BISHOP MADISON

California Exercising Freedom to Fail

2012-01-28T14:43:00.002-05:00

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.

Is The NCAA an Illegal Cartel?

2012-01-06T16:20:00.001-05:00

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

2012-01-06T15:45:00.007-05:00

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.

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

2012-01-04T19:03:00.010-05:00

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.

According to the 2011-12 NCAA Football Rule Book:

"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

2012-01-04T16:53:00.002-05:00

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.

2012 Bailout-Free Ford F-150 Named Motor Trend Truck of the Year

2011-12-30T14:08:00.000-05:00

Motor Trend Magazine has named the 2012 Ford F-150 truck of the year. Motor Trend calls the recently redesigned F-150 "a Truck for all reasons." Motor Trend was particularly impressed by Ford's "Ecoboost" V-6 engine (new in 2011 models), which boasts both improved gas mileage (22 MPG on the highway), 365 Horsepower and 420 foot pounds of torque. For a photo of the Ecoboost, go here. No wonder the Ford F-150 maintains is position as the best-selling vehicle in the United States, despite ill-advised federal bailouts of rivals Chevrolet and Chrysler. Quality, it seems, still matters.

Bill Gates' Quest For Profit Might Help China Turn Green

2011-12-29T13:46:00.000-05:00

Greedy Planet Savior?

As previously explained on this blog, China is the world's largest emitter of greenhouse gasses, even though its overall GDP is half or less than that of the USA. As also explained in that post, some project that China's production of greenhouse gasses will double by 2030. Almost a year ago this blog also called attention to China's under-reliance on nuclear power for electricity generation. As explained then, coal-fired plants account for a disproportionate share of China's electricity compared to various Western nations and Japan. Indeed, as also reported then, China, with the second largest economy in the world, ranks 9th in nuclear generation of electricity, behind such nations as Canada, Ukraine and South Korea. At the same, the post reported, China enthusiastically embraces nuclear power for military purposes, e.g., the propulsion of submarines. The post concluded as follows:

"If China is truly serious about moving to a clean energy economy, it should get with the (nuclear) program."

Recent reports suggest that China may in fact be getting more serious about civilian uses of nuclear power. In particular, Bill Gates and a start-up company, Terrapower, are developing a new line of nuclear reactors, called "travelling wave reactors," that will run mainly on spent uranium. (For a description of how such a reactor would work, go here.) According to a recent report in the South China Morning Post, Gates and Terrapower are in talks with the Chinese government about jointly developing the reactor in cooperation with the Chinese National Nuclear Corporation. Put another way, a profit-oriented entrepreneur is helping a Statist nation turn green in a way that could perhaps prevent undue damage to the climate. Of course, even if Gates is successful, some will still scrutinze whether he gives enough to charity!

Lower Tax Brazil Overtakes Higher Tax Britain

2011-12-27T23:22:00.001-05:00

Now Number Six

Brazil has apparently passed Great Britain to become the sixth largest economy in the world measured by GDP, according to this article in the UK Guardian. (The United States is first, followed by China, Japan, Germany and France.) Of course, Brazil's population of 203 million is more than three times that of Britain, with the result that Britain's per capita GDP is more than triple that of Brazil. The Guardian article mentions several factors that it says account from Brazil's strong GDP growth relative to that of Britain. For instance, Brazil has been exporting heavily to China, itself a rapidly growing economy. Moreover, the banking and credit crisis in Britain, Europe and the United States has slowed the British economy as well as that of some of its trading partners.

The Guardian story leaves out another possible explanation for the divergence between British and Brazilian growth rates, namely, tax policy. For, as previously reported on this blog, Brazil's top income tax rate is less than 30 percent, compared to a top rate of 50 percent in Great Britain. (The top British rate, it should be noted, is the fourth highest in Europe, behind only Sweden, Denmark and the Netherlands. In 2009, by contrast, Britain had the 13th highest rate in Europe.) While Brazil has relatively high payroll taxes, one source reports that its tax to GDP ratio is nonetheless significantly lower than that of Britain's. According to a previous article in the Guardian, some economists in Britain have contended that Britain's high tax rates are rendering the country less competitive internationally and slowing its growth. Brazil's most recent triumph may be "exhibit A" supporting this assertion. Nations rarely tax their way to prosperity.

Higher Minimum Wages Won't Stimulate the Economy

2011-12-27T22:20:00.001-05:00

Ptolomey: Thought Sun Revolved Around the Earth

CNN Money: Thinks Higher Minimum Wages Increase GDP

A recent story on CNN Money reports that several states are about to raise their minimum wages. The story repeats as "news" (and not opinion) the oft-made claim that raising the minimum wage will stimulate the economy and thus increase Gross Domestic Product.

According to the story:

"What's more, the increases could be a mini-boost for the economy. The expected rise in consumer spending as a result of the wage increases would add $366 million to the nation's gross domestic product and lead to the creation of more than 3,000 full-time jobs."

and

"Increasing minimum wage is a key form of local stimulus," said Paul Sonn, legal co-director at NELP. "It helps front-line workers whose wages have been stagnant and falling by putting more money into the pockets of low income families who then spend the money at local businesses."

Both economic theory and empirical evidence have long falsified such claims. Take theory first. Yes, raising wages by coercive fiat will increase the income of some workers. At the same time, such increases will reduce the income of other workers to zero, by inducing firms to eliminate their jobs and also to hire fewer workers in the future. Wages, after all, are the price of a particular input --- labor --- and increasing the price of one input, whether that input is steel, labor or electricity, will cause firms to substitute to other inputs and thus reduce their purchases of the now more expensive input. Moreover, to the extent that firms continue to employ some of the more expensive input, their costs will rise, thereby reducing their output, further reducing their use of the input in question. Thus, raising the minimum wage above market levels will cause firms to employ less labor, by reducing their output and using less labor per unit of remaining output than before the increase.

Now consider the empirics. As a nation, we have already experimented with using artifically-inflated wages as a tool for increasing GDP and thus stabilizing the macroeconomy. As previously explained on this blog (go here and here), legislation passed during the New Deal artificially raised wages, purportedly as a method of enhancing the "purchasing power" of employees and thus stimulating the macroeconomy. The legislation did not, however, have its intended effect. Instead, artificially high wages choked off economic recovery by increasing firms' costs, reducing their output and fostering unemployment, as workers expended resources searching for those scarce jobs that remained. Indeed, according to one study, reported here, New Deal policies that artificially raised wages deepened the Depression and prolonged it by seven years.

The story also helps illustrate the downside of over-reaching Federal regulation. As the story notes, there is also a federal minimum wage, currently equal to $7.25 per hour. (There is an exception for the first 90 days of employment for juveniles --- $4.25 pr hour --- so long as employment of the juvenile does not displace an adult worker.) That wage edict applies to any employee working in interstate commerce or working for a firm, no matter how local, with $500,000 in gross sales. Thus, federal law creates a wage floor, even in those states (and there are five) with no minimum wage whatsoever or those with minimum wages lower than that set by the national government. As a result, states that wish to compete with other states for labor and capital by eliminating their minimum wages or, for instance, adopting differential wages for youth greater than 90 days, will find such a policy thwarted by the "one-size fits all" federal floor on wages, a floor that applies equally in Manhattan, New York and Moscow, Idaho. Competitive federalism suffers when the national government asserts a regulatory monopoly over matters properly left to the states.

Christmas Story Marathon in Less than 16 Hours!

2011-12-24T00:32:00.003-05:00

A New Furnace ........

Tomorrow TBS will renew one of this nation's most important Christmas traditions --- its 24 hour Christmas Story Marathon. For the schedule see the TBS Christmas Story website.

In honor of the upcoming marathon, here are the ten best lines from the movie, in this blogger's estimation.

1. You used up all the glue on purpose! (Mr. Parker)

2. Nottafinga! (Mr. Parker)

3. Some men are Baptists, others Catholics; my father was an Oldsmobile man. (Ralphie as an adult) (Narrating)

4. Fra-gee-lay. That must be Italian. (Mr. Parker)

5. Uh, I think that says FRAGILE, dear. (Mrs. Parker)

6. My father's spare tires were only tires on the academic sense. They were round,and had once been made of rubber. (Ralphie as an adult) (Narrating)

7. My old man was one of the most feared furnace fighters in Northern Indiana. (Ralphie as an adult) (Narrating)

8. In the heat of battle my father wove a tapestry of obscenities that as far as we know is still hanging in space over Lake Michigan. (Ralphie as an adult) (Narrating)

9. My mother was trying to insinuate herself between us and the statue. (Ralphie as an adult) (Narrating)

10. Hey Dad! I bet you never guess what I got you for Christmas! (Ralphie)
A new furnace? (Mr. Parker)

He he, that's a good one Dad! (Ralphie).

Enjoy!

Competitive Federalism Punishing California

2011-12-23T21:27:00.004-05:00

Economic Dynamo

Not So Much

A recent Op-ed by George Will adduces additional evidence vindicating a fundamental choice by those who framed and ratified the Constitution, namely, the decision to limit the power of the National Government and thus to divide regulatory authority between the National Government and the States. According to James Madison's Federalist 51, this division of power between the central and various state governments, along with the separation of powers between judicial, executive and legislative branches at the national level, ensures that a "double security arises for the rights of the people." Madison apparently recognized that competition between states for productive citizens and capital would deter a state from infringing on the rights of its citizens who, if dissatisfied with their state's laws, could move to other states. Thus arose a system of competitive federalism, whereby each state can attempt to attract labor and capital by offering regulatory regimes and thus institutional frameworks most conducive to free market wealth creation and job creation.

California has not been doing well in this competitive struggle as of late. Once considered a land of opportunity, the state experienced a net outflow of citizens in 2008. The state's unemployment rate currently stands at over 11 percent, one of the highest in the nation. Will's Op-ed calls attention to part of California's problem, namely, a plethora of unduly burdensome regulations that inhibit the creation and expansion of businesses and thus job creation. Will focuses on the plight of CKE, Inc., which owns the Hardees and Carl's Jr. fast food chains. Each such restaurant creates 25 jobs, Will reports. According to Will, these and other "California restaurants are governed by 57 categories of regulations." Moreover, Will goes on to explain that:

"CKE has about 720 California restaurants, in which 84 percent of the managers are minorities and 67 percent are women. CKE has, however, all but stopped building restaurants in this state because approvals and permits for establishing them can take up to two years, compared to as little as six weeks in Texas, and the cost to build one is $100,000 more than in Texas, where CKE is planning to open 300 new restaurants this decade."

Simply put, California has apparently made it all but impossible to open a new restaurant, while Texas facilitates the creation of these businesses and the jobs they bring. That is to say, California stands in the way of voluntary arrangements that improve the welfare of consumers who would voluntarily patronize new restaurants and the employees who would work there. If California were to replicate similar regulatory strategies with respect to other industries, many California residents would have little choice but to move elsewhere to locate employment, and residents of other states would decline to immigrate to California in the first place. It's not much of a stretch to surmise that a portion of California's high unemployment rate results from these sorts of regulations.

Of course, some regulation is critical to a well-functioning free market and the welfare of a polity's citizens. No state would or should win the struggle for labor and capital contemplated by our constitutional design by embracing the state of nature as its regulatory philosophy. Even the most ardent libertarians properly endorse "police power" regulation that implements the ancient principle "Sic utere tuo ut alienum non laedas," viz. "use what is yours so as not to injure another's." States that leave their citizens at the mercy of predatory commercial tactics, such as the sale of impure food or fraud will lose citizens and investment just as surely as those that impose unduly burdensome regulations that prevent market entry or otherwise interfere with bona fide economic liberty. There is, however, no indication that, say, delaying market entry by two years is necessary to protect the public from such predatory behavior. Instead, such permit requirements function as a barrier to entry, plain and simple, protecting incumbent firms and limiting consumer choice.

Unfortunately, the system of competitive federalism that is punishing California and rewarding Texas is not self-enforcing but is instead constantly under attack. As federal regulatory power expands, the space for competition between states contracts, rendering such regulatory competition a less effective tool for enhancing the welfare of citizens. If, say, the central government imposes one model of "health insurance reform," on every citizen in the nation, then states cannot compete with each other to provide reforms that meet the needs of their own citizens. Moreover, if the national solution is suboptimal, citizens can only avoid the resulting reform by emigrating to another country, hardly a plausible option for most people. Unfortunately, proponents of the most recent "health care reform," overlooked this downside of a "one-sized fits all" centralized plan.

William and Mary Announces 2012 Football Schedule

2011-12-23T08:43:00.001-05:00

Can William and Mary Keep the Cup?

William and Mary has announced its football schedule for the fall of 2012. The Tribe will play the usual list of CAA opponents, including James Madison, Delaware, New Hampshire, Villanova, Old Dominion and Maine. The Tribe will also play the Penn Quakers for the sixth time ever (the Tribe leads the series 4-1) and the first time since 1995, when the Tribe defeated a # 22 Penn team 48-34 at Zable stadium. (This blogger was in attendance; the game, as I recall, was punctuated by rain showers.) As always, the Tribe will end the season playing for the Capital Cup, pictured above, against intra-state and CAA rival the University of Richmond. This is the oldest rivalry in the South; the teams first played in 1898 and have played each year except 1900, 1902 and 1943, for a total of 119 games. The Tribe leads the series 61-55-5 and has won the last two outings. (See here for a description of the rivalry and a summary of the scores from each game over the years.)

Other highlights include the opening game, against ACC powerhouse Maryland This blogger was in attendance when the Terps defeated the Tribe 27-14 in 2006, Maryland's first win in the series. (William and Mary had prevailed in the teams' two previous meetings.) The last time William and Mary defeated an FBS opponent was in September, 2009, when, as previoulsy described on this blog (this blogger was in attendance) the Tribe bested UVA, in Charlottesville, 26-14.

Here is the schedule. All games take place on Saturday; game times will be announced as the season approaches. Games marked by an asterisk are against CAA conference opponents.

Sept. 1 at Maryland

Sept. 8 Lafayette

Sept. 15 at Towson *

Sept. 22 Delaware *

Sept. 29 Georgia State (Family Weekend) *

Oct. 6 at Penn

Oct. 13 at James Madison *

Oct. 27 Maine (Homecoming) *

Nov. 3 at New Hampshire *

Nov. 10 at Old Dominion *

Nov. 17 Richmond *

Subsidy For Chevy Volt Keeps Growing

2011-12-21T23:31:00.002-05:00

Boondoggles

As previously reported on this blog, President Obama justified the ill-advised bailout of General Motors and Chrysler by claiming that the debt-financed federal ownership of these two companies would encourage the production of "green" automobiles, like the electric-powered Chevrolet Volt pictured above. (Whether such cars really are that green is a separate question; as explained previously the manufacture of batteries for such vehicles exhibits a large carbon footprint.)

A recent study described here suggests that the bailout is just the tip of the subsidy iceburg. The study emphasizes that state-ownership of General Motors did not, in fact, suffice to encourage production of cars like the Volt. Instead, in addition to the cost of the GM bail out itself ($14 Billion), various government agencies have showered GM with Volt-related subsidies that equal between $50,000 to $250,000 per car produced. (The exact figure will depend upon whether GM satisfies certain performance criteria attached to some of the subsidies.) Even taking the more conservative estimate, i.e., $50,000 per car, the Volt, with a sticker price of $40,000, costs a total of $90,000 per car, compared to a mere $82,000 for the "Car designed by Homer Simpson," pictured above, featured in "Oh Brother Where Art Though," episode 15 of Season 2. (The episode and the car Homer designed insightfully illustrated the consequences of ignoring scarcity when making important economic decisions. The car flopped and the company making it failed. Apparently the writers did not imagine a bailout.) It seems unlikely that the benefits of the Chevy Volt justify these costs.

Saab Files for Banktruptcy

2011-12-19T19:21:00.004-05:00

What, No Bailout?

The Chicago Tribune reports that SAAB has filed for bankruptcy. As previously reported on this Blog, General Motors sold its stake in SAAB to Spyker, a manufacturer of high-end sports cars, for $74 million, in 2010. (GM had paid $725 million to buy a partial and then complete interest in SAAB and then ran the company into the ground. What a terrific return in investment!) Unfortunately, SAAB was not able to recover from GM's "stewardship" of its classic brand. Moreover, unlike GM, which received an ill-advised bailout, SAAB will apparently receive no such taxpayer handout. In fact, as reported on this Blog at the time, Sweden rejected calls for such a bailout the last time SAAB was in trouble.

2011-12-14T10:20:00.000-05:00

If This is Fairness ......

In a CNN Op-ed, Professor Julian Zelizer urges the Democratic Party to make economic fairness to the middle class the centerpiece of its political agenda as the 2012 election approaches. Zelizer sees an analogy to his own characterization of the party's strategy during the 1930s. Quoting another historian, Zelizer claims:

"This is a familiar strategy for the Democratic Party. During the 1930s, according to the historian Lizabeth Cohen, the Democratic Party fought for a vision of moral capitalism whereby government and other institutions, such as unions, would lessen some of the suffering that could be inflicted in the free-market economy."

Zelizer's history is a little out of date. Despite the rhetoric, 1930s Democrats in fact fought for a vision of state-enforced cartelization, including the cartelization of labor, that, when implemented, both deepened and lengthend the Depression. (Many 1930s Democrats also fought to defend Segregation, hardly an example of "fairness to the middle class." Though it should also be noted that, during post-New Deal World War II, FDR issued executive orders banning racial discrimination in factories making weapons and ammunition for the military.) That vision first came to fruition in the 1933 National Industrial Recovery Act ("NIRA"), the centerpiece of FDR's New Deal. The NIRA encouraged industries to proposed so-called "Codes of Fair Competition," which, if approved by the President, would have the binding force of law. Such codes imposed express price fixing, output limitations, barriers to entry and/or various practices that facilitated anticompetitive collusion. Moreover, industries could only obtain approval of such codes if they agreed to pay minimum wages and allowed their employees to join unions --- labor cartels --- that then bargained for higher wages.

Of course, the Supreme Court unanimously invalidated the NIRA in Schechter Poultry Corp. et al. v. United States, reversing the criminal conviction of a small corporation and several of its middle class owners. (The Roosevelt Administration had indicted the defendants on 60 counts of violating an NIRA code. Violations included failure to pay minimum wages (that is, employing too many workers) and --- get this --- allowing customers to select individual chickens for purchase, contrary to the code requirement that the defendants and their rivals sell chickens in blocks.) Ironically, the Supreme Court would later declare so-called "block booking" (requiring customers to purchase an entire package of movies, for instance, unlawful per se under Section 1 of the Sherman Act.) The Court unanimously held that the Act was an unconstitutional delegation of authority to the Executive Branch and that application of the statute to the defendants exceeded the scope of Congress's power under the Commerce Clause. After the decision, Justice Brandeis sought out a lawyer from the Department of Justice and asked him to convey a message to FDR:

“This is the end of this business of centralization, and I want you to go back and tell the president that we're not going to let this government centralize everything."

Congress responded to Schechter by passing the National Labor Relations Act, which empowered individual employees to form unions --- labor cartels --- and thereby drive wages above free market levels.

Of course, proponents of centralization (both then and now) claim that expanding the power of the National Government will somehow encourage economic recovery and thus full employment. But the data show otherwise. For instance, President Obama's first Chair of the Council of Economic Advisors, Christina Romer, concluded that the NIRA raised prices and wages and thus slowed economic recovery. See Christina D. Romer, Why Did Prices Rise in the 1930s?, 59 J. Econ. Hist. 167, 187-93, 197 (1999). More recently, two UCLA economists, Harold Cole and Lee Ohanian, concluded that various New Deal policies, particularly those that artificially raised wages, both deepened and lengthened the Great Depression. Indeed, these scholars conclude that FDR's New Deal prolonged the Depression by seven years. Finally, in 1999, this blogger argued that 1930s state and federal policies that raised wages likely exacerbated the Depression, by thwarting the process of ordinary macro-economic adjustment. See Alan J. Meese, Will, Judgment and Economic Liberty: Mr. Justice Souter and the Mistranslation of Liberty, 41 William and Mary L. Rev. 3, 48-49 (1999). (I hasten to add that unlike Drs. Romer, Cole and Ohanian, this blogger's arguments were purely theoretical and did not rest upon the sort of sophisticated econometric analysis deployed by these economists.) That is to say, FDR's policies deprived millions of middle class or potentially middle class Americans access to employment, hardly a "fair" result or exemplar of "moral capitalism." Indeed, the NIRA, with its coercive limits on price, wages and output was hardly capitalism, moral or otherwise

To be sure, some New Deal policies ameliorated the plight of unemployed Americans. For instance, the Work Progress Administration ("WPA") provided jobs for millions working on parks and various forms of public infrastructure. Ironically, many who took such jobs were unemployed because other New Deal policies, such as the NIRA and NLRA, eliminated jobs these individuals might otherwise have obtained. As Richard Epstein has observed, coercive interference with free labor markets and resulting unemployment often gives rise to offsetting policies designed to ameliorate the human cost of such misguided policies. Speaking of the New Deal, Epstein has observed:

"[I]n 1935, American labor law created a system of collective bargaining whereby employees bargain with a single voice. That system allows unions to seek, and often obtain, monopoly profits for their members. That system in turn reduces the number of workers hired by the unionized firms. So what is to be done with the excess workers? They should be shepherded into job-training programs, funded by the public, which would allow them to reenter the labor force with other jobs."

The WPA, of course, was an example of such a countervailing program only made necessary by antecedent and unjustified interference with free markets that destroyed middle class private sector jobs.

Hopefully today's Democrats have a different conception of "fairness to the middle class" that that which apparently animated the NIRA, NLRA and similar New Deal policies.

Does Tenure Increase The Cost of Higher Education?

2011-12-11T14:23:00.013-05:00

A recent essay in the New York Times entitled "The End of Tenure" reviews two books critical of modern higher education. The complaints summarized by the review are familiar, and they include:

1) Higher education costs too much, and tuition keeps rising faster than inflation.

2) Tenured faculty at some elite universities do not teach enough, leaving much of the teaching to be done by adjuncts and other faculty who are not on the tenure track.

3) Student debt is rising by leaps and bounds and is unsustainable.

4) Faculty conduct research that is of little practical relevance, a claim that, if true, implies that the social cost of additional teaching by such faculty members is relatively low.

No doubt at least some of these claims are exaggerated. For instance, recent data also published in the Times suggests that horror stories about students graduating with, say, $100,000 in debt are few and far between. Indeed, these data show that 90 percent of students who borrowed to obtain their bachelor's degree graduated with less than $40,000 in debt. Moreover, some of those individuals who emerged with more than $40,000 in debt presumably chose to attend private universities instead of less expensive public institutions, thus undermining somewhat any complaint about resulting debt burdens. (A North Carolina resident who could have attended UNC Chapel Hill but matriculates at Wake Forest or Duke instead should not be heard to complain about his or her resulting debt burden.) Also, the tuition announced by a college or university is merely a sticker price and does not reflect financial aid that schools provide in the form of discounts for students who demonstrate financial need and/or academic merit.

What though about the claim, implied by the very title of the essay, that the institution of academic tenure is partly responsible for these woes? This is not a new claim --- earlier this year a legal academic argued that proponents of academic tenure for law school faculty were insufficiently sensitive to the fact that the institution of tenure increases the cost of law school. Does the institution of academic tenure make college more expensive, reduce access to higher education and pump up student debt?

Certainly not. After all, eliminating tenure and the job security that tenure brings would make academic positions less attractive than before, with the result that schools would have to raise salaries to attract high quality faculty. Moreover, if eliminating tenure led to greater faculty turnover, schools would presumably incur additional costs searching for and replacing departing faculty. In short, other things being equal, eliminating tenure would increase college tuition, reduce access to college and further add to student indebtedness.

While the institution of academic tenure might have some shortcomings, any propensity to raise the cost of higher education is not one of them.

More Evidence that Compelled Support for Unions Thwarts Job Creation

2011-12-10T23:21:00.014-05:00

Not so friendly to job creation and wages

Mr. Republican. Fought Trade Union Excesses and Bolstered Competitive Federalism

A recent study by the National Institute for Labor Research concludes that Right-to-Work states experience higher employment growth, enhanced economic growth and enhanced wages compared to those states that allow unionized firms to require all their employees to pay union dues, even if the employee declines to join a union. As previously explained on this blog, the Taft-Hartley Act of 1947 empowers states to become Right-to-Work states, thereby opting out of provisions in the 1935 National Labor Relations Act that originally allowed firms to compel employees, under threat of termination, to pay such dues against their wishes. Thus, the Act helps facilitate competitive federalism, whereby states offer different menus of background regulatory and tax policy in their efforts to woo industry that is free to locate in any of 50 states and numerous foreign countries. Co-authored by Ohio Senator Robert Taft (also known as "Mr. Republican"), pictured above, the statute followed a Republican landslide in 1948. Strangely, many of the Law's opponents referred to it as the "slave labor law," a bizarre appellation given the Act's effort to enhance the autonomy of individual employees and protect all employees against union excesses. Maybe "Johnny Friendly," the fictional leader of a corrupt union, portrayed in "On the Waterfront" by Lee Cobb (pictured above) would have characterized the law in this way!

In particular, the study finds that:

1) Between 2000 and 2010, private sector employmnt in Right-to-Work states rose .3 percent, while it fell by over 5 percent in other states.

2) During the same period, real manufacturing GDP grew over 18 percent in Right-to-Work states but just over 8 percent in other states.

3) During the same period, the compensation of employees in the private sector rose 11.3 percent in Right-to-Work states, while compensation of employees in other states rose only 0.7 percent.

Of course, the study does not by itself establish that a state's embrace of Right-to-Work status will thereby, other things being equal, enhance economic growth and job creation. For one thing, right to work status may correlate with other variables that encourage economic growth, such as a political culture within a state hostile to over-regulation and burdensome taxation. (Indeed, the study finds that the average "tax freedom day" in Right-to-Work states is April 6, compared to April 14 in other states.) If so, then superior economic growth may be the result of an overall regulatory and tax environment conducive to economic growth, of which Right-to-Work status is merely one element. Moreover, large economic events unrelated to labor regulation and trade unionism that affect a few states who happen to fall into one category or the other could produce employment effects that coincidentally correlate with Right-to-Work status. The results are nonetheless interesting and reflect the sort of empirical work necessary to test competing hypotheses about the impact of Right-to-Work status.

Do Health Care Systems Determine Life Expectancy? Of Course Not!

2011-12-03T08:49:00.005-05:00

Would Americans Be Healthier in Greece?

England's Daily Mail has produced a misleading attack on the U.S. Healthcare system, blaming the "system" for Americans' relatively low life expectancy. The article, based on a study from the Organization for Economic Cooperation and Development, reports that the USA ranks 28th in life expectancy, because Americans live on average "only" to age 78.2, behind countries such as Chile and Greece (the home of the hooliganism pictured above), with Japan, Spain and Switzerland taking first through third place respectively. The article attributes the gap between the US and other developed nations to a comparatively poor US health care system. The article also notes that the US spends more per person on health care than any other nation. This line of criticism is not new; at least one University maintains a website making a similar claim.

The article's argument falls wide of its intended mark. In any society, longevity depends upon any number of factors, of which the quality of health care is but one. Such factors include the prevalence of accidental death and homicide, the prevalence of unhealthy habits like smoking and excessive drinking, and cultural norms regarding diet and exercise. Indeed, according to one source, the 2008 homicide rate in the United States, 5.22/100,000, was more than ten times higher than that in Japan (.45/100,000), more than five times higher than in Spain (.91/100,000), and more than seven times higher than in Switzerland (.72/100,000). According to another source, America's per capita rate of death from automobile accidents is more than twice that of Japan and Spain and also larger than that of Switzerland as well. If, as seems likely, most victims of homicides and automobile accidents are significantly younger than the nation's average life expectancy, then such differences explain at least part of the gap between life expectancy in the United States and that in other countries. Any comparison of the outcomes produced by different health care systems would have to control for the numerous other independent variables that impact life expectancy.

Moreover, differences in accidental deaths and homicides also highlight another fallacy in the Daily Mail's argument, namely, the treatment of health care expenditures as an exogenous variable that "causes" death at particular ages. In fact, such causation may in many cases flow in the opposite direction. After all, many homicides and accidental deaths themselves result in significant health care expenditures. So do accidents and/or shootings and stabbings that do NOT result in death. Thus, any analysis seeking to isolate the impact of health care expenditures upon longevity, other things being equal, would have to treat health care expenditures as a variable driven in part by other independent variables. For all we know, such an analysis could conclude that the US Health Care System is more efficient than suggested by the Daily Mail's simplistic analysis.

Should Billionaires Like Steve Jobs "Give Back?"

2011-11-29T16:28:00.001-05:00

Insufficiently Generous?

Writing in the New York Times shortly before the death of Steve Jobs, Andrew Sorkin asked whether Jobs was a generous philanthropist and, if not, why not. (The essay, entitled "The Mystery of Jobs' Public Giving" can be found here.) As the essay points out, Jobs had a personal fortune over $8 Billion. Moreover, he declined to sign the so-called "giving pledge," orchestrated by Warren Buffet and Bill Gates, whereby signatories pledge to donate a majority of their wealth to charity. Sorkin also claimed that there is little evidence that, pledges aside, Jobs actually gave a significant share of his large personal fortune to charity. Finally, Sorkin asserted that Apple itself is less charitable than many Fortune 500 companies, "despite its nearly $14 Billion in profits last year," and that Jobs closed down the company's philanthropic programs in 1997.

Sorkin finds Jobs' failure to give more to charity "surprising," and also suggests that Jobs has received a sort of free pass not granted other super-rich individuals with meager giving records. As Sorkin puts it:

"But the lack of public philanthropy by Mr. Jobs --- long whispered about, but never said aloud raises some important questions about the way the public views business and business people at a time when some 'millionaires and billionaires' are criticized for not giving back enough while Mr. Jobs is lionized."

Sorkin points to Bill Gates, Warren Buffet and Sam Walton as billionaires who, unlike Jobs, have been criticized for not "giving back" significant parts of their personal fortune to society by making philanthropy a high priority.

Here are some thoughts on Sorkin's essay:

1. Sorkin does us a useful service by pointing out the double standard applied to billionaires on the question of philanthropy. Why criticize Warren Buffet or Sam Walton for miserly giving records, while leaving Jobs unscathed? Moreover, this blogger agrees with Sorkin that there IS such a double standard, that is, that some individuals, such as Jobs, somehow avoid public criticism for a perceived lack of charity while others with similar records come under fire.

2. However, identifying a double standard and thus concluding that the same standard should apply to all simply begs the following question: what should the standard should be? Should billionaires feel obliged (albeit in some unenforceable way) to "give back" a large fraction of their after-tax wealth to charity? Is criticism directed at other billionaires fair? It's reasonably clear what Sorkin thinks, namely, that all billionaires, including Jobs, should feel some sense of obligation to "give back" significant portions of their personal fortunes to the rest of society, presumably in a way that benefits individuals with more modest financial means. At the same time, Sorkin does not expend much effort arguing this case, but instead seems to take as a given that such an obligation exists.

3. Do all billionaires necessarily possess such an obligation to "give back" to society? This blogger doubts it. For one thing, the characterization of charitable donations by billionaires as "giving back," while common, is morally problematic in a free society. Mr. Jobs (and, for that matter, Mr. Gates and Mr. Walton) did not "take" their wealth from society. Nor did society "give" them that wealth or gratuitously shower it upon them. Instead, they earned that wealth, by cooperating with others to create products and services that individuals voluntarily purchased in free markets. It thus makes no sense to refer to charitable donations by such billionaires as "giving back," as though they are returning something they have passively received. The mere fact that individuals possess wealth does not thereby oblige them to give it away, though many do. Such donations are giving, plain and simple.

4. To be sure, society creates and enforces various background institutions and rules that help facilitate the creation and retention of wealth. Without property law and police protection, for instance, Sam Walton's Wal-Mart could not earn a profit buying and reselling products manufactured by others. Without the protection of copyright law, a form of property, Microsoft could not make several billion dollars per year selling its Windows operating system. As Nobel Laureates Ronald Coase and Friedrich Hayek both recognized, the "free market" in fact depends upon institutions of private property and contract law, both institutions backed by state force.

Still, while various forms of state action might be necessary to make the free enterprise system function, this does not mean that successful entrepreneurs or the companies they create owe some special obligation to share their wealth with others. After all, when it creates and supports various market-supporting institutions, the State is merely satisfying its most basic obligation under the social contract. Under that contract, individuals leave the state of nature and grant a portion of their natural liberty to the larger community. In return, the State creates and enforces property rights and rights in personal security, sometimes interfering with the liberty and property of those who would invade such property or security in the process. Such interference can include taxation that is necessary to support legitimate government activities, such as police forces, courts and the like, activities that facilitate the creation and operation of free markets and the wealth they produce. As James Madison explained in Federalist 10, government exists to protect liberty and property:

"The diversity in the faculties of men, from which the rights of property originate, is not less an insuperable obstacle to a uniformity of interests. The protection of these faculties is the first object of government. From the protection of different and unequal faculties of acquiring property, the possession of different degrees and kinds of property immediately result[.]."

In a free society premised on a Madisonian social contract, economic success does not oblige one to turn over a portion of one's wealth to the larger community. Wealthy individuals discharge their obligations to the State when they abide by general laws, including laws requiring the payment of taxes. Indeed, billionaires such as Mr. Jobs presumably paid far more to the State in taxes than the state expended to protect their property and personal security. Neither the State nor the larger community may invoke the satisfaction of its pre-existing obligation to protect liberty and property as justification for demanding even more.

5. Assertions that these billionaires have not done enough for society ignore the enormous contributions they have already made. Mr. Jobs did not find $8 billion in his backyard. Instead, he created and led a company that created numerous products that individuals chose to purchase voluntarily. No one was forced to purchase an I-Pad or I-Phone. Moreover, the $8 billion that Mr. Jobs amassed represents only a fraction of the value that Apple's products conferred on those who purchased them. (Because demand curves are downward sloping, we can assume that most individuals would have been willing to pay more than the market price for Apple's products.) Moreover, as already mentioned above, billionaires like Mr. Jobs and the companies they run pay far more in taxes than the State pays back to them; presumably the State redistributes what is left over to others. Admonishing individuals like Mr. Jobs to give even more to others almost seems like "piling on."

6. None of this is to say that NO billionaire owes a duty to "give back" a portion of his or her fortune to the rest of the community. Some may have obtained their fortunes unjustly, as when the State grants a firm a monopoly and thus the power to gouge consumers. Others may have religious beliefs that require them to share the wealth they have created with others. Finally, some may believe that a free society flourishes when institutions that are independent of government take on charitable responsibilities that government would otherwise assume. Indeed, as explained previously on this blog, some believe that a decentralized system of higher education, independent of the State, is essential for a free society to flourish. Such individuals may feel bound to create or support private charitable institutions. None of these considerations, however, establish that billionaires have an obligation to "give back" simply because they have amassed a large fortune.

Earthquake Hits Virginia, 5.8 on Richter Scale

2011-08-23T14:00:00.007-04:00

An Earthquake has struck, reportedly near Mineral, Virginia, registering 5.8 on the Richter Scale. Your humble blogger felt the quake here at the Law School in Williamsburg, where the building swayed a little. It felt as though a large truck was driving in the roof.

Update:

Friends report that the quake was also felt in Arlington, Virginia and Middleburg, Virginia.

Update number 2:

The Wall Street Journal reports that the quake was felt in Manhattan, New York.

Update number 3:

The U.S. Geological Survey reports that the quake registered 5.9, not 5.8 as initially reported. The quake was centered 4 miles SW of Mineral, Virginia, 4 miles SSE of Louisa, Virginia, and 41 miles NW of Richmond.

Update number 4:

CBS News reports that the White House and the Pentagon have been evacuated.

Update number 5:

The Chicago Tribune reports that the earthquake was felt in Toronto and Boston.

Amicus Brief of Antitrust Professors in Hosana Tabor v. Equal Opportunity Commission

2011-08-21T10:05:00.015-04:00

This blogger has signed an Amicus Brief in a case pending before the Supreme Court of the United States. The case is Hosana Tabor v. Equal Opportunity Commission, (For a summary of the case, including a link to the various briefs, including amicus briefs, in the case, go here. The opinion in the 6th Circuit that the petitioner is asking the Supreme Court to reverse, can be found here.) Professors Barak Richman of Duke Law School and Harry First of NYU, both leading scholars of antitrust law, co-authored the brief.

The petitioner in the case is a Lutheran church and elementary school that dismissed an employee who taught music and other secular subjects but who also taught daily religion classes, was a commissioned minister and also regularly led her class in prayer. The dismissed teacher claimed that the dismissal violated the Americans with Disabilities Act, and the EEOC intervened in support of the teacher. The 6th Circuit Court of Appeals held that the so-called ministerial exception did not apply, with the result that the plaintiff's suit could go forward on the merits. In particular, the court found it noteworthy that the teacher spent most of her workday teaching secular subjects from secular materials and could not recall bringing religious themes into her secular classes more than twice during her tenure. The court remanded the case to the district court for a determination of whether, in fact, the school had violated the ADA., and the petitioner sought review in the Supreme Court.

The Supreme Court granted certiorari to answer following question:

"Whether the ministerial exception, which prohibits most employment-related lawsuits against religious organizations by employees performing religious functions, applies to a teacher at a religious elementary school who teaches the full secular curriculum, but also teaches daily religion classes, is a commissioned minister, and regularly leads student in prayer and worship."

The amicus brief advises the Court not to expand the scope of the ministerial exception in a way that would provide immunity to professional associations of clergy who engage in concerted action of the sort that produces monopoly or its consequences and is thus unreasonable and unlawful under Section 1 of the Sherman Act. Indeed, at least one professional association of clergy has claimed that horizontal concerted action by the association's members falls within the ministerial exception and is exempt from the Sherman Act. (Professor Richman summarizes the policies of this association, the Rabbinical Assembly, and why they are problematic under the Sherman Act here.) As the brief explains, such concerted action among rivals can reduce competition among clergy for particular positions and also limit the number of clergy whom individual congregations can interview and offer positions, thereby increasing the bargaining leverage of such clergy. Moreover, such conduct does not fall within the contours or rationale of the ministerial exception, which applies in the context of employer-employee relationships between, say, a church or synagogue and its minister or rabbi. Indeed, as the brief explains, limiting the exception to cases involving the employer/employee relationship would not prejudice the petitioner's case at all and would instead protect the ability of other congregations to search for and hire clergy of their choice without interference from unlawful concerted action.

William and Mary 2011 Football Schedule and Game Times

2011-08-20T20:43:00.000-04:00

William and Mary has announced the game times for the upcoming football season here. The full schedule, including game times and locations, appears at the bottom of this post. Note that September 23-25 is "Family Weekend" at William and Mary. Moreover, the November 19 match-up with Richmond will be the 121st meeting between the two teams, the first having occured in 1896. The teams play for the Capital Cup. The game was once known as the "I-64 Bowl," after Interstate 64, which links Richmond and Williamsburg. (Williamsburg was the capital of Virginia before the capital moved to Richmond.) The William and Mary v. Richmond match-up is the oldest rivalry in the South, and only three other rivalries have resulted in more games. (Lehigh v. Lafayette, Yale v. Princeton, and Yale v. Harvard).

The Tribe, ranked 3rd in the "FCS Preseason Poll" is looking to build on last year's strong season. Returning starters include running back Jonathan Grimes, who is on the pre-season Payton award watch list, as well as Dante Cook (LB) and Alex Gottlieb (TE), who, with Grimes, made the The Sports Network's pre-season First Team FCS All America Team.

Finally, note that the first game will take place against the University of Virginia, in Charlottesville. Your humble blogger was in attendance at the last meeting of the two teams, which resulting in a convincing 26-14 victory for the Tribe. Go here for a post about that game. Tribe fans are hoping for another upset!

Here is the schedule:

September 4, 6:00 PM @ University of Virginia

Septmber 10, 1:30 PM @ VMI

September 17, 7:00 vs New Haven

September 24, 7:00 PM vs James Madison

October 1, 6:00 PM vs Delaware

October 15 12:00 PM vs New Hampshire

October 22 3:30 PM vs Towson

November 5 1:00 PM @ Rhode Island

November 12 12:00 PM vs Old Dominion

November 19 12:00 PM @ Richmond

Go Tribe!

Should Misleading Charts Accompany All Discussions of the Debt Ceiling?

2011-08-04T14:39:00.018-04:00

Probably Not "Incoherent"

Useless Visual Aid

In a recent blog post, James Fallows, national correspondent for the Atlantic Monthly, asserts that one cannot both be concerned with structural budget deficits and simultaneously support the across the board tax cuts that President Bush convinced Congress to adopt early in his Administration. Fallows' main argument is a picture --- a chart, reproduced above, which originated in a recent opinion piece in the New York Times. The chart purports to quantify how various policy changes supported by Presidents Bush and Obama, respectively, have increased spending by the National Government and/or deprived the National Government of revenue it supposedly would have received. Among other things, Fallows claims that the chart "demonstrates the utter incoherence of being very concerned about the structural federal deficit but ruling out of consideration the policy that was the single largest contributor to that deficit, namely the Bush-era tax cuts." (emphasis in the original).

Fallows' assertion is unconvincing, to say the least. Here's why.

1. The chart inexplicably omits over $500 Billion --- the forgone revenue attributable to the two year extension of the Bush tax cuts to which President Obama agreed after the 2008 mid-term elections. (See this story.) Indeed, President Obama's own former director of the Office and Management and Budget, Peter Orzag, advocated such an extension shortly after he left the Administration. Fallows does not explain why we should ignore this forgone revenue.

2. The chart is also misleading in a more fundamental sense. In short, the chart is a gerrymandered portrayal of factors that drive spending, revenue and thus the deficit and resulting debt. In particular, the chart focuses exclusively on the fiscal impact of new programs adopted during the Bush and Obama administrations, respectively. Thus, the chart entirely ignores the cost of existing programs, adopted during previous administrations which, taken together, cost far more than the various programs and tax cuts portrayed in the chart. Indeed, according to one source, the National Government spent $28 Trillion in 2002-2010 alone. During 2002-2009, Fallows claims, the Bush tax cuts deprived the National Government of $1.8 Trillion in revenue, a figure that rises to about $2 Trillion if one includes the forgone revenue attributable to the cuts which Congress extended, with President Obama's agreement, after the 2010 mid-term elections. Thus, the Bush tax cuts equal a whopping 7.1 percent of the expenditures by the National Government during the period in question and are hardly the driving force in the current budget deficit, projected to reach $1.5 Trillion, or 10 percent of GDP, in 2011.

3. The chart ignores all sorts of tax deductions and loopholes, adopted before 2002, that, like the Bush-era tax cuts, deprive the National Government of revenue. Examples include the home mortgage interest deduction (including the deduction for second homes) and the tax exemption for employer-provided health insurance. (The former reduces annual tax revenue by $100 Billion per year.) Inclusion of these potential sources of revenue in the Fallows/New York Times Chart would reduce even further the apparent contribution of the Bush-era tax cuts to the deficit.

4. Finally, the chart and any arguments based upon it ignore entirely the long run link between structural deficits and economic growth (or lack thereof), a link emphasized by John F. Kennedy in his 1962 speech to the Economic Club of New York. As explained in an earlier post on this blog, JFK argued that across the board tax cuts during an economic downturn were the best way to encourage investment, work effort and economic growth and thereby, in the longer run, reduce the budget deficit. In JFK's own words:

"The purpose of cutting taxes now is not to incur a budget deficit, but to achieve the more prosperous, expanding economy which can bring about a budget surplus."

Of course, JFK did not believe that tax cuts alone would ultimately lead to a budget surplus. He also advocated spending restraint, arguing that reliance on government expenditures to stimulate the economy would "demoralize our government and the economy" and that government should not "spend more than can be justified on grounds of national need or spent with maximum efficiency."

In short, like Ronald Reagan two decades later, JFK believed that low tax rates were a precondition for economic growth and that tax cuts and spending increases had quite different impacts on the deficit over the longer run. Moreover, both Presidents advocated policies that helped innaugurate lengthy economic expansions and economic growth. Most Americans would gladly embrace the sort of "incoherence" that resulted in such strong and sustained economic growth and resulting job creation and economic opportunity.

Conflicting Views at CNN Money About The Impact of the Debt Ceiling Deadlock on Interest Rates

2011-07-28T17:32:00.007-04:00

Yesterday this blog took issue with the claim, made by President Obama and others, that failure to raise the debt ceiling will raise interest rates that ordinary Americans pay for things like car loans, home loans, and credit cards. (See this post). Unfortunately, a story on CNN Money earlier today continues to repeat some of the unpersuasive arguments this blog rebutted yesterday. Among other things, this new story quotes market "experts" to support the claim that a downgrade in the credit rating of the United States will somehow cause lenders to raise the interest rates charged to Americans whose creditworthiness has not changed. To be more precise, the article repeats the claim that, despite a downgrade, lenders will still treat US debt as the safest investment in the credit markets and thus the rates on such debt as the "baseline" for other rates, even if there are other investments that present lower risks.

As I explained yesterday, this argument assumes that lenders are irrational and ignores the fact that less borrowing by the United States will reduce the demand for credit and thus lower the price of credit, namely, interest rates. Imagine, for instance, that the rating agencies downgraded US debt to a CCC+ rating, driving rates on Treasury Bonds to 25 percent. Would lenders really charge individuals and businesses with AAA credit ratings MORE than 25 percent? Of course not, and lenders who tried such an approach would quickly lose business to those who charged rates that reflected the creditworthiness of individual borrowers.

However, it appears that reason is starting to prevail at CNN Money. Earlier today Chris Isidore weighed in on the question, in this article. Among other things, Isidore explains that failure to raise the debt ceiling could actually lower the interest rates on US Debt because less borrowing by the United States would reduce the supply of bonds, raise their price, and thus lower rates. (This is simply the flip side of the argument that less borrowing by the United States means less demand for credit and thus lower interest rates.) Isidore also argues that uncertainty created by the deadlock over the debt will actually cause investors to flock to Treasury Bonds, particularly insofar as the government will continue to raise sufficient revenue to pay the interest and principal on the debt, because such bonds are perceived as a sure bet. Finally, Isidore offers some modest evidence to support his argument, pointing out that the most recent auction of 7 year treasury notes produced a yield of 2.25 percent, the lowest on such notes since November. Of course, there are various determinants of such rates; low rates may simply signal that investors believe the economy and thus the demand for credit is weak. Still, such low yields seem inconsistent with an assertion that failure to break the debt ceiling deadlock by August 2 will produce an economic cataclysm.

Perhaps those who claim that the rate on US Debt is the benchmark for rates on private credit will now argue that the debt ceiling deadlock will REDUCE rates for private borrowing!!!

Will a (Very Unlikely) US Default Raise Interest Rates Paid by You and Me?

2011-07-26T13:24:00.028-04:00

Needs a Crash Course on How Credit Markets Work

Might Become a Safer Bet Than The USA

President Obama and others are arguing that failure to raise the debt ceiling will raise the interest rates that Americans pay for mortgage loans, automobile loans and unsecured credit obtained via credit cards. (The President made the claim in his July 26, 2011 speech on the debt ceiling.) This argument is perplexing to say the least. If anything, failure to raise the debt ceiling will reduce interest rates applicable to private borrowing, whether or not that failure leads to default. Moreover, if the United States does default, rational self-interested creditors will continue to evaluate potential debtors in the same way --- by assessing the possibility of repayment --- and set interest rates accordingly.

Here's why.

1. It bears repeating that failure to raise the debt ceiling need not lead to default. The United States collects far more tax revenue each month than needed to pay the interest on the national debt. Thus, even if the debt ceiling remains fixed, the Department of the Treasury can prevent default by paying bondholders before making other expenditures. (See the following Op-ed in today's Philadelphia Inquirer by John Lott, explaining how the risk of default has been exaggerated.)

2. But let us assume that, contrary to logic and common sense, failure to raise the debt ceiling somehow leads the United States to default on its debt obligations. Certainly such a default will reduce the creditworthiness of the government of the United States and thereby reduce creditor confidence in US debt. Ratings agencies like Moodys and Standard and Poors would downgrade their rating of US Debt Securities. As a result, the national government would have to pay higher interest rates on any new debt it might issue if Congress were to subsequently increase the debt ceiling.

However, such a default will have no impact on the creditworthiness of individual Americans seeking to borrow money to purchase a home or car, for instance. (Why would your credit score fall if the United States defaults?) In fact, a failure to increase the debt ceiling and a resulting default by the United States might actually reduce the interest rates that ordinary Americans pay for credit. The interest rate, after all, is the price of credit, that is, the price of renting someone else's money. Like other prices, this price is determined by supply and demand. If Congress refuses to increase the debt ceiling, the United States will reduce its borrowing and thus its demand for credit, thereby reducing the interest rates paid by those entities (households, businesses, states and other countries) that continue to borrow. Even if Congress does eventually raise the debt ceiling and thereby authorize new borrowing by the United States, individuals, firms and states might still pay lower rates than before, as some creditors prefer lending to such entities over the United States.

3. Nonetheless, some news outlets continue to push the idea also advanced by the President that a default would raise interest rates paid for private credit. These outlets argue that banks and other financial institutions tie the interest rates on some loans to the interest rates on US Government Debt. If those rates rise, the story goes, so will rates on purportedly less secure debt incurred by private individuals.

Thus, according to one story on MSN Money:

"Treasury bonds provide the floor for other lending --- car and home loans, credit card debt and student loans, for instance. And because those loans are seen as more risky, the interest charged on them is higher and could rise faster than the increase in the rate on US Securities.

This prediction does not withstand scrutiny. Less charitably, the statement is economic balderdash. Certainly Treasury Bonds currently provide the floor for other lending, for the simple reason that such securities are perceived as safer bets than all other investments, whether AAA-rated state bonds, unsecured credit card loans or car loans. However, if the United States government defaults, creditors, as rational actors, will no longer treat such bonds as the safest possible investment, with the result that US Government debt will, by definition, lose its status as the "floor for other lending." Instead, creditors will presumably identify a different debt security as the safest bet and thus the "floor for other lending." For instance, creditors might choose the debt of states like Virginia, which currently enjoys a $300 million budget surplus and a long-standing AAA bond rating, as a benchmark. Or, creditors could choose a "market basket" of the debt of several states and/or well-managed private firms. In any event, if the United States government defaults, profit-seeking creditors, who operate in a competive capital market, will continue to judge other debtors the old fashioned way, that is, by assessing the prospect that such borrowers will pay back the loan in question. Those who do not, that is, who charge rates higher than justified by the risk presented, will rapidly lose business to those who do. Moreover, those borrowers who, like the Commonwealth of Virginia and millions of ordinary Americans, manage their affairs wisely will be rewarded.

UPDATE (6:30 PM Thursday, July 28): An hour or so ago CNN Money published a story repeating some of the arguments rebutted here. I discuss that story, as well as a better-reasoned story on CNN Money, in a subsequent post --- here.

Another Founding Father For Abolition

2011-07-03T20:46:00.017-04:00

American Aristides and Abolitionist

The Economist magazine has waded into the controversy, born as a dispute between ABC's George Stephanopolous and presidential candidate Michele Bachmann, over the extent to which the American Founders worked to end slavery. As many know, Stephanopolous argued that the Founders did not work to end slavery, while Congresswoman Bachmann claimed they did, citing only John Quincy Adams, a young boy at the time of the Revolution, as an example.

In a piece entitled "John Jay Saves the Day," The Economist has offered some support for Bachmann's assertion, contending that "[p]lenty of founders did fight hard to end slavery." At the same time, the essay asserts that "the really good guys on slavery were not" Washington, Jefferson and Madison, but instead "less venerated big government Yankee founders who sped the abolition of slavery in the North." As examples, the essay cites Alexander Hamilton and John Jay of New York and Gouverneur Morris of New Jersey. The piece praises Jay, himself a slave owner, for purchasing slaves and then granting them freedom after what Jay deemed a reasonable period of time. The piece also praises Jay for signing a 1799 New York "Act for the Gradual Abolition of Slavery." The Act provided that, beginning on July 4 of that year, all children born to slave parents in New York would be free. The Act also prohibited the export of slaves from New York.

The Economist is certainly right to praise Jay, Hamilton, and Morris for their opposition to slavery and their efforts to combat it. Hopefully Congresswoman Bachmann and George Stephanopolous will "stand corrected" and give these gentlemen their due. However, the Economist errs when it suggests that only northern Founders fought to end slavery, failing, as it does to mention George Wythe of Virginia, a prominent Founder and Abolitionist.

Wythe is perhaps best known as the first Professor of Law and Police ("policy") at the William and Mary Law School, founded as the nation's first law school in 1779. (Wythe served in this capacity until he resigned in 1789.) Less well-known is his role in the American Independence Movement and adoption of the U.S. Constitution. He drafted the Virginia Legislature's Resolution in Remonstrance, protesting the Stamp Act, in 1764. Elected to the Continental Congress in 1775, Wythe voted for the Resolution of Independence, moved by fellow Virginian Richard Henry Lee, and signed the Declaration of Independence drafted by Jefferson. He then served as Speaker of of Virginia's House of Delegates from 1777-78. He was a member of the Virginia Court of Chancery for more than two decades. In the so-called "Case of the Prisoners" (Commonwealth v. Caton, 1782) Wythe issued an opinion claiming the power to invalidate unconstitutional statutes, thereby presaging the doctrine of judicial review articulated by his future student, John Marshall, in Marbury v. Madison.

Wythe also attended the Philadelphia Convention that drafted and proposed the U.S. Constitution. George Washington, who presided, appointed Wythe, along with Hamilton and Charles Pickney, to a committee charged with developing procedures to govern the Convention. However, he left the convention early and did not sign the document. He did, however, participate as an elected member of the Virginia Convention that voted to ratifiy the proposed Constitution.

Like the northern Founders extolled by the Economist, Wythe was an abolitionist. He freed his own slaves and provided for their support, teaching Ancient Greek to one former slave who continued to live with Wythe in Richmond. Moreover, as a Judge in the District Court of Chancery in Richmond, Wythe ruled that the Virginia Declaration of Rights created a presumption that all men were free, regardless of their race. (Unfortunately, an appellate court reversed this portion of Wythe's opinion.) No doubt Wythe's example helped inspire the other Virginians who freed their slaves in the post-Revolutionary period. Perhaps Wythe's example also inspired his successor at William and Mary, St. George Tucker, to craft his "Plan for the Gradual Abolition of Slavery" published in the mid-1790s.

It is little wonder that Wythe's biographer called him the "American Aristides," a reference to the Athenian leader whose moderate assessment of tribute owed by members of the Delian League helped earn him the title of "the Just."

Hopefully the Economist, George Stephanopolous and Congresswoman Bachmann will "correct the record" and recognize Wythe's role in helping eradicate human slavery in the United States. July 4th would be a perfect day to start!

Should We Tax Our Way To Prosperity?

2011-06-29T14:48:00.013-04:00

Writing today on the Washington Post's Post-Partisan Blog, E.J. Dionne takes issue with Mitt Romney's effort to analogize President Obama poor economic record to that of the British Labour Party in the 1970s. At issue is Romney's adaptation of a campaign poster employed by Margaret Thatcher during the late 1970s, calling attention to the failure of the Labour Party's economic policies. These policies, of course, helped produce high unemployment, high inflation and economic stagnation, all leading to a 1976 IMF bailout orchestrated by the Ford Administration. Like Thatcher's poster, which asserted (correctly) that "Labour's Not Working," Romney's new poster asserts "Obama's Not Working."

Dionne does not dispute that economic conditions in the United States are in some ways analogous to those in Britain in the 1970s, e.g., unemployment is high and debt is rising. (At the same time, inflation is still at bay here, partly because unions exert far less influence than they did in Britain in the 1970s.) Still, he claims there is a key difference between 1970s Britain and the current environment that deprives Romney's analogy of much force. According to Dionne:

"[T]he big difference is that the economic mess Obama inherited was the creation of some of the very policies that Romney now endorses, including low taxes on the wealthy and deregulation."

Apparently Dionne, like Labour in the 1970s, believes that we can tax and regulate our way to prosperity.

Huh?

Unfortunately, Dionne does not explain how higher taxes on those citizens who create the most wealth, and already pay most federal income taxes, a cornerstone of Labour's policies in the 1970s, would have prevented the current downturn or otherwise stimulate the economy. Perhaps he should review the economic records of Ronald Reagan, John F. Kennedy and Lady Thatcher herself, all of whom cut taxes "across the board," including on the "wealthy," to get the economy moving again. As Lady Thatcher's predecessor Winston Churchill colorfully put it: "[F]or a nation to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle."

Nor does Dionne specify which "deregulation" led to the current economic downturn or, for that matter, document his claim that Romney, who was not a public official at the time, supported such deregulation. Finally, he does not mention that deregulation in both Britain and the United States in the early 1980s apparently helped produce sustained periods of economic growth in both countries or that President Obama's administration has sought to expand the power of cartelistic labor unions in so as to increase the cost of doing business in the United States and interfere with the process of competitive federalism.

This blogger suspects that Romney's message will have more resonance than Dionne cares to admit.

Do Low Taxes Put Our Food Supply At Risk?

2011-06-29T12:52:00.009-04:00

Generously Offers Americans a Choice Between Higher Taxes or Food Poisoning

In his press conference earlier today, the President claimed that failure to find additional tax revenue could result in the elimination of food inspections by the Federal Government. (Here's the clip.) Talk about the politics of fear! The Federal Government spent over $3.5 Trillion last year. According to one source, the national government, via the Department of Agriculture, spent less than $11 billion in 2010 on "animal and plant health inspections, food safety, grain and packing inspections, and conservation activities." Is President Obama really asserting that, absent tax increases, he could not find $10 billion in non-essential spending in a $3.5 Trillion federal budget that would be better spent on food inspections?

Speaking of non-essential spending, the President's plea for more tax revenue is particularly ironic in light of his Administration's opposition to the bipartisan effort to eliminate the $6 Billion in annual subsidies to the Ethanol Industry. Apparently the President believes the National Government has ample funds to subsidize the use of corn as a fuel but somehow cannot locate the money necessary to prevent Americans from eating tainted food. This is a common tactic by so-called "Progressives," viz., invoke the need to fund core functions of government while at the same time supporting the existence and expansion of programs that simply transfer income from taxpayers to special interests.

Electric Cars Not So Green After All

2011-06-21T10:15:00.000-04:00

An Un-Green "Leaf"

The Electricity-Hogging Chevy Volt

Nissan and General Motors are touting electric cars, like the Nissan Leaf, pictured above, as "green" alternatives to traditional gasoline-powered automobiles. At the same time, the National Government is subsidizing the sale of such automobiles, providing a $7,500 tax credit to individuals who purchase such automobiles. Moreover, as previously reported on this blog, President Obama justified the money-losing bailout of General Motors in part by claiming that the government would, as the owner of GM, encourage the firm to produce "green" automobiles like the $40,000 (minimum) Chevy Volt, also pictured above.

Just last week the Australian newspaper reported on the findings of a British study that suggests that electric cars are actually less "green" than their gasoline-powered counterparts. As summarized by this story, the study found that "[a]n electric car owner would have to drive at least 129,000 km before producing a net savings of CO2" compared to a similar gasoline-power automobile. Why? Because the production and disposal of batteries employed in electric automobiles consumes significant amounts of electricity, with the result that the production of an electric automobile consumes at least 50 percent more carbon than the production of a similar gasoline-powered automobile. Thus, while electric cars emit less carbon per mile than their gasoline-powered counterparts, their lifetime carbon footprint exceeds that of gasoline-powered cars unless driven at least 129,000 km. The authors of the study also suggest that electric automobiles will rarely reach the 129,000 km mark, "because they typically have a range of less than 145km on a single charge and are unsuitable for long trips."

Taken at face value, this study, if accurate, would seem to undermine the case for encouraging the production of electric automobiles. Perhaps the Federal Trade Commission or Environmental Protection Agency will require Nissan and General Motors to disclose to consumers the actual carbon footprint of their vehicles.

Still, there are two caveats.

First, some electricity generation is carbon-free. Hence, the results of the study are presumably sensitive to assumptions about the method of generating the electricity employed to manufacture electric cars and their batteries and to charge such cars. Thus, an electric car manufactured in France, where nuclear power provides 75 percent of the nation's electricity, would have a smaller lifetime carbon footprint than an electric car manufactured in the United States, where coal provides 56 percent of the nation's electricity, and nuclear energy provides a mere 20 percent , or China, where coal provides 80 percent of the nation's electricity and nuclear power provides only 3-4 percent.

Second, it's conceivable that, over time, the energy-intensity of battery production will fall, thereby reducing the carbon footprint of electric automobiles. For instance, as the output of electric cars rises, manufacturers of batteries may be able to realize economies of scale and thus reduce production costs, including electricty consumption. This is sheer speculation, however. Indeed, the overall cost of producing an electric car could fall, without impacting the amount of electricity consumed per automobile produced.

AFSCME Challenging Scheme It Endorsed.....

2011-06-16T15:22:00.021-04:00

AFSCME (Wisconsin) v. AFSCME

Yesterday several Wisconsin unions, including three Wisconsin Councils of the American Federation of State, County and Municipal Employees ("AFSCME") filed suit in Wisconsin federal court challenging the state's restrictions on collective bargaining by most state employees. As described by the Milwaukee Journal Sentinel, the suit claims that the recent legislation violates both the First and the Fourteenth Amendment to the Constitution of the United States. (See also here, for a report by Reuters.) In particular, the suit alleges that the law, which grants greater collective bargaining rights to police and firefighters than to other state workers, treats one category of state employee --- public safety workers --- more favorably than the rest and thus denies most state employees "equal protection of the law," in violation of the Fourteenth Amendment. The suit also refers to the category of "public safety workers" as "newly-created" and claims that reducing the collective bargaining rights of other employees violates the First Amendment by deterring union activity and granting preferential status to a favored political group --- police and firefighters.

The challenge is both unmeritorious and ironic. The First Amendment protects freedom of "speech," "press," "assembly" and the freedom to "petition" the government for redress of grievances. It does not guarantee the right to bargain collectively over terms of employment. Unions, after all, are labor cartels, which Congress or individual states could ban as such. Indeed, the Supreme Court has expressly held that there is no right for individuals to strike seeking higher salaries in defiance of duly enacted antitrust laws, even when the individuals are doing so for the purposes of making a political point. See FTC v. Superior Court Trial Lawyers, 493 U.S. 411 (1990). If Congress or individual states can outlaw such activity, then it necessarily follows that they need not encourage it by recognizing and bargaining with such unions. Moreover, while the 14th Amendment mandates "equal protection of the laws," it does not require states to authorize all labor cartels simply because it authorizes some. Where economic regulation is concerned, legislative classifications pass muster under the 14th Amendment so long as there is a "rational basis" to support them, unless the classification is based on race, gender or religion or burdens a fundamental right. Thus, Ann Althouse, a Professor of Constitutional Law at the University of Wisconsin, has suggested that the suit is frivolous:

"There's no suspect or quasi-suspect classification, so the courts will give this minimal scrutiny. How is this anything but a frivolous lawsuit?"

The suit is ironic because it represents a 180 degree reversal of the position that organized labor, including AFSCME, took last year. At that time, as previously discussed on this blog, organized labor advocated federal legislation mandating special collective bargaining rights for, you guessed it, public saftey employees! In fact, when the House of Representatives passed a "Public Safety Collective Bargaining Bill" in July, 2010, AFSCME bragged on its website that many of its members had visited members of Congress in support of the legislation. (Indeed, AFSCME repeatedly called for passage of such legislation last year. See here, here and here, for instance.) Such legislation was aimed at those states, like Virginia, that, following the advice of Fraklin Delano Roosevelt, refuse to engage in collective bargaining with public employees and would have required states and localities to allow public safety workers to unionize, even if such unionization was otherwise contrary to state law. (See here for a December 2010 editorial in the Daily Press of Hampton Roads taking issue with the proposed legislation and properly praising Senator Mark Warner for voting against it.) If passed, this legislation would have imposed on several American states the very sort of regime the pending suit claims is unconstitutional!

Perhaps AFSCME's national office will file a brief amicus curiae defending Wisconsin's decision to adopt the same regime AFSCME asked Congress to impose on the nation!

Should We Celebrate the Auto Bailouts?

2011-06-09T23:15:00.002-04:00

$14 Billion FLOP

The President of the United States recently proclaimed the national "bailout" of Chrysler and General Motors a "success," despite the fact that the American Taxpayer will, by the President's own calculation, lose $14 Billion on the combined bailout. Among other things the President claims that the bailout saved a million jobs in the American auto industry and related industries by preventing the failure of the two firms. (For a transcript of the President's speech, go here.) The Washington Post has already announced that the President's speech was "one of the most misleading collections of assertions we have seen in a short presidential speech," and this blog does not find the President's argument convincing, for several reasons.

1. The President assumes that both Chrysler and General Motors, along with the jobs they support (between 100,000 and 150,000 American jobs), would have completely disappeared without the bailout. The President also assumes that hundreds of thousands of other jobs related to the automobile industry would have disappeared as well. Both assumptions are apparently incorrect. To be sure, both firms would have declared bankruptcy, but bankruptcy does not automatically lead to a firm's extinction. The whole point of bankruptcy is to facilitate the renegotiation of a debtor's obligations, in the hope that a streamlined firm will emerge from bankruptcy able to compete again in the marketplace. David Skeel, an expert on the laws of bankruptcy at the University of Pennsylvania Law School, contends in an Op-ed in Monday's Wall Street Journal, that "General Motors was a perfectly viable company that could have been restructured under the ordinary reorganization process." My colleague Nate Oman made a similar point in August, 2010 in an Op-ed in the Washington Times. Such restructuring, of course, might have led to a smaller company that focused more on more profitable brands and models that consumers actually wish to purchase, unlike the notorious Pontiac Axtec pictured above. But the company would have hardly disappeared. (Nor would such a company necessarily be any smaller than the bailed out version, as taxpayer subsidies do not increase the demand for GM vehicles.) Ditto for Chrysler which, as Skeel points out, owned the popular "Jeep" brand and is now controlled by Fiat. (Indeed, some readers will recall that Chrysler bought Jeep from then-floundering American Motors Corporation in 1987. AMC, in turn, had purchased Jeep from Kaiser Motors in 1970. AMC and Kaiser are long since extinct as corporations, but the Jeep brand, and the jobs associated with it, live on.) Any fair calculation of the number of GM and Chrysler jobs "saved" by the bailout would have to take into account the fact that, even without the bailout, both firms most likely would have survived. And, of course, if both firms had survived, then firms related to the automotive industry would have survived as well.

2. Even if both Chrysler and GM had failed completely, there is no reason to believe that all jobs supported by the two companies would have disappeared. The existence or not of GM and/or Chrylser does not alter the demand by American consumers for automobiles. Other companies with excess capacity, particularly Ford, could have ramped up production to meet that demand, hiring some of GM's and Chrysler's displaced workers as well as individuals who have never worked in the automobile industry before. (In fact, Ford announced earlier this week that it plans to increase its production by 50 percent over the next few years.) Ditto for American factories owned by Toyota, Honda, BMW, Volkswagen, Kia, Nissan and others. These firms, in turn, would have purchased parts and other inputs from firms that previously served GM and Chrysler. That, after all, is how free economies work --- firms that produce products like the Pontiac Aztec that consumers refuse to buy do not succeed, and firms that ARE producing succesful products thrive. (See here for "10 Cars That Damaged GM's Reputation" by Popular Mechanics). Thus, many of the jobs purportedly saved by the bailout would have survived, albeit at other firms.

3. The President's argument "proves too much," that is, would, if taken to its logical conclusion, justify policies that all or nearly all Americans would reject. Even in the best of economic times, thousands of businesses fail each year, taking countless jobs with them. In good times, however, business expansions and start-ups outpace failures, causing a net increase in employment. In poor economic times, of course, there are more failures and fewer start-ups and expansions to offset such failures, thereby resulting in the sort of large net job losses the economy experienced in this most recent recession. One might naturally ask why it was appropriate, during poor economic times, to expend $14 billion bailing out Chrysler and General Motors while at the same time refusing to bail out thousands of other businesses (and thus the businesses that supplied them) that failed during the same period. The answer, of course, is that any effort to bail out all such failing businesses, that is, to apply President Obama's logic across the board, would have bankrupted the nation. True enough. But then why choose to bail out Chrysler and GM, both of which most likely would have survived anyway? The fact that the bailout saved jobs in one particular sector, while other sectors were also failing, is not a good answer.

4. Finally, President Obama's argument ignores the concept of opportunity cost. As explained earlier on this blog, capital is scarce, and free societies rely upon free markets to allocate scarce capital between competing potential uses. Moreover, the capital has to come from somewhere, either higher taxes or borrowing in credit markets. There is no reason to believe that the national government is in a better position to determine the best use of scarce capital than private markets, where investors generally bear the long term costs and benefits of their investment decisions. Even if the expenditure of $14 Billion in scarce resources saved some jobs, there is no reason to believe that this particular allocation of capital was superior to that which private capital markets would have produced.

China's Smog Production Growing Briskly

2011-06-08T13:08:00.006-04:00

Previous posts on this blog have sought to debunk the myth that China is somehow a leader in "green energy" and that the United States should seek to emulate Chinese policies. (See here, here and here, for instance.) A new report (discussed here and here) from British Petroleum further rebuts the myth and suggests that China is further solidifying its distinction as the world's largest emitter of greenhouse gases. The report concludes that China, which has a GDP less than half that of the United States, has nonetheless surpassed America as the largest consumer of energy derived from all sources. (China now consumes 20.3 percent of the world's energy, while the United States consumes only 19 percent.) The report also concludes that, in the last year, China increased its own energy consumption by 11.2 percent and its coal consumption by 10 percent. As a result, the report says, China now accounts for 48 percent of the world's annual coal consumption. In short, as previously explained on this blog, China's output is far more carbon intensive than that of the United States, undermining any assertion that China is a "leader" in green energy.

The NLRB Attacks Competitive Federalism

2011-06-07T17:15:00.000-04:00

Commissar for the Ministry of 787 Dreamliner Production?

The National Government is at it again, interfering with the workings of competitive federalism. That is, the general counsel of the National Labor Relations Board, Mr. Lafe Solomon (pictured above) has issued a complaint against Boeing, claiming that the firm has engaged in unfair labor practices. As a remedy, the complaint seeks an order to compell the firm to increase its production of 787 Dreamliners at facilities in the State of Washington, above and beyond current levels of production. In particular, the complaint alleges that Boeing chose to open a second production line for the 787 in South Carolina and to create numerous jobs (over 2000 according to one report) in that state in order to punish the members of The International Association of Machinists and Aerospace Workers, which called two strikes against Boeing in the past six years. (No one disputes that an eight week strike in 2008, for instance, cost Boeing $100 million per day in deferred revenue. For additional details on how the IAMAW has disrupted Boeing's operations and made its product less attractive to potential buyers, see this Op-Ed by Steve Chapman of the Chicago Tribune.) Such an allegedly punitive act, the NLRB says, violates federal labor law, even though the new facility would entail an increase in production of Boeing's 787, that is, would not move any production from Washington to South Carolina. Indeed, one former Chair of the National Labor Relations Board has opined that the complaint is unprecedented, given that Boeing is not moving existing work being done in Washington to South Carolina. Moreover, Boeing has itself exposed numerous inaccuracies in the NLRB's complaint and post-complaint statements, leaving one to wonder whether the NLRB will simply withdraw the complaint and correct the record. Finally, Boeing's answer to the NLRB's complaint points out that there were any number of reasons that motivated Boeing's decision to open a production line in South Carolina, including a desire for geographic diversity in the firm's production facilities and South Carolina's overall favorable business climate.

South Carolina, of course, is a so-called "right to work state," and employees at the new factory would not be members of the IAMAW or any other union. As previously explained on this blog, Congress, via the Taft-Hartley Act of 1947, altered American Labor Law, by empowering states to opt-out of portions of the National Labor Relations Act (NLRA) of 1935. Under the original NLRA, unions --- best characterized as labor cartels --- could use their bargaining power to force employers to to enter "closed shop" agreements. Under such agreements, an employee had no choice but to join a union and thus support the union financially if he or she wished to work for the company in question. Indeed, such agreements require firms to fire individuals who quit a union or refuse to pay their dues. Thus, by exempting unions from the antitrust laws and requiring private firms to recognize unions, federal labor law bolsters arrangements that coercively deprive individuals of their freedom of association, that is, their freedom not to join a union. This result is supremely ironic, as it turns the purpose of government on its head. For, as explained in an earlier post on this blog, the purpose of government, at least according to James Madison, is the protection of faculties of acquiring property, including occupational liberty. As Madison put it, in his 1792 Essay on Property:

"That is not a just government, nor is property secure under it, where arbitrary restrictions, exemptions, and monopolies deny to part of its citizens that free use of their faculties, and free choice of their occupations, which not only constitute their property in the general sense of the word; but are the means of acquiring property strictly so called."

A state-backed closed-shop arrangement is just such an "arbitrary restriction" that denies citizens a free use of their faculties.

The Taft-Hartley Act, by contrast, allows a state to declare itself a "Right to Work" jurisdiction, thereby outlawing "closed shop" agreements. A state that chooses this course ensures that individuals may pursue the occupation of their choice without being forced to join and financially support an organization they may dislike or, worse, believe to be contrary to their economic interest. Moreover, as a practical economic matter, union organization is less likely in right to work states, because a union that successfully organizes a particular workforce cannot be sure than any more than a bare majority of a firm's employees will financially support the union.

In our federal system, firms and individuals are free to incorporate where they wish and also free to locate their facilities where they wish. Combined with the NLRA, the Taft-Hartley Act authorizes two different frameworks for labor relations from which firms can choose when they select their locations. Presumably competition between these two frameworks, just like competition on other attributes that make for a healthy business environment, will result in firms locating their production facilities in those states that offer the overall best business climate. If, as some have argued, coercive unionization makes workers more productive and thus facilitates wealth creation, then choosing "right to work" status will deter investment in a particular state, other things being equal. (For instance, some claim that such coercion is necessary to prevent non-union employees from "free riding" on the efforts of unions to raise a firm's wages.) If, on the other hand, coercive unionization imposes more costs than benefits, then a state's choice as a "right to work state" will, other things being equal, attract capital investment and jobs. That is to say, "competition between states" will decide which of two possible institutional frameworks survives. In fact, it may be that one framework is superior for certain firms, while another is superior for others. That's the way federalism is supposed to work.

The NLRB's order, however, short circuits that process, at least in part. Under the rule sought by the NLRB, a firm that suffers at the hands of one or more costly strikes will find it difficult to open a new facility elsewhere, as a fact finder could always infer, perhaps quite reasonably, that the firm has opened the new facility in a different state at least in part "because" it wants to avoid the debilitating consequences of a future strike. And, having drawn this inference, the next logical inference will be that the firm firm opened the new facility to "punish" the union for striking, perhaps supported --- like the NLRB's current complaint --- by some offhand statements by company officials taken out of context. Indeed, the more costly the prior strike, the stronger will be the inference that any subsequent move is a form of retaliation! While the company might ultimately prevail, it will do so only after bearing significant costs in the form of litigation and uncertainty.

Aside from short-circuiting federalism, the NLRB's approach will, if validated in court, have other negative consequences as well. For one thing, the rule will encourage otherwise unwarranted strikes by unions that fear employers might be planning --- quite lawfully --- to build facilities elsewhere, even if those plans have nothing to do with organized labor. (Perhaps a firms is considering a move to a state with less onerous taxes or environmental regulation, for instance.) By striking today, a union would thereby give itself the option down the road to argue that any construction of new facilities in another state is retaliation for the recent strike. Moreover, the prospect that unions might behave in this manner, or otherwise take advantage of the NLRB's unprecedented rule, will cause companies to resist unionization more vigorously than they otherwise might, even if unionization would make sense for all concerned. Indeed, at the margin, firms might avoid closed-shop states altogether to avoid the NLRB's new rule.

Hopefully the courts will reject the NLRB's effort to short-circuit the workings of competitive federalism. Indeed, they may not even reach the issue, as Senators have already introduced legislation to clarify labor law in a way that rejects the NLRB's gambit.

Private Enterprise To Boost Production and Sales Without Federal Subsidies!

2011-06-07T09:35:00.005-04:00

Today's Chicago Tribune reports that Ford has announced plans to increase production by 50 percent worldwide by the middle of this decade, an increase that will be driven in part by greater demand in China and India. Apparently some American automobile companies, or at least one, can thrive without multi-billion dollar subsidies from the taxpayer! Now that's true job creation!

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

2011-05-20T13:35:00.000-04:00

Probably a Better than Average Investment at the Time

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

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

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

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

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

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

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

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

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

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

Some additional observations:

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

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

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

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

2011-05-13T14:39:00.028-04:00

NCAA Commissioner-in-Chief?

NCAA Vice-Commissioner in Chief?

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

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

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

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

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

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

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

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

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

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

Should The United States Replace Seal Teams With Grand Juries?

2011-05-09T22:37:00.011-04:00

Not a Grand Jury

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

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

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

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

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

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

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

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

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

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

Are All Business-Friendly Expenditures "Corporate Welfare?"

2011-05-06T14:03:00.012-04:00

Dispenser of Corporate Welfare?

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

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

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

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

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

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

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

Tom Brady et al. Score on First Drive/Far More To Come

2011-04-27T22:57:00.014-04:00

His Opinions May Doom Players' Suit

Yesterday Judge Susan Nelson declined to stay her ruling that enjoined the N.F.L.'s so-called "lockout" of players. Before the lockout, the players and the league were parties to a collective bargaining agreement that contained numerous provisions that would otherwise be deemed horizontal restraints subject to analysis under Section 1 of the Sherman Act, which bans unreasonable restraints of trade. However, provisions that are part of bona fide collective bargaining agreements governing core employment conditions are generally immune from antitrust scrutiny, and the N.F.L. has invoked this "labor exemption" to preclude antitrust review of the various restraints contained in the agreement.

Last month, of course, the players voted to decertify their union, in an effort to end the collective bargaining agreement, avoid the labor exemption, and thus render the league's various restraints subject to the antitrust laws. Thus, the players' post-de-certification complaint alleges that the "lockout" is a concerted refusal to deal by the N.F.L.'s 32 teams, each supposedly an independent business, and that the "lockout" is unlawful per se under Section 1 of the Sherman Act. In particular, the plaintiffs allege that the lockout is an agreement between rivals not to compete for the services of players, an agreement that destroys competition and thus reduces the salaries that players would otherwise receive. The plaintiffs also allege that the lockout is a means of enforcing a price fixing scheme, because the concerted refusal to employ the players will purportedly force the players to accept salaries lower than those that their current contracts require their teams to pay. (See Complaint Paragraphs 117-20).

In addition to the "lockout" claim, the plaintiffs have also challenged the N.F.L. draft and so-called "entering player pool." The draft, it is said, is a horizontal agreement between rivals that allocates to individual firms the exclusive right to negotiate with drafted players, while the "entering player pool" caps the amount that teams will pay rookies. (See Complaint Paragraphs 126-27). The plaintiffs have also challenged the salary cap and the league's restrictions on free agency, again claiming that these rules constitute unlawful horizontal agreements between rivals to reduce competition for players, thereby driving players' salaries below that which a competitive market would set. (See Complaint Paragraphs 132-33).

It should be noted that Judge Nelson did not rule on the merits of any of the plaintiffs' antitrust claims. For one thing, the plaintiffs did not seek to enjoin the draft, entering player pool, salary cap, or restrictions on free agency. Thus, Judge Nelson did not consider the antitrust status of these agreements. Moreover, while the players did seek to enjoin the lockout as a violation of the Sherman Act, the N.F.L. did not, according to Judge Nelson, contest the plaintiffs' claim that the lockout was a concerted refusal to deal/group boycott and a per se violation of Section 1 of the Sherman Act. (See Brady v. N.F.L., at page 83) ("the NFL does 'not contest that their ‘lockout’ is a per se unlawful group boycott and price-fixing agreement in violation of antitrust law.'”) (quoting the plaintiffs' memorandum). Instead, the N.F.L. focused its efforts on arguing that the so-called "non-statutory labor exemption" still barred the plaintiffs' claims despite the players' vote to decertify. Finally, Judge Nelson applied a standard for issuance of a preliminary injunction that merely required the plaintiffs to establish that there was a "fair chance" that they would demonstrate that the lockout violated the Sherman Act (in addition to the other requirements for equitable relief, e.g., a showing that money damages could not fully compensate the plaintiffs) and expressly held that the plaintiffs could meet this standard without showing that success on the merits of the litigation was "likely." (See Brady v. N.F.L., at page 69).

* * * * *

Thus, as the litigation proceeds, the N.F.L. will presumably challenge the plaintiffs' various antitrust claims with greater vigor. There are, it should be noted, numerous potential arguments in the N.F.L.'s arsenal. The balance of this post will focus on two such arguments.

1. Group Boycotts and Concerted Refusals to Deal are Rarely Unlawful Per Se. The plaintiffs' complaint repeatedly alleges that group boycotts or concerted refusals to deal are unlawful per se, that is, violate Section 1 of the Sherman Act without regard to their actual competitive effect. While this may have been an accurate statement of the law in the 1970s, the legal landscape has changed significantly since then. For one thing, the Supreme Court has greatly narrowed the scope of any such per se rule. In 1985, the Court declined to condemn as unlawful per se a group boycott that was ancillary to an otherwise legitimate joint venture. See Northwest Wholesale Stationers v. Pacific Stationery, 472 U.S. 284 (1985). Both before and after the Northwest Wholesale Stationers decision, lower courts rejected a blanket per se rule against group boycotts/concerted refusals to deal. See Rothery Storage v. Atlas Van Lines, Inc., 792 F.2d 210 (D.C. Cir. 1986) (group boycotts generally analyzed under the Rule of Reason); United States Trotting Association v. Chicago Downs Ass'n, 665 F.2d 781 (7th Cir. 1981) (en banc) (group boycotts by self-regulating sports associations are properly analyzed under the Rule of Reason). As Judge Posner explained more than three decades ago, concerted refusals to deal are generally self-help methods of enforcing other rules or practices and thus cannot be analyzed in a vaccuum. See R. Posner, Antitrust Law 207 (1976). Thus, instead of focusing on the challenged boycott or refusal to deal itself, courts should instead focus on the underlying rule or practice the boycott or refusal to deal is seeking to enforce. Indeed, this seems to be the approach taken by the Supreme Court in NCAA v. Bd. of Regents of the University of Oklahoma, 468 U.S. 84 (1984). There, the University of Georgia and the University of Oklahoma challenged the NCAA's collective refusal to deal with schools that declined to adhere to the league's horizontal restrictions the prices and output of game broadcasts. The district court found, inter alia, that the NCAA had engaged in an unlawful group boycott. However, no Justice on the Supreme Court argued that the threatened exclusion of Oklahoma and Georgia from the NCAA was unlawful per se. Instead, the Court, in an opinion authored by Justice Stevens (pictured above) analyzed the underlying restraints on price and output that the league was seeking to enforce, found that such restraints were properly judged under the Rule of Reason and condemned them as unreasonable restraints.

This is not to say that all concerted refusals to deal should be analyzed under the Rule of Reason. Some may well be "naked," that is, not efforts to enforce a rule or practice that might otherwise be valid. Some, however, seem plainly ancillary to other agreements that are themselves properly analyzed under the Rule of Reason. Take the N.F.L. draft, whereby the league allocates to a particular team the exclusive right to negotiate with a player the team has drafted. While this rule is admittedly the result of horizontal concerted action, courts nonetheless properly analyze it under the Rule of Reason. (See below). Proof that teams have enforced this provision via a group boycott should not short-circuit the process of determining whether or not the draft enhances or detracts from economic welfare.

2. Several Challenged Restraints Will Avoid Per Se Condemnation and Are Thus Properly Analyzed Under the Rule of Reason. Plaintiffs have also claimed that various restraints they have challenged are unlawful per se or otherwise unreasonable. For instance, the plaintiffs argue that the draft system combined with the entering player pool, which limits the salaries paid rookies, is itself unlawful per se, and, in the alternative, unreasonable. In support of this argument, the plaintiffs cite Smith v. Pro Football, Inc., 420 F. Supp. 738 (D.D.C. 1978). The plaintiffs also claim that the salary cap and various restrictions on free agency are unlawful per se price fixing and that, in any event, such restrictions are unreasonable because the defendants possess market power and the restrictions "are not necessary to achieve any procompetitive objective." (See Complaint Paragraph 133).

However, the N.F.L. will have little to fear from decisions like Smith, and the sort of reasoning that informed that decision and others from that era. When Smith was decided, horizontal agreements were automatically unlawful per se, even when such restraints were ancillary to otherwise lawful joint ventures by small market participants. The classic case in point was United States v. TOPCO, 405 U.S. 596 (1972), where the Supreme Court condemned as unlawful per se ancillary restrictions on horizontal rivalry between small grocery chains that had formed a cooperative venture to create private label products for the members' stores. Indeed, the Court condemned the restraints despite the trial court's finding that the members would not have formed the venture without the restraints, which limited free riding by venture participants and thus encouraged individual venture partners to promote the venture product. (I discuss the trial court's findings and the TOPCO decision at pages 469-71 of this article in the Antitrust Law Journal.)

There is no doubt that a straight-forward application of TOPCO supports decisions like Smith. And, if TOPCO were still good law, the NFL would be hard-pressed to avoid per se condemnation of its restraints. However, the Supreme Court subsequently refused to apply TOPCO in the context of sports leagues, and other subsequent developments suggest that courts would reject per se condemnation of the restraints the players have challenged in favor of a forgiving Rule of Reason.

In NCAA, mentioned above, the Court evaluated the NCAA's restrictions on: (1) the number of college football games that networks could televise, (2) the number of times each school could appear on television and (3) the prices schools could charge a network for the right to televise its games. The Court acknowledged that application of TOPCO would require per se condemnation of the challenged restraints which reduced output and increased prices "on their face." Nonetheless, the Court declined to condemn the restraints as unlawful per se, because, it said, some horizontal limitations on rivalry --- though not necessarily those before the Court --- were necessary for college football to exist in the first place. Such restrictions included limitations on how much colleges could pay athletes, requirements that student athletes attend class, limitations on the number of scholarships a school could provide, and agreements on the rules teams would observe on the field. Such horizontal restrictions on unbridled rivalry, including restrictions on the price that schools would pay for players services were, the Court said, presumptively reasonable because they likely enhanced the quality of the product offered by the NCAA and thus enhanced interbrand competition with other entertainment options.

Thus, NCAA stands for the straight-forward proposition that horizontal restraints --- even explicit restraints on price or output --- imposed by a sports league are judged under the Rule of Reason. Indeed, such Rule of Reason treatment applies without regard to whether the defendant can offer a plausible redeeming virtue that such restraints might produce. Indeed, the Supreme Court expressly reaffirmed this reasoning, albeit in dicta, in the context of professional sports in its recent decision, also authored by Justice Stevens, in American Needle v. N.F.L. (May 24, 2010).

Indeed, the case for Rule of Reason treatment is stronger in the current case than it was in NCAA. Separate and apart from NCAA's special rule for sports leagues, post-TOPCO decisions have emphasized that Rule of Reason treatment of challenged restraints is the norm, and that courts should only condemn restraints as unlawful per se if such agreements are: (1) always or almost always anticompetitive and (2) also always or almost always lack redeeming virtues. See Continental T.V. v. GTE Sylvania, 433 U.S. 36 (1978) (citing Northern Pacific Ry. v. United States, 356 U.S. 1 (1958)). As already noted, the NCAA Court did not identify any possible redeeming virtues that the restraints challenged there may have produced; a straight-forward application of the test for per se illegality would have required condemnation of such restraints. Not so for the restraints the players are challenging here. While horizontal restrictions like the draft and limits on free agency are "always or almost always anticompetitive" within the meaning of this test, they nonetheless avoid per se condemnation because they may produce redeeming virtues. Indeed, for several decades now, economists and legal scholars have recognized that unbridled rivalry can lead to a market failure and thus a non-optimal allocation of resources. Indeed, Oliver Williamson recently earned a Nobel Prize for work building on the foundation laid by Ronald Coase explaining how non-standard contracts, once viewed with suspicion by economists and antitrust courts alike, generally reduce transaction costs and overcome market failure, thereby enhancing economic welfare. The innumerable horizontal restraints adopted by sports leagues are no exception. (I explain both the historical hostility to such restraints and the Williamson/Coase interpretation of such agreements on pages 113-44 of this 2003 article in the Illinois Law Review.) For instance, the draft and limitations on free agency, while limiting unbridled rivalry for player talent, help ensure "competitive balance" by preventing the richest teams in the league from buying up all of the best talent and thus predictably winning each game. In fact, the American Needle decision expressly recognized, albeit in dicta, that maintenance of competitive balance is a bona fide objective that can justify otherwise unlawful horizontal restraints. The plaintiffs themselves seem to recognize that the challenged restraints can produce benefits, as they merely argue that the restraints are not necessary to produce such benefits, that is, that the restraints produce benefits that could be achieve via other means that the plaintiffs do not specify.

None of this is to say that all challenged restraints will survive; the mere fact that a restraint produces benefits does not automatically protect the restraint from condemnation. Courts must nonetheless "weigh" or "balance" such benefits against any harms the restraints produce. Nonetheless, once courts decide to evaluate such restraints under the Rule of Reason, the plaintiffs will bear the initial and substantial burden of proving that the restraints produce actual anticompetitive harm, a burden that plaintiffs rarely satisfy. (Though, satisfying this burden may be easier in this context, given the N.F.L.'s strong market position.) Moreover, once defendants show that challenged restraints produce benefits, plaintiffs generally fail to convince courts that a restraint's harms outweigh its benefits. Thus, despite their strong start, plaintiffs' antitrust action may stall in the red zone, or even earlier.

Will President Obama Have to Soak the Middle Class?

2011-04-27T22:07:00.001-04:00

Both men knew "where the money is."

An article last Monday in the Wall Street Journal "[w]here the tax money is" examined President Obama's purported claim that raising taxes on the wealthy will result in meaningful deficit reduction, thereby making the sort of spending reductions proposed by others, including Congressman Paul Ryan of Wisconsin, unnecessary. To this end, the article calculates the impact on federal revenue and thus the deficit of a 100 percent confiscatory tax on indivduals who earn $380,000 or more per year and finds that such a tax would raise $938 billion annually, far less than the current deficit of over $1.6 trillion. Moreover, a 100 percent tax on those individuals in the top five percent of the income distribution would yield $1.89 trillion, just enough to cover the deficit.

Note that these calculations certainly overstate the impact on the deficit of such confiscatory taxation. For one thing, the "wealthy" individuals in question already pay a sizeable portion of their income in taxes, with the result that the net increase in revenue resulting from a 100 percent tax rate would be less than the $938 billion and $1.6 trillion figures, respectively. Moreover, at least some individuals who must pay their entire salary to the government would work less, or not work at all, and thus create less income, if the government simply confiscated their income under the guise of "taxation." Such a reduction in work effort, of course, will also reduce the rate of economic growth and thus reduce the income of other citizens as well, thereby reducing tax payments from lower income groups. In short, even a 100 percent tax rate on high income earners, whether "high income" is defined as the top 1 percent or top 5 percent, defined, will still leave the United States with a very large deficit.

How, then, will the United States close its titanic budget deficit, if that is what she chooses to do? One way, of course, is to reduce spending, along the lines suggested by Congressman Ryan. If, however, the United States rejects meaningful spending reductions, the article predicts that Congress will, to quote bank robber Willie Sutton (pictured above), "go where the money is," that is, raise taxes (either directly, or by eliminating deductions) on indivduals in the middle and upper middle classes. For, as the article points out, individuals in the $50,000-$200,000 range produce more taxable income than individuals who earn over $200,000. Such an approach, it should be noted, would be consistent with the observation of nobel laureate Friedrich Hayek, also pictured above, to the effect that a chief function of high (progressive) tax rates on "the rich" is to induce individuals in the middle classes to accept rates that, while high in an absolute sense, are lower than those paid by the rich. (There is, of course, precedent for such an approach. In 1960, for instance, the top marginal federal income tax rate, levied on incomes of $400,000 and above, was 91 percent. Moreover, the marginal rate on income between $12,000 and $16,000 was 30 percent; the marginal rate on income between $24,000 and $28,000 was 43 percent, the marginal rate on incomes between $36,000 and $40,000 was 53 percent, the marginal rate on incomes between $88,000 and $100,000 was 72 percent, and so on. It short, while rates on the "rich" were quite high, so too were rates on individuals in the middle and upper-middle classes.) As Hayek put it:

"It would probably be true, on the other hand, to say that the illusion that by means of progressive taxation the burden can be shifted substantially onto the shoulders of the wealthy has been the chief reason why taxation has increased as fast as it has done and that, under the influence of this illusion, the masses have come to accept a much heavier load than they would have done otherwise. The only major result of the policy has been the severe limitation of the incomes that could be earned by the most successful and thereby gratification of the envy of the less-well-off."

See F.A. Hayek, "Taxation and Redistribution," in The Constitution of Liberty (1960).

Instead of simply redistributing income from rich to the middle class, such an approach would presumably also redistribute income within the middle class.

Hopefully the nation will opt for reduced spending instead of the Sutton approach.

More on the China Green Energy Myth

2011-04-22T16:51:00.008-04:00

Shanghai, China Smog. A Source of China's "Green Jobs" Advantage?

This blog has previously debunked the myth that China somehow leads the world in clean energy. (See U.S. Crushing China in Clean Energy Race) (See here for one such assertion that China might "clean our clock" when it come to clean energy technology.) As previously explained, China does lead the world in carbon emissions, a dubious distinction, and the country emits twice as much carbon per unit of output as the United States. Moreover, some estimate that, by 2030, China's carbon emissions, now growing by leaps and bounds, will equal the world's entire current emissions.

Yesterday, in a devastating Washington Post Op-Ed, Bjorn Lomborg further exploded the myth of China's Green Superiority, explaining that, while China manufactures numerous wind turbines and solar panels for export to other countries, its own utilization of such technology is cosmetic at best. Thus, it seems, China's role in green energy technology is an example of economic opportunism, whereby the country takes advantage of its various advantages to manufacture solar panels and wind turbines, all the while lagging behind other nations in the actual utilization of such devices.

Here are the salient points of Lomborg's essay, followed by some additional thoughts.

1) While China produced one half of the world's solar panels in 2010, it exported 99 percent of that production to other countries, many of whom subsidize the purchase and installation of such (expensive) panels. For all the ballyhoo about Chinese solar panel production, solar panels account for one-half of one-thousandth of 1 percent of Chinese electricity production. Basically, then, Western nations are subsidizing Chinese production of a very expensive method of generating electricity.

2) While China installs about one third of the world's wind power turbines, much of this has been "for show." Many such turbines are not even connected to China's power grid, and a 2008 study found that one third of China's wind turbines are not in use. Thus, wind power generates one-twentieth of one percent of China's electricity. By contrast, your blogger's own research reveals that wind power accounts for almost two percent of American electricity generation. That is, windpower is nearly 40 times more prevalent in the United States than in China.

3) 87 percent of China's power comes from fossil fuels, mostly coal. (Note that this compares to about 70 percent for the United States.)

4) China does lead in the production of so-called "solar heaters," which heat water for cooking, bathing, and other uses. In China, such heaters provide four times as much energy as windpower. The production of such heaters is not subsidized; Chinese consumers demand them because they far most cost-effective than, say, conventional water heaters.

Some additional thoughts:

--- Many point to ChinaAs Lomborg suggests, China's apparent emphasis and advantage in manufacturing solar panels is simply one manifestation of its larger emphasis on manufacturing for export. For instance, according to one source, China produces more than three times as much steel as the United States and Japan combined. (Note that the same source reports that China leads the world in steel production, with Japan second and the United States third.) China also replaced the United States as the largest exporter of information technology products in 2005. There are numerous reasons for China's growing dominance in these and other industries, but China's supposed commitment to "Green Energy" has nothing to do with, say, China's exploding steel production. On the contrary, and quite ironically, China's lax enforcement of its own environmental laws results in the sort of smog pictured above and also gives its manufacturing base, including firms that manufacture solar panels and wind turbines, a cost advantage over, say, American companies subject to more stringent environmental regulations. (This report, by the Alliance for American Manufacturing, documents the lax enforcement of China's environmental laws vis a vis the steel industry.) Ditto for China's relatively lax regulation of other subjects.

--- Much of the public rhetoric on this issue apparently conflates two different questions: (1) the level of a nation's carbon emissions, which depends in part on the sources (e.g., fossil v. non-fossil) of a country's electricity and (2) whether the country in question itself produces wind turbines, solar panels, and other devices for generating electricity without relying on fossil fuels.

As the China example shows, a nation can apparently thrive in one category while entirely falling down in another. Moreover, at the end of the day, performance in first category is far more important than the second. Indeed, if countries are serious about performing well in the first category, then performance in the second category will take care of itself, as producers of electricity will demand clean methods of electricity generation, thereby inducing the private sector to invest capital and knowhow in the production of such devices.

--- There is no doubt that domestic subsidies for the production of solar panels, wind turbines and the like will encourage firms that manufacture such items to locate in the United States and thus increase the number of Americans who work in "green-related industries." It's also the case that domestic subsidies for the production of paper clips will increase the number of Americans working in the paper clip industry. Someone, however, must pay for such subsidies, and a nation cannot subsidize itself to a strong jobs base.

--- A nation concerned about reducing its carbon emissions and providing good jobs for its citizens should focus on: (1) providing the appropriate incentives for consumers and producers to make only reasonable uses of carbon-based electricity and (2) providing an economic environment in which all companies, whether or not they make windmills, can grow and thrive, free of the shackles imposed by unduly onerous regulation.

Credit-Card Affinity Agreements and a Free Society

2011-04-19T00:04:00.013-04:00

Probably Would Disapprove Credit Cards, Like Any Good Nanny

Over at Conglomerate, Eric Gerding, a respected Professor of Corporate Law, apparently disapproves agreements between universities and credit card companies creating so-called affinity cards, whereby universities help companies market such cards to students and alumni, in return for a portion of the earnings that such cards produce. Gerding plainly does not like such arrangements, and he urges readers to examine a database created by the Federal Reserve that reports on the terms of such deals, including what payments universities have received, how many cards have been issued pursuant to such arrangements, and the identity of the card issuer. (For instance, a search of the database will reveal that the Duke University Alumni Association received $1.375 million from Chase Bank, USA N.A., that there are over 8,000 cards issued pursuant to the Duke/Chase Affinity program, and that 4 such cards were issued last year.) Congress required the Fed to create the database in the so-called Credit Card Accountability, Responsibility and Disclosure Act of 2009, and the Fed in turn required companies with these programs to turn over such information, without providing the companies with compensation for the time and effort spent complying with this request.

Here is the substance of Professor Gerding's critique:

"These [affinity] agreements allow issuers to create 'affinity' cards, that is credit cards branded for a particular university (Go Heels!) and marketed towards the students and alumni of that university. It is a familiar business model: if you want to get students hooked on debt, start dealing at the playground. To get inside the schoolyard, cut the principal in on the action. Universities can earn over a million each year with these deals. Check out how much your alma mater has made from deals with credit card issuers at this nifty searchable database."

Unlike Professor Gerding, I see no problem with the existence of such affinity agreements. Moreover, in my view, the 2009 Act's requirement that the Fed and credit card companies spend real resources compiling (and presumably updating) such a database is a waste of society's scare resources at best and at worst an effort to distort the competitive process of credit card issuance.

Let me explain.

1) We live in a free society. In free societies adults may enter voluntary agreements, including agreements to obtain credit cards and borrow money. Indeed, individuals leave the state of nature and form civil society in part to empower the community to enforce such voluntary agreements, which make individuals' property more valuable and help them acquire more.

2) College students and alumni are adults. As such they are free to marry (or not) join the army, enter college or drop out, eat three meals a day (or not), exercise regularly (or not), etc. They are even free to obtain credit cards and borrow money, if they choose to use such cards in this way.

3) While credit cards empower their holders to borrow, they do not require them to do so. Instead, such cards reduce the cost of transacting, e.g., allow consumers to avoid carrying large sums of cash (which can otherwise earn interest in a bank account, for instance). There is no reason, a priori, to deprive college students of these benefits or, for that matter, the option to use a credit card to borrow.

4) There is no logical basis for concluding that such affinity agreements, which are simply creative methods of distribution, produce harm. The market for issuance for credit cards is relatively unconcentrated. The largest issuer (Chase) has a 19 percent share of the issuance market, the second largest (Bank of America) has a 16 percent share, the third largest (CITI) has a share of 12 percent, the fourth largest (Amex) has a share of 9 percent, and the fifth largest (Capital One) has a share of 6 percent. Issuers ranked between 6 and 14 have shares of between 6 percent and 1 percent. Thus, the so-called Herfindahl-Hirschman index --- the sum of the squared market shares of industry participants --- for this industry is less than 1,000. Counts and the antitrust enforcement agencies would consider the market unconcentrated and thus not susceptible to an exercise of market power, whether unilaterally or via lawful coordinated interaction. (See e.g. Department of Justice and Federal Trade Commission Joint Merger Guidelines here.) (Of course, express collusion between market participants would be a felony.)

5) No one forces students or alumni to sign up for affintity cards. If such cards provide onerous terms, then consumers can simply turn to providers of non-affinity cards that provide better terms. Moreover, non-standard agreements such as exclusive dealing contracts, tying contracts, and various other restraints that arise in unconcentrated markets are presumptively beneficial, given that the proponents of such agreements have expended real resources negotiating and enforcing them in an environment in which the acquisition or maintenance of market power is not plausible. There is no reason to apply a different presumption to so-called "affinity agreements." While such agreements give the issuer that is a party to them the chance to convince a consumer to sign up for the affinity card, such consumers have numerous credit card options and may even choose payment vehicles other than credit cards. Duke, for instance, has 140,000 alumni. Fewer than 9,000 have a Duke affinity card, and some of those who do presumably have other cards as well.

6) Given the absence of any plausible theory of harm (the concentration statistics listed above are public), the statutory requirement to create a database results in a waste of resources. Moreover, the requirement imposes costs on those firms that employ such (presumptively efficient) agreements, thereby disadvantaging those firms simply because they have employed a successful marketing device. Cynics might guess that Congress imposed this requirement at the behest of credit card issuers that do NOT employ such arrangements, who are seeking to raise the costs of their rivals by forcing them to comply with onerous regulatory requirements.

7) To be sure, the cost of compliance with this particular regulation is modest. The American credit card industry will survive. Still, the rationale for the requirement and the purported concern for the welfare of (adult) college students and college alumni on which it rests reflect Nanny-like paternalism that is inconsistent with the precepts of a free society. Moreover, even if no single regulation can, by itself, hamper a business numerous regulations taken together can do so, just as numerous Lilliputian ropes held down Gulliver.

On Taxes and Civilization: an April 18 Reflection

2011-04-14T23:30:00.033-04:00

Thought Taxes Brought Civilization Not So Sure.....

Because of an April 15 holiday, today is tax day, and Americans are presumably reflecting on whether our current level of taxation is in fact justified.

More than a century ago, Oliver Wendell Holmes, pictured above, quipped that "Taxes are what we pay for civilized society, including the chance to insure." The occasion was a challenge to a Philippine tax on insurance premiums paid by a foreign corporation exporting merchandise from that country. See Compania General de Tabacos v. Collector, 275 U.S. 87 (1927) (Holmes, J. dissenting). While the Supreme Court invalidated the tax as an effort to regulate contracts beyond the territorial jurisdiction of the Philippine government, cf. Allgeyer v. Louisiana, 165 U.S. 578 (1897), Holmes (joined by Justice Brandeis) would have sustained the tax, in part because the Philippine government protected the property that was insured, thereby making it reasonable for that government to levy a tax on the property.

Many have invoked the Holmes quote or a version thereof in support of the sort of increased taxes necessary to support the modern welfare state. See here, here, and here for just a few examples. The IRS has even inscribed the quote above the entrance to its headquarters in Washington.

Several years ago your humble blogger rebutted such reliance on the Holmes quip to justify even higher taxes than Americans were already paying, in the following letter to the Daily Press of Hampton Roads:

"The editorial on the Social Contract ("Envisioning 2004," Jan. 4) cites Justice Oliver Wendell Holmes for the proposition that "taxes are what we pay for a civilized society," and laments the "crass self-interest" that purportedly animates anti-tax sentiments. While memorable, the Holmes quip is of little relevance to modern disputes over the proper level of taxation and public spending, coming as it did at a time when taxes claimed only a small fraction of our national wealth. When Holmes penned this aphorism in 1904, taxes paid to local, state and federal governments accounted for about 6 percent of gross domestic product. Today these taxes account for about 30 percent of GDP -- a five-fold increase. At the same time, per capita GDP is more than eight times larger in real terms today than it was in 1900. Thus, in the 100 years since Holmes equated taxes with civilization, government has consumed an ever-increasing share of a constantly growing pie. Even after adjusting for inflation, the average American now pays 40 times more for government than he or she paid at the beginning of the 20th century. I doubt we have become 40 times more civilized as a result. Before we further expand government's dominion over the wealth we create, we may want to ask whether those who already remit enormous sums to the public fisc are receiving fair value in return. A just social contract demands no less."

It's certainly true that some taxes are a necessary element of what we properly call civilization. As James Madison put it in Federalist 10, "the first object of government" is the "protection of different and unequal faculties of acquiring property," which results in "the possession of different degrees and kinds of property." (Madison repeated this sentiment in his 1792 Essay on Property, stating that: "Government is instituted to protect property of every sort; as well that which lies in the various rights of individuals"). Individuals once lived in the state of nature, where they enjoyed absolute freedom from coercion imposed by government which, by definition, did not exist. In this state, however, individuals, no matter how strong, were under constant threat from one another. As a result, men and women left the state of nature to form political society, each giving up a portion of his or her liberty on the assumption that similar forfeitures of liberty by others would, taken together, enhance each members' welfare.

"Society" as defined here entailed a legal system that recognized and enforced property rights (including rights in intellectual property), protected bodily integrity, enforced private contracts, and penalized fraud, all functions the private market cannot perform. This is where taxation comes in. Government cannot perform these various functions without hiring individuals --- police, prosecutors and judges, for instance --- who presumably will not work for free. Also, to the extent that enforcement of such rules requires the state to imprison offenders, such imprisonment will itself cost money. Moreover, the world is large enough that there are predictably several political communities, each with jurisdiction over different territory. If some such communities prey on others, a need will arise for "national defense" via an army, navy, air force, etc. Here again, providing such a defense will cost money, money which the state must raise by taxation. (Absent coercive taxation, individuals will "free ride" on contributions they hope others will make, and if all pursue this strategy, no individual will contribute.) In addition to national defense, there are other services that only government can provide, or at can provide more effectively than the private sector. Examples include the construction of highways and airports either directly or, instead, by delegating the (coercive) power of eminent domain to private parties who can then construct such roads.

The resulting common law baseline and community secure from external threats, supplemented by antitrust law, provides the sort of institutional framework necessary to free market competition and the resulting specialization and wealth-maximizing allocation of resources, i.e., labor, capital and technical know how. Such free market competition also promotes the individual opportunity necessary for persons to exercise fully the faculties of which Madison spoke. In short, taxation helps support various state activities necessary to give rise to the society that men and women seek upon leaving the state of nature and thus gives rise to "civilization."

State and national governments provided these necessary governmental services when Holmes penned his aphorism in the 1920s. However, as letter quoted above notes, per-capita taxes have, in real terms, risen by a factor of 40 since then. Are we today 40 times more civilized? Of course not. While some taxes are necessary for civilization, others have nothing to do with it. For instance, some taxes support regulatory schemes --- enforced by state employees (including judges) ---that unduly restrict economic liberty and opportunity and reduce society's economic welfare. Starting in the 1930s, that is, after the Holmes quip, many states and the national government began to impose coercive restrictions on prices, output, and entry, often creating the equivalent of cartels that would properly be deemed unlawful per se under the antitrust laws if imposed by private parties. Such state-imposed cartelization extended to labor markets. Thus, states and the national government imposed (and still impose) minimum wages, maximum hours, and other terms of employment contrary to those produced by free, competitive markets. Moreover, the National Government has empowered unions to "bargain collectively" with businesses operating in interstate commerce, a right enforced by a federal agency, the National Labor Relations Board, which employs, at taxpayer expense, more than 1500 individuals. After this and other exemptions, such "collective bargaining" over wages would violate the Sherman Antitrust Act, just as it would violate that Act for a jurisdiction's court-appointed lawyers to agree to boycott such appointments until the Court raised their fees. See FTC v. Superior Court Trial Lawyers Ass'n, 493 U.S. 411 (1990) (declaring such a boycot seeking higher wages under the Sherman Act unlawful per se).

These various price, wage and output fixing schemes, some of which survive to this day, all supported by tax rates higher than they would otherwise be, exceed the scope of governmental authority implied by rationale, outlined above, for leaving the state of nature and forming a political society. They enrich proponents of such schemes at the expense of others. Moreover, such "regulations" in no way enhance our civilization. Instead, such schemes raise prices and wages above the competitive level, reduce output in the industries governed by such schemes and induce the reallocation of resources to less productive uses, in industries not governed by such schemes. Indeed, far from advancing such civilization, Madison opined, again in Federalist 10, that such schemes are instead reminiscient of the state of nature that men and women left to form civilization:

"In a society under the forms of which the stronger faction can readily unite and oppress the weaker, anarchy may as truly be said to reign as in a state of nature, where a weaker individual is not secured against the violence of the stronger; and as, in the latter state, even the stronger individuals are prompted, by the uncertainty of their condition, to submit to a government that may protect the weak as well as themselves."

Madison also decried such "regulation" a few years later, in the 1792 Essay on Property cited above, viz:

Of course, these are not the only exercises of state authority that exceed the rationale for political society and seem to replicate elements of the state of nature. In some cases states and the national government simply raise taxes on some citizens and subsidize others for reasons unrelated to any valid public purpose. Agricultural subsidies are a prime example. Here again such programs have nothing to do with enhancing the quality of civilization.

* * * * *

What does all this mean for those interested in the link between taxes and civilization? First, there is no doubt that some taxation is necessary to what we consider civilization. No one, so far as a I know, seeks to repeal those taxes necessary to create and enforce property rights, protect bodily integrity from invasion by others, enforce private contracts and provide national defense and similar goods that only government can provide. At the same time, the conclusion that taxes are necessary for civilization does not thereby justify any and all taxes and government programs that such taxes support. Indeed, some such taxes and resulting programs actually bear resemblance to the state of nature, as some members of the community employ state-backed coercion to advantage themselves at the expense of others. Repeal of the taxes necessary to support these programs and concomitant repeal of the programs themselves would make us MORE civilized. Those who invoke Holmes' quip in support of the current level of taxation and/or even higher taxes simply misunderstand the appropriate scope of government and thus the link between taxes and civilization.

The Gipper on Taxes

2011-04-14T22:17:00.006-04:00

Did Not Celebrate April 15th.

In "honor" of April 15, your humble blogger thought it best to recall some of Ronald Reagan's wisdom on taxation. Loyal readers will recall an analogous post on April 15, 2009, reproducing some of Winston Churchill's wisdom on the subject.

1. "Republicans believe every day is the Fourth of July, but Democrats believe every day is April 15th."

2. "We don't have a trillion dollar debt because we haven't taxed enough; We have a trillion dollar debt because we spend too much."

3. "History shows that when the taxes of a nation approach about 20% of the people's income, there begins to be a lack of respect for government. . . . When it reaches 25%, there comes an increase in lawlessness.”

4. "The taxpayer - that's someone who works for the federal government but doesn't have to take the civil service examination."

5. "The government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it."

Americans Are Voting With Their Feet For Low Taxes and other Pro-Growth Policies

2011-04-14T21:47:00.007-04:00

CNN and Money Magazine recently announced a list of the 10 fastest growing cities in the United States, based upon figures from the most recent census. That is, the following ten cities had the fastest growth rates in the past decade:

1. Palm Coast, Florida, 92 percent.

2. St. George, Utah, 52.9 percent.

3. Las Vegas, Nevada, 41.8 percent.

4. Raleigh, North Carolina, 41.8 percent.

5. Cape Coral, Florida, 40.3 percent.

6. Provo, Utah, 39.8 percent.

7. Greely, Colorado, 39.7 percent.

8. Austin, Texas, 37.3 percent.

9. Myrtle Beach, South Carolina, 37 percent.

10. Bend, Oregon, 36.7 percent.

Obviously this list reflects the general movement in the American population toward the South and West. The list also seems to reflect a correlation between high population growth, on the one hand, and the low tax and pro-growth economic policies followed by the individual states where the cities are located, on the other. For instance the nine fastest-growing cities are in so-called "red" states, measured by whether a state voted for George W. Bush for President in 2004. Moreover, the six fastest-growing cities, and eight out of the top ten, are in so-called "right to work" states, that is, states that have opted under the Taft-Hartley Act to prevent unions and employers from negotiating "closed shop agreements," that is, collective bargaining agreements requiring employees to join a union as a condition of employment. (See here for a list of such states.) Also, three of the five fastest growing cities are in states (Florida and Nevada) with no income taxes. Finally, according to the Tax Foundation, eight of the ten cities listed, including seven of the top eight, are ranked among the states with the fifteen best tax climates for business.

The data thus show the American system of competitive federalism at work, with citizens moving to states that adopt pro-growth economic policies, e.g., low taxes and right to work laws. This blog has previously discussed other evidence of such competitive federalism at work. It should be noted that such competitive federalism is not a permanent or given phenomenon, but is instead the result of institutional choices contained in the Constitution itself and federal legislation. For instance, the Constitution divides power between the national and local governments, thereby depriving the national government of a monopoly over the content of tax and regulatory policy. Perhaps James Madison had this sort of competition in mind in Federalist 51, when he wrote:

"In the compound republic of America, the power surrendered by the people is first divided between two distinct governments, and then the portion allotted to each subdivided among distinct and separate departments. Hence a double security arises to the rights of the people. The different governments will control each other, at the same time that each will be controlled by itself."

Moreover, states cannot prevent their citizens from traveling to or moving to another state. See Crandall v. Nevada, 73 U.S. 35 (1868). This "fundamental right to travel" ensures that citizens may "exit" states whose economic policies thwart economic growth and wealth creation, and such exit no doubt explains much migration from one state to another. Finally, there is the Taft-Hartley Act, which allows individual states to opt out of that portion of federal labor law that otherwise allows companies and unions to negotiate closed shop agreements. None of this is to say that ALL federal legislation, for instance, facilitates competitive federalism. Some such legislation imposes a uniform federal approach to a regulatory question. In some cases such a unified approach is justified, as when an alternative approach would leave each state free to impose its own regulatory choices on interstate commerce. However, given the vast (and unjustified) scope of the national commerce power under current Supreme Court precedent, some such purportedly federal legislation applies to purely local matters, thereby eliminating the possibility of rivalry between states on matters of local concern. (At the same time, Congress does not always exercise all of the power the Supreme Court has given it. For instance, Congress still allows states to determine much of the content of corporate law, even though Congress possesses the authority under current law to impose a national corporate code.) Finally, some federal legislation affirmatively distorts rivalry between the states, subsidizing those that unduly tax their own citizenry. Thus, under the current tax code, citizens may deduct state taxes from their actual income when calculating that share of their income that will be subject to federal tax. As a result, a state that increases its taxes thereby deprives the national government of revenue the latter would otherwise receive, effectively shifting a portion of the state tax increase to citizens of other states, who must make up the lost federal revenue or, eventually, pay the interest on additional debt the national government must take on to meet its obligations. In short, competitive federalism can enhance overall economic welfare by preventing states from adopting legislation that infringes on economic liberty, and the census results reported by Money/CNN show the results of such federalism at work. At the same time, background rules that allocate too much power to the national government and impact the incentives that states face can dampen such competition and thus undermine (in part) its welfare-increasing properties.

Do Obama and Bush Have Equivalent Views of the Executive Power?

2011-04-02T14:58:00.014-04:00

Two Peas in the same Executive Power Pod?

Over at Salon, Glenn Greenwald chastises President Obama for supposedly embracing the same theory of Executive War Power purportedly embraced by President George W. Bush, a theory that Greenwald rejects. Greenwald heaps particular scorn on two different items expressing a strong view of the President's War Powers.

1) The memo, by the Bush Department of Justice, aruging that President Bush could intercept communications between Americans and individuals on foreign territory whenever the Attorney General found probable cause to believe that one or both of the individuals was affiliated with Al Qaeda. The memo, which justified the so-called "Terrorist Surveillance Program" ("TSP") argued that the President could order the interception of such communications without regard to the requirement, apparently contained in the Foreign Intelligence Surveillance Act ("FISA"), that the Attorney General first obtain a warrant from an Article III court. Imposing that requirement, the memo said, would infringe upon the President's power as Commander-in-Chief of the Armed Forces, which according to the memo included the power to gather battlefield intelligence in wartime.

2) A recent purported statement by Secretary of State Clinton that, even if Congress were to pass legislation countermanding the attack on Libya, the Administration would nonetheless continue with military action there. (I say "purported statement" because the statement allegedly occurred durring a classified briefing, the contents of which have been leaked. So far as I know the Administration has made no public statements to this effect.)

Greenwald finds these positions equivalent and both quite wrong. As he puts it:

"Initially, I defy anyone to identify any differences between the [Obama] administration's view of its own authority -- that it has the right to ignore Congressional restrictions on its war powers -- and the crux of Bush radicalism as expressed in the once-controversial memos by John Yoo and the Bush DOJ. There is none. That's why Yoo went to The Wall Street Journal to lavish praise on Obama's new war power theory: because it's Yoo's theory (as I was finishing this post, I saw that Adam Serwer makes a similar point today). If anything, one could argue that Yoo's theory of unilateral war-making was more reasonable, as it was at least tied to an actual attack on the U.S.: the 9/11 attacks. Here, the Obama administration is arrogating unto the President the unilateral, unrestrained right to start wars in all circumstances, whether or not the U.S. is attacked."

Greenwald also claims that those who supported President Bush's view of the Executive Power invoked FDR's internment of Americans of Japanese descent as precedent for that view. As he puts it:

"Then there's the notion that Presidents in the past have started similar wars without Congressional approval. That's certainly true, but so what? The fact that an act is commonplace isn't a defense or justification. That "defense" was also a common refrain of Bush followers to justify their leader's chronic unconstitutional acts and other forms of law-breaking: Lincoln suspended habeas corpus and FDR interned Japanese-Americans, so why are you upset that Bush is acting outside the law?"

One might add --- althought Greenwald does not mention it --- that President Clinton also asserted --- and exercised --- the unilateral power to attack a sovereign nation, that is, Serbia, against whom the United States and its NATO allies waged an air campaign for 78 days. Congress did not authorize the campaign. At the same time, I am not aware that President Clinton ever claimed that he would ignore an act of Congress that purported to countermand his decision to make war on Serbia.

In my view Greenwald overstates the equivalence between the position taken by President Obama (and Clinton) on the one hand, and that taken by President Bush, on the other. In some ways President Obama' claim of executive warmaking power is broader than that articulated, or at least pursued, by President Bush. But, there is also one sense in which President Obama's actual assertion of authority is less sweeping than President Bush's. Here is what I mean.

1. It is certainly true that President G.W. Bush, like various Presidents before him, made extravagant claims of unilateral power to initiate war with other countries. However, unlike President Clinton, who attacked Serbia without congressional authorization, and President Obama, who has attacked Libya without congressional authorization, President Bush in fact sought and obtained express legislative authorization to attack Al Qaeda as well as express legislative authorization to invade Iraq. Thus, while Presidents Clinton, Obama, and Bush all said similar things about the authority of the Executive branch to intiate war, only Presidents Clinton and Obama actually attacked other nations --- nations that did not threaten us it should be added --- without Congressional authorization. In this sense, any equivalence between President's Obama and Clinton on the one hand, and President Bush on the other, is illusory.

2. Given the Congressional authorization that President Bush sought and received to invade Afghanistan, known as the "Authoritzation to Use Military Force" or "AUMF," the analogy between the TSP and the attack on Libya (or Serbia) does not hold up. The AUMF authorized the President to "use all necessary and appropriate force" against Al Qaeda, thereby empowering the President to act as Commander-in-Chief of the Armed Forces in prosecuting a war against that terrorist organization. Neither President Clinton nor President Obama sought or received any authorization before making war on Serbia and Libya, respectively.

Article II of the Constitution expressly empowers the President to act as Commander-in-Chief, a power Joseph Story characterized as the power over "the direction of war" that is "obviously of an executive nature." Congress cannot strip the President of this power, any more than it can deprive him of the power to nominate a judge or pardon a felon. See Public Citizen v. Department of Justice, 491 U.S. 440 (1989) (Kennedy, J. concurring) (Congress cannot by legislation interfer a power --- there the power to nominate and appoint judges --- expressly committed to the President).

This power to "direct war" by setting military strategy and tactics presumably includes the power to gather the sort of strategic and battlefield intelligence necessary to inform such decisions. Such intelligence gathering would normally include the use of spy planes, satellites, drones, the interception of enemy radio traffic and so on. In World War II, for instance, the Navy relied heavily upon intercepted transmissions between German U-Boats and the German High Command and employed such intelligence, along with the results of aerial surveillance, to redirect convoys and target the submarines for destruction. To be sure, Congress does possess authority to make regulations governing the armed forces. Still, would anyone (aside from Greenwald apparently) argue that Congress, having declared war on Germany, and having appropriated funds for intelligence assets, then could by legislation order the Commander-in-Chief NOT to intercept such communications and/or NOT to conduct such aerial surveillance? And, if Congress could exercise such authority, could it not also, say, tell the President whom to appoint as the Supreme Commander over Allied forces preparing to invade Europe or, because it has the power to raise taxes, legislatively order the President not to veto a tax increase or not to pardon tax cheats? (Note that President Bush is not the first President to assert the power to decline to enforce unconstitutional statutes. As previously explained on this Blog (see here and here), Abraham Lincoln and James Madison each believed the President possessed such power, and Lincoln exercised it. Moreover, Woodrow Wilson exercised such power when he ignored a statutory requirement that he obtain Senatorial consent before firing a Postmaster, and the Supreme Court agreed with his interpretation of the Constitution in Myers v. United States, 272 U.S. 52 (1926).)

In short, assuming that Greenwald is correct (and I believe that he is) that a President cannot unilaterally initiate a non-defensive war, President Bush's claim that he could intercept Al Qaeda communications without adhering to FISA, after Congress had authorized war against Al Qaeda, is in no way similar to President Obama's decision to attack Libya without Congressional authorization. That is to say, while Article II of the Constitution does not empower the President to attack other nations without provocation, it does empower the President to act as Commander-in-Chief once Congress has authorized such an attack. Failing to enforce an unconstitutional statute is not equivalent to exercising a power --- the power to initiate war ---that only Congress possesses.

3. At the same time, there is one sense in which President Obama has been more deferential to Congress than was President Bush. That is, Congress has not purported by legislation or otherwise to prevent President Obama from attacking Libya. Thus, unlike President Bush (or, for that matter, Woodrow Wilson) President Obama has not ignored a Congressional statute.

4. Finally, Greenwald seems to imply that supporters of President Bush relied upon President Roosevelt's unconstitutional internment of Americans of Japanese descent to justify President Bush's refusal to adhere to FISA when intercepting Al Qaeda communications. (Perhaps I am misunderstanding Greenwald's meaning.) I am not aware that supporters of President Bush invoked FDR's unlawful internment to justify President Bush's policies. As should be clear at this point, there is plenty of other precedent and logic supporting President Bush's limited refusal to follow FISA, for instance.

Ford Takes The Lead (In More Ways Than One)

2011-04-01T18:26:00.007-04:00

CNN reports that Ford has surpassed General Motors in sales for the first time in 13 years. All this despite the fact that GM received a $19 Billion dollar bailout (not counting a $30 Billion post-bankruptcy loan to GM) that Ford declined. Moreover, an industry analyst attributes Ford's surge in part to the firm's attractive array of fuel-efficient vehicles, including small SUVs (apparently a reference to the Mercury Mariner hybrid) now in high demand given the recent spike in gasoline prices. This result is ironic to say the least, as President Obama justified the bailout in part by claiming that the bailed out companies would help America "lead the world in building the next generation of green cars." (The $40,000-plus Chevy Volt, on which some say Chevrolet will lose money, is an example of the sort of "leadership" the President was apparently talking about.) That is to say, the free market (Ford), incentivized by artificially high gasoline prices (because of the OPEC Cartel and gasoline taxes) and unassisted by taxpayer largesse, has done a better job implementing the President's "clean car" policies than the company owned and subsidized by the national government.

Mad Men Delayed Until 2012

2011-03-29T16:01:00.004-04:00

The Wall Street Journal reports that AMC's hit series Mad Men, your humble blogger's favorite television show, will not air in 2011 but will instead air in early 2012. Apparently negotiations between the network and Matthew Weiner, the show's creator, are partly responsible for the delay in production. The same story also reports that the entire cast will return for the 2012 season. That, at least, is good news.

Does The President Have the Courage of His (Purported) Constitutional Convictions?

2011-02-24T00:57:00.016-05:00

Had the Courage of His Constitutional Convictions

?????????

Earlier today, Attorney General Eric Holder announced that the Obama Administration will no longer defend Section 3 of the Defense of Marriage Act. Here is a portion of his statement.

"After careful consideration, including a review of my recommendation, the President has concluded that given a number of factors, including a documented history of discrimination, classifications based on sexual orientation should be subject to a more heightened standard of scrutiny. The President has also concluded that Section 3 of DOMA, applied to legally married same-sex couples, fails to meet that standard and is therefore unconstitutional. Given that conclusion, the President has instructed the Department not to defend the statute in such cases. I fully concur in the President's determination."

In other words, both President Obama and Attorney General Holder In other words, both President Obama and Attorney General Holder believe that DOMA's discrimination against gays and lesbians is more analogous to discrimination based on race or religion and thus subject to heightened constitutional scrutiny than, say, discrimination based on age, which is subject only to minimal scrutiny. Because the President and Attorney General cannot imagine a strong government interest justifying such discrimination, they will refuse to defend the law they have enforced and then defended for the past two years.

At the same time, Attorney General Holder's memo states that the Executive Branch will continue to enforce DOMA, that is, will continue to enage in the very discrimination that the President says violates the Constitution. As Holder put it: "Section 3 of DOMA will continue to remain in effect unless Congress repeals it or there is a final judicial finding that strikes it down, and the President informs me that the Executive Branch will continue to enforce the law."

While some are praising his decision, others are criticizing the President for declining to defend a statute passed by Congress, particularly a statute that the President has enforced and defended for the first half of his Administration. For instance, Orin Kerr at the Volokh Conspiracy has suggested that the failure to enforce the statute is an "Executive Power Grab." He also also noted that, if the current President can refuse to defend DOMA, then a future President, perhaps a Republican, could decline to defend the coercive individual mandate contained in the recent health reform legislation, if that President believes there are no reasonable constitutional arguments in defense of that mandate. (See Kerr's post making this point here.)

My own take is a little different from that of Professor Kerr and other critics of President Obama's action. That is, unlike Professor Kerr, who believes the President has gone too far in using his office to further his constitutional vision, my own view is that he has not gone far enough.

As previously explained on this Blog, Presidents may decline to enforce statutes they believe to be unconstitutional, without waiting for a court to pass on the enactment. Indeed, at the Pennsylvania Ratifying Convention, James Wilson, a prominent founder, justified judicial review by arguing that the President could decline to enforce an unconstitutional statute and that, by analogy, judges could also review statutes to determine their constitutionality. James Madison explained that each Department or Branch of government had to interpret the Constitution for itself when carrying out the duties that the Constitution assigns to them, including, for instance, the execution of statutes. Moreover, students of Constitutional Law will remember Myers v. United States, which arose because President Woodrow Wilson fired and stopped paying a postmaster, contrary to a statute that required Advice and Consent of the Senate, which Wilson did not even attempt to obtain. (The Supreme Court upheld Wilson's view that the requirement of Senatorial consent was unconstitutional, without questioning his decision to fire the postmaster.) And, of course, in his first innaugural address, President Lincoln, pictured above, 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 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, President Obama's approach seems internally incoherent. On the one hand, he claims that he will not defend DOMA because it is unconstitutional, indeed, so unconstitutional that there are no reasonable arguments in support of the statute. At the same time, the President and his Attorney General both assert that they will continue to enforce what they believe to be a blatantly unconstitutional law. Huh? If DOMA really is so blatantly unconstitutional, because it works unconstitutional discrimination, analogous to discrimination based on race or religion, should not the President simply refuse to enforce DOMA altogether? Imagine if, instead of classifying individuals based upon their sexual orientation, DOMA classified individuals based on race or religion and, for instance, denied federal benefits to Catholics or Asian-Americans lawfully married in their state of residence. Would President Obama and Attorney General Holder enforce such a statute, forcing affected indiviuals to challenge it in court? Certainly President Lincoln would not have enforced an enactment he believed to be unconstitutional, and I hope President Obama and Attorney General Holder would follow Lincoln's lead in such a situation. Why President Obama nonetheless continues to enforce DOMA, given his purported belief that the statute is plainly unconstitutional, is perplexing and causes this blogger to wonder whether President Obama is as certain about his constitutional views on the subject as Attorney General Holder's statement suggests.

Original Meaning or Something Else (and if so, what?)

2011-02-23T12:00:00.000-05:00

The Institute of Bill of Rights Law here at the William and Mary School of Law has posted the video of a debate between your humble blogger (pictured above on the right) and Michael Klarman (pictured above on the left), the Kirkland and Ellis Professor of Law at Harvard Law School. Here is a link to the video, which is in several parts. (The photo of Professor Klarman and myself, taken in the Institute, served as promotional material for a prior debate. Note the painting of the Constitutional Convention in the background.) Not surprisingly, I took the position that, when interpreting the Constitution, courts should adhere to the original public meaning of the document, endorsing the argument for Constitutionalism and judicial review articulated by John Marshall (pictured above) in Marbury v. Madison and Alexander Hamilton in Federalist 78.

As John Marshall put it in Marbury:

"That the people have an original right to establish for their future government such principles as, in their opinion, shall most conduce to their own happiness is the basis on which the whole American fabric has been erected. The exercise of this original right is a very great exertion; nor can it nor ought it to be frequently repeated. The principles, therefore, so established are deemed fundamental. And as the authority from which they proceed, is supreme, and can seldom act, they are designed to be permanent." (emphases added).

According to Marshall, then, the Constitution is binding because the People --- the ultimate repository of sovereignty --- are empowered to exercise that sovereignty in a manner that establishes the authority and limits of their government. The principles thereby established, Marshall says, are "fundamental" and "designed to be permanent." That is, such principles bind future generations, the government officials they elect, and the judges that such officials appoint and confirm.

This rationale for why the Constitution is binding, I (and others before me) argue, has certain implications for how courts (and other governmental actors) should go about interpreting the Constitution when called upon to do so. Thus Judges, for instance, should not treat the Constitution and judicial review as a license to choose whichever interpretive theory they please. Instead, the embrace of judicial review implies certain limits on the manner in which such authority is exercised. That is, the Constitution, from which judges derive their entire authority, imposes upon judges (and other officials) a duty to enforce the document's original meaning; nothing more and nothing else. Failure to execute this duty by, for instance, sustaining a statute contrary to the document's original meaning contravenes Marbury's rationale for a written, binding constitution as well as the rationale for empowering judges (and other officials) to enforce that document. In my view, then, a judge who purports to exercise judicial review while intentionally ignoring the original meaning of the constitution is not exercising "judicial power" in the first place, but is instead purporting to exercise an extra-constitutional authority not contemplated by the document or its ratifiers.

Watch the video to see Professor Klarman's response!

One final note.

I've had the pleasure of debating Professor Klarman four times --- three times here at William and Mary on Originalism and once at the University of Virginia on the soundness (or not) of the Supreme Court's decision in Bush v. Gore. He is an extraordinary scholar and person, and he has been a great friend to me over the years. I look forward to future debates!

A Precis on The Constitutionality of the Individual Mandate

2011-02-23T10:41:00.004-05:00

In this video, Allison Orr Larsen, Assistant Professor of Law at William and Mary, provides an excellent precis of the arguments, both pro and con, regarding the constitutionality (or not) of a mandatory requirement that all citizens who can afford to do so purchase a health insurance policy defined by the national government.

Wisconsin's Governor Finds a Powerful Ally

2011-02-19T15:05:00.017-05:00

Opposed Collective Bargaining by Government Employees

Supports Limited Collective Bargaining by Government Employees

Odd Man Out/To the Left of FDR and Wisconsin Governor Scott Walker

In a superb Op-Ed, Patrick McIlhern of the Milwaukee Journal Sentinel offers some historical perspective on the dispute between Wisconsin's public employee unions and the Governor elected by those who pay their salaries. In particular, McIlhern shows that opposition to collective bargaining by government employees has a venerable source -- President Franklin Delano Roosevelt, pictured above. According to McIlhern, FDR expressed his opposition to such collective bargaining by state employees in a letter to the National Federation of Federal Employees. To quote McIlhern, quoting FDR:

“The process of collective bargaining, as usually understood, cannot be transplanted into public service,” Roosevelt wrote in 1937 to the National Federation of Federal Employees. Yes, public workers may demand fair treatment, wrote Roosevelt. But he wrote, “I want to emphasize my conviction that militant tactics have no place” in the public sector. “A strike of public employees manifests nothing less than an intent to prevent or obstruct the operations of Government.”

It's ironic that, unlike FDR, who opposed such collective bargaining altogether, Governor Walker of Wisconsin (picture between FDR and President Obama, above) supports such bargaining over wages and salaries, but merely opposes it for benefits and working conditions. Thus, under Walker's proposal, public employees would have GREATER bargaining rights than the 90 percent of America's private sector workers who are not members of unions and thus cannot bargain collectively over ANY terms of their employment.

Meanwhile, President Obama has staked out a position far to the left of FDR......

Hat tip to Ann Althouse, who flagged McIlhern's op-ed here.

Are Self-Insurers Free Riders?

2011-02-15T13:55:00.037-05:00

Overplaying the "Free Rider" Card

In an Op-Ed last week in the New York Times, Laurence Tribe joins the effort to demonize individuals who decline to purchase health insurance, claiming that such individuals "choose to take a free ride on the health care system."

According to Tribe:

"Individuals who don’t purchase insurance they can afford have made a choice to take a free ride on the health care system. They know that if they need emergency-room care that they can’t pay for, the public will pick up the tab. This conscious choice carries serious economic consequences for the national health care market, which makes it a proper subject for federal regulation."

As Tribe sees it, such a "choice" to free ride by declining to purchase insurance impacts interstate commerce, with the result that Congress can ban that choice, by requiring individuals to purchase a health insurance policy whose terms are set by the national government.

Tribe's broad-brush characterization of those who decline to purchase health insurance fails to consider a more obvious explanation for why many individuals choose not to purchase health insurance and is thus off the mark, to say the least. Moreover, even if some such individuals ARE properly characterized as free riders, such a "choice" to free ride does not justify requiring such individuals to purchase the sort of health insurance mandated by the recent health care reform legislation. Finally, Tribe's argument proves too much, as it would justify all sorts of regulation of personal choices plainly beyond the reach of the National Government on the flimsy ground that unregulated individuals are "free riding."

Consider the following:

First, Tribe fails to note that the health care reform legislation he supports itself deters many individuals from purchasing health insurance and thereby would, without the coercive individual mandate, increase the number of individuals who are uninsured. Why? Because the law raises the price of health insurance for relatively young and healthy individuals by mandating a form of community rating whereby perfectly healthy individuals must pay significantly more each year for health insurance than the expected annual cost of their care. It should be no surprise, then, that some such individuals will, because of the new "reform," choose not to purchase insurance in the marketplace, opting instead to pay for their own medical expenses "out of pocket." Such individuals would not be "free riding" at all, but instead avoiding a federal requirement that they pay unreasonable prices for their health insurance. (In the same way, good drivers might decline to purchase automobile insurance if the State required insurance companies to charge reckless drivers and perfect drivers the very same premium, a premium that would have to reflect the average expected losses from accidents caused by both drivers during any given year.) While subsidizing the health care expenses of less healthy individuals may be good public policy, the body politic could instead choose to do so in an honest and transparent fashion, instead of diverting attention from the true impact of the law by falsely characterizing all who fail to purchase health insurance as "free riders."

Second, individuals who self-insure, that is, pay for their health care expenses "out of pocket," often subsidize individuals who receive their health care under the auspices of insurance plans. While insurance plans can obtain discounts from health care providers because they bargain on behalf of numerous individuals, individuals bargain on behalf of themselves, only. Paying full price for health care is hardly "free riding."

Third, while Tribe decries the possibility of free riding, he ignores the fact that the individual mandate does not apply to those individuals most likely to end up incurring medical bills they cannot afford. For, as Tribe notes, the law only requires individuals to purchase insurance if they are financially able to do so. However, individuals with the financial wherewithal to purchase the sort of over-priced insurance mandated by the new law will often have the financial means necessary to pay for their own medical care, including emergency room visits. (While federal law requires hospitals that receive federal funds to provide emergency care regardless of willingness or ability to pay, it does not prevent hospitals from billing individuals for such care after the fact.) By contrast, individuals who, often through no fault of their own, cannot afford such overpriced plans will more often not be able to pay their own health expenses and thus are more likely to free ride on the overall health care system. But, again, the individual mandate does not apply to such individuals.

Fourth, let's assume for the sake of argument that some who decline to purchase over-priced health insurance are properly characterized as free riders because they ultimately end up using emergency room care. (I should note, however, that Tribe offers no data hinting at what proportion of self-insuring individuals in fact fall into this category.) Even so, such free riding does not, as a matter of policy, justify mandating the purchase of basic health insurance that covers run-of-the-mill health care expenditures. Instead, at most, the prospect of such free riding would, as a matter of policy, merely justify a requirement that such individuals purchase a policy to cover catastrophic health care expenditures associated with, say, a very expensive visit to the emergency room.

Fifth, it should be clear that the sort of mandate that Tribe favors is vastly over-inclusive and also under-inclusive. That is, it applies to all sorts of individuals who are NOT free riders and who instead choose to self-insure to avoid paying unreasonably high premiums. Moreover, the law does NOT apply to those individuals who, because they are of modest means, cannot afford such insurance.

Sixth, even if Tribe's argument somehow made sense as a matter of policy, it falls flat as a matter of Constitutional Law because it "proves too much," that is, it justifies national regulation that plainly exceeds the power of Congress under any conceivable account of the scope of the Commerce Clause. All sorts of human inactivity impacts the health care system in one sense or another. For instance, each day millions of Americans who do have health insurance or are eligible for Medicare or Medicaid choose not to exercise, to eat too much and/or eat the wrong things, to sleep too little (or too much), etc. Each such choice can increase the risk that an individual who has insurance will have to incur health care expenses reimbursed by his or her health plan or, for that matter, Medicare or Medicaid. Thus, in failing to exercise regularly, for instance, individuals "free ride" on taxes or premiums paid by those who DO exercise regularly and thus minimize their own health care expenses. No where does Tribe articulate an account of the Commerce Clause that would, for instance, empower Congress to jail or otherwise penalize those Americans who fail to do 50 jumping jacks each morning.

2011 Tribe Football Schedule!

2011-02-15T13:55:00.036-05:00

Another Looming Upset?

Last week William and Mary released the schedule for the 2011 football season. Here it is. Note that, while the schedule includes dates, all times are "to be announced." All games will take place on Saturday; games in bold will take place at Zable Stadium in Williamsburg. Games marked with an asterisk are CAA conference games. (Note that Old Dominion joins the CAA in football in 2011.) The Tribe also recently announced its 2011 incoming recruiting class, including a tailback transferring from the Naval Academy. Go here for the story, which includes video highlights of each new recruit.

* * * * *

The Tribe will open at the University of Virginia on Saturday, September 3. Let's hope for a repeat of the Tribe's 2009 26-14 upset of the Cavaliers, previously reported on this blog here and here and memorialized in the photo posted above and taken by your humble blogger, who attended the game. (For a superb highlight video, apparently put together by someone affiliated with the University of Virginia, go here. Early portions of the video focus on early successes by Virginia, but the tide turns as the video unfolds. Go here for a shorter video put together by William and Mary.)

Here is the schedule:

1) September 3 Virginia

2) September 10 VMI

3) September 17 New Haven

4) September 24 James Madison (Family Weekend) *

5) October 1 Villanova *

6) October 8 Delaware *

7) October 15 New Hampshire *

8) October 22, Towson (Homecoming) *
Williamsburg, Va.

9) November 5, Rhode Island *

10) November 12, Old Dominion

11) November 19, Richmond *

Expensive "Clean Energy" Jobs ....

2011-02-09T11:30:00.000-05:00

Vice Planner-in-Chief?

Shortly after the State of the Union Address Vice President Biden visited a battery factory in Greenfield, Indiana owned by ENER 1, Inc., to tout the Obama Adminsitration's plan to encourage job creation via investments in "Clean Energy" as outlined in the President's State of the Union speech last evening. Biden's visit and speech was part of a larger communications strategy whereby, according to the White House:

"Members of the Cabinet will travel throughout the country to highlight the pillars of the president's remarks, visiting companies and schools that are already engaged in cutting-edge ways to innovate and accelerate economic growth[.]"

Let's hope that the particular project Biden is touting is not indicative of the Obama Administration's Economic Policy. Biden is visiting ENER 1 because it received a $ 118 million grant under the "Stimulus Package." According to a local news source, ENER 1 employs a grand total of 350 people. Hence, even if one assumes that the grant is responsible for each and every job at the company in the year the grant was received, the jobs in question cost $337,000 each that year. Such a method of "job creation," if applied accross the board, would rapidly bankrupt the country.

Moverover, even if the price tag of such jobs was lower, there is a more fundamental policy question to be engaged here. That is, should the National Government be choosing economic winners and losers, taxing some individuals and firms (or incurring debt to be paid back later) so as to subsidize those the government chooses to favor. Generally Free Societies rely upon decentralized market-based decision making to allocate scare factors of production, such as labor, capital and technology. If, as the Obama administration apparently believes, the production of particular batteries by a particular company is cost-justified, then presumably private investors will put their money at risk to support that production, having chosen such an investment over other opportunities, hoping to reap economic rewards in the process. And, in fact, ENER 1 has, according to CNBC, raised millions in private capital markets to support its enterprise, presumable because investors are optimistic about the company's success. There is no reason to believe that the National Government, which also has alternative uses for the capital it raises via taxation or borrowing, will do a better job choosing between competing uses (and there are ALWAYS competing uses) for that capital than private markets. Indeed, one suspects --- and Free Societies generally assume --- that private markets will do a better job deciding between different possible uses of scarce capital, thereby maximizing society's economic welfare for any given endowment of resources. If, say, the National Government wishes to encourage the production of alternatives to cars powered by fossil fuels, because such cars impose external harms in the form of pollution, it should, for instance, increase the tax on gasoline, or subsidize the purchase of automobiles --- and not just automobiles manufactured by a particular company. These steps would encourage consumers to demand automobiles that attain higher gas mileage, thereby encouraging private market actors to meet that demand in various ways, including more fuel-efficient gasoline-powered automobiles. The decentralized process of meeting this demand would presumably produce a more efficient allocation of labor and capital than a system under which the national government selects picks particular industries or even single companies to be the recipients of government largesse.

Finally, it should be noted that the sort of planning the Administration contemplates will do more than misallocate capital between various industries; the existence of such planning will also cause private firms to invest scarce resources in lobbying members of Congress and the Administration itself in an effort to obtain such subsidies. Unlike, say, an investment in plant and equipment, or research and development, such investments will produce no wealth. (By contrast, even a losing investment usually produces some output, even if that output is less than the magnitude of the investment.) Thus, the existence or possible existence of such programs will result in the diversion of scarce resources from productive to non-productive uses.

Federalism Survives (So Far)!

2011-02-01T10:41:00.027-05:00

Praised Limits on Congressional Power

Earlier this week Judge Vinson, of the Northern District of Florida, struck down the health insurance reform legislation that Congress passed in 2009. In particular, Judge Vinson held that the so-called “individual mandate,” which coercively requires all Americans to purchase health insurance, exceeds the power of Congress under Article I, Section 8 of the Constitution. In particular, he held that the mandate exceeds the authority of Congress to regulate commerce "among the several states" and that the law is not “necessary and proper” to carrying into execution the health reform law. As Judge Vinson recognized (and as this blog has previously pointed out) the government's rationale for treating the coercive individual mandate as constitutional would eliminate any meaningful limits on federal power, contrary to the plain language of the Constitution and even the Supreme Court's own decisions, which have repeatedly emphasized that the national government is one of enumerated powers, thereby leaving certain powers exclusively to the states. Thus, as Chief Justice John Marshall, pictured above, put it in Gibbons v. Ogden, 22 U.S. 1 (1824) "[t]he genius and character of the whole government" rested upon a limitation in the powers of Congress and resulting allocation to states of the remaining powers. More recently, in United States v. Morrison, 529 U.S. 598 (2000) the Supreme Court reiterated, quite properly, that:

"The Constitution requires a distinction between what is truly national and what is truly local. In recognizing this fact we preserve one of the few principles that has been consistent since the [Commerce] Clause was adopted."

As Judge Vinson put it:

"[Under the Obama Administration's argument] Congress could require that everyone above a certain income threshold buy a General Motors automobile—now partially government-owned—because those who do not buy GM cars (or those who buy foreign cars) are adversely impacting commerce and a taxpayer-subsidized business."

Of course, Judge Vinson is not the first judge to find that the coercive individual mandate exceeds the authority of Congress. This blog has previously praised Judge Henry Hudson’s similar ruling that the individual mandate exceeds the authority of Congress under the Commerce and Necessary and Proper Clauses. However, Judge Vinson went one considerable step further than Judge Hudson. Judge Hudson merely voided the individual mandate itself, holding that the rest of the law could still stand. That is, Judge Hudson held that the rest of the law was "severable" from the unconstitutional individual mandate. By contrast, Judge Vinson found that the unconstitutional provision was not severable and thereby voided the entire law.

While some have found Judge Vinson's decision to void more than the mandate itself surprising, this blogger was not surprised, for two reasons.

First, federal statutes routinely contain so-called severability clause, declaring that, if a portion of the law is deemed unconstitutional by the courts, Congress intends that the rest of the law should nonetheless remain in effect. While the presence of such a clause does not absolutely settle the question of severability, such a clause does militate against voiding an entire law simply because a portion is unconstitutional. However, the health care reform legislation contains no such clause, thereby giving rise to a possible inference that Congress meant the law to stand or fall in its entirety, i.e., for the entire law to become void if any portion of it is unconstitutional.

Second, the Obama Administration has repeatedly argued that the individual mandate is a critical portion of the overall scheme created by the statute. Indeed, in a recent Op-Ed, Attorney General Holder and Secretary of Health and Human Services Sebelius argued that, if the coercive individual mandate is struck down, there would be "devastating consequences for everyone with health insurance." Why? As Richard Epstein explains in this Op-Ed, the individual mandate is simply a covert tax on individuals who otherwise would not choose to purchase health insurance. That is to say, and as previously discussed on this blog, the law --- like previous "reform" in Massachusetts --- prevents insurance companies from denying coverage to individuals because of "pre-existing conditions." Under this "community rating" approach, insurance companies must generally provide such insurance on equal terms, including price, to all customers. As a result, individuals who are healthy, because of youth, good fortune, good habits or a combination of all three will pay more for such "insurance" than the expected cost of their care, while other individuals will pay less. (By analogy, imagine a law that required life insurance companies to charge the same premimums for term insurance without regard to the age or health of the insured.) Not surprisingly, many individuals with lower than average expected medical expenses would respond to such community rating by choosing to self-insure, that is, declining to purchase "community rated" insurance and paying whatever health care expenses they might incur "out of pocket." The individual mandate targets these individuals --- forcing them to purchase such insurance, at inflated premia, thereby subsidizing the purchase of insurance by others. Without this coercive requirement and the revenue that it generates, less healthy individuals who do choose to purchase insurance will pay higher prices than they would otherwise pay, though of course these premia that more closely approximate the actual cost of health care they will incur over the life of the policy.

Of course, there are provisions of the law that can function perfectly even without the individual mandate, e.g., provisions encouraging the study of best health care practices. However, the mere fact that part of a law can continue to function despite the invalidation of a different part cannot by itself require a court to sever the offending portion. If it did, then Congress could ensure severability simply by inserting a minor and unproblematic provision in each bill, perhaps even a provision identical to similar provisions in prior bills.

These considerations highlight a dilemma for the current Administration as it seeks to defend the law, with its unprecedented requirement that Americans who do not wish to engage in commerce must do so anyway, by purchasing health insurance they do not want or need. On the one hand, the Administration attempts to convince courts (and the public) that this unprecedented mandate plays a critical role in the health reform legislation it supported, sometimes even seeming to imply that, without the mandate, Congress would have to go back to "square one" and design a diferent system of reform. (Though, it should be noted that "absolute necessity" is not required for the mandate to be sustained under the Necessary and Proper Clause, as John Marshall explained in McCulloch v. Maryland, 17 U.S. 316 (1819).) On the other hand, to argue that the provision is severable, the Administration must contend that the law can continue to function despite the absence of the individual mandate. There is, to say the least, a tension between these two claims.

Note, however, that there may have been a "third way." Professor Michael Dorf, at Cornell Law School, has suggested in this post that Judge Vinson could have struck down the mandate and other provisions of the law intertwined with it, e.g., the insurance exchanges the law creates, without also invalidating those provisions that are wholly unrelated to the mandate, e.g., a provision that prevents discrimination against health care providers that decline to provide assisted suicide services.

Green Un-Jobs, Right Here in Virginia

2011-01-31T14:21:00.016-05:00

Sorry, Thomas, Your Invention Was Too Useful and Cost-Effective

You've probably heard proponents of "green" policies claim that such initiatives create "green jobs" and that the creation of such jobs can justify such programs. These same individuals are silent, however, about Green Unjobs --- that is, jobs lost because of "green" initiatives. According to the Washington Examiner, a classic example will soon occur right here in Virginia, when General Electric closes down it last remaining factory that manufacturers incandescent light bulbs, invented by Thomas Edison, pictured above. (According to the Post, the factory employs 200 workers.) You see, the National Government has, by enacting the 2007 Energy Indepence and Security Act, decided that such light bulbs use too much energy and thus should be replaced by mercury-laden bulbs manufactured in China. (See this article by the Times of London, reporting that hundreds of Chinese workers suffered mercury poisoning while manufacturing such light bulbs.) To be more precise, the law imposes hefty civil penalties on firms that manufacture light bulbs that are insufficiently efficient, thereby dooming the traditional incandescent bulb, which Americans would otherwise prefer to purchase over the more expensive mercury-laden options. It's not clear how this requirement will enhance our energy independence or security, given that 99 percent of America's electricity is generated via coal (a fuel we export), nuclear power, natural gas, hydro-electric power, and renewable sources of energy. (Note that, while the United States is a net importer of natural gas, we are also the largest producer of natural gas in the world, export the fuel to Japan, Mexico and South Korea and receive the vast majority of our imports (including 99 percent of our pipeline imports) from our neighbor and close ally, Canada.)

Of course, the mere fact that a new regulation eliminates jobs does not ipso facto require rejection of the regulation on policy grounds. Then again, the fact that regulation will create jobs does not necessarily recommend it, either. If a mercury factory repeatedly spills its output in local streams, thereby poisoning those who live nearby, closing the factory would be warranted, even though doing so would eliminate jobs. At the same time, a law the required all citizens suddenly to paint their houses purple would create jobs in the purple paint industry and, of course, ensure full employment for painters. This would not, however, establish the law's wisdom. Perhaps the best question to ask instead is whether the law bans conduct that produces more harms than benefits. If "energy security and independence" is the true point of the de facto ban on Mr. Edison's invention, the answer seems plainly "no."

Is The Onion Channeling J.M. Keynes???

2011-01-21T13:35:00.000-05:00

The Onion "reports" that a "Revamped WPA will Create 50,000 New Jobs by Disassembling, Reassembling the Hoover Dam." The story also reports that other "public works" projects are on the way, including:

"the bulldozing of libraries, the burning of national forests, and the defacing of public murals, which will be followed by a massive plan to rebuild libraries, revive national forests, and repaint public murals."

While styled as a spoof, the piece captures the essence of Keynesian stimulus theory. That is, when the economy is operating significantly below full employment because private consumption and investment are lagging, the government should borrow from its citizens and spend the proceeds by buying goods and services in the domestic market. Under this approach, it does not matter WHAT government buys; so long as the government purchases something it will stimulate aggregate demand and thus Gross Domestic Product, so long as the nation's aggregate supply curve displays some elasticity. (Technically, macro-economists would model this impact by shifting the aggregate demand curve up and to the right.) Thus, Keynes himself argued that the State could stimulate the economy by paying its citizens to dig holes in the ground and retrieve objects buried there:

"If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing. "

Of course, many Americans would criticize the sort of spending that Keynes identified as wasteful. However, let's assume for the sake of argument that this sort of spending would stimulate the economy when unemployment is high, as Keynes argued. Would such an expected effect justify such spending as a matter of policy? Probably not --- even for Keynes. For, as Keynes himself says in the language quoted, there would be more sensible means of spending the money in question, that could have the same stimulative effect. One could, for instance, spend the money on infrastructure projects --- roads, ports, bridges, airports and the like ---that enhanced that nation's productivity. Even Adam Smith recognized that spending on infrastructure was an appropriate role of the state. As he put it:

"The third and last duty of the sovereign or commonwealth is that of erecting and maintaining those public institutions and those public works, which, though they may be in the highest degree advantageous to a great society, are, however, of such a nature that the profit could never repay the expense to any individual or small number of individuals, and which it therefore cannot be expected that any individual or small number of individuals should erect or maintain."

One could also spend such money on research and development, for instance, producing the sort of basic knowledge that the private market might not otherwise produce, because certain types of discoveries are (properly) not patentable under federal law. If focused on the right projects and research, such spending could increase the potential output of the overall economy, a result that economists would model via a shift in the long run aggregate supply curve to the right.

Of course, the argument and rationale for spending on public works and research and development applies regardless whether the nation is in a recession. However, the argument might be stronger in a recession because: (1) such expenditures might help stimulate aggregate demand, as explained above and (2) the cost of such projects will likely be lower during a recession, as labor and capital stand idle because of reduced economic activity.

In short, while borrowing and spending on any number of activities might stimulate the economy in the short run, spending such money on projects that build infrastructure and create knowledge can enhance the nation's prospects for long term economic growth. In other words, as previously discussed on this blog, not all stimulus spending is created equal.

The Original 11 States of America....

2011-01-19T22:20:00.000-05:00

Failed to Carry Rhode Island and North Carolina in 1788?

So here's a quiz:

During President Washington's first term, the United States consisted of how many states?

1) 12

2) 11

3) 13

4) 14

5) 15

6) All of the above.

The answer is: 6, all of the above. How can this be, you ask? Here goes. Article VII of the Constitution proposed by the Philadelphia Convention provided that ratification by nine states would bring the Constitution into effect. New Hampshire ratified the document on June 21st, 1788, the 9th state to do so. Virginia followed suit a few days later, and New York ratified the document in July. The nation's first presidential election took place between December, 1788 and January 1789, and George Washington was innaugurated in April, 1789.

Article VII also provided that the Constitution only applied to those states that had actually ratified it. Hence, ratification by New Hampshire, though it brought the Constitution to life, did not annex states that had, to that point anyway, not ratified it. North Carolina did not ratify until November 21, 1789. Rhode Island held out until May 29, 1790. Thus, George Washington initially presided over a nation of 11 states, then 12, then, halfway through his term, the original 13 colonies. (Note also that Washington only carried 10 of these 11, because New York did not cast its votes.)

Thus, from June 21, 1788 until May 29, 1790, Rhode Island, for instance, was a sovereign nation, as was North Carolina, from June 21, 1788 until November 21, 1789.

But that's not all.

Vermont ratified the Constitution on March 4, 1791 and was admitted to the Union as the 14th state, having function as an independent republic, minting its own coins.

Kentucky then ratified the Constitution on June 1, 1792, becoming the 15th state.

Thus, by the end of his term, Washington, who began as President of a United 11 States, was President of a union of 15.

Do Powerful Unions Enhance Job Growth? Of Course Not!

2011-01-19T16:21:00.030-05:00

versus

In a perplexing analysis in today's New York Times, entitled "In Wreckage of Lost Jobs, Lost Power," David Leonhardt manages to turn both microeconomics and macroeconomics on its head, claiming, as he does, the stronger unions would somehow result in faster job growth and faster economic recovery. In so doing, he channels some of the discredited arguments that FDR and others made in favor of state-backed cartelization, including cartelization of labor, during the 1930s. Here are some excerpts of Leonhardt's analysis.

"But beyond these immediate causes, the basic structure of the American economy also seems to be an important factor. This jobless recovery, after all, is the third straight recovery since 1991 to begin with months and months of little job growth. . . . .

Why? One obvious possibility is the balance of power between employers and employees."

Later in the piece Leonhardt claims that:

"Study after study has shown that unions usually do benefit workers."

and

"For all their shortcomings, unions remain many workers’ best hope for some bargaining power."

Leonhardt does not explain how stronger unions and resulting "bargaining power" would speed job growth. "Union bargaining power" is simply a synonym for market power over the price of a very important input --- labor. Presumably unions would use such power to increase wages and/or foist other unwanted conditions of employment on employers. Because there are substitutes for American labor --- capital, foreign labor, or both, policies that raise the price of American labor will predictably cause firms to purchase less of it, either by substituting capital for such labor or exporting jobs to countries where wages are lower. (Moreover, foreign investors may choose not to invest here in the first place.) This is just basic microeconomic price theory, and Leonhardt offers no argument or evidence that the basic rules of price theory do not apply in this context. While unions may benefit workers who retain their jobs despite the wage-raising exercise of bargaining power, such a conclusion does not suggest that unions increase employment. Quite the contrary. The very exercise of bargaining power that raises wages and makes some employees better off also makes labor more expensive and causes firms to purchase less of it.

It should be noted that America experimented with the sort of policies Leonhardt advocates in the early 1930s. In 1933, Congress passed and FDR signed the National Industrial Recovery Act. The NIRA allowed firms, via trade associations, to adopt so-called "Codes of Fair Competition," and the NIRA required such codes to include provisions raising wages above the competitive level, as a means of stimulating the "purchasing power" of workers and thus jumpstarting recovery. However, none other than John Maynard Keynes suggested, in an open letter to President Roosevelt in the New York Times, that the N.I.R.A. "probably impede[d] recovery" by artificially raising wages and prices. According to Keynes, policies that stimulated aggregate demand would raise wages and prices, and not the other way around. Over a decade ago your not-so-humble blogger argued that the N.I.R.A. and other policies that raised wages and prices slowed the recovery from the Great Depression. See Alan J. Meese, Will, Judgment and Economic Liberty: Mr. Justice Souter and the Mistranslation of the Due Process Clause, 41 W. & M. L. Rev. 3, 48-49 (1999) (contending that the N.I.R.A.’s wage and price fixing likely exacerbated the Depression and slowed economic recovery).

Modern economists agree with Lord Keynes that the N.I.R.A.'s state-enforced cartelization of industry and labor impeded recovery. Thus, Christina Romer, immediate past Chair of President Obama's Council of Economic advisors, conluded that the NIRA "prevented the economy’s self-correction mechanism from working." See Christina D. Romer, Why Did Prices Rise in the 1930s?, 59 J. Econ. Hist. 167, 197 (1999). Moreover, writing in the Journal of Political Economy, economists Harold Cole and Lee Ohanian conclude that the N.I.R.A. and other New Deal policies, including the National Labor Relations Act passed in 1935, substantially prolonged recovery and inflated unemployment. See 112 J. Pol. Econ. 779 (2004) (For a prior version of the paper, go here.) Indeed, the article expressly identifies labor union "bargaining power" and resulting high wages as a culprit holding back recovery.

FDR, of course, did not have the benefit of the Cole/Ohanian/Romer analysis, thereby mitigating somewhat his responsibility for the unemployment and slow recovery that his policies wrought. Modern commentators who advocate such policies have no similar excuse.

House Right to Read the Actual Constitution

2011-01-07T00:50:00.020-05:00

Criticized for Reading Actual Constitution

Read Section 1 of the 14th Amendment

In an essay in Slate magazine Dahlia Lithwick has chastised the House of Representatives for reading the actual Constitution yesterday. (Congressman Robert Goodlatte, R-Virginia pictured above supervised the reading.) Apparently she would have had the House read the original document, including repealed provisions, and then various amendents to it seriatim. Lithwick argues that superceded provisions of the Constitution are still somehow part of the Supreme Law, because copies of the Constitution that she has read include the original language, as well as subsequent amendments. Indeed, she quotes Professor Akhil Amar for the proposition that:

"The Constitution is a thread. Nothing is ever erased and nothing can be omitted. Nothing tells us specifically what it repeals."

In the view of this Blogger, both Lithwick and Professor Amar are incorrect.

1) Thir argument proves too much. If they are correct, then the House should also have read the entire Articles of Confederation, which, after all, the Constitution did not expressly repeal. And, for that matter, why not also read each of the state constitutions extant between the Declaration of Independence and the adoption of the Articles, as well as the Northwest Ordinance (and changes thereto), which governed the territories of the United States both before and after the Constitution was ratified?

2) The Constitution does, in some cases, expressly repeal prior provisions. The 21st Amendment begins with the following language: "The eighteenth article of amendment to the Constitution is hereby repealed." What could be more clear? Also, Section 1 of the 14th Amendment, read by Congressman Mel Watt (D-NC) (pictured above) provides that all persons born in the United States are citizens, and Section 2 provides that "representatives shall be apportioned among the several States according to their respective numbers, counting the whole number of persons in each State, excluding Indians not taxed" thereby superceding (quite obviously) the prior provision in Article I, Section 2 whereby slaves were not counted fully for purposes of apportioning representatives among the states. The 14th Amendment's failure expressly to reference Article I, Section 2 does not change this result one wit. The plain language of the 14th Amendment leaves no doubt of its meaning in this context and thus no doubt about the content of the actual Constitution. The Constitution does not, John Marshall said, partake of the prolixity of a legal code or, as Justice Scalia has said, bristle with supras and infras.

3) More fundamentally, a "Constitution" is by definition a framework --- written or unwritten --- for actual governing that both empowers and limits governmental actors. Thus, the actual American Constitution includes the 14th Amendment and the 21st Amendment. It does not include the 18th Amendment or the provisions of Article I, Section 2 that the 14th Amendment repealed, for instance, any more than it includes a random provision selected from whatever constitution was in force in Vermont in 1896. A federal prosecutor who sought an indictment based on the 18th Amendment would be laughed out of court --- and subjected to sanctions --- and properly so.

4) Finally, it may well be that "constitutions" that Lithwick has read include provisions that have been repealed. However, the editorial choices of publishers cannot change the actual content of our fundamental law. Presumably original language is included in such publications as a matter of historical interest and to provide context for the amendments. (For instance, the 21st Amendment's reference to repeal of the 18th makes more sense if the text of the 18th is handy to the reader.) But language included for sake of convenience or historical exposition does not thereby become, by some form of legal alchemy, part of the actual Constitution of the United States.

* * * * *

While Lithwick's recommendation would make for an interesting and important history lesson, the House of Representatives is not, thankfully, a history department. Presumably the point of reading the Constitution yesterday was to impress upon members of the House both the source and the limits of their authority over their fellow citizens. Judged by this standard, the House properly read the actual Constitution that binds us and not those parts that We The People have discarded.