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American Founding Son

I see Amazon is temporarily out of stock of my John Bingham biography, but don’t let that discourage you from buying the book.  (Yes, this is shameless self-promotion.)  More substantive posts about King coming tomorrow.

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Piketty’s Capital & the Continuing Pull of Macroeconomic Theory

One of the important points of Thomas Piketty, Capital in the Twenty-First Century is to undermine the use exclusively of the long prevailing macroeconomic theories focusing on national economies called “the Chicago School.” Saul Levmore, in a review of Capital forthcoming in the Michigan Law Review, delivers what should be a devastating blow to macroeconomics as the only way to describe how our society works if, as Piketty shows, that in the long run the return on capital exceeds economic growth, r>g. In a nutshell, Piketty’s microeconomic view shows that macroeconomic theory simply fails to describe reality. Levmore describes how macroeconomic theory would predict that in the long run competition for capital would reduce its rate of return to close to the rate of economic growth: “If the rate of return to capital is high, then there should be more investment in capital. Individual can be expected to save more and to defer consumption. . . . . But as high returns attract capital, opportunities to earn high returns ought eventually to diminish, and decreasing returns should be expected. Moreover, if capital remains expensive, because its suppliers need to be paid high returns, then there is room to substitute labor for capital. This demand for labor ought to increase g. Piketty’s response to this doubt about the long-term claim regarding r>g is essentially to report that it simply had not been so. . . . [D]ata do not lie. . . . At every turn it is useful to remember that this is a thesis driven by data rather than by theory.”

Levemore goes on to describe how macroeconomic theory would predict that the initial very high returns to hedge funds and their managers would, again in the long run, be reduced by competition. But, he says, the continuing “stratospheric compensation of hedge-fund managers is more difficult to rationalize [using Chicago school macroeconomic theory]. It is possible that in the beginning there were some gifted managers who could find extraordinary investments, but with thousands of funds and trillions of dollars in the industry, the reality of efficient market prevails.” The attraction to hedge funds should create competition that reduces the earnings of their managers. But Levemore concedes that Piketty’s microeconomic data shows that it hasn’t and likely won’t absent some enormous disasters like another World War.

After setting forth such a radical critique of macroeconomic theory – that it does not describe reality — Levmore fails to take the next step of asking why marcroeconomic theory does not hold up. Perhaps that simply indicates the continuing hold that Chicago School macroeconomics has over how we all think. That economic ideology is the prevailing paradigm that has a powerful hold on how we think. Through sizable investment by big business and the very wealthy in Milton Friedman’s macroeconomic theory, the prior Keynesian microeconomic paradigm was replaced in the U.S. and also more broadly. While contesting data don’t lie — the prevailing macroeconomic theory fails to describe the real world — it is still hard to see and understand a new paradigm that replaces the existing ideology because it does so much better at describing reality.

In some sense, Piketty may make seeing the new paradigm more difficult. His characterization of capital as things – cash, corporate stock, buildings, etc. – fails to understand its essence. Capital is power. No only economic power, but also social and political power. In The Rise and Decline of Nations, Mancur Olson describes how special interests groups organize to capture power to serve their own interests. Olson’s Logic of Collective Action describes how small, focused groups are more effective than large, more diffused groups in being effective. In the late 1960s and early 1970s, the U.S. Chamber of Commerce directed a campaign for it to become such a group. Future Supreme Court Justice but then Chair of the Chamber’s Commerce Committee called on “business to mobilize politically: Strength lies in organization [and in] the political power available only through united action and national organization.” Chicago School macroeconomic theory triumphed very broadly and the public policy decisions made following the Reagan Revolution continue to reflect that triumph of what Piketty shows is theory over reality.

Certainly a work of such broad scope and in depth presentation of data from 20 countries over almost two hundred years calls for scrutiny and critique. Admitting “data don’t lie,” but then falling to acknowledge how devastating that data is to the prevailing economic paradigm that has helped to bring our world to such a precarious situation, while understandable from a psychological point of view, does not seem to advance very far the project of what to do about the alarming level of growing economic inequality in an economy that is not growing except for those at the very top.

 

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The Most Important Statutory Case?

Today I was thinking that King could be the most important statutory case decided by the Supreme Court.  How many other candidates are there?  The early cases under the Sherman Anti-Trust Act come to mind (Northern SecuritiesStandard Oil), and maybe one or two involving the Civil Rights Act of 1964.  Anything else?

UPDATE:  I suppose Ex Parte McCardle was more important.

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King v. Burwell-The Gruber Tape

Yesterday I said that my view is that Congress did not intend to use subsidies as a carrot for states to create exchanges under the ACA.  What is the best argument on the other side?  The answer is that Jonathan Gruber, one of the architects of the law, said in 2012 in a public Q&A that the subsidies were a carrot.    Gruber now says that he misspoke.

I have significant reservations about relying on this statement.  First, is this in the record?  Thus, can the Court consider this at all?  Second, even if it is in the record, Gruber did not give testimony in the District Court.  Maybe he is lying now when he says he made a mistake.  Maybe he is telling the truth.  I don’t know.  The way we figure these things out is through a fact-finder.  The way not to do this is through appellate briefs.

 

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King v. Burwell

The blockbuster case of this Term (depending on the timing of the next cert. petition on same-sex marriage) is the case granted today that could cripple the Affordable Care Act.  I’ve always thought that the Supreme Court would take this (nice try–DC Circuit en banc) and that there is a good chance that the Administration would lose there.

What about the question of who should win?  The most plausible explanation of the contested language is that Congress did not intend to limit the subsidies to state exchanges.  Why does the statute say that then?  Because Scott Brown was elected in a special election to fill Ted Kennedy’s seat.  This deprived Democrats of their filibuster-proof majority in the Senate.  Thus, the final bill was passed in the Senate through the reconciliation process (which only requires a simple majority).  There was no conference committee or the usual procedures to fix errors in the bill.

What should a court do about this?  The language about state exchanges is not ambiguous.  The problem is that it is inconsistent with the rest of the statute, the intent of Congress, and could lead to an absurd result.  Supporters of the Act are trying to make that an ambiguity argument because that gets the IRS interpretation Chevron deference.  I am  skeptical about this argument.  And normally if the text is unambiguous then you do not look at the legislative intent or anything other than the possibility of an “absurd result.”  So this may end up being the point on which King turns.

FTC 01
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Should the FTC Be Regulating Privacy and Data Security?

This post was co-authored with Professor Woodrow Hartzog.

This past Tuesday the Federal Trade Commission (FTC) filed a complaint against AT&T for allegedly throttling the Internet of its customers even though they paid for unlimited data plans. This complaint was surprising for many, who thought the Federal Communications Commission (FCC) was the agency that handled such telecommunications issues. Is the FTC supposed to be involved here?

This is a question that has recently been posed in the privacy and data security arenas, where the FTC has been involved since the late 1990s. Today, the FTC is the most active federal agency enforcing privacy and data security, and it has the broadest reach. Its fingers seem to be everywhere, in all industries, even those regulated by other agencies, such as in the AT&T case. Is the FTC going too far? Is it even the FTC’s role to police privacy and data security?

The Fount of FTC Authority

The FTC’s source of authority for privacy and data security comes from some specific statutes that give the FTC regulatory power. Examples include the Children’s Online Privacy Protection Act (COPPA) where the FTC regulates online websites collecting data about children under 13 and the Gramm-Leach-Bliley Act (GLBA) which governs financial institutions.

But the biggest source of the FTC’s authority comes from Section 5 of the FTC Act, where the FTC can regulate “unfair or deceptive acts or practices in or affecting commerce.” This is how the FTC has achieved its dominant position.

Enter the Drama

Until recently, the FTC built its privacy and security platform with little pushback. All of the complaints brought by the FTC for unfair data security practices quickly settled. However, recently, two companies have put on their armor, drawn their swords, and raised the battle cry. Wyndham Hotels and LabMD have challenged the FTC’s authority to regulate data security. These are more than just case-specific challenges that the FTC got the facts wrong or that the FTC is wrong about certain data security practices. Instead, these challenges go to whether the FTC should be regulating data security under Section 5 in the first place. And the logic of these challenges could also potentially extend to privacy as well.

The first dispute involving Wyndham Hotels has already resulted in a district court opinion affirming the FTC’s data protection jurisprudence. The second dispute over FTC regulatory authority involving LabMD is awaiting trial.

In the LabMD case, LabMD is contending that the U.S. Department of Health and Human Services (HHS) — not the FTC — has the authority to regulate data security practices affecting patient data regulated by HIPAA.

With Wyndham, and especially LabMD, the drama surrounding the FTC’s activities in data protection has gone from 2 to 11. The LabMD case has involved the probable shuttering of business, a controversial commissioner recusal, a defamation lawsuit, a House Oversight committee investigation into the FTC’s actions, and an entire book written by the LabMD’s CEO chronicling his view of the conflict. And the case hasn’t even been tried yet!

The FTC Becomes a Centenarian

And so, it couldn’t be more appropriate that this year, the FTC celebrates its 100th birthday.

To commemorate the event, the George Washington Law Review is hosting a symposium titled “The FTC at 100: Centennial Commemorations and Proposals for Progress,” which will be held on Saturday, November 8, 2014, in Washington, DC.

The lineup for this event is really terrific, including U.S. Supreme Court Justice Steven Breyer, FTC Chairwoman Edith Ramirez, FTC Commissioner Joshua Wright, FTC Commissioner Maureen Ohlhausen, as well as many former FTC officials.

FTC 03 GW

Some of the participating professors include Richard Pierce, William Kovacic, David Vladeck, Howard Beales, Timothy Muris, and Tim Wu, just to name a few.

At the event, we will be presenting our forthcoming article:

The Scope and Potential of FTC Data Protection
83 George Washington Law Review (forthcoming 2015)

So Is the FTC Overreaching?

Short answer: No. In our paper, The Scope and Potential of FTC Data Protection, we argue that the FTC not only has the authority to regulate data protection to the extent it has been doing, but it also has the authority to expand its reach much more. Here are some of our key points:

* The FTC has a lot of power. Congress gave the FTC very broad and general regulatory authority by design to allow for a more nimble and evolutionary approach to the regulation of consumer protection.

* Overlap in agency authority is inevitable. The FTC’s regulation of data protection will inevitably overlap with other agencies and state law given the very broad jurisdiction in Section 5, which spans nearly all industries. If the FTC’s Section 5 power were to stop at any overlapping regulatory domain, the result would be a confusing, contentious, and unworkable regulatory system with boundaries constantly in dispute.

* The FTC’s use of a “reasonable” standard for data security is quite reasonable. Critics of the FTC have attacked its data security jurisprudence as being too vague and open-ended; the FTC should create a specific list of requirements. However, there is a benefit to mandating reasonable data security instead of a specific, itemized checklist. When determining what is reasonable, the FTC has often looked to industry standards. Such an approach allows for greater flexibility in the face of technological change than a set of rigid rules.

* The FTC performs an essential role in US data protection. The FTC’s current scope of data protection authority is essential to the United States data protection regime and should be fully embraced. The FTC’s regulation of data protection gives the U.S. system of privacy law needed legitimacy and heft. Without the FTC’s data protection enforcement authority, the E.U. Safe Harbor agreement and other arrangements that govern the international exchange of personal information would be in jeopardy. The FTC can also harmonize discordant privacy-related laws and obviate the need for new laws.

* Contrary to the critics, the FTC has used its powers very conservatively. Thus far, the FTC has been quite modest in its enforcement, focusing on the most egregious offenders and enforcing the most widespread industry norms. The FTC should push the development of the norms a little more (though not in an extreme or aggressive way).

* The FTC can and should expand its enforcement, and there are areas in need of improvement. The FTC now sits atop an impressive body of jurisprudence. We applaud its efforts and believe it can and should do even more. But as it grows into this role of being the data protection authority for the United States, some gaps in its power need to be addressed and it can improve its processes and transparency.

The FTC currently plays the role as the primary regulator of privacy and data security in the United States. It reached this position in part because Congress never enacted comprehensive privacy regulation and because some kind of regulator was greatly needed to fill the void. The FTC has done a lot so far, and we believe it can and should do more.

If you want more detail, please see our paper, The Scope and Potential of FTC Data Protection. And with all the drama about the FTC these days, please contact us if you want to option the movie rights.

Cross-posted on LinkedIn

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Vanderbilt Law Review En Banc Roundtable: Comptroller v. Wynne

Vanderbilt Law Review En Banc, the online companion to the Vanderbilt Law Review, recently published its Roundtable on the upcoming case, Comptroller v. Wynne, set to be argued before the Court on November 12, 2014. In Wynne, the Court considers whether the Constitution bans a state from taxing its residents’ income, wherever earned, by requiring a credit for taxes paid on income taxed in other states. The Court could answer many questions: How far is the reach of the dormant Commerce Clause in the context of income taxation? What is the extent of a state’s power to enforce personal income taxes on its residents? What kinds of residents are subject to double taxation and why? Professors Edward Zelinsky, Dan Coenen, Brannon Denning, Norman Williams, Michael Greve, and Adam Thimmesch tackle these questions and more in their contributions.

Roundtable: Comptroller v. Wynne

Edward Zelinsky, Yeshiva University, Cardozo School of Law
Dan Coenen, University of Georgia School of Law
Brannon Denning, Samford University, Cumberland School of Law
Norman Williams, Willamette University College of Law
Michael Greve, George Mason University School of Law
Adam Thimmesch, University of Nebraska College of Law

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The Flawed Foundations of Article III Standing in Surveillance Cases (Part II)

Then-Secretary of Defense Melvin Laird Sharing a Light Moment With President Nixon

Then-Secretary of Defense Melvin Laird Sharing a Light Moment With President Nixon

In my last post, I introduced the 1972 Supreme Court case of Laird v. Tatum, which has since served as a basis for subsequent courts to deny standing to plaintiffs seeking to challenge government surveillance programs. Here, I continue the exploration of Laird as unsound precedent for the high Article III bar currently facing surveillance plaintiffs.

Read More

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FAN 39 (First Amendment News) More license plate cases come to High Court

The next great First Amendment battleground, it turns out,

is on the back of your car. — Adam Liptak (2009)

North CarolinaThe Second, Fourth, Fifth, Sixth, Seventh, Eight, and Ninth Circuits have all rendered rulings in First Amendment speciality license plate cases. Now, two of these cases have found their way to the Court’s cert. docket — one out of North Carolina, the other out of Texas.  In both cases the First Amendment claim prevailed in the lower courts. As noted below, the Court has declined to review such claims in four different cases coming to it from the federal circuit courts. The latest challenges are:

 Berger v. American Civil Liberties Union of North Carolina

Issue: Whether the government speech doctrine permits the state of North Carolina to promote its “Choose Life” message through a specialty license plate program over which it exercises complete and effective control without also offering a pro-choice specialty plate.

Counsel: Scott W. Gaylord for Petitioners, Christopher A. Brook for Respondents

→ Walker v. Texas Division, Sons of Confederate Veterans

Issues:  (1) Whether the messages and images that appear on state-issued specialty license plates qualify as government speech immune from any requirement of viewpoint neutrality; and (2) whether Texas engaged in “viewpoint discrimination” by rejecting the license-plate design proposed by the Sons of Confederate Veterans, when Texas has not issued any license plate that portrays the Confederacy or the Confederate battle flag in a negative or critical light

Counsel: Jonathan F. Mitchell (S.G. of Texas for Petitioner), R. James George, Jr., for Respondents

See also: “Lawrence Walters comments on the First Amendment issues surrounding confederate flag license plates” (Fox News on YouTube)

Spectrum of Issues

  1. Government Speech or Private Speech?
  2. What kind of forum? — Traditional public, designated public, or non-public?
  3. Viewpoint Neutrality and Reasonableness?

Circuit Court Rulings 

First Amendment Claim Sustained

First Amendment Claim Denied

Related Cases  Read More

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A Response to Piketty’s Capital from a Surprising Corner

Without referring to Thomas Piketty, Capital in the Twenty-First Century, the Harvard Business School, of all institutions, has recently published two studies that ultimately address the increasing economic inequality that plagues the United States and most of the developed world. Michael E. Porter and Jan V. Rivkin published the finding of the survey that the Harvard Business School did of its alumni. In short sum, the study concludes that “large and midsize firms have rallied strongly from the Great Recession, and highly skilled individuals are prospering. But middle and working-class citizens are struggling, as are small business. We argue that such a divergence is unsustainable. . . .” An Economy Doing Half Its Job: Findings of Harvard Business School’s 2013-14 Survey on U.S. Competitiveness (September 2014). Roger Martin, in the October issue of the Harvard Business Review, raises similar alarms: “In a democratic capitalist country, it is not sustainable to leave the members of the largest voting bloc out of the economic equation.” The Rise (and Likely Fall) of the Talent Economy, Harv. Bus. Rev. October 2014, pp. 41, 43.

Martin traces the shift from natural resources being the most valuable assets 100 years ago to the development of talent as the “asset” of greatest value. “By 2013 more than half the top 50 companies were talent based, including three of the four biggest: Apple, Microsoft, and Google.” As talent was becoming the most significant corporate value in the 1970’s, supply-side macroeconomic economists then argued that high income taxes created disincentives so that this talent would not be optimized. Given high tax rates for high incomes, talented people would slack off and not work as hard if so much of the resulting income went for taxes. With the Reagan Revolution, supply-side economics was the basis for the radical reduction in top tax rates. “The top marginal [income tax] rate plummeted from 70% in 1981, to 50% in 1982, to 38.5% in 1987, to 28% in 1988. Thus, in a mere seven years, $1 million earners saw the amount they kept after federal taxes increase from $340,000 to $725,000, while the $3.0 million that $10 million earners had been keeping grew to $7.2 million.” With the emergence of stock-based compensation, top executives focused on “managing the expectations of market participants, not on enhancing the real performance of the company.” The talent that was validated was in the ability short term to manipulate share value and that does not necessarily lead to the growth of the enterprise in the longer run. Thus manipulating the value of corporate stock does not lead to greater economic growth.

In addition to a tax system that creates incentives for top corporate executives to feather their own nests at the expense of the interests of the other stakeholders – shareholders and workers –, the emergence of hedge funds that rake off 2% of the value of the assets and 20% of the profits every year, provides extraordinarily high incomes to their managers. “[T]he top 25 hedge fund managers in 2010 raked in four times the earnings of all the CEOs of the Fortune 500 combined. The hedge fund industry, however, does not produce economic growth. “Essentially, the business of a hedge fund is to trade. . . . But trading doesn’t directly create value for anyone other than the hedge funds. One trader’s gain is simply another trader’s loss.” The tax system subsidizes hedge funds by not treating their earnings as earned income subject to the basic income tax rates but treat much of it as capital gains subject to lower tax rates

Putting together these two phenomena supports the conclusion that the personal gain of a small group of top corporate executives and hedge fund managers is a more important social policy than economic growth overall or even of return on the investment of capital itself. “Across the economy, the return on invested capital . . . peaked in 1979 and has been on a steady decline since the mid-1970s. It is currently below 2% and still dropping, as the minders of that capital, whether corporate executives or investment managers, extract ever more for their services.”

With little actual economic growth and the capture of so much income by top corporate and hedge fund managers, “inequality has rapidly increased, with the top 1% of the income distribution taking in as much as 80% (estimates vary) of the growth in GDP over the past 30 years.” Meanwhile “[r]eal wages for the 62% of the U.S. workforce classified as production and nonsupervisory workers have declined since the mid-1970s.

Martin attributes some job losses to the attempts by top managers to manipulate the price of corporate stock to increase their personal income by eliminating jobs, “the variable they can most easily squeeze in order to signal that they are addressing performance.”

Porter and Rivkin describe structural changes in the economy that pre-date the Great Recession. “Long-run growth rates in private-sector jobs started falling from historical levels about 2000 and remain low. The meager job creation that has occurred has been overwhelmingly in local industries, not those facing international competition. . . . Real hourly wages have stalled even among college-educated Americans; only those with advanced degrees have seen gains.”

When business expands, they do not do so by hiring new employees in the United States. “[B]usiness leaders in America are reluctant to hire full-time workers. When possible, they prefer to invest in technology to perform work, outsource activities to third parties [including off shore], or hire part-time workers.” For example, a story in the New York Times described the structure of Apple: “Apple employs 43,000 people in the United States and 20,000 overseas. Many more people work for Apple’s contractors: an additional 700,000 people engineer, build and assemble iPads, iPhones and Apple’s other products. But almost none of them work in the United States. Instead, they work for foreign companies in Asia, Europe and elsewhere.” Micro-economists would say that is as it should be because it no doubt is cost effective. From a macroeconomic point of view, aggregating the behavior of many enterprises leads to the hollowing out of our middle class work force and our middle class consumer economy. What is good for the Apples of this world, is not good for America.

Martin, Porter and Rivkin all agree that the present structure of our society, including our economy, is not sustainable. They do not, however, propose remedies. Porter and Rivken ask business to volunteer to be more proactive as to education generally and to educating their workers for the jobs that are allegedly available. While volunteerism is nice and may be of some help, it still seems grossly inadequate when what needs to be done is to redirect the structure and direction of our society and economy that does little for most people or the economy generally but creates tremendous incentives for corporate executives and hedge fund managers to capture almost all of the limited economic growth that results from these policies.

Could it be true that the Harvard Business School is proposing that we counterattack the class warfare the majority have suffered because of the extraordinary power of the small group at the top of the economic ladder? Is the Harvard Business School lining up with Occupy Wall Street?