Tuesday, July 29, 2014
I have recently read an interesting paper, which was just published in Psych Science called In Search of Homo Economicus. The paper takes an individual difference approach to the concept of rationality and demonstrates consistent behavioral differences among people across various behavioral and personality measures. While the classical approach to the study of rationality is aimed at finding the situations in which people deviate from what rational choice approach would predict, the described paper attempts to identify who are the people who deviate from rationality and who are the people who follow the prediction of rational choice.
The researchers have used a combination of dictator and prisoner dilemma games, as well as various personality, intelligence and demographic measures on a sample of Tokyo residents (which is not argued to be representative). They found that 7% of their sampled participants are Homo Economicus (HE) who have kept all of their endowment in the dictator game, and that 8.7% of the participants are quasi–Homo economicus (qHE) who gave away only 15% of their endowment. Moreover, the HE participants were found to be smarter, more individualistic and more likely to engage in long-term investments.
As suggested in some of my previous posts, this approach holds a very promising direction for the law and behavioral science movement. One example, is the idea of differential regulation regarding the usage of monetary measures vs. non-monetary measures [see for example my paper on Intrinsic and Extrinsic Compliance Motivations]. One can speculate that in some legal contexts we might expect a higher ratio of HE and qHE (e.g. corporate taxation) who might then receive a different treatment relative to regulatory contexts with lower ratio of HE and qHE (e.g. Transportation law, Labor law). Naturally, these last examples require further empirical investigation and are not part of the described paper, however, they definitely show potential advantages of an individual difference approach to bounded rationality, an approach which is definitely not common within the legal scholarship.
At the same time, a word of caution is required when moving from theory to policy in the context of individual difference. In contrast to what is sometimes being understood, even very stable differences between people do not mean that these types of people care only about money while others don’t care about it at all. We need to recognize that the differences are of magnitude and hence the policy requirements that followed are important but still relatively limited.
I was about to write a comment in response to Eric Rasmusen’s post below, but then I thought I’d make use of my privilege as a blog editor to reply through a post of my own.
I think framing the issue in Halbig as a question of intent is to view the dispute far too narrowly. As I noted in my prior post on these cases, I accepted a position at the Treasury Department after the passage of the Obamacare legislation, and I worked on the Regulations interpreting the tax provisions of Obamacare as a primary focus of my position.
Importantly, I did not hear anyone even mention the possibility that the Obamacare legislation could be read to deny tax credits through the federal Exchanges until months after I arrived at Treasury. I surrendered my Treasury computer and e-mails when my position ended, so I cannot look up the exact date. But I remember vividly when I first heard this argument. A senior political appointee I worked with had heard Michael Cannon present his argument on a radio show and asked me and others working on these issues what we thought of the argument.
Prior to that time, I had been reading the detailed language of the Obamacare statute on a daily basis while working on the early draft of Regulations for the premium tax credits (IRC Sec. 36B), the individual mandate (IRC Sec. 5000A), the employer mandate (IRC Sec. 4980H), and other related provisions. I had been discussing these provisions with literally hundreds of other lawyers and government officials, many of whom were also poring over the statutory text of these provisions of Obamacare. After first hearing Cannon’s argument , I asked the other lawyers and officials I had been working with whether they had heard anything like this argument before. None had. Everyone I spoke with was completely surprised upon first hearing Cannon’s argument.
How is this possible? If you read the language of Sec. 36B out of context, Cannon’s argument seems obvious. Many commentators agree with Cannon that his reading of the text is plainly correct. And yet this reading never occurred to me or to numerous other lawyers or government officials before Cannon began arguing for his reading on radio and (later) in print.
I’ve explained elsewhere how the plain language of Sec. 1311 defines “Exchanges established by a State” as a defined term-of-art. I thus consider Cannon’s argument to be based on a sloppy reading of the statutory language, because he ignores that the statute defines the terms he wants to read in a manner inconsistent with the statutory definitions.
But let’s imagine that I’m wrong. What if I’m misreading the statutory text? Numerous commentators have noted that we lack decisive contemporary legislative history. Should we thus despair of determining the “intent” of Congress?
Perhaps so. However, whatever the intent of Congress, no one claims that the States who chose to go with the federal Exchange infrastructure thought that they would be denying their citizens the premium tax credits by doing so. This argument simply did not factor into the state-level debates about whether to establish Exchanges on their own or to instead rely on the federal government Exchanges.
We thus return to the fact that Cannon’s argument (which formed the basis of the challenges in Halbig and related cases) was developed after the fact. Not only was this argument developed after the passage of the Obamacare legislation. But, more problematically, this argument was developed after important real-world actors made major decisions with far-reaching implications based on reading the language of the statute in a manner contrary to Cannon’s arguments. When the first states were deciding whether to establish their own Exchanges or instead to rely on the federal government, no one was arguing that this decision might have implications for whether the states’ citizens would be eligible for premium tax credits.
This “course of performance” evidence should easily trump any half-hearted attempts to directly divine legislative intent.
Monday, July 28, 2014
A lot of the discussion of the Halbig Obamacare case about federal vs. state insurance exchanges is about the intent of Congress. The problem is that people are thinking of different things when they think “intent”. Many people think it’s ridiculous to say that Congress intended to use subsidies to induce states to establish insurance exchanges, because if you had asked a random member of the Democratic majority whether he’d thought of that, he’d say it never entered his mind. I completely agree with that. But it’s not relevant, because it’s also true that if you asked the member about virtually *any* detail of the bill, he’d say it never entered his mind. We know what he voted for, but even that we know better than he did! He didn’t read it, after all. As Tyler Cowen said,
Did Congress know what it was doing in a detailed sense, one way or another? Hard to say, personally I doubt it, and Alex says no. The basic starter hypothesis here is that many of them knew this was a health care bill, it would extend coverage, it had a mandate, it had some subsidies, it had a Medicaid expansion, it had some complicated cost control, it was approved by leading Democratic Party experts, it met some CBO standards, and beyond that — if you pull out those who were confused on the details of the exchanges and the subsidies do you still have majority support? I doubt it. Most absurd of all are the tweets asking the critics to show Congress intended no federal-level subsidies.
How, then, can we allow a court ever to void the plain words of a statute? The answer, which I think is actually standard rational basis jurisprudence, is that if there is no conceivable rational reason why a bill would be written to say X instead of Y, then the court should read it to say Y, or strike it down entirely on the grounds that the bill has no rational and legitimate meaning. That’s the principle in Halbig: a law denying subsidies to people in states that don’t have exchanges is not so crazy that a court should strike it down as having no rational basis.
This is related to one of the most interesting issues involving intent, and one we in law-and-economics might analyze more closely: whose intent counts? Congress is not an individual. We obviously don’t mean the intent of all Congressmen, since many voted against the bill. Even those that did vote for it, though, had different intentions. Here are three aspects of diversity of intent.
1. If we use the average of the legislators’ intents, we will probably end up with an intent that no real congressmen had. The average of 1,2, and 6 is 3. If we use the median, that could be far from the average or the mode: the median of 1,2,3,20, 20 is 3. The mode is similarly problematic. Whose intent do we use?
2. Often, modifications are made to bills to satisfy not the bulk of the majority, but the marginal voter. It seems this happened with the state exchanges: they were stuck in to get the votes of some senator whose name I forget. In that case, since it was put in to please that one legislator, maybe his intent should be the only one that counts. The intent of the others was to let him have his way on state exchanges, whatever that was, so as to get the rest of the bill passed. Of course, this is further complicated if he outfoxed them, and they would never have agreed to his conditional subsidy idea if they’d realized its implications. Should the courts protect legislators against poor bargains?
3. Very often, a legislator will vote as his leader recommends, trusting that the leader will do what is best (or fearing punishment for nonconformity). In that case, should the relevant intent be that of the party leader--- Nancy Pelosi, say?
4. In the case of Obamacare, nobody was happy with the final bill. The Democrats who voted for it in the Senate were sure that the House would have a different version and the two would be reconciled in conference committee, at which time undesired parts of the bill would be taken out. The Democrats who voted for it in the House only voted for it because the Republicans had won the Massachusetts Senate election and they couldn’t send the bill back to the Senate for a new vote, so it was take-it-or-leave-it. Thus, it’s quite possible that *none* of the majority that voted for the bill actually wanted conditional subsidies to be in it, yet even if they’d realized the bill had that problem, they would have voted for it anyway.
Note that these group intent problems make the use of intent in statutory interpretation a lot tougher than in contract interpretation. Contracts at least only have two people involved.
These problems don’t mean that resort to legislative history and intent is always a bad idea. If courts have to fill a gap in a statute, we’d want them to think about how the legislature would have filled it, I think, rather than just thinking about what fits in best with the philosophy of the rest of the plain words. But in gap-filling, rational-basis arguments can't be used; that kind of argument can only create a gap, not fill one.
Friday, July 25, 2014
Following up on my previous post on law reviews, and inspired by some posts at the Business Law Prof Blog here and here, I thought I’d share a modest proposal for how we might move toward what I would consider to be a better world.
I agree that there are significant advantages to the law review submissions process, as compared to full peer review, in terms of the speediness of reviewing submissions, preventing the dominance of the field by entrenched senior scholars, and otherwise allowing a wider variety of voices to be heard. In particular, for legal scholarship aimed at influencing appellate courts (read: law clerks), student editors are probably better at selecting the most potentially influential pieces than would be faculty.
That said, I think it ridiculous that student law reviews as they are currently structured dominate the legal publishing world. This is probably more of a problem for some subfields than others. I think the dominance and current structure of student law reviews is seriously holding back the development of legal scholarship in my field of taxation.
Unfortunately, most of the existing peer-reviewed legal journals have significant restrictions in terms of length and style. I think there is value to the law review style and I’d love to see more peer-reviewed journals accept traditional law review style publications. My ideal would be for there to be a bunch of journals like the Tax Law Review, except made fully peer reviewed.
How might we evolve toward a system with more peer-review publishing opportunities for traditional-style legal scholarship?
I strongly urge student editors at law reviews to start by creating one peer-reviewed issue a year. The remaining issues of the journals could continue with their existing submission processes, thereby maintaining the advantages of the current system. But journals could accept submissions for their peer-reviewed issue off cycle. I imagine that many scholars would then try to submit to one or more peer-reviewed journals prior to the start of the submission cycles, with the intent of submitting through the general non-peer-reviewed process come February or August, for pieces rejected through the peer-reviewed process.
Note that student editors could retain control and primary decision making authority over what pieces are accepted for the peer-reviewed issues. As I understand it, all that peer-review requires is that the editors solicit formal reviews of scholarship before making a decision and that the decision be based partially on these formal reviews.
A number of top law reviews already solicit faculty reviews of scholarship. I have been asked to review pieces on many occasions. But this is generally done informally and inconsistently. I understand peer-review as requiring a consistent and formal process for soliciting review letters and incorporating these letters into the process of deciding what pieces to accept.
Particularly for secondary journals, I expect that making one issue a year peer-reviewed would greatly improve the quality of the submissions received and published. Currently, I send most of my best work to the Tax Law Review for exclusive submission. I would happily submit to peer-reviewed issues of secondary journals focusing on tax or business law if such existed.
If any student editors read this, I would be very happy to work with you to help in establishing a peer-reviewed issue of your journal. Please don’t hesitate to contact me if you might be interested.
Myself, I don’t think blind submission would have much effect on changing outcomes. But I do think that all journals should adopt blind submission in order to increase the appearance of fairness. I’ve served as a referee for a number of peer-reviewed journals that rely on blind submission. I think in essentially every case that I either knew who the author(s) of the papers I was reviewing were or that I quickly found out who the author(s) were as an unavoidable result of the few minutes of background research I typically do to assess the uniqueness of the contributions of the pieces I review. Tax is a small enough field, and we generally post papers in publically available fora and/or present papers at conferences well before submitting for publication.
I favor blind review not because I think it will significantly change outcomes, but rather because I think the small costs of blind review are greatly exceeded by increasing the appearance of fairness. That law reviews ask for authors’ CVs is just plain distasteful, in my consideration. It is undoubtedly difficult to evaluate scholarship on its quality, factoring out the biases generated by knowledge about the author. But journal editors should at least try. I’ve heard many stories that suggest that law review editors sometimes make decisions based on letterhead, CVs, and author reputation. Yuck!
Wednesday, July 23, 2014
Much of the media and blog discussion has framed the legal debate as being between (a) focusing on the literal wording of the statute, and (b) looking to broader contextual or purpovist forms of statutory interpretation. There is some truth to this. But I think the view that the literal wording of the statute supports the majority’s decision in Halbig is wrong.
Central to Obamacare are new Exchanges designed to offer insurance plans to individuals and small businesses, and premium tax credits offered to make these insurance plans affordable for low and moderate income Americans. Section 36B of the Affordable Care Act (“Obamacare” or the “ACA”) states that to be eligible for the premium tax credits, a taxpayer must enroll in a qualified health plan offered “through an Exchange established by the State under 1311.” The majority decision in Halbig thus holds that premium tax credits are only to be available through Exchanges established by a state, not Exchanges established by the federal government.
Based solely on the language above, it is easy to see why so many have thought that the narrow language of the statute supports the position reached by the majority in Halbig. However, it is crucial to understand that the term “Exchange” is a defined term in the statute. Section 1311(d)(1) requires that “[a]n Exchange shall be a governmental agency or nonprofit agency that is established by a State.”
The majority in Halbig discuss the language of Section 1311(d)(1) at length and provide numerous arguments for why they decide that this language should not be determinative. I think the majority makes a reasonable case, but I ultimately find their reasoning unconvincing. I discussed some of the reasons why in an Essay co-authored with Darien Shanske, available here.
I lack the time today to comprehensively review the majority’s arguments in the Halbig decision. But a few words of context might be helpful.
From 2010 through 2012, I took a leave from Berkeley Law to accept a position at the Treasury Department’s Office of Tax Policy. As part of that position, I worked on the regulations challenged in the Halbig and King cases. I started at Treasury after the ACA legislation had passed Congress and had been signed by the President, but I worked closely with many people who were involved in drafting the legislation.
When I arrived in Washington, most everyone was referring to the Exchanges as “state-run” Exchanges, or “state Exchanges”, or “state-established” Exchanges. Even when discussing the possibility that the federal government might need to step in to establish Exchanges on behalf of some of the states, most everyone still referred to the Exchanges as “state run or established” Exchanges. To this day, my files related to the Exchanges have the header “state-run Exchanges.” In other words, it was simply understood by everyone I met who was involved in drafting the legislation, that the phrases “state-run Exchanges” or “state-established Exchanges” were terms of art meant to refer to all Exchanges. Importantly, the structure and language of the statute is consistent with these forms of expression.
Far more can be (and has been) said on these issues. Again, I refer interested readers to my prior essay on this topic. I may write more as I have time. For now, I’ll end by emphasizing again the language of Section 1311(d)(1) setting forth the requirement that “[a]n Exchange shall be a governmental agency or nonprofit agency that is established by a State.” The provision instructing the federal government to establish an “Exchange” when states fail to do so reads: “the Secretary shall (directly or through agreement with a no-tfor-profit entity) establish and operate such Exchange within the State and the Secretary shall take such actions as are necessary to implement such other requirements.”
Ultimately, the textual question in these cases comes down to whether the language of Section 1311(d)(1) should govern or only the language of 36B. Arguments have been made for prioritizing the implications of each of these. But, in my view, any discussion that mentions only the language of 36B and not the language of 1311 is missing the heart of the issue.
Tuesday, July 22, 2014
I just posted on the DC Circuit’s 2-1 decision against the Government in Halbig, the Obamacare case about whether “an Exchange established by the State under section 1311” means an exchange established by the state, so that in locations where there is no state exchange, the individual mandate and subsidy and employer mandate won’t apply.
Nobody really could believe that the language of the statute is ambiguous, so though the Administration does help lighten our day with some humorous arguments to that effect, their main arguments are about intent. Congress could not possibly have meant to incorporate provisions in a statute that would thwart the intent of those who voted for it! Well, that’s humorous too, since it’s not uncommon for politicians to shoot themselves in the foot. Indeed, given Obama’s current ratings in the polls, one might argue that the Courts should reverse the result of the 2012 election; voters couldn’t possibly have meant to re-elect Obama, and no doubt a majority of them would now admit they were mistaken. But let’s move to where law-and-economics can be helpful to the DC Circuit when it takes up Halbig en banc, as everyone thinks it will unless the case goes straight to the Supreme Court.
In his dissent, Judge Edwards says:
[N]o legitimate method of statutory interpretation ascribes to Congress the aim of tearing down the very thing it attempted to construct…
Appellants in this litigation have invented a narrative to explain why Congress would want health insurance markets to fail in States that did not elect to create their own Exchanges. Congress, they assert, made the subsidies conditional in order to incentivize the States to create their own exchanges…
The simple truth is that Appellants’ incentive story is a fiction, a post hoc narrative concocted to provide a colorable explanation for the otherwise risible notion that Congress would have wanted insurance markets to collapse in States that elected not to create their own Exchanges….
The majority thinks it unremarkable that Congress would condemn insurance markets in States with federally-created Exchanges to an adverse-selection death spiral.
A little bit of game theory goes a long way. Here’s why Congress would indeed condemn insurance markets in States with federally-created Exchanges to an adverse-selection death spiral. It has to do with payoffs on and off the equilibrium path of a game. Or, since I’m not trying to be pedantic, with why people make threats.
Let’s use a story. Suppose Harry Reid has a choice between passing a bill saying “No state exchange, no subsidy” or a bill saying “Fed exchange OK for subsidy.” He would prefer the states pay for the exchanges, since even a small saving like that will help reduce the cost to the federal government. He’s got a majority in the Senate, so he can pass whichever bill he wants. His payoff is 10, let us say, if the federal government has to raise taxes to pay for the exchanges, and 12 if the states pay. For the states, let’s call the player “Indiana”, since it’s one of the conservative states from which Reid expects trouble. Indiana will get a payoff of 0 if the federal government pays for the exchanges, and -1 if it has to pay for the exchanges itself, Reid thinks. Reid calculates, though, that under the “No state exchange, no subsidy” bill, Indiana’s payoff will be -3, because it will lose the subsidies and that’s more important than the expense of the exchanges. To be sure, Reid’s payoff would be -20 under that bill if Indiana didn’t establish an exchange, but that would be for Indiana to shoot itself in the foot, which politicians never do. Thus, Harry Reid passes the No State Exchange No Subsidy bill, Indiana establishes an exchange, and Harry gets his maximum possible payoff of 12. Harry has refuted Judge Edwards: he has purposely passed a bill that would cause chaos in Indiana and wreck Reid’s own policy--- but only if Indiana makes a mistake.
Unfortunately, it was Harry who made the mistake. Indiana’s payoff from establishing the state exchange is -4, not -1. Harry has forgotten about the issue of principle: the Indiana conservative statehouse hates government health care even more than they love subsidies. And so Harry ends up with a payoff of -20.
The game could be expanded realistically. At the cost of some complexity, we could formally model Harry’s uncertainty over whether Indiana’s payoff was -1 or -4, making this into “a game of incomplete information.” That would just be a technical cleanup, though--- the game would behave much the same. Or, we could also add another player: the Supreme Court. Suppose Harry thinks there is some chance Indiana’s payoff is actually -4, so his No Subsidy bill would backfire. He also knows, however, that some judges, like Judge Edwards, would like to come to his rescue. Thus, we might add a move by the Supreme Court at the end of Refuse to Establish State Exchange. The Supreme Court could keep the law as is, or change it to “Fed Exchange OK for Subsidy”--- in which case Reid is back to his +10 payoff. Or, even better, the Supreme Court might choose the move, “Force Indiana to set up an exchange no matter what the statute says,” and Harry could get his +12 payoff no matter how Indiana moved. I’ll leave that game as an exercise, or maybe for an amicus brief (anybody interested in writing one on this point?)
This idea is familiar in law and economics in the form of the idea of “penalty defaults” in contract law. Professors Ayres and Gertner pointed out in 1989 that one way a judge could respond to sloppy contracts in which the parties made some clause ambiguous to try to get the courts to go to the trouble to sort it out would be for the court to pick a purposely harmful default clause to use if the parties tried that tactic. For example, if it was unclear which party would receive interest on an escrow account in a merger deal, the courts might want to say in advance that all the interest goes to the Taliban, so everybody loses. That would make them take more care with their drafting. A very recent example in another context is the case of the conservative professor who sued the U. of Iowa law school for political bias in hiring. The jury deadlocked and was dismissed, but somehow (I forget details) the judge called them back two minutes later and they were in agreement. The appellate court reluctantly said there’d have to be another trial, because though in this case it was satisfied that the jurors hadn’t had time to confer with outsiders and a new trial would be something of a waste, it was better to have a bright line rule.
Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 YALE L.J. 87 (1989).
Ian Ayres, Ya-Huh: There Are and Should Be Penalty Defaults, 33 FLA. ST. U. L. REV. 589, 597 (2006).
The DC Circuit just decided 2-1 against the Government in Halbig, the Obamacare case about whether “an Exchange established by the State under section 1311” means an exchange established by the state or means any exchange operating in that state, even if it was established by the Federal government because the State refuses to establish one. This matters because the statute says that the government can only impose the individual mandate and give subsidies after such an exchange is established. Otherwise, it can set up a Federal exchange, but can’t herd people into it by either force or subsidies.
The Government makes the argument that the phrase “established by the State” is ambiguous, so the Government can ignore it. It’s fine to look beyond one particular use of a term to see if the term is used in a contradictory way elsewhere in a statute, but the idea that the phrase is ambiguous just looks sillier and sillier the more the Government brings up other parts of the statute. The Government’s main argument, though, is that the ACA was drafted stupidly, and if the Courts don’t fix it up, it will collapse financially. Since the statute as written is such a stupid way to structure health insurance, the Government argues, Congress couldn’t possibly have intended to enact such a law, and the Courts should rewrite the law to achieve what Congress had in mind.
1. The difference between conservative and liberal judges is summed up by what the conservative majority says at the end of its opinion and the liberal minority says at the start of its dissent:
[A]lthough our decision has major consequences, our role is quite limited: deciding whether the IRS Rule is a permissible reading of the ACA.
This case is about Appellants’ not-so-veiled attempt to gut the Patient Protection and Affordable Care Act (“ACA”).
That is: is the role of the court process to make sure the government follows the law, or is it to defend good policies and defeat bad policies?
2. In another context, the Administration has explicitly adopted the position that the individual mandate is unnecessary for the purposes of the rest of Obamacare, completely undercutting its position in Halbig that the mandate is crucial. That is with respect to the Northern Marianas. Shouldn’t the Administration be estopped from switching its legal position?
Yet the supposedly unthinkable scenario the government and dissent describe—one in which insurers in states with federal Exchanges remain subject to the community rating and guaranteed issue requirements but lack a broad base of healthy customers to stabilize prices and avoid adverse selection—is exactly what the ACA enacts in such federal territories as the Northern Mariana Islands, where the Act imposes guaranteed issue and community rating requirements without an individual mandate….This combination, predictably, has thrown individual insurance markets in the territories into turmoil. … But HHS has nevertheless refused to exempt the territories from the guaranteed issue and community rating requirements, recognizing that, “[h]owever meritorious” the reasons for doing so might be, “HHS is not authorized to choose which provisions of the [ACA] might apply to the territories.”… The CLASS Act and the provisions applicable to the territories attest that Congress twice did exactly what the government and the dissent insist it never would: introduce significant adverse selection risk to insurance markets.
The dissent gives a feeble explanation for why the Administration is NOT estopped from arguing that the mandate is essential on the mainland but inessential in the islands—basically, that Congress doesn’t care about messing up the lives of people in unimportant places like the Northern Marianas:
Congress’ intentional omissions in these peripheral insurance markets of a tool it knew to be important to preventing adverse selection merely indicates that Congress had a substantially higher tolerance for the risk of adverse selection in such markets vis-à-vis the core markets where it did impose the individual mandate.
3. I hadn’t heard of this argument before. Apparently the ACA in 42 U.S.C. § 18043(a) actually makes a precise distinction in saying that certain federal exchanges---territorial ones--- would be treated as state exchanges for the purposes of the Act.
[T]he government offers no textual basis—in sections 1311 and 1321 or elsewhere—for concluding that a federally established Exchange is, in fact or legal fiction, established by a state. Moreover, as we have noted, that absence is especially glaring given that the ACA elsewhere provides that a federal territory that establishes an Exchange “shall be treated as a State,” 42 U.S.C. § 18043(a), clearly demonstrating that Congress knew how to deem a non-state entity to be a “State.” Thus, at least in light of sections 1311 and 1321, the meaning of section 36B appears plain: a federal Exchange is not an “Exchange established by the State.”
4. If we accept the argument that the Courts should rewrite stupid laws, I’d like the Court to go even further and strike down Obamacare completely, because Congress couldn’t have intended to mess up the country that way. Government health care is a rotten idea, so how could Congress have decided to enact it? In fact, the Courts should strike down all of the dozens--- hundreds, in fact--- of federal laws that are self-defeating and make the country worse off. Or, more mildly, stick to Obamacare and do what is normal judicial practice when one part of a law is unconstitutional but essential to a law’s purpose (and the law lacks a severability clause): strike down the entire law and tell Congress to start over.
5. I’ll write a separate post about penalty clauses, a game theory idea important to Halbig.
Monday, July 21, 2014
We want to take a moment here to recognize a man who was our classmate, our colleague, our blogfather, and of course our good friend, Dan Markel. He taught us not just how to be scholars, but how to be a community of scholars.
Look, words are not enough. Let's all think about building some more lasting tribute. His family, his students, his institution all I'm sure will want to recognize the things he contributed to them. Speaking just for myself, I'd like to see us, as scholars, make something that reflects and continues what he did for us. Too soon now to say exactly what. But I'm sure many others must feel the same. Let's all give it some thought.
Friday, July 18, 2014
Thomas Piketty's Capital in the Twenty-First Century has me reviewing some old law and economics articles. Piketty is concerned with wealth inequality, and believes that it will lead to dysfunctional democracies, and perhaps a return to the near-medieval inequalities of say, France's Belle Epoque period. He drops some dark hints of the violent dystopias that lie ahead if wealth gaps continue to increase.
Piketty is right to be concerned. In societies with vastly inequalities, those with very little will have very little opportunity costs of violence, with the result that they will have a comparative advantage in violence. The rich can of course purchase security with their vast wealth, conferring upon them an absolute advantage in violence, but that will not be enough to prevent those with little left to lose from engaging in violence. Even though the poor could lose more in a violent clash, in a sense the violence will be more costly to the rich than the poor, which is exactly what the rich fear.
Tuesday, July 15, 2014
Should the IRS warn taxpayers that they are in danger of audit, in the hope of getting them to file accurate amended returns? Here’s how I’d model the situation:
0. The government chooses a policy of an audit probability A(Uhat), where Uhat is the taxpayer’s estimated underpayment. The taxpayers only observe the average audit probability over all incomes and over the taxpayers that are warned in step 4 below and do or do not file amended returns.
1. The taxpayer earns income Y with probability f(Y), unobserved by the IRS.
2. The taxpayer reports income Yrep and income characteristics (salary, tips, mortgage payments, charitable contributions) X1…X9.
3. The government estimates the taxpayer underpayment Uhat = (Y-Yrep) based on Yrep and X1…X9.
4. The government gives the taxpayer a warning if Uhat<Ubar, choosing Ubar, and tells the taxpayer he may file an amended return.
5. The taxpayer files an amended return and reports income Y2 (which can be the same as Yrep, if he doesn’t really file an amended return).
6. The government audits or not. If it audits, it pays P and discovers Y. If the government finds underpayment, it imposes fine F(U), where U = Y2- Y.
That isn’t completely formulated yet, but you’ll get the idea. I don’t know how it would solve out. Anyone who wants to write it up, go ahead. It might make a good PhD exam question for an applied game theory course.
Monday, July 14, 2014
Is law An Applied Field?
Two weeks ago I have participated in a conference on individual differences in law beautifully organized by Avishalom Tor. The conference brought together many leading psychologists, economists and legal scholars to discuss the ability of the law to recognize individual differences. Whether the law is able to treat people differently is indeed a highly complex issue and during the two days of the conference, many related questions were raised and discussed. The focus of this post is related to an observation I had on the discourse between legal scholars and non-legal scholars at the conference. For the most part, the ability of the law to adopt individual differences was analyzed based on issues such as enforcement costs or the effect of differential regulation on behavior. This approach is not without a basis. Many of the academic papers in law reviews have a “mandatory” legal implications section. This is even truer, when it comes to empirical legal studies papers.
The discussion of whether law is a practical or a theoretical field, is of course quite old within the legal scholarship. However, the new point I wish to draw attention to here, is regarding the contribution of empirical legal studies to the perception of it as a policy oriented field. If this observation is accurate, it is quite paradoxical given the fact that empirical legal studies, could have been perceived as a way to merge legal scholarship better into other social sciences such as psychology or sociology, due to its shared methodology. However, instead when law is trying to have its own empirical perspective, it is being pushed to focus on improving legal policy rather than to contribute to the richness of the theoretical discourse in law, even if this could not translate to legal policy making.
This dilemma carries some relevancy for some interesting questions. For example, to what extent, should the research conducted in ELS, be externally valid (see my last post). In that regard, is there a justification for lab experimentation, which could not be translated immediately to policy making? Is there a point in doing empirical legal research, when variation in context is highly predictive?
Going back to the individual difference approach that triggered this discussion, we need to understand whether the law should adapt itself to the research on individual differences, only based on how complicated, it will be to change its enforcement practices or whether it should also consider theoretical justifications when accounting the fact that people are indeed different.
Friday, July 11, 2014
Thursday, July 3, 2014
How would you construct a political regime to avoid the problem of judges issuing rulings to promote their personal political agendas, while at the same time insulating them somewhat from pressure by the other branches of government? James Madison thought he had the answer, as he explains in Federalist 81:
“It may in the last place be observed, that the supposed danger of Judiciary encroachments on the Legislative authority, which has been upon many occasions reiterated, is in reality a phantom. Particular misconstructions and contraventions of the will of the Legislature, may now and then happen; but they can never be so extensive as to amount to an inconvenience, or in any sensible degree to affect the order of the political system. This may be inferred with certainty, from the general nature of the Judicial power; from the objects to which it relates; from the manner in which it is exercised; from its comparative weakness; and from its total incapacity to support its usurpations by force. And the inference is greatly fortified by the consideration of the important constitutional check which the power of instituting impeachments in one part of the Legislative body, and of determining upon them in the other, would give to that body upon the members of the Judicial department. This is alone a complete security. There never can be danger that the Judges, by a series of deliberate usurpations on the authority of the Legislature, would hazard the united resentment of the body intrusted with it, while this body was possessed of the means of punishing their presumption, by degrading them from their stations. While this ought to remove all apprehensions on the subject, it affords, at the same time, a cogent argument for constituting the Senate a Court for the Trial of Impeachments.” .
Was Madison correct in thinking that the danger of judicial enroachments was a phantom? If not, why not?
How many judges nowadays would dare impose their personal views of justice in place of what the Constitution and statutes actually say? Do we avoid this by selecting judges who say they will follow the law no matter how much they disagree with it or how unfair they think it is?
Monday, June 30, 2014
I ran into a spot of awkwardness recently that is a good example of the difficulty of changing policies at a university. I'm on a faculty committee that decides who should get various teaching awards based on nominations by department chairmen. I looked up the class grade averages for the nominees. That's public info at IU (you can look them up too---just google), along with, very interestingly, the average GPA of the students in the class going in. [Research note: someone should do something with that data.]
Anyway, I thought we should rank nominees low if they commonly did one of three things in their grading: 1. Violated school policy and gave more than 15% A's in MBA classes (or more than 50% A's and A-s), 2. Violated school policy and gave more than 10% A's in 100-student-plus undergraduate courses, or 3. Had a class average of more than 3.5 in an undergraduate course (that is, roughly speaking, more than half the class got A's or A-s).
This would knock out about 2/3 of the nominees, it turned out. Unfortunately, it appeared that about half of my committee also grades that high. The chairman had decided to have us all turn in our rankings by email and then he'd tote up the results, and he was reluctant to have a meeting. So I boldly sent out an email laying out my arguments. The response was frosty. Two arguments were that members had already made up their rankings and didn't want to do any more work, and that grading wasn't relevant. I replied again, and we'll see what will happen.
What can we learn? Probably this is just another illustration of the power of incentives and the oddly principled behavior of economists. What is most rewarded in teaching is high student evaluations. Departments get extra faculty lines if they have bigger enrollments. High grades facilitate both things. In addition, of course, the course atmosphere is more pleasant for the instructor, especially just after midterms, if most of the students get A's. Why, then is my own department somewhat resistant to grade inflation? I'll bring up the subject and see. We do get brighter-than b-school average students majoring in bus econ, so scaring off worse students is one thing going the other way. But what we probably should really do is bimodalize our grading so that reasonably good students get A-, A, or A+, with A+ being a large category in itself, and lazy or dim students, of whom there are now relatively few get grades from F to C+.
Sunday, June 29, 2014
Last week, we have hosted in Israel a conference on Behavioral Legal Studies dealing with Cognition, Motivation and Moral Judgment. The conference was organized by Hebrew U and Bar –Ilan U and involved leading international psychology and legal scholars.
An interesting discussion that emerged in the conference, due to the mixed audience of psychologists and legal scholars was related to the interaction between psychology, behavioral economics and empirical legal studies.
This tension was demonstrated through the presentation of my longtime collaborator Doron Teichman on Anchoring legal standards. (Feldman, Schurr & Teichman, 2014).
Anchoring in short is usually defined as ”a cognitive bias that describes the common human tendency to rely too heavily on the first piece of information offered when making decision” (Shrotriya & Pandey, 2013).
The classical studies in psychology (e.g. Tversky & Kahneman, 1974) which examined anchoring usually relied on the effect of some random 4 digits number or the number that emerged from a wheel of fortune on people’s judgment. In contrast, the studies done by legal scholars, including us, are usually related to damages asked by lawyers or numbers that emerged from a different legal source.
The mostly justified criticism of this argument is that legal usage of anchoring is not a pure anchoring effect because the original stimuli is not completely orthogonal to the target, meaning the stimuli is not clean and might carry other types of rational influence. Clearly, the number argued for by a lawyer, even in an adversarial system, does have some meaning regarding the size of the claim, relative to the wheel of fortune example in the original psychological experiment.
That being said, we ask ourselves whether empirical legal studies need to compete with psychology on the same term. If we take the example of the wheel of fortune vs. the number coming up from a legal suit, clearly the first one carries much greater internal validity – any kind of effect in the first case could not be interpreted as nothing but a cognitive bias. Admittedly, this is not the case when we look at the influence in judgment following a legal claim.
However if we see empirical legal studies as an academic community which tends to understand how cognitive biases might affect the legal system, clearly, the likelihood that someone would use a wheel of fortune to try and affect a judgment is highly unlikely.
Hence, nn my view, empirical legal studies should recognize that trade-offs do exist and that measuring pure effects is not the only measure of good science.
Friday, June 27, 2014
With the SEC still sorta thinking about requiring U.S. public firms to disclose their political expenditures, a newly posted paper by Saumya Prabhat and David Primo (of the Indian School of Business in Hyderabad and University of Rochester, respectively) should be getting some play. Prabhat and Primo claim to find evidence that the U.K.’s enactment of similar disclosure rules in 2000 was bad for shareholders of politically active firms, and they argue this is a reason to oppose possible U.S. reforms. I think they’ve got at least one really big methodological problem, and even taking their results at face value they’re just misinterpreting them.
Let’s start with their findings. Prabhat & Primo report that news of the expected reforms increased stock-price volatility for politically-active firms (16) and that a portfolio of active firms performed worse after news broke than a portfolio of other firms (18). For some reason they emphasize the first much more, even though it’s kind of a no-brainer that there will be stock price volatility for regulated firms when the market gets information about a new regulation affecting them.
I’ll focus on the second finding. First, causation or correlation? As P&P themselves note, many firms lobby as a fallback when things go badly, or to close off entry by threatening new competitors. Others lobby to head off government investigations or regulatory actions. Is it surprising, then, that the firms that were lobbying just before the period P&P observe performed worse than other firms? Probably not: lobbying is itself a red flag that there’s a rocky road ahead. Or, at a minimum, it is a signal to the market that managers know there is a potential pothole looming.
Since this is a post about the value (or not) of disclosure, let me say that again. News about firm lobbying could provide information to the market about managers’ private knowledge of looming challenges for the firm. And nothing that P&P report is inconsistent with that story.
Here’s another way in which their results show that disclosure was good for shareholders. Let’s say that most lobbying by individual firms is firm-specific rent-seeking. (Firms may also sometimes be willing lobby for collective goods, but often that is done through trade associations). From a diversified shareholder perspective, all firm-specific rent-seeking is destructive. The lobbying is moving money from Firm A to Firm B. I’m invested in both. So the two firms are wasting resources to fight over which of my pockets my money is in. (Contrast this with money spent on, say, R&D, which does just shift pockets to some extent but also contributes to growth). And maybe I’m also a consumer. They’re trying to shut out new competitors, keeping the prices I pay high.
Disclosures allow me, the diversified investor, to identify which firms are wasting my investment in this way. You can understand why undiversified managers would prefer to enrich themselves at the expense of competitors, but this is exactly the kind of self-serving behavior that investors want to curtail. So, long story short, if disclosure is actually reducing firm value, that could simply represent the fact that shareholders are unwilling to invest in managerial self-dealing.
Tuesday, June 24, 2014
Via Steve Sailer we find from Nato Secretary- General Rasmussen (no relation---one of those ss'ers) in the Daily Mail article below that Vladimir Putin and Gazprom believe in strong environmental regulation. A good example for class.
PUBLISHED: 17:14 EST, 19 June 2014 | UPDATED: 03:31 EST, 20 June 2014
Putin: Fracking makes ‘black stuff come out of the tap’
Russian agents are secretly working with environmental campaigners to halt fracking operations in the UK and the rest of Europe, the head of Nato warned yesterday.
Vladimir Putin’s government has ‘engaged actively’ with green groups and protesters in a sophisticated operation aimed at maintaining Europe’s reliance on energy exports from Moscow, said Nato Secretary-General Anders Fogh Rasmussen.
He said the Russians had mounted a highly developed disinformation campaign to undermine attempts to exploit alternative energy sources such as shale gas.
Moves to start fracking in the UK have been disrupted following a sustained campaign by environmentalists that has created fears about its impact.
Speaking at the Chatham House foreign affairs think-tank in London, Mr Rasmussen said: ‘I have met allies who can report that Russia, as part of their sophisticated information and disinformation operations, engaged actively with so-called non-governmental organisations – environmental organisations working against shale gas – to maintain European dependence on imported Russian gas.’ …
Mr Putin has repeatedly voiced concerns about fracking, once telling a global economic conference that ‘black stuff comes out of the tap’.
And Russia’s state-owned gas giant Gazprom, the world’s biggest gas producer, says fracking has ‘significant environmental risks’ including water contamination....
Mr Rasmussen’s comments drew an angry response from Greenpeace, which saw a group of activists threatened with up to 15 years in jail last year after they staged an anti-drilling protest on a Russian off-shore oil platform.
A Greenpeace spokesman said: ‘The idea we’re puppets of Putin is so preposterous that you have to wonder what they’re smoking over at Nato HQ.
‘Mr Rasmussen should spend less time dreaming up conspiracy theories and more time on the facts.
‘Fracked gas will probably cost more than Russian imports. There’s little chance fracking will generate more than a small fraction of Europe’s gas needs and it won’t even do that for at least ten years.’...
Most readers know that the U.S. has the most extensive nonprofit sector in the world. It also, not surprisingly, has among the most generous of subsidies for private contributions to charitable organizations. Congress periodically gets interested in fiddling with “tax expenditures” that support charity, although the most recent proposals were swatted aside with a “blah, blah, blah, blah” from the House Speaker. Still, for folks like me who study charitable organizations, the rationale for and design of those subsidies are a big deal.
One standard story for why government supports charity is that it’s a cost-effective way to produce public goods. If one dollar of government support can trigger more than a dollar of private spending, all else equal, we should invest that dollar. Studies do find that the tax deduction for contributions to charity is cost-effective in this way, returning somewhere in the range of $1.10 to $1.40 of contributions for each dollar of government revenue foregone.
A worry about these studies is that they are based on donors’ tax returns, not information from the recipient firms. What if changing tax subsidies also influences how charitable organizations behave? These behavioral responses could either improve or undermine the net efficacy of government supports. For example, how much does an average firm spend in fundraising to bring in a dollar of donations?
It turns out, as I report in a new draft, that the answer itself depends on the government’s policy.
Monday, June 23, 2014
Last week, the Canadian government approved the construction of the Northern Gateway pipeline that is intended to ship crude oil produced from the oil sands of Northern Alberta to Kitimat, a small port city on the West Coast in British Columbia. The approval comes with 209 conditions, an unusually high number for the legally parsimonious Canadians, but this is a very controversial project. The Canadian Prime Minister, Stephen Harper is from Alberta, and is desperate to make sure Canadian oil sands crude has an export outlet. Harper is many things, but he is not stupid; he wants to sell oil before greenhouse gas regulations start to gain currency worldwide and the demand for crude starts to ebb. An outlet to the West, and a shipping lane to China, a country that is likely to be one of the last to embrace fossil fuel curtailment, would be a great alternative to Keystone XL, or even the patched-together pipeline route to the East.
However, Northern Gateway faces intense opposition from the 70 some-odd distinct aboriginal groups in the pipeline's path. The 209 conditions are not likely to be a big deal as far as the federal government is involved, as long as Stephen Harper is Prime Minister. The question is whether the Canadian Supreme Court will uphold aboriginal challenges to the pipeline that are almost certain to arise from at least some of the groups. What must be very alarming, from the perspective of the pipeline proponent, Enbridge, is that aboriginal groups in British Columbia have already accepted a natural gas pipeline that will pass through much of the same territory. In particular, the Haisla Nation, which claims territorial rights around Kitimat, accepts the gas pipeline but vigorously opposed the crude oil pipeline. This suggests that aboriginal groups such as the Haisla are fine with natural gas, but not oil. It will be hard to characterize that legally as unreasonable, as gas pipelines pose less local environment risk than oil pipelines. I have always found it hard to guess at what the Canadian Supreme Court will do, but past cases such as Haida v. BC Ministry of Forests signal that the Court will expect some pretty sincere efforts to accommodate aboriginal claims and interests.
There is a larger economic question for the whole country of Canada. In the past, large parts of the Canadian economy have centered upon timber, fish, and minerals, and Canada's possession of the second-largest reserve of oil in the world seems to consign Canada to staying that way for a while. I do not believe that crude imposes a traditional resource curse on Canadian exports -- there are many other political factors that render Canada uncompetitive other than a strong petroloonie -- but I do worry that the political economy of Canada will tether Canada's education and commerce infrastructure towards resource extraction. A 2012 paper by Elena Suslova and Natalya Volchikova suggests that a second kind of resource curse is the diversion of public monies towards resource development rather than the development of a more diverse base of human capital, like say, high technology. The pipeline really could create some path-dependencies for the Canadian economy.