Monday, September 29, 2014
If you, reader, run a L&E colloquium/seminar/whatnot at your institution, let us know. We'd like to share schedules of upcoming speakers and the titles of presented papers (along with links, if authors opt in) with our readership. You can e-mail links to me at brian ~dot~ galle ~at~ bc ~dot~ edu.
Thursday, September 25, 2014
Saul Levmore has posted on SSRN his review of Thomas Piketty's Capital in the Twenty-first Century. In it, he raises a question that others have raised: is there a problem with inequality, per se? We exchanged emails, and I raised this point: severe enough inequality creates a sitution in which the poor have a comparative advantage in violence. Even if the rich are able, with their resources, able to buy enough security to obtain a sizable absolute advantage in violence, the poor may have such low opportunity costs of violence that they may freely engage in it. Professor Levmore replied that if we are afraid of violent revolution, then we are in a pretty dark place and we are not quite there yet. Agreed. But we may not need to be at a point of violent revolution in order for the threat of inequality-induced violence to impose costs. Is our American gun fetishism part of that? If so, that is pretty costly. Everybody talks about Ferguson as if it were about race, only. Is it? Maybe. But is some of it a fear of the other, that other being quite possibly poor enough to entertain rational thoughts of violence? I dunno. But possibly.
Wednesday, September 24, 2014
Today I'll talk to my regulation students about the importance of having the attitude that you can improve the situation around you. I thought of that because I was reassigned to Harvard Hall 102, which is a nice room, without the construction noise of Littauer, the lack of blackboard, or then noisy air conditioner, but which is a lecture room with the old-fashioned forward facing rigid chairs with fold-up writing boards. I use lots of discussion. The seating situation is crucial for discussion. There were, however, a number of loose chairs in the room, and, if truth be told, in the classroom next door (which used to have a nice little table too). So I had the students rearrange those to make a semicircle. It was not ideal, but it worked OK, and I even had the pleasure of a self-moving discussion igniting about Uber and a new service, just banned in Boston, for people to sell information about empty parking spots, which coujld keep going while I fixed a comptuer problem.
So I will make the point to them that there are two kinds of people: those who take their situation as given, and those who look for improvements they can make. Actually, there is a third kind, I guess: those who look for improvements and complain that nobody is making them. I have some recollection that psychologists can test for this personality attribute and it's correlated with success even conditioning on IQ and such things. I think there might be a good aphorism on that, but I can't remember it, so I'll make some up:
"You'll succeed if you don't about what is, but what might be because you're there."
"Don't think about what is, but what might be."
"Don't think about what's wrong, but about how you can fix it."
Where's the economics in this? Well, it pertains to any activity, so it pertains to economics research too. To do good research, you need to (1) See what's wrong, and (2) Try to fix it, and (3) Stop and write it up. (Just as the good is the enemy of the perfect, so the perfect is the enemy of the good.) Thus we get to the Verlaine quote that is the title of this blog post, a quote which can be loosely translated as:
"An economics paper is never finished, only published."
P.S. I thought of a couple of variants on the Verlaine quote, nicely pointed because of how he treated his wife and how he doesn't seem (from Wikipedia) to have written much in the last decade of his short life:
"Un poèt n'est jamais fini, seulement abandonné."
"La femme d'un poèt n'est jamais la finalée, seulement abandonnée."
Monday, September 22, 2014
Last time I suggested that the arguments in favor of very low rates of spending by philanthropic organizations are not particularly great. But law encourages and promotes low spending rates in a few ways. For example, most states require nonprofit boards to respect donor wishes in perpetuity, and to manage the organization's funds in ways that ensure the organization's perpetual life. Federal law gives donors a tax break at the time they donate, regardless of when the organization actually spends their money. Foundations have to spend 5% of their investment assets each year, but administrative and overhead costs (including, say, a fancy office for the executive) count towards the floor; other tax rules encourage living donors to park money in the firm for long periods.
These rules seem contrary to some fiscal basics. A dollar today is worth more than the promise of a dollar in the indefinite future, unless the marginal utility of that dollar will be way higher to us later (and we expect that if we had it now we'd fritter it away). Since (as Eric pointed out in his comment) we expect that if anything future folks will be even wealthier than us, granting tax deductions now for philanthropy in the 22d Century seems a bad deal. But admittedly measuring the exact extent to which this is a bad deal -- deciding on what we might call the "social discount factor" is tricky.
So let me focus on two other costs of waiting that are more tangible. One is the deadweight loss of giving. Sometimes, donors want to do the best thing for the world, but they don't know exactly how to get there. Even purely redistributive charities often deliver in-kind benefits instead of cash; they must think they know better what to do with the money than their beneficiaries. And they might! But sometimes they might not, as the folks at Give Directly argue. As time passes between when the donor writes down the permissible uses of her funds and their ultimate disposition, these gaps will get wider and wider.
Similarly, time worsens the problem of the separation of the donor's "ownership" of the contributed funds and managers' control over them. You think shareholders have it tough? They can go to a board meeting. What about the decades-dead philanthropist? I guess she...what? Sends her poltergeist to rattle the chandelier at the slacking trustees?
Nonprofit law, like other forms of organizational law, is designed to mitigate these problems. But the law is far from perfect, and long waiting times between donations and expenditures put it under great strain.
Wednesday, September 17, 2014
We’ve seen that U.S. foundations spend a very small portion of their investment assets each year. As it turns out, that amount is actually less than net-of-inflation appreciation and new contributions, so the philanthropic sector is constantly growing. Both state and federal law, if anything, tend to discourage larger payout amounts. And most contributions to foundations are heavily tax subsidized. Should current law be doing more to encourage faster use of philanthropic funds? Although I think there are strong arguments on both sides, my present inclination is to answer “yes.”
Let’s start today with arguments in favor of charitable savings --- that is, arguments against faster-payout rules.
Monday, September 15, 2014
The New York Times ran an article Sunday about how Germany is rapidly expanding its wind energy capacity, and realizing unexpectedly lower costs because of economies of scale never before seen in any non-hydro renewable energy industry. Large demand from Germany, Denmark, and a hanful of climate-conscious countries has helped induce the entry into the sector from Chinese businesses, which of course benefit from government support.
The question that hangs over environmentally-focused groups is why don't American utilities seem to be so intransigently wedded to fossil generation? This article seemed to point to the unease of utility executives. My theory is that in addition to a lot of physical capital in the industry, there is a lot of human capital tied up on fossil fuel extraction, transmission, and combustion. Economist and former Enron official John Palmisano used to talk about how he went around the country talking to utility executives, and made what he thought was a pretty strong case for switching to natural gas away from coal. The objection that seemed most heartfelt was that "[Utility Company X] was a company that is the coal-burning business, not the natural gas-burning business. Assuming we could retrofit coal plants to accept natural gas, what would do with all the people that know how to handle coal but not gas?" Add to that the infrastructure demands (gas pipelines, e.g.), it starts to look very difficult to switch from coal to natrual gas, or anything else. If it is that hard to get utility execs to think hard about another fossil alternative, it becomes even harder to think about non-hydro renewable energy sources. But it is not narrow-mindedness per se; it is form of capital that is specific to one way of doing things, and is not easily transferable to another way of doing things. That difficulty may be illusory, but it at least appears to those embedded in the fossil industries as very difficult.
BC is hosting an exciting conference this week on the future of philanthropy. One of our major focuses will be on whether current law has gotten the right balance between current and future spending. For example, should we be doing more to encourage large foundations to pay out their considerable fortunes, rather than hoarding them for the future?
I'll blog a bit more with some of my thoughts on those questions this week.
Let's start today with some background. Descriptively, most foundations pay out a small fraction of earnings; the law imposes penalty taxes on those that pay out less than five percent, but the median firm pays distributes slightly less than that:
What you're looking at are the proportions of private foundation's investment assets distributed annually for charitable purposes. The dashed line is the five percent "minimum payout" encouraged by a federal tax on foundations that distribute below that threshold. The upshot, for me, is that three-quarters of the 80,000 or so private foundations tracked in these data spend less than 6% of their investment assets each year. In other words, their spending plan is massively slanted towards future, rather than current, payouts.
What, if anything, justifies that pattern?
Sunday, September 14, 2014
Professor Amy Sinden at Temple has posted a paper titled Formality and Informality in Cost-Benefit Analysis. This is an important paper that seeks to transcend a debate about cost-benefit analysis that has gotten intellectually (though not politically) stale in recent years. Professor Sinden points out that there are many levels of cost-benefit analysis, formal and informal, precise and imprecise, analyzing many alternatives and few. The mistake that is made according to Professor Sinden, (who is a critic of how CBA is used in environmental law and related fields) is that the case for CBA is often made by appealing to the intuitive usefulness of informal CBAs, while the formal but falsely precise formal CBAs actually bend public policy. I wonder if this is just a variant of the "false formalism" critique of CBA, but even if it is, it deserves some attention because of the nuance with which it treats different CBAs. Here is the abstract:
Tuesday, September 9, 2014
I consider Uber and its competitors to be among the most potentially exciting innovations of the past few years (at least, of the innovations that I know of). In support of this contention, let me offer a couple of personal anecdotes.
First, my wife and I were planning to buy a second car this summer. But we decided to experiment with using Uber instead. So far, this is going so well that we don’t think we will need a second car. This strikes me as potentially huge, at least if a sufficient number of other families find themselves similarly situated. Extrapolating from our experience, its not too hard to imagine a future in which individual ownership of cars becomes rare, with most of us instead relying on services like Uber.
Second, in taking Uber home from work today, my wife asked her Uber driver how much he makes. This is only one unverified anecdote, of course; but the driver reported that he makes approximately $50 an hour when driving in San Francisco and $30 an hour when driving in Oakland. (If you are wondering why any Uber drivers drive in Oakland at all, in light of this disparity, see below). Again, this strikes me as potentially huge.
It costs us about $12 to Uber to our house in the Oakland hills from the UC Berkeley campus, or about $25 to Uber between downtown San Francisco and our house. This is significantly cheaper for us than it would cost to take a traditional taxi.
How then is it possible for Uber drivers to make so much and yet for Uber to remain so affordable for passengers?
The answer comes from high utilization. When we call a taxi, the taxi driver has to get to our house before the driver can start charging us, and then the driver has to get from wherever we are dropped off to the location of another paying customer before the driver can start charging again. In contrast, when we request an Uber, we quickly end up with a driver who just happened to be nearby. Presumably, the Uber driver can make $30 an hour driving in Oakland because the driver can get 2-3 fares equivalent to driving between the Oakland hills and the UC Berkeley campus per hour. My guess is that a traditional taxi driver would be very unlikely to get 2-3 such fares per hour.
And this answers the question of why Uber drivers drive in Oakland at all, rather than just remaining in San Francisco where they can earn more per hour. Presumably, many of the Uber drivers that find themselves near our house when we request an Uber got there by dropping off passengers that were picked up in San Francisco or elsewhere.
Ten years ago, if you had asked me to list the benefits of being truly wealthy, as opposed to merely well off, I might have placed having a personal chauffer near the top of that list. Today, Uber and its competitors offer most of the benefits of having a personal chauffer, but on the cheap.
Saturday, September 6, 2014
Friday, September 5, 2014
As numerous people have written, empirical legal studies are on the rise. More and more scholars define themselves as empirical legal scholars and it seems that this trend is only growing stronger in recent years (See for example, Heise, 2002 & George, 2006).
Many scholars have discussed the relationship between empirical legal studies and more classic approaches such as law and society, law and psychology and law and economics, that all carry some empirical component within them. Regardless of one’s stand in the debate on this issue, it is clear that empirical legal studies are on the rise in top law school in the U.S as well as around the world, as I have previously mentioned, when describing the global movement of empirical legal studies (see my previous blog).
The main question I want to raise in this post (against my own interest, as I definitely consider myself as an empirical legal scholar) is whether at some point could all legal scholars become empirical. To put it in a more realistic context, what is the optimal ratio of empirical legal scholars, in a given faculty or a given community of legal academics (e.g. contract law, tort law, etc).
The obvious objection to such situation is the notion of diversity, where the need in multiple theoretical perspectives is important for a rich discussion among scholars and for exploring conflicting perspective to any legal question. However, one might argue that in contrast to law and economics, empirical legal scholarship doesn’t have to adopt a narrow theoretical standpoint, as for example, many of the scholars who attend the ELS conference come from diverse backgrounds. Moreover, taking a broader approach to ELS, would include for example, scholars who use qualitative methods, would ensure an even broader theoretical perspective. Furthermore, most ELS scholars usually study one or two doctrines and hence the diversity of legal doctrines could be achieved. Even with that, there is naturally a limitation in the empirical research conducted in these different legal doctrines; if too many scholars study law empirically, very few scholars will need to carefully read cases for their research, as the focus would shift to the quantifiable factors in the case.
A second possible objection would be the legal expertise of such legal scholars. Accounting for the fact that people have limited time and energy to read and learn. Almost by definition, a scholar who have to master all the methods of empirical legal research could not dedicate the same amount of effort and time to learn the legal doctrine.
A final objection might be the dominant community of knowledge in such situations. For example, in the area of decision-making, there are a few dozen ELS scholars but several thousand psychologists and economists. Since one might assume that the interest of legal scholarship and other disciplines may not be always aligned, it is possible to speculate that the larger and more established community would be more dominant. Without an established “non-ELS” empirical community in every sub-legal scholarship, it might be hard for ELS to fulfil the needs of the legal community (see my past blog on external validity).
In sum, while on a personal level, I try my best to convince all of my colleagues to become empirical legal scholars, I feel obliged to recognize the existence of a trade-off.
Monday, September 1, 2014
Argentina defaulted on its government debt about 15 years ago. It offered a take-it-or-leave-it writedown to the bondholders, and most of them took it. The others got nothing. Now, the U.S. courts have ruled that the dissenting bondholders are entitled to full repayment, and have enjoined any bank with Argentine government money not to pay out anything unless all are paid equally. This is because of what is called the "pari passu" clause in the bond contract, which I read from Mark Weidemaier's Credit Slips post, " Argentina's (not so) unusual pari passu clause," says:
Saturday, August 30, 2014
Paul Caron posted on the TaxProf Blog a link to the IMF's list of the top 25 economists under the age of 45. Of course, elite institutions and economics departments are heavily represented, but am I the only one to have noticed that seven out of the 25 are French? They include Thomas Piketty, whose book has become a blockbuster (and which I reviewed), and his comrade in arms, Emmanuel Saez (Berkeley). Esther Duflo (MIT), Emmanuel Farhi (Harvard), Xavier Gabaix (NYU), Thomas Philippon (NYU), and Helene Rey (London Business School) complete the list.
What's going on here? Don't they just teach socialism in France?? Are there any OECD countries in greater need of labor reform? Why does a country with just five percent of the population of OECD countries produce seven out of the top 25 young economists? My speculation is that the work of these French economists have taken on increased relevance: poverty and inequality, the causes and effects of the financial crisis, and exhorbitant executive compensation. That, plus they're really good.
Friday, August 29, 2014
There is not a lot of law discussed in Thomas Piketty's book Capital in the Twenty-first Century. Piketty drops a few hints here and there about what laws he thinks likely contributes to widening wealth inequality (the advent of dynastic trusts, the lowering of marginal rates for the highest personal income tax brackets, which contribute to executive "super-salaries"), but his basic policy prescription is a small global wealth tax.
There is something elegant about such a tax, if the international tax haven problem can be solved. But in my review of the book, I suggest that some examination of the legal order is in order. Legal rules and institutions contribute to wealth inequality indirectly. In Piketty's world, wealth inequality increases when the rate of return on private capital is greater than the rate of economic growth, or r > g in his vernacular. My review examines several areas of law in which legal rules and institutions drive up rates of return on private capital (r in Piketty-speak) without doing much to increase overall economic growth. These areas are financial regulation, antitrust law, oil and gas tax policy, electric utilities regulation, and the generic practice of grandfathering. In my view, a rather simplistic faith in trickle-down economics has caused policy-makers to support any policy in which Δg > 0, however speculatively, and if Δr >> 0, well then, God Bless. Of course, Δg very often turns out negative, after all.
Tuesday, August 26, 2014
Professor Solmin at Volokh Conspiracy has a post on how the General Accounting Office has announced that the Obama administration violated federal law when it exchanged five Taliban leaders for the U.S. deserter Private Bowe Bergdahl without giving Congress the 30 days notice required by law. The GAO also said this violates the Anti-Deficiency Act. The GAO report was in response to a request by a number of Republican senators. The Department of Defense lawyers told GAO that Obama’s action was legal under the relevant statute and that the statute is unconstitutional anyway. GAO was asked in 2010 about another Obama use of funds for the Secret Service and found that it violated the Anti-Deficiency Act. The current report says:
Like the Secret Service, DOD obligated funds that were not legally available for obligation because DOD did not satisfy the notification requirements under section 8111. Accordingly, DOD violated the Antideficiency Act. See 31 U.S.C. § 1341(a). If Congress specifically prohibits a particular use of appropriated funds, any obligation for that purpose is in excess of the amount available. B‑321982. Here, DOD obligated at least $988,400 in excess of available appropriations.
So what happens next? ---A qui tam suit!
Political Diversity in Economics in 1960: Stigler, Coase, Goldwater, Buchanan, and the Ford Foundation
Sunday, August 24, 2014
Readers may recall we recently reviewed a draft paper on the effects of political activity on the stock price of British firms. One of the authors, David Primo of U. Rochester, dropped a gracious note to your blogger with news that there’s now an updated version of the paper on-line. The paper accounts for some of my concerns about method (see esp. p. 18), and Prof. Primo notes that resolving my point about selection bias still leaves most of their main results intact. I continue to differ with the authors on the interpretation of their results. But at least now we are closer to having results we agree on before we fight about what they mean.
Thursday, August 21, 2014
I’m posting again on the August IRS final regulations for tax whistleblowers, whose principal author is Melissa A. Jarboe of the Office of theAssociate Chief Counsel (Procedure and Administration). This could be a very boring post, because what I’ll do is compare what I suggested and what was done on several unrelated topics. If you’re interested in whistleblowing, in how little details require regulations because statutes don’t include them, or in how notice-and-comment works, you might like this blogpost.
Relevant links are my previous blog post that used these regulations to illustrate the usefulness of public comment on technical details, my public comment on the proposed regulations, the final regulations, Dean Zerbe’s article arguing that awards should be paid for violation of reporting requirements and on the basis of criminal fines for violation of laws not in the Tax Code, and Erica Brady’s nice blog summaries of (a) the Pro’s and Con’s of the final regulations, and (b) the important new procedures for rejections and appeals. I agree with Erica Brady that these final regulations are an improvement over the proposed regulations and a huge improvement over the status quo. I am heartened by them; the IRS has shown distaste for the whistleblower statute in the past, but these regulations will make it run better rather than worse.
The topics follow.
(1) How to treat whistleblower information about false tax attributes such as net operating loss carryforwards (NOL’s).
Wednesday, August 20, 2014
I’m experiencing the thrill of influencing national policy--- something Law-and-Econ-Blogger Gamage is well acquainted with, since he worked on government health care regulations. It’s a modest thrill, though. The regulations for whistleblowers who provide information on tax underpayment for a reward have just been issued. The IRS is notoriously hostile to whistleblowers (Congress forced the program on them in 2006), but these regulations are an improvement over the transition period. Lots of law firms and lawyers submitted detailed public comments, as did I, on both practical and policy matters. I’ll use this post as a way to talk about the comment process in administrative law, as something I can have my undergraduates read when I teach them about regulation starting two weeks from now. I’ll just talk about one comment in this post, and maybe write a second post once I’ve read through the entire regulations and reminded myself of what my other comments were.
My thrill comes from definitely improving the regulation, even though the IRS didn’t do exactly what I suggested.
I've recently been working on an article on preventive law enforcement methods. By preventive law enforcement methods, I mean any kind of pre-crime intervention that has the goal of preventing crime before it actually occurs. A good example is law enforcers interrupting a larceny while the attempt is ongoing. Another common example is a simple Terry stop.
While thinking about these methods, I thought that one of the most important costs that come with the use of such methods is increased wrongful conviction or wrongful intervention costs. I collectively refer to these and similar errors as type-I errors. It seemed quite intuitive to me that the use of preventive methods would increase the frequency of type-I errors. This is because, convictions for interrupted attempts, or interventions due to suspicions, require less evidence than convictions for completed crimes. Therefore, preventive methods, compared to non-preventive methods, are likely to increase type-I errors.
A friend, after I ran my ideas by him, told me that this need not be true: preventive enforcement also reduces the amount of evidence available, therefore, such methods can reduce type-I errors. After thinking about his comment, I agreed that as a theoretical matter the 'evidence reduction effect' can be greater than the 'reduction in the amount of evidence required'.
However, as an empirical matter, I still believe that the more frequent use of preventive methods is very likely to increase type-I errors for two primary reasons. First, preventive methods increase the number of people who are candidates for being subject to type-I errors: everyone can be subjected to a Terry stop, the same is not true for post-crime investigations. Moreover, the unfortunate presence and frequency of law enforcer misconduct suggests that allowing preventive methods to be used liberally is likely to increase the instances in which police officer can misuse their powers.
I am unable to locate conclusive data for my assumption. However, the numbers quoted in Floyd v. City of New York appear quite convincing:
-4.4 million Terry stops were conducted between 2004-2012 by the NYPD.
-By 2009, for 36% of the stops the officer could not state what specific crime he was suspecting
-94% of all stops did not result in an arrest.
-52% of them were followed by a protective frisk for weapons. 1.5% of the frisks resulted in the finding of a weapon.
-About 350,000 stops led to a search into the person's clothing, based on the officer's belief that the person was concealing a weapon, or an object immediately perceived to be contraband. 91% of the time, the object was not a weapon. 86% of the time the object was not contraband.
I am not aware of any study that compares error rates associated with preventive vs. non-preventive enforcement methods. But, are we safe to assume that preventive law enforcement methods increase type-I errors?
This is of course not to suggest that we should only focus on costs, and not focus at all on benefits. Such methods surely result in benefits by preventing harm before it happens. In fact, are these benefits not, at least theoretically, exactly what we should be balancing against type-I error costs in figuring out how often preventive enforcement methods ought to be used?