“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 [...]]]> 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.

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 [...]]]> 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.

“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 [...]]]> 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.”

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. [...]]]> 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.

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 [...]]]> 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.

1) Belief in Free Enterprise

Bruce Judson says that “the kids camping on Wall Street are the capitalists, not the people in the buildings.” Sure, you’ll find a few signs for Socialist Workers at OWS, just as you’ll find Ron Paul supporters. Between those extremes, there is a broadly centrist sentiment. Government shouldn’t be bailing out megabanks. Corporations should play by the rules and avoid destroying the natural environment. We need to live within our means, both as households and as a nation. Everyone deserves a shot at success.

These may sound like uncontroversial bromides. But they lead to some strong conclusions about the worth of various enterprises. As Frida Ghitis writes,

You never hear anyone complain that Steve Jobs became a multi-billionaire. That tells us something important about what motivates the protests growing on Wall Street and in many other places on both sides of the Atlantic. The anger of demonstrators is not the result of envy or of politically-motivated hostility against the rich. Instead, it is the understandable expression of frustration with a system that has richly rewarded people who, quite simply, do not deserve it.

Incredibly, in 2008, despite hundreds of billions in taxpayers’ bailouts and trillions in losses for investors, that year also ended with huge bonuses for Wall Street. That year, Wall Street firms paid $18 billion in bonuses, according to the New York State Controller. . . . Some European countries have instituted huge tax rates for large bonuses. In Israel, the board of Bank Leumi has introduced “negative bonuses,” taking compensation away from underperforming managers. In the U.S. , there is no penalty for failure. No penalty for those who cause it, that is: Everyone else has to pay.

Nicole Gelinas of the conservative Manhattan Institute further explains the distinction:

[T]he protesters’ affection for Jobs isn’t necessarily a sign of bad faith or ignorance. Rather, it could be a healthy discernment . . . . The point is not that Jobs was “this different, quiet billionaire,” as one protester put it, but that he lived by the rules through which free-market capitalism should work. . . .

Contrast the capitalist world in which Jobs lived with “capitalism,” as the U.S. government has applied it to the big banks against which the Zuccotti Park crowd is—imperfectly—protesting. If you’re a bank or an insurance firm, and you create a product that your investors and your regulators can’t understand in a crisis, you aren’t punished, as Apple was when it released products too complex for its customers. Instead, you get rewarded with bailout money. It’s hard to argue with the Zuccotti protesters’ manifesto on this point: “They have taken bailouts from taxpayers with impunity.”

Unlike many of the OWS protesters, I don’t find Jobs a very appealing figure. His contractors would rather silence than address the working conditions at their plans, and he aspired to bring those conditions to the U.S. Nevertheless, OWS points to a fundamental problem in today’s economy: a finance class that has used connections and power, rather than hard work and productivity, to make a fortune. As Matt Taibbi explains, Wall Street gets favors the rest of us only dream of. It is crony capitalism at its worst, a mockery of the ideals that supposedly animate its defenders.

2) Belief in Law & Order

Our “if it bleeds, it leads” media is morbidly fascinated by violence at the protests, ranging from pepper spray to beatings to tear gassing. The law & order question is always framed episodically: did the occupation go too far, or did police engage in brutality? Few ask why OWS arose in the first place. Protesters object to seeing destructive activity not merely escape prosecution, or investigation, but leave its perpetrators fantastically wealthy (as I explained in point 3 of my last post). Bill Black’s analysis of the belated FHFA suit demonstrates what many of us suspected all along. There are ample opportunities to investigate fraud in an episode that was 70 times as costly as the S&L crisis.

Glenn Greenwald puts it forcefully in his new book, With Liberty and Justice for Some:

It is now clearly understood that, rather than apply the law equally to all, Wall Street tycoons have engaged in egregious criminality—acts which destroyed the economic security of millions of people around the world—without experiencing the slightest legal repercussions. Giant financial institutions were caught red-handed engaging in massive, systematic fraud to foreclose on people’s homes and the reaction of the political class, led by the Obama administration, was to shield them from meaningful consequences.

OWS breaks the stale paradigm of state vs. market, and criticizes a troubling fusion of government and business, especially when it subverts normal legal processes.

3) Respect for the Military

Disgusted by repeated exploitation of soldiers, Pentagon officials asked the Senate to use financial reform to crack down on shady car dealers. Holly Petraeus, the wife of Gen. David Petraeus, has spearheaded efforts to protect military families from predatory banks. When an industry is so out of control that it begins to undermine national security, it’s time for a coordinated response. Unfortunately, thousands of potential violations of the Servicemembers Civil Relief Act (involving banks which were “accused of overcharging on interest rates for active duty military members and attempting to foreclose on them while they served overseas”) have provoked only a slap on the wrist settlement. (I wonder if any banker responsible for this policy has even been fired for it.)

On a darker note, during a violent dispersal of the Occupy Oakland protest, an Iraq War veteran (Scott Olsen) was critically injured. Sgt. Shamar Thomas, having earlier shamed overreactions to crowds, has called on fellow marines to join OWS and has joined a vigil for Olsen. Has the US learned nothing from the shameful treatment of the Bonus Army? As Frank Rich observes:

[In] June 1932, desperate bands of men traveled to Washington and set up camp within view of the Capitol. The first contingent journeyed all the way from Portland, Oregon, but others soon converged from all over—alone, in groups, with families—until their main Hooverville on the Anacostia River’s fetid mudflats swelled to a population as high as 20,000. The men, World War I veterans who could not find jobs, became known as the Bonus Army—for the modest government bonus they were owed for their service. . . .

The men were mostly middle-class, patriotic Americans. They kept their improvised hovels clean and maintained small gardens. Even so, good behavior by the Bonus Army did not prevent the U.S. Army’s hotheaded chief of staff, General Douglas MacArthur, from summoning an overwhelming force to evict it from Pennsylvania Avenue late that July. After assaulting the veterans and thousands of onlookers with tear gas, ­MacArthur’s troops crossed the bridge and burned down the encampment.

The first person I talked to at OWS was an army reservist, who discussed with me the plight of unemployed veterans. It’s time for the nation as a whole–and especially the top 1%, who benefit disproportionately from the work of our soldiers—to guarantee these vets health care, jobs, and housing.

4) Religious Faith

During one march, clergymen carried a golden calf through Liberty Plaza in Manhattan. David Graeber, one of the chief theorists of “Occupy,” frequently refers to Biblical attention to social justice. Vincent J. Miller, the Gudorf Chair in Catholic Theology and Culture at the University of Dayton, has stated that, “It’s clear the Vatican stands with the Occupy Wall Street protesters and others struggling to return ethics and good governance to a financial sector grown out of control after 30 years of deregulation.” E.J. Dionne does not go that far, but does observe the enduring resonances between Catholic Social Thought and the empowerment of the poor. As Pope Benedict stated in Caritas in Veritate:

Economy and finance, as instruments, can be used badly when those at the helm are motivated by purely selfish ends. . . . What should be avoided is a speculative use of financial resources that yields to the temptation of seeking only short-term profit, without regard for the long-term sustainability of the enterprise, its benefit to the real economy and attention to the advancement, in suitable and appropriate ways, of further economic initiatives in countries in need of development.

In my visits to OWS, I’ve been struck by the corporal works of mercy at them: feeding the hungry, clothing the cold, aspiring to some healing of a broken economy and an increasingly ravaged planet. I also spoke to some individuals who participated in a moving service, before Yom Kippur, on the Old Testament prophets’ denunciation of vast and irresponsible wealth, teachings on “gleanings,” and jubilees. If St. Francis of Assisi were around today, I have little doubt that he’d feel at home in such a place.

5) Suspicion of Big Government

Of course, not all conservatives are religious, or all that concerned about military prerogatives. There are plenty of agnostic or atheist libertarians at places like Cato. What does unite these conservatives is a deep-rooted suspicion of “big government.” And that’s a major theme of OWS as well. The various occupations raise difficult questions about how far law enforcement and surveillance can go to disrupt and demobilize dissent. The Supreme Court will be hearing a number of cases this term on similar issues, as Dahlia Lithwick relates:

[T]he court will face an array of questions about whether government is too crazy powerful: Can the cops stick a GPS device on your car without a warrant? Can the feds force Arizona out of the immigration-law game? Can the government force you to buy health insurance if you are hellbent on a slow and painful death? It will also face a host of questions about whether corporations can further immunize themselves against ordinary people: Can consumers sue credit repair companies for excessive fees? Can investors bring securities fraud suits for insider trading? Can oil and gas workers injured on the job sue to receive workers’ compensation?

And once we turn back to finance, it’s ever clearer that the “Wall Street vs. Washington” narrative of the mass media is Kabuki theater. Realistically speaking, Bank of America is a state actor. Much the same can be said of its rival megabanks, and those who profit from sweetheart deals with them. OWS realizes that much of the top 1% is not simply the beneficiary of impersonal forces like technology and globalization. Rather, modern wealth is increasingly based on state support. The FIRE (finance, insurance, and real estate) industries could not last for a week in their current form without constant state succor. Nor could many others in the top 1% maintain their fortunes without extensive investments in the drafting and interpretation of key legislation. (For those who’d like to see a case study from a field outside finance, check out my post on the American Medical Association/Specialty Society Relative Value Scale Update Committee (RUC)).

Bernard Harcourt’s excellent piece on the concept of “political disobedience” explains how OWS revitalizes the classic conservative suspicion of government:

Occupy Wall Street is best understood . . . as a new form of what could be called “political disobedience,” as opposed to civil disobedience, that fundamentally rejects the political and ideological landscape that we inherited from the Cold War.

Civil disobedience accepted the legitimacy of political institutions, but resisted the moral authority of resulting laws. Political disobedience, by contrast, resists the very way in which we are governed: it resists the structure of partisan politics, the demand for policy reforms, the call for party identification, and the very ideologies that dominated the post-War period. Occupy Wall Street . . . is politically disobedient precisely in refusing to articulate policy demands or to embrace old ideologies.

This “political disobedience” is a logical outgrowth of watchdogging activism on both left and right.

Must a conservative suspect all government, or merely the ossified and corrupt Washington of today? Perhaps the former view is a hallmark of actually existing conservatism. But to consign government programs like Medicare, Social Security, and the EPA to the scrapheap of history would itself be more the province of radicalism than conservatism. Thus one final sense of the conservatism of OWS is the protesters’ insistence on the endurance of a social contract that emerged in the New Deal. If conservatism is to be more than a categorical rejection of collective action, it has to articulate something worth conserving. OWS, at its best, does that.

Conclusion

After Mike Konczal “created a script designed to read all of the pages and parse out the html text on the” We are the 99% tumblr, he analyzed the concerns expressed. He found:

[N]o demands for cheap gas, cheaper credit, giant houses, bigger electronics . . . under the cynical “Ownership Society” banner. The demands are broadly health care, education and not to feel exploited . . . and the desire to not live month-to-month on bills, food and rent and under less of the burden of debt at the practical level.

The people in the tumblr aren’t demanding to bring democracy into the workplace via large-scale unionization, much less shorter work days and more pay. . . . The 99% looks too beaten down to demand anything as grand as “fairness” in their distribution of the economy. There’s no calls for some sort of post-industrial personal fulfillment in their labor – very few even invoke the idea that a job should “mean something.”

To be sure, a wide range of people—from Ron Paul fans to anti-nuclear activists—have been joining OWS, and their concerns go way beyond the politicization of personal problems on We Are the 99%. But the broader OWS coalition unites around concerns about a rigged economic game. Whether your bete noire is Solyndra or Halliburton, you can sympathize with that.

Of course, another conservatism is possible: one that merely exalts today’s “winners,” however they acquired their wealth, and despises “losers.” This is the vein of conservative thought Corey Robin traces in his book The Reactionary Mind. Robin quotes this von Mises letter to Ayn Rand to exemplify it: “You have the courage to tell the masses what no politician told them: you are inferior and all the improvements in your conditions which you simply take for granted you owe to the effort of men who are better than you.”

Whenever I hear media commentators putting down the “dirty hippies” in Liberty Plaza, I think of that letter. I don’t think it reflects modern conservatism; only a small and callous faction within it. As a truly great conservative, Adam Smith, once observed:

[D]isposition 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.

By fighting that corruption of the state and the soul, OWS promotes conservatism’s enduring ideals.

Contemporary legal thinking is in the thrall of a cult of flexibility. We obsess about avoiding decisions without all possible relevant information while ignoring the costs of postponing decisions until that information becomes available. We valorize procrastination and condemn investments of decisional resources in early decisions.

Both public and private law should be understood as a productive activity converting information, norms, and decisional and enforcement capacity into outputs of social value. Optimal timing depends on changes in these inputs’ scarcity and in the value of the decision they produce. Our legal culture tends to overestmate the value of [...]]]> Cornell Law Review just published Professor David Super’s article Against Flexibility, a forceful and engrossing indictment of flexibility and legal procrastination at its core.  Here is the abstract:

Contemporary legal thinking is in the thrall of a cult of flexibility. We obsess about avoiding decisions without all possible relevant information while ignoring the costs of postponing decisions until that information becomes available. We valorize procrastination and condemn investments of decisional resources in early decisions.

Both public and private law should be understood as a productive activity converting information, norms, and decisional and enforcement capacity into outputs of social value. Optimal timing depends on changes in these inputs’ scarcity and in the value of the decision they produce. Our legal culture tends to overestmate the value of information that may become available in the future while discounting declines over time in decisional resources and the utility of decisions. Even where postponing some decisions is necessary, a sophisticated appreciation of discretion’s components often exposes aspects of decisions that can and should be made earlier.

Disaster response illustrates the folly of legal procrastination as it shrinks the supply of decisional resources while increasing the demand for them. After Hurricane Katrina, programs built around flexibility failed badly through a combination of late and defective decisions. By contrast, those that appreciated the scarcity of decisional resources and had developed detailed regulatory templates in advance provided quick and effective relief. 

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 [...]]]> 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.

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, [...]]]> 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:

1) Dahlia Lithwick argues that GOP frontrunner Rick Perry “is skeptical of everything the government does—except when it executes people.” (And that privacy is on the rise for companies, but not for individuals.)

2) There is political passion for slashing government, except in criminal and military functions where its effectiveness is highly doubted.

3) Dana Priest and Bill Arkin have uncovered evidence that domestic intelligence agents are closely monitoring Tea Party groups. But the monitoring has stirred very little protest among such groups.

4) Banking law experts tell us that the Volcker Rule is trivial and counterproductive, because it would not have stopped the last crisis. They also tell us that rules that would have stopped the last crisis are trivial and counterproductive, because genius financiers have already cooked up new methods that can’t be touched by those “fighting the last war.”

Harcourt’s work puts all these positions in a larger intellectual perspective, helping us explain (if not forgive) them.

I highlighted Harcourt’s Illusion of Free Markets last year, and I’m pleased to see it reviewed on the History News Network. The reviewer, Eric Laursen, connects Harcourt’s work to current controversies over banking regulation:

Last December, Wall Street’s leading banks were fighting tooth-and-nail to keep federal regulators from setting rules governing the vast market in financial derivatives contracts – the market that helped turn the 2008 mortgage-backed securities meltdown into a global catastrophe. . . . Then an article appeared in the New York Times that seemed to blur the outline of this reform scenario. Titled “A Secretive Banking Elite Rules Derivatives Trading,” the article, by Louise Story, detailed how nine big banks had virtually captured the new regulatory regime before it even got started. One of Dodd-Frank’s provisions called for most derivatives to be traded via clearinghouses, putting buyers and sellers in closer touch with each other and cutting out middlemen.

According to Story, nine big banks, including such familiar names as JP Morgan Chase, Morgan Stanley, Goldman Sachs, and Citigroup, had already checkmated this plan by setting up their own, secretive clearinghouse to trade credit default swaps, and cut a deal with the Chicago Mercantile Exchange that gave them effective control of another new clearinghouse. Result: nine elite banks, operating out of public view, have cemented even tighter control of the derivatives market than they had before. If anything, Dodd-Frank has helped them to do it.

Now comes The Illusion of Free Markets, a dense, groundbreaking book that explains why such things happen: why the supposedly freewheeling capitalists of the post-New Deal decades can get away with operating a tightly controlled system geared primarily to generate profits for a small group of big players. “At the end of the day, the notion of a ‘free market’ is a fiction. There is simply no such thing as an unregulated market.” . . .

Harcourt calls The Illusion of Free Markets a “prolegomenon” – a first step in creating a new analysis that asks who benefits from the supposedly “free” economic system that’s been built to regulate us. The next step, of course, is to figure out what we want instead. By exposing the flawed ideological roots of what’s taken for “expert” social and economic thinking today, Harcourt’s book may help us avoid the pitfalls in getting there.

Harcourt’s work is a sustained reflection on the “two paradoxical tenets” that seem to rule contemporary politics: “of government incompetence when it comes to regulating the economy and government competence when it comes to policing and punishing.” He doesn’t try to separate out either trend as a dependent or independent variable, eschewing the trend toward “clean identification” in social science explanation. Rather, he adopts a more hermeneutical approach, examining how “neoliberal ideas were born — and remain today — joined at the hip with the Big Brother state.”

His recent interview with Scott Horton reveals some of the problems arising out of the elective affinities between neoliberal economics and an increasingly harsh policing regime. President Reagan “tripled the debt, increasing it by $1.9 trillion, and . . . oversaw the prison buildup and the war on drugs.” Bush fils further ballooned the debt, in even more costly foreign wars. Blocking tax increases on the wealthy to pay for these initiatives, they have left middle and lower class citizens more desperate and bereft of services.

That leaves a workforce willing to take any job to stay afloat. And when some scrambling workers use drugs like meth to keep themselves going, that just creates more work for the police apparatus. Can Hungarian-style labor camps for the unemployed be far behind? Forced evictions are also a tool of some multinational corporations, and are objectionable whether accomplished by paid mercenaries or bribed government officials. These trends reveal the invisible hand to be more than a little “iron fist,” even when covered in velvet glove rhetoric of freedom and contract.

Harcourt’s work also connects nicely with James Boyle’s critical work on the rise of intellectual property and the shriveling of antitrust law:

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

But when it comes to setting up some of those same quotas, limits and monopolies in the first place – in this case, by overly broad intellectual property rights that clog the channels of competition and allow companies to leverage their existing property into a control over tied services – we are much more sanguine. This, after all, is property, not regulation. Here there seems to be an optimism about unintended consequences, a willingness to believe that vague state regulatory schemes have got it right – even when existing market leaders can twist them to prevent challenges to their position.

In one view, the state is a bumbling idiot, in the other a scalpel-wielding genius, carving just the right pound of flesh to satisfy our debts to creators without shedding a drop of the blood of competitors and future innovators. Can this be the same state we are talking about?

Given Harcourt’s work, we should expect trends toward criminal enforcement of IP law to displace government sponsored efforts to subsidize (or compulsorily license) IP. DC elites roll their eyes at the idea of a government using its bargaining power to get a fairer deal for all here, but jump at the chance to police piracy.

Finally, I’m glad to see that Harcourt’s next book may focus on national security. These words from James Madison remind me of Washington’s and Eisenhower’s Farewell Addresses. Even the founding fathers anticipated that a garrison state could become a banana republic:

Of all the enemies to public liberty war is, perhaps, the most to be dreaded, because it comprises and develops the germ of every other. War is the parent of armies; from these proceed debts and taxes; and armies, and debts, and taxes are the known instruments for bringing the many under the domination of the few. In war, too, the discretionary power of the Executive is extended; its influence in dealing out offices, honors, and emoluments is multiplied; and all the means of seducing the minds, are added to those of subduing the force, of the people. The same malignant aspect in republicanism may be traced in the inequality of fortunes, and the opportunities of fraud, growing out of a state of war, and in the degeneracy of manners and of morals engendered by both. No nation could preserve its freedom in the midst of continual warfare. (“Political Observations” (1795))

And yet “continuous warfare” seems to be the foreign policy consensus. There are ways to channel that martial energy toward better purposes, ranging from William James’s “Moral Equivalent of War” to “Mr. Y’s” ideas about redirecting military expenditures toward projects that truly enhance national security. But, as Harcourt argues, there are also many connections between the growth of DOD and DHS and the cruel, cronified capitalism of leading firm/government combines.

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 [...]]]>

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.)

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 [...]]]> 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.

Gestalt Political Economy

In an ideal world, the S&P downgrade would jolt the US into recognition of how bizarre our economic policies have become. The very wealthy have captured more of the economy’s growth, but have seen their taxes reduced to near-record-low levels. As Juan Cole has argued, a self-reinforcing pattern of income gains at the top has left everyone else caught in a downward spiral of deleveraging, cutbacks, and austerity:

Most of our problems come from the US government coddling very rich people, which it does because the very rich pay for politicians’ campaigns and expect a payback. And as more and more of the country’s wealth has gone to the 750,000 families [at the top which have seen the fastest income gains], they have gained more and more control over Congress.

The recent budget deal accelerates the process, slashing funding for fundamental investments in the nation’s future in order to preserve the Bush tax cuts for the wealthy. Based on the work of Michael Perelman, Richard Seymour identifies the problems set to intensify:

The pathologies of the US economy are not exactly a secret[. . . ]: long-term underinvestment in research and development, low productivity resulting from a shift toward low wage service jobs, more financial vs productive investment, underinvestment in infrastructure, and an irrational military Keynesianism that results in the best innovation and research being conducted in secrecy . . . .

I have also commented on these trends, and I see them all as epiphenomenal of an increasingly short-termist elite angling for larger pieces of a shrinking pie. A little investment in transport, education, technology, and energy now may pay great dividends in the future. But in a world driven by quarterly profit statements, daily market fluctuations, and nanosecond-denominated high frequency trading, long-term value creation is decidedly unfashionable.

Naturalizing Penury

Still, the S&P downgrade is a call for long-term thinking. As American wealth continues to shrink, how can liquidationists justify the decline in living standards that results? That is the next big intellectual challenge for the Tea Party and its corporate funders. A few trial balloons have emerged:

1) Cutting America’s Poor Down to Size

As the fortunes at the top of society become astronomical, the most vigorous agitators for wealth-defense have seized on new strategies for justifying the fate of the economy’s “losers.” The extreme poverty prevalent in the less developed world can provoke at least two reactions. Some ask: how can we develop new technology and redistribute resources to reduce the suffering of the world’s poorest? Others say: why can’t America’s poor live as cheaply as, say, the favela-dwellers in Brazil, or the Phillipines’ poor?

That appears to be the approach of the Heritage Foundation, which thinks poverty is grossly exaggerated in the US. “[T]he typical household defined as poor by the government had a car and air conditioning,” the Foundation gripes. By this logic, of course we should keep historically low tax rates on billionaires and slash aid for public housing subsidies. The poor can sell their cars and A/C units to pay for rent! Even those who live on $2 a day have funds left over for tea and saving for family funerals.

2) The Economic Construction of the Zero Marginal Product Worker

What about the unemployed, now out of work on average for nearly 41 weeks? Don’t get hysterical over hysteresis, conservative thought leaders concur. Many of these people are “zero marginal product workers,” who literally have nothing to add to the economy. Like a portable CD player in a world of iPods, they are obsolete.

Sadly, those most responsible for the ZMP theory don’t like to think much about negative marginal product workers (NMPs), like the bankers who diverted vast sums in bonuses on the way to global economic catastrophe. They also appear to be unfamiliar with James K. Galbraith’s work (recapped toward the end of The Predator State) about the role of wage floors and labor standards in encouraging innovation. (Hint: involved, stable, and decently paid workforces are a bit more committed to the overall company project than revolving battalions of disposable peons.)

3) The Promise of Prison Labor

Chalk up another concern for America’s worried wealthy: how can their profit margins match those of compatriots in countries like Mexico or China, where labor is much cheaper? One solution is to employ people whose health care is provided by the state, and who are guaranteed to show up on time for wages less than an dollar an hour: prisoners. The strategy is closer than you may think:

The breaded chicken patty your child bites into at school may have been made by a worker earning twenty cents an hour, not in a faraway country, but by a member of an invisible American workforce: prisoners. At the Union Correctional Facility, a maximum security prison in Florida, inmates from a nearby lower-security prison manufacture tons of processed beef, chicken and pork for Prison Rehabilitative Industries and Diversified Enterprises (PRIDE), a privately held non-profit corporation that operates the state’s forty-one work programs.

In addition to processed food, PRIDE’s website reveals an array of products for sale through contracts with private companies, from eyeglasses to office furniture, to be shipped from a distribution center in Florida to businesses across the US. PRIDE boasts that its work programs are “designed to provide vocational training, to improve prison security, to reduce the cost of state government, and to promote the rehabilitation of the state inmates.”

Immigrants might also get conscripted to the same cheap labor, high-discipline programs. The more that big businesses complain about having to provide “minimum essential health benefits” to workers, the more appealing low-wage labor in prisons might be. Moreover, if a dollar crash or other macroeconomic disruption raises oil prices and makes shipping from China uneconomical, the massive prison population could rapidly step in to replicate the wages and working conditions that keep Wal-Mart and so many other retailers well-supplied.

4) The Reputation-Ruining Industry

A zero-sum economy like ours teems with the parasitic players of “gotcha capitalism.” Hidden late fees, penalties, and charges are common. Credit bureaus are happy to make many them a near-permanent “black mark” on your record if you’re foolish enough to ignore or dispute them. Now a new entrepreneurial venture is going after arrestees, trying to assure that their mugshots are near the top of Google results for their name, unless they pay a fee to have them removed. Multiply that by at least the number of embarrassments you can think of offhand, and you have a thriving new industry for the US! And one more source of “disposable people“—a class marked off as not deserving employment, and perhaps eventually many other benefits of modern life.

A Rapidly Shrinking Pie in a Divided Society

It has long been inevitable that the US’s share of critical resources would decline. Five percent of the world’s population can’t continue to consume 25% of the oil, or be home to 40% of the world’s listed shares (compared to, say, India’s 1%!), or maintain outsized “ecological footprints” we leave on the planet. Fairness demands that those who benefited most from our long hegemony contribute the most toward easing a transition to global parity. But exactly the opposite is occurring: public anger has fueled rapid political change that undermines even the few pillars of social insurance we still have left.

In Class Acts: Service and Inequality in Luxury Hotels, Rachel Sherman describes how workers in the deluxe hospitality service sector are trained to cater to every whim of guests. The workers go so far as to train the guests to want more, to be demanding, to express their every wish to strangers. This is hard cultural work, especially where patterns of social equality and self-reliance taint relations of servility with memories of royalism, unearned privilege, and oppression. But the vast inequality of resources on either side greases the transaction, as a butler angles for a tip each hour that the guest may earn in one minute.

In our society, the “naturalizers of penury” I described above are performing cultural functions similar to the luxury hotel trainers (and trainees) described in Class Acts. Are you a Walgreen’s worker who wants a longer lunch break? Sit down, be quiet, and be glad you’re not picking up garbage in a Manila slum. Thinking of quitting your job? Watch out—there are 5 applicants for every opening, and the reputation industry is quick to report any of your indiscretions to a would-be employer. Are you a chicken-patty-maker hoping for a pay raise? Why should the boss give you one when the prisoners down the road will do the job for 20 cents an hour? For individuals, there are no easy answers in any of these situations. The resulting mood of defeated quietism seeps into our culture and politics, undermining the collective actions that offer the only constructive response to these dilemmas. As C. Wright Mills argued, these personal economic problems can only be solved by political action.

Image Credits: Library of Congress for Dorothea Lange’s Migrant Mother; CBPP for chart.

This frustrates me, and if I could wave a magic wand (or controlled Google) I would create a national e-docketing system for [...]]]> 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)

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. [...]]]> 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?

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 [...]]]> 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.

It’s not just poor patients who need to worry about misplaced priorities in the health care system. We are increasingly seeing shortages of important drugs in the US. (Apparently this issue first caught mass media attention when prisons had a difficult time finding a key barbiturate used in executions.) Given that Congress is busy planning to cut funding for the statistical abstracts of the US and energy research (adding to prior DOJ cuts to studies of industrial concentration in the US), we shouldn’t be surprised to learn that “no one is systematically tracking the toll of the shortages.” Not many journalists are left to report on the government’s failure to report, either. But the head of FDA’s Drug Shortages Program is worried: “This is affecting oncology drugs, critical-care drugs, emergency medicine drugs.” It turns out that much-ballyhooed globalization has some downsides, too:

“We’ve certainly reached a very global supply chain for drug products, with the active ingredients typically made outside of the United States,” said [a] vice president for regulatory sciences at the Generic Pharmaceutical Association. “It could be Europe, India — some cases China. If there’s a problem at a facility in Italy or India, it leads to disruption of the drug supply in the United States.”

And a whole new triage system has developed to address an entirely avoidable crisis:

“We have heard some horror stories where patients are really begging to get the drugs from other sources and where practices or institutions are forced to kind of triage patients and save the drugs for those — quote — most curable, where they have the best prognosis and using substitutes where there isn’t a cure possibility,” [said the] president-elect of the American Society of Clinical Oncology.

A moving piece by Hagop M. Kantarjian describes the dilemmas facing some leukemia doctors:

Recently I sent out a plea on this national crisis to 8,000 oncologists who subscribe to a monthly e-mail newsletter published by the leukemia department at the MD Anderson Cancer Center. Within 12 hours, my in-box was jammed with replies from doctors in more than 25 states, each with his or her own horror story. . . . Take, for example, the 43-year-old Kentucky father who got a substandard dose of cytarabine because his doctor used all the doses he could find but still didn’t have enough. “I don’t know what I’ll do next,” the doctor told me.

Or the 45-year-old retired Air Force lieutenant colonel from Colorado, father of an incoming Air Force Academy cadet, whose leukemia came back after six months. His doctor looked all over the state for cytarabine with no luck and so was forced to give his patient second-line therapy. Or the 15-year-old boy from Florida who is in remission but can’t get the therapy that will cure him.

I see two takeaways from this sad situation. First, the next time someone says that generic “health care costs” are too high, consider whether they really mean we need to reallocate funds from less productive sectors to this, life-threatening crisis. Second, we need to reconsider the wisdom and necessity of far-flung, fragile supply chains for critical products. Barry Lynn has been making this point for some time. His book Cornered argues that “the drive to reduce costs has led to several competing manufacturers relying on a single overseas supplier for certain components and that this makes the whole system vulnerable to an event like an earthquake, a strike, or a war that might put the single supplier temporarily out of business.” Even for those skeptical of Lynn’s thesis in, say, the automotive or computer sector, his warnings should be salient for the food and health care industries. Too many lives have been put at risk by supply chains that are not robust enough to handle predictable challenges.

X-Posted: Health Reform Watch.

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 [...]]]> 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.

Nevertheless, it can’t hurt to have some reporting of contract terms to authorities, especially if there is a delay. (Even defenders of the Fed’s opaque operating arrangements concede that delayed releases would do little to no harm.) Secret contracts are proliferating in today’s economy. When they cover a large enough swathe of activity, they become as repugnant as secret law. Even if the core problems in today’s finance crisis are less about truth than about trust, better reporting can help address both issues.

Are Risks Quantifiable?

A great deal of financial regulation (and firm self-regulation) rests on the idea that the risks and liabilities of a firm are quantifiable. A vast and growing industry aspires to boil down firms’ many obligations and expectations into comprehensive-yet-comprehensible accounts of financial well-being.

As Kenneth Bamberger has argued, technological systems used to quantify risks have many shortcomings. For example, “computer code . . . operates by means of on–off rules, while the analytics it employs seek ‘to quantify the immeasurable with great precision.’” Bamberger makes at least two worthy suggestions for addressing the issue:

[C]urrent regulations [miss] the potential for transparency as to the exact methods of quantifying risk and the ways such measures automate decisionmaking [and] lack the ongoing capacity to provide timely and evolving risk information. . . . Transparency into the workings of regulated firms, however, provides only half the prescription. A new governance model further requires significant investment in the competence of administrative agencies themselves—both in terms of technical expertise and computing capacity. Regulators constrained by limited resources cannot currently keep up with the massive data-processing capacity of private corporations.

I think those points support de Soto’s project. The SEC and CFTC also appear to be interested, given the broadly positive views expressed in their “Joint Study on the Feasibility of Mandating Algorithmic Descriptions for Derivatives.” In that document, the staff concludes “that current technology is capable of representing derivatives using a common set of computer-readable descriptions[, which] are precise enough to use both for the calculation of net exposures and to serve as part or all of a binding legal contract.”

There might be some sleight of hand going on here; perhaps the SEC/CFTC goal is less about representing the value of the exposures than it is about preferring or otherwise supporting more manageable deals. This is one idea behind the research program of “formalized financial expression,” described in layman’s terms by Jaron Lanier:

[H]ighly regular financial instruments . . . can be traded on an exchange . . . because they are comparable. But highly inventive contracts, such as leveraged default swaps or schemes based on high frequency trades, [should] be created in an entirely new way. They would be denied ambiguity. They would be formally described. Financial invention would take place within the simplified logical world that engineers rely on to create computing chip logic.

Reducing the power of expression of unconventional financial contracts might sound like a loss . . . for the people who invent them, but, actually, they will enjoy heightened powers. The reduction in flexibility doesn’t preclude creative, unusual ideas at all. Think of the varied chips that have been designed [for computers].

Or, we might add, the dream of synthetic biologists to bring the efficiencies of interchangeable parts to the living world. Lanier insists that “the ability to register complex, creative ideas in a standard form would transform the nature of finance and its regulation,” making it “possible to create a confidential . . . method for regulators to track unusual transactions.” I don’t think this model will solve all our problems, but I think it would be capable of detecting some of the more grotesque overreaches, like AIGFP’s disastrous CDS business. Riles has also identified other rationales for reporting requirements; she cites research showing that they “are not simply ways of getting information—they are means of structuring an internal conversation within an institution that can lead to rethinking policies and perhaps internal change.” Just trying to model transactions more transparently might help financial innovators better understand their fallibility.

The Lure of Naturalizing Markets

Admittedly, there are many critics of Lanier’s proposal and others like it. For example, Michael Shermer, author of The Mind of the Market: How Biology and Psychology Shape Our Economic Lives, argues that the economy is as unmanageable as a natural system.

[E]conomies, like ecologies, are not intelligently designed from the top down; they spontaneously arise out of simpler systems from the bottom up. Life and economies, like language, writing, the law, civilizations, and cultures, arise spontaneously as self-organized emergent properties from within systems themselves and without the aid of a blueprint design by a clever engineer. Neither God nor Government are needed to explain such phenomena. In their stead, natural selection and the invisible hand explain precisely how individual organisms and people, pursuing their own self-interest in their struggle to survive and make a living, generate the emergent property of complex ecologies and economies. Both are Complex Adaptive Systems in which individual particles, parts, or agents interact, process information, learn, and adapt their behavior to changing conditions.

But this move toward naturalizing markets should be as suspect as its Social Darwinist forbears. Natural orders can be profoundly self-destructive. I am not saying that evolutionary theory has no role in economics; I’ve endorsed it myself in some scenarios. However, we need to be aware of the prevalence and pitfalls of natural images in economic thought. Geoffrey Hodgson has suggested that Hayek’s use of evolutionary theory is “sketchy and sometimes ambiguous,” and concludes that it “does not support the kind of political and policy conclusions that Hayek wishes to sustain.” Similarly, Riles has identified the “ideological dimension of Hayek’s argument” for “spontaneous order” in “the way he slips from observations that public legal reasoning has certain temporal weaknesses to a simple assumption that private reasoning must have equivalent temporal strengths” (158). Analogies between markets and ecological systems are the beginning of an argument about about the wisdom of regulation, not its end.

Invocations of the “invisible hand” are no less suspect. Adrian Vermeule has argued that there are “necessary conditions” for invisible hand “justifications to be cogent.” Such a justification must combine “(1) an explanation that identifies an invisible-hand process with (2) a value theory that identifies some social benefit arising from the invisible-hand process and (3) a mechanism that explains how the invisible-hand process produces that benefit.”* Shermer fails to articulate the social benefit from untrammeled financial markets, trying to imbue them with the same prestige that accompanies the longer history of market capitalism. But, as one commentator notes, financiers’ “$4 trillion daily trade in cross border capital, their $600 trillion of derivatives, about twice the capital stock of the world, [and] their algorithmic trading that accounts for about half of the turnover in the US stock exchange” have “never existed before,” and are as new a variant of “capitalism” as China’s system is of “communism.” It is naive to claim these enormous flows of funds are viable or even imaginable without sovereigns capable of guaranteeing order.

Little in finance is “irredeemably opaque,” in Alan Greenspan’s memorable phrasing: rather, powerful actors are constantly maneuvering to consolidate influence over a law enforcement apparatus that could peak into traders’ deals as intrusively as it examines those in suspect neighborhoods, professions, or political organizations. Of course, once the books are “open,” there are ever more incentives to make them too complex to understand. I discussed some of those in the last post, including off balance sheet accounting. Modelling those obligations could be very difficult. As the ISDA said in comments on the “Algorithmic Descriptions” rulemaking, “it would be costly for regulators to independently define or impose a data representation standard, due to the breadth, complexity, and rapid rate of change in the OTC derivative marketplace.”

But the question then becomes: how much more costly is the present system, where some new AIG might be blithely cashing in premium checks for obligations it can never meet? As Roscoe Pound has said, “In a commercial age wealth is largely made up of promises.” Combine the recklessness or excessive optimism of swap “protection sellers’” promises with the rampant agency problems that survive the crisis, and you have a recipe for ongoing turmoil and lack of trust in financial markets. Until the swaps market is well and truly ring-fenced from the rest of the economy, disclosure laws should end certain types of deals because they can’t be adequately represented, measured, or managed.

Truth or Trust

On the other hand, the “you can’t manage what you can’t measure” mantra has been abused in many contexts. “Data” can be endlessly massaged and manipulated, and any contractual arrangement depends on a stable background of responsible private and public sector actors. If we must be deeply agnostic about the accuracy of any representation of a firm’s assets and liabilities, we need to rethink much more than reporting requirements. Finance does not merely require more scientistic accuracy (or “trust in numbers”); rather, regulators must promote institutions where accountability and trusting relationships can prevail.

What Sutter and Riles have both helped me realize is that trust is a far more pervasive and critical factor than truth. Not every “worst case scenario” can be defended against, or even predicted. What we can hope for is a market whose participants can act in ways somewhat less self-regarding than the “I’ll be gone/you’ll be gone” ethic that now rules major players in the finance sector.

Riles’s proposed “new governance” solutions would require wide participation and “buy-in of market participants” (228). She is right to identify a broader cultural problem in today’s markets. There was only a market for toxic assets because of unrealistic yield expectations of thousands of entities, and their clients. A few players engaged in Icarian risk taking, but only did so to satisfy unrealistic aspirations for risk to be engineered away. In the future, those on the buy side have to level with their clients: there is no free lunch, and no guaranteed way to make money. By accepting that sober wisdom, clients can free the managers of their investments to make the sell side less slippery. Riles articulates a “greater ambition” to “fundamentally change the culture of financial practice, to create a world in which actors of their own will, indeed before even being admonished, incentivized, pushed or prodded by regulators, make socially optimal choices, the very choices regulators would enshrine in regulation” (236). Riles sees in Japanese financial markets a model for regulators to turn regulated firms’ employees “into collaborators, in the best sense of the term.”

These are ambitious goals, but I fear they may not be grand enough. In the US, we first need to recognize that private markets can’t aggregate the risk pools and credit necessary to do the work of a Social Security or Medicare program. The most basic and universal insurance is social, and if it is to work, it must be egalitarian, contestable, and politically determined.

Given overlapping ecological, health, and security crises, we need to relate the workings of the finance sector to the real needs of society. When finance mostly finances finance, we get a closed circuit economy, which does little more than drain purchasing power from lower and middle class households and reallocate it to insider elites. We must not only be able to trust that finance’s processes are legitimate, but also its results. Massive bonuses for top managers, mass unemployment for workers, and crumbling infrastructure are three signs that finance as presently constituted in the US is not fulfilling many of its major social roles. Sadly, it is hard to find a financial regulator in the US who is willing to take on more than one of those three critical issues.

Photo Credit: Elycefeliz.

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 [...]]]> 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.”

Over the past 20 years, Americans and Europeans have quietly gone about destroying these facts. The very systems that could have provided markets and governments with the means to understand the global financial crisis—and to prevent another one—are being eroded. Governments have allowed shadow markets to develop and reach a size beyond comprehension. . . . In a few short decades the West undercut 150 years of legal reforms that made the global economy possible.

de Soto gives a number of concrete examples of how we are kept in the dark about the “thousands of filaments that businesses are creating between themselves,” including:

1) Mortgage Bundling: Law professor Christopher L. Peterson observes that, “For the first time in the nation’s history, there is no longer an authoritative, public record of who owns land in each county.”

2) Default Swaps: “these risks have slipped outside the public memory systems, making it very difficult to know who ultimately bears the risk and where it is.” And you can count on Tim Geithner to exacerbate the problem. McClatchy’s Greg Gordon identified the problem in 2009:

Cayman Islands deals . . . . became key links in a chain of exotic insurance-like bets called credit-default swaps that worsened the global economic collapse by enabling major financial institutions to take bigger and bigger risks without counting them on their balance sheets. The full cost of the deals, some of which could still blow up on investors, may never be known.

3) Exemptions: “Businesses are left to figure out [accounting realities] on the basis of connections, influence, and private information. Just like we do in developing and former communist countries.”

4) Off-Balance-Sheet Accounting: “In the 1990s governments began . . . allowing companies in financial difficulty to pass facts concerning debts from their public balance sheet to a less visible memory system called a special purpose entity (SPE) (or to sweep debt information into the balance sheet’s footnotes in words so obtuse that the statements cease being factual).”

5) Government Use of Swaps and Repo Markets: “Gary Norton at the Brookings Institution has argued that we still do not have the vaguest idea of the size of the repo market.”

6) Rating Agencies: We need “to consider whether overreliance on ratings based on co-variance formulas is a trustworthy substitute for facts. Any reform effort must keep in mind the difference between facts, which can be tested for truth, and opinions, such as ratings, which can’t. Facts are not simply about transparency; facts are about empirical truth.”

de Soto has long been a hero of conservative property rights groups. Unfortunately, the official Republican position on finance reform appears not merely to tolerate, but to affirmatively encourage the “destruction of economic facts” that de Soto laments. Leaders like Spencer Bachus want to reduce funding for the SEC, the Office for Financial Research and the Office of Credit Ratings (or kill the latter offices outright).

Some might be astonished that a political movement based on the rhetoric of “property rights” sees fit to undermine the very institutions necessary for us to understand who owns (and owes) what. But perhaps we shouldn’t be surprised, since rapidly increasing opacity in political donations makes it very difficult to understand what dominant donor classes are demanding. Just as the Koch-allied groups have largely drown out other libertarian voices on monetary policy, so too can veiled money flows trump the doux commerce ideal of an invisible hand. Who wants to be on the wrong side of Rove’s Crossroads group? There is a much broader “process of social control” at work here.

Ideas for Reform

de Soto gives several brief suggestions for reform; more are developed in detail in the Roosevelt Institute report “Make Markets Be Markets.” For example, Joshua Rosner elaborates on worries about bundled mortgages, and proposes a solution:

[K]ey terms that define contractual obligations are not standardized across the industry, across issuers of securities with the same type of collateral (e.g. RMBS, CMBS or RMBS based CDOs) or even by issuer (each issuer often had several different Pooling and Servicing Agreements and Representation and Warranty Agreements).

The lack of standardization and the length of the documentation effectively created opacity, which contributed to the problems in the securitization market. When panic set in and investors began to question the value of their securities, they knew that they did not have the time to read all of the different several- hundred page deal agreements. This reinforced the rush to liquidate positions. . . .

In order to accurately price securities, investors need timely loan-level performance data on the assets backing each deal. We need loan-level data on a daily, or at least monthly, basis in both the primary and secondary markets. Without frequently updated and standardized disclosure of loan-level data, market participants can’t independently analyze and credibly value asset-backed securities based on full information.

I think these are very good points, but reformers will need to overcome much entrenched dogma about the sanctity of trade secrets and proprietary information. In coming weeks, I’ll be focusing on other solutions, suggested in sources ranging from the de Larosiere report to Eric J. Weiner’s book The Shadow Market. I’ll also look at journalists’ ideas of their role, ranging from Gillian Tett’s pre-crisis “Iceberg Memos” (which warned FT managers that they were only covering the tip of an increasingly murky financial world) to Joe Nocera’s recent declaration that journalists have a fundamentally different role than, say, law enforcement, because they lack surveillance tools.

Consumer Combat: Crouching Exceptions, Hidden Fees

I have one more big picture point to make: “gotcha capitalism” extends from the highest levels of finance down to the consumer end of the economy. As Nathalie Martin recently noted:

I heard a humorous radio program this morning in which Europeans were complaining about how you never know the real price of anything in America. Things seem cheap, but once you consider the taxes, the tipping, the hidden ad-ons, the price is so much more. There is no transparency. Boy, they don’t know the half of it. At times it seems everywhere you turn, you find a scam or an unauthorized fee.

I have been following efforts to improve transparency in health insurance contracts, especially those sponsored by the Center for Consumer Information & Insurance Oversight. Recently, Daniel Schwarcz has demonstrated the need for more clarity in homeowners’ insurance policies, too:

The current personal lines insurance marketplace is largely organized around a myth. That myth is that personal lines insurance policies are completely uniform. This myth explains regulatory rules that do nothing to promote insurance contract transparency. It explains the ignorance of most information intermediaries about the details of contract terms. And, to a substantial degree, it explains the willingness of courts to treat insurance policies as ordinary contracts. . . .

[The situation] reflects the efforts of carriers to limit coverage relative to the presumptive industry baseline. These insurers have actively hidden and obscured this trend, in notable contrast to the comparatively transparent marketing of the few carriers who have departed from standardized policies to improve coverage. If regulators do not act to substantially improve consumer protection in this domain, then it can be expected that coverage will continue to degrade for most carriers, in a modern day reenactment of the race to the bottom in fire insurance that triggered the first‐wave of standardized insurance policies.

Many commentators have worried that consumer protection has been a neglected goal of bank and insurance regulators, whose primary goal was promoting credit and industry. Consumer protections in the financial world have too often been treated as a distraction from the primary goals of regulators, rather than as a critical part of their mission. As work from de Soto’s to Schwarcz’s shows, that attitude is impossible to sustain. Practices that harmed borrowers contributed to a larger crisis of confidence that threatened to initiate a chain reaction of catastrophic consequences for the finance system. In 2010, legislators realized that the regulatory arbitrage persistent in the financial sector—where the Office of Thrift Supervision, Office of the Comptroller of the Currency, and other regulators competed to offer the most lax regulatory regime—served neither consumers nor the larger economy. The Dodd-Frank Act addresses both concerns by establishing a Financial Stability Oversight Council, the Consumer Financial Protection Bureau, and the Office of Financial Research. Each could help rebuild institutions devoted to the “economic fact-finding” that de Soto recommends.

Photo Credit: Autovac.

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 [...]]]> 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:

I’m surprised at how much of our time is spent trying to divide up the spoils between various economic interests. I had no idea. I thought we’d be focused on civil liberties, on education policy, energy policy and so on. The fights down here can be put in two or three categories: The big greedy bastards against the big greedy bastards; the big greedy bastards against the little greedy bastards; and some cases even the other little greedy bastards against the other little greedy bastards.

One could easily read the Carter & Grim’s 8,000-word article and despair. We learn in it, for example, that according to the Boston Federal Reserve, “the perks associated with plastic lead to an average wealth transfer of $771 from families making less than $20,000 a year to households earning $150,000 or more.” But while the economists in Boston’s Fed illuminate the upward redistribution the banking system is so good at, Fed Chair Ben Bernanke is contributing to the effort to scuttle the swipe fee reductions by fretting that he can’t shield small banks from its effects.

Even if we take Bernanke at his word (which one might not be inclined to do, given his “evolving” position and scant concern for other “little guys” in the economy), there are many ways the Fed could help small banks that would blunt or even outweigh the loss of swipe fee revenue. But that doesn’t stop Barney Frank from taking Bernanke’s side on the matter, betraying the very small businessmen he used as props for a photo op a few months before. Carter and Grim’s article suggests that the Schumer’s power plays here, along with House Dems’ moves closer to Wall Street, are reinforcing a long-term secular trend in Democratic party elites’ alignment toward a finance industry funding base.

Why care? Even Carter/Grim seem nihilistic by the end, quoting two defeatist perspectives:

Whatever happens the next few weeks or months, Charlie Chung of Cups & Co. isn’t confident that he’ll wind up paying less money to the banks. He guesses that the banks will find a way to increase unregulated fees: “It’s like, you’d scratch your head, ‘I thought they were going to charge me two cents per transaction?’” Mark Pryor, one of the senators from Walmart, is equally pessimistic that consumers will see any benefit. “Either way, the consumer probably ends up paying for it,” he says. “They’ll get you. You’re going to pay for it one way or another.”

Robert Reich observed the trend in his book Supercapitalism: the business of most members of Congress is not “jobs,” or “deficit reduction,” or whatever the MSM flavor of the week is. It’s finding a way to wrap up a donor’s agenda in those mantles.

But we can still distinguish between better and worse industries. Retail, for all its faults, is not a too-big-to-fail “house” providing stakes and leverage for an ever-more-dangerous and out of control Wall Street casino. If Walmart (or Cups & Co.) collapsed tomorrow, there’s no bailout. Walmart isn’t packing dubious debt into CDOs and marketing them to pension funds. Its general modus operandi is to ruthlessly force its suppliers to reduce costs. I don’t like when it does that by forcing poor overseas laborers to toil 60 hours a week for $8 a day; I do approve if they can reduce some of those absurdly high fees from banks. (Just one data point, from the credit card world: “in the US, retailers pay roughly a 2% interchange fee for each credit card purchase. This is compared to a 0.5% interchange fee in Australia, and a 0.3% interchange fee in the EU.”)

So consumers may well see little gains from interchange fee reform. But if Durbin manages to fend off the Schumer/Frank/Geithner/Rubin/Bean/Bachus/Corker wing of the Republicratic party, at least the money goes to a slightly less parasitic sector of the economy. That’s probably the outer limits of political hope in our time.

Image Credit: Peter Bondi.