Category: Economic Analysis of Law

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Ideological Blindspots and More

Here are two recent posts from Max Stearns’s The Blindspot:

Ideological Blindspots (part 2): The Grandchildren

Max Stearns

Liberals and conservatives tend to take sharply divergent views of two major issues: global climate change and the looming national debt. But they share one attribute in common. Both sides believe that by focusing on the issue that most concerns them, they, unlike their opponents, are protecting the interests of their children, grandchildren, and great grandchildren. Caring about our progeny demands attending to both issues, and also to understanding how they interrelate.

Conservatives point out the looming national debt, which, as I write, is hovering at just shy of $20 trillion dollars. See http://www.usdebtclock.org. The federal deficit is hovering at $591 billion. To understand what this means, we need to clarify some terminology.   Read More

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Some History on Trade and Tariffs

I tend to think that when someone says “This is how it should be” or “As it was, so it shall be” there’s a good chance that the claims are incorrect. Marc Levinson’s book, An Extraordinary Time, hits an area, where I have had that gut feeling that something isn’t correct, quite well. Can the US and the world reach the levels of growth that happened after WWII and ended around 1973? Short answer not likely. The book goes into the various technocrat approaches to fixing the economy, and then the book shows that none of those really hold up. A quote from Paul Samuelson sums up “The third quarter of the Twentieth Century was a golden age of economic progress. It surpassed any reasoned expectation. And we are not likely to see its equivalent anytime soon again.”

One specific area, the use of tariffs to protect American jobs, jumped out for me. After resisting pressure for tariffs on bolts, nuts, and screws (yes a major area it seems), in 1978 the Carter Administration caved and imposed a 15% tariff that lasted three years. US manufacturers raised their prices so that tariff protection cost was passed to consumers. One study estimated that limiting imports from Asia (the target of the tariff) cost $550,000 per job “saved” while the average job in that industry made $23,000 per year. And the tariff did not save the industry. By the mid 1980s sales of the US industry in that sector had lost about 15%.

When it came to autos, trade limits with Japan saved 44,100 US jobs. That is great. But one study says that the cost to consumers was $8.5 billion, because of higher prices “or $193,000 per additional job–approximately six times the annual pay of an American autoworker.” And Japanese automakers still sold their cars at the higher prices and so made “perhaps $7 billion in added profit” which was re-invested in building plants in the US and developing higher-end cars. That is they seem to have become more competitive.

I note these details, not because I am an avid free-trade person. I note them not because I think those who are displaced by the way society and industry change should be shoved aside or chewed up. I note them, because it seems to me that some of the core points about trade policy hold up, if we want lower consumer prices. Remember that part of being able to buy lower cost and super cool TVs, cars, etc. means our dollars are able to buy other things too. There are oceans of ink on the way trade and costs ought to spur overall good things. I leave that for others and other posts.

For this post, the core issue is what happens when large swaths of society, be they in the vast plains or the former industrial giants or in cities and suburbs, aren’t able to have jobs and so their place in society is unstable? Levinson’s book goes to the many times the US and other countries have tried to solve such riddles. The answers are not clear. But the book’s ability to show how looking to politicians and policy to save us has not worked as crisply as we may hope or believe is good tonic going forward. That is regardless of who is in power, look at the solution, look at whether it has been tried, see what happened, and ask whether there is a better way to address the problem; one that might give aid to those threatened and still tee up better businesses for the future.

Post-Neoliberal Higher Education Policy

The Obama Administration made at least two major contributions to higher education policy. It cracked down on some for-profit colleges, taking on a consumer protection role largely missing from the Bush years. Donald Trump is unlikely to continue that initiative, and may roll it back.

Obama also encouraged income-based repayment (IBR) of student loans. It appears that “the repayment plan proposed by candidate Trump is not too far from the current repayment plans already in existence”–but few know exactly how the policy will play out once a new set of think tankers and lobbyists take over the Department of Education (DOE).

I surveyed higher education finance policy in 2015, in a piece for the Atlantic. I felt at the time that the Sanders plan was by far the best, and that Clinton’s plan could lead incrementally to a better higher ed landscape. However, over the summer I co-authored a longer article on the foundations of higher ed policy with Luke Herrine, Legal Coordinator of the Debt Collective. Herrine does both scholarly and advocacy work. In a project organizing for-profit college students to obtain debt discharges, he saw some of the worst bureaucratic failures of the current DOE.

The same concerns I’ve expressed about health policy also dog education policy. Extreme complexity and baroque targeting of aid make it hard to sustain political support. Just as private insurers have done as much to undermine as to implement the ACA, the servicers at the core of DOE’s student loan management have serially failed the students they are supposed to help.
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The Phantom Industrial Policy of the Beltway’s Favorite Health Cost Cutters

A few weeks ago, I spoke on artificial intelligence in health care at the AI Now Conference. I focused on the distinction between substitutive automation (which replaces human labor with software or robots) and complementary automation (which deploys technology to assist, accelerate, or improve humans’ work). I developed three cases where complementary automation ought to be preferred: where it produces better outcomes; in sensitive areas like targeting persons for mental health interventions; and to improve data gathering. Law and policy (ranging from licensure rules to reimbursement regs) could help assure that the health care sector pursued complementary automation where appropriate, rather than chasing the well-hyped narrative of robot doctors and nurses.

The pushback was predictable. Even if complementary automation is better now, shouldn’t our policy reward firms that try to eliminate ever more labor costs? Doesn’t *everyone* agree that the US spends too much on health care–and isn’t technology the best way of reducing that spending? Let me try to address each of these views, boiling down some perspectives from a longer, academic article.

A Policy at War with Itself

There is a troubling tension at the heart of US labor policy on health care and automation. Numerous high-level officials express grave concerns about the “rise of the robots,” since software is taking over more jobs once done by humans. They also tend to lament growth in health care jobs as a problem. In an economy where automation is pervasive, one would think they would be thankful for new positions at hospitals, nursing homes, and EHR vendors. But they remain conflicted, anxious about maintaining some arbitrary cap on health spending.

Politico reporter Dan Diamond encapsulated this conflict in his recent article, “Obamacare: The Secret Jobs Program”–and he leaves no uncertainty about which side he thinks is right:
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Scholarship and Mid-Career Self-Assessments: A Brief Reflection on Simkovic’s What Can We Learn from Credit Markets?

Chris J. Walker has written a very helpful series of posts for young professors on “how to become a voice in one’s field.” The last addressed one of the hardest issues: “Am I Asking the Right Questions?” Academic freedom at a professional school comes with serious responsibilities: to choose field(s), to apply methodology well, and to try to establish the importance of one’s findings among one’s peers and (increasingly) among educated publics, as an engaged academic. Both Walker and Michael Rich offer wise perspectives on the dilemmas that inevitably come up during thoughtful reflection on these responsibilities, focusing on a process of discernment.

I also think that we can learn a great deal from the content of successful scholars’ inquiry. Usually, researchers only undertake this type of self-reflection when applying for jobs and preparing research agendas (a mostly private process), or at the end of a career (when a long list of accomplishments may seem too daunting to be relatable to younger peers). But winners of the ALI Young Scholars Medal appear to get invited to give a public talk on their work at an earlier stage of inquiry. Mike Simkovic (whose work I’ve previously praised here) gave such an address in May.

The talk is focused on the questions that led Simkovic to research credit markets. His work helped explain some puzzling aspects of personal finance–for example, why harsh restrictions on bankruptcy imposed in the mid-2000s did not lead to a cheapening of credit. His findings are revealing: consolidation in the credit card industry, as well as confusing contractual terms, helped dominant firms keep the resulting profits, rather than compete them away. As of 2016, even The Economist has caught up to this challenge to laissez-faire orthodoxy–but at the time it was made, complacent assumptions about market efficiency were dominant.

From that inquiry, Simkovic describes a chain of puzzles that led him to challenge widely held preconceptions in corporate, education finance, and tax law. It’s an engaging documentation of a particularly fruitful and insightful trajectory in inquiry.

I recently proposed a paper to the MLA’s annual conference entitled “Beyond the False Certainties of Impact Factors, Altmetrics, and Download Counts: Qualitative & Narrative Accounts of Scholarship.” It arose out of my dissatisfaction with the metricization of accomplishment. As citation counts proliferate, accumulating the ersatz currency of reputational quantifications threatens to overwhelm the real purpose of research–just as financialization has all too often undermined the productive functions of the economy.

Traditional modes of assessment (including tenure letters and festschrift tributes) are an alternative form of evaluation. And an essay like Simkovic’s is an example of a type of self-evaluation that should become more popular among scholars at certain career milestones (like tenure, appointment to full professor or senior lecturer, and, say, every 5 or 10 years thenceforward.) We need better, more narrative, mid-career assessments of the depth and breadth of scholarly contributions. Such qualitative modes of evaluation can complement the quantification-driven metrics now ascendant in the academy.

(R)evolution in Law & Economics

book-calabresiIt is a real pleasure to read Guido Calabresi’s The Future of Law and Economics almost 20 years after taking his torts class. Calabresi always struck me as a warm and inspiring presence at Yale. He’s attained eminence as a scholar, teacher, and public servant. There is much to learn from and celebrate in his work. I’ll start with his latest book’s major contributions, and then go on to raise some questions about just what future(s) might be in store for law & economics.

Bentham’s Shadow

Jeremy Bentham casts a long shadow over the legal academy. As Fred Schauer helpfully recounts, Bentham was extraordinarily suspicious of the complexity of law, and wanted it “to be understood by ordinary people without the intervention of lawyers and the interpretation of judges.” Bentham’s utilitarian legacy also stalks the profession of law. Following the lead of cost-benefit analysts, administrators may decide that legal regularity should shrink in importance as a value in comparison with quantified estimates of, say, consumer welfare. As another former Yale dean observed, the reduction of difficult conflicts to purely economic (or philosophical) questions threatens to undermine the autonomy of law as a field.

Calabresi advances this discussion with his crystalline distinction between “Economic Analysis of Law” and “Law & Economics.” I will quote at length here, since this distinction is central to the book:

What I call the Economic Analysis of Law uses economic theory to analyze the legal world. . . . In its most aggressive and reformist mode, having looked at the world from the standpoint of economic theory, if it finds that the legal world does not fit, it proclaims that world to be “irrational.” And this, of course, is exactly what Bentham did when he tested laws and behavior on the basis of utilitarianism and, in his most aggressive moments, dismissed what did not fit as nonsense. . . .

What I call Law and Economics instead begins with an agnostic acceptance of the world as it is, as the lawyer describes it to be. It then looks to whether economic theory can explain that world, that reality. And if it cannot, rather than automatically dismissing that world as irrational, it asks two questions.

The first is, are the legal scholars who are describing the legal reality looking at the world as it really is? Or is there something in their way of seeing the world that has led them to mischaracterize that reality? . . . . If . . . even a more comprehensive view of legal reality discloses rules and practices that economic theory cannot explain, Law and Economics asks a second question. Can economic theory be amplified, can it be made broader or more subtle . . . so that it can explain why the real world of law is at it is?

For Calabresi, behavioral economics is a great example of the kind of “bilateral relationship between economic theory and the world as it is” that he calls Law and Economics, because it has expanded economic theory to account for humans’ predictable irrationalities, and for some higher principles of altruism and fair play.

Calabresi’s chapter on non-profit institutions is a particularly strong vindication of the “Law and Economics” (as opposed to “Economic Analysis of Law”) perspective.  For market enthusiasts, the lack of profit motive at universities and hospitals is the key to understanding all that ails them. But from a more cosmopolitan perspective, one could just as easily conclude that the excess marketization of US systems of health and education (relative to, say, a European benchmark) is the better explanation.

Nevertheless, we can still expect plenty of government and corporate agitation to promote the profit motive in these sectors, however bad its results may be. Ugo Mattei (in a 2006 essay on Calabresi’s work) helps explain why:

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Beatles in the Ether or Streaming

By now many may know that The Beatles catalog (or most of it) is available for streaming on the major services. I happen to love The Beatles and easily recommend Cirque du Soleil’s Love in Las Vegas. But the streaming option presents some questions to which I have not seen answers. First, did the services offer anything extra or special to get the rights (I can’t recall the state of streaming license law as far as flat rate or baseline rate to stream if the rights are granted)? Second, will the rights holders (I can’t recall where those have ended up) track the money from streaming versus selling the tracks and albums? If they do what will they find? Work on P2P music sharing and its effect on music and a study on the effect of free options for film may shed light on the future for Beatles revenues. The film study offered:

Together our results suggest that creative artists can use product differentiation and market segmentation strategies to compete with freely available copies of their content. Specifically, the post-broadcast increase in DVD sales suggests that giving away content in one channel can stimulate sales in a paid channel if the free content is sufficiently differentiated from its paid counterpart. Likewise, our finding that the presence of pirated content does not cannibalize sales for the movies in our sample suggests that if free and paid products appeal to separate customer segments, the presence of free products need not harm paid sales.

If music works in a way similar to film, The Beatles rights holders may expand their pie, not reduce it.

Either way I am happy to enjoy the streaming options while they last.

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Politics of Process-Tricky Stuff

The walls between commercial and political products, processes, and speech continue to collapse. Douglas Kysar’s Preferences for Processes: The Process/Product Distinction and the Regulation of Consumer Choice, calls out that “[g]lobalization . . . has enhanced the flow of information, not merely goods, and information regarding processes increasingly is finding its way down-stream” such that “consumer preferences may be heavily influenced by information regarding the manner in which goods are produced.” (118 Harv. L. Rev. 525, 529, 641 (2004)). A recent decision by the EU highlights the tension.

According to the Economist, the EU has rules that will mean that goods made in West Bank will no longer be labeled as “Produce of Israel” but “Produce of the West Bank (Israeli settlement)”. As I have argued in Speech, Citizenry, and the Market “What we buy, what we use, how we make, and how we use have moved beyond pure, personal cost evaluations. Today the idea that purchasing choices are ‘purely private concerns’ is less clear and often inaccurate.” I think this point holds for both sides of this decision. The EU claims that the rule is “to ensure consumers are not misinformed;” not discriminate against Israel. Israel disagrees. According to the Economist at least one wine maker in the West Bank said “This will probably only make [his wines] more popular.” And “He is already planning a line of Christmas gift-boxes with additional settlement products, which he believes will be a hit in evangelical communities in America.” Is the rule increasing information or it is enabling discrimination? The answer is both views seem correct. Insofar as there is better information about where a product is made, people may choose to buy or not to buy based on politics. Thus the EU is providing more information (though may be not clearing up “misinformation”), and yes, some may not stock or buy goods made in the West Bank and in that sense discriminate.

In short, the EU rule creates the possibility for feedback from the market and that feedback can mean a range of things. As Kysar predicted, consumers “may well come to view such preferences as their most appropriate mechanism for influencing the policies and conditions of a globalized world.” If the rule influences the market, as I put the point about corporate speech, “Consumers are voting for policy through the market.” That said, if as the Economist indicated “Israel’s Economics Ministry reckons that it could cause no more than $50m-worth of damage to Israeli producers a year, out of some $300m exported from the settlements (and some $18.9 billion that Israel exports to Europe,” then it seems the gesture is trying to send a signal beyond just letting the market signal processes it cares about. As I said, the walls between commercial and political continue to collapse; maybe they were never that separate.

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Upcoming Symposium on Law & Econ

I’m pleased to announce that CoOp will be hosting an online symposium during the first week of February on Guido Calabrese’s new book entitled The Future of Law Economics:  Essays in Reform and Recollection.  Participants will include: Ian Ayres, Lee Fennell, Carol Rose, Arden Rowell, Ken Abraham, and Dan Cole. Should be fun.

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Centralizers: Uber vs the Others (Lyft, Didi Kuaidi, Ola, and GrabTaxi)

Uber is looking to raise more than $2 billion; Lyft, Didi Kuaidi, Ola, and GrabTaxi have formed a global alliance to counter Uber. Where or where is the disruptive scrappy tech savior? Answer: It existed briefly and the next phase is with us. In The New Steam: On Digitization, Decentralization, and Disruption I argued that [T]his era of disruption and decentralization will likely pass and new winners, who will look much like firms of old, will emerge, if they have not already.” I was building on the ideas Gerard Magliocca and I explored in our work on 3D printing. Although some technologies have helped decentralize production and distribution, to think that centralized players would all go away or new ones not emerge is a mistake. I was focused on safety, stability, liability and insights from Douglass North.

As I said in the paper:

Douglass North captures a paradox that goes with transaction costs. Greater specialization, division of labor, and a large market increase transaction costs, because the shift to impersonal transactions demands higher costs to: 1) measure the valuable dimensions of a good or service; 2) protect individual property rights; 3) enforce agreements; and 4) integrate the dispersed knowledge of society.26 Standardized weights and measures, effective laws and enforcement, and institutions and organizations that integrate knowledge emerge, but the “dramatic increase in the overall costs of transacting” is “more than offset by dramatic decreases in production costs.” Digitization forces us to revisit these issues.

Uber’s success and the response of the other players raises another point. Although I think that society will favor centralized players in the long run, because that allows for some regulation; the process of centralization may also occur for simpler reasons. When one big player starts to break away from the pack, the rest may co-operate or consolidate to keep pace. There may be one winer or a handful. Either way, as Seattle now allows Uber and Lyft drivers to unionize and calls for more regulation continue, the former disruptors will be seen as the new centralized power and treated as such. The reasons offered for that treatment are what draw my interest and where legal theory has and will see some action.