Friday, May 20, 2011

Happy Birthday Standard Oil v. United States, 221 U.S. 1 (1911)

Probably a Better than Average Investment at the Time

Didn't Live to 100, But His Greatest Decision Did

Sunday May 15 was the 100th birthday of Standard Oil v. United States, 221 U.S. 1 (1911). Authored by Chief Justice Edward D. White, pictured above, Standard Oil is the most important antitrust decision ever, having articulated certain fundamental principles that still animate antitrust law. Here are a few examples of Standard Oil's enduring principles, followed by some additional thoughts.

1. Standard Oil confirmed what was at least implicit in several prior decisions, namely, that the Sherman Act does not ban all contracts that "restrain trade" in the ordinary sense of that phrase. Instead, the Court said, the statute only bans agreements that restrain trade "unduly" by producing "monopoly or its consequences." To determine whether a contract produces such consequences, Standard Oil said, courts should employ "reason." Thus was born the Sherman Act's "Rule of Reason." Some, including Justice Harlan in dissent, argued that this Rule of Reason was a departure from prior case law which had purportedly banned all restraints of trade. However, as Chief Justice White explained for the Court, prior decisions had banned only "direct" restraints, leaving so-called "indirect" restraints entirely unscathed. See e.g. United States v. Joint Traffic Ass'n, 171 U.S. 505 (1898). Moreover, White continued, courts had employed "reason" to distinguish "direct" from "indirect" restraints, treating as "direct" only those restraints that produced monopoly or its consequences. Thus, he (properly) concluded, the "direct/indirect" test and the "Rule of Reason" would, if properly applied, would reach identical results. William Howard Taft, then President of the United States, agreed with the Court's assessment of precedent and expressed that agreement in a December 2011 message to Congress.

2. After examining both English and American sources bearing upon the meaning of the term "restraint of trade," the Court identified three possible "consequences of monopoly," the presence of which would require condemnation of a restraint because it restrained trade "unduly," namely output reduction, price increases, and reductions in quality. The mere fact that an agreement restricted the freedom of action of the parties to it did not suffice to render it a "restraint of trade" within the meaning of the statute. Courts still adhere to this principle today, requiring a showing or inference of tangible economic harm before condemning a restraint. For instance, in Continental T.V. v. G.T.E. Sylvania, 433 U.S. 36, 53 n. 21 (1977), the Court pointed out that all contracts restrain trade, and concluded that courts should only consider the objective economic effects of agreements when conducting Rule of Reason analysis. Thus, Standard Oil rejects assertions that courts should consider non-economic values, such as the autonomy of traders, when given content to the Sherman Act.

3. Any broader reading of the statute, e.g., one that applied "its prohibitions to any case within its literal language" would contravene the Constitution's protection for liberty of contract or, in the Court's words "be destructive of all right to contract or agree or combine in any respect whatever as to subjects embraced in interstate trade or commerce." Thus, instead of reading the statute broadly so as to ban each and every agreement that reduced competition in one way or another, the Court held that reasonable restraints of trade were protected by liberty of contract and thus beyond the reach of the statute, even if they otherwise restrained interstate commerce. Protection of such restraints, the Court said, was the best way to ensure a well-functioning competitive order.

"[T]he omission [from the Sherman Act] of any direct prohibition against monopoly in the concrete, indicates a consciousness that the freedom of the individual right to contract, when not unduly or improperly exercised, was the most efficient means for the prevention of monopoly, since the operation of the centrifugal and centripetal forces resulting from the right to freely contract was the means by which monopoly would be inevitably prevented if no extraneous or sovereign power imposed it and no right to make unlawful contracts having a monopolistic tendency were permitted. In other words, that freedom to contract was the essence of freedom from undue restraint on the right to contract."

The Supreme Court reiterated this insight, albeit without mentioning liberty of contract, nearly six decades later, citing Standard Oil for the proposition that Congress could not have meant to ban all private contract law because that body of law "establishes the enforceability of commercial agreements and enables competitive markets -- indeed, a competitive economy -- to function effectively." See National Society of Professional Engineers v. United States, 435 U.S. 679 (1978).

4. As a corollary to the ban on "undue" restraints, Standard Oil's Rule of Reason implied a safe harbor for "normal," "usual," or "ordinary" agreements. Indeed, the Court condemned the Standard Oil trust precisely because its growth, the Court said, was "not as a result of normal methods of industrial development[.]" Or, as the Court put it in the American Tobacco Co. v. United States, 221 U.S. 106 (1911), decided two weeks later: "[Standard Oil held] that the statute did not forbid or restrain the power to make normal and usual contracts to further trade by resorting to all normal methods, whether by agreement or otherwise, to accomplish such purpose." American Tobacco, it should be noted, reaffirmed Standard Oil's promulgation of the Rule of Reason and held that a similar analysis, including the distinction between undue and normal/usual/ordinary restraints, should control courts' determination whether a defendant has "monopolized" interstate commerce contrary to Section 2 of the Sherman Act. Subsequent decisions confirmed that a contract or other practice was "normal" or "ordinary" and thus beyond the scope of Congress's power to regulate under the Sherman Act or Clayton Act if it was the type of practice a firm would adopt without regard to the practice's propensity to obtain or maintain market power. See FTC v. Sinclair Oil, 261 U.S. 463 (1923) (holding that the Clayton Act did not empower the Commission “to interfere with ordinary business methods); FTC v. Gratz, 253 U.S. 421 (1920) (same). Courts still employ this approach under Section 2 of the Sherman Act, refusing to condemn conduct that reduces a firm's costs, even if such conduct should maintain or create a monopoly.

5. Standard Oil and its Rule of Reason require a "common law," dynamic approach to the Sherman Act. By its nature, the decision's "Rule of Reason," with its focus on the consequences produced by a challenged restraint, precludes any reading of the statute that would freeze in place a list of restraints that are prohibited or, for that matter, list of restraints that are not prohibited. Instead, the Court held that the statute provides courts with the flexibility to treat particular restraints differently over time, depending upon judges' assessment of the economic consequences of such restraints. Such assessments can change as economic conditions change or as evolving economic theory sheds new light on the impact of particular restraints, leading courts to "translate" the principles animating the Rule of Reason in light of new information. (See pp. 89-92 of this article for additional articulation of this point.) Thus, the Standard Oil Court expressly noted that restraints or other practices that appear harmful at one point in time can, decades or century later appear beneficial or vice versa, thereby justifying different legal treatment. The Supreme Court has repeatedly endorsed this approach. In 1988, for instance, the Court cited Standard Oil for the proposition that "[t]he Sherman Act adopted the term "restraint of trade" along with its dynamic potential. It invokes the common law itself, and not merely the static content that the common law had assigned to the term in 1890." See Business Electronics Corp. v. Sharp Electronics, 485 U.S. 717 (1988). This "dynamic potential," the Court said, included the ability to overrule previous decisions banning particular restraints when advances in economic theory undermined the economic premises of such earlier decisions. See also Continental T.V. v. G.T.E. Sylvania, 433 U.S. 36 (1977) (discarding per se rule against non-price vertical restraints based upon changed economic understanding of such agreements). This dynamic approach has served antitrust law well, as it has allowed courts the flexibility to adjust legal doctrine in response to changed conditions and insights, thereby minimizing the need for Congress to amend the Sherman Act in response to such changes.

Readers interested in further development of these themes may want to consult pp. 83-92 of this article.

Some additional observations:

First, the Standard Oil opinion was extremely controversial at the time as was the American Tobacco decision. Justice Harlan issued a lengthy and vehement dissent, in which he accused his brethren of judicial activism, ignoring precedent and reaching a result unduly favorable to trusts. Harlan even claimed that the Court's purported activism would undermine the public's faith in a neutral judiciary. Harlan's dissent helped fuel similar criticism by commentators and political partisans off the Court. Many criticized President Taft, who had appointed Chief Justice White, and these criticisms no doubt helped motivate Taft's lengthy message to Congress defending the decision mentioned above. Though highly controversial at the time, the Supreme Court unanimously invoked and applied the Rule of Reason just seven years later in Chicago Bd. of Trade v. United States, 246 U.S. 243 (1918), and the stands to this day.

Second, some criticism of Standard Oil reflected a fear that Chief Justice White's version of the Rule of Reason would empower courts to sustain price fixing agreements that set reasonable prices, contrary to what some saw as the holdings of prior decisions. Indeed, dissenting in United States v. Trans Missouri Freight Association, 166 U.S. 290 (1897) , then Associate Justice White, in an opinion joined by Justices Field, Gray and Shiras, argued that a ban on horizontal agreements setting reasonable prices would violate firms' liberty of contract, an argument the Court rejected, at least in the context of railroad corporations that had received special privileges from states where they operated, in both Trans-Missouri Freight and United States v. Joint Traffic Ass'n, 171 U.S. 505 (1898). (In Addyston Pipe and Steel Co. v. United States, 175 U.S. 211 (1899), by contrast, the Court first sustained the lower court's finding that the cartel set unreasonable prices before (unanimously) holding that the price fixing in question was a direct restraint of interstate commerce in violation of the Sherman Act.) However, Standard Oil does not address one way or the other whether in fact horizontal agreements setting reasonable prices would survive scrutiny under the Rule of Reason. Thus, future decisions condemning such price fixing without regard to the reasonableness of the price set did not contravene Standard Oil. See e.g. United States v. Trenton Potteries, 273 U.S. 392 (1927) (condemning agreement between firms with 80 percent share of the relevant market without regard to reasonableness of the price set).

Third, principles announced in Standard Oil apply equally to Section 1 and Section 2 of the Sherman Act, as the Court confirmed in the American Tobacco mentioned earlier in this post. Section 1, of course, applies to "concerted action," that is, an agreement between two or more parties. Section 2, by contrast, applies only to conduct that is "unilateral." At the same time, the modern Rule of Reason applied under Section 1 differs from that applied under Section 2 in two ways. First, courts analyzing concerted action under Section 1 purportedly "balance" any harms that a restraint produces against any benefits, in an effort to determine which impact predominates. (See pp. 98-113 of this article for a general discussion of this analysis and some of the issues that arise; see also this comprehensive article about how modern courts conduct rule of reason analysis.). By contrast, courts analyzed challenged conduct under Section 2 conduct no such balancing. Thus, in the Section 2 context, proof that challenged conduct produces significant benefits that cannot be achieved in some other way ends the case, without regard to whether such conduct outweighs any purported harms. Second, when balancing harms versus benefits under Section 1, courts purport to ascertain whether the restraint increases or decreases prices paid by consumers, thus implementing a "purchaser welfare standard." Under Section 2, by contrast, courts treat the prices paid by purchasers as beside the point. Thus, if conduct is "normal" or "usual" because it produces benefits independent (See pp. 673-86 and 708-15 of this article for a demonstration that courts implementing Section 2 have never focused on the welfare of purchasers but have instead articulated doctrine that seeks to ban only that conduct that reduces overall economic welfare). At some point, it seems, courts will have to reconcile these contradictions.

Friday, May 13, 2011

On the Distinction Between Regulation and Enforcement: Why the Antitrust Division is Apparently Exceeding its Authority

NCAA Commissioner-in-Chief?

NCAA Vice-Commissioner in Chief?

When running for President, Barak Obama (pictured above receiving a gift from 2010 BCS champion Alabama) made no secret of his desire to replace the current BCS Bowl system with an eight team national playoff to determine college football's champion. Moreover, nearly two years ago, Seantor Orrin Hatch, pictured below President Obama, called for an antitrust investigation of the BCS system. Last week the Antitrust Division of the Department of Justice finally "got the hint," and sent a letter to the NCAA seeking an explanation for the association's failure to adopt a playoff system similar to that employed in some other college sports, including, e.g., college basketball.

The letter does not formally or informally charge the NCAA with any violations of the antitrust laws or any other federal law. Nor does it articulate or even adumbrate any argument that the BCS system, which is a particular form of playoff system, and/or the means used to enforce it violate the antitrust laws. Instead, the letter begins by noting that the Attorney General of Utah, hardly a disinterested party (the state's two best college football teams are in conferences whose winners do not automatically qualify for a BCS bowl), has announced an intent to challenge the BCS under the antitrust laws. The letter also notes that 21 economists --- a miniscule fraction of the nation's economists --- have filed a memorandum with the Division calling for an antitrust investigation of the BCS system. Finally, the letter notes that "other prominent individuals have publicly urged the Antitrust Division to take action against the BCS."

The DOJ's letter is perplexing to say the least. The Antitrust Division is charged with enforcing the nation's antitrust laws, period. That is to say, the Division is charged with determining whether a given restraint, by reducing pre-existing competition, reduces consumer welfare. However, the letter reads more like a request from a congressional committee considering regulatory legislation or an adminstrative agency charged with promulgating New Deal style "public interest" regulation. Thus, the letter asks open-ended questions that are untethered to any recognizable standard of antitrust liability. For instance, the letter asks why "the Football Bowl Subdivision does not have a playoff" and "[w]hat steps does the NCAA plan to take to establish a playoff at this time?" Finally, and most oddly, the letter asks "[h]ave you determined that there are aspects of the BCS system that do not serve the interests of fans, colleges, universities and players?" To what extent would an alternate system better serve those interests?"

These questions suggest that the Antitrust Division is conducting an inquiry that exceeds its jurisdiction, that is, that the Division is seeking to leverage its authority to enforce the antitrust laws to determine whether, say, an 8 team playoff system is superior to the current BCS system and then to foist upon the NCAA the results of the Division's analysis. Would it be sheer coincidence if Division determines that the best system is the one preferred by the President of the United States, who can hire and fire the head of the Antitrust Division at will?

But don't the antitrust laws require the NCAA to adopt the optimal system of determining a national champion? After all, many have argued that antirust should ban those restraints that reduce economic welfare. Certainly not. The Sherman Act forbids contracts, combinations and conspiracies in restraint of trade or commerce among the several states. A century ago, in Standard Oil v. United States (discussed here in a subsequent post), the Supreme Court held that only contracts that produce "the consequences of monopoly" restrain trade within the meaning of the statute. There are, the Court said, three such consequences: higher prices, reduced output and reduced quality. (A modern economist would recognize these consequences as different manifestations of an exercise of market power.) A restraint that produces none of these consequences cannot violate the Sherman Act, regardless of its other effects and regardless of whether a different restraint would produce even more social benefits. (For a summary of Standard Oil's Rule of Reason, see pp. 83-92 of the article found here.) The Supreme Court has repeatedly reiterated that Standard Oil properly states the law under Section 1 of the Sherman Act. See e.g. National Society of Professional Engineers v. United States, 435 U.S. 679 (1978). Indeed, and ironically, the Antitrust Division's own guidelines for examining "collaboration among competitors" provide that "Rule of reason analysis focuses on the state of competition with, as compared to without, the relevant agreement." (See Competitor Collaboration Guidelines, Section 1.2; id. at Section 3.1) There is no suggestion that such analysis entails comparison of the challenged restraint to a restraint that has never existed in the hope that the latter restraint would better serve the interests of society and consumers.

It's difficult if not impossible to square the Antitrust Division's letter with any effort to enforce Section 1's Rule of Reason or for that matter its own enforcement guidelines. Under Standard Oil, the question for the Division is straight-forward, if difficult to answer. Does the BCS system adopted in 1998 --- the first effort to create a true national championship game --- reduce output, raise prices or reduce quality compared to the system that preceded it, that is, the status quo ante? That status quo ante, in turn, involved no playoff whatsover, but instead an uncoordinated "system" of numerous bowls, each promoted separately. The relevant question is NOT whether the Antitrust Division, 21 economists, or a court can imagine a different completely hypothetical system, e.g., an 8 team playoff, that would serve consumers and various other groups even better than the current system. Indeed, if Rule of Reason analysis did turn on this sort of hypothetical inquiry, the Sherman Act would rapidly become a license for a form of central planning. Any number of firms, after all, enter long term ventures or contracts that restrain parties to them and thus "reduce competition." However, most such agreements properly survive Rule of Reason scrutiny because they produce no harm in the first place or produce only benefits compared to the status quo ante. Thus, an antitrust standard banning harmless or beneficial restraints simply because a different practice would be even more beneficial for all concerned would empower courts and the antitrust enforcement agencies to examine any agreement to determine whether some other agreement would produce even more benefits. For instance, such an approach would authorize courts and the enforcement agencies to examine any merger to determine whether a different transaction produced even more benefits. Such an approach would be unprecedented and radically change the nature of antitrust regulation and contravene Standard Oil's fundamental premise that Section 1 should leave market actors free to exercise their contractual liberty as they see fit absent proof that the restraint in question produces antitrust harm compared to the status quo ante. The parties to various restraints, disciplined as they are by a free market, know far better than the enforcement agencies whether there might be some other arrangement that serves the interests of themselves and thus society even better.

Antitrust officianados might ask "but what about the less restrictive alternative test; don't courts conducting Rule of Reason analysis ask whether a challenged restraint is the least restrictive means of achieving the restraint's purported objective?" Yes, but only in narrow circumstances. (See pp. 110-113 of this article for an explanation of the role of less restrictive alternatives in Rule of Reason analysis.) That is to say, courts only ask whether there is a less restrictive means of achieving a restraint's objective if a plaintiff first shows that the challenged restraint produces antitrust harm compared to the status quo ante. Absent such a showing, the presence or not of such an alternative is simply irrelevant under current law, including the Division's own enforcement guidelines quoted above. Or, as Judge Frank Easterbrook put it in Chicago Professional Sports Ltd. Partnership v. NBA, 95 F.3d 593 (7th Cir. 1996) ("The Antitrust Laws do not deputize district judges as one man regulatory agencies. The core question in antitrust is output. Unless a contract reduces output in some market, there is no antitrust problem."). Ironically, the last question in the Division's letter quoted above, which asks whether there is another system that would improve everyone's welfare, seems to amount to an implicit concession that current system does not produce antitrust harm in the form of an exercise of market power that reduces output. For, if it did, then it's hard to imagine how a more competitive alternative would improve the welfare of consumers AND producers, the latter of whom benefit from reduced output flowing from exercises of market power.

None of this is the say that the BCS system would, in fact, survive scrutiny under an antitrust test that properly implements Standard Oil's Rule of Reason. The 21 economists mentioned above have argued that the BCS system entails a cartel between four bowls --- Fiesta, Orange, Sugar and Rose --- that were previously independent and unilaterally decided which teams to invite. The BCS system, these economists argue, disadvantages those schools from non-BCS conferences, that is, conferences whose winners do not automatically qualify for a BCS bowl and thus "injures schools in major college football's five other conferences . . . and also harm consumers by restraining output, fixing prices and reducing quality." The result, it is said, "is a marked change from the pre-BCS era, when non-traditional teams frequently competed for college football's national championship" (at least as measured by polls of sportswriters and coaches). It should be noted that, if these economists are correct, the appropriate remedy is emphatically NOT to impose an 8 team playoff, but instead to return to the status quo ante, where each bowl decided whom to invite and where to televise its product independent of the others.

There are, of course, significant counter-arguments to the claim that the BCS system is an unreasonable restraint of trade. For instance, the mere fact that the BCS entails horizontal cooperation between potential rivals does not transform it into a naked and presumptively illegal cartel. As the Supreme Court recognized in NCAA v. Board of Regents of the University of Oklahoma, 468 U.S. 85 (1986), college football necessarily requires some horizontal cooperation, including cooperation about the size of salaries paid athletes, that would otherwise be unlawful. Moreover, each college football conference is itself a "cartel" that, for instance, determines the number of games played by its member teams ("output") and divides revenue among various schools, sometimes allocating significant revenue to schools that had losing records during the season in question. Nor is it always apparent what measure of price or output the 21 economists are referring to; there were 35 bowl games at the end of the 2010-2011 season. Are the economists asserting that there would have been even more such games absent the BCS? Perhaps more importantly, are they including "quality" within their measure of output? (All sports leagues limit the "output" of games; presumably such limits survive scrutiny because they enhance the quality of the games actually played and thus maximize "output" properly understood.) Without such an output reduction, how could the BCS increase prices? What prices would have fallen without the BCS? Prices for tickets? Prices that networks charge advertisers? Prices that Bowls charge networks for the rights to televise various bowls? Finally, the 21 economists complain about facets of the BCS, e.g., its revenue sharing arrangements, that seem unrelated to any appropriate antitrust concern. Just as antitrust law is unconcerned with the choice between the BCS system and an 8 team playoff, it is also agnostic between different schemes of allocating revenue, unless a challenged scheme results in a reduction in output and resulting increase in price.

But, at least the 21 economists seem to be asking the right question, unlike the Department of Justice.

Monday, May 9, 2011

Should The United States Replace Seal Teams With Grand Juries?

Not a Grand Jury

Could Have Indicted Confederate Soldiers in 1861; Chose A Different Course

Over at the Atlantic, Conor Friedersdorf decries the lack of outrage over the Obama Administration's "secret" decision to assasinate American citizens abroad, including Anwar al-Awlaki, who have allied themselves with Al Qaeda and are thus levying war against the United States. Invoking the U.S. Constitution and an unsupported ACLU memo on International law, Friedersdorf seems to argue that the sole remedy against Americans who join foreign armies seeking to kill Americans is indictment by a Grand Jury and trial in civilian courts for Treason. Friedersdorf also asserts that, regardless whether an individual is an American Citizen, it violates International Law to launch an armed attack against a foreign enemy unless that enemy is in an "armed conflict zone." For the reasons outlined below, Friedersdorf and the ACLU that he is channeling are way off base.

1. The Constitution defines treason to include "levying war against [the United States]." Moreover, the Constitution plainly contemplates the use of military force against American citizens suspected of such treason, as it authorizes Congress to "[t]o provide for calling forth the Militia to execute the Laws of the Union, suppress Insurrections and repel Invasions." Congress so provides by authorizing the President to call forth the militia when needed to meet these emergencies, something it has done by statute from the earliest days of the Republic. Moreover, nothing in the Constitution prevents the President from employing non-militia armed forces to put down a rebellion.

Indeed, if Friedersdorf is correct, Abraham Lincoln erred when he resisted the South's effort to secede in 1861. That is, under Friedersdorf's logic, Lincoln should have abjured military force against the Southern rebellion and instead sought indictments against the 10s of thousands of Confederate soldiers --- all American citizens according to Lincoln --- who had taken arms against the union and, I suppose, asked them to turn themselves in. Fortunately Lincoln took a different approach.

2. Friedersdorf draws a distinction between "battlefields," on the one hand, and more pacific regions, on the other. The latter are, in his view, immune from the use of military force, even when such force is employed against individuals who have declared war on the United States. He quotes a late April, 2011 ACLU Letter to President Obama for the proposition that International Law prevents the use of force against enemy combatants, whether or not they are U.S. Citizens, unless those combatants are in "armed comflict zones." That letter, it should be noted, does not limit itself to attacks on U.S. citizens, but instead decries such attacks on U.S. citizens "and others." The letter also relies on ipse dixit, that is, cites no legal authority of any sort, international or otherwise, for the proposition that it baldly asserts. (Apparently the ACLU expects the President and/or his staff to conduct the ACLU's research for it, locating legal authorities, if there are any, to support the ACLU's assertions.) Nor does the letter attempt to define the term "armed conflict zone," or explain why International Law would adopt a rule that would encourage combatants to leave "armed conflict zones" and set up shop in peaceful regions.

3. The Congress of the United States apparently has a different view of International Law. On September 18, 2011 it passed the Authorization for use of Military Force, empowering the President to employ military force against Al Qaeda and those who support it. The AUMF contains no limitation on where the President may employ such force. Nor does it purport to prevent the President from using such force outside "armed conflict zones." Congress passed the AUMF after observing the consequences of taking an ACLU-like "law enforcement" approach to Al Qaeda, even after that organization had committed several acts of War against the United States, including the 1993 bombing of the World Trade Center and expressly declared war against the United States in 1998. (See The Report of the 9-11 Commission, beginning on page 47; id. at 59-62 ("War on the United States 1992-1996")). The 1998 Grand Jury indictment of Bin Laden can be found here. The indictment was apparently ineffective.

4. Even if a treaty or other rule of international law purported to implement the approach sought by the ACLU, Congress could, if it wished, abrogate that rule as a matter of domestic Constitutional Law. That is, the Supreme Court has repeated recognized the so-called "last in time rule," under which a statute trumps a previously-passed treaty. As between the AUMF and any purported rule of international law, then, the AUMF, which expressly authorizes the unrestricted use of military force against Al Qaeda, would prevail.

5. The rule proposed by Friedersdorf and ACLU would produce odd results, to say the least. Imagine, for instance, if Al Qaeda were to take over Iran and move thousands of fighters there. The country would not be a "zone of armed conflict." Thus, under the Friedersdorf/ACLU approach, America and her allies would have to stand idly by and do nothing as this enemy gained strength. (The only exception, according to the ACLU, would be for an imminent threat; one suspects that the victims of such a "threat" would only become aware of it after it was too late.) Of course, the United States could issue a warrant for the arrest of various members of Al Qaeda, but one doubts that those indicted would surrender themselves to U.S. authorities or that the FBI could serve such warrants without great risk.

6. Indeed, the Friedersdorf/ACLU logic calls into question the recent raid that killed Osama Bin Laden, to say the least. The sleepy suburb of Abbottabad, Pakistan is no more a "zone of armed conflict" than is Yemen --- the suspected whereabouts of Anwar al-Awaki. Nor did Bin Laden on May 1 pose any qreater threat to the United States than Anwar al-Awaki. According to the ACLU, however, the United States cannot use military force against citizens or non-citizens outside a zone of armed conflict. We should all look forward to the ACLU's effort to explain its views on the legality of the recent raid in Abbottabad and how, absent such a raid, we could have eliminated Mr. Bin Laden.

7. Finally, it should be noted that Friedersdorf relies on two make weight arguments designed to make his position apparently stronger than it really is. First, he frames his argument around the President's effort to attack American citizens. However, the arguments he derives from international law apply with equal force to attacks on citizens and non-citizens alike. Second, Friedersdorf decries the "secrecy" of President Obama's order. At the same time, one doubts that Friedersdorf and others opposed to President Obama's order would feel better if the order were published in the New York Times. "At bottom" Friedersdorf is apparently arguing that, American citizen or not, an enemy's presence outside a zone of armed conflict should immunize him or her from military action, until of course that enemy chooses, at his leisure, to attack us.

Friday, May 6, 2011

Are All Business-Friendly Expenditures "Corporate Welfare?"

Dispenser of Corporate Welfare?

Today the Richmond Times-Dispatch praises Virginia Governor Bob McDonnell for his veto of legislation appropriating taxpayer funds to Virginia's Public Broadcasters. The paper quotes with approval the Governor's statement that: "We must get serious about government spending. That means funding our core functions well, and eliminating spending on programs and services that should be left to the private sector."

At the same time, the paper also takes Governor McDonnell to task for "handing out" other "subsidies" to private business, subsidies used to induce such businesses to locate in Virginia. The Times-Dispatch cites what it calls "$6.9 million in state spending to bring a Microsoft data center to Mecklinburg," thereby inducing Microsoft to bring 50 new jobs to the state. The paper also cites a $300,000 expenditure to support a new General Electric IT center in Henrico, as well as $4.6 million in state assistance to support the production of a Steven Spielburg movie in the state, calling such expenditures "corporate welfare." The Times-Dispatch concludes with the following ringing critique of the sort of subsidies this Governor --- and past Governors as well --- have used to attract businesses to Virginia.

"The free market, say free-marketers — including, presumably, the governor — is the most efficient and effective allocator of resources. Using state money to distort market decisions leads to less than optimal outcomes. We agree with the governor about public broadcasting. Now if only he could agree with himself."

While the Times-Dispatch may be onto something, its critique of the Governor paints with too broad a brush. To be sure, simply handing out taxpayer cash as bounties to reward firms for locating in the state will result in an allocation of resources different from that produced by a free market and thus presumptively destroy wealth, as such subsidies will distort firms' investment decisions. Still, all government spending is not created equal, and not all such spending is analogous to such bounties. Indeed, some of the spending that brought the Microsoft project to the state is what the Times-Dispatch itself concedes is "infrastructure." According to one source, the Governor and Lieutenant Governor Bolling have worked to increase "the number of sites with roads and infrastructure in place to handle large facilities. Those changes have resulted in projects like software maker Microsoft Corp.’s plan to invest up to $499 million and create 50 jobs at a data center in Mecklenburg County."

Many, including Adam Smith, would argue that the construction of such infrastructure is a core state function and thus not analogous to the sort of naked subsidy that the Times-Dispatch rightly condemns. After all, such infrastructure will benefit firms and individuals other than Microsoft, and construction of such infrastructure at an efficient cost will require deployment of the power of eminent domain to acquire the necessary real property. Thus, reliance upon an unbridled private market to build such infrastructure will result in under-investment in such projects, because 1) private actors won't be able to capture all the benefits of such projects because so many will benefits and 2) such actors will pay higher than reasonable prices for the land necessary to construct them. Investing in infrastructure to attract new business to the state seems to be an example of competitive federalism at work and is entirely consistent with the Governor's veto of handouts for public broadcasting.

Of course, not all subsidies doled out by Virginia and other states take the form of justified investments in infrastructure. Some such subsidies seem to be outright grants, like the $4.6 million incentive package of tax credits, in-kind contributions and other funds used to lure the production of a Steven Spielburg movie to the state. As the Times-Dispatch suggests, such naked largesse is no more justified than doling out funds to public broadcasting. (Some such expenditures are "in between," like the $300,000 the state will spend to subsidize job training and recruitment by GE in connection with its construction of an IT Center in Henrico. While there are solid arguments for subsidizing some job training programs, it's not clear why GE cannot pay its own recruitment expenses.) Moreover, applied across the board, a policy of bidding for such businesses with outight grants would rapidly bankrupt the Commonwealth, particularly if firms already located in the state begin making credible threats to depart as a way of extorting similar largesse out of the state for themselves. To avoid such bankruptcy, Virginia would have to pick and choose among various possible recipients of such largesse, that is, pick winners and losers.

In sum, the Richmond Times Dispatch is on to something, even if has painted with too broad a brush. As this blog had previously explained, empowering governments to steer the allocation of scarce resources by handing out naked largesse will likely reduce our economic welfare. This is one of those rare instances in which reliance on competitive federalism could result in a "race to to the bottom." At the same time, we should not throw the baby out with the bathwater and condemn any and all state efforts to make expenditures, such as expenditures on infrastructure, that attract a company to its jurisdiction. And, we should not overlook the fact that Governor McDonnell supports Virginia's status as a right to work state and has worked to close the state's deficit without raising taxes, contrary to his predecessors who either raised taxes (Governor Warner) or tried and failed (Governor Kaine.) So, when it comes to policies that encourage a free market allocation of resources and thus facilitate wealth-creation, this Governor's glass is far more than half full.