows smoke onto neighboring property? If I own a shopping mall, does that mean I have the right to exclude protesters from demonstrating there? . . . As Duncan Kennedy and Frank Michelman pointed out . . . [in 1980], formal property law increases certainty for some that reduces it for others; it increases certainty about some expectations but decreases certainty about others. The real issue is whose certainty do you want to maximize, and about what. (164-65)

Both Sutter and Riles are right to criticize anyone who thinks the only, or even the major, “necessary reform of the financial markets is the creation of an adequate registration system for property in derivatives.” It is naive to think that, if only we had more information, the crisis could have been avoided. To take but one of many possible examples: even if the analysts at the rating agencies had done far more due diligence on the quality of the loans behind the residential mortgage-backed securities that were sliced and bundled into collateralized debt obligations, they still could have come up with some rationale for a AAA rating. Many understood what was going on, but “danced while the music was playing.” To the willfully blind, the naive, or the dense, virtually any arrangement can seem opaque.
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May 2, 2011 at 1:50 pm Posted in: Economic Analysis of Law, Financial Institutions Print This Post 3 Comments

Invisible Hand or Hidden Fist?

posted by Frank Pasquale

In his press conference last week, Ben Bernanke concluded on an upbeat note. He had high hopes for a US recovery, since he believed that the Great Financial Crisis (GFC) of 2008 hadn’t taken from the US any of its basic productive capacity.

Whatever the merits of that view, the GFC did highlight debilitating trends in US finance infrastructure that have been intensifying for years. In this week’s Businessweek, Hernando de Soto (with Karen Weise) highlights one of the most important: the opacity of key markets and relationships. With scant exaggeration, de Soto warns that the US is on its way to levels of uncertainty more common in developing and communist countries:

During the second half of the 19th century, the world’s biggest economies endured a series of brutal recessions. At the time, most forms of reliable economic knowledge were organized within feudal, patrimonial, and tribal relationships. . . . The result was a huge rift between the old, fragmented social order and the needs of a rising, globalizing market economy.

To prevent the breakdown of industrial and commercial progress, hundreds of creative reformers concluded that the world needed a shared set of facts. . . . The result was the invention of the first massive “public memory systems” to record and classify—in rule-bound, certified, and publicly accessible registries, titles, balance sheets, and statements of account—all the relevant knowledge available, whether intangible (stocks, commercial paper, [etc]), or tangible (land, buildings, boats, machines, etc.). Knowing who owned and owed, and fixing that information in public records, made it possible for investors to infer value, take risks, and track results. The final product was a revolutionary form of knowledge: “economic facts.”

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April 30, 2011 at 4:49 pm Posted in: Bankruptcy, Corporate Finance, Economic Analysis of Law, Financial Institutions, Insurance Law, Property Law Print This Post 3 Comments

“Politics is the shadow cast on society by big business”

posted by Frank Pasquale

In the run-up to passage of financial reform, internal tensions among Democrats were frequently on display. (The GOP political landscape appears much simpler: whatever can be labelled as “anti-regulation” gets approval from both the leadership and the Tea Party freshmen.) Now the grand guignol over interchange fees has exposed growing faultlines among Senate Democrats. The future of the party lies either with Chuck “Wall Street” Schumer, or Dick “Austerity” Durbin. Their struggle illuminates a great deal about the modern legislative process.

Ryan Grim and Zach Carter lay out the contours of the battle:

Delivery surcharge. Paper charge. Equipment charge. There’s an additional fee for using cards from banks outside his contract, but [retailer Charlie] Chung says he has no way of knowing until he’s gotten his bill how much of that pricier plastic has been swiped. The fees Chung pays are a tiny fraction of Wall Street’s swipe fee windfall; banks take in a combined $48 billion a year from these “interchange” fees on debit and credit cards, according to analysts at The Nilson Report. That money comes out of the pockets of consumers as well as merchants, as stores pass on whatever costs they can to their customers.

Last year’s financial reform bill ordered the Federal Reserve to crack down on debit card swipe fees, a $16 billion pool of money from which $8 billion flows to just 10 banks. As a concession to Wall Street, credit card fees were left unscathed. But the clock never ticks down to zero in Washington: one year’s law is the next year’s repeal target.

Mike Konczal and Adam Levitin have exhaustively analyzed the interchange battles; suffice it to say, it’s hard to read their work (and compare fees internationally) without getting the sense that banks are getting a massive windfall here. Usually that kind of extractive industry can use its profits to buy endless favors in DC. But the extremely high rates started irking retailers, who had enough leverage to push for legislation that required the Fed to reduce the swipe fees. Now Chuck Schumer (and his surrogate, Jon Tester) want to delay that reduction; Illinois Senator Dick Durbin, who sponsored it, is fighting back. According to Carter & Grim, “118 ex-government officials and aides are currently registered to lobby on behalf of banks in the fee fight,” and retailers “have signed up at least 124 revolving-door lobbyists.”

In phrasing a bit less poetic than the Dewey quote I titled this post with, a “frustrated moderate Democratic senator” described the battle as emblematic of the broader tone in Washington:
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April 28, 2011 at 10:56 pm Posted in: Economic Analysis of Law, Financial Institutions, Politics Print This Post 4 Comments

Welcome to the Blogosphere: Corporate Justice Blog

posted by Frank Pasquale

There are a number of interesting posts up at the Corporate Justice Blog, which has discussed both the FCIC Report and the Levin-Coburn Report. It’s great to see this terrific group of scholars comment on economic justice issues in the blogosphere.

April 26, 2011 at 10:53 pm Posted in: Blogging, Corporate Law, Economic Analysis of Law, Financial Institutions Print This Post No Comments

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