Saturday, January 28, 2012

California Exercising Freedom to Fail



No Longer a Land Worth Finding

In a recent Op-Ed in the Wall Street Journal, former Florida Governor Jeb Bush reminded us that true freedom includes the freedom to fail.  As he put it:

"We have to make it easier for people to do the things that allow them to rise. We have to let them compete. We need to let people fight for business. We need to let people take risks. We need to let people fail. We need to let people suffer the consequences of bad decisions. And we need to let people enjoy the fruits of good decisions, even good luck. That is what economic freedom looks like. Freedom to succeed as well as to fail, freedom to do something or nothing."

Bush, of course, was referring to the economic freedom of individuals and the businesses they own and create to compete in a free market.  But similar considerations apply to states in a system premised upon competitive federalism.   In such a system, states are free to make fiscal and regulatory decisions, so long as those decisions do not interfere with the authority of other states.  (For instance, Virginia is free to raise taxes on its own citizens; it may not raise taxes on citizens of New York.)  This freedom also empowers states to compete with one another for citizens and investment capital.  Thus, a state that offers an attractive mix of fiscal policy and regulation will presumably attract individuals and investment capital, while those that offer unattractive fiscal and regulatory policies will see individuals and capital flee.

Just as individual economic freedom must include the freedom to fail, so too must competitive federalism include the freedom of states to fail if they embrace detrimental fiscal and regulatory policies.  Like individuals, states should suffer the consequences of their actions. 

California seems to be exercising this freedom to fail with a vengeance.   According to Bloomberg News, California Governor Jerry Brown has proposed yet another significant increase in state spending, at a time when the State is already running a large deficit and holds an "A-" credit rating from Standard and Poors.  This rating is significantly lower than that held by Virginia (AAA), Indiana (AAA), the United States of America, (AA+),   France (AA+), Japan (AA-), and Chile (A+), to take but a few examples.   Sovereigns sharing California's credit rating include Botswana, Malaysia, and Malta.   (Go here for a comprehensive list of nations and their credit ratings.)  Indeed, according to this source, California is tied for last among American states with Lousiana when it comes to S & P's rating of its debt.  Brown would finance part of this new spending with yet another increase in state income taxes, raising the rate on individuals earning over $250,000 per year a full percentage point, to 10.3 percent. 

California already has the third highest income tax rates in the nation, behind Hawaii and Oregon, both of which stand at 11 percent.  Its sales taxes are also among the highest in the nation.  At the same time, the state imposes burdensome regulations on business that inhibit job creation and economic opportunity.  It's little wonder, then, that California currently suffers from an unemployment rate over 11 percent, compared to a national average of 8.5 percent.  Nor is it surprising that the state has recently seen a net outflow of citizens, as more and more Californians leave the Golden State for states like Texas.  While those who found California cried out "Eureka" ("I have found it"), more and more are crying "let's get out of here."  Hopefully Americans will resist calls by some to force citizens in more responsible states to bail California out.

Friday, January 6, 2012

Is The NCAA an Illegal Cartel?


Greedy Cartelist?

An Op-Ed in Sunday's New York Times entitled "The College Sports Cartel," Joe Nocera decries the fact that NCAA student athletes cannot receive more than a full scholarship, room and board, and stipend to cover living expenses.   As the author notes, NCAA rules --- the product of an agreement between competing member schools --- forbid schools to pay student-athletes a salary analogous to what, say, a minor league baseball team would pay its players.  (Put another way, NCAA rules require student-athletes to remain amateurs.)  The author characterizes this agreement as "collusion" of the sort ordinarily forbidden by the antitrust laws, collusion that enriches member schools at the expense of purportedly "shackled" student athletes.   He ends by opining that "[I]t certainly would be worthwhile to see someone challenge [the NCAA's] cartel behavior in court."

And yet, as Nocera himself perceptively admits: "Sports leagues can’t exist without at least some [so-called] collusion."   A classic example, of course, the agreement between a league's members on the number of games in a season.  Thus, the NBA's decision that each team will play "only" 82 games in the regular season is a horizontal agreement on the output of games, a limitation that could be unlawful in other circumstances.  Ditto for members' agreement on the length of the playoffs, including how many games are in the finals.  (Imagine if Ford, GM and Chrysler announced they were agreeing on the number of pickup trucks they would produce in the coming year.)  Indeed, calling such agreements between members of the NBA "collusion" would deprive the word of any useful descriptive value in this context, as the term would become a synonym of "contract" or "cooperation."

Sports leagues are not unique in this sense.  All sorts of welfare-increasing economic activity is the result of agreements between rivals, agreements that economists and antitrust courts call "horizontal."  For instance, the formation of a partnership is a horizontal agreement that eliminates rivalry between the new partners.  Such partnerships often include explicit agreements between the partners not to "moonlight" and thus compete with the partnership.    Ditto for franchising, which many economists properly conceptualize as an agreement between actual or potential rivals (think of the numerous independent McDonalds franchisees in a medium-sized town).  Such agreements set product standards, decide what products members of the chain will offer, what ingredients each product will contain, etc.  Without such (horizontal) agreements, what consumers currently experience as a well-run franchise system would rapidly devolve into a loose confederation of business establishments that, while operating under the same trademark, would offer varying products and varying degrees of quality, sowing confusion in the mind of consumers and defeating the purpose of operating under a single trademark.  Thus, while such agreements reduce rivalry in some sense between members of a franchise system, they can ultimately enhance the quality of the products offered by a particular franchise system and thus further useful competition with other such systems, to the ultimate benefit of consumers and the rest of society. 

In short, like many productive ventures, the NCAA and other sports leagues entail cooperation between rivals, cooperation that could be problematic in other contexts when viewed in isolation.  The key question from the perspective of the antitrust laws is whether the cooperation in question, while nominally reducing competition between rivals, might in fact overcome a market failure and thus increase the welfare of society by inducing a more efficient allocation of resources.  That, in short, is the focus of antitrust's "Rule of Reason, " announced in Standard Oil v. United States.  (See this article for a more in depth explanation of the connection between market failure and Rule of Reason analysis.)

While litigation against the NCAA on this question might enrich antitrust lawyers, the Supreme Court has already explained how it would rule in such a case.  Twenty-five years ago, in NCAA v. Bd. of Regents of the University of Oklahoma, the Court evaluated NCAA rules limiting the number of games that networks could broadcast on television during any given season.  The rules also limited the number of times that any particular school could appear on television.  The Court condemned the rules under the Rule of Reason because they reduced output without any offsetting benefits.

In so doing, however, the Court expressly approved other horizontal restraints imposed by the NCAA, including those fostering amateurism by the players.  The Court's language (previously discussed on this blog) is worth quoting in full:

"What the NCAA and its member institutions market in this case is competition itself -- contests between competing institutions. . . . . [T]he NCAA seeks to market a particular brand of football -- college football. The identification of this 'product' with an academic tradition differentiates college football from and makes it more popular than professional sports to which it might otherwise be comparable, such as, for example, minor league baseball. In order to preserve the character and quality of the "product," athletes must not be paid, must be required to attend class, and the like. And the integrity of the 'product' cannot be preserved except by mutual agreement; if an institution adopted such restrictions unilaterally, its effectiveness as a competitor on the playing field might soon be destroyed. Thus, the NCAA plays a vital role in enabling college football to preserve its character, and as a result enables a product to be marketed which might otherwise be unavailable. In performing this role, its actions widen consumer choice -- not only the choices available to sports fans but also those available to athletes -- and hence can be viewed as procompetitive."

The Court then noted (as suggested above) that "a restraint in a limited aspect of a market may actually enhance market-wide competition."

Simply put, the Court concluded that unbridled competition between member schools for players, thereby allowing schools to pay players a salary, would result in a market failure.  That is to say, no individual school would, when setting players' compensation, take into account the impact of that decision on the overall "brand" or "image" of the product being offered.  While players might benefit in the short run, the "brand appeal" of college football would suffer over the longer run, as what was once amateur athletics associated with an academic tradition (and thus a natural fan base) would degenerate into a professional league inferior to the NFL and without a natural fan base.

The result may seem to countenance an unfair distribution of the benefits produced by NCAA football.  Certainly some schools earn millions each year due to the performance of their student athletes.  (At the same time, however, many others lose money on the sport, and no one is proposing that student athletes share in these loses.)  However, antitrust law does not exist to ensure a fair division of the gains from economic activity but instead only bans those agreements or unilateral practices that reduce economic welfare. 

In Praise of President Obama's Embrace of Signing Statements and Presidential Review


Agrees With Reagan, G.W. Bush, Abraham Lincoln and James Madison



Thinks Abraham Lincoln and James Madison Didn't Get It

Earlier this week, President Obama signed Defense Authorization legislation while at the same time issuing a so-called "signing statement."  Among other things, the statement provided that the President will read the Act so as not to authorize detentions of American citizens that the President believes to be unconstitutional.  (The Associated Press recounts the President's signature and signing statement here.)  Thus, President Obama joined Presidents Reagan, Bush I, Bush II, Wilson, Madison, Jefferson, Clinton and probably others in asserting the authority to decline to enforce legislation the President believes to be unconstitutional.

Some are criticizing the President's decision to issue a signing statement, one of nearly 20 he has issued in his Presidency.  For instance, in a letter to President Obama, the President of the American Bar Association, William Wilson (pictured above) decried the President's signing statement.  Pointing to a 2006 Resolution of its House of Delegates, the letter claimed that a President must enforce any and all legislation validly passed by Congress, even if the President believes the legislation to be unconstitutional.  The letter argued that a President who believes particular legislation is unconstitutional must veto it and, failing such a veto, or if the veto is over-ridden, enforce the legislation as written.  (Moreover, the letter implied that a President is bound by his predecessor's decision not to veto legislation.)   According to Mr. Wilson's letter, the issuance of a signing statement announcing an intent not to enforce unconstitutional legislation is akin to a "line item veto" and "contrary to the rule of law and our constitutional system of separation of powers.”  Thus, the ABA apparently believes that the President should follow a Congressional directive to detain American Citizens even if the President believes that directive to be unconstitutional.

The ABA and other critics of the President are dead wrong.  The Constitution expressly requires the President to "take care that laws are faithfully executed."  In discharging this duty, the President cannot ignore the Constitution, which, according to the Supremacy Clause, is the "Supreme Law of the Land."  Refusing to consider the Constitution when carrying out his responsibilities would contravene the President's oath " to preserve, protect and defend the Constitution of the United States." 

The ABA's "Rule of Law" argument undermines itself and would, if taken seriously, give Congress a monopoly on Constitutional interpretation. After all, judicial review of legislation by Article III courts itself nullifies legislation passed by Congress.  Yet, no one would plausibly argue that such judicial review "offends the separation of powers."  Instead, such review implements an underlying value of such separation, by ensuring that all three co-equal and independent branches agree that legislation is constitutional before such legislation is enforced against individuals.  (E.g., before an individual is detained.)  The ABA's position would undermine that value, by requiring the President to enforce legislation he believed to be unconstitutional, thereby contracting the scope of individual liberty.

Oddly, the ABA letter claims that the Founders and ratifiers rejected Presidential authority to decline to enforce unconstitutional legislation.  However, as previously explained on this blog, the nation's two most prominent founders, James Madison and James Wilson, expressly endorsed such authority.

For instance, after serving as President, James Madison wrote as follows:

"As the Legislative, Executive, and Judicial departments of the United States are co-ordinate, and each equally bound to support the Constitution, it follows that each must, in the exercise of its functions, be guided by the text of the Constitution according to its own interpretation of it; and, consequently, that in the event of irreconcilable interpretations, the prevalence of the one or the other department must depend on the nature of the case, as receiving its final decision from one or the other."

Moreover, at the Pennsylvania Ratifying Convention, James Wilson, later a Supreme Court Justice, argued that a President could decline to enforce a law he believed to be unconstitutional and that, in the same way, judges could decline to enforce unconstitutional laws that came before them.

Finally, while Abraham Lincoln was not a member of the Founding generation, he knew something about the Constitution --- perhaps even more than the ABA's House of Delegates.   As previously noted on this blog, during his first inaugural address, President Lincoln famously announced, as he had argued in the Lincoln-Douglas debates, that he did not consider himself bound by the Supreme Court's decision in Dred Scott v. Sanford, except with respect to the actual parties in the case. Thus, Lincoln ordered the Executive Branch to grant patents and passports to qualified African-Americans, even though Dred Scott had odiously held that African-Americans were not citizens and thus, by implication, not entitled to such statutory benefits, because he (Lincoln) believed that Dred Scott was simply wrong.

Thus, Madison, Wilson and Lincoln made it clear that, when acting in the sphere of authority assigned to him by the Constitution, including the enforcement of laws, the President must adhere to the Constitution and thus may not carry into execution an enactment that he believes to be unconstitutional.

Two final thoughts. 

First, the sort of "Presidential Review" contemplated by Madison, Wilson and Lincoln does not create a "line item veto" as the ABA claims, even if announced via a signing statement. The line item veto empowers Chief Executives to prevent a portion of a bill from becoming law in the first place, simply because the Chief Executive believes that portion of the bill, even if entirely constitutional, to be bad policy.  By contrast, Presidential Review grants the President a very narrow authority to decline to enforce laws otherwise validly passed because they are unconstitutional.   To be sure, the President could abuse such authority.  But then so can the Supreme Court abuse its authority when it engages in judicial review.  Yet, as then-Justice Joseph Story noted nearly two centuries ago, the fact that a power may be abused is no argument against it.

Second, the ABA's preferred approach would render the President a less-than-equal participant in constitutional discourse.  After all, even under the ABA's approach, Congress can always decline to pass legislation because it believes such legislation to be unconstitutional.  Moreover, the ABA embraces the authority of courts to decline to enforce legislation via judicial review.  Under this scheme, the President, nominally a co-equal branch of government, is the "odd man out," that is, the only branch of government that, veto aside, must ignore the Constitution when exercising his authority.  Nothing in the text, structure or history of the Constitution suggests such a lopsided result.  Moreover, as a practical matter, such an approach would in some cases leave the constitutionality of legislation to a single branch, namely, Congress, given that some legislation is often not susceptible to judicial review, spending legislation being a prime example.  (Also, the 20-year charter of the First National Bank expired before there was any judicial review of the Bank's Constitutionality. The Supreme Court only reached the question after Congress re-authorized the Bank.)  The American People benefit when all branches consider themselves bound by the Constitution and participate in discourse about that document's meaning.

Wednesday, January 4, 2012

Replay Reversal Robs Danny Coale/Virginia Tech of Sugar Bowl Overtime Touchdown


Great Catch!

The Blogosphere is properly abuzz about the controversial replay reversal during last night's Sugar Bowl.  (See also here.)  During the first overtime, Hokie quarterback Logan Thomas passed to wide receiver Danny Coale for an apparent touchdown.  "After further review," however, replay officials reversed the touchdown call made by an official who was a few feet away from the catch.

In the opinion of this blogger, the reversal was erroneous.

"A player 'gains possession' when he is firmly holding or controlling the ball while contacting the ground inbounds."   

Moreover, same rules provide that:

"To catch a ball means that a player leaves his feet, firmly grasps a live ball in flight and [then] first returns to the ground inbounds with any part of his body."

According to the replay posted here, Coale left his feet to catch the ball.  (The critical footage begins about 31 seconds into the video.)  Moreover, he was "firmly grasp[ing] the ball" when his left arm (certainly a "part of the body") made "contact[] with the ground inbounds."

To be sure, after his arm contacted the field inbounds, the ball, still firmly in Coale's grasp, made contact with the ground.  However, nothing in the rules just quoted provides or even suggests that mere contact of the ball with the ground in these circumstances deprives the player of a catch. 

Indeed, the very same rules provide that a player may catch the ball even "with the ball first touching the ground inbounds" if, at the time of the touch, the ball is "still in his firm grasp."

(See Rule 2, Section 4 for these definitions of "Catch, Recovery and Possession")

Finally, it should go without saying that, to quote the same 2011-2012 NCAA Rules:

"The replay official may reverse a ruling if and only if the video evidence convinces him beyond all doubt that the ruling was incorrect.  Without such indisputable video evidence, the reply official must allow the ruling to stand."

This blogger is aware of no such "indisputable video evidence."

Update:  Here is an excellent blog post, complete with several stills from the video of the catch, arguing that Coale maintained control throughout the catch and that the ground did not assist in the catch.  The post is on a blog entitled "Tech Superfans."

Iowa Caucus Results Confirm that Money Cannot Buy Political Success


Consumers Balked Despite Massive Advertising



Ditto (at least this time)

Proponents of "campaign finance reform" (usually a euphemism for banning high value speech) often claim that unfettered campaign spending allows candidates to "buy" elections.   The results of last night's Iowa Caucus should throw some cold water on this idea.  As reported by Wonkette, Rick Santorum spent just $1.65 per each vote he received, compared to the more than $800 per vote spent by Texas Governor Rick Perry, pictured above.  (Governor Mitt Romney, the Iowa winner, spent just over $100 per vote.)  Thus, Perry joins the ranks of candidates such as former Texas Governor John Connoly, who earned a single Republican delegate after spending over $10 million in his 1980 presidential campaign, or current Vice President Joe Biden, who spent millions on his 2008 campaign but did not receive a single delegate. 

These results suggest what many have known for years, namely, high spending is neither a necessary nor sufficient condition for electoral success.  Political candidates are products.  As Ford learned with the Edsel (also pictured above) massive advertising (including an hour long special on CBS featuring Bing Crosby, Frank Sinatra and Bob Hope) cannot induce consumers in a free market to purchase an inferior product.  (Coke's experience with the so-called "New Coke" provides a similar historical lesson.)   At the same time, good products often "sell themselves," thereby obviating the need for massive advertising.  (Moreover many candidates are flush with campaign cash precisely because donors believe the candidate's message will resonate with the voters.  That is, a strong candidacy often results in numerous donations, and not the other way around.)  The people of Iowa apparently believed that Senator Santorum was a much better product than Governor Perry, thus explaining the Senator's strong second place finish compared to Governor Perry's less auspicious fifth place finish.

One final thought.  Voters in political markets are sometimes more forgiving than consumers in economic markets, with the result that politicians sometimes have several lives.  Thus, Richard Nixon lost the presidential campaign in 1960.  He then lost a race for governor of California in 1962 before resurrecting his political fortunes, winning the Presidency in 1968 and repeating the feat with a 49 state lanslide in 1972.  Abraham Lincoln, of course, lost more elections that he won.  In politics, persistence can sometimes pay off, and victory is sometimes a long run phenomenon.