The argument is fairly easily to follow. She argues that tort liability, because it is prospective and systemic, motivates providers to invest in precautions that are general and non-rivalrous: a collective good.  Thus, medical safety investments will be underproduced if left to the incentives of individual contracting parties, since each patient will want to free-ride off others’ choices to purchase “liability” from their doctors.  Moving liability to managed care organizations [...]]]> Jennifer Arlen came to Temple on Monday to workshop her paper, Contracting Over Malpractice Liability, forthcoming in the Penn Law Review.  I was her commentator.  Prof. Arlen uses fairly traditional economic analysis, assuming that patients are rational, to argue that it not welfare maximizing to permit patients to contract out of the background medical malpractice regime.

The argument is fairly easily to follow. She argues that tort liability, because it is prospective and systemic, motivates providers to invest in precautions that are general and non-rivalrous: a collective good.  Thus, medical safety investments will be underproduced if left to the incentives of individual contracting parties, since each patient will want to free-ride off others’ choices to purchase “liability” from their doctors.  Moving liability to managed care organizations doesn’t help matters, it turns out, because it would simply permit the company to segregate between consumers who need liability protection (ones who are, or are likely to become, sick) and those who don’t (the young and healthy).  Under such a system, MCOs will package “good” health insurance together with liability, meaning that healthy individuals with a taste for liability coverage will need to pay a premium to access it.  This again leads to insufficient amount of liability protection over all patients.

It’s an important paper, not least because the form of argument may generalize to other kinds of contracting over private law.  Isn’t it true for most forms of negligence protection that the benefits are non-rivalrous and hard to exclude?  If so, permitting any contracting out of tort law likely results in a net loss of socially optimal deterrence.  Similarly, contracting out of civil procedure may lead to loss in societal benefits (like, for example, the litigation-generated-spillovers resulting from more information about the content and operation of legal rules.)  That said, as I commented to Prof. Arlen, it’s not clear whether she really maintains that patients are rational maximizers, since some of the argument relies on facts about the world (e.g., bad monitoring by insurance companies, insufficient lawsuits) that are difficult to square with rational choice theory. Also, what does medical error mean anyway?

I thought it would be worthwhile to bring this paper to your attention, since we’re living in a world where contract law’s dominance over torts is becoming ever more evident.  As this law firm circular points out, doctors are requiring patients to sign enforceable arbitration clauses.  It’s my sense that the bleak view that Arlen’s paper gives of contracting out of liability entirely also extends to such agreements.

*Whether they are a true public good or rather a club good is a little bit obscure in the paper.

Dear Sir,

In your most recent Lexington column you reiterated the Economist’s long standing preference for a carbon tax rather than a cap-and-trade system for dealing with global warming.  Your preference has always puzzled me.  The Economist is quite right to insist that providing market incentives is a better way of controlling carbon emissions than command-and-control style regulations.  However, I have yet to see you make the case for carbon taxes.

A cap-and-trade system assumes that the government can set the optimal level of emissions and then lets the market determine the price of carbon.  A carbon tax assumes that the government can determine the costs that emissions impose [...]]]> I recently sent the following letter to the editor of the Economist magazine:

Dear Sir,

In your most recent Lexington column you reiterated the Economist’s long standing preference for a carbon tax rather than a cap-and-trade system for dealing with global warming.  Your preference has always puzzled me.  The Economist is quite right to insist that providing market incentives is a better way of controlling carbon emissions than command-and-control style regulations.  However, I have yet to see you make the case for carbon taxes.

A cap-and-trade system assumes that the government can set the optimal level of emissions and then lets the market determine the price of carbon.  A carbon tax assumes that the government can determine the costs that emissions impose on society, price those through a tax and then lets the market determine the overall level of emissions.  Another way of putting this, is that a cap-and-trade system assumes that scientists can determine the optimal level of carbon given the mosterously complex phenomena of the global climate.  A carbon tax, in contrast, assumes that economists can determine the costs that carbon imposes on society given the monsterously complex phenomena of the climate’s effect on the economy.

Other than your publication’s name, I am at a loss as to why you believe that the scientists are at a disadvantage to the economists.  Indeed, given the heroic intellectual feats that either policy demands, I’m at a loss as to which group of scholars has the edge.  Sadly, I suspect that we actually don’t know.

Nathan Oman

[The financial] crisis represents the culmination of a decades-long process by which our national policies have distorted economic activity away from savings and toward consumption, away from investment in our industrial base and public infrastructure and toward housing, away from the real sectors of our economy and toward the financial sector. . . .Corporate sector practices [have] had the effect of distorting decision-making away from long-term profitability and stability and toward short-term gains with insufficient regard for risk.

Even if GDP goes up, the problems she cites will haunt our economy for years to come. Stopping what Robert Kuttner has termed the “squandering of America” will [...]]]> As the Dollars & Sense blog notes, Sheila Bair’s testimony before the FCIC was insightful. My favorite lines:

[The financial] crisis represents the culmination of a decades-long process by which our national policies have distorted economic activity away from savings and toward consumption, away from investment in our industrial base and public infrastructure and toward housing, away from the real sectors of our economy and toward the financial sector. . . .Corporate sector practices [have] had the effect of distorting decision-making away from long-term profitability and stability and toward short-term gains with insufficient regard for risk.

Even if GDP goes up, the problems she cites will haunt our economy for years to come. Stopping what Robert Kuttner has termed the “squandering of America” will require more than financial sector reform. But it’s a good place to start.

I’m flattered to have  been asked to serve on the Advisory Board, which boasts many luminous scholars from around the world, including, from the US, Sudipta Basu (Temple, accounting); Jonathan Glover (Carnegie Mellon, accounting); David Kennedy (Harvard, law); my [...]]]> Scholars like me interested in law as it interacts with accounting and economics will be excited to learn of a new joural offering to link these three fields and many others. Called the Journal of Accounting, Economics and Law, this is a welcome new forum to celebrate study of the relation, too often under-appreciated, among these subjects. The journal’s founding editors are three scholars I’ve come to know and admire, Michigan law prof Reuven Avi-Yonah, Yale accounting prof Shyam Sunder and University of Paris business economics prof Yuri Biondi.  

I’m flattered to have  been asked to serve on the Advisory Board, which boasts many luminous scholars from around the world, including, from the US, Sudipta Basu (Temple, accounting); Jonathan Glover (Carnegie Mellon, accounting); David Kennedy (Harvard, law); my colleague Larry Mitchell (GW, law); Roberta Romano (Yale, law); Martin Shubik (Yale, economics); and Lynn Stout (UCLA, law).

Following is a description of the journal.   Manuscript submissions are encouraged!

“The Journal of Accounting, Economics, and Law aims to encourage a comprehensive understanding of the relationship between individuals, organizations, and institutions in economy and society.

Financial, economic and legal techniques and languages play an influential and neglected role in this relationship. Concerns of finance, control, accountability, responsibility, valuation, regulation, and governance will be raised in their connection with accounting, economics, law, sociology, anthropology, history, finance, political science, and the management and policy sciences.

The journal encourages works that seek to recombine disciplinary domains in response to practically relevant issues, while encouraging theoretical advances and insights, and comparative historical perspectives.”

But substantive law is an intrinsic part of the institutional structure. If the quality of institutions matter, then by definition the quality of laws matter. That is a point made over and over again by Coase, North, Williamson and other economists.

Yes and no. I don’t deny that law plays a role in the quality of the institutions that resolve disputes. I also don’t deny that the overall quality of dispute resolving institutions is effected by the substantive law that the institutions apply. On the other hand, legal institutions are the result of much more than either the legal rules that define [...]]]> There is an interesting exchange in the comments of my last post between Dan Cole,Jeff Lipshaw, and Michael Froomkin about institutions and the limits of substantive law. Dan Cole writes:

But substantive law is an intrinsic part of the institutional structure. If the quality of institutions matter, then by definition the quality of laws matter. That is a point made over and over again by Coase, North, Williamson and other economists.

Yes and no. I don’t deny that law plays a role in the quality of the institutions that resolve disputes. I also don’t deny that the overall quality of dispute resolving institutions is effected by the substantive law that the institutions apply. On the other hand, legal institutions are the result of much more than either the legal rules that define their workings or the legal rules that they apply. They are also the result of things like allocation of resources and informal social practices.

I was once at a panel that brought this point home forcefully. It was on comparativecommercial law and that perennial chestnut, which is better the common law or the civil law.  The partisans of the common law were laboring hard to establish the virtues of its flexibility and respect for freedom of contract.   (I’ve labored over these virtues myself on occasion.)  At this point, a long-time commercial practitioner on the panel interjected remarks to this effect:

At the margins, I suppose that the common law is slightly more friendly to commercial innovation than is the civil law. When I go to a civil law jurisdiction I often learn that there are certain transactions I simply can’t run or are more complicated to structure. On the other hand, when I am assessing the economic prospects in any particular country, my main question isn’t “Is this a civil law or a common law jurisdiction?” Rather, my main question is whether or not the fact that the lawyer on the other said is the judge’s cousin will effect the outcome of the case.

That is what I mean when I say that institutions matter more than substantive law.

Now consider prison sentences. Here, it seems to me, that the situation is reversed. Even [...]]]> Consider the following argument: The same punishment for different people is not in fact the same. Thinking of a criminal fine is the easiest example. A $1000 fine levied on an offender who is a millionaire is simply not as serious of a sanction as a $1000 fine leveled against a poor criminal. The millionaire can pay the fine without noticing it, while the poor criminal may be subjected to considerable economic hardship. The result is that the $1000 fine will not have much deterrent effect against the millionaire. To get his attention we require a much harsher punishment. So far so good.

Now consider prison sentences. Here, it seems to me, that the situation is reversed. Even a modest prison sentence — say of six months to a year — could have a devastating effect on an upper class defendant. The opportunity costs of foregone income will be substantial. Furthermore, there may be far more ancillary consequences in the form of foregone opportunities, and the like. A lawyer, for example, might lose the ability to practice law in the future. In contrast, a poor criminal with few opportunities faces fewer costs from the same length of time in prison. The opportunity costs in terms of foregone income will be much lower, and if the criminal really has few opportunities to begin with then the prison term may have a relatively small impact on one’s future prospects.

If the analysis in the above paragraph is correct it suggests that those in poor communities receive dramatically less protection than those in richer communities. This is not simply because those in richer communities tend to have more resources lavished upon them in the form of protection and law enforcement. It is also that — to the extent that the population of potential criminals who might victimize them are also wealthy — they are protected by larger sanctions against criminals. In contrast, so long as prison sentences are insensitive to the wealth of the criminal, those in poorer neighborhoods are protected by comparatively weaker deterrents for wrong doers. (Again, assuming that the population of criminals likely to victimize poor communities is also poor.)

In order to achieve equal levels of deterrence across communities using incarceration, it seems to me that we must punish poor criminals with longer prison sentences than comparable rich criminals. It is not that poor criminals are more deserving of punishment, although my initial intuition is that that those who prey on the poor are more culpable than those who prey on the rich. Rather, the argument for punishing poor criminals more harshly is to equalize the level of deterrence provided to all citizens. A regime of equal incarceration, in contrast, creates dramatic inequalities in the level of protection provided to citizens of different socio-economic status.

Of course, another solution would be to adopt a method of punishment where the cost imposed on the criminal is less sensitive to the criminal’s wealth. The stocks or publish whippings come to mind…

The sports network Versus, owned by Comcast, has been off of DirecTV’s satellite service for three months in a fee battle. More prominently, the Food Network and HGTV disappeared from Cablevision’s lineups in New York and New Jersey on Friday after talks broke down with the owner of the channels, Scripps Networks.

The Food Network costs distributors 8 cents a viewer on average now; Scripps wants a roughly 300 percent raise, according to people briefed on the negotiations. That might seem drastic, but 30 other channels, [...]]]> I’ve been following the debate over ala carte cable TV pricing, and the recent Fox/Time Warner showdown has put it back in the news. Brian Stelter’s NYT article on the topic reveals some interesting revenue figures in the cable industry:

The sports network Versus, owned by Comcast, has been off of DirecTV’s satellite service for three months in a fee battle. More prominently, the Food Network and HGTV disappeared from Cablevision’s lineups in New York and New Jersey on Friday after talks broke down with the owner of the channels, Scripps Networks.

The Food Network costs distributors 8 cents a viewer on average now; Scripps wants a roughly 300 percent raise, according to people briefed on the negotiations. That might seem drastic, but 30 other channels, some with lower ratings, already earn that much. “We were really, really undervalued,” said Brooke Johnson, the president of the Food Network. . . .

[T]he owners of Oprah Winfrey’s cable channel, set to begin one year from now, are hoping that her star power will be worth 50 cents for each subscriber a month. The channel it is replacing, Discovery Health, gets only 12 cents now. Consumers already pay dimes or quarters for most cable channels each month, whether they watch them or not. ESPN earns the most by far, $4.10 on average, and is forecast to receive more than $5 a month by 2012, according to the research firm SNL Kagan. Fox Sports Network gets $2.37 on average.

Many consumer advocates (and the Parents Television Council) have demanded that subscribers get the right to pay only for the channels they want. But Joe Nocera has convincingly worried that ala carte pricing will unravel the whole cable model:

[U]nmoored from the cable bundle, individual networks would have to charge vastly more money per subscriber. Under the current system, in which cable companies like Comcast pay the networks for carriage — and then pass on the cost to their customers — networks get to charge on the basis of everyone who subscribes to cable television, whether they watch the network or not. The system has the effect of generating more money than a network “deserves” based purely on viewership. Networks also get to charge more for advertising than they would if they were not part of the bundle. . . .

According to [one] analysis, if every African-American family in the country subscribed to the Black Entertainment Network, it would still have to raise its fees by 588 percent. He adds, “If just half opted in — still a wildly optimistic scenario — the price would rise by 1,200 percent.”

Ala carte pricing might seriously undermine the diversity of cable offerings. But I do think that the cable companies’ ever-rising rates require some regulatory response. One idea would be to follow the health insurance reform model and limit the amount of profits that the cable companies, as intermediaries, could make. The amount of money health insurance companies actually pay for medical care is called the “medical loss ratio.” It now appears that “both the House . . . and the newly recast Senate [health reform bills] would force insurers to spend the vast majority of premium revenue on medical care for their customers, reducing the amount available for profits, executive salaries, sales and administration.”* Would a content loss ratio make sense for cable companies–that is, requiring them to pay some fixed percentage of revenue for content?

I’m afraid that such a concept probably wouldn’t do much to reduce prices, because content providers are a pretty concentrated industry as well (and, where they’re not, copyright tends to give some level of monopoly power—Lords of the Mafia isn’t much of a substitute for The Sopranos). Likewise, in health care, the power of providers seems to have overmatched efforts by insurers in the 1990s to screw down costs:

One might wonder why consolidation among insurers did not allow them to resist the [medical] 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.

I suppose that cable companies, like health insurers, find it much easier to jack up rates for customers than to refuse content providers’ demands for more compensation. (The denoument of the TWC/Murdoch fight is one interesting data point here.) And there’s always the option of merging content and conduit, as Comcast’s proposed purchase of NBC will do. Recombinant conglomerates will no doubt concoct many business models, aided by the M&A kingpins on Wall Street. As Bruce Judson has commented, these “ultimate intermediaries” are now far more richly compensated than the average entrepreneur.

Perhaps the only constraint on these intermediaries’ ability to raise prices will be the decline of the real economy that employs most of their customers. While the ruse of the creative class lures community after community to turn to entertainment, “meds & eds,” and other staples of the weightless economy for growth, Michigan is learning the hard way that soft industries need some hard foundations:

The sputtering Michigan economy is dragging down the state’s once-strong health-care system, offering a preview of how a lingering recession could corrode Americans’ hospitals, savings and health. . . . Years of auto-industry layoffs and benefit cuts to white-collar retirees have left hundreds of thousands of Michigan workers . . . without employer-provided health coverage. . . .

The seven-hospital St. Joseph system lowered its operating margin and projects it will cut $60 million from next year’s budget, about 7% of its revenue. The William Beaumont Hospital system, which traditionally attracted well-insured patients at its hospitals in the affluent suburbs of Grosse Pointe and Royal Oak, reported its first net loss last year.

Admittedly, given the US’s penchant for panem et circenses, it would not be surprising if individuals prioritize the cable bill over health insurance premiums. There are so many compelling stories to watch.

*According to Julie Appleby, “The Senate bill would require insurers to spend at least 80 percent on medical care and quality improvements (85 percent minimum for plans sold to large groups), while the House bill specifies 85 percent.”

X-Posted: Madisonian.

First, a bit of background. As health costs rose in the 1960s, many policymakers believed that a surplus of health services was to blame. Policymakers worried that health care costs were rising due to “induced demand:” the more doctors and hospitals there were, the more these [...]]]> If there is one aspect of contemporary health care regulation that conservatives have decried, it’s “certificate of need laws.” These laws require licensure of new health facilities (and sometimes expansions of facilities) in thirty-seven states. Denounced as relics of socialist central planning, they were a prime target of the Bush-Era Dose of Competition report. But, as David Leonhardt notes, it appears that CON laws are reducing costs without impairing quality in some areas.

First, a bit of background. As health costs rose in the 1960s, many policymakers believed that a surplus of health services was to blame. Policymakers worried that health care costs were rising due to “induced demand:” the more doctors and hospitals there were, the more these actors would try to counteract the normal price-depressing effect of increased competition by finding more wrong with patients, thus “inducing” demand for their services. Although such a strategy could rarely work in a normal market, health care is a credence service—it is very hard for the average consumer to “second guess” his or her provider about the amount or nature of care needed.*

In 1974, Congress passed the National Health Planning and Resources Development Act. The Act required new health care facilities, and additions to existing facilities, to obtain a Certificate of Need (CON) from the appropriate state agency as a prerequisite to receiving federal funds via the Medicare and Medicaid programs. As a result of these laws, those opening new health care entities needed to demonstrate to state commissions that their services are actually needed by the community.

Over time, state boards started addressing concerns beyond “induced demand,” including social goals of equity and fair distribution of health resources. When I emailed a New Jersey policymaker who has worked in this area, he told me that the state would be unlikely to license specialty hospitals that concentrate on the most lucrative cases because they would threaten the ability of safety net hospitals to use revenue from such cases to cross-subsidize uncompensated care. He called such egalitarian concerns “explicit and leading factor[s] of discussion at all levels in CON proceedings.”

Leonhardt is more concerned about the classic CON goal of cost-control, and sees CON laws as a key reason for positive developments in Richmond, Virginia:

Since 1996, the Richmond area has lost more than 600 of its hospital beds, mostly because of state regulations on capacity. . . . Richmond has gotten rid of 15 percent of its hospital beds, and its health care still looks a lot like the rest of the country’s, only cheaper and a bit better. . . .

[Meanwhile, health facilities vastly expanded in South Dakota after it scrapped its CON law in 1988.] In other industries, all that new capacity might have led to a glut, in which workers and equipment sat idle. But health care is different. Doctors and patients tend to believe that more care is better, and patients often don’t pay much extra for any additional care. So new doctors, nurses and equipment generally stay busy.

Dr. John Wennberg of the Dartmouth Medical School refers to this phenomenon as supply-sensitive care. Dr. Marlon Priest, the chief medical officer of Bon Secours, puts it this way: “If you build 100 beds, they’ll get used.” . . . [But] [m]ore care is not always better care. Sometimes, in fact, it’s worse. Just consider the recent research showing that radiation from CT scans will eventually kill thousands of patients a year.

I’m not fully sold on the Dartmouth studies (here’s one critique of them), and I do worry that efforts to fight overtreatment will lead to some “meat ax” rationing that denies care to the poorest (rather than motivating those who don’t need the attention of the health care system to avoid it). But when cost saving initiatives are combined with a commitment to preserve access to care for all, they may be as close to a “Pareto optimal” health policy as we can get.

*(Lawyers have their own version of this “induced demand” problem, encapsulated in the old saw: “When there was one lawyer in town, he had no business; when another moved in, he was swamped with cases.” I suppose laws against barratry are offer a loose parallel to CON in the legal profession. Antitrust may stand in the way of legal and medical professionals’ own actions to avoid “induced demand.”)

In the House of Representatives, where the debate on regulatory reform started, the New Democrat Coalition has 68 fiscally conservative, pro-business members who fill 15 of the party’s 42 seats on the House Financial Services Committee. And with just a 38-member voting majority over Republicans (who often vote as a block in the House), Frank and Pelosi can’t push legislation through without the New Democrats’ support. . . [...]]]> A series of interesting journalistic takes on financial regulation have suggested that, after the hyperpartisan brawl over health care reform, financial reform may be a more bipartisan affair. For example, according to Alison Vekshin and Dawn Kopecki, it appears that House Democratic leaders have put a large contingent of moderates on the House Financial Services Committee:

In the House of Representatives, where the debate on regulatory reform started, the New Democrat Coalition has 68 fiscally conservative, pro-business members who fill 15 of the party’s 42 seats on the House Financial Services Committee. And with just a 38-member voting majority over Republicans (who often vote as a block in the House), Frank and Pelosi can’t push legislation through without the New Democrats’ support. . . .

While the House Financial Services Committee was tweaking the reform bill proposed by the Obama Administration this summer, the New Democrats pushed back on key regulatory issues. One of the biggest: derivatives, the complex financial instruments that helped spark the global financial crisis. Most derivatives are traded in murky over-the-counter deals. The Administration wanted to push some of them onto regulated trading platforms. But that would have crimped one of Wall Street’s most lucrative businesses: The top five U.S. commercial banks, including JPMorgan Chase, Goldman Sachs, and Bank of America, were on track through the second quarter to earn more than $35 billion in 2009 trading unregulated derivative contracts, according to a review of company filings with the Federal Reserve and people familiar with the banks’ income sources. So JPMorgan, along with Goldman Sachs and Credit Suisse (CS), lobbied . . . New Democrats to temper the proposed rules. . . .

The pro-regulation forces backed down. Under the House bill that passed in December, banks won’t have to trade standardized derivatives on regulated trading platforms, although they will have to report the deals to regulators.

The New Democrats’ fingerprints are all over the final House bill. Lawmakers rejected a mortgage “cram-down” amendment, which would have given federal judges the power to extend loan terms, lower interest rates, and cut principal for bankrupt homeowners. Although lawmakers ultimately voted to create a consumer protection agency, the New Democrats succeeded in stripping the proposal of some components. Under the bill, real estate agents, auto dealers, and other nonfinancial companies won’t fall under the purview of the agency. And the largest banks won’t have to offer plain-vanilla credit-card and mortgage products.

Vekshin & Kopecki portray tensions between the White House and the “New Democrats.” But other sources portray an Administration trying to be all things to all people. Sen. Maria Cantwell has tirelessly fought for more aggressive federal oversight of the financial sector. (Among other things, she (along with John McCain) proposed reinstating the 1933 Glass-Steagall Act last month.) Cantwell objected to the White House’s nomination of former Goldman trader Gary Gensler to chair the CFTC, and thought she had extracted some concessions from Geithner & co. But, as Robert Kuttner reports, the administration has apparently failed to keep its word to her:

[In Jan., 2009, Cantwell] put a hold on Gensler’s nomination. After a lengthy meeting with Gensler on Jan. 15, Cantwell sent him a letter soliciting commitments on several regulatory issues involving derivatives. His reply, dated Feb. 11, was detailed, but it deftly fudged key questions. . . .Little by little, however, Gensler came around to Cantwell’s demands. He went on a charm offensive, meeting with consumer groups, speaking with the press, and promising a total change of heart. . . .

But Cantwell was taking no chances. She pressed Treasury Secretary Timothy Geithner to put these commitments in writing. . . .After marathon negotiation sessions, [Larry] Summers agreed to a letter committing in detail to fundamental reform. . . .

She waived her hold on Gensler, but her suspicions were not entirely allayed. She still voted against confirming him. As Cantwell dryly said to me in an interview not long afterward, “It’s not unheard of in D.C. to feign a commitment and then not fight hard to have the legislation pass.”

That skepticism understated what was coming. Though Gensler fought inside the administration to keep his word to Cantwell, the Treasury Department released a white paper on June 17 that was weaker than the commitments in Geithner’s May 13 letter. And the financial-reform legislation that Geithner sent to Congress in August was even weaker than the white paper. The loopholes were widened further by the House Financial Services Committee after an industry lobbying offensive that was supported by the 15 members of the New Democrat Coalition on the committee — and these loopholes were not resisted by the administration.

“The Treasury Department should be ashamed of themselves,” Cantwell told MSNBC in mid-October. She added, “What is moving through on the House side is a bill that supposedly has a new rule but it has so many loopholes that the loophole actually eats the rule. … Current law with its loopholes would actually be better than these loopholes.”

As some of Vekshin & Kopecki’s sources concluded, a “moment for real change has been squandered.” But, as Frank Partnoy points out, legislators weren’t exactly quick out of the gate in 1929, either. It will be interesting to see if the McCain/Cantwell (and Paul/Grayson) forces will continue to press for more fundamental financial reform. They’ve got their work cut out for them, as this profile of the House Financial Services Committee suggests:

[The House Financial Services Committee] is known as a “money committee” because joining it makes fundraising, especially from donors with financial interests litigated [sic] by the panel, significantly easier. The Democratic leadership chose to embrace this concept, setting up the committee as an ATM for vulnerable rookies. Eleven freshman representatives from conservative-leaning districts, designated as “frontline” members, have been given precious spots on the committee. They have individually raised an average of $1.09 million for their 2010 campaigns, according to the Center for Responsive Politics; by contrast, the average House member has raised less than half of that amount. . . .

[B]y setting up the committee as a place for shaky Democrats from red districts to pad their campaign coffers, leadership made a choice to prioritize fundraising over the passage of strong legislation. . . .

And just as the lure of money leads inexperienced new members to join the committee, it prompts experienced staffers to bolt for larger paydays in the private sector. “You have this phenomenon where if you have a staffer who’s very experienced on a certain issue and is dealing with the financial sector for any number of months or years, all of a sudden they become a real acquisition target for Wall Street,” says . . . Rep. Stephen Lynch (D-Mass.), a subcommittee chairman, of the unwieldy panel.

Similar “acquisition targets” have paid off handsomely.

Why is it that here in the United States we have such difficulty even imagining a different sort of society from the one whose dysfunctions and inequalities trouble us so? We appear to have lost the capacity to question the present, much less offer alternatives to it. Why is it so beyond us to conceive of a different set of arrangements to our common advantage?

Our shortcoming—forgive the academic jargon—is discursive. We simply do not know how to talk about these things. To understand why this should be the case, some history is in order: as Keynes once observed, “A study of [...]]]> In the tradition of an “end of year” post, I just wanted to quote these paragraphs from Tony Judt’s recent lecture on social democracy:

Why is it that here in the United States we have such difficulty even imagining a different sort of society from the one whose dysfunctions and inequalities trouble us so? We appear to have lost the capacity to question the present, much less offer alternatives to it. Why is it so beyond us to conceive of a different set of arrangements to our common advantage?

Our shortcoming—forgive the academic jargon—is discursive. We simply do not know how to talk about these things. To understand why this should be the case, some history is in order: as Keynes once observed, “A study of the history of opinion is a necessary preliminary to the emancipation of the mind.” For the purposes of mental emancipation this evening, I propose that we take a minute to study the history of a prejudice: the universal contemporary resort to “economism,” the invocation of economics in all discussions of public affairs. . . .

[A] “disposition to admire, and almost to worship, the rich and the powerful, and to despise, or, at least, to neglect persons of poor and mean condition…is…the great and most universal cause of the corruption of our moral sentiments.” Those are not my words. They were written by Adam Smith, who regarded the likelihood that we would come to admire wealth and despise poverty, admire success and scorn failure, as the greatest risk facing us in the commercial society whose advent he predicted. It is now upon us.

Judt contrasts the extraordinary fortunes of individual titans of industry with the “discredited state and inadequate public resources” evident in the US. But he does not counsel a return to some golden age of statism:

The twentieth-century narrative of the progressive state rested precariously upon the conceit that “we”—reformers, socialists, radicals—had History on our side: that our projects, in the words of the late Bernard Williams, were “being cheered on by the universe.” Today, we have no such reassuring story to tell. We have just survived a century of doctrines purporting with alarming confidence to say what the state should do and to remind individuals—forcibly if necessary—that the state knows what is good for them. We cannot return to all that. So if we are to “think the state” once more, we had better begin with a sense of its limits. . . .

[F]rom a normative perspective we might begin with a moral “narrative” in which to situate our collective choices. Such a narrative would then substitute for the narrowly economic terms that constrain our present conversations. But defining our general purposes in that way is no simple matter. . . . What do we find instinctively amiss in our present arrangements and what can we do about them? What do we find unfair? What is it that offends our sense of propriety when faced with unrestrained lobbying by the wealthy at the expense of everyone else? What have we lost?

We are entering, I believe, a new age of insecurity. The last such era, memorably analyzed by Keynes in The Economic Consequences of the Peace (1919), followed decades of prosperity and progress and a dramatic increase in the internationalization of life: “globalization” in all but name. . . . Before 1914, it was widely asserted that the logic of peaceful economic exchange would triumph over national self-interest. No one expected all this to come to an abrupt end. But it did.

We have no idea what sort of world our children will inherit, but we can no longer delude ourselves into supposing that it must resemble our own in reassuring ways. . . . If social democracy has a future, it will be as a social democracy of fear. Rather than seeking to restore a language of optimistic progress, we should begin by reacquainting ourselves with the recent past. The first task of radical dissenters today is to remind their audience of the achievements of the twentieth century, along with the likely consequences of our heedless rush to dismantle them. . . . The left, to be quite blunt about it, has something to conserve. It is the right that has inherited the ambitious modernist urge to destroy and innovate in the name of a universal project.

Attorneys are often chided for standing in the way of “progress,” letting quaint values like fairness, procedure, and legal regularity block financial innovation, more rapid globalization, and corporations’ freedom to do whatever they want with their assets. Judt has articulated a Burkean rationale that should guide progressive efforts to maintain and extend great programs like Medicare, Medicaid, Social Security, food stamps, and housing assistance. Like Judith Shklar’s “liberalism of fear,” that work should “never cease[] to revolve around the fearful knowledge of the fragility of moral and political life.”

The finance sector is an intermediary — essentially a “middleman”. Like all middlemen, it should be as small as possible, while still being capable of accomplishing its mission. Otherwise it is inherently parasitical. Unfortunately, it is now vastly larger than necessary, dwarfing the real economy it is supposed to serve. Forty years ago, our real economy grew better with a financial sector that received one-twentieth as large a percentage of total profits (2%) than does the current financial sector (40%). . . .

[For example], The [...]]]> Bookforum recently offered an an eclectic collection of recent articles on the financial crisis. It links to William K. Black, who is as provocative as usual. He believes that finance, rather than serving the “real economy,” actually undermines it:

The finance sector is an intermediary — essentially a “middleman”. Like all middlemen, it should be as small as possible, while still being capable of accomplishing its mission. Otherwise it is inherently parasitical. Unfortunately, it is now vastly larger than necessary, dwarfing the real economy it is supposed to serve. Forty years ago, our real economy grew better with a financial sector that received one-twentieth as large a percentage of total profits (2%) than does the current financial sector (40%). . . .

[For example], The financial sector’s fixation on accounting earnings leads it to pressure U.S manufacturing and service firms to export jobs abroad, to deny capital to firms that are unionized, and to encourage firms to use foreign tax havens to evade paying U.S. taxes.

Black lists five “fatal flaws of finance” that make it a drain on the productive activities in the economy. But other commentators may question his effort to separate the “real” from the “finance” economy. Compensation in both areas is driven much more by law than we are usually willing to admit. As Bernard Harcourt has argued, we ignore the real determinants of advantage and disadvantage at our peril, “naturalizing and masking the regulatory mechanisms inherent to all markets that massively redistribute wealth.” (Harcourt’s comparison of 18th century French bread market regulation and contemporary futures markets nicely illuminates the problem.)

If I had one wish for the legal academy in the next decade, I’d hope we can do more to show how law (rather than “market demand,” “innovation,” or other naturalizing accounts) is the basis of so many great fortunes. We will be cleaning up messes from the past decade throughout much of the next one, and legislative and regulatory decisions will continually (and necessarily) influence who the big winners and losers will be.

Debates over relative dessert are going to be at the core of political decisionmaking in the 2010s. For a taste, compare the views of two economists, Gregory Clark and James Galbraith, on the value of labor in today’s economy. For Clark, the great social question of the 21st century is how to get the “makers” to pay for the “takers:”

[T]he economic problems of the future will not be about growth but about something more nettlesome: the ineluctable increase in the number of people with no marketable skills, and technology’s role not as the antidote to social conflict, but as its instigator. The battle will be over how to get the economy’s winners to pay for an increasingly costly poor.

By contrast, Galbraith’s book The Predator State questions whether there is a market-driven value behind any given individual’s compensation:

[T]he setting of wages and the control of the distribution of pay and incomes is a social, and not a market, decision. It is not the case that technology dictates what people are worth and should be paid. Rather, society decides what the distribution of pay should be, and technology adjusts to that configuration. Standards––for pay but also for product and occupational safety and for the environment––also promote the most rapid and effective forms of technological change, so that there is not trade-off, in a properly designed economic policy, between efficiency and fairness.

As an example of Galbraith’s point of view, consider an employer deciding whether to invest in more productive capital or relocating to find cheaper labor. If there is always a ready supply of cheaper labor, investment in technical productivity is relatively costly.* As Alan Tonelson has argued, a “race to the bottom” is nearly inevitable when no standards govern wages and the safety of products and workers. Sadly, I think the policy consensus in DC now is set by those who share Clark’s assumptions that the increasingly costly poverty of the “losers” in the US economy is a necessary concomitant of inexorable economic trends, rather than an avoidable result of policies that have systematically dismantled the Great Compression.

*Relatively costly for private investors, that is. A dirigiste state may mandate investment in technology and access to resources. Perhaps the biggest story of the decade will be the extraordinary spectacle of the world’s superpower investing in McMansions, war, SUVs, and useless financial instruments, while its putative rival built up its capacity to meet real human needs. Admittedly, the US policies may have made a great deal of sense if the goal was to bring its citizens’ buying power closer to the Chinese level, as a prelude to further integration of the two economies.

Here’s another example I’ve been thinking about lately: the claim that offensive linemen are smarter than other players on the field.  Think about it.  Doesn’t it just feel true?  And here’s the graph that popularized the claim:

Ben Fry, a smart fella by [...]]]> There are many candidates for the best visual display of quantitative information.  But how about a prize for worst display of information?  Call it the anti-Tufte. There has been some competition of late.  The graph can’t be merely misleading, or distracting. That’s too darn easy! A really bad display has several characteristics: (1) it has to overstate the certainty of the underlying data; and (2) by using pictures, it must reinforce our biases.  A recent example is the Obama Cabinet/Private Experience graphic.

Here’s another example I’ve been thinking about lately: the claim that offensive linemen are smarter than other players on the field.  Think about it.  Doesn’t it just feel true?  And here’s the graph that popularized the claim:

Ben Fry, a smart fella by all accounts, created the graph.  The size of the circles represent mean scores by position on the Wonderlic, a 12 minute, 50-question, intelligence test which players take during the combine before the NFL draft.  This graphic is often deployed to support the cliché that players closer to the ball have to be smarter. But closer examination has led me to believe that the claim – and the graph – are bunk.  And bunk of a particular sort: misleading empiricism of the sort that reinforces racial stereotypes.

The figure derives the mean scores by position from Wikipedia, which cites a 1985 (!!) book. We have no sense of the population sizes for the means.  More recent positional breakdowns provide different statistics.  For example, this page purports to release the Wonderlic scores for some entrants in the 2009 draft.  Centers scored highest (above QBs), but kickers and punters (who aren’t particularly close to the ball) were next, while offensive guards, fullbacks, outside linebacks and long-snappers scored about the same  There’s no way to know, so far as I can see, what a significantly different score looks like without more information about the sizes of each cell.  That is, I don’t think we can know that a score of a 24 is meaningfully different from a score of a 23 in a population this small.  And since the only scores we have are means, the size of outlier effects is hidden.

A second criticism relates to selection.  What possible mechanism would make the players “closer to the ball” “smarter” than those farther from it?  The baseline hypothesis is that linemen need superior decision making skills: quick judgments about blitzes, better memory of the intricacies of the plays and blocking schemes, etc. But this seems hard to swallow: doesn’t the running back need those exact skills? And why does the punter, whose job seems pretty one-off.   And the operation of this idea is weird, however popular it might be: the idea seems to be that there’s an undifferentiated mass of football players in pop-warner leagues. Some are smarter than others.  The smarter ones get pushed to the o-line and the QB position; the less smart ones are pushed to become little wide-receivers. Then, what happens?  In a feat of unprecedented lamarckian  adaptation, the little o-linemen become huge o-linemen; the little wide receivers become lithe, tall, or very, very fast.

Big Mike

Or maybe the selection operates over time in a different way: dumb o-linemen, notwithstanding their physical characteristics, are selected out of the football tournament; wide-receivers are encouraged to be stupid.  You might have thought football was a game about bashing the other guy, being a freakish physical specimen, and being willing to sacrifice your body and brain for the team. On this hypothesis, it isn’t: it’s a selection process for decisionmaking skills.   Look, I guess this is possible, but it seems quite unlikely

So I don’t understand the selection story. And that makes me doubt whether the Wonderlic test measures anything of relevance to football, as opposed to a particular kind of test taking skill which might result in a persistent bias in scores based on position.  Of course, I’m not the first person to make either of these observations.

Many teams no longer rely on the Wonderlic since it appears to do a bad job of measuring performance.  The teams that continue to rely on the test appear, to me, to be seeking empirical justification for some kind of gut decision making about character.

With respect to bias, start first with the observation that offensive linemen are disproportionately white in a league that is mostly (70% or so) composed of African-American players.  The Wonderlic, unfortunately, produces scores that are racially skewed. As law professor Michael McCann argues in Using Social Psychology to Evaluate Race and Law in Sports

“Research by Stanford University social psychologist Claude Steele on “stereotype threat” may help explain the discrepancy in performance [between African-American and White players]. Broadly speaking, “stereotype threat” refers to a self-fulfilling prophecy where “anything one does or any of one’s features that conform to [the stereotype] make the stereotype more plausible as a self-characterization in the eyes of others, and perhaps even in one’s own eyes.”  … When the stereotype concerns intelligence, the perceived threat of confirming the negative stereotype about one’s own group may be so strong that it diminishes performance.  Applying stereotype threat to the test-taking scenario, the general idea is that before a person takes an examination, he or she has certain preconceived notions about likely success on the test. If this person believes that he or she will do poorly on the test, perhaps because this person is a member of group which tends to do poorly on that test, then, according to Steele and others, he or she will likely feel more anxious while taking that test and, unsurprisingly, be less likely to do well.

Steele and his co-authors have found that stereotype threat negatively impacts African- Americans taking standardized tests. Stereotype threat affects other groups as well. For instance, it has been repeatedly observed when women take math and science tests. In one such study, a math test was administered to one group of women and men after they were informed that the test had produced gender-differentiated results in the past; meanwhile, the control group was told that the same test had produced no gender-based differences. The results were unsurprising: women in the informed group “significantly underperformed in relation to equally qualified men” whereas uninformed women performed statistically equally with the men. White men are also known to suffer from stereotype threat. Joshua Aronson, a psychologist at New York University, and his co-authors conducted a similar study of math and science performance, this time among Caucasian and Asian men. Aronson found that when the white male test-takers were reminded of the stereotype that Asian-Americans tend to outperform Caucasians on math and science tests, the Caucasian males subsequently performed worse than their uninformed counterparts in the next room.”

Similarly, Jason Chung argues

“A study by David Chan et al. noted that African-Americans adults in general have a lower regard in general for aptitude tests than their Caucasian counterparts which caused them to score lower on the tests. After motivation was given to black test-takers their scores improved until there was no discernible difference between black test scores and white test scores.”

Thus, even if Wonderlic scores are measurably different by position, which I doubt, those differences may represent racially-based differences in test-taking performance, not intelligence or decision-making.  This explanation, of course, begs the question of why there are racially-based differences between positions.  (Many commentators suggest that so called “racial stacking” may explain these differences, though that explanation suggests that selection operates in a way I continue to find implausible.)

In any event, I wanted to end this post with a few observations.  The first is that graphics can be both misleading and sticky, and you should be careful when you see a figure that confirms your priors.  Second, whatever the correlation between positions and intelligence, it’s clear that being an offensive lineman is a job that irrevocably destroys your brain.  As Malcolm Gladwell recently wrote:

Much of the attention in the football world, in the past few years, has been on concussions—on diagnosing, managing, and preventing them—and on figuring out how many concussions a player can have before he should call it quits. But a football player’s real issue isn’t simply with repetitive concussive trauma. It is, as the concussion specialist Robert Cantu argues, with repetitive subconcussive trauma. It’s not just the handful of big hits that matter. It’s lots of little hits, too.

That’s why, Cantu says, so many of the ex-players who have been given a diagnosis of C.T.E. [chronic traumatic encephalopathy] were linemen: line play lends itself to lots of little hits. The HITS data suggest that, in an average football season, a lineman could get struck in the head a thousand times, which means that a ten-year N.F.L. veteran, when you bring in his college and high-school playing days, could well have been hit in the head eighteen thousand times: that’s thousands of jarring blows that shake the brain from front to back and side to side, stretching and weakening and tearing the connections among nerve cells, and making the brain increasingly vulnerable to long-term damage. People with C.T.E., Cantu says, “aren’t necessarily people with a high, recognized concussion history. But they are individuals who collided heads on every play—repetitively doing this, year after year, under levels that were tolerable for them to continue to play.”

In sum: offensive linemen are not (necessarily) smarter than anyone else on the field (though they may be better test-takers) but they are getting less smart faster than everyone else.

(H/T: Readers CDP and Ringo)

My post on the value of having a PhD in the academic hiring market of 2015 has gotten a surprising amount of attention. I thought I’d respond to some of that feedback here.

By email and by blog, I’ve gotten pushback from those who continue to contest that we’re in an empirical “bubble.”  I take that to mean a fad – a passing interest –rather than an empirical claim that we are valuing work or candidates at more than their intrinsic worth. (How could we get any handle on either side of that equation!) My point about the economics of supply-side data is that it’s a trend that is only going to get stronger in the future. [...]]]>

Llewellyn Knew All About Lamposts

My post on the value of having a PhD in the academic hiring market of 2015 has gotten a surprising amount of attention. I thought I’d respond to some of that feedback here.

By email and by blog, I’ve gotten pushback from those who continue to contest that we’re in an empirical “bubble.”  I take that to mean a fad – a passing interest –rather than an empirical claim that we are valuing work or candidates at more than their intrinsic worth. (How could we get any handle on either side of that equation!) My point about the economics of supply-side data is that it’s a trend that is only going to get stronger in the future. Larry Ribstein certainly is correct to observe that this creates a “looking-under-the-lampost” problem. But of course, legal academics have been in a century-long crouch under a lamppost of their very own. As Llewellyn said:

“I am a prey, as is every may who tries to work with law, to the apperceptive mass . . . [T]he appellate courts make access to their work convenient. They issue reports, printed, bound, to be had all gathered for me in libraries. The convenient source of information lures.” (Bramble Bush)

Looking at newly cheap data about legal institutions encourages people to run fast regressions without thinking. But reading opinions, which are free, has encouraged thousands of legal articles about a dataset which is biased & shaped by selection. (Irrational behavior in response to a “radical price“? Nah.)  Truly sophisticated empirical work doesn’t discount the role of opinions in shaping legal norms, but it does conclude that opinions are skewed and rhetorically hot versions of what judges do, and thus unrepresentative of how practically-grounded lawyers make judgments about how to litigate their cases. Making that insight concrete is but one of the many projects undertaken by the New Legal Realists. Others – law and psychology, law and criminology, cultural cognition, etc. – together convince me that the future of the empirical revolution is pretty bright. And having a PhD/JD is an increasingly important entry credential in the field.

That said, I agree with Larry completely about some of the dangers of getting a PhD, i.e., overspecialization, small-thinking, and looking like “lines” rather than “snowballs. I agree as well that economic pressures will increase the value of law-and-business training, and decrease the value of jurisprudence, though I think the latter courses (outside of elite institutions) are really small parts of the hiring market. The question, for me, is to try to imagine what the typical ideal candidate would look like in 5-6 years, in fields that produce the majority of new hires. Generally, that’s someone who will teach one of the first year courses and who can add a large survey second year course to the pile (contracts & corporations; civ pro & advanced civ pro or evidence; torts & a federal statutory course; con law & fed courts). I look at the first of those pairs and I see immense opportunities for empirical and cross-disciplinary work, and thus lots of returns to getting more methods training.

Others have emailed that I shouldn’t have taken a pot-shot against political scientists writing about law.  I wrote “If law professors don’t write about courts, contracts, crimes, or property using statistics, then political scientists will do so, badly, and will eat our market in shaping legal policy.”  To my poly-sci friends, I admit I was unnecessarily snarky.  However, I do think that lots of work in political science and courts, particularly early work, simply brushed past the influence of legal institutions, ignored procedure, and pooh-poohed the force of selection. And isn’t it time to focus more on trial courts? How many times can you write a paper about ideological voting on a political court and draw conclusions about a system that is dominated by cases that are controlled by precedent?

Orin Kerr offers the following characteristically pragmatic comment: “the track record of PhD-versus-non-PhD hires over the next decade will play a significant role in determining the long-term picture of how much the academy values the credential”. I think this is true, but I don’t know how people will measure it except for anecdotally. As Kate Litvak points out here, measuring the extra influence of having a PhD runs into insurmountable endogeneity problems.

“Suppose we find that people with PhDs write more and better. This could be because PhD training adds value. Or it could be because smarter, more energetic, more ambitious people choose to get PhDs — and they are also the ones who write more and better, for reasons that have nothing to do with their PhD training. Or the opposite could be true…”

While there are ways of thinking about quality that don’t rely on numbers (thank goodness) I don’t know whether such judgments will be sufficiently coherent and strong to press against the practical and economic considerations that I discussed in my post. Simply put, a JD/PhD candidate will usually be better trained, more polished, and will have more publications than an equivalently situated Fellow. Since Fellowships are more likely (in 2015) to lead to VAPs than to tenure track offers, if you are choosing one path or another, I think the better strategy is the PhD.

Finally, a few people wrote in and recommended an SJD, particularly from HLS, as a distinct option that has (in recent years) had a really good track record. I don’t know enough about that program to judge, and I welcome comments on it.

Tradeable carbon emissions allowances are an example of the latter.  There’s a lot to like in the cap-and-trade programs proposed under the Waxman-Markey and Kerry-Boxer bills.  I hope some robust version of them passes and becomes law.  But one sticky issue that needs to be resolved is how [...]]]> If the last two years of American economic life have demonstrated anything, it is that property rights are not static.  Sometimes things that were once private property become public property (see, e.g., Motors, General).  Sometimes things that were once public property become private property, then become public property again, before they presumably become private property again (see, e.g., Mae, Fannie).  And sometimes things that were once considered inherently communal and thus inamenable to private property rights at all, become divided and privatized (see,e.g., the air).

Tradeable carbon emissions allowances are an example of the latter.  There’s a lot to like in the cap-and-trade programs proposed under the Waxman-Markey and Kerry-Boxer bills.  I hope some robust version of them passes and becomes law.  But one sticky issue that needs to be resolved is how initial allowances to fill airspace with carbon gases should be allocated.  Options include auctioning off all of the allowances, giving the allowances to existing carbon producers, and, most politically palatable, something  in between – some mixed proportion of free allocations and auctions.

Economist Robert Stavins, in the Coasean tradtion, has insightfully argued that  (with some caveats, including that transaction costs in this cap-and-trade program are similar to the transaction costs in others) the initial allocation of allowances doesn’t matter in most significant ways:  it will have no effect on the distribution of allowances after trading, and will have no effect on the total magnitude of emissions and their attendant social costs.

But there is another factor economists have not addressed, that could effect the total magnitude of emissions and their attendant social costs, and that may well depend in part on the method of initial allocations: compliance.

Law Professor Christine Parker and political scientist Peter May, among others, have demonstrated that compliance with business regulation is highest when the regulated businesses believe that the regulatory regime is fair.  Lower levels of compliance reduce the effectiveness of the regulation in producing the desired outcome, and increase the costs of achieving it.  In the world of carbon emissions, this would mean a higher total magnitude of emissions and a reduced benefit to the public through the higher costs required to achieve them.

My research into Icelandic fisheries suggests that in moving natural resources from communal to private property through cap and trade programs, initial allocations of rights do have an important effect on the perceived fairness of the regulatory regime, and thus on the willingness of the regulated to comply with it.

In Iceland, the government decided to protect fish stocks by freely allocating tradeable fishing rights and implementing catch quotas.  Permits were issued to fishing vessel owners based on their average catches during a three-year test period.  New entrants to the industry must now buy their way in by purchasing or leasing rights from others through the Icelandic Quota Exchange.  Although the system has been successful in reducing the overall catch, the perception that it is unfair has led to open defiance.  In an extraordinary case before the Icelandic Supreme Court, one fishing company did openly what many apparently do quietly — defied the system on the grounds that it was unfair.  

Transactions costs, of course, are inevitable, but it is not transaction costs that have produced resistance to the Icelandic system.  Rather, resistance is itself is a type of transaction cost, broadly construed, produced by the perceived unfairness of the initial allocation of rights.  In other words, the initial allocation of rights does indeed effect the overall effectiveness of a private property system. 

There has been considerable uproar over the potential free allocation rights to current carbon emissions producers.  Whether or not, as a matter of classical economic theory, the initial allocation of rights should effect the overall effectiveness of the program, the perception of fairness or unfairness will probably effect compliance with the system, and that in turn will effect its overall effectiveness.  It is important, therefore, for policy makers to bear in mind that the perceived fairness of initial allocations of property rights does indeed matter.

Best paper I saw: Amanda Geller and Jeffrey Fagan, Doubling Down on Pot: Marijuana, Race and the New Disorder in New York City Street Policing.  The original title was better: Pot as Pretext.  The idea is that if you look at the  surge of pot related arrests in NYC, a pattern emerges: using pot misdemeanors as a method of social control, with strong racial undertones.  The paper offers another perspective on the optimism expressed by many that legalization is around the corner, in turn prompted by polling data about its popularity.  To the extent that mere pot possession is now an important tool in order maintenance [...]]]> I’ve returned from CELS, which was a terrific conference.  Incredibly substantive and well-run.  As promised, here are a few reactions:

Best paper I saw: Amanda Geller and Jeffrey Fagan, Doubling Down on Pot: Marijuana, Race and the New Disorder in New York City Street Policing.  The original title was better: Pot as Pretext.  The idea is that if you look at the  surge of pot related arrests in NYC, a pattern emerges: using pot misdemeanors as a method of social control, with strong racial undertones.  The paper offers another perspective on the optimism expressed by many that legalization is around the corner, in turn prompted by polling data about its popularity.  To the extent that mere pot possession is now an important tool in order maintenance policing, the costs and benefits of its legalization seem different.  Indeed, the surprise of the paper is how well pot works as a method to get guns off the streets and out of the hands of felons (Volokh Conspirators’ perfect storm of bad outcomes).  Plus, Geller/Fagan’s data visualization is amazing (though the best stuff, with maps, is not in the paper).  Well worth reading, especially if you, like me, didn’t know that this was happening.

Runner Up: Yannis Bakos, Florencia Marotta-Wurgler and David Trossen, Does Anyone Read the Fine Print? Testing a Law and Economics Approach to Standard Form Contracting.  Remarkable dataset of 90,000 visitors to software sites, assembled by one of those firms that installs tracking software on your computer in return for compensation. The research question is how often to people read EULAs before entering transactions. It’s my sense that the results (almost never) give a huge, though expected, boost to the ALI Software Principles.  Consider it in tandem with Zev Eigen’s work on adhesion contracts, and the outlines of a research program are clear.

Best paper I wish I’d seen:  Shareholderism: Board Members’ Values and the Shareholder-Stakeholder Dilemma, by Amir Licht, Renee Adams and Lilach Sagiv.  They did an experimental survey on real board members, albiet from Sweden.  Basic findings: board members have unique and stable values about corporate governance that aren’t those of the general public.

Most Potential To Be Brought Up in a 2012 Presidential Debate:   The Economics of Rape: Will Victims Pay for Police Involvement, by Emily Owens and Jordan Matsudaira.  Just your classic little economics project analyzing how making victims pay for rape kits affects the likelihood of reporting a rape to the police.  The dataset?  Wasilla, Alaska, during Sarah Palin’s tenure as mayor.

Obvious Finding:  Police recruits are more likely that members of the public at large to think that mistaken acquitals are a worse problem than mistaken convictions.  (Logically, this can’t be true, as mistaken convictions mean that a criminal is walking free.)  Non-obvious findings from the paper: the modern racism scale predicts the likelihood of making a bad decision to shoot an unarmed but threatening stranger, but the IAT doesn’t.

Reaction to Suckers? I need a better set of anecdotes about suckers and contracts.

Reaction to Punishment Realism? If you like this, our torture results are going to knock your socks off.  Stay tuned!

Cool Poster? Black and Spriggs, The Depreciation of Precedent on the U.S. Supreme Court. So cool.  I wish they’d coded for the age of precedent in the briefs, since I think the inputs are dispositive.  Notable as well was Eisenberg et al., The Decision to Award Punitive Damages: An Empirical Study. Sure, the results are interesting, and part of Ted’s holy war with the ridiculous folks at the Chamber of Commerce.  But the nice thing was that after a study, I concluded that Ted’s poster had the best ratio of expenditure on the poster :  vistors.  Given that he’d photocopied pages from the paper and put them on a board, my guess was a dollar spent per 20 visitors.  The mean in the room was more like 1 : 1.

Trend:  More instruments, less law.

Thanks to Dan Klerman, Mat McCubbins, Gillian Hadfield, Tom Lyon, Dan Simon and Matt Spitzer for putting together a great program!