Sunday, December 30, 2012

Happy Birthday, Ronald Coase

102 Years Young

This Blogger wishes Ronald Coase, Professor Emeritus at the University of Chicago Law School, a happy birthday.  Born in 1910, Coase is 102 years old today.  As many readers know, Coase received the Nobel Prize in Economic Sciences in 1991.  Here is an excerpt from the Royal Swedish Academy's Press Release announcing the award:

"Coase showed that traditional basic microeconomic theory was incomplete because it only included production and transport costs, whereas it neglected the costs of entering into and executing contracts and managing organizations.  Such costs are commonly known as transaction costs and they account for a considerable share of the total use of resources in the economy.  Thus, traditional theory had not embodied all of the restrictions which bind the allocations of economic agents.  When transaction costs are taken into account, it turns out that the existence of firms, different corporate forms, variations in contract arrangements, the structure of the financial system and even fundamental features of the legal system can be given relatively simple explanations.  By incorporating different types of transaction costs, Coase paved the way for a systematic analysis of institutions in the economic system and their significance."

Coase’s work is the foundation of what modern scholars call “Transaction Cost Economics “ (“TCE” for short).  Coase began that work in 1937, with his now famous article “The Nature of the Firm.” As explained in a previous post, TCE eventually revolutionized antitrust law and policy, by altering how economists viewed both complete vertical integration and partial contractual integration via non-standard contracts such as exclusive dealing, minimum resale price maintenance, exclusive territories,  location clauses and tying agreements.  When Coase published "The Nature of the Firm," economists identified two, and only two, possible reasons for complete vertical integration.  First, such integration could create technological efficiencies and thus reduce production costs.  Second, integration could foreclose rivals from important  sources of inputs, thereby creating or fortifying the integrating party's market power.  Thus, when economists, or, for that matter, antitrust courts or enforcement agencies, could not identify any efficiency purposes for such integration, they naturally inferred that the conduct was anticompetitive.  The result was the so-called "inhospitality tradition" of antitrust law.

Coase's work and the resulting transaction cost revolution completely undermined these accounts of complete and partial integration.  According to Coase, reliance upon an unfettered market to conduct economic activity entailed various costs, what he dubbed "transaction costs."  By integrating vertically, then, a firm could avoid such transaction costs.  As Coase noted at the time, this explanation had nothing to do with market power or monopoly considerations.  Nor did this explanation depend upon any reduction in technological production costs.

Unfortunately Coase's work lay dormant for three decades, during which time antitrust courts and the enforcement agencies became increasingly hostile to complete and partial vertical integration.  During the mid-1960s, economists and others began to rediscover Coase's 1937 work, perhaps inspired to do so by Coase's "Problem of Social Cost," published in 1960.  Most famously, Oliver Williamson began to rearticulate and expand upon Coase's transaction cost thesis.  In particular, Williamson identified specific investments and the resulting threat of opportunism as an important source of transaction costs.  Moreover, during the same decade, Robert Bork cited Coase's Nature of the Firm in his 1966 work on the Sherman Act's treatment of non-standard contracts.  In particular, Bork explained why various forms of partial integration could align the interests and incentives of the contracting parties, thereby accomplishing the same economic objectives through partial integration that economic actors might otherwise achieve via complete vertical integration.  Most famously, building on the work of Lester Telser (who had not cited Coase), Bork argued that minimum resale price maintenance and non-price restraints such as exclusive territories and location clauses could ensure that independent dealers made optimal investments in promotional effort, thereby facilitating a manufacturer's strategy of relying upon a system of independent dealers to distribute the manufacturer's product.  As previously explained on this blog, this work, along with additional work by Bork and others, convinced the Supreme Court to repudiate numerous decisions from the inhospitality era.

Saturday, December 29, 2012

The Annual Dairy Cliff

"Orderly" Price Gouging

Pushed Nation Over the Dairy Cliff in 1934

With many fixated on the so-called "fiscal cliff," some fear that the nation will soon fall off the "dairy cliff."  In particular, current legislation setting milk prices higher than the competitive level (see below) is due to expire on December 31.   If such legislation does expire, then federal law will revert to that contained in a 1949 statute.  That statute, in turn, will require the Department of Agriculture to begin purchasing milk and other dairy products in an effort to drive milk prices even higher than they already are.  According to a recent essay in the Economist magazine:

 "[I]f there is no farm bill by the start of the next agricultural year, the government’s price-support scheme will automatically revert to what it was in 1949. Most crops have until the spring or summer, but the deadline for milk and other dairy products comes at the end of December. Applying the old formulas today would require the federal government to buy up enough milk to establish a minimum wholesale price more than double its current level."

As explained elsewhere, these "old formulas" set milk prices "based on what dairy farm production costs were in 1949, when milk production was almost all done by hand." Presumably the government would hold milk, cheese and other products off the market indefinitely, allowing them to spoil while some Americans go hungry. 

So far as this blogger is aware, no public official or pundit wants the nation to revert to the 1949 legislation, and the current Administration and some in Congress have proposed various solutions. If, however, the nation does fall off the "dairy cliff," the result will simply be the most extreme manifestation of welfare-reducing federal intervention in dairy markets.  Even under current law, the national government issues annual "milk marketing orders" that set minimum prices that dairy processors must pay  milk producers, "to assure dairy farmers a reasonable minimum price for their milk through the year." (See this articulation of the policy by the United States Department of Agriculture.)  These prices vary, sometimes by almost a factor of four, county by county (compare the price set for most of Montana with that for parts of Florida, for instance).  Prices also vary according to the use the purchaser plans to make of the milk.  Processors must pay the highest prices for Class I or "beverage" milk and lower prices for milk used in yogurt and cheese, for instance.  The image posted above, from a USDA website, shows only Class I prices.   Such marketing orders, the government claims, "make the buying and selling of fluid milk an orderly process."

These regulations result in two obvious and inter-related harms. First, they protect inefficient producers, by preventing more efficient producers from gaining market share by pricing below the coercively-established price.    Second, they injure milk purchasers by pricing some out of the market and forcing others to pay higher prices for the same product than they would pay in a competitive market.  Those consumers forced out of the market will, of course, purchase other, perhaps less nutritious, products.  In short, current federal law enriches producers at the expense of consumers and ensures that the milk industry employs more scarce resources than are necessary to produce its output, depriving other industries of such resources and making them less competitive vis a vis foreign rivals.

Of course, such price-fixing by the nation's dairy farmers would be a felony under the Sherman Act and analogous state antitrust laws.  These statutes reflect the nation's faith that competition, not collusion, should determine prices, output and thus the allocation of resources.  Unfortunately, both Congress and the states repeatedly displaced competition with government planning or authorization of private cartels during the 1930s, ostensibly to combat the Great Depression.  Wages, trucking, airlines, insurance, and agriculture --- all fell prey to anticompetitive governmental intrusion that enriched producers and injured consumers. The Supreme Court stood idly by, validating such legislation, including milk price controls.   Thus, in Nebbia v. New York, 291 U.S. 502 (1934), for instance, the Court, in a 5-4 decision, sustained a New York statute that set minimum resale prices for milk during the depths of the Depression, while many  of the state's families were struggling to put food on the table.  The majority opinion, by Justice Owen Roberts (pictured above) rejected or mischaracterized relevant precedents, many of which had invalidated such coercive state price fixing.  The Court also claimed that the legislation served a valid public purpose, without identifying any such purpose.   As Justice McReynolds observed in dissent, the state may as well have enacted legislation that "required householders to pour oil on their roofs as a means of curbing the spread of fire when discovered in the neighborhood."  Instead, he observed, there was a "superabundance" of milk, "which no child can purchase from a willing storekeeper below the figure appointed by three men at headquarters."  A few years later, Congress enshrined New York's anti-consumer policy into Federal Law in the Agricultural Adjustment  Act of 1937.  As previously explained on this blog, these Depression-era measures, including the cartelization of labor, both deepened and lengthened the Great Depression, as John Maynard Keynes had predicted in an open letter to President Roosevelt in 1933.

In short, the nation has been falling off the dairy cliff each year since the New Deal.  Unless Congress abolishes federal (and state) regulation of milk prices, such intervention in the free market will continue to gouge consumers, foster inefficiency and destroy economic welfare.  Perhaps the severity of the pending 1949 cliff will jar Congress into action.  We can only hope.

Friday, December 21, 2012

Robert Bork, Antitrust Revolutionary

Economic Subversive

This week brought the sad news that Robert Bork has died, at the age of 85.  Bork had a long and varied career.  (See here and here for remembrances.)  He served in the Marine Corp from 1945-46 and graduated from the College at the University of Chicago in 1948.  He then matriculated at the University of Chicago Law School, which he left to rejoin the Marines during the Korean War.  After Law School he served as a fellow in Law and Economics for one year, practiced law at Kirkland and Ellis in Chicago and then joined the faculty at Yale Law School.  While at Yale, President Nixon nominated and appointed Bork to serve as Solicitor General of the United States in 1973, where Bork served until the end of the Ford Administration in January 1977.  President Reagan nominated Bork to the United States Court of Appeals for the District of Columbia Circuit in 1981 and appointed him after Senate confirmation in 1982.   He retired from that court in 1988.  President Reagan nominated Bork to the Supreme Court in 1987, but the U.S. Senate ignominiously refused to confirm him.  This essay, by former Tenth Circuit Judge Michael McConnell, now Director of the Stanford Constitutional Law Center, explains why the Senate's rejection of Judge Bork helped politicize the Court and diminish the Rule of Law.

Most of the punditry and analysis following Judge Bork's death has focused on his views on the Constitution, particularly his strong and articulate support for an "originalist" approach to constitutional.  These commentaries have ignored Bork's tremendous influence in another field, namely, Antitrust Law.  For instance, the main piece in the New York Times on Bork's passing, while over 2,000 words long, contains only a brief paragraph about his contributions to antitrust law.  CNN's story on the occasion of Bork's death does not mention Bork's contributions to antitrust law at all, aside from a brief quote of Justice Scalia, who lauds Bork's influence over the field.  Other essays have, like Judge McConnell's, focused on the implications of Bork's nomination and rejection for the confirmation process and the integrity of the courts.  (See here and here.)  These oversights are unfortunate.   Simply put, Bork helped revolutionize the way that scholars, judges and enforcement officials view the appropriate scope of antitrust regulation and thus the role of the federal government in the nation's economy.  More precisely, no individual scholar had a greater influence on antitrust law and policy than Robert Bork.

Many know Bork from his classic book, The Antitrust Paradox, published in 1978.  For instance, one remembrance states "The Antitrust Paradox, published in 1978, shifted the entire focus of antitrust policy toward consumer welfare," without mentioning any previous work.  (See also several similar statements by various participants in this National Review symposium.)   However, Bork's campaign to revolutionize Antitrust started more than a decade and a half before publication of the Antitrust Paradox.   In particular, while at Yale (ironically?) Bork laid the foundation for the so-called "Chicago Revolution" in antitrust law and policy with a series of articles published between 1961 and 1968.  The Antitrust Paradox drew upon these arguments.     In these works, Bork made two broad and fundamental contributions to antitrust analysis, one normative and one technocratic.

As a normative matter, Bork argued that the antitrust laws should have one goal and one goal alone, namely, the maximization of consumer welfare, which Bork equated with allocative efficiency and thus total economic welfare.  To be sure, other scholars embraced a "total welfare" approach before Bork did.  In particular, and as I explained in this article, Harvard-school economists Edward Mason, Donald Turner, and Carl Kaysen also embraced "total welfare" as an exclusive goal of antitrust regulation.  However, Bork's work differed from the work of these scholars in two ways.  First, Bork expressly linked "total welfare" and "efficiency" to "consumer welfare," whereas the Harvard School had not employed the latter term, choosing instead to focus only on "efficiency" as the appropriate goal.  Second, unlike these Harvard scholars, Bork offered a legal defense of total welfare/consumer welfare as an antitrust goal.  In particular, after a thorough review of the legislative history of the Sherman Act, Bork argued that the Congress that passed the Act only "intended" to ban those restraints that reduced total welfare, thus leaving those that enhanced efficient resource allocation unscathed.  See Robert H. Bork, Legislative Intent and the Policy of the Sherman Act, 9 J. L. & Econ. 7 (1966).  Bork also argued that, even if Congress's goal was unclear, courts should nonetheless pursue "consumer welfare" exclusively, because the pursuit of any other goal (e.g., a fair distribution of income) or combinations of goals (e.g. protection of small businesses and efficiency) would require courts to make value choices and trade-offs that were properly left to the legislature.  See  Robert Bork, The Goals of Antitrust Policy, 57 American Econ. Rev. (Papers and Proceedings) 242 (1967).  Some scholars have taken issue with Bork's equation of "consumer welfare" with total welfare, with one scholar referring to this claim as "something [Bork] made up." (See also here for an argument that Congress meant to ban all restraints that increased consumer prices in a relevant market, even if the practice increased total welfare.)    Correct or not, Bork's claim was highly influential.  Indeed, in Reiter v. Sonotone, 442 U.S. 330, 343 (1979) the Supreme Court announced that Congress intended the Sherman Act as a "consumer welfare prescription," citing the Antitrust Paradox for this proposition.

As a technocratic matter, Bork proposed the sort of radical reform in antitrust doctrine necessary to make "consumer welfare" as he defined it the exclusive priority of antitrust law.   Perhaps most famously, Bork rehabilitated the distinction, made famous by William Howard Taft, between "naked" and "ancillary" restraints.  See Addyston Pipe and Steel Co. v. United States, 85 F. 271 (6th Cir. 1898).  Like Taft, Bork argued that naked restraints should be unlawful per se, while ancillary restraints should be analyzed under a forgiving rule of reason.   Moreover, Bork also contended that early Sherman Act case law followed Taft's template, even though courts sometimes used different formulations when articulating antitrust doctrine.  In particular, Bork concluded that Taft's formulation anticipated the "Rule of Reason," articulated in Standard Oil v. United States, 221 U.S. 1 (1911) (discussed here), which banned only those restraints that "unduly restrain trade" by producing "monopoly or its consequences."  See Robert H. Bork, The Rule of Reason and the Per Se Concept: Price Fixing and Market Division, 74 Yale L. J. 775 (1965).  Moreover, employing the latest economic theory of the time (and theory that is still adequate for such purposes today), Bork explained why this distinction between "naked" and "ancillary" restraints would produce results that would maximize "consumer welfare" as he defined it.  See Robert H. Bork, The Rule of Reason and the Per Se Concept: Price Fixing and Market Division, part II, 75 Yale L. J. 373 (1966).   Thus, Bork explained that ancillary restraints could align the incentives of individual venture participants with the welfare of the overall venture and thus produce significant efficiencies and enhance the allocation of resources.  In so doing, he argued persuasively for the expansion for the category of restraints deemed "ancillary" to otherwise lawful objectives.  For instance, relying upon the work of Lester Telser, Bork explained how minimum resale price maintenance or exclusive territories imposed by manufacturers or joint ventures could ensure that dealers or venture partners made adequate investments in promotion, instead of "free riding" on the efforts of other dealers or partners. (Unlike Telser, who had focused only on vertical minimum rpm, Bork focused on horizontal and vertical price and non-price restraints.)   In so doing, Bork drew on the work of Ronald Coase, whose 1937 article on the Nature of the Firm would help Coase earn the Nobel Prize in Economic Science in 1991.  Thus, Bork was an early pioneer in applying transaction cost economics to antitrust problems.   (See here, at pp. 53-54 for an account of Bork's early invocation of Coase and transaction cost considerations).  During this same period, Richard Posner, a later convert to Chicago thinking, contended that non-price vertical restraints rarely produced benefits and should this be presumptively unlawful.

The Supreme Court endorsed Bork's reasoning in Continental T.V. v. GTE Sylvania, 433 U.S. 36 (1977), holding, contrary to previous precedent, that non-price vertical restraints could prevent "free riding" and thus may produce "redeeming virtues" of the sort that preclude per se condemnation.  Instead, the Sylvania Court said, courts should analyze such agreements under a forgiving rule of reason.  (Note that the Court issued Sylvania before publication of the Antitrust Paradox.)  Less than a decade later, the Court applied similar reasoning in the context of horizontal restraints, invoking Sylvania and subsequent work of Judge Bork for the proposition that horizontal agreements between members of  sports leagues could enhance the quality of the league's product, thereby preventing per se condemnation of such restraints.    See NCAA v. Board of Regents of the University of Oklahoma, 464 U.S. 85 (1984).  Shortly thereafter, the Court extended Sylvania, holding that an agreement between a manufacturer and a dealer to terminate another dealer for price cutting was not unlawful per seSee Business Electronics v. Sharp Electronics, 485 U.S. 717 (1988).  Nearly a decade later, the Court unanimously reversed the per se ban on maximum resale price maintenance.  See State Oil v. Khan, 522 U.S. 3 (1997).  More recently, in Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007), the Court overturned a 96 year old ban on minimum resale price maintenance, relying upon the work of Bork and others for the proposition that such agreements could combat free riding and thus facilitate promotion of a manufacturer's product.  Each of these decisions, from Sylvania through Leegin, cited Bork's academic work with approval.  To be sure, these decisions cited the work of other scholars as well, but at least some such work simply repeated what Bork had already said a decade or more earlier.

Bork's influence was not confined to the definition and treatment of ancillary restraints.  He also leveled powerful critiques at the Supreme Court's hapless and wealth-destroying merger doctrine, exemplified by cases such Vons Grocery v. United States, 384 U.S. 270 (1964) and Brown Shoe Co. v. United States, 370 U.S. 294 (1962).  See Robert H. Bork, Anticompetitive Enforcement Doctrines Under Section 7 of the Clayton Act, 39 Tex. L. Rev. 832 (1961).    In both decisions the Supreme Court banned, as contrary to section 7 of the Clayton Act, mergers between firms with small shares in markets characterized by ease of entry.  (In Vons, for instance, the firm created by the challenged merger would have had 8 percent of a market with over 3,000 remaining firms.)  As Bork explained, such mergers could not create or facilitate the exercise of market power.  It was thus logical to infer that parties to such transactions hoped to achieve efficiencies. Bork also leveled powerful critiques against overly intrusive standards governing alleged predatory activity, particularly often-unfounded claims that refusals to deal or vertical integration disadvantaged rivals without creating offsetting efficiencies and thus injured consumers.  See Robert Bork and Ward Bowman, The Crisis in Antitrust, 65 Columbia L. Rev. 363 (1965); Robert H. Bork, Vertical Integration and the Sherman Act, 22 U. Chi. L. Rev. 157 (1954).  In 1986, the Supreme Court, in a unanimous opinion by Justice Stevens, invoked Bork's test for evaluating alleged predatory conduct.  See Aspen Highlands v. Aspen Highlands Ski Co., 472 U.S. 585, 597 n. 33 (1986)(citing the Antitrust Paradox for the proposition that conduct was only predatory if it excluded rivals on some basis other than efficiency).

Obviously Bork was not the only participant in the Chicago Antitrust Revolution.   Moreover, many outside the Chicago School endorsed Chicago School critiques of current doctrine and proposals for reform.  For instance, Bork's work led Harvard School icon Donald Turner to reverse his views on vertical restraints.  However, the record shows that Bork led the way and employed reason, not force, to convince others to follow.

Tuesday, December 18, 2012

The AALS Cartel

 Not Good Enough for the AALS?

Received Substandard Legal Education?

Over at Truth on the Market, Thom Lambert has taken issue with a rule, promulgated by the American Association of Law Schools, that forbids law schools from making lateral offers of employment to faculty at other schools after March 1.  To be more precise, the rule admonishes against such offers in cases in which the poached faculty member must begin teaching at the new institution that same fall.  Lambert asserts, and I know of no evidence to the contrary, that law schools fastidiously adhere to the rule, even though it is framed as a "best practice."

As Lambert points out, the rule in question is a horizontal restraint of trade between rivals of the sort that courts ordinarily condemn.  Indeed, he expressly (and properly) invokes the Department of Justice's recent suit against eBay, challenging an alleged agreement between eBay and Intuit whereby the two firms agreed not to poach each other's employees.  (The Department also entered a consent decree with Intuit forbidding the practice.)  If the eBay/Intuit agreement violates Section 1 of the Sherman Act, and Lambert makes a persuasive case that it does, then so does the agreement between the member law schools of the AALS.  Such agreements, by their nature, reduce rivalry between companies (in the case of eBay/Intuit) and member schools (in the class of the AALS rule).  At the same time, neither agreement appears to produce any "redeeming virtue" of the sort recognized as cognizable by case law applying the Sherman Act.  To be sure, the fact that a faculty member leaves her institution in, say, May, for another school, can impose substantial costs on the institution that loses the faculty member.   However, as Lambert notes, the costs will vary depending upon the faculty member, the courses she taught, and whether the school is located near other schools that might be sources of potential visitors who would not have to relocate.  As Lambert also points out, schools can protect themselves unilaterally against such harm by entering contracts forbidding their faculty from accepting offers after a certain date, contracts that contain liquidated damages clauses that compensate the school for the any damages suffered when the faculty member leaves late in the year.    (These damages could, for instance, compensate the school for the cost of hiring a visitor to cover the departing faculty member's courses on short notice.)  (By analogy, it should be noted that many universities unilaterally provide that a faculty member who receives a sabbatical must return to teach for at least one year before leaving for another school.)  As a result, Lambert contends, no agreement between law schools is necessary to combat the harms from late departures.

Of course, and as Lambert recognizes, the Sherman Act does not ban all horizontal restraints.  Instead, as previously noted on this blog, courts will allow those horizontal agreements that are necessary to overcome any market failures that would result from parties' reliance upon an unfettered, atomistic market to conduct economic activity.  A classic example is the formation of a partnership and restraints ancillary thereto.  Such restraints may, for instance, prevent individual partners from "moonlighting," that is, competing with the partnership, thereby eliminating horizontal rivalry that would otherwise occur.  Nonetheless, as William Howard Taft explained over a century ago, the common law encouraged such restraints, and properly so.   After all, Taft said, such agreements encourage partners to devote all of their efforts to furthering the business of the partnership, instead of diverting value from the enterprise to themselves or, as modern economists would put it, "free riding" on the larger partership.  See United States v. Addyston Pipe & Steel Co., 85 F. 271, 280 (6th Cir. 1898) (treating such restrictions as paradigmatic ancillary restraints that the law should "encourage"); Robert Bork, The Rule of Reason and the Per Se Concept: Price Fixing and Market Division, 75 Yale L.J. 373, 381-83 (1965) (explaining how such restrictions could prevent free riding by partners on the overall enterprise and thus enhance welfare).  Put another way, such agreements pass muster under the Sherman Act's "Rule of Reason," articulated in Standard Oil v. United States, because they do not restrain trade "unduly," but instead "advance" or "fructify" it. 

In short, horizontal cooperation between rivals is perfectly proper when reliance on the unfettered market would otherwise  result in a market failure and a misallocation of resources.  See Alan J. Meese, Price Theory, Competition and the Rule of Reason, 2003 Ill. L. Rev. 77.  Where, on the other hand, there is no such failure, that is, where unilateral decisions in an efficient market will produce efficient results, there is no rationale for such collective action, and courts should ban otherwise lawful restraints.   See Alan J. Meese, Monopoly Bundling in Cyberspace: How Many Products Does Microsoft Sell?, 44 Antitrust Bulletin 65 (1999).  As the Supreme Court explained in National Society of Professional Engineers v. United States, 435 U.S. 679 (1978), the antitrust laws rest on the assumption that consumers understand their own interests and can assess the virtues and relative prices of competing products.

At the same time, the "anti-poaching agreement" that Lambert has condemned may be the tip of the AALS cartel iceberg.   Even a brief perusal of the organization's membership requirements reveals various provisions that eliminate competition without any apparent market failure justification.  For instance, the AALS provides that law schools must have a full time faculty of a certain minimum size, so as to "provide ready professional relationships among the faculty and between the faculty and the students and to offer a reasonably broad curriculum."  The Nation's first law school, at William and Mary, would have flunked this standard, because the faculty consisted of Founding Father George Wythe, who taught, among others, John Marshall, who would later become Chief Justice of the United States.  So far as I know, however, no one would plausibly argue that Marshall's legal education was "not up to snuff."

The same AALS standards also prevent a law school from de-emphasizing research so as to encourage more teaching,   The standards also mandate that each member school "shall seek to have a faculty, staff, and student body which are diverse with respect to race, color, and sex."  Finally, the standards require each school to have a library of a particular size.  The requirements of minimum faculty size, significant support for research and minimum library size, it should be noted, likely raise barriers to entry, by requiring a new school to enter at a particular scale to become a member.

Each of these standards seems inconsistent with the principle that Lambert espouses and, for that matter, the Supreme Court's antitrust case law.  One can stipulate that large faculties, significant research, diversity and large libraries are "good things" without thereby providing a justification of collective imposition of these objectives.  Put another way, there is no apparent market failure that prevents competition between member schools from resulting in appropriate attention to each of these attributes.  For instance, there is no apparent reason that potential law students are incapable of assessing the value that a diverse faculty will add to their education and thus preferring, other things being equal, those schools with diverse faculties.  That's the way competition in a free society is supposed to work.  Ditto for faculty size.  If a school believes that its large faculty provides a better educational environment, other things being equal, than a smaller faculty and vice versa, each such school should be free to offer its product in the marketplace, subject to market competition from other products.  Who knows, one such school might educate the next John Marshall!

Monday, December 17, 2012

Strom Thurmond: Democrat Segregationist



(D-South Carolina)

The Washington Post is reporting that South Carolina governor Nikki Haley (R-S.C.) will appoint Congressman Tim Scott (R-S.C.) to replace retiring Senator Jim Demint (R-S.C.).  As the story points out, Congressman Scott will be the only African-American serving in the United States Senate. The story also contains some misleading material, however.  In particular, the story points out that Scott was elected to Congress after defeating the late Senator Strom Thurmond's son.  In so doing, the story implies that the elder Thurmond was a Republican when he led the opposition to desegregation.  In particular, the story states:

"Scott was first elected to the House in 2010, winning an open seat after defeating the son of longtime Sen. Strom Thurmond (R-S.C.), the former segregationist who held the state’s other Senate seat for nearly 50 years until 2003."

Readers unfamiliar with history will assume that the elder Thurmond was a Republican for his entire career and thus was a member of the Republican Party when he most vehemently and actively opposed desegregation.   Both assumptions are false, however. (Ann Althouse flagged this mistake earlier today.)  First elected as Governor of South Carolina in 1946, Thurmond was a Democrat his entire life, until 1964, when he switched parties.  Like other Southern Democrats of his era, Thurmond opposed desegregation and resisted Civil Rights.  Most famously, Thurmond ran for President on a segregationist platform in 1948, under the banner of the "States Rights Democratic Party," commonly known as the Dixiecrats, founded by disaffected Southern Democrats.   He won four states dominated by Democrats: Louisiana, Mississippi, Alabama and South Carolina.   He also received more votes than Republican nominee Thomas Dewey in Georgia.   Indeed, in some of these states Thurmond out-polled Dewey by extraordinary margins.  In Mississippi, for instance, Thurmond earned 167,000 votes, compared to less than 6,000 for Dewey.  In South Carolina, he earned just over 102,000 votes, compared to 5,283 for Dewey.   (See this page for state-by-state returns in the 1948 Presidential election.)

It's no surprise that Thurmond clobbered Dewey, the nominee of the party of Lincoln, in Democrat strongholds.   Like the modern Republican party, the Republican Party of 1948 embraced civil rights, equal opportunity and desegregation.  According to the party's 1948 platform

"One of the basic principles of this Republic is the equality of all individuals in their right to life, liberty, and the pursuit of happiness. This principle is enunciated in the Declaration of Independence and embodied in the Constitution of the United States; it was vindicated on the field of battle and became the cornerstone of this Republic. This right of equal opportunity to work and to advance in life should never be limited in any individual because of race, religion, color, or country of origin. We favor the enactment and just enforcement of such Federal legislation as may be necessary to maintain this right at all times in every part of this Republic.

We favor the abolition of the poll tax as a requisite to voting.

We are opposed to the idea of racial segregation in the armed services of the United States."

Harry Truman, of course, defeated both Dewey and Thurmond.  The Democratic party welcomed Thurmond back shortly thereafter, where he joined fellow Democratic segregationists like George Wallace, Orville Faubus, and Robert Byrd, just to name the most "prominent."   Though, to his credit, Truman did, for instance, order desegregation of the Arrmed Forces, over the objection of many members of his own party.

In short, like the modern Republican party, the 1948 Party was no home for segregationists like Thurmond.    Indeed, just six years after the 1948 election, Dewey's running mate, Earl Warren, authored Brown v. Board of Education.  Brown held that school segregation violated the 14th Amendment of the Constitution, which Congressional Republicans had authored and proposed during Reconstruction, as a vehicle for protecting African-Americans from oppression at the hands of Democratic officials in the former confederate states.  Three years later, President Eisenhower (R.-Kansas) sent the 101st Airborne Division to Little Rock to enforce Brown, despite opposition from numerous Democrats.  (Eisenhower is pictured above with various Civil Rights leaders, including the Reverend Dr. Martin Luther King.)

Unbowed by Brown, Thurmond also led dozens of fellow Democrats in the House and Senate in opposition to the 1957 Civil Rights Act, supported by President Eisenhower, launching the longest filibuster ever in the Senate.  (Thurmond is shown above during the filibuster.)  Despite opposition by Thurmond and some other Democrats, the Act  passed by a comfortable margin, with every Republican Senator, including Barry Goldwater, voting "Aye."   (I have not been able to locate the roll call votes in the House.)  (A majority of Democrats, it should be noted, joined their Republican colleagues and voted for the legislation.) 

To be sure, Thurmond switched political parties in 1964.  He never publicly renounced his 1948 run for President or his opposition to Brown, for instance.  At the same time, when he ran for President in 1948, opposed Brown during the 1950s, and filibustered the 1957 Civil Rights Act, he was no Republican byt was instead opposing Republicans and their policies.

Saturday, December 15, 2012

"Right to Work" is no Misnomer

Half Right

Did Not Volunteer For This

As previously explained on this blog, so-called "right to work" laws ban collective bargaining agreements that require all employees, under threat of termination, either to join a union or, in the alternative, pay union dues pursuant to so-called "agency security agreements."  The 1947 Taft-Hartley empowered states to pass such bans, thereby repealing that portion of the 1935 National Labor Relations Act that had empowered firms and unions to negotiate so-called closed shop agreements that required individuals to join a union as a condition of employment at the firm governed by the collective bargaining agreement.   As discussed earlier this week, Michigan recently joined Indiana as a "right to work" state.

Over at the Washington Post, Ezra Klein takes issue with the term "right-to-work," claiming that laws like those recently passed in Michigan protect no such thing.  As Klein points out, employers impose all sorts of contractual requirements on employees, including dress codes, bans on employees working for a competitor, and even regulations governing what employees may or may not tweet.  If an employee violates these terms, Klein says, a firm can fire the offending employee, and no one would claim that such termination violates the employee's "right to work."  After all, Klein says, the employee agreed to such terms when she accepted employment.  If he or she does not like them she can exercise her "right to work" elsewhere.  In the same way, Klein says, closed shop or agency shop agreements are simply contractual terms to which individuals have agreed by going to work for a unionized firm.  Thus, he concludes, the term "right to work" is a misnomer; no one has a "right to work" at a firm while ignoring contractually-imposed working conditions.

On the one hand, Klein's argument contains a refreshing articulation and defense of the right to enter and enforce contracts in a free society.   He is absolutely right that society should generally respect and enforce agreements between employers and employees over the terms of employment.  He is also right to point out that terminating an employee for breaching such a freely-entered contractual provision does not offend the employee's "right to work."  Individuals hold "rights" against the government, and not against other private individuals or firms to whom they have made voluntary contractual promises.   In the same way, an individual who voluntarily agrees not to criticize his employer as a condition of employment cannot invoke the First Amendment (the "right to speak") when fired for tweeting disparaging comments.   Ditto for an employee who voluntarily works for a firm that does not provide the exact form of health insurance the individual desires.  Those who argue to the contrary confuse "freedom" with "power."   The "right to work" or "freedom" does not grant an individual the power force employers to hire an employee on the latter's unilateral terms.

Klein goes astray, however, when he analogizes garden variety contractual provisions such as dress codes to closed shop and agency shop agreements.  This analogy fails for two independent reasons.

First, while firms impose and enforce dress codes and similar provisions voluntarily, the same cannot be said for collective bargaining agreements.  Many firms have no desire to enter such agreements in the first place, but federal law gives them no choice.  In particular, the National Labor Relations Act, mentioned above, requires firms to retain employees who join or seek to organize unions, whether the firm wants to or not.  Moreover, the Act also bans so-called "yellow dog contracts," that is, agreements whereby an employee agrees not to join a union.  The Supreme Court held that the NLRA is within Congress's Commerce power, even when applied to manufacturing, in NLRB v. Jones and Laughlin Steel, 301 U.S. 1 (1937).   As a result, the institution of collective bargaining very often infringes upon the very freedom of contract that Klein invokes.  Thus, closed shop and agency shop agreements are often the result of State-amplified union power, which impells firms to enter them, and not voluntary contractual agreement.  Such provisions do not amount to the sort of labor-instigated violence dramatized in films such as "On the Waterfront," which called attention to the plight of American workers victimized by their own union.  Nonetheless, such provisions function as a State-imposed tax on the "right" of an employee to choose for whom to work, indistinguishable from a tax on a decision to publish a book, attend a church or write a blog post.  While employees do "volunteer" to abide by dress codes, they do not volunteer to enter agency shop "agreements," any more than Terry Malloy, played by Marlon Brando, volunteered for (much worse) physical abuse at the hands of Johnny Friendly and his thugs.

To be sure, some firms might wish to enter collective bargaining agreements, regardless of federal coercion to do so.  Ironically, however, the mandatory nature of the NLRA makes it impossible to distinguish  (potentially) voluntary from involuntary agreements.

Second, unlike dress codes, collective bargaining agreements impact third parties who are not privy to the agreements.  In particular, such agreements, like other cartel agreements, reduce the output of labor below the competitive level and thus distort the allocation of resources, reducing society's overall output.  Any benefits that union members derive from such agreements are more than offset by the harm that such agreements impose on the rest of society.   Thus, to the extent that agency security agreements, for instance, pad union coffers, the ability to impose such contracts via collective bargaining agreements will increase the payoff from unionization and thus encourage the formation of more cartels.

Don't "Plan" The Colorado River or Why Property Still Works

Bound For Los Angeles? 

Had a Better Idea

Yesterday's Los Angeles Times reported that "[w]ater demand in the Colorado River Basin will greatly outstrip supply in coming decades as a result of drought, climate change and population growth."  The story is based on a recent study by the U.S. Department of the Interior, which concludes that demand for the river's water will exceed supply by 3.2 million acre-feet per year in 2060.  According to the story, 3.2 million acre-feet is more than five times the current annual consumption of water by Los Angeles and its citizens.  The story concludes by discussing various possible responses to such a shortage.  Such responses include conservation, recycling, desalinization, building a pipeline from the Missouri River to Southern California, or towing icebergs from the Arctic Ocean to Southern California.  Interior Secretary Ken Salazar admonished all those who rely on water from the Colorado to "plan for this together."  

With due respect to Secretary Salazar, little or no planning is necessary.   Such a "shortage" is the natural and predictable result of the failure to establish property rights in a resource, a failure that results in below-market prices and thus artificially high demand and overuse by those, including agribusinesses, who do not internalize the full social cost of using the resource.  As one leading scholar has explained: "[w]ell-defined and defended property rights encourage greater resources stewardship and sustainable utilization."  See Jonathan Adler, Water Rights, Markets and Changing Ecological Conditions, 42 Environmental Law Review 93 (2012).  Thus, a well-functioning market for water from the Colorado River and elsewhere would result in prices that reflect the actual social cost of that water and thus a more efficient allocation of this precious resource.

At first glance it seems more difficult to establish property rights in water than in other items such as automobiles, I-Phones or candy bars.  After all, it's one thing to own a pickup truck; quite another to own a river.  And yet, auctioning off the Colorado River might be just the solution to this purported "shortage."  Such an auction would create a single owner of all the water in the river, and this owner would then charge a market price for the water in question, a price that would bring demand and supply into equilibrium and thus eliminate any artificial shortage.  In such a market, consumers would only purchase water when their personal value for the water equaled its true social cost.  Moreover, such consumers would have incentives to conserve water in any number of ways.  For instance, farmers might choose to plant crops that are less water-intensive, even if such crops are slightly less valuable.  Fewer citizens would purchase swimming pools, and some would forgo grass lawns for the sort of faux desert landscapes, complete with rocks, cacti and palm trees, already popular in the Southwest.

Without any planning whatsoever, then, the creation of property rights in the Colorado's water would encourage conservation and result in a more efficient allocation of this scarce resource.  As F.A. Hayek explained more than six decades ago, the price system is a "marvel" that transmits information about the value of competing uses of particular resources to various market participants.  Thus, different possible purchasers of water need know nothing about how or why other purchasers might use water, as the market price will reflect values that other market participants place on that use.  See F.A. Hayek, The Use of Knowledge in Society, 35 American Econ. Rev. 519 (1945).   Moreover, as Hayek explained in subsequent work, the creation and enforcement of well-defined property rights is a necessary condition for a well-functioning price system.   See F.A. Hayek, Free Enterprise and Competitive Order in Individualism and Economic Order, 110-16 (1948) (explaining that well-functioning competitive order depends upon properly-designed “legal framework” of contract, property, tort, and business law).  Thus, granting the Colorado's water to a single owner would facilitate the operation of a well-functioning price system and thus help optimize the allocation of water resources. 
Some might object that this hypothetical single owner of the Colorado River would reduce output below the socially optimal level and charge monopoly prices for the river's water.  There are, however, there distinct reasons that this possibility is less problematic than it might first seem.

First, even if such a single owner did reduce water output below the socially optimal level, such a (negative) deviation from the optimal output of water may do less social harm than the current regime, under which firms and individuals consume too much water, thereby resulting in artificial shortages.  All institutions are imperfect; as Ronald Coase explained over two decades ago, society must choose between various imperfect institutional arrangements.  Perhaps granting a monopoly over the Colorado's water would be the least imperfect means of allocating this resource.

Second, any claim that a monopolist will produce well below the optimal level of output assumes that the river's single owner will change the same price per gallon to all purchasers, that is, will not engage in price discrimination.  If, however, the firm does engage in price discrimination, albeit imperfect discrimination, it will be able to set output closer to the socially optimal level.  While such a firm would earn excessive profits, a properly-run and competitive auction would force the firm to pay the expected value of such profits to the national government, which could use these proceeds to reduce taxes or take other steps that would mitigate the distributional consequences of such monopoly pricing.

Third and finally, any claim of monopoly is likely overstated.  After all, the Colorado river is not the only source of water for many of the firms and individuals that currently draw water from it.  Indeed, one suspects that the current and artificially low price for the Colorado's water has discouraged firms and individuals from seeking out alternate sources.  Thus, creation of a single owner of the Colorado's water, by increasing prices closer to market levels, may actually spur users to identify competing sources of water.  If a single owner really did end up with meaningful monopoly power, the national government could consider allocating particular shares of the river's output to several sellers, who could then compete to sell the water to purchasers.

Don't look for the national government to sell off the Colorado River any time soon.  The proposal may have additional downsides not discussed here.  Moreover, the national government may have to pay just compensation to individuals who currently possess property rights to particular amounts of water under state law, for instance.  Finally, political pressure from those who benefit from the current system would prevent the sort of major reform suggested here.  Still, imagining such a radical, property-based solution could be the first step toward meaningful reform that would eliminate artificial shortages and thus obviate the need for schemes like towing icebergs to Los Angeles.

Wednesday, December 12, 2012

President Obama's Strange Critique of Michigan's Right to Work Law

 Wolverine Fiercely Protecting the Right to Work (Finally)

Michigan has the nation's highest rate of unionization and one of the nation's highest rates of unemployment.  Many in the state and elsewhere believe that this correlation is not accidental, that is, that the state's union-friendly environment unduly raises wages and other labor-related costs and deters business investment and resulting employment opportunities.  See George J. Stigler, The Theory of Price, 279 (4th Ed. 1987) ("The labor union is for the labor market the equivalent of the cartel for the product market.").   (See this previous post discussing some data on the question.)  Indeed, as previously discussed on this blog, Michigan and other union-friendly states are losing population to states such as Texas, Florida, Georgia, Nevada, South Carolina and Utah, as businesses and the jobs they create migrate to states with tax and regulatory environments that are more friendly to productive economic activity. 

Just yesterday the Michigan Legislature added the Wolverine state to the growing list of states known as "right to work states."   In so doing, Michigan followed the lead of Indiana, which passed similar legislation in February of this year.  To precise, the legislature banned so-called "closed shop agreements," and "agency shop agreements."  Such provisions in collective bargaining agreements require a firm's employees to join a union (closed shop agreements) or, in the alternative, to pay dues to support the union's collective bargaining activities (agency shop agreements).  As a result of such legislation, Michigan workers may now choose to work wherever they wish, free of any compulsion to support unions they oppose.  Governor Rick Snyder signed the legislation into law last evening.

Support for Michigan's right to work legislation was not unanimous, with some on the Progressive Left decrying the legislation.  Chief among the detractors was President Obama, who flew to Detroit to denounce the pending legislation earlier this week, in a speech otherwise devoted to fiscal policy.  The Huffington Post reported the President's remarks as follows:

"And by the way, what we shouldn't do -- I've just got to say this -- what we shouldn't be doing is trying to take away your rights to bargain for better wages and working conditions," he added to loud applause from the audience. "We shouldn't be doing that. The so-called 'right-to-work' laws -- they don't have to do with economics, they have everything to do with politics. What they're really talking about is giving you the right to work for less money."

President Obama's attempted and failed intervention in Michigan politics is perplexing on several levels.  For one thing, the Taft-Hartley Act, which authorizes states to ban closed shop and agency shop agreements is the Supreme Law of the Land and expresses national policy of the subject.  As previously explained on this blog, that policy encourages states to decide for themselves whether compelled support for unions will enhance growth and economic opportunity within their borders.  As President, Mr. Obama must, according to Article II of the Constitution, "take care that [Taft-Hartley] is faithfully executed."       President Obama may well believe Taft-Hartley was a bad idea.  Moreover, he is perfectly free to introduce legislation repealing Taft-Hartley if he wishes.  Absent such a repeal, however, he should embrace the legislation and respect Michigan's choice.

Moreover, the President's account of the Michigan legislation is, simply put, false.  The legislation in no way limits "rights to bargain for better wages and working conditions."  On the contrary, the legislation leaves each and every Michigan worker perfectly free to affiliate with a union and thus bargain collectively for higher wages and better conditions.  All the legislation does is prevent unions and the firms with which they bargain from compelling individuals to subsidize a union as a condition of pursuing his or her chosen vocation.

Finally, the President's claim that "right-to-work" legislation  is about "politics" and not "economics" does not withstand even cursory scrutiny.  According to economists who have studied the question, rampant unionization of American industry during the mid-late 1930s hampered economic recovery and lengthened and deepened the Great Depression.  (See here and here for previous discussions of these data.)  To put a finer point on it, federal imposition of labor cartels distorted the allocation of the nation's resources and reduced employment, as many predicted at the time.  Millions of Americans became poorer as a result.  While coercive imposition of trade unions on American business raises the wages of some workers, other workers and, ultimately society at large,  suffer. 

Update (4:50 PM, December 12):  Over at CNN, William Bennett has penned an Op-Ed praising Michigan's choice of Right-to-Work status.  In so doing, Bennett echoes some of the arguments made above.  In particular, Bennett offers an effective rebuttal of President Obama's claim that right to work laws are all about politics and not about economics.  According to Bennett:

"[C]ontrary to President Obama's thinking, right-to-work laws are directly related to economics. Right-to-work laws give employers the freedom to hire non-union workers and negotiate contracts with more than one party. For this reason, right-to-work states are more attractive to private business than non-right-to-work, and could increase private-sector wages.  For example, on CNBC's annual list of the best states for business, nine of the top 10 states are right-to-work states. It's no coincidence that foreign automobile manufacturers often build new plants in right-to-work states like Tennessee and Alabama, rather than Detroit -- the "Motor City."  Perhaps Michigan's new right-to-work status will unlock employers from burdensome union contracts and attract new private enterprise to Detroit, which is predicted to go bankrupt by the end of this year. After all, Gov. Scott Walker's union reforms in neighboring Wisconsin helped eliminate the state's budget shortfall."

Monday, December 10, 2012

Conservatives Embracing Science, While the Left Balks

Accepts Science 


Rejects Science/Thinks He Knows Better

Senator Marco Rubio (R-Florida) and Pat Robertson, both pictured above, have made news recently, both embracing the scientific consensus that the earth is 4.5 Billion years old.   As Senator Rubio, a Roman Catholic,   put it:  "Science says (the earth) is about 4.5 billion years old.  My faith teaches that's not inconsistent. . . . God created the heavens and the earth, and science has given us insight into when he did it and how he did it."   Mr. Robertson, a Southern Baptist and the Chancellor of Regent University, put things this way:

"Bishop Ussher [who opined that the Earth was created in 4004 BC] wasn't inspired by the Lord when he said that it all [creation of the Earth and Man] took 6,000 years. It just didn't. You go back in time, you've got radiocarbon dating. You got all these things and you've got the carcasses of dinosaurs frozen in time out in the Dakotas.  They're out there. So, there was a time when these giant reptiles were on the Earth and it was before the time of the Bible. So, don't try and cover it up and make like everything was 6,000 years. That's not the Bible."

Mr. Robertson's remarks won the praise of national luminary "Bill Nye the Science Guy," who expressed hope that Mr. Robertson would continue to press his view on the age of the Earth.  Previously Mr. Nye had argued that the belief that the Earth is 6,000 years old "threatens science."

Unfortunately, some public officials still reject basic scientific teachings.  For instance, as previously explained on this blog, President Obama's repeated claim that tax cuts caused the recent "Great Recession" contradicts basic economic science of the sort taught to thousands of college freshmen each year in the United States and around the world.  More recently, Vice President Biden (pictured above) joined the anti-science chorus, claiming, again contrary to basic economic science, that tax cuts and increased spending during the G.W. Bush Administration caused the Great Recession.  Here's what the Vice President said, during his debate with Congressman Paul Ryan.  According to the Vice President:

"And, by the way, they [Republicans] talk about this Great Recession [of 2008-2009] as if it fell out of the sky, like, 'Oh, my goodness, where did it come from?' It came from this man [Congressman Ryan] voting to put two wars on a credit card, to at the same time put a prescription drug benefit on the credit card, a trillion-dollar tax cut for the very wealthy. I was there. I voted against them. I said, no, we can’t afford that."

Like President Obama's claim about tax cuts, Vice President Biden's claim that deficit spending caused the recent recession is economic nonsense, akin to a claim that the Earth is flat or the center of the Universe.  Just as there is a scientific consensus that the Earth is 4.5 Billion years old, there is a longstanding scientific consensus that increasing the deficit, whether by tax cuts, increased spending or both will stimulate aggregate demand, increase employment and increase the nation's real economic output.  See e.g. N. Gregory Mankiw, Macroeconomics, 296 (7th Edition 2010) (explaining how tax cuts increase the budget deficit and thus aggregate demand and national output); Rudiger Dornbusch and Stanley Fischer, Macroeconomics, 73-83, 401-11 (2d Edition 1981) (explaining how tax cuts and spending increases can increase aggregate demand and thus national output).  The only exception is for cases in which the economy is already at full employment.  In such cases, deficit spending cannot increase output but can only result in inflation.  However, so far as I know, no one contends that the economy was at full employment when, say, Congress enacted the so-called Bush tax cuts in 2001.  In the same way, the economy was at less than full employment when President Kennedy proposed across-the-board tax cuts in an effort to "get the economy moving again."

Of course, there are other reasons to oppose budget deficits and the resulting increase in the national debt.  For instance, government borrowing to encourage consumption can crowd out private investment, thereby partly (but only partly) offsetting any resulting increase in national output.  A nation could decide to forgo higher GDP in the short run in the hopes that, in the longer run, increased private investment will increase national productivity and thus potential national output.  But it bears emphasis that this argument against increased deficits assumes that such deficits increase national output, contrary to Vice President Biden's assertion.

Oddly the economics profession has been relatively silent in the face of this Administration's rejection of basic economic science.  To be sure, hundreds of economists endorsed Mitt Romney in the recent general election.  Six of these individuals were past recipients of the Nobel Prize in Economic Science.  However, so far as I know, no such economist has called out President Obama or Vice President Biden for their rejection of basic science.  This is surprising, because the rejection of economic science can have serious real world consequences for millions of ordinary Americans.  (Imagine if, instead, the President and Vice President claimed that vaccinations do not work or that smoking does not harm your health.  Surely the relevant scientific professionals would (properly) be up in arms.)

Perhaps the economics profession needs its own "Bill Nye the Science Guy" to shame public figures who reject basic economic science.