Archive | Economy

“Average is Over” and The Future of Lawyers

I’ve just finished reading, and rather enjoyed, Tyler Cowen’s latest book: Average is Over. At a macro level, it is a claim about the dramatic changes we can expect in the economy and our society over the next century. But it has a lot of strange side discussions I wasn’t really expecting. I still can’t figure out if it is utopian or dystopian.

In any event, much of the book is sort of about “how to get a good job” and “what kids today should be doing” and I thought readers would be interested in what Cowen had to say about legal education and the legal job market.

First there was this:

So a young person gets a good education and is deciding what to do with it. Why are so many of these people going into finance, law, and consulting?

There is a common impression — by no means illusory — that smart young people from top schools can walk into high-paying jobs in these areas with relative ease, even if they don’t have much or indeed any real-world experience. They start at salaries above the US median household income, and very quickly many of them are earning above six figures. . . . Beneath all the chatter is a sense that these salaries are possibly unmerited or unjust, because, to repeat an expression I used to hear from my father (he was a businessman of the old school): “I wouldn’t trust him in charge of a candy store.” If you took a few of these same young workers out of the consulting firm and put them on a factory floor, they probably would be lost. They do seem to be an impractical bunch. . . .

These freshly minted students will seek out jobs that rewards a

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IQ2US Debate: Abolish The Minimum Wage

At my suggestion, Intelligence Squared is hosting a debate on the motion: Abolish The Minimum Wage. At a time when President Obama is proposing to increase it, I thought it might be useful to go back to first principles and explore whether the minimum wage is good policy in the first place. The debaters are top-notch, and the program promises to be very lively.

Intelligence Squared debates are usually held in New York City, but this one will be in Washington, DC, at the Burke Theater at the U.S. Navy Memorial, 701 Pennsylvania Avenue, NW. Wednesday, April 3. Reception, 4:30-5:15pm; Debate, 5:30-7:00pm.

More information is available here. Tickets to the live debate can be purchased here. And, on April 10, the podcast will be available here. [...]

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Let’s Play Spot the Fallacies

From a review in the most recent issue of Reviews in American History:

Like most conservatives, Shlaes assumes a perfectly competitive marketplace in which the government can only make an unwarranted and counterproductive intrusion. This perspective leads Shlaes to discount the role of jobs programs such as the CCC and the WPA that contributed to the decline in unemployment from 22 percent in 1932 to 9 percent in 1937. By setting a standard in which a public program cannot provide real work and must be temporary, she forecloses the possibility that any government program could strengthen the economy. Because Shlaes’ position is roughly equivalent to a cancer researcher who refuses to count remissions from chemotherapy, Hiltzik easily rebuts her.

Outside these parameters, however, Hiltzik has his own problem. The New Deal did reduce unemployment, but it was ultimately World War II and the warfare/welfare state emerging out of it that has kept the rate down ever since. Although Hiltzik briefly acknowledges World War II’s role in reducing unemployment, both he and Shlaes actually suffer from parallel oversights: Hiltzik does not fully account for the military component of the intervention, and Shlaes does not count the welfare.

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The Inconsistency Between the Constitutional Arguments for the Mandate and Medicaid in the ACA

Now that Eugene has given me the electronic keys to this Conspiracy, I could not resist getting involved in the now-legendary discussion of the ACA…

There is a serious inconsistency between the government’s arguments for the mandate and for the Medicaid expansion. In a nutshell, these arguments make opposite assumptions about the effect of financial duress on states’ ability to execute their policy preferences. Defending the mandate, the government says states are individually incompetent to regulate insurance, because the first state to adopt generous rules would be inundated with the sick, and forced to abandon its policy. This is a basic race to the bottom story and has been around in Commerce Clause cases since the New Deal.

Crucially, the argument takes financial realities as dispositive: states cannot realistically choose to experiment with medical insurance individually because it would be ruinous. The economic effects mean that states do not really have the power to choose individual regulatory regimes.

Yet turning to the Spending power, the government ask us to believe that states can realistically turn down federal medicaid funds, though it would be at least as ruinous if not more. Either the prospect of massive losses makes a states ability to pursue a certain course illusory or it does not. 

Incidentally, these two cases are not equal in that in that in the former, the ruinous consequences are a result of the market, in the latter a result of calculated federal efforts to make the offer unrefusable. [...]

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Common Mistakes by Economists

Tyler Cowen has assembled two lists of common mistakes made by economists. The first is of common mistakes made by right-wing/market-oriented economists and the second is of common mistakes made by left-wing economists. They’re both quite interesting.

UPDATE: I’m not endorsing every item on each list, but I think they both provide much to consider and ample grist for discussion.

SECOND UPDATE: Ezra Klein comments.

MORE: David Leonhardt posts his own lists. [...]

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The Resurgence of ‘The Theory of Moral Sentiments’

Greg Mankiw points to recommended reading by Robert Shiller (and, apparently, Karl Rove).  The book?  Adam Smith’s The Theory of Moral Sentiments.

The book’s resurgence does not surprise me.  Certainly not from Shiller who, with George Akerloff, gave us the intriguing book Animal Spirits.  Shiller is of course not indifferent to the core point raised by TMS as well as the famous reference to Keynes, which is that “affect” matters in economics.  From Karl Rove, I’m not quite sure.  I’m curious as to what relevance, if any, Professor Mankiw thinks that TMS has today.

I’ve written about the importance of TMS before here at Volokh.  Smith himself believed that you could not really understand, or for that matter hope to see in action, the market operations and effects of The Wealth of Nations without a concomitant “moral psychology” of human beings.  The constitutive moral psychology of sociability was, for Smith, a predicate for the social institutions of the market that make up The Wealth of Nations.  He believed that the two books, and the two accounts of human affective traits and market institutions based around the commodification of affections within a marketplace were what made market institutions possible, or at least stable.

The commitment to a psychology of market-making human beings that is more than simply “thin” rational self-interest is not the same as urging that markets need morally “better” people, which, come to that, we are not likely to get.  The point of TMS or what I would hope is a turn toward economic foundationalism that takes affect and moral psychology seriously is not exhortation, windy or otherwise.  It is not prescriptive; it is, rather, descriptive in its assertion that stable and successful market institutions are constituted around social practices – legal, personal, affective, sociable – that presume [...]

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E.J. McMahon Argues for Alternatives to State Bankruptcy, and Fred Siegel on Public Employee Unions

The Manhattan Institute’s EJ McMahon argues for alternatives to state bankruptcy in the Wall Street Journal today.  The article is not framed as an argument for the sustainability of the state debt obligations – i.e., raise taxes to the level necessary to cover the promises made – but instead argues that governors and state legislatures have the tools necessary to deal with the public employee unions.  Perhaps most tellingly, it asks why a state would voluntarily enter into bankruptcy if it already lacked the political will to deal with the public employee unions.

For constitutional reasons, any federal law enabling state bankruptcy would have to be voluntary, meaning states would have to invite federal judges to play tough with their unions. But if Gov. Jerry Brown and the California legislature are unwilling to rewrite their collective bargaining rules—signed into law by Mr. Brown himself, 33 years ago—why assume they would plead with a federal judge to do it for them?

It’s more likely that a state like California would pursue bankruptcy if powerful unions and other budget-dependent interest groups saw this as a way to deflect some of the pain to bondholders. California is one of the states that constitutionally guarantees its general obligation debt, and whose bondholders are now seemingly untouchable. That could change with a bankruptcy option.

It’s a good piece, and worth reading closely, although I think it is somewhat arguing past Skeel’s argument.  It’s even better read in conjunction with historian Fred Siegel’s account of how New York’s mayor Robert F. Wagner first saw the opportunity presented by public employee unions, and how politicians and the unions found the way to collude to internalize benefits to themselves and externalize costs onto taxpayers.  It is a textbook example of public choice theory in operation, and Siegel gives [...]

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Skeel Speaks, NYT Takes Note, and Maybe Congress Listens?

The New York Times ran a front page story today on an issue discussed off and on here at VC, the possibility of creating a bankruptcy chapter for states.  It quotes David Skeel, who has been the leading intellectual mover of this idea, along with a number of other people, including various public employee union officials dismayed by the very concept.  It was not a long article, but decent straight-up reporting.  As I have mentioned in earlier posts, one of the most persuasive parts of the proposal to me is that bankruptcy allows judges a great deal of discretion – but that discretion is cabined within a highly specified range.  That seems to me of great importance in addressing financial shocks and crises. 

In the case of national security, in which government seeks to confront enemies, strategic ambiguity as to how crazy you might get – to reference the classic nuclear standoff debates – can serve a useful purpose.  Unbounded discretion in that situation, and ambiguity about scope, circumstance, and range of response can be of immense value in confronting true enemies.  In the case of financial crisis, one is not confronting enemies, but seeking to channel and contain and regulate the activities of those who are, in a word, friends.  Members of our political and social and economic communities, with whom we seek to find ways in which competition within the rules can create a whole that is greater than the mere sum of the parts.  In that case, strategic ambiguity, represented here by discretion without apparent boundaries or constraints, works in exactly the wrong way.  The effect is to ratchet up uncertainty and make planning for the future harder, and forces parties to seek to insure against the discretionary regulatory moves made by government.  Clear rules [...]

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Bankruptcy for States

Bankruptcy law professor David Skeel, whose new book The New Financial Deal is one I admire a great deal, has a new op-ed in the Wall Street Journal today urging a bankruptcy regime for the states.  Among his most important points is that bankruptcy for states offers the most likely means that states can address the arguably most important long-term problem – the deals set with public employee unions for retirement benefits that are already crowding out the provision of services to the public.  States cannot afford to maintain current staff – teachers or whatever job category – given the obligations to retired employees, even if one assumes that those services, requiring whatever levels of staffing, at whatever levels of current pay, are prudent.  As he says:

[S]tate bankruptcy could even permit a restructuring of the Cadillac pension benefits that states have promised to public employees. These are often “vested” under state law, and in some states, like California, are protected by the state constitution. Under state law, little can be done to adjust them to more reasonable amounts.

Although the law is somewhat murky, there is a strong argument that bankruptcy could provide for an adjustment of these obligations. Unless the state’s “guarantees” were construed as a property right protected by the Takings Clause of the Constitution (which is doubtful if there is no collateral or other indicia of a property right), the federal bankruptcy law would trump contrary state law under the Constitution’s Supremacy Clause.

A central feature of these promises in many states and municipalities is the capture of both sides of the bargaining table by public employee unions.  It is a classic process described by public choice theory, through which the campaign contributions of a highly motivated subset of voters capture the political offices that negotiate [...]

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What Would Public Choice Theory Say About Rating Agencies and Sovereign Debt?

Particularly since the European sovereign debt crisis put the question of sovereign debt ratings squarely on the table, and even more in the last few days since the rating agencies have downgraded Greek debt to junk status, I have to wonder what insulates Moody’s, Standard & Poors, and Fitch against pressures direct and indirect, subtle and not so subtle, by interested sovereigns.  The New York Times business pages ran a story on Friday (January 14, 2011, Graham Bowley) reporting that Moody’s and the S&P warned the United States that its outlook might conceivably put its AAA status at risk.  In Europe, it’s not just Greek bonds that are finally in question, it’s the debt of much bigger states as well – and the fact that the rating of sovereign debt even of Greece matters quite a lot to Germany or France for many reasons, not the least of which is that so much of it is held by their banks.

Standard public choice theory seeks to account for the essentially political forces that “supply” law and regulation to its economic “consumers” (voluntary or not!) in the marketplace.  It fills in a crucial gap in the account of law and economics, which tends to start with the laws and regulations and their creation as a given for structuring the incentives and disincentives of markets.  It connects law and markets, politics and markets, politicians and market-makers.  Sovereign debt, for its part, is a commodity in the markets that depends in very special ways on political and governmental forces, in part acting as market players, but in part acting as rule-creating sovereigns.  All of which is a roundabout way of saying that sovereign issuers of sovereign debt have large incentives to use their rule-influencing, regulatory, and law-creating powers, their political will, to influence [...]

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World Food Supplies and Prices

In conversation with someone who, as a senior NGO executive in international development and food aid, is well situated to respond on the question of rising commodity prices for food globally.  I asked specifically about the Wall Street Journal news story a few days ago on this topic, which reported:

Prices of corn and soybeans leapt 4% Wednesday and wheat gained 1%, continuing the broad rally in commodity prices that began in June. With yesterday’s gains, prices of corn futures contracts are now up 94% from their June lows; soybeans are up 51% and wheat is up 80%.

The USDA’s revisions reflect the impact of dry weather in South America and floods in Australia, which have compounded supply constraints that first started to emerge in the middle of last year, when a drought in Russia ravaged that country’s wheat fields. The agency also cut estimates for U.S. harvests of corn and soybeans.

At the same time, demand is increasing. The USDA said ethanol producers likely will increase their use of corn, and consumption by emerging market countries continues to be strong.

Prices of many agricultural commodities are still below the levels that sparked food riots in poor countries around the world in 2008. But economists see few signs that prices for grain, livestock and cotton will cool significantly anytime soon, signaling potential headaches for consumers and food companies.

I was told that, if anything, this article understated the problem, at least if consumers in poor countries were taken into account and that food riots akin to those of 2008 would be unsurprising.  I was asked in turn why the US continues to subsidize ethanol, for which I had no good answer.

(See also this story, HT Insta, and commenters are correct to note the Tunisian food riots.)

Update:   [...]

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Adam Levitin on the New Massachusetts Court Foreclosure Decision

(Update.  Megan McArdle has a number of interesting comments and posts on foreclosure, modification, the effect of securitization, and the processes for recording title and other things.  This blog post has very interesting comments as well.)

Adam Levitin writes at the ForeclosureBlues blog about the Ibanez decision in the Supreme Judicial Court of Massachusetts (pdf via Creditslips blog), handed down last Friday.  (Actually, I think Adam’s post originated at CreditSlips.) This is an important decision in addressing the exceedingly vexed and, as Megan McArdle notes, highly technical legal questions surrounding the property issues – chain of title, etc. – in foreclosures on mortgages that have been securitized.  Levitin offers this assessment of the holding in Ibanez (I recommend also his article with Anna Gelpern, Rewriting Frankenstein Contracts):

The Ibanez case itself is actually very simple. The issue before the court was whether the two securitization trusts could prove a chain of title for the mortgages they were attempting to foreclose on.

There’s broad agreement that absent such a chain of title, they don’t have the right to foreclose–they’d have as much standing as I do relative to the homeowners. The trusts claimed three alternative bases for chain of title:

(1) that the mortgages were transferred via the pooling and servicing agreement (PSA)–basically a contract of sale of the mortgages

(2) that the mortgages were transferred via assignments in blank.

(3) that the mortgages follow the note and transferred via the transfers of the notes.

The Supreme Judicial Court (SJC) held that arguments #2 and #3 simply don’t work in Massachusetts. The reasoning here was heavily derived from Massachusetts being a title theory state, but I think a court in a lien theory state could easily reach the same result. It’s hard to predict if other states will

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ROI for Law School

Probably many readers have seen this New York Times article, offering a lengthy and well-reported analysis in the Business Pages by David Segal of whether law school is a worthwhile investment.  The analysis points to a couple of different factors, including:

  • supply of lawyers outstripping demand, now and into the future;
  • cost of legal education outstripping the ability to repay on most lawyers’ salaries;
  • oversupply of law schools (leading to oversupply of lawyers, but in fact contributing its own frictions in bringing supply and demand to clear);
  • huge information gaps making it difficult at best for would-be students to make a decision;
  • inaccurate and gamed information supplied by law schools on employment and salaries of graduates.

The article traces through several law grads, with a particular focus on a graduate of Thomas Jefferson law school in San Diego, who has racked up several hundred thousand dollars in debt – if he were paying the monthly payments, they would be around $3,000 a month, if I recall the article correctly.  He himself says that he’s not so good at keeping track of that sort of thing.  The debt is not dischargeable in bankruptcy, so he and his girlfriend have simply gone off the employment or any other kind of income grid, pretty much.

A lot of readers of the article will be unimpressed with the young man’s cavalier attitude both to running up the debt – including on remarkably idiotic things, like trips abroad – and to repayment at all.  But while we all should take a lesson – I for one take a deep breath and hope that my own kid would not make these kinds of mistakes – there’s also a fact that it was only in the last two years or so that the vast majority of [...]

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David Skeel’s Excellent Book, and Comparing Discretion in the Financial Crisis and National Security

(Note: I was writing this on the plane without quite being able to see the computer screen, so I’ve gone back and corrected some grammar and spelling, and tried to make a couple of things clearer.  I’ll post separately as well on the topic of national security and the financial crisis, and the role of executive discretion in responding.  But I also wanted to note that over at The Conglomerate, the compadres there are also having a discussion of Professor Skeel’s book, including my friend David Zaring, who, along with the redoubtable Steven Davidoff, was responsible for a seminal article and concept in this question of discretionary regulation, “Regulation by Deal.”)

Flying to and from meetings this week at the Hoover Institution, I re-read David Skeel’s brand-new book, The New Financial Deal: Understanding the Dodd-Frank Act and Its (Unintended) Consequences (Wiley 2011), for a second time. I am even more impressed with this book the second time around, and I believe that it is one of the short list of essential books on the financial crisis and the regulatory aftermath. If you have any interest at all in these topics, this is a book to give serious consideration to reading.

The New Financial Deal is very far from being a dense, specialist book readable only by a lawyer, or law professor, or bankruptcy or finance expert. You might guess from the title that the book is a technically useful, but, for the general reader, impenetrable commentary on the Dodd-Frank bill. After all, the bill itself runs several thousand pages of impenetrable legislative language and Skeel himself one of the country’s leading bankruptcy scholars. It might seem from the title that it is simply an unpacking – at the technical level – of what Dodd-Frank says. Technical experts [...]

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