Category: Economic Analysis of Law

Taking Human Capital Theory Seriously: Simkovic on “The Knowledge Tax”

Graduate professional education in the US is facing a financing squeeze. Some argue that those learning to become doctors, nurses, engineers, lawyers, and the like should get no help from the federal government, because they tend to earn higher incomes than average. Others question that premise, arguing that past results of grad degrees are no guarantee of future performance. They believe that an impending wave of defaults on federal student loans will raise the cost of federal credit programs.

Nevertheless, each side argues for policy with convergent outcomes. The “grad students will be rich” camp argues for curtailing federal loans, since they believe professionals can handle the higher interest rates on the private market. The “grad students will be poor” camp wants to raise the rates on federal student loans, to build up the already hefty surpluses the government is now making, to prepare for the putative future defaults. In the eyes of both, graduate students are the undeserving recipients of government largesse.

I’m not convinced by either: the “too rich” camp fails to value professional services properly, and the “too poor” camp is relying on controversial accounting techniques. But until I read Mike Simkovic’s recent paper “The Knowledge Tax,” I’d never thought of an even more fundamental distortion at work here: tax policy. Simkovic lays out the problem with characteristic clarity, considering a hypothetical college graduate deciding on (1) attending medical school and practicing medicine; or (2) purchasing a small vacant building and converting it into rental apartments:
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Meet the New Boss…

One of the most persistent self-images of Silicon Valley internet giants is a role as liberators, emancipators, “disintermediators” who’d finally free the creative class from the grips of oligopolistic music labels or duopolistic cable moguls. I chart the rise and fall of the plausibility of that narrative in Chapter 3 of my book. Cory Doctorow strikes another blow at it today:

[T]he competition for Youtube has all but vanished, meaning that they are now essential to any indie artist’s promotion strategy. And now that Youtube doesn’t have to compete with other services for access to artists’ materials, they have stopped offering attractive terms to indies — instead, they’ve become an arm of the big labels, who get to dictate the terms on which their indie competitors will have to do business.

Ah, but don’t worry–antitrust experts assure us that competition is just around the corner, any day now. Some nimble entrepreneur in a garage has the 1 to 3 million servers now deployed by Google, can miraculously access past data on organizing videos, and is just about to get all the current uploaders and viewers to switch to it. The folklore of digital capitalism is a dreamy affair.

The Black Box Society: Interviews

My book, The Black Box Society, is finally out! In addition to the interview Lawrence Joseph conducted in the fall, I’ve been fortunate to complete some radio and magazine interviews on the book. They include:

New Books in Law

Stanford Center for Internet & Society: Hearsay Culture

Canadian Broadcasting Corporation: The Spark

Texas Public Radio: The Source

WNYC: Brian Lehrer Show.

Fleishman-Hillard’s True.

I hope to be back to posting soon, on some of the constitutional and politico-economic themes in the book.


Walmart versus Apple aka Revenue versus Profit

Which business would you want to be? The Economist Espresso reports that Walmart takes “about 65 seconds to collect $1m in revenue,” but Apple needs “very nearly three minutes.” Looks like Walmart is where the money is. And it is, but when it comes to profit, “Apple, with its high margins, is fastest in the profit stakes: chalking up $1m takes it less than 13 minutes and 20 seconds, whereas Walmart needs more than half an hour.” Looking at the chart, Apple and Google have good profit margins but banks like JPMorgan Chase and Goldman Sachs do even better (all above 20%). Coke (17.4) and Pepsi (10.4) are quite good too. So how much does the law affect these sectors and which the best to be in? Hard to tell.

No matter what, any regulation be it about disclosures about practices or nutrition or oversight or safety or labor or where a good is made or liability for property rights or ability to weather an economic downturn, can shape a sector. Given the high profits in some of these sectors, you will see some arguing that they are getting away with too much and others saying that any regulation will kill the sector. Both positions are likely incorrect. That said, watching where new money, new offices (for old and new ventures), and start ups go may tell us something about where people believe they can do well.

One thing I am thinking about is how much state-by-state regulations and barriers to labor mobility influence business decisions. Although work on intellectual capital and noncompetes is quite strong that lower restrictions help business overall, alleged protection of voting systems and other entry barriers matter too. Someone may have studied this point. If so, please share. But my guess is that a company that has trouble getting people (and I mean U.S. citizens) to their headquarters won’t be happy about that cost.


The 100 Year Bloom?: Wealth Inequality in the U.S.

The debates around Piketty’s analysis of wealth gaps will persist, but a recent paper by Emmanuel Saez (U.C. Berkeley) and Gabriel Zucman (London School of Economics) indicates that wealth disparity in the U.S. has hit the levels of about 100 years ago. As the Economist Espresso edition reports, the study finds that “In the late 1920s the bottom 90% held just 16% of America’s wealth; the top 0.1% had a quarter.” From the Depression until “well after” World War II, the middle class share went up. Since the go-go 1980s that tide reversed and now “The top 0.1% (160,000 families worth $73m on average) hold 22% of America’s wealth, just shy of the 1929 peak—and almost the same share as the bottom 90% of the population.” (The Economist link has a nice chart from the paper. The chart captures the trend well. I was unable to get the image from the paper, however.).

I have to wonder whether the intersection of wealth disparity, race and police tensions, health security, job prospects, lack of food, and perhaps other factors explain what seem to be larger examples of unrest and revolutionary impulses from all ranges of political interests all around the world. And, the general sense of rejecting all institutions (a millennial impulse if lack of joining a party is a signal) can still lead to the short term alliance of enough people to cause revolution (their cause is change and rage and unleashed energy against the unjust), the aftermath of which is rarely bloodless. Once the common enemy goes, the energies of the one truth turn on each other. The show Survivor is much more real: eliminate those who are strong and helped you win, for they may threaten your vision. In other words, I sense much anger out there (and it may be founded) on many fronts. I see lex talionis (eye for an eye), but that is not justice. The law is supposed to mediate our impulse to revenge, and yet the law lies behind the changing tides of wealth. The unarticulated sense of injustice and disenfranchisement can eat the system from the inside. And even those gaining the biggest benefit right now will not see that the bottom is falling out from under them.

Not all 100 year blooms are pretty or benign. Reorganizing a country or the world so that baseline well-being goes up and is shared by most, if not all, seems like a blip in historical terms (I am trying to think of an extended era, more than 100 years, when wealth disparity was not high). But it may be that if we don’t start to fix these problems, the desire for those blips will become real and travel with high costs: depressions, starvations, revolutions, and wars.

It may not take much to prevent the fall. Who knows? Maybe the Jam’s That’s Entertainment captures an odd, sad, equilibrium that barely satisfies.

Waking up at 6 A.M. on a cool warm morning
Opening the windows and breathing in petrol
An amateur band rehearsing in a nearby yard
Watching the telly and thinking ’bout your holidays

If that is gone, well…


Child Safety, Part III

How might tort law respond, if at all, to the preferences of parents and the general population to invest about twice as much in child safety as adult safety? (see this post for a summary of the data, and this post for a discussion of whether those preferences are normatively defensible).

Here’s my take, which you can read more about here:

Because the studies that I’m drawing from concern the allocation of safety-related resources, they have their most direct implications when we view tort law as (at least partially) a means to make people safer by deterring risky behavior. Those studies create two main implications, one for levels of care and one for damages.

Under a deterrence rationale, the standard of care in tort law reflects what we want potential tortfeasors to invest in accident prevention. The investment patterns from my first post in this series suggest that, at least as a prima facie matter, people want potential tortfeasors to invest twice as many resources in preventing accidents when children are the primary potential victims, even when both children and adults are equally vulnerable.  And if my second post in this series is right, we have reasons to respect those preferences. So when children are among the foreseeable class of victims, courts should require a heightened level of care. Although courts appear to respond to a child’s increased vulnerability to harms—they blindly run out into the street to reach ice cream trucks, for example—I have not found evidence that courts have picked up on the extra value that we appear to place on child safety. I’ve also looked at practitioner treatises, and so far I cannot find any mention that courts or juries are more likely to find a defendant negligent if the victim was a child. So, as a prima facie matter, there are reasons to question whether judges and juries are applying a sufficiently stringent level of care in cases involving children.

To motivate potential tortfeasors to take a heightened level of care for children, damages for child victims should be about twice as high as damages for adult victims. Currently, tort damages tend to exhibit child discounts or mild child premiums. This should not be a surprise. We ask juries to set damages in particular ways that constrain their discretion. For wrongful death, we generally ask them to set damages by looking at the economic contributions that the decedent would have made to her relatives. This puts a very small value on dead children, and results in child discounts even after we add non-economic damages. For permanent injuries, some back-of-the-envelope calculations suggest that juries tend to award children 20-25 percent more than adults. This is approximately what we would expect if juries were awarding damages based on the number of years that a victim will have to live with her injuries, and then discounting those future yearly payouts to arrive at a single lump sum.   But that child premium is significantly lower than the 2 to 1 ratio that a deterrence-oriented tort system might strive for. So, as a prima facie matter, there are reasons to question whether damages for child victims are high enough to generate the amount of deterrence that people appear to desire.

Of course, there is much more to say.

A fuller deterrence analysis would require examining a host of additional factors, such as whether regulatory agencies or market forces or the threat of criminal liability already provide extra protection for children, whether risk compensation or substitution effects operate differently for the adult and child populations, the differences between contractual settings like medical malpractice and stranger cases, how to handle “hidden-child” cases (which would be partially analogous to thin-skull cases), etc. I invite readers to offer their thoughts on these issues. But as a first cut, there are reasons to think that tort law does not offer the desired mix of protection for adults and children.

We could also ask what civil recourse and corrective justice accounts of tort law might contribute to the discussion. But I will leave that for another day.

From Piketty to Law and Political Economy

Thomas Piketty’s Capital in the 21st Century continues to spur debate among economists. It has many lessons for attorneys, as well. But does law have something to offer in return? I make that case in my review of Capital, focusing on Piketty’s call for a renewal of the social science of political economy. My review underscores the complexity of the relationship between law and social science. Legal academics import ideas from other fields, but also return the favor by informing those fields. Ideally, the process is dialectic, with lawyers and social scientists in dialogue.

At the conference Critiquing Cost-Benefit Analysis of Financial Regulation, I saw that process first hand in May. We at the Association of Professors of Political Economy and the Law (APPEAL) are planning further events and projects to continue that dialogue.

I also saw a renewed synergy between law and social sciences at the Rethinking Economics conference last month. Economists inquired about bankruptcy law to better understand the roots of the financial crisis, and identified the limits that pension law places on certain types of investment strategies.

Some of the organizers of the conference recently took the argument in a new direction, focusing on the interaction between Modern Monetary Theory (MMT) and campaign finance reform. “Leveling up” modes of campaign finance reform have often stalled because taxpayers balk at funding political campaigns. Given that private campaign funders’ return on investment has been estimated at 22,000%, that seems an unwise concession to crony capitalism. So how do we get movement on the issue?
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Interview on The Black Box Society

BBSBalkinization just published an interview on my forthcoming book, The Black Box Society. Law profs may be interested in our dialogue on methodology—particularly, what the unique role of the legal scholar is in the midst of increasing academic specialization. I’ve tried to surface several strands of inspiration for the book.


Knee Defender, Barro’s error, and Surprise Norms

Being a believer in Coase’s irrelevance “theorem” (see corresponding CALI lesson by me), I bring you a peeve springing from a podcast’s discussion of knee defender (a product that prevents the airline seat in front of you from reclining, which led to a recent fight on a plane, the plane’s diverted landing, and the arrest of the fighting passengers), which referenced a pundit’s (Barro‘s) quip that since nobody has offered to bribe him not to recline, little demand for no reclining exists. The podcast was also critical of reclining generally (as it is of warning motorists about speed traps), which raises the issue of hidden, surprise norms.

First on Coase. Bribing someone not to do something that annoys you is completely counterintuitive and counterproductive. It sounds and feels like extortion and perhaps we have an innate intuition against extortion. Maybe a jurisdiction existed, in the history of human development, where it was acceptable and habitual for some to pay others not to engage in annoying activities. However, nobody lives there any more because it got too annoying, since this functioned as an incentive for annoying behavior. How do we get from this point (my anti-extortion exception to acceptable Coasean bargaining) to worlds where ranchers bargain with farmers or quiescent spas with percussionists? I think social interaction follows the golden rule of do unto others as you would have done unto you (I accept gradual moderate reclining especially while napping and am very thankful indeed for speed trap warnings) and polite counterrequests not to recline are easy and possible (and we luckily have judges to protect us against oversensitive cops). Farmer-rancher and spa-percussionist interactions are different in that they happen at the professional level. Ranchers and farmers do not know eachother’s cost-benefit calculus making bargaining acceptable, as I think it is between neighbors with different attitudes about noise or lawn care. That having been said, my sense is that airline seat design seems to be sensitive to the various concerns because it seems to have shifted to minimal reclining in short flights or cramped rows and more reclining in transoceanic flights, where, also, the flight attendants do ask passengers to lift their seats for meals. So, anti-reclining demand seems to be producing results, consistent with Coasean reasoning and contrary to the intuition of Barro. Notice the unusual power of Coase here, since two of his conditions, the clarity of rights and enforceability of bargains, seem to be lacking in the social context of seat reclining (but not in neighborhood lawn care? Or is that why people pay a premium to live in associations? Coase all the way! Is it Lee Fennell or Jay Weiser who discuss premiums paid for association houses? Maybe both.). Perhaps I am wrong on reclining and it is clearly a right, not only because the button is on the handrest of the recliner (rather than the seat back, as the podcast points out) but also and especially since the airlines have banned knee-defender. The airlines also offer some seats with protection against reclining, the bulkhead and the exit row seats (maybe airlines could increase the number of non-reclined-against seats or charge the knee-defender premium for them). Thus, those seeking no reclining can obtain it by taking such seats instead of bribing Barro, buying knee defender, or trying to create a norm against it.

Second on surprise norms. No no no no, thou shalt not spring your righteous surprise norms on me. Western legal and social arrangement rests on the foundation that what is not prohibited is allowed. I can press my recline button and I can blink my brights to oncoming motorists at the cost of flying next to crying babies and driving behind those doing under the speed limit. (But in Sunday’s NY Times magazine, in Branson’s interview, he mentioned that he wants or tried to have his airline move toward children’s cabins, a development for which my ears are praying albeit from behind BOSE noise-cancelling headphones). To my reasoning, a necessary corollary of the rule of law is the non-rule of non-legal norms. When a need for a rule has enough thrust that it alters the law, then we have some warning about it and perhaps the chance to object against its creation. Holding people to a standard of conduct they do not know and to which they may object seems the height of (righteous, meddlesome, antiliberal, puritanical, strike four words) unfairness. (BTW, strike is obsolete litigator legalese for delete, dating from the days where the transcriber would back up the typewriter carriage and type XXXX or dashes over the, thus, struck text. That I could perfectly easily delete the words reveals my affectation here, but ignore that.) I have a sense that when I lived in the east coast a lot more of these surprise norms seemed to exist than here in the midwest and it grated. Or I am a rude boor who belongs in that extinct society above.

So, what is the norm in this blogo-podcast-sphere? Should I reveal that I am commenting on Oral Argument of Joe Miller and Christian Turner or should I leave the podcast nameless because I criticize it somewhat? Since law professors thrive on citation counts, I will presume that they would prefer attribution to marginalization despite that I am not in full agreement with everything they say (and who could possibly expect complete agreement in our milieu of professional debaters of trivialities?). I am very thankful for their podcast adding interest to my driving time and for triggering this post.

I hope no norm against run-on sentences and parentheticals exists in the blogosphere, or I am toast! In my defense, please notice that I could not instead drop notes. BTW, drop a [foot]note is legalese for removing from the main text a diversion or interjection and placing it in a footnote, which reminds me…

Digital Labor & Rethinking Economics

LaborDayIt’s easy to document the degradation of work conditions in the wake of capital’s ascendance. I’ve done so for years, fully expecting that globalization would push the downward convergence of non-college-educated American workers’ living standards to that of the 73% of the global work force now living in the developing world. But I think we are in the midst of a sea change of resistance. Just listen to Belabored, an extraordinary series of podcasts on labor struggles (with plenty of print/web sources accompanying each broadcast). Or, if you’re in, or can visit, New York City, try to attend the following two conferences:

Rethinking Economics: A student-led movement, this group has an all-star line-up for a conference on Sept. 12-14. I’m particularly happy to see Philip Mirowski in the mix, as his Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown was one of my most enjoyable (and illuminating) reads this summer.

Digital Labor: This November conference will “will bring together designers, labor organizers, theorists, social entrepreneurs, historians, legal scholars, independent researchers, cultural producers and perspectives from workers themselves to discuss emerging forms of mutual aid and solidarity.” I attended the first iteration in 2009, and am on the Advisory Board for this one. It should be a fascinating event, particularly as forms of exploitation common in the “gig economy” influence large corporations.

Photo Credit: Karen Horton.