The Volokh Conspiracy

Somehow I missed this when it happened a couple of weeks ago and I didn’t see any of my co-conspirators post on it.  But I read that a couple of weeks ago a bunch of Harvard students staged a walkout of Greg Mankiw’s introductory economics course because of its purported conservative bias.  They wrote in a letter explaining their action: “Instead, we found a course that espouses a specific—and limited—view of economics that we believe perpetuates problematic and inefficient systems of economic inequality in our society today. There is no justification for presenting Adam Smith’s economic theories as more fundamental or basic than, for example, Keynesian theory.”

Leave aside that it seems somewhat questionable whether Mankiw’s class is biased as opposed to being just good economics (a detailed description of the course to date is provided here).  Mankiw, of course, is a well-respected economist of the highest order and the author of one of the most popular introductory economics textbooks (apparently he sells 700 a year at Harvard alone–man, that’s a big class!).

Now here’s the humor in the cluelessness of the students who walked out–apparently Mankiw’s class is set up like a typical introductory economics course: the first semester focuses on micro economics and the second semester focuses on macro.  So the Keynesian macroeconomic theory that the students are demanding will be covered in the second semester of the course–when he actually teaches, you know, macroeconomics.

And here’s the irony: when one considers the number of left-wing professor proselytizing from the podium in higher education today, it is comical to think of these students are unable to tolerate the uncongenial views of even a single conservative professor.  If I had walked out of every class where my professors were saying things that were uncongenial to my ideological worldview then I would never have been able to finish enough courses to complete a degree.  By contrast, these students can–and, it seems, probably will–spend their entire four years hearing from professors who will never challenge their preexisting worldview.  I find it quite disconcerting that these kids at one of the premier universities in the world are so resistant to having their worldview challenged in even the slightest fashion.

For many years a signature program of the GMU Law & Economics Center was its programs in Economics for Law Professors and Law for Economists.  After a hiatus for several years, those programs are now back.

Here’s the info for economics for law professors.

Here’s the info for law for economists.

The two programs actually run simultaneously at the same hotel.

Yours truly, among others, will be among the faculty for the programs.

This is a cool new website on the history and philosophy of libertarianism.  Especially recommended is David Boaz’s essay on the history of libertarianism, which I like because of its implicit Harold Berman themes (Berman’s book Law and Revolution has been a huge intellectual influence on me).  Also not to be missed, of course, is the profile of our very own co-conspirator Randy Barnett as a “Major Libertarian Figure.”

I think the website looks really great too.

As I understand it, the simmering potential antitrust action against Google is premised on the idea that Google has market power in the search engine market that it exploits by biasing its search engine results in favor of its own content.  Well, according to this new study by my colleague Josh Wright, to the extent that Google’s results appear to be biased they are substantially less so than Bing biases its results in favor of itself and Microsoft.

(Disclosure: I am an academic affiliate of the International Center for Law & Economics, which published the study but I have nothing to do with this particular study).

I confess that it is awfully hard for me to see any antitrust harm or consumer harm from Google and until otherwise convinced this looks an awful lot like rent-seeking by Microsoft which is turning the tables in response to being targeted by similar rent-seeking in its own case a few years ago.

From yesterday’s WSJ:

Nan Terrie learned an expensive lesson last week about the importance of property rights. “Stealing is our biggest problem at the moment,” the 18-year-old protester told the New York Post. “I had my Mac stolen—that was like $5,500.” Why? Because she left it in a public place, amid a crowd demanding the redistribution of wealth. Imagine that.

I wonder what percentage of Americans own a $5,500 Mac computer–less than 1%, I’d guess.

I’ve been thinking the past couple of days about the parallels between price controls on debit card interchange fees and the investigations of Google after reading Eric Schmidt’s comments as reported by Gordon Crovitz in the WSJ:

Mr. Schmidt had just given his first congressional testimony. He was called before the Senate Judiciary Antitrust Subcommittee to answer allegations that Google is a monopolist, a charge the Federal Trade Commission is also investigating.

“So we get hauled in front of the Congress for developing a product that’s free, that serves a billion people. OK? I mean, I don’t know how to say it any clearer,” Mr. Schmidt told the Post. “It’s not like we raised prices. We could lower prices from free to . . . lower than free? You see what I’m saying?”

The parallel, of course, is that search engines and payment cards are two paradigm examples of two-sided markets where one side of the market–invariably the more inelastic side–bears the bulk of the cost in maintaining the platform.  And so, until the Durbin Amendment at least, consumers received debit cards for free and merchants (the more inelastic parties) bore the cost of operating the system.  For search engines, consumers get an unlimited number of free searches and clicks–with all those costs paid by advertisers (the inelastic parties).

If I follow the logic of apologists for the Durbin Amendment, what follows next is price controls on Google Ads with the goal of eliminating free search engines, thereby making the cost of search more “transparent” to consumers and eliminating the subsidy from consumers who don’t search on line to those who do.

Of course, this isn’t the nub of the government’s antitrust case against Google.  But the very fact that it is recognized that would be an illogical way of thinking about consumer harm in the case of Google illustrates the fallacy of the reasoning with respect to payment cards.

Hal Singer makes some similar points about the similarities between the FCC’s Open Internet order and payment card price controls at Truth on the Market.

I’ve posted a new paper on SSRN, “The Economics and Regulation of Bank Overdraft Protection.”   Here’s the abstract:

Consumer use of bank overdraft protection has risen rapidly over the past decade, leading to increased scrutiny and the imposition of new regulations. Public and political debate regarding overdraft protection has highlighted anecdotal stories about irresponsible college students who overdraw their accounts to buy a cup of coffee, thereby triggering substantial overdraft fees. But there has been little systematic examination of the safety and soundness or consumer protection issues implicated by the increased use of overdraft protection.

Available evidence indicates that those who rely on overdraft protection tend to have low credit ratings, use overdraft protection because it is sometimes less expensive, to maintain short-term liquidity needs, and more convenient than available alternatives. These alternatives include other credit options, such as payday lending, or options such bounced checks or dishonored payments, which may result in eviction or termination of utilities or other services.

There is also no evidence that those who use overdraft protection are unaware of the cost or otherwise use overdraft protection foolishly or unknowingly. In addition, there is no evidence that banks are earning economic rents off the issuance of overdraft protection, as increases in overdraft revenues have been offset by dramatic increases in free checking, improved quality, and free services offered to bank customers. A serious reduction in overdraft revenues would reverse all of these trends and result in many consumers being driven out of the mainstream financial system, especially low-income consumers.

Absent a demonstrable market failure or demonstration of systematic consumer abuse, restriction on consumer choice of overdraft protection would likely impose substantial costs on consumers and banks with minimal gains.

This will also be the paper that I will be contributing to the Washington & Lee Law Review Symposium on “Regulation in the Fringe Economy” coming up on November 10-11.

The wits at CEI have come up with another good one–you can print your own $5 “Durbin Dollars” and mail it to Senator Durbin to thank him for his price controls on debit card interchange fees and resulting new bank fees.  I like the motto too–”In Big Government We Trust.”

Maybe Home Depot will eventually come up with their “Durbin pennies” to symbolize the two cents you might possibly eventually save on a piece of plywood in a couple of years (no guarantees, of course).

According to a Bloomberg story:

About 30 percent of U.S. consumers said they’d leave their banks over fees for using their debit cards, according to a survey by the Research Intelligence Group.

About 43 percent said they’d switch to paying with cash or credit cards if their bank implemented charges; 13 percent said they’d pay the fee if it was “reasonable,” according to the survey released last week by the consulting and market-strategy firm.

According to the survey, lower-income consumers, who have the fewest alternatives for escaping the new fees, report that they will be the most likely to persist in paying bank fees:

Low- to middle-income consumers are more likely to pay the fees, according to the survey. About 22 percent of those consumers, defined as those households earning $35,000 to $49,000 a year, would be willing to pay the fee, compared with 14 percent of consumers whose households earn $100,000 or more.

“Less-affluent populations often feel like they have fewer options at their disposal,” Kaplan-Sherman said.

Jon Huntsman asks the right question in the WSJ today:

More than three years after the crisis and the accompanying bailouts, the six largest American financial institutions are significantly bigger than they were before the crisis, having been encouraged to snap up Bear Stearns and other competitors at bargain prices. These banks now have assets worth over 66% of gross domestic product—at least $9.4 trillion, up from 20% of GDP in the 1990s. There is no evidence that institutions of this size add sufficient value to offset the systemic risk they pose.

The major banks’ too-big-to-fail status gives them a comparative advantage in borrowing over their competitors thanks to the federal bailout backstop. This funding subsidy amounts to roughly 50 basis points, or one-half of a percentage point in today’s market.

Hunstman provides no citation for the 50 basis point subsidy, however.  I know that there were studies done before Dodd-Frank was enacted that estimated the subsidy in that range (here’s a summary of that debate).  Does anyone know of studies that have been done since Dodd-Frank?  Dodd-Frank supposedly eliminated the implicit subsidy of too big to fail and one of the open questions is whether in fact it actually did so.  So one cannot simply extrapolate from pre-Dodd-Frank estimates to post, unless one simply assumes that Dodd-Frank did not eliminate it.  Does anyone know of any work that has been done post-Dodd-Frank as to whether the subsidy has been eliminated?  The language of the law makes quite clear that the resolution process is supposed to eliminate it but most of those who I’ve talked to believe that in the end the TBTF institutions will be bailed out.  But that’s an assertion that hasn’t been proven and I’ve not been able to find any studies that have examined the question post-Dodd-Frank.

Update: Thanks for those who pointed out the typo in Huntsman’s name.  Boy, that’s embarrassing.

From today’s WSJ, “Short-Term Lenders Seize the Day“:

Tough times are good times for payday lenders and pawnshops.

***

Shares of nationwide chains, such as DFC Global Corp., Cash America International Inc. and First Cash Financial Services Inc., have jumped to records in recent weeks. Meanwhile, plans for two initial public offerings from the industry, including the online business of Cash America, have been filed since August. Cash America representatives declined to comment. DFC Global and First Cash representatives didn’t return calls seeking comment.

Though share prices have come off their highs in recent weeks, they are still up for the year. Cash America is up 49%, First Cash Financial 40% and DFC Global 18%. That compares with the KBW Bank Index, which is down 26% so far in 2011.

First Cash Financial is set to report third-quarter earnings Wednesday, with other payday lenders and pawn shops also reporting this week and next. Analysts covering DFC, Cash America and First Cash indicate they expect earnings at all of the companies to increase by double-digit percentages in the third quarter, though it is possible earnings could disappoint. All three beat expectations in the second quarter.

Wow, who ever could have predicted that?

Update:

Since the WSJ is subscriber only, a reader suggested it might be useful to provide the chart attached to the story:

The folks at NerdWallet have posted an interview they did with me recently on the impact of the Durbin Amendment.  Gives an overview of all that is going on in response.

Coming up on November 10-11 will be a symposium hosted by the Washington & Lee Law Review on Regulation in the Fringe Economy.  Details are here.  This corner of the consumer credit marketplace is exceedingly important but little-studied and recent innovations such as the Durbin Amendment and Credit CARD Act are increasing its importance as more people drop out of the mainstream consumer credit market.  Looks like a very interesting program with a lot of excellent participants.  Kudos to Jim Hawkins for organizing the program.  At some point there will also be a conference website that will collect drafts of the papers.

“It’s Time to Finalize the Robo-Signing Settlement“ a new op-ed by yours truly on Forbes.com today.  Let me emphasize that I think the practices of mortgage servicers were outrageous and they deserve to be punished for their practices.  But I don’t think that implies the remedy of principal reduction or that the settlement should be held up further in order to push for more on that score.  My objection is not to punishing mortgage servicers but to collapse of the settlement and some of the contemplated remedies.

Ralph Rossum has a new book coming out on the jurisprudence of Clarence Thomas.  He previews his themes in an op-ed in the Orange County Register, “No Longer Doubting Thomas.”

Update: Due to a brain freeze I originally mistyped the name of the article.  It is corrected now.

If you like Ayn Rand and want to introduce her to the kiddies, you might like John Blundell’s comic book about her life (I will just go ahead and supply the obligatory jokes by her detractors about how the term “comic book” is redundant).  John’s first one was a comic book on Margaret Thatcher.  I found both books to be quite fun.  No reviews to report from my daughter yet though.

My colleague Frank Buckley thinks so.

Co-Sponsored by Reps. Jason Chaffetz (R-Utah) and Bill Owens (D-N.Y.).  Text here.  Not likely to go anywhere now, I assume.

I had the pleasure of sitting next to my friend Peter Wallison at dinner last night and he reminded me of a great AEI Outlook he published last month on “The Error at the Heart of the Dodd-Frank Act.”  The question he poses is brilliant for its simplicity and seems to be exactly the right question.  So let me set it up.

The key idea of the bank bailouts and then Dodd-Frank is that there are some financial institutions that are “systemically risky.”  As I understand the theory, the basic idea is that some large institutions are so “intertwined” with others that the failure of one will lead to the failure of others as a result of a domino-type theory.  The failure of Lehman Brothers and the supposed subsequent market response is cited as the example that presumably demonstrates this.

Continue reading ‘The Myth of Systemically Risky Institutions’ »

After a couple of posts on the Durbin Amendment, it has become clear that not everyone has read and familiarized themselves with the Durbin Amendment.  So if I may, allow me to lay out a few basic principles:

1.  The Durbin Amendment Imposes Price Controls, Not Transparency: This is the key misunderstanding–by its terms, the Durbin Amendment requires the Federal Reserve to set the allowable price of interchange fees at the incremental costs of processing debit transactions.  So it expressly prohibits recovery for the fixed costs of running a debit program (operating branches, customer service, etc.) and prohibits a normal return on investments in running the debit card program.  In that sense it turns debit cards into something more like checks, where the effective interchange fee is set a zero and the banks and consumers have to bear the costs of checks (so, for example, you are issued your debit card for free but you have to pay to buy your own checks).  The argument also ignores the obvious threshold point that payments are Coasian by nature, so costs are reciprocal, so the whole concept of “making costs transparent” by arbitrarily reallocating costs when the costs arise reciprocally is simply a logical error.

2.  We Already Have Transparency For Payment Cards: Current law already permits merchants to discount for cash and merchants are permitted to steer consumers to alternative payment methods if they like.  So if it is just about transparency, we already have that.

3.  We Don’t Require Transparency for Anything Else: Right now many merchants offer “free parking,” which requires those who take public transportation or walk to a store to subsidize those who drive.  Presumably merchants offer free parking because it increases their overall profitability (the same reason they take payment cards, of course).  To justify the Durbin Amendment on the ground of transparency would be analogous to argue that the government should not only require the disclosure of how much free parking costs, but to actually prohibit stores from offering free parking.  We also don’t require merchants to disclose the full costs of paying with cash (safes, employee theft, employee time spent handling and counting cash, armored cars, etc.)–costs that payment card payers have to subsidize for cash payers.

4.  Payment Cards are Two-Sided Markets: They are like newspapers, where the advertisers subsidize the readers.  In fact, like debit cards, many newspapers are entirely advertising supported and are given away for free (magazines are sold at subscription rates much below their costs).  If, for example, the government imposed price controls on what The Onion could charge display advertisers, what would happen?  First, they might consider charging readers instead of giving it away for free.  Second, they would try to shift advertisers to unregulated margins, such as classified advertising or online.  Third, they might reduce their services to reduce costs, such as reducing their distribution.  There is nothing anomalous about offering a product for free if the cost is recovered somewhere else in the system.  And while it is possible that consumers as a group might be better off if the government prohibited free parking or imposed price controls on newspaper advertising rates, it certainly isn’t obvious and would require actual economic analysis.  Transparency in and of itself would have virtually nothing to do with the question of whether the pre-price controls price structure was more efficient that the post-price controls structure.  To the question of how it could be profitable to offer free debit cards pre-Durbin, this is the explanation–think of how it is economic to produce a free newspaper (free to readers but not advertisers).

5.  The Antitrust Rationale for the Durbin Amendment is Completely Wrong: I discussed this in a Washington Times column some time ago.  Because payment cards are a two-sided market, in competitive equilibrium, saying interchange fees for merchants are “too high” is identical to saying that fees to consumers are “too low.”  In Canada, for example, where interchange fees on debit cards are zero, consumers pay high costs for debit cards–higher than the new $5 Bank of America fees.

The problem, if there is one, is not a lack of competition, but rather that much of the competition is for consumers, not just for merchants.  Payment card networks seek to balance these two sides of the market through the prices that they charge to consumers and merchants in order to maximize the overall value of the network.  As a theoretical matter this can result in prices being too low for consumers and too high for merchants.  As a theoretical matter it can also result in prices being just right for both or too high for consumers and too low for merchants.  It all depends on the assumptions and elasticities of the players in the system.  So the theoretical argument is interesting, but to date, undetermined as an a priori matter.  As an empirical matter the question is equally unsettled.  What we do know, though, is that there are network externalities from payment cards and there are positive social externalities from bringing people into the mainstream banking system and reducing reliance on cash (which facilitates crime and tax evasion, for example).  If theoretical or empirical studies eventually do establish that market competition leads to market failure, then we’ve got a different question.  But based on current theory and empirics there simply is no such consensus.

In fact, this was the decision regulators made in Australia.  There it was determined that consumer prices for payment cards were too low and that as a result consumers inefficiently overused payment cards.  So interchange fee price controls were specifically intended to reduce merchant costs and raise consumer costs with the goal of reducing card use and increasing use of paper payments.  And by general consensus prices did go up for consumers–annual fees went up on credit cards for example and rewards were reduced–and costs for merchants went down.  But there is no evidence of any measurable cost savings being passed on to consumers yet in the form of lower prices or higher quality and there has not been even an effort to try to establish whether any purported retail price reductions to consumers were larger than the increased banking prices.  It is also not clear that use of payment cards actually declined even though consumers now pay more and get less from using them.  Overall, the Australian central bank seems to believe that that the overall market response–higher bank fees, lower merchant costs, and an assumption of retail pass-through despite the lack of evidence or estimate of size–was a good thing.  I think that the overall mix of intended and unintended consequences was a bad thing for efficiency and appears to largely have resulted in a wealth transfer from consumers to merchants (driven largely by all of the relevant elasticities of the players in the various interrelated markets).  This result of being largely a wealth transfer rather than an efficiency effect is seen as one likely outcome in markets where use and acceptance of payment cards is already high.  This doesn’t even consider the negative social effects of swelling the ranks of the unbanked.

But, unlike the justifications that are offered for the Durbin Amendment, at least the Australian case was theoretically coherent.  By which I mean that they acknowledged the unintended consequences identified by theory and practice and decided to do it anyway.  I disagree.  But if there is an argument for interchange price controls it is the one adopted by the Australians, not the ones that have been offered for the Durbin Amendment.

6.  Even If There is a Market Failure, It Doesn’t Justify The Below-Cost Pricing of the Durbin Amendment: But note that even if one adopts the Australian argument that costs are too low to consumers and too high to merchants, it still doesn’t support the precise price control of Durbin, which excludes fixed costs and a normal return.  If one is convinced that there is a market failure (and as I indicated, I’m not persuaded of that), it still doesn’t justify requiring below-cost pricing.  It would at least permit full-cost pricing (like traditional utility rate regulation).

I missed this quote from Barney Frank last week in response to BoA’s customers being Durbinized with new bank fees:

The Massachusetts Democrat, who co-sponsored the Dodd-Frank financial reform bill, said he still supports opposing a decision by congressional lawmakers to include the fee crackdown in the legislation.

“The banks will charge you more, and I don’t think the retailers are going to charge you less, which is why I didn’t want to put it in the first place,” Mr. Frank explained.

Some of the savings to retailers, of course, will be passed through to consumers (I assume Frank wasn’t suggesting there’d be no pass-through at all by retailers).  The real question is how much and how quickly the savings will be passed through by retailers versus the incidence and speed of pass-through in higher fees to bank customers (the question is one of incidence analysis). Based on available theory and empirical evidence it seems almost certain that the pass-through to bank customers in higher prices and lower quality will be larger and certainly faster (we already know the second part) than any potential savings to retailers.  Home Depot, of course, said that it expected to reduce its costs $35 million per year from Durbin and made no allowance or qualification for pass-through to its customers.  This estimate appears to be a static estimate and so doesn’t count  the inevitable substitution of consumers to greater use of credit and prepaid cards, which will wipe out some of this saving, as well as any effect of increased liquidity constraints on consumers from reduced use of debit cards.

Of course, even if the pass-through were largely equal (which it probably isn’t) that leaves aside what for me is an even more important issue–perhaps in the end Home Depot’s customers will save 2 cents on a 2 x 4 but that seems like small solace to the hundreds of thousands of low-income people who will be driven out of the mainstream banking system by Durbin fees.  Not to mention the social cost of deterring the continued spread of electronic payments and increased reliance on paper-based payment systems (including all the social costs of cash).

Update: Commenters have observed that my initial post title might be subject to being misconstrued.  That honestly never crossed my mind and I certainly didn’t intend that.  I apologize and have changed the title of the post accordingly.

Several notables, including my colleague Adam Mossoff, take a look at the upcoming Supreme Court term here.  Available in video or audio.

I’ll be on “The Willis Report” tonight on Fox Business talking about “The Dick Durbin Bank Fees.”  The show starts at 5and hit time should be about 5:15.

Not reporting results, but that for the first time ever I was actually called last night by the Qunnipiac Poll.  What was interesting for me is that they asked me my views on three candidates interchangeably–Romney, Perry, and Cain.  Cain is starting to remind me of Huckabee the last time around–you could tell that many people were enthusiastic about him if he could gain enough of a critical mass that people might actually think of him as something like a viable candidate.  Even though I didn’t like Huckabee’s policies at all, I could appreciate the appeal of his personal warmth and likability for many people.  I don’t know that much about Cain’s policy proposals at this point but my sense is that people are drawn to him personally as well, except that his appeal is in his authenticity and sense of core convictions which is such a contrast from most politicians out there.  I think this personal appeal (although different from Huckabee’s) makes him a better bet to stick around for awhile than was the case with Bachmann who seemed to become less appealing to people the more they saw her.  It is still a definite uphill battle for Herman Cain to win the Republican nomination (and I’m definitely not saying that I am for or against him right now) but I could see him in a constant place or show position throughout the early primary season.

Also, considering that the core of Cain’s support is driven by tea party types more than establishment Republicans, can this put to rest once and for all the canard that the tea party is racist because they oppose President Obama’s policies?

I just learned that law and economics legend George Priest has started blogging at Forbes.com.