August 27, 2011
Bloomberg recently reported on "The Slow Disappearance of the American Working Man":
The portion of men holding a job … fell to 63.5 percent in July … the lowest numbers [since] 1948…. Men who do have jobs are getting paid less. After accounting for inflation, median wages for men between 30 and 50 dropped 27 percent—to $33,000 a year— from 1969 to 2009 …. What is going on here? For one thing, women, who have made up a majority of college students for three decades and now account for 57 percent, are adapting better to a data-driven economy that values education and collaborative skills more than muscle…. The economic downturn exacerbated forces that have long been undermining men in the workplace …. Corporations have cut costs by moving manufacturing jobs, routine computer programming, and even simple legal work out of the country. The production jobs that remain are increasingly mechanized and demand higher skills. Technology and efforts to reduce the number of layers within corporations are leaving fewer middle-management jobs…. While unemployment is an ordeal for anyone, it still appears to be more traumatic for men. Men without jobs are more likely to commit crimes and go to prison. They are less likely to wed, more likely to divorce, and more likely to father a child out of wedlock.
August 26, 2011
In Law and Almost Everywhere Else, Reduced Regulation Is Not Deregulation
The Wall Street Journal recently ran an op-ed: Time to Deregulate the Practice of Law: Every other industry that has been deregulated, from trucking to telephones, has lowered prices without sacrificing quality. An interesting premise, and there are certainly some valid points. But it jumps out at me that there is an overall sense that all regulation is "bad." Plus, I see this as a fundamental overstatement of what "deregulation" is.
Trucking and telephones are not unregulated; the industries are certainly much less regulated than they were, but that is different than being unregulated. Reducing regulations often will increase competition by increasing market participants, and that can be a good thing. But this is true for every regulated industry.
If we reduced regulations on doctors and surgeons, there would be more and cheaper option for their services, but it's not at all clear it would a make health care better. The WSJ article states that "the medical field created physician's assistants to deal with less serious cases, [and] the legal profession can delegate less serious tasks. I agree. There is a difference between delegating diagnosis of a rash to a physician's assistant and delegating open-heart surgery. But physician's assistants still have a base level of education and expertise, in a way that unregulated lawyers would not, as I understand the proposal. Plus, it's not as though the era of physician's assistant has stemmed the tide of rising health care costs or dramatically increased access to medical care.
If we really hate legislation, we could eliminate usury laws, which would increase access to captial. We could remove speed limits, stop signs and stoplights, thus reducing regulations on the flow of traffic. We could elimate child labor laws, increasing the available workforce. And we could eliminate the FDA and kitchen inspections, thus making food cheaper and more accessible. All of these things have a downside, of course, but we could do it.
Regualtions are often overblown, intrusive, and unnecessarily restrictive, and that is a problem. And modifying and reducing some of the regualtions in my examples above may very well lead to a more efficient market and greater access to the relevant goods and services. But we need to keep in mind that there is often value in some regulation so that we can have some sense of safety and reliability, which also has value.
I'm open to reducing some regulations on lawyers, and I agree that the market for legal services could be improved in a number of ways. But "deregulation" is not the answer. Rethinking and reducing regulation may well be.
Three Myths of Capitalism
Greg Mankiw has posted on his blog a short video by Jeff Miron, an economist at Harvard, addressing three myths of capitalism. The myths that Miron addresses are (1) the notion that being pro-capitalism is the same as being pro-business; (2) the claim that capitalism generates an “unfair” distribution of income; and (3) the claim that capitalism was responsible for the recent financial crisis.
It’s short and well worth watching.
August 25, 2011
This is news?
From The Guardian: Ratings agencies suffer 'conflict of interest', says former Moody's boss
August 24, 2011
Crowdfunding and Federal Securities Law
My paper on crowdfunding and the federal securities laws is finally available on SSRN at this link. Here’s the abstract:
Crowdfunding—the use of the Internet to raise money through small contributions from a large number of investors—may cause a revolution in small-business financing. Through crowdfunding, smaller entrepreneurs, who traditionally have had great difficulty obtaining capital, have access to anyone in the world with a computer, Internet access, and spare cash to invest. Crowdfunding sites such as Kiva, Kickstarter, and IndieGoGo have proliferated and the amount of money raised through crowdfunding has grown to billions of dollars in just a few years.
Crowdfunding poses two issues under federal securities law. First, some, but not all, crowdfunding involves selling securities, triggering the registration requirements of the Securities Act of 1933. Registration is prohibitively expensive for the small offerings that crowdfunding facilitates, and none of the current exemptions from registration fit the crowdfunding model. Second, the web sites that facilitate crowdfunding may be treated as brokers or investment advisers under the ambiguous standards applied by the SEC.
I consider the costs and benefits of crowdfunding and propose an exemption that would free crowdfunding from the regulatory requirements, but not the antifraud provisions, of the federal securities laws. Securities offerings of $250,000 or less would be exempted if (1) each investor invests no more than $250 or $500 a year and (2) the offering is made on an Internet crowdfunding site that meets the exemption’s requirements. Exempted offerings would be required to include a funding target and could not close until that target was met. Until then, investors would be free to withdraw.
To qualify for the exemption, crowdfunding sites must (1) be open to the general public; (2) provide public communication portals for investors and potential investors; (3) require investors to fulfill a simple education requirement before participating; (4) prohibit certain conflicts of interest; (5) not offer investment advice or recommendations; and (6) notify the SEC that they are hosting crowdfunding offerings. Sites that meet these requirements would not be treated as brokers or investment advisers.
I would welcome any comments (or offers of publication) you might have.
Gooses, Ganders, and the Many Facets of Monetary Policy
Bloomberg reports that the Fed gave $1.2 trillion in "secret loans" to the largest banks in the United States and around the world. Bloomberg provides a cool liquidity chart here, that allows comparisons of the borrowers and their peak amounts borrowed.
I share frustration that, during the crisis, massive loans were available to the largest borrowers, while small businesses and individuals who posed reasonable credit risks were shut out of the loan market. And just because the Fed's massive loan program appears to have served its purpose without any significant harm to taxpayers, it doesn't mean that it was a risk-free endeavor. Still, I'm of a mixed mind as to whether its a good idea to ensure the Fed can't make such loans.
Adding to the current sense of foreboding, at least for me, is the fact that the Federal Reserve, which rode to the rescue last time, is legally constrained by provisions of Dodd-Frank legislation little recognized outside the world of regulators and financial techies. Back in 2007, the Fed could invent programs to bail out solvent but illiquid institutions. It could also turn investment banks like Goldman Sachs and Morgan Stanley (MS) into bank holding companies with access to unlimited Fed funding -- and even infuse cash into nonbank basket case AIG (AIG) directly and indirectly to forestall an uncontrolled collapse, which could have made the Lehman Brothers disaster look like a mere rounding error.
Sometimes, banks, businesses, and individuals are solvent, but not liquid, and access to credit is the only thing that can keep the banks, businesses, or individuals from going under. We see this at the largest banks, as the Fed program seems to demonstrate, and we see it at the individual consumer level, where there is some indication that restricted access to expensive payday lending can have a negative impact on consumers. (Zinman, 2008)
At a minimum, this is another instance where it is not clear to me whether the large government bailout (or bailout-like) program is the problem, though I remain skeptical of the bailout programs. What is clear to me is that the implementation of the program for only the largest and most powerful among us again creates an inequity that warrants questioning. As the Bloomberg report explains: "$1.2 trillion of public money [is] about the same amount U.S. homeowners currently owe on 6.5 million delinquent and foreclosed mortgages."
There is clearly some interest in shutting down the Fed's (and government's) ability to make large loans and expenditures. Maybe that's right, but I happen to like the idea that the government can choose to help in the face of disasters, whether they are financial or natural disasters. (Note that I maintain my view that government does a terrible job of planning for and mitgating such diasasters, but that's a different matter.) I just want government to make good choices and to recognize that's what's good for the very wealthy goose, may also be good for the very modest gander.
August 22, 2011
The SEC's Destruction of Documents
I’m back from an extended vacation and ready to begin blogging again. (By the way, if you’re a backpacker and haven’t experienced Wyoming's Wind River range, it’s definitely worth it. Just avoid the killer hike known as Porcupine Pass.)
Regular readers of this blog know I’m not a big fan of the SEC, but I think the recent brouhaha about the SEC’s destruction of documents is overblown. For those of you who haven’t seen the stories, the allegation is that the SEC routinely destroyed documents related to preliminary inquiries that did not turn into formal investigations. You can read the stories here, here, and here.
As J. Robert Brown, Jr. explains, the problem is that a government agency may not destroy documents except pursuant to a disposition schedule approved by the National Archives and Record Administration. Since the NARA had not approved a disposition schedule for these documents, their destruction violated the law.
The SEC’s destruction of these documents was careless and stupid, and I agree with Steve Bainbridge’s claim that this is another instance of the SEC itself being unable to comply with the type of rules it expects those it regulates to follow. But I see nothing venal in the SEC’s actions. The New York Times tries to tie it to the revolving door at the SEC and former staffers representing clients before the SEC. I think the suggestion that this document destruction facilitated the ability of SEC investigators to “do undetected favors for former colleagues and their clients by quashing investigations” is just silly.
Allan Sloan on the S&P Downgrade
From Allan Sloan at Fortune comes: American Idiots: How Washington is destroying the economy. This is an interesting review/rant, and some parts are especially compelling. It's worth the read. Sloan explains:
Now, a few facts. The S&P downgrade is not -- as some hate-filled knuckleheads inside the Beltway and in the hinterlands keep repeating -- from fear that the U.S. is "broke" or lacks the financial ability to meet its obligations. S&P's primary worry is that the U.S. may not summon up the political will to pay its debts.
. . . .
The root of our current problem is that there are no grownups in positions of serious power in Washington. I've never felt this way before -- and I've written business stories for more than 40 years, and about national finances for more than 20. Look, I certainly don't worship Washington institutions. I called former Federal Reserve chairman Alan Greenspan the "Wizard of Oz" when he was known as the "Maestro." I've said for more than a decade that the Social Security trust fund had no economic value and would be useless when the system's cash flow turned negative -- which I also predicted. But despite being an irreverent professional skeptic, I never felt there was a total absence of adult supervision in our nation's capital. Now I do.
I fear he's right. The question is, what are we going to do about it?
August 21, 2011
Smith on Corporate Governance
D. Gordon Smith has The Role of Shareholders in the Modern American Corporation posted on SSRN with the following abstract:
This chapter from the forthcoming Research Handbook on the Economics of Corporate Law (Claire Hill & Brett McDonnell, eds.) examines the role of shareholders in the modern American public corporation. The chapter starts with the Berle and Means (1932) problem of the separation of ownership and control, but notes that the rise of institutional investors has changed the situation. Shareholders have three main sets of rights through which they can protect themselves: the right to vote, to sell, and to sue. Each of these rights has evolved significantly in recent years. The chapter describes some of the changes and debates, and also briefly addresses the question of the proper beneficiaries of corporate decisions.
-- Eric C. Chaffee
Rock on Corporate Governance
Edward B. Rock has posted Shareholder Eugenics in the Public Corporation on SSRN with the following abstract:
In a world of active, empowered shareholders, the match between shareholders and public corporations can potentially affect firm value. This article examines the extent to which publicly held corporations can shape their shareholder base. Two sorts of approaches are available: direct/recruitment strategies; and shaping or socialization strategies. Direct/recruitment strategies through which “good” shareholders are attracted to the firm include: going public; targeted placement of shares; traditional investor relations; the exploitation of clientele effects; and de-recruitment. “Shaping” or “socialization” strategies in which shareholders of a “bad” or unknown type are transformed into shareholders of the “good” type include: choice of domicile; choice of stock exchange; the new “strategic” investor relations; and capital structure. For each type of strategy, I consider the extent to which corporate and securities law facilitates or interferes with the strategy, as well as the ways in which it controls abuse. In paying close attention to the relationship between shareholder base and firms, this article attempts to merge investor relations, very broadly construed, with corporate governance.
-- Eric C. Chaffee
A Brief Google-Motorola Reader
Unless you've been sleeping under a rock, you know Google recently agreed to buy Motorola for $12.5 billion (a price that apparenlty translates to a 63% premium). You can read an overview of the deal here.
Steven Davidoff examines the large breakup fee here. He notes that the large fee actually signals both investors and regulators that Google is very confident of antitrust approval--and will likely fight hard to ensure it gets it.
While Motorola likely appreciated the breakup fee, it's probably not as thrilled with the restrictions it now faces in conducting its business till the deal is done. Davidoff also comments on that here.
The deal is ultimately about patents, and Bloomberg argues it serves to illuminate how much our current patent system is in need of reform. Write the editors: The current system "rewards lawyers and investment bankers far more than inventors or consumers."
Finally, some are noting that the deal could ultimately prove to be a disaster for Google, noting the conflicts it creates between Google and a number of its partners, as well as the fact that "hardware manufacturing is a crappy, low-margin commodity business." Google shares appear to be down over 10% since the announcement of the deal, compared to a roughly 6% decline for the S&P 500.