Wednesday, December 31, 2014

Happy New Year!

It is time to say farewell to 2014 and to welcome 2015.  This blog closes out the year with three New Year's Eve photos of the Wren Building at the College of William and Mary in Virginia.  (A statue of Lord Botetourt is barely visible in the foreground of the third photo.) The Wren, presumably where Bishop Madison lectured on Political Economy and other subjects, is the oldest extant college building in the United States.  The building, where some classes are still held, remains the heart of the College more than three centuries after its construction.  

Happy New Year!  

Tuesday, December 30, 2014

Robert Bork and Transaction Cost Economics

Lawyer and Scientist

Economic science and antitrust doctrine go hand in hand.  Over a century ago, in Standard Oil v. United States, 221 U.S. 1 (1911), the Supreme Court famously announced that the Sherman Act bans only those agreements and other conduct that results in monopoly or the consequences of monopoly. The Court identified three (and only three) such consequences: (1) output below the competitive level; (2) prices above the competitive level; and (3) quality below the competitive level. Thus, as Justice Stevens explained for the Court in National Society of Professional Engineers v. United States, 435 U.S. 679 (1978), Standard Oil is based upon "economic conceptions," and courts applying  the decision's "Rule of Reason" must focus solely on a challenged restraint's impact upon "competitive conditions."  It is thus no surprise that advances in economic science have influenced the content of antitrust doctrine over the past century or more.  As Herbert Hovenkamp put it over two decades ago:

"One of the great myths about American antitrust policy is that courts began to adopt an 'economic approach' to antitrust problems only in the 1970s.  At most this 'revolution' in antitrust policy represented a change in economic models.  Antitrust policy has been forged by economic ideology from its inception."

See Herbert Hovenkamp, Enterprise and American Law, 268 (1991).

Of course, judges are not economists, and they lack the leisure time and expertise necessary to keep abreast of the latest developments in economic science.  At the same time, economists are generally not lawyers, with the result that many will have difficulty "translating" developments in economic science into appropriate proposed changes in antitrust doctrine.  For decades, then, economically sophisticated legal scholars have played the role of translators, bridging the divide between economists and economic science, on the one hand, and generalist judges, on the other.   Successful translators have included Robert Bork, Philip Areeda, Donald Turner, Frank Easterbrook, Herbert Hovenkamp, and Richard Posner.  

This account of the relationship between economic science and antitrust doctrine treats economic science as exogenous and legal scholars and judges as passive recipients of developments in economics.  Indeed, some legal scholars have described their contributions in exactly this way.  For instance, Robert Bork claimed that his work simply assessed and critiqued antitrust doctrine in light of what he called "conventional price theory" and "basic price theory."  See e.g. Robert H. Bork, The Antitrust Paradox, 117 (1978) (invoking "conventional price theory"); Robert H. Bork, Resale Price Maintenance and Consumer Welfare, 77 Yale L. J. 950, 952 (1968) (invoking "basic price theory").   Richard Posner also claimed that the Chicago School of Antitrust Analysis was simply a manifestation of rigorous application of "price theory" to antitrust problem, an approach that Posner characterized as "novel."  See Richard A. Posner, The Chicago School of Antitrust Analysis, 127 U. Penn. L. Rev. 925 (1979).  By characterizing their contributions as mere applications of scientific principles determined elsewhere, these and other scholars could enhance the authority and persuasiveness of their proposals.

The assumption that economic science is exogenous to the legal academy is roughly true. There is, however, one counter-example suggesting that this assumption is not entirely accurate, namely, Robert Bork's contributions to the body of economic theory known as Transaction Cost Economics.  Contrary to his modest claim that he merely applied basic price theory to antitrust problems, Bork also made original contributions to economic science.  Ironically, these contributions actually undermined certain facets of price theory, particularly price theory's account of non-standard contracts. As previously explained on this blog, basic price theory identified two and only two rationales for complete or partial vertical integration: (1) the realization of technological efficiencies or (2) the acquisition or extension of market power.  By their nature, technological efficiencies arise "within" individual firms, during production and before sale.  However, non-standard contracts (minimum rpm, exclusive territories and the like) necessarily reach beyond the boundaries of the manufacturer to control the behavior of other firms, particularly wholesalers and retailers.  As a result, price theorists naturally assumed that such agreements cannot produce efficiencies and thus inferred that they were instead efforts to acquire or preserve market power.  The result was the so-called "inhospitality tradition" of antitrust, which was particularly hostile to various forms of partial contractual integration.

Of course, even before World War II, Ronald Coase undermined price theory's account of vertical integration, demonstrating that such integration could reduce transaction costs, regardless of any technological efficiencies.  See R.H. Coase, The Nature of the Firm, 4 Economica (n.s.) 381 (1937). However, this contribution went unnoticed at the time, exhibiting no influence on economic theory itself, let alone antitrust doctrine.  Indeed, according to conventional wisdom (including the work of Coase himself), no one understood or applied Coase's insight until various economists, particularly Oliver Williamson, rediscovered and expanded upon Coase's insight, particularly by expanding the definition of transaction costs to include the risk of opportunism that can arise due to relationship specific investments.

There is no doubt that Williamson played the preeminent role in bringing attention to Coase's insight and developing the transaction cost paradigm of industrial organization.  For this work he properly earned the Nobel Prize in Economic Science.   At the same time, this essay, prepared for a conference at Yale Law School and recently published by this blogger, contends that Robert Bork, although not an economist, played a hitherto unappreciated role in rediscovering Coase's transaction cost explanation for vertical integration.

As the essay shows, in a 1966 article, Bork critiqued the conventional wisdom regarding certain forms of contractual integration, particularly: (1) vertical contractual integration between a manufacturer and its dealers and (2) horizontal contractual integration between partners in an otherwise valid joint venture.  See Robert H. Bork, The Rule of Reason and the Per Se Concept: Price Fixing and Market Division II, 75 Yale L. J. 373 (1966).  (For more on Bork's revolutionary contributions to antitrust thought, go here.)  This critique cited Coase's 1937 work for the proposition that "contractual" integration and "ownership" integration can be alternative means of achieving the same economic objectives, an assertion at odds with price theory's technological conception of the firm.  (By contrast, Lester Telser's transaction cost interpretation of minimum resale price maintenance, on which Bork also drew, did not mention Coase.) Moreover, Bork also employed transaction cost reasoning to explain how exclusive territories (both vertical and horizontal), customer restrictions and ancillary horizontal minimum price fixing could overcome various costs of relying upon unfettered atomistic markets to conduct economic activity.  In so doing, he expressly assumed the existence of post-transaction opportunism, a condition unknown to price theory, albeit not in so many words.  That is, Bork assumed that a manufacturer's or joint venture's reliance upon an unfettered market to distribute goods could result in "parasitical" behavior by some distributors, behavior that would "take advantage" of and "victimize" fellow trading partners by "appropriating" to the parasite the contributions of others.  Parties would anticipate such opportunism, he said, and respond by adopting non-standard agreements that could prevent such behavior and, for instance, ensure an optimal quantity and type of promotional expenditure. 

Bork also explained how relegating manufacturers and joint ventures to the alternative of specifying the promotional obligations of distributors would entail prohibitive information and monitoring costs, costs that price theory simply assumed away, such as a manufacturer’s cost of ascertaining the appropriate type and amount of promotion for each dealer’s locality.  Thus, Bork conducted the sort of comparative analysis of alternative contractual mechanisms that today is a hallmark of transaction cost analysis.  Indeed, Bork even went so far as to characterize vertically-imposed exclusive territories as contractual property rights that aligned the interests of manufacturers and dealers, thereby departing from price theory's assumption of fixed property rights. (For additional elaboration on the "property rights" interpretation of intrabrand restraints, go here.)

In short, despite his repeated invocation of "price theory" as the only appropriate source of economic knowledge relevant to antitrust, Bork himself rejected various price-theoretic assumptions and developed tools of transaction cost economics to offer a novel interpretation of various non-standard agreements that price theory's "inhospitality tradition" had condemned.  Instead of functioning as a passive recipient of scientific change, Bork helped initiate such change himself.  Hopefully Bork's contributions to economic science will receive the notoriety they deserve.   

Thursday, December 25, 2014

Christmas Story Marathon in Full Swing!

The annual 24 hour Christmas Story Marathon is in full swing.  TNT and TBS are simulcasting the marathon, the last installment of which airs at 6:00 PM today.  The Seattle Times labels the show a top pick among Christmas movies this year. 
In 2011, this blogger offered a list of the movie's ten best quotes.   Here are five more gems from this Christmas classic, in no particular order.

1.  "The snap of a few sparks, a quick whiff of ozone, and the lamp blazed forth in unparalleled glory."  (Ralphie as an adult) (narrating)

2.    "In our world you were either a bully, a toady or a hapless victim."  (Ralphie as an adult) (narrating)

3.     "In the heat of battle my father wove a tapestry of obscenities that, so far as we know is still hanging in space over Lake Michigan."  (Ralphie as an adult) (narrating)
4.     "Probably from his father."  (Mrs. Schwartz, explaining where Ralph learned a particular word)
5.     "You were always jealous of this lamp.  Jealous.  Jealous because I won."  (Mr. Parker)

Wednesday, December 24, 2014

FDR's and Churchill's 1941 Christmas Eve Addresses to the American People

On Christmas Eve 1941, less than three weeks after the Nation entered World War II, the two leaders of the Free World, President Roosevelt and Winston Churchill, delivered consecutive addresses to the American people from the White House.  President Roosevelt spoke first and ended his address with an introduction of the British Prime Minister.  Both addresses are reproduced below in full. 
"Fellow workers for freedom:  There are many men and women in America --- sincere and faithful men and women --- who are asking themselves this Christmas:  How can we light our trees? How can we give our gifts?  How can we meet and worship with love and with uplifted spirit and heart in a world at war, a world of fighting and suffering and death?  How can we pause, even for a day, even for Christmas Day, in our urgent labor of arming a decent humanity against the enemies which beset it?  How can we put the world aside, as men and women put the world aside in peaceful years, to rejoice in the birth of Christ?  These are natural—inevitable—questions in every part of the world which is resisting the evil thing.  And even as we ask these questions, we know the answer. There is another preparation demanded of this Nation beyond and beside the preparation of weapons and materials of war. There is demanded also of us the preparation of our hearts; the arming of our hearts. And when we make ready our hearts for the labor and the suffering and the ultimate victory which lie ahead, then we observe Christmas Day—with all of its memories and all of its meanings—as we should.  Looking into the days to come, I have set aside a day of prayer, and in that Proclamation I have said:

'The year 1941 has brought upon our Nation a war of aggression by powers dominated by arrogant rulers whose selfish purpose is to destroy free institutions. They would thereby take from the freedom-loving peoples of the earth the hard-won liberties gained over many centuries.  The new year of 1942 calls for the courage and the resolution of old and young to help to win a world struggle in order that we may preserve all we hold dear.  We are confident in our devotion to country, in our love of freedom, in our inheritance of courage. But our strength, as the strength of all men everywhere, is of greater avail as God upholds us.
Therefore, I... do hereby appoint the first day of the year 1942 as a day of prayer, of asking forgiveness for our shortcomings of the past, of consecration to the tasks of the present, of asking God's help in days to come. We need His guidance that this people may be humble in spirit but strong in the conviction of the right; steadfast to endure sacrifice, and brave to achieve a victory of liberty and peace.'

Our strongest weapon in this war is that conviction of the dignity and brotherhood of man which Christmas Day signifies-more than any other day or any other symbol. Against enemies who preach the principles of hate and practice them, we set our faith in human love and in God's care for us and all men everywhere.  It is in that spirit, and with particular thoughtfulness of those, our sons and brothers, who serve in our armed forces on land and sea, near and far- those who serve for us and endure for us that we light our Christmas candles now across the continent from one coast to the other on this Christmas Eve.  We have joined with many other Nations and peoples in a very great cause. Millions of them have been engaged in the task of defending good with their life-blood for months and for years.
One of their great leaders stands beside me. He and his people in many parts of the world are having their Christmas trees with their little children around them, just as we do here. He and his people have pointed the way in courage and in sacrifice for the sake of little children everywhere.  And so I am asking my associate, my old and good friend, to say a word to the people of America, old and young, tonight Winston Churchill, Prime Minister of Great Britain."
Prime Minister Churchill then addressed the American people as follows:
"I spend this anniversary and festival far from my country, far from my family, yet I cannot truthfully say that I feel far from home.  Whether it be the ties of blood on my mother's side, or the friendships I have developed here over many years of active life, or the commanding sentiment of comradeship in the common cause of great peoples who speak the same language, who kneel at the same altars and, to a very large extent, pursue the same ideals, I cannot feel myself a stranger here in the centre and at the summit of the United States.  I feel a sense of unity and fraternal association which, added to the kindliness of your welcome,  convinces me that I have a right to sit at your fireside and share your Christmas joys.

This is a strange Christmas Eve.  Almost the whole world is locked in deadly struggle, and, with the most terrible weapons which science can devise, the nations advance upon each other.  Ill would it be for us this Christmastide if we were not sure that no greed for the land or wealth of any other people, no vulgar ambition, no morbid lust for material gain at the expense of others, had led us to the field.  Here, in the midst of war, raging and roaring over all the lands and seas, creeping nearer to our hearts and homes, here, amid all the tumult, we have tonight the peace of the spirit in each cottage home and in every generous heart.  Therefore we may cast aside for this night at least the cares and dangers which beset us, and make for the children an evening of happiness in a world of storm.  Here, then, for one night only, each home throughout the English-speaking world should be a brightly-lighted island of happiness and peace.

Let the children have their night of fun and laughter.  Let the gifts of Father Christmas delight their play.  Let us grown-ups share to the full in their unstinted pleasures before we turn again to the stern task and the formidable years that lie before us, resolved that, by our sacrifice and daring, these same children shall not be robbed of their inheritance or denied their right to live in a free and decent world.

And so, in God's mercy, a happy Christmas to you all."

Portland Maine's 14th Annual Christmas Boat Parade of Lights


Earlier this month Portland, Maine held its annual Christmas Boat Parade of Lights.  The evening event features vessels of various shapes and sizes decorated with Christmas lights and sailing through Portland Harbor.  Founded in 2001, the parade has featured up to 37 vessels, including one or more ferries from the Casco Bay Lines, like that pictured above.  (See here for these and other historical details.)     Go here for a video of the event, set to "O Come O Come Emmanuel."  Go here for two spectacular photos of the fireworks display at the end of the event.  Finally, go here for a video of the 2009 parade.

Monday, December 22, 2014

Is the Free Market Broken? Hardly.

Wants to Fix What's Not Broken

Senator Elizabeth Warren (pictured above) has convinced herself that the free market is "broken," thereby justifying intrusive and coercive regulation to fix market outcomes.  According to this article, the Senator has offered three examples of such disrepair: (1) student debt (apparently including both the amount of debt and the interest rates that students pay), (2) wages that are in some cases lower than necessary to support a family, large or small and (3) insufficient financial regulation.  She would have the national government repair the market by, for instance, coercively raising the minimum wage and lowering student loan interest rates to the rate that the Federal Reserve charges individual banks.   (See here and here)  This rate, the so-called "discount rate," is less than one percent. (See here).     Senator Warren's indictment of the free market does not withstand scrutiny and reflects confusion about the proper objectives of this critical social institution.  As will be seen, it will be useful to compare her views regarding the appropriate objectives of the market with those of Frank Knight, one of the most influential and thoughtful economists of the 20th Century. 

1. What Americans call "the market" is a social institution that depends upon various background legal rules, particularly private property, free contract and legal prohibitions on fraud and duress. Frank Knight ably described the free market system as follows:

"Ours is a system of 'private property,' 'free competition,' and 'contract.'  This means that every productive resource or agent, including labor power, typically 'belongs' to some person who is free within the legal conditions of marketing, to get what he can out of its use."

See Frank H. Knight, The Economic Organization, 11 (1951).

2. Any critique of a social institution must begin by identifying a plausible set of objectives society expects the institution to achieve. For instance, while society can (and should) expect its system of education to produce a literate populace, it cannot expect that system to produce a safe and abundant food supply.  Thus, while proof that many high school graduates cannot read or write would indict the educational system, proof that many people go hungry would not.

3. In the same way, any critique of the free market must begin by specifying the objectives that society legitimately expects the market to achieve.  Does society expect the market to defend the nation from foreign attack?  Eliminate cruelty to animals?  Prevent the spread of infectious disease? If the answer to any of these questions is "yes," the market is "broken," and coercive regulatory intervention is appropriate.  But of course, no rational society would expect the free market as such (as opposed to other social institutions), to achieve any of these objectives.  

4. What, then, can society properly ask of free markets? Frank Knight would have answered the question as follows: society should expect markets to allocate resources (including labor) and organize production efficiently so as to maximize the amount of "want satisfaction" that consumers derive from society's given endowment of resources and know how.  See generally Knight, The Economic Organization, at 9-10.   A secondary but related objective involves assuring what Knight calls "economic maintenance and progress."  See id. at 12-14.  In particular, a well-functioning market will ensure optimal allocation of resources toward capital investment (including investments in human capital) and technological progress.   In the medium and longer run, such investments can enhance the nation's overall productivity and thus its ability to produce goods and services that provide want satisfaction. 

5.  Of course, free markets sometimes fail to maximize such want satisfaction and/or ensure optimal capital investment and technological progress.  For instance, transaction costs can prevent voluntary private bargains from allocating resources to their highest valued use.  The classic example involves an activity that imposes costs --- what economists call "negative externalities" --- on individuals who are not parties to a given transaction.  The result can be be overproduction by the industry in question and thus overuse of resources that would produce more social value elsewhere.  Even the most dedicated adherents to laissez faire have long recognized that governments should intervene to correct such market failures and that such intervention should include, if necessary, coercive restrictions on output.  Moreover, high transaction costs can also result in positive externalities.  For instance, bargaining and information costs may prevent individuals contemplating investments in technological innovation from identifying and securing remuneration from other individuals who might reap the benefits of such investments.  Here again, some coercive intervention in the market, such as the creation of patent rights, might be necessary to ensure adequate investment in the creation of new technology and thus optimal increases in national productivity.

6.  None of Senator Warren's examples qualifies as a manifestation of market failure that somehow suggests that the free market is "broken" and thus ripe for coercive interference.  Take the minimum wage first.  Labor is an input in the production of goods and services, and firms purchase this input in the market, in the same way they purchase other inputs such as steel, electricity or bread.  The wage is simply the price for labor, a price determined by conditions of supply and demand.

It is certainly true that free market determination of the price of labor sometimes results in wages insufficient to support an average-size family.  In the same way, prices for other inputs may be insufficient to guarantee any profit whatsoever to the owners of firms that produce such inputs.  A company that makes and sells high quality steel to automobile companies will earn negative profits and fail if automobile companies forgo steel for aluminum, for instance.  In such cases, the wages of some steel workers will fall to zero as steel companies cease to employ them.  To be sure, one can imagine situations in which such low wages reflect a market failure resulting from an employer's status as the dominant purchaser of labor in a particular market. However, the Senator's proposal to raise the minimum wage would apply to all employment relationships, including those in markets that are competitive, as most labor markets are. Far from exemplifying a broken market, wages in competitive markets reflect a well-functioning economic system at work performing its social function of allocating resources to their most efficient use. Society may in some cases view the resulting wages as unjust, either because they are too high or too low,  Indeed, employers may pay wages as low as the market will bear so as to increase their own share of the fruits of productive activity. However, coercive regulation setting different wages than those set by the market will undermine the market's chief virtue, namely, encouraging the economic actors to organize and allocate productive resources, including labor, in the most useful way possible. Here again Frank Knight is persuasive:

"It is assumed . . . that there is in some effective sense a real positive connection between the productive contribution made by any productive agent and the remuneration which its 'owner' can secure for its use.  Hence, this remuneration (a distributive share) and the wish to make it as large as possible, constitute the chief reliance of society for an incentive to place the agency into use in the general productive system in such a way as to make it as productive as possible.  The strongest argument in favor of such a system as ours is the contention that this direct, selfish motive is the only dependable method, or at least the best method, for guaranteeing that productive forces will be organized and worked efficiently."

See Knight, Economic Organization, at 11-12.

Ironically, then, Senator Warren's proposed "fix," state-determined wages, would itself injure the market and reduce the amount of wealth this critical social institution generates.

None of this is to say that society must stand idly by while some hardworking citizens earn only poverty wages.  On the contrary, there is one obvious method for alleviating such poverty, viz., the earned income tax credit, previously discussed on this blog.  By subsidizing wages, the EITC both makes hard work pay off and avoids the job-destroying impact of the minimum wage. It is thus no surprise that thoughtful experts such as Christina Romer, who once chaired President Obama's Council of Economic Advisors, have advocated the measure as an alternative to the minimum wage. This blogger has previously called on Congress to expand the availability of the EITC.

Of course, governments must find resources to pay for this subsidy. During a recession, governments that embrace the Keynesian economic paradigm can borrow unused private savings and spend the proceeds on a more robust EITC.   If the economy is near full employment, however, such a "borrow and spend" approach can be inflationary, with the result that governments should find the revenues for wage subsidies by cutting spending elsewhere and/or raising taxes.  One obvious source of such funds would be a tax on carbon  emissions.  As previously explained on this blog, such a tax would discourage pollution creating activity while generate revenue.  In this way society can have the best of both worlds:  a free market that generates as much wealth as possible and spending policies that reward work and alleviate poverty.
7.  What about the current system of students loans and resulting student debt and interest payments? Here again, the current system on financing higher education, including the student loan system, is not evidence that the marker is "broken." To be sure, a purely private market will produce insufficient investments in human capital, including higher education.  As previously explained on this blog:

 “The background legal framework prevents individuals who invest in education from granting creditors a security interest in their most valuable asset, namely, the human capital that a college education creates.  A creditor cannot “foreclose” on an individual’s college degree if the borrower defaults on a student loan.”

Moreover, as the same post also explained, state and federal income taxes, which combined produce top marginal rates of nearly 50 percent in some states (and more than 50 percent in California), prevent individuals from internalizing the full benefits of such investments.  As a result, individuals will generally under invest in human capital, even if lenders can perfectly assess the ability of such borrowers to repay and assure repayment when borrowers are able.  The state can respond to this under-investment in various ways, including by founding public universities that charge tuition that is far lower than the cost of the education provided, as every state does. (States could also, of course, provide college-age students with vouchers that students could spend at any qualifying institution, public or private.)  At the University of Virginia, for instance, full tuition covers just 52 percent of the cost of educating an in-state undergraduate student,    Indeed, some private and public universities do not charge tuition, fees or room and board to students from low income families. Some of these same schools provide significant discounts to middle class students as well.  To be sure, a significant proportion (far less than half) of America's students emerge from college with some debt; the average amount equals the cost of a new minivan.  To be sure, a subset of this subset of students graduates with significantly more debt than the average.  However, given the availability of below-cost public education and need-based financial aid, it stands to reason that some (though not all) students who emerge from college with larger than average debt loads voluntarily chose to attend relatively expensive universities in lieu of more modestly-priced options.  It's not clear why such voluntary decisions are evidence of market failure that calls for intervention by the national government.

As previously explained on this blog, government subsidized student loans can also be part of the response to the sort of market failure that results in under-investment in human capital.  Such loans, already provided at below-market rates, further subsidize investments in human capital.  Indeed, under recent reforms, many student loan payments are capped at a percentage of the debtor's income, still further reducing the actual cost of borrowing.  Some borrowers are even eligible for complete loan forgiveness if such capped payments do not suffice to pay off the loan over 20 years.

So far as this blogger is aware, Senator Warren has not explained why the one-two-three punch of (1) below-cost tuition at the nation's public universities, (2) below market interest rates and (3) income-based repayment and possible forgiveness does not suffice to counteract the unfettered market's admitted tendency to produce insufficient investments in human capital.  The existence of a market failure does not justify the adoption of every conceivable policy response to that failure.  Her own proposal --- interest rates of less than one percent for long term student loans already subject to repayment caps and possible forgiveness --- could, when combined with numerous other subsidies for such investments, result in the allocation of too much scarce capital to investments in human capital, further increasing demand for higher education and exacerbating increases in tuition.  Here again, Senator Warren has not made the case that the market, supplemented by public universities and the current system of student loans, is in need of further repair.

8.  What, though, about financial markets?  Surely insufficient federal regulation resulted in the financial crisis and resulting recession in 2008, thereby establishing that the free market is "broken" and in need of additional intrusive regulation,  Here again the Senator has not made her case.  After all, the financial system extant in 2008 hardly exemplified the free market in action. Instead, the national government had intervened in financial markets in various ways that predictably caused market failure and distorted market outcomes.  For instance, the nation's policy of "too big to fail" resulted in dangerous moral hazard, as large banks did not internalize the potential downside of risky investments.  Banks quite predictably made non-optimal investments as a result.  Moreover, the national government encouraged lenders to develop financial products (e.g., no money down mortgages) that extended credit to individuals that did not meet traditional lending standards.  Banks were all too happy to extend such credit, knowing that they could immediately resell many mortgages to the Federal National Mortgage Association (FNMA), which was itself deemed "too big to fail" and thus lacked adequate incentives to examine the quality of mortgages it purchased.  The FNMA, in turn, would either hold these mortgages itself or guarantee their repayment and use them as backing for so-called "mortgage backed securities" that it issued.  (See here for a description of the mechanics of the FNMA's role in the mortgage market.)  Regulators encouraged banks to hold these securities to satisfy capital reserve requirements, even in lieu of other securities.  While federal regulations required banks to hold $4 in high quality reserves (e.g., U.S government bonds) for every $100 in lending, banks could avoid this requirement by holding $1.60 in mortgage-backed securities instead, thereby signaling the national government's confidence in the FNMA's guarantee of the mortgages that backed these securities. Little wonder, then, that, according to this same source, banks held half the outstanding debt backed by sub-prime loans when the financial crisis broke out.  Simply put, the 2008 financial markets were rife with various forms of federal intervention and involvement that produced market failure, moral hazard and also set the table for the 2008 financial crisis.  That crisis hardly qualifies as evidence that the market is broken.

9.   In sum, free markets have great potential but they also have limits.  Critics must take care lest they attribute to markets objectives they cannot plausibly achieve.  To be sure, transaction costs sometimes result in market failure, including negative or positive externalities.  In such cases, society properly steps in with coercive regulation to correct such failure.  However, failure to achieve distributive justice is not a shortcoming of markets.  On the contrary, markets produce the very wealth that its opponents wish to redistribute, and society can employ taxation to redistribute income for social justice purposes.  Moreover, the presence of some market failure does not thereby justify the simultaneous adoption of every imaginable policy response.  Finally, markets sometimes "fail" because ill-considered regulation or other forms of state intervention distort private incentives and thus induce market actors to engage in wealth-reducing economic activity.  Such state-induced market failure is hardly a justification for even more coercive regulatory intervention. 

Saturday, December 20, 2014

Congratulations on Tony Shaver's 500th Career Win!

Last night William and Mary defeated the Washington College Shoremen, 86-46, extending the Tribe's record for the year to 6-3.  (For the story, including box score, go here.)  The victory was a milestone for head coach Tony Shaver, who chalked up his 500th career coaching victory.  Shaver, who previously coached at Hampden-Sydney College, is enjoying his 12th season at William and Mary.  He is the Tribe's winningest coach, with 142 wins thus far.   Congratulations to Coach Shaver and the Tribe.  Keep up the good work! 

Friday, December 5, 2014

O'Bannon, the Rule of Reason, and the Less Restrictive Alternative Test

Applied Reason to College Athletics

Earlier this year, in O'Bannon et al. v. NCAA, the U.S. District Court for the Northern District of California invalidated the NCAA's policy governing compensation that colleges and universities may provide football and basketball players. (Here is a link to the decision.)  That policy allowed schools to provide players a full grant-in-aid, namely, full tuition, fees, room and board, and the cost of textbooks.  Moreover, the policy also allows schools to provide additional compensation to the neediest student athletes --- those who qualify for federal Pell grants.   

Ordinarily, agreements between rivals regarding the compensation paid to input suppliers are unlawful per se.  Ditto for agreements that govern non-price aspects of the relationship between rivals and input suppliers.  If Ford, Toyota, Honda and General Motors agreed on the salaries or working conditions provided their engineers, for instance, courts would rightly declare the arrangement a buyers' cartel and condemn it as unlawful per se under the Sherman Act.  Ditto if, say, several silicon valley firms or an academic trade association agreed not to hire or "poach" individuals employed by rivals

In NCAA v. Board of Regents of the University of Oklahoma, 468 U.S. 85 (1984), the Supreme Court rejected the analogy between the NCAA's policy on player compensation and the sort of buyers' cartel just described.  As explained in much greater detail here, the Court, in an opinion by Justice John Paul Stevens (pictured above), recognized that, unlike buyer cartels, the NCAA is a legitimate joint venture, the existence of which is necessary to produce a product, college football, that many consumers find attractive.  The Court also recognized that unbridled rivalry between colleges and universities for student-athletes would transform college athletics into semi-pro athletics, thereby undermining consumer demand for the joint venture product.  Thus, the Court expressly noted that, in order to protect the integrity of this product, members of the NCAA must collectively set limits on player compensation.  In so doing, the Court rejected the "cartel" label for such restraints.  (For additional discussion of the NCAA decision by this blogger, go here.) According to the Court:

"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 field of play might soon be destroyed.  Thus, the NCAA plays a vital role in enabling college football to preserve its character, and as 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."

See NCAA, 468 U.S. at 101-102 (emphasis supplied).  

More technically, the Court essentially held that unbridled competition between NCAA member schools to attract and retain student athletes would result in a market failure and reduce economic welfare, including the welfare of consumers.  Such rivalry, one suspects, could result in six figure salaries for some players at some schools, over and above a full grant-in-aid.  The prospect of such a market failure, the Court believed, distinguished the NCAA's limits on player compensation from otherwise analogous forms of collective wage setting such as the hypothetical agreements between automobile manufacturers mentioned above.  (See this essay by this blogger explaining the role of the market failure paradigm in the antitrust jurisprudence of Justice Stevens, including his opinion in NCAA.) 

The NCAA court did not hold that agreements governing student-athlete compensation are lawful per se.  Instead, such agreements are to be analyzed under Standard Oil's Rule of Reason. After conducting this analysis, the district court in O'Bannon agreed with the NCAA (and the Supreme Court) that the NCAA's limits on student-athlete compensation produce significant procompetitive benefits by, for instance, enhancing consumer demand for college football and basketball.  These benefits, the court apparently assumed, would suffice to justify the restraints.   Nonetheless, the court invalidated the limits, holding that a "less restrictive alternative" would achieve the same benefits.  In particular, the court held that increasing the limit to "cost of attendance" (which includes grant-in-aid plus transportation and supplies), plus $5,000 per year, to be derived from "licensing revenue generated from the use of their names, images, and likenesses during college[,]" would be "less restrictive of competition, while at the same time achieving the same admitted benefits as the current policy.

This blogger has joined a brief amicus curiae by fifteen antitrust scholars taking issue with the district court's application of the less restrictive alternative test.  (Here is a link to the brief.  See here for a story about the brief on ) The brief does not question the role that a properly-applied less restrictive alternative analysis can play in rule of reason analysis.  At the same time, the brief contends that the district court misapplied this test.

Ordinarily the less restrictive alternative test involves identification of a different type of agreement, actually existing somewhere in the marketplace, that produces the same benefits as the agreement under scrutiny.  Thus, in the context of product distribution, courts evaluating vertically-imposed exclusive territories could conceivably conclude that so-called "location clauses" are less restrictive of competition and produce the same benefits in a particular setting as exclusive territories.  Cf. Continental T.V. v. GTE Sylvania, 433 U.S. 36 (1977) (describing location clause and holding that courts should evaluate such restraints under the rule of reason).  However, the O'Bannon court did not identify any such categorically different alternative actually existing in the marketplace.  Instead,  the court simply amended somewhat (upward) the level of compensation that players can potentially receive, without questioning the need for a collectively-set limit on such compensation.

Not surprisingly, then, the brief argues that the district court improperly treated the less restrictive alternative test as a license to substitute its own judgement about appropriate compensation for the judgment of market participants who adopted policies that, according to the court's own findings, produced significant economic benefits. Thus, the district court's approach empowers judges to function as regulatory commissions, recalibrating otherwise reasonable levels of compensation.  Such quasi-regulators would displace beneficial agreements that produce significant economic benefits, simply because the judge believes that a hypothetical variant of the agreement, in this case one involving somewhat higher compensation for some players, would produce marginally greater net benefits than the agreement the parties actually adopted.  However, as Judge Frank Easterbrook --who argued NCAA for the defendants -- once explained when applying the rule of reason in a subsequent case: "the antitrust laws do not deputize district judges as one-man regulatory agencies."   See Chicago Professional Sports Ltd. Partnership and WGN v. National Basketball Association, 95 F.3d 593, 597 (7th Cir. 1996).  Instead, courts must simply ask whether a restraint is "reasonably necessary" to produce the benefits in question.   Hopefully the Ninth Circuit will agree with Judge Easterbrook and properly apply the rule of reason that has, thanks to NCAA and Justice Stevens, been applicable to such restraints for the past three decades.

Thursday, November 27, 2014

FDR's 1942 Thanksgiving Proclamation

Fighting for Liberty

Including the Liberty to Give Thanks

By the President of the United States of America

A Proclamation

It is a good thing to give thanks unto the Lord.  Across the uncertain ways of space and time our hearts echo those words, for  the days are with us again when, at the gathering of the harvest, we solemnly express our dependence upon Almighty God.

The final months of this year, now almost spent,   find our Republic and the Nations joined with it waging a battle on many fronts for the preservation of liberty.   In giving thanks for the greatest harvest in the history of our Nation, we who plant and reap can well resolve that in the year to come we will do all in our power to pass that milestone; for by labors in the fields we can share some part of the sacrifice with our brothers and sons who wear the uniform of the United States. 

It is fitting that we recall the reverent words of George Washington, "Almighty God, we make our earnest prayer that Thou wilt keep the United States in Thy holy Protection," and that every American in his own way lift his voice to heaven.

I recommend that all of us bear in mind this great Psalm:

"The Lord is my shepherd; I shall not want.

"He maketh me to lie down in green pastures; he leadeth me beside the still waters.

"He restoreth my soul: he leadeth me in the paths of righteousness for his name's sake.

"Yea, though I walk through the valley of the shadow of death, I will fear no evil: for thou art with me; thy rod and thy staff they comfort me,

"Thou preparest a table before me in the presence of mine enemies: though anointest my head with oil; my cup runneth over.

"Surely goodness and mercy shall follow me all the days of my life: and I will dwell in the house of the Lord forever."

Inspired with faith and courage by these words, let us turn again to the work that confronts us in this time of national emergency: in the armed services and the merchant marine; in factories and offices; on farms and in the mines; on highways, railways, and airways; in other places of public service to the Nation; and in our homes.

Now, Therefore, I, Franklin D. Roosevelt, President of the United States of America, do hereby invite the attention of the people to the joint resolution of Congress approved December 26, 1941, which designates the fourth Thursday in November of each year as Thanksgiving Day; and I request that both Thanksgiving Day, November 26, 1942, and New Years Day, January 1, 1943, be observed in prayer, publicly and privately.

* * * * * 

Americans understandably take both Thanksgiving and the liberty to give thanks, in their own way, for granted.  But in November 1942, less than a year after the Axis Powers initiated war on the United States, liberty was in peril throughout the world.  Fortunately, America and her allies, including the United Kingdom, were fighting back.  Leaders like FDR and Winston Churchill, both pictured above on the HMS Prince of Wales concluding the Atlantic Charter, understood the threat and rallied their respective Nations to victory.  As we give thanks today, let us also remember leaders such as these and the innumerable sacrifices by those who followed them in a war that preserved both Democracy and Liberty.

Friday, November 21, 2014

William and Mary and Richmond to Meet for 124th Time

Tomorrow William and Mary and Richmond will continue their gridiron rivalry.  Unlike rivalries that some believe to be contrived, the Tribe/Spider rivalry is the oldest in the South.  The teams first played in 1898, and tomorrow's game will mark the 124th time the two have met.  The two schools will thus tie the Wisconsin-Minnesota rivalry for the fourth most prolific in college football history, behind Lehigh-Lafayette (150 games), Princeton-Yale (136 games), and Harvard-Yale (131 games). Once known as the I-64 bowl, the teams now play for the Capital Cup, in recognition of the fact that both Richmond and Williamsburg have served as capitals of the Commonwealth. 

William and Mary leads the series 61-57-5.  Richmond has shut out the Tribe 23 times, and the Tribe has returned the favor 19 times. The teams have played to three zero-zero ties, and the Tribe holds the record for the most points scored in a game, 59, in 2003.  (For the source of these data, adjusted to reflect last year's result, go to this source updated in 2014.)

The rivalry's 124th game has more than historical significance.  Both CAA teams are 7-4 and rank 21 (Richmond) and 22 (William and Mary), respectively in the Sports Network Poll of FCS teams.  One observer has speculated that the winner of tomorrow's game (and only the winner), will earn a playoff spot.  Kickoff will be at 7:30 PM, and tickets are still available!  (For detailed game notes, go here.)  Those unable to attend the game in person can watch on the NBC Sports Network.  Good luck to both teams, and Go Tribe! 

Will Georgia Reject Liberty for Tesla (and Consumers)?

Protecting Economic Liberty


The nation's automobile dealers are at it again, attempting to thwart basic economic freedoms in a manner that protects themselves, and their manufacturers, from fair competition.  The battleground this time is Georgia, where the state's automobile dealers' association has filed a petition seeking to bar Tesla from selling automobiles in the Peach State to willing purchasers from outlets owned by Tesla.  The petition claims that Tesla, which holds an automobile dealership license in Georgia, has violated the state's Automotive Franchising Law by selling automobiles to willing consumers from a single Tesla-owned retail store.  That law makes it unlawful for any automobile manufacturer to:

"own, operate, or control, directly or indirectly, more than a 45 percent interest in a dealer or dealership in this state[.]"

Just last week, Tesla filed a motion to dismiss the dealers' anti-liberty complaint. (See here, for a report about Tesla's filing).  Hopefully the Georgia courts will look north for guidance on how to rule on Tesla's motion.  Earlier this fall, the Supreme Judicial Court of Massachusetts struck a blow for economic liberty and the welfare of consumers, by rejected a similar petition by automobile dealers demanding coercive economic protection.  See Massachusetts State Automobile Dealers' Association et al. v. Tesla Motors, MA, Inc. and Tesla Motors, Inc.   As in Georgia, the plaintiffs, an association of automobile dealers and an individual dealer, claimed that Tesla's direct sales to willing consumers violated Massachusetts' own statute governing automotive franchising, General Law Chapter 93B, entitled: "Regulation of Business Practices Between Motor Vehicle Manufacturers, Distributors and Dealers."

Section 3 of chapter 93B prohibits what it calls "Unfair Methods of Competition and Unfair or Deceptive Acts of Practices."  Section 4 in turn defines various practices that violate Section 3. Section 4(c)(10) provides that it shall be a violation of Section 3 for:

"a manufacturer, distributor or franchiser representative to . . . own or operate, either directly or indirectly through any subsidiary, parent company or firm, a motor vehicle dealership located in the commonwealth of the same line [or]  make as any of the vehicles manufactured, assembled or distributed by the manufacturer or distributor.”

Tesla obviously manufactures automobiles, and it distributes such vehicles in Massachusetts via Tesla Motors of Massachusetts, a wholly-owned subsidiary.  Nonetheless, the Supreme Judicial Court concluded that the legislature did not mean to protect the state's dealers from competition by unrelated manufacturers.  Instead, the court said: "93B is aimed primarily at protecting motor vehicle dealers from injury caused by the unfair business practices of manufacturers and distributors with which they are associated, generally in a franchise relationship."  In other words, if a manufacturer, say Ford, relies on independent dealers to distribute its vehicles, it may not then open its own dealerships that compete with such dealers.  On the other hand, a manufacturer such as Tesla that only engages in self-distribution is perfectly free to do so, even if the resulting sales reduce the profits of established manufacturers and their dealers.  As the court put things later in the opinion:

Chapter 93B "was intended and understood only to prohibit manufacturer-owned dealerships when, unlike Tesla, the manufacturer already had an affiliated dealer or dealers in Massachusetts."

While the court couched its ultimate holding as resting upon the plaintiff's lack of standing, the opinion's rationale also suggests that Tesla's self-distribution does not violate the statute in the first place.  If so, then a party that did have standing to challenge a purported violation would nonetheless lose any challenge to Tesla's practice on the merits.

Of course, the ruling by the Supreme Judicial Court is not binding on Georgia courts interpreting their own statutes.  Moreover, the operative language of the Georgia statute is somewhat different from that of the Massachusetts statute.  Still, both statutes govern the franchising relationship between manufacturers and existing independent dealers.  Moreover, both statutes ban numerous practices that manufacturers might employ to the detriment of such independent dealers.  Read as a whole, then, neither statute seems designed to govern manufacturers that, like Tesla, have no independent dealers whatsoever.  Perhaps the Georgia courts will recognize this apparent function of the statute and reiterate the Massachusetts approach.  Failure to do so would place red-state Georgia in the embarrassing position of rejecting a form of economic liberty recognized in blue-state Massachusetts, an a potentially ironic twist given credible rankings finding that Massachusetts otherwise lags far behind Georgia when it comes to protecting basic economic freedoms.

Even if courts in both states embrace a pro-liberty position, the respective state legislatures are still perfectly free to amend their statutes so as to abridge basic economic liberty by banning self-distribution by firms like Tesla.  Indeed, less than a year ago, and as reported here, a member of the Massachusetts legislature introduced a bill intended to "clarify" Chapter 93B. The bill included the following language that would have banned Tesla's strategy of self-distribution.

"The blanket prohibition on manufacturer ownership applies notwithstanding whether a manufacturer has used independently owned or operated dealerships to distribute its vehicles."

Hopefully both legislatures will resist any temptation to alter their statutes in this way.  As previously explained on this blog, free societies respect the rights of entrepreneurs to distribute products as they see fit, so long as the method chosen does not impose inefficient harms on third parties.    Like some other manufacturers, Tesla has chosen to rely upon complete vertical integration, a practice that can reduce the transaction costs that sometimes result from reliance upon independent dealers. While such dealers can provide valuable services, some consumers choose to forgo such services and purchase directly from the manufacturer.  Proponents of legislation imposing blanket bans on such vertical integration by automobile manufacturers have offered no plausible account of how integration by modestly-sized firms such as Tesla can produce economic harm. (See here, discussing and refuting arguments in favor of such a ban.)  Thus, some commentators have properly concluded that statutes banning Tesla's self-distribution "reduce competition in [the state's] automobile market for the benefit of its auto dealers and to the detriment of its consumers."  As a result, they conclude, such statutes amount to "protectionism for auto dealers, pure and simple." Such protectionism, of course, also raises barriers to entry for firms such as Telsa, who apparently believe that self-distribution is less costly than reliance upon independent dealers.  A state anxious to maximize the liberty and welfare of its citizens will reject such coercive protectionism.

Saturday, September 13, 2014

Tribe Home Opener Tonight!

Just Hours Away! 

The Tribe opens its home football schedule tonight against the Norfolk State Spartans.    The unranked Spartans are 0-2, having lost to nationally-ranked Maine in a defensive struggle, 10-6 and Liberty, 17-0.  Ranked 16th in the Sports Network Poll and 19th in the Coaches Pollthe Tribe is 1-1, having lost to Virginia Tech on opening day and defeated Hampton, 42-14, last week.  William and Mary leads the series with the Spartans 4-0.  (For the Tribe's all-time record against other 2014 opponents, go here.) 

Good luck to both teams, and GO TRIBE! 

Tuesday, September 2, 2014

A "Win Win" for American Workers

Wants to Make Work Pay

Ditto, But Has a Better Plan 

Speaking in Wisconsin on Labor Day, President Obama reiterated his call for a higher national minimum wage. The President claimed that such coercive wage fixing will help ensure that "hard work pays off --- with higher wages, and higher incomes."  The President did not mention a recent report by the Congressional Budget Office predicting, consistent with economic science, that the President's proposal to mandate a minimum wage of $10.10 per hour would throw 500,000 Americans, and perhaps more, out of work.  Nor did the President mention other scientific evidence rebutting his previous claims that raising the minimum wage will stimulate the economy and increase employment.

President Obama is right to be concerned about the economic plight of America's working poor. Fortunately a resident of Wisconsin has offered an alternative plan that would improve the living standards of millions of Americans without the various negative consequences of higher minimum wages.  In particular, Congressman Paul Ryan has proposed expanding the earned income tax credit ("EITC") for workers without children, thus significantly raising the effective wage that such individuals receive.

As currently structured, the EITC provides an annual tax credit of $5,500 to an individual with two children who works full time at minimum wage.  When combined with the current federal minimum wage of $7.25 per hour and the refundable child tax credit of $1,000 per child, the EITC pushes the effective wage for such individuals to just under $11.00 per hour.  (See this tax calculator to generate these data.)  Individual workers without children fare far worse under the current tax code, however.  Such individuals are of course not eligible for the child tax credit.  Moreover, the EITC provides such individuals only $503 per year, less than one tenth what individuals with two children receive.

Congressman Ryan's proposal would double the $503 credit for such employees, lower the eligibility age from 25 to 21 and raise the income cap that limits participation in the program. The Ryan proposal would be superior to increases in the minimum wage in several ways. First, the proposal would not throw any Americans out of work.  Second, raising the EITC would confer its benefits only on individuals who need assistance.  By contrast, raising the minimum wage would confer benefits on all minimum wage employees, including, say, teenagers and college students in high income households.  Indeed, most individuals who work for minimum wage are not in or near poverty, with the result that higher minimum wages redistribute income from businesses and consumers (some poor) to individuals in the middle and upper classes.  Third, the burden of an increased EITC would fall on the community as a whole, and not merely upon those employers (and their consumers) that happen to occupy low wage industries.  Fourth, the cost of increasing the EITC would be transparent, unlike the cost of the minimum wage and other labor regulations.   Fifth, the EITC would preserve a level playing field between employers competing with one another in the marketplace. By contrast, mandating a higher minimum wage would disproportionately burden small, labor-intensive firms vis a vis those with capital-intensive production processes, thus protecting large incumbent firms and distorting firms' choices of production technology.  (See pp. 293-95 of this article for additional detail regarding how minimum wages and other labor regulation can disadvantage firms with labor-intensive production processes.)   It is thus no surprise that leading economists, such as Christina Romer, have endorsed the EITC as superior to the minimum wage as a means of ensuring that hard work pays off.  Nor is it surprising that various newspapers, including the Washington Post and Baltimore Sun, have endorsed Congressman Ryan's plan.  (See here and here).  Indeed, President Obama has himself advocated such an increase in the EITC, albeit in addition to a job-killing minimum wage.

It should be noted that, even if Congressman Ryan's plan becomes law, the effective wage of a childless American earning the minimum wage will still be less than $10.00 per hour.  Perhaps there is room for a compromise of sorts between the President and Congressman Ryan.  That is, President Obama could back off his demand that Congress increase the minimum wage, and Congressman Ryan could propose a more generous increase in the EITC. Such a plan would be a "win win" for millions of American workers.

Monday, September 1, 2014

Even Binding on the GAO 

Various media outlets are reporting that the Obama Administration violated federal law when it swapped five Taliban prisoners for Army sergeant Bowe Bergdahl, whom the Taliban had held captive for five years.  (See here and here, for instance.) These stories uniformly cite a report by the non-partisan General Accounting Office, an arm of Congress, prepared at the request of the several U.S. Senators. This report asserts that the swap violated two different statutes. First, the report concludes that the swap violated the National Defense Authorization Act for 2014, which provides that the President must notify Congress 30 days in advance before releasing any prisoner from Guantanamo Bay. Second, the report concludes that the expenditure of money necessary to effectuate the transfer violated the "Antideficiency Act," which prohibits the expenditure of funds that exceeds Congressional authorization.

The GAO report is incomplete to say the least.  Federal law includes more than just statutes duly enacted by Congress.  The paramount Federal law is the U.S. Constitution, which declares itself the supreme law of the land.  Article II of the Constitution vests the Executive power in the President and also provides that the President is "Commander-in-Chief of the Army and Navy of the United States." As previously explained on this blog, this provision grants the President power over what Joseph Story called "the direction of war" once Congress has initiated such hostilities.  Congress has authorized hostilities against individuals and organizations that planned and perpetrated the 9-11 attacks, included those, like the Taliban, who aided and/or harbored the perpetrators.  (See here, elaborating on the September 18, 2001 "Authorization to Use Military Force"). Having authorized the use of military force against our enemies, Congress cannot interfere with the President's exercise of the powers as Commander-in-Chief, any more than Congress can interfere with the President's authority to nominate a judge once it has created the judgeship by statute.

There is a strong argument that the detention and release of prisoners falls squarely within what Story called "the direction of war."  The conduct of military operations often results in the capture and subsequent detention, sometimes for the duration of the conflict, of those who surrender.  Direction of battlefield operations requires continuous decision making about whether to detain such prisoners, how and whether to collect intelligence from such prisoners, and which prisoners to release and when.  Such decisions are bound up with other tactical decisions, such as whether to conduct raids to capture additional prisoners, whether to enter temporary truces during which wounded prisoners are exchanged, and whether to release prisoners for the purpose of planting false intelligence with the enemy. The detention and treatment of prisoners can have strategic implications as well; an enemy might decline to surrender unless it receives adequate assurances that its captured soldiers will be released in a timely fashion.  Finally, successful negotiations with adversaries, again pursuant to the President's Article II powers, often depends upon preventing leaks so as to ensure the utmost secrecy.   Requiring the President always to notify Congress 30 days before releasing one or more such prisoners could in some cases unconstitutionally infringe on Article II of the Constitution.

If in fact the detention and release of prisoners falls within the President's authority to "direct war" and negotiate with adversaries, then President Obama was free to ignore, as unconstitutional, legislative constraints on the exercise of that power. In the same way, for instance, President George W. Bush was free to ignore legislation that purported to require the military to obtain a judicial warrant before gathering military intelligence from phone conversations between Americans and suspected members of Al Qaeda located in other countries. Presidents, like courts, are duty-bound to decline to enforce legislation they believe to be unconstitutional, regardless of whether courts have agreed or will agree with the President. (See here). Indeed, when he signed the National Defense Authorization Act for 2014, President Obama issued a signing statement contending that the notification requirement could in some cases infringe upon the President's Article II authority by depriving the President of the "flexibility, among other things, to act swiftly in conducting negotiations with foreign countries regarding the circumstances of detainee transfers."  As previously explained on this blog, such statements are an entirely legitimate means by which the President may publicly contest legislation he or she believes to be unconstitutional.

The GAO report did not examine whether the statutory provisions it invoked infringed upon Article II of the Constitution.   Instead, the report reiterated the GAO's apparent practice of declining to opine on the constitutionality of duly enacted statutes.  The GAO also asserted that statutes passed by Congress and signed by the President are "entitled to a heavy presumption of in favor of constitutionality."

GAO's failure to consider the constitutional dimensions of the question was unfortunate and weakens the persuasiveness of the report's conclusion that the Administration "broke the law," given that unconstitutional statutes are not "law" in the first place. Moreover, the report's invocation of a presumption of constitutionality is misplaced. Such a presumption might make sense in the judicial context, when judges evaluate the constitutionality of legislation passed by Congress and defended in court by the President.  Where, however, Congress and a sitting President disagree about the constitutionality of legislation that purports to constrain the President, the application of such a presumption is unwarranted.  As Justice Scalia once explained, in such cases there is simply  no rationale for according the constitutional views of one branch of government greater deference than those of the other. See Morrison v. Olson, 487 U.S. 687, 704-705  (Scalia, J. dissenting).  As James Madison explained in Federalist 49: "The several departments being perfectly co-ordinate by the terms of their common commission, neither of them, it is evident, can pretend to an exclusive or superior right of settling the boundaries between their respective powers." (quoted in id.)  Thus, "[a]s one of the interested and coordinate parties to the underlying constitutional dispute, Congress, no more than the President, is entitled to the benefit of the doubt."  Morrison, 487 U.S. at 705 (Scalia, J. dissenting).    By ignoring James Madison and Justice Scalia and invoking this misplaced "heavy presumption," the GAO avoided the sort of analysis that may have clarified and helped resolve the constitutional dispute between Congress and the President.

Hopefully GAO will discard its practice of disregarding the Constitution when opining on the legality of executive branch actions.